So much for containment. Remember the simpler days when Ben Bernanke told us that the subprime meltdown was an isolated incident, one which would be contained and not affect the rest of the credit markets?  Well, throw that out the window (if you’ve been inexplicably clinging to it for some reason) now that Goldman Sachs has said that disruptions caused by subprime mortgage lending may take more than $2 TRILLION off of the global lending table.  And for kicks, throw in the ‘R’ word with that decrease.

Losses related to record home foreclosures using a “back- of-the-envelope” calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief U.S. economist at Goldman in New York wrote in a report dated yesterday. The effects may be amplified tenfold as companies that borrowed to finance their investments scale back lending, the report said.

“The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized,” Hatzius wrote. “It is easy to see how such a shock could produce a substantial recession” or “a long period of very sluggish growth,” he wrote.

Hatzius said his report is based on a “conservative estimate” of financial companies cutting lending by 10 times the loss to their capital. Investors realizing half of the potential losses, at $200 billion, would have to scale back lending by $2 trillion, he said.

Obviously the loss of $2 trillion in lending ability would make it increasingly difficult for companies to achieve growth as borrowing costs make growth costs prohibitive.  Lack of growth means a stall out in the economic engine that is already feeling pressure from reduced equity spending by the consumer.  This could put the brakes on a big portion (jobs and consumer spending) of the economy.

So much for contained.  Why do our leaders feel it is OK to lie to us to keep the proletariat calm in the midst of a problem the likes not seen since the Great Depression?

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Filed under: Earnings reports, Forecasts, Gap Inc (GPS), Abercrombie and Fitch (ANF), Nordstrom, Inc (JWN)

Abercrombie & Fitch Co. (NYSE: ANF), Gap Inc. (NYSE: GPS), and Nordstrom Inc. (NYSE: JWN) are scheduled to report earnings next week, offering a chance to see how these apparel retailers have been doing in the lead-up to the holiday season.

Abercrombie hasn’t fallen short of Wall Street’s earnings expectations since Q2 2006. When it reported second quarter 2008 results back in August, earnings were 88 cents per share, beating the consensus estimate of analysts surveyed by Thomson Financial by a penny, as well as the actual 72 cents per share in the same period a year ago. For the third quarter, analysts expect $1.28 per share, up from $1.11 in the same period a year ago.

Abercrombie’s 13.6% earnings per share growth forecast for the next year is better than the S&P 500, and much better than the apparel retail industry average of -0.5%. The analysts’ consensus recommendation has been to buy Abercrombie for at least six months, but about half of those analysts rate it a hold. The share price reached a 10-year high of $85.77 earlier this month, before sliding to close Friday at $75.01.

For news about Abercrombie and other retailers that could influence the earnings results, check out BloggingStocks’ Abercrombie & Fitch coverage.

Continue reading Earnings previews: Abercrombie (ANF), Gap (GPS), Nordstrom (JWN)

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Filed under: Consumer experience, Competitive strategy, Apple Inc (AAPL), Starbucks (SBUX), Marketing and advertising, McDonald’s (MCD)

In a post yesterday, BloggingStocks’ Zac Bissonnette blogged about the announcement that Starbucks (NASDAQ: SBUX) will be launching a national TV advertising campaign for the first time. Bissonnette makes a good case why this could be a bad sign for Starbucks, the paradigm and case study for word-of-mouth marketing.

From one Zack to another, I’d like to take the other side of the argument. I actually think this could be good for Starbucks and good for investors. I think this is a clear case of a corporation reaching a new stage of growth and using age-accepted tools to continue growing its business. Far from being negative, I think this is a good thing.

Rather than being a smear on the brand, I think customers will see this as the maturation of the brand. After lowering guidance and reporting negative traffic numbers in its stores, Starbucks has seemingly exhausted effective use of word-of-mouth marketing and now needs to turn elsewhere for growth. In essence, the “cool factor” is no longer driving huge growth for the company (keep in mind, even 20% long-term growth is still impressive).

