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Here is the article that talks a little about the Visa deal:

http://biz.yahoo.com/ap/080225/visa_ipo.html

I think I'll be getting in early on this one, even right after the IPO. What do you guys think?
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I think I'll be getting in early on this one, even right after the IPO. What do you guys think?

There's an interesting sidenote to the Visa IPO. Most of the current owners are banks and financial institutions, which as we all know have had a horrendous time of late. These Visa owners have also had to set aside funds to cover potential losses from an anti-trust suit against Visa. For example, National City has set aside $292M to cover its prorated portion of the potential damages. But it is estimated that proceeds from the IPO could be around $880M according to some analysts (http://tinyurl.com/36c22e), which more than covers what to date have been non-cash charges.

While Nat City has already taken a charge to cover those lawsuits, this bit from Nat City's 10k seems to indicate that Visa is also setting aside cash for those same lawsuits. So not only would Nat City get the IPO cash, but it appears they will also be let off the hook on the settlement charges. From the 10k:

If the Visa initial public offering is successfully completed, the Corporation is expected to receive cash in partial redemption of its equity interest currently carried at zero value. Further, management expects that the indemnification obligation to Visa will be reduced when Visa either disburses funds for negotiated settlements, or funds an escrow account designated for settlement of covered litigation. Management expects that the gain to be realized from redemption of Visa shares will more than exceed the indemnification obligations recorded to date.

Somebody correct me if I'm wrong, but Nat City is assigning no value to Visa shares that could be worth $880M, plus they look to reverse a $292M non-cash charge. In any event, the Visa owners are poised to make out quite nicely from the IPO.

Now there is debate as to whether the Visa IPO is already baked into the member banks share prices, but I was talking to a friend of mine who works for another such bank and he feels the market is not fully appreciating the full impact of the IPO. He further stated that right now, banks are throwing every bit of bad news they can into the hopper, figuring the market hates banks anyway, so they may as well air out all the dirty laundry now. Keep in mind that this is just mid-level corporate scuttlebutt, but it indicates that once the bad news stops, there could be smooth sailing thereafter. The IPO could provide the initial tailwind.

Other major Visa shareholders include Bank Of America (BAC), Wells Fargo (WFC), JP Morgan (JPM) and Wachovia (WB). I have not read through their SEC filings to see if they read the same as National City, but I think it's something to look at if one is interested in the Visa IPO.

Paul
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Sounds like an investment in one of these banks might be an better option?

Calvin
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Calvin, you might be right. BAC looks pretty tempting right now, with its 6% dividend yield. I already own WFC.

Paul
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Hey Paul, thanks for the insight into this Visa deal. You really hit the nail on the head and think you may be on to something. I don't think the market has caught on to this yet and I think you may be right about this deal giving some of these banks a nice push upward, especially the quality banks like Wells Fargo.

Getting kind of off topic here I want to ask your opinion regarding the overall market. I heard on the news recently that a large bulk of ARMs are expected to adjust a couple months from now. Analyst Meredith Whitney of Oppenheimer, expects a lot more bad news to come in the financial sector on top of this. I know a lot of people have mixed feelings right now but I just wanted to get your quick opinion on where the general market might be headed over the next 3 to 6 months.

Thanks
Marcus
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The real question seems to me to be how much of this pending bad news has already been priced into financial and housing stocks? A Citibank analyst also said something today or yesterday about more writeoffs coming from Bank of America and others, but the market seems to have shrugged most of this off.

Most of the impending writeoffs have already been discounted by the market, but there could be other bad news lurking about that hasn't been uncovered yet.

Paul
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I too am interested in this particular IPO. Mastercard certainly has done well since it's debut a couple years ago, up about five-fold, if I recall correctly. And Visa has an even greater market share. As mentioned in earlier posts, Visa isn't on the hook for defaults, since it's the banks that issue the cards that have the exposure to defaults (Amex and Discover are different in that they are also the banks that provide the credit for their cards).

I have the opportunity to particpate in the IPO through Fidelity, and have downloaded the prospectus. Still wallowing through all the verbiage, and would appreciate the perspective that other eyes might bring to the task of due diligence on this one. If anyone would like a copy, just drop me an email (submit a reply to this message but check the email option only), and I'll gladly forward you the pdf file. While I haven't read enough to come to any conclusions, it would seem this could be a great investment for the long term.

While a recession would undoubtably curb consumer spending, we're also reading that consumers are turning to their credit cards to make payments for essentials as funds become tighter. For a company like Visa that generates revenue on size and quantity of transactions, this could be good news, even though overall spending may mitigate somewhat. Bottom line, this seems like an interesting space to be in.

Not sure if others saw this tidbit in the news, but it seems to confirm some of the concern that Paul mentioned. I would think there's still more pain ahead for the economy, and for homebuilders and banks in particular: http://www.cbsnews.com/stories/2008/02/26/national/main3877652.shtml

<snip>
(AP) The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday. [...]

"You have more people going into default and a higher percentage of the properties going back to the banks," said Rick Sharga, RealtyTrac's vice president of marketing. [...]

Attempts to help struggling home owners have fallen short.

"The loan workout modification programs aren't having a significant material effect on keeping properties from going back to the banks," Sharga said.

One dramatic trend last month was a 90 percent spike in the number of properties that were repossessed by banks, compared to January 2007.

"It suggests that there's little or no equity in a lot of these homes, because they're not even being sold to investors at auctions, and it suggests a continuing weakness in a lot of markets in terms of real estate sales," Sharga said. [...]

A wave of adjustable rate mortgage resets expected in May and June threatens to push many other homeowners into default.

</snip>

Regards,
Derek
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I just wanted to get your quick opinion on where the general market might be headed over the next 3 to 6 months.

I wish I knew. We're at a very tricky point in the economic cycle and it could go either way. I do believe this is a very good point to buy for long term investors, but trying to predict the next six to twelve months is not something I'm prepared to to. Sorry I can't be of more help.

Take care,

Paul
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I'm with Paul. It's near well impossible to tell where the market will go over the next 3-6 months at any time, but it's even more difficult today.

But don't let this scare you out of picking up some bargain stocks. They may go even lower in the short term, but right now I think Whole Foods (just above a 52-week low), Bank of America, Wells Fargo, 3M and some others look pretty good. BWLD too.

Paul
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