Thursday, May 27, 2010

Latest Ideas From Some Heavy Hitters

By Eric Jackson
RealMoney Contributor

5/27/2010 5:00 PM EDT
Click here for more stories by Eric Jackson

Yesterday was the 15th annual Ira Sohn Research Conference in New York. The event brings together the best hedge-fund managers in the world to present their top ideas for the coming year. All proceeds from the event go to charity, supporting pediatric cancer and other childhood diseases.

The event has a stellar reputation, partly because of its track record of managers presenting ideas here for the first time publicly that go on to pan out exactly as they argue. In 2008, David Einhorn made a splash at this conference by pointing out some of the problems with Lehman Brothers -- four months prior to that firm's bankruptcy. At the 2007 conference, Bill Ackman called for the demise of Ambac (ABK - commentary - Trade Now) and MBIA (MBI - commentary - Trade Now), and last year he touted General Growth Properties (GGP - commentary - Trade Now) when the stock was under $4 -- it's now over $13. Some have called this conference the Learning Annex for hedge-fund managers.

Just an idea for the event organizers: There's such interest in the ideas from the event that they should consider live streaming the event on the Web. They could charge for it and likely still get a large audience that would further support their worthy cause.

Yesterday's roster of speakers was stellar as usual, including Ackman of Pershing Square, Einhorn from Greenlight, Sam Zell, David Tepper of Appaloosa and Seth Klarman of Baupost.

Many speakers, including Einhorn and Ackman, reiterated arguments they've made publicly, for example shorting the ratings agencies likeMoody's (MCO - commentary - Trade Now) andMcGraw-Hill (MHP - commentary - Trade Now) and going long General Growth. Other speakers, such as Niall Ferguson of Harvard and former auto-czar Steve Rattner, chose to stick to macroeconomic predictions.

David Tepper, who was bullish in 2008 and lost money, then stayed bullish in 2009 and made $4 billion, was still bullish yesterday. He pointed to the bleachers, a la Babe Ruth, and said that Bank of America (BAC -commentary - Trade Now) is going to $27. Tepper also likes AIG (AIG - commentary - Trade Now) and the beaten-down Spanish bank Banco Santander (STD - commentary - Trade Now).


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Wednesday, May 26, 2010

Sounding the Alarm About Japan

05/26/10 - 11:35 AM EDT

Europe has captivated the headlines the past six weeks with concerns about whether Greece will be able to pay back its debts given the required austerity measures it has been forced to take and its already slow-growing economy. Investors also have worried about the ramifications this thorny situation could have on richer countries in the European Union like Germany and France if they decide they no longer want to be on the hook to bail out Greece or another weak sister country such as Portugal, Spain, or Italy.

We know this situation has been brewing in Europe for some time. We've known about the fiscal situations in these southern European countries, yet the problems have always been off in the future so that we could ignore them. It wasn't really until there were riots in the streets of Athens that the markets really got awakened to the gravity of the situation.

The drop in the euro has been so severe that the other members of the EU have been forced to look into the abyss which those of us in America did in September 2008. Nothing focuses a man's mind like knowing he's going to be hung in the morning, said Samuel Johnson. That's exactly right. The situation in 2008 forced America to act and Europe is now forced to do the same.

I suspect the rescue package, which still has to be formally ratified by all the countries, will take hold. Frayed nerves will calm over Europe with time, just as they did following the Troubled Assets Relief Program in the U.S. and the Federal Reserve's quantitative easing campaign. The can of Europe's problems has been effectively kicked down the road so that we'll be able to go back to collectively forgetting about Greece for a while.

However, there is potentially a bigger and more dangerous sleeping giant out there for world markets: Japan. Despite a few hedge fund managers sounding the alarm about Japan last year, little attention has been paid to it of late because -- just as with Greece -- nothing bad or newsworthy (like violent street riots) have occurred there yet.


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Tuesday, May 25, 2010

Groupthink and Contrarian Sentiment

By Eric Jackson
RealMoney Contributor

5/24/2010 5:30 PM EDT
Click here for more stories by Eric Jackson

It's always striking to me how consistently wrong conventional wisdom is when it comes to estimating future moves in the stock market. At the moment -- at least until we string together two "up" days for the Dow -- the mood is extremely pessimistic. The dominant view is that Europe is still in trouble post-rescue plan and that it's going to take down the rest of the world with it.

Yet, five weeks ago, investor sentiment was running at inordinately high levels. The bull run was continuing apace. You had to be in the game to be keeping up with the market's moves. We heard endless talking heads on television, spouting about the "cash on the sidelines" that needed to come into the market and be "put to work".

