"Not as if we got dumb all of a sudden"

J.C. Penney is a storied tale in U.S. retail. Its first store opened in 1902 in Kemmerer, Wyoming. That store is still open for business. But today shareholders had a rough day. The stock dropped 5%. The second steep sell-off in 2 days. The company has already had a terrible couple of months. The shares are down over 40% since March. Today the company spooked investors by sending out a chilling profit warning. Its Q4 profit will be $1.80/shr at the most. Previously the company said it would make $2.41/shr. Ouch! But don’t look to CEO Myron Ullman to take any responsibility for the company’s shoddy performance. He’s blaming everything on external factors. The weather, the funky housing market, high gas prices, Hollywood writer's strike (ok maybe not that one). During the conference call Ullman said “it’s not as if we got dumb all of a sudden”. Now that's eloquent.

Business Buzzkills

There will be a little less holiday cheer this year. According to an executive search firm, 85% of U.S. companies say they will throw a Christmas party this year. In 2006, 95% threw parties. To make matters worse, this year’s crop of parties will likely be less fun. More companies are planning afternoon affairs instead of evening get-togethers. And horror of horrors, less booze will be served. Only 70% of parties will serve alcohol versus 85% last year. What a drag! The grinches are blaming it all on sub-prime. Apparently there is simply less money to throw around this year.

More beer money

The Canadian dollar had quite a day. As of 8am the loonie had busted through US$1.10. But the c-buck actually ended the day around 1.07. A lot of volatility. A lot. BNN assigned me a fun story today. Find out how much more buying power Canadians have now versus a year ago when they go abroad. I decided not to look at buying power in the U.S. That has been well documented in the mainstream media. Apparently wait times to cross the border into the U.S. and get back into Canada are one hour plus. So obviously Canadians already know how much further the dollar takes them these days when they go to the U.S.
But what about Europe and elsewhere? The price of a plate of fish and chips in "Archies Fish and Chips" in North London will cost you approx 15 pounds which is about 30 Canadian bucks. A year ago it would have cost you 35 bucks. The price of a pint of Guinness in "101 Talbot" in Dublin Street, will cost you about 3 Euros and 50 cents. Or about 5 bucks Canadian. A year ago it would have been 5.50 Canadian. Savings in the price of fish and chips and lovely pints all because of how much the loonie has gone up against the pound and the Euro.

Microsoft Stuns The Street

People love to knock Microsoft. Kevin O’Leary, host of BNN’s Squeeze Play recently called its Vista operating system “a piece of junk”. That acrid sentiment is shared by many. Despite reliability issues and problems over compatibility with things like printers, Microsoft saw Windows’ sales increase 25% year-over-year. The quarterly report Microsoft unloaded late yesterday was stunning. On revenue, Microsoft beat estimates by 1.4 billion. Now that’s what I call “blowing away the street”.

Analyst David Garrity of Dinnosaur Securities told me today Microsoft executed almost to perfection in every single business category. Its games division, traditionally its weakest sector made its first profit in 4 years. And Microsoft could only count one week of Halo 3 sales ($300M) which fell in the last quarter. Obviously Halo 3 will bring in hundreds of millions more in sales in the months to come and the full effect on the top line will be felt in upcoming quarters.

Microsoft’s stock leaped in After Hours trading, surged in the pre-market and sustained those gains in the regular session. Suddenly everyone loves Microsoft again. Garrity says this earnings statement proves Microsoft can grow despite its size.

ABCP Mess Not Over Yet

HSBC Securities Canada is being sued for providing poor investment advice to a client. Aastra Technologies says HSBC advised it to buy almost $14M in third party asset backed commercial paper. Up until August, parking your cash in ABCPs was seen as a smart and more importantly safe bet. Now the market is in an actual freeze. Nobody wants to buy new paper. And holders of existing paper can’t cash out. And we’re not talking about an insignificant amount of cash. $35B is at stake here.

