Rohm and Haas (R&H) approached Dow Chemical and two other companies in early June to gauge their interest in acquiring R&H, a move that resulted in Dow’s July 10 acquisition agreement, says a recent R&H SEC filing. The surprise move late last year by the Haas family trusts, which control 32% of R&H shares, to seek the sale of its stake was the driver behind the R&H sale. Dow’s $18.8-billion, or $78/share, bid bested a $75/share offer from another chemical maker identified in the filing only as “company A.” BASF told CW last month that it placed a bid but declined to reveal the amount of its offer (CW, July 7/14, p. 7).
Haas trusts representatives told R&H chairman and CEO Raj Gupta in November 2007 that the trusts would seek to sell “all or substantially all” of their holdings within 12-18 months, the filing says. “Based on the trusts’ prior conduct, the company’s board of directors did not anticipate the request of the Haas trusts,” the filing says.
R&H and its financial adviser Goldman Sachs (New York) discussed several steps during the next six months to address the sale or purchase of the trusts’ holdings as well as other possible alternatives including putting R&H up for sale, the filings say. The group held discussions in April and May regarding R&H repurchasing a small percentage of the trusts’ shares as part of a deal that called for the trusts’ remaining holdings to be sold over a three-year period, R&H says.
R&H’s management maintained a strong desire to remain independent through negotiations, but management and the board were concerned about market and industry reaction to a sale by the trusts, the filings say. In early June, Gupta held separate discussions with Dow chairman and CEO Andrew Liveris as well as the CEO of company A, believed to be BASF, regarding their interest in R&H, the filings say. Gupta subsequently had a similar conversation with the third company’s CEO, it adds.
Dow responded with an initial offer of $74/share on June 16, which prompted R&H to conduct a “targeted process” among Dow and the two other potential acquirers, the filings say. Company A responded with an offer of $70/share. R&H requested definitive acquisition proposals, which resulted in a $76/share bid from Dow, and a $75/share bid from company A. R&H once again contacted the two companies seeking higher bids.
Dow submitted a $78/share bid on July 9, and company A submitted a revised agreement that improved certain terms but did not increase its offer, R&H says. Dow and R&H signed a definitive agreement that included a voting agreement with the Haas trusts.
All U.S. vice presidents and above, including Howard Schultz and the senior leadership team, will receive no salary increases this year.
Based on Starbucks year-to-date performance, we are not currently on track to reach the requisite financial targets for the General Management Incentive Plan (GMIP). When we announce FY08 results in November, GMIP participants will learn more about the status of bonus payouts.
Sears Holdings Corporation(SHLD) today reported net income of $65 million, or $0.50 per diluted share, for the second quarter ended August 2, 2008, compared with net income of $173 million, or $1.15 per diluted share, for the second quarter ended August 4, 2007. Our second quarter 2008 results include the positive impact of the reversal of a $62 million ($37 million after tax or $0.29 per diluted share) reserve because of the overturning of the previously disclosed February 2, 2007 adverse jury verdict relating to the redemption of certain Sears, Roebuck and Co. bonds in 2004. Excluding this item, earnings per diluted share were $0.21 for the second quarter of fiscal 2008. The decline in our second quarter results from the same quarter last year primarily reflects lower operating results at both Sears Domestic and Kmart, partially offset by improved operating results at Sears Canada.
“Our second quarter results reflect the continued effects of a slowing economy which contributed to the earnings declines we have experienced since the third quarter of 2007,” said W. Bruce Johnson, Sears Holdings’ interim chief executive officer and president. “While it was a difficult quarter, we were successful in reducing our domestic inventory levels by $500 million which should lead to lower markdowns and favorably impact our gross margin rates in the second half of the year.”
Mr. Johnson added, “We expect to generate higher EBITDA in the second half of this year as compared to the corresponding period in 2007 as we benefit from our lower domestic inventory levels and continued vigilant expense management. Given our year-to-date results and the state of the economy, our current full-year EBITDA forecast, which assumes flat to modest comparable store sales declines for the rest of the year, is comparable to, but no longer exceeds, last year’s EBITDA”.
Revenues and Comparable Store Sales
For the quarter, Sears Domestic’s comparable store sales declined 6.7% while Kmart’s comparable store sales declined 5.6%. Total domestic comparable store sales declined 6.2%. The comparable store sales declines at both Kmart and Sears Domestic continue to reflect increasing competition and weakness in the general economy, but are less than the declines reported by Sears Domestic and Kmart during the first quarter of 2008 of 9.8% and 7.1%, respectively. Comparable store sales declined for the quarter across most major categories at both Kmart and Sears Domestic, but continue to be offset by increases in sales of consumer electronics. Comparable store sales declines continue to be driven by categories directly impacted by housing market conditions (including home appliances and, most notably, tools at Sears Domestic), and the increased costs of consumer staples, such as food and gas, which decrease consumers’ discretionary spending.
