The company now sees revenue flat to up 3% sequentially; old guidance was for a range of down 2% to up 3%. Lattice continues to expect gross margin of 52%-54%. The company sees operating expenses for the quarter of $30.2 million, including $2.2 million of restructuring charges, compared to a previous forecast of $29.2 million, with $1.2 million of restructuring charges. The $1 million in additional charges reflect some additional office space consolidation in Silicon Valley, the company said.
The last post – which was incredibly difficult to write – received remarkably little comment – and almost no feedback. So I am going to close the modelling sequence early – and write a few posts about the politics of Fannie Mae and Freddie Mac as standalones. Almost all the proposals for “reform” seem to leave most of the credit risks with the government and give much benefit to Wall Street bankers. That includes the original proposals implicit when Paulson – the once King of Wall Street – put them into conservatorship. I will later expose those for the vacuous positions that they are. I want to write the politics sequence so you do not have to have closely read the modelling sequence – because I know these will appeal to different audiences.
But for now I will note that most the well-informed comment has indicated that I have underplayed the role that tax losses have played in putting Fannie and Freddie into the position they are. Certainty as to their future will enable them to write back the charges against tax assets they have taken. 18 months of profitability (which they will have) plus some certainty to the future will allow approximately 30 plus billion dollar write backs at both GSEs. That will leave the GSEs with positive net worth (and able to repay government loans) in time for the 2012 election. I will leave that to the politics sequence.
I said in the first post that I will close with a comment that was once left on my blog by “Bondinvestor”. This was the only comment I have ever censored because it stole my thunder… here it is… [with annotations in square brackets and blue colour]. I pleaded on the blog for Bondinvestor to contact me – but with not much luck. Bondinvestor summarises my arguments quite well – though I think the same applies to Fannie Mae – albeit with less force.
You should take a deeper look at FRE. it was a very well run company before the crisis - and not just on the portfolio side. [I was – well before Bondinvestor left this comment.]
Look at their credit statistics. the 90+ delinquencies are high relative to history, but far below the rest of the industry - as well as Fannie Mae. [I noted this in Part III.]
The tragedy at Freddie is that they purchased non-agency AAA MBS in an attempt to meet their housing sub-goals. [I noted in Part II that the losses came primarily from the Private Label Securities.] Their calculus was that the inherent subordination in the AAA's would protect them in a credit Armageddon. [Well we got credit Armageddon and the Private Label Securities business did cause huge losses for the GSEs.]
What is fascinating about FRE is that the jury is still out on what the actual realized losses in their non-agency book will be. The AAA private label pass throughs that the agencies bought were specially designed for them. The balances were all conforming; the pools had lower CA/FL concentration than the rest of the non-agency universe; and - most interestingly - the loans underlying the GSE's AAA's were segmented from the AAA's that were sold into the public market, though they shared the same subordinate tranches. what this means is that catastrophic losses in the Type II bonds do not necessarily imply catastrophic losses in the Type I bonds (the GSE-eligible AAA's). [Analysing this was the point of Part IX. They will incur losses – just nothing like as bad as they provided for.]
If you go look at remit reports, you'll see that the delinquencies underlying the agency-eligible bonds are much lower than the DQ's underlying the non-agency bonds. [Actually I have done so – and whilst the DQs are lower in the agency-eligible pools they are not much lower. The biggest advantage that the agency eligible pools have going for them is that they retain far more excess collateral against their delinquencies.]
Now, part of the problem is that the atrocious performance of the non-agency pools will eat up the subordinate tranches, thereby depriving the GSE-bonds of their fair share of the enhancement. [They have almost entirely done so in the series I analysed in Part IX] but, given the relative performance of the loans underlying the GSE bonds, it may not matter. [It will matter with respect to the series that I have looked at – but the excess protection in the agency-eligble pools means that the GSE losses will be under half the losses incurred by the AAA strips of the non-agency eligible pools – in many cases less than 15 percent of the normal AAA losses.]
