Now, after all of that success and effort, some tainted chicken in China has battered Yum!’s reputation. That just shows how little it takes to sweep a reputation away, even one that has been constructed over years.

The big backlash against Yum! started a few hours after it announced fourth-quarter earnings and its share price fell. Brokerage Baird dropped its price target to $60 from $72 and cut its rating on Yum! Brands to Neutral, which is Wall St.’s word for “sell.” Shares traded at $63.84 before the company released its numbers.

Yum! made an absurd attempt to put the Chinese chicken problem backstage. David C. Novak, chairman and CEO, said:

We delivered full-year 2012 EPS growth of 13% or $3.25 per share, excluding Special Items. This marks the 11th consecutive year we delivered at least 13% growth, which puts us in an elite group of high-growth companies. We also take satisfaction with our record level of international development in 2012 which lays the foundation for future growth and makes Yum! a leader in emerging market development. With new-unit development at the core of our growth model and the continued rapid expansion of the consuming class overseas, we believe our opportunity for long-term growth has never been better.

As the market’s reaction to the news showed, not one cared about Novak’s comments at all.

A little less emphasized than the positive news about earnings was the acknowledgement by Yum! that:

KFC sales in the last two weeks of the fourth quarter were significantly impacted by the intense media attention surrounding an investigation by the Shanghai FDA (SFDA) into poultry supply management at Yum! China. The investigation was prompted by a report broadcast on China’s national television (CCTV), which aired on December 18, 2012. The report showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken. Regrettably, some of this product was purchased by two poultry suppliers of KFC China. The investigation caused further media attention, including social media commentary, and this negatively affected consumer perceptions of poultry safety, and KFC in particular.

Consequently:

We are confident the YRI and U.S. businesses will deliver annual operating profit growth consistent with our ongoing growth model. Given current uncertainties related to KFC sales in China, it is difficult to confidently forecast our overall financial performance. We have made the assumption that KFC China same-store sales will improve as the year progresses and will be positive in the fourth quarter. With these assumptions, we estimate a mid-single digit EPS decline in 2013 versus prior year, excluding Special Items. This includes an expectation for a significant decline in EPS performance in the first half of the year followed by EPS growth in the second half.

Investors were furious.

Yum! has made a habit of bragging that its store chain in total locations now matches that of McDonald’s Corp. (NYSE: MCD) worldwide, and Yum! may have surpassed the long-time champion. Yum’s China revenue has been almost miraculous, led by sales of KFC products.

It was only two quarters ago that management stated the following:

Yum! China, our largest profit-contributing division, reported strong system sales growth of 27%, prior to foreign currency translation. However, operating profit declined 4%, prior to foreign currency translation, as high inflation drove restaurant margins down 4 percentage points versus last year. We expect this to be short-lived, returning to double-digit profit growth in the second half of the year. Our outstanding China team now expects to open a record of at least 700 new units this year.

Yum!’s China plans quickly have fallen into disarray.

Interbrand recently valued KFC’s global brand at $6 billion. That is equivalent to a quarter of Yum!s market cap, and ahead of the value of brands such as Tiffany and Porsche. That brand valuation, so critical to the perception of Yum!’s share price, has been badly damaged, particularly in China. With it, so have Yum!’s longer term prospects of hyper-rapid growth. Earnings are important. Reputation is invaluable.

Steve Ballmer and friends will recognize a “non-cash, non-tax-deductible income statement charge for the fourth quarter of fiscal year 2012 for the impairment of goodwill in its Online Services Division segment, mostly related to its 2007 aQuantive, Inc., acquisition.” In short, it is effectively a writedown of the company’s goodwill on the balance sheet (listed as almost $19.7 billion for the last quarter).

Microsoft noted, “Under accounting guidelines, companies are required to conduct an annual goodwill impairment test for each business unit. Goodwill arises in an acquisition when the fair value paid for a business exceeds the value of the identifiable net assets. The goodwill in the Online Services Division was substantially the result of the 2007 acquisition of aQuantive. As a result of its 2012 impairment review, Microsoft has determined that a write down of its Online Services Division goodwill of approximately $6.2 billion is required.”

Microsoft did try to show the upside here behind the math… It said that Bing search share has been rising in the United States, revenue per search has been growing, MSN is the No. 1 portal in 29 markets worldwide, and the company’s partnership with Yahoo! Inc. (NASDAQ: YHOO) has continued to expand geographically. While the Online Services Division business has been improving, the company’s expectations for future growth and profitability are lower than previous estimates. Still, the company said, “ While the aQuantive acquisition continues to provide tools for Microsoft’s online advertising efforts, the acquisition did not accelerate growth to the degree anticipated, contributing to the write down.”

