Filed under: Bad news, Citigroup Inc. (C), Housing

Bloomberg News reports that Citigroup Inc. (NYSE: C) might need more capital on top of the $7.5 billion it’s already gotten from Abu Dhabi. And this announcement has caused Citi stock to fall to a nine-year low of $21.

A few months ago, I posted that Citi would keep dropping and that it might be a purchase at $15. It’s much closer to that $15 target than it was in December. But in my view, the uncertainty associated with how much more of the structured securities Citi will write off remains very high.

I think that Citi’s future depends on how lenient the auditors are. If those auditors force Citi to mark all of its illiquid securities to their current market value, then Citi could run perilously low on capital. According to its 2007 10K, Citi had $133 billion of these illiquid Level 3 assets in December 2007. If auditors deem those worthless, Citi will need to match the write-offs with that much capital.

I’m not sure where Citi will get that much money. So if Citi does hit $15, I might need to set my target price even lower.

Peter Cohan is President of Peter S. Cohan & Associates. He also instructs management at Babson College and edits The Cohan Letter. He owns Citigroup shares.

Share This

Share This

Filed under: Bank of America (BAC), Countrywide Financial (CFC), Housing

During the days when subprime lending wasn’t widely seen as a quagmire, pay-options mortgages were popular. Here’s how it worked: “homeowners” (I will hence forth put “‘homeowners” in quotes when I’m referring to situation where the borrower owes more on the home than it’s worth) could select to make a smaller monthly payment than normal, and then tack the difference on at the back-end of the loan. This came in very handy for borrowers looking to travel to Cancun or invest in plasma-screen TVs.

Now, Countrywide Financial (NYSE: CFC) is worried about these negative amortization loans. At the end of December, the company had $29 billion in pay-option loans, with $26 billion of that amount having increased beyond the original loan amount. People with pay-option loans are exercising that option and will likely continue to do so — the housing downturn means that you have to think that the increased loan balances are leaving a big chunk of those subprime borrowers upside down.

Here’s the best part: 81% of those loans were made to borrowers who provided little or no documentation of income.

I wonder how much of this carnage Bank of America (NYSE: BAC) was aware when it decided to purchase into the company. Obviously it sees value but I can’t help being skeptical: Given its status as a poster child of pathological stupidity, does the Countrywide brand really have any value at all?

Share This

Share This

Filed under: Law, Housing

New York Attorney General Andrew Cuomo has reached an agreement with Federal Home Loan Mortgage Corp. (NYSE: FRE) and Federal National Mortgage Association (NYSE: FNM) in the midst of the office’s year-long investigation into the mortgage industry.

Freddie Mac and Fannie Mae will no longer buy mortgages from lenders that use in-house appraisers. Many observers believe that the use of independent appraisers — who don’t work for a company that has the goal of making loans –would have resulted in fewer of the ebulliently optimistic appraisals that contributed to a run-up in home prices that was destined to come crashing down.

The move will force lenders like Countrywide Financial (NYSE: CFC) to sell their appraisal operations. The New York Times reported that “As defaults and foreclosures have surged in the last year, regulators and industry analysts have raised pointed questions about the independence of appraisers. Because they rely on banks and brokers to give them additional business, appraisers often feel pressured to value a home at prices that match or exceed loan amounts.”

Following in the footsteps of Eliot Spitzer, it seems that Cuomo has been charged with the task of cracking down on flamingly obvious conflicts of interest that never should have been allowed to exist in the first place. Remember when Spitzer had the epiphany that maybe, just maybe, allowing “independent analysts” to be compensated based on the investment banking business they generate might lead to some funky doings? This is a similar situation.

Regulatory efforts to crack down on self-dealing and conflicts of interest in the mortgage industry will go a long way toward restoring sanity to the market.

Share This

Share This

Filed under: Market matters, Amer Intl Group (AIG), Housing, Cramer on BloggingStocks

TheStreet.com’s Jim Cramer states Pennsylvania’s foreclosures are declining, thanks to a plan that can be applied nationally.

We keep hearing how the AAA paper is unfairly being marked down because of the “need” to sell. We hear that if the paper, particularly the mortgage paper, were granted to be held, there would be no problem, that, for example, the Thornburg (NYSE: TMA) (Cramer’s Take) paper, which is most likely not going to default, or the paper that AIG (NYSE: AIG) (Cramer’s Take) is insuring, the so-called super senior, which is also most likely not going to default. We keep believing that the real issue is the markings, and how the markings reflect unrealistically depressed valuations.

