Stephen’s Posterous

Rearden Commerce has raised an additional $40 million in a Series F funding from JPMorgan Chase. This brings Rearden’s total funding up to $240 million.

Rearden recently let go roughly 60 employees from a staff of 335 employees (or 18 percent), following a round of layoffs last November of around 10 percent, 40 employees, of the company’s staff.

Rearden is hoping for an IPO, but the company wants to be profitable first. Rearden is known in the corporate world, offering its services to more than 5,000 corporations, and over 2 million individual employees using the service.

Rearden offers enterprises an automated personal assistant that helps their employees organize any sort of travel-related task. They can set their profile up with the types of restaurants they like, whether they like aisle or window seats, and their preferred car provider, and Rearden will book all aspects of their trip for them.

Rearden also launched a mobile version of its service. Rearden had a great year in 2008, raising $100 million in funding, growing the company’s client and user base and expanding into the mobile space.

Rearden also acquired Global Ground Automation to assist with limousine and other ground transportation reservations, and ExpenseWire to simplify expense reporting for users. Rearden is still planning to target consumers directly, after promising to roll out a consumer-facing service for the past few years.

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Jamie Dimon has never been one to shy away from making the occasional comment to stir the pot. But the JPMorgan chief outdid himself when discussing the bank’s first-quarter earnings, taking the opportunity to land multiple punches on government policy. He might not always have that luxury.

First, he dubbed the Troubled Asset Relief Programme the “Tarp baby” and a “scarlet letter”, a public mark of shame. Unsurprisingly, he said JPMorgan wants to pay back the $25bn it received from the US Treasury and could do so tomorrow if regulators gave the go-ahead.

Dimon even put one over on Goldman Sachs, claiming JPMorgan could reimburse the government without having to raise more capital, again assuming regulators agreed.

He’s not alone in condemning Tarp: US Bancorp boss Richard Davis recently called it lousy and Wells Fargo chairman Dick Kovacevich attacked Washington’s decision to add punitive features to it retroactively.

Dimon didn’t stop there, though. He also took issue with the Public-Private Investment Programme designed to remove problem assets from bank books. Granted, he said it could be of use for the financial system, but called it “irrelevant” for JPMorgan, asserting the bank wouldn’t take part.

Refusing to sell any of its dodgy assets is a way to underline his belief in the bank’s risk management and pricing, which has held up pretty well so far. That’s also why he described the recent softening of mark-to-market accounting rules as “a hullabaloo about nothing”. In any event, he could probably change his mind about selling into PPIP without much backlash should he need to.

But it’s his decision not to be a PPIP buyer that will raise more eyebrows. With government-funded leverage, the programme could be a big money-spinner. But, says Dimon: “We’re not going to borrow from the Federal government. We’ve learned our lesson about that”, another shot at retroactive Tarp restrictions.

Throw in a stout defence of bank lending volumes and an implication that FDIC-guaranteed bonds do little for JPMorgan’s cost of funds, and Dimon got a fair bit off his chest.

Of course, it helps to have strong earnings, $2.1bn for the first quarter and a strong balance sheet even without Tarp as cover to throw the punches. But Dimon probably shouldn’t make a habit of using Washington as a public punchbag.

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The government’s capital infusion into banks aimed at getting them lending again has achieved only part of its goal, according to a monthly bank lending survey released by the Treasury Department today.

While the banks gave out more home mortgages in February than in January in 2009, they extended less credit to businesses for such purposes as capital expenditure and acquisitions, the survey shows.

The survey reviewed data reported by 21 banks including Bank of America, JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group and Morgan Stanley & Co. It found that the median increase in home mortgage lending from January to February was 35% among the banks, showing that lower mortgage rates had spurred demand for such loans.

But commercial and industrial lending saw a median decrease of 13% for new commitments and a 14% decline for renewal of existing accounts.

“Uncertain economic conditions have resulted in borrowers reducing expenses, paying down debt, and delaying capital expenditure,” the Treasury said in a report. “Also contributing to the lower demand was lower overall merger and acquisition activity.” The survey didn’t break down business lending for different purposes.

Bank of America leads the banks with highest amount of both loan renewal and new commitments, lending $11.7 billion and $10.2 billion, respectively in February. JPMorgan comes in second, with $10.7 billion in loan renewal and $8.9 billion in new lending. Wells Fargo is a solid third, with $9 billion in loan renewal and $4.8 billion in new lending.

By comparison, three other large banks lent much less in February, with $2 billion in new loans for Morgan Stanley, $422 million for Goldman Sachs, and $416 million for Citigroup.

“New loan origination has been substantially limited as the current economic environment makes very few deals viable,” Citigroup said in a report to the Treasury.

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Since JPMorgan Chase has sailed through the credit crisis, while famous Wall Street houses have foundered all around it, the reputation of Jamie Dimon, JPMorgan's chief executive, has soared to new heights.

In The House of Dimon, Patricia Crisafulli seems determined to make it soar even higher. She describes Mr. Dimon as "skilled," "gifted," "driven," a "talent magnet" and a "Dimon in the rough." And that's just for starters. She quotes others who describe him as "interesting and impressive," "performance-oriented" and the hardest worker in his company.

But just because praise is fulsome doesn't make it untrue. And whether or not we're seeing the whole picture in "The House of Dimon," anyone who reads Ms. Crisafulli's fiduciary love letter will take away some valuable lessons in running a bank or, for that matter, a business.

