Week in Review Part II: Street Bytes

Stocks had another miserable week with the Dow Jones losing 4.8% to close at 11231, down exactly 1,000 points in four weeks and now down 3.0% for the year. The S&P 500 lost 4.7%, while Nasdaq declined 5.1%, its fourth-straight weekly loss. Both the S&P and Nasdaq are now down 8% in 2011. For very selfish reasons I wish the year ended now. I’d be spot on with my yearend forecast of the major averages finishing down 5% to 7%. Plus the CRB Index of 19 commodities is at 305.45, down from the 12/31/10 level of 332.80, so my prediction there is good.

But five weeks is an eternity these days and I wouldn’t be the least bit surprised to see a big rally before yearend. No one said it has to be a rational one.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.27% 10-yr. 1.96% 30-yr. 2.92%

The debate over deficit reduction didn’t shake the Treasury market as Europe’s turmoil led to a further flight to quality, at least the U.S. being perceived as the best kid on a sleazy planet. Back on Aug. 5, when S&P downgraded the U.S. credit rating, the benchmark 10-year Treasury was at 2.56%. Today it sits at 1.96%, after hitting 1.67% on Sept. 23, and 1.87% on Nov. 23.

--The Federal Reserve is putting the 31 largest banks (with assets over $50 billion) through another stress test, this one where GDP would decline 6.9% based on a euro recession, with 13% unemployment and locusts; the point being to measure capital levels in times of crisis.

I don’t know if a stress test is necessary, I would just raise bank capital requirements above where they are now, almost to draconian levels, to kill any thought of excessive risk-taking and return them to what they were supposed to be doing in the first place. Lend to businesses and homeowners (with a mandatory 20% down). Boring stuff. I love to be bored.

--Speaking of housing, October existing home sales were a little better than expected, but the median home price was down to $162,500. The July 2006 peak was $230,300. The Feb. 2011 low was $156,000.

--Tokyo’s Nikkei index is at its worst level since the March 2009 lows.

--It’s staggering to think that AT&T will have to take $4 billion in charges in the year’s final quarter as a result of its seemingly failed $39 billion acquisition of T-Mobile USA, as the Federal Communications Commission announced it would seek a trial-like hearing on the merger, one that would cause countless delays, which then led AT&T and T-Mobile parent Deutsche Telekom AG to pull their application for FCC approval in order to focus on the Justice Department, which is also seeking to block the acquisition.

The two agencies say that a merger of the No. 2 and No. 4 wireless carriers would damage competition. AT&T needs approval from both to proceed.

The thing is, AT&T agreed to a breakup fee of $3 billion with Deutsche Telekom for the latter to go along with the deal and to turn over valuable spectrum if the deal wasn’t approved (estimated cost another $1 billion). Obviously, AT&T didn’t anticipate such fierce opposition from the feds.

--An estimated 200,000 jobs have been lost this year in the financial services sector, worse than the 174,000 in 2009, as compiled by Bloomberg. This is more than just Wall Street’s traditional cyclical moves; over-hiring at the top, slashing too much at the bottom. It is indeed a permanent shrinking of the industry. An economist at Moody’s predicted the Street wouldn’t regain these jobs until 2023.

So tell your kids that are in high school and about to go off to college to focus on engineering.

--The U.K.’s High Pay Commission has recommended that top executives be restricted to a basic salary plus a single performance element instead of three or four that are commonplace in order to halt the spiraling bonuses that are “corrosive” to the economy “and threaten to create the type of inequalities last seen in the Victorian era,” as the Financial Times put it.

For example, John Varley, Barclay’s top executive in 2010, earned 169 times the earnings of an average British worker, whereas in 1980 Barclays’ top pay was just 13 times the average.

At BP, “the boss earned 63 times the company’s average, while the 1980 multiple was 16.5.” [Brian Groom/FT]

--According to ComScore, online holiday shopping was up by 14% over last year in the first 20 days of November. The growth is owed to record numbers prowling the Internet on enhanced smartphones and tablet computers, even when they are in bricks-and-mortar stores. ComScore is expecting online sales to rise 15% for both November and December. In 2010, ecommerce grew by 12% over the previous year.

--What a mess. Kaja Whitehouse / New York Post:

“Folks who got stuck with bum checks from Jon Corzine’s defunct brokerage firm MF Global are getting bounced a second time.
“This time, it’s by the MF Global trustee’s claims process….

