Friday, July 30th, 2010

Daily Download: Financial and Stock Investing News for 12-10-09

December 10th, 2009 at 5:21 am by CB | No Comments

Good morning, investors and traders! You are reading the Daily Download (”Daily DL”), which includes summaries and links to the day’s selected economic and stock investing news. The Daily DL is maintained by Chain Bridge Investing (“CB”), which is a financial blog at www.chainbridgeinvesting.com. Chain Bridge Investing is constantly improving and adding new financial and investing content to the website. Please let us know if you have any suggestions at the following email address: .

General News & Headlines Summary

News items not covered below are as follows: (1) Timothy Geithner announced that TARP would be extended until October 2010, however, Mr. Geithner does not expect to deploy more than $550 billion of the program; (2) despite a string of attacks in Iraq killing roughly 120, major oil companies still intend to bid for licenses for access to Iraq’s oil wells ; (3) AOL, now fully independent, is betting its future on the $29 billion U.S. online advertising market and will begin trading on the NYSE on Thursday; (4) due to their concerns over their long-term oil revenue, Saudi Arabia and the big Gulf states could withhold their support for any deal in Copenhagen regarding pressure to cut carbon emissions and oil consumption; (5) on Thursday, oil prices remained below $71 a barrel in Asia due to concern that U.S. crude demand is not improving; (6) Raytheon Co. announced a quarterly dividend of 31 cents a share; (7) Berkshire Hathaway has released another 2.7 million shares of Moody’s on the market, while still controlling 15% of the company; and (8) on Wednesday, Bank of America announced that it had fully repaid the $45 billion in TARP funds.

Upcoming Economic Data for the Day (all times EST)

8:30 AM International Trade

8:30 AM Jobless Claims

9:00 AM RBC CASH Index

10:00 AM Quarterly Services Survey

10:30 AM EIA Natural Gas Report

1:00 PM 30-Yr Bond Auction

2:00 PM Treasury Budget

4:30 PM Fed Balance Sheet

4:30 PM Money Supply

Initial Public Offerings (”IPOs”) for the Week of December 7 – 11, 2009

12-9-09 Pebblebrook Hotel Trust – Acquire and invest in hotel properties (“PEB”)

12-9-09 Chesapeake Lodging Trust – REIT focusing on hotels (“CHSP”)

12-9-09 China Nuokang Bio-Pharmaceutical- Biopharmaceutical company (“NKBP”)

12-9-09 Linkage Tech Intl Hldgs – Provider of software solutions and IT services (“BOSS”)

12-9-09 Trony Solar Hldgs Comm – Solar renewable energy (“TRO”)

12-10-09 Concord Med Svcs Hldgs – Medical and healthcare services (“CCM”)

12-10-09 Elington Fin LLC – Focusing on mortgage loans & sec. (“EFC”)

12-10-09 Kar Auction Svcs – Used vehicle & salvage auction services (“KAR”)

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

List of Selected Companies with Third-Quarter Earnings for 12-10-09

News

Citigroup in Talks for Equity Offering – Financial Times

Summary: At present, Citigroup is discussing with regulators its plans to raise an additional $15 billion through an equity offering to repay $20 billion in bail-out funds as soon as Thursday. Furthermore, Citigroup also intends to raise nearly $2 billion through mandatory convertible securities, which convert into equity when Citigroup’s capital ratio drops below a predetermined level. Yet, regulators continue to express concerns that Citigroup’s financial situation is not strong enough to allow it to repay the Troubled Asset Relief Program (“TARP”) funds. In addition, the government will most probably announce its intention to sell its 34% stake in Citi during the next year.