How has giant JPMorgan Chase weathered the financial storm while giant Citigroup was overwhelmed by it? The simple answer, to judge by Ms. Crisafulli's book, is that Morgan has been run by a seven-day-a-week number-cruncher who interrogates managers about the risk exposures in individual transactions. Citi, meanwhile, sailed into the howling winds with a lawyer on the bridge.

The master, commander and lawyer atop Citigroup, CEO Charles Prince, missed the signals on the deteriorating housing market and allowed risks to pile up in off-balance-sheet structured investment vehicles, SIVs. He was forced out of Citi in 2007.

A year before, Mr. Dimon's JPMorgan, he had taken over as CEO in 2005, had begun aggressively reducing its exposure to subprime mortgages after Mr. Dimon and others at the bank saw rising default rates at other, less-careful lenders. And Morgan had no use for SIVs.

Tragically for Citi shareholders and the taxpayers who have been forced to invest alongside them, Mr. Dimon might have helped Citi avert such wreckage. In 1986, Mr. Dimon, Sandy Weill and a group of colleagues from New York banking, calling themselves "refugees from bureaucracy," got started with a struggling consumer finance company called Commercial Credit.

They turned it around and set out on an acquisition spree, with Mr. Dimon responsible for integrating the new firms and whipping them into shape. The result was a dynamic cluster of financial companies that eventually merged with Citibank to create Citigroup. Mr. Dimon worked alongside Mr. Weill at Citi until he was forced out of the company in 1998.

Such valuable experience made Mr. Dimon "destined" for his job at JPMorgan, according to Ms. Crisafulli, and she may be right. In her telling, the Morgan chief is exactly what shareholders need and want. He spends 80 hours a week examining and refining the operations of the firm, in constant communication with subordinates in various units.

Usually he is asking for numbers, and when he doesn't get them, he writes down the information he is owed on a piece of paper that remains folded in his pocket. When he gets the data he is waiting for, he crosses the item off his list. A former colleague describes the executive culture that Mr. Dimon learned while working for Mr. Weill: "If there is a problem and you tell me, it's our problem. If there is a problem and you don't tell me, it's your problem and you don't want to have a problem!"

One problem Mr. Dimon does not appear to have is a weakness for $1,400 wastebaskets and $87,000 area rugs. When he took over as CEO of Bank One in 2000, he took a relatively modest office among the senior managers and canceled a planned renovation of the executive floor. His cost-cutting was so thorough that he personally called vendors to reduce the firm's phone bill.

When competitive pressures convinced him that bank branches needed to be open longer hours, he was told that longer days would hurt employee morale. Mr. Dimon tells Ms. Crisafulli that he responded by saying, "I don't give a sh -- about employee morale." He quickly adds: "I didn't mean that. What I meant was . . . you've got to compete. Never stop doing the right thing for the business to save a few bucks. Working hard and winning in the marketplace boosts employee morale."

Mr. Dimon also cut executive pay that wasn't tied to performance. To help get decisions made more quickly, he shrank Bank One's board from 22 members to 14. Most important, he sought to prepare the institution for "a rainy day" in credit markets.

Mr. Dimon tells Ms. Crisafulli that when he took over at Bank One, at the height of the dot-com bubble, he was "terrified by the peak of the market." He set about increasing the bank's reserves for loan losses while raising its lending standards. This healthy sense of fear was in short supply nearly everywhere, to say the least, during the recent housing bubble.

In 2004, Bank One merged with JPMorgan Chase. Upon becoming president of the combined entity, Mr. Dimon cut pay, country-club memberships, first-class airline tickets and generous outsourcing contracts, and he cut jobs as well.

When he became CEO the following year, he continued to make sure that the company was prepared for the worst. Thus when government officials came calling in 2008, looking to save an ailing Bear Stearns, Mr. Dimon was in a strong position.

He succeeded in buying Bear for $1.2 billion while the Fed put taxpayers on the hook for $29 billion of Bear's questionable assets. Mr. Dimon was also able to snap up some of Washington Mutual's assets on the cheap when it failed last fall and was taken over by the FDIC.

If Ms. Crisafulli's portrait in "The House of Dimon" is even close to accurate, we appear to have, in Jamie Dimon, a man at the top of a mega-bank who seems never to have grown comfortable with the idea that his firm was too big to fail. And that may be why it didn't.

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Despite a fabled brand name and an affluent, free-spending clientele that is the envy of the charge-and credit-card business, American Express has gotten caught in the same downward vortex as the rest of global financial industry.

Indeed, its once-highflying stock crashed to under 10 in early March 2009 from more than 50 last spring, before rebounding to 18.83 on Aparil 9, 2009. Negatives seem to abound. A poor economy caused card usage, both business and personal, to slow, and in some categories, to drop.

Amex credit-card delinquencies and charge-offs hurtled to higher levels both in the second half of 2008 and the first two months of this year. And an ill-fated company decision to push credit cards on folks with multiple mortgages resulted in Amex dramatically increasing its exposure to customers in the epicenter of the home-price collapse in California and Florida.

Not even American Express (ticker: AXP) thinks things will improve much for at least the next three quarters, or so Amex Chairman and CEO Kenneth Chenault said in recent shareholder communications; company officials were unavailable to comment to Barron's, since Amex is in a "quiet period" before releasing first-quarter earnings.

Yet American Express' outlook isn't nearly as hopeless as is commonly thought on Wall Street. For one thing, unlike its peers, the company gets the bulk of its revenue and earnings from fee income generated by transaction volume, not the extension of credit. This is because charge cards, which are supposed to be paid off monthly, make up a substantial share of American Express' volume. AmEx therefore has substantially less credit risk.

