G-7 Redux

The CS Monitor has an interesting article on the economy:

http://www.csmonitor.com/2008/1020/p16s03-wmgn.html

Froehlich suggests the G-7 reflect the "changing global landscape" by adding China, India, Mexico, South Korea, Russia, and Brazil, all with economies exceeding $1 trillion in size, to the current members – the US, Britain, France, Germany, Canada, Italy, and Japan.

Sounds similar to what I suggested in this post:

http://willworkforjustice.blogspot.com/2008/10/g-7-to-rescue-dont-bet-on-it.html

Housing Graphic of Foreclosures

From Bloomberg comes a great graphic showing the hardest hit areas in the U.S. housing crisis:

http://www.bloomberg.com/apps/data?pid=avimage&iid=ibDX8eWtKfZs

Visa's Shareholder Meeting (2008)

(CEO Joseph Saunders and me)

Visa's first annual shareholder meeting was held on October 14, 2008 at the San Francisco Museum of Modern Art. You would think that the very first shareholder meeting of an internationally known company would be exciting. Unfortunately, the meeting was anything but.

I spoke with a Visa (V) employee prior to the meeting, who said that October 14, 2008, happened to be the first day that employees could sell their restricted shares. Given all the volatility in the stock market, it must have been an interesting day for Visa employees. (At least someone was experiencing interesting times.)

The food spread was small and consisted of the basics--bottled water, some drinks, and coffee. Security guards hovered around shareholders, which seemed strange--who is going to show up at 8:00AM at a shareholder meeting to cause trouble? Perhaps the company was concerned shareholders who had bought at the 52 week high would arrive en masse, but the stock is still slightly above its pre-IPO price, so many shareholders haven't actually lost anything. It appeared that around 15 non-employee shareholders appeared for the meeting. One woman insisted she owned 4000 to 5000 shares, but didn't have a proxy statement or other proof of ownership. She was not let in. To give you an idea of the meeting's entertainment value, this incident was the highlight.

Shareholders were let into the museum's theater and saw Mr. Joseph W. Saunders, Visa's CEO, and Visa's general counsel sitting at a table in front of a blank theater screen. Eagerly awaiting some kind of presentation, many shareholders were let down when the informal portion of the meeting consisted of only ten minutes of Q&A. With 6 billion dollars in the bank, surely Visa could offer some branded trinkets (a notepad, at least) or a preview of its upcoming commercials. Alas, most of the meeting was just the CEO and CFO answering questions. I suppose for its first meeting, Visa wanted to take no risks at all, which, ironically, made it look like a small, unprofessional company instead of the international brand it is.

I asked about Visa's exposure to consumer debt. The CFO said Visa had "no debt issued to consumers." Visa is only a financial intermediary. It facilitates transactions between banks, shoppers, and retailers and receives a fee for its limited participation, called an "interchange" fee. If a customer defaults, the bank that issued the credit card is on the hook, not Visa or Mastercard (MA). For this reason, Visa has an almost fail-proof business model. Collecting a fee for safely transferring money is boring, but profitable--again, Visa has 6 billion dollars in the bank. A shareholder asked how safe this cash was, given recent financial turmoil (e.g., some money market funds had "broken the buck"). The CFO answered that of the 6 billion dollars, less than 30 million dollars were held in illiquid auction rate securities, and Visa was in the process of unwinding those positions.

I knew Visa had some debt, so I asked about Visa's debt obligations. This is where the meeting became somewhat interesting. Apparently, the day before the meeting, Visa settled litigation involving Discover Card (DFS). Some of you might remember that Discover, American Express, and a collection of retailers had sued Visa, Mastercard and several issuing banks alleging anti-trust violations. In a nutshell, retailers, especially small businesses, are concerned that Visa and Mastercard have virtual monopoly power because banks may have colluded with the two companies to exclude competitors. The plaintiffs alleged that the exclusion of Discover, American Express, and other potential competitors placed many retailers at the mercy of Visa and Mastercard, who could increase interchange fees at will. More below on the litigation:

