Big Banks Abandon Proprietary Trading

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Goldman Sachs (NYSE: GS) and other big banks have seen the light! After tussling with lawmakers over the controversial issue of proprietary trading during the financial regulation battle, it appears that the big banks are straightening up and preparing to do right.

Business writer extraordinaire Michael Lewis explains on Bloomberg:

Having not merely preserved but bolstered their place at the heart of capitalism -- with little banks failing everywhere, the big keep getting bigger and stronger -- the major Wall Street firms have experienced an epiphany about their relationship to wider society. They don't need to screw people!

Newly able to raise their prices, they want to return to serving their customers, rather than exploiting them. ... In a smaller and less competitive financial industry, it will pay to be the nice guy, and so Goldman Sachs now wants to play nice.

There's only one problem. Just like Lewis' own reaction to his hypothetical explanation of the situation, I don't believe it.

Head-scratcher
But it's definitely happening. Goldman has already decided to disband its prop trading unit, and that unit is being hungrily eyed by firms such as Avenue Capital and KKR (NYSE: KKR). Morgan Stanley (NYSE: MS) and JPMorgan (NYSE: JPM) have announced similar plans as well, and Bank of America (NYSE: BAC) joined the parade today when it announced that it is laying off 20 to 30 of its prop traders.

What's so confounding about it is that the banks had actually won the right to more or less keep some internal trading action via the ability to invest up to 3% of capital in internal hedge funds. They fought tooth and nail to get this concession, and now they all seem to be collectively throwing their hands up and surrendering their victory.

What gives?

Sharks
It's hard to beat Lewis' imagery on this strange situation. He writes:

To see Wall Street turn its back on money is as unsettling as watching a shark's fin veer away, and then sink from view. It leaves you wanting to know where the shark has gone, and why.

And it's similarly hard to argue with his conclusions. After dismissing the highly implausible possibility of the banks simply deciding that it's time to ditch the shark act and start looking out for its clients, Lewis suggests that the movement away from proprietary trading is likely a combination of the fact that prop trading desks were starting to face tougher conditions and the firms have realized that they can run similar activities -- and, more importantly, reap similar profits -- through other parts of the bank. And with regulators bearing down, prop trading, at least under that specific name, is simply becoming a hassle.

Sharks are revered as the frightening rulers of the ocean because of their deadly ruthlessness. In that way, Lewis' imagery is perfect when comparing bankers to the giant fish. The sharks haven't swum away to find a nice spot to peaceably munch on some seaweed. They're just out of sight for the moment, readying for the next swift, deadly attack.

Charlie Munger doesn't have great things to say about Wall Street. Of course, Charlie Munger has plenty to say on a lot of topics.

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Dividend Mania

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As Fools Todd Wenning and Bryan Hinmon pointed out last week, the word "dividends" has received more media mentions than Lady Gaga over the past month.

This isn't surprising. One of the cool things about writing about markets is that you can gauge how investors feel at any given moment based on how readers react to articles. Over the past year, mention the word "dividends" and suddenly you're on everyone's good side. Dividend giants like Annaly Capital (NYSE: NLY), Altria Group (NYSE: MO) and Pfizer (NYSE: PFE) -- companies few cared about two years ago -- have become some of individual investors' favorite stocks.

Why is this?

The main theory I hear batted around is that with bond yields so low, investors who want yield are now forced to search in dividend stocks. It's the only place you find respectable yields. In that case, the reason dividends are so popular is because they're taking on the de facto role of bonds.

This makes sense, but this story might be deeper than that. I think the reason so many investors are suddenly enthralled with dividends is not just because they need a bond substitute, but because their perceptions of stocks have been fundamentally altered.

In the most distilled sense, there are two ways to make money in the stock market: either from dividends, or capital appreciation. Dividends, of course, are when companies write you a check. Capital appreciation -- an increase in a stock's market value -- comes either from earnings growth, or multiple expansion (the market's willingness to pay more for earnings).

For the better part of the past half-century, most investors focused almost entirely on capital appreciation as a way to make money. The hype wasn't about collecting a 3% dividend and compounding it over a lifetime; it was about buying a stock at $10 and selling it at $20, $30, or $40 as soon as humanly possible. You bought low and sold high. That was what the market was all about.