At the beginning of the year, you could hardly find a single commentator who liked the US dollar. The consensus was that the US was in dire shape and printing money to solve its problems. How could the dollar not continue to slide against every other currency? Well, it turns out that the US dollar is up over 8% YTD and the euro is down over 12%. People apparently forgot that the rest of the world had its share of problems too, and the US economy, by comparison, did not look so bad. I read a report today by UBS (UBS -commentary - Trade Now), saying that the US dollar is going to be a super-currency in the next 10 years, attracting investors in the way it did in the late years under Clinton and Rubin.

My point is that everything makes sense in the rearview mirror. Yet, people always seem to forget how hard it is to predict the future before it happens. They also forget how bad other people -- especially those holding the conventional viewpoint -- are at predicting the future.


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Monday, May 24, 2010

China: To Fret or not to Fret?

By Eric Jackson
RealMoney Contributor

5/21/2010 1:45 PM EDT
Click here for more stories by Eric Jackson

I've spoken often of my bullishness on China over the last few months. This is based on my read of its shift from an export-driven economy to a domestic demand-based economy, the government-fueled growth in infrastructure and the emergence of 200-800 million middle-class Chinese over the coming 10 years (depending on whose estimates you believe).

I firmly believe that China is an unstoppable economic force in the world and nothing about the market gyrations of the past couple of weeks have swayed me from that view. Unlike Europe or the US, China has financial flexibility (in terms of a clean balance sheet) and enormous economic growth potential. That can mop up a lot of non-performing loans if it needs to.

Arguing the pro-China point of view, however -- and disputing some of what I think are false, or off-base conclusions by those with a bearish view of China -- means that I don't often get a chance to discuss some of the potential risks I see in the country. So here are some of the things I worry and don't worry about.

I am not losing any sleep about the property market in China's Tier 1 cities (Beijing, Shanghai, Shenzhen and Guangdong). China basically didn't have a property market until 1978. It was controlled by the Communist Party. From 1978 to 1998, some property transactions occurred, but they were mainly for state-owned enterprise building (for example, large apartment complexes). It was really only around the turn of the century that the government allowed Western-style property transactions to happen. Even still, the market truly didn't get its legs until 2003. So, you have a nascent market for real estate in the second-biggest economic country in the world, trying to make up for 50 years of no market.


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Wednesday, May 19, 2010

Canada's Real Estate Market Bubbly

By Eric Jackson

05/19/10 - 06:00 AM EDT

Stock quotes in this article: RY , TD , CM , BMO

NEW YORK (TheStreet) -- It has been painful to watch the housing turmoil in the last few years play out in the U.S. I know friends who have been terribly affected by it. After seeing the devastating impacts on the entire economy from this housing downturn, many market observers have pointed to China as a frothy real estate bubble that will likely pop soon. However, you might be surprised to learn that -- up until very recently -- there were bidding wars going on for homes in Canada.

Canada might be America's neighbor to the north, but it has a bubbly real estate market, even as the U.S. market continues to limp along. Consider these eye-raising facts:
  • Canada's real estate prices have increased on average 40% in the last year while incomes have dropped.
  • Canadian residential real estate is now worth more today than it was pre-Lehman.
  • There are now more dwellings built in Canada (assuming, as the Canadian government does, that an average of 2.3 people live in each dwelling) than the population of Canada.
  • Canadian consumers have racked up enormous debts while interest rates have been low over the past 20 months.
  • Personal bankruptcies are at record levels now in Canada when interest rates are still at historical lows.
  • In Vancouver, people now spend 68% of their disposable income on housing. In Toronto, people spend 44% of their disposable income on housing. (Keep in mind that the China bears were complaining that it was unsustainable that some Chinese in Beijing and Shanghai were spending more than 30% of their disposable income on housing.)
  • Canadians have been proud that their banks have done well post-Lehman, unlike so many of their global peers. The banks have actively originated mortgages demanded by Canadians over the last year, but -- unlike U.S. banks during the housing boom -- for the most part, they've elected not to hold on to these mortgages. As quickly as they can, they pass along the mortgages to the Canada Housing and Mortgage Corporation. This is a crown corporation, meaning it's 100% owned by the federal Canadian government (i.e., the Canadian taxpayers).

