The famous bond king, Bill Gross, once told a very interesting story about his early experience as a lender (creditor). He was visiting a company in San Francisco and noted the contemporary decor and building. The other enterprise he was considering holed up in a small, plain building with very few extra furnishings. The leadership of the former was smooth and polished and in an industry believed to be on the cusp of a large expansionary phase. The management of the latter was experienced and tested but in a stagnant industry. The loan was for $25 million dollars. Gross made the decision to lend to the first candidate rather than the second. He tells the story as an explanation as to why he keeps a picture of the famous banker, J.P. Morgan on his wall. Morgan's prime rule in lending was to evaluate the applicants character before extending credit. Three years later, the loan went bad because of fraud, while the business which was turned down proceeded to prosper. We want character, not characters, when we lend, and it is the moral of this little story, my friends, which we should never forget.
With this idea in mind, let us turn to the never ending saga which is the Greek and Euroland credit extension. The Greeks bought themselves another four months of time to extend and refinance their credit arrangements with the ECB. If ever there was a case to be made that never has been so much attention been paid to something with so little substance, this is it. The Greeks, based on J.P. Morgan's old definition, are, shall we say, a bit lacking in the characteristics of a worthy borrower. Capacity. Collateral. Capital. Conditions. Character.
The latter is most important, and when the borrower wants to ease conditions on repayment and extend more money to its not so hard working citizens, um, well, uh, as the polite loan officers of many banks say, maybe another time. However, with the ECB under thumb of Germany, they worked something out. Good for the Greeks and we will see you in a few months. Lovely.
Elsewhere in the markets last week,Wal-Mart Stores Inc (NYSE:WMT) reported an expected number and actually gave its employees a raise for the first time in thirty years. Now they make $9.01 per hour versus $9.00. Mr. Buffett disclosed he sold all of his position in Exxon (NYSE:XOM) and was a buyer of John Deere. It seems owning the equipment on the farm is more appealing than the fluid which runs the machinery. Beg to differ on that one Warren, but time will tell. The food chain Noodles & C (NASDAQ:NDLS) reported a quarter which was, ahem, soggy, and the stock got slaughtered, down almost 30%. Intuit (NASDAQ:INTU.O) showed tax time is always profitable as it reported a better than expected revenue number. The payoll and tax preparation group is trying to rebound from self inflected wounds regarding TurboTax. Apple Inc (NASDAQ:AAPL) will release it's long awaited watch next month and reports are saying they expect a run of nearly 5 million units. There have also been rumors of an I-car as well, along with the thought they might buy Tesla (NASDAQ:TSLA). The only I phrase which could be given to that possibility would be I-diotic.
Take a look at the following chart as I think it is instructive. It comes from this weeks edition of Barron's:
There has been much made of the NASDAQ Composite approach to 5,000 and how it compares to 2000. In addition, there is plenty of speculation that equity markets are in a bubble. Certainly, rock bottom interest rates all over the globe have, to put it kindly, helped the valuations of financial assets in every country (other than Russia and Venezuela). Still, if you take into consideration the lessons from J.P. Morgan about capacity, capital, and of course, character, it seems pretty certain the leading companies in the Nasdaq would be more worthy of a loan than some sovereign nations, like, well, uh, never mind.
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