I spoke to Montreal lawyer Avram Fishman. He represents some of the holders of this dubious debt. He says investors who hold ABCPs are right to sue because it may be their only hope of getting their investment back. Also some holders of that debt can't afford to hang around for their notes to mature at a later, unspecified date. Investors bought the notes based on short maturity dates (as little as 30 days in some cases). Why should they have to wait longer for their money?
Fishman says more law suits are imminent.

Madonna is ditching her label, Radio Head selling direct to fans

Madonna is ditching her long term beau. No not Guy Ritchie. Her record label, Warner Music Group. The pop princess is inking a deal with concert promoter Live Nation for about 120 million dollars.

The deal includes record sales, concert ticket sales and merchandizing. Madge’s deal is groundbreaking because it consolidates every revenue stream under one roof. Historically "artists" had to cut separate deals with different companies for different revenue streams.

Radio Head has started selling its new record direct to fans. With a twist. The band is allowing fans to decide what price its music is worth. They can download the songs for free if they want. I spoke to legendary Canadian music producer Jake Gold about this arrangement today. He says Radio Head will fare just fine using this tactic. But Gold says the strategy won’t work for everyone. Radio Head has an extremely loyal fan base. Not many of the its fans are likely to gyp the band and download the music for free. An upstart band with no name recognition is likely to get jipped.

Is Cott a terrible investment?

Investors hate uncertainty. Much of the uncertainty around the fate of Cadbury Schweppes' drinks division is now gone. The company says Schweppes will be spun off and get a listing on the NYSE next year. The stock moved up about 2 percent on the news.
At its core though, the development is a massive disappointment for management. CEO Todd Stitzer admitted today that post credit crunch, the debt market is still in terrible shape. And that an acceptable sale price was unlikely. In other words no private equity company was interested in ponying up the cash. Obviously. What financier would be willing to cut a 15 billion buck cheque to private equity today? Nobody that’s who.
Still the worst off today would seem to be Canada’s Cott Corp, a bit player in the soft drinks market. In March, when Cadbury announced its plan to shed Schweppes, one of the scenarios being touted by analysts was private equity would buy Schweppes and then merge it with Cott. Another wilder, more outlandish scenario was that Cott might even buy Schweppes. Mon Dieu! Considering Schweppes is 28 times bigger than Cott it would have been a pretty nutty deal. But not out of the question considering the credit zeitgeist at the time.
Alas all that is out the window today. Cott shares lost about another 1 percent of their value today. The company is worth about half of what it was a year ago. Rubbish investment going forward? Analyst David Hartley at BMO told me today all might not be lost for Cott shareholders. The company is so cheap now that private equity may buy it anyway. If it was attractive during the height of the boom at 16 bucks. And Hatley maintains it’s still attractive today at 8 bucks. Dire credit market be damned.

Cognos Conundrum

Shares in Cognos (CSN TSX) zipped up the most in a year today. About a 10 percent pop. For good reason most would say. Its chief competitor Business Objects of France is being taken out at a fat premium by SAP of Germany. Consolidation is gripping the business software sector and Cognos is the only standalone left. RBC analyst Mike Abramsky figures there’s a 95% chance Cognos will be acquired now. Abramsky upped target on the stock to $59. That's about 11 bucks higher than where the stock closed today. A nice gain for sure if everything pans out as planned.
Another analyst I spoke to on the phone today had a wee bit of a different take though. Nathan Schneiderman of Paradigm Capital in California says investors should not be buying shares in Cognos. He views the SAP acquisition of Business Objects as a negative development for Cognos and has actually cut his rating from a buy to a hold. Reason being in recent months, both of Cognos’ chief competitors have been acquired. Business Objects by SAP and Hyperion solutions by Oracle. Neither Oracle nor SAP had their eyes on Cognos and neither is likely to pursue Cognos now. Not good says Schneiderman. Furthermore a Cognos takeout is likely to take months to materialize. The company’s Q3 earnings due out in about 8 weeks will likely be released before any deal is announced. In Q2 the company missed the street and the stock sold off. That Schneiderman says could happen again.