    Over the last five years, the CHMC's liabilities -- meaning the mortgages they hold on their books -- have gone up five times from C$80 billion to C$400 billion. Any time you see a business increase its liabilities by that amount, it's intriguing. When you consider the last two years has been the worst economic downturn since the Great Depression, it's even more head-scratching.

    However, Canada's economy was going along okay pre-Lehman. Whenthe stock market dropped, Canadian housing and real estate activity stopped and prices did drop. But, with most consumers and the Canadian banks in okay shape, and with Canadian job losses not as bad (relatively) as in the U.S., Canadian consumers had quicker confidence to spend thanks to the lower interest rates.

    When famous bear David Rosenberg left Merrill Lynch to move back to Canada in 2008 and join Gluskin Sheff, he spoke in glowing terms about Canada's position in the global economy. Yet, even he has begun to acknowledge the housing bubble that exists in Canada.


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    Tuesday, May 18, 2010

    Get Used to Volatility

    "Part of the new normal for investors is getting used to more volatility," Eric Jackson from Ironfire Capital told CNBC Monday. Piers Curran from Amplify Trading joined the discussion.

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    Google Is Too Cheap

    By Eric Jackson
    RealMoney Contributor

    5/18/2010 7:32 AM EDT
    Click here for more stories by Eric Jackson

    I've recently been critical about Google (GOOG - commentary - Trade Now). The company has made a number of missteps this year and hasn't really demonstrated much urgency in fixing things. However, the negative sentiment on Google is too high and the price is too low. Although I've had my complaints about the company and its lackadaisical culture, it's drifted too low for too long. I like Google as a good turnaround bet from here and intend to find the right entry in the next month or so.

    There's no question that Google has had a difficult year. Its stock price is down 18% versus a 3% rise in the Nasdaq over the same period. It is not used to under-performing the benchmark.

    A few weeks ago, Google announced it would be leaving China in a dispute over the information requested by the Chinese government. Since then, Baidu (BIDU - commentary - Trade Now) -- the top search player in China -- has seen its stock price surge 23%, and it has recently split the stock. Google's share price, meanwhile, has continued to slump.

    Google's new mobile operating system, Android, has had difficulty attracting investors' attention since the start of the year, while everyone has been focused on Apple's (AAPL - commentary -Trade Now) successful iPad launch.

    Since it became clear that the iPad would be a hit -- and would give iMac, iPhone and iPod users a new reason to rush out to the Apple Store to buy yet another gadget they can no longer live without -- most large mutual funds have been playing catch-up, buying up Apple shares. Google, amidst the iPad buzz, has been an afterthought.

    Google is also losing talent. Its top salesman, Omid Khordestani, has retired. Android Senior Product Manager Erick Tseng just left Google to join Facebook's Mobile team. That suggests he saw bigger opportunity at Facebook Mobile.


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    Coal-Fired Potential

    By Eric Jackson
    RealMoney Contributor

    5/18/2010 1:00 PM EDT
    Click here for more stories by Eric Jackson

    Yesterday, I attended the CCG China Rising conference in New York. CCG is an investor-relations firm that has built up a strong practice, representing Chinese-based companies that have listed on US exchanges. The companies tend to be smaller, typically with a market capitalization of less than $1 billion and often less than $500 million.

    Despite recent market volatility, there was a big turnout at the conference yesterday. Yet many of these companies have seen sharp price declines since early April. As US investors have lightened up on their long high-beta names, they've sold many of these smaller Chinese companies. Still, I sensed a lot of optimism on the part of the CFOs who were presenting.

    Almost every presentation began by talking about the market potential in China and favorable government policies that are set to benefit their growth trajectory. When you have an economy of 1.3 billion people growing 8% a year, with an emerging middle class of 300-400 million, you're fortunate to be shooting a basketball hoop into the ocean.

    Yet, talking to several investors in the hallways in between presentations, although they hope that their research will uncover a company that will double or triple over the next year (compensating for more modest returns from the rest of their portfolio), they also have much higher concerns about the potential for fraud in the Chinese companies they're looking at.


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    Friday, May 14, 2010

    China (Still) Rising

    By Eric Jackson
    RealMoney Contributor

    5/14/2010 7:32 AM EDT
    Click here for more stories by Eric Jackson

    Despite all the worries about a China bubble, many of its U.S.-listed companies are posting real profits and boasting tremendous potential for growth.

    Next week, I'll be attending a conference in New York put on by CCG Investor Relations featuring up-and-coming U.S.-listed Chinese companies.Oppenheimer & Co. is also running a China conference next week. As many in the media took notice of the fact that Shanghai's stock market entered "bear" territory early this week, it's important to revisit the outlook for these Chinese names.

