The curious story of the day is back-to-back reports, minutes apart, by the same news agency, saying different things.
Greece Says has Begun Drawing Up Agreement with Creditors
Here is Reuters headline number one: Greece Says has Begun Drawing Up Agreement with Creditors
Greece and its creditors are starting to draft a technical-level agreement, a government official said on Wednesday, signalling progress in long-running talks to unlock aid for the cash-strapped country.
“At the Brussels Group (of credit negotiators) today procedures to draw up a staff-level agreement are beginning,” the official said, adding that Prime Minister Alexis Tsipras would be in constant touch with other leaders to conclude a deal.
The official said the deal would avoid wage and pension cuts, include reform of value-added taxes and include a lower target for a primary surplus in the first year.
The Greek official also cited differences between the EU and IMF as holding up an overall deal and called on the creditors to do their part to ensure a deal was struck.
“There remains a problem with the differing stance among the institutions. If an agreement by the IMF was not needed, the deal would have closed by now,” the official said.
Eurozone Officials Dismiss Greek Comments
Here is Reuters headline number two (actually 8 minutes before the above): Euro Zone Officials Dismiss Greek Comments on Deal Being Drafted.
Greece’s European creditors cannot confirm a statement by Athens that it is starting the process of drafting a technical-level agreement with creditors to secure aid, an EU official told Reuters on Wednesday.
“I wish it were true,” a senior euro zone official said.
Loop of Lies?
It’s vaguely possible no one is lying here, but that’s only possible if the senior eurozone official does not know what is going on.
Another curious aspect is the Greek official blaming the IMF, when actually it is the IMF and not the eurozone creditors that have admitted Greek debt needs another haircut.
I suppose it is possible the IMF wants harsher terms on a new deal than Germany and the creditors, but somehow that seems unlikely.
Who benefits more from a lie?
The answer to that question is Greece, two ways.
- It buys Greece more time to prepare capital controls
- It may stop some panic out of Greek banks
Just because someone benefits from a lie is no proof a lie is in progress. Yet, lie or not, both of those two points are in play.
Greece needs to prepare for capital controls to stop a run on banks should talks fail.
Mike “Mish” Shedlock
When companies have a burning need to boost their stock price and/or have no organic growth opportunities requiring fresh investment, they do one thing: engage in stock buybacks (usually funded with recently issued bonds). We first warned about the dangers of such a “strategy” in 2012, and most recently, earlier today the WSJ once again noted that “U.S. Firms Spend More on Buybacks Than Factories.”
The reality is that stock buybacks are great… as long as the stock price keeps rising. They are also great as long as the stock isn’t so illiquid that once the sole buyer withdraws, be it the company itself or its CEO (in the case of Hanergy using corporate funds) the stock crashes.
The real problem emerges when after sinking hundreds of millions, or more, in stock buybacks, the stock no longer keeps rising.
This is precisely what happened to KORS stock. As Dominique Dassault points out, earlier today Michael Kors reported abysmal earnings which have lobbed a whopping 23% off the stock price and the market cap of KORS just today.
But it was not KORS’ operational issues that were troubling: it is how much the company burned on stock buybacks. In KORS’ earnings release we read:
During the quarter, the Company repurchased 1,409,682 shares of the Company’s ordinary shares for approximately $92.0 million in open market transactions
This means in the quarter ended March 31, KORS spent $92 million supporting its stock ahead of what it knew would be an earnings debacle. It also means that its average purchase price was $65.3/share in Q4, or 40% higher than KORS’ last trade at $46.50.
But that’s not all. Last quarter, after authorizing $1.5 billion for stock repurchases, KORS reported the following:
During the quarter, the Company repurchased 5,068,813 shares of the Company’s ordinary shares for approximately $399.9 million.
In other words, KORS’ average price in Q3 was $78.9, a 70% premium to the current market price.
Combining the two quarters, we calculate that KORS spent $492 million to repurchase 6.5 million shares at an average price of $75.9, some $30 higher than current market levels, and a 63% premium!
