Friday, July 31, 2009
We continue to see things we just have never seen before.... a 3 week rally is nothing new, but absolutely no danger of selloffs and in between each rally point all we do is "churn". And many days when we were "somewhat down" intraday had the trademark post 3:30 Pm rally to make sure we finished green or flattish.
Very strange - it appears we have to adjust Newton's laws... once a computer is in motion it remains in motion.
Two weeks ago we "won" and "lost" in back to back trades 7% in shorting Las Vegas Sands - net flat. This time around I put my chips on black, instead of red and went with Wynn Resorts. Notwithstanding I should of done NOTHING ahead of earnings reports (which I just completely missed in the case of WYNN), I crapped out on this one. If I had gone to my other horse: LVS - I'd be looking much more smart in this trade.
Las Vegas Sands results: Ironically they "beat analysts estimates" but still cratered.
- On Thursday, Las Vegas Sands said it lost $175.9 million in the second quarter. Adjusted profit of a penny per share beat expectations for a loss of 1 cent per share.
- Shares of Las Vegas Sands Corp. dropped in premarket trading Friday as analysts expressed concern about its capital position and a challenging Las Vegas market.
- "We are still uncomfortable in LVS's capital position going forward and need more evidence that a capital raise is in the near future," Stifel Nicolaus & Co. analyst Steven Wieczynski said. "A disconnect remains between their debt balance and what their asset are actually worth that will likely not close until 2011 and beyond," Wieczynski wrote.
- Also, the slow economy slowed traffic at casinos, a trend that may continue to hurt results.
In this case the house won. (so far) If the market ever corrects again I still believe I can "wynn" here. But I would of prefered the much easier road with Las Vegas Sands.
Short Wynn Resorts in fund; no personal position
(that said, I'd also not let multi hundred page spending bills pass in Congress and then have to be signed in less than a few hours, giving no one time to read it - but I digress)
I know a few people involved in First Solar (FSLR) and what a circus ride - the stock was up some 20+ points in after hours after the initial earnings report printed (right after 4 PM). By 5 PM the stock was down. Today it's down 10%. I realize this is all fun for day traders but seriously - can't we move to a slightly more rationale market? Are time outs not good for adults? Clearly many stocks would gap down or up even after my "time out period", just as they do now but generally they'd just gap in 1 direction once all the key information points and conference call were on full display and people had time to ... (wait for it)... analyze. But that wouldn't be fun for computers, and those high end financial institutions who run the computers - so this day won't ever come.
Let's look at what caused all the confusion at First Solar, which if you are not familiar with is one of the 2 big solar companies in the US. Before we do, to better familiarize yourself with the situation and to give credit where credit is due (since we are almost always on the back of analysts) one of them gave a warning in May for what appears to be happening - the pressures of competition from polysilicon [May 26, 2009: Analyst - Some Customer(s) Switching Away from First Solar]
I know some solar fans still exist out there - while I am a fan of the "theme" over the long run, it is hard to get too cheery about specific companies since there is so much competition. [Jan 3, 2008: The Long Term in Solar]
.....this analyst call for First Solar (FSLR)... if you are not that familiar with solar this will sound like gobbligook but most of the major (and medium) sized players have technology based on polysilicon... (same idea as your computer chips). The prices in the polysilicon supply chain have been an rollercoaster causing pressure of extreme proportion to the 90%+ of public players who are on that side of the technology divide.
First Solar's process has nothing to do with polysilicon and thus has been shielded from these issues. The polysilicon bull case is eventually a glut will happen and supply/demand will come into better balance - hence cost of goods can drop through the floor allowing some serious price wars. With that said, the potential exists for many smaller to medium sized player in the polysilicon space to also die in this war - hence why this sector is very difficult to invest if you care about intermediate to long term fundamentals. Solar itself should grow quite well over time, but how much thriving can be done at an individual company level will be the question.
Recent checks indicate at least one of FSLR top customers has already switched from FSLR to a si-based module vendor for a project that is currently under construction.
So as is the order of the day - "stimulus plans" in the form of rebates were the culprit for the wild swings. Despite a very impressive out performance, the use of rebates to stoke demand caused the consternation. This is a fancy way to say "we are cutting prices" because it does the exact same thing - and so we begin the price wars I've been warning about. Again I think solar "the theme" is a good one, and it will grow. I am not the only one - Goldman Sachs is literally (I am not making this up) buying land in the Southwest to position itself for the solar future. I am sure they will gladly sell it or lease it to companies who get government subsidies to build out solar expansions. Which they will finance. (sorry, I digress again) [Jul 29, 2008: Some Minor Solar Deals]
And probably most important, the smartest kids in the room are snapping up land quietly throughout the U.S. Southwest.
- Solar prospectors tend to be as secretive about their land as forty-niners were about the veins of gold they discovered. Most bids are placed by limited-liability corporations with opaque names that conceal their ownership. And no one has been as quick to move into the Mojave - or as tightlipped about it - as Solar Investments.
- That entity, it turns out, is Goldman Sachs’s solar subsidiary. The investment bank’s designs on the desert are a topic of intense interest and speculation. Goldman declined to comment.