But all of that changed over the past two years. Since the crash of 2008, which sank markets back to levels not seen since 1996, talking about capital appreciation has become a sore subject, if not a sick joke. Given that stocks are now cheaper, that's a completely backwards mentality, but it's not surprising. It's hard to get fired up about capital appreciation when your portfolios has lost value over the past 10-12 years.

And due to our innate tendency to extrapolate past returns into the indefinite future, expectations of future capital appreciation have been chronically flattened. Just look at the P/E ratios on some high-quality stocks like Johnson & Johnson (NYSE: JNJ) and Microsoft (NYSE: MSFT). We're talking nine to 12 times earnings. The market is pricing in what looks like zero expected growth -- which isn't surprising given that both companies' stocks have been stuck in neutral for years. In so many cases, investors have all but given up on the possibility of future growth.

But think about what that means. If investors don't think they can earn much capital appreciation in the future, then there's only one other reason to be in the stock market: dividends.

That, I think, is why dividends are suddenly so popular. Return expectations have become so depressed that dividends are the only scraps of hope left to cling to.

And frankly, I think that's great news. The time you want to invest is when expectations are low. And today, they're pretty low.

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Fool contributor Morgan Housel owns shares of Altria, Microsoft, and Johnson & Johnson. Microsoft and Pfizer are Motley Fool Inside Value selections. Johnson & Johnson is a Motley Fool Income Investor pick. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Altria Group, Annaly Capital Management, Johnson & Johnson, and Microsoft. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

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Ford's Deceptively Simple Strategy

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Netflix Hits $100!David Gardner called Netflix in 2004 at $15.42. He’s up 684% as of July 13th. See what David’s recommending that you buy NEXT.

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Writing for the Fool has some cool benefits. One of those benefits came my way last week, when I had an opportunity to spend a few minutes talking with Ford (NYSE: F) CEO Alan Mulally.

I really enjoyed the conversation -- Mulally's enthusiasm is infectious -- and while he didn't tell me anything that would be news to anyone who has followed the company's turnaround closely, as a Ford shareholder it was great to hear his obvious excitement about the company's possibilities going forward.

If I were Mulally, I'd be excited too, because Ford is probably as well-positioned as it has ever been -- thanks to a simple-sounding plan with big consequences.

A long road back from the brink of disaster
The basics of Ford's turnaround story are well known: The company famously mortgaged everything it could, including the rights to its famous blue oval logo, to raise the money necessary to fund a turnaround through difficult economic times. That resulted in a horrific $30 billion-plus debt load, but it worked: Ford was able to continue funding product development through the worst of the economic downturn.

Now, the company is generating big profits and winning market share thanks to an array of well-received new vehicles, and management expects its cash level to exceed its remaining debt by the end of next year -- years ahead of schedule.

While the outline of the turnaround plan, originally dubbed "The Way Forward," was under way when Mulally arrived in September 2006, it was Mulally who led the mortgage-everything effort, and who, more than anyone else, took the company from there to here.

Mulally calls his approach "One Ford," and the overriding idea is deceptively simple: to run Ford as one company, with one set of products.

That might sound easy, but in practice, it's fiendishly complicated.

But really, only 20 products?
Speaking in London on Monday, Mulally said that Ford, which had 97 different models under several different brands when he arrived at the company, would eventually reduce its total number of "nameplates" to fewer than 30, perhaps as few as 20. "Fewer brands means you can

put more focus into improving the quality of engineering," Mulally said, according to a Bloomberg report.

These remarks spurred news stories and commentary around the world, so it's worth looking at what Mulally meant. "Brands" and "nameplates" in this context are referring to model lines -- for instance, while there are probably a dozen different variations of the upcoming new Focus for different markets around the world, they all have many parts in common, can be produced on identical assembly lines, and came out of one design and engineering program.

That sounds like a sensible approach, but for years, that's not how it worked. Producing a truly global car model is much more complicated than it sounds, largely because of government regulations. The safety and environmental features a car needs to pass regulatory muster in the European Union are different from, and in some cases conflict with, the features needed to gain approval to sell in the U.S. Add in China, Japan, Australia, Brazil, and other key markets, each of which has its own set of regulations, and you can see the scope of the problem.

