Friday, August 17, 2007

Wal-Mart Fumbles Into India

Wal-Mart (WMT) recently announced a strategic entry into India. They are positioning themselves as wholesalers so as to not run afoul of Indian laws prohibiting foreign entities from direct control of retail stores. This supposedly protects the very large class of small merchant and the employees they may have.

The expansion plans call for approximately 15 stores to be opened with perhaps 5,000 people to be employed in the next seven years. There is precious little commentary about the merchandising strategy as to which products will be carried and why. The statements are general overviews about how good Wal-Mart is in supply chain management. 15 stores over seven years will not contribute tangibly to financial results. Also the rupee exchange rate will not be currently helpful.

Very little has been said about its JV partner Bharti Enterprises. A quick review of the Bharti Enterprises web site yields no tangible financial or other information. They have some retail projects pending but cannot point to any retail chains that I can find. Bharti’s main forte seems to be in telecommunications. Bharti is making forays into agricultural and food distribution. But clearly they are new at it and are trying to find their legs. Given the usual risks of entering a new market why rely on this JV partner with no substantive retail experience.

So why this hook up? Some comment is being made that perhaps Wal-Mart wishes to increase sourcing in India to reduce reliance on China. Well OK but you do not have to set up a wholesale operation that freaks out the local merchant class. Recently there have been street protests against Wal-Mart. The Indian merchant class has heard of Wal-Mart’s history in crushing small retailers and is rightfully concerned.
Is Wal-Mart using the thin edge of the wedge, slowly pushing in and just seeing what will happen? Wal-Mart has had their head handed back to them with huge losses in Germany and South Korea. In Japan red ink still flows much too freely. China? Domestic results are anaemic, high end fashion is failing and whispers abound as to the CEO’s (Lee Scott Jr.) weakening grip on his job.

The Indian expansion may have some fuzzy strategic connotations. But at this point there does not seem to be a sharp edge to the Indian Knife. If this is a move designed to head fake the Indian market I fear Wal-Mart will continue to experience the same tone deaf problems they have in other areas. Bharti’s expansion into food and agriculture does not seem to offer sufficient promise either.

It’s just all to ephemeral at this point. Hey Wal-Mart you need to do something and this isn’t it!

Thursday, August 16, 2007

Fortress Investment Conflicted Lingo

Fortress Investment Group (FIG) recently announced their first quarter of earnings as a public company. This is a complicated entity and will take some time to understand.

Only six analysts on the call Robert Lee - KBW, Prashant Bhatia - Citigroup, Marc Irizarry - Goldman Sachs, Michael Hecht - Banc of America, Roger Freeman - Lehman Brothers, Mathew Fischer - Deutsche Bank.

The management line up included Lilly Donohue - IR, Wes Edens - CEO, Pete Briger - President and Head of Hybrid Hedge Fund Business, Mike Novogratz - President and Head of Liquid Markets Hedge Fund Business, Dan Bass - CFO.

Big name analysts with big name Wall Street Bankers talking to big name executives about highly complicated transactions in a very challenging environment. Conference call Q&A are extemporaneous. But listen to some of the fumbling that was going on! I suspect that the level of understanding is not where it needs to be. Otherwise all these very smart highly paid guys would be better able to articulate questions and answers. Here are some quotes from the transcript provided by

Robert Lee - KBW

...I am just curious, since the start of the quarter and in the midst of this, I mean, can you give us some color maybe on -- if you are seeing your clients actually viewing it as an opportunity and seeing pretty decent new money flows until at least hybrid product or maybe tell us a little bit about the kind of reaction you are seeing from your investor base?....

Prashant Bhatia - Citigroup

Hi, the unrealized gain in a public portfolio -- what is that now, is that roughly 3.5 billion?

Wes Edens

I don’t have the numbers on a mark-to-market basis in front of me, it's at the quarter end and the price is down, so around a bit, but it was about $5 billion at quarter end. I think it’s maybe down a little, maybe it’s $4.5 or $4.75 billion as we sit here today, but it’s plus or minus I think where it was around at the quarter end....

