Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
February 28, 2011
Foreign markets were higher
overnight. Oil is down with a $97 handle and Gold is $1410 as the trading day
U.S. market measures opened
higher but GM is lower because of the following article in the WSJ. Obviously
this is the bear case and we don’t agree and that’s what makes a market.
Mean Street: Why the New GM
Is Destined To Lose
For those of you who missed
out on GM’s IPO, here’s your second chance. After almost hitting $40 in early
January, GM’s shares are now back down to their offering price of $33.
That should be tempting. GM
shares are cheap. Or at least, that’s what Wall Street thinks. Its analysts are
nearly unanimous in rating GM a “buy” with price targets from $42 to $50 a
In fact, on Friday, one day
after GM reported a pretty mediocre 4th quarter, Credit Suisse and Citi
actually raised their GM price targets. Fair enough. If you think GM will earn
$4.50 to $5.00 a share in 2011, then you’re only paying seven times earnings
for a re-capitalized, re-born GM. And don’t forget – with the “new” GM, you’re getting $45 billion worth
of tax loss carry-forwards and other tax breaks courtesy of
the U.S. taxpayer.
But if Wall Street is so
enthusiastic about GM, then why did its shares drop almost 5% after last
Thursday’s earnings announcement, its first since the IPO? And why has GM
underperformed the S&P 500 by 15% since the start of the year? The most
obvious answer is the recent spike in oil prices. Over 60% of GM’s revenues in
North America, and even more of its profits, come from the sale of trucks and
SUVs. That’s okay when gas is $2 a gallon, but not okay when it’s twice that
and the Middle East is mired in chaos. For every lost sale of a 12 mpg Sierra
Denali, GM has to sell a handful of 29 mpg Chevy Impalas to break-even.
But while investor fears of an
impending oil shock explain some of the sell-off in GM’s shares (Ford’s shares
also down 10% year-to-date) it’s probably not the whole story.
The truth is there are a bunch
of things we learned recently about the “new” GM that should give any sensible
investor pause. We learned that GM’s remarkable progress in China, the world’s
largest auto market, hasn’t been very remarkable of late. GM’s market share
fell from 13.2% to 11.4% year-over-year – and profits were down by almost a
third. We learned that GM’s perennially underperforming business in Europe was
still underperforming. The “new” GM lost an astonishing $630 million in Europe
last quarter. We learned that GM North America is back to juicing incentive
payments and boosting fleet sales, two of the very practices that got the “old”
GM into trouble. And, perhaps, most significantly, we learned that the “new” GM
is still operating in an “old” industry where there are just too many carmakers
and too much overcapacity.
A big announcement from Volvo
last week was a startling reminder of why GM will struggle to earn reliable
profits. Volvo, you may recall, was a failing Swedish-based division of Ford
Motor Company until it was bought by Zhejiang Geely Holding of China. Now, according to the WSJ,
Geely is investing $10 to $11 billion in Volvo to double production from
373,000 to 800,000 units over the next five years. It isn’t that Geely today is
much of a threat to GM in either China or the U.S. GM sells more than five
times as many cars in China as Geely. And Volvo sells just 40,000 cars a year
in the U.S. But Geely’s grandiose expansion plan for Volvo is yet another
example of an industry that simply refuses to rationalize itself.
As The Economist recently noted,
“the car industry can produce 94 million cars a year against global demand of
64 million.” (Link 3) That’s lots of spare capacity with much of it in the
wrong places – meaning not in China, India or Brazil.
If you’re thinking of
following Wall Street’s advice and buying GM at $33, please consider this recent
observation from Warren Buffett. “The single most important
decision in evaluating a business is pricing power.”, he said. “If you’ve got
the power to raise prices without losing business to a competitor, you’ve got a
very good business. And if you have to have a prayer session before raising the
price by ten percent, then you’ve got a terrible business.”
With GM’s U.S. market share
now down below 19%, you can be sure there is a non-stop prayer session at the
Renaissance Center in Detroit. Just like the “old” GM, the “new” GM has got
itself a very terrible business.
Swonk, Chief Economist Mesirow Financial
Consumers Bank Extra Cash in
Consumer spending rose a much
less-than-expected 0.2% in January, as consumers banked the extra cash they
received from the expansion of the payroll tax cut, combined with a somewhat
better jobs picture. Indeed, spending actually declined on an
inflation-adjusted basis, as everything from heavy snows to the pullback after
Christmas and higher oil prices put a crimp in spending by middle- and
Core inflation measures remained
relatively tepid, despite the increases in energy costs. The numbers were
gathered, of course, prior to the recent spike in energy prices associated with
turmoil in the Middle East. The best bet is that the spillover effects of
higher oil prices will remain muted, because consumer reaction to higher prices
at the pump is to cut back on everything else. Last week, Richmond Federal
Reserve President Jeff Lacker noted how little of the recent surge in commodity
prices had been passed through to final goods prices. Prices of services
outside of transportation have remained particularly sticky.
That said, inflation hawks within
the Federal Reserve are clearly regaining their voices. Lacker warned that the
Fed would have to act if and when producers are able to pass along more of
those input cost increases later in the year. St. Louis Fed President Jim
Bullard said today that the Fed may need to take a break from QE2 (the Fed's
second round of quantitative easing, i.e., large-scale asset purchases) before
the program is completed in June. The March meeting of the Federal Open Market
Committee (FOMC), in particular, is likely to be heated.
Bottom Line: The recovery
continues, but at a more tepid pace because consumers are still cautious about
how they spend. We should see some bounce in spending as the weather normalizes
in February, but now consumers are struggling with even higher prices at the
pump (I paid almost $4 per gallon for premium over the weekend). This will
increase the tension between the Fed's doves, who see the recent spike in oil
as more of a threat to demand than inflation, and the hawks, who were never too
happy about QE2 in the first place. I expect that Fed Chairman Ben Bernanke
will get his way with policy and that the FOMC will vote to continue QE2 at the
next meeting. That vote, however, is not likely to be unanimous; Charlie
Plosser of the Philadelphia Fed will probably cast the first "nay"
vote of the year.
Frank Buckles, last American
veteran of World War I, dies at 110
Frank Buckles, one of more
than 4 million Americans to serve in World War I, drove ambulances in France
and was later a civilian prisoner of war during Japan's invasion of the
Philippines in WWII. http://www.chicagotribune.com/news/obituaries/la-me-buckles-20110228,0,6194906.story
Condo deals die in shadows of
financially distressed buildings
Buyers aren't the only ones who
have to pass lenders' test; high percentage of rentals, foreclosed units put
some condo buildings on 'blackballed' list. Condo buyers who sat out last
year's real estate market, waiting for prices to bottom or their own financial
footing to improve, find themselves in an enviable situation. Prices have
plunged, and mortgage interest rates, while slowly rising, remain near 5
percent, creating the best home affordability in decades for consumers who
qualify for loans. There's just one problem. It's not just the borrower who has
to be up to snuff, it's the building, too, and in the Chicago area there are
plenty of buildings that lenders won't touch.
Among the deal killers: too many
renters in a building, pending litigation, inadequate association reserves and
delinquent assessments. Those are some of the criteria lenders must look at in
order to sell the loan to Fannie Mae or Freddie Mac, the troubled,
government-sponsored entities, and the Federal Housing Administration, the
first choice for many first-time homebuyers. Combined, the three agencies
account for about 90 percent of the secondary loan market. Real estate agents
and lenders say they are seeing more developers, condo associations and
individual owners in economic distress, and, as a result, so are buildings.
(Dealbook) Buffett said
Berkshire last year spent more than $5 billion on property and equipment in
the United States – more than 90 percent of the company’s total expenditure –
and that the overwhelming part of the company’s future investment will be at
home. “The prophets of doom have overlooked the all-important factor that is
certain: Human potential is far from exhausted, and the American system for
unleashing that potential – a system that has worked wonders for over two
centuries despite frequent interruptions for recessions and even a Civil War –
remains alive and effective,” he wrote. “Now, as in 1776, 1861, 1932 and 1941,
America’s best days lie ahead.”
(CNN) -- An Arizona state
senator involved in an apparent freeway-shoulder scuffle with his girlfriend
was not detained because he has immunity from arrest while the legislature is
in session, police said. Officers in Phoenix who were called to investigate a
reported altercation found that both Sen. Scott Bundgaard and his girlfriend,
Aubry Ballard, had marks suggesting a physical dispute,
police spokesman Sgt. Tommy Thompson said. Bundgaard, a Republican and the
state senate's majority leader, was allowed to go -- although prosecutors
will review the case and could later file charges, Thompson said. Ballard
was arrested on suspicion of misdemeanor assault and taken to jail.
Oil ended at $96.85. Gold
finished at $1408 and European bourses closed higher.
DJIA and S&P 500 closed higher with the NAZZ slightly lower. Breadth was
positive on the NYSE and negative on the NAZZ and many of the high flying tech
momentum plays were lower as were financials. Volume was light.
February 25, 2011
Why Isn't Wall Street in Jail?
Aguirre joined the SEC in
September 2004. Two days into his career as a financial investigator, he was
asked to look into an insider-trading complaint against a hedge-fund megastar
named Art Samberg. ….
Aguirre also started to feel
pressure from Morgan Stanley, which was in the process of trying to rehire Mack
as CEO. At first, Aguirre was contacted by the bank's regulatory liaison, Eric
Dinallo, a former top aide to Eliot Spitzer. But it didn't take long for Morgan
Stanley to work its way up the SEC chain of command. Within three days, another
of the firm's lawyers, Mary Jo White, was on the phone with the SEC's director
of enforcement. In a shocking move that was later singled out by Senate
investigators, the director actually appeared to reassure White, dismissing the
case against Mack as "smoke" rather than "fire." White,
incidentally, was herself the former U.S. attorney of the Southern District of
New York — one of the top cops on Wall Street.
Pause for a minute to take
this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall
Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In
the course of doing so, he finds out that his target's firm is being
represented not only by Eliot Spitzer's former top aide, but by the former U.S.
attorney overseeing Wall Street, who is going four levels over his head to
speak directly to the chief of the SEC's enforcement division — not Aguirre's
boss, but his boss's boss's boss's boss. Mack himself, meanwhile, was being
represented by Gary Lynch, a former SEC director of enforcement…. Full story
and fun read through tears at:
Asian markets were higher
overnight and gold is $1402. European bourses are higher at midday and U.S.
futures indicate a higher opening. Oil has a $97 handle as the trading day
Putting Chicago to shame
The Wisconsin brouhaha has been
exhaustively covered but we notice that the media when reporting usually
neglect to mention that the state troopers sent to arrest the Democratic state
senators are commanded by the father of the Majority Leader of the Wisconsin
State Senate the Speaker of the Wisconsin House of Representatives who are
brothers. Until he was appointed Command of the State Troopers Stephen
Fitzgerald was out of work.
(Milwaukee Journal) February 9,
2011-The father of the state’s two most powerful legislators was named
Tuesday as the head of the State Patrol. Department of
Transportation Secretary Mark Gottlieb passed over five current top officials
at the State Patrol to give the job to Stephen Fitzgerald, 68, a former Dodge
County sheriff with four decades in law enforcement who was until May the U.S.
marshal in the Western District of Wisconsin. Fitzgerald ran for Dodge County
sheriff again in September in the Republican primary but was defeated 2-to-1 by
incumbent Sheriff Todd Nehls. Fitzgerald starts Monday and will earn
$105,700, slightly less than the current acting superintendent.
Swonk, Chief Economist Mesirow Financial
GDP Revised Down in Fourth Quarter
Real GDP for the fourth
quarter was revised down from an initial estimate of 3.2% to 2.8% on weaker
consumer spending, a smaller decline in imports and not surprisingly, even
larger-than-initially reported declines in spending at the state and local
levels. Indeed, we are expecting state and local government spending to be a major
drag on growth in 2011, as the drama of bringing their budgets into balance
Moreover, incoming data
suggest that growth in the first quarter will be weaker than many had hoped.
Everything, from inclement weather to soaring prices at the pump, is
contributing to those revisions, which now suggest growth closer to 3% than 4%
in the first quarter. Housing activity remains particularly weak, while budget
battles at the state and local levels are just heating up.
Surging oil prices represent a greater threat to demand than inflation, against
such a weak economic backdrop as we see in the U.S. A double dip is unlikely,
but the economy could very well stall, like it did last spring, if Saudi Arabia
fails to deliver on promises of more oil. The good news is that they appear to
be more than willing to do so.
Sentiment Buoyed by
Optimism among Wealthiest Households
The Thomas Reuters/University
of Michigan consumer sentiment index jumped to 77.5 in February, the highest
level since the start of the recession in January 2008. All of that
improvement, not surprisingly, was due to an improvement in confidence among
the highest-income households. The majority of Americans, somewhat rightly,
expect the economy to improve in the year ahead, but for overall economic
conditions to remain poor. Indeed, confidence actually deteriorated among the
poorest of households, as higher energy prices ate into limited household
budgets, even before the market impact of the spreading crisis in the Middle East.
Improvements in the job
situation were the primary reason for increased confidence, and more than
offset concerns about rising energy prices. It is worth noting, however, that
the survey was taken prior to the most recent spike in energy prices and volatility
in financial markets.
Bottom Line: The
recession revealed the deep divisions created by rising income inequalities,
especially once credit evaporated in the fall of 2008. The unevenness of the
recovery has done nothing to cure that problem. Indeed, the income divide is
likely to become even more apparent in the year ahead, as the most vulnerable
suffer disproportionate pain in the face of higher energy costs.
disappointed and we added shares at
$27.40. We also added AT&T and GM which has moved back down 15% to
its late fall 2010 IPO price. AT&T was added for the dividend and because
we think the loss of the exclusive Apple franchise is now in the price. We
added GM because our theme is that because folks aren’t trading up in the home
market they will be more likely to spend their extra dollars on autos for which
creative financing is always available and profitable to the auto industry.