Again, this is not a cash charge and it is not as though the company has to pay this figure. Microsoft sees no impact its ongoing business or financial performance. Microsoft closed down 0.1% at $30.56 on Monday and shares are down 0.4% at $30.43 in the after-hours session. If this was a $6.2 billion cash charge you would be seeing a reaction that is exponentially worse. Also, the market capitalization rate here was $256 billion at the close.

JON C. OGG

This troubled almond food products player just cannot get its act together.  The company is going to miss its filing deadline for restated results to reflect all of the woes that have plagued the company.  To add fuel to the fire here, this puts Diamond Foods at risk of being delisted from the NASDAQ Stock Market as the missed date is beyond an extension already granted by the exchange before.

While Diamond Foods has been trying to shore up its balance sheet with a $225 million credit infusion from Oaktree Capital, the company still has management gaps and its shareholders have been so battered here that it is a miracle that the firm has not had to face the wrath of a shareholder posse.

Brian Driscoll, formerly of Hostess Brands, has only been CEO since May and Diamond Foods lost out on its diversification ploy to buy Pringles from Procter & Gamble (NYSE: PG).  Kellogg Company (NYSE: K) stepped in and swept that deal out from under Diamond Foods, but that was expected as Diamond just did not have the funds and street-cred to pull this buyout off under the current circumstances.

Toi show just how bad things are, this stock is down over 7% at $18.75 and the stock hit a new low of $18.55 earlier this morning.  The prior 52-week range was $18.83 to $96.13.  Things have gotten so bad here that the market capitalization for Diamond Foods is now barely $400 million.

Unfortunately, the risks here remain high for shareholders.  Having a NASDAQ delisting risk is almost never a good thing.

JON C. OGG

The current report is that the firm may sell a minority stake to raise capital.  Whether that is common stock or preferred stock is not yet known but the troubled company has hired Dean Bradley Osborne Partners in an effort to explore capital alternatives to strengthen its balance sheet.

After tapping its credit line to pay debt, the company announced that it would pay its lenders a 25 basis point forbearance fee and that access to the revolving credit facility would increase as well.

Cutting even a 0.7% dividend yield is no good thing.  Unfortunately, when companies run into issues with creditors they are often obligated by credit pacts to cease paying dividends.  That appears to be the case today.

The news is bad on the surface, but maybe it is good news in the end.  Imagine if a private equity player actually saw real value here.  With a crimp on its spending, perhaps that would finally start to mark a bottom.  Just remember that a bottom in a situation like this company has faced rarely comes all at once in a rapid instant.

Diamond Foods shares are down 6% at $24.09 against a 52-week trading range of $21.41 to $96.13.

JON C. OGG

S&P has now lowered its ‘CC’ long-term and ‘C’ short-term sovereign credit ratings on Greece to ‘SD’ for a ‘selective default’ rating.  The recovery rating of ’4′ which was on Greece’s foreign-currency issue ratings is unchanged.

The move is having no immediate impact on the after-market ADR trading in National Bank of Greece S.A. (NYSE: NBG).

S&P did note that, as for all other Eurozone members, its country transfer and convertibility (T&C) assessment for Greece remains at ‘AAA’.

The retroactive insertion of collective action clauses has an effect which binds all bondholders of a particular series “to amended bond payment terms in the event that a predefined quorum of creditors has agreed to do so.”  It is this retroactive insertion of collective action clauses which materially changed the original terms of the affected debt.  S&P then considers the launch of what it considers to be a situation of a distressed debt restructuring.

S&P noted, “Under our criteria, either condition is grounds for us to lower our sovereign credit rating on Greece to ‘SD’ and our ratings on the affected debt issues to ‘D’.”

JON C. OGG

The list includes the following still-public stocks: Alimera Sciences, Inc. (NASDAQ: ALIM); AMR Corporation (NYSE: AMR); American Apparel, Inc. (AMEX: APP); Eastman Kodak Co. (NYSE: EK); Energy Conversion Devices, Inc. (NASDAQ: ENER); FriendFinder Networks, Inc. (NASDAQ: FFN); Nortel Networks Corp. (NRTLQ); Pinnacle Airlines Corp. (NASDAQ: PNCL); Reddy Ice Holdings, Inc. (RDDY); YRC Worldwide Inc. (NASDAQ: YRCWD). 

Almost all of these have either had a form of bankruptcy or reorganization, while others have been in the rumor mill for quite some time.  We included a write-up on each, and have even have gone as far as discussing some caveats which could help some of these stocks to survive. There is even a chance that a couple of these could end up being major turnaround stocks.

