Some things have real deadlines. Requiring a deadline to resolve a big problem with a “permanent” solution sounds definitive and ominous. Unless of course you are ACA Holdings (ACAH on the pinks). Their deadlines are “permanently temporary”. I have written about this $7.7 million market cap company and its relevance to the ongoing credit crisis a few times in the past (click here). June 20, 2008 was previously imposed as a deadline for coming up with a “permanent” solution to their liquidity solvency survival as part of 4 previous forbearance agreements with its creditors. At the last moment…. only 3 hours before the deadline of 6:00 pm (New York time) was set to expire…..it was extended. WHHHHEWWW! I was really surprised by that! (NOT) This is not about ACA and hasn’t been for months. In my opinion, it’s about avoiding the complications in the financial industry for all the structured credit products that ACA provided financial guarantees for. It’s not about ACA and what its shareholders have to lose. It’s about the people that have so much more to lose by finally and “permanently” dealing with this mess. Since it’s not comfortable to do that - the interested counterparties much prefer to permanently temporarily provide the fifth forbearance agreement.

Here’s a snippet from KeyCorp’s most recent 10-Q  filed on May 6, 2008 for the period ending March 31, 2008.

Capital adequacy. Capital adequacy is an important indicator of financial stability and performance. Key’s ratio of total shareholders’ equity to total assets was 8.47% at March 31, 2008, compared to 7.89% at December 31, 2007, and 8.37% at March 31, 2007. Key’s ratio of tangible equity to tangible assets was 6.85% at March 31, 2008, above Key’s targeted range of 6.25% to 6.75%. Management believes Key’s capital position provides sufficient flexibility to take advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.

In that same filing, they said their Tier 1 capital was 8.33%.

Only a month has gone by since Key’s last report, but a lot has changed. Here’s a summary of their decision on June 12, 2008 to cut the dividend in half and raise $1.65 billion. The press release (click here) indicates that an adverse IRS ruling of about $1.2 billion caused management to pursue this capital. I don’t think the market that whacked the shares by over 20% believes them that this is the sole problem with capital. Raising $400 million extra with highly dilutive offerings might be one clue. Cutting the dividend by 50% to save $200 million per year might be another clue.

I doubt that management still believes what it believed just a month ago that their “capital position provides sufficient flexibility to take advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.”

I have written repeatedly about my dislike of buybacks when they are done for the wrong reasons. Okay, so Key didn’t buy any shares in the last two quarters, but they bought 16 million shares in the first 3 quarters of 2007. Back then, the stock traded between $31 and $40 per share with an average of about $35/sh. Not only were those purchases expensive compared to today’s $11.73, but wouldn’t it be nice to have the $500-600 million in the capital they spent on themselves? Was that a good opportunity to “repurchase shares when appropriate”?

So what about their dividend policy decisions? They raised quarterly dividends in 2007. In 2006, it was $0.345/sh. In 2007, it was $0.365/sh. And they raised them a few months ago to $0.375/sh. Small raises really, but raises nonetheless. They had to (I guess) to keep up their record of 43 years of consecutive dividend increases. After one quarter and a one-time tax ruling, they decide to cut dividends by 50%. So much for the record.

Key is not alone. Many banks have spent their capital in prior years on buybacks and dividends and expensive acquisitions (aka “investment opportunities”). During that time, stocks were heading higher and there appeared to be no downside. Now, the reverse is true.

I know people far smarter than me have assured everyone that the worst is behind us. They apparently know more about the key to capital than I do.

I’ve decided to stay out of the Lehman Brothers discussion … until now. I think they should rename the firm “Oh Brother!” As in what you might say when you get disgusted.

I am not going to get into the absurdity of the Einhorn vs. Lehman or Bloggers vs. Gasparino situations. I think these debates speak for themselves. Honesty has a way of becoming apparent. Honest questions as well as honest answers. In my opinion, there have been a lot more honest questions than honest answers.

Personally, I struggle severely with money center and investment bank financial statements - I call it Financial Fudge. Simply put - I have no faith in the integrity of their numbers - whether that means revenues, margins or net income or the related desires to manipulate the balance sheet via marking methods. Part of this lack of trust comes from my self-recognition that I don’t understand many of the products that they are selling (derivatives and the like).

