Published by clickbroker.blogspot.com.
The Strong
The Wall Street Journal’s “Slump Spurs Grab for Markets” reports that strong companies like JP Morgan (JPM), Bed Bath and Beyond (BBBY), and New York Life have used the turbulent market to annihilate their competitors. JP Morgan is stealing cheap deposits from weaker banks, Bed Bath went in for the kill on invalid Linens‘n Things, and New York Life is out selling AIG (AIG), Hartford (HIG) and Lincoln National (LNC) in life insurance and annuities.
All three of the winners cited by the Journal were strong entering the crisis and deserve their outcomes. But do Bank of America (BAC) and Wells Fargo (WFC) now deserve to control nearly half of the mortgage origination market? And does Citicorp (C) still deserve to be the preeminent international transaction banker?
Financial firms differ from all others in that confidence is a matter of life and death. Bloomberg’s “Bank of America Said to Balk at Paying Backstop Fee” reports the government seeks value for its willingness to backstop $118B of Merrill Lynch’s more difficult assets, even though the deal was never consummated. The original agreed fee was $4B. It could be argued that willingness from an institution as strong and powerful as the US government had economic value that was reflected not only in Bank of America’s share price, but in its very survival.
All of the banks that I mentioned are members of the top 19, deemed too large to fail. This group gets added value that should be paid for. The Fannie Mae (FNM), Freddie Mac (FRE) and AIG precedent of protecting all bond holders, including junior unsecured, for full principal and interest has allowed all 19 to access the debt market relatively unencumbered. Even Citigroup will soon be forced to leave the nest of FDIC guaranteed commercial paper and debt.
Equally important with the ability to float debt is the ability to retain large deposits. These 19 banks have implied FDIC deposit insurance beyond $250K for interest bearing accounts. Why shouldn’t they be required to pay for that implied deposit insurance?
The Obama Administration is proposing additional oversight and regulation on financial institutions deemed too big to fail. This would definitely add cost, but that price is not high enough for admission to sit under the government’s protective umbrella.
The Disingenuous
The Wall Street Journal’s “SEC Plays Keep-Up in High-Tech Race” reports that the agency lacks the technical expertise to collect and analyze data on the way financial markets actually function. The SEC is reliant the exchanges for alerts and deep data dives. It cannot directly determine the effect of restricting flash orders or dark pools on share pricing.
I say that the SEC does not need proof to determine right from wrong or good public policy. Former Fed Chairman Greenspan never acted to prevent bubbles because he never had any proof they were forming, or that “financial innovation” could cause any serious harm. And former SEC Chairman Cox was even too resistant to even look for evidence of potential harm.
The Journal’s “Can Mercedes Keep Its Luxury-Car Edge?” reports manufacturers that sell less than 400K cars per year in the US are exempt from the new tighter fuel economy standards. This neither benefits the specialty brands nor our country. Pricing at the luxury end allows for real leaps in material science and other technologies for true innovation.
Image if the Lexus LS were required to get an average 35 miles per gallon. Lightweight large cars would become commonplace, and the technology would trickle down to Toyotas (TM) and Chevys. Instead we’re on the same old path of either small and efficient, or large and inefficient - no real change.
The Journal’s “Vermont Mortgage Laws Shut the Door on Bust -- and Boom” reports that while the state’s restrictions prevented mortgage abuse, the restrictions also kept “qualified” potential homeowners from achieving their dreams and stunted the state’s growth. Vermont’s economy grew 60% over the 10 year period ending in 2008, just 3% less than the national average. Think what Florida could have learned from Vermont.
The New York Times’ “Calm, but Moved to Be Heard on Health Care” reports that Bob Collier (62) believes: “We’ve got to do something about those people who can’t get insurance. There has to be a safety net there. But I don’t want that safety net to catch too many people.” Collier, who gets his news from Fox News, Rush Limbaugh and Matt Drudge, claims that he is genuinely concerned about the federal deficit and lazy freeloaders.
What makes Collier’s protest at Democratic Representative Bishop’s town hall meeting disingenuous is that his wife of 35 years had breast cancer and is uninsurable if he loses his job. But his fear of healthcare rationing during his Medicare years outweighs his fear of losing insurance coverage before he and his wife get there.
Collier’s employer Buccaneer charges him no premium but he pays $509 per month to cover his wife. Their out of pocket costs are rising 15% per year and deductibles are up 400%. $63K of his wife’s treatment was considered experimental and billed to the Colliers. But miraculously Emory Healthcare agreed to write off the charges.