Alimera Sciences, Inc. (NASDAQ: ALIM) saw a share price implosion take place in November after the FDA all but rejected its eye drug.  We covered this one at BioHealthInvestor with a near 75% drop on the news after being public less than two years.  Shares fell to $1.96 with a $61 million market cap and shares are now at $1.30 with a $41 million market cap.  The good news is that it has no debt overhang and it may be able to scrap operating costs down to nothing.  Still, we cannot see how it can fund itself through another set of trials.  Mathematically it is more than financially challenged, even if the company manages to hang on as a NASDAQ listing.

AMR Corporation (NYSE: AMR) is effectively done already.  We had been expecting an NYSE delisting notice to come for a while, even though there was a time even in the last week of the year where shares gapped up big and traded as though there may be some intrinsic post-bankruptcy value left for common shareholders.  That would not be the normal post-bankruptcy value.  While anything is possible, this one will move to the pink sheets and will trade around with a 5-ticker symbol for a while.

American Apparel, Inc. (AMEX: APP) has so far managed to avoid being delisted and so far managed to avoid a bankruptcy through a shaky history.  Still, things have been sketchy here for so long that even a near-40% jump in shares from $0.57 to $0.75 since its early December business update showed improving store sales metrics.  This company has managed to survive on less than $10 million in cash but still has a net tangible value of $56 million despite a loss in 2010 of $86 million.  Here is the caveat” American Apparel has managed to exist in this diminished state for some time and its controversial CEO has managed to hang on.  Maybe the company can pull a rabbit out of a hat and turnaround.  American Apparel often notes “going concern” as a risk under its safe harbor statements in press releases.

Read Also: Analysts Top Biotech Stocks For 2012

Eastman Kodak Co. (NYSE: EK) has done everything wrong and had everything go wrong that could go wrong.  Antonio Perez has been on our list of CEOs that need to be fired for years now and the company has stuck its head in the sand for far too long.  The bankruptcy rumors have swirled for long enough.  The real value left in the company is in the patents, but the company has not been able to make its patent machine turn into a survival machine.  The KKR board members have also resigned and that could be a sign that the private equity firm will try to force a move here so it can secure whatever value is left. At the end of September when we polled our readers, the poll response was that Kodak was more likely to go bankrupt than Greece.  Ouch.

Without trying to draw too much in cause and effect, this could have an impact on most of the mortgage REITs if this develops as it is being accepted today.  Specifically, this may bring a similar interest in shares of Annaly Capital Management, Inc. (NYSE: NLY), American Capital Agency Corp. (NASDAQ: AGNC), and Hatteras Financial Corp (NYSE: HTS). We would also look for the sector to impact the Market Vectors Mortgage REIT Income ETF (NYSE: MORT).

It was on November 10 that Chimera disclosed that the review by its outside independent accounting firm was with an analysis of the treatment under GAAP of “other-than-temporary impairments” related to investments in securities rated less than AA, non-rated non-Agency securities and other subordinate securities.

Chimera noted that it has not completed its analysis, but it did specify that it expects only immaterial adjustments to its historical financial statements in prior comparable periods.  Also noted was that the effect will be a non-cash change in the GAAP accounting results and this change will not affect previously stated GAAP or “economic book values, actual cash flows, dividends and taxable income for any period.”

Another note was that the second quarter GAAP book value of $3.35 per share and economic book value of $3.08 per share will not change due to this action.  As of September 30, Chimera’s GAAP book value was $3.27 per share and the economic book value was $3.01 per share.  Its taxable income for the third quarter was $0.13 per share and the analysis is said to not have an impact on prior or future dividend distributions.

Chimera shares are up 7.8% at $2.76 and the last $0.13 dividend would generate a yield of nearly 19%, but mortgage REIT yields can fluctuate wildly as taxable income and distributions come and go. The fairly new Market Vectors Mortgage REIT Income ETF (NYSE: MORT) is trading up only 0.3% at $22.72 on very thin volume.  Chimera is the third largest weighting of that ETF at 6.91%, but that falls a distant third with American Capital Agency Corp. (NASDAQ: AGNC) at 13.17% and with Annaly Capital Management Inc. (NYSE: NLY) having nearly a 19.7% weighting of the entire ETF.

Annaly Capital Management, Inc. (NYSE: NLY) is often tied to Chimera because of its past and because of management teams and its shares are actually down 0.5% at $16.23. American Capital Agency Corp. (NASDAQ: AGNC) is also down 0.5% at $27.85 and Hatteras Financial Corp (NYSE: HTS) is down 1% at $25.61.  All sport double-digit implied dividend yields if the payouts remain static.