But just because a "theme" is there, does not make for great investments (unless you are Goldman Sachs) - these stocks are speculative and will time to time run 100% in weeks. And then they almost always implode. Competition is fierce and until a great shakeout occurs that levels the playing field to just a few giants it is going to be messy. I said that in early 2008 and I stick with it. Doesn't mean you cannot trade around certain names for profit if you are a nimble speculator. But don't get "investing in solar" confused with "investing in solar companies" if you catch my drift.
As for First Solar - they have been the stud of the group, and continue to be - the question is the same as I listed above; how much the plunging cost of polysilicon will force them to sacrifice some profitability to keep up their growth curve.
AP chimed in:
- First Solar, the nation's largest solar panel maker, said Thursday its second-quarter profit more than doubled on strong sales of its thin-film modules. The results beat Wall Street expectations, but investors were turned off by a rebate program that would hurt company earnings in the second half of the year.
- The Tempe, Ariz.-based company reported net income of $180.6 million, or $2.11 per share, in the three months ended June 27. That compares with earnings of $69.7 million, or 85 cents per share, in the same period a year ago.
- Quarterly sales reached $525.9 million, almost double the $267 million reported for the same period in 2008.
- Analysts surveyed by Thomson Reuters expected earnings of $1.62 a share on revenue of $459.1 million.
- First Solar Inc., the largest solar company by market capitalization, has dropped its manufacturing costs by 6 cents to 87 cents per watt in the second quarter. It also boosted production as it completed a new manufacturing facility in Malaysia.
- The company said that despite falling prices, its gross profit margin rose to 56.7% from 56.3% in the first quarter. (just a ridiculously good standard compared to peers on the polysilicon side)
- First Solar said it still expects 2009 revenue of $1.9 billion to $2 billion and gross margins of 31 to 33 percent.
- Ahearn said First Solar will push its solar panels heavily in Germany, which has some of the most generous incentives for alternative energy. The company will offer rebates for its thin-film modules that are tied to its competitor's polysilicon solar modules, guaranteeing that First Solar's modules come at a discount. "We'll do what we can to defend our position in these core markets," Ahearn said.
- Company officials estimate that the rebate program would cost between $40 million and $60 million in the second half of the year. As soon as they announced it, First Solar shares started to fall in after-hours trading.
- Mark Bachman, an analyst with Pacific Crest Securities, said a solar company has never offered a rebate like this. While it shows innovation during a tough economy, it also worries investors. "People have never seen it before and they don't know how to value it," he said.
- "We're the cost leader in the industry by a wide margin, and we're going to do what we have to do," Ahearn said, adding that the duration of the program would be "flexible" and depend on market conditions. "We're willing to reduce price so long as, but not beyond when, it's necessary."
- "They say they're doing it through a rebate program, but it doesn't matter what you call it, they still have to cut prices," said Kaufman Bros analyst Theodore O'Neill. "Their best quarter is the one they just did. The margins will only get worse from here."
- Credit Suisse analyst Satya Kumar dowgraded First Solar to "neutral" from "outperform," saying the current quarter would "be the last good quarter for a while...we expect the stock to look ahead of this peaking earnings momentum and pull back to lower levels."
- "Concerns over channel inventory and competitive pricing from some of the lower-cost crystalline module companies seem to be weighing," Canaccord Adams analyst Jed Dorsheimer said.
- The program will most likely cut away at margins, said Deutsche Bank analyst Steve O'Rourke as he maintained his "Hold" rating, raised his 2009 profit estimate and cut his 2010 earnings forecast for the company. O'Rourke expects 2009 and 2010 profit of $7.60 per share and $8.35 per share, compared with earlier estimates of $7 per share and $8.45 per share, respectively.
[May 11, 2009: Energy Conversion Devices (ENER) Results and Darker Times for the Solar Industry]
[Mar 14, 2009: NYT: Europe's Way of Encouraging Solar Power Arrives in U.S.]
[Feb 6, 2009: NYT - Dark Days for Green Energy]
[Dec 20, 2008: BusinessWeek - Clouds Over the Solar Industry]
[Jul 30, 2008: First Solar - You Cannot Stop Them; You can Only Hope to Contain Them]
Of course, we were clueless as to why it was - only "those in the know" knew. Information is everything on Wall Street... and so we learned later that Philip Falcone of hedge fund fame [Harbinger] (a major owner of Cleveland Cliffs) immediately let it be known he hated the deal and would not allow the executives to fulfill their strategic initiative. While Goldman Sachs surely knew within minutes and was surely able to book big profits on the short side while the rest of us were buying the "dip", it took a few days for the peasants (hand raised) to find out. And realize we were the dips!
And so we now see the era where hedge fund managers have more power over companies than their own executives. (I'm all for shareholders having a major say in companies but this one went over the top) After many months of fighting, and even rumors of a new suitor for our damsal in distress [Jul 31, 2008: FT.com - Mittal (MT) Considering Bid for Alpha Natural Resources] (natch) the hedge fund man got his way and the deal died. [Nov 18, 2008: Cleveland Cliffs, Alpha Natural Resources Call off Merger] Even after a last ditch attempt by Cleveland Cliffs to get its other shareholders to consolidate against hedge fund man. [Aug 22, 2008: Bloomberg: Cleveland Cliffs Asks Shareholders to Block Harbinger] Ironically Falcone's fund imploded later in the year. And you thought there was nothing in the stock market so interesting as a typical soap opera. But that did not make up for him taking away our rewards for his own personal profit motive.
