I have been nailing the “books for the times” lately. Last week I reviewed “Once in Golconda” about the 1920’s and 1930’s on Wall St. If you haven’t read it, do it.
Now I have been given an advance copy of “Mr. Market Miscalculates” by James Grant.
About 1/4 of the way through it and already wishing I had subscribe to Grant’s years ago, as the current conditions were almost expected by the author. More when finished. You can pre-order the book here
OK, let’s ignore the politics. If Democrats want to pass this they can, they have the majority. Period. Republican’s are powerless and will not block a vote. Anything else is just games.
So, will it pass? Yes. As the market drops, Main St. will feel the pain and the public opinion polls will turn.
When that happens, everything let’s loose and we rally. In the meantime you have GE trading at decade lows yielding 5%, Dow Chemical at 5 year lows yielding 5.5% and the list goes on.
The point is you have people panicking out there. Panic leads to selling en mass and that means bargain basement prices.
Think about it. we have heard daily for 2 weeks now that something has to get done TODAY or we risk armageddon. Yet, nothing has been done, Wachovia (WB) and Washington Mutual (WM) were absorbed by Citi (C) and JP Morgan (JPM) respectively i na very orderly manner. No deposits were lost and there was no run on the bank when the news was announced. An 8% drop in the DOW (.DJI) today isn’t even in the top 5 worst days.
There are deals out there for the patient investor. Pick strong companies with low debt and strong balance sheets. The yield alone out there have not been seen in a long time..
Something will get done, just pick at the bargains until it does..
So, Starbucks has a policy that it knows is injuring customers, yet refuses to change the policy. I guess them recognizing $5 coffee in an economic malaise won’t sell isn’t going to happen anytime soon.
Arthur F Licata, an attorney in Boston has a case against Starbucks that make you questions the thought process in Seattle.
Starbuck has a policy that when you hand them your cup (the travel mugs) to be filled, they do not put the top back on the 185 degree coffee that sits inside. What is happening? People are getting burned. In Licata’s case, his client was burned when the cup the barrista placed on the counter began to tip. In an effort to catch it, the barrista ended up shoving the cup and its contents into the face of his client who’s eyes were burned to the point she no longer has any peripheral vision. What stuck Licata is that through his investigation, this is a common occurrence. Whether it be employees spilling on customers, customers spilling on themselves or customers spilling on other customers, it is happening daily, yet the policy remains.
I know some people are going to scream “McDonalds coffee lawsuit”. I will simply say those who mock that suit have no knowledge of the details of it or the injuries suffered by the old woman or McDonalds role in them. I will also say that McDonalds altered it policy, to date, Starbucks has not.
When I buy coffee at Starbucks and they make it for me, they place the top on.
What does this illustrate? Arrogance. Howard Schultz in a recent interview called the coffee at McDonald’s (MCD) and Dunkin’ Donuts, both of whom are serving more people every day, “swill”. I have never heard a CEO so insulting of another company’s product before, especially when their results are lapping his.
Despite store traffic declining for over a year, Starbucks only recently acknowledged its prices were affecting its business may made at least token efforts to make its products more affordable.
Both episodes go to a mindset. “We do what we do”. If you think we are too expensive or like the other coffee, you just aren’t cultured or are to cheap. We don’t put cap on your travel mug, if you get burned, too bad.
Call it hubris, stubbornness, arrogance or whatever you want, just don’t call it common sense.
UPDATE: Here is an article about advertising companies walking away from a “very difficult client”. One agency’s head was actually a friend of Howard Schultz
Anyone remember the famous Monty Python skit? See it below
Circuit City (CC) is the old guy on the being carried by John Cleese.
Circuit City Stores reported a wider quarterly loss and withdrew its financial outlook on Monday as the electronics retailer reviews its business, sending its shares down 10% to $1.26 a share. Last week announced the overdue firing of CEO Phil Schoonover, also said it would suspend store openings beginning with its 2010 fiscal year to focus on turning around its operations.
Circuit City has reported losses for five of the past six quarters, and sales have dropped for more than a year. Q2 net loss was $239.2 million, or $1.45 a share, compared with a loss of $62.8 million, or 38 cents a share, a year earlier. Total sales fell almost 10% to $2.39 billion and same-store sales, fell 13.3%. A year ago in a post commenting on then rumors Sears Holdings (SHLD) Eddie Lampert might make a bid for the company I said, “Lampert, based on his past history would more likely wait for these buffoons to run it into bankruptcy and pick it up for a fraction of today’s price”.
I doubt Lampert wants it, but if he does, bankruptcy is right around the corner..
Citigroup Inc. agreed to acquire Wachovia Corp.’s banking operations in another deal orchestrated by the federal government — this time by the Federal Deposit Insurance Corporation and one in which the agency could be on the hook for loan losses.
The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies.
