I’ve watched a lot of football over the years, and this had to rank as one of the worst plays I’ve ever seen. It smacked of desperation, made no strategic sense, and of course, it failed miserably — with the Colts going on to lose the game 34-27.
Now why am I bringing this up? Because I’m seeing corporate managements pull the same kind of “trick play” moves with increasing frequency. Silly, rash, ill-conceived transactions — transactions that will likely fail to boost long-term shareholder value, just like the Colts’ play failed to earn a victory.
Take Yum Brands (YUM), the fast-food operator behind the Pizza Hut, KFC and Taco Bell restaurant chains. It opened its first KFC outlet in Beijing in 1987 as part of a long-term, continually reinforced plan to expand aggressively into the Chinese market.
|Are corporate execs contemplating more “trick plays”?|
The firm ultimately opened 6,900 restaurants there, making the market central to its strategy. It earned a reputation among investors as the best company to own if you wanted to bet on Chinese growth, and even called China “an absolute gold mine.”
Then earlier this month, it slashed its earnings forecasts in large part because of lousy China results. And a few days ago, it basically said “Oops, never mind” to a strategy it pursued for the better part of three decades.
Yum announced plans to spin off its China business as a separate company. But it couldn’t or wouldn’t say how it would list the company, or where its shares would trade. It couldn’t or wouldn’t tell investors what kind of royalty the Chinese stub listing would pay the parent. Heck, it wouldn’t even provide proposed names for the two surviving companies.
Bottom line: The “plan” seemed as ill-thought-out and slapdash as the Colts’ fake punt! It was clearly a desperation mood to pump up Yum shares, which had plunged from $95 in the spring to around $66 earlier this month.
|“The plan seemed ill-thought-out and slapdash.”|
Or how about Credit Suisse Group (CS), the Swiss megabank that also trades here in the U.S.? I identified this company as a weak one in my Interest Rate Speculator service a little while ago, and sure enough, it just laid an egg.
Net income missed third-quarter estimates by more than 9%, dropping 24% from a year ago. Fixed-income sales and trading revenue plunged 53%, while pretax earnings in private banking/wealth management tanked 31%.
So what did the bank do amid obvious, widespread deterioration in its businesses? Why, throw a bunch of reorganization plans at the wall to see what sticks, of course!
It said it would reorganize its operations into three regionally oriented units, and divide its securities business into market-focused and investment banking-focused units. It also said it would list its domestic Swiss bank as a separately traded entity, and shrink a portion of its investment banking asset base.
As if those weren’t enough signs of chaos, disorganization, and desperation, Credit Suisse announced that it would have to sell more than 6 billion Swiss francs ($6.3 billion) of shares to boost capital. Finally, it said it would cut thousands of jobs, with London getting hit particularly hard.
This isn’t the kind of stuff healthy, prospering companies do in strong underlying economic or market environments. It’s the kind of trick play shenanigans that confirm we’re facing serious problems.
It almost never works, either. Just go back and look at how a bunch of old-line companies tried to spin off their dot-com businesses during the tech bubble … only to have those plans blow up in their faces when the dot-bomb bubble burst.
So what do you think of moves like these? Are Yum Brands and Credit Suisse taking smart steps to boost shareholder wealth? Or are they just grasping at straws? Do you see other companies doing this same kind of thing, and if so, will it work? What do these trends say about the broader market? Share your thoughts at the Money and Markets website.
The debate about Canada’s major political shift continued at the website overnight. Several of you also commented on the Valeant Pharmaceuticals (VRX) fiasco.
Reader Eagle495 said: “One only needs to look at the chart of the iShares MSCI Canada ETF (EWC) to see how poorly they have done under the Conservative Harper government. Despite what the right wing screamers say, the Conservatives are poison to the economy and in turn their stock markets.”
But Reader Alan T. said: “There is a big issue brewing in the commodities market. When Australia elected a liberal, one of the first acts was to levy a large tax on commodity companies in the country. Now look at Canada. Same MO. I think the Canadian stock market is in for a surprise.”
As for Valeant, Reader Samantha said: “I have a little VRX through the Janus biotech mutual fund. Depending on the outcome of the allegations, this might be a blip in a wider sector. The fund is actually up for the year-to-date. Can’t say that about every security.”
Reader Steve added: “I want to know how a short selling entity like Citron, who is (presumably) short Valeant, can make an announcement such as this, pocket millions or maybe hundreds of millions, and not be investigated.
“The answer, I suspect, is that they make enough money off us to hire lawyers until they die. Fair enough if they are correct. But if they aren’t, they are no better than the miserable bunch that destroyed the financial system prior to 2008, or who front run us poor schmucks through high frequency trading three feet from the exchange, and live happily ever after.”
Lastly, Reader Mike P. said: “The biotech sector has exhibited exceptional endurance in the face of a nonstop onslaught of attacks from politicians and now, a short selling hedge fund trashing Valeant.
“I’ve seen this too many times where a hedge fund analyst, who is short a stock, publishes a frightening white paper analysis based on complete speculation. Only start worrying if the iShares Nasdaq Biotechnology ETF (IBB) drops below 285.”
Thanks for sharing your thoughts here. I’m no expert on Canadian politics. But I’ll definitely be watching how that country adjusts policy to cope with economic weakness and the ongoing commodity weakness.
As for biotech stocks, they were clear market leaders during the latest easy-money-fueled equity market run. So I can’t see how anyone can spin a significant technical breakdown as bullish. When you lose leaders, asset markets overall struggle. I too will be watching that 280-285 level on the IBB … if it goes, I think it will help drag down the Nasdaq overall.
If I didn’t get to your comments, or you want to expand on any points you’ve made already, please do hit up the website and weigh in.
Every day we get a bit more of the earnings picture filled in. Dow Chemical (DOW), McDonald’s (MCD) and Texas Instruments (TXN) told a bullish tale, while American Express (AXP), 3M (MMM) and Caterpillar (CAT) disappointed.
The European Central Bank left interest rates unchanged at record lows at its policy meeting today. But President Mario Draghi said in the post-meeting press conference that external economic weakness could lead to additional stimulus measures, or the extension of Euro-QE beyond the previously forecast September 2016 end date. Draghi’s comments helped send the euro into a tailspin, and fuel the rally in stocks today.
If you think houses are expensive in your neighborhood, just be glad you don’t live in London! An average house there costs just over $800,000, and the housing bubble in the U.K. capital is likely to get even worse thanks to low mortgage rates, a housing shortage, and loosening of qualification standards by lenders.
And finally, my wife’s Chicago Cubs got swept by the New York Mets last night – losing the fourth game in a row by a score of 8-3. While that means the prediction of a 2015 World Series Cubs victory from the Back to the Future movie series won’t pan out, she’s still proud of how far they came with such a young team. I can’t argue with that.
What do you think about the ECB’s latest move? Or the batch of earnings we got in the last 24 hours? Are you excited to see the Mets back in the World Series for the first time in years? Let me hear about it online.
Until next time,