Credit Cardholder "Bill of Rights" Looks Like Sensible Regulation

One of the biggest concerns from conservatives since President Obama's election has been the possibility of new, overly burdensome government regulation on various aspects of the economy and financial markets. While this should be a real concern, it is unfair to assume new regulations will be over-the-top before any of them are actually drawn up, passed, and enacted.

Among the first is a credit cardholder "bill of rights" which is supposed to protect consumers from unfair and deceptive credit card issuer practices. The U.S. House of Representatives overwhelmingly passed its version of the bill (the Senate is working on possible modifications), so I thought I would go through the summary of its contents to see how reasonable it is. Below are the details:

Interest Rate Increases

1) Limits interest rate increases on existing balances to those cardholders who are late with their payments, have a promotional rate expire, or have a card with a variable rate

2) Requires card issuers give consumers 45 days notice to any interest rate changes or significant contract changes

Credit Limits

1) Lets consumers set their own fixed credit limit

2) Prevents over-the-limit fees for consumers who have set a limit or for "hold" transactions

3) Limits (to 3) the number of over-the-limit fees issuers can charge for the same transaction

Penalties for On-Time Payers

1) Ends "double cycle" billing - interest charged on balances that were paid on time

2) If cardholders pay on time and in full, prevents issuer from charging left-over interest fees

3) Prohibits additional fees for paying over the phone or internet

Allocation of Consumer Payments

1) After the minimum amount due, payments must be allocated proportionally to high interest and low interest balances, not exclusively to the lowest interest rate debt

Due Dates

1) Billing statements must be mailed 21 calendar days before the due date, payments received by 5pm local time on the due date must be considered "on time"

2) Extends the due date to the next business day if the due date falls on a day the card issuer does not accept or receive mail

Misleading Terms

1) Establishes standard definitions for terms such as "fixed rate" and "prime rate" so as to ensure clarity in marketing materials

2) Gives consumers who have been "pre-approved" for a card the right to reject the card prior to activation without negatively impacting their credit score

High Fee, Subprime Cards

1) Prohibits issuers of subprime cards (cards with fixed annual fees that exceed 25% of the card's credit limit) from charging those fees to the card itself, which often results in consumers going over their limit

Issuance to Minors1) Prohibits card issuers from knowingly issuing cards to individuals under 18 who are not emancipated minors

After reviewing this "bill of rights" I was pleased to conclude that none of these measures, in my view, would be considered excessive regulation by the federal government. I think we all need to take more responsibility for our actions and our financial situations, and empowering the consumer with information and the ability to avoid certain products if they choose to can only aid in that process. Kudos to Washington on this one (hopefully the Senate doesn't mess with it).

You Can't Go Broke Taking Profits

A common saying on Wall Street, and for good reason. Although the stock market has been acting very well in recent weeks and today's 200-point gain is a good start to this week, I am not going to be bashful about taking some chips off of the table for my clients and you shouldn't be either.

It is a contrarian move (not surprisingly, coming from me), as the market is breaking through upside support levels on a technical basis, but I want to have some cash on hand to make purchases during the next correction. When will that drop take place? I have no idea but it certainly will come. I would not be surprised if it was soon. After all, the S&P 500 has rallied from 666 in early March to 907 in early May, a gain of 36%. Still, we are up less than 1% for 2009.

Trading in Dendreon Stock Shows Why Short Term Trading Is Such A Gamble

You may have heard about Dendreon (DNDN), a small money losing biotechnology company that is in the process of getting its cancer vaccine, Provenge, approved by the FDA. Full results from a crucial phase three study were released yesterday afternoon in Chicago, but about half an hour prior to their release, shares of Dendreon fell off a cliff for a couple of minutes and trading was halted for "news pending." Between 1:25pm and 1:27pm ET Dendreon stock fell from above $24 to as low as $7.50, and were halted at $11.81 per share.

Immediately investors were baffled. The most plausible explanation was that the full study results somehow were leaked early, someone learned they were bad and sold their stock, which in turn caused others to panic and sell too. That would have been an odd turn of events, however, because the company had indicated recently that the study results were clearly favorable.

When the news was finally released to the public there were no surprises, which makes those trades just before 1:30pm very strange. The NASDAQ exchange quickly investigated the trades to see if any were made erroneously, but they found nothing wrong and the trades will stand. Today the stock reopened and is currently fetching about $24 per share.

This story only serves to further my personal belief that short term trading in the stock market is so speculative that it is really nothing more than gambling. Evidently somebody somewhere thought they saw or heard something that was negative for Dendreon, others followed suit and sold their shares like lemmings jumping off a cliff, but in reality there was no news at all.

