Desparate for money, Citi goes Junk

Citi took out a loan that pays 11% coupons today. When an investment grade company has to take out a loan/capital infusion at junk rate, you know the credit market is in trouble. Especially when we are talking about a financial service company, which expertise is in managing interest spread and capital.

http://biz.yahoo.com/ft/071127/fto112720071558005500.html?.v=1

Sorry for all the Citi's shareholders and soon to be lay-off employees. I feel your pain.

However, the former CEO of Citi won't be feeling the pain with a severance package that is worth $40 mil. Good job, Chief Value Destroyer Chuck Prince.

Goldman the magnificent

Goldman Sachs is an unstoppable beast.

First, they're the #1 investment bank on Wall Street.

Then they navigate the subprime mess with speed and efficiency unheard of in the Street (although the practice of taking the opposite side of the trade .... on their clients, is heard of) and was the only bank with heavy subprime exposure to turn a profit.

Third, all of their alums are heavily court at by their competitors and are turning up in CEO suites everywhere on the Street including Rubin (Citi), Thain (Merrill), Duncan (NYSE), Lampert (next coming of Buffett?).

And this last event is what really pops out at me .... Goldman Sachs' partners helping to play a hand in grabbing back the best player in baseball, A-Rod, from the grasps of Scott Boras and into the hands of the Yankees again.

I think this past quarter has been a great one for GS. Stay tune as I would not be surpise if Goldman somehow rescues the Knicks from being the NBA's black sheep into a powerhouse again by buying out the team from under the Dolan's eyes (Cablevision is a public company and the BoD hates the Dolans), firing Isiah Thomas, jettisoning Marbury, and getting LeBron James in 2009.

New York New York is soon becoming Goldman, Goldman.

Humor me

Don't buy what Steve Schwarzman is selling

A picture (chart) is worth a thousand words.

Am I joking? or Do I mean it literally?

Life takes Visa, but Mastercard is priceless.

So, Visa has finally filed for IPO.
http://biz.yahoo.com/rb/071109/visa_ipo.html?.v=1

Visa is own by a group of well-known banks. JPM and BAC together own 34.8% of Visa. Citigroup, Wells Fargo, US Bancorp and National City own another 24% of Visa.

Now, this chart is a very rough comp. b/w Mastercard and Visa. We know that Mastercard IPO was a success. Mastercard stock went up 5x since its IPO. The problem with this chart is that I'm not sure if Visa is selling out all of its shares to public, which they value at $10 bil. Or if it's selling ~40% stake (60% own by the rest of the banks). If Visa is selling 40% stake and valued the stake at $10 bil. , then it would fetch a $25 bil. market cap. That is in-line with Mastercard's current market cap.

Assuming that Visa fetch the same price/market cap as Mastercard, then its IPO is NOT worth buying into. Even though Visa has a bigger share of the market, it fails to bring its top-line to its bottom-line. The lower net income margin is causing Visa to earn about the same amount as Mastercard (not looking too deep into the quality of the earnings). Visa has also agreed to settle a lawsuit recently- which would cost Visa ~$2 billion dollars. On the surface, Visa looks attractive because of Mastercard's previous success. However, Mastercard's successful IPO launch was due to the fact that it was vastly underpriced. But that is not the case for Visa (unless $10 bil it plans to raise = 100% stake, which I highly doubt at the moment).

However much I love IPOs. Visa is a no-go for me.

Financials dogged the market AGAIN

Looks like many of my potential employers (financial firms)are in trouble. I must say my employment outlook does not look good at the moment. The financials once again take a hit today. As I posted over the weekend; uncertainty clouds over the financials. Morgan Stanley wrote down another couple bil. bucks. No biggie. It's only ~5-7% of MS market cap as Morgan already lost ~40% of its market cap YTD. MS is trading flat throughout the day. Up 0.49% as of now.

This is a good time to bring up the topic of Level 3 assets.

http://www.themoneyblogs.com/urbandigs/my.blog/level-3-assets-credits-next-concern.html

Basically, these are difficult to value assets. These are probably private investments in other private companies, investment in exotic investment vehicles, investment in illiquid instruments. ..etc. So the banks have to "guesstimate" the value of these assets. In today's environment, the value of these assets the banks have to come out with can be ugly. If I didn't sound bearish enough, I will say it again, I'm staying away from the financials.

End Of the Day Update:

A fresh round of buying emerged this afternoon. The XLF finished positive for the day. But I'm still not convinced that the financials are bargain at this level.

