Morning News: August 24, 2012
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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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Still Staying Away from Dell
Posted by Eddy Elfenbein on August 22nd, 2012 at 12:37 pm

I wish I could like Dell ($DELL) more than I do. The cheap price is tempting and I wouldn’t be surprised to see the shares rally from here. The problem for me is that by buying Dell here, I’m taking on more risk than I need to. One of my fundamental rules of investing is to never take risks that I don’t need to. Last month, I said I was staying away from Dell and that’s how I feel today.

Warren Buffett said, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” That’s my thought about Dell. The company just beat earnings by five cents per share. This is a good example of the quarterly earnings report not meaning much. The big news was that Dell said it expects earnings for the year of $1.70 per share which is down from the previous forecast of $2.13 per share they gave in February.

Earnings downgrades are like cockroaches: there are usually a few more for every one you see. Companies aren’t like athletes who may go into a slump or have an “off day.” If a company lowers its guidance by a lot, there’s probably a major reason why, and that reason isn’t easily fixed.

Dell, once the world’s top personal computer maker and a pioneer in computer supply chain management, is struggling to defend its market share against Asian rivals like Acer and Lenovo and consumers’ fast-growing adoption of tablets like Apple’s iPad in place of PCs.

Dell forecast that its revenue would slide 2 percent to 5 percent in its fiscal third quarter from the second, to $13.8 billion to $14.2 billion. Wall Street had been expecting third-quarter revenue of $14.85 billion.

It is predicting earnings of “at least” $1.70 a share for fiscal 2013, compared with a previous forecast for more than $2.13 a share.

“People had already expected them to take down numbers, but I think the level to which they are taking down numbers is pretty severe compared to expectations,” said Shannon Cross, an analyst at Cross Research.

Dell’s chief financial officer, Brian Gladden, said in an interview that the company had tempered its outlook for the fiscal third quarter partly because it expected distributors to hold off on buying new computers before the late October release of the latest version of Microsoft’s Windows operating system.

Using $1.70 or earnings compared to the new stock price of $11.50 makes Dell appears attractive. But I’m not convinced. I just don’t see much coming out of Dell in the way of growth. Until I’m convinced that Dell can increase its earnings at a stable rate, I don’t see much value in the shares.

The Beatles 50 Years Ago Today
Posted by Eddy Elfenbein on August 22nd, 2012 at 10:56 am

This is the first real video of the Beatles from 50 years ago today. Ringo Starr had just replaced Peter Best as drummer. You can even hear someone shout at the very end, “We want Pete!”

Morning News: August 22, 2012
Posted by Eddy Elfenbein on August 22nd, 2012 at 8:03 am

Asian Stocks Decline on Japan’s Trade Deficit, Greek Bailout

Pressures Intensify On Merkel

Spain Deficit Goals at Risk as Cuts Consensus Fades

China To Spend $372 Billion On Cutting Energy Use, Pollution

China Raises Rare-Earth Export Quota

RBS Probed Over Possible Iran Sanctions Violations

U.S. Companies Worry About Effect of Russia Joining W.T.O.

Dell Outlook Gloomy as PCs Slump

Sharp Rescue Needs Precision

Nokia’s $39 Phone Rebound Wins More Time for Comeback Bid

Apple Breaks A Record, Facebook Breaks Its Fall

Best Buy Net Sinks as Turmoil Builds

Strong Revenue Boosts Toll Brothers’ Net Profit

Jeff Carter: When Insiders Sell An IPO is it “Bad”?

Pragmatic Capitalism: No Recession Now, But When?

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Medtronic’s CEO on CNBC
Posted by Eddy Elfenbein on August 21st, 2012 at 2:43 pm

Here’s Omar Ishrak, CEO of Medtronic, on CNBC earlier today.

Medtronic Earns 85 Cents Per Share
Posted by Eddy Elfenbein on August 21st, 2012 at 11:36 am

Not much of a surprise from Medtronic ($MDT) this morning. The company reported fiscal Q1 earnings of 85 cents per share which matched Wall Street’s forecast. I was expecting a little more but I’m not at all disappointed by these results. Revenues were up 1.6% to $4.01 billion..

The world’s biggest medical device maker said sales of coronary and vascular devices and structural heart products all improved. Medtronic said revenue from implantable devices like pacemakers and defibrillators decreased, although it said U.S. sales of implantable defibrillators are holding steady.

Bone graft revenue decreased in the wake of safety concerns and a shareholder lawsuit, and revenue from diabetes and surgical technology and other devices increased.

The earnings-per-share figure got a boost thanks to 3% fewer shares outstanding.

Medtronic said revenue from coronary products increased 11 percent to $433 million. Sales of structural heart devices like artificial valves rose 2 percent to $280 million and endovascular revenue, which includes stents, increased 12 percent to $209 million.

Revenue from the company’s restorative therapy business, which makes surgical devices and products used to treat diabetes, nerve disorders, and other conditions rose 3 percent to $1.89 billion. Medtronic said most of its businesses reported better sales than a year ago, but sales of its Infuse bone graft shrank 19 percent to $141 million during the quarter.

In 2011, a medical journal said Medtronic understated the risks of Infuse and did not disclose payments to the authors of studies on the product. In March 2012, Medtronic agreed to pay $85 million to resolve a federal lawsuit brought by shareholders. The U.S. government closed an investigation into Infuse in May. The product contains a genetically engineered protein that can stimulate bone growth. It is approved for use in spinal, oral and dental graft procedures, and it was frequently used in neck surgeries and other procedures.

The most important news is that Medtronic is reaffirming its full-year earnings forecast of $3.62 to $3.70 per share. Earlier today, the shares got to a new 52-week high.

Apple’s Gained 1% a Week, On Average, for 10 Years
Posted by Eddy Elfenbein on August 21st, 2012 at 10:57 am

Shares of Apple ($AAPL) are up again today making the company not only the most valuable company in the world, but also the company valuable company that’s ever been.

A few days ago, I tweeted that Apple has gained an average of 1% a week for the last ten years. The key word here is on “average.”

Let’s check the math. On April 17, 2003, Apple closed at $13.12. Adjusted for splits, that comes to $6.56. Tomorrow will mark 488 weeks which is roughly nine years and four months.

Going by today’s high of $674.88, Apple is up over 102-fold since April 17, 2003. Compounded per week, that works out to 0.954%. That also doesn’t include the dividend which Apple recently instituted.