Anyway, all this is a very long winded way of saying that the actual realized losses in Freddie's $150B portfolio of private label MBS may not approach anything like the huge mark they have taken on this book (and which destroyed their capital base in the early innings of the credit cycle). [Freddie thinks about 30 billion will reverse as described in Part IX – I think it will be less – but I am having a very sophisticated conversation with one reader who thinks it will be more – and provides modelling to prove his points… I think I could be twisted to agree with him – and will put up a technical post if we (jointly) ever get around to writing it…]
I know folks inside FRE who think that the "shadow equity" that comes back on the balance sheet as the PLS portfolio pays down is on the order of $70B. that is more than enough to retire the convertible preferred note the government took as part of the conservatorship. [I know no such folks. I worked this out on my own. But I think the shadow equity is closer to 50 billion – say 25 billion that will reverse on the private label securities and the other temporary impairment plus about 30 billion in tax losses but less the 10 billion or so more reserves I think they need to take over time on the traditional business.]
Now, none of this is to say the losses on the guaranty book won't be large. but the company discloses enough information to come up with a reasonable estimate of what they could be. You just have to look at the 06/07 vintage curves and make a judgment about how long it will take those books to season. the realized cumulative losses will most likely be somewhere between $30 and $50B. they already have a loan loss reserve of $22B. so they have some wood to chop, but it's not an egregious amount. [Well I did that modelling in Part VI. I agree with the numbers Bondinvestor comes up with – actually I think the end losses will be less.]
A much bigger issue for the company than the actual credit losses is the terms of the senior convertible preferred. If the coupon is 10% if paid in cash, and 12% if they take the PIK option. That's $5B a year after tax and it wipes out all of the normalized profits of the enterprise. it's a far more egregious rate than any of the other pieces of paper the government bought in the midst of the crisis, and it was put there by the bush admin to prevent the GSE's from organically rebuilding their capital bases. [Again I agree – the object of the conservatorship terms were to wipe Fannie and Freddie out – the takeover was political in execution. However the current income of Fannie and Freddie is way above trend – and this will not be a problem if the high revenue is sustained.]
FRE preferreds trade at 1-3 cents on the dollar. they are basically warrants on the ability of the company to one day retire the government note. with a payoff function of 100x, i think it's a speculation worth taking. [They trade higher now – but I was buying at these prices.]
In summary – working through my models I will be wrong if
(a) the running income halves
(b) the end losses are higher than I thought and
(c) the “temporary impairments” – particularly at Freddie Mac turn out to be “other than temporary”.
On those I am most insecure on the running income as I discussed in Part V – but the running income is already running far faster than I anticipated when originally buying these securities.
The GSE takeover will wind up costing government surprisingly little. I think it will wind up being profitable. The future of the GSEs is not determined by their insolvency. That I think, time will take care of. It is determined by politics.
I will do a political series later – and they will have a wider audience. Wall Street wants to carve the GSE business up for the benefit of Goldman Sachs et al. The Wall Street political lobby is very effective and the terms of the GSE conservatorship prevent the GSEs from lobbying on their own behalf – which means that unless we are careful the Wall Street lobby will get what Wall Street wants. But that is for future political debate – and the Obama administration has sensibly put off decisions as to the GSE future until next year – and ideally they will put it off until even later.
I hope I have achieved what I wanted to with this series – which is to stop the model-free GSE bashing that had become the popular line of thought of the press and the blogosphere. Later I hope to take on the vested self interest behind that GSE bashing – showing them (especially the Mortgage Bankers Association) for the egregious self-interested participants that they are.
I got into (yet another) one of those useless, interesting, unprovable debates on exactly where growth is go to come from.
I said there were several fields that were potentially big growers, but their best years were some time in the future.
It would be a good few years before we enjoyed another Cambrian explosion like we did in the 1990s. Recall the full build out of cellular, PCs, semiconductors, software, CPUs (286/386/486) — the explosion of internet websites, and data storage. These were enormous job creators.
Now? I can name 10 niches, most of which have future growth potential, but few that can expand into something truly substantial, rising to the size of any of the giant sectors above.