The Tory (conservative)
government in Britain is cutting spending and lowering taxes on the rich and
corporations wheel eliminating tax credits for the middle class. And how is
that working out after three months?
(The Guardian) Britain's
economy shrank by 0.6% in the final quarter of last year, a sharper fall than previously
thought. The surprise downward revision, from a 0.5% quarterly drop reported last month,
was blamed on industry and service sector firms whose performance was worse
than originally estimated. Consumer spending also slipped and the economy was
kept afloat by higher government spending, which will see sharp cuts in coming
months. The Office for National Statistics stuck to its view that the harsh
winter weather in December – the coldest December on record – contributed 0.5
percentage points to the decline, so without the snow GDP would still have
shown a slight fall.
European bourses reversed five
days of losses to close higher as traders exhausted their ability to
concentrate on Libya. Oil ended $1 higher at $98 just in case something occurs
over the week-end and Gold finished the week at $1410.
major market measures closed higher and near their best levels with the S&P
500 up 1%; the DJIA less; and the NAZZ more. Breadth was 4/1 to the good and
volume light. There has been light volume on the rallies and heavier volume on
February 24, 2011
“… and understand this: If American workers are being denied their
right to organize and collectively bargain when I’m in the White House, I will
put on a comfortable pair of shoes myself, I’ll will walk on that picket line
with you as President of the United States of America. Because workers deserve
to know that somebody is standing in their corner.”
Asia was lower with India
dropping 3%. European bourses are lower at midday and Gold is $1430 with Oil
touching $100 as the trading day begins. U.S. futures are flat pre-market
opening after trading lower overnight.
(NYT) General Motors,
which nearly collapsed from the weight of its debts two years ago before reorganizing
in a government-sponsored bankruptcy, said Thursday that it earned $4.7 billion
in 2010, the most in more than a decade. It was the first profitable year since
2004 for G.M., which became publicly traded in November, ending a streak of
losses totaling about $90 billion.
The shareholders of GM, i.e.
widows and orphans, were wiped out in the bankruptcy. In their books that was a
total collapse not near collapse as the NYT suggests.
Forty percent of the
buildings in Dubai are vacant, according to Arabian Business.
For comparison only 28 percent of homes are vacant in America's ghost town, Detroit. Now
here's the scary part. Dubai hasn't stopped building: As many as 48,000 homes
will be completed in the next two years, increasing current supply by 12
percent, Landmark Advisory estimates. Around 12 million sq. ft. of commercial
space probably will be completed in Dubai this year, according to Jones Lang
LaSalle Inc. Real estate values have already fallen by over 60 percent since
the Dubai crisis, according to Arabian Business.
New properties coming online are expected to push prices down by another 10-15
percent, in a slump lasting another 18 months. Last year Dubai office space was
the fourth most expensive in the world, at $1,214 per square foot per year,
according to Cushman & Wakefield.
This year the emirate has fallen off the list,
with declines of more than 30 percent.
Read more: http://www.businessinsider.com/dubai-40-percent
the banksters win; tails British taxpayers lose: this couldn’t happen in the
U.S. - oops sorry it already did. We wonder if they are getting rid of
teachers’ unions in Britain.
Bailed out Royal Bank of Scotland
reported losses of £1.1bn for 2010 – but still plans to pay out bonuses of
£950m to its bankers. The figure is an improvement on the loss of £3.6bn a year ago
and the record breaking £24bn loss in
2008, when it was rescued by the taxpayer. Even so the shares
fell more than 3% to 45.8p in early trading as the losses were still larger
than market had been expecting. RBS returned to the black in the final quarter
even though it was hit by a £1.1bn charge for its Irish banking unit, Ulster.
Total impairments in Ulster increased to £3.8bn for the year, while total
impairment losses were down 33% at £9.2bn. Stephen Hester, who was parachuted
in as chief executive in October 2008, confirmed that he intended to accept the
£2.04m bonus that was announced earlier this
month as part of the Project Merlin deal with the
government. The bonus is to be placed in a so-called "share bank" and
deferred for three years. The bonus pool for RBS's investment banking arm –
known as RBS Global Banking and Markets – was set at £950m in 2010, down on the
£1.3bn in 2009, and cash bonuses were capped at £2,000.
Despite this reduction in the
bonus pool, the proportion of revenue the bank uses to pay its investment
banking staff rose to 34% from 26% a year ago, although the bank insisted that
pay had fallen by £200m in the division. Average pay fell to £144,000 in 2010
from £162,000 in 2009.
saying it: (Hewlett Packard) Looks Cheap
We pooh-pooh plenty of stocks
high price-to-earnings ratios. But we’re more tentative about
saying when things look cheap. That’s because quality can be tough to find,
which brings us to H-P’s terrible session today. It’s down nearly 11%.
Still, H-P isn’t exactly a fly-by-night operation. And this doggie could be
considered pretty cheap. It’s trading at an 11.7 multiple of the last twelve
months earnings. (That’s less than the five-year average multiple of 17.8.) The
multiple of price to consensus expectations for the next 12 months is around 8,
way below the five year average of 12.1. On the other hand, it’s less than
clear cut that the company is underpriced based on its price-to-book ratio,
which is 2.4. That’s below the five-year average of 2.7, but more than the 1.8
low point over the last five years. Quick refresher: book value is a best-guess
measure of the sum that could be raised if the bank liquidated all of its
assets immediately. Think of book value as a yardstick that measures what would
be left for shareholders if the company were sold. Hey, do your own homework.
But at current prices, it could be an interesting stock for a buy-and-hold
investor to take a gander at.
Swonk, Chief Economist Mesirow Financial
Durable Goods Orders Mixed,
Jobless Claims Improving
Durable goods orders
increased 2.7% in January, reversing three consecutive monthly
declines. All of that increase, however, can be attributed to a surge in
aircraft orders, which are not only highly volatile, but take a long time (five
years) to actually produce. Nondefense capital goods orders excluding aircraft
fell 6.9%. Orders for computers and communications equipment were particularly
weak, but some of that may be due to price cuts. The bright spot was autos. We
are also hearing anecdotal reports that demand for heavy trucks is picking up,
as the old trucks are just that: old, and need to be replaced.
Shipments of durable goods,
which are less volatile and a better indicator of actual investment in the U.S.
economy, increased a modest 0.3%, the fifth consecutive rise. In general, the
headline data was not as good as many had hoped, but when viewed in the context
of upward revisions to previous reports, plus the volatility implicit in
initial reports, it appears that corporations continue to upgrade and replace
older equipment. Firms are being pressured to redeploy the cash they have on
hand, with both carrots and sticks. Institutional investors are insisting, but
tax breaks for investment are sweetening the incentive to spend now.
Separately, jobless claims
fell to 391,000 from upward revisions for the previous week. It
appears that the backlog created by heavy winter storms has finally been
cleared, and we are getting closer to the underlying trend, which is tracking
close to 400,000 on the basis of a four-week moving average; it's the lowest level
since July 2008. To put that in perspective, we were already in a recession in
the summer of 2008, following a spike in oil prices to more than $140 per
barrel, but we had yet to see the avalanche of layoffs that followed the
failure of Lehman Brothers in September.
The fly in the ointment is
uncertainty in the Middle East: both the effect it has on financial markets,
and the fate of oil. The best bet is that Saudi Arabia will increase its
production to make up for at least a portion of the shortfall that is likely to
continue from Libya. Those gains are not going to be enough, however, to offset
potential disruptions elsewhere in the Middle East. As a result, they will
temper but not fully reverse the recent spike in oil prices.
Bottom Line: If
we lived in a vacuum, today's data would have been seen as mostly good news.
But we don't live in a vacuum. The situation in the Middle East will affect us,
both in raising inflation and curbing demand, if it can't be contained soon.
This is a difficult situation for the Federal Reserve. The central tendency
will be to worry more about demand than inflation implications, as it has
proven the greater threat to the economy over the last decade. Fed Governor
Kevin Warsh, who resigned as of March 31, is probably feeling pretty good about
his decision to leave.
)The Republican plan to slash government spending by $61bn in 2011 could
reduce US economic growth by 1.5 to 2 percentage points in the second and third
quarters of the year, a Goldman Sachs economist has warned. The Goldman
analysis also points out that a potential compromise deal with $25bn in
spending reductions this year – a more likely scenario – would lead to a
smaller drag on growth of 1 percentage point in the second quarter. Thereafter
it would fade, with “negligible” impact on US output by the end of the year.
(Bloomberg) Purchases of new
houses in the U.S. fell more than forecast in January, reflecting declines in
the West and South that indicate a California tax credit and bad weather
may have played a role. Sales declined 13 percent to a 284,000 annual pace,
figures from the Commerce Department showed today in Washington. The median estimate of
economists surveyed by Bloomberg News projected a decrease to a 305,000 rate.
Demand dropped 37 percent in the West and 13 percent in the South. Foreclosures
will keep depressing prices, making distressed, previously owned properties
more attractive to prospective buyers than new houses. Combined with
unemployment at 9 percent and tight credit standards, home construction
may keep lagging behind the rest of the economy this year. “This is still a
very weak demand picture,” said Jonathan Basile, a senior economist at
Credit Suisse in New York.
“There has been no recovery in housing starts, permits or new-home sales. We’re
in a period where demand and supply will run well below average.”
DreamWorks reports tonight and hopefully Wall Street
will be disappointed. We want to take a position down here around $27. The 12
month high was $45
DreamWorks Animation SKG, Inc.
develops and produces animated feature films. The company also offers
television specials and series, live entertainment properties, online virtual
worlds, and related consumer products. It also produces animated feature films
for theatrical, home entertainment, television, and merchandising and licensing
markets. As of February 23, 2010, the company had theatrically released 18
animated feature films, including the franchise properties, Shrek, Madagascar,
and Kung Fu Panda. It has strategic alliances with McDonalds, Hewlett-Packard,
Intel, Samsung Electronics Co. Ltd., and Royal Caribbean International.
DreamWorks Animation SKG, Inc. was founded in 1985 and is headquartered in
Oil closed lower on the day
but still had a $97 handle. Gold also dropped a bit ending at $1404. European
markets ended moderately lower. The Libya blowup seems to be wearing off.
major market measures were lower much of the day but closed mixed as techs
helped the NAZZ and S&P 500 but neglected the DJIA. Breadth was flat and
We have been in and out of Yahoo at these levels ($14-$16)
and hope to buy some lower in the correction. Below is an interesting article
I have had a love-hate
relationship with Yahoo (YHOO) for five years now. I have always thought the
stock was undervalued and primed for a turnaround that could unlock value.
That's why I longed the stock and led an activist campaign against it.
Unfortunately, even though the campaign resulted in former CEO Terry Semel
quitting in 2007, the company's board muffed the chance to sign a deal with
Microsoft (MSFT) leading to the company's stock
price to collapse. It's really never recovered.
Yahoo's new CEO is into her
third year at the helm of the Internet company. Most investors and analysts are
fixated on her efforts to turn the business around. When you listen to the
earnings calls, 95% of the discussion from Carol Bartz and her CFO, Tim Morse,
focuses on the wholly-owned business.
Yet, despite the company finally
biting the bullet and doing needed layoffs and closing underperforming or
overlapping businesses -- things that have been obvious to many for years -- my
interest in Yahoo is purely based on its private stake in Alibaba Group, the
parent company of Alibaba.com, Taobao and Alipay
There has been some general
talk among investors who don't follow Yahoo closely that Yahoo should
"monetize" the Asian assets. By this, I think they are suggesting
that Yahoo divest its stake in Yahoo Japan and Alibaba Group. There also seems
to be a lot of hope that private equity will come in and buy the wholly-owned
company. Remember the spike-up in shares we saw a few months ago when rumors
circulated that AOL (AOL) was going to team up with private
equity to make a bid for Yahoo!?
To me, all the private equity
talk and concern about the current or future health of the Yahoo core business
is a side-show. I believe most of Yahoo's largest shareholders believe -- as I
do -- that the real value-creation in Yahoo shares will come when the market
sees how big Taobao and Alipay are going to be in the next 10 years.
Let's do a sum-of-the-parts on
Tim Morse discussed last week
that they are looking into a tax-free spin-off of their Yahoo Japan stake. At
recent market prices, Yahoo!'s 35% stake in Yahoo Japan is worth $5.76 per
At the end of last quarter,
Yahoo's cash and deferred revenue amounted to $2.96 per share.
Its 29% stake in Alibaba.com
is currently worth $2.9 billion or $2.21 per share. That's actually 9% higher
than what it was worth at the end of December, even after the news over the
weekend that Alibaba.com's CEO and CFO were stepping down due to some small
cases of fraud, which were found on the B2B site recently. That news dropped
Alibaba.com's stock by 8% on Monday in Hong Kong, and carried over to impacting
on Yahoo's stock price on Tuesday. But, even with that drop, Alibaba.com's stock
only retraced to late January levels.
What is Yahoo's core business
worth? If you take the mid-range of next year's earnings per share (of 91
cents) and apply a below market multiple of 7x, you come to a per share
valuation for the wholly-owned business of $6.37. That's roughly half the
forward valuation for the S&P 500 at the moment.
You add all these numbers up
and you get to a per share valuation of $17.30 and we haven't counted anything
for the Asian private assets yet.