Bruce Johnson noted that, “Despite the difficult economic environment, we remain focused on long-term value creation and continue to invest in the future of the Company. Since last year we have added 65 net stores, which consist of Home Appliance Showrooms, dealer stores and outlet stores, and we have continued to expand our online and multi-channel capabilities. In May we added a huge selection of books, DVDs, music and software to sears.com, nearly quadrupling the number of products available.”
For the quarter, our total revenues declined $0.5 billion to $11.8 billion in fiscal 2008, as compared to $12.3 billion for the second quarter of fiscal 2007. The decrease in revenue primarily reflects the impact of lower domestic comparable store sales.
Operating Income
For the second quarter 2008, we reported operating income of $187 million, as compared to operating income of $332 million in the second quarter of fiscal 2007. The decrease in operating income was mainly due to lower gross margin generated at both Kmart and Sears Domestic. We generated $3.1 billion in total gross margin in the second quarter as compared to $3.4 billion in the second quarter last year. Our gross margin rate decreased by approximately 120 basis points to 26.5% and reflects rate declines for both Sears Domestic and Kmart due to increased markdown activity as a result of the intense competition for consumer business. Domestic gross margin rate was also reduced as a result of a $36 million increase in inventory reserves over the reserve for the comparable period last year primarily attributable to the reset of the Sears home electronics department and transition to newer products. The decline in Sears Domestic and Kmart gross margin rates was somewhat offset by an increase in the gross margin rate at Sears Canada. Given that we do not expect any significant near-term improvement in the overall retail environment, we believe that our sales and gross margin will likely continue to be pressured by the above-noted unfavorable economic factors for the balance of fiscal 2008.
Declines in sales and gross margin were partially offset by declines in selling and administrative expenses for the quarter. Selling and administrative expenses for the second quarter of 2008 include the above-noted impact of $62 million related to a favorable legal judgment. In addition to the legal judgment, selling and administrative expenses declined $46 million, mainly as a result of our focus on controlling costs. This additional decline was comprised of decreases in domestic operations of $54 million and a slight increase of $8 million at Sears Canada. The decline in domestic selling and administrative expenses is primarily due to lower payroll and advertising expenses. The increase in Sears Canada was primarily due to changes in foreign currency exchange rates.
Financial Position
We had cash and cash equivalents of $1.5 billion at August 2, 2008 (of which $771 million was domestic and $763 million was at Sears Canada) as compared to $2.6 billion at August 4, 2007 and $1.6 billion at February 2, 2008. During the first two quarters of 2008, significant uses of cash included share repurchases of $477 million (as discussed further below), capital expenditures of $277 million and long-term debt repayments of $179 million. These amounts were partially offset by an $812 million increase in short-term borrowings, primarily through borrowing on our $4 billion credit facility.
Merchandise inventories at August 2, 2008 were $9.8 billion, as compared to 10.2 billion at August 4, 2007. Domestic inventory declined from $9.4 billion at August 4, 2007 to $8.9 billion at August 2, 2008, reflecting the effectiveness of our efforts to control inventory levels. Sears Canada’s inventory levels increased approximately $80 million from August 4, 2007 to $880 million at August 2, 2008. The increase in Sears Canada’s inventory is partially due to the change in exchange rates. As we expect difficult economic conditions to persist in the near term, we intend to continue to manage our inventories throughout the remainder of the year with the goal of further reducing our domestic merchandise inventories to better align current levels with expected sales.
Share Repurchase
During the 13- and 26- week periods ended August 2, 2008, we repurchased 5.6 million and 6.0 million of our common shares at a total cost of $437 million and $477 million, respectively, under our share repurchase program. As of August 2, 2008, we had remaining authorization to repurchase $206 million of common shares under the share repurchase program. Share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods. Timing of repurchases is dependent on prevailing market conditions, alternative uses of capital and other factors. Since the third quarter of fiscal 2005, when our repurchase plan was first approved, we have repurchased approximately 38.7 million of our common shares at a total cost of $4.8 billion pursuant to the program. As of August 2, 2008, we had approximately 126 million common shares outstanding.
Borders Group, Inc. (BGP) today reported results for the second quarter, ended Aug. 2, 2008. The company generated a second quarter loss from continuing operations of $11.3 million or $0.19 per share, which represents an improvement over the same period last year when Borders Group recorded a loss of $18.1 million or $0.31 per share. On an earnings per share basis, this represents an improvement of 38.7%.
In the first half of the year, operating cash flow from continuing operations improved by $195.7 million. The company generated operating cash of $50.7 million from continuing operations in the first half of the year compared to operating cash used of $145 million in the same period a year ago with the improvement due to tighter management of inventory and other working capital. Inventory from continuing operations decreased at cost by $181.7 million in the second quarter compared to the same period last year. Debt -- including the prior-year debt of discontinued operations -- was reduced by approximately 37% or $272.7 million at the end of the second quarter to $465.7 million, which compares to $738.4 million for the same period a year ago. The debt reduction was driven primarily by improved management of inventory and other working capital, lower capital expenditures, and proceeds from the previously announced sale of the company's Australia/New Zealand/Singapore businesses.