[Aug 15, 2008: Harbinger Seeks to Raise Stake in Cleveland Cliffs]
[Jul 25, 2008: More Drama at the Cleveland Cliffs Corral]
[Jul 16, 2008: Thoughts on Cleveland Cliffs (CLF), Alpha Natural Resources (ANR) Deal]
Cleveland Cliffs was so sure the deal would happen that they renamed the company - it is now Cliffs Natural Resources. But it's without Alpha Natural Resources. Like a jilted lover who knew her suitor's father (Falcone) would not allow the marriage, Alpha Natural has found a new spouse... in the form of Foundation Coal (FCL). This deal closed today, making ANR the #3 player in the US. And in a more than ironic twist, Alpha Natural Resources largest shareholder - Duquesne Capital Management - opposed the deal. But this time, the hovering parent did not get his way.
- Alpha Natural Resources completed the takeover of rival Foundation Coal Holdings on Friday, winning shareholder approval of a deal that creates a national power out of two regional players even as the recession hammers energy demand.
- Abingdon, Va.-based Alpha now has 6,200 employees and 61 mines in Wyoming, West Virginia, Kentucky, Pennsylvania and Virginia. And with 91 million tons of annual production, Alpha ranks as the nation's third-largest coal mine operator behind St. Louis-based giants Peabody Energy and Arch Coal.
- Alpha now is expected to generate about $4.2 billion in annual revenue, will have about $400 million in cash and more than $1 billion in total liquidity. It also will control 2.3 billion tons of reserves.
- Alpha did not release a vote total, but the deal had to overcome opposition from its largest shareholder. Among other things, Duquesne Capital Management argued the deal would reduce Alpha's financial flexibility.
And so it appears the once jilted, now is the attack dog. They are not done yet it appears.
- Alpha Natural Resources Inc., which today became the third-largest U.S. coal company with shareholder approval of its $2 billion purchase of Foundation Coal Holdings Inc., is open to more acquisitions.
- “At the end of the day, we don’t view the Foundation transaction as the ‘be all and end all,’” Chief Executive Officer Kevin Crutchfield said in a telephone interview. “I would characterize it perhaps as the second leg of a four-legged chair. We’re not done yet.”
- Crutchfield’s strategy is to broaden Alpha’s operations and coal product base from the Central Appalachia region to other key U.S. basins, he said in an interview July 29. He was president before becoming CEO today with the takeover.
- The deal also gives Alpha access to the least expensive U.S. reserves in Wyoming’s Powder River Basin. “A name like Foundation doesn’t come along all the time,” said Pearce Hammond, an analyst at Simmons & Co. in Houston. “You’ve got the opportunity to diversify. The Powder River Basin to me is like an annuity.”
- Diversifying the company’s coal offering to include both thermal and metallurgical makes Alpha more attractive to investors, Hammond said.
- “We not only can continue to consolidate in Central Appalachia, but now we have other regions to consider growth in,” Crutchfield said. “Wide open for us is the Illinois Basin. We can continue to grow in the Powder River Basin. The Rockies region is open and available for growth for us.”
- The company this week said its second-quarter profit plunged 77 percent to $15.4 million from a year ago. Alpha’s production costs averaged $62.05 a ton. That compares with Foundation’s second-quarter profit of $30.7 million from a loss of $4.4 million, last year. The company’s production costs averaged $17.04 a ton. Alpha’s costs are higher because mines in Central Appalachia are deep underground and require more earth removal and disposal, and the activity is subject to more safety regulations.
- The two largest U.S. producers, St. Louis-based Peabody Energy Corp. and Arch Coal Inc., shed most of their Eastern mines to focus on the lower-cost surface mines in the West.
- “There will be opportunities as a result of this recession that we’re going through and it’s not going to be too long from now,” Crutchfield said. “The opportunities will start to present themselves later this year and that will continue all the way through maybe sometime in 2011.”
And like sands through the hourglass so are the Days of Our Coal....
... but in our world of incredibly high correlations this move the past few days is an outlier. Equity markets up, yet US Treasury bonds up? For past few years its been US Treasury bonds up = equity market down. Hmmmmm....
I have a very long term (i.e. 5-10 years) short on US bonds via this instrument - the day to day action doesn't usually hit my radar but it's an interesting development ... maybe.
Short iShares 20+ Year Treasury Bond in fund; no personal position
Since the overall market could obviously continue upward, I am continuing to hedge my bets and this gives us a better entry point in a name I am familiar with. If we are ever allowed an actual correction we can jump ship from a much lower floor than those who bought the stock in the previous week. We last exited Blue Coat in February 2008 ($10 higher than it is priced today) after a very rough patch where the company was performing well but it's competitors ills were constantly causing investors to rush out. I suppose I have a pairs trade on here as I'm short Riverbed [Jul 30, 2009: Short Riverbed Technology] and now long Blue Coat. Both compete in the WAN (Wide Area Network) optimization area, but Blue Coat also has a more mature (slower growth) security segment; so they are not directly apples to apples and hence hard to compare on valuation. But even after the swan dive from Riverbed it is valued at over 30x forward estimates, whereas Blue Coat is under 20x. (BCSI has always traded at a discount as long as I have been following both names) Both are potential takeover candidates - and have been for years.
