Posts Tagged 'JPM'

So Long Vikram, Hope You Had Fun. Say Hi to Sally. Citi.

Citi

I have never owned Citi shares until I began purchasing it in the pre-market today, preferring to root my bank exposure in JPM and BAC.  To me, the appointment of Vikram Pandit as CEO was an extremely poor decision.  What exactly in his background, aside from political savvy – a requirement for ascension in the sell-side world, qualified him to lead what was the world’s largest, most complex financial institution during the worst financial crisis ever seen?  Perhaps it was his ability to sell his mediocre hedge fund, that would subsequently fail, to Citi for nearly a billion dollars? I guess the then BOD valued negotiating skills more than commercial bank experience.

Pandit’s tenure was marked by numerous missteps: the submission of his plan to return capital to shareholders resoundingly rebuffed; the sale of the brokerage arm to Morgan Stanley, consummated for an astounding $4.7 billion less than he had apparently advised the BOD it was worth in the sale – an even more enormous miss when taking into account that the final price was settled at less than $13.5 billion; and what about the stock price – it has lagged all the other major banks and still hovering near its ’09 lows.

John Haven’s picture hangs in the man cave of every block trader who ever traded on Wall Street.  Those who move on from block trading on the sell-side find themselves working at hedge funds, playing golf, or in extreme cases, dispatching taxis.  In fairness, Havens is very bright and did a fine job running the institutional equity department at Morgan Stanley but again, not exactly qualified to run a major commercial bank.

I chuckle at the pundits espousing how surprised everyone was about this move, alleging something nefarious.  Citi just reported their quarter, their financials and disclosures never more current than today.  Given that, it was the best time to make this move.  Of course this took the press and rank and file by surprise; BOD’s don’t hold open meetings.  I applaud Citi’s BOD for their discretion.  As to questions about Pandit’s compensation, we finally get a shareholder base that paid attention to the performance of its stock, aligning CEO’s compensation to shareholders interests.  Let this be a warning shot to other CEOs.  And to those who had questions about Pandit’s stewardship but now bemoan his firing after a “great” quarter –  com’on!  After years of disappointments, expectations were finally reduced to his level of expertise.

On the positive side, both Havens and Pandit punched above their weight but were far less than ideal stewards of Citi’s fate.

Perhaps I’m just jealous.

Facebook Pt 2: A Wall Street Insider’s Perspective

Prior to the pricing of Facebook’s IPO, not one institutional investor I spoke with expected a successful offering. In fact, I had said on Fast Money that I would sell any shares I received as soon as I could.  I had a bet with a noted hedge fund manager on the size and pricing of the deal.  He had believed that it would price at the mid-point of the original range.  My bet was an increase in size and price; I won lunch.

Having been involved in the pricing of hundreds of deals during my time on the sell-side of Wall Street, I can tell you that kowtowing to FB management, hubris and greed led to a failed transaction.  Facebook may also be to blame for the  poor performance since it appears that they took a much more active role than most other issuers usually do during an IPO process.  I can tell you that it is unlikely that the other “lead” managers had anything to do with the mechanics of the offering since they rarely do; they are there in name only.

Morgan Stanley had a lot at stake; they likely won the lead mandate based upon their view on pricing and size as well as their distribution capabilities through retail, a sales force that GS doesn’t have.  MS was not going to be the lead manager of the first “hot” tech transaction, the largest ever tech IPO, not to upsize on price and size, nor were they going to lose the lead role to a competitor.  They focused on the front end, hoping the back end would take care of itself.  My guess is that they pitched FB a valuation higher than the other firms seeking the business whereas the right thing to do would have been to start the price lower and then walk it up into the original range.  This was their first fatal mistake since they left themselves no margin for error.  Not increasing the filing range would have been a mistake since it would have sent a negative message about demand, but increasing the size significantly was a much bigger misstep. But, hey, more shares and a higher price equate to more fees for the underwriter.  And , of course, a more hallowed place in the record books.

