I'm Hosting "Varney & Co." on the Fox Business Network today from 9:20- 11:00AM
EST
President Obama spent some time in a backyard in Ohio yesterday, which is better than spending it on a golf course; unfortunately
this listening tour underscores just how backwards the priorities were out of the gate. This tour was to be some kind of victory tour, the summer of
success, touting all the achievements of the stimulus and other government programs. But, it's just not working anymore. The hype, spin, and untruths,
that is. People are tired of the notion that millions of people would have been out of work if this and if that didn't happen. At this stage of the
game, nobody wants to hear "if" or twisted facts and non-facts. I hope a message was delivered to President Obama instead of a sales jobs delivered to
the good folks in a backyard in Ohio.
The White House message now is give us time, as it's going to take years to get this right. That's a far
cry from the promises, so many promises, from limiting unemployment to 8.0% to going through the budget line by line and to uniting the nation. If
there was a real effort to arrest the economic downturn and turn things around, people might be willing to consider entertaining the hype and spin.
It's falling on more deaf ears these days just as concerns from Americans have fallen on deaf ears at the White House. Turnabout is fair play.
Another huge takeover deal in the works this time is a U.S. name, and a big U.S. name at that. Intel (INTC) is buying McAfee (MFE) for $7.68
billion in cash. This is a huge premium, but the stock closed at a 52-week low yesterday so it's a win-win for both parties. I love these big deals,
and I think more will come. Companies are loaded with cash, and some have begun increasing capital expenditures while others will cut to the chase and
make acquisitions. The good news is this suggests businesses see the economy maybe as hitting a bottom, and at some point over the next year making a
meaningful turn higher.
It also serves as a lesson in value, which is largely ignored by investors these days. There was no hint at this deal
from the charts, but some will be telegraphed. But, the best way to be in a major mega-deal is to understand value and weather some initial weakness.
Free Markets
After all the bailouts and easy money, it turns out banks have only recently begun easing lending
standards for would-be homebuyers and businesses. With demand in the gutter, banks (who are actually in business to lend money when not getting
freebies from the government) have to fight for business, and that's great news. With the kind of money on the sidelines that will eventually seek
returns, banks understand they must make it easier to seduce reluctant borrowers-in-waiting into the mix. It's only a trickle right now, but banks are
lowering standards, and at some point will make getting loans more attractive.
If the government moves out of the way, this ritualistic dance
between banks and would-be borrowers would get hot and heavy, and ignite the economy.
A couple of days ago the Federal Reserve released its
Senior Loan Officer Opinion Survey on Bank Lending Practices. As it turns out, banks eased lending standards for the first time since 2006. Commercial
and industrial loan demand edged up slightly even as standards eased "somewhat."
There were many selections for why banks were easing credit standards or loan
terms; the following two stood out to me. It's not about the economy as only 3 of 32 banks choose that answer.
The issue of risk tolerance is still a key issue, but more respondents said it was
"not important" but equally "somewhat" and "very" important.
The biggest reason banks are making credit and loans easier is competition. If you
connect the dots there is no doubt thin demand is making banks more aggressive. This debunks the notion banks don't want to lend money.
On the topic of demand, smaller firms are still more reluctant
than larger ($50.0m +) to seek Commercial and Industrial (C&I) loans and in fact, banks report demand is moderately weaker than stronger.
For residential mortgage loans, 48 of 55 banks replied
standards "remained basically unchanged", with five large banks saying there was some easing, and two small banks saying standards tightened somewhat.
There is some softening that is now allowing the 90% financing to come back, after a mandatory 20% down became the norm during the financial crisis.
Economic Data
Initial jobless claims hit 500,000. This is a shockingly sad number that should piss everyone off. I
want to cry for my country because it feels like the best we could get is a jobless recovery with a new permanent underclass.
Private Circling a Seemingly Dead
Bird?
By: Brian Sozzi, Equity Research Analyst
It has been a real slog in takeover land when it comes to retailers. Gone
are the days of private equity swooping in to a debt less retailer, leveraging up the balance sheet, and then selling off the operation a few years
later. I find this to be an unfortunate set of circumstances as it gives me very little in the way of juicy material to conjure up, outside of course
findings from a recent mall tour or conveying reasons why a stock needs to be bought.
So it was with great pleasure that buyout rumors emerged
yesterday afternoon on teen apparel king American Eagle Outfitters (AEO). As background, the stock has been a beaten down dog for much of 2010, and it
has all been deserved. The company had product misses in its spring assortments (actually holiday 2009 was infused with slow moving product), average
unit retail prices are being lowered to compete with department stores and off mall operators, and too much inventory was ordered for back to school
as management became euphoric with positive sales trends in the early warm months. All in all, it has been a sad season for the American Eagle team.
Better yet, it has been a sad two years for the company, which has consistently disappointed on product and is falling behind with new store concept
development and international expansion. The stock is trading on a P/E multiple 11.2x consensus 2011 forecasts, a 26% discount to our specialty
apparel coverage universe, and a 15% discount to the current S&P P/E multiple.
Let's briefly examine why a private equity shop is circling
the company:
1. Stock has been hammered
2. Stock is at the lowest multiple in the teen apparel sector, minus Aeropostale
3. Lots of
cash
4. No bank debt (I consider leases debt, just not bank debt)
5. Viable concepts (American Eagle Outfitters, aerie, 77 kids)
6. A
management team that has not executed properly (merchandising and the fact they have been behind peers on international expansion). I think the poor
execution the past three years makes it easier for a private equity to dive in and change things up.
I can absolutely see this name in play for
private equity. Department stores shed teen apparel brands years ago, and I am sure are dealing with their own headwinds with the consumer spending
backdrop and bloated debt positions from years of over expansion. Moreover, I do not believe the thirst is there for big box retailers to purchase
mall-based retailers.
GM Files For IPO
By: David Silver, Research Analyst
So the wait is finally over,
General Motors filed its needed paperwork with the SEC for its IPO, a little more than a year after it entered bankruptcy. It is not really the result
I expected, but it is a small step. The company filed its second quarter earnings release on August 13, and hinted at today's S-1 filing. I am still
working my way through the filing (it is more than 300 pages long), but the initial number that the company hopes to offer is staggering, and not in a
good way. I wrote on Wednesday that I hoped GM would be conservative with its offering in the hopes of generating extra excitement for the IPO:
however, only filing for a $200 million IPO is a bit ridiculous. Yes, it is not all the money it hopes to raise, but saying only $200 million just
seems like a waste of everyone's time. Tesla sold 400 vehicles last year, and GM sold more than 8.4 million around the world, and the Tesla IPO raised
$224 million. Something seems a bit off, no? However, both companies are completely dependent on government money.
I still believe the company
will end up raising between $16-$18 billion through the IPO, but the filing indicates that only the proceeds from the preferred stock (about $100
million) will go to funding the company. However, the IPO is expected to get rid of 20% of the government's investment (about $12 billion), but it
should be that the U.S. taxpayer has to be made whole again (we would lose money anyway) before anyone can make a dime off of the new GM stock. Will
that actually happen? Not likely.
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