Today we will restart the name as it bounced smartly this morning and regained the 20 day moving average. I wanted to make sure it would not have a 2nd day of free fall before making an investment. We're entering in the $18.80s with a 2.8% allocation. I'll be stopping out on any sharp move down below the 50 day moving average (currently low $17s and rising) Of course, we wonder why the sharp drop out of the blue on such high volume - could be a precursor of "someone in the know" getting out. We'll watch this one closely for more signs of weakness.
Since the company reported in early June, I can purchase this now without any earnings risk for at least 6 weeks, unlike a lot of other names I have been considering who still are to report in the next few weeks.
- The security hardware and software maker said it lost $3.5 million, or 9 cents per share, in the three months ended April 30. That compares with a profit of $12.5 million, or 32 cents per share, in the year-earlier quarter.
- Sales climbed 29 percent (not organic growth) to $113.6 million from $88.2 million, helped by the company's acquisition of Packeteer Inc. last year. But operating expenses also grew, climbing 35 percent to $80.3 million from $59.5 million. Excluding items, Blue Coat said its earnings came to $8 million, or 19 cents per share. Analysts polled by Thomson Reuters expected 21 cents per share on sales of $114.3 million.
- Blue Coat forecast adjusted fiscal first-quarter earnings of 20 cents to 25 cents per share on sales of between $114 million and $119 million. Analysts are looking for 21 cents on $115.6 million.
- Blue Coat Systems (BCSI) late last week sent an e-mail to all employees suggesting they take extend their July 4 holidays by two days, according to JMP Securities analyst Samuel Wilson. The analyst writes that the goal appears to be to reduce operating expenses for the fiscal first quarter ending July.
Speaking of a world reliant on government handouts we wrote a piece on the broader "sector" in April. [Apr 8, 2009: Stimulus Fire Hydrant (Worldwide) Should Benefit Networking Companies/Broadband]
[Oct 25, 2007: Networking peers keep hitting Blue Coat Systems].
[Nov 20, 2007: A Damn Shame - Blue Coat Systems]
Long Blue Coat Systems, Short Riverbed Technology in fund; Short Riverbed Technology in personal account
And yes, each of those countries did a bevy of government incentives which is anathema to our (ahem) "free market ideology" (I say that chuckling under my breath based on what we've been seeing for 2 years) Even the CEO of General Electric (GE) was out this week saying that in the U.S. "it is not a free market, it never has been" when he was talking about his decisions to go after the money the government is offering left and right. Personally I much prefer when the truth is spoken, even if it's ugly - versus the dogma that dominates our media and national mindset. Thanks Mr. Immelt for speaking reality.
It's never been a free market; it's never gonna be a free market. That's just the way it is. The fact that I'd like GE to work in concert with where government policy is in the U.S. doesn't mean that I'm a traitor or a bad guy, I think it's just being practical that that's gotta happen.
As noted hedge fund manager Doug Kass says, you cannot be moralistic if you want to profit from the actions going on in this country. So as Step 1 one must sit and think, if it won't change... and in fact it is accelerating, how can I - aside from participating in the handouts themselves, benefit from the wealth transfer from future generations of unborn to the "so deserving" today? That's our jobs as speculators whether we like what is going on, or not. Step 2 is to stop the denial - our corporate leaders long ago dropped the denial and have benefited immensely. Most of the public deniers are wrapped within the dogma of one of our political parties and their associated media outlets - ignore the talking points, it's a fantasy land. Step 3 is realizing even more opportunities are cropping up by the (seemingly) month; not only is the growth of programs increasing - frankly it is at a historic, rate. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] [May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States]
If you are honest with yourself, it is no different than our current economy as a whole or the stock market. As each tick ever higher goes the market, just try to wash your mind from the fact someone's great grandchild is subsidizing this move. We've taken from future generations to support ourselves today - to drive economic activity and stock market returns. And we're darn proud of it - look at the smiles all over the country at the "success". Complain all you want you tiny minority of long term thinkers (I certainly have) but people are profiteering at a rampant pace and certainly most appear to have no qualms in the country. When you don't think out more than next month, life is much simpler. Please note the the glee in consumers faces on local TV news stations as they drive off the lot in new cars on their grandchildren's dime!
We do indeed have socialism here, but most of it is corporate socialism unlike the socialism that is focused on the workers class in much of Europe. Ah, some of it spins off onto the consumer here as well, but only a fraction. My favorite term for what we have in the US is Reverse Robin Hood - take from the many to give to the few. Which again, is why I snicker each time I hear the arguments against the potential for "socialism in America." Potential? It's here folks - it has been here, and those who argue against it normally are receiving huge amounts of lobbyist dollars from those who benefit the most from it. The main thing they are fighting is European type socialism - if its American type socialism, they are "all in" (by their actions, ignore their words).