CB: Citigroup’s actions illustrate a company that is desperately trying to catch up to its rivals to remain competitive in the banking industry. In a vacuum, a Citigroup shareholder would want the company to hold on to the TARP funds and maintain a solid financial position until the bank was self sustaining. Yet, in the current situation, Citigroup is like a patient being rushed out of the hospital prematurely, which oddly may be its best chance for survival. Given the circumstances, if these TARP funds are not repaid, then the company will face challenges retaining its workforce talent and attracting additional talent due to the pay limits the TARP funds impose on Citigroup. According to Andrew Ross Sorkin, the Treasury contends that the number one reason Bank of America already repaid its funds was due to the compensation limits. Furthermore, there are other fees associated with the TARP funds that have to paid to the government, which would continue to hurt Citigroup’s reported profit margins.

Considering this situation from the perspective of other industries, this race to repay funds in order to increase compensation seems narrow minded, but necessary. Nearly all the analysts covering the banking sector have indicated that paying back TARP funds allows banks to eliminate the competitive disadvantage of lower compensation. There has been very little focus on whether repaying the TARP funds is a wise decision for the financial strength of the bank. Remember, the banking system experienced troubles due to their lack of financial strength and their large quantity of richly compensated employees. At present, the banking industry’s participants seek to enrich themselves, while possibly putting the banking system at risk again. It is almost as if nothing was learned since the first crisis. The reason this focus on compensation is narrow minded is that in any other service industry, while there would be a focus on compensation, a company in Citigroup’s position would seek to innovate new products and services as well as revise its business plan. Instead, it appears that the focus on the compensation paradigm could be stifling other potential competitive strategy. As a result, the banking industry appears to need more imaginative and capable talent. Unfortunately, this is highly unlikely to be resolved, since the increased compensation will likely be used to hire more like-minded individuals, thus the banks will continue to compete along the same lines as always.

Finally, Citigroup owes its shareholder’s a large apology for continuing to dilute them. While there was always the possibility of further dilution, this was not a certain event. Some shareholders must be wondering when their dilution will ever stop? If the plans mentioned in the article are implemented, then Citigroup shareholders face the following two additional headwinds against the price of their shares: (1) the market capitalization of Citigroup is currently $88.25 billion and the company wishes to issue an additional $15 billion (The Wall Street Journal reports that this amount could be $20 billion) of equity, that is a significant dilution and downward pressure on Citigroup’s share price; and (2) the government unloading its 34% share of Citigroup into the markets will likely result in further downward price pressure, most experts would agree that such an unloading of a position, even over time, will likely downwardly affect the company’s stock price. Furthermore, if Citigroup does repay the funds and needs additional capital in the future due to its weaken position, then shareholders will likely experience another diluting event. The company continues to cut more pieces from the pie, while the total amount of the pie remains the same and the size of the pieces become smaller.

Investors need to contemplate whether the gains from increasing compensation will materialize in the bottom-line of the financial results. The greater the dilution, the larger those bottom-line results need to be. and the greater the pressure on Citigroup for increased performance. Will being freed from government pay restrictions really result in significant value added to the firm? Time will tell. As the situation currently stands, it appears the executives at Bank of America and Citigroup are risking the financial health of their entities (the FDIC was one of the regulators against Bank of America’s repayment of TARP funds for this reason) and their shareholders in order to more richly compensate themselves. As mentioned, the pay off of this move remains extremely uncertain. The chief fears that remain are: (1) shareholder dilution and (2) the fact that the company’s capital ratios remain much worse than their peers’, indicating that Citigroup is still risky from a financial stability perspective.

On the surface, CB has mainly touched upon the dilution issue and some corporate governance issues. Additional research would have to be conducted to try to understand more deeply why investors like John Paulson, David Tepper, Richard Pzena, and Lee Ainsile have significant long positions in Citigroup. As any shareholder, CB would be greatly encouraged by a management whose primary compensation is tied to the long-term health of the company, but this still remains uncommon in most industries.

For Wholesalers, Two Positive Readings – The Wall Street Journal

Summary: According to the Commerce Department, wholesales in industries including autos, grocers and electronics witnessed sales increase 1.2% in October from September for the seventh consecutive monthly increase. Yet, sales are wholesalers remain 10% lower from October 2008 levels. An analyst from Wells Fargo believes that the increase in sales will increase the comfort level of businesses and lead to increased new orders and hiring. Furthermore, after 13 consecutive months of declines, wholesale inventory levels increased .3% to $379.6 billion, possibly indicated that businesses are needing to restock.

