Archive for November, 2010

  • General Motors Part 2
    , November 18th, 2010 at 9:52 am

    The stock market is in a good mood this morning. Shortly after the open, the Dow is up over 140 points.

    The General Motors IPO was priced at $33 per share. The 478 million shares sold will raise over $20 billion for GM. Including the overallotment, the total IPO could be $23.1 billion which would be the largest ever.

    The U.S. government isn’t doing so well on its investment. The Treasury offered about 358.5 million shares in the IPO, about 95 million more shares than initially planned. The Treasury’s cost basis is $43.67 per share. With today’s IPO, the 500 million shares left need to be sold at an average price of $53.07 per share to make a profit. I’m not sure that’s going to happen.

    The IPO brings the Treasury’s stake to 37% from 61% (or 33% with the overallotment).

    So far, the stock is getting a little pop. The shares have been as high as $35.99 this morning.

    Here’s what I wrote about the old GM nearly five years ago:

    Whither GM?

    In 1979, the British economy was in freefall. Inflation was spiraling out of control. The unions were demanding commensurate pay increases, and when they didn’t get them, they struck. The country that had stood up to the Luftwaffe was falling apart. The garbage men went on strike and soon piles of “rubbish” dotted the countryside. Even the gravediggers went on strike and corpses were gruesomely left unburied.

    The winter of 1978-79 was called the Winter of Discontent, echoing the opening lines of Richard III. The situation was so bad that Her Majesty’s government had to apply for a loan from the IMF. This was back in the days when doing so was deemed shameful. You were even expected to pay it back.

    A reporter asked the Prime Minister, James Callaghan, his opinion of the “the mounting chaos in the country.” Callaghan said: “Well, that’s a judgment that you are making. I promise you that if you look at it from outside, and perhaps you’re taking rather a parochial view at the moment, I don’t think that other people in the world would share the view that there is mounting chaos.”

    That was it. British socialism died right there. The commanding heights were nothing more than a literal heap of trash. The next day, The Sun’s headline read: “Crisis? What Crisis?”

    I can’t help but think of the similarities between British socialism and General Motors (GM). Once upon a time, GM ruled the world. Today, it’s an embarrassment. What’s good for GM is largely irrelevant to America.

    For reasons unclear, billionaire Kirk Kerkorian sunk a good part of his fortune in GM’s stock. His investment has been a disaster. Now’s he’s sent his aide, another son of York, Jerome York to be exact, to Detroit to tell the automaker everything they’re doing wrong. The New York Times quotes York as saying: “The time has come to go into crisis mode and act accordingly.”

    No, the time to go into crisis mode has long since past. GM is a fiscal black hole. The company burns through $24 million every day. That’s more than the Yankees. Yet the company still pays out $566 million per year in its dividend. Crisis? What Crisis?

    Talk about unburied corpses. I honestly don’t think GM will survive this decade. Even if it does, it will hardly be recognizable. Any future GM will merely be a Commonwealth living in the shadow of a by-gone Empire. York’s plan is to get rid of the dividend and reduce the pay of senior management. Well…that’s a nice start, but I think GM will have to go a lot further, perhaps ditching some key brands like Hummer.

    The New York Times quoted Frederick A. Henderson, GM’s new CFO:

    “To be honest, I am in crisis mode. So I agree with him,” Mr. Henderson said. In December, he succeeded John M. Devine, now a G.M. vice chairman, who accompanied him to Mr. York’s speech. Like Mr. Devine, Mr. Henderson watched impassively while Mr. York spoke.

    Impassively? Ha! I bet they were ready to toss him out the window. I’d actually feel much better if GM were really in crisis mode. They’re not. They’re sleepwalking. Perhaps now, they’re sleeprunning. This is a company that plainly refuses to see reality. They’d be plenty happy to go on ignoring the mess they’ve made, but high oil prices have forced the issue. The long-run was much shorter than any of us expected.

    The idea that GM can discount its way home is a foolish illusion. The facts are clear. Every GM car carries about $1,500 in health care costs. The employees’ health care trust has over $20 billion, and GM had to tap it twice recently for $1 billion each time. Retirees outnumber current U.S. employees 2.5 to 1. The company has stopped providing earnings guidance.

    GM’s problem isn’t cars or legacy costs. Companies can deal with those. What GM has is a leadership crisis. They need to make major changes soon. If not, the Winter of Discontent will last a very long time.

  • Latin Baseball Futures
    , November 18th, 2010 at 8:32 am

    I have a bad feeling about this:

    Investors from the United States believe they have found an exotic new prospect: Latin American baseball players, some as young as 13 and many from impoverished families.

    Recognizing that major league teams are offering multimillion-dollar contracts to some teenage prospects, the investors are either financing upstart Dominican trainers, known as buscones, or building their own academies. In exchange, the investors are guaranteed significant returns — sometimes as much as 50 percent of their players’ bonuses — when they sign with major league teams. Agents in the United States typically receive 5 percent.

    (….)