There are differing views about
what Taobao and Alipay are worth because they are private. Some analysts
covering Yahoo value these private stakes for little more than what Alibaba.com
is worth ($2.5 billion). Others put it at around $10 billion. Most analysts
also take off 10% of the stake's worth as a liquidity discount and 30% as a tax
The bottom line is that both
Taobao (which could be best described as a combination of eBay (EBAY) and Amazon (AMZN) of China, with close to a 90%
market share) and Alipay (which is the dominant e-payments processor in China)
are massive companies with an even brighter future. Credit Suisse (CS) recently projected that the e-commerce market
(including payments) in China would increase five-fold in the next four years.
Reports in the local Chinese
press have estimated that Taobao's annual revenue alone is now almost $1
billion and is profitable. Alipay's revenues are also believed to be large with
more than a 50% market share of the payments market currently in China,
although some speculate it is not yet profitable for Alibaba Group. We do know
that PayPal will surpass eBay's Marketplace business in size within the next
three to five years, according to that company's recent analyst day
Marianne Wolk of Susquehanna
has done the best analysis I've seen on the potential value to Yahoo! of the
Taobao and Alipay stakes. She's also estimated that Taobao did between $825
million and $1.2 billion in revenue last year. Based on a lowball estimate of
future growth, Wolk believes Taobao's revenues will reach $2.5 billion by 2012.
In an optimistic scenario, she thinks the site could hit $7.35 billion in
revenues by then.
What would Taobao be worth in
an IPO? There have been two popular recent Chinese IPOs: high-flier online
video site Youku (YOKU) and a much smaller competitor to Taobao called
At current prices, Dangdang
sports an Enterprise Value to Forward Revenue multiple of 2.4x (Wolk estimates
DANG will do $800 million in revenues by then). Youku trades at a higher
multiple of 21x (with her assuming they will do $170 million in revenues by
It's likely that a Taobao IPO
would fall in-between Dangdang and Youku from a multiple perspective. But a
mid-range multiple of 10x, along with a mid-range estimate of 2012 Taobao
revenues of $5 billion gives a current valuation of at least $50 billion. Some
I've spoken to within China believe that, a Taobao IPO within the next 12
months could lead to a valuation closer to $100 billion based on market
excitement over the dramatic coming penetration of the Internet in China over
the next five years, increased standard of living of shoppers, and Taobao's dominant
Assuming a current $50 billion
valuation for Taobao alone (and assuming Alipay is worth half of that), Yahoo's
40% stake in the private Alibaba entities is worth $30 billion today
(representing $22.90 per share). Even if you take a 40% haircut on that for
taxes and illiquidity, that's $18 billion of value or $13.74 per share for
these private stakes.
This brings a total
sum-of-the-parts valuation of Yahoo! to $31.04 per share.
Why then is the market pricing
Yahoo at nearly half that valuation? I think it's simply a case of US-centric
investors and analysts not being aware of what's going on with private Taobao
and Alipay. Of course, Carol Bartz doesn't discuss this inherent value that's
being created because she has no part in it. By Tim Morse's own admission last
week, Yahoo is purely a financial investor in Alibaba Group. It provides no
So, despite the chorus of
Yahoo critics who say the stock has been "dead money" for years,
there is good reason to believe there will be a dramatic re-pricing of Yahoo's
stock in the next couple of years.
While I think it would be
foolish for Yahoo to sell its entire 40% stake in Alibaba Group anytime soon,
there would be some merit to selling a portion of it back to Alibaba Group
At the moment, Yahoo owns 40%
of Alibaba Group, while Softbank owns 30%. Alibaba Group management only owns
There is no indication that
there will be an Alipay or Taobao IPO anytime soon, according to the latest
public comments. If I were Alibaba management, I would like more "skin in
the game" before an IPO. Carol Bartz also has an incentive to see an IPO happen.
According to her employment contract, she can maximize her wealth, if she can
get Yahoo's stock price above $35.19 for
20 straight trading days by
the end of 2012. A hot Taobao IPO would make that possible.
Now, almost no one assumes it
is possible for Yahoo to ever get its stock higher than the old Microsoft offer
for the company in 2008. But, on a sum-of-the-parts basis, I believe that's a
very realistic goal between now and the end of 2012. And I like it that Bartz
has a big incentive to make something happen. If she and Softbank decided to do
a deal with Alibaba management, it could work out to be a beautiful
In the meantime, I'm happy to
patiently wait, owning an asset worth $1 that is trading for 55 cents.
February 23, 2011
The major market measures opened
lower after trading higher overnight. Asian and European markets lower and are
mixed mild and gold is $1404 while Oil continues to climb with it trading at
$96 and change as the situation in Libya remains cloudy this morning.
Packard reported in line earrings and revenues for the quarter but forecast
next year’s revenues at $131 billion which is lower than the $133 billion
analysts were expecting and the price is off $5.25 (12%) and we added shares to
accounts. We thought the stock had run away from us but we forgot how fickle
Wall Street folks are.
(WSJ) H-P's computer
sales to businesses climbed 11% for its fiscal first quarter—but it wasn't
enough to offset a 12% drop in sales to consumers. Overall, revenue in H-P's
personal-systems group, which makes PCs, declined 1% to $10.4 billion. However,
the unit's operating income jumped 27% to $672 million, its highest ever. H-P's
revenue from servers, networking gear and storage systems increased 22%, and
operating income climbed 36%. Revenue in the company's services business
declined 2%, and operating income was essentially flat, as H-P didn't sign as
many short-term deals as it expected. Revenue and operating income for H-P's
printer business each increased 7%. Overall, H-P said earnings for its first
fiscal quarter ended Jan. 31 was $2.61 billion, or $1.17 a share, up from $2.25
billion, or 93 cents a share, a year earlier. Quarterly revenue rose 3.6% to
$32.3 billion from $31.2 billion a year earlier but was below H-P's projection
of $32.8 billion to $33 billion for the quarter. Since joining the company in
November, Mr. Apotheker has been working on a strategic plan for H-P, but on
Tuesday he deferred questions about his long-term strategy to an event scheduled
for next month. In an interview with the Wall Street Journal last week, Mr.
Apotheker said he expected H-P to expand its software portfolio—about 2% of
revenue in the January quarter—and invest more in "cloud computing,"
the industry's term for software and other computing resources that are
accessed over the Internet. Whereas Mr. Hurd was known for cost cutting, Mr.
Apotheker said in the interview that under his watch H-P would "focus on
profitable growth." "People are suspending their verdicts until the March
event," said Toni Sacconaghi, an analyst at Sanford C. Bernstein. Looking
ahead, H-P forecast fiscal-year earnings of $5.20 to $5.28 a share on revenue
of $130 billion to $131.5 billion, down from its November estimates of earnings
of $5.16 to $5.26 and revenue of $132 billion to $133.5 billion.
also switched our Ford Warrants to Ford Common on a 2/1 ratio. The premium on
the warrants was 60 pennies on the switch (we paid a 40 pennies premium when we
purchased) and 60 pennies per warrant is equal to $1.20 per common share that we
own on the switch. Since we have the cash in accounts which is earning nothing
we made the switch to provide a better feel for our Ford exposure (which we
plan to own for a while) as we add other companies on the correction. We kept
warrants in our smaller accounts for the leverage.
Swonk, Chief Economist Mesirow Financial
Home Sales Increase:
We'll Take It, with a Grain of Salt
Existing home sales rose 2.7%
to a 5.36 million unit (annualized) rate from December. The National
Association of Realtors noted that is the first year-on-year increase in home
sales in seven months. The industry group which gathers the figures credited
what it called "abnormally high levels of all-cash purchases" and
increased investor purchases. These two categories dominated January sales
because first-time buyers and owners of existing homes, who would like to sell,
are still having trouble securing mortgages. Many realtors are complaining of
an increase in cancellations, in which banks pull out after a deal is cut,
scared off by further deterioration in home values. Indeed, median home values
dropped almost 4% from a year earlier, as distressed sales made up a larger
percentage of sales
The good news is that rents
are exceeding the marginal costs of home ownership in many markets, which along
with an improvement in employment, should continue to feed modest gains in the
housing market. The bad news is that recent questions about the quality of the
data suggest that the bust in housing and overhang of inventories may have been
significantly underestimated, suggesting even more downward pressure on prices.
applications surged in the most recent week, the first increase in a very long
time. Almost all of that activity, however, can be attributed to those trying
to refinance. The flight to safety following the initial turmoil in Egypt, in
particular, pushed down Treasury yields and opened a window for those waiting
for a dip in rates.
Bottom Line: The
housing market is showing some but not enough signs of life, especially for
home owners who bought near the peak and are now underwater on their
properties. Moreover, we are not likely to see the kind of buying we should
see, given the improvement in employment and high levels of affordability in
the market, as lenders are expected to remain cautious in underwriting loans
for assets likely to fall further in value. There are definitely deals to be
had, something investors have already figured out. Look for much of what was
recently sold to be rented in the near future. For example, I just noticed a
large residential real estate office open instead of close in Chicago; its
focus is entirely on finding space for renters instead of buyers.
answer is to own both and the markets have given us the opportunity on earnings’
news collapses in both.
(WSJ) Cisco Systems
Inc. has long dominated the business of selling the switching systems
that connect computers, but the networking-technology behemoth now is
increasingly faced with customers like Kevin Gaffer.
Mr. Gaffer is chief executive
of Renkim Corp., a Southgate, Mich., processor of invoices. Until recently he
purchased his company's switches from Cisco. But in December, he bought two
switches from Hewlett-Packard
Co. after it launched a discount program for Cisco customers.
"The price H-P provided
couldn't be passed up," said Mr. Gaffer, adding he paid $361 for each H-P
switch, compared with a quoted price of $4,987 per Cisco device. He said he
will consider H-P gear again when he replaces up to four Cisco switches this
year at his 130-employee company.
A Cisco spokeswoman said the
products weren't comparable: The Cisco switch is meant for large companies; the
H-P model has fewer capabilities and is designed for small businesses.
Marius Haas, H-P's senior vice
president and general manager for networking, said, "We're right there
competing in that space" with Cisco. On Tuesday, H-P reported its
quarterly profit rose
16% and H-P CEO Leo Apotheker
said his firm was winning share in the networking-switch market. But the
technology giant issued a weak sales outlook, sending its sales tumbling in
Mr. Gaffer's example
illustrates the growing competition Cisco faces in its biggest business, the
$13.6 billion switching unit. The San Jose, Calif., company earlier this month
reported a 7% drop in quarterly revenue from switches, a stumble for a business
that represents about a third of Cisco's $40 billion in annual revenue. Wall
Street since has pummeled Cisco's shares, sending its stock down 16% to $18.59
in 4 p.m. trading Tuesday on the NASDAQ Stock Market.
On Tuesday, Cisco named Gary
Moore, executive vice president of services, to the new position of chief
operating officer, marking the first time Chief Executive John Chambers has had
a clear No. 2 since late 2007.
The appointment, which comes
after a string of disappointing financial results, is a signal that Mr.
Chambers needs help managing Cisco's expansion into dozens of businesses.
"Given the state of the
organization, it made sense to have someone with operational responsibilities
driving all these changes throughout the company," a Cisco spokeswoman
said. Mr. Moore is 61, the same age as Mr. Chambers, and isn't seen as a
successor to the CEO.
Cisco has accounted for more
than 70% of global switch revenue since 2004, excluding two quarters in 2009
when the recession took an outsize toll on its sales, according to research
firm Dell'Oro Group.
The cracks in Cisco's
switching business are being driven by increased price and technology
competition from sharp-elbowed rivals such as H-P and Juniper Networks
Inc. Juniper has expanded its share of the network-switching market to around
2.3% from nothing in early 2008, according to Dell'Oro. On Wednesday, Juniper
plans to unveil a new suite of networking gear, called QFabric.
Meanwhile, H-P increased its
share of the network-switching market from around 6% in early 2010 to an
estimated 10.7% in the fourth quarter of 2010, helped by the close of its $2.7
billion acquisition last year of networking-gear maker 3Com Corp.
Since then, H-P has
aggressively pursued large Cisco customers, many of which already buy server
systems and other products from H-P.
Because H-P maintains lower
profit margins than Cisco, it can afford to undercut Cisco's prices with
discounts such as a promotion it announced in December that offers U.S.
customers 20% off the list price of certain switches if they trade in
comparable Cisco gear.
The upshot: Cisco's share of
global switch sales fell to an estimated 70.4% in the fourth quarter of 2010
from 73.8% in the same period in 2008, even as the overall market increased 9%
in 2010 compared with 2008, to a record $20 billion in annual revenue. Cisco's
share of router sales, its second-biggest business, also declined to 53.1% in
the fourth quarter—the lowest level since 1995—while Alcatel-Lucent
and Juniper gained share, Dell'Oro said.
"The competition is
definitely heating up," said Forrester Research analyst Robert Whiteley.
"As more viable competitors enter the market ... companies are getting a
lot more confident in investing in Cisco alternatives."
A Cisco spokeswoman declined
to comment on H-P and Juniper but said its switching "portfolio has never
been in better shape" and added that "unsustainable discounts don't
solve customers' long-term problems."
In a recent interview, Mr.
Chambers attributed the company's switching revenue decline largely to the
higher "price-performance" of Cisco's latest line of switches,
meaning customers now are able to do more with fewer or cheaper switches. Margins
for new products typically increase over time, he said, adding, "It's not
an issue of global competitors putting pricing pressure on us," Mr.
Cisco's rivals said they plan
to continue going after its market share. Cisco is "in a very defensive
position," said David Yen, executive vice president and general manager of
Juniper's switching business. "We definitely will be gaining share."