Total consolidated sales from continuing operations in the second quarter, at $749.2 million, were down 6.9% over a year ago.
In their discussion of the economic situation and outlook, many FOMC participants noted that recent developments suggested that economic activity was likely to remain damped for several quarters. Although economic growth in the second quarter had apparently been boosted by fiscal stimulus, resilience in consumption spending even before tax rebates were distributed, and robust gains in exports, recent indicators pointed to a near-term deceleration in household spending and to softer export demand. Moreover, increasing concerns about financial institutions had contributed to a widening of some risk spreads and a further tightening of credit to households and businesses. Growth in overall economic activity was generally expected to be weak during the remainder of 2008 before recovering modestly next year, and nearly all meeting participants saw continuing downside risks to growth. Recent readings on inflation had been high, but growth in unit labor costs had remained subdued and commodity prices had declined of late. Accordingly, most participants anticipated that inflation would moderate in coming quarters. However, participants also expressed significant concerns about the upside risks to inflation, particularly the risk that longer-term inflation expectations could become unmoored.
Headline inflation was generally expected to moderate in coming quarters, reflecting importantly an anticipated leveling-out of prices for energy and other commodities. Although measures of core inflation might well edge up later this year, given the pass-through to final goods prices of earlier increases in the prices of energy and other inputs, most participants anticipated that core inflation would edge back down during 2009. Some participants reported that firms were increasingly using various pricing strategies--such as escalation clauses or the imposition of fuel surcharges--to pass higher costs on to their customers, who were apparently becoming less resistant to such price adjustments. However, one participant mentioned the difficult pricing decisions of manufacturers who face a combination of elevated input costs along with weakening demand for their products. And a number of participants noted that the outlook for slack in resource utilization should tend to limit the extent of pass-through, contain the degree of inflation spillover to goods and services without high commodity content, and reinforce the anticipated moderation in inflation.
Dear Sirs:
We are writing to express our concern about MI Developments’ (“MID”) investment in Magna Entertainment Corp. (“MEC”). Given the dire situation at MEC, the MID Board needs to take the necessary actions to enforce or preserve the value of MID’s $267 million senior debt investment in MEC and not compound the risk to MID by continuing to fund MEC or extending the maturity of existing debt.
It is clear that MEC is in serious financial trouble. According to the MEC press release issued on August 5, 2008, “... the Company has needed and will again need to seek extensions from existing lenders and additional funds in the short-term from one or more possible sources.” MEC’s stock price has fallen over 90% since MID’s Board of Directors claimed in 2005 that it was adopting its own recommendation to direct management to maximize the return on MID’s current and future investments in MEC by examining the funding necessary for MEC’s strategic plan, stabilizing MEC’s capital structure, and assessing all reasonable financing alternatives for MEC. At that time MID’s Board determined that MEC was poised for growth and Frank Stronach expressed a vision that MEC would become the most profitable company in the world.
While we disagreed at the time with the Board’s assessment of MEC’s prospects, MID asserted that this was simply a question about short-term versus long-term value creation and that reasonable people could disagree.
Since Magna spun-off MEC over eight years ago, there has been a favorable environment for the U.S. consumer, and the gaming industry has experienced significant growth. MEC failed to create any value during that favorable part of the cycle. Instead, it has been a case-study in mismanagement and poor resource allocation. Its prospects were dim even before the cycle turned against the U.S. consumer and the gaming industry.
MEC’s situation and prospects are no longer matters on which reasonable people can disagree. The facts are obvious and beyond dispute: MEC has utterly failed as a business enterprise. More money, time and resources will not resuscitate it under Mr. Stronach’s leadership or anyone else he appoints to pursue his so-called vision. After many years of failure, MEC still has no viable business plan.
MEC’s plan to eliminate its debt by December 31, 2008 has also failed. On MEC’s conference call on August 6, 2008 (the “MEC Call”), Mr. Stronach stated “...we do not expect to achieve our previously announced targets of eliminating our debt by December 31, 2008.” In addition, MEC’s 10-Q for the quarter ended June 30, 2008 (the “MEC 10-Q”) states that “...we do not expect to execute the Plan on the originally contemplated schedule, if at all.” (emphasis added). Even MEC’s convertible subordinated bonds that mature shortly are now trading at only fifty cents on the dollar.
The MEC debt reduction plan has been such a dismal failure that according to the MID press release issued on August 8, 2008 (the “MID Release”), MEC’s net debt has actually increased by $21.6 million, from $564.5 million to $586.1 million, during the period from December 31, 2007 to June 30, 2008 when debt reduction was supposed to be MEC’s main priority.
MID’s equity investment in MEC is clearly no longer a strategic investment. Yet in the face of the rapidly deteriorating situation at MEC, the MID Board has continued to extend the maturity of the senior debt owed to it by MEC.