Obviously the Fed believes this, too or it wouldn’t have been so complacent. So why doesn’t the Fed puts its money where its mouth is, and do something, non-bailoutish, that exploits the market’s imperfection. Why doesn’t it issue $50 billion of two-year notes at 1.60% and take the money and buy high quality mortgages and other collateralized obligations, the very stuff that everyone states will pay off over time. Then the Fed can make money holding the stuff, the banks get more liquid, which takes the pressure off their balance sheets, and no bailout occurs?

If you’re worried that the Fed will get snookered, or if the Fed is worried, more accurately, it can hire someone — yes, moral hazard, someone makes money — like a Pimco to evaluate what it purchases if it lacks the expertise, even though I don’t think it does.

This is a quick and dirty way to get out of this mess and it might be worth a try.

Ultimately I favor an FHA guarantee plan not unlike the Pennsylvania say equivalent that’s making it so Pennsylvania’s foreclosures are declining. Pennsylvania put it in place under Governor Rendell, because there was a terrible boom-bust cycle in the Poconos a few years before all of this madness.

It worked there, it could work nationally.

I know that Pennsylvania didn’t have the radical price appreciation as we had in Florida, but it is no superior than Michigan or Ohio. Either way, the two-year plan does not need the Fed to keep slicing rates, and if it really was in a jam it could do this plan yesterday!

No bail out, no Treasury, no Congress, what’s not to like?

——————————————————————————–
RELATED LINKS:
Two Bargains in Banking Stocks
Stocks of the Week
——————————————————————————–
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com’s sites and serves as an adviser to the company’s CEO. At the time of publication, Cramer had no positions in stocks mentioned.

Share This

Share This

Filed under: Products and services, Abercrombie and Fitch (ANF), Limited Brands (LTD)

Abercrombie & Fitch Co. (NYSE: ANF) recently opened Gilly Hicks, a provider of women’s undergarments like no other.

“The shop, which contains upper-end lingerie, loungewear and intimate accessories, is modeled after a British manor, with columns at its doorways, dark wood paneling and close to a dozen rooms, such as a `bra library’ featuring more than 40 styles,” according to the Wall Street Journal (subscription required). The company plans to open as many as 15 other Gilly Hicks outlets this year, the paper said.

Abercrombie & Fitch continues to walk the fine line between sexy and soft core porn with Gilly Hicks. The promotional video for the chain on its Web features half-naked and at times totally naked models of both sexes cavorting on a beach in what appears to be Australia. Gilly Hicks, according to the company’s marketing department, emigrated from England to Australia in 1932 and opened an underwear store in her family’s British colonial-style manor home in Sydney.

This 40-year-old married guy from New Jersey isn’t sure if the message of the commercial is that our underwear is so comfortable that you will run around in it in front of total strangers in the beach. Apparently, the models didn’t get the message that prolonged exposure to the sun can damage your skin.

Gilly Hicks, which is the company’s fifth chain, seems like a good fit with the rest of the company’s businesses which are aimed at young people. Plus, the timing seems right as well. Shares of Limited Brands Inc. (NYSE: LTD), parent of Victoria’s Secret, have been clobbered over the past year, tumbling more than 33%. December same store sales fell 8%, twice as much as expected. American Eagle Outfitters Inc. (NYSE: AEO) is counting on its Aerie brand of bras, underwear and robes to keep its sales from eroding further.

Shares of the New Albany, Ohio-based casual retailer have risen about 5% over the past year, a solid performance given the worries among investors about consumer spending. Earlier this month, Abercrombie & Fitch posted a decent 9.4% increase in fourth quarter profit on the performance of its Hollister Co. chain and its children’s apparel business. Wall Street investors were disappointed with the company’s guidance though one analyst is predicting that the stock could jump nearly $30 to $100. That means they’ll pay extra attention to the performance of the Gilly Hicks, something which they probably would have done anyway for reasons having nothing to do with finance.

Share This

Share This

Filed under: Products and services, Competitive strategy, Apple Inc (AAPL), Wal-Mart (WMT), Target Corp. (TGT), Ideal Buy (BBY)

Wal-Mart Stores, Inc. (NYSE: WMT) is the world’s largest retailer, and the largest U.S. retailer of music. The retailer sells more CDs than anyone, but that dominance is being threatened in a paradigm shift that’s been coming for years now: the digital download.