Anti-Trust Lawsuit:

http://home3.americanexpress.com/corp/pc/2004/lawsuit.asp

Settlement:

http://www.bloomberg.com/apps/news?pid=20601103&sid=axrdWpuRyQPQ&

There may have been some truth to the allegations--we've all heard of retailers rejecting Discover and American Express cards. One of my favorite lines from Futurama has Fry trying to use an old Discover card in the future and being told, "Ooh, sorry, we don't take Discover." Also, Discover and American Express, unlike Mastercard and Visa, do have some exposure to consumer debt, perhaps to facilitate being more involved in the interchange market.

The CFO said the terms of the settlement required Visa to pay $800 million to Discover (DFS) at $200 million per year for four years. This is good news for Discover, which may see a slight but significant impact on its bottom line. (More on the impact of the settlement on Discover after the jump: Article)

I asked whether the DOJ or FTC was involved in the settlement. The CEO answered that neither agency was involved, which means government intervention may still occur. I asked whether any "non-financial concessions" were made as part of the settlement agreements. The CEO answered with a resounding, "No."

After the meeting, the CEO Saunders was gracious enough to grant me a picture with him. Mr. Saunders seems like a genuinely decent person and lacks any trace of arrogance. Another shareholder said he reminded her of "bread and butter America and the Midwest," and it's an indication of the kind of respect Mr. Saunders inspires. I have no idea whether Mr. Saunders is from the Midwest, but these days, companies could use more CEOs who exude honesty and throwback values. Unfortunately, the same cannot be said of Visa's Investor Relations. After I took the picture with the CEO, a woman from Investor Relations immediately approached me, telling me repeatedly not to publish the picture. Then, she took out out a piece of paper and demanded to know my name. After telling her she was behaving rudely, I gave her my first name and this blog's website address. The next day, someone did a search on my blog for "Visa." Why is Investor Relations so paranoid about a picture? One expects more confidence from a company that is supposed to have solid international standing.

To characterize my experience with Investor Relations, I was going to borrow Chuck Thompson’s line about being “blocked at every turn by an army of protective minions reminiscent of David Spade as Dick Clark’s personal assistant on Saturday Night Live”; however, the analogy wouldn't be exactly applicable, because the Investor Relations employee tried to block me after the picture was taken, as if my camera somehow had a way of morphing the CEO into Satan himself. (See first picture above for yourself–the CEO looks good and healthy, which Joe Nocera and Apple shareholders might appreciate). So, one last bit of advice to Visa: leave the Wehrmacht, er, overly nervous employees, at home next time. Shareholders, being owners, should be treated like friends, absent erratic or strange behavior. Attempts to block them from gaining access to company officers make a company look insecure, weak, and unprofessional. Let’s hope a company that relies on its good public image will teach its employees the delicate art of handling admirers.

There was some upside to being accosted. Investor Relations' misplaced energy produced an epiphany: Visa's greatest strength--its ease of making money without taking on risk--is also its greatest weakness. Its business model is so simple, Visa employees and officers might feel compelled to overreach out of sheer boredom. Privately, another shareholder complained that Visa was holding too much cash and should return some of it to shareholders in the form of an increased or special dividend. Historically, companies tend to make bad decisions and acquisitions when they have too much cash. Symantec (SYMC) is one example of this phenomenon--just review its acquisitions of Axent and Veritas. Let's hope that Visa's CEO and top brass really are "bread and butter" American types. If not, Visa could be in for a wild ride.

To sum up, the first Visa shareholder meeting was a non-event. The CEO, CFO, and general counsel shined, even if no one else did. Next time, if Visa has a video or pays more attention to the informal part of its presentation, shareholders might feel more vindicated for getting up at 5:00AM to catch the train to San Francisco. Another shareholder gently admonished Visa for not introducing its Board of Directors, as is customary at shareholder meetings. The CEO indicated he appreciated the advice and would remember to do it next year. Because it's Visa's first year being public, Visa gets a pass for having a dull, ordinary meeting. In the future, however, shareholders should hope that Visa settles into its new public skin and acts more confident.

