Friday, September 19, 2008

Jim Cramer's Next Move

OK the market is nuts. The Republican administration has called the fire brigade. But the guys in charge only have a few months left and most of them want to be out on job interviews. Senator McCain is on record that the current SEC Chairman should be fired. Senator Obama if successful will need to restaff extensively. SEC Chairman Cox is clearly a Republican appointment.

Given the mess with traders, funny money CDO's and God knows what other malfeasance exists who would be best suited to run the SEC and try to bring order to this chaos. Well FDR turned to Joe Kennnedy on the basis he had the best skill set and understood the game and more importantly the game players and their psychology.

Today that man could very well be Jim Cramer who you may have seen on CNBC. He does not need the money and is not polishing his resume. He understands traders and their mentality. He appears to have a sincere interest in teaching the newbie's and little investors. A particularly important point in a democratic society where everyone is supposed to have a decent chance. He does not appear to think as a lawyer reading a boring prospectus.

He would be tough enough to bark the market back to where it should be. I could see him play the role of peoples tribune and not Wall Street operator.

Fedex – Proxy for Economy?

Fedex (FDX) announced results and let the world know they did slightly better than expectations. The cost of fuel moderated somewhat and therefore profitability was just that much better. In reading the earnings release which is a painfully abbreviated document and then reading the earnings call transcript I am beginning to get the sense that the executives are attempting to seduce the investing public into thinking that they are an economic proxy.

By this I mean they point to fuel costs, weather conditions and underlying economic conditions to explain results. There is almost no discussion of competition or the relative merits of offerings. The question becomes well what is management doing? If this is a proxy for the economy with a built in execution risk why not just buy an ETF or index and factor out company specific risk. Management needs to continue building the case for continued investor involvement.

Thursday, September 18, 2008

Arthur J Gallagher Offers No Details on Summit Acquisition

Arthur J Gallagher (AJG) which bills itself as an international insurance brokerage and risk management services firm, headquartered in Itasca, Illinois, operations in 14 countries and doing business in more than 100 countries around the world through a network of correspondent brokers and consultants; announced that they just bought Summit Insurance Group in San Antonio, Texas.

No terms and conditions were announced. Was it a stock deal or a cash deal? What will the acquisition do to EPS. Accretive is the word most analysts look for. I assume there are the normal closing adjustments (whatever that means).

But let’s look at the record. On Sep 17 they announce the acquisition of Oxygen no terms disclosed. On Sept 15 they announce the acquisition of California Insurance Center no terms disclosed. On Aug 19 they acquired Wm W Grace no terms disclosed. Hey buddy that’s a lot of acquisition without terms and conditions being disclosed.

It’s time to open the kimono and let’s see how the family jewels look.

Oh by the way. Gallagher announced a dividend on July 24 payable a full two and a half months later. So the record date is Sept 30 and dividend is Oct 15. Why do you need the dividend hanging out there for such a long period of time? Especially, when you are wheeling, dealing and making announcements of mergers and acquisitions.

Wednesday, September 17, 2008

Morgan Stanley Is Overhead An Issue

Morgan Stanley (MS) reported decent Q3 numbers. Better than the market expected. But nowhere near last year. OK so while we are worried about credit quality and the domino effect of other defaults, lets take a look at a few other factors which may become issues.

Read this quote from the earnings release

“Net revenues decreased 20 percent to $22.9 billion and non-interest expenses decreased 10 percent to $17.3 billion.”

The market is focused on financial leverage but curiously they are not able to manage their operating leverage. Occupancy and equipment is up 10%. Compensation costs are up 3%. They seem to be gearing up not down. Professional service costs are down 10%. In today’s litigious environment to tell me that you will not need lawyers seems difficult to accept. This line item will not hold. They still have a ways to go with the house keeping.

AIG Factors Itself

AIG (AIG) finally raised enough funds to facilitate an orderly liquidation. Too bad for Hank Greenberg but some will call it financial karma. No one wanted this asset. It was just too big and too gnarly. It also had a finger in so many pies risk measurement officers were reduced to tears or worse.

