Archive for August, 2012

  • Morning News: August 29, 2012
    , August 29th, 2012 at 7:34 am

    Draghi Hits Back at German Criticism of ECB Bond Plan

    Spain, Italy Yields Hit 2-Week Highs on New Issue, Catalonia

    AgBank Sees Stern Challenges Ahead

    Hungary Tests Investors With Rate Cut as Recession Deepens

    What Downturn? Bank Profits Hit $34.5 Billion

    Home Prices Jump In 20 Major U.S. Cities

    Consumer Confidence in U.S. Declines by Most Since October

    Occupy Sets Wall Street Tie-Up as Protesters Face Burnout

    Daikin Buys Goodman For $3.8 Billion, Gains Access To North America

    U.S. Sets Higher Fuel Efficiency Standards

    Ford Breaks Ground On New Plant In Eastern China

    GM To Invest $1 Billion In Russia Within 5 Years

    Lexmark’s Inkjet Exit Symptomatic Of Industry

    Unplugged or Checked Out?

    Stone Street: Book Review: “Bailout” by Neil Barofsky, or: Why I’ll Never Work in Washington D.C.

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  • Morning News: August 28, 2012
    , August 28th, 2012 at 7:54 am

    Spain Says Recession Deepening, GDP Shrinks 0.4%

    German at European Central Bank at Odds With Country’s Policy Makers

    ECB Said to Urge Weaker Basel Liquidity Rule on Crisis Risks

    A Youthful Populace Helps Make the Philippines an Economic Bright Spot in Asia

    Occupy Hong Kong Holdouts Defy Order to Leave Despite Effort by HSBC

    Greece Plans “Special Economic Zones” To Boost Growth

    Isaac Seen Making Release of U.S. Strategic Oil Likely

    Apple Seeks Ban on Sales of Eight Samsung Phones in U.S.

    IBM Taps Into Talent With Kenexa Buy

    Struggling AOL Defies Gravity Again

    Ford’s European Legacy Losing to Hyundai’s Newcomer Edge

    Ford Readies Lincoln Launch In China By 2014

    New York Bank Merger May Be Too Good To Be True

    Credit Writedowns: Profit Incentives, Disruptive Technology, and Reducing Health Care Costs

    Cullen Roche: John Bogle’s 10 Rules of Investing

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  • Harris Raises Dividend
    , August 27th, 2012 at 10:52 am

    More good news for our Buy List this morning. Harris ($HRS) just announced a 12% dividend increase. The quarterly dividend is rising from 33 to 37 cents per share. Going by Friday’s close, the stock yields 3.18%.

  • Hudson City to Merge With M&T Bank
    , August 27th, 2012 at 8:37 am

    One of our Buy List stocks is getting married! Hudson City ($HCBK) has decided to merge with M&T Bank ($MTB). Investors can get cash or stock worth 0.08403 of an MTB share. Based on Friday’s close, that comes to $7.2156 per share. Hudson City closed Friday at $6.44 per share.

    My advice is to take the MTB shares, and that’s how I’ll adjust the Buy List.

    Here’s the press release:

    Hudson City Bancorp, Inc. (HCBK) (“Hudson City”) and M&T Bank Corporation (MTB) (“M&T”) announced today that they have entered into a definitive agreement under which Hudson City will merge into a subsidiary of M&T, expanding the premier community banking franchise in the eastern United States.

    Under terms of the agreement, each Hudson City share will receive consideration valued at 0.08403 of an M&T share in the form of either M&T stock or cash, based upon the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). Based on the closing price of M&T stock on August 24, 2012, the transaction is valued at approximately $3.7 billion. The transaction is expected to be immediately accretive to the combined company’s capital ratios, capital generation and tangible book value per share, as well as its GAAP and operating earnings per share.

    “This merger creates tremendous opportunities to build on the successes that each company has achieved individually in its own markets,” said Hudson City Chairman and CEO, Ronald E. Hermance, Jr. “Hudson City recently embarked on a diversification of our product lines and our balance sheet. This transaction accelerates that transformation. As we combine Hudson City’s attractive retail network with M&T’s full service commercial banking suite, our stakeholders will participate in the growth of one of the nation’s strongest and most successful banking franchises.”