Still, some customers said
they are sticking with Cisco because of its track record in the market. "I
typically go with proven technologies even if some of the new players are less
expensive," said Janis O'Bryan, chief information officer at asset-management
company Hudson Advisors LLC in Dallas.
hits $100; the last time was September 2008 on the way down from $150.
Pension Fund Among Nation's Healthiest
WASHINGTON -- While Wisconsin
Gov. Scott Walker (R) has painted a dire picture of his state's pension
obligations, Wisconsin's pension fund for public employees is among the
nation's strongest, according
to a report by the nonpartisan Pew Center for the States.
The Pew report, issued last year,
concluded that Wisconsin is a "national leader in managing its long-term
liabilities for both pension and retiree health care." Walker has cited
the fund's lack of sustainability as grounds for his plan to revoke collective
bargaining rights for state employees, but that proposal has sparked outrage
among state employees and drawn tens of thousands of protesters to the state's
"We're going to ask our
state and local workers ... to pay a little bit more, to sacrifice, to help to
balance this budget," Walker said in a Sunday interview with Fox News'
Chris Wallace, adding that he would be forced to lay off 5,000 to 6,000 state
employees if his budget plan was not approved, as well as a comparable number
of local public employees.
But the Wisconsin pension fund is
simply not in fiscal trouble. Its managers weren't burned by subprime mortgage
assets or mortgage-backed securities as the housing bubble collapsed. The fund
also relies on an automated dividend system, which pays out benefits in years
the system is making gains while restricting payouts in years when it takes
losses. And while the pension fund had a rough year during 2008 due to stock
market losses, it remains robust, both in terms of fundamental financial
stability and in comparison to other state pension programs.
to the Pew study, Wisconsin had about $77 billion in total pension
liabilities in 2008. But according to that same Pew study, those liabilities
were 99.67 percent "funded," giving Wisconsin one of the four-highest
of such ratios in the nation. Other states had funding ratios as low as 54
percent. For comparison, expert
analysts and the Government Accountability Office consider an 80
percent level to be a good benchmark for pension fund stability, while Fitch
Ratings considers 70 percent adequate.
Pension accounting relies on a
very long-term outlook. When the state calculates its pension liabilities, it
adds up the total expected pension expenditures for the entire lifetimes of
everybody currently receiving a pension and all employees expected to receive
pensions. That outlook routinely eclipses 30 years, depending on the ages of
state employees. A $77 billion liability is only a problem if the state has no realistic
way of meeting those expenses over that 30-plus year timeframe. But the
Wisconsin pension system actually does have the vast majority of that money --
in fact, in 2008, the pension fund had 99.67 percent of that $77 billion total
on hand. If all of the assets in the fund had simply been sold at market values
on June 30, the resulting cash would have been enough to pay 99.67 percent of
the state's total pension payouts for decades to come.
According to the Wisconsin
pension fund's own 2010 annual report, the system had $69.1 billion in total
assets at June 30, 2010, while paying out $3.7 billion in benefits over the
course of the previous year. The value of those assets has since risen.
According to Dave Stella, secretary of the Wisconsin Department of Employee
Trust Funds, the retirement system's assets were worth $79.8 billion at the end
of last month. The most recent solvency test for the fund was conducted for the
fund's operations at Dec. 31, 2009. At the time, the funding ratio was 99.8
percent. The next solvency test is scheduled for June of this year.
So while Wisconsin does face a
$137 million budget shortfall this year, the source of that fiscal trouble is
not the state's pension fund. Under the current plan, Walker hopes to
generate $30 million this year by raising taxes on public employees -- the
governor refers to this as increasing the "contribution" that state
employees make to their pension funds.
But Walker could make the state's
pension system bear the costs of a broader state budget shortfall -- one
created almost entirely by lower tax revenues resulting from the economic
downturn -- without raising taxes on public workers or eliminating public
bargaining rights. All he has to do is cut a few ties with the
According to the pension fund's
2010 report, the fund spends about 84 percent of its management
costs on outside help -- highly-compensated fund managers who work for
private-sector financial firms. While Wisconsin has made a concerted effort to
bring more of its fund management in-house, it could do more.
In 2009, roughly half of the
pension fund's total assets were managed by state employees, who were paid a
total of $28.4 million for their work. By contrast, outside Wall Street
professionals were paid $194.7 million to manage the other half of the fund's
assets. Cutting Wall Street pay, or simply moving more fund management
in-house, could easily generate the $30 million in new taxes Walker wants to
assess on state employees.
Wisconsin accounts for its
pension fund assets using "mark-to-market" accounting. That means
that while the state often expects to hold its assets indefinitely, collecting
interest payments until the assets expire, it can't simply add up those
expected interest payments to determine the value of an asset. Instead, the
fund can only say that the asset is worth what other investors are willing to pay
for it at a given moment. If investors want to pay less than the future
interest payments, that's too bad for Wisconsin.
While some accounting experts say
this market-oriented accounting is a more honest and accurate way to represent
asset values than other methods, U.S. corporations are often allowed much more
lenient accounting standards. During the financial crisis, for instance, many
banks balked at the suggestion that they be required to account for subprime
mortgage bonds at the prices that people were actually willing to pay for them.
Instead, they argued, banks should be allowed to account for these items based
on secret company economic models. If Wisconsin and other pension funds were
simply cut the same slack that the government cut for Wall Street, it's easy to
imagine pension fund worries easing, even in states whose pension situations
are more dire.
God bless America:
Sponsored by 43 of the 90
members of the Arizona legislature, the new bill seeks
to make the Colt single-action Army revolver the "official state
firearm" of Arizona. In January, lawmakers in Utah
moved to make M1911 semi-automatic pistol the official gun of that state.
major market measures closed lower with the DJIA and S&P 500 off .75% and
the NAZZ down over 1%. Volume was moderate and breadth was 2/1 negative.
February 22, 2011
We are at a wonderful ball where the champagne sparkles in every glass
and soft laughter falls upon the summer air. We know at some moment the black
horsemen will come shattering through the terrace doors wreaking vengeance and
scattering the survivors. Those who leave early are saved, but the ball is so
splendid no one wants to leave while there is still time. So everybody keeps
asking -- what time is it? But, none of the clocks have hands.
Money Game by Adam Smith (aka Jerome Goodman)
Gold is $1400, Oil is $95 and
Libya is under siege. Asian markets were lower over the holiday weekend as are
European markets at midday. U.S. futures indicate a lower opining.
added shares of Cisco to accounts. We are looking for a 15% market correction.
At its present price Cisco is down 15% from its yearly high and 15% from its monthly
high. We have room to add more shares.
(AP, by Derek Kravitz) -- Home
prices in a majority of major U.S. cities tracked by a private trade group have
fallen to their lowest levels since the housing bubble burst.
The Standard &
Poor's/Case-Shiller index fell in December from November in all but one of the
20 cities it tracks. The 20-city index declined 1 percent.
The only market to see a gain
was Washington, D.C.
Eleven of the markets hit
their lowest point since the housing bust, in 2006 and 2007: Atlanta,
Charlotte, N.C., Chicago, Detroit, Las Vegas, Miami, New York, Phoenix,
Portland, Ore., Seattle and Tampa, Fla.
Swonk, Chief Economist Mesirow Financial
Home Prices Fall, but
Consumer Confidence Improves
The Case-Schiller Index of 20
metropolitan areas continued to fall in December, as more distressed sales hit
the market. Eleven of the 20 markets posted new lows in home prices since the
2006 peak. Chicago was included in the markets that hit a new low.
Moreover, anomalies in the
National Association of Realtors Home Sale data suggest that the correction in
home sales since 2007 was much more severe than they initially reported. This
correction could show up in June revisions; it also suggests that the overhang
of inventories is actually much worse than currently estimated. The result will
be even more downward pressure on home values in 2011 than we initially
expected. We are still hoping for a bottom by year-end, but with the
uncertainty regarding oil prices and the Middle East, it is now unclear whether
we will reach such a bottom in prices this year or well into next.
confidence improved significantly on a sharp jump in expectations. It is hard
to imagine that we will be able to hold these gains if oil prices are still
rising when the next survey is taken in March. The only offset is what appears
to be some firming in the labor market. The operative word, however, remains
Housing is expected to remain the Achilles heel of the economy in 2011, and
will prevent the bulk of Americans from regaining what they lost in terms of
wealth during the recession. A lack of housing construction is also a major
factor holding back the labor market; if housing starts (still near record
lows) were to improve, that would create more jobs and begin to replace the two
million construction jobs lost during the Great Recession.
Middle East Turmoil and
the U.S. Economy
I am no oil expert, nor do
I pretend to be one on television. I do, however, know a lot of people who
are more up-to-speed on the industry, and the state of affairs in the
Middle East, than I am. This is what I have been able to cobble together
from a broad array of sources:
-Saudi Arabia has enough
spare capacity to offset losses from Libya and some other nations facing
turmoil, like Algeria and Yemen, but not Iran. However, uncertainty over
how the situation in the Middle East will eventually play out is placing a
higher-than-usual risk-premium on oil prices.
-Bahrain poses a separate
threat. While it is not a major oil producer, it could bring Iranian
(Shiite) religious extremists closer to Saudi Arabia's doors, because
Bahrain and Saudi Arabia share a border. The Saudis have already been
fairly outspoken about this risk, and will no doubt use their ample
financial resources to quash any unwelcome changes.
-Efforts by the Saudis to
increase oil production ahead of the next scheduled OPEC meeting in June
(combined with U.S. efforts to loosen domestic bottlenecks of large oil
inventories) should eventually bring the price of oil down from crisis
highs. Most agree, however, that we should price in an additional
risk-premium of four dollars this year, even as supplies pick up again.
-Democracy is the stated
goal of many protesters. However, the only groups who are organized enough
to run the countries are the military and religious groups, which do not
exactly fit our definition of democracy. Indeed, while many pushing for
democracy in the region gloat, some of my most secular contacts in the
region shudder, as they fear a spread of theocracies across the region.
This is even as Iran faces its own internal disruptions.
What does this all mean
for us? Well, it means that we will have to deal with even higher oil
prices for a period, which will act as a tax on consumers and represent a
headwind to a recovery that was clearly regaining momentum. The best bet is
that the recent rollback in the payroll tax will go more towards filling
our gas tanks than discretionary spending, which seems a waste (this is
what happened in the spring and early summer of 2008, when almost all of
the $150 billion that the Bush Administration offered in tax rebates was
spent on keeping our tanks full, instead of spurring growth in a faltering
In terms of inflation, the
rise in oil prices could temporarily elevate inflation, but ultimately
force larger cuts in discretionary spending (hitting demand, as the Federal
Reserve has feared). This chain of events would effectively prevent energy
price increases from becoming an inflationary spiral.
If it appears that the
more organized, religious leaders are going to take a larger hand in
running many of these unstable countries in the Middle East, one could
expect another flight to the safety of the U.S. dollar and U.S. treasury
market. That happened briefly when Egypt's drama was unfolding, and could
easily happen again. We saw some evidence of that today, when the yield on
the 10-year note dropped to 3.48%, the lowest in three weeks. But mostly,
the market has moved in the other direction, with Treasury yields rising on
inflation fears and the depreciating dollar.
Many of these are very poor countries, with dry kindling just waiting to
ignite. It finally has. No one is quite sure the best way to extinguish a
fire, however, with so many crosswinds. This is a region of the world where
missteps by the West have already caused deep-seated resentments. We need
to tread carefully to stem the bloodshed without empowering even more
deeply-rooted (and equally oppressive) enemies. One anonymous protester in
Libya has already asked (via Twitter) for humanitarian aid, but nothing
else from the West. The Middle East is a very conservative region, with
little experience of what true democracy could mean.
Libya declares force
majeure on oil.
Force Majeure literally means "greater force". These
clauses excuse a party from liability if some unforeseen event beyond the
control of that party prevents it from performing its obligations under the
contract. Typically, force majeure clauses cover natural disasters or other
"Acts of God", war, or the failure of third parties--such as
suppliers and subcontractors--to perform their obligations to the contracting
party. It is important to remember that force majeure clauses are intended to
excuse a party only if the failure to perform could not be avoided by the
exercise of due care by that party.
When negotiating force majeure clauses,
make sure that the clause applies equally to all parties to the agreement--not
just the licensor. Also, it is helpful if the clause sets forth some specific
examples of acts that will excuse performance under the clause, such as wars,
natural disasters, and other major events that are clearly outside a party's
control. Inclusion of examples will help to make clear the parties' intent that
such clauses are not intended to apply to excuse failures to perform for
reasons within the control of the parties.
(Jeff Saut) The S&P
500 bottomed 102 weeks ago and has since rallied 100%. There have been only two
other instances when that has happened, 1934 and 1937. Following the peaks of
February 1934 and March 1937, the stock market corrected. Hence, cautious
but not bearish. Not bearish because individual investor exposure to equities,
according to Barron’s, “Is at a generational low of 37% of all assets.”
Barron’s continues by noting, “Another possible lift to the market? Rising
S&P dividends, where the 26% payout ratio is less than half the 54%
historic average.” Plainly I agree, but with risk appetites at their highest
level since January 2006, combined with hedge funds “long” exposure at its
highest level since July 2007, I can’t help but be cautious.