But I am not alone even though I may be one of the few that is not embarrassed to admit that I don’t get it.   And this is where it gets scary - it is clear that the board and management team did not and does not understand it as well as they may have thought when things were going well.  As for the analysts - those supposed “experts” in understanding all this crap and being able to create reasonably accurate forecasts of revenues…they showed they didn’t understand very much over the past few years and they showed they didn’t understand Lehman’s situation today. Average earnings estimates polled by Thomson Reuters was a loss of 22 cents / share with the lowest estimate at $1.28/sh. How good is that? Do you really believe they understand this business when the real loss is $5.14/per share.  So  - the average investor who might use fundamental analysis and valuation metrics based upon questionable accounting and hopelessly inaccurate analyst estimates…well they are relying very flawed information.  Oh Brother!

Yahooed - as in… You’ve been “Yahooed.” This is what happens to investors when the their stock price gets hammered by someone being greedy. And by “someone” - I mean a group of people.

It could be the Board of Directors who, for whatever reason believe they are acting in the best interest of shareholders. In case you own YHOO right now, you might want to know whom to blame, so here is where you can start - the Yahoo Board of Directors:

• Jerry Yang, CEO, Chief Yahoo and Director
• Roy J. Bostock, Chairman of the Board
• Ronald W. Burkle, Director
• Eric Hippeau, Director
• Vyomesh Joshi, Director
• Arthur H. Kern, Director
• Robert A. Kotick, Director
• Edward R. Kozel, Director
• Mary Agnes Wilderotter, Director
• Gary L. Wilson, Director

Shortly after the MicroHOO deal was proposed in early February, I wrote this post and asked…

I get a kick out of Yang and the Yahoo board. I know they are just trying to negotiate a higher price but consider that maybe Microsoft tells them to forget it. What will the board conclude then is the best interests for stockholders?

So Monday morning, when the market has a chance to “revalue” YHOO, I am looking forward to hearing how the Board was just looking out for shareholders when it tried to play hard to get.

Except for Microsoft’s offer, this stock has gotten hammered by failed optimism and mismanagement over the last several years while Google kicked its ass. On Monday, investors will get to experience that all over again.

Outside the Board of Directors, there are others who have “Yahooed” investors. Chief among them are the big YHOO shareholders like Bill Miller of Legg Mason who owns about 84 million shares of YHOO (approximately 6% of the company) and whose position represents about 4.4% of the Legg Mason Value Trust Fund. When this deal was announced, Bill was quick to opine that MSFT would “need to enhance its offer” and that $31 was just too low to get a deal done for a company that Microsoft needed. According to the great value investor, YHOO was actually worth closer to $40. Just Yahoo “Google” for the commentary of Bill Miller on this deal when it was announced and you’ll have a field day of seeing what it takes to get “Yahooed.” There comes a point where large shareholders overstep their bounds in pursuit of a few more bucks per share to juice their own performance and they run the risk of screwing things up. In my opinion, that happened here. The BOD listens to big shareholders like Bill and since their “hard to get” stance reflects the views of their constituents, you should not forget the impact of large investors when you get “Yahooed”.

Next on the list of groups that “Yahooed” this deal, are the arbs. I enjoyed listening to a few arb interviews this weekend where they whined about how this deal should have been done. “Live by the sword, die by the sword.” I absolutely hate dealing with the impact of arbs on most positions affected by M&A. Sometimes I am on the right side when the deal is announced and other times, it’s not pretty. As I have repeatedly written, I try to get out of the way of any transaction that has the attention of the arbs. So if a few of them have gotten hammered by playing the gap on this deal, I am enjoying it. I have great respect for the arbs and if they got “Yahooed” partly due to their own efforts, I am not broken up about it.

Lastly, I look to the group of speculators who “Yahooed” this deal. There were more than a few people that bought YHOO over the past 3 months (and even last week)betting that a deal would get done at a premium to market prices. Their optimism trying to play the buyout game probably contributed to the bravado of management. Sadly, they “Yahooed” themselves.

To all of you YHOO shareholders that were in this position prior to the Microsoft bid and who held on for a higher bid or a hostile offer, you got “Yahooed” - by the Board and by big shareholders, and by the arbs, and by the speculators and sadly, by your own willingness to hang on.