Likewise, the company has addressed its credit-card mistakes with some vigor since the fall, and should be able to stem the surge in defaults in the next couple of quarters. Not least, with the help of various government bailout programs, AmEx seems to have ample liquidity to ride out the current economic downturn without having to dilute shareholders by selling stock.

To be sure, plenty of uncertainties remain for the New York-based company. The outlook for home prices and unemployment levels weighs heavily on any credit-card lender like AmEx, and remains a wild card in a weakening economy. As a result, analysts' estimates for AmEx are all over the place.

Consensus forecasts for this year vary from a profit of $1.65 a share to a loss of $1.11, with the average of 19 estimates coming in at 55 cents. Next year has spawned even wilder inconsistencies in earnings forecasts. The average forecast of $1.16 includes high and low estimates of $2.79 and negative 27 cents.

Yet William Ryan of the financial-industry research boutique Portales Partners recently issued a Buy on the stock at 15, after rating AmEx a Hold since it traded above 60 in July 2007. He reasoned that even with higher credit-card charge-offs coming in the near term, the stock is a great buy in the longer term.

"Look, we never know until after the fact when the inflection point comes, as low valuation finally trumps near-term fundamentals," Ryan says. "Most people are going to miss the party if they wait for the turn in credit losses."

Ryan and Portales refrain from giving out target prices. But an analyst at a large, low-profile hedge fund that has been loading up on American Express wasn't so constrained. "I think AmEx is at least a double over the next year or two," he avers.

Much of Amex's resilence to tough times comes from a business model that emphasizes lower-risk transaction-fee volume rather than lending, according to Fox-Pitt Kelton analyst Bill Carcache. Last year, for example, AmEx cardholders used their charge and credit cards to buy $683 billion worth of goods and services, a volume that dwarfed that of their competitors.

Chief among the transaction fees generated by this prodigious volume is the industry-high 2.5% fee that AmEx typically charges merchants for access to AmEx's big-spending cardholder population.

AmEx gets to keep the bulk of this fee income, since unlike most card sponsors, the company runs a closed-loop network in which it issues and markets cards, handles all transaction processing and even "acquires" and directly pays off all its merchants around the globe. Most bank issuers have to share their merchant fees with the likes of Visa (V), MasterCard (MA) and First Data.

Credit risk from customers stiffing credit-card companies looms smaller at AmEx. It had extended $72 billion to cardholders as of year-end 2008, less than half the total in cardholder receivables carried by competitors Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM).

Much of the investor concern over AmEx arises from the sudden surge in delinquencies and, even more damaging, loan charge-offs in excess of the company's competitors. This wasn't supposed to happen at American Express, given the company's more affluent customer base.

Yet after lagging behind industry averages for most of 2008, charge-offs at AmEx began to skyrocket in the fourth quarter, according to closely watched monthly performance data taken from the company's major credit-card-receivables securitization. By February of this year, charge-offs in the AmEx trust had vaulted to 9.31%, far above the industry's monthly average of 7.76%.

The jump in AmEx loan defaults, however, may not be as telling as it first appears. The rates of late have been pushed higher by a wicked denominator effect, as management began reducing outstanding credit to U.S. consumers in the second half of last year by cutting credit lines and raising interest rates and fees on accounts. The company even offered some account holders with outstanding balances a $300 gift card in exchange for closing the accounts.

The efforts earned AmEx some bad press for its hard-nosed tactics but enabled the company to reduce its U.S. credit-card receivables total (the denominator of the charge-off data) to $57.8 billion at the end of February from $65.9 billion at year-end 2007. This also magnifies the default rate vis-á-vis peers who were less aggressive in paring back their credit exposures.

Other factors also may work to blunt the recent vertiginous rise in AmEx's U.S. charge-offs. After closely examining the February trust data, Portales' Bill Ryan sees some favorable developments. While charge-offs surged in the month, loan delinquencies, the raw material for future charge-offs or defaults, were far better-behaved.

Total delinquencies in the trust rose just 12 basis points, 12 hundredths of a percentage point, to 5.40% of total U.S. credit-card receivables or borrowing, compared with a sequential monthly jump of 42 basis points in January. But even more telling, according to Ryan, was the fact that in February, early-stage (31-to-60-day) delinquencies actually dropped from the month before by nine basis points, to 1.38%, while mid-stage (61-to-90-day) delinquencies rose but five basis points, to 1.23%.

Early-stage delinquencies normally drop some in February, for the simple reason that many cardholders labor hard to pay down swollen balances quickly from the holiday season. But the drop this February was larger than usual.

As a student of the credit cycle, Ryan thinks that yet another factor may soon steady AmEx's fortunes. AmEx currently is paying the price for its promiscuous extension of credit and bad underwriting practices of recent years that saw its U.S. card-lending jump from $39.9 billion at the end of 2004 to the aforementioned peak of $65.9 billion at the end of 2007.

AmEx was looking for love in all the wrong places, oblivious as were most Americans of the approaching financial and economic tsunami.

Yet, says Ryan, the losses AmEx is now suffering from bad underwriting decisions tend to be short-lived and violent, compared with losses that creditors suffer from economic weakness, with its attendant rise in unemployment and drop in consumer spending.

"I'm not saying that credit losses at AmEx won't continue to rise some in the months ahead, but the deterioration in charge-offs compared to that of its peers will be tempered somewhat as the underwriting mistakes are quickly washed through AmEx's system," says Ryan.