    “M&T, which was established in 1856, and Hudson City, founded in 1868, have been serving their customers and communities for generations, and we look forward to building on that long history and tradition together in the future,” said Robert G. Wilmers, M&T Chairman and CEO.

    M&T will acquire Hudson City’s network of 135 branch offices, which are located in New Jersey (97 branches), downstate New York (29 branches) and Fairfield County, Connecticut (9 branches). M&T’s existing branch network is adjacent to Hudson City’s franchise, with very little overlap. The combined network of 870 branches will stretch from Connecticut to Virginia.

    M&T expects to gain approximately $25 billion in deposits and $28 billion in loans from the merger (before acquisition accounting adjustments), giving M&T the fourth largest deposit share in New Jersey.

    “To the customers and communities now served by Hudson City, M&T brings a wider array of banking products and services,” continued Wilmers. “As a thrift, Hudson City focused primarily on deposits and mortgages. M&T will build on Hudson City’s loyal customer base to create a comprehensive community banking franchise that provides a full range of checking and savings accounts, debit and credit cards, home equity loans and other lending options, plus small business and commercial banking services and our premier wealth management and corporate trust solutions through Wilmington Trust.”

    Headquartered in Buffalo, N.Y., M&T has $80.8 billion in assets. Hudson City, based in Paramus, N.J., currently has $43.6 billion in assets. After the merger is completed, M&T expects to repay approximately $13 billion of Hudson City’s long-term borrowings by liquidating its comparably sized investment portfolio. M&T’s pro forma balance sheet will have then increased by approximately $28 billion.

    The merger has been approved by the boards of directors of each company, and is subject to certain conditions, including regulatory approvals and approval by M&T’s and Hudson City’s common shareholders. After the transaction is completed, Mr. Hermance will be appointed to the boards of directors of M&T and its principal banking subsidiary, M&T Bank.

    J.P. Morgan acted as financial adviser to Hudson City and rendered a fairness opinion in connection with the transaction, and Sullivan & Cromwell LLP acted as its legal adviser. Evercore Partners rendered a fairness opinion to M&T in connection with the transaction, and Wachtell, Lipton, Rosen & Katz acted as its legal adviser.

    M&T is a financial holding company headquartered in Buffalo, New York. M&T’s principal banking subsidiary, M&T Bank, operates banking offices in New York, Pennsylvania, Maryland, Virginia, West Virginia, Delaware and the District of Columbia. Trust-related services are provided by M&T’s Wilmington Trust-affiliated companies and by M&T Bank.

    Hudson City Bancorp, Inc. maintains its corporate offices in Paramus, New Jersey. Hudson City Savings Bank, a well-established community financial institution serving its customers since 1868, is the largest thrift institution headquartered in New Jersey. Hudson City Savings Bank currently operates a total of 135 branch offices in the New York metropolitan and surrounding areas.

  • Morning News: August 27, 2012
    , August 27th, 2012 at 7:32 am

    German Business Confidence Falls

    Merkel Reins In Greek Exit Talk in Euro’s Decisive Phase

    German, French Finance Ministries To Coordinate Euro Zone Proposals

    Wen Targets Confidence as China Risks Weakest Growth in 13 Years

    China Approves Ford, Mazda, Changan To Split JV In Two: Ford CEO

    Gold Hits 4-1/2 Month High On Fed Stimulus Hopes

    Jackson Hole May Disappoint Investors Primed for Stimulus

    Apple Triumphs Over Samsung In Landmark Patent Case

    Nokia to Microsoft Seen Benefiting From Possible Samsung Ban

    Hertz and Dollar Thrifty Announce a Merger Deal

    BHP Sells Australian Uranium Deposit to Cameco for $430 Million

    Times Co. Sells for $300 Million

    Tiffany & Co Lowers Sales, Profit Views

    Joshua Brown: Save Yor Money, It Won’t Work

    Jeff Miller: Weighing the Week Ahead: Hopes Too High for Jackson Hole?