This, together with different consumer priorities in different parts of the world, led automakers to fragment their offerings over the years. For a long time, the Ford Focus sold in Europe was a completely different car from the one sold in the U.S. Most automakers do this, to some extent. The Honda (NYSE: HMC) Accord you'll find at a dealer in Germany, for instance, looks very different from the one sold here. In fact, it's a completely different car, one more closely related to the U.S.-market Acura TSX than to the U.S. version of the Accord.

On the other hand, a Toyota (NYSE: TM) Corolla is a Toyota Corolla, no matter where you go -- despite local variations and different versions (hatchback, sedan, coupe, wagon), the basic engineering and production requirements are the same.

The goal of "One Ford": Big profits
That's the model Ford is seeking to emulate. Just as Nokia (NYSE: NOK) may sell dozens of different cell phones around the world, but can't match the profits Apple (Nasdaq: AAPL) generates from the same-wherever-you-go iPhone, Ford plans to have fewer models, each of which is sold in more markets. That will both reduce its fixed costs (allowing for more profit per vehicle) and increase its engineering focus (allowing it to lavish more attention and refinement on each design).

The upcoming Focus, officially revealed on Wednesday in Paris, is the first Ford designed from the ground up with this strategy in mind. Mulally has said that Ford has accelerated development on other products, and the implication is clear -- we should expect a slew of new "world" products over the next few years.

And that, in a nutshell, is Ford's opportunity: an Apple-like small set of top-notch models, each of which represents the company's very best effort in its segment, sold all over the world, with lower fixed costs (and thus higher profits) per car -- coming to market just as the global economy is recovering.

Can you see why Mulally is excited?

Read more of the Fool's global automotive coverage:

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Fool contributor John Rosevear owns shares of Ford and Apple. Nokia is a Motley Fool Inside Value recommendation. Apple and Ford Motor are Motley Fool Stock Advisor picks. The Fool owns shares of Apple. You can try any of our Foolish newsletter services free for 30 days, with no obligation.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

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BP's New CEO Begins With a Shakeup

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Beginning Friday, British oil giant BP's (NYSE: BP) CEO throne will be filled by the third occupant in just over three years. Robert Dudley will replace Tony Hayward, who had taken over for Lord John Browne in May 2007. Mr. Dudley is already making his presence felt by announcing the primary parts of a shakeup in the company's management and structure.

You're well aware that in April BP was the operator of Transocean's (NYSE: RIG) Deepwater Horizon rig when it exploded, burned, and sank in mile-deep Gulf of Mexico water, killing 11 workers and unleashing the mother of all U.S. oil spills. As oil gushed from the Macondo well until July, Hayward was unable to keep his tootsies from his mouth, a trait that ultimately got him the ax. In fairness, he'd likely have been removed anyway, simply for being at BP's top post at the time of the disaster.

Wobbling safety record
Hayward wasn't the first to besmirch BP's safety record. In 2005 a company refinery in Texas City, Texas, exploded, killing 15 workers and injuring 170. But the April tragedy was enough in itself to cause Congressman Henry Waxman, chairman of the Congressional Energy and Commerce committee, to accuse the company of maintaining a culture that "short-changed safety."

The congressman's reaction is particularly sobering when juxtaposed with Hayward's promise as the new CEO in 2007 to focus "like a laser" on safety. Beyond that, I've wondered since April how differently a similar event to BP's tragedy, but involving such clearly well-managed members of Big Oil as ExxonMobil (NYSE: XOM) or maybe Chevron (NYSE: CVX), might have been received.

For now, however, Dudley appears to be cracking the whip at BP, although there remain lots of unknown details to his plans. We do know that he'll create a new safety and risk unit under Mark Bly, who has been the company's top safety executive and headed the preparation of BP's investigation into the Gulf disaster. The unit will be vested with the authority to contest managerial decisions that it believes are risky.

