Finally, somebody takes the ratings agencies to task publicly.
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Yeah, 1997 was the last time you could have bought shares of GE (GE) at $23. The difference? Now that price comes with a 5.3% yield and shares trade at 10 times earnings, not the 24 times they traded at then.
In the latest quarter, global revenues growth was +24% (emerging markets +20%, developed (ex. U.S.) +26%, U.S. (2)%).
What’s the problem? Fears over GE Financial Services. In Q2, Commercial Finance earnings grew 7%, GE Money fell 9%.
The fears at GE Money are overblown. GE Money encompasses roughly 13% of profits at GE. Let’s assume earnings for the year, about $4 billion are wiped out. It won’t, because GE Money is not structured in the “borrow long, lend short” model that is currently crippling financial institutions. They underwrite to hold. In consumer mortgages (UK), they are self funded and have a mortgage LTV of 70%, meaning mortgage holders on average have 30% equity. In consumer credit, the current delinquency rate is 5%, not bad. But, for arguments sake, let’s say earnings are gone. That would still leave GE with approx. $20 billion in earnings of $1.97 a share. That still leaves GE trading at 11.6 times earnings and yielding 5%.
GE is saying Commercial Finance earnings ought to decline in Q3 10% to 15% and GE Money ought to grow 0% to 5%. Hardly the desperate scenario the markets are currently pricing into the stock price. What is of interest is that revenue growth at both divisions ought to grow 5% to 10%.
GE, during the Q2 results presentation forecast 3Q’08 continuing EPS outlook of $.50-.54, (0-8% growth)and said they were on track for 2008 guidance, $2.20-2.30, (0-5% growth).
Now CEO Jeff Immelt got himself in hot water when in the spring he stated 15% EPS growth for this year was “in the bag”. Because of that there is now a slight cloud of skepticism over him and the company. The only way to erase it is to perform and show it to be an aberration. That, will take time. Coming through the current relatively unscathed would be a huge first step.
Ge is currently being price not as the conglomerate it is, but as a financial service company. That, has created a great buying opportunity….
I think I just may bite soon..
Here is a recent WSJ article on the subject
Disclosure (“none” means no position):
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Wells Fargo Buying…..What?
Some thoughts on the “candy” Wells Fargo (WFC) may be after..
Reuters Reports:
The chairman of the No. 2 U.S. mortgage bank said on Wednesday that his company was “buying with both hands” and, given the distressed state of financial assets, he felt “like a kid in a candy store.”
Wells Fargo (WFC) Chairman Richard Kovacevich declined to comment to Reuters at a conference in Beverly Hills, California, on whether the company is interested in buying Washington Mutual Inc (WM) or Wachovia Corp (WB) but indicated he was interested in buying other banks in distress.
“Wells Fargo often buys fixer uppers,” companies that have had some hard knocks and can be rehabilitated in two or three years, he said in a speech at the Association of Corporate Growth 2008 conference. “Given the financial conditions today I feel like a kid in a candy store. There is a lot out there today.”
“We are buying with both hands right now, as we have done for the past year,” Kovacevich said, describing himself as a “confessed serial acquirer.”
Well, we know they are buying insurance operations around the country. Banking? CEO John Stumpf recently said a “large transformational deal was unlikely”.
Does that rule out WB or WM? I think it it means they pick up branches, rather than the whole thing. Or, it means maybe that as Wells looks at the books of the most mentioned two banks, things are not really as bad there as people currently think vs the price they can be had at.
I would be very surprised at an outright buy…..pieces? Yes.
Disclosure (“none” means no position):Long WB,WFC, none
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Now SEC Increases Rhetoric
SEC Commish Chris cox is getting real good with the memo thing…
Less than 24 hours after yesterday’s note, Cox gives us this.
FOR IMMEDIATE RELEASE
2008-209
Washington, D.C., Sept. 17, 2008 — Securities and Exchange Commission Chairman Christopher Cox and SEC Enforcement Division Director Linda Chatman Thomsen issued the following statements today concerning ongoing and forthcoming Commission actions to investigate fraud and manipulation in the nation’s securities markets:
“Millions of investors entrust their savings to our securities markets because they can be confident that our markets are orderly, liquid, efficient, and rational,” said Chairman Cox. “The turmoil in today’s markets, particularly in the financial sector, is challenging that assumption for ordinary Americans. Markets are the best tool a free society has to price and allocate assets across a complex economy, but as is well known from experience, sometimes the wisdom of crowds is supplanted by crowd behavior. We need well-functioning markets to help us draw the line between reasonable miscalculation and error or something worse involving the failure of due diligence, self-dealing, and conflicts of interest. It is thus vitally important that the market mechanism continue to inspire investor confidence.
“In order to ensure that hidden manipulation, illegal naked short selling, or illegitimate trading tactics do not drive market behavior and undermine confidence, the SEC today took several actions to address short selling abuses,” Chairman Cox continued. “In addition to these initiatives, which will take effect at 12:01 a.m. ET on Thursday, I am asking the Commission to consider on an emergency basis a new disclosure rule that will require hedge funds and other large investors to disclose their short positions. Prepared by the staffs of the Division of Investment Management and the Division of Corporation Finance, the new rule will be designed to ensure transparency in short selling. Managers with more than $100 million invested in securities would be required to promptly begin public reporting of their daily short positions. The managers currently report their long positions to the SEC.”