The call for today:
Recently, if you threw a brick out of a Wall Street window, it would go up! As
seen in the charts, this skyscraper stampede has not given up much ground since
it began on September 1, 2010. Indeed, the DJIA has not experienced anything
more than the perfunctory one- to three-session pause/correction since this
stampede began, not giving anyone an easy entry point. I was pretty
constructive on stocks until the beginning of this year when I wrong-footedly,
like my gray-haired lunch friends, turned too cautious. Still, in this
business you have to play the odds; and currently I just don’t think the odds
are favorable enough to be aggressively bullish. As David Sklansky wrote in
his book The Theory of Poker, “Any time you make a bet with the best of it,
where the odds are in your favor, you have earned something on that bet,
whether you actually win or lose the bet. By the same token, when you make a
bet with the worst of it, where the odds are not in your favor, you have lost
something, whether you actually win or lose the bet.” I continue to invest, and
Investors may make a little;
Insiders always make a lot:
Nashville-based HCA Inc. today
filed its much-anticipated initial public offering, reported first-quarter
earnings of $388 million and announced a $500 million distribution to
HCA, which operates 162 hospitals
and 106 freestanding surgery centers across the country and in England, expects
to raise $4 billion with an IPO, though underwriters could bump that figure up
to $4.6 billion. About $2.5 billion will come in the form of newly issued
shares, with the rest coming from current shareholders who will sell on the
public market. HCA spokesman Ed Fishbough declined to comment….. Analysts and
other industry-watchers have been expecting HCA to make a return to the public
market for some time, especially since the passage of health care reform
legislation in March….. This will mark the third time that HCA has gone public
since its founding in the mid-1960s. The company has been private since 2006
when a private investor group that included affiliates of Bain Capital,
Kohlberg Kravis Roberts & Co. and Merrill Lynch Global Private Equity
joined HCA founder Thomas Frist Jr. in a $33 billion leveraged buyout. Since
going private the last time HCA has paid its investors over $5 billion in
dividends by borrowing money which will attach to the new public offering.
In the 1990s HCA was famous as
the Hospital Company that paid a fine of over $1.7 billion for shafting
Medicare. At that time the CEO was Richard Scott who is now the Governor of
Maggie Mahar at the Century Foundation's Health Beat blog has written about
Scott in her book, Money-Driven Medicine: The Real Reason Healthcare Costs So
Much. She reports that Scott previously started a for-profit hospital chain in
1987 that later became the $23 billion Columbia/HCA. He
was ousted from this post in 1997 after:
The FBI swooped down on HCA
hospitals in five states. Within weeks, three executives were indicted on
charges of Medicare fraud, and the board had ousted Scott.
The investigation revealed
that the hospital chain had been bilking Medicare
while simultaneously handing over kickbacks and perks to physicians who steered
patients to its hospitals. ... The company did not fight the charges. In 2000,
HCA (which by then had expunged “Columbia” from its name) pleaded guilty to no
fewer than 14 felonies. Over the next two years, it would pay a total of $1.7
billion in criminal and civil fines. http://www.sourcewatch.org/index.php?title=Rick_Scott
In 1997, Scott was forced out
as head of the Columbia/HCA healthcare company as the result of a fraud
investigation conducted against the company in the 1990s. The firm eventually
pleaded guilty to charges that it overbilled state and federal health plans,
and paid the government a record $1.7 billion in fines. Scott argues that he
was never charged with any crime and that other health-care companies have also
received fines for overbilling. However, court records show that the illegal
activities during his tenure as chief executive officer were so extensive that
he knew or should have known about them. One of the government complaints
alleges that he was actively involved in kickback schemes in which doctors were
illegally given large incentives for making referrals.
Scott was also once a partner
in the Texas Rangers sports team with George
W. Bush. He now runs an
investment firm and owns a chain of walk-in urgent-care clinics in Florida
called Solantic, which serves people who would benefit from having a
"public option" for health insurance.
Scott believes that free
market principles are the solution to the U.S. health care problems. (we
guess that cheating Medicare is just part of the free market process)
Oil ended at $94.92, $1401 on
gold and European bourses closed lower with Italy not trading either because of
computer problems or the Libyan crisis.
major market measures were lower all day and finished at their nadir with down near
and more than 2%. Breadth was 6/1 negative and volume moderate but more than recent
trading volume on the upside.
February 18, 2011
February 17, 2011
February 16, 2011
are taking the rest of the week off. We will be back on Tuesday February 22.
Monday, February 21 is Presidents Day although as we all know the 22nd is George’s birthday.
February 15, 2011
continue to await the correction that never comes.
Asian was lower as is Europe at
midday. Gold is $1135 and Oil continues with an $85 handle as the trading day
The major measures are lower out
of the gate and most categorizes are lower except financials.
Diane Swonk, Chief Economist
Weather and Rising Prices at
the Pump Dampen Retail Sales
In January, retail sales rose
0.3%, almost half of what was expected, following a slight downward revision
for December. Sales excluding autos last month also rose 0.3%, but edged up
only 0.2% after stripping out gasoline purchases.
Several factors help explain the
weaker-than-expected January report, not the least of which was a flurry of
snowstorms that interrupted business from New York to Florida. Indeed, almost
every state in the country had snow on the ground (or sand) at some point
during the month. We also saw prices at the pump soar, which along with the
winter storms kept consumers from spending and traveling as much. Not
surprisingly, discretionary spending at restaurants and bars declined. The
silver lining is that a drop in seasonal travel has pushed gasoline inventories
to a 20-year high, which should provide some relief for consumers at the pump
as the snow thaws in February and March.
The one persistent winner in
retail spending in January was online shopping, which continued to grow at a
double-digit rate compared to a year ago, as homebound consumers continued to
browse and shop online. Internet shoppers also tend to be wealthier than their
strictly brick-and-mortar counterparts, and have seen much more robust
improvements in their own economic situations, so they are more confident.
Indeed, most of the increase in consumer confidence that we have seen in the
last three months has been attributed to a rise in confidence among the most
wealthy of households. This shouldn't be surprising, given the ongoing
constraints on middle- and lower-income households, most notably on wages.
Bottom Line: The recovery in
consumer spending remained extremely uneven and subject to external shocks. The
picture will brighten a bit as the snow thaws, but most of the gains we see
will continue to be carried by the wealthiest households, some of which have
not only regained what they lost during the crisis, but were also able to
double down during troughs in the market and hit new high-water marks in their
wealth. The recent rally in equity prices and the extension of tax cuts appear
to have been particularly advantageous for them. Federal Reserve Chairman Ben
Bernanke should at least get a nod of gratitude from some of them for QE2 (the
Fed's second round of quantitative easing) and its effect on equity prices.
Import Prices Soar on
Higher Energy Prices
Import prices surged 1.5% in
January, nearly double what the market expected, on the heels of higher energy
prices. However, instead of triggering an inflation spiral with a pass-through
of higher energy prices to other prices, we saw higher prices at the pump cut
into other types of consumer spending. This is particularly important when
assessing the impact that higher commodity prices will have on a
wage-constrained economy such as our own. After the initial sprint in headline
inflation, overall inflation should trend closer to core inflation, which has
actually decelerated because retailers were forced to increase discounts when
consumers became more careful in their spending, due to higher gas prices.
In fact, this is exactly what
we saw the last time energy prices spiked at such a rapid pace, which was in
2008. Overall inflation initially soared, then converged to the core rate as
demand was dampened by a wage-constrained consumer. The only offset on consumer
balance sheets is the payroll tax cut. I would hate to see the payroll tax cut
used to keep our tanks full rather than spur additional spending. This also
happened in 2008 when tax rebates were used to fund gas purchases instead of a
more meaningful increase in consumer spending.
Bottom Line: The
rise in energy prices represents more of a relative than an absolute price
increase. As long as that remains the case, higher energy prices do not pose a
threat to broader-based inflation, but they do complicate the economic outlook.
Think maybe farm subsidies can
be cut with $7 corn and beans in the teens? We wouldn’t bet on it.
Obama targets wealthy
farmers, crop insurers
by Philip Brasher:Des Moines
President Barack Obama is
setting up a battle with Republicans in Congress over farm spending by
proposing to slash subsidies to the wealthiest farmers. It could shape up
in part to be a choice between farm subsidies and food assistance to the poor.
Under the president’s proposed
budget for fiscal 2012 released today, tighter limits on payments to big farms
would save taxpayers $2.5 billion over the next 10 years, while the reduction
in payments to insurance companies for catastrophic-damage policies would cut
Obama has tried before to
tighten limits on payments to big farms, as did President George W. Bush before
him, but the idea has been consistently rejected by farm-state lawmakers.
The politics could be different this year, in that House Republicans have made
cutting the budget deficit their signal issue, but they have shown little
interest so far in touching payments to grain and cotton farms, the biggest
recipients of traditional subsidies.
Obama’s proposed budget notes
that net farm income was up 27 percent last year to the third largest level in
U.S. history. “The top five years for farm earnings have occurred since 2004,
attesting to the profitability of farming this decade,” according to the White
House budget office.
The chances that subsidies to
big farms will be cut are better this year than in the past because of the
intense pressure in Congress to reduce the deficit, said Ferd Hoefner, who
follows budget issues for the National Sustainable Agriculture Coalition. “It’s
more relevant this year than it has been.” The major form of government support
to grain and cotton growers is a fixed, annual payment that is based on a
farm’s historical production. The payments total about $5 billion a year, with
about 10 percent of the money going to Iowa farmers and landowners.
Obama is proposing to cut off
subsidies to farmers and landowners who have more than $500,000 in annual net
farm income and $250,000 in off-farm earnings. Both limits would be $250,000
than under current law. Additionally, the annual direct payments would be
capped at $30,000 per farm, down from $40,000.
“We continue to maintain a
strong safety net for people who are in most in need of that safety net. This
affects 2 percent of the producers,” said Agriculture Secretary Tom Vilsack.
The budget also includes a
reduction in reimbursement to crop insurance companies on certain policies.
That cut would total $1.8 billion over 10 years but was already been made
by the USDA as part of a new operating agreement with the industry.
Totaled up, the cuts Obama has
proposed in USDA spending would help cover the $3.3 billion cost of
restoring a cut to food-stamp benefits that was used to fund a
child-nutrition bill that passed Congress last year.
Obama also is proposing to
raise revenue through a series of fees at the Agriculture Department. Such fees
are typically rejected by Congress.
Obama is releasing his 2012
budget as House Republicans are preparing to push through cuts in the fiscal
2011 spending budget. The House Appropriations Committee is proposing to slash
$5.2 billion from 2010 spending levels at the Agriculture Department and the
Food and Drug Administration. Some of the biggest cuts would be in domestic and
international feeding programs. But the proposals also would also reduce
spending for conservation, rural development and loans to farmers.
Here’s an example of where the
battle lines could be drawn: The House GOP has proposed to cut the Women,
Infants and Children nutrition program for fiscal 2011 by nearly $750
million, more than 10 percent off the $7.2 billion WIC received in fiscal 2010.
For the next budget year, 2012, Obama wants to boost WIC spending to nearly
International food assistance
would fall by 42 percent, or about $800 million, to its lowest levels in a
decade, if the cuts are enacted, according to the Alliance for Global Food
Security, a coalition of aid organizations. The reduction would eliminate
assistance to nearly 18 million people, the group said.
Republicans control the House
but not the Senate, and Democrats are likely to resist many of the GOP
We receive Social Security and
we agree with these thoughts
I don’t think we should cut
Social Security benefits. But if we are going to cut Social Security benefits, I
think it doesn’t make sense to do what the Obama administration has done and
make “No current beneficiaries should see their basic benefits reduced” one of
the bargaining points.
After all, this isn’t how any
other kind of benefit cuts work. When Obama proposes cutting oil and gas
subsidies, they propose cutting them right away. When Obama proposes a nominal
freeze in federal pay, he’s proposing a real cut right away. When
LIHEAP gets the ax, it gets the ax right away. When Arizona cuts Medicaid,
people can’t get organ transplants right away.
And on the politics, it’s a
mess. Right now we have conservatives simultaneously calling for huge spending
cuts and also getting the line’s share of old people’s votes even while the
vast majority of non-security spending is on old people. In essence, by first
separating the domestic budget into “discretionary” and “entitlement” portions
and then dividing the entitlement programs up into “what today’s old people
get” versus “what tomorrow’s old people will get” the political class has
created a large and vociferously right-wing class of people who are completely
immune from the impact of their own calls for fiscal austerity. In my view,
that reality is the biggest driver of our current political dysfunction.
There’s some need for spending to be lower over the long term than it’s currently
projected to go and I think it’s politically and morally vital that the
adjustments be made in a balanced way. You frequently hear of the need to
exempt everyone over the age of 55 from any possible cuts. That’s nice for them
and encourages them to go right on complaining about out of control spending.
But the average 55 year-old will still be alive and collecting benefits in 2035
so the long-term budgetary implications of this “let the geezers keep their
full benefits while they whine about how Democrats are bankrupting the country”
are actually pretty significant.
If I were the president, my
line would be closer to the reverse: I don’t want to cut Social Security
benefits for anyone, but if the Republicans want to tempt me into a compromise
they’re going to need to make sure that their own core constituency—people born
before 1955 or so—pay a fair share of the price. Progressives don’t need to
indulge the premises of this “welfare state for me but not for thee” brand of
conservatism that’s taken over the country.
major stock measures closed mildly lower in light trading. Breadth was
February 14, 2011
learned over the weekend that an asteroid is scheduled to hit the Earth in
2036. Coincidentally that is the year the Repubs claim that Social Security will
cease being able to pay full benefits. Actually the Repubs with the hyperbole
for which they are famous say that Social Security will go broke in 2036. Given
our present age we really aren’t too worried about either event but it seems
to us that the asteroid will solve the Social Security problem.
Asia was higher overnight; Europe
is mixed at midday; gold is $1358 and Oil has an $85 handle as the trading day
Egyptian Military has dismissed Parliament and imposed Martial Law until
elections can be held or until the twelfth of never and that’s a long, long
Krugman: Eating The Future:
The moral is clear. Republicans don’t have a mandate to cut spending; they
have a mandate to repeal the laws of arithmetic.