If Collier actually had to write a check for $63K or face bankruptcy would he feel differently about healthcare reform? Would he be more concerned about his grown children and grandchild’s ability to get healthcare than an uncontrolled federal deficit? Collier should know that his wife’s cancer will forever prevent his offspring from getting medically underwritten insurance. (The underwriting process involves medical question about blood relatives.)
Lastly, does Collier think that individuals should be given the same protections as he gets in a group plan?
The Creative
The Wall Street Journal’s “With Money Tight, a Bank Takes Parmesan Cheese as Collateral” reports that an Italian bank watches over its collateral in its own temperature controlled warehouse. The 85 pound wheels are each stamped with the month and location and a certificate is issued to the borrower to secure a loan. The tradition dates back to after World War II.
Disclosure: Author is long BAC, C, FNM, FRE and WFC.
Business Trends: Banks, Cars, Healthcare and Safe Vermont Mortgages
You can keep your Doctor if your Employer and Union Say So
Published by clickbroker.blogspot.com.
The Sun Sentinel’s “School employees protest possible insurance switch” reports that 150 of Palm Beach County (FL) School District’s 21,000 employees have grave concerns with the pending switch from UnitedHealthcare (UNH) to BlueCross BlueShield of Florida as the administrator for their self-insured plan. Superintendent Art Johnson said the agreement with the union will save employees approximately $30 per year.
School districts in Florida are countywide, so they represent big business in the context of the state. The district pays 100% of the “premiums” for employees and 60% for an additional 14,000 receiving dependent coverage.
The interesting part of the story is that the plan administrator rather than the self-insured employer chooses the doctors and hospitals in the network. UnitedHealthcare has 950 primary care physicians in Palm Beach County while BlueCross only has between 400 and 500. BlueCross says it has already convinced 22 of the 87 most used providers to join its network. But that’s not good enough for employees that have developed trust in their doctors.
The newspaper gave an example of an employee with a difficult to diagnose condition that is fearful of starting over with a new doctor. The importance of the article is that patients have very little security in maintaining their doctor relationships, regardless of the outcome of healthcare reform.
No politician, left or right, can guarantee that you can keep your doctor or your health plan. This is true even if you don’t change jobs. So let’s evolve beyond the dreamland of Ozzie and Harriet and Father Knows Best.
School board member Monroe Benaim (an eye doctor) was even rejected from joining the BlueCross network. Unsympathetically, he advised employees to go out of network to stay with their preferred doctors. Such irresponsible advice opens employees to the risk of balance billing.
The final board has a final vote on the issue scheduled in two weeks.
No Disclosures.
Rational Market Theory and Black Swans in Healthcare
Published by clickbroker.blogspot.com.
Whether you are a believer in the rational market theory or black swans, you could see that even former SEC Chairman Christopher Cox would have cause to blush at the healthcare marketplace. Cox was the champion non-interferer in charge of enforcing a level playing field for investors large and small.
So the question is can our current healthcare marketplace be modeled by rational market theory, black swans, or neither? Rational market theory is based on current security prices reflecting all available information. Perhaps the only more opaque marketplace than healthcare is derivatives. I’d call it a tie.
Patients cannot even get committed pricing from doctors and hospitals, let alone be on an equal footing to negotiate. Marcus Welby, M.D. television fans looking for a sympathetic doctor are stuck in the 1970s with their heads in the sand.
Those black swans, uninsurable patients, are left to go bankrupt or die. Private insurers have removed black swans from their membership. When they appear those member’s policies are rescinded. The only black swans that remain are either on Medicare, Medicaid, or employed by large self-insured companies and governmental entities.
So before any intelligent discourse can begin, opponents of healthcare reform must admit that a level playing field in the SEC sense cannot be developed unless every citizen is insured or no citizen is insured. And all must be insured at roughly the same level. You cannot have a cash market and an insured market at the same time. This has been the failure of Republican instituted high deductible insurance policies.
When conservatives argue that the private insurers cannot compete with the government, they should also argue that a cash market cannot compete with the private insurers. Cash buyers pay typically two to ten times the private insurer and government reimbursement rates. This alone is proof of my all or no one theorem. Individuals must pay ridiculously high premiums, with up to $5000 deductibles just to pay hospitals insurer negotiated rates. Even Cox would call this extortion.
I felt compelled to write this article after carefully reading Merck (MRK) and Schering-Plough’s (SGP) advertisement in my Sunday newspaper. The soon to be merged companies state in bold type: “Vytorin has not been shown to reduce heart attacks or strokes more than Zocor alone.” Zocor is already available as a generic, so you would have to be brain dead to believe that any participant in a rational free market would select Vytorin without adverse financial incentives to doctors and patients. And that’s without even considering the potential adverse affects of Vytorin.
