What WikiLeaks Should Say About Regulators Who Knew Shady Deals Were Going On

While I can-not pre-dict what Wik-iLeaks will leak about some major banks, I have a hunch that one of the rev-e-la-tions might be from a spe-cial New Con-structs report pro-vided to the Sen-ate Bank-ing Committee’s Sub-com-mit-tee on Secu-ri-ties, Insur-ance, and Invest-ment in late Octo-ber?2009.

In that report, we revealed that reg-u-la-tors, if they were pay-ing atten-tion, would have seen that many Wall Street firms were engag-ing in alarm-ing lev-els of credit deriv-a-tives trading (credit default swaps or CDS).

For exam-ple, the notional value of Bank of America’s (BAC) credit deriv-a-tives con-tracts at the end of 2007 was over $3 tril-lion and 5328% greater than the $57 bil-lion at the end of 2001. For Amer-i-can Inter-na-tional Group (AIG) the notional value of its credit deriv-a-tives con-tracts at the end of 2007 was $562 bil-lion and 447% greater than the $126 mil-lion at the end of 2001.

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It is a won-der that Bank of Amer-ica was able to sur-vive the finan-cial cri-sis with-out the same level of bailout/takeover by the U.S. gov-ern-ment expe-ri-enced by AIG given that BAC’s credit deriv-a-tive expo-sure was so much greater. Per-haps, Wik-iLeaks will offer some insight into how that happened?

The growth in expo-sure to credit deriv-a-tives was so high that any-one pay-ing atten-tion would have noticed. So, either the reg-u-la-tors knew and chose to do noth-ing about it (i.e. Bernie Mad-off) or they sim-ply were not pay-ing atten-tion (i.e. Enron, World-Comm?etc).

The point is not that reg-u-la-tors missed or ignored clear and obvi-ous early warn-ing sig-nals of the impend-ing finan-cial fall-out that occurred years later. The point is that they seem to miss these sig-nals quite?often.

None of this sur-prises me given my expe-ri-ence work-ing with the SEC, Sen-ate Bank-ing Com-mit-tee, FDIC, Sen-a-tor Corker, and the Con-gres-sional Over-sight Panel. My pre-sen-ta-tions to them focused how to improve the integrity of the cap-i-tal mar-kets most effi-ciently by imme-di-ately fill-ing holes in the cor-po-rate finan-cial report-ing sys-tem. I high-lighted sev-eral major breaches of finan-cial dis-clo-sures that had gone unde-tected and remain uncor-rected by the SEC. For exam-ple, over the last 5 years we found 10 com-pa-nies whose income state-ments do not add up cor-rectly and 20 com-pa-nies in the last 11 years whose bal-ance sheets do not bal-ance. For more exam-ples, see the Cor-po-rate Finan-cial Dis-clo-sure Trans-gres-sions report I sub-mit-ted to the SEC and the Sen-ate Bank-ing Com-mit-tee. What you read in that report will surprise?you.

In my hum-ble opin-ion, our reg-u-la-tory frame-work (before and after over-haul) is woe-fully ill-equipped to find, track and address the finan-cial machi-na-tions con-stantly invented on Wall Street and in cor-po-rate America.

As I stated in Pri-vate Sec-tor to the Res-cue, “Given that our abil-ity to trust polit-i-cal lead-ers is low, we must rely more than ever on pri-vate enter-prise to lead our society.”

There is no sub-sti-tute for “doing the dili-gence.” Watch your back when investing in this mar-ket because no one else is watch-ing it for?you.

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Shoes Are Kicking But Nike Should Get Knocked Back Below $70

Nike can soar. It may be coming back down

Nike competes with Sketchers, Adidas AG, Steven Madden and K-Swiss in the global footwear market.

Widening product lines coupled with strong marketing and innovation has contributed to Nike’s rising market share in the global footwear market. Its share has increased from almost 14% in 2006 to around 16% in 2009, ^[] and we expect this trend to continue over our forecast period.

According to our estimates, Nike branded footwear constitutes around 44% of Nike’s stock; hence the stock is significantly impacted by the global footwear market share. If Nike’s footwear share reaches 21% in coming years instead of the 19% that we currently forecast, this could create an upside of 5% to our current price forecast.

We currently have a Trefis price estimate of $68.63 for Nike’s stock, which is about 20% below the current market price.

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Innovation is Key for Nike

Nike is known for its innovative products. It spends a significant amount of time on shoe development and design. It also collaborates with other companies in order to design new products. For example, it worked with Apple to create a shoe with space in it to accommodate a chip that communicates data on speed and distance covered to the runner’s iPod. This resonates with users and keeps its offerings fresh. Given the proliferation of iPods and other mobile devices that runners often use during exercise, incorporating these into Nike’s products shows an innovative product design.

Strong Marketing Campaigns

Big brands like Nike capitalize on large-scale sporting events like tennis and soccer tournaments. Effective advertising campaigns during these sporting seasons trigger market share growth.

In recent news, the National Football League announced that it’s splitting the key part of its apparel licensing between two companies: Nike and New Era. ^[] This five-year multi-million dollar deal will be effective April 2012. Nike also has a strong licensing programs with leading college and universities in the US, which popularizes its brand at the local level.