The Zeitgeist Has Changed

The Japanese are prodigious savers. Historically they’ve socked away about 20 percent of what they earn. Citigroup knows this. HSBC knows this. That’s why both banks are upping their exposure to the Japanese market. HSBC recently said it would open its first retail branch there in January. Citi which already has a beefy branch structure in place today announced it's scooping up the chunk of brokerage Nikko Cordial it doesn’t already own for $4.6B. A 16% premium. Nikko shareholders will get Citi shares for their trouble. No cash. Increasingly big deals are being funded using equity as opposed to cash. The cash component of Toronto Dominion’s $8.5B purchase of Commerce Bancorp is pretty small too. Only about 25% of the deal. This seems to be the lasting legacy of the global credit crunch. A tighter and more stringent credit market means companies are unable to borrow the bucket loads of cash they need to fund these massive deals. That may also be driving down the overall value of deals and the premiums being paid. Bank analyst Gary Townsend commented on BNN today the premium being paid by TD for Commerce Bancorp was pretty thin. Savvy deal making by TD you could say. Or the zeitgeist may have changed.

Back From Vacation

I was away for a bit. I went to "Beautiful B.C.". That's what all the car plates say there and I have to agree. Spent majority of time away on Vancouver Island. A wild and relatively untouched place. Anyway I come back to the world of business news to find the C-buck at parity with the greenback. Mainly down to Bernanke's aggressive cut in rates. Of course oil bubbling along near 80 bucks a barrrel doesn't hurt either. Quite a story for Canadians and the economy. When I first came here almost 10 years ago there were calls for Canada to ditch the loonie altogether and adopt the American buck as their currency.
If Canada was a cat it should be of the cheshier variety. In reality Canadians are a notoriously humble bunch so they're not likey to rub it in anybody's face. But well done at any rate Canada.

Lou Schizas

I had the honour of working alongside and becoming friends with the great Lou Schizas over the past 3 years. Lou's last day at Business News Network was today. He worked at BNN, formerly Report on Business Television as an equities analyst, since the station's launch in 1999. He was perhaps the station's best known face and on-air personality. Originally from New York city, Lou is a tough as nails, no nonsense, "here's what I think kid", razzle dazzle, blunt, bold, force of nature. Lou is moving on to radio and continuing his teaching at Sheridan College where he's a finance prof. And what a teacher. I learned so much from Lou. His passion, character, intelligence and wit are unmatched. Lou coined the term "Happy Capitalism" and he truly believes capitalism leads to happiness. Lou I salute you and wish you the best for the future.

RIP Business Section

In the internet age how can the business section of the newspaper survive? I guess you could say the same thing for general news. But the news flow in business is a different beast than in any other beat. It changes on a minute by minute basis. Even in tv journalism where we might have one hour leadtime before presenting a live report on a news item, often it's hard to keep up. How can printed business news hold up when the stories have been written in some cases twelve hours previously? In no other area of news is access to timely and up-to-date information as paramount. And nowhere else does the "ancient history" tag apply as aptly than to the printed business word. Sure the newspaper's website can update the story. But in the meantime the printed version will do nothing but fester and draw attention to itself as a uselessless incarnate. Television journalists routinely used to rip off newspaper journalists for story ideas. But now the ripping off has moved to the wire service, Bloomberg, Reuters, AP etc. These guys break the story online. Then everyone else follows.

Dubious debt

When Dominion Bond Rating Service rates a piece of debt, the issuer of that debt pays DBRS.
DBRS says it charged the issuers of Asset Backed Commercial Paper up to 125 thousand bucks per debt security. In addition DBRS charges a "maintenance fee" of about 40 thousand. It's been more than a week now that Coventry admitted it was having trouble rolling over new debt. Some of Coventry's ABCPs have pieces of subprime mortgages as their underlying asset. Two hundred thousand Americans defaulted on subprime mortgages last month. Two million subprime defaults are predicted by year-end. No wonder then that prospective buyers of this debt dried up. DBRS says it's now reviewing how it rates these securities and admits late last year it started to question the ratings on ABCPs. Yet the paper issued by Coventry which nobody apparently wants to buy still carries an "R-1" rating. Equivalent to the safety of a T-Bill which is backed by the government.