Chairman Cox continued, “Director Thomsen and the Division of Enforcement will also expand their ongoing investigations by undertaking a series of additional enforcement measures against market manipulation. The Enforcement Division will obtain disclosure from significant hedge funds and other institutional traders of their past trading positions in specific securities. Those institutions will also be required immediately to secure all of their communication records in anticipation of subpoenas for these records.”
SEC Director of Enforcement Linda Chatman Thomsen said, “The Enforcement Division has been investigating and will continue to investigate any suggestion of manipulative trading. We are committed to using every weapon in our arsenal to combat market manipulation that threatens investors and capital markets.”
The Commission is actively considering additional actions as appropriate.
I guess the question has to be…..why haven’t we required short-seller disclosure before? We have been complaining for years about short sellers, why not require disclosure? All I have heard from the SEC is “transparency”, yet, nothing has been done until now, the actually move towards it? Even at that, it is still “just a thought”, not an action.
The SEC needs to actually do something…..save us the memos.
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Hank Greenberg Talks (9/16)
This video with Charlie Rose was done the eve of the Gov’t AIG (AIG) bailout..
Disclosure (“none” means no position):None
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Thursday’s Links
Rumors, Twitter, Bogle, Gumshoe
– Jeff Mathews makes a good point
– This is a great product
– Can’t wait to read his books
– Is it just me or do these scam seem to proliferate during booms and busts
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David Einhorn Cuts Helix Energy Stake
In a just filed SEC notice, David Einhorn and Greenlight Capital sold 3.58 million shares of Helix Energy (HLX) at $26.40 a share.
The move come just a day after he added shares at prices between $26 and $28 each.
Disclosure (“none” means no position):None
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WOW. What a couple weeks this will have been..
Goldman Sachs (GS) will be the last investment bank standing if there is any truth to this rumor.
The NY Times is reporting Morgan Stanley(MS) CEO John Mack received a call over the weekend from Wachovia (WB) CEO Bob Steel about a possible merger.
Mack is reported to have said he is considering the idea…
Disclosure (“none” means no position):Long WB, none
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Longs Dismisses Higher Walgreen’s Offer
Ok, has managament at Longs Drugs (LDG) never heard of Bill Ackman?
Market Watch Reports:
Longs Drug said its board won’t have negotiations or provide due diligence materials Walgreen was seeking. It also said Walgreen (WAG) has given no assurances the deal will be completed as it gave no timetable. Walgreen on Friday told Longs it was looking to offer $75 a share, subject to additional due diligence. Walgreen said it was “confident” it could secure antitrust approvals and had hired two real estate investment firms to handle potential store sales.
“We are disappointed with the refusal of the Longs board to discuss our superior proposal,” Walgreen said in a statement. “We remain committed to pursuing our proposal, which we believe creates superior value for our respective stockholders.”
This should be criminal. Longs has nothing to lose in negotiating with Walgreen. Why? the CVS tender offer is a one year deal. That gives Longs one year to find a better offer. In that time they could assure Walgreen can complete the deal and run it by the FTC.
Longs has rejected shareholder attempts to look at the company’s lease agreements. Now, Ackman’s Pershing has an economic interest in 26% of Long’s shares. How can you deny someone who has 26% of the stock a look at the books? How?
When did the interest of management trump the rights of stockholders as owners? This is as blatant an example as I have seen. One can argue about golden parachutes and their legitimacy all day but to deny a 26% owner a look at the leases of the company he owns, it should be illegal.
At least one thing will come of this. The next letter Ackman fires off the Long’s will be a classic. I’ll have it for you as soon as I get it.
Disclosure (“none” means no position):none
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OK, let’s just ignore the obvious off color jokes we could probably run with for another 200 words. That being said, readers know I am not a fan of SEC Commish Cris Cox and his tenure. Simply put, if you have a rule, enforce it and remove it as a rule. Cox has done nothing about “naked shots” sales for years now despite constantly talking about it. Do something about it or shut up. Let’s look.
FOR IMMEDIATE RELEASE
2008-204Washington, D.C., Sept. 17, 2008 — The Securities and Exchange Commission today took several coordinated actions to strengthen investor protections against “naked” short selling. The Commission’s actions will apply to the securities of all public companies, including all companies in the financial sector. The actions are effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.
“These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling,” said SEC Chairman Christopher Cox. “The Enforcement Division, the Office of Compliance Inspections and Examinations, and the Division of Trading and Markets will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation.”
In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn’t actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.
Today’s Commission actions, which are the result of rulemaking under the Administrative Procedure Act, go beyond its previously issued emergency order, which was limited to the securities of financial firms with access to the Federal Reserve’s Primary Dealer Credit Facility. Because the agency’s exercise of its emergency authority is limited to 30 days, the previous order under Section 12(k)(2) of the Securities Exchange Act of 1934 expired on Aug. 12, 2008.
