JC Penney just reported their earnings .... or lack thereof and it was worse than the terribly low guidance. Suffice it to say that this company is not firing on all cylinders. Penney's loss for the fourth quarter was $428 million bringing their one year total loss to $985 million. The estimated loss before the earnings report was 18 cents a share making the $1.95 a share loss that much more dismal. Revenues decreased 28%.
There is now a very large spot light on the management team's decision to remove sales and discounts from their pricing display. Change and innovation are necessary for businesses to compete and survive. But this is just a display of change for change sake. Not only is it common sense to use sales and discounts in a retail discount store, it is a clear display of change for change sake. Definitely a head scratcher. This is a decision with terrible results that a new management team will not be able to recover from. Penney's will now have to spend more money to employ the same discounts and sales pricing they had before the change. Deploying resources to stand still fast does not bode well for this management team. This company is in a free fall and drastic changes will be forthcoming.
Thursday, February 28, 2013
Wednesday, February 27, 2013
Walmart The Bank.... What?
I recently stumbled across an article talking about Walmart's new prepaid debit card partnership with American Express to provide the Bluebird prepaid debit card. This is an excellent platform for clients with small account balances (under $10,000) or those that don't qualify for a bank account at say Wells Fargo, Bank of America, Chase due to poor credit history. The cost to establish the Bluebird account is $5. You get a starter card and an online account to monitor your transactions.
There are no monthly fees. No fees for direct deposit. No minimums. No fees to withdraw funds and you can deposit checks using your camera phone. This is a great tool for Walmart's audience and it creates a win win product. Walmart's clients have access to a bank like debit card that can be used wherever American Express is accepted, and Walmart makes money on the float and probably saves money on swipe fees..
I would not be surprised to see Walmart aggregating enough deposits to make a dent in the banking industry. Big Banks don't want the smaller clients and Walmart once again finds and affordable solution for the masses. This is a great display of innovation at one of the largest companies in the world that would not be classified as an innovative company. Only the paranoid survive. And that is why Walmart will continue to succeed. Here is a link to the Bluebird site... https://bluebird.com/
There are no monthly fees. No fees for direct deposit. No minimums. No fees to withdraw funds and you can deposit checks using your camera phone. This is a great tool for Walmart's audience and it creates a win win product. Walmart's clients have access to a bank like debit card that can be used wherever American Express is accepted, and Walmart makes money on the float and probably saves money on swipe fees..
I would not be surprised to see Walmart aggregating enough deposits to make a dent in the banking industry. Big Banks don't want the smaller clients and Walmart once again finds and affordable solution for the masses. This is a great display of innovation at one of the largest companies in the world that would not be classified as an innovative company. Only the paranoid survive. And that is why Walmart will continue to succeed. Here is a link to the Bluebird site... https://bluebird.com/
Tuesday, February 26, 2013
The Eye of the Perfect Storm... Tech Bubble Remembered
There is a rumor that Apple will soon announce a stock split. For some reason this still gets novice investors excited as if something good is about to happen to the companies balance sheet and/or stock price. Clearly, a stock split has zero material impact on a company's financial status and means nothing... but it is still deemed to be magical to the average retail investor. This reminded me of my time answering calls while working at Charles Schwab in 1999. This role allowed me to witness the eye of the perfect storm that was the 1999/2000 tech bubble.
Why was it the perfect storm? The stock market had been on a 17 year grand bull run depending on when you measure the starting and ending points. From 1982 to 2000, the charts of the DOW displayed a steady trend from the bottom left of the screen to the top right. This clearly affected investor confidence in the stock market. Maybe confidence isn't the correct word. I should probably replace it with arrogance. The stock market became a can't lose investment and everyone wanted to be a part of it. The top stocks of the 90's included Dell Computer, Microsoft, Intel, and Charles Schwab. The majority of the stocks that were over performing were tied to the personal computer revolution. But how was Schwab tied to this revolution? They were technically a finance company.
