Archive for March, 2008

• Jos. A. Bank Down on Barron’s Article
  Eddy Elfenbein, March 31st, 2008 at 10:38 am

  This week, Barron’s criticized the inventory levels at Jos. A. Bank (JOSB):

  Chief Executive Robert N. Wildrick did a great job of shaking up the century-old retailer after he took charge in 1999. Annual sales have since tripled, to $604 million, while per-share earnings have risen eightfold. The company expects to report about $2.67 a share when it finishes accounting for the fiscal year ended January 2008 (called the 2007 fiscal year, by retailing convention). While adding 50 new stores a year, the chain grew revenues at existing stores. In all but 11 of the past 77 months, the retailer reported higher comparable-store sales — a measure that compares each store’s sales with its sales in the prior-year period. Frequent promotions drive the sales. These discounting binges make monthly comps erratic, varying by an average of seven percentage points around the median increase of 6%.
  But comparable-store growth has been shrinking in the last two years. In fiscal 2005, comps grew more than 10%. In 2007, they grew less than 4%. The 2005 inflection in comps is intriguing, since that’s the year the company stopped using a controversial calculation method that had inflated its comps by not counting stores within 10 miles of a newly-opened store. Barron’s had previously criticized Bank’s comps approach (“Dressed for Success?“ Oct. 13, 2003). That may explain why the chain didn’t respond to our inquiries last week. More disturbing, Bank stopped reporting monthly comps after January of this year.
  Along with softening comps, another sign of sputtering growth is Bank’s inventory accumulation. When we wrote about the company in 2003, it had about 350 days of inventory on hand (with a “day” of inventory equaling the quarter’s cost-of-goods-sold divided by 90 days). As of November 2007, Bank’s inventory had hit the 425-day mark while Men’s Wearhouse’s ending inventory was 292 days. The average of Bank’s starting and ending inventory for its November quarter was 397 days. Holiday sales probably reduced Bank’s number by the end of January, but the company hasn’t yet reported that balance sheet.

• Investors pull almost $100bn out of equity funds
  Eddy Elfenbein, March 31st, 2008 at 10:29 am

  From the FT:

  Investors worldwide pulled close to $100bn (€63.3bn) out of equity funds in the first three months of this year – a record shift that accelerates a longer-term trend away from US and western European stock markets.
  Equity funds suffered outflows of $98bn in the quarter ending March 28, according to Emerging Portfolio Fund Research, which tracks retail and institutional flows. The funds had inflows of $19bn during the same period last year and inflows of $49bn in the same period for 2006.
  EPFR said the outflows were because “the credit squeeze linked to the US subprime debt mess weighed on investor confidence and global growth”.
  The outflows also accelerate a trend for investors to put their money either in ultra-safe cash options such as money market funds, or into riskier markets and high-fee products such as hedge funds. They are abandoning the middle ground of mainstream equity and fixed income funds, especially in the developed markets.
  Investors pulled $70bn from US, Japan and Western Europe funds during the quarter, compared with inflows last year and in most previous years.
  Funds enjoying inflows were nearly all focused on Taiwan, Russia, the Middle East and Africa. Emerging markets funds as a group had outflows of $20bn, compared with a small outflow of $1.6bn in the same period last year.

• Let’s Go Nats
  Eddy Elfenbein, March 31st, 2008 at 6:42 am

  Dad and I went down to the Nationals season opener last night at their brand-new ballpark. The park gets an A+ from me. They did a really good job, and the food is light years better than RFK.
  Most importantly, the Nats won a thriller with a two-out bottom-of-the-ninth walk-off home run from Ryan Zimmerman. The place went absolutely bonkers. Hey, we’re in first!
  Here’s a brief photo montage starting with Pop:
  
  The scoreboard is roughly the size of Delaware. This picture below is taken during the opening ceremonies when they unfurled two huge flags. I snapped this right as an F-16 did a flyover, as you can tell from everyone looking up. I tried to take another picture of the plane, but F-16s are very, very fast. By the time I did, the pilot was probably back in the hangar drinking beers.
  
  See that little tiny red dot stepping off the pitcher’s mound. That’s Bush.
  
  This is the view behind us.
  

• Jimmy Cayne Cashes Out
  Eddy Elfenbein, March 28th, 2008 at 9:39 am

  Jimmy Cayne dumps all of his Bear Stearns (BSC) stock.

  Only a year ago James E. Cayne’s stake in Bear Stearns was worth more than $1 billion. But on Thursday, Mr. Cayne, the chairman of Bear, disclosed that he had sold all of his shares in the troubled investment bank this week for just $61 million.
  While the sale leaves Mr. Cayne a wealthy man, it nonetheless underscores the deep losses suffered by Bear’s shareholders after the company’s forced sale to JPMorgan Chase two weeks ago.
  And for Mr. Cayne, the liquidation evokes a deep sense of loss. It represents a humiliating capitulation for a brash executive who, with his ever-present cigar, suspender-snapping ways and Friday golf outings in the summer, epitomized the classic, if outdated, picture of the Wall Street chieftain.
  To the end, Mr. Cayne heeded the advice he often gave his colleagues at Bear: hold on to your stock. Whether the stock was flying high, as it was early last year, at $171, or plummeting, as it did in recent months, Mr. Cayne kept the vast bulk of his 5.6 million shares.