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  • CWS Market Review – August 24, 2012
    , August 24th, 2012 at 6:31 am

    The Great Summer Snoozefest continues. Volatility is low, and trading volume is moribund. Don’t worry, though, friends. Things will get a lot more exciting once all the traders and hedge-fund big shots get back from the Hamptons and Martha’s Vineyard after Labor Day.

    In this week’s CWS Market Review, I’ll tell you why the S&P 500 may be due for a short-term pullback. Not a biggie, but perhaps a short rest is in order. I’ll also highlight another good earnings report from Medtronic ($MDT). And I’ll tell you why the latest reports of imminent Fed stimulus are way off base. Plus, we have an upcoming earnings report from Jos. A. Bank Clothiers ($JOSB). (Sadly, I’m not expecting much from them.)

    Expect a Modest Pull-Back over the Next Few Weeks

    On Friday and Monday, the S&P 500 came oh-so-close to finishing the day at a fresh post-Crash high. But it was not to be. Then on Tuesday, the index got as high as 1,426.68 before we gave back much of our gains. Still, even this uptick in volatility is kid’s stuff compared with the rollercoaster we were on last August. The market has had a pretty good run this summer. Going back to early June, the stock market has been on a definite upwards sawtooth rally (see the chart below).

    As I’ve described in recent issues of CWS Market Review, the underlying currents of the rally have changed. At first, the market was very defensive as we saw high-yielding stocks like Reynolds American ($RAI) and Johnson & Johnson ($JNJ) lead the charge. Lately, however, the market has adopted a more aggressive posture as stocks like JPMorgan Chase ($JPM) have marched higher.

    I suspect—though I’m not yet fully convinced—that this is due to the market’s newfound belief that the economy is doing better. Or at least, that it’s doing horribly at a slower pace than before. Some of the recent economic reports, like those for industrial production and retail sales, have been pretty good. Notice how stocks like Walmart ($WMT) and Bed Bath & Beyond ($BBBY) have done fairly well.

    I’ve also been impressed by a pickup in the housing market. Home prices just had their biggest jump in over six years. I should explain that traditionally the housing market has been a major catalyst for the economy to get back on its feet. The fear this time around is that with the massive overbuilding, any recovery would be hollow since it wouldn’t be aided by the housing market. That may be changing. The weak spot in the economy is still the jobs market, but initial jobless claims are holding below 400,000. We’ll know more when the next jobs report comes on September 7th.

    The problem right now is that the market has charged higher without much resistance. Over the next few weeks, Wall Street will face its greatest enemy—uncertainty. Not only is there an election coming, but there are still unresolved issues in Europe, plus the domestic earnings outlook isn’t quite so rosy. That leads me to believe that stocks will probably go sideways for a bit or may even lose some ground. But I think any pullback will be a prelude to a strong year-end rally.

    The most important fact facing investors is that stocks are cheap and bonds are pricey. Analysts’ estimates for next year have stopped falling. If they’re right, that means the S&P 500 is currently going for just over 12 times earnings. That’s pretty stiff competition for a 10-year Treasury, which is up to 1.67%.

    Ignore the QE3 Nonsense

    Sometimes Wall Street can be such a drama queen. On Wednesday, traders freaked out over the “news” that the minutes from the Federal Reserve’s last meeting hinted that more stimulus was imminent. The gold market was especially emotional. Here’s the line that everyone latched on to:

    Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

    I hate to break it to them, but that sentence doesn’t mean much. Read by itself, it sounds far more impressive than it is. This is the type of boilerplate language that’s always included in Fed minutes. Read the whole thing, and you’ll see what I’m talking about.

    The Fed’s minutes are jam-packed with indefinite pronouns (many, several, some). The reason is simple—they’re debating the economy, and people have differing views. And even given these differing views, there are different opinions about what to do next. It’s very easy for “many” to feel that Action A would “likely be warranted” assuming event B becomes a reality. Big whoop. That’s a far cry from promising that a large-scale asset-purchase program is on the way.

