Then came the weird patterns, stripes and polka-dotted stuff…driving me into the arms of Old Navy and Banana Republic (only on sale days!).  Both are part of Gap, Inc., so the company could still count on me for a tiny contribution to their revenue.

Then the crazy patterns made their way to Old Navy. :(  I still haven’t figured out where to go next!

Apparently, I am not the only one that was turned off by the Gap’s brands.  Gap’s sales have been sliding for quite some time and in the most recent quarter, Old Navy and Banana Republic suffered the greatest sales declines, 18 and 11 percent respectively.

As a result of the sad sales situation, the Gap’s stock has struggled for years.  The company shuffled around the board room and paid serious dollars for ad campaigns featuring celebrities, but when companies need higher profits there are only two things they can do: increase revenues or cut costs. 

In an economy like this, the latter is probably most viable and Gap got it right this time!

Gap’s overall revenue for Q3 was down almost 8 percent from the same quarter last year, but this year the Gap’s Q3 profits were almost 17 percent higher.  How did they do it?  According to the company’s press release, Gap has employed new inventory and cost management measures to offset the tough sales environment.

I’d like to know some specifics, but I don’t expect any greater detail than the press release contained.  If the Gap is on to something it would be best to keep it quiet.

Kudos to Gap!  Now restore the product line and I can resume shopping.  Wall Street has already resumed buying the stock, Gap (Ticker: GPS) shares were up 18 percent by noon today.

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It’s pretty simple: positive 0.03 percent is better than negative anything.

Someone asked me why the rate is so low and wouldn’t it be less trouble to tuck the money away somewhere safe at home.  Here are some reasons why the rates are low and why a T-bill may be worth the trouble:

1.  Treasury rates will always be relatively low. Risk and return are directly related and since the U.S. government is believed to be one of the safest borrowers on the planet, you will not get any major reward for loaning it money.

2. Bond prices and bond rates have an inverse relationship. The demand for T-bills is so high that it is making the bills more expensive.  More expensive bills will pay lower rates of return since prices and yields move in opposite directions.

3. It is not that hard to buy a T-bill. You can buy bills directly from the Treasury, no broker necessary. www.treasurydirect.gov

4. A T-bill is safer than the safest place in your house. If you get robbed or your house burns down, so long to your stash.  The government will protect your stash and give you 0.03 percent!

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Back on 10/28, the Dow closed at 9,065.12 after rising 889 points during an extremely volatile session.  Traders were jumping for joy while I played the pessimist telling everyone to beware of the 900 point pop.  Prior to the pop, I also said I thought we were nearing the bottom.

Much to my surprise, the Dow popped back up and many thought the worst was behind us, but not me!  The index had no business being above 9,000 so soon, especially in the midst of such economic uncertainty.

The Dow sank below 8,000 on 10/10, but today is the first time it closed below 8,000 since 2003 and things will get worse before they get better.  I don’t think things will get too much worse, but if you look at the figures on unemployment, housing and spending there would be no reason for the Dow (or any index) to make solid positive moves.

Earlier this week the Philly Fed announced that the U.S. economy entered a recession in April. The recession is expected to last for fourteen months.  Shopping is the last thing people think about in a recession, but if you have some room in your budget I would recommend some holiday shopping in the stock market!

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J.P. Morgan Chase is a worldwide financial holding company with over 228,000 employees worldwide.  JPM brought in $51 billion in revenue last year.   The financials sector has been subject to much well deserved scrutiny as of late, it is time to see what the technical indicators reveal about this banking behemoth!

Simple Moving Average: JPM is currently trading at $32.14 per share.  As of today, JPM’s 5-day moving average is $34.23 and its 200-day moving average is $40.74.  Looking at the chart below, we can see that both the 5 and 200-day moving averages are sloping downward. 

Chart by T. Silver, Data from Yahoo 

SMA Signal: SELL because JPM has been heading downward in the short and long-term and is currently trading below both moving averages.

Exponential Moving Average: JPM closed today at $32.14 per share.  As of today JPM’s 5-day exponential moving average is $34.90 and its 200-day exponential moving average is $40.68. 

EMA Signal: SELL because JPM has been heading downward in the short and long-term, and is currently trading below both exponential moving averages. Check out Yahoo’s interactive chart with the EMAs.

Looks like bad news all around for JPM, at least on a technical front.  Next time, I will use another moving average tool, the MACD.  Please feel free to submit a stock and check out Techie Tuesday’s track record.

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Initial reports said the charges stemmed from his involvement in the IPO of a search engine called Mamma.com, but the sale in question was actually from a private investment in a public entity, also known as a PIPE. 