In light of MEC’s financial situation, we would have expected MID to see that MEC took aggressive steps to reduce its debt, or otherwise attempt to stabilize its financial situation. Instead, the MEC 10-Q threatens the abandonment of its plan to sell assets to reduce debt by stating “...given the announcement of the MID reorganization proposal, and pending determination of whether it will proceed, we are in the process of reconsidering whether to sell certain assets that were originally identified for disposition under the Plan.” Mr. Stronach made a similar statement during the MEC Call.
On the MEC Call, in an ominous and thinly veiled threat to the public MID shareholders, Mr. Stronach said “...I have some — call it some chips in my hand which the MID shareholders would like to have. And I have no problems releasing those chips or giving up those chips, providing it’s a fair thing for MEC.”
A reasonable interpretation of this statement in light of Mr. Stronach’s MID reorganization proposal is that Mr. Stronach intends to hold MID hostage until MEC is fully funded and Mr. Stronach has received a very large personal pay-off at the expense of the MID shareholders.
To that end, among other things Mr. Stronach has overseen (1) MID’s failure to implement any of its own 2005 Board approved resolutions; (2) the inexplicable “destruction” of MID’s relationship with its largest customer (Magna) which Mr. Stronach also controls; (3) MID dramatically increasing its exposure to the deteriorating investment in MEC through project financings and bridge loans on which MEC has been unable to perform; and (4) MID and MEC’s repeated failures to implement any recognizable business plan.
MID shareholders have been threatened that if they don’t capitulate to Mr. Stronach’s demands, MID will continue to fail to take any action to create shareholder value and, in fact, will destroy additional value through unlimited support of MEC, including perhaps buying the company. Undoubtedly this is why a majority of them were intimidated enough to support a reorganization proposal that otherwise made no sense.
We at Greenlight will remain vigilant in our efforts to protect ourselves and our fellow minority shareholders from what we believe to be oppressive treatment. We have never before witnessed such overt aggression by a business leader against a company he controls.
Despite Mr. Stronach’s actions and intentions, each and every member of the MID Board of Directors has a fiduciary duty to all of the shareholders of MID, not just to Mr. Stronach, and the Board must explore all of MID’s alternatives with respect to MEC, not just the ones that Mr. Stronach wants. It may be that Mr. Stronach can vote his shares on matters subject to shareholder vote as he wishes. However, there are many protective actions MID’s Board can take that do not require a shareholder vote and would mitigate the harm that Mr. Stronach is trying to inflict on the company.
MID’s Board must stop expending any more funds to prop up the value of the MEC equity, should not bail-out MEC’s subordinated bondholders and should stop coercing (including by failing to take affirmative action to protect shareholders) the MID shareholders into approving Mr. Stronach’s terms. MID’s Board is duty bound to resist Mr. Stronach’s efforts to use MID’s money in this regard.
Given that MEC’s equity is no longer a strategic investment for MID, rather than blindly continuing to extend the maturity of the senior debt, MID should act like an independent third-party lender and explore all of its options with respect to MEC. There are several possible options MID’s Board can implement that would not require Mr. Stronach’s personal support, including foreclosing on the senior debt or marketing its MEC debt position for sale to a third party. MID’s Board of Directors has a fiduciary duty to protect the shareholders of MID, not to focus as Mr. Stronach says on what’s a “fair thing for MEC.”
By continuing to extend the senior debt, rather than exploring all of their options, the MID Board is endangering MID’s senior debt investment in MEC and is making repayment of the debt in full less likely with each passing day.
If MEC fails to repay its debt to MID in full, the members of the MID Board will be held accountable for failing to fulfill their fiduciary duty to the MID shareholders. We minority shareholders are looking to you to protect our interests from Mr. Stronach’s continued irresponsible, uneconomic and self-serving support of MEC.
Mr. Stronach said during the MEC Call, “I wouldn’t throw money in an empty hole.” Why has so much of MID’s money met exactly that fate?
Stumpf quashed repeated speculation that Wells, the fifth largest US bank, would take advantage of the collapse in the shares of many rivals to clinch a large deal.
“A large transformational [deal] is highly unlikely. Not impossible, but highly unlikely,” Mr Stumpf said. “We don’t need to do a deal. Organic growth is the core growth engine in this company.”
Market talk has linked the San Francisco bank with a number of rivals including Wachovia and Washington Mutual.
Wells was seen as a buyer because, in spite of suffering $3bn in credit-related losses, it has a strong balance sheet and has remained profitable throughout the crisis.
Its share price has outperformed the sector and its market value is about equal to that of the much bigger Citigroup (C).
As the only US bank with a top-notch triple A credit rating, Wells would also be able to borrow funds at advantageous rates.
Mr Stumpf noted that since the 1998 merger between Norwest and Wells Fargo, the group had eschewed large acquisitions, preferring to focus on bolt-on purchases of companies in the western states.