    If the Fed is ready to act, then they would be far more decisive than they are at the moment. On Thursday, James Bullard, the head of the St. Louis Fed, said that even modest growth of 2% would be enough for the Fed to keep its powder dry. That may be unpleasant for some people to hear, but it sounds right to me.

    The minutes make it clear that at least one member (most certainly Richmond’s Jeffrey Lacker) is strongly opposed. There may be others. I don’t see how the Fed can implement a program so soon before an election, and with divisions within the Federal Open Market Committee. Bottom line: There’s no QE3 on the way.

    Medtronic Is a Buy up to $44

    Now let’s turn to our Buy List. On Tuesday, Medtronic ($MDT) reported quarterly earnings of 85 cents per share. That was in line with Wall Street’s forecast, though I was expecting a little more. The important news is that the company is sticking with its full-year earnings forecast of $3.62 to $3.70 per share.

    The good news is that sales of Medtronic’s coronary and vascular devices and structural heart products all improved. The downside is that sales of pacemakers and defibrillators fell. For the quarter, Medtronic’s sales rose 1.6% to $4.01 billion. I thought it was interesting that MDT’s earnings-per-share figure got a 3% boost thanks to fewer shares outstanding. That’s a pleasant exception to the normal corporate action of diluting shares via executive compensation. Notice how well-run companies do even the little things better.

    On CNBC, the CEO said that he was pleased by the performance of Medtronic’s new products. Even though the overall market isn’t growing very much, the company has been able to gain market share. That’s important to note. On Wednesday, shares of MDT touched a new 52-week high. Remember that the company bumped up its quarterly dividend by 7% in June to 26 cents per share. That’s a sign of confidence. At Thursday’s closing price, the stock yields 2.58%. Medtronic is a very solid buy whenever the shares are below $44.

    My Mistake with Jos. A. Bank Clothiers

    We have an earnings report due soon from Jos. A. Bank Clothiers ($JOSB). I don’t know the precise date just yet, but for the last few years, the company has reported on the Wednesday before Labor Day, so I’m assuming next Wednesday, August 29th will be the day this year.

    With JOSB, I have to confess that I made a mistake. I should not have kept it on this year’s Buy List. I try to be very up front with you about why we do what we do, and it’s important to realize when you’ve made a mistake. For many new investors, the biggest mistake they make is their refusal to admit an earlier and often smaller mistake.

    Three months ago, JOSB had a terrible earnings report—they missed by nine cents per share. Revenue dropped by more than 4%, and the key metric, same-store sales, dropped by 1%. Ugh! The company had warned us that the quarter would be weak, but those numbers are quite poor. JOSB did say that last quarter, the fiscal second, was off to a good start. We’ll see.

    For the second quarter, Wall Street expects earnings of 73 cents per share. That’s one penny below last year. I don’t have a precise estimate for you, but I’m afraid Wall Street might be too high. I’ll note in JOSB’s favor that the stock isn’t unreasonably priced at $41, but that’s because it’s down from $54 in March. My apologies, but this is why we keep a well-diversified Buy List. I’m keeping my buy price at $48.

    Some Buy-List Bargains

    I want to highlight a few stocks on our Buy List that look especially good right now. I’ve been impressed by the recent rally in Oracle ($ORCL). Look for another strong earnings report next month. I also like Ford ($F). I don’t see how the stock can go for less than $10, but it is. JPMorgan Chase ($JPM) has rallied, but it’s still going for a good price. Lastly, CA Technologies ($CA) has quietly settled to a good price. The stock also yields a cool 3.88%. Not bad.

    That’s all for now. Next week is the week before Labor Day, so I don’t expect to see much action. I’ll be curious to see if the government revises the Q2 GDP report higher on Wednesday. If not, it will give traders something to freak out about. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: August 24, 2012
    , August 24th, 2012 at 6:09 am

    Merkel Seeks to Keep Greece on Path in Hollande Talks

    BHP Says Committed To $20 Billion Australian Port Project

    China Confronts Mounting Piles of Unsold Goods

    Gold Bulls Strongest in Nine Months as Hoard Builds

    Money Funds Test Geithner, Bernanke as Schapiro Defeated

    Jobless Claims Up Slightly

    Swap Margins, New York Fed, SEC-Money Funds

    Citadel Urges SEC to Accept Nasdaq Settlement on Facebook

    Apple Counts on iPhone Being Too Cool for U.S. Import Ban

    G.M. Has High Hopes for New, Smaller Cadillac

    Kodak to Sell Imaging Units as Patent Auction Continues

    Roger Nusbaum: The Jumbo Shrimp of Permanent Portfolios

    Stone Street: Is Japan Becoming the U.S.?