S&P Revises Spain’s Outlook to Negative – Financial Times

Summary: A day after Fitch downgraded Greece, the Standard & Poor’s credit agency stated that its outlook for Spain had turned negative due to the following: (1) private-sector debt representing 177% of GDP for 2009; (2) deflationary pressures; (3) an inflexible labor market; (4) an estimated increase in government debt from less than 40% to nearly 67% of Spain’s GDP in 2010 ; (5) the lack of policy actions to reduce Spain’s fiscal and economic imbalances; and (6) the expectation that Spain’s GDP growth would be less than 1% annually.

CB: This weakness announced by Standard & Poor’s should not be a surprise, especially with yesterday’s discussion of Greece, the euro, and the European Union. This situation with Spain will likely further augment the scrutiny applied to the European Union’s current practices and monetary system, please see yesterday’s Daily DL for more in-depth discussion.

Steel Girds to Oppose Iron-Ore Venture – The Wall Street Journal

Summary: At present, Rio Tinto and BHP Billiton have proposed a joint venture sharing the production costs of their iron ore mines in Western Australia, which they state could produce roughly $10 billion of combined savings and result in cheaper iron ore. The venture plans to reduce costs through shorter trips to the railroad, better allocation of port capacity, and combining the operations of the adjacent mines into a single operation. The companies claim that this joint venture is production based and will deliver more ore to market faster and at a lower cost, while both companies continue to pursue independent marketing and commercial strategies. Yet, many steel makers believe that this venture would create an entity with a controlling and unfair position in the seaborne iron ore market, and would essentially turn a market supplied by an oligopoly of three players into a duopoly. As a result, the steel makers believe that the joint venture will allow Rio Tinto and BHP Billiton to control both supply and iron ore prices. Consequently, the World Steel Association, which represents nearly every large steel maker, has petitioned the European Union to reject the proposed joint venture. Analysts believe that Rio Tinto and BHP Billiton will face a challenging battle for approval as they have to prove that pricing information and negotiating strategy will not be shared amongst them.

CB: CB believes that even if these two companies do not explicitly share pricing information with each other, they will be determine each other’s pricing based on the information they garner from their combined operations. Such combined operations require cooperation on the behalf of both parties to optimize output, which would mean the sharing of production and capacity information. Such information would likely provide officials at both companies with a strong sense of the other’s pricing levels. Furthermore, one should note that these companies are producing a commodity and not a differentiated product, thus pricing with knowledge is much more operational dependent.

Fund Streak Hits 38 – The Wall Street Journal

Summary: The following figures are reported weekly by the Investment Company Institute regarding the flow of money amongst various funds for the week ended December 2 (”this week”):

(1) Mutual funds witnessed net inflows for the 38th consecutive week, with total inflows estimated at $7.11 billion during this week and $384 billion for the entire streak.

(2) The stock funds experienced outflows of $2.27 billion this week, compared to outflows of $1.34 billion in the prior week. U.S. stock funds had $3.26 billion of outflows this week, while foreign funds had $991 million of inflows.

(3) Bond funds had estimated inflows of $9.59 billion this week, an increase from the $8.22 billion inflows from the prior week.

(4) Money-market funds saw their assets increase by $13 billion for this week leaving a total of $3.288 trillion of total assets in money funds.

More Links of Note

Depression Economics: Some Basic Fiscal Arithmetic – Bradford DeLong

Requiem for the Dollar – James Grant

Option ARMs and the “Time Bomb” – FixedIncomeColor.com

The Best Stocks For 2010 – PragCap

The Dollar’s Fall Reflects a New Role for Reserves – Martin Feldstein

Peter Thiel – Gold is the “Anti-Investment”

Volcker: No Time for Return to Business as Usual

Recession Elsewhere, but It’s Booming in China – The New York Times