Marc Irizarry - Goldman Sachs

Great, thanks. Hi everybody. Wes for you on the private equity side of the business for the capital that’s committed, but maybe as we put it to work at, can you just give a little bit of color in terms of what your LP investors expect,...

Marc Irizarry - Goldman Sachs

Great. And then Pete, a question for you on the hybrid business. Can you give a little color on your returns to-date....

Michael Hecht - Banc of America

Okay. And just last question, I know it's still kind of early but can you talk any more about the relationship into more how that often an investment idea perspective or distribution or any of the close you are seeing coming from relationships opened up to that kind of relationships and more?...

Roger Freeman - Lehman Brothers

Okay. Do you have any early thoughts on looking at the portfolio going into 2008 where you might be looking to IPO next year?

Wes Edens

We’ve got a couple of I think real prospects -- the life cycle of our businesses is that we tend to buy these things and try to rationalize the almost -- the business can think or are needed to be rationalized. And then in a company and the business where we think there are investment opportunities, we want to get those companies public to get access to lower cost capital and take advantage of that.

I do have a couple of very specific thoughts about our businesses which that we think would benefit from being public and again absence some kind of cataclysmic market conditions which frankly, I don’t think is the expected case I think we will continue to be active in this markets so....

If you cannot explain then you do not understand it. If you do not understand it then you should not invest in it.

Wednesday, August 15, 2007

Heinz Anticipates Shareholder Wrath

Heinz (HNZ) released substantial Q1 financial information this morning essentially predicting their financial results which are to be released on Aug 24. The annual shareholder meeting is today.

The stock has dropped from early July from $48 to $42 and change. Technical traders note it appears to breaking through support levels. Management seems a little concerned before the meeting and desperately needs to point to something positive.

Annual meeting dates and quarterly release announcements are usually well orchestrated. Heinz wants to detract from its annual meeting and any potential shareholder questions by focusing on the upcoming Q1 earnings release. The AGM is in the middle of Aug when traditionally many are away on holiday. But this mornings announcement is not a full Reg FD release. Its just a teaser about what they think will be in the results nine days from now. Because you see the accountants are still accounting so that's all they can lay out. To bad everyone showed up for the AGM but more important news will be coming out in nine days so do not get to excited about anything right now.

This drip style disclosure limits the ability of investors to maintain context. Good news is trumpeted. Not so good news will be on page two.

Tuesday, August 14, 2007

Beware of Canada

All scam artists and fraudsters are learning to love Canada. Never mind about Sarbanes Oxley being onerous because in the end the Canadian court system will let you off.

Here is the scam. Not that long ago there was a company called BRE-X. It was touted to be one of the largest if not the largest gold discovery in the history of mining. The market piled in and ran the capitalization up into nose bleed levels. Yes you guessed it the stock crashed. It turns out the only gold on the property was in the wedding rings of the few married explorers.

The chief geologist Felderhof was charged with numerous securities infractions. You see regulators wanted to know how you drive the reserve estimates from being so large to non existent. The chief Geologist surely was culpable in some fashion. After ten long years of investigations and prosecution the courts found Felderhof not guilty. The Chief geologist could not tell the difference between the largest gold find and a busted play with no gold. Apparently that’s OK. To date no one is legally responsible although several key figures that surely would have been charged are dead.

There are calls for a national securities regulator in Canada. But if the court system does not back up the regulator then the regulator is a paper tiger. Investors are truly at risk in the event of malfeasance.

If that is not enough for you, take the case of recently convicted Conrad Black. He has not passed the smell test for some time. The Ontario Securities Commission (OSC) has been accused of practically letting Lord Black go. The story is that the SEC flew in from Washington and read the riot act to their Canadian counterparts.
The recent prosecution and conviction of Conrad Black is the result of vigorous SEC action at the outset. Much of Conrad Black’s dealings were based in Canada but with US based counter parties.

Business and investor sophistication is very high in Canada. The legal system that backs them has several surprising blind spots. Investors are at risk. Therefore there needs to be a Canadian risk premium to compensate for the lack of legal jurisprudence that is usually afforded to the investing community.