SEC to appeal rejected Citigroup settlement

NEW YORK (CNNMoney) -- The Securities and Exchange Commission is appealing a federal judge's decision last month to toss out a proposed $285 million mortgage securities fraud settlement between the agency and Citigroup.
Federal judge Jed Rakoff ruled on Nov. 28 that the deal between the SEC and Citi was "neither fair, nor reasonable, nor adequate, nor in the public interest" and ordered the case to proceed to trial in July 2012.
He said that the settlement announced in October, under which Citigroup (C, Fortune 500) neither admitted nor denied the SEC's allegations, deprived the public "of ever knowing the truth in a matter of obvious public importance."
The SEC argued in a statement Thursday that the ruling "inadvertently harms investors by depriving them of substantial, certain and immediate benefits."
"We believe the court was incorrect in requiring an admission of facts -- or a trial -- as a condition of approving a proposed consent judgment," said the agency. It argued Rakoff's ruling would set a new standard for settlements that would be difficult to reach and that it is at odds with established practice.

Big bank SEC settlements: Toothless face-savers?

"Courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide," said the agency.
The SEC said the $285 million proposed settlement, "while less than investor losses, represents most of the total monetary recovery that the SEC itself could have sought at trial. An SEC settlement does not limit the ability of injured investors to pursue claims for additional relief."
Rakoff said in his ruling that given the damage done to financial markets by the alleged actions by Citigroup, a greater level of transparency is needed.

JPMorgan pays $153 million to settle mortgage case

"[I]n any case like this that touches on t! he trans parency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth," Rakoff, a U.S. district judge in Manhattan, wrote in his decision.
The SEC's pattern of allowing big banks to reach settlements without admitting or denying wrongdoing, Rakoff added, has been "hallowed by history, but not by reason."
Citigroup did not have an immediate reaction to the SEC's appeal. At the time of Rakoff's ruling, a spokeswoman for the banking giant said it respectfully disagreed with the decision.
"In the event the case is tried, we would present substantial factual and legal defenses to the charges," she added.
The SEC alleged that in 2007, Citi created and sold a mortgage-related collaterialized debt obligation, or CDO, called Class V Funding III.
According to the SEC complaint, one CDO trader characterized the asset group in internal communications as "a collection of dogshit" and "possibly the best short EVER!"
Can Wall Street thrive again?
In marketing materials, however, the assets were described as "attractive investments rigorously selected by an independent investment adviser," Rakoff's decision said.
After marketing the CDO, Citi then took a short position -- or bet against -- the security as the housing market deteriorated, bringing in a net profit of $160 million for the bank. Meanwhile, investors lost more than $700 million.
The SEC has settled a string of similar complaints in recent months, including agreements with Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500).
Rakoff, though, has been a thorn in the agency's side in recent years, rejecting a proposed $33 million settlement in 2009 between the SEC and Bank of America (BAC, Fortune 500) over allegations that BofA lied about bonuses for Merrill Lynch & Co. employees following the firms' merger.
That settlement ! was late r revised upward to $150 million, which Rakoff reluctantly approved, calling it "half-baked justice at its best."
Shares of Citi (C, Fortune 500) closed down 0.5% in trading Thursday.

Buy, Sell or Hold: The Clorox Co. (NYSE:CLX) Is Cleaning Up

The Clorox Co. (NYSE:CLX) on Thursday reported net earnings of $171 million on sales of $1.52 billion for the fourth quarter of fiscal year 2010 ended June 30, compared to net earnings of $170 million on net sales of $1.5 billion the year prior.

This continued the company's trend of improvement. But more importantly, the bulk of Clorox's profit and margin growth came from its international unit, and the firm projected an expansion in earnings per share of at least 10% to 14% for next fiscal year.

Boring is beautiful when you're dealing with consumer staples, since share prices improve with incremental increases in sales and margins. In Clorox's case, this has meant taking advantage of low rates and dependable cashflow to finance expansion plans. But the good news is that the high financial leverage results in an exorbitant return on equity. 