My top 10 list (in order of biggest near term potential):
1. Nano Technology (Think of the line “Plastics” in The Graduate).
2. Green (low carbon) Energy (generation)
3. Battery technology (storage)
4. Genomics/Stem Cell Research
5. Web 2.0/3.0 — smaller, niche companies using increased bandwidth
6. Robotics — the continued replacement of humans by machine, for both labor and judgement
7. Life extension Technologies (not disease cures, but actual extension technology)
8. Bio-Agriculture (GMF, etc.) Feeding 15 billion people will require some technological breakthroughs.
9. Atmospheric Engineering — modifying Earth’s biosphere to keep it hospitable to Humans in the face of an ice age or global warming;
10. Terra forming/Extra Planetary Colonization (uh-oh, time to go)
You will note that as you work your way down the list, these rapidly becoming highly specialized niches — not broad sectors like internet or semiconductors.
Where do you think the growth is going to come from over the next few decades?
NEW YORK (Reuters) - Yale University’s endowment fund shrank a more-than-expected 30 percent in the year ended June in the largest contraction in at least a decade, bogged down by illiquid assets that have yet to rebound in value.
The university expects to report later in September that the fund, the second largest among U.S. universities, fell to $16 billion as of June 30, 2009, according to a letter from Yale President Richard Levin and Yale Provost Peter Salovey to faculty and staff on Thursday.
“Only a small fraction of our endowment is invested in publicly traded securities, so the recent stock market rebound has not had a substantial effect on that number,” said the letter, which was obtained by Reuters.
“The bulk of our endowment remains invested in illiquid assets, which have not begun to recover their value,” it said.
Yale, located in New Haven Connecticut, will release final results later this month.
The fund totaled $22.9 billion on June 30, 2008, according to its most recent endowment report. In December, Yale had forecast that the the fund would fall to $17 billion by June.
Before last year, the fund posted double-digit gains over the preceding four years.
Yale will reduce payouts from the endowment by 6.7 percent this year and by an additional 13 percent in 2010-2011, according to the letter.
It will also slow the pace of faculty recruitment.
Yale’s endowment appears to be moving in line with other university endowment funds.
In January, the National Association of College and University Business Officers reported that while university endowments dipped by an average 3 percent in the 2008 fiscal year, they shrank 23 percent from July to November 2008.
In fiscal year 2008, the Yale fund reported a gain of 4.5 percent, or $1 billion.
(Reporting by Joe Rauch and Phil Wahba; Editing by Tim Dobbyn and Ted Kerr)
TOKYO (Reuters) - Japan’s Asahi Breweries (2502.T) is in talks to buy soft-drinks maker Orangina, competing with domestic rival Suntory Holdings in a $3.8 billion auction, the Financial Times said on Friday.
Private equity firms Blackstone (BX.N) and Lion Capital, which acquired Orangina in 2006, are considering an approach from Asahi after an exclusive negotiation period with Suntory expired in August, the paper said.
Asahi spokesman Jin Yoshioka denied that the company was or ever had been in talks on Orangina. Suntory was not immediately available for comment.
Japanese firms are keen for overseas growth, lending hope to buyout firms struggling to find exit routes for their investments. Blackstone and Lion Capital, which confirmed it was in talks with Suntory, paid $2.6 billion for Orangina three years ago. [ID:nN09358450]
A Suntory spokeswoman reiterated that it was in talks to buy Orangina but nothing had been decided. She declined to comment further.
Privately held Suntory, itself in talks to be sold to bigger rival Kirin Holdings (2503.T), is still favoured to buy Orangina, and a deal could be announced on Friday, the paper said.
The FT said Merrill Lynch was advising Suntory. (Reporting by Mayumi Negishi and Taiga Uranaka; Editing by Hugh Lawson)
Rue21, which operates 500 stores serving young adults in 43 states, according to a prospectus filed on Thursday with the U.S. Securities and Exchange Commission, said it would use some of the proceeds to pay down all or some of its debt, which totaled $29.2 million as of Aug. 1.