    “Buscones in the Dominican Republic are in the business of selling children,” he said. “And it’s very disturbing that American investors would come in to profit from a system that exploits and discriminates against young children.” An hour and a half by car from Santo Domingo, at the end of a dirt road in the town of Don Gregorio, a piece of the Dominican baseball system can be found in a small house surrounded by concrete walls and metal fences topped with shiny barbed wire. The entrances are locked.

    Inside is a pensión, a dormitory for about a dozen prospects as young as 14. They are trained by California Sports Management of Sacramento, a firm run by the agent Greg J. Maroni and financed by his father, Greg G. Maroni, a dentist who owns several fast-food franchises.

    Along with using the academy to produce teenage Dominican players they can represent, the younger Mr. Maroni represents Neftali Feliz, the Texas Rangers’ closer.

    The dormitory, which was built in 2007, contains one large bedroom with bunk beds and a small bathroom with two showers. The barbed wire was installed a few months ago, after a player hopped the fence to look for girls in town, said Carlos Paulino, a Dominican trainer who runs the dormitory for California Sports Management.

    Although one coach supervises the dormitory at night, two other prospects had gone over the fence earlier this year, Mr. Paulino said in September. “It’s to make sure they don’t get out,” he said.

    I’m curious what a bailout of baseball futures would look like.

  • Morning News: November 18, 2010
    , November 18th, 2010 at 7:38 am

    Global Stocks Rise; Nikkei Gains 2.1%

    China Behind Chilling Drop in Commodity Prices

    London Stock Exchange Profit Gains 26%; to Offer Derivatives in 2011

    Irish Central Banker Says Rescue Loan Is Likely

    Beijing’s Focus on Food Prices Ignores Broader Inflation Risk

    General Motors Returns to NYSE After Raising $20 Billion in IPO

    Goldman Says to Buy Calls, Not Shares, in Intel, IBM

    Sears Loss Widens on Tepid Sales

    More Shoppers at Malls on Black Friday Weekend

    I Don’t Short Uptrending Markets

  • IPOs by the Numbers
    , November 17th, 2010 at 12:50 pm

    Tim Kildaze at the Globe and Mail lists the five largest global IPOs and the five largest U.S. IPOs:

    Top 5 Largest Global IPOs

    Agricultural Bank of China – China
    Size: $22.1 billion (U.S.)
    Date: July 2010
    Sector: Banks

    Industrial and Commercial Bank of China – China
    Size: $22.0 billion (U.S.)
    Date: October 2006
    Sector: Credit institutions

    American International Assurance Group – Hong Kong
    Size: $20.5 billion
    Date: October 2010
    Sector: Insurance

    Visa Inc. – U.S.
    Size: $19.7 billion
    Date: March 2008
    Sector: Other financials

    NTT Mobile Communications Network Inc. – Japan
    Size: $18.1 billion
    Date: October 1998
    Sector: Wireless technologies

    Top 5 Biggest U.S. IPOs

    Visa Inc.
    Size: $19.7 billion
    Date: March 2008
    Sector: Other financials

    AT&T Wireless Group
    Size: $10.6 billion
    Date: April 2000
    Sector: Wireless Technologies

    Kraft Foods Inc.
    Size: $8.7 billion
    Date: June 2001
    Sector: Food and beverage

    UPS
    Size: $5.5 billion
    Date: November 1999
    Sector: Transportation and Infrastructure

    KKR Private Equity Investors
    Size: $5.0 billion
    Date: May 2006
    Sector: Alternative financial investments

    The GM IPO has a shot of becoming #1. Here’s how it breaks down:

    * Total IPO and preferred offerings before overallotments: $19.3 billion to $19.77 billion. The midpoint would be $19.54 billion.

    * Total IPO and preferred offerings including all overallotments: $22.19 billion to $22.74 billion. The midpoint would be $22.47 billion.

    * Treasury total take from IPO and preferred offering: Up to $15.7 billion from common stock sales including overallotments and $2.1 billion from selling its Series A preferred shares to GM when the IPO is completed.

    * Common share price range: $32 to $33 per share

    * Common shares offered: 478 million shares

    * Optional underwriter overallotment: 71.7 million

    * Total common shares with overallotments: 549.7 million

    * Series B preferred shares price: $50 per share

    * Preferred shares offered: raised to 80 million

    * Optional underwriter overallotment: 12 million shares

    * Total preferred shares with overallotments: 92 million

    * Preferred shares proceeds: $4 billion

    * Preferred proceeds with overallotment: $4.6 billion

  • The Market Is Not a Market
    , November 17th, 2010 at 12:11 pm

  • The Battle for GM 1910-1915
    , November 17th, 2010 at 11:38 am

    Thanks to heavy demand, the GM IPO has been increased by 31% to 478 million shares.

    An overallotment and an offering of preferred shares may increase the total amount raised to about $22.7 billion. Agricultural Bank of China Ltd.’s $22.1 billion initial sale is the largest common-stock IPO in history.

