Analysis: Credit agencies remain unaccountable

The Securities and Exchange Commission has kept the credit rating industry — whose dominant members, Standard & Poor's and Moody's, played a notoriously key role in the financial crisis — in legal limbo for four years. And the industry's just fine with that.

Apparently so are members of Congress, who have failed to press the SEC to hold credit agencies accountable, as law requires, for the ratings they issue on securities backed by mortgages or other assets.

The law, part of the Dodd-Frank Act of 2010 that Congress passed in response to the crisis, was intended to fix a main cause of the meltdown: high but highly inaccurate credit ratings that firms, particularly S&P and Moody's, gave to the likes of investment bank Lehman Brothers before it failed, insurance giant AIG before it nearly failed and billions of dollars of subprime mortgage securities that proved worthless.

"I'm disappointed," says Barney Frank, the now retired congressmen from Massachusetts who, as chairman of the House Financial Services Committee, helped craft the act that bears his name.

So are investors, who say the SEC's inaction leaves the economy vulnerable. They worry an ongoing lack of accountability permits credit agencies to return to bad habits.

"(A) higher standard of accountability ... would make rating agencies more diligent about the ratings process and, ultimately, more accountable for sloppy performance," says Ann Yerger, head of the Council of Institutional Investors, a shareholder advocacy group representing pension funds, employee benefit funds, endowments and foundations with combined assets of more than $3 trillion.

Dennis M. Kelleher, CEO of Better Markets, a nonpartisan, nonprofit group pushing to make financial markets fairer and more transparent, agrees: "Credit rating agencies are critical and must be held liable for their failures. The SEC has failed the American people."

S&P, Moody's and smaller rival Fitch for decades have avoided legal liability by suc! cessfully arguing in court case after court case that credit ratings are merely opinions and therefore protected by the First Amendment of the U.S. Constitution.

Dodd-Frank changes that. It requires the SEC hold credit rating agencies to the same standard of "expert liability" that auditors and lawyers face when they give opinions in financial filings with the agency.

The SEC issued a rule in 2010 doing just that. The credit agencies response? They went on strike, threatening to withhold ratings. That would have disrupted credit markets, which rely on the agencies' assessment of how creditworthy securities and the companies that issue them are. Specifically, it would have frozen the asset-backed securities market that, including mortgage-backed securities, accounted for 25% of the nearly $40 trillion debt outstanding at the end of 2013.

SEC officials quickly backed down, saying that they would temporarily not enforce the rule so that credit agencies could have six months to adjust. That was four years ago, with no end in sight.

Credit reporting agencies like this state of affairs, because, although they lost the lobbying war to have the expert liability provision deleted from Dodd-Frank, they so far have won the fight to not have to comply with it.

Kathleen Day is a lecturer at The Johns Hopkins Carey Business School(Photo: Handout)

But as the economy recovers, and debt markets rebound, pension funds and other professional investors grow increasingly impatient with inaction by Congress and the SEC. Investors often are required to use credit ratings in weighing the risk a security will default.

Requiring the expert liability standard in SEC filings is one of several provisions in Dodd-Frank intended both to h! old credi! t agencies accountable and, at the same time, reduce the investing public's reliance on their ratings. For example, the act also requires the SEC and other federal agencies to delete references to credit ratings in regulations.

But while Dodd-Frank aims to reduce investors' reliance on ratings, it does not prevent them from doing so. And for those who do, Dodd-Frank says courts can hold a credit agency financially liable if it committed fraud or acted recklessly in preparing a rating. In other words, when credit agencies act irresponsibly, they can no longer rely on First Amendment protection against suits brought by investors.

"If credit rating agencies are deficient or do a bad job, they should be liable for investor losses. The risk of liability is really the only way to get quality control from them," Kelleher says.

Gregory W. Smith, CEO of the Colorado Public Employees' Retirement Association, agrees but is more sympathetic to the political reality the SEC faces. Unlike most other financial regulators, the SEC's budget is part of Congress's annual funding process. That enables financial industry executives who want less oversight to lobby to keep the agency underfunded and therefore constantly short of the manpower needed to do its job of policing markets and implementing new rules and oversight.

"In a perfect world, the SEC would have all the resources necessary to enforce credit rating agency accountability as it was originally contemplated in Dodd-Frank," Smith says.

Spokesmen for S&P and Moody's declined to comment except to say that they should not be held to the same liability standard that auditors face in SEC filings.

Officials at the SEC won't comment except to say that implementing Dodd-Frank is a top priority, which SEC Chairman Mary Jo White reiterated during recent testimony before the House Financial Services Committee. No specific mention of credit rating agency accountability came up at the hearing. Committee Chairman Jeb Hensarling (R-Texas)! referred! to a spokesman questions about what, if any, oversight his committee has done on the issue. The spokesman pointed to a 15-month-old statement pledging oversight.

A spokesman for the Senate Banking Committee, chaired by Sen. Tim Johnson (D-S.D.), declined comment.

Kathleen Day is a lecturer at The Johns Hopkins Carey Business School with campuses in Baltimore and Washington. Her e-mail is: kathleen.day@jhu.edu. Website: carey.jhu.edu.

How Warren Buffett lost $1 billion

With the first quarter of 2014 officially closed, one stock in the portfolio of Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B) sunk the value by $1 billion. And which one it is will surprise you.