Member Forecasts

Trefis members expect Nike’s global footwear market share will increase from 17% in 2010 to 21% during the forecast period compared to the Trefis estimate of an increase from 16% in 2010 to almost 19% during the same period. See the modifiable chart above to make your own estimates.

Our complete analysis for Nike’s stock is here.

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Off-Balance Sheet Debt: Bad Enough That FASB Notices, Maybe You Should Too?

Nov. 8 2010 - 2:54 pm | 517 views | 1 recommendation |

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After pouring through the Financial Footnotes of over 50,000 annual reports on file with the SEC, we found that over 2,900 companies have off-balance sheet debt. The result is that over $765 billion of corporate liabilities are left off of company balance sheets. The accounting rules allow companies to move debt off their balance sheet by employing operating leases instead of capital leases to account for certain assets. The differences between an operating lease and a capital lease are quite small despite the rather large impact the difference in accounting can have on the balance sheet and economic earnings of the business. For example, there are 10 companies in the S&P 500 whose off-balance sheet debt is greater than 50% of their reported total assets. Details on this group, which includes Whole Foods, Walgreen, Starbucks and others are in our report.

FASB seems to agree that operating lease accounting rules impair investors’ ability to properly value companies. FASB recently issued a proposed new standard that bans the use of operating lease accounting and requires all leases be capitalized on the balance sheet. The proposed standard, if accepted, is scheduled to be implemented in 2012. I think this new standard is a great step in the right direction by the accounting regulators. However, it does nothing to help investors – in the present – track how much debt is off-balance sheet now or during a company’s history. Even after the new standard is implemented, investors will need to convert operating leases into capital leases for all prior years to perform apples-to-apples historical comparisons.

I highly recommend that investors understand how much debt companies keep off balance sheet before making an investment. Knowing the true debt of a business may change your mind about making an investment. For example, how do you feel about knowing that Kohl’s kept over $8 billion (61% of total assets and 50% of its market cap) off its balance sheet? Not so good…now maybe you see why FASB is finally getting around to addressing the issue.

New Constructs includes off-balance sheet debt in all of its reports and adjusts the reported earnings of all companies for this misleading accounting practice.

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Intel Should Be $26 But Not Because Of Atom Chips

Intel's Atom is a market share champ but doesn't do much for the stock price.

Since their launch in 2008, Intel’s Atom microprocessors have dominated the global netbook market. In addition to netbooks, the Atom microprocessor is used in a variety of other places including smartphones, tablets, car infotainment systems, smart TVs, low power consuming servers, and energy management systems.

Despite this, Atom’s rising market share will have minimal impact on Intel’s stock since these ultra low voltage microprocessors account for only around 2% of Intel’s stock price, based on our estimates. Intel’s Atom competes with AMD’s Athlon Neo, Qualcomm’s Snapdragon, and Nvidia’s Tegra microprocessors. We currently have a Trefis price estimate of $26.50 for Intel’s stock, about 32% above the current market price of $20.

Will Atom’s market share increase?

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In the past, Atom’s market share of the combined netbook and smartphone market has increased from an estimated 8% in 2008 to 13% in 2009 ^[], attributable to the rise in netbook shipments from around 11.4 million in 2008 to 26.5 million in 2009.

The average forecasts for Atom’s market share created by Trefis members indicates a projected increase from 14.3% in 2010 to 23.2% by the end of the Trefis forecast period. This is in comparison to the baseline Trefis estimate of an increase from 13.5% in 2010 to 20.5% during the same period ^[]. If the member estimates are indeed true, it would imply an upside of 1% to the Trefis price estimate for Intel’s stock.

Going forward, we expect Atom’s market share to grow as it expands into the competitive smartphone and tablet PC market. Intel has partnered with Nokia to develop an OS named MeeGo, a Linux-based software platform which is compatible with Atom’s x86 architecture and will support a broad range of devices including tablets, mobile computers and media phones.

In its quest to break into the Android-based smartphone market, Intel ported Android to its Atom processor platform in early 2010, paving way for the companies to develop Android-powered smartphones based on Intel’s Atom processor. Despite this, the smartphone market remains dominated by ARM technology-based processor chips. If Atom-based smartphones gain traction, there could be further upside to our estimates.

Our complete analysis for Intel’s stock is here.

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Gilani, says the party should accept the errors of the past

Prime Minister Yusuf Raza Gilani speaks with journalists to a press conference Multan, Pakistan, 29 August PHOTO: FILE/EPA

Prime Minister Youssef Raza Gillani said Saturday that one should admit courageously if political party is erroneous.

While speaking at a ceremony at Zimindar College in Gujarat, he said that it was wrong for the Government to nationalize the College, adding that the central Government will fully support the reforms suggested by the Government of the Punjab.

GILLANI has also announced that granting Rs50 million for College which he had earlier announced will be accelerated.

The Prime Minister said that the country is currently overwhelmed by several problems including inflation, poverty, terrorism and devastation of the imposed flooding.

He said that the homes and livelihoods will be provided to the 20 million people displaced by the floods.

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