• Goodbye Moto
  Eddy Elfenbein, March 26th, 2008 at 10:27 am

  Instead of one big sucky company, we’ll now have two!

  Motorola said Wednesday that it would split itself into two publicly traded companies as it struggles to boost its stock price and faces pressure from activist investor Carl C. Icahn.
  Motorola said in a statement that it would separate its flagging cellphone unit from its broadband and mobility operations, which encompasses the servicing of wireless networks and the building of television set-top boxes. Motorola shareholders would receive stock in both companies.
  “Creating two industry-leading companies will provide improved flexibility, more tailored capital structures, and increased management focus – as well as more targeted investment opportunities for our shareholders,” Gregory Q. Brown, Motorola’s chief executive, said in a statement.
  Motorola said in January that it was considering a break-up as its stock has plunged 45 percent over the past year. Despite the success of its Razr cellphone, Motorola has lost market share to rivals like Nokia, Samsung and Apple.
  It has also faced increasing pressure from Mr. Icahn, its second-largest shareholder. The activist investor recently sued Motorola to gain access to documents related to its board’s discussions about its cellphone business.
  Mr. Icahn, who holds about 6.3 percent of Motorola shares, is also seeking four seats on the company’s board.

  This makes some sense as the company’s stock has also split itself in two. I really don’t see the value of doing this. I’m always suspicious of the phrase “unlocking shareholder value.” The problem is, there has to be shareholder value in the first place that can be unlocked.
  One of the reasons for the breakup, given by CEO Gregory Brown, was that the two separate units would benefit from increased focus from management. Why couldn’t they effectively manage both?

• Goldman: $460 Billion More in Credit Losses
  Eddy Elfenbein, March 26th, 2008 at 9:34 am

  From Bloomberg:

  Wall Street banks, brokerages, and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.
  “There is light at the end of the tunnel, but it is still rather dim,” Goldman analysts including New York-based Andrew Tilton said in a note to investors yesterday. They estimated that residential mortgage losses will account for half the total and commercial mortgages for as much as 20 percent.
  Earnings and share prices at US financial institutions tumbled in the past year as fallout from the mortgage crisis spread to other markets. Demand for mortgage-backed securities evaporated, leading to the collapse of Bear Stearns Cos., once that market’s largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co. this month.

• Federal Reserve Announces Emergency Release Of Butterflies
  Eddy Elfenbein, March 26th, 2008 at 6:56 am

  The Onion Radio News is on the scene.

• JPMorgan Sweetens the Pot
  Eddy Elfenbein, March 25th, 2008 at 12:55 pm

  I won’t say I predicted it, but I did, in fact, predict it.
  Yesterday, JPMorgan Chase (JPM) announced that it will increase its bid for Bear Stearns (BSC) from $2 a share to $10 a share.
  Last Wednesday, I wrote.

  I would say that the most likely outcome is that JP Morgan will sweeten the offer. To add some context, it’s really not that much for JPM. The company’s market value has already increased by $20 billion this week. The offer for Bear will cost JPM $236 million. What’s the big deal if it doubles or even triples the offer? Plus, it could win JPM some goodwill.

