How do you fix Fannie Mae (FNM) and Freddie Mac (FRE)?
George Soros has a couple suggestions.
On Politico.com this afternoon, the legendary speculator reviews the shift of Fannie and Freddie into risky sub-prime mortgage financing and securitization, writing that both institutions became hooked on fees without worrying about the quality of mortgages.
His solution: separate the insurance of mortgages from the financing of mortgages, giving the former to government agencies and leaving the latter to the private markets.
His model is from Denmark, where since 1795 just such a model has been used, noting that “it has not prevented housing bubbles, but it has never broken down.”
In that model, home buyers borrow from the bond market, not a mortgage originator, with every mortgage balanced by an equivalent bond. The link is never broken between the borrower and the mortgage, unlike in the U.S. securitization scheme.
It would eliminate the agency problem that was the primary cause of failure. It would separate the credit risk from the interest rate risk. It would be transparent. And it would be open: The duopolistic position of the GSEs would disappear.
Shares of athletic apparel retailer Finish Line (FINL) are up $1.24, or almost 9%, at $15.90, and were briefly halted, after the company this evening blew away Q4 estimates, reporting profit of 61 cents as sales rose 9%, year over year, to $374.5 million, ahead of the 48 cents and $347 million expected.
It seems everyone in America is turning to fitness apparel: Finish Line’s beat follows much-better-than-expected Q4 results this morning from Lululemon Athletica (LULU). Finish Line operates 688 stores in 47 states.
Finish Line said same-store sales this month are tracking at a 15.5% increase from February.
Plenty of questions tonight around American Apparel (APP), which this afternoon reported Q4 revenue comfortably ahead of estimates, at $158 million versus the $144 million expected, but turned in profit of just 4 cents, in line with estimates.
The lack of upside on the bottom line is despite the fact that the company’s gross profit margin increased by half a point to 55% of sales. The culprit appears to be a jump in operating expenses in the quarter, thanks to opening 21 stores, net of closures, in 2009, which boosted payroll, occupancy and other costs.
The company declined to give out a forecast for the year, instead choosing to wait until after it announces Q1 results. It also wouldn’t say how many stores it will be opening this year, citing a need to comply with disclosure guidelines of financial covenants.
One thing is clear: store sales are set to get worse, with the year over year decline in Q1 projected at 10%, up from 7% this past quarter.
American Apparel shares closed up 22 cents, or 6%, today.
Well, just as some folks thought, all Europe had to do was tell Greece it would help, and the whole cost of a Greek bailout gets cheaper.
The heads of France and Germany have agreed to a bailout package, in conjunction with the International Monetary Fund, with the proviso that the assistance package from the various EU nations would only come if Greece requests it.
CMA Vision, which keeps track of credit spreads, said that contracts to insure Greece’s sovereign debt against default, fell by 8 basis points to 314.70 basis points. Mind you, the numbers been bouncing around a bunch, with the spread earlier today listed by the Financial Times’s Alphaville blog as 307 basis points.
But Europe couldn’t do it alone. German Chancellor Angela Merkel’s statement to the German Parliament today that the IMF should be involved was a concession that Europe’s “current instruments are inadequate” for the continent to sold Greece’s problems on its own, as Charles Forelle and Marcus Walker of the Wall Street Journal report.
As French paper Le Figaro points out, the IMF is widely viewed as an arm of the U.S. Treasury, in a sense. The paper today recalls the remarks of Patrick Devedjian, the head of France’s economic recovery efforts, who has said “Relying on the IMF to help Greece would be a sign of weakness” on Europe’s part.
The bailout has not stopped the Euro from falling, however, with it trading this afternoon at $1.3289, down from yesterday’s closing cross of $1.3325.
In other credit disaster news, Dubai’s debt woes, which were all the news last fall but had faded into the background this year, are back in the news today, and considerably brightere. Dubai’s government announced today that it will recapitalize conglomerate Dubai World with a $9.5 billion funding infusion.
That drove down credit default swap rates for Dubai sovereign debt by 10%, to 383 basis points, from over 600 basis points as recently as the middle of last month.
As Margot Patrick and Ainsley Thomson report in the Wall Street Journal, the repayment of holders of Dubai bonds on time and in full is a far rosier scenario that that which was expected only days ago.
HSBC analyst Erwan Rambourg today upgraded shares of Nike (NKE) to “Overweight” from “Neutral,” writing that “the tiger is back!” having nothing to do with Tiger Woods, he cautions.
The fitness apparel market should expand this year, Rambourg believes, thanks to an improving economy, less price-chopping, and the 2010 World Cup. Nike plans to spend on advertising and marketing, which should boost top-line results, with some risk to margins, however, and the company is expanding its share of market in China, he writes.
Rambourg raised his price target on the stock to $85, though he notes that Nike hasn’t been cheap for awhile now, trading at 17.5 times his EPS estimate for this year and 15.7 times next year’s estimates.
But then, “astonishing cash generation probably has a price,” he writes, along with evidence of market share gains. Rambourg thinks the company, with cash and equivalents totaling 12% of the company’s market cap, could hike its dividend or authorize expanded share buybacks, which he sees evidence of in management’s recent comments.
Rambourg expects to learn more on that score at the company’s investor day on May 5.
Meantime, he’s raising his EPS estimates by an average of 7% over the next three years, he writes.
Nike shares today are up $1.15, almost 2%, at $74.53.