Liquidity has been yet another concern of investors, about AmEx specifically and the financial industry in general. Beaten-up stock prices in the sector make stock offerings punishingly dilutive to current stockholders. Even more damaging has been the freezing-up of the all-important asset-backed securitization market, which allowed lenders like AmEx to bundle vast hunks of their credit-card receivables and sell them off to investors in the form of bonds.

At the end of last year, such securitizations accounted for some $29 billion of the $72 billion in credit that AmEx had extended to cardholders in both the U.S. and abroad.

After the collapse of global credit markets following the Lehman bankruptcy last September, AmEx, like other U.S. financial institutions, has made ample use of the panoply of U.S. government liquidity and credit facilities to fill in the financing breach. It received an injection of $3.4 billion under the now somewhat notorious Troubled Asset Relief Program.

AmEx also availed itself of $5.9 billion in borrowings under the government-guaranteed Temporary Liquidity Guarantee Program. In addition, AmEx has plenty of unused credit capacity, including $7.4 billion under the TLGP, $8.7 billion under its bank facilities and a $5 billion credit conduit that won't expire for several months, according to a recent report by JPMorgan analyst Andrew Wessel.

All of this has left AmEx with about $25 billion in cash and readily marketable securities, which more than covers its liquidity needs for the next 12 months. They include some $20 billion in long-term debt and asset-based-securitization maturities.

American Express seems to have ample capacity to weather the current financial storm and survive comfortably until charge-offs abate and the all-clear sign is posted for the economy. Among other things, the company recently exhibited its confidence by affirming its current dividend-payout level, which costs it some $200 million a quarter.

And as AmEx recently observed on its Website, its ratio of tangible common equity to risk-weighted assets was 8.5% at year end, "higher than that of most bank holding companies, and all our regulatory ratios are comfortably above the 'well-capitalized' thresholds."

The government facilties eventually will expire. Yet AmEx is hard at work developing other funding sources should its access to traditional capital markets remain difficult. It is now availing itself of retail certificates of deposit pushed by traditional brokerage houses like Merrill Lynch as an investment alternative to high-net worth customers. This program has yielded some $8.8 billion in funding since last fall.

The company also plans to roll out a new program this quarter designed to attract direct deposits to American Express using direct mail, the Internet and other forms of advertising. With the cachet of the American Express name, the company should have no trouble using these channels to replace the securitization market as a source of cheap funding.

Given the necessity of carrying a larger capital base even after the economy improves, AmEx said in its annual report that in the future it expects to deliver a return on equity of more than 20%, instead of meeting its old goal of better-than-33% ROE. Of course, 20% is a return that most companies would die for.

Investors could do a lot worse than shares of American Express, especially at current price levels, even if it no longer aspires to be the fastest car on the track.

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This may be a great time to add shares of Amazon.com to your shopping cart and proceed to checkout.

The stock makes sense because the retailer itself makes sense to smart shoppers. They don't waste valuable gas fighting for a parking space in a massive mall parking lot; they find prices that compete with Wal-Mart's and flirt with the Web's biggest bargains; and they can easily peruse a vast array of merchandise, ranging from gigantic TVs to Elmore Leonard novels to disposable razors. What's more, their purchases tend to get delivered as promised.

The many benefits of the e-tailer's business model are even more apparent in tough times. Amazon's highly automated and centralized operations run at a lower cost than those of traditional retailers, allowing the Seattle company to pass on significant savings to its customers. Rather than truck merchandise to thousands of stores from myriad distribution centers, Amazon picks and packs its items from computerized warehouses where they are shipped direct to a customer's house, just the way founder Jeff Bezos envisioned.

No stores means fewer layers of expense for real estate, employees, inventory and utilities. While traditional outfits like Circuit City and Linens 'N Things have gone belly up, and speculation mounts about the staying power of household names like Sears (ticker: SHLD), among many others, Amazon.com (AMZN) had a strong Christmas season and free cash flow that rose 16% for 2008.

"A lot of consumers are migrating to Amazon," says Walter Price, a veteran technology investor from Allianz Global Investors. "It simply has a better retail model, and it is only getting better," and Bezos has added a couple of kickers, which Price views as options on two nascent Amazon businesses that aren't reflected in the share price.

The e-commerce pioneer always has been pragmatic in finding ways to leverage its operations by running portions of other companies' businesses, from Website check-out services to logistics.

Now, Amazon is taking that a step further by providing Web services, better known these days as "cloud computing." What is cloud computing? It is the outsourcing of information-technology and data-center operations to third parties, mostly by small- and medium-sized companies that choose not to spend their resources to deal with these tasks themselves.

The name cloud derives from the remote ether-like computer space where the outsourced operations take place. Amazon, which has spent more than $2 billion on its systems in the last decade, has divided these services into several parts, including: Amazon Simple DB (databases), Amazon Elastic Compute Cloud (computing capacity) and Amazon Simple Storage (data storage).

Price believes these services could eventually generate hundreds of millions of dollars annually and investors are getting them for almost nothing.

The second kicker is Kindle, a digital-reading device. Its original version was generally well received, but its recently released 2.0 edition has become a hit with consumers. Wall Street analysts estimate the company has sold 350,000 of the devices, which got a plug from Oprah Winfrey last fall. A Kindle runs $359, and it not only generates revenue but protects and promotes Amazon's original business of selling books.