  Actually, they quintupled it. Before you go thinking that a newfound spirit of generosity and altruism has broken out on Wall Street, I should remind you that self-interest may be playing a part.
  That $20 billion figure I mentioned was on Wednesday morning. By the end of the week, shares of JPM tacked on 25.8% which is an increase of $32 billion. I swear, Jamie Dimon must be some sort of financial Jedi. How did he pull this off? That $32 billion is far more than Bear was ever worth.
  At any rate, even after raising its bit, JPMorgan is really just kicking a couple of pennies Bear’s way.
  John Carney at DealBreaker said the real reason for the sweetened bid was to hold off a potential second run at Bear. That could be. Either way, JPMorgan Chase basically got one of the best deals imaginable. This will go down in Wall Street annals as a legendary deal.
  Think of it this way, thanks to the folks at the Federal Reserve, this was the most harmonious cooperation between the public sector and free enterprise since Eliot Spitzer and Kristen (or was it Ashley?). Except now, the roles are reversed.
  In the end, the Bear Stearns was done in by questionable liquidity. Unfortunately, the liquid in question was Kool-Aid and there was plenty to go around. Bear’s mismangement is simply staggering. While the deal was being worked out, Jimmy Cayne, Bear’s chairman, was at a bridge tournament in Detroit.
  What’s scary is, this wasn’t the first time. Over the summer, when two of Bear’s hedge funds rammed the iceberg, Cayne, who was then CEO, was at a bridge tournament in Nashville. Not only that, but according to the Wall Street Journal, he was “without a cellphone or an email device.”
  Sheesh. How does that happen?
  (Less importantly, there are bridge tournaments in Nashville??)
  The WSJ article also noted: “Attendees say Mr. Cayne has sometimes smoked marijuana at the end of the day during bridge tournaments. He also has used pot in more private settings, according to people who say they witnessed him doing so or participated with him.”
  Thank you, Rupert. Now that’s reporting! So while Bear’s stock was making new lows, management was making new highs. Not surprisingly, BSC shareholders aren’t too pleased with their shares vaporizing into thin air. On Sunday, The New York Post reported, “Cayne’s armed hulk of a bodyguard trailed him everywhere and parked himself outside Cayne’s office all day, sources said.”
  How much you want to bet that that source owns more than a few shares of BSC? Also, at what point, exactly, did the world of high finance start taking the form of the movie My Bodyguard? This can’t be a good development.
  Ironically, 101 years ago, J.P. Morgan, the man, helped bailout the financial system during the Panic of 1907. It was at this time that people realize that it might not be a great idea to have our entire financial system dependent on one man. So, to make a long story short, Congress eventually passed the Federal Reserve Act of 1913.
  Which leads us to last Tuesday. That’s when the Federal Reserve lowered interest rates by 75 basis points to just 2.25%. All told, rates have dropped by 300 points in just over six months. Until recently, Treasury Inflation Protected Securities (or TIPS) maturing as late at 2012 carried a negative yield.
  What I find interesting is that the financial media refuses to discuss the possibility of a bond bubble. Everyone assumes the bond market is correct—it never suffers from exuberance, rational or otherwise. Another interesting note is that this Fed decision was the first time since 2001 that there were two dissenting votes.
  Nevertheless, the market roared its approval and surged—perhaps in homage to Mr. Cayne—420 points. The two best days of the past five years came exactly one week apart.
  The course of events has probably left you feeling a bit rattled. That’s understandable. Standard & Poor’s recently said that the stock market’s volatility has reached its greatest point in 70 years. At one point last week, the yield on the three-month T-bill hit 0.2%.
  But I should remind you that times like these are often great buying opportunities. Since 1950, the entire capital gain of the S&P 500 has come when the yield spread between the three-month and the 10-year Treasury is over 65 basis points. Today, that spread is over 230 basis points.
  Not every stock is reeling from the credit crises. Many of the best companies aren’t overly leveraged and they see a bright year ahead. A great example is Donaldson (DCI) of Minneapolis, Minn.
  I have to warn you, Donaldson is about as dull as they come. The company makes…hold on to something…filtration systems! Woo!
  Yeah, I know, it’s pretty boring. But consider a few facts. Donaldson has reported record earnings for 18 straight years. Does that grab your attention?
  Last month, the company reported earnings of 42 cents a share, which was in line with the Street’s consensus. That was for the second quarter of their fiscal year, so for the first half, sales were up 14% and EPS was up 17%. That kinda beats the 0.2% from T-bills.
  On top of that, Donaldson increased its 2008 projection to $2 to $2.10 a share. That’s higher than what they first projected in November when they forecast $1.97 to $2.07. Not only that, this is actually the second time Donaldson has increased its projection. In September, the company expected EPS of $1.92 to $2.01.
  Always pay attention when companies warn or increase estimates. They’re a lot like cockroaches: For every one you see, there are five more scurrying around the woodworks.
  This credit crisis, too, shall pass. Ten years ago, when the financial system was heading for the cliffs, frightened investors left high-quality stocks. Shares of Donaldson dropped in half. But the stock is up over five-fold since.

• Bove: Bear Will End Up Costing JPM $65 a Share
  Eddy Elfenbein, March 25th, 2008 at 10:04 am

  Richard Bove said that when you add it all up, Bear will eventually cost JPMorgan Chase $65 a share.

  While some may think that JPMorgan is getting Bear Stearns at a bargain price, “I do not,” Bove said in a note to clients. “Bear Stearns is a deeply troubled company which would have no value if the Federal Reserve had not stepped in to bail it out.”
  JPMorgan does not need Bear Stearns mortgage operation, has a “much stronger investment banking business,” and the Bear Stearns New York headquarters is “just another piece of Manhattan real estate that it must rid itself of,” Bove said.
  While JPMorgan Chase may want Bear Stearns’ prime brokerage business, it is likely that the unit’s best customers have already left for Goldman Sachs, he said.
  Bove currently has a “Market Perform” rating and $44 price target on JPMorgan Chase. The target implies he expects shares to drop about 6 percent over Monday’s $46.55 close.
  “What is most disturbing about this deal is that it uses a great deal of Morgan capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that is best described as sclerotic,” he said.

• Pot Takes Out Ad on Kettle
  Eddy Elfenbein, March 24th, 2008 at 8:14 am

  Fox Business Network has taken out a big ad in the NYT and WSJ to question Cramer’s credibility over his Bear Stearns call. Here’s the PDF.
  (Via: The Stalwart)