Investment Banking executives remind me of President George H.W. Bush (#41) when he uttered those regrettable words “Read my lips…NO NEW TAXES.” Except the current group is just making promises that they don’t need more capital. Of course, those comments go a long way to calm the crowd and suggest that the worst is behind us. They’ve been doing that since last fall but investors seem to have a very forgetful and forgivable nature. I am neither forgetful or forgiving when it comes to things like this.

• Merrill Lynch CEO John Thain March 16, 2008 - “We have carried out an enormous cleaning of our credit portfolio. We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem.”
• Merrill Lynch CEO John Thain April 3, 2008 -”We have plenty of capital going forward and we don’t need to come back into the equity market.”
• Merrill Lynch CEO John Thain April 17, 2008 - Says he is “open” to raising capital through preferreds.

In the end, they raised billions. They had to after all. Never mind the promises. As they say….promises are meant to be broken. We all know that. Why get so upset?

Citi has had their share of “read my lips” promises too. In January, after the billions of capital injections received from the Sovereign Wealth Funds, Citi CFO Gary Crittenden and CEO Pandit suggested the bank wouldn’t need to raise more capital. Then on April 18, 2008, Crittenden said this about needing more capital infusions - “You can never say never.” Tonight, never is now as they announce another $3 billion of new equity that will dilute existing shareholders.

Everybody seems to love new capital….The media loves new capital…The Fed loves new capital…The market bulls love new capital. They love hearing that no new capital will be required. They also love hearing that new capital is required but it’s already on the way. Both stories work just fine. This either means that the kitchen sink worked and the worst is behind us so we won’t need new capital. Or…this means there is a strong appetite for investors to keep plowing more money into these blackholes and we will always have new capital to avoid big problems that might require another government bailout. In fact, go back to the post-Bear Stearns bailout articles and you’ll see that whether it was UBS or any other writedown, as long as it was followed with the promise of new capital…it was all good and the markets went higher. Imagine an exec of a financial institution being honest and saying they don’t have enough capital….Just ask Alan Schwartz what happens when you cannot lie about it any longer. Imagine an exec promising to cut dividends. Imagine an exec saying they have no clue how much they’ll need but just plan on them asking for a few billion every quarter until they don’t ask anymore. The truth hurts. Apparently, the lack of truth is much preferred in our current market.

I don’t dislike new capital. I dislike the appearance that these comments were made specifically to manage the stocks and the markets. Apparently, there are no consequences for making promises that will be broken as long as it helps the government and the bulls prop up the markets. It’s either intentional miscommunication or it’s an incompetent failure of execs to understand their balance sheet. Neither of those are encouraging to me.

Typically, buzzards don’t eat something until it is dead.  What the press is doing to Lehman may seem like good old-fashioned journalism but just consider Lehman’s position.  If it doesn’t take the call, it looks like it is running and hiding something.  If it takes the call and says “No Comment”, it looks like it is hiding something.  If it takes the call and says, “Our liquidity position has been and continues to be very strong”, it sounds just like Bear Stearns did about 48 hours before failing.   I am not suggesting that Lehman is or is not in trouble.  All I am saying is that there is nothing they or anyone else can say to defend themselves.

I know the market got excited yesterday when IBM announced a $15 billion increase to its buyback plan. I wasn’t overly impressed, as you may know that I am not a huge fan of buybacks (click here and scroll down). Bulls love to hype them when they are announced but the realities of share repurchases are not so exciting.

Listening to the cheerleaders cover the story yesterday, you might be led to believe that IBM increased its guidance and announced the buyback because they were going to be generating so much extra cash they wouldn’t know what to do with it. The reality is that the 5 cent increase in EPS guidance came directly as a result of the reduction in shares expected from the buyback. The cause and effect is exactly the reverse of what many investors were told yesterday.

Don’t take my word for it - here is what the company said in its press release:

IBM said it expects to spend up to $12 billion on stock repurchases in 2008. In January, the company said it expected 2008 full-year earnings per share of $8.20 to $8.30. IBM said the anticipated share repurchase activity could add up to $.05 to 2008 full-year earnings per share. The company now expects full-year 2008 earnings per share of at least $8.25, or year-to-year growth of 16 percent. The actual earnings per share impact will depend on the total amount spent, the timing of repurchases and market conditions.