“The (process) allows those with accounts to recover 60 percent of the $5.5 billion in MF’s accounts frozen after it emerged that $1.2 billion* was missing from accounts that should have been segregated, and therefore safe.

“But folks who cashed out of their MF brokerage accounts leading up to the Wall Street firm’s Halloween collapse – and received checks from MF for their account balance, only to see them bounce – are not addressed by the claims process, The Post has learned.

“Potentially hundreds of people with an estimated $50 million in claims are in this limbo.”

*It was discovered this week that the shortfall in customer funds had doubled from previous estimates. Jon Corzine is slated to testify on Dec. 15 before the House Financial Services Subcommittee on Oversight and Investigations, which might be the first time we finally see the guy, he having disappeared from sight. Maybe he’s in Bimini?

--Further evidence of contagion from Europe as Australian banking officials say the sovereign debt crisis in the former is threatening to become a full-fledged credit crisis impacting the Aussie housing market as banks stop lending to each other. Roughly a third of the funding for Australian mortgages comes from overseas bond markets; so that’s a third of the big banks’ sources of capital potentially drying up, which will lead to price drops, as reported by the Sydney Morning Herald.

--And further evidence of Ireland’s housing crash. The Irish Independent used the example of a property in Dublin, where a father bought his ideal family home for 65,000 euro. The same three-bedroom house was going for 380,000 when he first looked at it. The previous owner couldn’t sell it during this time and finally went to auction.

The number of mortgages in arrears more than three months in Ireland has grown to 63,000 as of Sept. 2011 from 26,200 at the end of Sept. 2009. An Irish Central Bank study also found that four out of 10 households in mortgage arrears are actually behind by a year or more. As I told you from my last trip to Ireland in October, the anecdotal evidence I picked up is beyond scary. In all honesty, it’s a topic I think of every day, knowing some of the folks in deep trouble.

[By the way, Canada is clamoring for Irish workers to fill needs in industries such as fisheries, mining, and oil and gas. Some 10,000 Irish have relocated to Canada in just the past two years. In turn, the Canadian government is increasing the quotas on work visas for the Irish.]

--Sticking to the real estate theme, the Wall Street Journal reported that in my native New Jersey, “100,000 homeowners are dealing with foreclosures that are stalled in court and another 48,000 are way behind on mortgage payments.” This is going to be a drag on home prices for years to come, but, at the same time, these are people actually ‘saving’ a ton of money and the impact on consumer spending cannot be discounted.

Heck, I know a guy who hasn’t made a mortgage payment in at least 18 months and he’s spending at least as much as he always did. Part of the issue in his case is his mortgage kept being bounced around with all the bank mergers that took place during the peak of the crisis and with each merger, let alone the robo-signing scandal, the clock on the foreclosure process and/or workout would start anew.

--Automakers GM, Honda and Volkswagen expect China passenger-car sales to rise as much as 10% next year, faster than China’s current 6% pace for the first ten months of 2011. Well this kind of flies in the face of every other prediction on a slowing China due to the Euro crisis. The car folks, though, tout still extremely low ownership levels and rising incomes for their bullishness.

--According to the Labor Department, the jobless rate dropped in 36 states in October, while payrolls increased in 39, led by Illinois which added 30,000 jobs, and California with 25,700. [Wisconsin lost 9,700, and New York, 8,300.]   North Dakota continues to have the lowest unemployment rate, 3.5%, while Nevada still has the highest, 13.4%.

--Nokia Siemens Networks is cutting a whopping 17,000 employees worldwide as part of a massive restructuring to focus the telecom equipment maker on more profitable broadband operations. The 17,000 figure is almost a quarter of its 74,000 workforce.

--With the European Union in full crisis mode, I got a kick out of the European Parliament and Commission’s request for a 5% hike in its budget next year. It had to settle for a 2% increase. They just don’t get it.

The real problem, however, is that the EC has made financial commitments to its newer and poorer members that it may not be able to honor, such as farm subsidies and regional development funding.

--Ohhh Ca-na-daaa! I’m packin’ my bags for theeee…

You see, kids, Canada’s debt to GDP ratio is but 35% vs. a Group of Seven average of 80%. And the beer is all premium. Plus, in my case, I’d become a hockey fan again after shunning the sport for about 15 years. And Tim Hortons is even better than Dunkin’ Donuts. Only thing is you have to wear long underwear in Canada for up to 350 days a year.