At the same time, Dudley's new plans have caused Andy Inglis, the head of BP's exploration and production unit, to be hit by the same ax that got Hayward. Inglis will relinquish his board position on Halloween -- a date that we probably shouldn't read anything into -- and will leave the company completely at year's end. Inglis was effectively second in command in the company and oversaw drilling in the Gulf, so his departure isn't a surprise.

Changes upstream
Further, the upstream segment (exploration and production) will be divided into exploration, development, and production. Each of the three operations will be overseen by an executive with reporting responsibility directly to Dudley. The expanded structure will replace Inglis' sole control of all upstream activities.

There will also be a review of the company's relationship with its contractors. In the internal analysis of the causes of the Gulf explosion, Bly's team accepted a portion of the blame for the incident, but was only too happy to share the remainder with Transocean and Halliburton (NYSE: HAL), which was responsible for cementing the well.

That's about all we currently know about Dudley's restructuring plans. I, for one, am hopeful that the many blanks that remain will be filled in steadily in the weeks and months ahead. At this point, the laying out of the key parts of his changes is commendable -- especially since it occurred prior to his officially assuming the company's top position. But given Mr. Hayward's early promise to imitate a laser, there's also an element of déjà-vu to the situation.

This could be costly
And while the restructuring blueprints are being completed and implemented, Dudley and his minions will also be occupied by several ongoing probes into the cause of the Gulf accident. The results of these investigations are hardly insignificant: BP could be hit by civil fines of $1,100 for each and every barrel of oil spilled.

Or (and brace yourselves for this one), the amount could rise to $4,300 per barrel if gross negligence is determined to be involved on BP's part. This more serious finding would absolve Anadarko Petroleum (NYSE: APC) and Japan's Mitsui & Co., BP's partners in the well, from responsibility for the accident and related fines.

Preventing nothing
I'll also be watching the ongoing analysis of the key role of the rig's faulty blowout preventer (BOP) in fostering the accident. According to the BP internal report, "...most of

Pick Your Android Poison

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According to many critics,  Google's (Nasdaq: GOOG)  Android mobile platform is just too darn fragmented. Google's deliberately open attitude to hardware and software designs has left Android buyers swamped with a staggering array of choices. Compare the wild jungle of competing Android phones and OS versions to the Apple (Nasdaq: AAPL) iPhone: one phone a year, one software platform for that phone, and one user experience. Simple as Apple pie.

Google is acutely aware of the situation, but the folks at Mountain View are loath to call it a problem. Rather than clamping down on its many partners and demanding tighter design parameters for a more uniform experience, Google is launching a web site to help consumers pick the Android of their dreams.

Known as the Google Phone Gallery, the site makes it a snap to handily compare Android phones from different manufacturers and service providers. Verizon (NYSE: VZ) Droids sit next to Sprint Nextel (NYSE: S) 4G models, Motorola (NYSE: MOT) handsets, Samsung models, and so on.

But the service is far from perfect. It doesn't include every Android phone, and it's not completely accurate. The myTouch 3G I own is listed as running Android version 1.5 with no headphone jack, but the silly thing has been updated since launch, and now comes with a headphone plug and Android 1.6.

The Phone Gallery also isn't entirely necessary. On Google's site, you can only browse around for information. In contrast, when you go to the Best Buy (NYSE: BBY) mobile phone wizard, you'll be able to do the same thing -- and then buy a phone through Best Buy. Imagine that. Google's site does offer some hardcore technical data, like battery specifications, that Best Buy doesn't, but the retail giant's search options are arguably better. (That's a little embarrassing for a search specialist like Google, no?)

These shortcomings aside, the Phone Gallery seems like a productive way to recycle the old Nexus One store, which used to live at the same online address. Choosing an Android will obviously never be as simple as picking an iPhone, but this is a small step in the right direction.

Could Google do more to simplify the Android buying process? Should it do more? Discuss in the comments below.

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Best Buy, Google, and Sprint Nextel are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple and Best Buy are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Apple, Best Buy, and Google. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

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5 Stocks Approaching Greatness

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Netflix Hits $100!David Gardner called Netflix in 2004 at $15.42. He’s up 684% as of July 13th. See what David’s recommending that you buy NEXT.

