Friday, July 13, 2007

Moody's and S&P Faux Subprime Downgrades

Moody's and S&P are reducing ratings on hundreds of mortgage pools and watching nervously on probably every other pool that exists. There is much commentary about the sophisticated nature of these pools and how some pools are better than others because of the way the mortgages were sliced and diced.

Here is the reality. When a subprime borrower defaults he/she defaults on the entire mortgage. They do not send in a cheque for the top 25% of the mortgage and stiff the lower strata. Quite frankly they are usually completely unaware of the mechanics that have been applied to their mortgage.

Some pools may hold the more senior portions of the mortgage so they will eventually recover most if not all of their capital and perhaps some of their overdue interest. But first the dirty work of an eviction and power of sale must occur. Given the legalisms that apply several more months will pass.

Investors in the lower strata will have all of the above problems plus worries about market value erosion and whether there is a sufficient equity cushion. A repo house usually needs repairs which again reduces values.

When the administrator works out the problem mortgage they work on a specific property. The slicing and dicing is a concept that does not truly manifest on the front lines.

What does this all mean? The individual ratings are truly nonsensical. Also the workouts will take a long time which means the subprime mess will continue to fester. Subprime mortgage securities represent about 2.13% of the $565.3 billion of the U.S. residential mortgage-backed securities industry rated by S&P between the fourth quarter of 2005 and the fourth quarter of 2006.

The mortgage industry will stay constipated. The housing business will also continue to slow because so many repo houses will be available savvy buyers will want the bargains not the brand new fancy stuff. Some hope for hardware companies as the repo's will need some fixing up.

If you are liquid and have good credit go visit your bank manager. He may have some bargains for you.

Thursday, July 12, 2007

Vasogen News: Just Read The Second Paragraph

Vasogen (NASDAQ:VSGN) announces Q2 earnings. One reads the press release and reads and reads. Most corporations lead with the bottom line. Vasogen trumpets the fact that they still have cash available. They eventually get to the bottom line which does have losses. The company is unintentionally signalling that balance sheet considerations outweigh operations such as developing new drugs and therapies. But they want you to believe that they are able to survive and reach the next level.

In the same press release they echo some previous comments that they made on June 27 about meetings with the FDA regarding their studies on Celacade and the treatment of chronic heart failure. Essentially they are very happy with their claim that the FDA is recommending the use of a statistical sampling technique which will allow them to avoid costs. This is important as they will need to make a pre-market approval confirmatory study.

At the same time they are also making some significant changes in the executive suite. You do not change horses just before the finish line. The stock has drifted downwards and is trading near its 52 week lows. The company is blowing smoke until it figures it out yet again. Read this quote from Vasogens verbiage laden press release and you decide if there should be confidence

"On June 27, 2007, we announced the outcome of a meeting with the Food
and Drug Administration (FDA) regarding the next steps in the
development of our Celacade technology for the treatment of chronic
heart failure in the United States. During the meeting, we discussed
with the FDA the results of the ACCLAIM study, with a particular
focus on the 689-patient subgroup with NYHA Class II heart failure.
As a result of this meeting, the FDA has strongly recommended that we
conduct a confirmatory study to support a Pre-market Approval (PMA)
filing and also recommended that we consider utilizing a Bayesian
statistical approach to designing the confirmatory trial. The
Bayesian approach involves a specific trial methodology that allows
utilization of prior trial results with a confirmatory study to
obtain additional information regarding efficacy and safety and has
the potential to substantially reduce the number of patients required
for a confirmatory study, as well as the cost and duration. Having
received the FDA's input, we are now in a position to fully evaluate
our options with respect to a confirmatory trial that could
potentially be smaller than the 689-patient NYHA Class II subgroup of
patients in ACCLAIM if we elected a Bayesian approach. We are
continuing our ongoing dialogue with the FDA, as well as consulting
our statistical experts and other advisors to review trial design

Wednesday, July 11, 2007

Capital One Breaks It's hockey Stick

Capital One (NYSE:COF) needs to shake its head. Long known for their marketing prowess and finding more ways to hook consumers on plastic debt they now want you to look the other way as the CEO blows out a truck load of stock options and reduces his own personal exposure to Capital One.