In a presentation to the U.S. House of Representatives’ Financial Services Committee, Federal Reserve Board chair Ben Bernanke today gave a history of the Fed’s extraordinary measures to prop up credit and liquidity during the financial crisis, reiterated the need for ultra low interest rates for an “extended period,” and committed the Fed to lowering the Fed’s balance sheet over time. (You can read the prepared remarks here.)
During the Q&A, Rep. Ed Perlmutter of Colorado held up a few charts of unemployment and production statistics, and asked Bernanke how he plans to deal with the first priority in the economy, unemployment. As Perlmutter put it:
This chart shows America to be the most productive it’s been, per person, in sixty years. That’s great news, except that we have 8 million people that are unemployed. I agree, we’ve got to deal with the debt. We’ve also got to get 8 million people, in my opinion, back to work. So, step one is getting people back to work, step two, grapple with this debt that exists. By getting people back to work, you help the revenue side of the balance sheet, dealing with the debt, you help with the expense. Where are you with your ideas for getting people back to work? If you tighten the money supply, what do you expect happens to our effort to get people back to work?
Bernanke responded, emphasizing:
In the very near term, there’s a reason for the big deficit, and I don’t think it’s either desirable or possible to get rid of it in the next year or two. Down the road, when the economy is operating more normally, if we can convince creditors that in fact we’ll have a more sustainable situation, that will improve interest rates today and improve the growth process today. From the Federal Reserve’s perspective, we are recovering from a very deep recession, and monetary policy is more accommodative than it’s ever been. Interest rates are close to zero, and we’ve more than doubled our balance sheets, and used all these other policies to get markets working again, and increase capital in the banking industry. We are taking very seriously the unemployment situation, and we take seriously that part of our mandate, for maximum employment.
The archived video of the hearing is here.
Update: Some of you wondered about that comment by Rep. Perlmutter about needing to put 8 million people back to work. The official unemployment number (not even counting the underemployed, those who’ve disappeared, etc.) is 14.9 million as of the February data from the Bureau of Labor statistics. But Perlmutter was referring to the loss of 8 million jobs on a net basis since January of 2008, as a spokesperson from his office told me this afternoon.
With the Dow Industrials up 100 points at 10,936.14, and the S&P 500 up 12 points at $1,179.56 on a smaller-than-expected rise in jobless claims, here are some of the stocks moving this morning:
Shares of biotech Genzyme (GENZ) are off $3.86, or 7%, at $51.50, after JP Morgan Chase’s Geoffrey Meacham downgraded the stock to “Neutral” a day after the company said the FDA raised questions about the company’s manufacture of some drugs. UBS Securities analyst Maged Shenouda cut estimates for the company as well, dropping this year’s EPS estimate to $2.60 from $2.90. Shenouda believes the FDA move could raise cost of goods for the company, lead to disgorgement of profits, and may threaten sales of the company’s drug Thyrogen.
Shares of Marriott International (MAR) are up 89 cents, or 3%, at $30.56 after JP Morgan analyst Joseph Greff raised his rating on the stock to “Overweight” from “Neutral” and raised his price target to $36 from $27.
Shares of Fruity Pebbles cereal maker Ralcorp Holdings (RAH) are down $2.69, or 4%, at $66.60 after UBS Securities analyst David Palmer cut his rating on the food maker to “Neutral” from “Buy,” writing momentum has stalled in its “private lable” food business, according to his store checks, and coupled with inflation later this year, that could limit profits. His price target remains unchanged at $72.
Shares of ConocoPhillips (COP) are down 7 cents, at $52.46, after Credit Suisse analyst James Neale this morning raised his estimates on the firm the day after COP’s analyst day presentation. The 10% promised hike in the dividend is attractive, as is the planned buyback of up to 14% of the shares. Neale raised his EPS estimates for 2012 to 2014 by 5% to 9% across the various years. He raised his price target to $60 from $50, though he said the company’s exit from its stake in Russian oil firm Lukoil could hurt profits.
Shares of Starbucks (SBUX) are down 73 cents, or 3%, at $24.56 after R.W. Baird & Co. analyst David Tarantino cut his rating on the stock from “Outperform” to “Neutral” after Starbucks yesterday unveiled its first-ever quarterly dividend payment.
Shares of Conagra (CAG) are off $1.13, or 4.4%, at $24.99 after the company this morning failed to meet some analysts’ expectations for a hike in its forecast.
Fitness apparel retailer Lululemon Athletica (LULU) are up $4.21, or 12%, at $40.26 after the company this morning blew away Q4 revenue and EPS estimates and forecast this quarter and the year above estimates.
Shares of Citigroup (C) are up 21 cents, or 5%, at $4.35 after the a Bloomberg story this morning suggested the U.S. government will initiate sales of its one-third stake in the stock starting in late April.
Shares of Wynn Resorts (WYNN), owner of the Wynn Macau casinos in the Chinese port city of that name, near Hong Kong, are down 24 cents, or 0.3%, at $75.57 after the Wall Street Journal this morning ran a piece by Kate O’Keeffe noting that Macau’s government has said it’s not approving any more casino’s in the city and it will only allow 500 more gaming tables over the next three years, a mere 10% rise from the current total.
O’Keeffe cites Macau gaming official Francis Tam, who said the move is to “promote healthy and orderly development” of the casino market. Gambling revenue rose 66% in January and February, combined, O’Keeffe notes.
I would think that Wynn would be up on this news as the company has place in a market that is now harder to crack for newcomers. But maybe the crimp in future growth has investors spooked.
What are “dark spreads”? The marginal profit of an electrical utility after factoring in the price of the coal used to power its plants, similar to a “spark spread” for gas-powered utilities.
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