Which brings me back to the
Republican dilemma. The new House majority promised to deliver $100 billion in
spending cuts — and its members face the prospect of Tea Party primary
challenges if they fail to deliver big cuts. Yet the public opposes cuts in
programs it likes — and it likes almost everything. What’s a politician to do?
The answer, once you think
about it, is obvious: sacrifice the future. Focus the cuts on programs whose
benefits aren’t immediate; basically, eat America’s seed corn. There will be a
huge price to pay, eventually — but for now, you can keep the base happy.
If you didn’t understand that
logic, you might be puzzled by many items in the House G.O.P. proposal. Why cut
a billion dollars from a highly successful program that provides supplemental
nutrition to pregnant mothers, infants, and young children? Why cut $648
million from nuclear nonproliferation activities? (One terrorist nuke,
assembled from stray ex-Soviet fissile material, can ruin your whole day.) Why
cut $578 million from the I.R.S. enforcement budget? (Letting tax cheats run
wild doesn’t exactly serve the cause of deficit reduction.)
Once you understand the
imperatives Republicans face, however, it all makes sense. By slashing
future-oriented programs, they can deliver the instant spending cuts Tea
Partiers demand, without imposing too much immediate pain on voters. And as for
the future costs — a population damaged by childhood malnutrition, an increased
chance of terrorist attacks, a revenue system undermined by widespread tax
evasion — well, tomorrow is another day.
(WSJ) Neil M. Barofsky, the
special inspector general for the Troubled Asset Relief Program since December
2008, announced his resignation Monday and plans to step down from the job on
The 40-year-old Mr. Barofsky
notified staff members of his decision on Monday morning and submitted a resignation letter to
President Barack Obama. The former federal prosecutor plans to spend time with
his family and pursue new opportunities.
Wonder which Bank or investment
Bank will hire him at a gillion dollars a year?
(NYT) Governors and mayors
facing large deficits have set their sights on a relatively new target — the
soaring expense of health benefits for millions of retired state and local
It is too bad, and so myopic that
governors and mayors and school boards across the country are not banding
together into one large health care buying cooperative and negotiating directly
with health insurance companies the way the Federal government does. Forget
national health care which is communist etc. etc. etc.; why can’t governmental
bodies realize that forming buying pools will lower costs. No the dumb easy way
to go- and one that makes insurance companies happy is to continue to cut
benefits and raise co-pays. We get what we vote- or in most cases don’t’ vote -
for. Less than 50% of the population votes in off year elections.
major measures closed mildly mixed Monday in light trading. Breadth was flat.
February 11, 2011
answer us this, what is the difference between having Mubarak backed by the
army running Egypt and a Vice President, Omar Suleiman, appointed by Mubarak and supported by the
military running Egypt? From the markets standpoint and the U.S. government -
as long as there is a dictator backed by the army running Egypt the U.S. is
content and so is Israel. Except for the protestors in Egypt most Western and
Middle East governments don’t want free elections in Egypt because then the
same thing that occurred in Gaza may occur again. The devil you know- Democracy
for us- Tyranny for Egypt-what could be fairer?
Asia was mixed and Europe is
mildly lower at midday. Oil has an $87 handle as the trading day begins and
Gold is $1358. U.S. futures indicate a slightly lower opening.
10:14am (WSJ) Egyptian Vice
President Suleiman says President Mubarak has stepped down and has delegated
Egypt's affairs to the army.
Comments on Cisco:
Not all of my epiphanies and
conclusions were negative during the week. While Wall Street hated Cisco's
earnings report on Thursday, I found some bright spots in the comments from CEO
John Chambers. The company saw a 20% increase in orders from large U.S.
businesses, excluding those in the financial sector. That is an indication that
corporations are finally starting to at least consider spending the cash on the
books and upgrade their technology. Other IT companies have reported strong
quarters and this confirms that some of the pent-up demand could lead the
sector into a new upgrade cycle that bodes well for tech earnings this year.
Cisco Adds Inlet to Its Video
Cisco: Loaded With Value
Your Grandmother's Salad
Shooter is manufactured by a Defense Contractor
The National Guard is fighting
in IRAQ and Afghanistan. Now Wisconsin’s Republican governor wants them ready
to fight at home:
Walker says the Wisconsin
National Guard is prepared to respond wherever is necessary in the wake of his
announcement that he wants to take away nearly all collective bargaining rights
from state employees. Walker said Friday that he hasn't called the Guard into
action, but he has briefed them and other state agencies in preparation of any
problems that could result in a disruption of state services, like staffing at prisons.
Walker says he has every confidence that state employees will continue to show
up for work and do their jobs and he's not anticipating any problems. His plan
would require higher pension and health insurance contributions and remove
bargaining rights except in a limited way over wages. (Chicago Tribune)
As we all
know, teachers are the cause of all the problems in this country.
Adolfo Laurenti, Deputy Chief
Economist, Mesirow Financial
U.S. Exports and Consumer Sentiment on the Rise
Two reports this morning
provide additional optimism, which supports our economic outlook. In the case
of the trade balance, the headline number shows a minor widening of the
deficit in December by $2.3 billion; the total deficit in goods and services
increased to $40.6 from $38.3 in November, less than most economists had
forecast. The underlying trends, though, seem to be more encouraging. To a
large extent, the trade gap is a result of rising energy prices. On a quarterly
basis, U.S. exports are, in fact, accelerating, while imports appear to be
stable. If this trend were to continue, it would bode well for future
are beginning, albeit slowly, to appreciate that the economy is moving in the
right direction. The preliminary reading of the Thomson Reuters/University of
Michigan's survey of consumer sentiment for February shows the index at its
highest level in eight months, rising almost one full point and beating
economists' expectations. These are still little steps in the right direction.
But we hope that many little steps will make, at the end, one big leap forward.
We have been waiting for it a long time.
European stocks reversed
losses to end higher Friday, buoyed by news that Hosni Mubarak has resigned as
president of Egypt to the jubilation of those in Cairo's Tahrir Square.
Oil dropped $1.30 to $85.50
and Gold ended at $1360.
the dictator in Egypt has been replaced by a new dictator in Egypt. The world’s
oil supplies are safe and it will be business as usual. To celebrate this
wonderful news the markets rallied from a down opening and finished higher on
the day. Breadth was 2/1 positive but volume was light.
February 10, 2011
Cisco missed last night
and coupled with Asia and Europe being lower, plus the recent run-up, the major
market measures are taking a breather and maybe more today. Oil has an $86
handle and gold I $1356.
Cisco is down $2.50 per
share this morning and back on our radar screen.
The article below pretty well
summarizes the thoughts on ‘the street’ about CSCO’s quarter and outlook.
Of course we always like to buy on bad news. We did on the first day last
quarter and were too soon although we eventually exited profitably. We are
going to wait a bit this quarter.
(WSJ) After hitting "air
pockets" last quarter, has Cisco gone into a tailspin? To explain Cisco Systems'
third consecutive earnings disappointment, Chief Executive Officer John Chambers
said Wednesday that the company was entering "a period of
transition." Those aren't words investors like to hear. Shares were down
11% in Thursday trading. Two quarters ago, Mr. Chambers blamed Cisco's troubles
on customer doubts about the economy. But the recovery has continued apace.
Last quarter, he blamed cash-strapped states, the European economy and TV
providers that didn't buy enough set-top boxes. But Dell and Motorola
Solutions, both big vendors to states, reported no hiccup in orders. Nor did
Motorola Mobility complain of trouble selling set-top boxes. The reality for
Cisco appears to be that its dominance in network switches, its best-selling
and highest-margin product, is waning. Meanwhile, efforts to diversify into
other products are meeting with mixed results.
Switching revenue declined 7%
in the latest quarter, compared with the previous year. That business is under
attack, says William Blair analyst Jason Ader, as the company rolls out its
latest product lineup. Though Cisco's new generation of switches offers better
functionality than the last, customers aren't willing to pay as much for them.
Gross margins are taking a hit as a result, falling to 60% from 65% last year.
has been particularly aggressive in going after the switching market. The two
companies once cooperated, but after Cisco said it would sell servers, one of
H-P's core products, H-P retaliated by acquiring networking-equipment company
3Com. In December, H-P launched a promotion offering 20% discounts to customers
trading in Cisco switches for its own.
Cisco's decision to diversify
into servers was likely smart. It knew the growth opportunity in switches, and
its other core product—network routers—was limited. And its servers offer
compelling value to customers, incorporating, as they do, Cisco's networking
technology. Server revenue grew eight-fold to an annual pace of $650 million.
The downside, however, is that
servers carry lower gross margins, dragging down the company average as sales
Other new products aren't
faring so well. Set-top boxes continue to decline, dropping 11% in the quarter.
And its consumer products—a grab bag including Linksys routers, Flip video
cameras, and more—stand little chance against more innovative rivals like
Apple. Indeed, revenue from consumer products was down 15%.
Cisco's misunderstanding of
the consumer market is underlined by its strange choice to market a $600
video-conferencing system for the living room that comes with a $25 a month
service fee. There is little market for such a product when consumers can video
chat for free via the Internet.
Cisco, however, still trades
at 18 times Mr. Ader's estimate of fiscal 2011 earnings, including stock-option
and other oft-ignored expenses. Stripping out the firm's $25 billion of net
cash, it falls to a more beguiling 13 times. But that assumes the money is
spent well, or returned to shareholders without incurring repatriation taxes.
With Mr. Chambers failing to reaffirm his somewhat fanciful 12%-to-17% growth
target on a call with analysts, and the core business under long-term attack,
Cisco doesn't yet look cheap enough.
Corn is near $7 per
Diane Swonk, Chief Economist
Weather Continues to Distort Jobless Claims
Jobless claims plummeted to
383,000 in the week ended on February 5th. Severe winter weather likely delayed
some processing of unemployment claims that week, as it included the blizzard
in Chicago and a snow storm that stretched more than 2000 miles across the
country. Government workers who process the claims, in particular, could not
get to work, which suppressed the overall figure. Unfortunately, employment
data has been skewed by weather problems for the last several months, as this
has been one of the strangest winters in anyone's memory.
We are also starting to see
the 99-ers (those who are losing their 99 weeks of unemployment benefits and
are ineligible to apply for extensions) starting to fall out of the
data. This will, all else equal, hold down unemployment claims relative to what
we have seen since the start of the recovery, but it doesn't necessarily signal
an improvement in underlying economic conditions. Indeed, for some, it is a
Bottom Line: Weather
problems are making it difficult to decipher high frequency data on the labor
market, but it does appear that things are on the mend. The bad news is that
the gains are not likely to be strong enough to lift the spirits and economic
situations of the most vulnerable of workers: the long-term unemployed.
This is what will keep the Fed pursuing QE2, but will likely prevent it
from going the next step and enacting QE3.
Wall Street Justice Means
Nobody Gets Pinched: Jonathan Weil
is running a headline that the markets cut losses on news Mubarak will step
down. That may be true but we would posit that such actions are premature. The
new Egyptian Vice President is cut from the same cloth as Mubarak and the Army
may continue killing demonstrators. But then again maybe the demonstrators are
looking for style over substance. Americans sure are.
– Mubarak isn’t quitting yet. The major measures moved to
the plus side when he began speaking 5 minutes ago but now the measures are
heading down again.
the close the major measures closed mixed; breadth was flat; and volume was
light except on for the 550 million shares of Cisco that traded. The $3 plus
drop in Cisco was the reason the DJIA closed lower.
February 9, 2011
Asia was lower overnight and
Europe is mixed small at midday. U.S futures suggest a mildly lower opening.
Oil has an $87 handle and Gold is $1364 as the trading day begins.
53% Bulls; 23% Bears in the
latest report by Investors’ Intelligence.
Prize-winning economist Joseph Stiglitz said another 2
million foreclosures are expected in the U.S. this year, adding to the 7
million that have occurred since the economic crisis of 2008.
“U.S. foreclosures are
continuing apace,” Stiglitz told a conference near Port Louis, the capital of Mauritius,
today. “A quarter of U.S. homes are underwater.”
The number of U.S. homes worth
less than their outstanding mortgage jumped in the fourth quarter as prices
fell and lenders seized fewer properties from delinquent borrowers, Zillow Inc.
said in a report today.
About 15.7 million homeowners
had negative equity, also known as being underwater, at the end of the year, up
from 13.9 million in the previous three months, the Seattle-based real estate
information company said. The total represented 27 percent of mortgaged
single-family homes, the highest in Zillow data dating to the first quarter of
“Americans today are worse off
than they were 10 to 12 years ago,” Stiglitz said. At the same time, the U.S.
faces “increasing inequality”, with the “upper 1 percent controlling 40
percent of wealth. Instead of trickle down, it has trickled up.”
(http://lacrossetribune.com/) A civil lawsuit and recently
proposed federal regulations raise questions about S.C. Johnson's self-imposed
The litigation contends the
Racine company is deceptively implying that some of its products have be tested
by a neutral party and found to be environmentally friendly. Windex and Shout
carry the" Greenlist" seal of approval. But the word "Greenlist"
is actually a patent held by S.C. Johnson.
The company denies the label
is misleading. S.C. Johnson spokesman Christopher Beard says the "Greenlist"
system has helped the company eliminate nearly 48 million pounds of volatile
organic compounds from its products in the last five years.
The Journal Sentinel says
proposed federal regulations say it's deceptive for a company to imply a
product has been certified by an independent third party.
Beware of Brazil
By Josh Lipton Feb 09,
2011 12:45 pm
Are Brazil and China at the
forefront of a US stock market decline
It’s full speed ahead for this
stock market recovery.