The Bizarro World

The price of eggs in China went up 30% in July. Cooking oil by the same amount. Inflation brought on by the industrialization of China. So the People's Bank of China hiked rates today. Again. The forth time since March. No liquidity crunch over there.
The CSI 300 (equivalent to the S&P 500) actually went up 2% today in response to the hike. And no folks over there are not pricing in rate cuts going forward. Another hike is expected by the end of the year. The overnight lending rate is just over 7% right now. Could the scenario in China be any different than in North America? I've read about companies in China issuing press releases with bad news and stock prices going up as a result. People also apparently will buy securities based on the tickers alone. Lucky numbers and the like. Is China the bizarro world of the capital markets?

Betting on Dean

Looks like Hurrricane Dean won't inflict major damage on oil refineries in the Gulf Coast. Welcome news for anyone living in that area. Rotten news for investors long energy, particularly natural gas. Making short-term calls based on the weather seems like a particularly risky gambit. Betting on stock or commodity prices is risky enough. Throwing something as uncertain as the track and force of a hurricane into the mix seems downright wacky. A year ago, Amaranth lost about $6B due to this kind of nutty, weather bet on natural gas. Let's hope today's 14% plunge in nat gas prices won't cause any funds to go belly up. The last thing the market needs is another hedge fund blowup.

The Black Swan

So the Fed came to the rescue. Sort of. Dropping the discount rate by half a percentage point. Pretty much everything rallied today. Now debate turns to do this mean the Fed will cut the federal funds rate in September or even before that? If that happens look for a rally to end all rallies. Some speculate we might even a Federal funds rate cut as early as Sunday night before markets open on Monday.
So much has changed in the space of a week in the markets. What the markets are going through is what author Nassim Nicholas Taleb would no doubt term a "Black Swan" event. I've been reading "The Black Swan" off an on for weeks now. It's a hard book to read in some fell swoop. Or maybe it's that I just don't have the time so wrapped up I am in the Wall Street Journal these days. What a newspaper. But I digress.
"The Black Swan" is a must read for any financial journalist. Reason for the title by the way is before they discovered black swans in Australia the assumption was that only white swans existed. Lesson there is, don't assume anything I guess.
Nassim hits on a few areas that ring true for me personally. The fact that experts will predict with seemingly unflappable confidence predict that a certain event is sure to happen e.g. oil prices are sure to go higher, interest rates are going up this year, blah blah blah. Yet turns out the so-called experts are wrong as often as they are right. So where does that leave the investor? Tons of other insight such as the tendancy of people to look for confirmation of what they assume to be true, rather than searching out evidence that might undermine a particular way of thinking. The central tenet though is every once in a while a "black swan" event. happens. And unforseen event that basically knocks everyone on their ass. Subprime contagion anyone? Critically Taleb lays out why and how people should prepare for "Black Swan" events.

TSX Tumbles.

Another helter skelter day on the markets. Two minutes after the open the TSX was already down 200 points. Index was down over 500 points at one stage. Station sent me down to King & Bay to gauge reaction from the Bay Street folk. It’s a funny thing to ambush people on the street with a camera. Getting “streeters” as we in the biz call it. Most reporters hate doing it. A colleague who worked for a time at the BBC says the Brits call it “AAA” as in “ask any arsehole”. For some reason I don’t mind doing streeters at all. I ended up getting sound bites galore today and more than a handful were insightful.
When I asked one Bay Streeter if investors are right to be panicking? he replied “Yes and September is historically a bad month on the markets too” Another gentleman said “bring on the panic selling”. His thesis was the selling would create a buying opportunity for a bargain hunter such as himself. The buying on the dips strategy has been a sound one over the past year or so. But I have a sneaking suspicion it truly is different this time.