Week in Review Part II: Street Bytes

Stocks had their worst week of the year even with the biggest 2-day rally of 2012, as the Dow Jones lost 1.6% to 12849, while the S&P 500 lost 2% and Nasdaq 2.3%. Earnings start flooding the system in earnest the next two weeks. Friday, JPMorgan Chase and Wells Fargo beat their respective earnings estimates but the shares in both dropped because of rising expenses and concerns over the quality of the profits.

And a look at some 10-year return figures thru March 31, 2012.

Large-Cap Growth funds…3.71% annualized return
Small-Cap Growth…5.77%
S&P 500 Index Objective…3.58%
Intermediate Investment Grade Debt…5.31%
[Source: Lipper / Barron’s]

U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.27% 10-yr. 1.98% 30-yr. 3.13%

The inflation data for March was released. Producer prices were unchanged, but up 0.3% ex-food and energy. For the last 12 months the two figures are 2.8%, 2.9% on the core.

Consumer prices rose 0.3%, 0.2% ex-food and energy. And for the last 12 months the CPI is up 2.7%, 2.3% on core.
Rep. Paul Ryan (R-Wis.):

“Treasury Secretary Tim Geithner came to the House Budget Committee about a month ago and said to us: ‘We’re not suggesting we have a solution to the long-term fiscal problem. What we do know is, we don’t like yours.’

“This is the essence of failed leadership. Rather than put out a solution to this very clear and present danger to our country’s future, the president has decided to wait for the Republicans to offer their solution and then attack it.

“If you put a budget plan in place that does deal with the drivers of our debt, that will give us an immediate boost of growth today. The bond markets and businesses are looking to see if leadership is getting this situation under control so that they can take risks, so that they know they will have a certain future to be optimistic about. Until you have a plan like this in place, you can’t reap that kind of a growth dividend.” [New York Post]

VW’s sales in China rose 13% in the first quarter, with BMW’s up 41%. Mercedes-Benz reported a 24% sales increase on the mainland.

But, total vehicle sales in China fell 3.4% from a year earlier for the quarter (down 1.3% for passenger cars). Sales are still expected to rise this year.

Natural gas traded below $2 for the first time since January 2002. The warm weather in the first quarter kept usage low and in turn has led to record inventories as supplies continue to rise.

On the crude front, the International Energy Agency said tightness in the oil market is easing, but it’s still largely about Iran.

The Justice Department announced it was suing five major publishers and Apple on e-book price-fixing charges, and simultaneously settling with three of them, which is a big boon for Amazon, which then announced it was pushing prices down on e-books to as low as $9.99 for some big titles. The publishers and booksellers argue that the ultimate effect of the suit will be to enhance Amazon’s perceived monopoly even further, with Amazon already controlling 60% of the e-book market.

The government said the five plus Apple met secretly to set prices and then sought to hide their discussions.

HarperCollins, Hachette and Simon & Schuster settled, while Penguin, Macmillan and Apple vowed to fight the charges.

Facebook acquired photo-sharing app maker Instagram for $1 billion in cash in a move that, needless to say, had people buzzing, especially since Instagram has been around for about 18 months, and has all of 13 employees and no revenue, while founder Kevin Systrom just made an estimated $400 million. Facebook, with an estimated value of $100 billion, goes public next month. CEO Mark Zuckerberg promised Systrom that Instagram would be able to operate as an independent company. The two have known each other since 2004.

Among the many amazing parts to this story is the fact that last Friday, Instagram closed a $50 million funding round led by Sequoia Capital, which valued the company at $500 million, and then on Monday, Facebook acquired it for $1 billion.

Holman W. Jenkins, Jr. / Wall Street Journal

“Facebook obviously has learned one lesson of the Internet bubble. If you have a $100 billion market cap and no way to make money, find a way to spend it.

“We’re being mean. The $1 billion Mark Zuckerberg spent on Instagram is pocket change and the deal’s purpose wasn’t handwaving to convince investors he was finding a solution to Facebook’s profits challenge. He’s still trying to please users, God bless him, especially mobile users, who love Instagram to customize the look of photos they snap with their smartphones.

“It’s nice that Mr. Zuckerberg continues to be mostly interested in the happiness of his users, who number a gross 845 million. But how to make money should be the key focus for a company expecting to go public in May….

“Facebook is bursting at the firewalls with unmonetized information. Pathetic are the teensy, inconspicuous promotions for bridal supplies when a female user changes her relationship status to ‘engaged.’ Pitiful are the barely noticeable come-ons for Ted Nugent concert tickets that apparently materialize because a ‘friend’ insists on posting a new music video every day….

“Not exploiting user information is the worst kind of exploitation of all. Facebook would earn no profits. It would gradually fade in significance. Users would lose all the benefit of a powerful, growing Facebook. They’d also lose the untapped, incipient value of the immensely valuable personal data Facebook has been collecting.”

In another $1 billion deal, Microsoft bought the majority of AOL’s patents for $1.06 billion, covering intellectual property rights to more than 800 innovations. AOL is retaining 300 patents which Microsoft will be granted licensing rights to. AOL shares rose 40% on the news.

Google reported earnings that beat expectations, though revenues were in line, but it was a move by billionaire founders Larry Page and Sergey Brin that drew the ire of shareholders. In announcing a two-for-one stock split, Page and Brin said a new class of non-voting shares would be created that ensures the two do not lose power. Coupled with chairman Eric Schmidt’s stake, the three will control about 2/3s of the voting rights.

All shareholders will receive one additional non-voting “C Class” share that will be quoted on Nasdaq. Google tanked $28 on Friday.

