Dubai Insider Trading Advantage -- Manufacturing Black Swans

How are Donald Trump and Dubai the same? They build beautiful stuff and then re-negotiate their debt. Dubai may be doing what most real estate developers would do in a flash; stick it to their financiers and get better terms.

Except the world sees it in different terms. This is supposed to be one of the richest cities in one of the richests parts of the world. Impoverished oil sheikhs do not exist or so we need to think.

Unlike Donald Trump, Sheikh Zayed bin Sultan Al Nahyan still has oil and can write a cheque. Donald Trump has a much better sense of location and despite his outrageous prices sells out his projects. Sheikh Zayed not so good on the location thing.

The news comes out during American Thanksgiving and freaks out European markets. The Black Swan event is the perfect cover for unscrupulous insider trading activity. They knew what this news was going to do.

Black Friday Inventory Finance

Retailers have cut back on inventory and the consumer may find certain products sold out or not discounted as deeply as one would think. But the retailer also runs a risk of running out and having paying customers walking out of their stores putting their cash back into their wallets.

So let's financial engineer the solution. What if a percentage of the inventory is held in an arms length third party investment vehicle. The retailer has the product in his system. If it sells they split the margins. If it does not sell the retailer is not obligated. With most retail margins the investor receives approximately a 50% return over say a six month hold and does not absorb any marketing or G&A costs. If the product does not sell it is sent to discounters and liquidators. costs are tax deductible.

A few rough edges but if you can slice and dice mortgages why not slice and dice inventories.

Deere & Co Residual Value Losses

Deere & Co (DE) issued Q4 and year end results the day before the long Thanksgiving Day weekend. They lead with this headline ” Deere Completes Profitable Year in Face of Historic Economic Slowdown”

Spinmeister was in charge of that one. The reality is the results are worse than last year. By this stage of the game it is not a surprise but as this is the year end release the headline is designed to last a long time.

What is more important is revenues and margins. We see some telling signs of problems when you read the results of their captive credit arm. They are experiencing losses with residual values from operating leases on construction equipment. No comment on where in the world this is happening but the shareholders pocket book is impacted.

If they are experiencing absolute losses in this category for the entire year the category has problems. If you believe the economy is coming back because of stimulus spending and shovel ready projects for infrastructure, think again. The equipment is being sold at a loss. This will be a strong headwind against new equipment sales in the same category. Double dip anyone?

Bank of Montreal -- Just What Is The Plan?

Bank of Montreal (BMO) announced results for Q4 and satisfied investors that the ship is safe. They did not increase the dividend. Many feel that regulator in the back room did not want to see increased dividends. But with the stock trading near its 52 week high and the current dividend ratio is over 5%, why would you raise the dividend. Some purists say yields over 5% are a danger signal. So they keep the powder dry.

BMO has purchased Diners Club from Citigroup (C) but refuses to disclose purchase price. Both parties say it’s not material but just want you to know that they did the deal. Diners Club seems to be the Brand that does not want to go and Citi finally threw it overboard. I cannot remember the last time I saw someone use a Diners Club Card.

What is significant in the earnings release is the lack of comment on future direction. There is much commentary about the economy but nothing about how they intend to exploit opportunity. But when they state that the Fed reserve will probably start raising rates in Sep of 2010 it would seem that they have a re-active approach and see business as one large bond trading model.

Hewlett-Packard Cash Balance Conundrum

Hewlett Packard (HPQ) released numbers and maintained it’s claim as the world’s largest technology company. The market cap is around $120 Billion. They have purchased EDS and 3Com so it’s up up and away. The question becomes one of capital management. (By the way I love most of their products)

The dividend yield is less than 1% and dividend payouts seem to be an after thought. They are more focused on the sexy M&A side of the technology business. Yes their cash balances are large. Would you love the company if they were much smaller? We all know what cash is yielding and right now approximately 10% of their market cap is invested in cash. Therefore 90% of their balance sheet is driving 100% of their ability to create wealth.

To maintain the large cash balances and still do large deals or spend money on R&D they will need to raise capital. The dividend yield is low and they will need to make it more attractive. Also the leverage is very low and interest costs are very low. For god’s sake why not lever up somewhat with cheap long term debt and lock in some strategic advantages into the future.

Rupert Murdoch End Game Strategy.

News Corp (NEWS) wants to make money, blow off Google (GOOG) and get paid by Bing for indexing. OK that part is pure capitalism and you have to understand Rupert Murdoch. Look beyond the deal. Financial news information is one of the major internet categories that has monetized. WSJ charged an online subscription fee from the get go.

Microsoft (MSFT) has this thing called MSN Money. Yahoo Finance ain’t what it used to be and Google Finance while it seems to be big is not driving Wall Street. Have not heard any comment about the impact on Reuters or Bloomberg. Then of course Warren Buffet controls Business Newswire which provides full text press release distribution. Therefore he sits at the beginning of the information food chain.

I can see this becoming a huge anti-trust battle where all search engines must be treated equally. Then Rupert Murdoch decides not deal with any search engine and everyone must come directly to him because he has the goods. You have to understand the concept of end game strategies to get this one.

LDK Still Too Many Questions

LDK Solar (LDK) released financial results and here are a few things investors may worry about.
1. Accounts receivable are equal to 100% of the last reported quarters revenues. Does anyone pay a bill?
2. The balance sheet reads more like a financial institution than a high tech manufacturing enterprise. Prepayments to suppliers show up in both current assets and long term assets expecting to last longer than one year.
3. We now have inventories which are expected to be processed over one year from now. This in a company whose promise is fantastic growth.
4. Deferred income tax assets show up in both current assets and long term assets. Just what is this category all about?
5. Pledged bank deposits show up in both current and long term assets. The financial engineering of this company is getting overly complex.
6. They just recently “Sold a 15% ownership stake in 15,000 MT annualized capacity polysilicon plant to Jiangxi International Trust and Investment Co., Ltd. for RMB1.5 billion (equivalent to approximately US$219 million)” The deal closed just a few days before the earnings release. No mention as to valuation. Why was this deal necessary? Why should the shareholders be happy?

When you go back to the original press release issued through PR Newswire on Nov 17, 2009 announcing the 15% sale you find this explanation of who the purchaser is supposed to be.

“About Jiangxi International Trust and Investment Co., Ltd
Jiangxi International Trust and Investment Co., Ltd. is engaged in economic development in Jiangxi Province through the operation of financial trusts, management of enterprise assets restructuring, mergers and acquisitions, project finance, corporate finance, and other intermediary business, on behalf of the custody business, by bank deposit, interbank offered loans, or investment using its own funds, managing the financial lending and other business approved by the People's Bank.”

But hey LDK says they earned some $29 million this quarter which is a big turn around from previous losses. There was a big fat government subsidy of $13.8 million which drove half that number.

But the final point is this. If they just sold 15% of a key facility where is the capital gain or loss on the transaction? Have they adjusted or marked to market any valuations?

LDK just too many questions.