Apple, Inc. (NASDAQ: AAPL)’s iTunes on the internet music, video and motion picture store will likely surpass Wal-Mart as the largest music seller in the U.S. without a single physical product being sold some time this year. Research group NPD estimates that iTunes has moved past discount retailer Target Corp. (NYSE: TGT) and consumer electronics retailer Best Buy, Inc. (NYSE: BBY)

“Digital sales were up close to 50% and CD sales were down 20 % last year … even at half that growth rate in digital sales, Apple will in all likelihood catch Wal-Mart this year,” according to NPD. As has been predicted for quite a long time, the CD, while still popular, is slowly fading away, although the transition to an all-digital music future in the U.S. is far from complete.

But, it’s happening — and with teens leading the way (but not owning credit cards in most cases), on the web music retailers need to make it easier for core customer groups to buy on the internet. If each 15 year-old can go on the internet and purchase music without a credit card in the future, the transition will only see more speed.

Share This

Share This

Filed under: Products and services, Competitive strategy, Apple Inc (AAPL), Wal-Mart (WMT), Target Corp. (TGT), Ideal Purchase (BBY)

Wal-Mart Stores, Inc. (NYSE: WMT) is the world’s largest retailer, and the largest U.S. retailer of music. The retailer sells more CDs than anyone, but that dominance is being threatened in a paradigm shift that’s been coming for years now: the digital download.

Apple, Inc. (NASDAQ: AAPL)’s iTunes online music, video and movie store will likely surpass Wal-Mart as the largest music seller in the U.S. without a single physical product being sold some time this year. Research group NPD estimates that iTunes has moved past discount retailer Target Corp. (NYSE: TGT) and consumer electronics retailer Ideal Buy, Inc. (NYSE: BBY)

“Digital sales were up close to 50% and CD sales were down 20 % last year … even at half that growth rate in digital sales, Apple will in all likelihood catch Wal-Mart this year,” according to NPD. As has been predicted for quite a long time, the CD, while still popular, is slowly fading away, even though the transition to an all-digital music future in the U.S. is far from complete.

But, it’s happening — and with teens leading the way (but not owning credit cards in most cases), on the internet music retailers need to make it easier for core customer groups to buy on the internet. If each 15 year-old can go on the internet and buy music without a credit card in the future, the transition will only see more speed.

Share This

Share This

Filed under: Products and services, Industry, Consumer experience, Rants and raves, Competitive strategy, Marketing and advertising

I read another blog recently that ranted and raved about the request record industry companies recently made to Internet Service Providers to enforce anti-piracy on their servers and networks. The blog was not in favor of that move and I wholly concur that it is not the responsibility of another industry to make up for the problems facing the record industry. True, it would likely be prudent for ISPs to check for anti-piracy issues on their networks, but in the long run it has to be about keeping your own customers and not alienating others with threats against their privacy.

The British government seems poised to deal with the dynamic of this problem directly, after music industry trade groups there asked the government to take action. According to Billboard, the move to fight illegal file-sharing is “intended to ensure the prosperity of the country’s creative industries” by taking legislative action as early as 2009 if the music industry and ISPs don’t find a common ground. Legislators have also vowed to protect privacy in the face of these challenges. Unfortunately, the challenges of ISPs providing anti-piracy clean-up for the music industry does fly in the face of privacy issues, even if that means protecting the act of illegal file-sharing.

The Australian government has also taken a similar stance, but is keen to implement a “three-strike proposal” where illegal file sharers would be issued warnings before a suspension of access and eventual cancellation. Still, the plan would require ISPs to monitor user traffic and infringe on privacy issues, reports Billboard. World wide web industry trade groups in Australia have also defended the position of not adopting these types of policies or “taking responsibility of illegal operations on their networks” because “present legislation already covers copyright infringement, and these should be used against illegal downloaders.”

Whatever your thoughts on the position of the ISPs might be with regard to anti-piracy, this should not be read as advocating that activity. Simply put, it is nearly pathetic for the record industry to expect another industry to sacrifice its business practices because music is being illegally traded and shared. As others have pointed out, some responsibility should be taken by ISPs about regulating users who do break copyright law but “ratting” out users to the music industry is not the proper action either.

It is the duty of the record industry to figure out ways to make consumers want to pay for music. Obviously that’s the real crux of these issues, the fact that consumers don’t find value in the music. At least that is the idealistic hope on the part of this writer as to why consumers would illegally trade and share the products. It is obvious that no matter how much freedom the record industry gives digital stores to sell tracks without anti-piracy technology, the tactic is just not working. It’s been a bad year for anti-piracy technology, but that just means a good year for digital stores. While it is hard to see any return from how far things have gone, there is a solution out there and illegal file sharing isn’t the answer.

