MCI-Verizon Merger Approved

MCI today announced the certified results of its shareholder vote that approved its merger with Verizon. The company said that the results show 64.6% of outstanding shares and 88.2% of votes cast were in favor of the merger. Also today MCI's Board of Directors declared a special dividend of $5.60 per share in accordance with the merger agreement. The special dividend will be paid on October 27 to shareholders of record at the close of business on October 17.

"Little evidence of a housing bubble"

A paper in this quarter's Journal of Economic Perspectives by Himmelberg (the Fed of NY), Mayer (Columbia) & Sinai (Wharton) says that their "analysis reveals little evidence of a housing bubble." We'll see if they know what they are talking about. Myself, I am skeptical myself since part of their analysis involves constructing new measures for evaluating the cost of home ownership because existing measures (which seem to indicate prices are exuberant) are not adequate. Whatever.

Ameriprise

American Express Company completed the distribution to its shareholders of all of the outstanding shares of Ameriprise Financial (the former American Express Financial Advisors).

Delta files for bankruptcy

Northwest too

Federated-May merger complete

Transaction closed today.

Third Union Is Leaving AFL-CIO

The United Food and Commercial Workers just became the third union to quit the AFL-CIO. The 1.3 million member union said it was committing itself to the new Change to Win Coalition, following in the footsteps of the Teamsters and the Service Employees International Union.

In addition to the UFCW, Teamsters and SEIU, the new labor coalition includes three AFL-CIO member unions (the United Farm Workers, Laborers' International and Unite Here) and the United Brotherhood of Carpenters and Joiners.

Source: Wall Street Journal

Who would fall for this?!

I have been getting these stupid flyers that claim "Buy stock XXXX, which is poised to skyrocket." It's a well-known variation on the scam; the only thing that has impressed me is the increasing quality of the production. One even posed as a 32-page investment magazine with a variety of articles, but if you actually looked through it, it was only pushing one particular stock.

Got another one today and actually took a minute to read through it. A footnote reads, "[The producer of the flyer] may hold positions in the company mentioned." Even more ridiculous, it discloses that, "The profile of XXXX is a paid advertisement by a third party shareholder to XXXX in the amount of 250,000 shares of stock that need to be sold to pay for the cost of this advertising." And most farcical of all we are treated to "The target price was determined arbitrarily."

Who would fall for this?!

Obviously, this scam works or they would have stopped sending me the flyers. But I am amazed to learn that there are enough people dumb enough to fall for this pitch to keep it alive.

What is even more unbelievable is that they obtained my name due to my Financial Planning Association membership. I have cancelled my membership not just for the obvious reason that I believe they violated their duty to take reasonable care with my information, but even more so because the FPA apparently has enough members who might fall for this scam to make them worth targetting.

Ford and GM Hurting

After a disappointing performance in the first half of the year, Ford Motor Company is considering cutting more salaried workers, a company spokesman said Friday. Ford spokesman Oscar Suris wouldn't confirm a report in The Wall Street Journal that said Ford may lay off up to 30% of its white-collar work force - about 10,500 of its 35,000 salaried workers - in North America over the next few years. But he noted that earlier this week, Ford CFO Don Leclair said "nothing is off the table" when asked about possible cuts during a conference call to discuss second-quarter earnings.

Ford already has announced plans to reduce its salaried work force in North America by 2,700 people by the end of this year. It also has said it will reduce the use of agency workers and other purchased services by 10%. But Suris said the company is considering even more aggressive measures. "We have operating challenges that include our cost structure and excessive production capacity, and we have plans to address that," Suris said.

Ford said it earned $946 million in the April-June period versus a profit of $1.17 billion in the year-earlier period. It lost $907 million in North America, down $1.4 billion from a year ago. Ford's U.S. sales were down nearly 4% in the first six months of this year.

So Ford made $1.853 billion on sales outside the US? Man, if they could somehow wipe their US operations off the face of the Earth, they would be on easy street!

Ford CFO Don Leclair said the automaker would no longer issue quarterly earnings forecasts. GM withdrew its earnings outlook for 2005 after reporting a stunning $1.1 billion first-quarter loss in April. Both GM and Ford have been hurt by a dramatic slowdown in sales of profitable mid- and large-size sport utility vehicles amid high gasoline prices. They are also struggling with higher borrowing costs following cuts in their debt ratings to "junk" status by the Standard & Poor's rating agency in May.

Yuan to fluctuate

China ended the yuan's peg of about 8.3 per dollar that had been in place since 1995 and will allow it to fluctuate versus an unspecified basket of currencies, the central bank said on its Web site. The new yuan rate strengthens the currency to 8.11 per dollar.

To Rein In CEO Pay, Why Not Consider Outsourcing The Post?