Getting back to how we can benefit from the transfer of US taxpayer dollars from the many to the few: US farming has been one area for a long time. (before you shed a tear for the small family farm which is the first dogmatic response ingrained in our head, please research the massive farm bill, and what % of US agriculture is done by corporate versus 'family farm'). Our readers know the truth [Mar 27, 2008: WSJ - Farm Lobby Beats Back Assault on Subsidies] Oil has been another. Obviously US banks are the most obvious investment nowadays. US home builders have been another - although the housing market has been so distraught it's not been quite as easy of a play in the near term. We own Ocwen Financial (OCN) as a play on the handouts to the mortgage industry to "do the right thing" and "get people's mortgages adjusted" - even those poor sods who put nary a nickel into their homes via down payment. [Apr 22, 2009: Fight the Power - or at Least Hedge Against It with Ocwen Financial] [Apr 15, 2009: Treasury Saving $10 Billion for Big Banks to Modify Loans] And now we have the auto market.
Just yesterday we wrote in [Jul 30, 2009: Cash for Clunkers a Bit Hit; Government Asks "What Can We Buy You Next?]
Then, after this handout to buy cars empties I envision the program being extended. That should get us through 2010.
Well good news folks; within 24 hours of that piece it looks like we're already empty in the bank vault! This program was supposed to get us through Nov 1st, but Americans across the land have already spent the $1 Billion. Look, we're a people that will spend 2 hours in line just for a free $5 pizza - do you not think when the government gives us money from the heavens we won't jump? Now, lawmakers are furtively looking for ways to put more liabilities on our future generations to give to the so deserving today. And with an election coming in 2010 and the real economy is quite pitiful shape I am fully confidant they will be very successful! Remember how US programs go ... sell it under "1 cost" so you can say it won't be too expensive, and then once the program is running, explode it.
- The Department of Transportation told auto makers the Obama administration is looking at "all options" to getting additional funding for the "cash for clunkers" incentive program, a person who was briefed on the matter said.
So let us find our Ocwen Financial of the automotive field. The easiest choice of course are automakers - and Ford's (F) results I am sure will be subsidized nicely by the direct transfer of money from the grandkids to corporate coffers.
But since they still have huge liabilities and costs I'd like a simpler pure play - a name I've been watching for a good 4-5 months but never unfortunately, pulled the trigger on - Auto Nation (AN).
Now if you are a 2nd derivative fan you could also go with any number of chains heavily dependent on used cars - i.e. as new cars are bought and clunkers dismantled (keep in mind some of these "clunkers" are younger than most of the grandkids we're stealing from) you could make a connection that the whole daisy chain from new to used will benefit. Certainly the market has made that case... [Jun 19, 2009: Carmax (KMX) Roars on Earnings]
But let's keep it simple and focus on Auto Nation which reported last night - first the immediate benefit.
- AutoNation Inc., the country's largest chain of car dealerships, said Friday that it has sold more than 3,000 vehicles in the past week through the Cash for Clunkers program. "It's been a huge success," Chairman and Chief Executive Michael J. Jackson said in a brief interview. "I think there has been a psychological effect and gotten consumers to start buying cars again."
- Traffic in AutoNation's 264 franchises increased 36% after the Department of Transportation launched the "cash for clunkers" incentives July 24, Mr. Jackson said.
Let's take a quick look at earnings.
- Top U.S. auto dealer chain AutoNation Inc (AN) posted a 29 percent drop in quarterly earnings, but forecast an improving domestic vehicle market after slashing inventory costs and seeing a sharp gain in July sales. "The downward spiral has been broken," AutoNation Chief Executive Mike Jackson said. "We saw a stabilization in sales in the second quarter, and there will be a recovery in auto sales. There's no question about it."
- Second-quarter net earnings fell 29 percent to $36.7. million, or 21 cents per share, from $51.8 million, or 29 cents per share, a year earlier. Revenue dropped 29 percent to $2.6 billion. Excluding one-time items, earnings from continuing operations were 29 cents per share. That was above the 25 cents that analysts on average had forecast on that basis, according to Reuters Estimates.
- For the quarter, the company said domestic segment income was $26 million compared with $33 million in the year-ago period, with a 34 percent decline in new vehicle sales. Income from imported vehicles declined to $42 million from $57 million last year, with an 41 percent drop in new vehicle sales. Premium luxury income was $43 million compared with $52 million a year ago, with a 34 percent slip in new vehicle sales.
- Sales of new vehicles at AutoNation stores fell 38 percent during the quarter, but the company said it fared better than its peers. Industrywide, new vehicle sales fell about 40 percent, the company said, citing data compiled by CNW Research.
- AutoNation is the largest U.S. dealership chain by sales. The Fort Lauderdale, Florida-based company operates 264 dealerships in 15 states.
No positions but definitely figuring out the "new era"!
The Obama administration's plan to increase the powers of the Federal Reserve, says one critic, is like giving a teenager "a bigger, faster car right after he crashed the family station wagon." Treasury Secretary Timothy Geithner disagrees. He argues that the Fed is "best positioned" to oversee key financial companies, and that the Obama plan would give the Fed only "modest additional authority."
Mr. Geithner is right about one thing: The Fed's power is already vast. But it wasn't even well-positioned to supervise the likes of Citicorp. Broadening the Fed's responsibilities won't help. Instead, we should think of how best to dismantle an overextended Fed.