    First, let's talk about the Shanghai market, perhaps the most unusual in the world. You can't short stocks or trade futures (although the Chinese government has recently proposed changing this). I haven't seen any studies, but anecdotally, it is pretty clear this index has the lowest correlation with other world markets. Therefore, you have to take its movements with a grain of salt.

    This year, the Shanghai Composite Index is down 17%, compared with a 5% gain for the S&P 500. Some market watchers have been worried about this being a leading indicator of a pending China crash, with the commodities that feed the country's booming demand about to fall off a cliff. In fact, my RealMoney colleague, Don Dion, wasout this morning with an article titled "Avoid China." Recall, however, that Shanghai surged 80% in 2009 vs. 27% for the S&P. This means that, since Jan. 1, 2009, Shanghai has climbed 46% vs. 32% for the S&P.

    An investor also needs to keep in mind that U.S.-listed Chinese stocks trade in line with U.S. indexes -- not the Shanghai or Hong Kong exchanges. Why? Simply because they trade on U.S. exchanges, where the primary movers are U.S. investors. A good rule of thumb is that, if U.S. equities are rising, these China-based equities trading on the Amex, Nasdaq or OTC, are up some multiple of that. However, the same holds true in down markets. One reason is that these equities are smaller and less liquid. Sometimes, just a few retail investors dumping their holdings can drop a stock.


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    Thursday, May 13, 2010

    Construction Craze: China Watch

    NEW YORK (TheStreet) -- Contributor Eric Jackson breaks down Jim Chanos' remarks that China's GDP levels are based on construction and offers his insight on whether China is a bubble based on construction and loan trends and what investors need to know.
    Mon 05/10/10 06:00 AM EST -- Brittany Umar
    Stocks in this video: ONP | ABB | PH | CNH | UTX | DE | CAT |ITW

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    Wednesday, May 12, 2010

    LA Times: Whitman's words put spotlight on deeds

    Meg Whitman says she became one of the world's wealthiest CEOs by always asking, "What is the right thing to do?"

    In her recently released autobiography, the front-runner for the GOP gubernatorial nomination disavows Wall Street "self-dealing and fraud" and rejects as myth the idea that successful executives must "step on people, stretch the truth . . . and make heartless decisions based only on the bottom line."

    Several of Whitman's actions while in corporate office and as an investor, however, raise questions about whether her conduct has squared with the image she has created in the book, on the stump and through tens of millions of dollars' worth of campaign commercials. Her ethical compass was tested repeatedly as she went from young Harvard MBA to chief executive of the online auction giant EBay, and some shareholders, regulators and business partners found it wanting.

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    A lucrative deal that Whitman cut for herself with investment banking giant Goldman Sachs was called "corrupt" by the U.S. House of Representatives Financial Services Committee. The partnership she forged between EBay and online rival Craigslist landed in court and is still there; Craigslist has accused EBay of stealing trade secrets and fraudulent advertising. At another company, her dismissal of a subordinate executive resulted in an age-discrimination lawsuit and a secret court settlement.

    As an investor, she put millions of dollars into private equity firms with a reputation for callous business practices. Subsidiaries of one of the "distressed asset" firms in which she identifies herself as a limited partner foreclosed on dozens of victims of Hurricane Katrina.

    "It's nice to say if you just behave ethically, you will make profits," said Meir Statman, a professor of finance at Santa Clara University who focuses on ethics. "If that were true, life would be really easy. But . . . there are tradeoffs. And if you are a politician, you have to account for them."

    Whitman declined to be interviewed, referring questions to her campaign staff.

    Her business practices came under intense scrutiny in the fall of 2002, when congressional investigators identified her as one of a handful of corporate executives who had made self-serving deals with Wall Street firms at the expense of shareholders.

    After Whitman hired Goldman Sachs to handle EBay's investment banking business — deals that generated $8 million in fees for the bank, court records show — Goldman gave Whitman early access to initial public offerings of stock for her personal portfolio. The head start on the rest of the market allowed her to sell shares for a profit of $1.78 million.

    The deals raised suspicions among regulators that Whitman and other executives, including Kenneth Lay of Enron, were trading shareholder assets — in the form of fees paid to investment banks, for example — for personal gain.

    "It is effectively a bribe for future services," said Mercer Bullard, a law professor at the University of Mississippi and former Securities and Exchange Commission attorney who was not involved in the government investigation. "It was exactly the kind of thing crooked politicians engage in."