As the rhetoric is getting hotter, I would like the opposition to either come to the table with rational cash market regulation or stop fighting minimum standards for the entire citizenry to be insured. The courts have been of little help in protecting patients against extorted prices. “Financial responsibility” contracts signed in the emergency room should certainly be viewed as “beyond the conscience” of the courts. Lawyers, please help me understand.
While Sara Palin sings to choir, other flamboyant orators will soon face burnout. Let Whole Foods CEO John Mackey tell me how all citizens can buy into his company’s health insurance to create a level playing field. Let FOX News (NWS/NWSA) tell me how to create a rational cash market.
Glenn Beck lectured before three cardboard cutouts Saturday night on how debasing our currency will lead to a fascist takeover of America similar to Germany in the 1930s. The implication being that President Obama is the new Hitler and healthcare reform is the mechanism for the revolt. Government will deny care to babies and grandmas that have little economic value to save money as the country is drowning in debt. And the green movement will kill the unborn to save the planet from overpopulation.
Not only is FOX News losing sponsors for Beck’s show, it also appears that top tier guests are refusing to participate. The Saturday show was loaded with public service announcements and promos for other FOX shows. I saw only one paid commercial per break. I am also seeing FOX News anchors only interviewing each other throughout the day on other shows.
Paid sponsors do matter. Sponsors temporally removed syndicated radio celebrity Dom Imus from the air for a racial snafu. And the lack of paying advertisers and real customers led to the end of the dot-com bubble. Eyeballs alone won’t save Glenn Beck.
The healthcare opponent rebel rousers already have sugar daddies. But what they share in common with Beck is the need to constantly raise the bar of outrageous commentary and behavior to keep the public’s interest. Sensationalism is like a drug to an addict; over time an ever increasing dose is required to keep the affect. Then the addict dies from overdose.
Finally, I am perplexed as to why President Obama is being blamed for debasing the currency and not Federal Reserve Chairman Bernanke. It is Bernanke who is actually monetizing the country’s debt, not the President. You see, this is not a battle about healthcare – it is an attempt to destroy the President. In this context no rational discussion of the marketplace can proceed.
While the opposition protesters appear far less sincere than the civil rights and antiwar movements of the past, I have never seen a President so dedicated to accomplishing his goals as Obama. This President is the most aggressive that I’ve seen in my lifetime. That is what really scares the opposition.
No disclosures.
Business Trends: Whole Foods, McDonalds and New Banking Fears
Published by clickbroker.blogspot.com.
Whole Foods Attacks Its Base
Apparently Whole Foods (WFMI) CEO John Mackey has not learned the real political lesson from Karl Rove. Instead, Mackey chose to regurgitate Rove’s false rhetoric on healthcare reform in a long winded editorial in The Wall Street Journal “The Whole Foods Alternative to ObamaCare”. I won’t repeat the details here.
Mackey’s Darwinist vigor to destroy and swallow his competition has led to Whole Foods unquestionable success. Entrepreneurs become successful either by feeling invincible or being paranoid. Legend is that Intel (INTC) is the success of the paranoid. When Intel started becoming too fat and happy David (AMD) took a nice size slice out of Goliath. The last few years returned Intel to its roots.
Recently I wrote “WFMI Moves from Whole-Paycheck to Partial Paycheck”, convinced that Mackey was developing a healthy sense of paranoia by steering the company back to its core values. I confess that I spoke too fast. Mackey’s healthcare editorial tells me that he still retains an unhealthy sense of invincibility.
Mackey’s Darwinist theory of healthcare is surely to antagonize his highly educated, one might even say elitist target audience. How could a customer willing to spend extra so that the farm workers get fair wages not want health insurance for all? Yet Mackey is calling for the uninsured and uninsurable to kneel at the mercy of philanthropists or just do without healthcare and die as martyrs. After all, he says healthcare is no more a right than food or shelter.
It’s interesting that when I watch the most unruly and disrespectful participants in this month’s political town hall meetings I see only the most obese and unhealthy. Granting those any health insurance at all runs counter to both Mackey’s Darwinist and personal responsibility doctrines.
Trouble is Mackey doesn’t really understand how Rove got George Bush, Jr. elected president twice. Rove would espouse any policies that galvanized the base, his personal morals were irrelevant. Unfortunately, Mackey’s core values are as superficial as Rove’s. And I believe Whole Foods customers will revolt.
The real question is did Whole Foods board of directors approve an outburst by the CEO that was clearly against the shareholders interests?