Undoubtedly some investors quickly hit the sell button during those few short minutes yesterday afternoon, fearing that if they didn't their stock would fall even further (Dendreon stock sold for $2 in March, so many people had huge gains). They lost between 50% and 75% of their money for no reason. Other investors surely had large paper gains in Dendreon and had stop loss orders in place to limit any future losses. Many of those stops were triggered as the stock collapsed from $24 to $7 and rebounded to $12 and those investors also lost big time.

As you can see the market is very complex and sometimes things happen that are not rational and should never have happened. Speculating on near term movements of stocks (especially small biotech companies) is a very risky endeavor. All the market needs is a willing buyer and a willing seller to agree on a price in one split second. Reality need not apply in such a case, but millions of dollars can be lost in a matter of minutes, as was the case with Dendreon yesterday.

Traders beware. In some cases Wall Street can look very much like a casino.

Full Disclosure: No position in Dendreon at the time of writing, but positions may change at any time

Look For Swine Flu Related Opportunities

To me this swine flu outbreak looks a lot like avian bird flu; fairly contained and overhyped. Of course anything is possible, but as Wall Street frets about swine flu (Dow futures are down 150 this morning), investors should be on the lookout for investment opportunities. Worries over bird flu led to numerous bargains, especially in the poultry industry. We'll have to see what stocks, if any, are adversely affected by swine flu worries. Chances are they will excellent investment opportunities just as were available when SARS and bird flu were the worries of the day.

Paulson Threatened To Remove Ken Lewis If He Backed Out Of Merrill Lynch Deal

Some people are worried that President Obama is going to try and run the banks and credit card issuers but how about this little tidbit from the Wall Street Journal:

Then-U.S. Treasury Secretary Henry Paulson threatened to remove Bank of America Corp. Chief Executive Kenneth Lewis and the bank's board of directors if the bank backed out of its merger with Merrill Lynch & Co. last year, New York Attorney General Andrew Cuomo said.

Mr. Lewis had informed Mr. Paulson on Dec. 17, 2008, that Bank of America was planning to invoke a material adverse event clause in the merger agreement that would allow it to call off the deal, Mr. Cuomo said. Three days before, Mr. Lewis had learned that Merrill Lynch's financial condition "had seriously deteriorated at an alarming rate" since Dec. 8, 2008, Mr. Cuomo said.

The difference between this news and the ouster of GM CEO Rick Wagoner, of course, is that the government is a creditor of GM and without having lent them money, GM would have filed bankruptcy a long time ago. Forcing shareholder-owned companies to merge simply to prevent possible instability in the financial system is questionable at best and completely inappropriate at worst. I hope the Obama administration doesn't repeat these types of things. Fortunately, pushing for a credit cardholder bill of rights, as discussed today in Washington, does not fall into such a category. Let's cross our fingers it stays that way in the future.

Q1 2009 Earnings Exceeding Estimates So Far

Are you surprised that the market is acting as well as it has lately, especially with earnings season having begun? Still waiting for that overbought correction after six weeks of gains in stocks? Me too. Why the relative strength? Well, according to Bespoke Investment Group first quarter earnings are coming in well above estimates so far (20% reporting):

"A fifth of the companies in the S&P 500 have reported earnings for the first quarter, and so far earnings are down 16.6% versus the first quarter of 2008. While down, this is much better than the -37.3% expected at the start of earnings season. When comparing actual earnings versus estimates, Consumer Discretionary, Financials, and Energy are leading the way. On the downside, the Industrial sector is the only one where actual earnings have come in weaker than expected. Earnings season still has a long way to go, but the fact that growth has come in better than expected thus far has been one factor driving the market higher."

Dell Shares Look Excessively Cheap

It has been a long time since I can recall seeing a blue chip company like Dell (DELL) carry such a meager stock market valuation. It is true that Hewlett Packard (HPQ) has been stealing market share from Dell in recent years, and even overtook them as the world's leading computer maker, but investors seem to be pricing Dell stock as if they are no longer relevant in the computer hardware marketplace. Given that Dell remains number two worldwide in PC shipments, I think pronouncements of their death may be greatly exaggerated.

Just how cheap are Dell shares? Well, Dell currently has about $8.8 billion of net cash on their balance sheet, which equates to nearly half of their share price ($4.50 per share in net cash versus a stock price of $10 and change). Total cash of $5.50 per share (excluding debt) is more than 50% of their current share price. I can't name another profitable blue chip company that trades at just two times net cash.

