Mix Tape: January 28, 2009

Includes: CCTYQ, F, SAN, TM
by: Markham Lee

The usual mixture of news stories and other tidbits I think you may find interesting:

Santander (STD) is offering $1.8 billion to individual clients that were ripped off by the Bernie Madoff fraud in a move that's probably designed to both maintain the bank's image and avoid lawsuits, I hope other banks and money managers follow suit but with the current state of things there is no guarantee that they will or can even afford to.

Either way the Madoff fraud is indicative of the fact that regulators and money managers are all too happy to look the other way as long as everything appears fine, as opposed to their true role/purpose: to keep a vigilant eye on things even when things are going well, so as to head off any future problems before they become a major crisis.

The potential for the Obama administration to create a "bad bank" that will absorb the bad assets held by other banks led to a rally in the US financial markets today. Personally I'm not too keen on the idea because even if the banks are able to dump their bad assets they're still going to have capitalization problems, the debts they owe on these assets will still be around, etc, etc. Furthermore if the original vision for TARP was a bad idea, how is doing the same thing via an giant bad bank any different?

Perhaps someone in the Obama administration should remember that calling a foul smelling rose a different name won't make it smell any better.

Not to mention the fact that creating a financial institution to hold these toxic assets is nothing more than massive theft of taxpayer dollars, because all it will do (ultimately) is allow the banks to dump bad assets at inflated prices (in all likelihood) and transfer their mistakes onto the backs of the taxpayer.

CNET provides an inside look at a Circuit City liquidation sale , suffice it to say the discounts weren't very good in many instances and it appears the general model is to offer 10% off MSRP as opposed to a large discount on top of an already normally discounted (vs. MSRP) price.

I'm not especially surprised by this as this was pretty much the case during the CompUSA liquidation sales, and at the end of the day the company running the liquidation is trying to make as much cash as possible and is effectively using the lure of extra cheap prices as a marketing gimmick.

In labor news here is a link to an interactive graphic displaying the YoY change in unemployment rates in various parts of the country, the graphic comes from a larger article from the WSJ discussing unemployment rates reaching 10% in certain states, which you can find here.

The thing that concerns me the most about the layoffs isn't so much the short to medium term impact, it's the potential longer term impact if companies find ways to return to old productivity levels with fewer workers (as they did during the last recession), people in high paying manufacturing jobs who are now forced to go work at the local Wal-Mart (NYSE:WMT), or situations where a company disappears and its competitors are able to "pick-up the slack" whilst only needing to hire a fraction of those who lost their jobs.

For instance, think about the Circuit City (OTC:CCTYQ) situation: Best Buy (NYSE:BBY), Costco (NASDAQ:COST) and other electronics retailers aren't going to need to hire a similar number of people as were laid off from CC to deal with the increase in business caused by Circuit City's demise. They'll probably only need to hire a fraction of that number, and will probably be able to absorb the increased volume with their existing employee base.

On a somewhat related topic here is an article from the WSJ around the potential Auto Dealer shakeout (primarily for the Detroit brands), this is another instance where some jobs will be gone for good as the surviving dealers will be able to handle the demand from customers.

The other side of this is that the Detroit brands undoubtedly have way too many dealers vs. their sales volume, and so some level of scaling back will be needed in order to make the overall organization (Automakers & their dealers) more efficient. Here is a quick anecdote to illustrate this, within 10-15 minutes from my home (a close in Suburb of Seattle) there are about eight Ford (NYSE:F) Dealerships (over 20 in the metro area), and about two Toyota (NYSE:TM) dealerships. Expanding it to include the larger metro area yields a similar ratio.

Thing is it goes without saying that Toyota sells more cars than Ford especially in the import happy Northwest, so who is getting the most bang for the buck as far as the cash they're investing into their dealer network?

Moving forward Detroit really needs to think in terms of bang for the buck, as opposed to the current model that (or at least appears to) seems more concerned with size then overall efficacy.

In lighter news there is a support group in for the wives and girlfriends of bankers who feel neglected (either emotionally or financially) as a result of the economic downturn. While I can definitely emphasize with families who suffer from former, I think it's a sad statement on our society that people are forming support groups to deal with the "hardship" of fewer luxury items, and it's no wonder that our country has spent itself into a near depression.

If anyone should be forming support groups over the loss of financial strength it should be the families of autoworkers, and other middle class workers who may very well find themselves working at Wal-Mart and making a fraction of their former wages.

Call me crazy.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.