Week in Review Part II: Street Bytes

Stocks finished mixed on the week, dealing with both earnings and Europe, as the Dow Jones and S&P 500 broke two-week losing streaks, up 1.4% and 0.6%, respectively, while Nasdaq, largely on the heels of Apple’s sloppy performance, fell 0.4% for a third straight weekly decline.

--U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.26% 10-yr. 1.96% 30-yr. 3.12%

The 10-year rallied yet again on the heels of Europe’s difficulties.

--China increased its holdings of U.S. debt for a second straight month in February, according to the Treasury Dept., to $1.178 trillion. Japan, which has been adding significantly, is next at $1.095 trillion.

China also is freeing up trading of its currency, which has been a major sticking point for global trade relations, not just with the United States, as keeping the renminbi (yuan) artificially low gave Chinese exporters an unfair advantage. Plus it’s been criticizing state-run banks of late.

U.S. Treasury Secretary Timothy Geithner said of China’s moves, “The cumulative effect…is very significant and very promising. It signals a continued commitment by Chinese authorities to a broad change” in economic strategy.

Among the benefits for China a more flexible yuan provides is the ability to control inflation. Economist Stephen Roach said, “The government is confident that China will avoid a hard landing, otherwise why would they introduce the possibility of greater foreign-exchange volatility?”

--Japan’s exports for the month of March rose 5.9% from a year earlier, the best growth rate in a year; further bolstering the IMF’s forecast, per the above, that Japan’s economy will grow 2% in 2012. Car exports to the U.S. were a big contributor.

--Tensions between Madrid and Buenos Aires boiled over this week as Argentina suddenly seized a majority stake in YPF, the nation’s largest oil company, which is majority-owned currently by Spanish energy company, Repsol YPF. Spain announced on Friday it would retaliate by cutting off Argentine biodiesel, which had accounted for 45% of Spain’s consumption and $991 million for the Argentines.

Cristina Fernandez de Kirchner, Argentina’s president, said the expropriation of YPF, a company founded by Argentina’s government in the 1920s and privatized in the 1990s, was a “recovery of sovereignty and control.”

Repsol said it would seek at least $10.5 billion in compensation for the nationalization of its operations there. Argentina said it owes Repsol nothing.

A spokesperson for the U.S. State Department said, “These kinds of actions against foreign investors can ultimately have an adverse effect on the Argentine economy and could further dampen the investment climate in Argentina.”

The European Union signaled it would throw its full diplomatic weight behind the Spanish government.

The move against YPF would represent the largest renationalization in the energy sector since Russia seized Yukos more than a decade ago.
Editorial / Financial Times

“What is certain is that the renationalization of YPF by the government of President Cristina Fernandez will guarantee that it is not only the share price of YPF and 57% owner Repsol that are heading south. Argentina simply cannot afford the $25 billion a year needed to develop new fields containing up to 22 billion barrels of shale oil and gas. Which oil company will now lend its expertise?

“It is already embarrassing that long-suffering but energy-rich Argentina has to spend 7% of its annual budget on energy imports…And Argentina can kiss goodbye being treated seriously again by investors for another generation.”

Recall, Argentina is already shut out of sovereign bond markets because of its 2001 default. Argentina attracted just $2.4 billion in foreign direct investment last year, compared to Brazil which brought in $44 billion.
Nice job, Cristina.

--U.K. retail sales rose 1.5% in March, ex-fuel, owing to the warmest March since 1957. Never discount the importance of weather.

--More stats on the $1 trillion student-loan debt ticking time bomb, courtesy of Barron’s Jonathan R. Laing.

“Ever-rising tuitions are the biggest part of the problem…tuition and fees at four-year schools rocketed up by 300% from 1990 through 2011. Over the same period, broad inflation was just 75% and health-care costs rose 150%.

“However you apportion blame, it boils down to this: Two-thirds of the college seniors who graduated in 2010 had student loans averaging $25,250, according to estimates in a survey by the Institute for College Access & Success, an independent watchdog group….