    The initial sale, scheduled for today, will bring Chief Executive Officer Dan Akerson closer to his goal of returning the $49.5 billion GM received in a taxpayer bailout last year. The Treasury, which is taking a loss on its portion of the sale, will break even only if the shares climb at least 60 percent, Bloomberg data shows.

    One of the most exciting and rollicking periods in Wall Street history was the battle for control of GM between 1910 and 1915. Billy Durant had founded the company but was tossed out by the bankers in 1910. He then partnered up Louis Chevrolet to start Chevrolet. He soon bought him out, then bought a controlling interest in GM and by 1916 was president again. In 1914 shares of GM were going for as low as $37 each. Thanks to Durant’s raid and WW1, the stock got as high as $558 by 1915.

    In his battle to regain control, Durant used DuPont as an ally. This tactic was to become common in the 1980s. The problem was that by 1920, DuPont had control.

    Still, it’s a great story. Check out this NYT story from December 1915 when Durant finally gained control of GM.

  • Trading Volume in NICK
    , November 17th, 2010 at 10:53 am

    Trading volume in Nicholas Financial (NICK) has been pretty slow. Make that very slow. As in zero volume yesterday and none so far today.

    Yep, that’s real slow.

    Update: Oh Em Gee! 200 shares at $9.99!

  • Buffett Says “Thank You”
    , November 17th, 2010 at 10:47 am

    Here’s part of Warren Buffett’s “thank you” letter to Uncle Sam in today’s New York Times:

    When the crisis struck, I felt you would understand the role you had to play. But you’ve never been known for speed, and in a meltdown minutes matter. I worried whether the barrage of shattering surprises would disorient you. You would have to improvise solutions on the run, stretch legal boundaries and avoid slowdowns, like Congressional hearings and studies. You would also need to get turf-conscious departments to work together in mounting your counterattack. The challenge was huge, and many people thought you were not up to it.

    Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic — and, overall, your actions were remarkably effective.

    I don’t know precisely how you orchestrated these. But I did have a pretty good seat as events unfolded, and I would like to commend a few of your troops. In the darkest of days, Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair grasped the gravity of the situation and acted with courage and dispatch. And though I never voted for George W. Bush, I give him great credit for leading, even as Congress postured and squabbled.

    You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess — most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly.

    That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world.

    So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through — and the world would look far different now if you had not.

    Your grateful nephew,

    Warren

  • We Don’t “Make Anything” Anymore
    , November 17th, 2010 at 9:24 am

    One of the biggest myths about the U.S. economy is that we don’t “make anything” anymore. This simply is not true. The U.S. is a manufacturing powerhouse.

    The difference is that fewer people are employed in manufacturing. Productivity and output have soared. Since 1983, manufacturing production has doubled.

  • Six Losses in Seven Sessions
    , November 17th, 2010 at 8:42 am

    The stock market has now fallen for six of the last seven sessions. Yesterday was particularly ugly as the S&P 500 dropped 19.41 points or 1.62%. The index is now 4.66% off the high reached the Friday before last.

    I had thought the market might pull back in the wake of Quantitative Easing, but instead, the market rallied when QE2 was announced on November 3rd. I was either wrong or premature. In any event, I still believe the market is very inexpensive. Let me explain what’s been happening.

    There’s been a slow exodus out of the long end of the Treasury yield. Yesterday, the yield on the 30-year Treasury got as high as 4.40%. That’s a 94-point jump from the recent low reached on August 25th.

    Overall, this is a good thing. First, it shows that investors are turning against overpriced bonds and finding value in stocks. Just look at how many blue chip stocks have dividend yields that compare favorably with 10-year Treasuries.

    Second, investors are now willing to take on riskier assets. During the recent unpleasantness, investors crammed themselves into anything and everything that appeared to be safe. As a result, all assets that were perceived as even slightly below “bulletproof” were tossed overboard. That’s starting to correct itself.

    This is why growth has been leading value, why small-caps have been leading large, why cyclicals have been leading consumers and why stocks have been leading bonds. Very recently, we’ve seen a large shift away from mid-term bonds like the 5-year Treasury which is up 37 basis points over the last eight sessions.

    I caution you not to be rattled by the past few days. The stocks on the Buy List are very strong. In particular, stocks like AFLAC (AFL) and Reynolds American (RAI) are fairly cheap. Wright Express (WXS) also looks good. Yesterday’s close was at $43.12 which is a very good price.

    Interestingly, gold got hit hard yesterday. The contract for December delivery dropped over $30 per ounce which is 2.2%. This could mean that a Fed rate hike will come sooner than people think.

    The good news today is that inflation continues to be tame. Headline inflation was up 0.2% last month and core inflation was flat. Wall Street has been expecting rises of 0.3% for headline and 0.1% for core. I just don’t get the nervousness over hyperinflation. It may come one day, but for now, the statistics say inflation isn’t a problem.

    Here’s a very good clip of Tadas Viskanta on Stock Twits TV explaining that the stock market might have rallied over the past few weeks because things are really looking better.

    (HT: Jeff Miller)