    Goldman Sachs and nine other Wall Street firms agreed to stop giving executives they do business with early access to public offerings as part of a settlement with regulators in 2003. Whitman writes in her book that there was nothing illegal about the transaction and that "such investment opportunities were common at the time."

    In a debate last week with her primary election opponent, state Insurance Commissioner Steve Poizner, Whitman said she "did not actually see a conflict of interest" in the deal. "It was a completely separate account that had nothing to do with EBay's banking business," she said. "But the truth is leaders have to be above reproach."

    Whitman, who had joined the Goldman Sachs board in October 2001, resigned from it two months after she was named in the congressional investigation. She paid $1.78 million to settle a subsequent lawsuit brought by EBay shareholders who said the money she made on the stock deal belonged to them, not her.

    She has since worked to restore her reputation, devoting substantial time and resources to charitable efforts. Her book says that in the aftermath of Hurricane Katrina, EBay dropped $1,000 credits into the accounts of 1,000 customers in New Orleans.

    "It was the best million dollars we ever spent," she wrote.

    Sometimes, however, the way she has managed her family's personal investments has contrasted with such efforts.

    A disclosure of economic interests that the state requires of candidates shows that Whitman's family has placed at least $2 million in Fortress Investment Group, a private equity firm that gained notoriety a few years ago when subprime lenders it owned foreclosed on homeowners, including at least 34 Katrina victims.

    In a written statement, Whitman campaign spokesman Tucker Bounds declined to specify how much the candidate has invested in Fortress. Her disclosure form, which she filed March 11 and which covers the previous 12 months, notes two investments exceeding $1 million; the state does not require more specificity.

    As a limited partner in the fund, "Meg has no control or influence over investment decisions," Bounds wrote. Asked in April whether she knew about the Katrina foreclosures, he responded, "No."

    The firm's investments created unwelcome headlines in 2007 for Democratic presidential candidate John Edwards, who had worked for Fortress for 14 months and had $16 million invested in the firm. Edwards ultimately renounced Fortress, divested his holdings and created a charity to help the Katrina victims who were foreclosed upon.

    Whitman is a limited partner in more than two dozen other secretive hedge fund and venture capital investments, some of which have been accused by regulators, scholars and activists of questionable business strategies. The Whitman family portfolio includes, for example, at least one fund that sought profits from the bankruptcies of American automakers and another that is partly owned by the government of Abu Dhabi, which has been cited for human rights abuses by U.S. officials and advocacy groups.

    Whitman has said she is a passive investor in these businesses and cannot be held responsible for what they do with her money. But some experts disagree.

    "You are on the hook for what you own," said David Wood, director of the Initiative for Responsible Investment at Harvard University. "It is a dodge to say, 'There is no way I could possibly monitor all these investments.' "

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    One investment that Whitman has taken ownership of is the $1.15 million she contributed to stop the development of a 572-acre property near land she has in Telluride, Colo. The money helped the city use its power of eminent domain to force the owner to sell.

    Neal Blue, a San Diego defense contractor, bought the pristine land adjacent to small, wealthy Telluride for $6 million in 1983. Years later, he began moving on plans to build condos and shops on the land. Local preservationists and affluent landowners, including Whitman, protested.

    To stop Blue's development, the town expanded its border in 2001, annexing his property. Litigation ensued. The courts ruled that Blue could be forced from his land in exchange for $50 million.

    Whitman, in addition to pitching in the $1.15 million, "rallied friends around the country to the cause," according to a May 2007 news release from the nonprofit Valley Floor Preservation Partners. Property-rights advocates — whose views she claims to share unequivocally — said Telluride was engaging in an unconscionable abuse of government power.

    Blue, who is now 75, "didn't appreciate a fellow Republican, somebody who supposedly stands up for property rights, being at the forefront of the effort to take away his land," said his attorney, Thomas Ragonetti.

    Bounds said Whitman "simply supported a community fundraising effort" and was not involved in the eminent domain proceedings. Whitman asserted in an October interview on the conservative blog Flash Report that "people's property rights absolutely need to be respected" and they are "a core part, I think, of why people live in America."

    As Whitman celebrated the 2007 victory in Colorado, her EBay shareholders had little to cheer about. The stock price was in decline. It had peaked at the end of 2004 and had lost more than half its value by the time Whitman announced her departure from the company in January 2008 amid talks with top Republicans about a possible run for California governor.

    Some of her boardroom moves in the final years of her decade-long EBay tenure rankled investors.