Outsourcing is the rage. It is possible to find qualified and cheaper workers to write software and perform other tasks in India, China, Taiwan, Turkey, etc. It makes competitive sense to outsource. Which leads to the following statement. Maybe it's time for American CEO's to include themselves in the outsourcing strategy. Certainly from a compensation standpoint it could be a great deal. US executives are by far the highest paid in the world, and their pay seldom has anything to do with performance. Directors give executives a boatload of money before they have done a lick of work. And when they fail, they are given another boatload of money so it doesn't hurt too much when the door hits them on their way out. If outsourcing the CEO's job isn't appealing, then what is the solution? Directors have to put a price tag on every single form of compensation so shareholders truly know what is going on. And directors have to stop rewarding incompetence. If a CEO is fired for screwing up, no more exorbitant severance packages.

(The Wall Street Journal, 19-Jul-2005, Midwest ed., p. B1)

Real Estate

Built on the assumption that home prices will continue to rise, interest-only mortgages represent a gamble that many home owners accustomed to conventional fixed-rate loans would never take. Unlike conventional 30-year mortgages, interest-only loans typically don't require payments toward the principal for three to seven years, substantially lowering the costs of entry and making it easier to qualify for the loan. [1]

But the financial firepower of interest-only mortgages is affecting all home owners. They are further elevating already lofty housing prices, a trend that's raising fears of crash that could plunge the economy into a recession. "When this market adjusts, it's going to be painful," said UCLA economics professor Edward Leamer, who has been warning of a California housing bubble for three years. "Borrowers are getting in over their heads, and lenders are too."

The growth of interest-only mortgages reflects a fundamental shift in the way many Americans think of their homes. Rather than places to grow old in, they see homes as part of their investment portfolios — in fact, a much better bet than the stock market in recent years. In California alone, homeowner equity has grown by a whopping $1 trillion since 2000, according to the California Building Industry Association. Even borrowers who can afford the higher payments of a conventional mortgage are opting for interest-only loans, so they can free up more cash to invest in retirement plans, college education funds or other home purchases, [2] said Mark Carrington, director of information products for LoanPerformance, a mortgage research firm.

[1] Yes, interest-only loans typically don't require payments toward the principal for 3-7 years, but at the end of this period eventually you *will* have to start paying down principal and/or re-finance your loan (either of which will result in a higher payment). Furthermore, we are in a period of historically low rates, and interest-only loans are generally variable-rate. So at the end of the interest-only period, rates will almost certainly be higher, causing payments to be even higher still. People are jumping into these loans under the assumption that their income will be substantially higher in 3-7 years; in most cases that assumption is unwarranted.

[2] Retirement investments or college funds would not be an altogether bad reason to do this. However, this statement is inaccurate. In most cases, the only reason people get into these loans is to buy a lot more house than they could otherwise be approved for (and often a lot more house than they can actually afford). Their payment is still a stretch, and any savings are used to finance current consumption not investing.

SCOTUS: Sorry, Andersen, Our Bad

The Supreme Court Tuesday unanimously threw out the conviction of accounting firm Arthur Andersen, a symbolic victory for a nearly defunct company torn apart in a document-shredding case involving the fallen energy giant Enron. In a 9-0 opinion, the justices concluded that "jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing." Chief Justice William Rehnquist wrote the opinion, saying, "Indeed, it is striking how little culpability the instructions required."

The conviction had essentially forced Arthur Andersen out of business. The company, which is down to a couple of hundred employees handling the remaining legal issues facing it, said it was pleased by the decision even if it did nothing to bring the former Big Five accounting firm back to life.

"We are very pleased with the Supreme Court's decision, which acknowledges the fundamental injustice that has been done to Arthur Andersen and its former personnel and retirees," the firm said in a statement. "We pursued an appeal of this case not because we believed Arthur Andersen could be restored to its previous position, but because we had an obligation to set the record straight and clear the good name of the 28,000 innocent people who lost their jobs at the time of the indictment" and protect the firm against a flood of civil lawsuits.

There's a reason people talk about "liberal media bias"

While I'm not given to idiotic conspiracy theories about this, it's a well-known fact that most reporters vote Democrat. This clearly results in a kind of group-think, where the "obviousness" of certain "facts" is uncritically accepted.

Today's the headline at the top of the AJC's business page blares out at me, "GDP report fans stagflation talk." Well, if you read the story, you learn that the economy in 2005Q1 grew 3.1% (less than the expected 3.5%). This (pretty good) rate is the weakest growth pace in two years, when growth has ranged from this quarter's 3.1% to a high of 7.4% (in 2003Q3) and averaged a very healthy 4.3%. Yet one not-blistering quarter (but still over the magic 3%) and out comes the "stagflation" talk.

During Clinton's tenure as President, 13 of the 32 quarters had less than 3.1% GDP growth, and I don't recall any "stagflation" "talk" being "fanned." Something to think about...

More Trouble for Krispy Kreme

Krispy Kreme Doughnuts announced that Canadian franchisee KremeKo has filed in the Ontario Superior Court of Justice to restructure under bankruptcy protection. Krispy Kreme owns 40.6% of KremeKo.