In 1998, Charles Schwab went live with Schwab.com. This allowed the average Joe to begin placing their own trades online from the comfort of their home or office. It opened a whole can of worms that our society was not prepared to handle.
We have the stock market in a long bull cycle, the tech revolution is charging ahead in full force, the Fed was lowering rates to prepare for Y2k and ignoring the massive growth statistics the economy was producing and now the every day Joe was armed with the ability to start trading their own accounts. Not to mention, they all had equity in their homes, 401(k)'s were starting to really mushroom and all the ingredients were there for a massive rise in the stock market.
I remember getting calls from people that knew nothing about balance sheets, cash flow, EBITDA, or what the company even did. Seriously! A typical phone call would be a lady calling with a dog barking in the background and CNBC blaring in the background giving me her account number and verification information so fast that I could barely type the data into the computer fast enough. She would proceed to yell "I want to buy 1000 shares of VXYZ stock at market!" I would retort "Ma'am, VXYZ isn't a valid ticker symbol. Do you know the name of the company you want to purchase so I can find the ticker symbol?" She would respond...."No... I don't know the name of the company but I just saw the ticker go across the screen on CNBC." I then chuckled and said "You want to purchase the shares of a company that you don't even know the name of?"
This was the eye of the perfect storm. I didn't know it at the time... but I was right in the middle of the most historical era of the stock market of all time. It may never be matched. Yes... there will be booms and busts as there always are in history.... but this was the perfect storm. Everything was sailing along on all cylinders and everyone wanted to be a part of this.
As the market charged upward and onward in February of 2000, the Schwab system was completely overwhelmed. The mainframes from IBM to handle the Internet traffic from Schwab.com could not be built fast enough to support the amount of people using the website. So when I would get to work in the morning... the first thing I would check is if the site had gone down yet. And when it did go down... it was complete chaos. The calls on hold would go from 17 to well over 300. Viewing customer accounts became impossible. I could no longer verify account balances, account numbers, or even if I was talking to the correct client. All trade orders would be placed on a paper ticket and held on my desk until the system came back up.
I once had a doctor call in to place 9 separate orders to buy and sell different tech stocks. I took the orders on the paper ticket and told the doctor "When the system comes back up you won't see these orders on you account. Do not duplicate them!" I then call the trading desk to place the orders manually because the dollar amount was too large to hold onto. A few minutes later the system comes back up and I check the doctor's account. Sure enough, he had duplicated the orders. I call him up to tell him to do nothing while I try to fix it. After working with the trading desk we realize that all of his stocks had moved in the opposite direction by $30 to $50 per share. The trader I was talking to asked me if the doctor knew this was an $800,000 oops? I nearly threw up and it wasn't even my money. I hope he wasn't in the middle of surgery!
The market was so volatile and everyone and their brother was all in. It was the biggest money grab of all time. Everyone looked smart because every stock that had 4 symbols (meaning it was listed on the NASDAQ) was going up... especially if the name of the company had dot com at the end of it. CNBC had even given a new phrase to the tech industry called "The New Economy." They were referring to the PC/Internet revolution. CNBC even built celebrities such as Cramer, Kudlow, Maria Bartiromo, Henry Blodget, Mary Meeker, Abby Joseph Cohen. People like Mark Cuban made their wealth during this run. It was a juggernaut.
But all good things come to an end. And did it come to an end! Just as epic as the run up... the downfall was even faster and more furious. Tom Costello would stand in front of the Nasdaq leaderboard on CNBC as if he were standing in front of a burning building. It was like he was watching the entire world's wealth just disappear. The tone in his voice changed to somber and he looked like he wanted to just put a sheet over the screen of red ticker symbols as if there was too much carnage to show live on TV. It was the end of something so perfect... so epic. But that is just it.... for it to be so epic it had to be too good to be true. Something was too perfect and unable to replicate. It will be remembered for the next 100 years and beyond just like the Great Depression. There will always be more booms and busts. Money will flow into different asset classes and over inflate them. But it will never replicate the perfect storm that was 1999/2000!
