matisse capital management

Around the World - News You Need to Know

ATA Airlines shuts down, bankrupt.  Flights canceled, most jobs terminated, airline will not honor tickets.  New York Times

United Arab Emirates consider removing US dollar peg.  UAE and Qatar expected to revalue currencies this year because of high inflation. Globe and Mail

TransCanada utility buys New York City generating station from National Grid.   Station fills about 21% of New York's demand. Globe and Mail

Bank of England governor warns of major changes to bank regulations.  More capital and liquid assets to be required. Telegraph

UBS writes off another $19 Billion.  Chair is forced to step down; bank's subprime losses double.  Guardian

UK home prices could drop 25% in two years.  Economist cites credit squeeze, consumer confidence. Telegraph

Lehman to sue Japanese firm to recover $350 m in losses.  BBC

Some railways taking cars out of operation.  Recession indicator? BNSF (Ticker: BNI) and others park cars as freight slows.  Globe and Mail

Allianz SE (AZ) may sell banking unit Dresdner Bank. Possible buyers?  Banco Santander (STD), Commerzbank and China Investment Corp. Deutsche Welle

Deutsche Bank issues profit warning.  Profit estimate of 8.4 B euros will be tough to achieve. Deutsche Welle 

IKB Bank to face audit?  ECB head Trichet: "We cannot make life easier for those who have made mistakes. They have to pay for their mistakes." Deutsche Welle

Per George Soros, world economy at end of 'superboom.'  Thinks downturn will be deeper than many expect.  Telegraph 

The Dividend Arisocrats: The Dividend Growers

Standard and Poor's publishes a list of companies called the "Dividend Aristocrats."  This list is updated every year: some companies are added, and some fall off the list.  The criteria for inclusion is paying a dividend which has been increased every year, for the last 25 years.  There are currently 58 companies on this list, which I have copied below.  However, the Dividend Aristocrats are not created equal.  Some increase their dividends at significantly faster rates than others and the differences can be staggering. 

UTX - United Technologies for the Long Haul

Now that we are in a recession, I am looking at buying shares of industrial and aerospace companies, which have been beaten up of late (I’m a bit of a contrarian).  One company I am looking at is United Technologies (UTX), a business in which I already own shares.  I bought last year when the stock was at $73.  As I think this company has strong long-term prospects, it might be worth buying more, if you plan to hold long-term.  The recent arrival of the company’s 2007 annual report in my mailbox gave me a reason to dig into its financials.  Below, UTX over the last three years:

Around the World - News You Need to Know

Bank of England has no plans to slash rates.  The UK economy is "not suffering to the extent that the American economy is." Telegraph Or is it?  See below.

UK forecast for GDP growth is lowered to 1.7%. Troubled credit markets, commodity prices, slowing demand will slow economy.  Telegraph

In Australia, REITS will "have to endure worsening ride before the market settles."  Warning made by property managers.  Sydney Morning Herald

US home mortgage deduction played a big role in housing crisis.  Encourages high loan to value ratios. Opinion piece.  Globe and Mail

Pepsi will buy 76% of Russia's largest juice maker.  Coke acquired number two in 2005.  Wall Street Journal

Barron's names world's best CEO's.  Barron's  List includes Warren Buffet and George David of United Technologies.

Australia REIT Centro told to sell assets, reduce debt.  Market cap of $6.9 billion six months ago is now $232.4 million. Sydney Morning Herald

Financial crisis the worst since World War II?  Economist with common sense: "where there is no credit bubble, there can be no credit burst." Deutsche Welle

MFS property group defaults on $184 m loan from RBS.  "11,000 investors face significant losses," as fund redemptions are frozen.  Sydney Morning Herald

Jaguar and Land Rover sold to India's Tata Motors (NYSE: TTM) for $2.3 B.  Ford has owned the two brands for 20 years.  Telegraph 

Fed Rate Cut - Was it the Right Thing?

By now, everyone knows that the Fed cut the federal funds rate, by 75 basis points yesterday, to 2.25%.  But was this the right strategy?  Really, the Fed had to do it, given the recent "difficulties" at Bear Stearns and other financial institutions.  It seems like I said that a few months ago when Countrywide, American Home and Northern Rock had difficulties.  Back then, mortgage backed securities became tough, if not impossible, to sell and this created a crisis of confidence and liquidity that threatened better capitalized companies.  And as that crisis has continued to the present time, the consequences of not cutting the rate would have been grim, or would they?