At essentially the same time corporate press releases are issued saying that Capital One is using the Gretzky Concept in their business expansion. For the non hockey fan, and there may be many US investors who do not follow hockey, Gretzky was a phenomenal hockey player who had a sixth sense about where the puck was going.

Gretzky became a super star in the sport. Gretzky to the best of the hockey worlds collective memory never screwed the fans and was much beloved and respected by team mates and competitors. Richard Fairbanks you are no Gretzky.

The CEO of Capital One Richard D Fairbanks is only blowing smoke to cover up his huge insider sale. Richard Fairbanks is skating to where the puck is going. But on his stick he carries his own personal portfolio and he has chosen to sell massively. He is not skating to where Capital One will be going. Probably because he knows where the puck is going next.

Tuesday, July 10, 2007

Sony vs Microsoft: Contrition Wars

Microsoft (NASDAQ:MSFT) announces a huge $1 Billion charge to take care of obvious xBox issues. A reported 35% failure rate was causing some credibility problems. Sony (NYSE:SNE)should have been able to deliver if not the knock out punch than a damn good knock the wind out of your lungs jab to the solar plexus.

Instead senior Sony executives first say no price cut. One week later they announce a price cut and also announce a new bigger and better version PSP. The communications problem has focused attention on the price cut reversal and away from the relative merits of what could be a relatively exciting new product.

From a marketing point of view Microsoft is in the drivers seat. They have acknowledged the problem and now everyone wants to see how they handle it.

Sony recently dodged a bullet from the Church of England because of a violent game set in Manchester Cathedral. If the church had sued for intellectual property infringement because of unauthorized use of one of their iconic properties they may have had more success in shutting down Sony.

Microsoft acts like a major religion so they probably will not have comparable problems. That is why Microsoft will do much better than Sony. Their product sins were worse but they are better at contrition and acts of penance. Sony will carry the burden of arrogance.

Monday, July 09, 2007

Oracle Is Not NetSuite

Oracle’s (NASDAQ:ORCL) Chief Executive Officer Larry Ellison appears to be a lead investor at a soon to be issued IPO called NetSuite. Reports indicate that he and his children through trusts, control approximately 74% of Netsuite. The IPO is expected to raise somewhere around $75 million. Larry Ellison has already helped raise approximately $125 million privately.

Everyone expects Mr. Ellison to be very prominent at NetSuite and not just a passive investor making a few bucks on a good idea. Larry Ellison is reported by Forbes magazine to be the 11th richest man on the planet. He and his family are not wanting for money.

Eyebrows have been raised by the potential conflict of interest. Why is this entity not being folded into Oracle? Which horse is Ellison on? Which horse do investors want to be on?

What we need is a public statement containing an explanation as to why this will not be a conflict of interest. NetSuite apparently will operate in an overlapping market and product line. One of the founders of NetSuite former Oracle Vice President Evan Goldberg also complicates the optics and suspicions. Although it must be said the company was founded in 1998.

Some also point to Larry Ellison’s early involvement in Salesforce (NYSE:CRM). Salesforce while also started by former Oracle executives did not really challenge Oracles market position in the same manner. But there is a serial pattern of backing former Oracle executives and allowing them to step out of the Oracle mother ship which supposedly is creating wealth for shareholders. Very disdainful of shareholder interests.

Oracle’s board needs some legal and governance advice. How can they allow such a critical member of Oracle to run around and help start up potential competitors and be actively involved in its management? In this case is Larry Ellison really working for the Oracle shareholder? Is the Oracle board awake to the ramifications and are they mindful of their very real responsibilities to the Oracle shareholder? Or has Larry Ellison just blown this one by them. Looking at the board’s composition, it’s not what you would call heavyweight.

One can see some shareholder class action lawsuits claiming Larry Ellison’s behaviour with NetSuite to be akin to financial treason. This will only distract Oracle and cannot possible help Netsuite. The IPO will be by Dutch auction. We are being reminded that this is just the way Google did it. Sounds promotional to me. It appears that WR Hambrecht & Co will be managing the auction. What questions have they asked?

More importantly what questions are the investors asking? So Larry why even bother. The wealth creation if it does occur does not correlate to the distraction and trouble it will cause. So again why not have some public announcements as to why this is really OK. The Board needs to speak.