Why was it the perfect storm? The stock market had been on a 17 year grand bull run depending on when you measure the starting and ending points. From 1982 to 2000, the charts of the DOW displayed a steady trend from the bottom left of the screen to the top right. This clearly affected investor confidence in the stock market. Maybe confidence isn't the correct word. I should probably replace it with arrogance. The stock market became a can't lose investment and everyone wanted to be a part of it. The top stocks of the 90's included Dell Computer, Microsoft, Intel, and Charles Schwab. The majority of the stocks that were over performing were tied to the personal computer revolution. But how was Schwab tied to this revolution? They were technically a finance company.
In 1998, Charles Schwab went live with Schwab.com. This allowed the average Joe to begin placing their own trades online from the comfort of their home or office. It opened a whole can of worms that our society was not prepared to handle.
We have the stock market in a long bull cycle, the tech revolution is charging ahead in full force, the Fed was lowering rates to prepare for Y2k and ignoring the massive growth statistics the economy was producing and now the every day Joe was armed with the ability to start trading their own accounts. Not to mention, they all had equity in their homes, 401(k)'s were starting to really mushroom and all the ingredients were there for a massive rise in the stock market.
I remember getting calls from people that knew nothing about balance sheets, cash flow, EBITDA, or what the company even did. Seriously! A typical phone call would be a lady calling with a dog barking in the background and CNBC blaring in the background giving me her account number and verification information so fast that I could barely type the data into the computer fast enough. She would proceed to yell "I want to buy 1000 shares of VXYZ stock at market!" I would retort "Ma'am, VXYZ isn't a valid ticker symbol. Do you know the name of the company you want to purchase so I can find the ticker symbol?" She would respond...."No... I don't know the name of the company but I just saw the ticker go across the screen on CNBC." I then chuckled and said "You want to purchase the shares of a company that you don't even know the name of?"
This was the eye of the perfect storm. I didn't know it at the time... but I was right in the middle of the most historical era of the stock market of all time. It may never be matched. Yes... there will be booms and busts as there always are in history.... but this was the perfect storm. Everything was sailing along on all cylinders and everyone wanted to be a part of this.
As the market charged upward and onward in February of 2000, the Schwab system was completely overwhelmed. The mainframes from IBM to handle the Internet traffic from Schwab.com could not be built fast enough to support the amount of people using the website. So when I would get to work in the morning... the first thing I would check is if the site had gone down yet. And when it did go down... it was complete chaos. The calls on hold would go from 17 to well over 300. Viewing customer accounts became impossible. I could no longer verify account balances, account numbers, or even if I was talking to the correct client. All trade orders would be placed on a paper ticket and held on my desk until the system came back up.
I once had a doctor call in to place 9 separate orders to buy and sell different tech stocks. I took the orders on the paper ticket and told the doctor "When the system comes back up you won't see these orders on you account. Do not duplicate them!" I then call the trading desk to place the orders manually because the dollar amount was too large to hold onto. A few minutes later the system comes back up and I check the doctor's account. Sure enough, he had duplicated the orders. I call him up to tell him to do nothing while I try to fix it. After working with the trading desk we realize that all of his stocks had moved in the opposite direction by $30 to $50 per share. The trader I was talking to asked me if the doctor knew this was an $800,000 oops? I nearly threw up and it wasn't even my money. I hope he wasn't in the middle of surgery!
The market was so volatile and everyone and their brother was all in. It was the biggest money grab of all time. Everyone looked smart because every stock that had 4 symbols (meaning it was listed on the NASDAQ) was going up... especially if the name of the company had dot com at the end of it. CNBC had even given a new phrase to the tech industry called "The New Economy." They were referring to the PC/Internet revolution. CNBC even built celebrities such as Cramer, Kudlow, Maria Bartiromo, Henry Blodget, Mary Meeker, Abby Joseph Cohen. People like Mark Cuban made their wealth during this run. It was a juggernaut.