The one tough start to 2014

Coca-Cola (KO) watched its stock price dip 6.4% through the first three months of 2014, and when you consider Buffett has a 400 million shares which were worth $16.5 billion at the beginning of the year, that drop means the position is now worth a staggering $1.1 billion less.

The sales volume at the beloved drink firm fell below analyst expectations when it announced earnings in the middle of February. With the questions swirling surrounding the future success of soft-drinks as Americans and individuals everywhere become more health conscious, many have begun to question the lasting value of Coca-Cola.

What the market is missing

Buffett once said he has "to stick with what I really think I can understand," and troublingly, it seems as though many people have lost sight of the true reality of Coke.

Many people forget Coca-Cola is willing to expand within its circle of competence, beverages, but outside of its own core products. It acquired Vitaminwater for $4.2 billion in 2007, and in February it announced it has taken a 10% stake in the popular Green Mountain Coffee, for $1.25 billion which sent Green Mountain stock soaring up 25%. All of this is to say nothing of its smaller -- but likely pivotal -- brands like Simply and Honest Tea.

In addition, few people realize the willingness of Coca-Cola to return its earnings to its shareholders. In 2013, it reported a net income of $8.6 billion, and it sent $8.5 billion back to its shareholders through dividends and share repurchases.

This is part of the reason why its adjusted earnings per share -- excluding currency and other impacts -- was up 8% even despite its net income falling by 5%.

Buffett himself noted as a result of its buybacks, the total ownership of Coca-Cola by Berkshi! re Hathaway rose from 8.9% to 9.1%. While that may not sound significant, he highlighted "if you think tenths of a percent aren't important, ponder this math: For the four companies [Wells Fargo, American Express, Coca-Cola, and IBM] in aggregate, each increase of one-tenth of a percent in our share of their equity raises Berkshire's share of their annual earnings by $50 million."

All of this is to say, Buffett isn't deterred by the ability of Coke to generate remarkable returns to those who own it, even despite growth that "misses expectations."

Buffett is undeterred

As mentioned earlier, the position's value shrunk and is now worth over $15 billion. But Berkshire Hathaway only paid $1.3 billion for these shares -- meaning Buffett and team are still well in the green when it comes to Coca-Cola.

And when you consider a year ago Buffett remarked "We've never sold a share of Coca-Cola stock, and I wouldn't think of selling a share," the reality is, his billion dollar "loss," is simply one that'll be logged on paper only.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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Saying Yes to Your Kids

My previous column on how to say no to your kids sparked an interesting reaction from one of my Kiplinger colleagues, Stacy Rapacon. Stacy was working on a "Starting Out" column, and one of the sources she interviewed made the point that young adults should ask their parents to help them fund a Roth IRA so they can open an account early on. Stacy suggested that I follow up my column with another on when to say yes to your kids.

SEE ALSO: Three Ways to Teach Kids About Money

Great idea, Stacy. After all, in the real world, it's natural for parents to want to spend money on their children (or let their kids spend their own). The key is to have good reasons for doing so. Here are seven occasions when it's fine to say yes without guilt or reservations:

When kids want to blow their allowance. The main purpose of an allowance is to give children experience in deciding how to spend their money. So if you try to control how every cent should be parceled out, you defeat the purpose. It's fine to set some rules -- I recently wrote about a couple who decided not to let their 6-year-old son spend his allowance on a virtual game (see Teaching Kids to Save). But if your children want to buy a toy that you suspect will soon break, or a video game that they'll soon tire of, or an item of clothing that will quickly be out of style, let them make their own mistakes and learn from the experience.

When they receive gift money. If we're talking about, say, several hundred dollars from a generous grandparent, you might want to put the bulk of it into the bank. But the gift-giver probably wants your kids to have some fun with the money, so let them spend a portion. When my children were young, their grandmother always sent them a birthday check, which we deposited in the bank, plus $1 in cash for each year of their birthday. That was theirs to spend.

When they reach a savings goal. It's tempting to encourage kids to hang on to the money if it has taken them months of doing chores or working at a part-time job to accumulate enough for a new game, an item of sports equipment or a class trip. But enjoying the purchase is the reward for all their efforts, so don't spirit the cash off to the bank or try to talk them out of spending it. Once it's gone, they'll have an incentive to start all over again.

When they make a reasonable request. Let's say you're shopping for back-to-school clothes and your kids ask for a new backpack or a lunch box or a package of glitter pens. Seems to me that the cost of a backpack is a small price to pay if it means they'll be excited about setting off for school. And if they want to stop for lunch at McDonald's after your shopping excursion, why not?

When they're willing to pitch in. Suppose your 13-year-old wants a new video-game system or a tablet or his own computer. You don't object to the item per se, but you don't think it's necessary, or you don't want to foot the entire bill. If he's willing to chip in for a portion of the cost, it's reasonable to say yes to that deal.

When they ask for something that will benefit them in the long run. Kicking in the cash to help children start Roth IRAs with their summer earnings is one example. As long as kids have earnings from a job (income from babysitting or mowing lawns counts), they can contribute up to $5,500 a year or their annual earnings, whichever is less. Another example is paying for college or other post-secondary education. You don't need to bear the entire burden, but I think it's a parent's responsibility to help kids get the training they need to succeed on their own.

