Archive for August, 2005

  • Arizona Funds Might Belong to Bayou
    , August 31st, 2005 at 11:17 pm

    More leads in the case of the Bayou hedge fund. Investigators have located $101 million in Arizona that might belong to Bayou. It’s hard to say because no one exactly knows. The hedge partners aren’t talking and their lawyer just quit. Gretchen Morgenson has more.

  • Yum! Brands
    , August 31st, 2005 at 11:03 pm

    The Economist has an article about Yum! Brands, the fast food restaurant that’s as successful as it is unknown.

    China might seem an exotic market for an American fast-food firm, but it is a logical one. Yum!’s core business is not really making food, but feeding people, and China is where the people are. Yum! gives them what they appear to want, repackaging it often enough to keep it interesting. Yum! is, in its way, as plain and simple as a huge company could be. Its key values are persistence, ingenuity and good humour. It is living proof that in the food industry, as in the newspaper business, you will never go bust by under-estimating the public taste. But you have to do it cheaply, efficiently and on a very large scale.

  • Hurricane Katrina
    , August 31st, 2005 at 10:58 pm

    The damage from Hurricane Katrina is simply overwhelming. Communities on the Gulf Coast have been wiped out. Thousands of people have been evacuated, and no one can say when power will be restored. Insurance companies estimate the losses at $26 billion.

    The mayor of New Orleans said thousands might be dead, and President Bush said it could take years to recover. Just by looking at today’s big winners (ExxonMobil, Home Depot), you could tell what was on Wall Street’s mind. Yesterday, gasoline futures soared 20%, the biggest move ever. And today, all 29 energy stocks in the S&P 500 went up.

    At times like this, it seems almost callous to talk about investments and financial markets. But markets are the medium of investment, and that’s what will help rebuild the Gulf Coast.

    The investing landscape has changed. Before, I was convinced that long-term interest rates were headed higher. No longer. In the last two days, long-term rates have plunged. The yield on the 10-year Treasury bond came within a hair of falling below 4% today. The Federal Reserve will probably raise interest rates one more time, but after that, the outlook is unclear.

    The economy had been strong. Up till now, consumers have been able to withstand higher energy prices. Could this simply be too much to bear? My initial feeling is to be optimistic. The S&P 500 held above 1,200 and saw a nice rally today. The market is still well above where it was in April and May. I’m still a bull, but Katrina’s reminds why it’s important to be conservative because risk is the event you never saw coming.

  • White House to Open Strategic Reserve
    , August 31st, 2005 at 8:50 am

    Today, the White House announced that it will open the Strategic Petroleum Reserve in order to cushion the oil market in the aftermath of Hurricane Katrina. I doubt this will have much of an impact outside of the very near term. For now, crude oil fell below $70 a barrel.

    The government also reported the economy grew by 3.3% for the second quarter, slightly below its original forecast of 3.4%. There will be one more update to this number at the end of September. I wouldn’t be surprised to see second-quarter growth revised higher.

    Economists that the economy will grow by 4.1% for this quarter but that’s before the impact of Katrina is taken into account.

  • The Onion: Google Announces Plan To Destroy All Information It Can’t Index
    , August 31st, 2005 at 7:21 am