In the end, the solution is also not going to be found by looking to blame other industry’s or even the consumer for not regulating illegal file sharing. ISPs are not responsible for the record industry’s problems. If anything, that industry has providing new markets and avenues of advertising for music, so to be bitten at might not be taken too lightly by ISPs. Consumers should not be illegally sharing, but they shouldn’t distrust their World wide web service providers either.

Share This

Share This

Filed under: Products and services, Industry, Consumer experience, Rants and raves, Competitive strategy, Marketing and advertising

I read another blog recently that ranted and raved about the request record industry companies recently made to Internet Service Providers to enforce anti-piracy on their servers and networks. The blog wasn’t in favor of that move and I wholly concur that it is not the responsibility of another industry to make up for the problems facing the record industry. True, it would likely be prudent for ISPs to check for anti-piracy issues on their networks, but in the long run it has to be about keeping your own customers and not alienating others with threats against their privacy.

The British government seems poised to deal with the dynamic of this problem directly, after music industry trade groups there asked the government to take action. According to Billboard, the move to fight illegal file-sharing is “intended to ensure the prosperity of the country’s creative industries” by taking legislative action as early as 2009 if the music industry and ISPs do not find a common ground. Legislators have also vowed to protect privacy in the face of these challenges. Unfortunately, the challenges of ISPs providing anti-piracy clean-up for the music industry does fly in the face of privacy issues, even if that means protecting the act of illegal file-sharing.

The Australian government has also taken a similar stance, but is keen to implement a “three-strike proposal” where illegal file sharers would be issued warnings before a suspension of access and eventual cancellation. Still, the plan would require ISPs to monitor user traffic and infringe on privacy issues, reports Billboard. World wide web industry trade groups in Australia have also defended the position of not adopting these types of policies or “taking responsibility of illegal operations on their networks” because “present legislation already covers copyright infringement, and these should be used against illegal downloaders.”

Whatever your thoughts on the position of the ISPs might be with regard to anti-piracy, this should not be read as advocating that activity. Simply put, it is almost pathetic for the record industry to expect another industry to sacrifice its business practices because music is being illegally traded and shared. As others have pointed out, some responsibility should be taken by ISPs about regulating users who do break copyright law but “ratting” out users to the music industry isn’t the proper action either.

It is the duty of the record industry to figure out ways to make consumers want to pay for music. Obviously that’s the real crux of these issues, the fact that consumers don’t find value in the music. At least that is the idealistic hope on the part of this writer as to why consumers would illegally trade and share the products. It is obvious that no matter how much freedom the record industry gives digital stores to sell tracks without anti-piracy technology, the tactic is just not working. It’s been a bad year for anti-piracy technology, but that just means a good year for digital stores. While it is hard to see any return from how far things have gone, there’s a solution out there and illegal file sharing isn’t the answer.

In the end, the solution is also not going to be found by looking to blame other industry’s or even the consumer for not regulating illegal file sharing. ISPs are not responsible for the record industry’s problems. If anything, that industry has providing new markets and avenues of advertising for music, so to be bitten at might not be taken too lightly by ISPs. Consumers should not be illegally sharing, but they shouldn’t distrust their World wide web service providers either.

Share This

Share This

Filed under: Products and services, Wal-Mart (WMT), Target Corp. (TGT), Procter and Gamble (PG)

Wal-Mart Stores, Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT) are in this one together, and we’re not speaking a battle for retail supremacy here. The two mega discount retailers face an ongoing patent lawsuit over their use of RFID technology to keep track of warehouse and retail inventory levels and automated ordering and processing.

It’s hard to imagine a commodity technology being used in so many ways by retailers the world over being patented, but that’s just what Houston, Tx. citizen Ronald Bormaster is claiming. Bormaster’s RFID patent covers RFID in a way that ensures pallets and units of merchandise don’t “collide” when being handled in an automated fashion, and he assigned the patent to a Houston company called “RFID World” — which is not even using the system on a commercial basis to this day.

Wal-Mart and Target both have asked the patent lawsuit to be thrown out, arguing that it has no merit and that Bormaster’s patent isn’t a patent in the first place. The retailers state, based on a 2005 University of Arkansas study, that RFID grants in-store merchandise to be replenished three times more swiftly when RFID is involved as opposed to manually-scanned bar code systems. Would customers see visible inconveniences in stores if this patent lawsuit was won by Bormaster and RFID was no longer allowed to be used by the two retailers? They say yes. Procter & Gamble Co. (NYSE: PG)’s Gillette brand is also involved with this dispute since it’s a big proponent of using RFID in its mass production facilities with its partners. All three companies want the case to be thrown out in its entirety.

Share This

Share This