When you want to surprise them or share an experience. Part of the fun of being a parent is buying things for your kids or taking them places you enjoy, too. Just make sure that when you say yes, you do it because you want to -- not because you're afraid to say no.

Debt ceiling: When will this soap opera end?

NEW YORK (CNNMoney) Here's how the latest episode of the debt ceiling drama will end: Congress will eventually raise or suspend the country's borrowing limit, probably for as much as a year.

The key word, though, is eventually. They could do it right now if they wanted. But they'll probably drag things out until the end of this month.

That's when Treasury Secretary Jack Lew has warned that the nation's borrowing authority absolutely, positively must be extended or the United States will risk defaulting on some of its obligations in March.

In the meantime, here's what's on tap in the next few weeks:

Republicans grope for a strategy: House Republicans keep saying they're going to demand something in exchange for raising the debt ceiling.

They just can't get agree on what exactly. This week, they ditched the two leading proposals they had been considering. And there's no obvious Plan B yet.

What's more, House Speaker John Boehner has already made it clear that default -- even getting close to it -- is not an option. So if push comes to shove, Boehner may just put a "clean" debt ceiling bill up for a vote and count on Democratic support to pass it.

Treasury starts juggling: This Friday marks the end of the current debt limit suspension.

Effectively, that means Treasury will not be authorized to borrow more money from the public, because the nation's debt will be at its legal limit.

But through the use of special accounting maneuvers, Treasury can temporarily reduce the amount of debt owed to various government funds, and thereby create some "headroom" under the debt limit that will allow it to continue borrowing in the markets.

Treasury has already said it will deploy the first of these maneuvers on Friday so the government may continue to pay all its b! ills in full as they come due.

But the special measures won't buy very much time. Treasury Secretary Lew estimates they will run out by the end of February.

If Congress hasn't acted, Treasury at that point will only be able to pay bills with the cash balance it has on hand plus incoming revenue. That won't be sufficient to meet all the country's obligations for long.

Democrats refuse to negotiate: Even if Republicans do agree on the demands they want to make, President Obama has made it clear he won't negotiate the issue.

That could mean another 11th hour standoff. Or, more likely, it could mean Republicans back down.

Given the political blowback from the government shutdown instigated last fall by a small group of conservatives, there isn't much appetite for more showdowns, especially in an election year.

"Republicans ... have little interest in making too much noise around this event," said Sean West, U.S. policy director for the Eurasia Group, in a note Thursday. "Many privately concede that they will receive little or nothing in return for raising or suspending the debt ceiling."

'Fast Money' Recap: Looking for Bargains

NEW YORK (TheStreet) -- The broader market finished flat on Friday on low volume to end the holiday-shortened trading week. 

On CNBC's "Fast Money" TV show, Stuart Frankel & Company's Steve Grasso said many market participants are looking for a pullback in February or March. 

Carter Braxton Worth, chief market technician and managing director at Oppenheimer & Company, said the last time the stock market increased five years in a row was the period that ended in 2007, and then that was followed by a poor year. He said this current stock rally is getting too extended. 

Josh Brown, a financial adviser at Ritholtz Wealth Management, disagreed. He said the market was essentially flat in 2011 and the real bull market is only about two years old. He said bull runs typically end when the S&P 500's PE ratio is near 17 or 18. Currently, we're near 16.  Jim Lebenthal, CFO and CIO of Lebenthal & Company, said a pullback is likely in the first quarter of 2014. He advised investors to just take some profits, but not to get out of stocks entirely or sell them short.  Twitter (TWTR) fell 13% and Worth said it looks like its headed to the mid-$50s. Grasso agreed. Michael Babich, CEO and president of Insys Therapeutics (INSY), was a guest on the show. He said its new product allows cancer patients to spray pain relief under their tongues for quicker absorption. The stock is up 400% from its initial public offering and the proceeds are being used to boost projects and research and development staff, he said.  Lebenthal likes Target (TGT) as an investment.  Grasso said Ford (F) should begin to outperform and he's a buyer.  Brown said he is bullish on the e-cigarette trend but doesn't think any of the companies are suitable investments.

Sprint (S) was the first stock on the show's "Pops & Drops" segment. Grasso is staying long both S and T-Mobile U.S. (TMUS).  Delta Air Lines (DAL) fell 3% and Worth said he would take profits.  Barracuda Networks (CUDA) soared 20% and Lebenthal also said investors should take profits.  Baidu (BIDU) jumped 4%. Brown said the stock is likely to run until the Alibaba IPO.  The crew revealed their top contrarian calls for 2014:

Worth said to lighten exposure to Japan through the iShares MSCI Japan ETF (EWJ) and Brown said to buy the Vanguard Materials ETF (VAW) based on rising commodity prices. Lebenthal is a seller of WTI crude oil and is looking for it to hit $70 per barrel based on increased global supply from the U.S. Grasso is buying Abercrombie & Fitch (ANF) with a stop-loss at $30.  For their final trades, Worth is buying Starbucks (SBUX) and Brown said to buy Bank of America (BAC). Lebenthal is buying Exxon Mobil (XOM) and Grasso suggested buying Qualcomm (QCOM).  -- Written by Bret Kenwell in Petoskey, Mich. Follow @BretKenwell Follow TheStreet.com on Twitter and become a fan on Facebook.