    Eric Jackson, a hedge fund manager and shareholder activist who analyzed EBay's SEC filings for the online financial publication, found that Whitman's take from salary, bonuses, stock awards and other perks jumped nearly fivefold, from $2.9 million in 2004 to $13.9 million in 2007. Costs to shareholders from her use of the company jet soared, the filings show; she spent more than $1 million on the plane in 2006 alone. In addition to her work travel, she charged EBay shareholders nearly $300,000 for flights to attend board meetings for other companies.

    Bounds said the private jet travel was "instrumental in growing EBay from a start-up company to an $8-billion global corporation." He added that most of Whitman's personal fortune, which has been widely estimated at more than $1 billion, did not come from salary or stock grants received in her later years with the company, some of which she never redeemed.

    "Meg earned her money because she had an early ownership stake in EBay and grew the company into a huge success," Bounds said.

    Another product of Whitman's EBay years continues to dog the company. EBay is locked in dueling lawsuits with, perhaps the world's best-known classifieds website, whose owners accuse EBay of stealing their proprietary financial information to launch a competing website.

    The seeds of the dispute were sown in 2004, when EBay bought about a third of Craigslist. Founder Craig Newmark and Chief Executive Jim Buckmaster were wary of what a profit-driven, mainstream corporation might do to their proudly low-budget website. They signed the deal, according to Buckmaster's December 2009 testimony in a Delaware courtroom, after Whitman gave her "personal assurance" that EBay would "gracefully unwind" the collaboration if anyone became uncomfortable with the partnership.

    That discomfort arrived with a shock in the summer of 2007, when EBay announced the U.S. launch of a classified ad site — — designed to compete directly with Craigslist.

    Buckmaster said in court that he demanded Whitman sell EBay's share of Craigslist. He didn't want a competitor on the board with access to his company's most sensitive financial data and Web traffic statistics.

    Whitman testified that she refused to sell. But she assured Buckmaster in an e-mail that her company, "with the emphasis our culture places on integrity," had taken steps to protect Craigslist's trade secrets from the Kijiji team. Whitman later acknowledged in court that she had no idea what steps EBay was taking when she made her assurances.

    "The firewall would have lived at a much lower level," she testified in the lawsuit that EBay filed against Craigslist. That suit accuses the smaller firm of violating its shareholder agreement with EBay through actions that Craigslist executives say were necessary to protect trade secrets. They included diluting EBay's stake in their company enough to remove EBay from the board.

    Craigslist countersued, accusing EBay of unfair competition and false advertising for, among other things, buying ads on search engines that invited users to click But the link took customers to EBay's new site instead.

    Without acknowledging any role in buying the ads, Whitman testified that she didn't think they were deceptive or even particularly unusual.

    "This didn't completely surprise me," she added. "I mean, this is sort of typical. . . . When you actually type in 'Meg Whitman for Governor,' guess who has bought the keywords next to Meg Whitman for Governor? My gubernatorial opponent."

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    Bounds declined to answer specific questions about the ongoing litigation.

    The tolerant attitude Whitman displayed on the witness stand in December contrasts with her actions in 2008, when she sued an independent entrepreneur for trademark infringement and "political cyberfraud" after discovering that he had registered several potential Whitman campaign Web addresses, including, and

    Her complaint demanded hundreds of thousands of dollars in damages and an advertising campaign, funded by the entrepreneur, to "correct any consumer confusion or misperceptions." She took her case to a United Nations arbitrator in Switzerland — where she lost — before signing a secret settlement.

    Earlier in her career, she ended another court case with a secret settlement after being sued, at age 39, for age discrimination.

    In December 1995, eight months after Whitman took over as chief executive of the flower delivery service FTD, she fired her 55-year-old technology chief, Dave Carlson. She replaced him with a man almost two decades younger, according to the lawsuit Carlson filed in a suburban Detroit court near FTD's headquarters.

    Whitman told some staff members that the company was too "old and stodgy," Carlson alleged. He also said she told a conference room full of senior managers: "We need about 15 killer young executives."

    FTD's vice president of government affairs interrupted, telling Whitman that she didn't mean to use the word "young," the complaint said. "Actually, I do," Whitman allegedly replied, "but I get your point."

    Carlson declined to comment because of the confidentiality agreement he signed to settle the case. Whitman's attorney denied Carlson's allegations in his response to the lawsuit.

    Bounds said in his statement: "Suits of this nature filed against executives of major companies are commonplace today. Too often they are frivolous and in no way reflect the true performance of management."