Though advanced economies like ours require organizations capable of taking on a wide range of activities, there are limits. As Frank Knight, the great Chicago economist, pointed out in his 1921 classic "Risk, Uncertainty, and Profit," individuals who control large organizations have to delegate many decisions to subordinates. Entities like hedge funds, where individuals such as George Soros make most of the consequential choices, are exceptions.
Therefore, good judgments about people -- picking the right subordinates, refereeing staff conflicts, evaluating performance, and so on -- are crucial.
Good judgment requires experience, not just exceptional intelligence or raw ability. Although many lessons about managing people can be applied to different fields, good judgment also requires some specific expertise. You can't manage plumbers without knowing something about plumbing.
Unfortunately no one can learn everything about everything. Yes, Lou Gerstner turned around IBM without any prior experience in the computer business. But he had decades of general management experience, was an exceptionally quick study, and had to come up to speed in just one industry. Individuals who can learn how to effectively lead conglomerates, especially during periods of transition, are exceedingly rare.
This mismatch between what even the most talented minds can learn and the challenges of controlling widely disparate businesses has helped bring our financial system to the brink of collapse.
Willy-nilly diversification turned these focused outfits into highly leveraged, unwieldy agglomerations of unrelated fiefdoms.
Likewise, the Fed has been incapacitated by its transformation into an omnibus enterprise with responsibilities ranging from boots-on-the-ground regulation to high-level monetary policy. The Federal Reserve Act of 1913, which created the Federal Reserve System, did so to forestall financial panics rather than pursue macroeconomic policies. The gold standard defined monetary policy. The Fed was merely meant to "provide an elastic currency" by serving as lender of last resort in times of crisis. The Act also assigned the Fed routine responsibilities for maintaining and improving the financial system -- examining banks, issuing currency notes, and helping clear checks.
The adoption of Keynesian and monetarist ideas by central bankers and elected officials subsequently cast the Fed in a proactive macroeconomic role. William McChesney Martin, who served as chairman from 1951 to 1970, said that the job of the Fed was "to take away the punch bowl just as the party gets going." This might have been wise in theory, but it wasn't mandated by the law. In 1977, an amendment to the 1913 Act explicitly charged the Fed with promoting "maximum" employment and "stable" prices. The Humphrey-Hawkins Full Employment Act that followed in 1978 mandated the Fed to promote "full" employment and while maintaining "reasonable" price stability.
Legislation also has increased the Fed's responsibilities for overseeing the mechanics of the financial system. The Bank Holding Company Act of 1956 gave the Fed responsibility over holding companies designed to circumvent restrictions placed on individual banks. It was tasked with regulating the formation and acquisition of such companies.
Congress further tasked the Fed with enforcing consumer-protection and fair-lending rules. The Fed was made the primary regulator of the 1968 Truth in Lending Act that required proper disclosure of interest rates and terms. Similarly, the Community Reinvestment Act of 1977 forced the Fed to address discrimination against borrowers from poor neighborhoods.
The expansion of bank holding companies into activities such as investment banking and off-balance-sheet exposures to complex instruments such as credit-default swaps also required the Fed to increase the scope of its supervisory capabilities.
In principle, an exceptionally talented theorist might capably run a Fed focused just on monetary policy. Setting the discount rate and regulating the money supply are centralized, top-down activities that do not require much administrative capacity. But without deep managerial experience and considerable industry knowledge, effective chairmanship of a Fed that relies on far-flung staff to regulate financial institutions and practices is almost unimaginable. The vast territory the Fed covers would challenge the most exceptional and experienced executives.
As it happens, the Fed has been led for more than 20 years by chairmen who had no senior management experience. Prior to running the Fed, Alan Greenspan started a small consulting firm and Ben Bernanke was head of Princeton's economics department. Given their understandable preoccupation with monetary and macroeconomic matters, how much attention could they be expected to devote to mastering and managing the plumbing side of the Fed? While the record of the Fed's monetary policy has been mixed, its supervision of financial institutions has been a predictable and comprehensive failure.
The Fed's excessively broad mandate also has thwarted accountability. The CEOs of Citibank, AIG, Bear Stearns, Lehman and Countrywide are all gone -- albeit with too much delay and with no clawback of unmerited compensation. At the Fed, no high-level heads have rolled. Mr. Geithner was promoted to treasury secretary. Mr. Bernanke is treated with great deference as he solemnly testifies that if it weren't for the Fed, the crisis would have been much worse. But then, how can anyone be held responsible for failing at a job no human could do?
At the very least we should split the monetary policy and regulatory functions of the Fed, as was done through the Maastricht Treaty that established the European Central Bank. What we need now is a debate about how to break up the Fed -- and some of the sprawling financial institutions it supervises -- in order to make both the regulator and the regulated more manageable and accountable.
Thursday, July 30, 2009
- Investment bank Greenhill & Co. said Thursday it priced a stock offering of 3 million common shares at $76 per share.
- The offering consists of shares now owned by managing directors and senior advisers of New York-based Greenhill. Greenhill will not receive any proceeds from the sale.
- The offer price is a 5.1 percent discount from Wednesday's closing price of $80.09.
- Boutique investment bank Greenhill & Co Inc (GHL) posted a sharply lower second-quarter profit, hurt by a 85 percent slump in merchant banking and other revenue, and completion of fewer large deals.
