Wednesday, September 05, 2007

Paperstand (C, AEO, NUE, RYL)

The WSJ’s “Heard on the Street“ column reports that through few investors realize it, banks such as Citigroup (C) could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper. The investment vehicles, known as "conduits" and SIVs, are designed to operate separately from the banks and off their balance sheets. Citigroup, for example, owns about 25% of the mkt for SIVs, representing nearly $100bn of assets under mgmt. The largest Citigroup SIV is Centauri, which had $21bn in outstanding debt as of Feb’07. There is no mention of Centauri in its ‘06 annual filing with the SEC. Yet some investors worry that if vehicles such as Centauri stumble, either failing to sell commercial paper or suffering severe losses in the assets it holds, Citibank could wind up having to help by lending funds to keep the vehicle operating or even taking on some losses. Citigroup has told investors in its SIVs that they are sound and pose no problems. So far, there hasn't been any suggestion of problems with Citigroup's SIV or conduit vehicles. Yet recent turmoil in the commercial-paper mkt, in which some issuers were unable to find buyers for new paper, raised concerns that SIVs and conduits could face problems that would force the banks affiliated with them to step in. This has left bank investors grasping at straws as they try to piece together the risks facing individual banks. Accounting rules don't require banks to separately record anything related to the risk that they will have to loan the entities money to keep them functioning during a mkts crisis. "Any off-balance-sheet issues are traditionally poorly disclosed, so to some extent, you're dependent on the insight that mgmt is willing to provide you and that, frankly, is very limited," says Mark Fitzgibbon, of Sandler O'Neill.

“Inside Track” section reports that 4 insiders at American Eagle Outfitters (AEO) recently disclosed buying about $4.4m of their co's shares at the same time the co's CEO reported selling more than $700K in stock under a prearranged sales plan. Jonathan Moreland, of, said the stock purchases by insiders, including two who had been selling stock at higher prices earlier this year, constitute "definitely a positive buying cluster" barely damaged by the relatively small stock sale by CEO James V. O'Donnell. "Two of the buyers had been sellers relatively recently, so this was quite a reversal of sentiment for them."

Barron’s Online out saying that Nucor (NUE) is poised once again to become a Wall St. darling, thanks to its solid growth story and affordable shares. Nucor is one of the most profitable, low-cost producers in the US. And its stock comes cheap, with the kicker of a 4.7% dividend. The co's EPS will be boosted by new capacity coming online due to acquisitions, generally low supply inventories across the industry, a recover in steel prices and stock buybacks. America's "best run steel company" has a track record of posting strong margins and now trades at a discount to peers rather than a premium, says Citigroup analyst John Hill.

“Inside Scoop” section reports that hedge fund Tontine Capital Partners just unloaded $8.8m worth of stock in Ryland Group (RYL), even with the developer's shares down 48% YTD. Tontine sold 307K shares. Tontine now holds just under 10% of Ryland's stock, or 4.2m shares. The fund still has significant exposure to the home-building sector, according to's Ben Silverman. Silverman says Tontine has over $1.1bn invested in the sector, among names such as KB Homes, Centex and Toll Brothers. The positions add up to 8% of its disclosed equity assets, according to Silverman. Mgmt of Tontine's $13bn portfolio is led by the firm's founder, Jeffrey Gendell, who, Silverman says, has made some successful contrarian bets in the past. Silverman calls Gendell's firm one to watch: "Tontine is one of the funds that we track very closely and that other hedge funds follow as well." "It's definitely a bearish sign for Ryland, based on Tontine's exposure to the home-building sector as a whole," Silverman says. "At the moment, we don't know if they're selling in other names," he adds.

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