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By William Patalon III
Money Morning/The Money Map Report
If you follow the financial markets for as long as I have, you'll see that Wall Street tends to operate in cycles. It's kind of a high-stakes game of follow the leader. When one firm does something different, the rest can be expected to follow along shortly.
If you think about that for just a minute or two, you can see Wall Street and investors in general are so susceptible to fads and speculative manias. If one firm starts pulling in big profits from junk bonds, leveraged buyouts or Internet initial public stock offerings (IPOs), then rest assured that the rest of the snorting herd will be along shortly to join in on the fun.
Corporate America – literally just an extension of Wall Street – is no different. There are management fads just as there are investment fads. Back in the middle 1990s, when I was covering the Eastman Kodak Co. (EK) turnaround saga for Gannet Co. Inc. (GCI), the fad du jour was the board revolt.
The board-revolt fad was more than warranted at the time, I must admit, given that the financial performance of many well-known companies was, well, revolting. Even so, it became quite the sport for boards to force out the chief executive officer, and then replace him [the carcass was typically male] with a carefully chosen outsider.
Companies such as Polaroid Corp., IBM Corp. (IBM), Kodak and many others made headlines with their upper-echelon coup de tats, each seeming to try and outdo the companies that had moved before them. You had to use the "right" executive recruiter [a high-dollar employment agency for CEOs], and then contract had to be worth $50 million, $75 million, or even $100 million should the newly anointed, I mean, appointed, CEO actually engineer the turnaround.
It was all very sporting and transformed some of the top recruiting firms and some of the top "recruitees" into financial-market celebrities.
Lou Gerstner was one who – most would agree – succeeded well enough to warrant the adulation. Gerstner was a high-ranking executive with American Express Co. (AXP), when he was recruited away to take the top spot at the sputtering RJR-Nabisco (RAI). RJR, you see, needed rescuing because it was wheezing under a huge load of debt brought on by two earlier fads: Junk bonds and LBOs [For a truly great overview of those two fads and how RJR ended up in the crosshairs, check out the former best-seller, "Barbarians at the Gate." Or, if you're more a "Cliff's Notes" kind of guy, you could even check out the later – and decidedly less-than-stellar – movie adaptation by the same name. It started James "Jim Rockford" Garner as RJR CEO Ross Johnson].
Gerstner did a pretty fair job at RJR, though he ultimately earned an "incomplete" mark from Wall Street, because he left before the job was really finished. There was a reason for his early exit, however: He was recruited to take the top spot at "Big Blue," computer-giant IBM. Unfortunately, IBM had grown so fat, lazy and risk-averse that the company once revered by the nickname "Big Blue," was now being derisively referred to as "Big Black and Blue."
Gerstner stayed and finished the job at IBM, transforming the company into one that again had a strategic vision and a realistic chance for long-term success.
Not every superstar CEO was able to boast of such successes. For every Lou Gerstner there were two "Chainsaw Al" Dunlaps – who succeeded once but then wasn't able to find that turnaround touch the next time around.
We're starting to see that nexus of financial fads come into play in the U.S. banking sector now. And once again, the boardroom insurrection/upper-echelon ouster is leading the charge. This time around, however, the secondary component isn't the junk-bond fueled LBO. Instead, that second factor is the quickly emerging involvement of the global sovereign wealth funds, the massive state-run investment pools that we here at Money Morning have labeled as "The Middle East Cash Barons" [although some of the players are also from China and other parts of Asia, as well].
Though it's technically not a Wall Street fad, there is a third force at work this time around that warrants mention: The faltering U.S. dollar, which is effectively slashing the price tag on U.S. assets for foreign shoppers.
Time will tell how this round plays out. But when it comes to some of these turnaround candidates – such as U.S. banking giant Citigroup Inc. (C) – I'm optimistic. As for the others, we'll just keep watching, and observing the results. Turnaround plays can provide very nice returns, if an investor chooses wisely.
The Week That Was: Market Review:
10 yr Treasury (Yield)
Perhaps misery really does love company. If so, Morgan Stanley (MS) (CEO may soon to be scheduling a golf foursome with such former industry rivals as E. Stanley "Stan" O'Neal, late of Merrill Lynch & Co. Inc. (MER), Charles O. "Chuck" Prince III, forced out as CEO at Citigroup, and Warren Spector, shown the door at The Bear Stearns Cos. Inc. (BSC).
Morgan Stanley, the second-largest domestic investment bank, became the latest casualty of the subprime mortgage mess after it reported a $9.4 billion write-down, a move that prompted Mack to pass on his 2007 bonus [Don't feel too badly for Mack; bear in mind that his 2006 bonus exceeded $40 million].
In the continuing emergence of the sovereign wealth funds, Merrill Lynch is getting a $6.2 billion investment from Singapore's Temasek Holdings Pte. and Davis Selected Advisors LP. Morgan Stanley also received a $5 billion capital infusion from the state-run China Investment Corp., which has already made investments in such financial firms as The Blackstone Group LP (BX). Not to be outdone, Merrill Lynch turned to Singapore's Temasek Holdings, receiving a $5 billion investment of its own.