Charles Schwab meets McDonalds
The Wall Street Journal’s “McDonald's Profit Declines” reports some dissention in the land of McCafés (MCD). Sensing fear from Charles Schwab’s animated commercials warning about discussing a complex trade with an inexperienced broker, “some franchisees … voiced concern over how well equipped the stores are to handle complicated coffee orders.” Fortunately, my trades are never so complex that I would need Schwab’s services and I actually stopped drinking coffee.
Banks at Liquidation Value
Bloomberg’s “Next Bubble to Burst Is Banks’ Big Loan Values: Jonathan Weil” reports that Regions Financial’s (RF) loans were worth $22.8B less than book value and shareholder equity was just $18.7B. This was a footnote disclosure in the 10Q according to Bloomberg. Bank of America’s (BAC) discrepancy was $64.4B and Wells Fargo (WFC) $34.3B.
The fair-value gaps are based on the accounting distinction between loans held for investment and loans held for sale. Loans held for investment can optionally be fair valued, but traditionally are valued at historic cost (less impairments and reserves).
Bloomberg is also reporting “Toxic Loans Topping 5% May Push 150 Banks to Point of No Return”. While the government told us that the nation’s top 19 financial institutions are “guaranteed” not to fail, Bloomberg has screened a list of 150 publicly traded banks with non-performers over 5% and almost 300 at 3% or more. Bank failures when non-performers reach 5% are not imminent if reserves are adequate, but trouble is implied.
How scary are these stories? First liquidating value of loans should not be a key metric as long as the banks can reasonably be viewed as going concerns. Almost no businesses, whether financial or industrial, has a positive liquidating value without goodwill. However, I do give value to the investment risk in banks topping 5% non-performing loans or being inadequately reserved. Bloomberg alerted me to this regulatory benchmark.
Disclosures: Author is long BAC, INTC, RF and WFC.
‘Cash for Clunkers’ Program will Exhaust Itself
Published by clickbroker.blogspot.com.
The Wall Street Journal’s “Dealers Scramble to Find Fuel-Efficient Cars” reports potential shortages in the more popular higher mileage vehicles sought by the consumer stampede into the CARS (Car Allowance Rebate System) program. This super-hyped government program is the subject of endless advertisements by all of the domestic manufacturers. It is so hot that even the most demagogue conservative Republicans have had to put their ideology to rest.
The program’s popularity in the industry is rooted in its showroom traffic generation. Dealers can’t sell anything without customers, so any sense of excitement is welcome. And those that don’t qualify can be “bait and switched” with an alternate deal. All the news reels of clunkers being destroyed at the dealerships and contrived “worry” that program will run out of cash increases consumer anxiety to act now.
The news media continues to dispel the rumor that even the extra $2B just approved for the program won’t last through September. But I say calm down. Just like the tape recorder in the old “Mission Impossible” TV program, the CARS program will also self-destruct. That could be why its ideological opponents only pretended to put up a fight.
The first batch of clunkers came from a prudent set of consumers with high FICO scores. They most likely kept their clunkers because it was more economical to maintain rather than replace their vehicles. Sooner or later we will reach stage two when the remaining clunkers are no longer in strong hands. The clunkers left will be owned by consumers that have to drive a junker; not those playing the game of how long can I make this last for fun.
Even Warren Buffett traded his storied Oldsmobile for a new Cadillac a few years back. With fewer frugal Buffett protégés holding qualifying classics, the CARS program will either die of exhaustion or be modified. Either way, it won’t require new funding. Most likely money would be transferred from other parts of President Obama’s stimulus. This appears to be the only real economic action I’ve seen in any of the stimulus programs.
The real question is does the CARS program actually benefit consumers? The Wall Street Journal’s “Lawmakers Seek 'Clunker' Vouchers for Out-of-Stock Cars” and “Clunkers Prove Common, But Dream Cars Are Scarce” report that consumers are unlikely to have much bargaining power when they seek the maximum $4500 CARS voucher. They are likely to have to pay full sticker from the dealers or settle for their second choices.
Whether we are experiencing a mini automobile bubble or the effects of an airline style capacity reduction is unknown. But hysteria is never the right time for a consumer purchase. Clunker or not, it is highly likely that on a total deal basis consumers will fare better in the fall. Remember every car has some value to the junk yard, as long as the engine is not destroyed. (The CARS program required that dealers destroy the clunker’s engine.)
Previously I wrote "Fed Running Out of Credit Worthy Consumers". The government’s programs to add liquidity to the economy are useless unless the liquidity gets to the hands of consumers financially able to spend it. I draw the same conclusion with the CARS program.
