Circuit City Stores and Fannie Mae show that companies singled out as great don’t necessarily make worthwhile investments.  The companies were among 11 featured seven years ago in “Good to Great: Why Some Companies Make the Leap, and Others Don’t,” a best-selling management book written by Jim Collins.  Circuit City filed for bankruptcy and Fannie Mae, a ward of the federal government, reported a record quarterly loss yesterday.

As the chart here shows, their reversals of fortune caused the group’s shares to decline more than the Standard and Poor’s 500 Index.  The chart tracks an index of all but one of the companies cited in the book during the past five years, the longest time period available using Bloomberg calculations.  Gillette is left out because it was bought by Procter and Gamble in 2005.  Each company is weighted by market value. Four of them – Abbott Laboratories, Altria Group, Kimberly-Clark and Pitney Bowes - were adjusted for spinoffs.

“Good to Great,” published in October 2001, was designed to answer this question: “Can a good company become great, and if so how?” Collins picked the 11 companies after five years of research.

Nucor has been the group’s leader in the stock market, and its share price has more than tripled since the book’s release.  Kroger and Wells Fargo also advanced during the period, as did Abbott and Altria.  Gillette almost doubled before being acquired.  Walgreen, the worst-performing stock other than Circuit City and Fannie Mae, rounded out the book’s lineup.

I’ve kept quiet about this for quite some time.  Mostly because it’s probably a pretty sensitive topic for some people.  But, well, I can’t control my fingers any longer, so here’s my rant…  The notion that every American should be able to own a house is ludicrous.  It is not a right to be able to own a house, it is a nicety, a privilege, something many people save for many years to be able to afford.  I, as ataxpayer, expect the taxes I work hard to earn and pay, to be used for things like building roads, paying for the military, ensuring the water we drink is fit for consumption.  It absolutely drives me up the wall every time I hear politicians drawing up plans to help people remain in their houses by reducing their mortgage payments using taxpayer money.  And this morning Citi Mortgage, which is part of Citigroup (article to the right, click on it for the full version) announced a plan to pre-emptively reduce the mortgage payments for half a million borrowers to prevent foreclosure.  Last time I checked, Citi borrowed money from the many discount lending windows instituted by the Fed over the past months, so effectively is using taxpayer money to bail out would-be foreclosees.  I don’t know the details of Citi’s involvement with the TARP plan but I assume if they take money from it they’ll be able to channel it wherever they want, except for executive pay packets.

Now, I understand it’s a sad thing for someone to lose their home.  I’m not a cold-hearted capitalist that thinks people in trouble should be put out on the street.  But why should the majority of US homeowners who can afford their mortgage payments, have sensibly managed the interest rate risk associated with their mortgage payments, and budgeted to be able to handle their payments, continue to pay their mortgages when irresponsible borrowers get bailed out using taxpayer money?!  I’m sorry, if you didn’t understand the contract you signed when borrowing hundreds of thousands of dollars and are now in dire straits, you deserve to learn the hard way.  If you purchased a house you couldn’t afford using a negative amortization loan and are going to be out on your arse unless you get bailed out, you should lose your home and take that as a lesson.  If you took out a home equity loan to buy a boat and a new car with a variable rate first mortgage and now can’t afford any of it, you should get ready to say bye bye to the whole lot.

Of course, there’s another side to the story.  Crooked mortgage brokers that took advantage of uneducated borrowers, or falsified mortgage applications to get loans approved and receive their commission, those people should be in prison.  I can understand taxpayer funds being used to protect borrowers from predatory lending.  When you consider the scope of the financial fallout from five or six million homeowners losing their houses, I can also understand instituting some kind of protection against foreclosures.  The question then becomes where do you draw the line?  Who gets aid and who gets left to burn like Lehman?  Who makes the decision?  And can I get my mortgage payment reduced too, maybe a little reward for being conservative and managing my interest rate risk, understanding the contract when I signed on to borrow hundreds of thousands of dollars, not taking a home equity loan to buy a new Porsche?  That seems fair, doesn’t it?

Finally, something that’s up!  Volkswagen almost tripled its market capitalization today, closing around 218 on Friday and reaching an intra-day high today above 625!  To put that in perspective that’s equivalent to finishing last week with a company the size of Citigroup and hitting a point this morning where the car maker was bigger than GE.  Amazing.  If the stock was listed in the US (it’s listed in Germany) it’d be the secon largest stock in the S&P 500.  Talk is that Volswagen was one of the biggest short positions in European hedge funds’ portfolios; Porsche announced today that it would aim to take a 75% stake in Volkswagen by 2009.  Porsche has raised its current stake in Volkswagen to 42.6% of the company and holds options to purchase another 31.5%.  I’ve read that Porsche made more money last year from trading options (primarily on Volkswagen stock) than they did making cars! 

