Six months of 2008 are now behind us and the stock market has not been a friendly place to most investors. Stability that was once found in household names that were industry giants is gone, and they have now been brought to their knees.
Many of them were the stocks we might have looked to in the past for stability, so you can be sure I put forward my five candidates with a little trepidation, but forward I go anyway. First a little review is in order.
Citigroup Inc. (NYSE: C) dropped from around $53 per share last year to around $30 in January and we can buy it today for around $17. Even at that price Goldman Sachs (NYSE: GS) has downgraded it to a sell and thinks there is more bad news to come. Citigroup was the largest bank in the world. Not any more.
General Motors (NYSE: GM) was the largest car maker in the world. That was before the stock tumbled from $43 to its current $11 range. A crushing blow to long time investors hoping that someone in the company could stop the ship from sinking.
Last November, Google Inc (NASDAQ: GOOG) and 30 partners were said be developing a new type of handset using Android that was expected to revolutionize the industry. The first new phones were expected to be available in this year's second half but are now slated for the fourth quarter the Wall Street Journal reported.
According to people familiar with the situation, the Wall Street Journal reported that Citigroup Incorporated (NYSE: C) will make sharp cuts in its investment banking division this week.
The Wall Street Journal reported that Live Nation Inc's (NYSE: LYV) Chairman, Michael Cohl, stepped down down as a director and executive to end the strategy feud with CEO Michael Rapino. over how to pursue the "360 deals" with music superstars.
The Financial Times reported that there are worries that investment banks will accelerate the pace of their layoffs this summer, after it became known that The Goldman Sachs Group Inc (NYSE: GS) gave pink slips to workers in its investment banking division last week. Goldman is now expected to lay off up to 10% of the workers at the division.
OTHER PAPERS:
New Jersey put its $150M center for stem cell research on hold, the Star Ledger reported, eight months after ground was broken on the project.
Bloomberg News reports that 10 of the biggest names in investment banking are blocking investors from getting their hands on their share of the $330 billion Auction Rate Securities (ARS) that they were told was as safe as a money market fund.
I first posted about this back in February and now it has 4,325 comments from people trying to get at their money. Bloomberg quotes one victim of frozen ARS syndrome: Franklin Biddar, a 65-year old real estate investor who can't get his $100,000. "I can't do anything," said Biddar, who was so eager to unlock his money that he was willing to accept 11 percent less than what he paid for the securities. "Bank of America (NYSE: BAC) got me into these securities that are supposed to be as safe as a money market, and now they won't get me out."
Here's a list of the banks involved in this money blocking operation and the volume of municipal ARSs they issued between 2001 and 2007:
Bloomberg News reports that Lehman Brothers Holdings (NYSE: LEH) wants to sell $4 billion in equity. But it already raised $6 billion so why does it need more? It should be no surprise -- but thanks to a chorus of statements by financial leaders that "the worst is over" -- including Lehman's CEO Richard Fuld, Jamie Dimon, Hank Paulson, and Barton Biggs some are surprised that there are still problems.
Since the crisis began -- last August when the Fed began cutting rates from 5.25% to 2% -- banks have been trying to reduce their ratio of debt to equity below the hugely risky 32:1. But it's hard when they hold $500 billion worth of Level 3 assets -- which don't trade and therefore have no objectively set market value. To maintain or improve their capital ratios, banks have been writing down the value of the securities on their books -- $276 billion worth so far -- and simultaneously raising capital. Citigroup (NYSE: C) has raised the most -- $44 billion.
S&P downgraded Lehman, Morgan Stanley (NYSE: MS) and Merrill Lynch (NYSE: MER) saying they may disclose more write-downs for devalued assets. And hedge fund manager David Einhorn -- who's short Lehman -- got into a verbal debate with Lehman CFO Erin Callan arguing that Lehman had failed to disclose $6 billion worth of such Level 3 assets -- known as Collateralized Debt Obligations (CDOs) and it needed to raise capital. Today's announcement suggests that Einhorn was right.
Just because executives act like cheerleaders, it doesn't mean investors should take them at their word.
The Wall Street Journal also reported that the oil industry and some U.S. lawmakers are looking to end long-standing bans on domestic drilling put in place to protect areas that are environmentally-sensitive, fueled by concerns about global energy.
In an interview with the Financial Times, Citigroup Incorporated's (NYSE: C) former chairman and CEO Sandy Weill acknowledged that choosing Chuck Prince as his successor in 2003 turned out not to be the "right thing" for the company and was flawed. Instead of handing the job to Prince, Weill said the board should have fostered competition among the bank's top managers for the job.
OTHER PAPERS:
According to the Washington Post, MedImmune, a unit of drug giant AstraZeneca Plc (NYSE: AZN),settled with Genentech Inc (NYSE: DNA) a lawsuit over a patented component of its best-selling drug Synagis, which is aimed at preventing respiratory infections in infants. No details of the settlement were provided.