- The company earned $10.3 million, or 35 cents per share for the period, compared with $28.9 million, or $1.04 per share, a year ago.
- Quarterly revenue at the company, which specializes in deal-advisory work, more than halved to $54.1 million.
- The investment bank has been aggressively hiring the cream of global banking talent as the financial crisis and regulation force large institutions to cut staff and limit pay.
Since so much money now is all set to the same "bait", I don't know when this type of set up fails. (perhaps a higher power than HAL than stop it? Terminator?) It has to fail at some point... but if we cross that black line this afternoon expect the place to go bonkers.
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What's that? Yes, I suppose these 3 and 4 letter symbols flashing on computer screens still represent underlying businesses but please.. we can't be bothered with details like that. Have your microchip ready to pounce. Just follow HAL9000. He comes through with 97.8291% accuracy. The remaining 2.2% is all human error... HAL never fails.
Until the alert goes off, enjoy your summer beach reading - meanwhile I'm frantically trying to find Terminator's cell phone #. Last sighting somewhere in Sacramento area... hmm...
- A year ago Bush sent us rebate checks so we can shop
- This year Obama cut our payroll taxes so we can shop
- First time home buyers are now handed $8000 (no, it's no longer just a tax credit anymore as many states have turned it into a down payment replacement) to buy homes
- And now the government is handing us "up to $4500" to buy cars
I mean what is left to susidize? (don't ask)
In my projections we'll have the home buying handout raised to $15,000 and applied to all home buyers by this winter after the success of turning people with no down payment saved into home owners this spring and summer. Then, after this handout to buy cars empties I envision the program being extended. That should get us through 2010.
If you are a newer reader you may not realize this but ---> [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]
Thankfully, most Americans don't ask where the money came from - they are just happy money shows up from the heavens year after year. Some don't realize it comes from "somewhere" whereas others I am sure could care less - they won't be around when the bill comes due. [May 29, 2009: In 1 year, US Taxpayer on the Hook for $55,000 More per Household] Heck I don't even have kids, so I am wondering why I care.
This is literally what it has come to in a country where the many don't have savings. Our government pays us to shop. And some of you actually consider moving away?
The counter argument of course is "this is our own money in the first place" - I agree with that, but we can't enjoy the services and not pay for them.
Strike that - it appears yes, we can.
[May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States]
[May 19, 2009: Paper Printing Prosperity Defined]
Bookkeeping: Short Riverbed Technology (RVBD); Adding to Skyworks Solutions (SWKS) and RF Micro Devices (RFMD)
Most of the shorts I have on are intermediate term - today's is more of a technical scalp idea. Riverbed Technology (RVBD) has rallied back to a resistance area after a gap down - this is one of the best setups you can ask for. If it doesn't work, it doesn't work but you go with probability - the S&P gapping up 3% a day from here, will make the chart meaningless of course.
RVBD has the 50 day at $21.50, I'm short just over $21.00 and we'll stop out just over $22.00 risking a 4%ish loss. I'm doing just under a 4% allocation - my target is ultimately that gap in the chart below $16. There is really no support here so its going to take the market bringing along all boats to make this one fail I believe.
I've added some cursory exposure in Skyworks Solutions (SWKS) and RF Micro Devices (RFMD) although reluctantly simply to keep somewhat hedged - about 2% long exposure. I mentioned these names yesterday - I was looking at all 3 holdings and these were the 2 that broke over recent highs, TriQuint Semi (TQNT) has not (yet). I want to emphasize I am a very relucant buyer here since this is pure momentum chasing. While that style is working wonders for everyone doing it right now, when it reverses it gets ugly fast.
Overall, I am now net short - while today is a trend day up, these are longer term thought processes I outlined above. If we do a new leg up later in the day I'll go with some short term SPY calls for a quick trade which will offset short losses we would suffer on a new burst upward. If this is just another typical day, we are now setting up a mid day base after the morning explosion higher. Once we break to a new high for the day in the afternoon all the world's hedge fund and investment banking computers will chase in and off to the races we will go. I will repeat what I said this morning - in the old days these very obvious "trend days" would eventually stop working and trap a lot of longs. I don't know why it doesn't happen anymore, but I am sure many of the changes to the market we discuss ad naseum are contributing to it. When everyone is on 1 side of a trade it should stop working. Or... that's how it worked before.
Short Riverbed Technology, Long Skyworks Solutions, RF Micro Devices in fund; short Riverbed Technology, long RF Micro Devices in personal account
In fact delays on these gifts from the taxpayers is the reason QSII said they missed the quarter. After dropping to support this morning, the stock has now bounced and is actually in the green. Until the name breaks support we'll stick around. The action around mid $58s is important as that was a late June peak. If the stock breaks above that, it has potential for the next leg up; if the stock reverses there you have a bearish double top potential.
In normal times this sort of earnings miss would of meant a much darker outcome. But we're in the new normal. And despite missing analysts expectations for revenue by about $1M, they still grew the top line by 20%+ year over year, which is a lot more than most companies can say. Gross margin came in around 61%.
- The Company posted record net revenues of $66.6 million in the first quarter, an increase of 21% from the $55.2 million generated during the same quarter of the prior year.