Yahoo’s new CEO Scott Thompson finally unveiled his plans to restructure the company around three core groups: “consumer, regions and technology.”

The goal, according to Thompson, is to “bring some of our best product designers and engineers much, much closer to consumer needs and demands.” Prior to the move, Yahoo had announced plans to dismiss 14% of its workforce.

Best Buy CEO Brian Dunn’s resignation was a result of a probe into his “personal conduct,” according to the company, though no details have been released. The retailer said the issues are not linked to Best Buy’s operations or financial controls. G. Mike Mikan, a board member who was named interim CEO, told employees Dunn’s departure was “a surprise.”

Shares in Nokia hit a 15-year low after reporting its worst quarter for sales since 2006. Finland’s flagship company is having a major issue with its Lumia 900 handset that stops it connecting to the Internet – which isn’t good, especially considering the phone was designed for the American market and launched just days ago with the slogan: “An amazingly fast way to connect.”

Nokia also admitted it lost money on every phone it sold in the first quarter and warned it did not expect an improvement in margins in the second quarter.

Sony announced it is shedding 10,000 jobs as part of a major reorganization. The cuts will be made over the next 12 months. Earlier, Sony forecast a record annual loss of $6.4 billion for the past financial year, double a previous estimate and due largely to an additional tax expense.

Sony’s television business has lost money for the past eight years, despite selling 20 million sets per annum, so the company is looking to cut costs in the business by 60% by March 2014.

A survey by the New York Times of CEO compensation finds that among the 100 top-paid execs, overall pay rose 2% in 2011 from 2010, with the median CEO in this group taking home $14.4 million – compared with the average annual American salary of $45,230.

Apple CEO Tim Cook was paid a salary of just $900,000 in 2011, but was granted a one-time stock award that at the end of last week (April 6) was valued at roughly $634 million.

Credit Suisse estimates that multi-employer pension plans, managed by trade unions on behalf of members working for various employers, are now just 52% funded. The most recent data by the Pension Benefit Guaranty Corporation, which insures U.S. pension programs, puts it at 48%. Both awful.

The New York Post’s Mark DeCambre reports that Goldman Sachs Chairman and CEO Lloyd Blankfein and President Gary Cohn are not getting along as well as they have in the past, with Cohn frustrated that he hasn’t taken over the top slot yet. One Goldman insider said, “Gary thinks it’s his time [to lead].” Cohn is 51, Blankfein 57, with the latter telling other Wall Street executives he wants to remain CEO for another few years – or as long as it takes to restore the investment bank’s reputation.

So imagine the battle taking place between the two spouses.

“When is Lloyd going to give up the top spot to Gary?”

“Not any time soon, honey. My Lloyd will step down when he’s ready to. Deal with it.”

[Lloyd received a pay cut for 2011 to $12 million, which also didn’t please Lady Blankfein.]

Separately, Goldman agreed to pay $22 million to settle regulatory charges alleging Goldman analysts had weekly “huddles” from 2006 to 2011 where they discussed confidential research on stocks with the firm’s traders. The analysts then passed on the ideas to selected clients, before it was published. This is but one example of why some of us despise Goldman, not because of the New York Times op-ed by the disgruntled former employee. It was July 2010 that Goldman reached a record $550 million settlement of the SEC’s fraud charges it misled buyers of mortgage-related investments.

This is bad. As the Wall Street Journal reports, the spread of white-nose syndrome among the bat population to Missouri and Alabama for the first time makes 19 states and four Canadian provinces, killing an estimated 5.5 million. The concern is that bats serve as nature’s pest-control and it could have a major impact on agriculture and the battle against crop-eating insects.

The federal government reached an agreement with 41 American Indian tribes to settle charges it mishandled money and natural resources managed on their behalf. The dispute is decades old.

The Interior Department oversees 50 million acres of land for federally recognized tribes and in the process handles leases for oil and gas production and timber harvesting, among other things.

If you ever wondered where stolen art ends up, try Serbia. A painting by Paul Cezanne, valued in excess of $100 million that had been stolen from a Swiss museum four years ago, was recovered in Belgrade. Other stolen works have been traced to an art theft ring in Serbia as well.

Update: Matt Lauer’s new contract with NBC’s “Today” pays him $25 million a year. The network desperately needed him to stay and has granted him a four-day work week and god knows how much vacation. Evidently, he also requested a new co-anchor as rumors swirl Ann Curry will be shunted to roving international correspondent. Savannah Guthrie is a possible replacement. Or, Meredith Vieira may return.

 “The Lion King” became Broadway’s all-time highest grossing show, replacing “The Phantom of the Opera.” Cumulative gross for ‘Lion’ is $853,846,062 as of Monday. ‘Phantom’ continues but its pace at the box office trails ‘Lion’. I did see where 40% of ‘Phantom’ tickets are sold to repeat customers, and 68% are women, according to music historian Cary Ginell. ‘Phantom’ also remains the longest-running show in Broadway history.

We note the passing of painter Thomas Kinkade, 54, the self-styled “Painter of Light” who made a fortune on his work, some $53 million alone between 1997-2005. Early in his career, Kinkade was selling his paintings in parking lots and once rode the rails with another artist, sketching landscapes. But he persevered. He was dismissed in some circles for “mass producing kitsch,” but I kind of liked some of it. Since his death last weekend, business has been booming.

Finally, on the portfolio front I had some bad news on my main China holding, but I don’t want to say anything more until the company issues a statement this coming week. I promise to tell an ugly story next time concerning this one.