Needless to say, any portfolio manager who had spent half a billion only to see his investment return -40% that same year, would have been fired long ago. But not KORS management team, the same management team which in Q3 made the following statement:
Joseph B. Parsons , Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer, stated, “We are pleased to have repurchased approximately 5.1 million shares this quarter. This action demonstrates the Board and management’s confidence in our ability to generate strong free cash flow and to achieve our long term growth objectives
Perversely he is somewhat accurate, but here is the full story: in Q3 the company generated $474 million in cash from operations, the most in years. Of this amount, it spent $125 million on CapEx and $400 million on buybacks.
That $400 million is now worth $236 million.
Perhaps that is why Mr. Parsons did not have any commentary about how “pleased” he was to announce a further $92 million in KORS buybacks : $92 million which at today’s KORS stock price is worth $65 million today.
Said otherwise, of the $500 million KORS spent on buybacks in the past two quarters, it already has a paper loss of $200 million. Incidentally, KORS spent about $200 million on capex for all of fiscal 2014.
And that, in a nutshell, is what happens when stock buybacks go horribly wrong.
Expect to see just this outcome for increasingly more stocks who are only propped up thanks to billions and billions in repurchases by management, which does nothing but merely delay the inevitable day of reckoning when massively overvalued and artificially supported stocks finally meet gravity.
As for KORS, which should be repurchasing stock precisely on today’s epic rout, it very well may do just that: as the company conveniently noted in the release:
The Company also announced today that the Board of Directors approved an amendment to its share repurchase program on May 20, 2015, at its regularly scheduled Board meeting, authorizing the repurchase of up to an additional $500 million of the Company’s ordinary shares and extending the program through May 2017. This increases the initial repurchase authorization previously announced in November 2014 to $1.5 billion, of which approximately $1.0 billion is available for future repurchases over the next two years.
KORS also noted: “Share repurchases may be made in open market or privately negotiated transactions, subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy, and other relevant factors. The program may be suspended or discontinued at any time.“
A few more quarters in which the IRR on buybacks is -40% and something tells us the future of KORS buyback program may be in very serious jeopardy.
U.S. Sen. Rand Paul joins the Illinois Policy Institute at the 1871 Center for a discussion about how to transform Chicago, the state of Illinois and the U.S. with liberty-based public policy solutions.
Tickets are completely sold out, but you can watch the livestream at 12:45 p.m. CST.
Paul’s speech is on unequal economic opportunity, failing schools and a broken criminal-justice system.
Mike “Mish” Shedlock
Overnight saw yet another dip at the open that was ripped by the close in Chinese markets as Year-to-Date gains for China’s Shenzhen Composite now top 105%.
Of Two Minds could easily be worth $50 million in a matter of months.
In the event you haven’t heard about the stock bubble currently inflating in China, please take a quick look at these two charts of the Shenzhen Composite:This second chart displays the Shenzhen’s price-earnings ratio (PE), a widely used measure of fundamental valuation. If a company’s stock is worth $100 per share, and its net earnings are $10, it has a PE of 10. If a company’s stock is worth $100 per share, and its net earnings are $1, it has a PE of 100.As Alan Greenspan noted in his mea culpa for missing the bubble in 2008, you have to keep dancing while the bubblicious music is playing. Why I Didn’t See the Crisis Coming:Almost all market participants were aware of the growing risks, but they also knew that a bubble could keep expanding for years. Financial firms thus feared that should they retrench too soon, they would almost surely lose market share, perhaps irretrievably. In July 2007, the chair and CEO of Citigroup, Charles Prince, expressed that fear in a now-famous remark: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”Financial firms accepted the risk that they would be unable to anticipate the onset of a crisis in time to retrench. However, they thought the risk was limited, believing that even if a crisis developed, the seemingly insatiable demand for exotic financial products would dissipate only slowly, allowing them to sell almost all their portfolios without loss.The take-away from this is to join the party and offload marginal enterprises at sky-high valuations to greater fools–which is why I plan on listing Of Two Minds as an IPO on the Shenzhen Exchange.Based on the insane PE ratio of Shenzhen listed companies, Of Two Minds is worth at least $5 million. But there are various premiums that have to be included in this base valuation.