Rue21 plans to expand and estimated it could have more than 1,000 stores within five years, including 100 new stores it plans to open in 2010.
Rue21’s same-store sales rose 4.1 percent in the half-year ended Aug. 1, 2009, while overall sales rose 33.3 percent to $233.1 million, with net income of $8.3 million over the same period.
The submission of the prospectus comes on the heels of a spike in IPO filings by retailers, including those of the parent of health supplement chain Vitamin Shoppe and discount chain Dollar General Corp.
There has not been an IPO by a retail chain in the U.S. since beauty products chain Ulta Salon, Cosmetics & Fragrance Inc (ULTA.O) went public in October 2007 in a $153.7 million IPO, according to Thomson Reuters data.
Rue21 was originally founded in 1976 as a low cost specialty apparel retailer. As part of a turnaround earlier this decade, the chain sought bankruptcy protection in February 2002 and emerged within fifteen months with fewer stores.
The Warrendale, Pennsylvania-based company is owned by funds advised by private equity firm Apax Partners LLP and BNP Paribas North America Inc (BNPP.PA).
The IPO will be managed by Bank of America Merrill Lynch, Goldman Sachs & Co, and JPMorgan. (Reporting by Phil Wahba; Editing by Phil Berlowitz)
If you recall the the US government engineered the bankruptcy and restructuring of General Motors. Negotiations have dragged out for months and now, finally, GM will sell it Opel holdings to Magna and a Russian Consortium of state owned Sherbank and GAZ One component of the plan was for GM to sell off some of its assets to raise cash.
GM will still retain 35% ownership of Opel. Magna and Sherbank would each own 27.5% and Opel employees would hold 10%.Read | Permalink | Email this | Comments
Starting around 6:30pm Eastern and extending until around 7:30pm Eastern, about 25% of the people trying to connect to our website may have experienced problems. We tracked the issue down to an router at our ISP that was still trying to send network traffic through the Gigabit Fiber link that was disabled last night. That router has now been updated and things should be working again for everyone. We apologize if you were impacted by this issue.
With the exception of the problem mentioned above, things went fairly well today. We continue to appreciate everyone's patience as we keep working on fixing the problem with the faster Fiber link. Currently, there is no ETA for when that link will be restored.
Filed under: Stocks to BuyI'm reiterating my Buy rating for Capital One Financial (NYSE: COF), first recommended on May 7, 2009 at a price of $29.41. If you purchased COF then, you're up about 28%.
There's considerable risk with COF, due to the possibility of an increase in delinquencies and charge-offs if a double-dip recession occurs.Permalink | Email this | Comments
A study the Cass Business School conducted for Towers Perrin and reported widely (see, for example, Reuters’ report on 10 September 2009, ‘Deal Talk — Rallying stock markets help accelerate M&A plans’) showed that firms that do M&A deals are more likely to outperform their industry peers (and the market overall) than firms that have held back on doing acquisitions. This is consistent with an earlier study (released in June) that Towers Perrin sponsored and which focussed on the short-term market reaction to companies who were brave enough to do deals subsequent to the infamous Lehman bankruptcy weekend in September 2008. Both studies looked at all deals over $100 million done by public companies.
As reported in the above 10 September 2009 Reuters article: ‘Marco Boschetti, global head of M&A and restructuring at business consultancy firm Towers Perrin, said deals that closed in the second quarter of the year outperformed the market by 8.5 percent, compared to outperformance of 2 percent in the second quarter of 2008. “What this is saying is that there is a lot of value in deals at the moment and if you can afford to close a transaction you should go for it,” he said.’
This continues to confirm that the inflexion point in M&A activity may have been reached already, which I will write about shortly. Certainly if the word gets out that the market does reward firms that announce strategically defensible deals, even more deals should emerge from the planning stage to announcement and execution.
U.S. video game sector sales fell 16% from a year ago, the sixth straight year-over-year decline, according to research firm NPD Group. Hardware sales were down 25% and software sales fell 15%. Sales of accessories were actually up 2%.