The S&P 500 rose again
yesterday to yet another new cyclical high of 1324.57. The “500” is now up more
than 90% since its March 6, 2009 low of 666.
So far this year, the SPDR
S&P 500 ETF (SPY), which includes holdings like
Exxon (XOM), Apple (AAPL), Microsoft (MSFT), IBM (IBM), and Bank of America (BAC) is up 5.4%.
Bulls have their reasons to
buck: with 66% of the S&P 500 companies now finished reporting fourth-quarter
earnings, the results suggest another solid quarter: earnings and revenues are
4.7% and 2.2% above analysts’ forecasts, according to Yardeni Research.
One could argue that
valuations don’t look too stretched. Analysts expect $97.18 in earnings for
S&P 500 companies for 2011, according to Thomson Reuters. At current
levels, that leaves the market multiple at 13.6 times.
strategists highlight other feel-good reasons for cheer: relatively low
interest rates, low core inflation, and a platoon of Federal Reserve
policymakers openly committed to moving this stock market higher.
Retail investors have heeded
the call: fund tracker EPFR reports that, for the week ended February 2, US
equity funds extended their current inflow streak to five weeks and $20.6
Still, other strategists and
technicians, or those who study price charts to forecast resistance and support
levels, offer reasons for caution. These market pros argue that the market
could suffer a near-term pullback. As the Wall Street Journal publishes
articles such as today’s Stock Recovery in High Gear, and risk
appetite returns to the markets, its worth listening to the
words of caution from these investment professionals. In this fast sprint,
these contrarians say, investors face a number of potential pitfalls: market
sentiment is tilted heavily toward the bullish camp, which from a simplistic
contrarian perspective is bearish; a February
flop for the market, as recently detailed by Minyanville, is
not an uncommon historical event; and there have been some eye-catching
Specifically, as Gluskin
Sheff’s David Rosenberg notes, the Dow Transports have fallen short of
validating the latest gasp in the Industrials to a new high. The Transports,
which peaked back on January 13, are down 2.7% since that time, and yet the
blue chip Dow 30 has managed to rally 4.2% since then.
[Under Dow Theory, when both
the Transports and the Industrials are moving together, hitting new highs at
about the same time, the bull market is likely to continue. However, divergence
between the two signals risk of a potential turn in the market].
Here is another reason that
some pros urge their clients to remain watchful right now: while the US stock
market might be moving hard to the upper right hand corner of the chart, the
stock markets of our friends overseas are struggling.
Specifically, China (FXI),
India (EPI) and Brazil (EWZ) are weak. In fact, chartists emphasize that the
Brazilian index, called the Bovespa, has now “double-topped”. This is a bearish
technical pattern of two equal price spikes that could foretell a fall.
This is all important, says
Jon Markman of Markman Capital Insight,
because change usually occurs on the periphery first, and then works its way
“The emerging markets like
China and Brazil were the first to recover in late 2008 and 2009 and led the
developed markets higher in mid-2009,” the strategist says. “Now those markets
are weak, and getting weaker, so it begs the question as to whether they are in
the forefront of a potential decline.” The divergence between the
performances of the US market and those of some headline-grabbing emerging
markets is one reason why Mark Arbeter, S&P’s chief technical strategist,
remains convinced that the major indices could suffer a 5% pullback in the
near-term, with a more dramatic down-move potentially starting in April.
“These markets [China, Brazil,
India] topped out early November and all are in clear intermediate-term
downtrends,” Arbeter says. “They have put in lower lows and lower highs. All
three are below their 40-week exponential moving averages, which suggest to me
the possibility of bear markets in these three markets.”
Emerging markets are many times
leaders during advances and declines, says the technician, so this is very
worrisome. “The last couple of years,” says Arbeter, “these markets have been
great predictors for the US market both at market tops and bottoms.” Still, not
every technician Minyanville checked in with thinks we’re necessarily due for a
back-slide. Phillip Roth, Miller Tabak’s chief technical market analyst, makes
a couple of points. For one, he says, some of these once red-hot emerging
markets have been getting mauled for some time. But their weakness hasn’t
deterred our strength.
“The bull market peak for
China was on August 4, 2009, 20% above current levels,” Roth says. “China has
been in a bear market for a year or more, depending on how you measure it. Why
should China be a negative now?”
Instead, Roth says that he’s
focused on the US market and he sees no sign of a market top right here. At the
close on February 8, he notes, all the major indexes [DJIA, S&P 500, NASDAQ
Composite, Russell 2000] made new highs and so did the A/D lines for the DJIA
stocks, the S&P 500 stocks, and for the NYSE operating companies.
[The A/D line indicates market
breadth. It represents the number of stocks advancing versus declining. An
upward sloping A/D line, coupled with a rising market, would indicate to
technicians that the market is healthy].
“I won’t pick a top with that
background,” Roth says. “I look for failing rallies or increasing selling
pressure on declines, or both, before looking for a generally exploitable
(WSJ) The United Nations’ food
agency issued an alert on Tuesday warning that a severe drought was threatening
the wheat crop in China, the world’s largest wheat producer, and resulting in
shortages of drinking water for people and livestock.
China has been essentially
self-sufficient in grain for decades, for national security reasons. Any move
by China to import large quantities of food in response to the drought could
drive international prices even higher than the record levels recently reached.
“China’s grain situation is
critical to the rest of the world — if they are forced to go out on the market
to procure adequate supplies for their population, it could send huge shock
waves through the world’s grain markets,” said Robert S. Zeigler, the director general
of the International Rice Research Institute in Los Baños, Philippines.
major market measures traded lower all day but the DJIA popped to positive in
the last few minutes of trading. Breadth was 2/1 negative and volume light.
February 8, 2011
continues to overcome caution and valuation as stocks gained yesterday to
resistance at 1320. The markets need a rest, a correction. We are not
predicting nor do we expect a crash but a pullback will occur. We know we sound
the like the boy crying wolf but remember he was eventually correct. We
succumbed to the ever higher theme by adding to our Ford warrants yesterday.
But even with the purchase we maintain a very large cash position in accounts
from 70% for our smaller accounts to 90% for the larger ones.
Suttmeier, chief market strategist at ValuEngine.com,
which is a fundamentally based quant research firm in Princeton, New Jersey,
that covers more than 5,000 stocks every day.
Stocks began the week
continuing the melt-up that began December 1. Within the first hour of trading,
all weekly risky levels were violated, becoming pivots for the remainder of the
week; 12,142 Dow Industrial Average, 1316.2 S&P 500, 2770 NASDAQ,
5077 Dow Transports, and 800.13 Russell 2000. These levels have
an 85% chance of being tested again before the end of the week. The only major
risky level is my quarterly risky level at 2853 for the NASDAQ. Keep in mind
that the October 2007 high for the NASDAQ is 2861.51. Stocks are ignoring
higher 10-year note and 30-year bond yields and the stronger dollar as the euro
has declined from 1.3860 on February 2 to 1.3511 into Monday.
Asia and European markets were
mixed overnight and Oil is down over a dollar with an $86 handle with Gold at
(WSJ) Cash buyers represented
more than half of all transactions in the Miami-Fort Lauderdale area last year,
according to an analysis from real-estate portal Zillow.com. In the fourth
quarter of 2006, they represented just 13% of deals. Meanwhile, downtown Miami
prices rose 15% in 2010 from a year earlier, according to the Miami Downtown
The percentage of buyers in
Phoenix paying cash hit 42% in 2010—more than triple the rate in 2008,
according to Raymond James's equity research division.
Nationally, 28% of sales were
all-cash transactions last year, according to the National Association of
Realtors. The rate was 14% in October 2008, when the trade group began tracking
By Associated Press /
February 8, 2011
Ford Motor Co.
will increase factory production 13 percent in the first quarter because of
higher demand for Ford and Lincoln brand cars and trucks, and further increases
are likely through the year, company executives said Sunday.
The Dearborn, Michigan,
automaker said its sales to individual buyers rose 27 percent in January, a
strong increase that shows demand for Ford products like the Explorer sport
utility vehicle is on the rise. Ford's overall sales, including those to big
fleet buyers such as rental car companies, rose 9 percent last month.
"We're trying to catch up
to just the customer demand," Jim Farley, Ford's global marketing chief,
told reporters at the National Automobile Dealers Association conference in San
The first-quarter increase, to
555,000 vehicles, could mean additional jobs. U.S. sales chief Ken Czubay said
Ford is studying whether to add a third shift to factories that now are on two
shifts and working overtime. The company also could add production by raising
the assembly line speed or by paying more overtime to extend work time.
Czubay said demand for
vehicles like the revamped Explorer has been so high that the company has only
a "single-digit" days' supply of the model on dealer lots. Automakers
like to have around 60 days’ worth of a product so customers have adequate
Ford's Chicago plant is most
likely to get additional jobs or overtime because it builds the new Explorer.
It's based on a car chassis and gets better mileage than the old Explorer, and
arrived at dealers late last year.
Ford already has announced
plans to hire more than 7,000 workers in the next two years, including
engineers and factory workers. But those jobs will be to build new models like
the revamped Ford Escape midsize SUV.
The executives also promised
six new or updated models for the Lincoln brand during the next three years as
they try to revive its sales. Dealers who attended a meeting Sunday with Farley
and Czubay said no specifics were given on the models. Ford has phased out its
Mercury brand, leaving some dealers with only Lincoln. Lincoln sales rose 3.6
percent last year but lagged the overall U.S. auto market, which was up 11
percent, according to Autodata Corp. In January, Lincoln sales fell 21 percent
compared with the same month of 2010.
The Ford executives said they
are offering sales bonuses to Lincoln dealers who meet company requirements on
perks for customers, such as car washes and loaner cars, staff training, sign
changes and having 30 percent of their used-car sales certified. That means the
cars pass dealer inspections and meet Ford standards for their mechanical and
The dealers have until Sept. 1
to meet the new standards and start getting the bonuses. Ford wouldn't give
specifics on how much the bonuses would be.
Many Lincoln dealers also sold
the Mercury brand, which Ford phased out at the end of last year.
Ford is trying to reduce the
number of U.S. Lincoln dealers to make the remainder more profitable. It has
about 1,100 across the country.
Obama's man in Cairo: http://www.salon.com/news/egyptian_protests
the eighth straight day the major market measures moved higher in light
trading. Breadth was 2/1 positive. Gold gained $16 to $1864 and Oil closed with
an $87 handle.
February 7, 2011
The New Year is still being
celebrated in Asia and so some markets were closed and the ones that were open
were mixed overnight. European bourse are higher at midday and Oil has an $88
handle as the trading day begins.
The S&P 500 has doubled
off its March 2009 low.
European stocks rose, their
fifth consecutive gain, boosted by basic-resources shares as copper and tin
prices hit new highs and as investors focused on the positive side of Friday's
U.S. employment report. Oil lost $1.50 to $87.50. Gold finished at $1345.
added Ford warrants to accounts at $7.55.
major market measures closed 0.5% higher but off their best levels. Breadth was
2/1 to the good and volume light. 6 days in a row up for the major measures.
February 4, 2011
The Labor Department reported
that 36,000 payroll jobs were created in January well below the 135,000 figure
expected. But the unemployment rate fell to 9% as folks quit looking or because
of the weather or something, anything. The talking heads have spent the hour
arguing what the numbers mean. The average hourly work week declined to 34.2
from 34.4 hours but hourly pay rose 0.4%. And 3.6 million will fall off the
unemployment payment rolls over the next 12 months as their benefits expire.
Needless to say the markets are confused and flat pre-opening. Asian markets
were mixed overnight with a few still closed for holiday and European bourse
indexes are higher at midday. Gold is $1350 and Oil has a $91 handle as the
trading day commences.
(salon.com) But the real
surprise was a stunning drop in the unemployment rate of four tenths of a
percentage point, from 9.4 to 9.0. Economists had predicted the opposite -- a
bump up to 9.5 percent. To put that last number in perspective, prior to
December's drop in unemployment from 9.8 to 9.4 percent, the unemployment rate
in the U.S. had not dropped by as much as .4 percentage points in
But now it's happened in two consecutive months.
Normally, that would be
considered great news, a sign of a surging economy. But when the unemployment
rate falls while job growth is anemic, the usual explanation for the drop is
that workers have simply given up looking for jobs. If, for example, your 99
weeks of unemployment benefits have finally run out, you are no longer counted
as unemployed in the topline BLS number. According to the BLS, "the number
of unemployed persons decreased by about 600,000 in January to 13.9 million,
while the labor force was unchanged." That's not good.
Your income taxes pay for snow
removal so that your property taxes don’t rise:
(Chicago Tribune) To be sure,
such municipal efforts will come with a hefty price tag: Overtime budgets are
expected to skyrocket, further pinching public budgets already under stress
from the national recession. Many municipalities are counting on a federal
reimbursement after being declared a disaster area.
BusinessWeek article on Ford from
Oil dropped to $89 and Gold
ended at $1345. European bourses were higher but gave back most of their gains
by the close.
major market measures closed higher in light trading. Breadth was positive.
February 3, 2011
and Korea were closed overnight and the rest of Asia was mixed. European
markets a bit lower at midday and U.S markets are flat pre-opening. Jobless
claims were less than at 415,000 and Oil and Gold are not doing much at $91.25
and $1338 respectively as the trading day begins.
Employment Figures Up for January
(Diane Swonk, chief economist Mesirow Financial)
preliminary data on private sector employment for January rose a stronger than
expected 187,000. The data for December were revised down from 297,000 to
247,000, which is still a substantial gain. The survey has now shown 12
consecutive months of private, service sector gains.
increases in January were broad-based, showing improvement in both the service
and goods-producing sectors, and across all sizes of employers, with small
firms finally receiving some business from corporate America.