- Of Two Minds is highly flexible. It might IPO as Of Two Minds Mobile Apps, unless mobile apps are no longer fashionable, in which case we’ll change the name to Of Two Minds P-to-P (peer-to-peer). This adds at least $1 million to the base valuation.
- Of Two Minds is based in the San Francisco Bay Area (with an active branch in Hawaii). Just being in the white-hot tech frenzy of the Bay Area adds at least $1 million to the base valuation.
- The growth possibilities are staggering. The Internet is global, and the global population who reads English or has access to online translation is equally vast. This adds at least $1 million to the base valuation.
- Of Two Minds is in the hot alternative-media space, which includes mobile apps, peer-to-peer marketing, social media–basically every hot technology relates back to alternative media. This adds at least $1 million to the base valuation.
- Of Two Minds has a long history in China, due to our early ties with the Kroika Cookie and Biscuit Company. This adds at least $1 million to the base valuation. The Kroika Story: This Blog Sells Out (December 21, 2005)So here’s the deal: an enterprising entrepreneur, hedge fund or private equity fund can snap up Of Two Minds for a pre-IPO price of only $10 million. Who knows how high the Shenzhen Composite can go? 1,000? 3,000? Heck, why not 5,000?Of Two Minds could easily be worth $50 million in a matter of months. $10 million is insanely cheap for a company that’s about to IPO on the Shenzhen. The sky’s the limit, Baby!
While careful to ‘remain optimistic’ KPCB’s Mary Meeker warns that “growth rates for leaders… are slowing,” and warns that global tech puiblic/private financings are now 17% above 1999 levels and “there are pockets of Internet company overvaluation but there are also pockets of undervaluation,“ as she unveils her latest (record-breaking) 197-page epic chartapalooza on Internet Trends…
Meet Martin “The Hammer” Mallett, chief currencies dealer at the Bank of England in 2007, and, as WSJ reports, recipient of emails that were part of an alleged campaign to rig benchmark interest rates, according to evidence presented in a London trial Wednesday. Remarkably, as we have detailed extensively, the emails were sent out with daily suggestions for where a variety of banks should set Libor. Mallett was later fired for what the central bank described as “serious misconduct,” although the bank said his departure wasn’t directly related to the currencies-rigging investigation.
As The Wall Street Journal reports, Martin Mallett, who at the time was the chief currencies dealer at the Bank of England, was among a couple dozen recipients of emails sent in 2007 by brokers allegedly working at the behest of former bank trader Tom Hayes. The recipients were blind carbon-copied on the messages…
In the emails, the brokers sent out daily suggestions for where a variety of banks should set the London interbank offered rate, or Libor. Mukul Chawla, the prosecutor trying Mr. Hayes, said those emails were used in an attempt to skew interest rates for the benefit of Mr. Hayes, at the time a trader in Tokyo at UBS AG.
Mr. Mallett, nicknamed “The Hammer,” was sent the emails at his firstname.lastname@example.org address.
Mr. Mallett left the Bank of England amid an investigation into attempted manipulation of foreign-exchange markets. He was fired for what the central bank described as “serious misconduct,” although the bank said his departure wasn’t directly related to the currencies-rigging investigation. Mr. Mallett, who couldn’t immediately be reached Wednesday, hasn’t previously commented.
A Bank of England spokesman had no immediate comment.
It is unclear why Mr. Mallett was receiving the emails. There is no indication that Mr. Mallett was involved in the alleged Libor manipulation by Mr. Hayes and his brokers.
Mr. Chawla said Wednesday that Mr. Hayes’s employer, UBS, arranged special payments—or “kickbacks”—to the brokers for their assistance.
UBS pleaded guilty to Libor manipulation in 2012.
Mr. Hayes pleaded not guilty to the criminal charges, but hasn’t had the chance to present his defense to the jury. He previously told The Wall Street Journal that “this goes much, much higher than me.”
News organizations covering Mr. Hayes’s trial aren’t currently allowed to report on the identities of the brokers or their employers.
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But just keep believing that markets are efficient and there’s no rigging… so we leave you with one rather notable comment from the emails and chatrooms of this rigging scandal…
“if you aint cheating, you aint trying.”
That seems to sum up our new normal perfectly.