Category Archives: Value Investing

GM Exodus Puts Australian Car Industry Step Closer to Extinction

According to Bloomberg,

Australia’s century-old automotive industry is stepping closer to extinction after General Motors Co. (GM) joined Ford Motor Co. (F) in deciding to stop making cars in the country.

Seven months after Ford announced it would pull out, GM said yesterday its Holden unit will cease production in 2017. That prompted the last holdout, Toyota Motor Corp. (7203), to say the  move will place “unprecedented pressure” on parts makers and  questioned the merits of remaining in the country. A stronger local currency and falling import tariffs have  driven down  sales of Australian-made cars by almost half since 2007.

The hollowing out of the nation’s auto industry has implications beyond the three companies as carmakers have about 150 suppliers that employ an estimated 42,000 people. The departure of Australia’s biggest carmaker also adds pressure on Prime Minister Tony Abbott, who’s facing rising unemployment and deteriorating consumer sentiment three months after winning an election by pledging to restore confidence in the economy.

“The Australian dollar has claimed an iconic brand of cars,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “The announcement will be a major blow to confidence in the run-up to Christmas, as job losses will exacerbate an already heightened sense of insecurity.”

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How Risperdal Whistle-Blowers Made Millions From J&J ?

According to Bloomberg,

Judy Doetterl was a sales representative for Johnson & Johnson (JNJ) in 2004 when federal agents placed a hidden recording device on her and sent her to tape marketing presentations at a national company sales meeting.

U.S. prosecutors wanted to prove claims by Doetterl and others that J&J boosted sales by urging doctors to prescribe its antipsychotic drug Risperdal far beyond its approved use. Doetterl, then earning $150,000 a year, said she fretted for the two days she wore a wire at the meeting in a Dallas hotel.

“I was concerned that I would be found out accidentally and someone would see me go into a room to meet the agent,” Doetterl said. “I had to change battery packs every four hours. I knew in the end I was doing the right thing. They needed to know what was going on.”

The government spent nine more years investigating Risperdal before J&J, the world’s biggest seller of health-care products, agreed Nov. 4 to pay $2.2 billion to resolve criminal and civil probes. Doetterl, prosecutors and other lawyers offered an inside account of a decade-long probe that ended with eight J&J whistle-blowers making more than $20 million each.

The U.S. said J&J marketed Risperdal and two other drugs for off-label uses and paid kickbacks to doctors and pharmacists to boost sales. J&J’s Janssen unit pleaded guilty to misbranding Risperdal. The company also settled civil lawsuits filed under the False Claims Act, which lets citizens file sealed complaints on behalf of the government and share in any recovery.

Six Whistle-Blowers

Doetterl and four other former J&J employees filed such cases. They will each get about $29 million from the U.S. and state governments that claimed they overpaid through Medicare or Medicaid because of J&J’s practices. A sixth whistle-blower, Allen Jones, got $20.3 million last year when J&J paid $158 million to settle with Texas over Risperdal.

Two other whistle-blowers — Joseph Strom, who sued over marketing of the drug Natrecor, and Bernard Lisitza, who alleged kickbacks to Omnicare Inc. (OCR), a nursing home pharmacy — will get about $28 million each, according to the Justice Department. Whistle-blowers typically pay their lawyers about one-third of their award and pay taxes on the rest.

In settling the case, J&J signed a five-year corporate integrity agreement with the inspector general of the Department of Health and Human Services. J&J has “robust compliance programs that have been continually strengthened,” according to a company statement on Nov. 4.

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Penny Pricing for U.S. Stocks Said to Get Scrutinized for Harm

According to Bloomberg,

Securities executives are trying to determine if the 12-year-old decision to narrow the price increments for American stock trading has harmed investors, according to two people with knowledge of the matter.

Representatives from exchanges, brokers, mutual funds and regulatory agencies held two conference calls today to discuss concerns about market structure, said the people, who requested anonymity because the discussions were private. One topic was the U.S. mandate in 2001 to trade equities in pennies rather than eighths or sixteenths of a dollar, they said.

Compressing what traders call tick sizes reduced profits for human market makers and helped drive the ascent of high-frequency traders, which now account for about half of U.S. volume, according to data compiled by Tabb Group LLC. Widening price increments for smaller companies to a five or ten cents could spur trading and prompt more initial public offerings, according to U.S. Representative Sean Duffy, who has sponsored legislation to test such a shift.