Stock quotes in this article: TWTR, INSY, TGT, F, S, TMUS, DAL, CUDA, BIDU, EWJ, VAW, ANF, SBUX, BAC, XOM, QCOM 

Reuters: Bad News Bear Jim Chanos Urges Market Prudence

Prominent short-seller Jim Chanos is probably one of the last true “bad news bears” you will find on Wall Street these days, save for Jim Grant and Nouriel Roubini.

 

Almost everywhere you turn, money managers still are bullish on U.S. equities going into 2014 even after the Standard & Poor’s 500’s 27 percent returns year-to-date and the Nasdaq is back to levels not seen since the height of the dot-com bubble in 1999.“We’re back to a glass half-full environment as opposed to a glass half-empty environment,” Chanos told Reuters during a wide ranging hour-long discussion two weeks ago. “If you’re the typical investor, it’s probably time to be a little bit more cautious.”Chanos, president and founder of Kynikos Associates, admittedly knows it has been a humbling year for his cohort, with some short only funds even closing up shop.But he told Reuters that the market is primed for short-sellers like him and as a result has gone out to raise capital for his mission: “Markets mean-revert and performance mean-reverts and even alpha mean-reverts if at least my last 30 years are any indication.

 

And the time to be doing this is when you feel like the village idiot and not an evil genius, to paraphrase my critics.”Chanos’ bearish views are so well respected that the New York Federal Reserve has even included him as one of the money managers on its investment advisory counsel.

 

By his own admission, Chanos said he tends to be the one most skeptical on the markets.Chanos knows bad news when he sees it as he is known as the man who almost single handedly vindicated short sellers by revealing the ongoing fraud at Enron and WorldCom. And he sounded the alarm bell early on struggling computer giant Hewlett Packard.

 

Just last week, he sent shares of CGI Group Inc., the parent of CGI Federal, which is the main contractor behind the U.S. government&rs! quo;s glitch-plagued HealthCare.gov website, under selling pressure after Newsweek revealed that Chanos had placed a major short position.Chanos spoke about his other shorts including Caterpillar and – yes, just in time for Christmas — coal stocks at the Reuters Global Investment Outlook Summit and even shared some of his observations on the 1 percent and what they owe the rest of us.

 

On the U.S. stock market Chanos: “A few years back, I felt the U.S. was the best house in a bad neighborhood for a cliché hackneyed term and certainly there were better places that I think on a macro basis to be short like China. Our thinking is changed on that now. I think that the U.S. market is pretty fully discounting an awful lot of good news. While one can never be precise on markets and that’s not why my clients pay me, we’re finding many more opportunities (on the short side) in the U.S markets than we found a few years ago. The U.S. market at roughly 1,800 on the S&P is trading at 19 times earnings. I am always sort of befuddled because people use a much lower figure on that…we went back and triple-checked trailing 12-month S&P 500 earnings and they are only $95. A lot of companies report earnings before the bad stuff and we’re talking about GAAP earnings – actually talking about real accounting earnings – they are only $95. So for you to believe that the market is only at 14 times, 15 times next year’s number, you have to make some pretty robust assumptions on earnings growth to get to $95 to that $120 or $125 figure.”Déjà vu all over again.

Continue reading: [blogs.reuters.com]

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Subscribe via Email Subscribe RSS Comments AlbertaSunwapta - 2 hours ago

I've noticing a lot more of the big mercedes SUVs rolling around our town.

further down the article... "Chanos: “At Sotheby’s basically it goes from 10 to 50 seemingly in every cycle since the late 80s. There are some reasons for that — contemporary art is what I call ‘socially acceptable conspicuous consumption.’ "

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Jim Cramer's 'Mad Money' Recap: Major Moves on Lesser News

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NEW YORK (TheStreet) -- The markets are seeing a lot of major moves on very little news, Jim Cramer said on "Mad Money" Tuesday.

Cramer said there's a revaluation of stocks underway, the likes of which we haven't seen in a very long time. He said that certain old-line names are seeing new life and new highs.

Among the big movers: Best Buy (BBY), Boeing (BA) and Bristol-Myers Squibb (BMY). Cramer said Best Buy's comeback from $26 a share to now $42 has been remarkable while Boeing is up 71% for the year, even in the face of early problems with its Dreamliners. Bristol-Myers has popped from $48 to $53 a share in just a few days. Others on Cramer's list include Chipotle Mexican Grill (CMG), Core Labs (CLB) and FedEx (FDX), along with GameStop (GME) and Kimberly-Clark (KMB). Cramer said Chipotle's momentum has returned, while Core Labs has also sprung back to life, as has FedEx, a big beneficiary of the global economy. Meanwhile, GameStop is benefiting from the next generation of console gaming and Kimberly-Clark is seeing lower input costs. Last on Cramer's list of standouts is Schlumberger (SLB), whose shares are up from $71 to $94 a share, and Whirlpool (WHR), which has seen a move from $112 to $148 even with a slowdown in housing. Cramer said all of these are good companies that have gotten even better in recent months. The market is clearly listening. Back From the Dead What ever happened to Cramer's "F.A.D.S. C.A.N." list of growth stocks from 2010? Cramer said the list -- which included F5 Networks (FFIV), Apple (AAPL), Deckers Outdoor (DECK), Salesforce.com (CRM), along with Chipotle Mexican Grill (CMG), Amazon.com (AMZN) and Netflix (NFLX) -- is back from the dead, just in time for Halloween. Chipotle was an unstoppable momentum name until it faltered during the summer of 2012. Since then the momentum is back and this stock has a lot more runway ahead of it, Cramer said. Apple, a holding in Cramer's charitable portfolio, Action Alerts PLUS, also has been working its way back from when shares fell to below $400. With the company delivering a strong line of updated products, Cramer said it's a steal at 8.5 times earnings.