The Wall Street Journal reported that a federal judge said that the government had "sufficient evidence" for a jury to conclude that a conspiracy to fraudulently boost the financials of American International Group Inc (NYSE: AIG) began with former CEO Maurice R. "Hank" Greenberg. That led to a transaction that artificially inflated AIG's loss reserves.
Citigroup Incorporated's (NYSE: C) Falcon Strategies fixed income hedge fund is down 75%, the Wall Street Journal reported, bad news for the three U.S. banks that invested in it to help increase returns on employee life insurance. One of the banks, Fifth Third Bancorp (NASDAQ: FITB), is suing Transamerica Life and Smith Barney, both of whom helped to arrange the investment, and some are now questioning whether Citigroup will be forced to give back some of the investments as they have with individual investors.
After it stopped offering some mortgages last month because it was swamped by volumes of new applications, the Financial Times reported that First Direct, a unit of HSBC Holdings Plc (NYSE: HBC), has resumed lending to new customers. The bank said it has continued to receive "significant interest" in its mortgages from existing customers.
OTHER PAPERS:
In an effort to raise capital from shareholders, the Telegraph reported that Barclays Plc (NYSE: BCS) is considering a takeover bid for a rival in the U.S. or UK. Sources believe Barclays may attempt to acquire an investment bank, a struggling bank or a deal in a fast-moving economy. Potential names mentioned include UBS AG (NYSE: UBS) and Lehman Brothers Holdings Inc (NYSE: LEH).
Wendy's International Inc (NYSE: WEN), struggling since the 2002 death of founder Dave Thomas, and pressed by investor Nelson Peltz to improve results, will today announce a deal with Peltz, the Wall Street Journal reported.
The Wall Street Journal also reported that the House Financial Services Committee voted to approve $15B in loans and grants so that local governments can buy foreclosed homes throughout the U.S. Committee chairman Barney Frank said the bill will avoid abuse, including requiring that purchased homes be a minimum 60 days into the process.
Adding to evidence of a rally in corporate credit markets, the Financial Times reported that Deutsche Bank AG (NYSE: DB) is preparing another big sell-off of its leveraged loans in Europe.
OTHER PAPERS:
Several e-mails that have been obtained by the New York Post sent between Wall Street banks may prove a serious setback in the fight over the takeover Clear Channel Communications Inc (NYSE: CCU). The e-mails reportedly show the banks, led by Citigroup Incorporated (NYSE: C) and Deutsche Bank, looking to get out of financing the buyout by Bain Capital and THL Partners by offering terms "they know the [firms] won't be able to accept."
The Wall Street Journal reported that New York state's attorney general, Andrew Cuomo, has launched an investigation into auction-rate securities and is seeking information from some of Wall Street's biggest institutions including UBS AG (NYSE: UBS), Citigroup Incorporated (NYSE: C) and Merrill Lynch & Co Inc (NYSE: MER), a person familiar with the matter said.
According to the Financial Times, Deutsche Bank AG (NYSE: DB) and other investment banks are working on plans to develop a clearing house for the credit derivatives markets. In an attempt to reduce counterparty risk, the banks are trying to develop a system that would only allow institutions with strong capital bases and credible trading histories to clear trades in the credit default swap markets with a central counterparty.
OTHER PAPERS:
The news that The Royal Bank of Scotland Group Plc (NYSE: RBS) is planning a rights issue of between GBP5B and GBP12B received mixed reviews from British analysts and investors, the Telegraph reported. The analysts expect the bank to cut its dividend.
Since I have been a shareholder of Berkshire Hathaway (NYSE: BRK.A), I have enjoyed reading with great interest the musings of company chairman Warren Buffett as he gives almost a play-by-play review of the year in his letter to shareholders. He writes in a tone I would compare to Will Rogers, the writer, actor, comedian, cowboy and former mayor of Beverly Hills.
"My pal Warren" highlights both the triumphs and disasters of the year and his own perspective of the State of the Union and the economy like only he can. I strongly recommend investors take the time to read his letter(s).
One of the most often referred to items in Buffett's letters is regarding the quality of the management at each of the companies that Berkshire owns, or has major stock holdings in. There are many shrewd investors who will make a convincing argument that the quality of management is the highest priority.
He glowingly speaks of the wisdom, integrity and hard work of his management partners. He openly states that one reason that most of Berkshire acquisitions tend to work so well is the mutual appreciation of these character traits they all share. Unlike many companies that look to make money by shaking up the management structure, Buffett bases his investment strategy on keeping the strong management that built the enterprise in place.
A newly published report by Standard & Poor's said that the performance of organizations such as Federal National Mortgage Association (NYSE: FNM), or Fannie Mae, and Federal Home Loan Mortgage Corporation (NYSE: FRE), or Freddie Mac, could directly affect the U.S. economy and the country's credit rating, especially if they have to be rescued by the government, according to the Wall Street Journal's "Credit Markets" column.
Seagate Technology LLC (NYSE: STX), a hard drive maker, filed a patent infringement suit in San Francisco against STEC Inc (NASDAQ: STEC) over four patents related to technology used to store data on computer chips, the Wall Street Journal reported.