Continue reading Starbuck’s new ad campaign piping hot for investors

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Filed under: Consumer experience, Competitive strategy, Google (GOOG), AT and T (T), Sprint Nextel Corp (S)

It is widely assumed that Google (NASDAQ: GOOG) will move aggressively into the wireless business buy bidding for spectrum in the January FCC auction. The price of entry for that privilege is put at close to $5 billion. Owning the spectrum would allow Google to compete with AT&T (NYSE: T) and Verizon Wireless by offering consumers low cost or no-cost wireless broadband. The search company would probably have to make most of its money by delivering advertising onto handsets linked to its network.

But, Barron’s offers a powerful contrarian view of Google’s move (registration required), penned by tech writer Mark Veverka. He points out that buying the spectrum and leasing cell towers could badly damage Google’s balance sheet and undermine it high P/E. Veverka makes the case that wireless is a mature and saturated business in the U.S., and Google cannot afford to move into an industry that is already largely in place. The cellular carrier business is also well-regulated.

So, will Google bid for the spectrum? Probably not. It may have to rely on its handset OS, Android, to carry it into the wireless business, or form a partnership with one of the weaker players like Sprint (NYSE: S). That would be very good news for AT&T, and would mean that, to some extent, Google’s future is tied to the PC.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: International markets, Management, Industry, Competitive strategy, Marketing and advertising, China, Employees

Because the business of manufacturing nearly everything has been deferred to China, it seems to me that there must be some great opportunities in store for those who learn to communicate in the Chinese language. Corporations large and small have already taken hold of this thinking and I believe that companies wishing to thrive in a true global sense are duty bound to maintain staff fluent in English, Spanish, Chinese, and a host of other languages. Gone are the days when speaking English was the “responsibility” of foreign corporations wishing to do business with us. If we want to keep pace, we need to drop our attitude of superiority and realize that the world of business has some staggering new rules.

I’m not doing a promotion here. I’m merely examining the current business conditions and investigating some options. When considering the fact that one out of five people on this planet speaks some form of Chinese dialect, doesn’t it make good sense that we should be interested in communicating with them? Perhaps they don’t understand that we don’t want lead in our children’s toys. Wouldn’t you like to explain that to them?

Continue reading The Chinese language for business: It’s time has arrived

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Filed under: Internet, Next big thing, Headline news, Technology

Frequently, the difference between a successful investor and one less so is all timing. Making money in the market requires not only picking the right companies to invest in, but also deciding when (or when not) to invest in such companies.

I rediscovered Earthlink (NASDAQ: ELNK) last year while running a value screen. Like many stocks that end up in the proverbial value barrel, this company was once a high flier, trading at a split-adjusted $50, while now trading around $8. There were highs and lows, culminating in Earthlink’s founder being charged with fraud and money laundering. I recalled that Earthlink was in the now-dying dial-up ISP business during the bubble days of the internet and decided to dig a little deeper.

What I saw, when I looked under the hood, caught my attention. While Earthlink was indeed seeing dial-up customers dial-out of their contracts, Earthlink was converting a good percentage of these customers to DSL service. It was working well — while the company wasn’t growing much, it was producing a lot of cash from operations and instead of just building a cash horde, like many companies would do in a situation like this, the company was looking to reposition itself with two major, seemingly sexy initiatives.

Continue reading Earthlink (ELNK): Why-Fi?

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Filed under: Rants and raves, Business of sports

Seeking advice on his contract negotiation with the New York Yankees, Alex Rodriguez went to the number one source for business wisdom, Warren Buffett, and a pair of Goldman Sachs executives.

After opting out of his contract at the urging of super-agent Scott Boras, Rodriguez found limited interest in his services at the price he was seeking. Now, he’s back negotiating with the Yankees, after alienating the team badly by refusing to meet with them.

Buffett’s advice to Rodriguez was this: If you want to stay in New York, go talk to the Yankees yourself and leave Boras out of it — there’s too much bad blood between him and the Yankees.