Netflix is up 225% since Cramer recommended it back in 2010, but not before sinking to $54 a share on a series of bad management mistakes. Since then, the mistakes have been rectified; with a host of new exclusive content, subscriber growth is on a tear.

Then there's Deckers, makers of Uggs footwear. Cramer said after losing the eye of investors for several quarters, Deckers shot the lights out this quarter and is seeing its shares steadily rising.

Cramer saved his commentary on the rest of the F.A.D.S. C.A.N. names for after the break. F.A.D.S. C.A.N., Part 2

Continuing his followup on his F.A.D.S. C.A.N. growth stocks from 2010, Cramer offered up his analysis on F5 Networks, Amazon.com and Salesforce.com. Cramer said Salesforce.com, a stock that's up 155% since 2010, continues to power higher on every pull back. He said the company is stronger than ever with $3 billion in sales. Amazon.com is the only name in the list that's not back from the dead, as this stock never died in the first place. Cramer said Amazon just keeps coming at you like a zombie, crushing competitors while growing its sales and expanding its gross margins in the face of continuing pessimism. Finally, there's F5, the network equipment maker that also keeps making comebacks from anything that's thrown at it. Cramer noted this stock fell from $138 to just $67 a share, but has already crawled back to $84 on the back of a new product cycle. Lightning Round In the Lightning Round, Cramer was bullish on Magnum Hunter Resources (MHR) and Southern Company (SO). Cramer was bearish on Federal-Mogul (FDML), Applied Materials (AMAT) and Cisco Systems (CSCO). Off the Charts In the "Off The Charts" segment, Cramer went head to head with colleague Carolyn Boroden over the direction of the markets. Boroden's most recent analysis suggested that its time to get cautious, as the S&P 500 is approaching two ceilings of resistance where the markets could pause or even reverse course. She identified levels between 1,760 and 1,768 and also between 1,776 and 1781 as the trouble spots to watch for.

Boroden also applies her Fibonacci theory to the timing of the market, looking at the number of days between market moves. Here, her analysis flagged from Oct 28 through Nov 5th as the days when the market is most likely to take its pause.

Boroden and Cramer both agreed that now is an excellent time to take profits, as the market has had a big rally and it's never a mistake to lock in a gain after a big market move. No Huddle Offense

In his "No Huddle Offense" segment, Cramer sounded off on the moronic trading in Apple.

Cramer said the press is always in a race to get the story told, even if they don't yet know what the story is. That's how Apple's stock was able to get hit for $15 a share after the "headlines" reported stalled gross margins. But as soon as investors learned that an accounting change at Apple deferred nearly $1 billion in revenues, the stock immediately took a $21 a share bounce off the bottom. Similar events occurred on another Action Alerts PLUS holding, Eaton (ETN), during its earnings call; investors learned, after the headlines, that orders were on the rise towards the end of the quarter. Cramer said sometimes it makes sense to beat the other guy to the market, but for the most part, jumping in after a company reports, is never a smart move. To watch replays of Cramer's video segments, visit the Mad Money page on CNBC. To sign up for Jim Cramer's free Booyah! newsletter with all of his latest articles and videos please click here. -- Written by Scott Rutt in Washington, D.C. To email Scott about this article, click here: Scott Rutt Follow Scott on Twitter @ScottRutt or get updates on Facebook, ScottRuttDC

At the time of publication, Cramer's Action Alerts PLUS had a position in AAPL, CSCO and ETN. Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC Universal or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money." None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, TheStreet.com or CNBC that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer, nor TheStreet.com, nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser. Some of the stocks mentioned by Mr. Cramer on "Mad Money" are held in Mr. Cramer's Action Alerts PLUS Portfolio. When that is the case, appropriate disclosure is made on the program and in the "Mad Money" recap available on TheStreet.com. The Action Alerts PLUS Portfolio contains all of Mr. Cramer's personal investments in publicly-traded equity securities only, and does not include any mutual fund holdings or other institutionally managed assets, private equity investments, or his holdings in TheStreet.com, Inc. Since March 2005, the Action Alerts PLUS Portfolio has been held by a Trust, the realized profits from which have been pledged to charity. Mr. Cramer retains full investment discretion with respect to all securities contained in the Trust. Mr. Cramer is subject to certain trading restrictions, and must hold all securities in the Action Alerts PLUS Portfolio for at least one month, and is not permitted to buy or sell any security he has spoken about on television or on his radio program for five days following the broadcast.

Whither Japan Stocks: Panasonic, Sony, And Sharp

Last Friday, October 11, was a strong up day for the Tokyo market.  The Nikkei 225 rose 210 yen, or 1.5%, to 14,404, a fourth consecutive up day.