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  • So the Vietnamese Are Now Better At Enforcing the Rules of Capitalism than We Are
    , August 23rd, 2012 at 10:39 am

    Whenever I’m at a dinner party and the subject of the public-education system in the U.S. comes up, inevitably the conversation turns to America’s consistently dismal performance on international standardized tests in math, reading and the rest. When asked what I think would be a challenging yet still doable goal for our nation’s schools to shoot for, I smile and say, “Well, some day, I’d like for us to be in the same league with Estonia.”

    I don’t think I’m asking for the moon. I mean, hey, I’m not hoping to compete with, say, Lithuania. Let alone a colossus like Singapore. After all, America’s educational system is still developing.

    As it turns out, in the area of market capitalism, too, the U.S. could stand to learn a good deal from other countries—specifically, from one of the last four Communist nations left on earth.

    Vietnam is a small country. Market-wise, it has a way to go. Yet to all appearances, the Vietnamese have arrived at some innovative new approaches for dealing with corruption and monetary malfeasance. In Vietnam, if someone does something bad, especially something bad that involves other people’s money, they arrest the offender. Afterwards they proceed to investigate and prosecute that person, regardless of his or her business clout, political ties or potential ability to undermine other financial firms by means of the tentacles they’ve insinuated into crevices in the system.

    Exhibit A: On Sunday, the Vietnamese Ministry of Police arrested Ngyuen Duc Kien, the 48-year-old business mogul who founded Vietnam’s Asia Commercial Bank (ACB), one of the country’s top lending institutions. The charges are as yet unspecified; the tight-lipped arresting officers have stated only that Kien was involved in “illegal business” with three private firms.

    Kien, though, would appear to have fingers in many different pies in the banquet that, up until very recently, was his country’s developing economy. In addition to being a major shareholder in several Vietnamese banks, he is also the chairman of both the Hanoi Football Club and the V-League, a professional soccer association. He also has close ties to Vietnam’s prime minister, Nguyen Tan Dung, who himself is under suspicion of financial Lehmanism. In 2010, Kien resigned from ACB’s board of directors; the bank’s current vice-president issued a statement online two days ago distancing himself from the disgraced tycoon’s misbehavior, calling the indiscretions a “personal matter” that would not affect his company’s operations.

    Kien’s fall comes in the wake of a long financial ride, for both himself and Vietnam. The country boasted one of the fastest-growing Asian economies in the first years of the new millennium, with annual GDP growth cruising along at 7% until the 2008 financial crisis. At this point, the government, hoping to avoid going down with the ship of unbridled Western capitalism, overstimulated the economy, causing inflation to skyrocket to 23% one year ago. The Viet Fed then took away the punchbowl. Construction sites around Hanoi fell silent as scores of major projects failed. At present, the central bank is easing up on the credit bit, hoping to restore a modicum of tranquility to an overheated system.

    Needless to say, Kien’s arrest has hit Hanoi’s stock exchange hard; the HNX was down more than 5% on Tuesday, the biggest drop in over four years. ACB’s share price fell first 7% on Monday, then 6.6% on Tuesday. (The maximum daily drop allowed by the regulation-rife Vietnamese government is 7%.) All this is on top of the knot of problems in which Vietnam is already entangled: the country has more bad debt than any other Southeast Asian nation, largely because its bank officers customarily make loans not on the basis of the financial soundness of the projects under consideration, but as a result of cronyism and connections.