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Some companies are obviously great investments -- in hindsight. Yet for every stock out there screaming "buy me," others simply give us a nudge and a nod. How can we tell tomorrow's obviously great investments from the thousands of pretenders?

The stars' walk of fame
On Motley Fool CAPS, these opportunities can be found among our four-star stocks. In CAPS' proprietary ratings system, they rank higher than most of the other 5,400 starred companies, but they're just shy of superstardom. While all the attention might be focused on their five-star peers, we can sift through CAPS to find four-star firms approaching greatness. Here are a handful of four-star firms approaching greatness.

Hewlett-Packard (NYSE: HPQ) Internap Network Services (Nasdaq: INAP) Isis Pharmaceuticals (Nasdaq: ISIS) LSI (NYSE: LSI) Western Digital (NYSE: WDC)

Some of these names might surprise you. For example, computing giant Hewlett-Packard is buying almost $4 billion worth of companies this month (3Par and ArcSight) and it's making a major investment in its Palm purchase. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold.

Last week we pointed out how Western Digital and rival Seagate Technology (NYSE: STX) were sporting miniscule margins as the market mispriced the value traditional storage systems still hold. However, the 170,000-plus CAPS members chose these companies as less obvious sources for tomorrow's great buys so let's see why they might merit your attention.

In the sight of greatness?
Another storage name exhibiting weakness is LSI, whose revenues in its most recent quarter missed analyst expectations and came in at the low end of its own guidance. Inventory adjustments at customers who were previously buying up product in the first quarter hit its results, and LSI issued a cautious outlook for the third quarter.

The apparent misstep doesn't much concern CAPS members who still strongly support the chip maker. CAPS member jsGreenmachine says it's been through the cycle before and will be around to go through it again in the future:

Chip maker that has out-lasted most firms through the cycles. Top decision makers know what it takes and the time is now!

On the shoulders of giants
Datacenter operator and Internet traffic router Internap Network Services continues looking to new markets for growth, including content delivery network services. But revenues fell 6% last quarter as the switch from reseller to facilities-based datacenter provider tries to gain traction. The controlled churn has eaten into the top-line numbers, but margin expansion is under way, suggesting the bundling of services that it's undertaking is paying off.

Before you rush to buy in, note that it's bumping up against industry leader Akamai Technologies (Nasdaq: AKAM), which handles about 20% of all Internet traffic, Limelight Networks, and Level 3 Communications. There's no shortage of competition in this space and Internap will need to distinguish itself further.

The CAPS community remains solidly behind Internap, however, as 92% of those rating it think we'll be seeing market-beating performance in the months ahead. You can add your ideas on whether the change will work out as planned on the Internap Network Services CAPS page and put it on your My Watchlist page to find all the Foolish news and analysis about the company.

A big opportunity
It was a scene we've seen played out before at Isis Pharmaceuticals, which reported that cholesterol drug mipomersen had similar outcomes to phase 3 data reported earlier this year. With severe liver enzyme-elevating side effects, Isis and Genzyme may find their treatment has a narrower patient population to attract, but the ability to significantly reduce cholesterol levels will enable them to still generate sales, just at a much lower level. That's good enough for CAPS member irishred1, though, as Isis is still financially sound:

robust balance sheet, a good entry into RNAi along with ALNY, and believe that mipomersen has a good shot at approval even if its use will be restricted

Although Isis went on to report an earnings loss that was wider than anticipated because research and development spending rose, management hopes full-year losses will be smaller because of a new partnership with GlaxoSmithKline.

A great opportunity for you
Investor sentiment suggests these four-star investments still seem to be on their way to five-star greatness, but it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page.

Sign up today for the completely free service and let us hear what you have to say about the great and almost great companies that interest you.

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Akamai Technologies is a Motley Fool Rule Breakers selection. GlaxoSmithKline is a Motley Fool Global Gains recommendation. The Fool owns shares of GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey currently does not own any stocks as you can see here. The Motley Fool has a disclosure policy.

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The Best Automaker for Your Portfolio

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I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Ford Motor (NYSE: F). Is America's comeback automaker the real thing? Let's get to the numbers.

Foolish facts

Metric

Ford Motor Co.

CAPS stars (out of 5)