But all good things come to an end. And did it come to an end! Just as epic as the run up... the downfall was even faster and more furious. Tom Costello would stand in front of the Nasdaq leaderboard on CNBC as if he were standing in front of a burning building. It was like he was watching the entire world's wealth just disappear. The tone in his voice changed to somber and he looked like he wanted to just put a sheet over the screen of red ticker symbols as if there was too much carnage to show live on TV. It was the end of something so perfect... so epic. But that is just it.... for it to be so epic it had to be too good to be true. Something was too perfect and unable to replicate. It will be remembered for the next 100 years and beyond just like the Great Depression. There will always be more booms and busts. Money will flow into different asset classes and over inflate them. But it will never replicate the perfect storm that was 1999/2000!
Bernanke's Hidden Inflation
After being called a dove in the Senate Committee meeting today, Ben Bernanke claimed his inflation record is one of the best postwar records of any Fed chairman. I thought I would take the time to break down the CPI and then try to look at what inflation really is. When Ben Bernanke says his inflation record is the best, he is referring to the Consumer Price Index or CPI. Here is the breakdown of the CPI...
41.4% Housing
17.4% Food & Beverage
17% Transport
6.9% Medical Care
6.9% Other
6% Apparel
4.4% Entertainment
***TAXES ARE NOT INCLUDED***
Common sense says that during the first part of the decade, housing was pushing the overall CPI numbers higher and everything else was tame... flat perhaps. But the last 6 years have seen significant decline in housing. In fact, the Schiller Index reported today that housing prices are still 29% lower than they were in 2006. With housing taking up the bulk of the index weighting... it is clear that housing prices being low have kept the CPI number low for the past several years as the Fed continues to print money.
The Consumer Price Index is supposed to measure the average outflow of money from any consumer's wallet. It is supposed to measure how much it costs to live on a monthly basis. The breakdown makes sense, but by excluding taxes... you miss out on the area where the money printing will eventually catch up. At some point we will have to pay for the Trillions in dollars printed over the past few years to keep our economy running. So if Bernanke is trying to steer the economy from short term pain while manage the CPI numbers along the way.... he has performed brilliantly. Almost like a CEO that has a pile of stock options and wants to inflate the revenues short term.... push expenses out to future obligations.... and make the stock price go up so that he or she can walk away smelling like a rose only to leave the mess for someone else to clean up.
Bernanke has absorbed all of our prior exuberance into future obligations that will have to be paid off through higher taxes. He took the problems from banks, automakers, insurance giants, and over spending by the government and buried it deep into the future. All the while claiming that the CPI record is great! He then goes on to say that now is not the time to curb spending. We can deal with the problem later when things get better. How they will get better he doesn't know.... just hoping that someone else can fix it later. Or let someone else take the blame. Thanks Ben! Keep kicking the can down the road!
41.4% Housing
17.4% Food & Beverage
17% Transport
6.9% Medical Care
6.9% Other
6% Apparel
4.4% Entertainment
***TAXES ARE NOT INCLUDED***
Common sense says that during the first part of the decade, housing was pushing the overall CPI numbers higher and everything else was tame... flat perhaps. But the last 6 years have seen significant decline in housing. In fact, the Schiller Index reported today that housing prices are still 29% lower than they were in 2006. With housing taking up the bulk of the index weighting... it is clear that housing prices being low have kept the CPI number low for the past several years as the Fed continues to print money.