    The pattern here is eerily familiar. Relaxation of traditional economic restraints. A runaway stock market. Shenanigans at the top by the entitled rich. A sharp crash. But the Vietnamese seem to have maintained their moral clarity about one thing: if predators jeopardize the system through their misdeeds, they have to pay the price.

    It wouldn’t the first time Hanoi has understood something Washington hasn’t.

    America fell into recession in 2008. Four years and no high-level arrests later, many of us are still wondering about what has happened to our country’s ethical foundation. What has happened to America that the Communists are getting capitalism right, but we’re not?

    As police carted Kien away from his Hanoi mansion, a neighbor, Tran Trung Thanh, 33, expressed concern:

    “People around here felt very surprised,” he said. “We thought that he’s working in the banking system, so he must be doing clean business.”

  • Big Profits in Little-Followed Companies: Tootsie Roll Industries
    , August 23rd, 2012 at 9:53 am

    One of the mistakes a lot of new investors make is that they assume they need to invest in some revolutionary technology. They think they need to find some outfit that’s inventing the 18th dimension or planning to set up colonies on Pluto.

    That’s not the case at all.

    Those opportunities do exist like Apple and Google, but they’re very rare. Even Apple was dead money for years, and Google hasn’t done much over the past few years. Instead, investors ought to focus on companies that consistently churn out the profits. If you look around you realize that there’s money to be made everywhere. In fact, it is being made everywhere.

    Just because a company seems dull doesn’t mean it’s not worth investors’ attention. Many times, the dull ones are the best. The key to business success is actually quite simple; keep your costs down, be wary of debt, take care of your customers. All the numbers and ratios I refer to are merely reflections of how well a company is keeping faithful to these basic concepts.

    I was reminded of this as I read Ben Kesling’s profile of Tootsie Roll Industries ($TR) in the Wall Street Journal. Who would think that the little candy-maker has been enormously profitable? The company has raised its dividend every year since 1966, and the stock is up 100-fold since 1980.

    But Tootsie Roll is in a rather unusual position right now. The firm is run by an elderly couple, Melvin and Ellen Gordon, and they’ve become incredibly secretive. Kelsing writes:

    The 116-year-old company, run by one of America’s oldest CEOs, has become increasingly secretive over the years, severing nearly all of its connections to the outside world. Tootsie Roll shuns journalists, refuses to hold quarterly earnings calls, and issues crookedly-scanned PDFs for its earnings releases. The last securities industry analyst to maintain coverage of the company stopped last year because it was too hard to get information.

    “I think the only way you can get a tour is by jumping over the fence and sneaking in,” said the last analyst to attempt the task, Elliott Schlang of Cleveland firm Great Lakes Review.

    Tootsie’s profit margins have come under pressure over the past few years, and the company desperately needs a shake-up. Unfortunately, there’s no clear succession plan. In recent years, large confectioners have snapped up smaller ones, but Tootsie has insisted on remaining by itself.

    There’s clearly a lot of untapped potential in Tootsie. My concern is that I have no idea if anyone can try to unleash that anytime soon.

  • Morning News: August 23, 2012
    , August 23rd, 2012 at 8:05 am

    Fed Signals Readiness to Ease Without U.S. Growth Pickup

    German Finance Minister Says Giving Greece More Time Will Not Solve Its Problems

    Euro-Zone Business Activity Points to Recession

    Marubeni’s $5.6 Billion Gavilon Deal Hits Delay

    Manufacturing in China Slows Further

    Gold Rises For Seventh Day After Fed Stimulus Surprise

    Facebook Wins Antitrust Approval for Instagram Purchase

    Facebook Director’s Quick $1 Billion Share Sale Lacks Precedent

    Weak Sales and a Large Write-Down Give H.P. a Loss

    Hormel Foods 3rd-Quarter Net Rises 13% on Strong Spam, Turkey Sales

    Qantas Cancels 787 Order After Posting Annual Net Loss

    Steep Profits Drop Adds To ZTE Woes

    Diageo Still in Hunt for Jose Cuervo

    Credit Writedowns: The Fed, The Interest Income Channel And Net Interest Margins

    Howard Lindzon: Peter Thiel is a Genius…You are Just a Taxpayer!

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