If you recently sent your CEO packing in the wake of $17.4 billion in writedowns, you need to do something to stop the outflow of cash.
For some that might mean eliminating the dividend or cutting back on out-sized executive pay. For Citigroup (NYSE: C), that apparently means cutting back on color copying and BlackBerry use. The Associated Press reports that John Havens, the head of the company's institutional clients group, sent a note to employees admonishing them that "color copying and printing should only be used for client presentations," and "presentations should be printed double-sided to reduce unnecessary paper usage."
That's right: when you're pulling that stunt that involves sitting on the copier and printing 20 shots of your derriere, use the black and white machine, thank you very much. BlackBerry use will also be more closely monitored, and there will also be a cutback on outside management consultants and training, and functions held outside of the company's offices.
Of course the savings from measures like this are a pebble in the sand of hideously bad mortgage investments, but it's good to see that the company is clamping down on the waste of shareholder resources.
But doesn't it seem a bit, I don't know, hypocritical to be yelling at employees about wasting paper when the failed CEO left the company with a 9-digit parting gift?
TheStreet.com's Jim Cramer says that even in lousy markets -- and this is one of them -- you can find stocks to buy.
When nothing's working, something's working. I know sounds counterintuitive. but there is simply no reason to think, as bad as this market is -- and it is really, really bad -- that there isn't something to buy.
But are they really hurting General Mills (NYSE: GIS) (Cramer's Take)? Can I see selling Procter & Gamble (NYSE: PG) (Cramer's Take) because of them? After we know the price increases are all baked in? And don't hit me with that strong-dollar stuff, because GIS doesn't have that much overseas exposure. Same with Pepsi (NYSE: PEP) (Cramer's Take): This is a national company with an international arm that is generating oodles of cash and doesn't have as much bad commodity exposure as it did a few months ago.
Stock futures were mixed Monday morning, indicating stock would start on a down note a week full of economic data. This morning, investors are focusing on rising oil prices and existing home sales data to be released at 10:00 a.m. EDT. Also, over the weekend, Federal Reserve Chairman Bernanke commented from the Fed's yearly retreat, saying that problems in credit markets not yet over and are a threat to economy. Meanwhile, economists are saying inflation is catching up to the credit crisis as the major concern for the economy.
American International Group's (NYSE: AIG) credit ratings may be downgraded by Fitch due to uncertainties over AIG's exposure to mortgage backed securities. AIG was down 1.5% in after-hours Friday.
The Australian government approved Chinalco 14.99% stake in Rio Tinto's (NYSE: RTP) but warned the Chinese firm against buying more shares without prior approval. Alcoa (NYSE: AA) backed the purchase. RTP shares were up over 1% in Australian trading.
Broadcom Corp. (NASDAQ: BRCM) will pay around $192.8 million in cash to acquire chipmaker Advanced Micro Devices Inc.'s (NYSE: AMD) digital TV business, the companies announced Monday.
The New York Times reports that since we've had such a catastrophic run with home mortgages, it's time to watch the collapse of commercial ones. The same names surface when it comes to the collapse of our financial system -- in the case of commercial mortgages Deutsche Bank (NYSE: DB) ($25.1 billion), Morgan Stanley (NYSE: MS) ($22.1 billion), Lehman Brothers (NYSE: LEH) ($40 billion in commercial mortgages and property), and Citigroup, Inc. (NYSE: C) ($19.1 billion) are among the biggest holders. They are also big names in Auction Rate Securities (ARS).
Why do people think that commercial real estate could be tanking? Here are four reasons:
Declining property prices. The Times reports that the Moody's/REAL Commercial Property Price Index has dropped 12% since its peak last October.
Commercial mortgage write-downs. According to the Times, Morgan Stanley reported commercial mortgage write-downs of $400 million and Wachovia (NYSE: WB) said it would take at least $1 billion worth of such write-downs.
Potential Riverton default. The Times reports that Riverton, a 1,230 unit Harlem development, was premised on the idea that developers could convert "lower-priced rentals to apartments priced closer to the higher market average." But the Times reports that Monday Fitch "issued a negative watch on part of the Riverton Apartments trust" since the developers had not made much progress -- threatening commercial mortgages that Citi and Deutsche Bank hold.
By all accounts, Salesforce.com (NYSE: CRM) is on its way to being a legendary software company. Based on the latest quarterly results, announced Wednesday after the close, the revenues are on track to reach $1 billion.
The company also continues to grow at a blistering rate. In Q2, revenues surged 49% to $263.1 million. Net income came to $10 million, or $0.08 per share. Actually, for the past 12 months, Salesforce.com generated about $270 million in operating cash flow. In all, there is $823 million in the bank.
Q2 saw the addition of roughly 4,100 new customers for a total of 47,700. What's more, Salesforce.com continues to get traction with its existing major customers, such as Dell (NASDAQ: DELL), Citi (NYSE: C) and Canon. It certainly helps that the company has a highly customizable platform (known as force.com).