Feeling fit after recently receiving a $7.5 billion infusion from the Abu Dhabi Investment Authority, Citigroup went on a shopping spree and is acquiring a 10% interest in Banco de Chile (BCH) [You can't help but at least wonder whether Abu Dhabi okayed the deal]. This week, Bear Stearns reported the first loss in its 84-year history, while Goldman Sachs Group Inc. (GS) again played Contrarian and announced a record year. [Interestingly, however, the Goldman CFO, , has urged "caution," for the upcoming quarters – a sound move, given they won't be able to capitalize on the same financial magic tricks in those quarters to come].
U.S. Federal Reserve Chairman Ben S. Bernanke seems to be pulling several all-nighters prior to year-end. Last week, the Fed conducted two $20 billion auctions which were quite well-received by banks looking for added liquidity [and not wishing to tap into the deep pockets of those state-owned Cash Barons]. The U.S. central bank also supported new mortgage-lending regulations that placed limitations on prepayment penalties, required more escrow accounts, and ended those sought-after "stated income" [liar] loans.
In other news last week – and in a sign that not all borrowers are innocent victims in the U.S. housing mess – foreclosures soared by 68% in November, and fraud was repeatedly mentioned as a primary culprit.
While the financial stocks [sans Goldman] continue to struggle during this credit crisis, techs are proving to be an almost-constant positive, reminding many investors of the late 1990s, when anything with a
".com" suffix or an "e'" prefix was an almost-certain winner.
Last week, software giant Oracle Inc. (ORCL), a one-time investor favorite, announced a 35% surge in profits, easily exceeding "The Street's" expectations. Likewise, Research in Motion Ltd. (RIMM) reported strong demand for its ubiquitous Blackberry PDA, helping its profits more than double in the third quarter. Pleased with the inaugural domestic showing for its iPhone sales, Apple Inc. (AAPL) set its sights on global domination, and is looking to ink a deal with NTT DoCoMo Inc. (DCM), Japan's leading mobile phone company.
Hoping to benefit from a late-year "Santa Claus Rally," stock-market investors finally enjoyed a positive week last week, with most of the gains coming on Friday. With the negative mortgage announcements seemingly becoming "old news," investors seemed to take much-needed comfort from the technology earnings reports – and from the apparent successes of the Fed-liquidity moves. Investors are also reacting positively to the Cash Baron cash infusions, which are serving as a "bailout" of sorts for some of the nation's top financial institutions. Hopefully, this initial optimism is not misplaced and America does not lose its edge or ongoing status as global financial Superpower. Perhaps, Mack, O'Neil, Prince, and Spector should take a break from their misery and enjoy some holiday cheer.
Weekly Economic Calendar
The Week Ahead
Durable Goods (11/07)
Initial Jobless Claims (12/22/07)
Consumer Confidence (11/07)
New Home Sales (11/07)
Existing Home Sales (11/07)
And the Surveys Say …
In the ongoing over-analysis of the success of the holiday season, virtually everyone is throwing in their two cents or polling "fickle" consumers about their buying patterns. CreditCards.com revealed that two-thirds of Americans would reduce spending on other items next year so that they can continue filling up their cars.
On the other hand, a CNBC survey showed that consumers would increase holiday spending by 6% from last year's level. However, its "Starbucks Indicator" (SBUX) concluded that more than 10% of those polled may reduce future expenditures on specialty coffee [meaning those caffeine addicts can expect at least a 10% increase in the price of their grande caramel café macchiato with room for cream]. As far as bigtime winners and losers go: Video game junkies now show a clear preference for the Nintendo Co. Ltd. (NTDOY) Wii over the Sony Corp. (SNE) PlayStation and Microsoft Corp. (MSFT) xBox, while Best Buy Co. Inc. (BBY) continued it dominance over Circuit City Stores Inc. (CC).
Inside the numbers, November personal spending climbed by 1.1%, its best showing in 3.5 years, although the related inflation gauge raised some eyebrows as it moved just above the Fed's comfort zone. While GDP surged by 4.9% in the third quarter, most analysts expect U.S. economic growth to slow to about 1.5% this quarter.
News and Related Story Links:
- Bloomberg News:
Merrill Lynch to Get $6.2 Billion From Temasek, Davis.
- Money Morning Investment Analysis:
Fang-Temasek Partnership the Latest in a String of High-Profile Sovereign Wealth Deals.
- Money Morning Special Investment Report:
Nine Ways to Profit From the Diving Dollar.
- Money Morning Investment Research Report:
Citigroup: Why This Turnaround Play Has Legs — Big Ones.
- Money Morning News Analysis:
Citigroup's CEO Prince Opts to Retire; Robert Rubin Steps in as Chairman.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.