Manufacturing posted a third monthly gain, following two other surveys this
week (ISM and PMI) which indicated a rebound in manufacturing activity at the
turn of the year. It is important to remember, however, that gains remain small
and come from an extremely low base for manufacturing.
for Friday's employment report: The ADP report has been running much hotter
than the "official" data released by the government, which could
reflect the government's inability to capture start-ups and other gains in the
small business sector. One hopes that the actual data come in closer to the ADP
report in January and catch up with an upward revision to December.
more likely scenario, however, is that the "official" data continue
to lag the ADP report. The "official" government data are
particularly bad at capturing shifts in new firm and small business hires,
which appear to be accelerating. Indeed, small businesses (firms with fewer
than 50 employees) accounted for more than half of private sector job gains in
the January ADP report.
government data is more subject to errors in timing, and so was likely
suppressed by disruptions from unusually harsh winter storms in January.
Anyone who couldn't get to work and get paid during the week of the survey was
not counted for the entire month. Look for an increase of close to the
consensus (140,000) in payroll employment for January. I am still hoping for
upward revisions down the road.
we are also keeping a close eye on the European Central Bank, as well as events
Surges, Labor Costs Plummet
productivity growth surprised on the upside, rising 2.6% in the fourth quarter,
and increasing even more, 3.6% for all of 2010, which marks the fastest pace
since 2002. As a result, unit labor costs plummeted 0.6%, which provided
some offset to any inflationary pressures on profit margins, associated with
rising commodity prices. It also suggests that rising commodity prices are more
of a threat to demand than inflation, something that Federal Reserve Chairman
Ben Bernanke will no doubt point out in his remarks scheduled for later today
at the National Press Club; the following question and answer session should be
first-time weekly jobless claims fell back to more reasonable levels, catching
up after the weather disruptions that affected last week's claims report.
In general, claims have moved down from the elevated levels we saw last summer
and suggest that the labor market continues to heal, albeit much more slowly
than anyone would like. It is kind of sad when something as transitory as the
weather can have such a large impact on the data.
retailers' same-store sales are being released today and, so far, are largely
disappointing on the downside. This is consistent with anecdotal reports that
consumers curtailed their purchases when prices at the pump increased during
the holiday season and into the early weeks of January.
Line: The recovery is
regaining momentum, albeit unevenly. Slack and the push-back on price increases
by cash-strapped consumers, however, will keep those gains from triggering
broader inflation, even as commodity prices soar. In his remarks today, look
for Bernanke to keep the door open to additional asset
purchases, should economic conditions warrant.
costs plummeting hurts the consumer (worker) and so the jobless/reduced income
recovery continues. To whom will the companies sell after they fire/reduce the
salaries of all their workers?
of Robert Benmosche, the CEO of AIG, which received $185 billion in Federal Aid
so it would not go bankrupt:
International Group Inc.’s mortgage insurer does more business in
Republican-leaning states as it signs up more reliable customers than those in
“more liberal” areas, Chief Executive Officer Robert Benmosche said. “All of
the states where we’re a leader, where we’re the No. 1 insurer, are red states,
all of the states where we’re at the bottom are blue states,” Benmosche, 66,
said yesterday at a conference in Washington. “Part of what we found out is
that our model is about culture and it’s about the attitude in the public. And
what we find is where there’s more of a tendency for people to be more liberal,
more that the government is responsible for what happens to me.”
by Americablog.com) Maybe Benmosche forgot that (a) AIG is only in existence
today because of a massive bailout by the American taxpayers and (b) the Red States more
often receive more federal dollars than they pay into the
system. So yes, AIG certainly is more of a Red State kind of company. He should
move AIG to Alabama or Mississippi so he can enjoy the high level of education
and quality living standards that only Dixie can provide. Texas may also be
another prime choice since the governor is a hypocrite who funded 97% of
the state’s deficit using stimulus cash, while criticizing
you have the time- Why Mubarak is out:
After trading in negative territory for most of the day the
major market measures moved mildly higher in the last hour to close on the plus
side. Breadth was flat and volume light.
Why not to rob a casino:
Vegas Metro Police have made an arrest in the recent armed robbery at the
Bellagio (MGM) hotel-casino.
this morning, cops charged Anthony Carleo, 29,
of robbery with the use of a deadly weapon, burglary with use of a deadly
weapon and trafficking in a controlled substance, after a “large quantity of
narcotics” was discovered during the course of the investigation (which is
still ongoing), according to officials.
3:50am on December 14, Carleo allegedly walked up to a craps table in a
full-face motorcycle helmet, pulled a gun, and made off with approximately $1.5
million in chips, ranging in value from $100 to $25,000.
casino robberies are not common, they happen more frequently than most might
think. The Bellagio was the 10th casino to be robbed last year in Metro’s
Theft is a constant threat, regardless of the economy,
Alan Feldman, a spokesman for MGM Resorts International, tells the Las Vegas
there weren’t bars on the casino cage, there were robberies. When they were on
the casino cage, there were robberies,” he says. “When times were good there
were thefts. When times are bad there are thefts. You’re not going to stop this
kind of activity.”
while “this kind of activity” may continue, casino crime doesn’t pay.
the stolen chips were worth seven-figures at 3:50am, at 3:51am they weren’t
worth a thing -- and any potential financial damage to the Bellagio is exactly
Clint Nichols of the Las Vegas Metropolitan Police Department told reporters at
a press conference that, “The industry has some safeguards in place that make
[redeeming stolen chips] extremely difficult.”
converting a stolen chip into cash is far more than extremely difficult, it is,
in fact, nothing short of impossible.
Kendall, president of CHIPCO International,
a gaming chip manufacturer with over 100,000,000 chips in use worldwide, says
he was “stunned” when he heard about this morning’s theft.
have spoken to the people at the Bellagio, whom I know well,” Kendall told
Minyanville the day after the robbery. “And those chips became worthless the
moment they left the casino. This guy obviously just did not understand the
dynamics of the industry he was attacking.”
starters, immediately after the robbery, every chip in the house was
permanently replaced with a “secondary set” which, according to Kendall, would
total around a million at a casino the size of the Bellagio. These so-called
secondaries utilize an entirely different design scheme, rendering all previous
even if they hadn’t been replaced, the chips still lose their value as soon as
explained that, in 2005, the Wynn Las Vegas (WYNN) was the
first casino to begin using chips embedded with RFID tags, electronic devices
that assign a unique identification code, or “license plate,” to each one.
Today, RFID technology is in use across the entire industry. While individual
casinos are loath to discuss details of their security operations, it’s safe to
say that players from the Venetian (LVS) to the Fremont (BYD) have RFID-tagged chips
stacked in front of them.
can void the stolen chips, like a registration that’s no longer valid,” Kendall
said. “When we manufacture RFID-embedded chips and send them to a casino,
they’re not worth anything until they register the codes. Until then, they’re
nothing but freight.”
chips with a face-value of $100 or higher are inlaid with RFID, but Kendall
says a $25 RFID chip is not unheard of.
casino can buy an RFID gaming chip for $2.50, so you could theoretically go
lower, but no one’s stealing $5 chips,” Kendall said.
brain of RFID is a regular silicon chip from one of many different companies --
Texas Instruments (TXN), Intel (INTC), AMD (AMD),” Kendall said. “Each casino
chip has a coil antenna inside it, tuned to a certain frequency like a radio in
your car. A transceiver sends out a signal, which harmonizes with the
capacitor, and can tell exactly where it is. It’s a passive device, so the
police can’t track them down, but whoever took them might as well bury them. He
may try to fence them to somebody at a discount, but they’re now sort of like a
disabled cell phone. The Bellagio doesn’t even have the same chips on the table
anymore at this point.”
technology is not only used for security purposes -- it has also turned the
tracking of customer behavior, once the purview of pit bosses and floor
managers, into a science.
RFID, casinos know how long someone’s been playing, what their average bet is,
what games they like to play, what kind of drinks they like,” Kendall said. “It
really has a lot of benefits to the casino, some more subtle than others -- for
example, RFID can tell if a dealer has mispaid a player that’s won.”
technology is in use off the casino floor, as well. The Treasure Island hotel
and casino uses RFID-enabled spouts at its bars, to track the amount and types
of liquors the bartenders pour.
to Capton, the maker of the Beverage Tracker
system, “whenever a bartender pours a drink, the tipping of the bottle turns on
both the tag and the measuring device, allowing the spout to measure the volume
of liquor poured (in ounces) before the employee tips the bottle back up. The
tag then transmits that information to [an] antenna, attached to the ceiling
above the bar.”
beats the house in Las Vegas” as the old saw goes, whether it’s in the bar or
at the craps table.
John Kendall explained, “The casino business has decades of practice on how to
stay ahead of people trying to cheat them.”
February 2, 2011
alerts were higher overnight and European bourses are mixed at midday. U.S.
futures indicate a mixed opening and Gold is $1333 while Oil has a $90 handle
as the trading day begins.
Deficit hawkery as farce:
says that a net 187,000 jobs were created in January. The government Employment
Report is Friday.
52% (55%); Bears 22% (19%).
We switched the Ford shares we own to
twice as many Ford warrants for less than the same dollar amount thus doubling
our exposure (the warrants are down 30% in the last 3 days) for less than the
Some 43 Million Americans Use Food Stamps
The major market measures closed slightly
lower in light trading. Financials were under pressure.
Breadth was slightly negative.
February 1, 2011
Egypt doesn’t matter anymore until it
does. Markets around the world are higher as the poobahs and gurus have decided
that Egypt isn’t so important after all. Earnings continue to be good and
traders seem to want to take stocks higher although today is turnaround Tuesday.
Gold is $1336; Oil has a $91 handle and
U.S. futures indicate a higher opening.
is the first day of the month is higher with the major measures up 1% after an
hour of trading.
From our 10 January 2011 post:
has to really wonder about a stock market (talking about the S&P 500 here)
in which 134 points of the 143 points that were racked up in 2010 occurred in
the first trading day of each month (see The Trader on page M3 of Barron’s).
That is truly remarkable? 94% of the entire year boiled down to 12 sessions.
And what do you know? 2011 started with a 1.1% pop and has sputtered since.
is truly the nuttiest thing? the best days last year were the first day of each
month (save for June and July) and then after that there were practically no
crumbs to nibble on: These are the point changes for the first trading day of
each month in 2010, which totals 134 points (as we mentioned above): December
+26 points; November +1 point; October + 5 points; September +31 points; August
+24 points; July –3 points; June -19 points; May +16 points; April + 9 points;
March +11 points; February +15 points; and January +18 points.
look at 2011? +14 points to kick off the month and year, to close at 1,271.87,
and here we are today, after a supposedly ripping ISM and ADP set of numbers,
and as of January 7, the S&P 500 is sitting at 1,271.50. Hope you didn’t
decide to get in on the second day.
Amid complaints about high taxes and
calls for a smaller government, Americans
paid their lowest level of taxes last
year since Harry Truman's presidency, a
USA TODAY analysis of federal data found. Some conservative political movements
such as the "Tea Party" have criticized federal spending as being out
of control. While spending is up, taxes have fallen to exceptionally low
levels. Federal, state and local income taxes consumed 9.2% of all personal
income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis
reports. That rate is far below the historic average of 12% for the last
half-century. The overall tax burden hit bottom in December at 8.8% of income
before rising slightly in the first three months of 2010. "The idea that
taxes are high right now is pretty much nuts," says Michael Ettlinger,
head of economic policy at the liberal Center for American Progress.
Rest of story:
Diane Swonk, Chief Economist Mesirow Financial
Construction Still Limping, but Manufacturing Finds Footing
Construction spending plummeted 2.5% in
December. Coupled with downward revisions to November, this looks a little
closer to reality than initial reports which consistently surprised on the
upside in the fourth quarter. Total construction spending fell 10.3% last year
compared to 2009.
Losses were broad-based, and spread
across both the private (largely residential) and public sectors. Unusually
harsh winter storms, particularly on the East Coast, no doubt contributed to
but did not create the weakness we are seeing.
Look for construction activity to remain
weak in January, with freak snow storms and weak, underlying demand to continue
holding back spending. Indeed, builders complained in January that a
combination of persistently tight lending conditions and extremely tough
competition from the existing home market are making it difficult to build new
homes. The only bright spot is the apartment market, which has benefited from
tight supply and new-found demand from foreclosed homeowners. There are plenty
of unsold and unfinished condos, just waiting to be rented instead of sold:
anything to fill them.
Managers Index (PMI) released yesterday.
Employment, in particular was up, which could portend another increase for
manufacturing jobs when the payroll data for January is released on Friday. Any
employment gains that we do see, however, will be coming off of an extremely
low base and require more education and training than in the past (i.e., don't
expect gains in manufacturing jobs to do much to reduce the ranks of the
The recovery remains extremely uneven, with our weakest sector, housing, still
in the dumps. The result is an economy that is regaining momentum, but not
enough to float all boats or dramatically reduce the ranks of what now appear
to be the chronically unemployed.
(MarketWatch) -- Ford on
Tuesday reported a 13.3% rise in January U.S. sales to 127,317 cars and trucks
as a surge in retail business more than made up for a big reduction in fleet
sales. Car sales moved fractionally lower, as a result of the move away from
rental-car customers, while trucks picked up the slack with a 24.6% increase.
The top-selling F-Series pickup reported a 29.6% improvement to 35,806
major market measures closed 1% to 2% higher at their top levels of the day in
moderate trading. Breadth was 3/1 positive. And so the first day of the month
pop theory played out again today.
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Summary of Business Continuity Plan