Krispy Kreme Doughnuts is trading at $5.93, down 82.7% from their all-time high of $34.33 (on 4/29/2004, exactly one year ago tomorrow).

Response to Comment on Google

Google shares on Friday leapt by 7% on Friday after reporting blow-out quarterly earnings for the third time since becoming a public company last year, powered by the continuing boom in advertising linked to search engine results.

IPO = 95.96, Stock value as of this posting = 216.80. God, I wish I had gotten in on the ground floor for this.

Getting in on the ground floor is great, as long as you are able to recognize when the elevator has gotten to the top and don't ride it all the way back to the basement. There is just no way that Google is worth $216.88 a share, which is 151x 12-month earnings which are widely described as "blow-out." Consider what will happen once earnings are no longer "blow-out." The multiple and stock price is going to come crashing down. As well it should ...

Keep in mind this is a company with rapidly shrinking margins. In 2002 it was 22.7% ($100M/$440M); it 2004 it was 12.5% ($399M/$3.19B). Yes, revenue is growing at an incredibly fast pace, but is this real? (let's remember Enron, WorldCom, Global Crossing and to a lesser extent AOL with their revenue "growth") And is it sustainable? Revenue from 2003 to 2004 may have doubled from $1.5B to $3.2B, but it is not going to double again in 2005.

Can anyone seriously believe that Google with $3.2B of revenue and $400M of earnings is worth $60 BILLION??? Let's compare it to the companies immediately above and below it on the market cap list - Hewlett-Packard and 3M. HP has $82B in revenue and $3.5B in income; 3M has $20B in revenue and $3.1B in income. Not only are both of these companies' INCOME approximately the same size as Google's REVENUE, but 3M has a healthier profit margin (15.5%) than Google. There's just no way that Google is fairly valued at its current price.

More on the Verizon/MCI/Qwest saga

Curioser and curioser...

Verizon Communications said yesterday it is paying $1.1 billion ($25.72 a share) to acquire a 13.7% stake in MCI directly from its largest single stockholder [Mexican investor Carlos Slim Helu]. The transaction removes a major wild card in Verizon's bid to fend off a higher-priced offer to acquire MCI by Qwest Communications.

42% of first-time home buyers put 0% down

Today, the typical first-time home buyer might finance the entire cost of the house and pay only the interest owed on the loan for the first several years. The latest option? A monthly "minimum payment" that doesn't even cover the interest. [...] buyers have been experimenting with more aggressive financing in the best of all times, when interest rates remain low and home prices continue to appreciate.

Source: Money

Buick and Pontiac strive to avoid Oldsmobile's fate

More bad GM news...

At an analysts' conference last week, GM Vice Chairman Bob Lutz said both lines are "damaged" and that dropping one of the venerable names - both date back more than a century - was possible unless there's a turnaround. Lutz said closing a brand, as it did with Oldsmobile after the 2003 model year, was something that GM hoped to avoid. But he said that, if the carmaker's brands don't hit sales targets, "then we would have to take a look at a phase-out. I hope we wouldn't have to do that. What we've got to do is keep the brands we've got." GM officials have tried to backtrack somewhat on Lutz's comment, saying there are no plans to drop a brand and that he was only answering a question about a hypothetical. They say they're confident the brands will get the investment needed to grow.

But auto experts look at GM's continued slide in market share along with the financial problems caused by its current cost structure, and say the possible end of another GM brand isn't as much a surprise as the fact that a top GM executive would raise the possibility. "It's a signal to folks that it's going to happen," said Walter McManus, director of the Office for the Study of Automotive Transportation. "They're very careful not to speculate about things that aren't going to happen." Buick had 1.8% of the U.S. market in 2004, just ahead of the 1.7% share that Oldsmobile had in 2000, when GM announced the end of that line. Pontiac had a 2.8% share.

SunGard Acquired by group of private firms

A consortium of seven private investment firms is paying $10.8 billion to acquire financial data powerhouse SunGard Data Systems in the nation's second-largest leveraged buyout ever. Under the terms of the agreement, SunGard stockholders will receive $36 in cash for each share of SunGard common stock they hold. Also $500 million in bonds will remain outstanding, so the total transaction is valued at $11.3 billion.

The deal would be exceeded in size among takeovers of public companies by private investors only by the Kohlberg Kravis Roberts $29.4 billion purchase of RJR Nabisco in 1989.

SunGard creates a variety of financial software, including products that manage complex stock trades, insurance holdings, mutual funds and corporate finances.

(SunGard purchased an employer of mine back in 1999.)

Most people "above average" financially

According to a Money poll conducted February 11-15, when asked "How do you rate your financial status?" Americans answered:

• 53.7% feel they are better off than other people of the same age and education level
• 36.3% say they are on par
• 9.9% believe they have fallen behind

54-10. Wow! How can people's perception be this far off from reality?