--Oh to have been a shareholder of Pharmasset Inc., which was acquired by Gilead Sciences for $11 billion, or $137 in cash; this being a company with no products on the market and a stock that traded as low as $20 in the past year. But they have a pill in late-stage testing that could be a treatment for hepatitis C, which analysts expect to become a bigger health problem due to the aging baby boomer population, seeing as it is spread by intravenous drug users, among other ways, and can take years to emerge once you have picked up the virus.

--Meg Whitman, Hewlett-Packard’s new CEO, had her first earnings report card and in the process lowered fiscal 2012 guidance to $4 per share vs. $4.88 in the year just finished. Wall Street expectations were for $4.60. Whitman promised “No more surprises,” but then said the company would no longer provide revenue guidance, just earnings, which was a surprise.

--People still send holiday cards. According to Hallmark, 1.5 billion are mailed for Christmas, followed by Valentine’s Day (144 million), Mother’s Day (133 million) and Father’s Day (94 million). It seems the greeting card industry has weathered the Internet storm and is making a comeback. Hallmark and American Greetings control 82% of the market. No word on Festivus sales.

--Shares in Groupon, the largest Internet daily-deal site, closed the week at $16.75, or already below the IPO price of $20 on Nov. 4. Of course anyone buying that first day paid substantially more than $20, like between $26 and $31, and is thus at a rather sizable loss already. Your editor said he wouldn’t touch this one.

--We note the passing of legendary financier Ted Forstmann. He was 71. Forstmann was chairman of IMG Worldwide, the largest sports and entertainment management firm of its kind, but earned his fame and fortune as the founder of the modern leveraged buyout, or LBO, though what distinguished Forstmann was that he did his deals with as little debt as possible, blasting what would become a bubble in junk bond financed deals in the 1980s. Forstmann expressed his open contempt for Wall Street’s hustlers at congressional hearings, telling the SEC that the investment banking heads of the day were like street walkers. “They are the hookers who make $1 million a night, but pretty soon, what have you got? Eleven hookers.”

In Forstmann’s fight with rival Henry Kravis over RJR Nabisco, Forstmann accurately predicted the junk bond debt would kill the company, coining the phrase “barbarians at the gate.”

Eventually, after making $15 billion in profits for his investors, he turned away from Wall Street and acquired IMG, which was struggling at the time, turning it back into a true powerhouse.

Forstmann was a big philanthropist, giving an estimated $440 million to help poor kids, and led the charge for school voucher programs in the 1990s.

--This story hit a week ago and I wasn’t able to get it into the review, but 28 waiters at Smith & Wollensky, the Capital Grille and other New York area restaurants were charged with copying customers’ credit cards and then passing them on to a crime ring. The crimes allegedly took place between April 2010 and this month and involved at least 50 American Express account holders. The crime ring bought luxury goods, including from Chanel, Bloomingdale’s and Bergdorf Goodman, showing they had good tastes.

--So I get this envelope in the mail and it says ‘payment enclosed’ and I’m thinking, what’s this? Found money? A relative I didn’t know I had leaving me some funds for premium beer?

Nope, I received $53.86 for damages in a class action suit involving American Express and foreign transaction fees! So my extensive travel really paid off.
--My portfolio: I had dinner with my CFO friend of the China company in Fujian province. I’m not expecting any miracles, though confident in what they are doing. [I have no idea if their acquisition of the feedstock company for $13 million was a fair price or not. That would be a little arrogant of me to think I did.]   It’s just all about the global, and China, economies, as well as the still dreadful sentiment towards China small caps. After the holidays I might hit the road with them for a day or two in the U.S., depending on our schedules. I really can’t say more at this time.

--Finally, a real Street Byte, the passing of Gregory Papalexis, the owner of the Sabrett hot dog trademark. He was 86.

Ah yes, the Sabrett tube steak. Many was the day when I was starting out in the business world, working for an insurance brokerage firm in Manhattan, that I could only afford two Sabrett dogs for $2 at a local pushcart. They were/are pretty nasty, but gotta hand it to Mr. Papalexis, who formed Marathon Enterprises in 1964 and acquired a number of competitors, including Sabrett Food Products later on, selling hot dogs and other items from a pushcart brand called House O’ Weenies.

His daughter, a company executive, “said her father gave great detail to the buns his company sold, insisting they be ‘light, airy and fluffy.’ His reasoning was simple: If customers filled up on the bun, they won’t have room for a second hot dog.”