Les Schwab Passes Away

I'm about ten days late on this one:

"When Les Schwab died May 18 at 89, the company he founded from scratch in 1952 had annual sales topping $1.6 billion and 7,700 employees."

"Chief Executive Dick Borgman reaffirmed the company's commitment to running the business the way its namesake did.

"Les had very clear principles about how he wanted the business to operate," he said in an e-mail exchange with The Oregonian. "The best way to ensure continuation of those principles is for the family to retain ownership of the company."

It could be a tricky transition, since both of Schwab's children have died.

His wife of more than 70 years, Dorothy, and four adult grandchildren survive him. All are on Schwab Tire's board. Borgman said they, and he, will rely on the traditions that built the business to carry it forward.

"I plan to continue Les's unrelenting focus on providing world class customer service through extensive employee training and continued employee profit-sharing programs," said Borgman, a longtime Schwab Tire executive named CEO in December.

Schwab shared yearly profits from each store with its managers and staff. That helped produce employees who worked like race car pit crews, rushing out to greet customers on arrival.

Schwab Tire promoted exclusively from within, creating a consistent corporate culture across 410 tire stores in eight states, from Alaska to Utah.

John Dugan, the Comptroller of the Currency (who is responsible for regulating multi-state banks) has made some tough statements about the need to restrict "stated income" mortgages, also know as "liar loans"

"But, what may be suitable in limited circumstances has now become acceptable as
general practice. For subprime loans, stated income has become the rule rather than the
exception, and in a very brief span of time. While this practice was relatively rare just a few
years ago, last year nearly 50 percent of all subprime loans relied on stated income."

"Art"

The Daily Reckoning continues to tie it all together, people with too much money doing silly things with it:

"Of course, Blackstone couldn't do this unless there were plenty of people
with plenty of money to throw around on this sort of stuff. We have not
only more evidence of that in today's news...we also have an explanation.

For the evidence, we have a report from last week's art sales - that hit
new records of absurdity. Can you imagine paying $70 million for one of
Andy Warhol's slick inventions? Well, someone did. And others spent
millions more on other works of art. How did they know they were valuable
works of art...and not just silly pieces of pop trash? Ah...ah...ah...how
did they know these objects had VALUE...and not merely prices?
Ah...ah...ah..."

Time for a Diet

John Mauldin shows us where inflation lives:

"Few people I know slice and dice the details in the data better than good friend Greg Weldon (www.weldononline.com). Let's look at some of the tidbits he found buried in the CPI data.

Food at home prices (different than restaurants) are rising at a three-month rate of over 8.6%, up from only 0.8% in January. Alcoholic beverages (!) are up 7.1% on a three-month basis versus 2% in January (bad news for bud Art Cashin and the Friends of Fermentation at the NYSE). Ditto for meat, poultry, fish, and eggs at 10.1%! Overall, the three-month rate for CPI food has spiked to 6.4% since being at 2.1% in January.

For most of the country, food and energy are at the core of our expenses. When we spend more on food and energy, we have less to spend on other goods and services."

USG in Barron's

Barron's has a good article about USG this week:

"Building for the Future by Dimitra Defotis

Summary: Wallboard maker USG Corp. (USG) emerged from asbestos litigation-induced bankruptcy last year just as the housing market peaked. From $11.05 in 2005, USG hopes to make $2/share in 2007-8. While USG's share price halved commensurately to $48, other builder suppliers like American Standard (ASD), Masco (MAS) and Owens-Corning (OC) have weathered the housing slump better because USG is so strongly identified with wallboard. Gypsum market demand should fall 10% this year, and y/y prices were down 9%; USG controls 30% of the industry. Yet diversification efforts have made just 45% of USG's $5.8 billion revenues derive from new homes; the rest comes from sturdier residential remodeling (15%) and commercial construction (40%) markets. USG invested $900 million+ in faster production facilities, expanded product lines, and reduced wallboard output 20% to stem price declines -- but also used the drop in prices to acquire businesses like a lower-cost Mexican manufacturer and L&W Supply distributors. Warren Buffett's Berkshire Hathaway believes in USG's value; it owns 17% and counting. Barron's Bottom Line: Bulls say when the housing market turns EPS could triple, doubling shares back up to $90."

Everyone Feels Invincible

According to Merrill:

" In a speech in Europe last week Bank of America CEO Lewis, after celebrating his firm's ability to arrange large, complex financial transactions added in response to a question later: "We are close to a time when we'll look back and say we did some stupid things…We need a little more sanity in a period in which everyone feels invincible and thinks this is different."

"Zaitech"

Economist Ed Yardini adds an important new risk to his risk list:

"(3--new item) “Zaitech” (Financial Engineering): The concern is that abundant and cheap credit is fueling the private equity bonfire. More than five years into the current economic expansion, company balance sheets are becoming increasingly leveraged with debt. This is bound to exacerbate the next recession, which will eventually occur.

Larry Fink, BlackRock’s chief, told the FT (4/26) that “[l]enders to highly indebted companies are making the same mistakes that undermined the US subprime mortgage market.” So the leveraged loan market is likely to become “tomorrow’s problem.” According to the WSJ (3/31), “covenant-lite” loans--with few provisions that protect debtholders--are increasing rapidly. High-yield loan lending rose 65% to a record $216 billion in Q1, as leveraged buyouts fueled the demand for such financing. Reuters reported that loans without any “maintenance financial covenants,” which restrict the amount of additional debt that is permitted, reached a record $29 billion in the last quarter. This is a relatively small amount, but may be a harbinger of much more Zaitech ahead. This is more likely to keep the economic boom and equity bull market going for now than to lead to an imminent bust. More than $4 trillion in M&A deals occurred in 2006. By early May of this year, there were already over $2 trillion. April was the busiest month in history for such deals.

KU APM Wins RISE Award

KU's Applied Portfolio Management class recently took first place in the Hybrid portfolio class at New York's RISE completion.

APM allows KU students to manage a portfolio of real investments. The students in the class research, write up and make buy and sell decisions for the portfolio, which over time, has produced outstanding returns.