Did you get a load of that crazy fake punt the Indianapolis Colts tried to run against my New England Patriots on Sunday?
Market Roundup
I’ve watched a lot of football over the years, and this had to rank as one of the worst plays I’ve ever seen. It smacked of desperation, made no strategic sense, and of course, it failed miserably — with the Colts going on to lose the game 34-27.
Now why am I bringing this up? Because I’m seeing corporate managements pull the same kind of “trick play” moves with increasing frequency. Silly, rash, ill-conceived transactions — transactions that will likely fail to boost long-term shareholder value, just like the Colts’ play failed to earn a victory.
Take Yum Brands (YUM), the fast-food operator behind the Pizza Hut, KFC and Taco Bell restaurant chains. It opened its first KFC outlet in Beijing in 1987 as part of a long-term, continually reinforced plan to expand aggressively into the Chinese market.
|
|
| Are corporate execs contemplating more “trick plays”? |
The firm ultimately opened 6,900 restaurants there, making the market central to its strategy. It earned a reputation among investors as the best company to own if you wanted to bet on Chinese growth, and even called China “an absolute gold mine.”
Then earlier this month, it slashed its earnings forecasts in large part because of lousy China results. And a few days ago, it basically said “Oops, never mind” to a strategy it pursued for the better part of three decades.
Yum announced plans to spin off its China business as a separate company. But it couldn’t or wouldn’t say how it would list the company, or where its shares would trade. It couldn’t or wouldn’t tell investors what kind of royalty the Chinese stub listing would pay the parent. Heck, it wouldn’t even provide proposed names for the two surviving companies.
Bottom line: The “plan” seemed as ill-thought-out and slapdash as the Colts’ fake punt! It was clearly a desperation mood to pump up Yum shares, which had plunged from $95 in the spring to around $66 earlier this month.
| “The plan seemed ill-thought-out and slapdash.” |
Or how about Credit Suisse Group (CS), the Swiss megabank that also trades here in the U.S.? I identified this company as a weak one in my Interest Rate Speculator service a little while ago, and sure enough, it just laid an egg.
Net income missed third-quarter estimates by more than 9%, dropping 24% from a year ago. Fixed-income sales and trading revenue plunged 53%, while pretax earnings in private banking/wealth management tanked 31%.
So what did the bank do amid obvious, widespread deterioration in its businesses? Why, throw a bunch of reorganization plans at the wall to see what sticks, of course!
It said it would reorganize its operations into three regionally oriented units, and divide its securities business into market-focused and investment banking-focused units. It also said it would list its domestic Swiss bank as a separately traded entity, and shrink a portion of its investment banking asset base.
As if those weren’t enough signs of chaos, disorganization, and desperation, Credit Suisse announced that it would have to sell more than 6 billion Swiss francs ($6.3 billion) of shares to boost capital. Finally, it said it would cut thousands of jobs, with London getting hit particularly hard.
This isn’t the kind of stuff healthy, prospering companies do in strong underlying economic or market environments. It’s the kind of trick play shenanigans that confirm we’re facing serious problems.
It almost never works, either. Just go back and look at how a bunch of old-line companies tried to spin off their dot-com businesses during the tech bubble … only to have those plans blow up in their faces when the dot-bomb bubble burst.
So what do you think of moves like these? Are Yum Brands and Credit Suisse taking smart steps to boost shareholder wealth? Or are they just grasping at straws? Do you see other companies doing this same kind of thing, and if so, will it work? What do these trends say about the broader market? Share your thoughts at the Money and Markets website.
|
The debate about Canada’s major political shift continued at the website overnight. Several of you also commented on the Valeant Pharmaceuticals (VRX) fiasco.
Reader Eagle495 said: “One only needs to look at the chart of the iShares MSCI Canada ETF (EWC) to see how poorly they have done under the Conservative Harper government. Despite what the right wing screamers say, the Conservatives are poison to the economy and in turn their stock markets.”
But Reader Alan T. said: “There is a big issue brewing in the commodities market. When Australia elected a liberal, one of the first acts was to levy a large tax on commodity companies in the country. Now look at Canada. Same MO. I think the Canadian stock market is in for a surprise.”
As for Valeant, Reader Samantha said: “I have a little VRX through the Janus biotech mutual fund. Depending on the outcome of the allegations, this might be a blip in a wider sector. The fund is actually up for the year-to-date. Can’t say that about every security.”
Reader Steve added: “I want to know how a short selling entity like Citron, who is (presumably) short Valeant, can make an announcement such as this, pocket millions or maybe hundreds of millions, and not be investigated.