Given the low stock price, Dell's operations must be going horribly wrong, right? Well, not really. For their latest fiscal year, which ended January 31st, Dell earned an operating profit of $3.2 billion. Subtract out income taxes and Dell's operating businesses are earning about $2.4 billion per year. This compares very favorably to their enterprise value of around $11 billion. At $10 per share, Dell stock trades at less than 5 times operating earnings. Is it a stretch to think it could fetch twice that price sometime down the road? Not in my view.

Now, something could certainly get in the way of this analysis. Excess cash is a great thing to have, but it can easily be wasted by management. Dell has been doing many smaller acquisitions in recent years to beef up its product line. If management did a large deal (using their cash war chest) and it turned out be a bad idea, shareholder value could be destroyed rather quickly.

Another risk is that they use their excess cash to beef up research and development. I say this could be a negative because the new products might not pay off. For instance, there have been rumors for months that Dell is developing a cell phone line. As a shareholder, I don't care for this idea. The cell phone market is crowded and Dell has no experience in it. If they spend hundreds of millions on something like that, and it fails, a once large cash hoard could quickly shrink without much to show for it.

Regardless, Dell stock looks very cheap to me, especially if management spends their money wisely in coming years. Finding such strong companies at discounted prices isn't always easy, but in this case Dell looks to be a bargain. Feel free to let me know what you think.

Full Disclosure: Peridot Capital was long shares of Dell at the time of writing, but positions may change at any time.

First Quarter Best Quarter Ever for Wells Fargo

No wonder the market is up huge today. Before the bell, Wells Fargo (WFC) announced that it would earn a profit of $3 billion in the first quarter, making it the best quarter in the company's history. Even more impressive, that result includes $372 million in TARP preferred dividends paid back to the government.

Some numbers from their press release:

Revenue $20 billion (+16%)Pre-tax, pre-provision profit: $9.2 billion

Provision expense: $4.6 billionPre-tax profit: $4.6 billion

Net earnings: $3 billion

Allowance for future loan losses: $23 billion

Why isn't the Wachovia deal killing them? As I have pointed out before, purchase accounting lets you write-off loans when deals close, so Wells was able to take most of the Wachovia losses up front, which boosts earnings in the future quarters. As we can see, this is the first quarter for the combined company and they are really executing well.

Full Disclosure: No position in WFC at the time of writing, but positions may change at any time

Why I Have No Problem With The Government Firing Rick Wagoner

Call me skeptical that since the Obama administration's auto task force ousted General Motors CEO Rick Wagoner it means the government is going to take over and ruin the auto industry. I think Wagoner's list of accomplishments (or lack thereof) shows that he deserved to be gone long ago. After all, GM stock went from $60 to $2 under his tenure as CEO.

As for whether the government should have the right to force him out, why shouldn't they have the same power that any other creditor or investor would have when trying to help a company avoid bankruptcy? Private equity invests in distressed companies all the time and as a condition of such investments always has a say in the turnaround plan, including replacing a chief executive. Having such power is the only way they feel comfortable that adequate changes will be made to somewhat protect their investment.

The government is unfortunately in the drivers seat in this case because nobody else will come to GM's aid in its current form. By doing so, however, they should have the same rights as anybody else. No more, no less. Whether they should have even tried to prevent a GM bankruptcy is another question entirely, and a very valid one at that. I have no problem with someone arguing against that, but that really has nothing to do with the Wagoner situation.

The Obama team has decided to continue the public aid that the Bush team started, probably to try and avoid further destabilizing the financial system and economy. Reasonable minds can (and are) disagree over whether that is the right thing to do or not, but Rick Wagoner had to go regardless. Don't forget, under his leadership, even when the economy was booming GM North America was in the red.

What about Wagoner's replacement, Fritz Henderson? Well, I don't think the government had a hand in choosing him. He openly and proudly announced that he was a lifelong GM'er and that Rick Wagoner was his mentor. Yikes, I guess the jury is still out on whether that is change we should believe in or not.

Full Disclosure: No position in GM at the time of writing, but positions may change at any time (I don't expect this to change in this case)

Unconventional Wisdom: Consumers Reduce Debt During Recession

The conventional wisdom has been that as the recession deepens and more people lose their jobs, they will rely more heavily on credit cards, etc to fund their expenses, consumer debt will rise, and banks will struggle with more and more debt that is less likely to be repaid.

Well, based on the graph below from the April 13th issue of Business Week, the consumer is de-leveraging, not borrowing more. This trend is also seen in the savings rate, which has spiked in recent months. As a result, consumers might be in better financial condition after the recession than before, ironically enough.