The Consumer Price Index is supposed to measure the average outflow of money from any consumer's wallet. It is supposed to measure how much it costs to live on a monthly basis. The breakdown makes sense, but by excluding taxes... you miss out on the area where the money printing will eventually catch up. At some point we will have to pay for the Trillions in dollars printed over the past few years to keep our economy running. So if Bernanke is trying to steer the economy from short term pain while manage the CPI numbers along the way.... he has performed brilliantly. Almost like a CEO that has a pile of stock options and wants to inflate the revenues short term.... push expenses out to future obligations.... and make the stock price go up so that he or she can walk away smelling like a rose only to leave the mess for someone else to clean up.
Bernanke has absorbed all of our prior exuberance into future obligations that will have to be paid off through higher taxes. He took the problems from banks, automakers, insurance giants, and over spending by the government and buried it deep into the future. All the while claiming that the CPI record is great! He then goes on to say that now is not the time to curb spending. We can deal with the problem later when things get better. How they will get better he doesn't know.... just hoping that someone else can fix it later. Or let someone else take the blame. Thanks Ben! Keep kicking the can down the road!
Wednesday, February 20, 2013
Icahn vs. Ackman
In recent weeks, Bill Ackman has shorted the stock of Herbalife stock which means he is betting that the price of stock will go down and that he will benefit from this position. His hypothesis is that Herbalife is an illegal multi marketing scheme and with a spotlight on the company (that he has imposed), their operation will be shut down completely. The interesting part of this story is that Carl Icahn has taken a completely opposite position in the same company and in effect betting against Bill Ackman.
What is interesting is that Bill Ackman's position does nothing to create capital or enhance the company's profits. The same can be said for Carl Icahn. It doesn't even appear that either of these investors have looked at the balance sheet or care about the balance sheet. All they care about is the stock price of Herbalife. This battle is nothing more than a high stakes poker game between two competitors with deep pockets. It's like watching two enemies sitting at the final table with substantial chip stacks ready to go to war. Sure there are a few variables such as the Federal Trade Commission, company performance, and investment decisions from the crowd. Carl has a hot hand right now with his recent performance returns in his portfolio. You have to believe that Ackman is seething when laying in bed at night thinking about how Icahn may have foiled his plan.
I wonder if there is a bookie out there taking bets on who wins this battle. It seems that Icahn has the upper hand in this one. Capital requirements and stock movement aside, Ackman may not be able to hang on to his shorts. Stock loans for shorting are not unlimited in shares and length of time. Ackman may have to cover his position whether he likes it or not. I'm leaning toward Icahn winning this bet. Let's see where the chips fall!
What is interesting is that Bill Ackman's position does nothing to create capital or enhance the company's profits. The same can be said for Carl Icahn. It doesn't even appear that either of these investors have looked at the balance sheet or care about the balance sheet. All they care about is the stock price of Herbalife. This battle is nothing more than a high stakes poker game between two competitors with deep pockets. It's like watching two enemies sitting at the final table with substantial chip stacks ready to go to war. Sure there are a few variables such as the Federal Trade Commission, company performance, and investment decisions from the crowd. Carl has a hot hand right now with his recent performance returns in his portfolio. You have to believe that Ackman is seething when laying in bed at night thinking about how Icahn may have foiled his plan.
I wonder if there is a bookie out there taking bets on who wins this battle. It seems that Icahn has the upper hand in this one. Capital requirements and stock movement aside, Ackman may not be able to hang on to his shorts. Stock loans for shorting are not unlimited in shares and length of time. Ackman may have to cover his position whether he likes it or not. I'm leaning toward Icahn winning this bet. Let's see where the chips fall!
Friday, February 15, 2013
Monsanto's Patent Fight
As the world's human population continues to increase, food supplies will become more difficult to sustain. We can not alternate the number of planting seasons in a year, the number of rainy days, the amount of fertile land... but we can introduce technology and innovation to the food supply. We know that technology and innovation brought us the scientifically engineered McRibb at McDonald's, but Monsanto's technology brings us scientifically engineered seeds for soybean, corn and sugar cane among others. Their seeds are resilient from weed killer and pesticides, have a better yield, and are more weather resistant. In essence, the DNA of the seeds are altered to be a bigger, better, healthier generation.