“The answer, I suspect, is that they make enough money off us to hire lawyers until they die. Fair enough if they are correct. But if they aren’t, they are no better than the miserable bunch that destroyed the financial system prior to 2008, or who front run us poor schmucks through high frequency trading three feet from the exchange, and live happily ever after.”
Lastly, Reader Mike P. said: “The biotech sector has exhibited exceptional endurance in the face of a nonstop onslaught of attacks from politicians and now, a short selling hedge fund trashing Valeant.
“I’ve seen this too many times where a hedge fund analyst, who is short a stock, publishes a frightening white paper analysis based on complete speculation. Only start worrying if the iShares Nasdaq Biotechnology ETF (IBB) drops below 285.”
Thanks for sharing your thoughts here. I’m no expert on Canadian politics. But I’ll definitely be watching how that country adjusts policy to cope with economic weakness and the ongoing commodity weakness.
As for biotech stocks, they were clear market leaders during the latest easy-money-fueled equity market run. So I can’t see how anyone can spin a significant technical breakdown as bullish. When you lose leaders, asset markets overall struggle. I too will be watching that 280-285 level on the IBB … if it goes, I think it will help drag down the Nasdaq overall.
If I didn’t get to your comments, or you want to expand on any points you’ve made already, please do hit up the website and weigh in.
|
Every day we get a bit more of the earnings picture filled in. Dow Chemical (DOW), McDonald’s (MCD) and Texas Instruments (TXN) told a bullish tale, while American Express (AXP), 3M (MMM) and Caterpillar (CAT) disappointed.
The European Central Bank left interest rates unchanged at record lows at its policy meeting today. But President Mario Draghi said in the post-meeting press conference that external economic weakness could lead to additional stimulus measures, or the extension of Euro-QE beyond the previously forecast September 2016 end date. Draghi’s comments helped send the euro into a tailspin, and fuel the rally in stocks today.
If you think houses are expensive in your neighborhood, just be glad you don’t live in London! An average house there costs just over $800,000, and the housing bubble in the U.K. capital is likely to get even worse thanks to low mortgage rates, a housing shortage, and loosening of qualification standards by lenders.
And finally, my wife’s Chicago Cubs got swept by the New York Mets last night – losing the fourth game in a row by a score of 8-3. While that means the prediction of a 2015 World Series Cubs victory from the Back to the Future movie series won’t pan out, she’s still proud of how far they came with such a young team. I can’t argue with that.
What do you think about the ECB’s latest move? Or the batch of earnings we got in the last 24 hours? Are you excited to see the Mets back in the World Series for the first time in years? Let me hear about it online.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 36 comments }
Dear Mike: I love your articles. I have been following you since you started at Weiss. Larry Edelson and you provide me with most of my investment information and guide most of my thinking of World Events. For all of that I am grateful to you both. Thank you.
I think what Yum Brands and Credit Suisse are doing are the beginnings of a long tragic condition that exists in the worldwide marketplace. I personally expect the condition to spread rather quickly over the next six months.
Mets will win World Series! lol
How can you be linked up with Weiss advisory pundits who predict ” end of world ” predictions in a financial market crash of Epic proportions( Mr Larry ). Guess you don’t pay attention to its ” Halo Effect.” As a Weiss customer it’s Disconcerting to me. And Annoying.
Larry predicts gold and the Dow to rise to record levels. That is not exactly “end of the world”, Joe. So he predicts a crash of some sort first – go to cash and sit that part out. out.
Did you notice how Larry has altered his tune lately? Before it was the world starts crashing on October 16 (or so). When that didn’t happen, it’s become the world will start crashing soon. As for the U.S. Markets, the cycles predicted a big drop to around S&P 1800, followed by a rally starting October 12. When there was no drop, Larry altered his prediction to a big drop coming soon, perhaps in the first half of 2016, followed by the previously predicted surge to new highs around Dow 31000. Before Larry’s Dow prediction was based on the Dow’s rally in 1937; now it’s based on the ratio of the Dow/gold price, based on historical ratios of this measure. Maybe Larry will be right, especially if he waits long enough. But Mike’s positioning for a total market collapse is diametrically opposed. Of course Mike hedges by saying he’s going to cash as a precaution, and if he’s wrong, you’ll only miss part of the rally. Meanwhile, Mike accentuates the negative (YUM, CS), while conveniently glossing over or ignoring the positives (MCD, GOOG, AMZN). Seems Weiss has all bases covered, no matter what happens in the Markets; follow at your own peril.
