Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1.  China to Reinvest Bubble Proceeds in New, Larger Bubble 

The Chinese government on Sunday said it would acquire a $3 billion stake in the private equity firm Blackstone Group.

  • The China/Blackstone deal, set to coincide with Blackstone’s $4 billion initial public offering in June, will give China a roughly 8% stake in the private equity firm. 
  • Blackstone owns companies that have 375,000 employees and $83 billion in annual sales, according to the New York Times.
  • Blackstone announced plans in April to go public in an initial public offering of around $4 billion.
  • The private equity firm is now expected to increase the offering to $7 billion to accommodate the Chinese investment.
  • This deal marks China's first effort to diversify its $1.2 trillion in foreign-exchange reserves.
  • By "diversify," China obviously means shifting capital away from "low-yielding" U.S.-dollar denominated assets and U.S. government backed securities that are highly liquid, and into high-risk, highly-concentrated and leveraged assets with little liquidity and a four-year lockup.  Smart!
  • Anyway, it's a good deal for Blackstone, because nothing says ensured profitability, prosperity and success like giving up an 8% stake of your firm to communists.   


     


2.  What is Private Equity?

For millions of Americans who aren't intimately involved in financial markets on a day-to-day basis, "private equity" is a code phrase for "blah blah blahquity."  This China/Blackstone deal, however, is apparently enough to (finally) push "private equity" from the business page to the front page. 

  • So what is this... how you say? -  ah yes, "private equity" -  anyway? 
  • We can best discuss exactly what "private equity" is and does by using the classic "Lemonade Stand" example. 
  • Suppose you run a Lemonade Stand that employs three people - you, the chief executive and operator; your mom, the one who makes the lemonade; your little brother or sister, the one who runs around the neighborhood telling everybody to come and buy your lemonade. 
  • After a period of time, you realize you can expand to other corners only if you sell shares of you Lemonade Stand to the other people in your neighborhood, so you have a Lemonade Stand public offering. 
  • Now, anyone who wants to invest in your Lemonade Stand can go to your next door neighbor Billy's backyard and trade shares of your Lemonade Stand.  
  • Meanwhile, as a public Lemonade Stand, you take the capital from your investors and use it to branch out to three street corners. 
  • This allows you to increase overall profitability that the shareholders in your Lemonade Stand also enjoy via the dividends you pay. 
  • Meanwhile, across the street in Johnny's basement, plotting is taking place. 
  • Johnny and his friends are pretty sure they know more about running Lemonade Stands than you do, ya friggin' bagodonuts ya. 
  • Look at you, Johnny says.  You're just a kid.  What do you know about business?  Nothing, that's what you know about it.  Meanwhile, you got a bunch of bagodonut shareholders out there who can't see what a joke their "investment" is!  What's your plan for ice cream? 
  • Ice cream?, you ask. 
  • You don't even know what I'm talking about do you, Johnny says, slowly shaking his head in disapproval.  When those ice cream trucks hit the street, your Lemonade Stand is history, pal. 
  • Long story short, Johnny borrows enough money from his old man to take out the existing shareholders at a price they can't refuse. 
  • Ultimately, you have little choice but to sell your Lemonade Stand to Johnny, who quickly fires you and your employees, hires a team of Lemonade Specialists to run the stands, expands the offerings to include ice cream and candy, uses the increased sales and cash flow to borrow against the assets of the Lemonade Stand to expand and increase the dividend and capital repayments to himself so he can recoup his initial investment and pay back his old man.
  • The increased traffic and cash flow at the stands has the neighborhood wowed.
  • They can't believe how Johnny has really turned around this flailing business! 
  • Hey Johnny, Billy asks, can we buy into this business? 
  • Sure!, Johnny says.
  • The IPO is expected to raise $4 billion, pricing in a range of $28 - $31.


3.  How Lowe's Can You Go?

Lowe's (LOW) fiscal first-quarter net dropped 12%, missing both internal and street expectations, and the company cut its full-year earnings outlook.

  • Lowe's, the second-largest home-improvement retailer, said said net income for its first quarter ended May 4 fell to $739 million, or 48 cents a share, from $841 million, or 53 cents a share, a year earlier.
  • Lowe's Chairman and Chief Executive Robert A. Niblock said the quarter was hurt by a variety of things; a difficult housing market, tough comparisons to hurricane rebuilding efforts, poor weather, significant lumber and plywood price deflation.
  • Rival home-improvement chain Home Depot (HD) posted a 29.5% drop in first-quarter profit last week as well.
  • Last year, Lowe's cut its sales forecast four times amid the drop in U.S. home sales.


4.  We're Apparently Already Standing On the Soup Line

Campbell Soup (CPB) said its fiscal third-quarter profit jumped 30% helped by a strong performance from the company's soup business.  Sweet, here we are like idiots waiting for the depression to get started and we're apparently already standing on the soup line!

  • Campbell Soup raised its full-year profit forecast this morning after posting a 31% increase in net income. 
  • U.S. soup sales were up 10%, in part, the company said, because of an 18% increase in advertising spending. 
  • Campbell said consumers made repeat purchases of its reduced-salt soups at a higher level than it had expected.
  • Sales of condensed soups such as tomato and chicken noodle increased 4 percent while demand for "Campbell's Select'' and "Campbell's Chunky'' boosted ready-to-serve soup sales by 17 percent, according to Bloomberg.
  • Campbell demonstrated some remarkable pricing power. 
  • In February, Campbell increased prices on most soups by 4.8%. 
  • A year ago, the company increased prices in the same unit by 2.3%. 

     


5.  U.S. Mint Unveils New Silver Dollar Coin

The U.S. Mint over the weekend unveiled a new silver $1 coin.   Although 500,000 of the coins were minted, circulation is so far failing to meet the U.S. mint's expectation; perhaps because, as the picture below shows, the coins are the size of manhole covers and weigh 150 pounds each. 

"On the bright side, you won't lose one of these suckers in your couch," a U.S. Mint official said.