Citigroup also said it plans to sell $10 billion of common stock and slash its quarterly dividend in half to 16 cents a share to maintain a strong capital position, in the wake of its takeover of Wachovia’s banking operations.
They continued:
Over the past year, Citigroup has racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown. The company was a leader in creating and marketing some of the exotic securities that have been at the heart of the credit crunch. Its stock price has shriveled to less than $20, compared to more than $50 early last summer.
Citigroup is buying what the FDIC said is “the bulk of” Wachovia’s assets and liabilities, including five depository institutions, and assumes the company’s senior and subordinated debt. Not being sold are the A.G. Edwards brokerage division and Evergreen Investments operations.
The FDIC also has entered into a loss-sharing arrangement on a pre-identified pool of loans under which Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, with the FDIC covering anything beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing the risk.
Citi, like JP Morgan (JPM), got a lot for almost nothing. Citi was desperate to expand its deposit footprint and this deal does it, very cheaply.
Now that we look at these recent deals, it does appear more evident every day that Ken Lewis and Bank of America (BAC) vastly overpaid for Merrill Lynch (MER). Assets are being had at “give away” prices currently and Lewis did pay a huge premium to the then Merrill price when he agree to a deal. He reasoned at the time the price was cheap and wanted to snap it up. But, the questions needs to be asked, snap it up from whom?
Merrill was not actively being pursued by other institutions. I think no one could argue Lewis did not grossly overpay for Countrywide (CFC) when he both made his first investment and finally when he purchased the rest of it, he could have bought it out of bankruptcy had he waited.
Lewis has the deposit base to absorb the deal without hurting shareholders badly, the problem it that the upside to both deals is limited at best.
At the rate this is going, the “bailout” may not be necessary.
Last week JP Morgan (JPM) swallowed Washington Mutual (WM) and now it appears Wells Fargo (WFC) has the inside track to acquire Wachovia (WB). The WSJ Reports:
The troubles at Wachovia, based in Charlotte, N.C., and of Fortis, based in Utrecht and Brussels, signal the first time that major commercial banks are now at risk of being forced into sales or breakups since the onset of the credit crisis a little more than a year ago. Wachovia is a big lender to midsize U.S. companies, and at the end of last year, it oversaw a commercial-loan portfolio totaling $190 billion. In the real-estate industry, Wachovia had signed off on $35 billion in loans.
Federal officials are involved in the Wachovia talks and were believed to be pushing the bank to seal a deal fast to avoid further pressure to its deposit base. While Wachovia is much larger than Washington Mutual in terms of assets, Wachovia’s business mix is broader, including a strong commercial bank and solid securities brokerage.
What is happening is that we are on a path to fewer, much larger banks that face more regulation. The next on the list is National City (NCC). Both Wachovia and WaMu could have survived until a gov’t plan was enacted, but depositor panic, rushing to withdraw insured funds lead to a massive deterioration of the capital bases of both, forcing a sale. Short sellers it should be noted, had nothing to do with it.
So, if WaMu is gone, and Wachovia will be soon and not a single deposit has been lost, do we really need the bailout plan? Do we? I’m not sure.
If we simply better funded the FDIC and raised the deposit insurance to $250,000 per account, then we would stop the rush to withdraw we are seeing. Had we stopped the bank run last week, WaMu might have survived. Wachovia would most likely also. Now, that does not mean that either banks shareholders would have seen appreciation in shares anytime in the near future. But, do we really need to money now that the market is seemingly taking care of it? We also have word that the recent investment in Goldman Sachs (GS) by Berkshire’s (BRK.A) is going to be used to buy????? Anyone??? Troubled mortgage assets from banks, up to $50 billion worth. These are some of the same assets, buy the way, that the gov’t is looking at buying.
We have also hear that hedge funds have been raising billion to do the very same thing. It would seem that the specter of gov’t intervention has spurned those “waiting for rock bottom pricing” to now act before those assets were scoop buy Washington.
We may still need a gov’t package but my feeling it that is may just need to be a fraction of what was talked about last week. Perhaps just the threat of losing a bargain will be enough to shake the buyers out of the trees. It really does not matter who does the buying, it is the action of it that will solve the problem.
For those who who wonder what the Fed is and how it does what it does, I found the perfect primer.
First, the boilerplate stuff from the publisher: Product Description Ben Bernanke’s swearing in as Federal Reserve chairman in 2006 marked the end of Alan Greenspan’s long, legendary career. To date, the new chair has garnered mixed reviews. Business economists see him as the best-qualified successor to Greenspan, while many traders and investors worry that he’s too academic for the job. Meanwhile, ordinary Americans do not even know who he is.
How will Bernanke’s leadership affect the Fed’s actions in the coming years? How will Bernanke build on Greenspan’s success, but also put his own stamp on the Fed? What will all this imply for businesses and investors? In Ben Bernanke’s Fed, Ethan Harris provides exceptional insights into these crucial issues.