- The Company reported net income of $10.3 million, down 7% when compared to net income of $11.1 million earned in the comparable quarter of the prior year. Fully diluted earnings per share was $0.36 in the quarter, which was down 10% compared to $0.40 per share earnings recorded in the same quarter last year.
- The Company’s results continue to be impacted by the delays in purchasing decisions related to uncertainty surrounding the American Recovery and Reinvestment Act of 2009 (“ARRA”), which was signed into law in February 2009.
[Jan 6, 2009: Analyst Throws Water on "Hope" in Medical IT]
[Jan 9, 2009: Bookkeeping - Starting Quality Systems]
[Jan 30, 2009: Quality Systems Earnings Solid]
Looks like they beat estimates by 16 cents, which makes the weakness of the stock everytime it was hammered when mortgage rates jumped all the more silly. Remember the thesis behind the title insurers is homes exchange hands - 30 year rates dont need to be at 5.2% for that to happen. Each foreclosure handed off to a vulture is a new title exchange... but again, see paragraph one: the market can't be argued with.
In full disclosure while stock after stock we own has been dancing to the heavens - at this point with almost every stock in the universe going up as HAL9000 does his thing, I cannot tell anymore which stocks are going up on merit and which are going up on actual solid business metrics. Our companies seem to be doing well on the business side, but countless companies who are not doing well but "beating expectations" are also surging. Therefore, there appears little value to these things we call fundamentals but I'll still type about them for entertainment purposes.
- Net income attributable to shareholders of the Santa Ana, California-based company rose to $70.3 million, or 75 cents per share, from $19.6 million, or 21 cents, a year earlier. Excluding investment losses, profit was 89 cents per share, the company said. Revenue fell 9 percent to $1.54 billion, while expenses fell 15 percent.
- Analysts on average had expected a profit of 73 cents per share on revenue of $1.57 billion, according to Reuters Estimates.
- Revenue from title insurance and related services dropped 16 percent to $935.3 million as the average fee per order fell, though the number of title orders closed grew by 9 percent.
- Title insurance guarantees that property owners have title to property and can legally transfer that title. Many lenders require that buyers have the insurance before extending loans.
- The company's direct operations closed 438,100 title orders for the second quarter of 2009, an increase of 9 percent, when compared with 401,200 title orders closed in the second quarter of 2008. Average revenue per direct title order was $1,302, an 18 percent decline relative to the second quarter of 2008.
We had half a short position on this name (2% allocation), so I am going to add the second half in the coming day(s) - preferably as the S&P scorches through 1000 on the way back to all time highs by Labor Day. Should not have had any position since earnings were coming but just missed it. Let go of a quick profit on the short side just like that (first 2% is in mid $46s). The stock is north of $50 and I'd love for it to get to $60 to put the 2nd half on; then when it drops to fill today's gap we can still win. Let's do it.
- Casino operator Wynn Resorts Ltd (WYNN) posted a lower second-quarter profit on Thursday as revenues fell. Wynn, which has filed to list its Macau unit on the Hong Kong stock exchange, reported net income of $25.5 million, or 21 cents per share, compared with net income of nearly $272 million, or $2.42 per share, a year earlier.
- Profit fell to $25.5 million, or 21 cents per share, from $272 million, or $2.42 per share last year. Adjusted to exclude one-time items, net income totaled 9 cents per share. That beat analyst expectations of a penny loss per share.
- Revenue fell 12 percent to $723.3 million from $825.2 million in last year's second quarter. Analysts predicted higher revenue: $739.3 million.
I'll be dropping some short exposure this morning, adding to some of those RF semi names which surely will gap up at the open and if this is going to be one of those straight up all day days, will assess around 10-10:30 AM on going with some SPY call options. Almost every gap up day of this magnitude has led to strength all day - in fact I doubt I can remember one case it has not the past 5 months. I keep saying this very obvious pattern has to stop working as it is so well known by now, but it just keeps happening. The inability to break S&P 970 yesterday had me thinking I should be getting long but you just never know what news will break overnight. The train to S&P 1000 appears inevitable.
As an aside continuing jobless claims are falling (those are the long term unemployed). As we stated a month or so ago - this would eventually happen... the real reason for the majority of that is some people have now been unemployed for over 1.5 years and despite multiple extensions they have exhausted unemployment benefits. The market sees that as a positive because they do not like to look under the hood - somehow I guess they think people are heading back to new jobs. Maybe a small portion but the majority of these people who fell off the rolls are now going to be on welfare.... or hopeless - that's a green shoot.
Or if you drink Kool Aid, 100,000 people who just so happened to be in the long term unemployed rolls suddenly found work last week.
I continue to like the action in Quality Systems (QSII) and Ocwen Financial (OCN)
...looks like I missed the fact QSII reported this morning - missed on earnings and revenue but still only down 1% - lucky ducky
Best Of FMMF
- 1: Warren Buffet Piles on Europe
- 2: [Video] Jim Chanos Returns from Europe, Even More Bearish on China
- 3: A Chart to Open Our Eyes - Staggering Changes by Multinationals in Employment Behavior 00s vs 90s
- 4: Futures Blasted on Dexia Woes... and Poor Preliminary China Data
- 5: Market Working to Worst Thanksgiving Since 1932
- 6: Et Tu, German Bonds? Poor Auction Raises Eyebrows