“Federal Reserve Chairman Ben Bernanke turned some heads in an aside during congressional testimony last month when he said that his son, who is in medical school, would probably accumulate total debt of $400,000 before completing his studies.”

Laing points out, on the other hand, that Ivy League schools, while charging room and board of $50,000 to $57,000, use their large endowments to give out sizable sums of student aid. “As a result, students graduating from elite schools like Princeton, Yale, and Williams College are able to graduate with total debt under $10,000, making them among the lowest-debt colleges and universities in the country.

“But the Ivies can’t be absolved of all blame in the current debt mess. They began the sticker-price arms race in the early 1980s, reasoning correctly, it turns out, that they could boost prices with impunity because of the scarcity value, social cachet and quality of the education they offer. They’ve led the charge ever since, even getting caught by the U.S. Justice Department for colluding on tuition increases and grant offers to applicants in the early ‘90s. They signed a consent decree neither admitting to nor denying the charges….

“The student-debt crisis is emblematic of issues bedeviling the U.S. as a whole, such as income inequality and declining social mobility. For as scholarship money is increasingly diverted from the needy to achievers with high grade-point averages and test scores, boosting institutional rankings, the perhaps less-privileged applicant is thrust into the position of having to take on gobs of debt, indirectly subsidizing the education of more affluent classmates. The race to the career top is likely over long before graduation.

“Student debt also helps sustain many school hierarchies that are virtually bereft of cost controls – the high-salaried tenured professorates, million-dollar-a-year presidents and provosts, huge administrative bureaucracies, and lavish physical plants.

“The game will continue until students and their families revolt or run out of additional borrowing capacity. Don’t expect the educational establishment to rein in its spending. Things have been too cushy for too long.”

Of course the massive debt load threatens to impede overall economic growth in the U.S.

--Microsoft reported solid earnings relative to expectations, with revenue beating as well, as sales of Windows rose 4% in the quarter and overall revenue was up 7%, this as the company prepares to roll out the eagerly awaited Windows 8 operating system. On the downside, Microsoft’s entertainment division was hit hard as Xbox sales plummeted 16%.

--Shares in Apple closed 2011 at $405 and had soared to a closing high of $636 on April 9 ($644 intraday, April 10) before five consecutive down days took it to $580 at Monday’s close. It then extended the losing streak to 8 of 9 sessions, finishing the week at $573, or down 9.9% from the high. With the company to report next week, there are all sorts of rumors on shortfalls vs. expectations for iPhones, for example. Shareholders, and the Street, will be on pins and needles.

--American Airlines wants to eliminate another 1,200 jobs as part of its bankruptcy procedure, which would mean an overall target of 14,200 positions being jettisoned out of a workforce of 73,000.

But U.S. Airways is methodically trying to put a deal together for AMR, negotiating separately with some of AMR’s unions as part of a deal that CEO Doug Parker says could save about half the jobs AMR is looking to cut.

--TransCanada submitted a new series of proposed routes to Nebraska environmental officials for the Keystone XL pipeline in order to avoid the sensitive Sandhills region. Nebraska said they would speed up the approval process, giving President Obama absolutely no reason to further block it, except to maintain his environmental base for November. This will be interesting.

--California’s unemployment rate in March ticked up to 11.0% from 10.9% as more workers entered the labor force. Nevada continued to have the highest jobless rate, 12.0%, while on the other end, North Dakota’s is 3.1% and Nebraska’s 4.0%.

--Rich Ross, chairman of Walt Disney Co.’s film unit, resigned, joining the ranks of the unemployed in California, following the disastrous “John Carter” sci-fi flick that resulted in a loss of $200 million for the studio.

--EBay reported yet another solid quarter on Wednesday, with revenue climbing 29% to $3.3 billion. The company has been trying to position itself as more than an online auction site to a retailer that can compete with the likes of Amazon. EBay’s PayPal acquisition continues to pay off big time with their revenue increasing 32%. Half of PayPal’s business is now coming from overseas.