What is a PIPE?  Well, a PIPE differs from an IPO in a few ways.  An IPO is the first offering of securities to the general public.  PIPEs usually take place after a company has gone public and new securities are usually marketed to venture capitalists (instead of the general public).  Some companies turn to the PIPE when the value of their equity shrinks and they need additional financing.  PIPEs can provide the needed capital through selling stock or issuing convertible debt, but the stock is usually issued at a discount to the company’s existing stock price. 

Before the PIPE offering, Mr. Cuban owned 600,000 shares of Mamma.com’s common stock.  The SEC alleges that Mr. Cuban later learned the company was using PIPE financing for a secondary offering and instructed his broker to liquidate his shares. He sold them before the PIPE’s debut and saved $750,000. 

ESPN.com published a 2005 blog entry in which Mr. Cuban wrote about the experience:

“I’m not going to discuss the good or bad of PIPE financing other than to say that to me its a huge red flag and I don’t want to own stock in companies that use this method of financing . Why? Because I dont like the idea of selling in a private placement, stock for less than the market price, and then to make matters worse, pushing the price lower with the issuance of warrants. So I sold the stock.”

I can understand his position since PIPE deals may not be good for existing shareholders.  I wouldn’t be in a rush to lose $750K either, but it is not fair for some shareholders to have access to material information like this before others.

People are lining up to compare Cuban to Martha Stewart and speculating on his punishment…fines, jail time, or both.  Pump the brakes!  Remember: Martha Stewart’s insider trading charges didn’t stick. She went to jail for obstruction of justice, conspiracy and making false statements.  So as long as the Maverick cooperates he should remain a free man.

BTW, yesterday I looked up the company that Mamma.com merged with and is now trading under as a possible candidate for this week’s edition of Techie Tuesdays, but Copernic, Inc. (Ticker: CNIC) is trading around 25 cents a share. 

I’m not bringing out the charts and bands for a penny stock.  You can make money with penny stocks, but most of the action there would be speculative at best…kind of like buying a 6 percent stake in a fledgling search engine company using the PIPE ;)

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The SEC has charged Dallas Mavericks owner, Mark Cuban, with insider trading.  The charges stem from Mr. Cuban’s involvement in the initial public offering of a Montreal based firm, Mamma.com.

IPOs are typically marketed to individuals with access to large amounts of wealth.  The SEC alleges that the Mamma.com IPO made its way to Mark Cuban in 2004 and he was offered the opportunity to buy the stock after he agreed to keep the information to himself.

According to AP reports, the Mavericks owner found out that his shares would be sold below the market price.  He then instructed his broker to liquidate his shares prior to the IPO in order to avoid approximately $750,000 in losses.

Details are sure to emerge, but what’s $750k to guy worth over $2 billion?

Mr. Cuban was once quoted as saying, ”If you don’t follow the stock market, you are missing some amazing drama.”

Truer words have never been spoken.

NOTE: This story has been updated, click here for additional details.

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I’ll look to one of my classroom experiences to answer this one.  On my first day of teaching Principles of Corporate Finance, I had my students participate in a role play exercise about a major airline in crisis.

I broke the students up into six groups, each representing a stakeholder in a major airline company: pilots, flight attendants, mechanics, executives, customers and stockholders.  There are more stakeholders, but I wanted to keep it pretty simple.

Each group had to explain (through one representative) their position on options to increase profitability.  All of the options came down to raising revenues or cutting costs, but I provided them with options such as raising airfares and fees for travellers, cutting salary and benefits for pilots, flight attendants and mechanics, cutting compensation for everyone, cutting dividends, and finally cutting the multi-million dollar bonuses collected by executives.   

My findings: After four sections, the groups were unable to agree unanimously on any changes.  The change with the most support was to cut executive compensation.

The argument from all of the workers outside of the executive suite was pretty consistent, including ”when times get rough we get punished and they keep on getting their millions…they don’t know what it is like out here doing the real work…what do they get so much money for anyway?”

My answers: true, probably true and I have no clue.

Executive talent is valuable.  Companies need good leaders and a good leader can go a long way, but in terms of compensation where do we draw the line? 

In each of my classes, the groups representing the executives said the same thing.  In a nutshell, if we’re losing a billion dollars a year, taking away a million dollar bonus from me won’t help as much as cutting the wages and benefits of all of you. 

By the numbers they are right, but the whole thing is just wrong.  I started this exercise in 2003, now companies are losing billions per quarter and many executives are still padding their pockets.   

A few leaders are asking questions, check out this interview with one congressman pushing for legislative intervention.