Clorox's strong cashflow affords the company very comfortable debt coverage ratios. Its level of debt to earnings before income tax, depreciation and amortization (EBITDA) has declined in the last three years from 3.3-times to 2.2-times, improving its creditworthiness.  Clorox's interest coverage ratio (EBITDA to interest expense) also has improved strongly, to 8.96-times from 6.27-times.  This trend has warranted an improvement in the firm's credit rating outlook, which in the investment grade is BBB+ to stable. 

There is no question that this is a sound strategy with interest rates so low.  A few years from now, as interest rates normalize and the cost of debt goes up, this strategy will be more costly.  But, by that time, the company's effort to improve its earnings/debt ratio will have put it in a better position to face higher borrowing costs.

Of course, there's more to Clorox's recent success than shrewd borrowing.

In the past two years the company has set out to recover the slight profit ! margin e rosion brought on by the economic disaster.  And in that time, Clorox has recovered much its lost market share through disciplined cost cutting, better pricing power and lower commodity prices.  You see, in this business, little differences add up. That means careful marketing, advertising, distribution and cost controls, as well as an optimal financing structure are of paramount importance.  And that's precisely where Clorox has excelled.

For example, Clorox is already number two in U.S. market share, behind The Procter & Gamble Co. (NYSE: PG).  In fact, Clorox is ranked in the top two in almost every one of its key brands.  And those brands represent 88% of the company's total portfolio. 

While double-digit earnings growth is achievable via growth in both its core U.S. operations and in its international units, do not expect miracles.  The likely range for outperformance or underperformance is relatively small at first sight.  Yet, the relatively low weight of international sales within the company and a proven capacity for successful and profitable innovation make its objectives achievable.  There is some room for upside surprises with both new products and developments in fast-growing emerging economies.

Clorox concentrates some 71% of its international presence in home cleaning and bleach and laundry products in Latin America.  And the fact that Asia today represents only 5% of sales is actually a plus, since it leaves lots of room for improvement in the long term. So, we have a superbly managed marketing company, with plenty of room to grow internationally. 

This success is the result of a carefully managed process that prioritizes margin and market share expansion, allocating resources based on economic profit.  We expect continued margin improvement through the continuation of relentless cost savings initiatives, information technology investment, and innovation.  In addition, market s! hare imp rovement will come from the launching of carefully targeted products - the emphasis being in value and superior customer perception.

Health and wellness are key themes that will drive future growth.  Clorox has very sophisticated market segmentation, product positioning and overall marketing strategy in these sectors.  It is bound to deliver results, based on their proven track record.

Earnings momentum is at its back due to a mix of carefully tested marketing and financial initiatives.  The stock is valued at 13-times earnings at a nice discount to the Standard & Poor's 500 Index. Its Price/Earnings/Growth (PEG) ratio is high at 1.43, though not disqualifying. 

We can overpay a little for growth that we are pretty certain lies ahead. And Clorox offers an attractive 3.4% dividend yield.  That dividend is easily sustainable at a dividend payout ratio of only 47%. In fact, it was just raised by 10% in May.

Technically, the stock is almost "boringly" bullish.  Its 200-day moving average shows a very steady upward slope. At just over $64 a share Clorox is sitting right near its 50-day moving average and in the middle of the Bollinger bands, in an oversold condition.  This bodes very well for an entry point.

However, the stock also is approaching the 2007 all-time high, so it should start showing some short-term resistance. So what is the investment proposition? 

With this type of stability and high dividend yield, Clorox should be a core holding in any portfolio that is not purely speculative.  Rather than sitting in ten-year U.S. Treasury bonds, we can sit on Clorox stock, get paid much more and have the upside of a first-class equity that can actually adjust prices up if inflation becomes a problem. 

If we see some resistance here, we could run a short-term covered-call strategy: Buy the stock and sell some out of the money calls on it.  The one-month calls we sell lower our entry poi! nt in th e stock by the amount of premium we collect and would probably expire worthless.  The traditional risk-minimization strategy is to dollar-cost average into the stock over the next couple of months.

Recommendation: Dollar-cost average into The Clorox Co. (NYSE:CLX) on a weekly basis over the next two months (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in The Clorox Co.

[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]