Price action from the beginning of the year (above right), with the two-day and today’s intra-day pricing below.

I meant to put this up last Friday but got a little tied up…  Anyway, there’s been a lot of markets halted since this whole fiasco started last August, but the majority of market closures and halts occur in often overlooked, developing markets like Russia and Indonesia (I put up a post about it here a while back: Let’s Just Close the Markets?).  You don’t often see the US market main index futures or equity exchanges halt trading.  Nothing should come as surprising in the financial markets these days, times when the forward looking volatility of the US markets is at its highest ever levels (right) and a day of 5% losses or gains is commonplace, but I wanted to post Friday’s major index halts because it’s a little out of the “ordinary” to see this happen.  The last time an NYSE circuit breaker was triggered was during the Asian financial crisis in October 1997 in an attempt to stem similar panic-drive losses to those experienced on Black Monday in 1987, when the circuit breakers and futures limit-downs were first instantiated.  On Friday we didn’t see the NYSE halt, but overnight we did see the futures limit-down during the early hours of London trading.  Below are the S&P 500 (left) and Dow Jones Industrial Average (right) futures contracts intra-day price action plots for Friday October 24.

Like I keep saying, crazy times we’re livin’ in these days…  In case anyone’s interested, the major US equity and futures exchanges circuit breakers and limit-down conditions are as follows.

NYSE
Level One Halt: A 1,100-point drop in the DJIA before 14:00 will halt trading for one hour; for 30 minutes if between 14:00 and 14:30; and have no effect if at 14:30 or later unless there is a level one halt.
Level Two Halt: A 2,200-point drop in the DJIA before 13:00 will halt trading for two hours; for one hour if between 13:00 and 14:00; and for the remainder of the day if at 14:00 or later.
Level Three Halt: A 3,350-point drop will halt trading for the day regardless of when the decline occurs.

CME
S&P 500: When there is a 5% drop or a 60-point slide in the S&P 500 stock index futures prior to the opening of regular trading the limit-down threshold kicks in.
DJIA: When there is a 5% drop or a 550-point slide in the Dow Jones industrial stock index futures prior to the opening of regular trading the limit-down threshold kicks in.
NASDAQ 100:When there is a 5% drop or an 85-point slide in the NASDAQ 100 stock index futures prior to the opening of regular trading the limit-down threshold kicks in.
Once regular trading commences, the next applicable trading limit shall be in effect. Additionally, if there is a halt declared on the primary securities market or the NYSE, trading will halt in all domestic stock index futures and options, whether a limit has been hit or not.

The Hang Seng index (the major index tracking the performance of the Hong Kong stock market) today had its largest single day loss since the Asian crisis in 1987, the last time the NYSE circuit breakers kicked in.  What does today hold for the US?  I don’t think I want to know…

A great book recommendation, so popular it’s now in its second edition!  Thanks Wayne Leong.

Thanks John DeMarino.

Stuff You Need to Know

Amazon (AMZN) – They beat estimates, but lowered guidance.  I was right.  The Grinch stole Christmas, Thanksgiving, and Halloween, and is under investigation for kidnapping the Easter Bunny. 

Wachovia (WB) – Wachovia’s loss of $24 billion exceeds the GDP of Uruguay. 

Potash (POT) – Beats estimates by 36 cents!  Yet the stock is only up 3% in pre market trading.  The stock is down 70% in a year, they crush the number, and they don’t get rewarded for it. Oy Vey.

Stuff You Want to Know, But Your Broker Won’t Tell You

Nasdaq – The Exchange has applied to the SEC for permission to suspend the rule establishing a $1 minimum bid price and the market value requirements for continued listing.  Does this give you an idea of where the market is heading?

“Breaking News” – Is there any stock quote or financial statistic that’s being broadcast that isn’t amazing?

Statements – You thought your September 401-k statement looked bad?  Wait until you get you October statement.  September’s going to look like “It’s A Wonderful Life” compared to October.

Heartburn – I’m a size buyer of Zegerid.  Asset reflux is giving me acid reflux.

Capital Infusions – The Treasury last week provided $125 Billion for big banks to lend to customers, including $10 billion to Morgan Stanley.  Morgan Stanley has accrued $10.7 billion of employee compensation expense, almost twice as much as its pretax earnings.  The vast majority of this remuneration hasn’t been paid yet.   Now I feel like I’m going to pay their bonuses.