--Yahoo finally appears to be getting its act together, reporting a first-quarter profit of $286 million, a 28% jump from a year ago, though once again the revenue story was less than exciting, up 1%. Facebook gained 14% of online display ad revenue in 2011 to Yahoo’s 10.8%, according to research firm eMarketer.

--According to the American Association of University Women, women in the U.S. earned 77% of what men earned in 2010 (women’s annual median earnings were $36,931, compared with $47,715 for men).

The gender pay gap is smallest in Washington, D.C., where full-time working women earned 91% of what men earned. The largest disparities were in Wyoming (64%) and Louisiana (67%).

--Speaking of income inequality, Citigroup shareholders, in a rare revolt, voted down the bank’s $15 million pay package for CEO Vikram Pandit; the first time this has happened at one of the large financial institutions. The vote isn’t binding, but certainly sends a shot across the bow to other banks increasing the pay of their undeserving top executives.

Mike Mayo, a leading bank analyst, said: “This is a milestone for corporate America. When shareholders speak up about issues on which they’ve been complacent, it’s definitely a wake-up call. The only question is what took so long?”

--Moody’s Investors Service is threatening to downgrade some of the largest banks, with Morgan Stanley among the most vulnerable of 17 global financial institutions under review. This could be a big blow to those downgraded as it could lead to far less trading with customers demanding a minimum level of creditworthiness for counterparties.

--Billionaire hedge fund manager John Paulson is shorting German government bonds in a bet the eurozone debt crisis will deepen soon. He told investors in a call on Monday he sees the eurozone deteriorating severely. German bunds have been trading with record low yields, Germany being viewed as the safe haven for the region. While Paulson has had a shaky time of it recently, his longer-term record remains among the best.

--President Obama demanded more “cops on the beat” to go after what he calls oil market manipulators by calling on Congress to increase penalties for offenders. But his proposal to spend an extra $52 million on enforcement is going nowhere. Just another election year gimmick…especially when it’s all about Iran!

--Speaking of oil and gas, 2012 will be the third year in the past five with historically high oil prices, but consumption has dropped 6% from 2007 through 2011, according to the Energy Information Administration. “The Federal Highway Administration adds that the number of vehicle miles driven over a 12-month period ending January was lower than in any year since 2004.” [Steven Mufson / Washington Post]

--First Solar announced it was stopping all of its German production as part of a global restructuring that will see it cut the work force by 30 percent, or 2,000 workers. It’s so bad in Germany, with lower government subsidies and weakening demand, that “First Solar said it will return a $30 million government grant, write off at least $150 million in assets and spend as much as $55 million on severance payments to its workers there to pull out.” [Diane Cardwell / New York Times]

--As reported by USA TODAY, more and more states are ending the requirement that phone companies must provide everyone land-line service. I don’t like this one bit. My landline is reliable and the quality good, compared to the crap you hear on cellphones.

A spokesman for AT&T countered, “(Such legislation removing a carrier’s obligation to provide land line service) levels the playing field for traditional land-line providers in a competitive environment. Relief of these regulations encourages additional investment in the new technologies that customers are demanding.”

As of last June, nearly 32% of U.S. households were wireless only. It’s the rural families without good wireless who could really get screwed.

--Berkshire Hathaway CEO Warren Buffett told shareholders he has early stage prostate cancer but “feels great” and will continue to run the show. Buffett, 81, said his condition is “not remotely life-threatening or even debilitating in any meaningful way.”

--Kim Jong Kim, a Korean-born American and president of Dartmouth College, is the new president of the World Bank; the U.S. traditionally holding this position while a European gets the IMF top post, much to the chagrin of developing nations who once again failed to muster enough support for one of their candidates. Kim is a physician and anthropologist, which, needless to say, had more than a few people uttering, “And this qualifies him for the position because…?”

--My portfolio: Over five years ago, incredibly, I started investing in a biodiesel/specialty chemical plant in Fujian province, China. I visited the company there twice; once to look at the old facility and once to make sure they were really building the far bigger second plant on the coast that was the key to all shareholders’ success. Once it became fully operational in 2010, all seemed good. At least the results were solid and the company was highly profitable.

