Week in Review Part II: Street Bytes

Despite the respectable economic news, stocks took it on the chin owing to renewed uncertainty in Europe and the potential impact on U.S. banks should the crisis worsen even further as the Dow Jones lost 2.9% to 11796, while the S&P 500 fell 3.8% and Nasdaq dropped 4.0%. The latter two are now down again on the year.

I also can’t help but note an appearance by billionaire Mark Cuban on CNBC, wherein he totally trashed investing in the stock market, saying it was for “hackers,” [hedge fund types looking for nothing more than an edge] and that cash is “king.” Can’t say I disagree with Mr. Cuban.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.28% 10-yr. 2.01% 30-yr. 2.99%

Foreign central banks purchased $38.8 billion in Treasury notes and bonds in September amidst the flight to safety that month. China’s holdings rose $11.3 billion to $1.148 trillion after falling a bit in August. [This does not include China’s holdings through London.] Japan, the second-largest holder, also increased its share.

Total net buying of U.S. assets, including equities, totaled $68.6 billion, the highest since November 2010. U-S-A! U-S-A!

--Bankrupt brokerage MF Global’s record-keeping was so sloppy, there is no telling just where the missing $600 million in customer money is. Myriad federal regulators as well as criminal investigators are on the case and one thing is becoming increasingly clear; the final days were beyond chaotic as MF failed to register all the transactions that took place, forcing regulators to reconstruct the ledger. The bankruptcy trustee alone has a team of 200 accountants attempting to unwind the firm, in addition to 200 MF Global employees who were retained for this purpose. Some customers are finally getting access to a portion of their money…the lucky ones as much as 60%.

[Some MF customers are also ticked at JPMorgan Chase as they feel the bank is looking to cut ahead of them in the long line of creditors. JPMorgan argues it’s the lead creditor because it had provided MF with a revolving $1.2 billion line of credit before MF imploded.]

--UBS, Switzerland’s biggest bank, is looking to reduce headcount by a further 1,500-2,000, after announcing it would eliminate 2,000 back in July.

--Citigroup is looking to cut 3,000 positions, equal to about 1% of the staff. In both the case of Citi and UBS, investment banking and trading operations are being targeted.

--And Mizuho Financial Group Inc., Japan’s second-largest bank by assets, said it would cut 3,000 jobs as well by 2015, 10% of total staff.
--From the Financial Times:

“The Federal Housing Administration touts itself as the only U.S. government agency that ‘costs taxpayers nothing.’ That may soon change and was hardly true in the first place. Founded in the Depression, the FHA’s role in fostering home ownership expanded hugely after the crisis hobbled its private but government-sponsored brethren, Fannie Mae and Freddie Mac. Its share of new mortgages insured expanded six-fold to more than 30 percent of the market. But an audit released this week shows that it faces a 50 percent chance of exhausting its current reserves. If home prices fall sharply, auditors reckon it could require as much as $43 billion in support. Some experts say it may be more.”

The FHA has pitifully small reserves on a portfolio that is now $1.1 trillion.

--As for Fannie and Freddie, a congressional committee approved a measure that would slash pay for employees of the two mortgage giants, which is leading to an exodus of executives. Freddie CEO Charles E. Haldeman Jr., announced plans to leave next year. The House committee plan still must be approved by the full House (likely) but then move to the Senate (not as likely).

Rep. Spencer Bachus (R., Ala.) said, “Taxpayers own these companies and staff should be paid accordingly.” The CEOs at Fannie and Freddie have base salaries of $900,000, but stood to make as much as $6 million a year after receiving deferred pay and bonuses.

It’s an easy argument to make that the executives don’t deserve this kind of money, but you still have to be able to attract the right kind of talent or you potentially cost taxpayers further $billions on top of the $150 billion the two have already cost us. However, I’m in no way defending $6 million.

--Enbridge, a Canadian oil pipeline company, is buying a 50% stake in a pipeline that would run south from landlocked Cushing, Oklahoma to the Gulf of Mexico. Thus the oil would then be available for Gulf Coast refineries and change the supply/demand situation in the region and lessen the need for imports from Mexico and Venezuela.

The significance is that heretofore there was excess supply in and around the Cushing delivery point for West Texas Intermediate crude, the price of which I list at the end of the column each week. That has helped keep prices down vs. similar oil types, but now the move by Enbridge is an attempt to drain inventories.

So the price of West Texas immediately soared over $100 a barrel on the news, but then finished the week around $98.

--Meanwhile, regarding the controversial Keystone XL pipeline that the Obama administration is looking to delay until after the 2012 election, if it allowed it at all, TransCanada agreed to change the route of the pipeline to avoid the ecologically sensitive Sandhills region of Nebraska. Canada needs the crucial pipelines to export its growing oil sands production from northern Alberta; the third-largest reserves in the world. Daily production of 1.5 million barrels from the sands is expected to increase to 3.7 million in 2025.

--And one other item on the energy front. In August, the latest month for which Energy Department data is available, U.S. refiners exported a record average of 895,000 barrels a day of refined fuels, most going to Central and South America, though the Netherlands was the biggest single buyer, mostly diesel fuel.

But with incentives to produce diesel, that means less production of gasoline by the refiners and that equates to stubbornly high prices for U.S. consumers at the pump; in fact currently record prices for this time of year.

--The World Gold Council announced that central banks made their largest purchases of gold in the third quarter in decades. It was just last year that the banks became net buyers after two decades of heavy selling. The last time central banks were net buyers before 2010 was in 1988.

--Boeing secured the biggest order in its 100-year history after signing a $26 billion deal with Emirates for as many as 70 aircraft

--California is slated to take in $3.7 billion less in revenues than a budget crafted just a few months ago planned on, necessitating even more cuts to services, including a shorter school year. Tuition at state universities would also rise further. Needless to say, residents of all kinds are outraged.