This review brought on a rating update on Chimera by Credit Suisse with a reiterated “Outperform” rating and a $3.50 price target objective.  Credit Suisse went on to note that Chimera trades at a 15% discount to book value and that its yield before the pop was 20.4%. The end result is that this would begin to ease investor concerns as shares had fallen from $2.80 down to almost $2.50 in recent days before the recovery.

Usually investors tend to run for cover when they see accounting changes.  So far, that is not the case with Chimera as investors are taking the company at face value.  If everything represented is as-is, then Chimera is trading under its implied book values and that may be cushion enough for investors.  Stay tuned.

JON C. OGG

F5 (NASDAQ: FFIV) received an upgrade from Barclays which its shares up. Western Digital moved higher on postitive comments by Morgan Stanely

S&P 500 TOP 10 LISTS

BIGGEST STOCK PRICE GAINERS

FOR WEEK, MONTH (JUNE) AND YEAR-TO-DATE AS OF JUNE 23

Aluminum Corporation of China, or Chinalco, is a holding company and the controlling shareholder in Aluminum Corporation of China Ltd. (NYSE: ACH), or Chalco. Along with China National Offshore Oil Corp. and China Unicom, which respectively control Cnooc Ltd. (NYSE: CEO) and China Unicom (Hong Kong) Ltd. (NYSE: CHU), Chalco has been named as one of 17 state-owned enterprises to have irregularities and other violations in their financial statements to the Chinese government in fiscal year 2009. China’s Xinhua news agency reports that by March of this year 735 irregularities had been corrected and “65 people responsible for the irregularities or violations have been punished.”

The accounting irregularities for the 17 companies included overstatement of assets, profits, and liabilities by $292.4 million, $405 million, and $528 million, respectively. Undercounted assets totaled $446 million, while undercounted profits totaled $185 million, and undercounted liabilities totaled $385 million.

In the case of Chinalco, the problems appear to be violations of Chinese rules more than accounting irregularities. Chinalco included 11 companies in its 2008 financial report that failed to meet profit targets by the end of 2009 and launched or acquired 10 projects for which Chinalco did not have permission from the state. The total investment in the 10 projects topped $1.4 billion in 2008. Chinalco also got slapped for some irregularities in its senior managers’ shareholdings.

The troubles at Chinalco are reasonably small, but they should be the final straw needed to kill speculation about the company’s rumored intention to buy Alcoa, Inc. (NYSE: AA). The truth could be that China just doesn’t want to be embarrassed by another rejection of a bid for a large US firm. And Chinalco probably doesn’t want more scrutiny from the SEC after getting raked over by Chinese regulators.

Running afoul of China’s regulations governing state-owned enterprises is not the only issue. The so-called “Facebook of China,” Renren Inc. (NYSE: RENN) had to correct its financial statements just before its IPO earlier this month. Shares officially opened at $19.50, climbed to $24, and closed the first day’s trading at $18.01. Shares are now trading at around $12. Busted IPO for sure.

Hong-Kong based financial software maker Longtop Financial Technologies Ltd. (NYSE: LFT) lost its CFO, saw its auditing firm resign, and watched the US SEC initiate an investigation of the company’s financial reports. Shares had fallen -25% since the beginning of May before trading was halted last week. Longtop’s CFO was also an independent director and chairman of Renren’s audit committee.

Advanced Battery Technologies, Inc. (NASDAQ: ABAT) and China MediaExpress (OTC: CCME) are both Chinese reverse merger companies. Advanced Battery’s chairman has been accused of selling a key subsidiary to himself without compensating the company. A report by a short-seller has led to a -33% drop in the share price and a bevy of shareholder lawsuits. Advanced Battery makes lithium-ion batteries for electric vehicles, including its own line of motorbikes and scooters. China MediaExpress, the billboard company, saw its share price fall from near $20 to around $1.50 following a short-seller’s report regarding reporting irregularities.

China Shen Zhou Mining & Resources, Inc. (AMEX: SHZ) is one of China’s leading miners of rare earth minerals and other metals. If any company should be making money, this is one. But the company’s auditing firm issued a “going concern” note to China Shen Zhou’s 2010 10-K. The auditors apparently don’t agree that a private placement of $20 million in common stock and another $7.2 million in warrants is enough to keep the company going for all of 2011. China Shen Zhou’s stock peaked at $10.84/share in January, and trades at about $4.10 today.

While each of these companies may exemplify a different aspect of what’s going on with Chinese firms, they all have one thing in common: they’re Chinese. That is, they must operate under the constraints of Chinese regulations, which are a little hard to pin down at times. The major problem that firms face is that the Chinese government has given inflation fighting a pre-eminent position in its policy making. Higher interest rates, lower lending limits, and reduced liquidity make profitability uncertain.