“We come from a culture where bigger is not better. You get bigger by being better, you don’t get better by being bigger,” he said, adding that Wells was also unlikely to stray from its western focus by buying on the East Coast.
(1) acquire or retain shares that would cause its ownership of
American Express** voting securities to equal or exceed 15% of the amount
outstanding (if at such time Berkshire Hathaway has a representative on the
Board of Directors of American Express as allowed by section 4 hereof), or
otherwise acquire or retain shares that reflect ownership or more than 17% of
the amount outstanding; _provided_ that for the purposes of this commitment
shares held by officers or directors of Berkshire Hathaway shall be aggregated
with shares held by Berkshire Hathaway;
Walgreen Co is the largest U.S. retail drug chain in terms of revenues. It sells prescription and non-prescription drugs, beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items and convenience foods. Linked here is a detailed stock analysis and commentary.
The latest example of the power of dividends and dividend growth came on June 16 when U.S. Bank Wells Fargo (WFC) announced a 10% dividend increase. The stock market promptly celebrated big time. Normally dividend increases are hardly reported as news let alone get front page headlines.
In the quest to select solid dividend paying stocks that will appreciate over time and pay ever-increasing cash back to us in the form of dividends, success lies in the future, not the past. Sometimes the best dividend growing stocks for the future might be only in their infancy as far as dividend growth goes.
Sometimes being a dividend investor sucks. As part of my overall investing strategy, I state that 'dividends are half the journey'. This essentially rules out any potential investments that pay a very small, and/or non-growing dividend. There are a few stocks, with stories that I believe in long term that were eliminated from my watchlist because of this fact.
In the quest to select solid dividend paying stocks that will appreciate over time and pay ever-increasing cash back to us in the form of dividends, success lies in the future, not the past. Sometimes the best dividend growing stocks for the future might be only in their infancy as far as dividend growth goes.
The general rule when buying and selling energy and commodity names is the reverse to other stocks; "buy when P/E ratios are high and sell when P/E ratios are low". This strategy would work like a charm right now, if and only if, the energy and commodity bull market is coming to a close.
Earlier this week we looked at my top 5 high fliers for 2008. Unfortunately, for every up, there is a down and that is certainly true for my portfolio. As before, we will look at results through July 31, 2008. Here they are my cellar dwellers with comments:
Since 1984, Greenberg has outperformed the S&P 500 by almost 10% per year. One of the chief reasons he attributes to this is a strategy of anti-diversification!
A couple of months ago, Warren Buffett was kind enough to invite a group of us to Omaha to meet with him at Berkshire headquarters and subsequently dine at one of his favourite restaurants, Piccolo Pete's.
Does MagicDiligence add value to the Magic Formula Investing strategy? A comparison against the raw screens.
Diageo is an international dividend achiever. It has been increasing its dividends for the past 10 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 10.90 % to its shareholders. Diageo is the first international dividend company that I have analyzed in my pursuit of international exposure for my stock portfolio.
With profitability hitched to the notoriously cyclical moves of not one but two commodities, Terra Industries is one unpredictable stock. Can the current "perfect storm" for profitability last?
A detailed look at an odd-lot tender offer by someone other than Fat Pitch Financials! The United Rentals tender offer was a very standard tender offer, which was profitable for one financial blogger who shares his story.
Boring title isn't it? I wanted to avoid the overused title "Size Matters" which for some reason is used as a headline for topics ranging anywhere from mp3 players to water-buffalo mating rituals. Nevertheless, the relevance of this assessment can't be dismissed.
NEW YORK (Reuters) - Warren Buffett said the U.S. economy is unlikely to improve before 2009, and there was a "reasonable chance" that Fannie Mae and Freddie Mac shareholders would be wiped out though the companiesthemselves are too big to fail.
"An effective means of increasing the resilience of the financial system is to strengthen its infrastructure. For my purposes today, I want to construe "financial infrastructure" very broadly, to include not only the "hardware" components of that infrastructure--the physical systems on which market participants rely for the quick and accurate execution, clearing, and settlement of transactions--but also the associated "software," including the statutory, regulatory, and contractual frameworks and the business practices that govern the actions and obligations of market participants on both sides of each transaction. Of course, a robust financial infrastructure has many benefits even in normal times, including lower transactions costs and greater market liquidity. In periods of extreme stress, however, the quality of the financial infrastructure may prove critical. For example, it greatly affects the ability of market participants to quickly determine their own positions and exposures, including exposures to key counterparties, and to adjust their positions as necessary. When positions and exposures cannot be determined rapidly--as was the case, for example, when program trades overwhelmed the system during the 1987 stock market crash--potential outcomes include highly risk-averse behavior by market participants, sharp declines in market liquidity, and high volatility in asset prices. The financial infrastructure also has important effects on how market participants respond to perceived changes in counterparty risk. For example, during a period of heightened stress, participants may be willing to provide liquidity to a market if a strong central counterparty is present but not otherwise.