While I’m honestly surprised that so many clunkers were held by credit worthy customers, I am again stunned that customers are fighting to get an end of model year car at virtually full price. But if you must, get that Pontiac before it’s too late.
WFMI Moves from Whole-Paycheck to Partial Paycheck
Published by clickbroker.blogspot.com
Whole Foods (WFMI) emphasized that customers are beginning to recognize its value proposition during its recent Q3 earnings call. Customers that purchased the company’s “investments” in value items had larger baskets at checkout and visited their stores more frequently. At the same time management disagreed with analysts that the stores focused on a wealthier clientele.
Whole Foods claims they target the more highly educated, not necessarily the wealthiest customers. But along the way they ventured from being the basic organic grocer to the gourmet shop. The newer stores required ever higher capital expenditures and carried increasingly more expensive delicacies. Consciously or not, Whole Foods required an ever more high-margin (read wealthy) customer base to feed its growth.
Then came the worst recession since the Great Depression and as President Obama coined, Whole Foods had a “teachable moment.” CEO John Mackey unveiled the company’s new emphasis on customers that appreciate higher quality food rather than foodies that desire high priced gourmet.
Less high-margin customers translate into simpler stores that require lower capital expenditures. The marketing direction is to drive higher volume from lower cost outlets by convincing lower margin customers of the value in shifting their grocery dollars to Whole Foods. And when the customers’ grocery budget is not high enough for Whole Foods, the company needs to convince them to shift money from other expenditures.
When is it worth buying cheaper clothes, paying less rent or keeping your home appliances a little longer to enable you to shop at Whole Foods? With less discretionary spending available, that is the make it or break it question for the company. John Mackey realizes that Whole Foods can no longer depend on wealthy customers alone, and aspirational consumption has become out of favor. Look at the travails of the middle to high-end department stores like Macy’s (M) and Saks Fifth Avenue (SKS).
Whole Foods does not claim to know whether their better than expected results are a harbinger of an improving economy or unique to the company. Mackey repeated emphasized that more moderate growth led to higher margins, as established stores have the volume to profitably cover their fixed cost.
I think that Mackey is on target. If you believe consumer spending will be stagnant over the next few years, each retailer has to establish greater importance to its merchandise to gain a greater share of their customers’ wallets. Creating more average income customers that value Whole Foods definition of quality food is the only way for Whole Foods to continue to grow.
Previously I wrote that Whole Foods was in denial; I no longer think so.
No disclosures.
High-Frequency Trading Winners and Losers
Published by clickbroker.blogspot.com
The Wall Street Journal’s “What's Behind High-Frequency Trading” provides a pretty good Q&A on how Goldman Sachs (GS), Citadel and various smaller specialty firms take advantage of advanced peaks at orders, exchange rebates and flash orders that can be withdrawn in a split second. A political furor is starting to emerge from highly leveraged firms front running orders and teasing prices fractionally up, at the expense of mutual funds and other large institutional investors.
With firms jockeying for the closest physical proximity to the exchanges data centers, NYSE Euronext is building a huge data center in New Jersey to accommodate them. The exchange will be renting space in its own multi-football field size data center to house the computers of high-frequency traders. That’s how critical the speed of light along fiber optic cables is to this form of making money.
Aside from some inherent unfairness, what has regulators and politicians concerned? First is leverage, especially with the small firms specializing in this extreme form of programmed trading. Second is the systemic risk of large trades gone wrong. Third is the cascading effect of copy cat strategies. Think of how seriously flawed the portfolio insurance schemes of the 1990s were when they encountered a few black swans.
While mutual funds and large institutions are marginal losers, the exchanges are obvious winners with increased volume. Typically institutional traders don’t use limit orders for fear of tipping their hand, so any market manipulation hurts their clients. In a very real way high-frequency traders, such as Goldman, are trading against their own clients.
The story is mixed for retail investors. Most firms no longer charge higher commissions for limit orders, so higher volatility increases the likelihood that retail orders will be filled. Investors that are not pressured to buy or sell in a certain time frame are clearly winners.
Retail “active” traders that favor market orders could be buying or selling at a slightly disadvantaged price. Also they could be fooled by a false sense of momentum.
Retail investors that are dependent upon gradual investment sales for living expenses are most vulnerable. It can also be said the retail mutual fund shareholders will suffer slightly lower returns. But, investors in low churn funders should not be concerned.
If regulators rein in on this form of front running and insure firms have the capital to cover their risk, I see little harm in high-frequency trading. In many ways high-frequency trading has the same risks and benefits as programmed trading on the news.
No Disclosures.
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