    MOUNTAIN VIEW, CA—Executives at Google, the rapidly growing online-search company that promises to “organize the world’s information,” announced Monday the latest step in their expansion effort: a far-reaching plan to destroy all the information it is unable to index.
    “Our users want the world to be as simple, clean, and accessible as the Google home page itself,” said Google CEO Eric Schmidt at a press conference held in their corporate offices. “Soon, it will be.”
    The new project, dubbed Google Purge, will join such popular services as Google Images, Google News, and Google Maps, which catalogs the entire surface of the Earth using high-resolution satellites.
    As a part of Purge’s first phase, executives will destroy all copyrighted materials that cannot be searched by Google.
    “A year ago, Google offered to scan every book on the planet for its Google Print project. Now, they are promising to burn the rest,” John Battelle wrote in his widely read “Searchblog.” “Thanks to Google Purge, you’ll never have to worry that your search has missed some obscure book, because that book will no longer exist. And the same goes for movies, art, and music.”
    “Book burning is just the beginning,” said Google co-founder Larry Page. “This fall, we’ll unveil Google Sound, which will record and index all the noise on Earth. Is your baby sleeping soundly? Does your high-school sweetheart still talk about you? Google will have the answers.”
    Page added: “And thanks to Google Purge, anything our global microphone network can’t pick up will be silenced by noise-cancellation machines in low-Earth orbit.”
    As a part of Phase One operations, Google executives will permanently erase the hard drive of any computer that is not already indexed by the Google Desktop Search.
    “We believe that Google Desktop Search is the best way to unlock the information hidden on your hard drive,” Schmidt said. “If you haven’t given it a try, now’s the time. In one week, the deleting begins.”
    Although Google executives are keeping many details about Google Purge under wraps, some analysts speculate that the categories of information Google will eventually index or destroy include handwritten correspondence, buried fossils, and private thoughts and feelings.
    The company’s new directive may explain its recent acquisition of Celera Genomics, the company that mapped the human genome, and its buildup of a vast army of laser-equipped robots.
    “Google finally has what it needs to catalog the DNA of every organism on Earth,” said analyst Imran Kahn of J.P. Morgan Chase. “Of course, some people might not want their DNA indexed. Hence, the robot army. It’s crazy, it’s brilliant—typical Google.”
    Google’s robot army is rumored to include some 4 million cybernetic search-and-destroy units, each capable of capturing and scanning up to 100 humans per day. Said co-founder Sergey Brin: “The scanning will be relatively painless. Hey, it’s Google. It’ll be fun to be scanned by a Googlebot. But in the event people resist, the robots are programmed to liquify the brain.”
    Markets responded favorably to the announcement of Google Purge, with traders bidding up Google’s share price by $1.24, to $285.92, in late trading after the announcement. But some critics of the company have found cause for complaint.
    “This announcement is a red flag,” said Daniel Brandt, founder of “I certainly don’t want to accuse of them having bad intentions. But this campaign of destruction and genocide raises some potential privacy concerns.”
    Brandt also expressed reservations about the company’s new motto. Until yesterday’s news conference, the company’s unofficial slogan had been “Don’t be evil.” The slogan has now been expanded to “Don’t be evil, unless it’s necessary for the greater good.”
    Co-founders Page and Brin dismiss their critics.
    “A lot of companies are so worried about short-term reactions that they ignore the long view,” Page said. “Not us. Our team is focused on something more than just making money. At Google, we’re using technology to make dreams come true.”
    “Soon,” Brin added, “we’ll make dreams clickable, or destroy them forever.”

  • Citi Slickers
    , August 31st, 2005 at 6:17 am

    So many Citigroup execs are jumping ship, you’d think the bank was Hewlett-Packard. That’s not quite fair—the Hewlett-Packard employees are getting laid off. The Citigroup folks are voluntarily leaving en masse. Funny, I’d think it’d be a good joint to work for. Huge salary, nice office, no heavy lifting. Be that as it may, the top brass is rushing for the exits.

    The latest is Marjorie Magner, the consumer banking chief. She got nailed by a taxi in New York. While recovering, she decided what she wanted to do with her life and apparently it has little to do with being one of the most powerful women in world finance. Her unit (think credit cards) makes more money than Wal-Mart. What could be more powerful than that? Well, she’s considering a career in the entertainment industry (I’m not making this up). The stock sold off on the news. It’s kinda hard to analyze that one.

    Then there’s Robert Willumstead. Remember him. Me neither. Anyway, he was the guy Sandy Weill brought in to quiet down the “Sandy has no heir” choir. Well, Willumstead is out too. And by “out” I mean, “an office, car and driver until he finds a job.” Oh, and did I mention the $18 million? That too.

    Wall Street wants to know what’s going on. The answer is that Citigroup is being de-Sandyfied. All the negative karma is fleeing and taking its money with it. Ironically, when Weill chose Chuck Prince to be the new CEO, the Street thought it was because Sandy would still be in charge. He’d be the bank’s Dick Cheney to Chuck Prince’s George Bush. Few people thought that Prince would ever be king. But now Prince is in charge and he’s giving the bank an extreme makeover.

    Firstly, Citigroup needs to change its strategy of aggressive growth through mergers. Actually, that’s not a choice. The Federal Reserve put Citigroup on Double Secret Probation—no mergers until they’re clean. During the Sandy Years, Citigroup was the banker of choice to all the all future members of Cell Block D—Enron, Parmalat, WorldCom, Adelphia. I think they even did a few deals with Suge Knight. It’s all a little hard to remember.

    The big difference now is that Prince is a lawyer. His top priority is cleaning up Citigroup’s regulatory reputation as a bank of easy virtue. One of the moves he’s made is that he’s hired more lawyers. In fact, Willumstead complained of too many Indians in the head office. Magner also complained of micro-managing. Sandy used to let them do whatever they wanted.