Sony executive vice president and Sony Computer Entertainment president Kazuo Hirai bows to apologize for the massive theft of personal data from users of the company's PlayStation Network and Qriocity online services, at a press conference at the Sony headquarters in Tokyo on May 1, 2011. Sony said on May 1 it would 'shortly' begin restoring its PlayStation Network and Qriocity following a major security breach that compromised millions of users. (Image credit: AFP/Getty Images via @daylife)

(Today, the 15th, it rose slightly to 14,441.)  Boosting the market has been a reversal of the yen's recent strengthening trend which was mainly an adverse market reaction to the Yellen nomination. The Japanese currency is now around 98.5 yen/dollar, close to its recent lows.

At the present level, the Nikkei 225 is off its YTD high of 15,627 set on May 22, but it is even further above the YTD low of 10,487 set on January 23. Short term moving averages have been rising.  My sense, as posted previously, is that further broad market gains are likely.

Amid Friday's general market cheer and rising prices, we note with interest the substantially different performance of the stocks of Japan's three leading consumer electronics companies, Panasonic (OTC:PCRFY), Sony (NYSE:SNE), and Sharp (OTC:SHCAY). All three are in the throes of massive and painful restructurings, on-going market evaluation of which has been the main factor driving their stock prices. Hint for what comes below:  on Friday in Tokyo, Panasonic was up 2.8%, Sony was up 1.05%, and Sharp lost 2%. Today, the 15th, the movement was Panasonic up 0.63%, Sony us 0.99%, and Sharp dropping a further 2.39%.

Last week Panasonic announced that by March 31, 2014 it would completely end production of plasma television panels and stop all related sales globally. Previously the company had targeted exiting this product business a year later, in FY 2014, which ends March 2105. It had already stopped R&D. Now the company decided it would not drag out the withdrawal and would immediately close (and sell) the one factory in Japan located in Amagasaki City, Hyogo Prefecture, still producing the panels.

According to the October 9 Nihon Keizai Shimbun, in the two fiscal years ended March 31, 2013, Panasonic had lost annually over JPY 750 billion (USD 7.7 billion) in the plasma TV business.   This volume of bleeding had to be stopped.  From the mid-2000s Panasonic invested over JPY 500 billion (USD 5.1 billion) in the Amagasaki factory. By now equipment is fully depreciated and the book value of buildings is only JPY 40 billion (USD 408 million). A write-off of this and other costs of the plasma TV business is not expected to prevent Panasonics main business from returning to profits.

Sony was also in the news on October 11, with its CEO Hirai Kazuo declaiming in an interview with the Nihon Keizai Shimbun the ambition to raise Sony's share of the world smartphone market from the current 6th place to 3rd. Hirai is nothing if not ambitious.

Hirai believes Sony can leverage its digital camera and television technology to produce a differentiated, competitive smartphone that can capture market share from Samsung and Apple. Engineers from Sony's camera and TV divisions have been transferred to its smartphone R&D division for the task of producing a market-leading product. "Good products have started to come out," Hirai said.

Sony posits that the global smartphone market will continue to expand by double digits.  In Japan Sony is competing with the iPhone being sold by NTT Docomo.  After one year, Hirai believes Sony's Xperia device is taking market share from Apple. Interestingly, reflecting that operating resources are limited, Hirai hinted that Sony would focus on the domestic and European markets and not attempt a full sales campaign the U.S. and China.

Hirai reported that restructuring continues "according to plan" in Sony's money-losing electronics and television divisions, such that a return to profitability is in sight. In TVs, the restructuring has meant winnowing models and reducing unit production while rolling out the more competitive 4K television model which it is hoped will recapture market share.

Hirai did not comment on Sony's computer sales, but reports are that the company is reducing sales forecast numbers. A Sony SVP in charge of computer sales was quoted in the October 8 Nihon Keizai Shimbun as saying that this fiscal year's sales budget of 6.2 million units, down 18% from the previous year, will be hard to achieve. The forecast had been lowered in August and will probably be lowered again. It seems that consumers have been migrating away from computers to tablets.

Which brings us to Sharp. Friday's stock price drop within an up market, and today's further decline, occurred as the company completed a public offering of 400 million shares. Some 120-128 million of the shares—the maximum allowed—were offered to foreign investors.  Price per share for both domestic and foreign investors was 279 yen.  (The stock closed on Friday at 293 and today at 286.) Sharp is netting some JPY 119.1 billion (USD 1.2 billion) from the new issue.  But the company had hoped to sell the shares for 348 yen and net JPY 149 billion.

Whither Japan's three iconic electronics brands?  No doubt they will all survive.  I do not own any of them but if I did it would be Panasonic.  As I have suggested in earlier posts, of the three companies, Panasonic is in all ways the strongest. It also seems to have been executing—and with a growing sense of urgency–the most effective restructuring strategy.  Here is some more data:

Panasonic:  ADR price $9.72.  10/15 TSE close 961.  PBR 1.85 times. Forward PER 46.85 times.  Dividend yield 1.08%. EPS yield 2.19%. TSE YTD high 993 (5/22); low 502 (1/9).

Sony:  ADR price $19.75.  10/15 TSE close 1,938.  PBR 0.88 times. Forward PER 38.84 times. Dividend yield 1.3%. EPS yield 2.57%. TSE YTD high 2413 (5/22); low 918 (1/9).