There are also, apparently, more than a few executives willing to cut corners in pursuit of riches. Accounting rules in China are different from US SEC GAAP accounting rules, and taking advantage of those differences leads to different numbers on both Chinese and US reports, which leads to reports from short-sellers who smell blood in the water, and eventually to government investigations on both sides of the Pacific.

Finally, it’s also worth noting that China faces a serious real estate bubble and that many well-known investors are counseling short positions on Chinese real estate. But real estate, like copper, can be used by China’s small- and medium-sized firms as collateral for low-cost loans while the country’s banks are prohibited from making more loans.

China wants to grow its economy by about 8% annually in an effort to keep up with population growth, rising wages, and large numbers of retirees. To date the country’s exports, wild lending, and government funding have pushed GDP growth above 10% for a number of years. Ratcheting back to 8% means cooling the economy, as the government has done.

The problem is that the constant accelerate/brake pattern is hard to control. China essentially has no choice but to keep the shell game going. If it stops, no one will know for sure where the pea is. 

We have a saying here at 24/7 Wall St.: KNOW WHAT YOU ARE INVESTING IN!  It is getting hard to trust anything out of China at the moment.  Maybe trusting Chinese accounting is becoming the same as trusting that Chinese vitamins are even half of what they are supposed to be.  Welcome to the World of Knock-Off Accounting.

Paul Ausick

This may sound like something that only the most active or experienced traders should care about.  That is only partly true.  Retail investors now run stock screens with regularity when they look for value stocks and overvalued stocks alike.  When they see that a utility or a consumer products company has doubled or more from its yearly low, they automatically throw these names out.  The only reason for that low is because of the Flash Crash and the lows should have never been there in the first place.  After Friday, these ranges will look normalized.

Accenture plc (NYSE: ACN) has an official 52-week trading range of $17.74 to $58.21, but the reality is that this is closer to $36 to $58.21.  During the Flash Crash panic this one traded some 10 million shares at 3-times normal volume and somehow went all the way down to an official exchange price of $17.74 and then the stock closed back up at $41.09.  This was one of the companies which reportedly went to $0.01.

Apple Inc. (NASDAQ: AAPL) is one which will soon stop being mis-quoted for its highs and lows of the last 52-weeks after this Friday.  On May 6, 2010, its shares went from a high of $258.25 down to a NASDAQ official low of $199.25 but they closed back up at $246.25 that day.  I even know of one trader who made literally $20.00 per share that day and those trades were close enough to the market that the NASDAQ did not break those trades.  Apple’s ‘real’ 52-week trading range should really be closer to $235.00 to $364.90.

CenterPoint Energy, Inc. (NYSE: CNP) has an official 52-week range of $5.67 to $18.83, but this really should have been about $12.75 to $58.21 without the Flash Crash.  We have this as one of the stocks that went to a penny.  This one traded 9.3 million shares, more than twice its average volume and shares closed at $13.88 on that day.

Exelon Corp. (NYSE: EXC) is another one of the companies which reportedly went to $0.01 during the Flash Crash.  The 52-week trading range is currently listed as $16.78 to $44.49, and that Flash Crash trading on the NYSE records now shows that shares went from a high of $43.35 down to $16.78 before closing all the way back up at $39.82.  Excelon’s ‘real’ 52-week range should be closer to $37.50 to $44.49.

Procter & Gamble (NYSE: PG) has an official 52-week range of $39.37 to $66.95, but the reality is that this is closer to $59.00 to $66.95 with the exception of the Flash Crash.  When this crashed that day it was on more than twice normal trading volume of 28 million shares and shares closed at a price then of $60.75 that day.  If you recall, Jim Cramer touted this during the peak of selling saying that is an error or a gift, and he was right.  Arguably, at the time you could have removed Greece, Ireland, and Portugal off the face of the world and P&G shares might not have ever fallen to that low of a price.

Again, these are just some of the stocks which experienced significant drops.  There were many others that took share price hits, but some of those Flash Crash lows were actually taken out for real during the peak of the summer selling last year.

If you want to know what real nitpicking is, that is this view here… Thursday, May 5 should be the one year anniversary of the 2010 Flash Crash.  It is due to the one day per year addition on the calendar.  While the May 6 date this year is on a Friday, it was on a Thursday last year and it was also a day before key economic data.  Regardless of how you look at ‘anniversaries,’ come Monday the 52-week trading ranges will have normalized in these five and many other stocks.

JON C. OGG