“There are a couple of groups that are really driving this and want it to happen, and it seems like everybody else may not be convinced it’ll make a huge difference but feels it should be tried because it probably won’t hurt anything,” said Justin Schack, partner and managing director for market structure analysis at Rosenblatt Securities Inc. He declined to comment on the ICI meetings.

Third Meeting

Today’s talks were the third hosted in 2013 by the Investment Company Institute, a trade group whose members manage $16 trillion, according to two people with knowledge of the matter. This year’s participants have included senior officials from the New York Stock Exchange and Nasdaq Stock Market, mutual fund companies Fidelity Investments and T. Rowe Price Group Inc., broker-dealer Morgan Stanley, and the Securities and Exchange Commission, among others, according to one of the people.

Representatives of those firms declined to comment on the meetings.

Supporters of larger price increments for some stocks argue that it would encourage more volume for small companies by making trades more profitable for market makers.

The Jumpstart Our Business Startups Act, signed into law last year, instructed the SEC to study the impact of penny pricing and mandate a new minimum increment of less than 10 cents for “emerging growth companies” if the regulator found that was warranted.

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Amazon: Rejected by U.S. High Court on New York Sales Tax

According to Bloomberg,

The U.S. Supreme Court stayed out of the multibillion-dollar fight over Internet sales taxes, leaving intact a New York law that forces Amazon.com Inc. (AMZN) to collect money from customers in that state.

Acting on one of the biggest online-shopping days of the year, the justices made no comment in rejecting appeals by Amazon and Overstock.com Inc. (OSTK), another Internet retailer. The companies said the law, upheld by New York’s top court, violates the Constitution by demanding tax collection from businesses that don’t have facilities in the state.

States lose an estimated $23 billion a year in uncollected sales taxes from web retailers. Although Amazon has agreed to collect taxes in some states as it sets up distribution centers, it has resisted efforts by others to impose sales taxes unilaterally. New York’s measure is among a handful that have been dubbed “Amazon laws” because they affect only the largest online sellers.

The New York law “subjects Internet retailers to significant burdens on pain of serious civil and criminal penalties,” Seattle-based Amazon argued in its appeal. The world’s biggest online retailer now collects taxes in 16 states.

The rebuff leaves it to Congress to craft a nationwide approach to the sales-tax issue. Amazon supports federal legislation that would explicitly let states require tax collections by all online retailers above a certain size.

‘Physical Presence’

Amazon.com Homepage

Amazon.com Homepage

The legal dispute revolved around a 1992 Supreme Court case involving a mail-order company. The court said retailers can be forced to collect a tax only in states where they have a “physical presence.”

The rise of the Internet has increased the stakes since then, putting tens of billions of dollars at issue. New York alone lost $1.8 billion in 2012 on Internet and catalog sales, according to the National Conference of State Legislatures. Although consumers are supposed to pay the taxes themselves, few do unless the seller collects the money.

New York has a 4 percent statewide sales tax, and local jurisdictions impose additional levies. In New York City, the total tax rate is 8.875 percent.

New York said in court papers that its 2008 tax law “seeks to restore a level playing field between in-state brick-and-mortar stores and their out-of-state Internet-only counterparts.”

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London Gold Fix Calls: Draw Scrutiny Amid Heavy Trading

According to Bloomberg,

Every business day in London, five banks meet to set the price of gold in a ritual that dates back to 1919. Now, dealers and economists say knowledge gleaned on those calls could give some traders an unfair advantage when buying and selling the precious metal.

The U.K. Financial Conduct Authority is scrutinizing how prices are set in the $20 trillion gold market, according to a person with knowledge of the review who asked not to be identified because the matter isn’t public. The London fix, the benchmark rate used by mining companies, jewelers and central banks to buy, sell and value the metal, is published twice daily after a telephone call involving Barclays Plc (BARC), Deutsche Bank AG (DBK), Bank of Nova Scotia, HSBC Holdings Plc (HSBA) and Societe Generale SA. (GLE)

The process, during which gold is bought and sold, can take from a few minutes to more than an hour. The participants also can trade the metal and its derivatives on the spot market and exchanges during the calls. Just after the fixing begins, trading erupts in gold derivatives, according to research published in September. Four traders interviewed by Bloomberg News said that’s because dealers and their clients are using information from the talks to bet on the outcome.

