Idiot Award
Posted by Eddy Elfenbein on August 8th, 2005 at 8:50 pm

The week’s winner brings our Idiot Award to a whole new level. Not only was his goal idiotic, but so was his method and outcome. He nailed it all! It’s like a Triple Crown of stupidity.

C. Clive Munro, a Wyoming stock analyst, was arrested from trying to extort money from Hardee’s. If there’s anything I learned it high school, it’s that you don’t screw with Hardee’s.

Munro demanded that CKE Restaurants, the owner of Hardee’s, hire him as a consultant for $25,000 a month. Hardee’s declined, so Munro showed them. He put a sell on the stock and down it went.

Most idiots would simply end there, but not our Mr. Munro. When the stupid get angry, they become a lethal force of anger (and stupidity). So Munro sent Hardee’s an e-mail.

”Hi Andy,” prosecutors said it read. “If you were smart, you would hire me at $25K per month for 12 months (for half my time) and take me out of the game. Plus, you would have vastly improved your relations with investors, and you might have avoided some of the current problems with Hardee’s. So far this year, this would have saved you $160 million in lost market value. That certainly beats shutting me out of asking questions on conference calls. You are getting some bad advice. Clive.”

Munro has been sentenced to a year and nine months in prison. I prefer to look on the bright side. He just might land that job in the fast food industry after all!

Scary Thought for the Day
Posted by Eddy Elfenbein on August 7th, 2005 at 9:47 pm

General Motors’ debt, most of which is rated as “junk,” is worth 4,000 Dow points.

Before 1997, it was accepted wisdom that nuclear powers simply “don’t go bankrupt.” Well, Russia changed all that. If you recall, when the ruble went under, it also took down the infamous hedge fund, Long-Term Capital Management. The world financial markets got a bit freaked for a few days.

History may be repeating itself, but this time the culprit is much more important that some has-been empire. General Motors could actually declare bankruptcy. One of the great American corporations could join the ranks of Willie Nelson, Hammer and Sherman Hemsley. Once again, the markets seem pretty nervous. Some hedge funds reportedly took big losses when GM’s debt was downgraded.

Consider the facts: GM has $284 billion in debt and roughly 560 million outstanding shares. That comes to about $500 a share in debt. Since GM is a Dow component, and each dollar in share price is equal to about 8 Dow points, GM’s debt represents around 4,000 points on the Dow.

So if you buy one share of GM for $35, you’re picking up more than 14 times that in debt. If you buy it on margin, you’re borrowing money to borrow money. All you need is a pinky ring and 1978 Cadillac to complete the outfit. Nearly 90% of GM’s debt is for GMAC, which is its financing arm.

Fortunately, GMAC is one of the few parts of GM that’s actually making money. The problem is that the overall company’s lousy credit rating is holding back GMAC’s profitability. Lower-rated debt means higher borrowing costs. On top of that, interest rates are rising.

One solution is to spin off GMAC. In fact, GMAC recently announced a deal to sell $55 billion in car loans to Bank of America over the next five years. But that doesn’t solve anything. It simply let’s some of the crew jump ship. There is the option of Chapter 11. It’s not unthinkable, but time is running out.

The new bankruptcy law goes into effect on October 17. If GM wants to move, it had better do so before then so it can take advantage of the older, more lenient law. I’m sure some airline will be taking the plunge, but airlines are always declaring bankruptcy.

The bad news gets even worse. A few years ago, GM spun off Delphi Automotive. Delphi’s bankruptcy seems to be an almost certainty. But here’s the problem: GM makes up half of Delphi’s business. So if Delphi goes, GM is also screwed. Unless, GM tries to save Delphi. But who will save GM?

I’m not sure, but if you pay taxes, I think you already may know the answer.

The Croatian Connection
Posted by Eddy Elfenbein on August 6th, 2005 at 7:39 pm

Wow, Cox is really moving. The SEC has come down on a 63-year-old Croatian woman for (cough) alleged illegal trading.

Here’s some of advice for you. Let’s say you just so happen to have advanced knowledge of a major corporate merger. Try not to draw attention to yourself. That would include such things as buying a zillion out-of-the-money call options. Yeah, that’s a wee bit suspicious.

But I’m dying to know how this woman got the 411. I mean, allegedly got the 411.

Cox in at SEC
Posted by Eddy Elfenbein on August 6th, 2005 at 6:56 pm

Congratulations to Christopher Cox, the new head of the SEC. He was sworn in this week by Alan Greenspan. Later, he gave a speech to all the employees of the SEC.

Well, for those of you who were English majors, and the rest of you who appreciate good English, we have an immediate bond. Even though I’m an attorney, legalese is not my first, second, third, fourth, or even fifth language. Chronologically, it came after my native tongue, and then Spanish, Latin, Greek, and Russian. And I never could actually speak legalese — I could only read it.
So I never got invited to the really FUN parties. I’m sure I missed out — all those people conversing in the parlance of party-of-the-first-part and whereases. Oh, the times I could have had.

Well, he may not be conversant in legalese, but he’s perfectly fluent in High Oprah.

When I was a young boy, Charlie Wilson was the chairman of GM. He famously told a congressional hearing that “What’s good for General Motors is good for the rest of America.” I’m not sure how accurate that ever was, but I’m certain that such days are long gone. When Charlie Wilson made his statement, investing wasn’t common for working Americans. Today, the majority of America’s workers are participants in our capital markets. It is increasingly true — and increasingly apparent — that what’s good for American investors is good for the American people. It is also absolutely true that the managers of a well-run business should at all times concern themselves with what is good for their investors.