Engaging and discerning, this book demystifies the man who has stepped into what many describe as the second most powerful job in America.
About the Author Ethan S. Harris is a member of Lehman Brothers’ Global Economics team. A U.S. chief economist, he started his career at the Federal Reserve Bank of New York, joining Lehman Brothers in 1996.
So, it it worth it. In a word, yes. Now, if you are a veteran Fed watcher and have an advanced degree in Economics, then this may be a bit rudimentary for you. But, if you are like the overwhelming majority if people who are mystified by the Fed and its operations, this book is perfect.
Harris also does a nice job explaining the economic concepts that decisions are based on. For those without a background in economics, fear not, Harris explains everything he write about for all to understand.
Harris goes into detail on Ben Bernake’s background and education and illustrates how that influences his belief in how the Fed should operate today. Harris also examines his predecessor Alan Greenspan’s tenure as he tracks the current economic conditions we find ourselves in. He does a nice job laying out the Greenspan years without sounding too harsh or complimentary, it is a truly balanced look.
He then looks into Bernanke’s response to events as they unfolded both when he was a Fed Governor and as its leader. The only regret is the the books ends in the spring of 2008, too early to address the climax of events in capital markets we witness today….perhaps a sequel?
For those interested, you can buy the book through this link.
One of our readers asked about my thoughts on Trident Microsystems (Nasdaq: TRID). Trident is an electronics company that designs and manufactures integrated circuits for different digital media products such as digital television and liquid crystal displays.
Nordic American Tanker is not a dividend achiever but a component of the NYSE Composite and Zacks Yield Hog index. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 29.10 % to its shareholders. The stock gained 19 % value so far in 2008.
Warren Buffett tells CNBC he’s making a $5 billion investment in Goldman Sachs because “the price was right, the terms were right, and the people were right.” Best quote: “Why buy a Wall Street firm after his difficult experience with Salomon in the early 1990s? “The pain has worn off,” he joked.”
Todd Sullivan thinks Goldman Sachs is raising money in order to pick up some cheap assets. I’m thinking Buffett saw some cheap assets as well by providing the financing.
Safe 5% yield and 10 times earnings….picked up some for $24.77 a share Friday morning.
I first got real interested in GE (GE) last week when shares hit $23 and change but did not pull the trigger.
Yesterday, GE lowered guidance for the quarter and the year. Not real surprising given conditions out there but two questions I has were answered. Was the dividend safe, and was their ‘AAA’ rating safe. The answer to both was yes.
Why does ‘AAA’ matter? Consider there are only 6 companies that carry that rating, Automatic Data Processing (ADP), Berkshire Hathaway (BRK), GE (GE), Johnson & Johnson (JNJ), Exxon (XOM), and Toyota (TM). It simply means safety and low cost of capital. In these times, with the inevitable credit contraction with us for years, a ‘AAA’ rating will take on more importance.
The dividend. I like high, safe dividends. I currently hold Altria (MO) at 6%, Phillip Morris International (PM) at 4%, Dow Chemical (DOW) at 5%, Wells Fargo (WFC) at 4% dividend yields. Now we’ll ad GE at 5%. All of the above had dividends that, were they to be forced to be cut, simply would mean economic conditions have deteriorated to the point that the actual dividend cut would be the least of all our worries.
Watch the following video from Thursday. Please ignore CNBC’s Melissa Francis saying GE Capital was a “buy to sell” model. It isn’t (that has been discussed here on this blog before as a reason to maybe buy GE shares). It is a “buy to hold” and Immelt corrects her…how could she get that wrong? She just interviewed her boss and had the business model for the company’s main profit driver wrong….I bet it will come up at review time. Anyway, the video.
Here is an interview with Charlie Rose from March: I think it is safe to say Immelt as GE (along with virtually every economist and other business leader) underestimated to the scope of the current crisis. That being said, I can’t single him out as “being wrong” about the future. But, if we look at the various businesses, one must be encouraged. GE is global in scope and will benefit from global growth. It’s financial services, being hit hard by the crisis, still maintain ‘AAA’ ratings despite the turmoil. That means very attractive opportunities will arise for GE that other lenders will not get, or be able to fund.
Now, the Immlet bashers will point to thew stock being near $60 a share in 2000 (yielding less than 1%) and want his head for its fall. But, GE made $1.27 a share that year. So, if you paid 47 times those earnings in 2000, Immelt is not the problem, you are. Paying 47 times earnings for a conglomerate the size of GE, is well ,for lack of a better word, just moronic. But, 10 times earnings with a 5% yield?
Essentially a bet on GE at this time is a bet on the global growth story, at a very good price, and a 5% yield. It may take some time to pan out, but i think it will, handsomely.