    This begins a series of articles examining the backgrounds of the major candidates for California governor and U.S. Senate in the June 8 primary election.

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    More Interconnectedness, More Volatility

    By Eric Jackson, Senior Contributor

    05/12/10 - 06:07 AM EDT

    Stock quotes in this article: C , GS , AIG

    Mark Cuban, entrepreneur and the owner of the Dallas Mavericks professional basketball team, recently complained that the Wall Street game had changed. It's not enough any more to do fundamental research on individual companies, he said. Individual investors today have got to be a global macro hedge fund. It's too complicated, Cuban says.

    There are changes. Last Thursday's "flash crash" -- when the Dow Jones Industrial Average lost 1,000 points in a few minutes -- was the latest evidence of the "new normal" the stock market is operating under these days. There's no question that volatility has increased sharply compared with, say, 10 years ago.

    When events like last Thursday or the near collapse of the credit markets in September 2008 take place, government officials or market commentators have a knee-jerk first instinct to blame a discrete market actor like a rogue trader or rogue hedge fund. They blamed the hedge fund Long-Term Capital Management for sparking the Asian currency crisis of 10 years ago. They said it was a "fat finger" on some Citigroup(C)trading desk which caused last week's mayhem. On Tuesday, the Wall Street Journal ran a story laying the blame of last week on one trade by one hedge fund who pays Nicholas Taleb, the market watcher and proponent of "black swan" events in markets, as an adviser.

    The trouble with these single actor or "it-was-out-of-our-hands" explanations for these crashes is that it suggests no major changes need to occur. As long as we prosecute the bad apples or make a tweak here or there to the existing system, we can continue on our way.

    But, I've got news for you. Cuban is right that something systemic has changed on Wall Street, in our economy, and in our society. These changes have introduced greater interconnectedness, greater speed, and greater complexity to our markets and decision systems than we've ever had before.

    These changes are mostly good and beneficial to the markets, but they do introduce much greater risk and volatility than we've ever seen before. At the same time, the system and rules by which the markets operate haven't changed. What this means is that it is highly likely that we will see large market swings again -- both intraday and over a period of many months. In fact, if anything, volatility is likely to increase in the years ahead, not decrease.


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    Monday, May 10, 2010

    Moody's Wells Notice Blues

    By Eric Jackson
    RealMoney Contributor

    5/10/2010 5:00 PM EDT
    Click here for more stories by Eric Jackson

    A couple of weeks ago, I offered up a negative short-term view of Moody's (MCO - commentary - Trade Now), saying it was too risky to hold the stock, given the Securities and Exchange Commission's suit against Goldman Sachs (GS - commentary - Trade Now). That move signaled regulators would likely pursue other high-profile symbolic targets, with Moody's near the top of the list.

    Late on Friday, Moody's disclosed in its latest quarterly filing that it had received a Wells Notice from the SEC on March 18, saying Moody's Investors Service, the credit-ratings unit, may face SEC action over its June, 2007, application for renewal of its status as a nationally recognized statistical ratings company, or NRSRO, an official designation that is crucial to its business. According to Moody's, the SEC believes that the MIS "...description of its procedures and principles were rendered false and misleading..." in the application because the company had determined that one of its employees had violated its internal ratings committee policy.

    Moody's said it disagreed with the Wells Notice and has submitted a response "explaining why its initial application was accurate and why it believes an enforcement action is unwarranted."

    This news first broke on the Zerohedge blog, and has been widely reported since. It is big news, and in line with my previously stated concerns.

    For those who don't know, the NRSRO status is enormously important for Moody's. The SEC determines which credit-ratings agencies can rate certain types of securities. Certain investors, think pension funds, can only purchase securities that have been rated a certain level by an NRSRO-accredited agency.

    Until recently, only Moody's, Standard & Poor's, a unit of McGraw-Hill (MHP - commentary - Trade Now), and Fitch Ratings were official players. Then, a few years ago, the SEC widened the field, accrediting smaller players, such as DBRS, Egan-Jonesand others.

    If the SEC stripped Moody's of its accreditation, it would shut the company out of a major part of its high-margin business, which would deal a huge blow to the stock, with likely spillover to other parts of its business. Earlier today, the stock plunged as much as 12.1% on the Wells Notice news, before recovering to close down 6.8%, at $21.77 a share in regular trading, on a day when the Dow Jones Industrial Average surged 3.9%.