Pet Peeve #1: Everyone quotes Wilson as saying that, but he never said it. Wilson was asked if he could make a decision as secretary of defense that was in the interest of the nation, but not in the interest of General Motors. Wilson said, “Yes sir, I could. But I cannot conceive of one, because for years I thought what was good for our country was good for General Motors and vice versa. The difference does not exist.” That’s quite a different quote.
Cox closed with:

So, to each of you, thank you for what you do.
Thank you for the honor of joining you in the mission of protecting America’s financial markets.
Let’s roll.

Ewww. I just winced so hard I think I burst my retina. One of the hidden dangers of stock blogging.

Buy Du
Posted by Eddy Elfenbein on August 5th, 2005 at 2:20 pm

I think this is what’s called “irony.” The U.S. political establishment goes nuts over CNOOC trying to buy Unocal. But one tiny Chinese search engine goes public, and Americans throw gobs of money at it.

Baidu, the Chinese search engine company, hit the Street today. At least for a few moments today, the 90’s were back. This was the easily the hottest IPO since Google went public last summer. Baidu’s offering price range was raised twice. The shares finally hit the open market at $27.

The first trade: $66. And it went up from there. The high trade today (so far) is $99.50.

Baidu is unstoppable. I can’t even think of a good metaphor. It’s like some mighty ocean-going vessel, steaming its way through the chilly North Atlantic. What can possibly stop it?

Bonds Fall Again
Posted by Eddy Elfenbein on August 5th, 2005 at 10:24 am

The 10-year Treasury bond is getting slammed today. The yield is now up to 4.382%. That’s nearly 50 basis points higher than it was in June. The yield curve has been squished. The 10-year is up more today than the 30-year, and the 5-year is up more than both.

The futures market has little doubt that the Federal Reserve will raise rates by 0.25% at next week’s meeting, and again at the September 20 meeting. That will bring the fed funds rate up to 3.75%. There’s also an 88% chance that the Fed will raise interest rates up to 4% by November 1.

Today’s Jobs Report
Posted by Eddy Elfenbein on August 5th, 2005 at 10:01 am

The government reported that the unemployment rate for July was 5.0%, which was the same as June’s. Relatively speaking, that’s a pretty low number. The unemployment rate peaked at 6.3% in June of 2003. While the jobless rate has fallen since then, it was stuck around 5.4% for much of last year.

The economy created 207,000 new jobs last month, which was higher than expectations. The number of new jobs for June was revised higher to 166,000. For the last 17 months, the economy has created an average of about 195,000 jobs a month. That’s good, but it’s still well below what the economy did in the recoveries of the 80s and 90s. The economy averaged over 250,000 jobs for a 90-month period from November 1992 to May 2000.

Wall Street seems to be impressed by the current economy. We’re hearing talk that the Federal Reserve may raise interest rates into next year. Also, some analysts are raising their GDP forecasts for next quarter.

Lindsey in Running Fed Chairman
Posted by Eddy Elfenbein on August 4th, 2005 at 4:47 pm

The Wall Street Journal reports that the White House is also considering Lawrence Lindsey to replace Alan Greenspan as chairman of the Federal Reserve. For several months, it was assumed that the three major candidates were Martin Feldstein, Glenn Hubbard and Ben Bernanke.

Who’s the frontrunner? I like to watch the numbers at TradeSports, which let’s users buy “futures” on real world events. According to their market, Bernanke is in the lead at 38%. Feldstein is second at 28%, and Lindsey is third at 20% (up 2% today).

Just Do It!
Posted by Eddy Elfenbein on August 3rd, 2005 at 4:24 pm

The latest craze of foreigners buying second-rate American companies continues. Now, the Germans have gotten into the act. Adidas Salomon will annex Reebok for $3.8 billion.

The claim is that this is a move to compete with Nike. I’m sorry, but they’re worried about this now! You’re at least a decade too late. Over the last 18 years, Reebox’s stock is up 184%. Nike’s stock is up 3,300%. Is Nike supposed to be scared now?

All the top athletes are with Nike (Tiger Woods, Lance Armstrong). In fact, Nike is even moving into Adidas’ traditional territory of soccer. The Wall Street Journal notes:

Nike has signed up prominent European soccer teams such as Manchester United and Arsenal. More broadly, Nike has been in acquisition mode, diversifying beyond its core of running and basketball shoes to buy brands such as Converse, Cole Haan and Official Starter Properties.

Requiem for CNOOC/Unocal
Posted by Eddy Elfenbein on August 3rd, 2005 at 3:53 pm

The New York Times looks at the demise of the CNOOC/Unocal deal. I think they get it right. This was a case of transferring legitimate political grudges onto a deal that was completely legitimate.

Many economists, while not necessarily disputing that claim, would still say that the political reaction was far out of proportion to the case.
They are particularly dubious about arguments that Cnooc’s bid would have jeopardized national security, noting that oil is a globally traded commodity and that Unocal’s reserves contributed only about 1 percent of American oil consumption.

Let’s hope that the floating of the Yuan has helped relieve some of the tension. Although it looks like we have more ground to cover.

China is likely to let the yuan gain 5 percent against the dollar by 2007, not enough to slow its economy or end U.S. criticism that the nation has an unfair trade advantage, according to a Bloomberg survey.
The People’s Bank of China will allow the yuan to reach 7.7 per dollar, based on the median forecast of 37 traders, strategists and investors. The central bank let its currency rise 2.1 percent on July 21 after a decade of being pegged at about 8.3 to the U.S. currency.
Additional appreciation of 5 percent is unlikely to appease lawmakers such as U.S. Senators Charles Schumer and Lindsey Graham, who said last month’s shift was a first step and the currency remains undervalued.