“Traders involved in this price-determining process have knowledge which, even for a short time, is superior to other people’s knowledge,” said Thorsten Polleit, chief economist at Frankfurt-based precious-metals broker Degussa Goldhandel GmbH and a former economist at Barclays. “That is the great flaw of the London gold-fixing.”

Gold Capital

Barclays and HSBC Holdings Headquarters in London (Bloomberg)

Barclays and HSBC Holdings Headquarters in London (Bloomberg)

The U.K. capital is the biggest center for gold trading in the world, according to the London Bullion Market Association, which said more than $33 billion changed hands there each day in 2012, exceeding the $29 billion of futures traded on Comex, the New York commodities exchange, data compiled by Bloomberg show. Financial instruments including cash-settled swaps and options are priced off the London fix, according to the LBMA website.

In private meetings this year, the U.S. Commodity Futures Trading Commission, which regulates derivatives, discussed reviewing how gold prices are set, according to a person with knowledge of the talks. The FCA review is preliminary and not a formal investigation, another person said. The people wouldn’t say what’s being looked at or if regulators suspect wrongdoing.

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RBS Appoints Clifford Chance to Conduct Lending Probe

According to Bloomberg,

Royal Bank of Scotland Group Plc appointed Clifford Chance LLP to investigate whether it pushed companies that owed it money into difficulties to boost profit.

RBS said in an e-mailed statement today it appointed the law firm after a report by Lawrence Tomlinson, chairman and founder of LNT Group Ltd., said that once companies were in default, the bank could charge them advisory fees and buy their assets at reduced prices. Business Secretary Vince Cable has referred RBS to the Financial Conduct Authority.

U.K. banks, including 81 percent taxpayer-owned RBS, have been criticized by the government for holding back lending to businesses since the 2008 financial crisis as they boost capital reserves and clean up their balance sheets. The Bank of England earlier this year extended its plan to provide cheap loans to companies and consumers and make credit available for small firms to help support the economy.

“There are many devastating stories of how RBS has wrecked good businesses and the ruinous impact this has on the lives of the business owners,” Tomlinson said in an e-mailed statement.

RBS shares rose 0.4 percent to 331.50 pence in London. They have gained 2.2 percent this year, making them the second-worst performer among Britain’s five largest banks.

‘Serious Problems’

Royal Bank of Scotland (Bloomberg)

Royal Bank of Scotland (Bloomberg)

Chris Hamilton, a spokesman for the FCA in London, declined to comment on the report, as did a spokesman for the U.K.’s Prudential Regulation Authority. RBS said that Clifford Chance is scheduled to report its findings in 2014.

Cable has previously signaled concerns about small and medium-sized companies’ access to finance and in 2010 called bankers “spivs and gamblers.” Tomlinson, entrepreneur in residence at Cable’s department, compiled allegations about companies’ difficulties with their banks during the recession and turned them into a report for Cable. Chancellor of the Exchequer George Osborne today called the results “shocking.”

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Honduras Votes for President as Drug Violence Crimps Growth

According to Bloomberg,

Hondurans choose a new president and Congress today as the world’s highest rate of violent crime crimps economic growth in the country four years after a military coup ousted former President Manuel Zelaya.

Polls show the race in a statistical tie between the ruling National Party’s Juan Orlando Hernandez, 45, and Zelaya’s wife, Xiomara Castro, who heads the newly formed Libre party. Both candidates have vowed to improve security after a surge in murders fueled by drug gangs linked to Mexican cartels. Polls opened at 7 a.m. local time and will close at 5 p.m.

Castro, 54, is seeking to break a century-long grip on the presidential palace by the country’s two traditional parties. She has tapped into frustration from the coup, during which she led protests to have her husband returned from exile. Hernandez led the national assembly when Zelaya was ousted for backing a referendum to change the constitution.

In the eight-candidate race, no party is expected to win a majority in the legislature.

“It’s going to be difficult for whoever wins to govern,” said Geoff Thale, director of the Washington Office on Latin America.

Bordered by Nicaragua, El Salvador and Guatemala, Honduras has a murder rate of more than 80 per 100,000 inhabitants, the highest in the world, according to the United Nations. The U.S. State Department estimated that last year about 90 percent of all cocaine smuggling flights departing South America for the U.S. first land in Honduras, where illegal airstrips abound in poorly patrolled parts of the country.

International Observers

The government plans to deploy 14,000 soldiers and police to safeguard the process, while almost 750 international observers will monitor the vote. Current President Porfirio Lobo is barred from seeking re-election and whoever gets the most votes wins. There is no second round.

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