Share price was another matter, though I chalked it up to the awful sentiment for Chinese stocks, which was exacerbated by the growing reports of fraud, see Sino-Forest.

But as I would tell you from time to time, I was patient and, after all, with the stock trading at a P/E of about one by last fall, I figured that sometime in 2012 sentiment would change and perhaps a little hot money would come back to begin to juice the performance. Had it traded with a multiple of just 4-5, I was set for a long, long time. Imagine; similar chemical companies in the U.S. trade at multiples of 11-13. I wasn’t asking for much. Plus the location of the plant is superb…the closest point to Taipei, so you had that angle going as well.

Last November, though, right before release of third quarter earnings, my company (which I still refuse to name) acquired a feedstock company, as discussed for the better part of a year, in order to get a better handle on costs. I, like many other shareholders, questioned the price paid but what do we know being here in the States for the most part?

The next day, if I remember right, there was a conference call to discuss earnings, which while not as good as before were still more than OK. I opened the questioning, there was another question, and then the operator cut it off. Shareholders were ticked at the abrupt finish.

I got together with the CFO in New York shortly thereafter for a fourth time in about a year. He never turned down my requests for meetings and our dinners were actually delightful. He was always forthright. I thought we had also reached an agreement that the company would hold kind of a makeup call to placate shareholders miffed over the handling of the prior one. This was supposed to be in December but I understood when the company said it wanted to wait until after the holidays. But then communication got spotty, at best. I got ticked, other shareholders got ticked, and relations between us went south.

Normally, small companies like this don’t report Q4 results until the end of March (it also being the far more comprehensive 10K, or annual). Reporting requirements for small caps are a killer these days; both time-consuming and costly. The CFO had told me that he was going to China (he split his time between New York and there) to look at the acquisition with the auditors in February. Fine, I thought.

On March 30, the company filed for a two-week extension to get the 10K together. Nothing unusual here, especially given the complexity of the acquisition.

On April 5, the share price suddenly popped 33% to levels not seen in 2012.

On April 11, there was a terse announcement my CFO friend had resigned, though a replacement with more company experience was immediately promoted to the slot. Nonetheless, not a good sign.

There has been nothing since except confirmation a scheduled conference call to discuss results was canceled. The company has gone dark. The PR firm and auditors left.

I have heard from informed sources that everything was all lined up to be signed off on as of April 10 and the auditors and company couldn’t agree on the valuation of the acquisition. I do not know for certain what the deal is. Again, as the share price has now slid back into oblivion, it is not good.

All those investing with me in this one have the same dark thoughts. The cash was never real. The sales were never there. What I do know is what I saw with my own eyes and my discussions with management, face-to-face. I know, for example, that some changes were in the works in terms of the players involved, but I must leave it at that.

The company could go silent for quite a long time until it gets a new team in place. To say I’m frustrated, and infuriated, is an understatement. Traveling this week, with many long drives, hasn’t helped matters, especially in terms of communication.

So that’s all on this topic for now, but I owed those of you playing along with me my thoughts. I feel terrible about it but at this point can only hope for the best. I’ll only comment further as information becomes available. Moving along…because I still have a job to do…

--ABC’s “Good Morning America” topped NBC’s “Today” in the morning ratings the week ending April 13 for the first time in 16 years.

--As reported by Mike Vallo of Barron’s, a study by Worldwatch Institute out of Washington finds that the world’s farm animal population has increased 23% from 1980 to 2010, to 4.3 billion, which means one thing, sports fans…lots of gas…greenhouse gases, that is. Back in 2007, a UN study found that farm animals account for 18% of greenhouse-gas emissions; more than the 14% contributed by cars, trucks and other modes of transportation.

--And we note the passing of American music and television mogul Dick Clark; an amazing success story who truly had his finger on the pulse of America from “Bandstand” to “$10,000 Pyramid.” And since 1972, he helped us ring in the New Year. He leaves one of the great legacies of all time.