Institutional investors were uncomfortable with such a large retail component – it is usually the sign of a poorly accepted transaction although, in this situation, their participation was strategized into the process from the outset.  And with all the hype, institutions believed that if the deal went south, retail would panic and sell.  The news flow was also terrible: GM dropping, the ad model being questioned and constant commentary on valuation.  When I was involved in a transaction I almost always received calls from Portfolio Managers cautioning me on price and size; MS undoubtedly received these calls too but ignored them, as I often did.  Institutions nonetheless piled into the deal figuring that MS had to support the transaction with a long lasting syndicate bid.  A free put is nothing to turn down.  As such it didn’t take long for MS to eat away at the capital allocated to support the share price and my guess is that they first took a stand above the issuance price, realizing that if FB traded to issue, it would trade through it in a heartbeat.  But FB, being THE trophy deal of the millennium, used their weight to get MS to take a large discount in their fees.  As with a lot of items bought on sale, there is a reason why the price is low.  In this case, the attendant discount manifested itself in less capital in the syndicate bid.

So lots of blame to go around, hindsight being 20/20 except of course for the smarter, professional investor who had it pegged from the start.  Overhyped and overvalued.  The NASDAQ technology glitches – those were icing on the proverbial cake.

At the end of the day, a troubled start to life as a public company should not have a long lasting impact on its stock price.  That will be the result of its ability to execute on its business model and the valuation investors assign to the company.  On this, I have no opinion.

News Flash: Europe is Slowing; News Flash: China is Slowing

March 22, 2012

News Flash: China is Slowing

News Flash: Europe is Slowing

News Flash: Goldilocks May Have Left the Building

“There is the school of thought, of which I am not a student, that believes we shouldn’t worry about China and Europe since U.S. GDP is not overly reliant upon either Europe, 2% of total U.S. GDP, or China, 0.6% of GDP, but given that our economic revival is not particularly robust, any potential hit to growth has to be regarded seriously.   And it is the strengthening domestic economy, abetted by perhaps misplaced optimism on the global economy that overshadows the current weakness abroad.”

Like most, I tend to operate from selective memory. Sometimes I have to venture far into the archives to find a pearl of wisdom, other times the proverbial ink has yet to dry. Fortunately, this occasion finds me in the latter camp leading to a trip back to March 6th.  I actually present this somewhat cheekily since the S&P has had a nice move since the date I wrote the above but completing the thought, I remained bullish equities within a much reduced net long position laboring under the belief the non-US swoon would not really hit our economy until year end.  That is still the case from an economic standpoint.  It shouldn’t be a surprise to anyone that the massive credit issues in Europe have caused a slowdown nor should anyone be surprised about China, where economic indicators have revealed a contracting economy for 4 months.  However, with the market being a discounting mechanism perhaps I was too optimistic.  I went on to say:

“To bottom line it, the market is in a consolidation phase and faces the likelihood of a minor correction near term while remaining highly dependent upon data in the U.S. and continued optimism about the European and Chinese economies.” 

This will update my outlook and clarify my views.  The market is in a consolidation phase with a slight bias to the downside in the very near term as we are in a good news vacuum pending earnings.  Optimism still reigns regarding China’s ability to manage their way out of their declining economic fortunes and the yields on sovereign debt in the countries that matter, while recently forfeiting some of their optimism, are still at much more reasonable levels.   THE KEY FACTOR GOING FORWARD WILL NOW BE EARNINGS SEASON which I suspect will acquit itself well in most areas of the economy except for certain sectors, such as coal and steel, where I have been very visibly short, and which have already updated their outlook.   (Every steel company, regardless of business model, has disappointed but has guided to a turn in fundamentals resulting in a nice move off the bottom.  I am still short.  And coal remains in a death spiral.)   This will provide support for the market at that juncture but for now, in a good news vacuum, the path of least resistance is slightly lower.

But the key to a further rise in equities is the direction of US govt bonds.  While flows continue into bond funds in a meaningful way and out of equities in a less meaningful manner, a situation that surprises me, I believe this will reverse. I am short through TBF and TBT because I believe most investors have come to expect unabated and unprecedented performance and don’t realize that a an 85 bps back-up in yield from 2.15% to 3% will result in approximately a 7% loss in capital, an untenable risk/reward when considering that any appreciation of Treasuries is in the best case, severely limited.   And as the EU sovereigns continue to hold these levels, funds will flow from bunds and bonds into their higher yielding debt.

Within the slowing of global growth view, I remain short the Euro and Aussie dollar, materials and transportation, CSX (dicey), and long technology, big US banks, and defensive value.  The market will continue to pause, but not collapse, into earnings season and unlike each of the other reporting periods since the bottom in March 2009, expectations are much lower setting up for decent equity performance for the next quarter unless sentiment regarding Europe and China fall off a cliff.  I realize this straddle risks my being likened to a sell-side strategist, a label more feared than “moderate Republican” but that’s how I see it.

 


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