Modern News

Saudi Prince Alwaleed bin Talal is a major player in the investment world. Bloomberg’s Erik Schatzer interviews Alwaleed about the current state of Wall Street. I had never listened to an interview with Alwaleed before, and was struck by the common sense of his perspective. And by the irony that he appears to have a better understanding of our system than many in Washington DC.

Some major highlights:

-Alwaleed hopes that the government does not have a vendetta against Goldman Sachs, which would destabilize the financial markets, and cautions that the firm is innocent until proven otherwise.

-Financial reform is a necessity and will happen. Republican opposition to the current bill is part of the negotiating process.

-Citibank’s recently reported earnings of $4.4 billion is proof of the value of its global franchise, and CEO Vikram Pandit has his confidence (Alalweed is a major investor in Citi).

-Alalweed’s Kingdom Holding Company, which went public a few years ago, will soon declare dividends in order to satisfy Saudi retail investors, who carry more clout in their system than institutional investors. (Now that is change one could believe in here!)

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Investing legend Warren Buffett has criticized the role of derivatives in causing the 2008 financial meltdown. However, the talk on the street is that he is lobbying to exclude existing transactions from the scope of the pending finance reform bill.

It is not hard to see why. Berkshire Hathaway owns over $60 billion of such contracts, which are hedging the financial risk exposure of its vast corporate empire. Buffett would prefer not to subject these holdings to the requirement to post collateral that is embedded in the bill.

One wonders whether the outcome will be the ususal Washington DC “reform” product- a bill riddled with exceptions, exemptions and grandfather clauses that give the politically connected an advantage versus their less savvy peers.

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Business jets are becoming the ultimate status symbol of the rich and their wannabees. Nothing tickles the superiority complex of the Beautiful People than flying over the plebs to yet another gala or conference while lamenting the common people’s overconsumption of energy.

At least the super-rich are spending their own money. But CEO’s of public companies are spending the shareholders’ money, and those pesky corporate governance activists are noticing.

Take Abercrombie & Fitch, for example. Time Magazine’s Sean Gregory points out that CEO Mike Jeffries took home a cool $71.8 million in total compensation for 2008. Unfortunately, the company has fallen on hard times during his watch, basically earning nothing for 2009, and Jeffries was named “one of the five Highest Paid Worst Performers of 2008 by the Corporate Library”.

But impulses towards thrift are rippling through the Abercrombie organization. The CEO will no longer be entitled to unlimited travel on the corporate jet, as the company is capping his personal travel allowance at $200,000. However, the firm is not heartless; Jeffries will receive a lump sum payment of $4 million for this sacrifice, in effect being paid NOT to fly. In fact, Gregory points out that depending on assumptions regarding use of the jet, Abercrombie could be paying out more money than ever on this part of the CEO’s compensation package.

There is one consoldation for Jeffries should he consider cheaper travel alternatives under the new austerity regime. If he travels as light as the scantily clad models who hawk Abercrombie & Fitch threads (not a bad description of some of the product line), he won’t have to pay much in excess baggage fees.

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The SEC announced a blockbuster lawsuit against Goldman Sachs today that goes to the very heart of Wall Street’s role in the subprime bubble. The SEC claims that Goldman knowingly allowed hedge fund manager John Paulson to play an active role in selecting CDO’s for Goldman’s structured offerings while simultaneously shorting those securities. If true, this would be a mind-boggling conflict of interest. Bloomberg’s Peter Cook reports:

As Bloomberg’s Roben Farzad explains in another interview, Goldman is accused of enabling Paulson to come up with a self-fulfilling prophecy. Goldman took part of Paulson’s long CDO position off his hands, presumably the worst part, and then Paulson coined more money from shorting this former holdings.

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James Volker, CEO of Colorado-based Whiting Petroleum Corp., appeared on Bloomberg Television to discuss his increasingly bullish outlook on oil. Consumption is rising, inventories are shrinking, and crude prices are on the rise. Whiting believes crude should reach the $88 price level later this year.

In response to this new economic environment, Whiting is doubling its exploration budget. One wonders whether Washington DC has heard of this novel approach to dealing with rising energy prices.

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Venture Capital firms raised less money in the first quarter of 2010 than in any period since 1993, reports the Kansas City Business Journal. The slow growth in the economy combined with a less favorable overall market contributed to reducing investment in new firms, even as the Dow Jones Industrial Average breached the 11,000-mark today.

The National Venture Capital Association and Thomson Reuters released a report Monday saying that 32 funds raised a combined $3.62 billion during the three months ending March 31. That’s down 31 percent in terms of dollar commitments and 44 percent in terms of the number of funds, compared with a year ago.

“Over the last two years, alternative asset allocations have declined, and the exit market has suffered, putting venture firms in the unenviable position of communicating their value in an extremely challenging environment,” NVCA President Mark Heesen said in a prepared statement. “Many firms have been waiting until the exit market improves before embarking on their fund-raising efforts. This wait has been considerably longer than many firms anticipated.”

(more…)

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Jim Chanos, hedge fund manager and founder of Kynikos Associated Ltd., achieved fame outside the investment world when he publicly questioned Enron’s financial reporting. He is now casting a skeptical eye on the Chinese economy.

Chanos believes that China has developed a huge real estate bubble that is about to burst. While there has been a lot of buzz about the need for China to revalue its currency, a real estate crash could force the opposite- devaluation.

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Bloomberg Television interviewed Hunter Shkolnik, an attorney working on one of the various Toyota accelerator lawsuits. It is clear that the government’s well-publicized decision to fine Toyota a cool $16 million is certainly helping these cases along. The lawyers are going to try to aggregate the cases into a class action lawsuit, which is the mother lode of big legal settlements.

All in all, a very interesting example of our legal system at work and the confluence of forces facing Toyota. Not to mention a healthy tan.

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In addition to the actual government spending driven by the health care “reform” legislation, its passage has triggered a wave of corporate writedowns.

Naturally, the Democratic leadership is in denial about the true cost of their baby. James Taranto of the WSJ is on the case:

Meanwhile, Henry Waxman and House Democrats announced yesterday that they will haul these companies in for an April 21 hearing because their judgment “appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.”….
In other words, shoot the messenger. Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden. Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don’t like what their bill is doing in the real world, so they now want to intimidate CEOs into keeping quiet.

It is a testament to the duplicity of the processes by which Obamacare passed that Waxman is actually trying to obstruct the financial disclosure process that is required by federal law.

Only in America!

Go to the WSJ opinion page to read Taranto’s piece.

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Updated March 14

Matt Miller of Bloomberg Television did a very wide-ranging interview with two prominent market participants: Philip Orlando of investment giant Federated Investors and Todd Colvin of MF Global Inc. I will be commenting on this through the weekend.

Miller raised the issue of interest rates. This is key in the current market environment, as the stock market has been buoyed by short term interest rates that are effectively zero. But what goes down must go up, and should the Fed be forced to raise rates, the market could get the chills, especially if there are earnings disappointments. (2:00-4:00 of video)

Orlando expects an earnings bump in tech stocks, as capital spending by corporate America put on hold at the beginning of the recession resumes. However, an uptick in tech stock prices depends on investor perception that the nascent recovery is sustainable (8:45-10:15)

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