Considerations of this type were very much in our minds during the Bear Stearns episode in March. The collapse of Bear Stearns was triggered by a run of its creditors and customers, analogous to the run of depositors on a commercial bank. This run was surprising, however, in that Bear Stearns's borrowings were largely secured--that is, its lenders held collateral to ensure repayment even if the company itself failed. However, the illiquidity of markets in mid-March was so severe that creditors lost confidence that they could recoup their loans by selling the collateral. Many short-term lenders declined to renew their loans, driving Bear to the brink of default.
Although not an extraordinarily large company by many metrics, Bear Stearns was deeply involved in a number of critical markets, including (as I have noted) markets for short-term secured funding as well as those for over-the-counter (OTC) derivatives. One of our concerns was that the infrastructures of those markets and the risk- and liquidity-management practices of market participants would not be adequate to deal in an orderly way with the collapse of a major counterparty. With financial conditions already quite fragile, the sudden, unanticipated failure of Bear Stearns would have led to a sharp unwinding of positions in those markets that could have severely shaken the confidence of market participants. The company's failure could also have cast doubt on the financial conditions of some of Bear Stearns's many counterparties or of companies with similar businesses and funding practices, impairing the ability of those firms to meet their funding needs or to carry out normal transactions. As more firms lost access to funding, the vicious circle of forced selling, increased volatility, and higher haircuts and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions. Largely because of these concerns, the Federal Reserve took actions that facilitated the purchase of Bear Stearns and the assumption of Bear's financial obligations by JPMorgan Chase & Co.
This experience has led me to believe that one of the best ways to protect the financial system against future systemic shocks, including the possible failure of a major counterparty, is by strengthening the financial infrastructure, including both the "hardware" and the "software" components."
"A systemwide focus for financial regulation would also increase attention to how the incentives and constraints created by regulations affect behavior, especially risk-taking, through the credit cycle. During a period of economic weakness, for example, a prudential supervisor concerned only with the safety and soundness of a particular institution will tend to push for very conservative lending policies. In contrast, the macroprudential supervisor would recognize that, for the system as a whole, excessively conservative lending policies could prove counterproductive if they contribute to a weaker economic and credit environment. Similarly, risk concentrations that might be acceptable at a single institution in a period of economic expansion could be dangerous if they existed at a large number of institutions simultaneously. I do not have the time today to do justice to the question of the procyclicality of, say, capital regulations and accounting rules. This topic has received a great deal of attention elsewhere and has also engaged the attention of regulators; in particular, the framers of the Basel II capital accord have made significant efforts to measure regulatory capital needs "through the cycle" to mitigate procyclicality. However, as we consider ways to strengthen the system for the future in light of what we have learned over the past year, we should critically examine capital regulations, provisioning policies, and other rules applied to financial institutions to determine whether, collectively, they increase the procyclicality of credit extension beyond the point that is best for the system as a whole.
A yet more ambitious approach to macroprudential regulation would involve an attempt by regulators to develop a more fully integrated overview of the entire financial system. In principle, such an approach would appear well justified, as our financial system has become less bank-centered and because activities or risk-taking not permitted to regulated institutions have a way of migrating to other financial firms or markets. Some caution is in order, however, as this more comprehensive approach would be technically demanding and possibly very costly both for the regulators and the firms they supervise. It would likely require at least periodic surveillance and information-gathering from a wide range of nonbank institutions. Increased coordination would be required among the private- and public-sector supervisors of exchanges and other financial markets to keep up to date with evolving practices and products and to try to identify those which may pose risks outside the purview of each individual regulator. International regulatory coordination, already quite extensive, would need to be expanded further."
"In management’s letter last quarter, it was observed that short sellers and bear raiders have never been more powerful. TAVF operates differently from short sellers. At Third Avenue, Fund Management tries to avoid investment risk, i.e., something going wrong with the business or the securities issued by that business. TAVF pretty much ignores market risk, i.e., fluctuations in market prices. Short sellers, on the other hand, have to be acutely conscious of market risk. If the security they are short rises in price, short sellers have to come up with more collateral. If short sellers buy puts, and the security price does not go down, it is “sudden death” at the date of expiration of the put options.
As a consequence of the need to be so sensitive to market prices, bear raiders seem to tend very much to engage in nefarious activities, whether legal or not. First, the shorts condition markets any way they can, whether by spreading rumors or issuing
analyses where the consequences for long security holders are deemed to be draconian if the buyer continues to hold. Sometimes the true intentions of the short sellers are masked. For example, William Ackman appears to be disingenuous when he writes and
talks about saving MBIA’s policyholders. Why does he care about policyholders? Ackman’s objective is to drive down the market price of MBIA securities. The bear raiders have enjoyed great success. Bear Stearns (BSC) lost its creditworthiness when customers and counterparties reacted to rumors and stopped doing transactions with Bear.