The Financial Times reported that Citigroup Incorporated (NYSE: C) is allowing private equity groups such as Apollo, The Blackstone Group LP (NYSE: BX) and TPG that are bidding for up to $12B of its leveraged loans to 'cherry-pick' from a wide range of assets with different credit ratings and prices.
In an effort to increase sales in the Middle East, the Wall Street Journal reported that Dell Inc (NASDAQ: DELL) is in talks with a government-owned vehicle in Dubai called Tecom about establishing a joint venture.
The Wall Street Journal also reported that Washington Mutual Incorporated (NYSE: WM), which obtained a $7B capital infusion from TPG and other investors, had reportedly been working on the TPG deal while negotiating with JP Morgan Chase & Co (NYSE: JPM), which made a preliminary takeover bid of about $7B, people familiar with the deal said.
Citigroup Incorporated (NYSE: C) is close to reaching a deal to sell $12B in leveraged loans at a discount to a group of leading private equity firms, the Financial Times reported. Although details of the deal were still being worked out, inside sources said Apollo Management, The Blackstone Group LP (NYSE: BX) and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar.
OTHER PAPERS:
The UK Times reported that The Boeing Company (NYSE: BA) is today expected to announce that its 787 Dreamliner has been delayed by 18 months, a setback which will affect all airlines that have ordered the 787, including British Airways Plc (OTC: BAIRY) and Virgin Atlantic.
Treasury Secretary Henry Paulson will today outline a new plan to better organize the overall bureaucracy that oversees financial markets, the Wall Street Journal reported. Paulson's new proposals include merging or eliminating all together institutions such as the SEC.
According to people familiar with the matter, the Wall Street Journal also reported that Alphonso Jackson, the Housing and Urban Development secretary, is expected to today announce his resignation, a move which could deal a blow to the Bush administration's efforts to combat the crisis in the housing markets.
The Financial Times reported that Bank of America Corporation (NYSE: BAC) may take its equity prime brokerage business off the market after receiving weak interest from potential bidders. People close to the situation emphasized that no final decision has been made on the unit.
WEB SITES:
Bloomberg reported that Citigroup Incorporated (NYSE: C) will set up an independent credit card unit, according to sources. The rest of the consumer division, mainly bank branches and non-bank lending, will be divided into five regional groups, according to the inside sources.
For 25 years, Steven Halpern, editor of TheStockAdvisors.com, has surveyed the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is one of 100+ ideas in the Best Stocks for 2008 report.
"In a perverse twist of irony, more adventurous investors could choose Citigroup (NYSE: C), which is my speculative favorite for 2008," says Keith Fitz-Gerald, editor of Money Morning.
"I recognize that you might be thinking that I've completely lost my mind. But I believe this is an opportunity to buy into one of the world's fastest growing and best run financial companies at a bargain basement price.
"First, what's causing Citi's current angst is related to a breakdown of risk management -- not the deterioration of operations. The company remains globally diversified, and many portions of its business still reflect double-digit growth rates, particularly when it comes to China and Eastern Europe.
"In my view, Citi is now trading for a pittance. In fact, it's just barely seven times earnings and eight times 2008 earnings. Yet if you add up the growth prospects and current valuations, the company reflects a value that could be as high as $60 or more a share.
TheStreet.com's Jim Cramer explains why "purchased HELOC" is the next phrase to fear.
Purchased HELOC.
Get that term into your head. Home equity loans that were purchased from other originators are the scourge of the system. Any piece of paper backed by these second liens that were issued by pure mortgage originators is just a goner.
This is the paper that was generated by Fremont General (NYSE: FMT) (Cramer's Take) and NovaStar (NYSE: NFI) (Cramer's Take) and New Century Financial and American Home Mortgage and so many of the other bankrupt and walking-dead companies. It was mostly no-documentation loans paper and served as another way to tap money that was meant to be paid back when you flipped a home. It was predicated on the continued increase in value of your home.
TheStreet.com's Jim Cramer says if any of your holdings in this sector have too much of any one kind of credit, use current market strength to sell.
Getting our arms around the problem. That's the real way we get closure on this credit problem. That's why the market was able to rally Tuesday, even though no one says the problem is getting better.
At last we're just trying to figure out how bad it can be because we know it is worse than the $42 billion that has already been charged off in subprime. By the way, even that figure, which seems staggeringly high, is only a fraction of the $250 billion minimum number I am using.
What's so maddening is that there isn't one kind of debt problem. There are three kinds of debt, with a subset for the worst kind. You have to run the gauntlet of all three kinds if you are going to be blessed by the market. And so far, only Goldman (NYSE: GS) (Cramer's Take) has done that.
Six months of 2008 are now behind us and the stock market has not been a friendly place to most investors. Stability that was once found in household names that were industry giants is gone, and they have now been brought to their knees. .gif){kind=logo}
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"In a perverse twist of irony, more adventurous investors could choose 
TheStreet.com's Jim Cramer explains why "purchased HELOC" is the next phrase to fear.
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