Rating Agencies – Instant message exchange between raters said “It could be structured by cows and we would rate it.”  This is very disrespectful of cows.     

Thoughts of the Day

Stimulus Plan – Who needs a stimulus plan?  Oil is at $66.  So gasoline is down, assuming you have a job to drive to.  Interest rates have been cut, assuming you can borrow money.  Houses are cheaper to buy, assuming you can buy one.  And the stronger dollar is making overseas traveling cheaper, assuming you can afford a vacation.

Afghanistan – An Afghan student who asked about women’s rights had his death sentence revoked but received a 20-year jail term.  Some guys ask women to marry them and receive the same sentence.

A follow up to the post I put up about Iceland’s woes: Icelandic Freeze

Iceland and the International Monetary Fund will probably announce an agreement today that may include a loan of about $1 billion and a plan to restructure the economy, said Einar Karl Haraldsson, adviser to Industry Minister, Oessur Skarphedinsson.

“The government knows roughly what the IMF is proposing and there is no disagreement with that,” Haraldsson said in a telephone interview from Reykjavik today. “I guess there will be a decision meeting some time today.”

Iceland has special drawing rights at the Washington-based fund equivalent to about $1 billion, according to Standard and Poor’s. The island nation faces a prolonged period of contraction, possible hyperinflation and rising joblessness. Iceland is the first western country to seek IMF support since the U.K. in 1976.

Iceland needs aid after the collapse of its banking system froze the foreign-exchange market, making it hard for importers to finance purchases. Glitnir Bank hf, Landsbanki Islands hf and Kaupthing Bank hf imploded with debts of $61 billion, or as much as 12 times the size of the economy.

Norway, Sweden and Denmark would probably follow any accord with the IMF, with Japan also a candidate to provide the Atlantic island with aid, Skarphedinsson said on Oct. 20.

The central banks of Denmark, Norway and Sweden in May provided Iceland with a euro swap facility worth a total of 1.5 billion euros ($2 billion). The central bank of Iceland has so far drawn on 400 million euros of that.

Iceland is also in talks with Russia to secure a loan worth as much as 4 billion euros ($5.2 billion).

The U.K. may lend Iceland 3 billion pounds ($5 billion), the Financial Times reported today, without saying where it got the information. Haraldsson said he had no knowledge of any such agreement.

This is a bit of an eye-opening story I read this morning.  For a country completely isolated out there in the Alantic it’s a very scary state of affairs when importers won’t accept your currency and the global banks won’t exchange it for Euros or USD.  And when importers require payment in advance due to the Icelandic bank collapses and the resulting foreign exchange freeze, you start to wonder how the population is going to feed and clothe itself when the existing supplies run out.  This is taking the credit crunch one step further than people simply losing money they’ve invested and not being able to borrow…

After a four-year spending spree, Icelanders are flooding the supermarkets one last time, stocking up on food as the collapse of the banking system threatens to cut the island off from imports. “We have had crazy days for a week now,” said Johannes Smari Oluffsson, manager of the Bonus discount grocery store in Reykjavik’s main shopping center. “Sales have doubled.”

Bonus, a nationwide chain, has stock at its warehouse for about two weeks. After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally.

Iceland’s foreign currency market has seized up after the three largest banks collapsed and the government abandoned an attempt to peg the exchange rate. Many banks won’t trade the krona and suppliers from abroad are demanding payment in advance. The government has asked banks to prioritize foreign currency transactions for essentials such as food, drugs and oil.

The crisis is already hitting clothing retailers. A short walk from Bonus in the capital’s Kringlan shopping center, Ragnhildur Anna Jonsdottir, 38, owner of the Next clothing store, said she can’t get any foreign currency to pay for incoming shipments and, even if she could, the exchange rate would be prohibitively high.

“We aren’t getting new shipments in, as we normally do once a week,” Jonsdottir said. “This is the third week that we haven’t had any shipments.”

Bankrupt
Iceland’s 320,000 inhabitants have enjoyed four years of economic growth in excess of 4 percent as banks and businesses expanded abroad, buying up companies from brokerages to West Ham United soccer club. Now, the three biggest banks, Kaupthing Bank hf, Landsbanki Island hf and Glitnir Bank hf have collapsed under the weight of about $61 billion in debts, 12 times the size of the economy, according to data compiled by Bloomberg.

The central bank, or Sedlabanki, ditched its attempt to peg the krona to a basket of currencies on Oct. 9, after just two days, citing “insufficient support” in the market. Nordea Bank AB, the biggest Scandinavian lender, said the same day that the krona hadn’t been traded on the spot market, while the last quoted price was 340 per euro, compared with 122 a month ago.