Disclosure: as of October 17, 2008, I own around 20 shares of Visa (V); between 90 and 100 shares of Discover (DFS); and no Mastercard (MA) shares.

Update on 10/20/08: here is the Futurama bit:

Fry: "Do you take Visa?"
Clerk: "Visa hasn't existed for five hundred years."
Fry: "American Express?"
Clerk: "Six hundred years."
Fry: "Discover Card?"
Clerk: "Hmmm...sorry, we don't take Discover."

A Fishful of Dollars

Funny: Reality of Elections

"Points in Case" has some hilarious articles. This one seems perfectly timed:

http://www.pointsincase.com/articles/we-drunk-chick-united-states-america

If the link doesn't work, google the author, "Eric Cheesic," and "We the Drunk Chick of the United States." This one's destined to become a classic. Here are some excerpts:

[N]either of these candidates cares about you and me. They really don't. It's just a big pissing match. The match isn't conservative verses liberal; it isn't even John McCain versus Barack Obama. It's Republicans versus Democrats—-McCain and Obama are just the PR firm picked to sell you the wares. They are a face and a name to be associated with the big political machine that is the United States of America...

So where does the American public come in?

Well, here's the deal: we, the people, are the drunk chick at the bar. We are expected to do very little. Our responsibilities are to:

1. Obey all the rules posted above the door to the bathroom (The Constitution).
2. Pay for the food and drinks we consume (taxes).
3. Leave the bar when it's closing time (die).
   

Warren Buffett Says "Buy"

The Oracle of Omaha to the rescue? Warren Buffett has issued a "buy" signal:

http://www.nytimes.com/2008/10/17/opinion/17buffett.html

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.

Over-Correction Overhyped

I am tired of reading articles about how we are not near the low, and how markets tend to over-correct when rebounding from a crash. Almost every article I am reading now talks about the possibility of over-correction, i.e., another 20% drop in the S&P 500.

First, the prevalence of such pessimistic articles is a contrarian signal. Second, Warren Buffett just highlighted that he was buying major U.S. stocks (he's probably adding to his Coca-Cola (KO) and Wells Fargo (WFR) holdings), because he thought they represented reasonable values. And third, almost all the articles base their theory on the 1929 and 1987 crashes. See, for example, this article:

http://www.minyanville.com/articles/spx-charts-TD-technicians/index/a/19550

The above article and ones similar to it fail to distinguish between 1929, 1987, and 2008. In 1929, the government acted too late. Bernanke himself has cited a failure of speedy government intervention as one cause of the Great Depression. In 1987, again, the government arguably did not intervene quickly enough and did not pump into the market substantial taxpayer monies to inspire investor confidence. In addition, the crash of 1987 did not lead to a prolonged bear market--within two years, markets had begun moving substantially higher.

Now, in 2008, not only is the U.S. government inserting between 700 billion and 2 trillion in the markets, but worldwide governments (the G-7) are following suit. Thus, the current situation is completely different from 1929 and 1987. As an attorney, I see briefs all the time where opposing counsel uses one line from an appellate court's opinion that supports his or her client, but fails to mention that the case involved completely different facts, diminishing its applicability. Investors and writers who compare 1929 and 1987 with 2008 are making the same amateurish and unfortunate mistake.

Warren Burger on Self-Restraint

In PAPISH v. BOARD OF CURATORS OF THE UNIVERSITY OF MISSOURI ET AL. (1973), a case about the limits of free speech on campus, Justice Warren Burger dissented. His dissent advocates self-restraint as a core American value:

In theory, at least, a university is not merely an arena for the discussion of ideas by students and faculty; it is also an institution where individuals learn to express themselves in acceptable, civil terms. We provide that environment to the end that students may learn the self-restraint necessary to the functioning of a civilized society and understand the need for those external restraints to which we must all submit if group existence is to be tolerable.

http://www.law.umkc.edu/faculty/projects/ftrials/firstamendment/papish.html