There are lot of athletes who could use Buffett’s wisdom: Mike Lowell has professed his desire to stay in Boston, but may leave the team if he can secure a four-year deal from another team — Boston is only offering him three. Buffett would probably tell him that it’s silly to leave a great situation for more money when you’re already rich. Mr. Lowell: Please stay in Boston. You had the best year of your career and the fans love you.

Buffett would probably tell Barry Bonds … Well, Buffett would actually probably beat the crap out of Barry Bonds, because Warren Buffett is a person of integrity — he doesn’t like people who cheat and lie.

Full Disclosure: Zac Bissonnette is long the Boston Red Sox and has a large naked short position in the New York Yankees.

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Filed under: Earnings reports, Forecasts, Hewlett-Packard (HPQ), Whole Foods Market (WFMI)

Among companies scheduled to report earnings next week are Hewlett-Packard Co. (NYSE: HPQ) and Whole Foods Market (NASDAQ: WFMI). Here is a quick look at each of them.

HP has beat earnings expectations in every quarter since Q4 2004. When it reported third quarter results back in August, earnings were 71 cents per share, easily beating the consensus estimate of analysts surveyed by Thomson Financial, as well as the actual 52 cents per share in the same period of 2006. For the fourth quarter, analysts expect 82 cents per share, or $2.88 for the full year.

HP’s 15.7% earnings per share growth forecast for the next year is better than the S&P 500, but nowhere near the computer hardware industry average of 76.2%. Yet, the analysts’ consensus recommendation has been to buy HP for at least six months, and has been trending slowly toward strong buy. The share price reached a five-year high of $53.48 earlier this month, before slipping to close Friday at $50.75.

For news about HP and the tech sector that could influence the earnings results, check out BloggingStocks’ Hewlett-Packard coverage.

Continue reading Earnings previews: Hewlett-Packard (HPQ) and Whole Foods (WFMI)

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Filed under: McDonald’s (MCD)

At most McDonald’s Corp. (NYSE: MCD) drive-through windows, the worker’s ask: “Do you want fries with that?” But at one Massachusetts McDonald’s, drive-through customers got an unusual offer: “Do you want marijuana with that?”

It sounds incredible but it’s true. The Eagle-Tribune quoted Haverhill Police Sargent John Arahovites as saying that Michael Brown, an assistant manager at the Haverhill, MA store, sold bags of marijuana worth $20 to $80 along with a McDonald’s meal to his customers. He would use his cell phone and direct customers to the drive-through. Police set up a sting to buy $40 worth of marijuana from Brown and arrested him Thursday at the restaurant. Police seized $57 and six bags of marijuana from Brown.

What does Brown say? “This is not going to put me down. I’ll get back on my feet.” No word on whether McDonald’s got a share of Brown’s profits. But smoking marijuana makes people hungry. Brown could have created some important synergies.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in McDonald’s.

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Filed under: Insiders, Law, Competitive strategy

Standard & Poor’s has studied the impact of stock buybacks and reached some pretty disconcerting findings. As stock buybacks have soared in popularity and become a favorite demand of activist investors, S&P found that they might not be so great after all.

As the company put it: “Conventional wisdom holds that (1) stock prices go up as a result of buybacks, (2) more buybacks are better than fewer buybacks, and (3) announced share buybacks actually reduce the number of outstanding shares significantly.

“Based on a study of buybacks conducted by S&P’s Equity Research Services of the 18 months ended June 30, 2007, we believe that all three points were unsupported by the data during that period.”

This may be true, but I’m still a fan of buybacks. When no compelling internal growth opportunities can be found, buying back stock is a lot better from a tax perspective than returning cash to shareholders the traditional way: dividends. Changes in the tax code could very well make buybacks obsolete.

One of the reasons for the declining performance of buybacks could be the motivation behind them. If they are done because the stock is undervalued and the company wants to return money to shareholders, that’s great. But here’s what Warren Buffett had to say about buybacks:

Continue reading Study shows stock buybacks fail to create value … on average

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