Citi, banks, stress tests – I’m confused

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Dear readers,

Due to an increase in traffic and in order to keep our site limited to active traders, hedge fund managers, finance professionals, etc. we are increasing our monthly subscription price starting on February 15th. Any existing subscribers will not have any changes in the subscription plans and we will not increase the price for anyone subscribing by February 15th.

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Let Goldman go private

Goldman went public in order to take risks that the partnership didn’t want to take on, and in the process also found a way to compensate managers for doing things the partners would never have allowed – so let them go private. If Goldman wants to leverage 30 to 1, and all they are leveraging is partner capital, let them. They didn’t do it in the past. Why would they now. When did they increase leverage and VAR and other risk measures? When there was a disconnect between the capital providers and the managers. Not only that. Let them go private and ensure that government won’t provide a backstop. Just like any hedge fund, Goldman will end up doing a lot of risk adjustments if the partners are on the line (remember, in a partnership, they’ll also have some personal liability). If I were a Goldman spouse, I’d be thrilled, because suddenly, all the assets will go into the spouse’s names and the divorce lawyers, pre-nup attorneys, etc. will have exponentially more work (true, it will be the equivalent of a one-off event, but in this market, who cares).

So, let them do it, and don’t fall into the trap of thinking that they will, nor that it will provide a bid for the stock. This market will move with the regulatory winds, and is just a speculators game.

Keep an eye on Citi

After hours it’s trading more than SPY traded throughout the day. It’s down around 3-4% as of this writing. The government is saying they might not be selling their entire stake; the implications around the tax benefits that Citi will retain has been a main source of reports, their secondary is facing a tough market. All in all, the financials won’t be able to lead this market in the near term.

CME to clear CDS?

I’m not sure what will come of this and what it means for CME or ICE at this stage, but the direction is obvious. CDS securities will start trading in standard form on some exchanges, with all the clearing, operations, etc. support that comes with it. Long-term it should be a positive, especially for firms worried about marking books in OTC securities. It also might be a big payday for CME and ICE (which has already started the process). At a P/E of roughly 30, neither is cheap, but might be worth keeping an eye on.

http://www.ft.com/cms/s/0/75922198-dfa1-11de-98ca-00144feab49a.html

Gamestop and deflationary signals

Continued deflation in wants. First it was the Wii. Now the games (unfortunately, we own GME in client accounts – we thought they’d come out better than most). Next stop the retailers? Will margins getting clipped across the board. With margins at cyclical (secular) highs and revenue stalling, P/E’s look awfully high.

http://www.bloomberg.com/apps/news?pid=20601087&sid=apB3tUG1UVxA&pos=7

Security fear drive gun sales

When people are scared, they’ll spend a lot on security. http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article6917828.ece In full disclosure, we have a position in RGR (not a recommendation in any way.)

Costco is taking food stamps

If you were worried how the unemployed would be able to buy 48 rolls of toilet paper at a time, fear not, for Costco is taking food stamps: http://247wallst.com/2009/10/29/costco-cost-takes-food-stamps/

International Paper Treads Monsanto’s Path to ‘Frankenforests’

Aug. 28 (Bloomberg) — International Paper Co., the world’s largest pulp and paper maker, plans to remake commercial forests in the same way Monsanto Co. revolutionized farms with genetically modified crops.

International Paper’s ArborGen joint venture with MeadWestvaco Corp. and New Zealand’s Rubicon Ltd. is seeking permission from the U.S. Department of Agriculture to sell the first genetically engineered forest trees outside China. The Australian eucalyptus trees are designed to survive freezes in the U.S. South.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aEHNB_XJRWGU

How Netflix gets your movies to your mailbox so fast

The Netflix warehouse in Carol Stream does not appear on any map. Your odds of finding it are slightly better than your odds of stumbling upon a rare insect in a field of weeds.

One could drive to Carol Stream, stop in a random office park, climb from one’s car and scream, “Reveal thyself, Netflix!” This is not advisable. But the temptation remains.

If you subscribe to the DVD-rental service, the Netflix warehouse, which you know must exist somewhere; which a P.O. Box on every Netflix envelope suggests does exist; which processes your Netflix queue with alarming efficiency; which you bet will be as magical as you imagined if you ever stumble on it, overrun with dancing Oompa Loompas in matching jumpsuits of Netflix red, is one of those mythical New Economy temples.

http://www.chicagotribune.com/entertainment/chi-0804-netflixaug04,0,6424990.story

GE ‘Buy American’ Water-Filter Shortage Strands Work

Aug. 6 (Bloomberg) — President Barack Obama’s stimulus spending has run into a problem: A shortage of General Electric Co. water filters.

GE makes them in Canada. Under the program’s ‘Buy American’ rules, that means the filters can’t be used for work paid for by the $787 billion fund.