A whole lot of Irrational Exuberance Part II

General Motors lost $39 billions?
Most of the $39 billions posted by GM today is accounting NON-CASH charges which is related to the write down of deferred tax assets on GM's book. The loss in GMAC is what concerned me. But even then, GM sold 51% stake of GMAC to Cerberus Group before the subrpime mess got messier. Smart move?
The automotive segment of GM actually made $122 mil during the quarter, driven by strong solid performance results from GM Latin America and GM Asia-Pacific segment. Surprise?

Toyota Motors trades at $200 bil market cap vs. GM $19.5 bil market cap. GM is on my list of stocks to buy if it get cheaper. Too many reasons to list in a blog post. You will definitely see a report on TM vs. GM from me soon.

Time Warner (AOL) mess
AOL division profit decline continued to drag down TWX's results. Disappointing to say the least, TWX replaced Dick Parson with Jeff Bewekes. Shareholders are probably looking at some sort of asset(s) sales in the near future (hopefully, someone would take AOL off TWX's hands). I must say, Steve Case (former CEO of AOL) sold the top. The man is a genius in destroying shareholders' value and enriching his own. I was tricked by Yahoo thinking that TWX is trading at P/E of 11. The company affirmed that guidance of $1.07 for 2007, which make the company trades at P/E of 17. No value here even if they sell AOL out (who will buy that crap?). Good luck to Jeff Bewekes. TWX is off my list.

The Big Red Umbrella?
I did not know that Citigroup sold it's big red umbrella logo to the St.Paul Travelers Group. Looks like Citigroup really need a big red umbrella now. They saved for rainy days, but it has been pouring every day since. On top of that, Citigroup's CDS is trading at the lowest of investment grade level, coupled with a downgrade from Fitch recently, the cost of capital at Citi must be rising. Citigroup is also stuck with $55 bil of CDOs and $135 bil of Level 3 assets (assets that don't have readily market value). I smelled more write downs to come. I'm staying away. If Citi trades at book value, another $10-15 bil write down will bring down another $10-15 bil market cap. That's roughly 10% of Citi $171 bil market cap. Citigroup, I will be waiting for you on the sideline.

I can't believe the automaker is the most attractive out of my list. Talk about Irrationality!

A whole lot of Irrational Exuberance

Google at $700?
Google has gained 40% market cap over the last month or so. That is a gain of $90 billion. It is safe for me to say that the G phone factor has been priced into the stock. And Google has yet to bid on the spectrum.

http://techland.blogs.fortune.cnn.com/2007/11/06/verizon-and-att-no-shows-at-the-google-party/?source=yahoo_quote

Verizon, on the other hand, is trading at $120 bil market cap. This $120 billion market cap includes Verizon landline, DSL, Fiber Optics and Verizon Wireless. It boggled me as to how Google can find $90 billion off an already competitive wireless market.

$1 Trillion Company? Really?
Petro-China is now worth $1 trillion dollar. That's more than 2x what Exxon-Mobile is trading at. If the Chinese aren't selling gas at 2x the price what Exxon get in the U.S., how can you explain the 2x market cap? And if we (U.S.) is complaining about $3.0 a gallon gasoline, how can the Chinese afford $6.0 a gallon when their GDP/Capita is one of the lowest in the world. I'm perplexedly confused.

More Financials Carnage
So Chuck Prince finally quitted, and Citigroup's shareholders might finally get a relief. Not so fast. In the same day as they announced Chuck's resignation, Citi mentioned that it will write down another $8 billion +. Citigroup has lost about $100 bil market cap since the beginning of the year. I'm more than glad to announce that Citigroup will be in my "soon-to-be-too-cheap-and-attractive-value" list. (put that down with TWX)


It's Tuesday morning, I'm jobless and all I care about is $100 a barrel crude oil. Perplexed and Confused? I'm too.

I am not bottom fishing (on the financials).

For the first time in five years, the financials are lagging the broad market indices.

The sub-prime mortgage virus has successfully spread itself to the entire financial system. Any financial intermediaries are feeling the pinch. However you want to be known to the outside world (investment bank, commercial bank, specialty finance company, mortgage lender, or all of the above), you did not escaped the effect of the recession in the housing market. The business of borrowing money short term (and cheap) and lending it long term (at a higher rate) has been very lucrative in the past few years, thanks to the low Fed Funds Rate and a robust housing market.

The party has come to an end as the Fed started to move interest rate back up and as the housing market went down the drain. And most banks are just feeling the pinch now as they are stuck with packages (ABS, CDO) that nobody wants. Each of these financials have recently written down billions dollar of value.

Dude, where’s my value?Source: Seekingalpha.com

The question is, are we done writing down?

Many of us want to believe that this is the last of it. The fact is, I simply don’t know what methods these guys used to write down their books. Which one of these guys are more conservative in their approach? Which one of them are stuck with a lot of bad loans (leveraged buyout loans/mortgage related CDOs)?