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    Thursday, May 06, 2010

    Gold Rush

    By Eric Jackson
    RealMoney Contributor

    5/6/2010 2:00 PM EDT
    Click here for more stories by Eric Jackson

    With the concerns about Europe and sovereign debt swirling around the capital markets, gold has risen to a recent high of $1,184 an ounce. Gold bulls like Eric Sprott have made outspoken calls that the price of the commodity is going to spike in the coming months in response to fear of overleveraged governments grappling with new fiscal constraints and diminished purchasing power of their currencies. In a seemingly contradictory turn, though, now may be a perfect time to position yourself for some consolidation in the space.

    Investors have been interested in gold as an investment since Lehman's bankruptcy. The price of gold jumped to $900 an ounce in the days following the Lehman filing and AIG (AIG - commentary - Trade Now) bailout. In the weeks the followed, though, the price of gold collapsed amid an immediate deleveraging of all types of assets, stocks and commodities alike -- by November 2008, the commodity dropped to close to $700 an ounce.

    At that time, many large gold producers and junior miners saw their stocks hit significant low points. In fact, if you go back and study the charts for the gold stocks, their low point came not in March 2009 but in early December 2008. Since then, they've had a steady upward climb.

    You might have thought larger companies like Barrick Gold (ABX - commentary - Trade Now), Newmont Mining (NEM - commentary - Trade Now) and Goldcorp (GG - commentary - Trade Now) would have been scooping up junior miners at that low point because of the low prices. Like most of corporate America, however, they were hesitant to pull the trigger on any deals with so much uncertainty in the air.

    With most observers expecting further price inflation and potential debt uncertainty ahead, many hedge fund managers are betting that gold prices will keep rising. If management teams of gold companies agree, they are likely considering how to grow their reserves. Using their higher stock prices and healthy cash balances will likely prove tempting in grabbing some smaller, valuable companies before other competitors do.

    So, with the price of gold now much higher -- and the stock prices of these major players largely recovered (Barrick's market capitalization is over $44 billion) -- the sector seems poised for consolidation. What is the best way to play this? Simple -- look for the junior miners with the most attractive assets from a major producer's perspective.

    I am a long holder of Seabridge Gold (SA - commentary - Trade Now), a company I wrote about back in February. Seabridge owns the rights to the KSM project in Canada; it's not developing the property, which is estimated to have 50 million in gold deposits, but looking to partner or be acquired by a larger producer.


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    Wednesday, May 05, 2010

    Yahoo! CEO Doesn't Deserve High Pay

    By Eric Jackson, Senior Contributor

    05/05/10 - 09:18 AM EDT

    Stock quotes in this article: AAPL , YHOO , GS , JPM , GOOG , ADBE , ADSK

    Carol Bartz was paid $47.2 million last year -- her first -- as CEO of Yahoo!(YHOO).

    Since it was announced that she would assume the top job on Jan. 13, 2009 through today, Yahoo!'s stock is up 29%. Over that same time, the Nasdaq is up 60%.

    For her $47.2 million in pay for 2009, Bartz might argue that she created $5 billion in market cap through today as Yahoo!'s market cap went from $18 billion to $23 billion.

    But she under-performed the market by 52% through today. This suggests her leadership led to the company destroying $5 billion in value (as the company should have a $28 billion market cap today if it just kept pace with the industry).

    Comparing her pay and performance to other corporate CEOs also leaves you scratching your head.

    Much criticized Lloyd Blankfein of Goldman Sachs(GS) was paid $9.6 million for 2009. He created $33 billion in market cap over the same period as Bartz.

    Goldman's stock price out-performed the market by 117% over this time. So, he creates 6.6 times the market capitalization value as Bartz and got paid one-fifth what she did. How does that math work?

    Jamie Dimon of JP Morgan Chase(JPM) was paid $9 million for 2009. He created $68 billion in market cap over the same period as Bartz, and JP Morgan Chase out-performed the market by 100% over this time.

    Let's take a tech example. Steve Jobs of Apple(AAPL) is not a fair comparison, as he received total comp of $1 last year (just as he did in the two previous years).

    So, let's take his COO, Tim Cook, who made $14 million in total comp last year. He/Steve created $160 billion in market cap over the same period as Bartz, and Apple out-performed the market by 329% over this time.

    Look at Google(GOOG). After all, hasn't it had a disastrous year in terms of stock price under-performance, exiting China, etc.? Google CEO Eric Schmidt was paid $9 million for 2009. He created $69 billion in market cap over the same period as Bartz. And it turns out that he/the company has out-performed the market by 17% since Bartz was hired.


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