Of course, Amazon's financial performance hasn't gone unnoticed. With a forward-looking price/earnings ratio of 39, you may feel as though you are paying retail for the shares. But valuing them on a cash-flow basis is a more accurate gauge because it takes into account the company's unusually long float period, which allows it to use the cash as working capital.

At a price of 70 on Friday, March 27, 2009, the shares sell at roughly 20 times the company's free cash flow of $1.36 billion, or $3.18 per share, in 2008. That is less than Wal-Mart 's (WMT) free cash flow multiple of 22.6 and Costco 's (COST) 25.4.

Allianz's Price expects free cash flow to grow about 20% annually going forward, without taking potential revenue growth from Kindle or Web services into account. He believes the shares could crack 100 in two to three years, while Piper Jaffray research analyst Gene Munster has a more modest 12-month target of 81 for the stock.

Amazon's business model for billing, inventory and delivery gives the company some unique financial advantages over other retailers. It can carry customer payments on the balance sheet for up to 26 days before it must pay suppliers. The float on that money can help to lower pricing and gives Amazon still more power to grab market share.

"We have a negative operating cycle," Chief Financial Officer Tom Szkutak told investors at a recent Morgan Stanley conference. "So, as we grew, we generated cash from working capital. And we are all about maximizing profit dollars, not individual margins," he said.

"It isn't unreasonable to expect that revenue could double over the next three years," says Price, barring a complete collapse of the economy. Amazon reported 2008 profit of $1.49 a diluted share or $645 million, up 36% from the prior year on $19.17 billion in revenue for fiscal 2008, which was up 28% from 2007.

Because of its other advantages, the e-commerce company tends to follow others' prices without necessarily trying to beat them. "We really want to offer low prices every day...[but breadth of] selection is very key to growth," Szkutak told the conference. Not only does Amazon carry more product categories than ever either through its own e-tail operations or third-party retailers on the site, it also offers more brands and styles per category.

Amazon's strong balance sheet and wide selection stand out even more in this wretched retailing environment, where malls find themselves losing tenants, and tenants find themselves with less and less inventory. Retail sales generally stagnated in 2008 and have dropped nearly 10% for the period December 2008 through February 2009 over the same period a year earlier. With the exception of Wal-Mart, drugstores and warehouse clubs, just about every retail business is off.

That leaves Amazon to pick up the slack. More and more consumers turn to the Web for shopping, with Amazon often the first destination. After a decade of starting their online purchases by searching on Google (GOOG), cybershoppers now make Amazon their default page, knowing that its bots are crawling the Web to identify the lowest prices.

Even e-Bay (EBAY), which tried to compete, recently shifted its focus back toward selling used merchandise. And with less than 10% of all retail sales done over the Internet, there's loads of upside. Price contends that U.S. online sales will account for as much as 20% of total retail sales within the next 10 years.

On top of that, Amazon is grabbing a greater share of online commerce as consumers realize that it is routinely price-competitive, delivers in a timely fashion, and now has arguably the greatest selection of merchandise assembled in one place, albeit in cyberspace, including Wal-Mart.

"E-commerce now starts and ends with Amazon, and eventually it will show up with higher sales," Price says. "As they get more volume, their costs relative to their prices should come down, which should improve their profits over time," he says.

Amazon is also growing overseas. It now ships in six foreign countries, including Germany, Japan and China. For the fourth quarter, international sales of $3.07 billion were 46% of total revenue.

Lower shipping costs also improve the customer's experience. In the early days, Bezos would goose sales with free-shipping promotions. Now he has implemented a "Prime Program" designed to keep shipping costs down while spurring more sales.

For $79 a year, Amazon customers get guaranteed "all-you-can-eat" free shipping on two-day deliveries for most merchandise, excluding bulky items like furniture. Or they can pay $3.99 extra for one-day delivery. Only Amazon can afford to offer those terms and still make a profit because of its huge volume and efficient inventory and shipping operations." Amazon's logistics is its secret sauce," Price says.

One of the reasons Piper's Munster upgraded Amazon to a Buy in early March was a survey his firm conducted that showed 81% of Amazon's customers are satisfied with the retailer, compared to 71% for eBay.

More important, 94% of the respondents said they would recommend the e-tailer to a friend. That score, he says, is reminiscent of Apple 's (AAPL) tally earlier this decade before the iPod, as well as Netflix 's (NFLX) rating prior to its breakthrough. In both cases the scores presaged big runs in the stocks to record highs.

"It's a leading indicator," says Munster. Goldman Sachs analyst James Mitchell was impressed by Amazon's 15% increase in year-over-year gross profit and 9% jump year-over-year in operating profit. The fact that it could grow profitably during one of the worst holiday shopping seasons ever meant Amazon wasn't just "buying" revenue via discounted pricing, noted Mitchell.

Majestic Research predicts Amazon is on track to at least meet expectations on revenue for its first quarter ending March 31, 2009, adding that sales have begun to accelerate and could actually exceed Street estimates for the quarter.

After spending billions to build the technology that drives its retail operation, Amazon, at its heart, is a tech company. As a result, it is always looking for ways to leverage operations, which is why it is pioneering areas like cloud computing. Tech researcher Gartner Research forecasts that, industry wide, this category will reach $56.3 billion in revenue in 2009, a 21.3% gain over 2008. The market is projected to reach $150 billion in 2013.

The notion of trusting your entire enterprise-computing needs to someone else is controversial and meets with resistance by big corporations. But small- to medium-sized companies, especially start-up software developers, embrace the trend. Adam Selipsky, a vice president of Web Services at Amazon, told trade publication Intelligent Enterprise that there are three reasons for companies to switch to its cloud: efficiency, economics and performance.