Sharp:  ADR price:  $2.89.  10/15 TSE close 286.  PBR 2.79 times. Forward PER 69.65 times.  Dividend yield: nil. Forward EPS yield 1.41%. TSE YTD high 633 (5/21); low 234 (4/3).

Time to Buy the Refiners, Howard Weil Says

The refiners have been beat up, they’ve been thrown out, but they’re not down–at least not today.

REUTERS

Shares of refining companies are on the move today after brokerage firm Howard Weil released a positive note on the sector today. Analysts Blake Fernandez and Richard Roberts explain their reasons for optimism:

We have patiently waited for equity prices to fully digest downward 3Q revisions. Initial indications were that numbers needed to move lower, but the magnitude has taken both buy side and sell side by surprise. The Chevron (CVX) interim update citing weak downstream performance in 3Q should be the final communication the Street needs to fully digest a weak quarter…

After being on the sidelines for the bulk of this year, we feel the relative underperformance in the refining group provides an opportunity to start nibbling. Those feeling they had missed their opportunity to participate in the US energy renaissance may have another shot.

Fernandez and Roberts singled out three stocks for upgrades. Holly and Valero were upgraded to Sector Outperform from Sector Perform, while Marathon was made a Focus Stock.

Shares of Holly (HFC) have gained 1.9% to $43.29 at 10:43 a.m., shares of Marathon (MPC) have risen 1.8% to $68.41, and shares of Valero Energy (VLO) have ticked up 0.6% to $36.77. Tesoro (TSO) has dropped 0.8% to $45.21.

Financial fraud is rampant but most people can't spot it: Survey

Most people in the United States have been targeted by financial fraudsters, while nearly half are unable to spot classic red flags of fraud.

For example, more than 40% of people surveyed for the Financial Fraud and Fraud Susceptibility in the United States report, which was released today, found an annual return of 110% for an investment to be appealing, while 43% felt that way about “fully guaranteed” investments.

“These outsized returns are highly improbable, as are any sort of guaranteed returns,” said Gerri Walsh, president of the Finra Investor Education Foundation, which issued the report.

“Bernie Madoff was offering guaranteed returns of 12%, which isn't even an outsized number,” Ms. Walsh said. “But the market conditions didn't matter. He was offering consistent annual returns.”

The survey found that more than 80% of respondents had been solicited to participate in potentially fraudulent financial schemes, while 40% could not identify some classic red flags of fraud.

The large share of Americans still attracted to persuasive conmen doesn't shock Ms. Walsh. What was more surprising to her was the extent to which defrauded investors underreported their status as victims.

Although 11% of respondents said they lost money when they were prompted by specific types of schemes (such as e-mail scams and free-lunch sales pitches), only 4% admitted to being a victim of a fraud when asked directly. “That's an estimated 60% underreporting rate,” she said.

Of those who admitted to being defrauded, 45% reported the fraud to someone, but the remainder found reasons not to. Among those who chose not report, the most common reason was, they didn't think it would have made a difference, followed by not knowing to whom they should turn. Embarrassment also played a key role in underreporting, according to the survey.

Though the report points to the elderly as easy targets for financial scams, the group willing to take the most risk in hopes of higher returns is well-represented among younger males with high income and education levels.

To combat the encroachment of schemers, the Financial Industry Regulatory Authority Inc. foundation has been engaged in an investor protection campaign for a number of years.

“The first thing consumers need to understand is that many of us are at risk, not just the little old ladies sitting at home all day without a lot of means,” Ms. Walsh said. “We're also trying to educate consumers about the power of persuasion.”

But there's still no tried-and-true method of foreseeing whether that glimmerin! g investment is a diamond in the rough or just a piece of broken glass in the dirt. “When people look at financial fraud, hindsight's always 20/20,” she said.

The foundation surveyed nearly 2,400 U.S. adults 40 and older. Like what you've read?

How To Invest Like David Einhorn

"Sticks and stones may break my bones, but words will never hurt me." 

Try telling that to a company that has just been "Einhorned."

Hedge fund billionaire David Einhorn has the ability to crater a company's share price with the mere mention of its name in one of his closely followed investment presentations. That ability has turned his name into a verb, spawning the expression that a company is being "Einhorned" when targeted by short sellers.  

Einhorn's forensic approach to research has enabled him to sniff out some of the most publicized and successful shorts in the past 10 years. That includes one of the earliest calls and moves on Lehman Brothers' bankruptcy and a short on Green Mountain Coffee (Nasdaq: GMCR) that netted his firm hundreds of millions.

That has turned Einhorn into one of the most popular figures on the Street -- but also one of its most polarizing. Some call him a genius; others oppose his ability to profit from struggling companies. But there is no disputing that Einhorn's Greenlight Capital boasts one of the best performances in the past 20 years, averaging a market-crushing annual return of 20%. That makes Einhorn one of the most influential and closely followed hedge fund billionaires on the Street.

David Einhorn's Bio
Einhorn isn't a stereotypical fund manager like Carl Icahn, Warren Buffett or George Soros. Although he's already a hedge fund Hall of Famer, Einhorn is only 44 years old. His youthful looks belie an incredible intellect and competitive fire that have pushed him to the top of one of the world's most competitive industries.