The Commission’s actions were as follows:
Hard T+3 Close-Out Requirement; Penalties for Violation Include Prohibition of Further Short Sales, Mandatory Pre-BorrowThe Commission adopted, on an interim final basis, a new rule requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.
If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller’s behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer’s activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.
Although the rule will be effective immediately, the Commission is seeking comment during a period of 30 days on all aspects of the rule. The Commission expects to follow further rulemaking procedures at the expiration of the comment period.
Exception for Options Market Makers from Short Selling Close-Out Provisions in Reg SHO RepealedThe Commission approved a final rule to eliminate the options market maker exception from the close-out requirement of Rule 203(b)(3) in Regulation SHO. This rule change also becomes effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.
As a result, options market makers will be treated in the same way as all other market participants, and required to abide by the hard T+3 closeout requirements that effectively ban naked short selling.
Rule 10b-21 Short Selling Anti-Fraud RuleThe Commission adopted Rule 10b-21, which expressly targets fraudulent short selling transactions. The new rule covers short sellers who deceive broker-dealers or any other market participants. Specifically, the new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This rule also becomes effective at 12:01 a.m. ET on Thursday.
So, how is any of what is being describe about a investor issue? I use Etrade. If I want to short a stock, I go through them. They either tell me there are shares available or not.
If the shares are not available to shot and the broker allows the short sale, they are the responsible party, no?
Even with all this, the “new/old rule” still does not take effect for 30 days pending “comment”. In other words, sell away boys until mid-October. This isn’t a matter of more or less regulation, this is a simple mater of enforcing rules already on the books. One cannot even consider Cox a “free market” guy, just impudent.
How long have we been hearing the same song? At least two year off the top of my head. Naked shorting is rampant as witnessed in a Sears Holdings (SHLD) post on it I did. Cox just needs to do something and stop issuing press releases, blaming the wrong parties and asking for comment. Either ban it and stop it, or allow it.
Do something, anything, just stop talking about it
Disclosure (“none” means no position):Long SHLD.
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Wednesday’s Links
McCain, Target, Doom, Master’s
– Not that most of us already did not know this, but a review of records indicates McCain has reaches across the isle far more than Obama
– Isn’t it almost always bad news for shareholders when companies buy stadium naming rights?
– Let’s hope his streak ends
– The StockMaster’s make a great point
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Phillip Morris Completes Acquisition
Phillip Morris International (PM) has closed the acquisition of Canadian cigarette maker Rothmans Inc. after receiving Canadian Gov’t approval.
Philip Morris said owners of about 47 million shares or 68% of the company, had accepted its offer of 30 Canadian dollars (about $28.16) per share. It will pay for those shares on Friday. They extended their offer by 10 days to allow shareholders to tender remaining shares.
This follows an industry trend of consolidation. Altria (MO) said earlier this month that it would buy smokeless tobacco maker UST (UST). And in January, Imperial Tobacco (IMT) bought Franco-Spanish company Altadis.There is much speculation about a possible eventual buyout of Lorillard (LO), which was spun off from the Loews (L) recently.
In Q2, PM started production of Marlboro cigarettes at two factories in China and have a partnership with the state-owned China National Tobacco, the only tobacco company in the world larger than Philip Morris International itself.
Rothmans owns 60% of Rothmans, Benson & Hedges Inc., which makes and sells cigarettes including Benson & Hedges, Craven A and Mark Ten. Philip Morris owns the remaining 40%.
PM pays 4% dividend and is growing earnings 15% to 20% in a market it has just begun to enter full force. this is one of those “buy it and put it away” investments.
Disclosure (“none” means no position):Long PM, Mo, none
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Walter Schloss Talks Value
The guy Berkshire’s (BRK.A) Warren Buffett admires talks about how e chooses companies.
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In Case You Haven’t Heard
With all the myopic focus on Merrill (MER), Lehman (LEH), AIG (AIG), Fannie (FNM), Freddie (FRE) the last 2 weeks days, there are some other things going on..
– Did you hear about Ike? Can’t help but notice the apathy in the media towards those affected
– Oil looks to fall below $90
– ABC’s Brian Ross appears to think Sarah Palin is the only candidate in the election.
– The NFL Season has started (Thank God)…..
– The Yankees season is officially over…..
– Housing? Still sucks…
Disclosure (“none” means no position):
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It’s official, AIG (AIG) will not go under. Here are the details…
The Federal Reserve Board on Tuesday, with the full support of the Treasury
Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.
The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
This had to be done and it is being done in a way that current shareholders, will see little benefit for quite some time (if ever if they bought shares last year). The market really did hold its own through Bear Sterns (BSC), Fannie (FNM), Freddie (FRE) , Lehman (LEH) and Merrill (MER). There are, however, only so many shots anyone can take before throwing in the towel and AIG may just have been that final shot for the market and its participants.
What does remain to be seen is who starts picking up pieces of it now that the process will begin.
No word yet on any management changes. More tomorrow..
Disclosure (“none” means no position):
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