The loan acts as a traffic cop while investors pick through the assets and take what they want or need. The valuation will reflect the liquidation nature so top dollars or even reasonable dollars will not come out. Shareholders will effectively take the hit. But management kept saying all is good and now we have to pawn the family jewels. Who will hang for that one.

Similar to what the rag trade used to do and may still do AIG has factored its assets. It is the most expensive form of financing and only to be used when you have backed yourself into a corner. The rag trade usually knows it will factor and will price their assets accordingly. AIG never saw it coming.

Tuesday, September 16, 2008

Value Line Discloses? Well Sort Of!

Value Line (VALU) released its Q1 results ending July 31. They made less money bit the net worth is up. By the way readers are reminding that the parent may be buying more shares over time. That is all. Please continue investing elsewhere. The press release would not satisfy one value line analyst.

Before we belabour the point that as of June 30, 2008, Arnold Bernhard & Company, Inc. owned approximately 86.5% of the Company's issued and outstanding common stock, lets take a look at some of the metrics they have agreed to let investors know about in the press release.

Shareholder equity is up 11% from the comparable period last year. No explanation as to how this blessed event has happened.

Net income for Q1 is down 11% from last year’s comparable quarter. No explanation again.

Then we get the warning about the really large dominant shareholder who may be nibbling away. While much of the investment community relies heavily on their product offering very few find the stock to be a compelling proposition.

I am not asking for a stock promotion but when you clearly use every available stratagem to make the market go to sleep you have to wonder about which side of the bread is being buttered.

Monday, September 15, 2008

Merrill Lynch Embraced by B of A

Merrill Lunch (MER) will get hitched with Bank of America (BAC). At least The Raging Bull can say someone wanted it. The music in Wall Street’s game of musical chairs has stopped and it is critically important to sit down. Lehman (LEH) could not find a chair. Bear Stearns (BSC inactive) was rudely thrust into one but the complaints seem to have dissipated.

The question about Bank of America is how many more chairs they can pull up to the table. Not that long ago they took in Countrywide which is widely assumed to have many malignant financial tumours. There have been many acquisitions by Bank of America in recent past, most of which will have some warts on it.

Watch for write downs as Bank of America digests their strategic moves. The time and psychology is correct. Investors expect bad news. If they do not clean out the closets and shake out the rugs they will only be setting themselves up for future disappoints.

Best Buy Swallows Napster

Best Buy (BBY) has offered a 95% premium to acquire Napster (NAPS). The rationale offered in public is that this is an incredible fit with really great synergies. Best Buy has ruled the retail space for electronics and rightfully has developed respect from customers and investors. Napster well the stock has dropped dramatically but people still listen to music. They do lay claim to approximately 700,000 subscribers.

So from a marketing point of view this makes sense. No question.


Digital platforms such as Napster and other sites require huge Capex spending for R&D. This is an industry that eats its own babies for the smallest incremental advantage. As of their Q2 statements they have approximately $1.5 Billion in Cash and Short Term. Take out approx $120 million for the acquisition and the acquisition looks cheap. But maybe is like buying a cheap SUV the purchase price looks good but it will not sip lightly on the gas.

We are not used to seeing R&D costs on Best Buy’s statements. The management team is not used to managing R&D. The deal makes sense but is not a complete slam dunk. How much cash will be needed to stay in the game and be good at it?

AIG Needs $40 Billion – Anyone?

AIG (AIG) needs $40 Billion or else the rating agencies will spank it hard and downgrade. Oh by the way they need to find it today. Come on when was the last time that a $40 billion dollar deal was put together that fast? When was the last time that a fast deal withstands the test of time?

AIG insists that it is in discussion with lots of parties. The rationale is that if they stave off the rating downgrade it will be cheaper to raise capital later. Does this mean that they will need more capital after the $40 billion?

AIG gets the “Catch a falling knife” award. If you are thinking about class action lawsuits start reading the press releases from AIG. They have all been sufficiently upbeat to keep the investors interested. They never laid out a $40 Billion crisis.
Management has been whistling through the grave yard and has now actually fallen into an open grave.

Stay tuned for more analysis of the “Highway to Hell”