Start-up software companies are among Amazon's biggest Web-services clients. They can develop code and deliver software using Amazon's delivery infrastructure, paying only for the computing power they use and leaving the data center headaches to Amazon. This allows start-ups to build their businesses without a lot of upfront cost, which is especially attractive during this period of tight capital.

Amazon isn't competing with Nordstrom (JWN) or Sears in this marketplace. It's going up against the likes of IBM (IBM), Google, and Microsoft (MSFT). But Price thinks Amazon has an edge over Google, because Amazon's systems use computer languages that are more open and flexible. Plus, the company is already geared toward handling outsourcing in other parts of its operations, so adding data-center services is just a natural extension, Price argues.

Tech Crunch, an online-technology publication, estimates that 60,000 corporate customers are using Amazon Web Services. Amazon wouldn't confirm that number.

Kindle is another example of Amazon's technology prowess. The electronic book reader is arguably superior to a similar gadget developed by Japanese consumer-electronics giant Sony (SNE). It even has prompted comparisons to Apple's iPod and iTunes. Kindle allows people to carry entire libraries of digital books on one device, and it focuses their selections on Amazon's list of offerings.

It also provides potential growth from the device itself. That won't provide a huge boost to sales in the short term, but the Kindle could improve margins, says JPMorgan Chase analyst Imran Khan. For the iPod, Apple has to pay for intellectual-property rights on songs and movies; and Amazon must pay book publishers for its digital content. But both "playback"devices are proprietary.

According to some analysts, it isn't a stretch to see Kindle's estimated 350,000 unit sales hitting one million this year. Goldman's Mitchell, for one, predicts Amazon may double or triple Kindle sales in 2009 based on demand built not only by the Oprah endorsement, but by an increasingly broad range of book titles, and sales to overseas markets such as Germany and Japan.

If Amazon can build a big Kindle user base, it could raise barriers to entry in the eBook market, lower per-book marketing costs, reduce fulfillment costs, and increase revenue , all of which would lead to higher margins, Khan argues.

Needless to say, fulfillment costs on a digital download are a lot lower than those on a book delivered via an overnight shipper. Fulfillment costs took an 8.3% bite out of Amazon's revenue last fiscal year, whereas the cost of delivering an eBook would account for about 2% to 3% of total revenue.

Khan more conservatively forecasts Amazon to sell another 500,000 Kindles in 2009, adding $63 million in fiscal 2009 revenue, or two cents earnings per share. He predicts Amazon will sell 12 million eBook downloads during the fiscal year. Every two million book downloads equals about a penny a share in annual earnings, Khan says.

There is more than a comparison with Apple; there is compatibility. The Kindle reader application is now available for the Apple iPhone, which will expand Kindle's reach beyond avid book readers. Another potential boon: schools and colleges, if Amazon successfully taps the textbook market.

Of course, there are risks. Just last week the company said it would close three distribution centers, laying off or transferring 210 workers, to fine-tune its business. And whenever investors pay up for growth, there is always the chance that revenue can disappoint.

Amazon is hardly immune from the crash in consumer spending. If it gets much worse, the company will surely suffer. As it becomes a more global entity, foreign-currency swings can have a negative impact on revenue, too.

During the dot-com boom, shopping over the Internet was an exotic experiment. Today, Bezos' Amazon has created an experience that is often more satisfying than shopping at an understaffed mall store with depleted inventories. With more selection, less hassle and faster checkout, and with competitive pricing thrown in, you have the world's best retailer, albeit one whose shares trade at a technology multiple.

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Two Bear Stearns deal veterans are putting out their own shingle.

Denis A. Bovin and Michael J. Urfirer, who together led Bear's aerospace and defense practice, have formed a boutique advisory firm under the name Stone Key Partners. The firm's focus will be in the areas of technology, aerospace and defense.

The move is just the latest sign that the turmoil among Wall Street's major firms is driving some of its best-known talent into the boutique universe. The increased public scrutiny of compensation and other constraints have prompted a number of senior bankers to abandon the big institutions in recent months. Yet few bankers actually start their own firm.

Mr. Bovin, 61 years old, and Mr. Urfirer, 49, say they were emboldened by their clients to make the move. The aerospace and defense franchise the two ran at Bear, which was later bought by J.P. Morgan Chase & Co. in a fire sale was widely viewed as one of the bank's major strengths on the advisory side. The team worked on a number of major deals including Honeywell's $15.6 billion acquisition of AlliedSignal and Raytheon's $9.5 billion purchase of Hughes Electronics.

"We're staying focused on what we've made our names on: high-end strategic advice," Mr. Urfirer said. Stone Key, which the founders said was named for a mythological key said to open up great secrets, has received financial backing from a major New York-based financial firm the two men declined to name.

Stone Key will have offices in New York and Connecticut. In addition to senior management and boards of directors, the firm will also run a proprietary investing arm.  Several members of the Bear team the two men ran will also join Stone Key, and the firm is looking to bring in other senior bankers.

"Given some of what's going on on Wall Street at the moment," Mr. Bovin said, "it appears that there are a bunch of people who are interested in talking to us."

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In recent years the FBR Large Cap Financial Fund has lost a lot of money, but outperformed the vast majority of its peers, in great part because its skipper, David Ellison, ramped up his cash position. The same holds true for FBR Small Cap Financial (FBRUX), which Ellison also runs.