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Alcoa is a big time aluminum producer operating in 44 countries.  In the past 52 weeks, shares of Alcoa (Ticker: AA)bottomed at $9 and peaked at $44.77.  Shares closed yesterday at $11.20.  Wondering what to do with Alcoa?  Let’s see what the fundamentals have to offer.

Valuation measures

Note: This week I have added average ratios for the sector.

Price-earnings - Compares the current market value per share to the earnings per share.  P/E ratio for AA: 5.34, P/E industry average: 3.09.  P/E sector average: 1.51 Signal: OVERVALUED

Price-sales - Compares the current market value per share to the revenue per share.  P/S ratio for AA: 0.30 , P/S industry average: 24.4,  P/S sector average: 1.33   Signal: UNDERVALUED

Price-cash flow - Compares the current market value per share to the cash flow per share.  P/CF ratio for AA: 2.72, P/CF industry average: 1.84, P/CF sector average: 1.32   Signal: OVERVALUED

Some analysts use earnings or sales with the following formula to solve for a stock’s expected price.

Expected stock price = historical P/E average x Current EPS(1 + EPS growth rate) =  19.9 x 2.95 (1+0.3724) = $80.57

For AA, the 5 year P/E average is 19.9 (from ADVFN Financials), EPS from last year $2.96 (Reuters) and 5 year average EPS growth rate is 37.24% (Reuters), resulting in an expected stock price of $80.57.  The stock is currently trading around $11 per share.  Signal: UNDERVALUED

Profitability Measures 

Return on Assets - Net income relative to total assets.  ROA for AA: 5.18%, ROA industry average: 2.17%

Return on Equity - Net income relative to total equity.  ROE for AA: 11.27%, ROE industry average: 3.70%

Profit margin - Net income relative to revenue.  PM for AA: 6.84%, PM industry average: -18.63%

Bottom Line: Mixed bag on valuation, overwhelmingly positive on profitability.  

Ratios should always be evaluated relative to a company’s competitors, sector and industry averages to see how the company stacks up.  The data used is also pulled from financial statements which have been known to be subject to manipulation.

Based on the ratios used today, TST’s Fundamental Friday Recommendation for Alcoa: BUY

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The regulators have spoken and like the cashier at a Palm Beach Publix when Ann Coulter attempted a credit card purchase back in February, the answer is…DENIED! 

About two weeks ago, a request was submitted to the Treasury Department by the Financial Services Roundtable (representative of the banks, etc.) and the Consumer Federation of America.  Last night, news broke that the request was rejected.

According to AP reports, the proposal allowed credit card companies to forgive of up to 40 percent of debt per person.  Each credit card holder could delay payment of income taxes owed on their forgiven debt until after the remainder of the debt was paid off.  The credit card companies would wait until the remaining debt was paid off to book their losses on the forgiven portion.

I can see how lowering balances and lengthening repayment terms would help borrowers (look at the government and AIG).  I can also see how this would help debtors.  The delayed recognition of losses can make a company look more profitable than it actually is.  This can make a company look more attractive to investors and lead to a higher stock price.  So again, we have banks coming together to aid the consumer and again, we know that they want to aid their bottom lines as well.

FYI: just like mortgages were used to back bonds so too are credit card receivables.  If the receivables are not received then we are in for more write-offs, write-downs and losses.  :(

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GGP is a real estate investment trust (REIT) which operates over 200 shopping centers from Hawaii to Maine.  The company has over $1.1 billion in debt coming due, the vast majority of it is payable within the next month.  Last month, GGP announced that it may sell assets in order to service its debt.

GGP operates one of my favorite malls, Tysons Galleria in northern Virginia.  Tysons is listed as one of General Growth’s Platinum Properties (the best of GGP) offering stores such as Tiffany, Neiman Marcus, Louis Vuitton, Versace, Saks Fifth Avenue, and Barneys New York…all of which I enjoy perusing through (looking, but not touching!) on my way to P.F. Chang’s or The Cheesecake Factory. :)

Does this mean our favorite malls will be no more?!?!  According to Ivan Friedman, president & CEO of RCS Retail Real Estate Advisors, store closings are much more likely than mall closings. 

It looks like we can relax, at least for now.  I wish I could say the same for GGP’s shareholders.

Last month, GGP did the boardroom shuffle and replaced its CFO.  In the same press release it announced the suspension of dividends on its common stock.  After yesterday’s debt warning, the company was promptly booted from the S&P 500 index (effective at the close of markets today). 

Shares opened today at $0.43 and before 10 AM trading volume is already over one-third of its daily average. 

Wouldn’t it be nice if the malls saw the same volume?

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