Until I get a better picture of these write downs, I’m in the same trench as Michael Mayo, the DB analyst who believed that this isn’t the last of it. (http://www.bloomberg.com/apps/news?pid=20601087&sid=ajoV.anbChd4&refer=home)

I refuse to go bottom fishing in the financials. I can vividly remember the recent turmoil in the housing market and how optimistic we were to believe that the housing market would bottom in 2007, or was it 2008, perhaps 2009 and beyond? The risk in buying these stocks remains high in my case since I don’t really know how to look at the financial companies nor do I have any experience in it. Investors tend to be overly optimistic in the beginning of every bubble burst. I am staying away from the financials for the time being. And not to mention a recent interview Jim Roger did with Bloomberg. He mentioned that there are "level 3" assets that have yet to surface on the books of these banks and brokers. And he is currently shorting the investment banks. I'm going to do my research on these "level 3" assets and in the meantime I'm going to sit tight on the next roller coaster ride.

All banks are not created equal:

XBD: Amex Broker Dealers Index http://finance.yahoo.com/q/cp?s=%5EXBD

BKX: Phlx Banks Index http://www.kbw.com/research/BKX.asp

A Quick Look: Textron Inc. (NYSE: TXT)

Textron (NYSE: TXT)

Business Profile: Textron Inc. (NYSE: TXT) is one of the world's largest and most successful multi-industry companies. Founded in 1923, we have grown into a network of businesses with total revenues of $11 billion, and approximately 40,000 employees in 32 countries, serving a diverse and global customer base. Headquartered in Providence, Rhode Island, Textron is ranked 190th on the FORTUNE 500 list of largest U.S. companies. Organizationally, Textron consists of numerous subsidiaries and operating divisions, which are responsible for the day-to-day operation of their businesses ("Textron businesses").

Textron’s Business Segments:

Bell: The Bell segment includes Bell Helicopter [2], Textron Systems Corporation [3] and Lycoming Engines [4]. Bell Helicopter is a leader in the global helicopter industry and the pioneer of tiltrotor aircraft. Textron Systems provides innovative technology solutions to meet the needs of the global aerospace and defense industries. Lycoming Engines is the world leader in reciprocating aircraft engines.

Cessna: Cessna Aircraft Company is the leading worldwide manufacturer of general aviation aircraft, with product lines spanning single-engine piston aircraft, utility turboprop aircraft and Citation business jet models. Citation customers have access through a network of 10 company-owned Citation Service Centers.

Industrial: The Industrial segment is a diverse collection of high-powered industrial businesses including Greenlee E-Z-GO, Jacobsen Kautex , and Fluid & Power Group as well as various smaller brands within the Fluid & Power Group.

Finance: Textron Financial is a diversified commercial finance company with core operations in Aviation Finance, Asset-Based Lending, Distribution Finance, Golf Finance, Resort Finance, and Structured Capital.

Textron 2006 Revenue breakdown

Textron 2006 Segment Profit Breakdown

Source: Company website.

Recent Quarter (3Q07):

Textron reported a solid 3^rd quarter with revenue increased 15% (13% organic sales growth) to $3.3 billion. Earnings per share from continuing operation increased 40% compared to 3Q06. The strong operating performance in Textron was continued to be driven by strong demand for business jets (Cessna) and continue strong military spending (Bell). Cessna’s backlog continues to show strength with 609 business jet orders added to date. All of Textron’s business segments show top-line growth and margin expansion. Top-line growth at Textron was mainly driven by increase in volume and offset by inflation. The Finance segment continued to perform in spite of a shaky credit market. Full year free cash flow now expected to come in at $600-650 million. The free cash flow would likely be used for strategic acquisition (recent purchase of UIC), and for shareholder enhancement (shares repurchases).

Risk factors: (Source: Textron 2006 10-K filing)

-Textron might unable to effectively mitigate pricing pressures. (Industrial segment)

-Delays in aircraft delivery schedules or cancellation of orders. (Cessna)

-19% of revenue derived from U.S. Government. (Bell)

-U.S. Gov’t can terminate contracts with Textron at anytime. (Bell – V-22s)

-Cost overruns on U.S. Gov’t contract

-Interruptions of production and supplies chain and labor disruptions (All manufacturing segment)

-Disruptions in the capital market. (Finance segment)

-Macro economics factors: interest rate, currency and raw material prices

-Legal proceeding and claims.

Overall, Textron is a very solid industrial company that is more aerospace and defense oriented. The management was able to keep cost under control as we saw segment profit margin expanded during times of high commodities prices and higher labor costs. The big question for TXT's future is how well can the non-military related segments weather out a potential slow down in the global economy? That has yet to be seen.