Contractors are searching the U.S. in vain for filters as well as bolts and manhole covers needed to build wastewater plants, sewers and water pipes financed by the economic stimulus. As officials wait for federal waivers to buy those goods outside the U.S., water projects from Maine to Kansas have been delayed.

“It’s added a whole new level of difficulty,” said Kathy Emery, a senior engineer for the West Virginia Department of Environment. “We’re continually having changes and further guidance” from federal rule-makers, she said.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a8PcscLTa_7w

Nissan’s Plug-In Gamble

Like all other auto executives these days, Carlos Ghosn has been pulling in the reins. In February he suspended Nissan Motor’s three-year business plan and launched widespread cost cuts, even delaying new products. Even so, Nissan couldn’t avoid a $170 million first-quarter net loss, reported in July.

But Ghosn, who surprised many with his quick turnaround of the Japanese carmaker a decade ago, has been careful to protect spending for his boldest initiative yet: to lead the world into a new era of mass-market electric vehicles. With the help of government loans in the U.S. and elsewhere, Nissan ( NSANY – news – people ) plans to invest several billion dollars over the next three years to construct factories for advanced batteries and retool assembly plants that could produce 300,000 to 400,000 electric vehicles a year on three continents.

http://www.forbes.com/2009/08/03/nissan-electric-vehicles-business-autos-leaf.html

New Epidemic Fears: Hackers

The government is committing billions of dollars for technology systems that help healthcare providers share information. But making patient data more accessible has the unpleasant side effect of it potentially falling into the wrong hands.

Under the Obama administration’s stimulus bill and other proposals, portions of a $29 billion fund are available to reimburse hospitals and doctors’ offices that invest in electronic records systems and other software that might improve care and lower health-care costs. The government has stressed the need for increased security as part of this digitization initiative, but hasn’t yet proposed mechanisms for how the data will be protected.

Now, many privacy advocates are concerned the administration’s effort could end up making health information less secure. “If there isn’t a concerted effort to acknowledge that the security risks are very real and very serious then we could end up doing it wrong,” says Avi Rubin, technical director of the Information Security Institute at Johns Hopkins University.

http://online.wsj.com/article/SB124933240378002457.html#printMode

PayPal Users Hit by Global Service Outage

In markets like these it pays to respect the unexpected.

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EBay Inc.’s PayPal unit experienced a world-wide system outage on Monday, leaving millions of customers of the online payments service temporarily unable to complete transactions.

The outage began around 1:30 p.m. EDT, and affected all PayPal customers for about an hour, said spokesman Anuj Nayar. By about 6:30 p.m. EDT, service had been restored to all customers, the company said.

The cause of the outage was an “internal network hardware issue,” said Mr. Nayar. “Everyone is working flat out to fix it,” he said. “We are looking into how to address our affected merchants.”

PayPal is the world’s largest online-payments service, with 75.4 million active users, including both small-time eBay merchants and large e-commerce companies such as Wal-Mart Stores Inc. PayPal handled $16.7 billion in online commerce in the quarter ended June 30.

Mr. Nayar said he didn’t know how much business was affected by the outage, but the company has previously said it normally transacts about $2,000 in online commerce every second.

Such outages aren’t routine among big Internet companies, but neither are they rare. Google Inc., for example, experienced a technical glitch in May that rendered its main Web page, mail service and news site sluggish or unavailable to millions of people world-wide for about an hour. Google said an error in one of its systems rerouted some of its U.S. Web traffic through Asia, which created service disruptions.

In 2004, many PayPal customers lost access to the service for about five days after a software update went awry. As part of an apology, the company credited some members for all transaction fees that they paid on one particular day.

PayPal’s terms of service, which its customers must agree to before using the service, state that it isn’t liable for “lost profits or any special, incidental or consequential damages arising out of or in connection with our Web site, our service, or this agreement (however arising, including negligence).”

PayPal is at the core of a turnaround strategy for eBay, which has seen growth taper off at its online marketplace business in recent years. Revenue in the company’s PayPal business grew 11% in the second quarter.

Last month, the company unveiled plans to open its system to outside developers, who can include the online payments service inside their own applications. In a recent interview, eBay Chief Executive John Donahoe said the move would enable PayPal to expand into “exponential” new uses.

Buffett Posts $1 Billion Profit on China Hybrid Carmaker BYD

Berkshire’s MidAmerican Energy Holdings Co. unit agreed to buy 225 million new shares of BYD for HK$8 apiece. That stock now has a market value of HK$9.66 billion ($1.25 billion), based on today’s closing price. Buffett will pay HK$1.8 billion.

BYD said last night it completed the sale. Buffett didn’t respond to a request for comment.

http://www.bloomberg.com/apps/news?pid=20601109&sid=amaKePJpsGCk