Something else: Salesforce.com announced the acquisition of InStranet, which develops knowledge-based management systems for call centers. There has been much demand for such offerings, so why not buy a leading company in the space? Salesforce.com considers the market opportunity to be about $3 billion.
The issue? Well, the deal will mean a 5 cents charge per share for the full-year.
That's not appetizing to Wall Street. So far in today's trading, Salesforce.com's shares are down 15% to $55.31.
It should come as no surprise that banking is a cyclical business. After the bubble bursts, there is always lots of hand wringing and vows to be more rigorous in underwriting. Then the bubble refills and people start to worry more about losing market share to companies with less disciplined underwriting approaches. This leads to a free-for-all as everybody scrambles for market share by lowering their credit standards. The bad loans don't get paid back and the cycle starts anew.
In the past, the Fed has been able to recapitalize banks during the down times by cutting interest rates. Since banks were tightening their credit terms, the interest rates on loans remained high or got even higher. But with the lower interest rates, the amount that banks paid depositors immediately dropped. As a result, the spread between loan and deposit rates widened and the resulting net interest revenue helped to replenish banks' capital.
That is sort of happening now. Since the Fed cut rates from 5.25% to 2%, banks' net interest margins have widened. A look at Citigroup Inc.'s (NYSE: C) most recent quarterly statement reveals that between Q2 2007 and Q2 2008 its net interest margin climbed from 2.41% to 3.18%. During that same time, the average amount Citi charged for loans declined slightly from 6.41% to 6.21% but the rates it paid depositors fell much more -- from 4.42% to 3.30%. Unfortunately, I said it's sort of happening now because the wider spread is not generating enough additional capital to offset Citi's writedowns.
As he prepares to accept the Democratic presidential nomination, Barack Obama's allies in organized labor are worried that he is becoming too friendly with Wall Street types such as former Treasury Secretary and current Citigroup, Inc. (NYSE: C) senior executive Robert Rubin.
According to Bloomberg News, a recent presentation by Richard Trumka of the AFL-CIO argued that unfettered global traded and inadequate government regulation resulted in lost manufacturing jobs. "It will do us little good if, when the next Democrat moves into the White House, Wall Street takes command of our country's economic policy," Bloomberg quotes Trumka's presentation as saying. The story adds that there is no doubt that Trumka is taking a shot at Rubin.
Trumka is unapologetic. The AFL-CIO already is flexing its political muscle and began looking at candidates for cabinet posts including the Treasury and Energy Departments along with the Federal Reserve. Obama's advisors deny that Rubin or anyone else has any particular sway over his economic policies. But there definitely is a tilt toward the center going on.
With the share prices of most of the financials in the toilet, and hundreds of billions in writedowns done and hundreds of billions more to come, UBS has laid out plans for a break-up, the question is being raised about other financial conglomaterates, most notably Citigroup: does the business model of a huge banking conglomerate that handles all aspects of commerce make sense?
From a risk management, it doesn't appear to -- and that was one of the main arguments put forth by consolidation evangelists like Sandy Weil.
The current mess appears to be demonstrating what many skeptical observers have suggested -- and studies have demonstrated -- for decades: mergers and acquisitions and other methods of corporate deckchair arrangements don't add value. In the end, the whole is the sum of the parts.
But that raises the question: why break them up? If stringing them together into a conglomerate didn't change anything, is there any reason to think that breaking up will change anything? I doubt it.
The bottom line is that all the mergers and acquisitions and spin-offs and break-ups are just a distraction from the real business.
The idea that the huge financial services conglomerates should be broken up has been around for a long time. The fact the UBS (NYSE: UBS) is cutting itself into pieces has brought the debate back to the fore.
To some extent taking a company like Citigroup (NYSE: C) and carving it up would allow investors to get shares in some of the good divisions along with the bad. At that point, at least shareholders could decide what they wanted to hold. The original idea behind merging bank pieces together was that if one segment of the business got in trouble, others could do well. Earning would be supported through diversity. Recent quarterly statements have shown that theory holds little water.
According to the AP, "Ladenburg Thalmann's Richard X. Bove, one of the most outspoken banking analysts since the credit crisis began last year, wrote in a note that the 'concept behind the creation of JPMorgan Chase has broken down.'" Bove's view is not longer part of a tiny minority.
The trouble with the thinking is that it is hard to see how it would work in practice. Can Citi simply be split into four or five pieces, each with its won management and fate? It worked for AT&T 30 years ago, and investors were the better for it. Perhaps it is the banking industry's turn.
Douglas A. McIntyre is an editor at 247wallst.com.
In December, 2002, ten of the most prominent brokerage firms in the country agreed to a massive settlement. The charges involved well-documented claims that analyst reports issued by these firms were deceptive. The firms sold out their retail clients to curry favor with their underwriting clients.
The industry unleashed a massive PR campaign. It convinced you that it saw the error of its ways. They had "reformed." You could trust them again with your hard earned assets.
And you did. Money flowed back in the coffers of these firms and others.
Citigroup (NYSE: C) has come close to saying it will not cut its dividend under any circumstances. Merrill Lynch (NYSE: MER) has not cut its dividend in almost four decades. But there are signs cuts will come.