Recently, a 75 year old farmer from Indiana named Vernon Bowman decided to pay Monsanto for 1 year's worth of seeds only to harvest the crop for more seeds to use for future crops. This strategy allows Vernon to pay Monsanto for only 1 year of seeds and bypass them for every year going forward. Monsanto is crying foul because this cuts into their profits. They obviously created this technology so that farmers purchase their seeds every year for planting. This is an interesting patent case. Pharmaceutical companies usually are allowed several years of dominance with a new drug before generic drugs are allowed to undercut the price.
The case of Monsanto vs. Bowman is clearly a David vs. Goliath case but will have far reaching consequences. On one side you have the farmer that is trying to make a buck on his crop. On the other side you have a company that wants to be rewarded for their science, technology, research and development. Without this innovation, the world may be a lesser place. It could be argued that Monsanto's innovation is necessary for mankind and the world will be a better place if they are rewarded. Attached is the original article... http://www.cnbc.com/id/100464458.
Recently, a 75 year old farmer from Indiana named Vernon Bowman decided to pay Monsanto for 1 year's worth of seeds only to harvest the crop for more seeds to use for future crops. This strategy allows Vernon to pay Monsanto for only 1 year of seeds and bypass them for every year going forward. Monsanto is crying foul because this cuts into their profits. They obviously created this technology so that farmers purchase their seeds every year for planting. This is an interesting patent case. Pharmaceutical companies usually are allowed several years of dominance with a new drug before generic drugs are allowed to undercut the price.
The case of Monsanto vs. Bowman is clearly a David vs. Goliath case but will have far reaching consequences. On one side you have the farmer that is trying to make a buck on his crop. On the other side you have a company that wants to be rewarded for their science, technology, research and development. Without this innovation, the world may be a lesser place. It could be argued that Monsanto's innovation is necessary for mankind and the world will be a better place if they are rewarded. Attached is the original article... http://www.cnbc.com/id/100464458.
Thursday, February 14, 2013
Student Loans... The Silent Catastrophe
Laura Silva Laughlin wrote "Welcome to SubPrime University" today. In a nutshell, high default rates, incorrect accounting at the government level, no systemic risk, burden transfers to taxpayer. It has become the American way to sign a few pieces of paper to obtain instant gratification whether that be a student loan, new car, a home, or a credit card. The 2008 disaster was centered around lending standards for housing. Hindsight is 20/20 for everyone but it is clear that most people look back at what led to the 2008 Great Recession and say "What were we thinking?" It seems like common sense in hindsight.
But the student loan problem is different. The problem is hidden within the Country's budget. It can be swept under the rug along with several other wasteful spending items. It won't cause any public company to face the brink of destruction and gain significant media attention. It will simply stay under the overall deficit spending umbrella. Deborah Lucas says in the article that it is a $56 Billion miscalculation to the Government's overall deficit calculations. The problem is that our system is set up to handle problems in a reactionary approach. We only look to fix things when their it is too late or after a major catastrophe. Are we too weak to be proactive and get ahead of these problems. Maybe I am cynical because you rarely hear about crises averted. Here is the link to the blog...http://finance.fortune.cnn.com/2013/02/14/subprime-student-loans/
But the student loan problem is different. The problem is hidden within the Country's budget. It can be swept under the rug along with several other wasteful spending items. It won't cause any public company to face the brink of destruction and gain significant media attention. It will simply stay under the overall deficit spending umbrella. Deborah Lucas says in the article that it is a $56 Billion miscalculation to the Government's overall deficit calculations. The problem is that our system is set up to handle problems in a reactionary approach. We only look to fix things when their it is too late or after a major catastrophe. Are we too weak to be proactive and get ahead of these problems. Maybe I am cynical because you rarely hear about crises averted. Here is the link to the blog...http://finance.fortune.cnn.com/2013/02/14/subprime-student-loans/
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