Lehman Brothers Holdings has been hurt by the same kind of rumor mongering. TAVF no longer will invest knowingly in the common stocks of companies that need relatively
continuous access to capital markets; or where customers and counterparties can flee without appreciable costs. Fund management does not believe that Ambac and MBIA, both of which are the objects of bear raiders, can ever have a Bear Stearns type of experience. The great weight of probabilities seems to be that both companies enjoy such financial strength that they can survive almost any stress. For TAVF, the activities of the short sellers have meant that securities became available for purchase at far, far lower prices than would otherwise be the case. The most nefarious aspect of the short sellers revolves around their concerted efforts to destroy, or at least diminish, the companies’ existence as going concerns. In the cases of Ambac and MBIA, the short sellers have been bringing as much pressure as they can on rating agencies, insurance regulators and securities regulators to downgrade Ambac and MBIA, to demonstrate insolvency and to prevent either company from accessing capital markets.
It should be noted that until the recent SEC inquiries, short sellers were pretty much free to say, or write, whatever they like. There is no apparent downside for being a “loose cannon”. Managements and insiders, however, are quite restricted in what they can say or write because of securities laws, in general, and
Sarbanes-Oxley attestations and auditor limits, in particular. In informing uninformed investors, there does not seem to exist a level playing field.
I will write to you again when the Annual Report for the period to end October 31, 2008 is published.
Sincerely yours,
Martin J. Whitman
Chairman of the Board"
Read Full Letter Here
Gap shareholders are going to do just fine under Murphy. Let's not forget, with the exception of Wal-Mart (WMT), retailers are being savaged right now. The fact that Murphy's shareholders (because of the company's results) have escaped that must be telling us something, the plan is working.
ap (GPS) reported that second quarter net earnings increased 51 percent through the combination of driving healthy margins and effectively managing costs.
For the quarter ended August 2, 2008, net earnings were $229 million, or $0.32 per share on a diluted basis, compared with $152 million, or $0.19 per share, for the second quarter last year.
The 2007 second quarter diluted earnings per share included $0.02 of expenses related to the company’s cost reduction initiatives. Excluding the $0.02 per share of expenses, second quarter diluted earnings per share last year on a non-GAAP basis were $0.21 per share. Please see the reconciliation of diluted earnings per share on a GAAP basis to diluted earnings per share excluding the expenses associated with the company’s cost reduction initiatives, a non-GAAP financial measure, in the table at the end of this release.
“External conditions aside, we continue to deliver improved earnings with healthy margins and I am pleased with our second quarter results,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “While we continue to pursue our 2008 financial strategy, we are very focused on bringing more customers into our stores.”
Short-selling runs deep in financial history. Perhaps the first case dates to 1609 when the Dutch trader, Isaac Le Maire, targeted the shares of the shipping company Vereenigde Oostindische Compagnie (the Dutch East India Company). VOC was the first multinational corporation in history and had broad powers. Nonetheless, Le Maire, concerned about threats of attack by English ships, sold VOC’s shares short. After learning about Le Maire’s tactics, the stock exchange governing VOC’s trading banned short-selling (although the ban was later revoked).
In the early 1630s, the Dutch economy fell into a depression following a speculative peak in the trading of tulips. Again, short-selling raised the ire of regulators, many of whom saw it as magnifying the effect on the Dutch economic downturn. As a result, England banned short-selling outright.
Almost 420 years later – in the late 1920s – short-sellers warned of the consequences of speculation. But in the aftermath of the Wall Street crash of 1929, many blamed them and the uptick rule – which banned short-selling on downticks – was instituted (and stayed in effect until 2007). More regulation governing short-selling came into force in 1940, with a ban on mutual funds from short-selling (though that law was lifted in 1997). In early 2005, the SEC again sought to restrict the practice.
Yet short-sellers have served as financial watchdogs, as many of their warnings have been spot on. The delusional dotcom boom in the late 1990s brought Cassandra-like utterings from the short-selling cabal that proved insightful but were largely ignored. After the subsequent 75 per cent collapse of the Nasdaq, a bull market in corporate fraud emerged and short-sellers such as David Rocker, founder of Rocker Partners, highlighted accounting problems at companies such as Sunbeam, Tyco and Lernout & Hauspie. Kynikos’ Jim Chanos played a role in uncovering the largest fraud in history when his contrary-minded analysis warned of Enron’s accounting shenanigans – which were emulated (but ignored by investors) in the banks’ recent dalliance with structured investment vehicles.
By the middle of the decade the property cycle was in full bloom and David Tice of the Prudent Bear Fund warned of the dire ramifications of a downward spiral in home prices on the levered balanced sheets of Fannie Mae (FNM) and Freddie Mac (FRE). Soon thereafter, Nouriel Roubini, the economist, voiced particularly pessimistic forecasts about the housing market’s impact on credit.
Drawing a line between economic and market progress as against fantasy is a role taken by the few. Short-sellers provide an anchor of objectivity in an investment world populated by those more interested in rewards than in uncovering systemic risks. This week, Mr Cox said the SEC would announce new regulations to restrict short-selling. Instead of more regulation, the chairman and investors should begin listening to what short-sellers have to say about our economy and credit markets.