Einhorn's attention to detail and expertise with numbers showed up early in life, leading him from high school in Wisconsin to the Ivy League at Cornell University, where he graduated with highest honors in 1991. After graduation, Einhorn developed his analytical chops with a four-year run at an investment bank and hedge fund. By the age of 27, he was ready to set out on his own, launching a fund in 1996 with just $1 million under management. 

Einhorn quickly produced a couple of monster years, including a 58% return in 1997 and a 32% in 2001 when the S&P 500 index was crashing. As Einhorn's reputation began growing within the hedge fund community, he took his reputation to another level with a string of amazing shorts that dazzled the Street before and during the financial crisis. That has propelled his net worth to $1.2 billion while his firm's assets under management have grown to $4 billion.

Einhorn is also a noted poker nut, with some serious skills to match. In July 2012, Einhorn finished third at the World Series of Poker, pocketing $4.35 million in prize money that he quickly donated to one of the many charitable foundations he supports.

David Einhorn's Investment Philosophy
Einhorn's rock-star reputation was built on the short sale, which is how he rose to prominence and scored some of his biggest victories. But Einhorn is no one-trick pony. He has also seen big gains playing the long side of the market, including positions in Apple (Nasdaq: AAPL) and Microsoft (Nasdaq: MSFT) that both produced outsize returns. But in either case, whether long or short, Einhorn is known for producing copious amounts of research and incredibly detailed analysis.

When searching for his next big short, Einhorn likes to dig deep into a company's financial statements and business model. He then relies on his forensic approach to research and analysis to identify accounting inconsistencies, unsustainable leverage ratios or unsustainable growth. These are the tools Einhorn used to nail two of his biggest trades, shorting Allied Capital and Lehman Brothers.

But when playing from the long side, Einhorn's approach looks a lot like Buffett's, placing value among his highest priorities. He also likes to invest in industry leaders that enjoy high barriers to entrance, which insulates them from new competition and margin compression. These were the driving forces behind two of Einhorn's biggest longs in the past few years with Microsoft and Apple.

David Einhorn's Big Wins
That scientific approach to numbers and analysis has produced some big victories for Einhorn.

Einhorn's reputation took a quantum leap forward in 2002 after he was invited to speak at a presentation where investors pay to hear leading hedge fund managers discuss their best investment ideas. Einhorn unleashed an attack on Allied Capital, a mid-size private-equity firm, suggesting the company was manipulating its accounting standards and valuing its debt incorrectly. Shares opened 20% lower the next morning, and the legend of Einhorn as a short seller was born.

But it wasn't until a few years later when his reputation as a remarkable analyst and short seller was sealed with what is still considered the best call of his career. That distinction came on Einhorn's early warnings and move on Lehman, using his forensic accounting skills to spot another company that was hugely vulnerable to any kind of weakness in the economy or housing with an overleveraged balance sheet. At the time, that was a hugely contrarian opinion, leading many to think Einhorn was crazy. But those are the trades with the most potential, and in the end, Einhorn netted billions shorting Lehman.

Einhorn followed up that legendary call with another huge short position in 2011, this one in Green Mountain Coffee Roasters, right before shares cratered from more than $100 to less than $20. It was another incredible call where Einhorn placed huge bets on a company directly before its share price cratered. It also added to the growing belief that Einhorn is the most potent short seller on the Street.

That incredible string of winners helped Einhorn's Greenlight Capital Management to deliver an average annual gain of 20% since 1996, one of the best track records in the history of the hedge fund industry.

David Einhorn's Portfolio: What's He Holding Now?
As one of the youngest players in his field, Einhorn remains plenty active in managing his fund. But right now, he is more focused on the long side of the market, with no outstanding shorts that the market is closely watching. His largest position remains Apple, where Einhorn has invested close to $1 billion, accounting for 18% of his portfolio. Einhorn also owns a big stake in General Motors (NYSE: GM) with a stake valued at $568 million, occupying 11% of his portfolio.

Action to Take --> Einhorn is going to be on the hedge fund scene for many years to come, in position to continue capitalizing on his detailed research and analysis from both the long and short side of the plate. But since hedge fund managers are not required to report short positions, it is best to follow Einhorn's buys. Right now, his two biggest positions are Apple and General Motors, which mean this hedge-fund billionaire sees plenty of upside in both companies.

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Report: Merrill Lynch Legal Entity to Be Merged Into Bank of America, Brand Name Retained

Four years after purchasing Merrill Lynch, Bank of America (BAC) said it will end investment bank’s days as a separate legal entity. Bloomberg has the details:

AP

Bank of America Corp., the second-biggest U.S. lender, plans to merge its Merrill Lynch subsidiary into the parent company to reduce complexity and costs.

The move could happen as early as the fourth quarter and means Charlotte, North Carolina-based Bank of America assumes all the investment bank's obligations and debt, Merrill Lynch said in an Aug. 2 filing. Dissolving the legal entity also ends Merrill Lynch's need to file separate regulatory disclosures.

Shares of Bank of America have gained 1% to $14.47 today, while JPMorgan Chase (JPM)  has risen 0.7% to $53.66, Citigroup (C) has ticked up 0.3% to $51.01 and Wells Fargo (WFC) is up 0.3% to $43.13. The Financial Select Sector SPDR ETF (XLF) has gained 0.5% to $20.16.