--The “constitutionality” of the Obama health care law will be decided by the Supreme Court next spring (March…with a likely decision in June) and the nine Justices are going to allow an historic 5 ½ hours to hear oral arguments. [Normally it’s just one hour for each case presented before them.]
Editorial / Wall Street Journal

“The issue at the heart of the ObamaCare challenge brought by 26 states and the National Federation of Independent Business is whether the federal government has the constitutional authority, under the Commerce Clause, to order everyone in the United States to purchase health insurance – the so-called ‘individual mandate.’ If that is so, critics argue, then there is no limit to what commercial activity the government can command. And make no mistake: Future governments would  order specific ‘commercial’ activity under this authority.”

--Japan’s economy grew 1.5% in the third quarter over the second, or 6% annualized, but the trends for the fourth are nowhere near as good as industrial production is sliding anew.

--The Irish government is looking to cut 18,000 public sector workers by 2015. On the housing front, the peak-to-trough decline in residential prices is now expected to be 60%, an unprecedented collapse in wealth levels. [Japan’s property collapse of 90% in 1990 was on the commercial side.]

--China is resuming service with 54 bullet trains recalled over safety concerns following July’s deadly crash. Of course China doesn’t say how the trains have been fixed or modified.

--Shares in Rambus Inc. collapsed after it lost a $3.95 billion jury trial over its allegation that Micron Technology and Hynix Semiconductor colluded to manipulate prices of DRAMs, or memory chips, and thus impede Rambus’ business relationship with Intel. Rambus claims it would have made $3.95 billion in royalties without the alleged conspiracy. On Wednesday, shares in the company opened at $18, then the ruling came out and the stock dropped to $4, before finishing the week at $8.40.  

--Warren Buffett announced he has been buying a $10.7 billion stake in IBM, or 5.4% of the company, Buffett’s largest holding after Coca-Cola.

--Dell missed the Street’s revenue expectations and warned the flooding in Thailand creates uncertainty for the global economy as Thailand has some of the biggest makers of hard drives, a key PC component. Dell’s CFO Brian Gladden said he expected the flooding to be an issue for several quarters.

--Wal-Mart broke its string of same-store sales declines for its fiscal third-quarter, up 1.9% (ex-fuel) but margins declined, as did earnings, and it sees sales flat to up 2% for the fourth quarter.

--Home Depot, the world’s largest home-improvement chain, beat the Street’s earnings expectations on the heels of Hurricane Irene generated business.

--In the latest chapter in the Solyndra debacle, the Obama administration asked the company to delay announcing layoffs until after the November 2010 midterm elections that imperiled Democratic control of Congress, newly released e-mails show. The layoffs were announced Nov. 3, the day after the Nov. 2 vote.

Appearing before a Republican-controlled House committee on Thursday, Energy Secretary Steven Chu refused to apologize for the bad investment that cost the American taxpayer in excess of $500 million.

--The U.S. Postal Service said it lost $5.1 billion for the fiscal year ending Sept. 30, with losses only expected to accelerate in 2012. The Postal Service had a Friday deadline to pay $5.5 billion into the U.S. Treasury for future retiree health benefits but Congress was expected to grant a reprieve that only delays the day of reckoning. The losses are despite the fact the USPS has slashed 130,000 jobs over the last few years.

--Until 2005, portfolio manager Bill Miller was a superstar in the mutual fund business as his Legg Mason Capital Management Value Trust beat the S&P 500 for 15 consecutive years. And then the roof caved in and he was slaughtered. Over the last five years, Value Trust is ranked last of the 818 funds in its Lipper category. He’ll now retire in April, handing over full management to Sam Peters. Assets, once $21.5 billion, have dwindled to $2.8 billion.

--Jon B. Lovelace, who led the American Funds complex to its explosive growth from the 1980s through the mid-2000s, died. He was 84. The parent Capital Group Cos. now manages about $1.2 trillion.

--A Manhattan-based executive recruitment firm has been conducting a survey of holiday parties for the last 23 years and an all-time high 97% of companies threw them in 1996 and 1997. Only 74% will do so this year. Said the survey coordinator, Dale Winston, “once a company does away with them, parties rarely get back in the budget.” [Crain’s New York Business]

--I never liked clothing retailer Benetton and now I vow never to walk into one after their despicable ad campaign showing world leaders kissing (using Photo Shop).

--My Fujian, China holding reported earnings this week that were a little disappointing, but at the same time the company finally made the feedstock acquisition it’s been talking about all year. Some think they overpaid; I haven’t had the time to study it myself yet, but I’m having dinner with the CFO in New York on Monday. For those doubting if the company and its healthy cash position were real, however, the acquisition should have at least allayed any of those fears. The CFO is seeking my advice on a different aspect of the company, which is also encouraging.

That said I’m impatient like every other shareholder at this point. Conservatively, even given the dreadful sentiment towards Chinese small caps these days, the stock should be at least 2 ½ times what it is today.

Some of these small cap stories are amazing. I also have a much smaller position in China I’ve touched on before, a food company that is like a mini-ADM. For the past three months I’ve wondered if it was still alive because literally it didn’t trade, day after day…so I’d buy 100 shares just to make sure I could still do so. Until Friday, when someone else suddenly bought 200, I was the only buyer in the whole freakin’ world for like 10 weeks! And this is a company whose reported third quarter revenues went from $20 million to $86 million, while its annualized earnings give it a P/E of well under two (just like my Fujian play). I just keep believing that in the next up cycle these stocks will once again be recognized…the survivors of the Great Purge.