Among the consoles, the Nintendo Wii sold 277,400 units, ahead of the Microsoft Xbox 360 at 215,400, Sony PS 3 at 210,000 and the PS2 at 105,900. Among handhelds, the Nintendo DS sold 552,900 units, while the Sony PSP sold 140,300 units.
NPD analyst Anita Frazier noted that all hardware systems other than the PS2 saw a sequential sales increase over the July quarter. The PS3 had the biggest gain, up 72% sequentially, follow a recent price cut.
Here’s a list of the top 10 selling games for the month:
- Madden NFL 10, Electronic Arts, for the Xbox 360, 928,000 units.
- Wii Sports Resort w/Wii Motion Plus, Nintendo, for the Wii, 754,000 units.
- Madden NFL 10, Electronic Arts, for the PS3, 665,000 units.
- Batman: Arkham Asylum, Square Enix, for the Xbox 360, 303,000 units.
- Batman: Arkham Asylum, Square Enix, for the PS3, 290,000 units.
- Madden NFL 10, Electronic Arts, for the PS2, 160,000 units.
- Dissidia: Final Fantasy, Square Enix, for the PSP, 130,000 units.
- Wii Fit, Nintendo, for the Wii, 128,000 units.
- Mario Kart w/wheel, Nintendo, for the Wii, 120,000 units.
- Fossil Fighters, Nintendo, for the DS, 92,000 units.
Tim Duy takes a look at recent data on international trade:
Trade Activity Up, But Rebalancing Stalled, by Tim Duy: I was somewhat distressed this morning when I realized that, with the absence of Brad Setser, I would have to do my own analysis of the trade data - data Brad taught me how to analyze over a decade ago. I may be a little rusty.
The good news in the data was the widely touted revival of global trade, an indication of economic healing. The bad news in the data was the return of an old enemy, a pattern of unbalanced trade. To be sure, I would not focus too intently on a single data point, but the July numbers raise the possibility that the external sector will weigh on US GDP growth in the third quarter. That, of course, is the price to be paid for attempting to revive growth via household spending as a portion of that spending flows overseas in the form of increased imports.
The trade deficit rose to $32 billion in July on the back of rising import growth that easily swamped export growth. Note to that higher oil prices were not the primary culprit; goods imports drove the trend:
The firming of the US economy is thus having the expected impact, as efforts to sustain consumer spending combined with stabilizing business investment plans have combined to drive import growth in the expected sectors - capital, consumer, and automotive goods. Similarly, with oil prices having little impact, real goods imports gained sharply, rising 5.3%:
Exports got a boost from reviving global growth, but, in contrast imports, real goods exports gained a smaller (although still respectable) 3.7%:
On net, the real goods deficit increased 8.5% compared to June to $38,811. Moreover, the July figure compares to a second quarter average of $38,500. If this trend continues, trade will likely be a net drag on growth, something of a disappointment for those looking for continued rebalancing to help support the US economy.
Again, a single data point does not make a trend. Indeed, it is a trend that should not return. Perhaps the US economy stumbles while the rest of the world remains strong, the long-awaiting decoupling. Moreover, the falling Dollar should help support rebalancing, driving export growth in excess of import growth. But perhaps with each new recession the structural nature of global imbalances becomes more entrenched as manufacturing capacity that is lost in the US during recessions is revived overseas, particularly China, thus explaining why durable goods manufacturing employment failed to recover from the 2001 recession and is not likely to recover after this recession. And clearly nondurable goods manufacturing is simply dying in the US, as employment is in virtual freefall with the advent of the strong Dollar policy. It may simply be that as the US emerges from the recession, sustained rebalancing cannot continue without a very significant depreciation of the Dollar that justifies the more rapid expansion of export and import-competing industries in the US, a depreciation that appears in excess of what Chinese policymakers are willing to tolerate (or other nations are willing to tolerate on their behalf). Or a more significant relative compression of US consumer spending than US policymakers are willing to endure.