I already have-I have Zero $ Equity Position. Waiting for “the Great on Sale” debacle to begin. Patiently on the sidelines for now. Cash will be rewarded. And I don ‘this need pundits to tell me what’s cheap.
It is apparent the Fed is still playing games.. From a biblical prospective, “the truth will be found out” , and there will be hell to pay!
Let us hope it is not of biblical proportions. Financial Armageddon would not be pretty. Fortunately, the Fed is not God, regardless of its fantasies.
I get the impression that those who manage corporations do so for their own interests and take the shareholder and stakeholder along for the ride. The only way we ever know about the outcome of their decisions is the stock market’s response in the form of share prices. I know that it would be a bit much to ask for, but how about a greater focus upon fiduciary duty to the company, shareholders and stakeholders as stewards who are accountable rather than farmhands whose only job is to milk the (cash) cow.
It’s been my experience after 30 years in corporate America that half of the publicly traded companies are run by executives that depend on fear rather than ideas and leadership, and the result is a ‘play it safe’ mentality that crushes innovation. My last 15 years were with a company that went through 4 mergers, countless reorganizations, and whose net effect was the destruction of $10 billion in value and Chapter 11. Nevertheless, the 3 CEOs that oversaw this train wreck (and their minions – they always have their ‘A Team’) walked away with millions. Shame on me for not getting out sooner.
Hi Mike
BHP. is talking about borrowing funds to give increased share holder dividends. Commodities have almost tanked and so they want to increase debt to pay these dividends. Gives you hope and confidence right??????
But it will make the company look superficially good, and let the management vote themselves big bonuses at year’s end.
I have owned a small amount of BHP for many years and have done well with it. Management has a good record. From what I understand they have considered this move because they believe the worst is over for commodities and the risk therefore minimal. They insist the China situation isn’t near as bad as is being reported. I appreciate the heads up but I will stick with it for now. Jim
NEXT FINANCIAL CONTAGION ?
Big (European) Banks are In Trouble and Don’t Know What to Do. Who is next ? Could it be that U.S. BANKS are eventually headed for the same troubles as Credit Suisse and Deutche Bank?, only with no “Plan B”? It sure is looking like we could be next.
All one needs to do is take a look at what banks lent money for fraking and buy backs to determine which banks will be in trouble down the road; but who will be able to bail them out then?
Canada did very poorly since 2009 under a Conservative Administration while America did very well during the same time period under a Liberal Administration…
Another reader blamed the poor performance in Canada on the fall in the Oil and Commodities markets…
If that were the case, then why did America do so well despite experiencing exactly the same fall in exactly those same markets?
Nope, history has shown us that Conservative Administrates are poison on economies and in turn, the stock markets…..
Another reader recently pointed out quite correctly that The Market isn’t The Economy. The Stock Market has certainly been juiced with free money but I think even you would have to admit that real economic growth is not all it should be. I do not think the US economy is in very good shape at present. I don’t see how you can brag about systemic real unemployment at record levels, 94 million Americans not working, 49 million on food stamps, and $18 trillion in debt. We are all playing shuffleboard on the deck of the Titanic. If you are right and the Liberals prevail and salvage our current mess I will be a willing convert. I think the macro situation has so deteriorated that none if them can fix it, and both parties are responsible. Jim
Yes, history will repeat itself; see my comment above.
Will Mike Larson ever get it right? Every month this year he’s been wrong about The Fed raising rates..wake up pal, it’s not happening! Your government can’t afford the higher repayments. Be honest & admit you are wrong again, like your “oil to rise” call last year. Good luck :) What a consistent persistent gambler ;) I wonder if he’s been throwing away his own money or just telling everyone to toss there’s..PS global markets have been rising, not falling..there is no QT & won’t be..for a lonnggg time..Wake up & smell it..Stop misleading readers..They show you the respect to read..some are even foolish enough to act on it..Please lift your game or go back to school Mike
The fundamentals of many companies are deteriorating, the job market is ugly, and corporate debt is way overextended. The market keeps going up. Any idea when this “fake rally” will end?
Mike,
With the recent rally in the market, especially today’s Dow’s run up+320.55, are you still bearish on the market going forward?.I am a subscriber and have followed your advice to buy market inverse ETF’s and go to cash, but am now sitting on a pretty good deficit.
Scotty B.
Why did the markets go so high today? Seriously can anyone give an answer that has any logic to it. As far as I can see the markets are not connected to any kind of reality. Truly I cannot fathom how the markets could have such a day in this financial day and age.