Over the past year, the large-cap fund (FBRFX) was down 31% through March 18, 2009, while besting the Standard & Poor's 500 by 7.6 percentage points and outpacing 83% of its Morningstar peers. None of this is cause for celebration.

But Ellison, 50 years old, whose tenure at Fidelity included learning from the estimable money manager Peter Lynch, maintains there are some very good opportunities in the financials, given their dirt-cheap valuations.

Ellison, who is chief investment officer of FBR Equity Funds, recommends buying a basket of these stocks, rather than picking one or two, though he thinks there is probably downside before things turn around in the sector.

Barron's: You have been very aggressive about raising cash in your financial-services funds. How much cash do you have now in those funds?

Ellison: It has come down a bit. It is about 50% in the small-cap fund, and it is in the high-30s for the large-cap fund.

Why the reduction?

Primarily because some of these stocks were so cheap, relative to book value and relative to assets. I figured if they are all going to go to zero, I wasn't going to have a job anyway. So I might as well see what happens.

How far along is the repairing of the banking system?

The big collapse of the system has been taken off the table, primarily because of the trillions of dollars the government has put into it, along with other things that they have done. So we don't have to worry about a collapse, and that is a big step.

Now, the question is: Will the government allow these banks enough time to earn their way into the appropriate capital ratios and the appropriate reserve positions? Or is the government going to try to rush it?

In what way?

If you were to mark to market everything that the big banks hold on their books, they would all be technically insolvent in terms of their nonperforming assets. But that isn't how the world works. Not everybody is born a millionaire; they have to earn it.

So, in a sense, the banks have to earn their way out of this. If the government makes some adjustments on capital requirements, mark-to-market accounting and a few other things to give the banks more time, they will, in almost every case, be able to earn their way out of this crisis.

What is the outlook for equity investments in the sector?

The government clearly wants to keep as much of the banking system intact as it can, and certainly doesn't have any interest in shutting these big companies down. They want to keep the infrastructure in place. So now the question is: When is new private capital going to start coming into the business?

I'm looking for the first bona fide recapitalization where a company comes in and says, "We have taken our losses, we have circled the wagons, we have taken the appropriate charges, and we are really thin on capital. But we have cut our expenses, downsized our assets, and now we need new capital to grow."

There will be plenty of new shares to buy, and you will have a chance to buy on these recapitalizations. If that works, we have a banking system that can now start to grow again. Once that begins, you have a real opportunity because you have plenty of names to choose from. The valuations aren't as good as they were earlier this month, but you have plenty of opportunities in the sector. It is just a question of not being in a hurry.

So the return of private capital to the banking system is crucial?

Absolutely. The problem is that these banks have lost so much, and they need to have private capital come into the system and create the necessary discipline. In a sense, many of the banks have done a lot already, as they have gone from paying dividends to not paying dividends.

They have gone from thinking about growth to thinking about growing appropriately, and everybody has cut expenses dramatically. The underwriting process is being examined across the entire industry, which is a good thing for the equity players. That means they are setting themselves up for a period of much better loan quality over the next five to 10 years.

There is a widely held view that there are too many banks in the U.S. and that the industry needs more consolidation. Is that an investing theme to look at?

You are going to see more consolidation. The past five or six years were very quiet because, until fairly recently, everyone had been doing well. Nobody has needed to sell and, of course, the banks that did sell did quite well by getting big prices, which haven't been good for the buyers.

If you are a buyer now, you are in position to buy from others' weakness, as opposed to their strength. Their weakness is not having enough capital, pressure from the FDIC [Federal Deposit Insurance Corporation] or whatever.

That is a good thing for people like me because I own the stock. I don't want to see every bank go down, but I see the potential for tremendous opportunities.

Where in particular do you expect to see M&A activity?

For a Bank of America to buy a $2 billion bank doesn't mean much. But for a $3 billion bank to buy a $2 billion bank from the FDIC at no cost and therefore it is incredibly accretive you probably want to own that $3 billion bank.

How is the first quarter shaping up for the banks?

Nonperforming assets will be up and spreads, that is, between the yield on loans and the cost of deposits, will be stable. Fee income is going to be uneven, depending on the type of company. Expense cuts are going to be a little better than expected, because everybody is working really hard to cut expenses.

And these banks are going to have to continue to build their reserves. Nobody is going to really care if they make money, because it is really all about repairing the balance sheet and preserving book value. If you can break even and use all of your core profitability to build reserves and take care of severance costs and charge-offs, that is good.

This year is about getting the balance sheet repaired; last year was trying to figure out how bad it was going to be...and it is bad now.

What is your advice to investors when it comes to bank stocks?

This isn't the get-rich-quick option; it is going to take time. If you have patience and are willing to sit with a portfolio of bank stocks, that makes more sense than buying one or two stocks. I would try to buy 10 to 20 stocks. Having said that, we could give back the recent rally, especially if the quarter is worse than expected or unemployment goes a lot higher or the government does something stupid.

With financial stocks, you make most of your money going from bad to good, not from good to great. The recent rally aside, everybody knows that all of these stocks are near their 52-week lows and that conditions are bad. Everybody is losing money. Companies need government bailouts. So this is as bad as it gets. But things are going to get a lot better. Still, you have to say to yourself that if you buy today, you may go down 20% before you go up 200%.

Where have you been nibbling lately?

In the past couple of months, I have owned and added to names like KeyCorp [KEY]. But as I mentioned, now is the time to buy a portfolio of names, because if I give you one name out of the 10, it would be the one that will underperform. That is the Peter Lynch rule: Give a lot of names, and your chances of being right are pretty good.