And, of course, if rebalancing does not resume while labor markets remain anemic, expect trade tensions with China to continue to rise. Never a dull moment on the international policy front.
Theres damning with faint praise. And then theres damning with too much praise.
How else to interpret todays press release from Morgan Stanley announcing that current Co-President James Gorman will take over from John Mack as CEO come the New Year?
Right up top in the headline of the press release was this dead give away: Announcement Follows Thorough Succession Planning Process and Achievement of Key Company Milestones.
The cynical reader will of course immediately question two things: a) whether the fix was in on the succession from the day Gorman joined Morgan Stanley back in 2006 and b) whether any company milestones were in fact achieved.
I guess Morgan Stanley didnt go belly up like Bear Stearns and Lehman, so CEO Mack can at least claim some achievement. Whether thats a milestone is open to dispute.
Its exhausting reading these succession press releases. They just go on and on. Morgan Stanleys runs almost 1400 words. An average column of mine runs only about 600 words and sometimes that even seems too long.
Hey, at least, most of my columns arent this dull. Invaluable leadership Tremendous progress Relentless execution Premier franchises Executing winning strategies Deliver tremendous value for our clients. I suppose there exists a corporate cliché that wasnt put to work in writing this press release, although just now I cant think of one.
Not that I blame whoever drafted it. Theres no easy or fully honest way to craft some of the harsh truths contained in Macks succession.
The reality is that under Mack, a former trader, Morgan Stanley made some very bad trading decisions both before and after the Wall Street collapse. These mistakes cost Morgan Stanley shareholders billions of dollars and made it almost impossible for Morgan Stanley to ever catch up with Goldman Sachs, its traditional rival.
Thats in fact why James Gorman is the new CEO. No doubt that hes smart and talented. But he is also the architect of Morgan Stanleys current strategy one which looks more like the old Merrill Lynch (Gormans alma mater) than Goldman Sachs.
The press release mentions Gormans game changing transaction that will play a key role in the Firms future growth and profitability. Thats a reference to the Morgan Stanley Smith Barney wealth management joint venture. Its Gormans baby and for better or worse, its now Morgan Stanleys future.
Time will tell if he can deliver. Not that Mack is going anywhere soon. The Firm is grateful that we will continue to benefit from Johns insights and experience in his critical role as Chairman.
Here’s a quiz on your expertise in the teen fashion retail sector. Can you name the private equity-owned chain that filed for an IPO today? It has more than 500 stores and revenue of $233.1 million for the first half of the year, and according to its Web site, denim is on sale.
Here’s an easier hint. The company says “our merchandise is designed to appeal to 11 to 17 year olds who aspire to be ‘21’ and adults who want to look and feel ‘21’.”
Rue21 Inc., which counts Apax Partners as a 63.4% stockholder, has filed to sell up to $125 million of stock. This will provide relief for retail-IPO fans who are strict believers in the Three’s A Trend law, providing that the filings by Vitamin Shoppe and Dollar General aren’t mere anomalies.
Apax’s investment can be traced back to 1998, when Saunders Karp & Megrue invested in Rue21. (Saunders Karp later merged with Apax.) The retailer, previously known as Pennsylvania Fashions, filed for bankruptcy in 2002. When it emerged in 2003, with 170 stores, Saunders Karp was the majority owner.
The company says in its filing with the Securities and Exchange Commission that its strengths include a “fashion meets value” proposition with low prices, and a focus on small-to-medium markets, defined as communities with populations of 25,000 to 200,000. This helps reduce competition with other apparel retailers. Rue21 believes “there is a significant opportunity to expand our store base from 505 locations as of August 1, 2009 to more than 1,000 stores within five years. In fiscal year 2009, we plan to open 85 new stores.”
For the 26 weeks ended Aug. 1, net income rose to $8.3 million from $5.2 million, and same-store sales were up 4.1% for the period.
BNP Paribas North America Inc. is the company’s second largest shareholder, with a 23.6% stake.