Bernie Madoff pleaded guilty to engineering a decades-long Ponzi scheme to defraud investors. He was thrown in jail immediately. Madoff told a packed courtroom that, "As the years went by, I realized my risk, and this day would inevitably come."
My precocious 17-year-old tried to suggest Madoff was brilliant to have gotten away with a huge scam for so long. Sensing an opportunity and suddenly a bit anxious about his future (!), I tried to steer him toward the idea that, though Madoff is likely of above-average intelligence, how smart was it to commit a crime at all? It's almost always stupid to put your freedom at such great risk, civil disobedience notwithstanding. Even if you don't get caught, you'll likely suffer a cancer-like anxiety every day. No matter what Ivy League school he may have attended or what his IQ, what Madoff did was just plain stupid. He threw his life in the garbage can and could easily have avoided doing so.
A friend forwarded to me an e-mail announcing The Gap's latest "Give and Get" event at all its Gap, Banana Republic, and Old Navy stores. The e-mail contained a barcode coupon that gets you a 30% discount on anything in the store for the next four days, March 12 through March 15. You can use the coupon as many times as you like. Gap says it'll give 5% of sales to Feeding America, a charity that helps feed low-income people.
"What does this tell us about the state of retail in the U.S.?" my friend asked... Well, The Gap has done this before, but I don't doubt the American consumer is clinging to his money for dear life these days. My local mall (yes, a GGP property), anchored by Macy's and JCPenney, is a giant indoor ghost town with tumbleweeds blowing through it.
We were afraid the American consumer would have trouble this year, and that it would be bad for American Express...
In the November issue of Extreme Value, I wrote:
American Express... could easily fall in half from here... I can't believe 2009 won't be a miserable year for every credit-card company on Earth.
Amex's stock was $20 then, recently dipped below $10, and trades around $12 today.
On Tuesday, we reported that Meredith Whitney had come around to our way of thinking, saying credit-card debt would be the next huge bubble to burst. Goldman Sachs jumped on the bandwagon today, recommending clients go long Morgan Stanley and short American Express. "Capital market activity is a relative bright spot in conversations, while consumer credit appears to be deteriorating by the day," says the Goldman report.
Morgan Stanley is up more than 30% this year. Meanwhile, the Financial Select SPDR ETF (XLF) is down around 40%. American Express is down close to 50%. The Morgan Stanley-Amex paired trade is up 6% at the time of this writing.
Seems like Goldman is a little late to this party. I was long American Express last year, and even I got wise to the situation months ago, when the stock was still at $20. This is what you get from Goldman's army of Ivy League MBAs, each armed with the most powerful information tool in finance, the Bloomberg terminal? Seems like a typical Wall Street, me-too recommendation, but I'm probably just jealous, because those Goldman guys make tons of money and would never hire me, since I don't have an MBA and I didn't go to Haaahvud or Yaaale.
Goldman might make money shorting American Express, but its employees aren't allowed to spend it on hotel rooms. Back when Goldman earned a record $11.6 billion in 2007, no expense was spared. Goldman regularly hosted employees and clients at the best hotels in New York City, spending $800 a night.
Now, Goldman is operating on government funds, and expensive hotel rooms are off limits. Now, out-of-towners stay at the Embassy Suites across from Goldman's future Battery Park City headquarters – for $250 a night. Employees aren't happy. "No one's supposed to complain out loud. But let's face it, we're spoiled," says one Goldman employee. "They turned us into hotel snobs."
Yellow Pages publisher R.H. Donnelley has hired investment bank Lazard to evaluate its capital structure. The company recently drew $361 million from its revolving credit line, and it has more than $6 billion in debt coming due between 2010 and 2017.
"Our goal is to better position R.H. Donnelley for the future by establishing a more sustainable capital structure," said Steven M. Blondy, executive vice president and CFO. "We have significant debt maturities commencing in 2010 that we are working to address. Though we intended to refinance this debt prior to maturity, it may no longer be possible to do so given the current state of the capital markets. In the meantime, the company continues to generate robust EBITDA and has significant liquidity to meet all our financial and business obligations."
Instead of "establishing a more sustainable capital structure," maybe R.H. Donnelley should spend some time establishing a more sustainable business model. Hard-copy phone directories are probably even more obsolete than newspapers. Unfortunately, there's not much left to short...
The former $1 billion company now trades on the pink sheets for $0.12 a share (total market cap is $8 million).
New York representative Charles Rangel, voted one of the most corrupt members of Congress by a citizens watchdog group, was ambushed and recorded on video recently, telling comedian Jason Mattera, "Why don't you mind your g*d*mn business?" Mattera asked the Congressman why he drove a Cadillac that was paid for by taxpayers and how he got four – count 'em, four – rent-controlled New York apartments 50% below market. I've never liked Rangel. He looks like a cross between a pimp and a circus clown (an insult to pimps, for which I apologize).
Even our own head of marketing, Sean Carroll, loves the deals Doc Eifrig has come up with... After logging on to Eifrig's favorite website – restaurant.com – Sean walked one block from our Baltimore office yesterday and got more than 50% off his sushi lunch... Right now, you can get a $25 gift certificate for $2 with the special code "MENU"... We encourage you to try it. And you can discover even more ways to live a richer life on less in Eifrig's new letter, Retirement Millionaire. Find out more here.
New highs: Calpine (CPN) and TJX Companies (TJX).
We got a few comments about how biased we are, but we know you can do better. Shouldn't I stick to financial topics? Don't you want to fill our inbox with invective? Let us have it here: feedback@stansberryresearch.com.
"Come on now, your bias is glaring on your comment re Obama buying $11.2 billion in new choppers. The guy's only been there 50 days or so and he sure as hell didn't order those in that short a time. In fact he indicated he didn't need them so I assume he's looking for a way out of the contract on this. Give credit, or blame to your Republican heroes for this – and for getting us in this whole mess." – Paid-up subscriber John Navaux
"In The Daily Crux, you covered Alan Greenspan's piece on his contention that it was world wide excess liquidity not the short term Fed rates that caused the housing bubble. He is right. There is no way that the Fed somehow created the situation that the Chinese, Japanese etc. decided they would pull dollars out of the air and loan them to the US, especially the US housing market - which at the tiem seemed to have the best returns.
"I can clearly remember Steve predicting – correctly – that the Fed would lower interest rates, because they had to: they were simply following the market. And the rates were lowered because there was so much cash oversea. If you scratch deep enough, one of the root causes is that the US bought more stuff from other countries than we sold. And when then those dollars piled up, they came back as Mortages, lots of mortgages. Also Barney Frank and others telling Fannie and Freddy they needed to make more loans to the disadvantaged portion of the population, certainly is a key ingredient." – Paid-up subscriber Henry
Ferris comment: Whether or not the market attempts to discount future Fed rate cuts is not the point. The Fed buys securities, and that lowers interest rates. Nobody puts a gun to its head, and it doesn't happen by accident. The Fed chooses to do it. It manipulates interest rates on purpose, trying to make credit cheaper, which virtually guarantees the banking system will lend billions more dollars into existence. The money has to go somewhere. As for the disposition of cash and Treasuries in foreign hands, it's one of those subjects everybody has opinions about, but about which nobody seems to have any facts.
Regards,
Dan Ferris
Medford, Oregon
March 12, 2009