In 2007, IBM had operating cash flow of $16.094 billion. During the year, they purchased $18.8 billion of their shares. I find it hard to get too excited about IBM’s ability to generate so much extra cash when more than 100% is spent on company shares. Where did the money for buybacks come from? Mostly it came from $21.744 billion of new debt.

According to IBM’s press release announcing this year’s repurchase plan, they intend to spend about $12 billion on their stock. Hopefully they’ll have more than that in operating cash flows this time. Don’t get me wrong - I thought the 2007 revenue growth and operating performance was good. However, as it relates to their 2007 repurchases and the new announcement for 2008 I was not impressed.

The rest of the market seemed to be and that is more important than what I think. (Note that I have had an UP signal on IBM since February 11, 2008.) The fact is that the average price per share of IBM stock repurchased during 2007 was $105.29. When yesterday’s buyback hype started, the stock was trading at $110, a whopping 4.4% higher than what they spent on 2007 repurchases. Sorry, but that doesn’t impress me as a great investment. Not a bad one, but not great either. What made it great to others seems to be the very act of announcing buybacks which caused a 6% increase in one day. I guess what this company needs to do to make investors happy is to just keep announcing $15 billion buybacks. That did much more for the stock than increasing revenues by 8%.

Microsoft bought Hotmail for about $400 million during the internet boom to enhance its online presence in 1997. If you go back in history and evaluate their investments into and purchases of other content companies to round out their internet offerings, it is not pretty - unless you like blackholes. Spending $240 million to invest in Facebook at a valuation of $15 billion is steep. $6 billion for aQuantive was pretty steep. And yet $44.6 billion for Yahoo is the current question. After yesterday’s comScore data on Google ad clicks, I have to wonder “what is Microsoft buying?” If you believe that the comScore data is indicative of future and prolonged economic weakness, then Microsoft is paying way too much to get into a business that is declining.

I like Google - primarily for the utility of their product and the respect I have for the corporation’s pursuit of innovation. As for the stock, HEDGEfolios has had a DOWN signal since November 12, 2007 when it was trading at $657.74. To be fair, I have been very even-handed on my opinions for the likely direction of the stock. Since I first started covering GOOG in September 2004, I have given 14 signals - 7 UP and 7 DOWN. Only one of those was wrong with a loss of 10%.

Throughout this whole time, I have watched Price Targets on GOOG get ramped up and often in $100 increments. Two years ago, I wrote a post called Moving Targets - if you read it, you know I don’t do price targets and I have little use for them. They are great for hyping stocks, especially for high profile / high growth momentum stocks like Google. When you had Cramer or some analyst seeking attention by slapping big price targets on GOOG as it was heading higher, they got a lot of positive attention like the $985 target given at the end of October, 2007. But just consider where we are today on this stock relative to the targets. Click here for the current summary of GOOG estimates. Pretty pathetic.

One of the big problems for using price targets is that they encourage you to buy when the stock slides. Take a listen to Cramer’s 11/14/07 explanation of how to buy GOOG on the way down and when you do, just know that the Michael Steinhardt he references is not me. For the record, I don’t advocate “averaging down” either.

The next time you hear a price target increase being hyped to encourage you to buy a stock, please consider this example.

“After a careful evaluation, the board has unanimously concluded that the proposal is not in the best interests of Yahoo and our stockholders.” - Jerry Yang. Really!?! I get a kick out of Yang and the Yahoo board. I know they are just trying to negotiate a higher price but consider that maybe Microsoft tells them to forget it. What will the board conclude then is the best interests for stockholders? They said the offer “substantially undervalues” the company. Really!?! So they suggest that the market (excluding MSFT) two weeks ago was 50% off the real valuation of the company according to them at around $40 per share. Really! That’s right near the high it hit two years ago and the highest level since 2001 when it was on its way to single digits. If $40 per share is the right number, then you might think that the board and key insiders must have been buying heavily while the shares were substantially undervalued before they became aware of the Microsoft bid. Click here - they weren’t behaving like they thought it was a bargain. As for the company’s share repurchase program, I look forward to the next financial statement filing to see whether the people looking out for shareholder interests were using all their resources to buy shares they thought were 50% undervalued. I don’t care which way this thing goes but I seriously doubt that the board and company management has been running this company in the best interests of stockholders for years while they got their asses handed to them by GOOG and the stock became “substantially’ undervalued. So hearing that they now know what is in the best interests of stockholders just doesn’t inspire too much confidence.