Director James A. Marcum, 49, has been appointed vice chairman of the company. In this executive officer position, Marcum will play a key role in leading the efforts to accelerate the pace of the company's turnaround.
"The board and I selected Jim for this role because he is a highly-experienced retail turnaround executive," said Philip J. Schoonover, Circuit City's chairman, president and chief executive officer. "I believe he will be a great partner to me and the rest of the management team as we focus on ways to improve our business. Today's announcement shows that the management team remains fully committed to delivering value to shareholders in the near term through the successful execution of our turnaround plan. Meanwhile, the board continues to pursue strategic alternatives for the company that offer the best possible results for our shareholders in the long term."
During the second quarter of 2008, the market witnessed a significant increase in
regulatory activity by the SEC and other government entities. Over the past several
weeks, the SEC has served subpoenas on over 50 different hedge funds, seeking
information relating to short sales in Bear Stearns and Lehman Brothers, and the
dissemination of rumors about those companies in the market.
This investigation comes at the same time that the SEC has implemented several other
measures designed to address short-selling. On July 15, 2008, the SEC instituted a 30-day emergency measure aiming to make the short-selling of certain financial institutions more difficult by requiring all sellers to borrow or enter into a bona fide agreement with the share lender to borrow the securities prior to the short sale.
The SEC also recently announced that it is concerned about the deliberate spreading of false rumors by short-sellers – known as rumor mongering – which some have claimed led to the Bear Stearns implosion. To this end, the SEC announced that its regulators would immediately begin conducting examinations of broker-dealers and investment advisers to determine whether they have sufficient procedures in place to protect against the dissemination of false rumors.
As you may recall, the SEC conducted an audit of Third Point last year after we
registered as an investment advisor. During the course of the audit, the examination staff noted that we regularly communicate with portfolio managers at other hedge funds about investment and trading ideas. The SEC later informed us that it had commenced a formal investigation of Third Point primarily relating to these types of communications. Such conversations permit us to test our hypotheses and refine our thinking and, as a result, we believe that participating in give-and-take with other managers is in the best interest of our investors. Our outside counsel has examined this matter thoroughly and assured us that our position is consistent with the securities laws and that we have not violated any law in connection with these communications.
Regulatory matters are certainly playing a significant role in the life of hedge funds as the obligations and demands of the current regulatory environment continue to increase. However, rest assured that we have a strong operational and legal team to assist me in these endeavors, and as a result, all of us on the investment team at Third Point remain completely focused on our investment activities and maximizing returns for our investors.
"a loss of $1.8 billion or more, instead of the modest profit they previously expected. If the dour projections come true, Lehman's losses since the start of March would total at least $4.5 billion -- or more than the firm churned out in profit during fiscal 2007."
".. reached record levels of short interest as a percentage of publicly traded shares in the last month. Sears led the Standard & Poor's 500 Index with 55.9 percent as of Aug. 12, according to Bloomberg data. Target's reached 7 percent."
"It's easy to say when a stock has declined after you buy it that you've made a mistake, but there's a big difference between being early and being wrong"
"The fact that there are so many naysayers out there," he said, "just means that vindication will be all the sweeter".
Using the new Google Insights for Search tool, I examine the global patterns and trends of online investors searching for information on value investing since 2004. The article includes maps of the distribution of value investing globally and in the United States. It also includes a list of the top related search terms and the fastest rising searches for value investing.
Steak N Shake reported Q3 numbers, their first under Sardar Biglari. A look at the numbers and how SNS might be simply valued.
I recently spoke with Cal-Maine Foods CFO Tim Dawson, and here are the notes from our conversation.
A funny graphic depicting the thoughts running through the average investor's head during a market dip. Make sure it doesn't describe your thought process!
National Retail Properties is a dividend achiever as well as a component of the S&P 1500 index. It has been increasing its dividends for the past 18 consecutive years. From 1998 up until June 30 2008 this dividend growth stock has delivered an annual average total return of 9.60 % to its shareholders.
Air Products and Chemicals Inc. produces industrial gases and specialty and intermediate chemicals and also has interests in environmental and energy-related businesses. Linked here is a detailed stock analysis and commentary.
A little look at what might have happened with Pinnacle Airlines and why Mohnish Pabrai might be selling his position.
Ever since I started analyzing stocks on my blog, I have been gathering information about several stocks in my data folders. I wanted to check what was the relationship between the ten year dividend growth rate and the ten year total return of the stocks that I previously covered on my blog.
Bruce Berkowitz must be disappointed that the current Olympic Games program doesn't include professional money management in the competition. If it did, the veteran stock picker's neck would be weighted down with gold right now.
The latest Berkshire Hathaway 13F was just filed. It appears Warren Buffett increased his position in IngersollRand, SanofiAventis and added a new position in NRG Energy. It also appears the holdings in AnheuserBusch were reduced.