    Perhaps the biggest surprise was when CNBC reported that Sandy was bolting as chairman of the board. The board told him that if he walked, he’d have to give up his lifetime perks. Sandy backed down.

    Today, Citigroup’s stock is barely above its 52-week low. The shares are down 17.3% since April 1, 2004.Obviously, the flattening yield curve hurts the bank, but Wall Street wants to see what Prince can do. I won’t go near this stock until it can prove its turned around.

  • Hope for Dell
    , August 30th, 2005 at 11:15 pm

    Daniel Gross has more on the recent anti-Dell noises. I still think it’s a thesis looking for a story.

    Despite this rash of bad news, it’s too early to write either the Dell-is-doomed or Dell-is-back story. Dell’s business model isn’t broken, and it’s not fundamentally challenged. No, for every trend, there comes a time when you can no longer simply extrapolate the results of the past into the future. It happens to every great company and to every great brand. Dell’s stock still trades at a significant premium to the market. Investors are willing to pay far more for a dollar of Michael Dell’s earnings than they are for a dollar of the S&P 500’s earnings today because they think his will grow faster. To a degree, Dell has finally fallen victim to the same malaise that has affected the other gigantic stock stars of the 1990s: Wal-Mart, General Electric, Microsoft, and Citigroup. They have undergone ungainly transitions from supercharged growth to merely impressive growth. At 21, Dell has belatedly entered its awkward adolescence.

    That’s an important reminder, but I disagree. Dell is still able to deliver astonishing growth. The company’s sales growth rate has actually accelerated in the past few years (13.6% in 2002, 17.1% in 2003, 18.7% in 2004; although just l5.3% YTD).

    Here’s more on the falling prices in the PC industry.

  • Spitzer’s Settlement Two Years On
    , August 30th, 2005 at 12:04 pm

    Eliot Spitzer made quite a name for himself taking on Wall Street. Two years ago, he forced the biggest firms on Wall Street into a global settlement due to conflicts of interest between research and investment banking. The firms had to pay over $1.4 billion. The money was supposed to go to investor education, independent research and investors who were harmed. Instead, it’s turned into a money grab among competing federal and government agencies.

    Most of the $413 million that went to the states, based on population, went to help balance state budgets (or close big gaps). California had the largest share–$43 million. It put $40 million into its general fund and reserved $3 million for investor education. So far, it has spent $150,000 on a campaign to teach military personnel and their families how to avoid financial scam artists.

    Georgia. The state spent $4.3 million on public service announcements featuring Secretary of State Cathy Cox, who just so happens to be running for governor. The ads ran all over the state. Also, the independent research isn’t working out well either.

  • More on Bayou
    , August 30th, 2005 at 10:14 am

    The New York Times has more on the fall the Bayou hedge fund.

    “It’s not logical to me,” said Leon Meyers, an investor in Bayou who is still baffled by the indications of possible fraud at the firm. “If this was a Ponzi scheme, why would the firm go through a voluntary liquidation, when all this would come to light?”

    The Wall Street Journal has more on Bayou’s clients. Also, The Stamford Advocate has a good article on the investigation.

  • The Collateralized Debt Obligations Market
    , August 30th, 2005 at 9:53 am

    The market for collateralized debt obligations, or CDOs, is the fastest-growing business on Wall Street.

    Banks create CDOs by bundling together assets ranging from mortgages to loans to high-yield bonds, with income from those assets used to repay investors. The securities are divided into pieces, or tranches, that can offer yields as high as 14 percent, said Nestor Dominguez, 48, co-head of Citigroup’s North American CDO group in New York. Average investment-grade bonds yield 5.1 percent and junk bonds yield 7.5 percent, according to Merrill.
    “The high yields have created great demand for CDOs from hedge fund managers and arbitrageurs,” said Thomas Eggenschwiler, 47, co-head of fixed-income research at Aladdin Capital Management LLC in Stamford, Connecticut, which oversees about $3.5 billion and buys the securities.
    CDO fees usually equal about 1.5 percent to 1.75 percent of the size of a deal, bankers who arrange such sales say. That’s more than triple the average 0.4 percent that banks charge to sell investment-grade bonds and about the same as fees on junk bonds, traditionally the most lucrative, Bloomberg data show.

    Many CDOs are “synthetic,” meaning they’re backed by credit default swaps. Although Greenspan has spoken favorably of credit default swaps, the growth of this market has led to meeting to a meeting of top Wall Street firms next month at the New York Fed to discuss credit derivatives.