“There is absolutely no currency in the country today to import,” said Andres Magnusson, chief executive officer of the Icelandic Federation of Trade and Services in Reykjavik. “The only way we can solve this problem is to get the IMF into the country.”

Imports Dependency
The International Monetary Fund sent a delegation to the island last week. Prime Minister Geir Haarde said on Oct. 9 his country may ask it for money after failing to get “the response that we felt that we should be able to get” from European governments and central banks. The state will also start talks with Russia over a possible 4 billion-euro ($5.5 billion) loan.

Iceland’s rugged, treeless terrain, a barren stretch of volcanic rock, geysers and moss, means the country imports most food, other than meat, fish and dairy products.

Magnusson said last week that one of Iceland’s largest supermarket chains was unable to get any foreign currency to make purchases abroad and another retailer’s electronic payment didn’t go through. Iceland will begin to see shortages of “regular goods” by the end of the week if nothing changes, he said.

“We are struggling to make the economy survive from hour to hour,” Magnusson said. “There is an enormous amount of capital that wants to get out of the country.”

Sedlabanki told lenders on Oct. 10 that residents who want foreign currency should first prove they need the money for traveling by providing documentation for their trip.

Essential Goods
Wholesalers are demanding that importers pay before any goods are shipped, said Knutur Signarsson, head of the Reykjavik-based Federation of Icelandic Trade. Under normal circumstances, wholesalers abroad would extend credit for 30 to 90 days, he said.

“Many of them ask us to pay cash before they send the goods to Iceland,” Signarsson said. “Because of the situation, Iceland has become a country that no one trusts any longer.”

Bogi Thor Siguroddsson, owner of Johan Roenning, an import and retail business which has about 7 billion krona ($71 million) in annual sales, says he’s instructed his purchasing managers to only import the core goods, including light bulbs, lamps and electrical cables, they need to serve their customers.

“It’s enough to have the credit crisis,” he said. “Then you have the currency crash. Unfortunately, we have shown that we can’t handle it ourselves.”

Food Inflation
Icelanders, whose per capita gross domestic product is the fifth highest in the world, according to the United Nations 2007/2008 Human Development Index, will have to tighten their belts.

Shoppers are paying more for the goods they do get. The cost of fruits and vegetables, nearly all of which are imported, have gone up about 50 percent in recent months, said Steinunn Kristinsdottir, a 33-year-old Reykjavik resident who was leaving the Bonus store with her cart full.

“This situation really has been a bit troubling for people,” she said. “They don’t know what’s going to happen.”

With the global rout of stock markets over the past few weeks, during which time we’ve seen almost a decade of economic growth disappear, some countries around the globe are deciding that they’ll just close their exchanges until things get better.  Indonesia is closed for the second day in a row today.  After Wednesday’s open saw shares on the exchange plunge a whopping 14% in the first 30 minutes, Russia closed the MICEX, where most Russian stocks are traded, on Wednesday and it will not reopen until tomorrow (Friday).  Crazy times we’re living in…  Don’t know if just closing the exchanges is going to really fix a whole lot, though!

I put a post up a few days ago about the central banks executing a coordinated rate cut in an attempt to stem the rout.  Didn’t do a whole lot of good so far…  The Mexican Central Bank is taking a slightly different approach.  Mexico’s central bank (and Brazil’s too, actually) has been initiating publicized currency intervention for the past couple of days, holding auctions for billions of dollars worth of the Peso in an attempt to stem its jaw-dropping depreciation.  Publicly auctioning currency like this can sometimes be an invitation for leverage to attack the move and drive an exchange rate even further away from where the government would like it; but in this environment, where credit is seemingly harder and harder to come by, the Mexican Central Bank is obviously of the opinion that they can make stem the depreciation.  I meant to put up this post yesterday, but just ran out of time; the image above (click on it if it’s too small) is the spot exchange rate for the Peso intra-day yesterday.  From the close of New York on Tuesday to 30 minutes before stocks opened on Wednesday the Peso depreciated a whopping 15.6% against the US dollar.  This isn’t a stock or future we’re talking about here, this is the currency of a pretty sizable country!  Nuts…  To top it off, the auctions of USD by the Mexican Central Bank did seem to have some effect and sent the Peso right back to where it started the day.  What a ride!  Dollar Mex was trading with a nine handle not too long ago, during a week or two when everyone when yield crazy and the EM currencies like MXN and TRY went on appreciation rampage.  I bet companies like Volkswagen, who manufacture the majority of their cars for the US market in Mexico, are grinning from ear to ear as they watch their labor costs go through the floor with this Peso depreciation…