Good Advice. So what do you like about KeyCorp, a large regional bank?

KeyCorp isn't quite as cheap as it has been, and the same is true for SunTrust Banks [STI]. But both are true value propositions. There is nothing unique about these companies in the sense that they all have balance-sheet issues and the stocks have come way down. On a price-to-book basis, these banks are trading as low as you are going to get them.

They have cut their dividends, and they have built their reserves. Right now, it is all about what the managements are doing to correct things. They are working on that. A big question for many of these banks is whether their stocks are cheap enough. Another is: Do they have enough capital to survive a severe write-down so they don't have to raise a whole bunch of additional equity that would dilute my equity holding?

What are some other names you like?

JPMorgan Chase [JPM] is in the same boat. It is a little more expensive than KeyCorp or SunTrust, based on book value. But JPMorgan has been very proactive in dealing with reserves. You have heard [CEO] Jamie Dimon speak, as I have, and clearly I want to own that company.

I may not want to own the stock right now, but he is doing everything he can to get to the other side. To me, that is the most important part here; there are managements saying, "OK, now it is time to really get to the other side and we are going to do everything we can to get there." You would be surprised what a company's management can do when it is in full survival mode.

Where does JPMorgan Chase trade on book value?

With the stock at around 26.27 last week, it was trading north of tangible book value, which is about 22 a share.

What about Bank of America [BAC]?

I have been nibbling, although it has gone up a lot recently. But they are doing everything they can [to improve]. We can argue about the yin and yang and all the bad stuff there. But Bank of America trades at about half its book value.

That is a huge discount.

Yes, because everybody thinks it is going to zero. Its book value is $10 or $11 a share. The stock was at 3 earlier this month, and now it is over 7. Unfortunately, it has had a significant move recently, which makes things feel a little different.

I also like Wells Fargo [WFC], one of the better-run companies historically. They have made an acquisition of Wachovia that they are going to have some issues with, notably problem loans. But everybody knows that. And Wells Fargo's management is fully engaged in saving this company as it is.

What about Citigroup [C]?

Citi is a little more complicated. I own some, but you have to watch it like a hawk. It is sort of the Enron of the financial-services industry; there is a lot of stuff going on there. I would not recommend that anybody own it who didn't understand the industry really well.

But you own it?

Yes, but it is a small position, under 1%. I would encourage everybody to own more traditional names where they can understand what is happening with a company. Plus, the government [basically] controls Citi, so you have to wonder what they will do. I have never seen that in my lifetime. As an investor, you are given another metric to look at, which is unknown.

How does this downturn for the banks compare to the one in the late 1980s and early 1990s?

Back then, the quality of the managers wasn't anywhere near as good as it is today in the industry as a whole. Unfortunately, you could argue that, if today's managers were so smart, why did they get into these issues?

Exactly. So what went wrong?

It is called 10 years of a very good economy. On top of that, it was 10 years of these companies trying to compete with each other on making their numbers and looking good on CNBC and everything else. They had to compete on underwriting, on price, on volume. And they had to compete for people who want to get paid a lot of money.

But now we are setting ourselves up for a complete overhaul of the intellectual thought process in the business, which had been corrupted by a good economy. The Fed lowered rates and suddenly everybody could borrow money real cheap. That is when the wheels came off and the regulatory climate became looser and looser.

What does that mean for equity investors?

It is a good thing, because now you are going to see more stable returns, more honest returns, and cleaner returns. For the next five or 10 years, this sector is going to be a good place to be, although it may not be good right now, meaning it could go back down a little bit.

Thanks, Dave.

Source.

US lawmakers have turned protectionism on its head. They seem hell-bent on cutting American bankers down to size. A punishing bonus tax on a large swathe of those working on Wall Street was approved by the House of Representatives on March 19, 2009. That follows an earlier pay cap on the banking elite.

The latest measure would impose a 90% tax on some bonuses. That draconian rate would apply to employees who earned more than $250,000, from companies which took more than $5bn of government rescue money from the Troubled Asset Relief Programme. The tax would be retroactive to December 31, 2008, and would remain in effect until the company paid back the funds.

Even if that proposed tax, or a milder version under consideration in the Senate, doesn’t get signed into law, the best bankers at the likes of Goldman Sachs, Citigroup and JPMorgan Chase probably won’t be waiting to find out.

The anti-protectionism works two ways. It will increase the inbound flow of applicants to foreign-owned banks unaffected by the legislation, and give the employees of those same institutions fewer places to flee. Inside Manhattan, Barclays, Credit Suisse, Deutsche Bank and Nomura must be among those rubbing their hands with glee. As yet, these ambitious firms have dodged the restraints of state ownership.

But London might be an even greater beneficiary of Washington’s outrage. Alistair Darling, the UK Chancellor of the Exchequer, said the UK would not follow the US with a blanket cap on banker pay. The Conservative party plans to campaign on a pledge to raise the tax rate on top earners, but to 45%. In comparison to what’s rolling through the US Congress, that rate sounds appealing.

American citizens won’t be able to escape any new tax by moving, since they have to pay US taxes wherever they live. Non-Americans, even at the affected firms, probably wouldn’t be subject to the proposed 90% surtax.

Still, with London house prices down, and no “Keep Out” signs for foreigners, think Tarp-related visa restrictions in the US, many of those who can choose their continents might soon be thinking the City is something of a safe haven with better job opportunities. As long as the UK doesn’t wind up succumbing to mob rule too.

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