According toBloomberg, options traders think a Merrill dividend reduction is coming. "The market is pricing in a significant cut, roughly 50 percent or more,'' said Steve Sosnick, who trades options at Interactive Brokers Group Inc.," the news service reported.
Leaving options traders aside, there may be strong financial reasons for Merrill, Citi and other banks to make the cuts. Many analysts believe that total mortgage-backed securities losses will come to over $1 trillion. Only about 50% of that has passed through financial firm P&Ls. That means more losses and a need to raise more capital. Dividend cuts could do that.
For shareholder in the banks, dividends are almost all they have left. Merrill has a high dividend of 5.6%, which means it pays out more like a corporate bond. But that is $1.40 a share and the broker has a float of almost 1.4 billion shares. Citi's numbers are similar.
Is a dividend cut already priced into the stocks? Who knows? Merrill trades at $25.60, near its 52-week low of $22. A heavy set of losses could take it well below $20. For investor who got in at much higher prices, the dividend is cold comfort.
Financial firms will cut their dividends. With capital hard to come by, it is their most efficient way to "raise" money.
Douglas A. McIntyre is an editor at 247wallst.com.
Deutsche Bank downgraded China Netcom (NYSE:CN) to Hold from Buy, according toBriefing.com. The news services also reports that Citigroup downgraded McDermott (NYSE:MDR) to Hold from Buy.
Citigroup (NYSE:C) was cut to Underperform from Neutral at Merrill Lynch, according to24/7 Wall St. The financial website also reports that Goldman Sachs (NYSE:GS) was cut to Underperform from Buy at Merrill Lynch.
Bloomberg News reports that banks' subprime write-downs have hit $500 billion. The last time I checked, that figure was $400 billion. Bloomberg reports that New York University economist Nouriel Roubini forecasts such losses will ultimately total $2 trillion. I wonder if he would revise his estimate upwards.
Recently banks have been taking write-downs for their Auction Rate Securities (ARS). Bloomberg reports about $1.9 billion has been set aside so far to cover ARS losses. It notes that UBS AG (NYSE: UBS) set aside $900 million to cover potential losses and Citigroup, Inc. (NYSE: C) and Wachovia (NYSE: WB) each estimate that their ARS buybacks will cost $500 million.
Write-downs have been going hand in hand with capital raising. But banks and brokers have not been able to raise enough capital to offset the losses. Bloomberg calculates that they've raised "$353 billion of capital to cope with the write-downs. The gap between the losses and capital infusions, which stands at $148 billion, has regularly narrowed to about $80 billion as capital raising follows write-down announcements."
Can banks and brokerages raise another $1.7 trillion to keep up with the write-downs that Roubini forecasts? I sincerely doubt it.
CNNMoney notes that Morgan Stanley said it would offer to repurchase all ARS "held by individuals, charities and small and medium-sized business with accounts of $10 million or less at the bank." Morgan Stanley will begin to start buying back $4.5 billion worth of ARS on September 30th and will "make its best effort to provide liquidity solutions" for institutional investors by the end of 2009. But New York attorney general Andrew Cuomo is not satisfied with Morgan Stanley's proposal.
Meanwhile, the list of big ARS issuers that have not settled grows shorter. Here are six holdouts (with their 2007 municipal ARS issuance in parentheses):
The poor souls at the Swiss bank UBS (NYSE: UBS) are having trouble fixing what they have broken. The bank posted a loss of $329 million in the second quarter and took write-offs of $5.1 billion for bad assets.
Some sources say that UBS will now break off its investment bank from its wealth management division. Wealth management has healthy earnings while the investment side of the house is responsible for most of the big losses. Now nervous investors, troubled by rising mayhem, are pulling money out of the firm.
According toThe Wall Street Journal, "Bowing to shareholder pressure, the Zurich-based bank said its main units will be separated, backing away from its integrated model." It may be a model for other large financial companies facing balance sheet troubles, especially Merrill Lynch (NYSE: MER) and Citigroup (NYSE: C), which also have big operations meant to handle individual investors.
The lesson from UBS is that there appears to be little advantage and a lot of risk to keeping private client and investment banking services under one umbrella. Shareholders in some of the largest U.S. financial companies can watch for UBS-style break-ups, which will probably push share prices in these companies higher. Walling off risk will become necessary as mortgage-paper related write-offs grow.
Douglas A. McIntyre is an editor at 247wallst.com.
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It should come as no surprise that banking is a cyclical business. After the bubble bursts, there is always lots of hand wringing and vows to be more rigorous in underwriting. Then the bubble refills and people start to worry more about losing market share to companies with less disciplined underwriting approaches. This leads to a free-for-all as everybody scrambles for market share by lowering their credit standards. The bad loans don't get paid back and the cycle starts anew.
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In December, 2002, ten of the most prominent brokerage firms in the country agreed to a massive settlement. The charges involved well-documented claims that analyst reports issued by these firms were deceptive. The firms sold out their retail clients to curry favor with their underwriting clients.
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