Please read the second bullet under the above “Other Developments for the Day” for the answer to fathom this.
Seems Europe and China are going to print done more money! Jim
It’s always fascinating to hear the formulaic pronouncements on “liberal” v. “conservative” governments, particularly in reference to the Canadian experience. The fact is that, whatever the assumptions about liberal “waste and extravagance”, the historical record shows that the economy has consistently done better under Liberal governments. The most recent example: The resurrection of the Canadian $ under the Liberals in the mid-90s to the early 2000s (it was jokingly referred to by the WSJ as the “northern peso”). Whatever right-wingers say about the waffling of the left-centre it sure beats the ideological rigidity of the right.
Canada isn’t the US. Their big problem is whether the are going to speak
French or English. They don’t even lock their doors. If it wasn’t within shouting distance of The Arctic Circle I wouldn’t mind living their at all. The valid comparison is Europe. They have been doing what we want to do for years and it simply isn’t working. Jim
Michael,
These kinds of central bank actions combined with the mis-allocations of capital and distortions of the economy because of this irresponsible fiat, paper, worthless currency is QUICKLY bringing us close to the end of this equity bull market..
“Smoke and mirrors”, “tricks and shenanigans”, sum up my thoughts on what many companies like Yum have been doing for years. How can the new “sum of the parts” greatly exceed the market cap of the total company that previously existed; even though it is basically the same old business. And what about companies borrowing huge sums of money to buy back stock or be able to pay unrealistic dividends to shareholders. Borrowing to buy out your competitors also points to something being “amiss”. If you can’t beat them, absorb them. Companies used to grow based on internal growth and rising profits. I do believe that all of this has gotten worse lately, yes indeed!!
When a company starts spinning out reorganization plans, like Yum and Credit Suisse are doing, especially after decline, you KNOW there is trouble brewing. Why mess around with things if everything is going smoothly? ‘Best to get out, even at a loss. Losses seldom become smaller in that sort of situation.
Since you used the football analogy, I noticed that you forgot to include Deflategate and all the other questionable things your favorite team has done since Belichick/Brady arrived that somehow always gets swept under the rug. (I’m sure no money was exchanged for it going away, not) Which reminds me of VW pretending that it was only a few low level people that decided to hide emissions while being tested. Or large institutional investors that are selling right now to retail investors before they leave the market and the dow then drops to 13000-14000 and then start buying back the retail shares for the next run-up. Lack of Ethics in sports mirrors the corporate world. Not sure who follows who…
I am a little excited about the Mets and would have been just as excited if the cubs would have made it to the series. I am a big giants fan, watching my first game at seals stadium in ’59. If a team wants to win a world series you have to have the pitching, and the mets have the pitching, now, and for the next few yrs. If the cubbies got in Arrietta would have to pitch three games, if it came to that.
The Met’s pitching staff is one if the best I have ever seen. Great command, on the corners at the knees. Their pitch patterns look like they were done with a rifle. I’m a Cubs fan, but they were overmatched. Poor Jake Arrietta had racked up 240 innings. Even the best pitchers have limits. The young Cubs should be proud though, they are way ahead of schedule. For the next two weeks I am a fan of the exciting Meta team. I was at the Dodger-White Sox Series in 1959. I’ll never forget Junior Gilliam And Early Wynn. Murphy could make history this time. Jim
BTW, you Giant fans have had your turn! Jim
Is now a good time to buy a house?
Agreed, two companies sharing the same brands in different regions of the world is stupid.
The OECD reported lately that Canada’s GDP and employment have been slipping for the last nine years versus the other OECD countries. This tells me that the Conservative supporters either don’t read financial news or they feel ineptness is a quality they admire in a Prime Minister. I didn’t vote Liberal but I feel they have vision, something that has been lacking in our former leader.
I am dumbfounded by the number CEOs, CFOs & C on whom cannot extrapolate (to form an opinion or to make an estimate about something from known facts) the value of income their companies have earned. The excuse most often given: The value of a higher US Dollar.
These individuals placed into management positions by board members would rather admit to a lack of education regarding extrapolation of Dollar/Euro and others than admit to failure in leadership. There may be bonuses and other monetary benefits earned by these ignorant folks (admitted to via their reporting) but, that is for auditors, board members and shareholders to uncover.
To accept the excuse of leadership by board members allowing these Cs to remain in these million dollar positions should be unforgivable and replaceable by shareholders.