If another rate cut was the right short-term strategy, I believe the hand of the current Fed was forced by Greenspan, who left rates too low for too long, a lax policy that created many of the current problems.  The federal funds rate was below 2.0% for most of 2002 to 2004.  And from June 2003 to June 2004 the rate was 1.0 %.  This created negative "real" interest rates for much of this time period.  The last time the federal funds rate was so low was the late 1950's, another period of recession (see the chart below). 

Section 13(3) of the Federal Reserve Act

The exact language of Section 13(3) of the Federal Reserve Act is set forth below.  This is the paragraph under which the Fed conducted the Bear Stearns rescue:

13(3) Discounts for Individuals, Partnerships, and Corporations

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

Around the World - News You Need to Know

By bailing out bear Stearns, the Fed invoked Article 13(3) of the Federal Reserve Act which permits it to lend in "unusual and exigent circumstances" following a vote of five governors.  This is the first time it has done so since the Great Depression.  Money quote from strategist at Banque AIG: "We have moved one step closer to the direct purchase of assets by the US authorities. I'm afraid this has horrible implications but it may be the only way to avoid a serious risk of Depression. This is a Greek Tragedy set in motion by Alan Greenspan a long time ago."  The excellent coverage by the Telegraph UK is here.

Australia's Central Bank raises rates.  Key rate now at 12 year high of 7.25% to fight inflation.  Sydney Morning Herald

Plans announced for $12 B metro in Sydney.  The new lines are set to open by 2015. Sydney Morning Herald

Siemens shares fall 13% on profit warnings.  Delays and cancellations of key contracts will cut earnings.  Guardian

Pound suffers biggest one day fall in 15 years.  LIBOR jumps 80 basis points on fear of bank stability. Telegraph  Most US variable mortages are tied to LIBOR.

ACH, Aluminum Corporation of China 2007 profit down 13.5%.  Falling prices and rising costs will make 2008 challeging.  Standard Hong Kong

Sales in Germany's auto sector up 17% this year.  Daimler, BMW soar despite US slowdon.  Deutsche Welle 

Fed allegedly discussed Lehman's situation over the weekend.  Contacted three major banks.  Will situation be similar to Bear Stearns? Telegraph

Visa and Other Upcoming IPOs

There are three IPOs scheduled for this week, March 17.   There is only one which I find interesting: Visa Inc. (Ticker: V).  The shares will supposedly be priced between $37 and $42.  Exactly how this IPO will fare in the current bearish environment is an unknown.  But given rising defaults on credit cards and home mortgages, I will be surprised if the shares take off.  Of the 24 new filings in January and February, the following companies, which are not REITs or pharma caught my attention:

CVE, CVR Partners, LP - agricultural chemicals

INTL, Intelius, Inc., - information and records management services

CFX, Colfax Corporation - fluid control, pump seal and valve manufacturing   

Update on Petrobras (PBR)

Petrobras, or Petroloeo Brasileiro (ticker: PBR), just released its third quarter newsletter.  As I own PBR shares, I am summarizing here the content that I feel is the most important for investors. 

New Discoveries

PBR has announced two major discoveries in recent months.  The first was in November; it is the Tupi Field which is estimated to be at least 8 billion barrels in size.  This oil is located in water with a depth of two to three thousand meters.  The second discovery was in the Xerelete Field and is estimated at 1.4 billion barrels.  Excluding these discoveries, PBR has proven reserves of 14 billion barrels (Exxon currently has proven oil and gas reserves of 22 billion barrels; Chevron has 11.6 billion).  In addition to these discoveries, PBR acquired 26 blocks in the Gulf of Mexico.

Operating Performance

For the nine months January through September, sales revenues were up 15.5 % over the same period 2006.  Net income was up only 2.8 %, due to higher expenses.

US Dollar: Where to From Here?

As goes the dollar, so goes the economy.  Perhaps.  The next FOMC meeting is March 20 and 21.  It is almost a forgone conclusion that the Fed will cut rates, perhaps aggressively.  Meanwhile, the dollar is weak, and another rate cut will likely weaken it further. It currently takes $1.01 to buy one Canadian dollar (called the loonie) and that is the wholesale rate.  At a retail currency exchange you will pay about $1.09.  In 2002, it cost only about $0.65 to buy one loonie. 

So when in the past did the loonie exceed parity with the dollar? I'll give you some hints. The Everly Brothers had a big hit with "Bye Bye Love."  Cadillac came out with a new model that had gigantic tail fins, below.