Archive for March, 2009

Diamonds are a banker’s worst friend

Tuesday, March 24th, 2009

By Suzanne Kapner


(Fortune Magazine) — On the morning of Sept. 27, 2007, two Merrill Lynch bankers arrived at the Rockefeller Center office of Ralph Esmerian, a jewelry dealer and art collector, and boxed up tens of millions of dollars of rare jewelry. Armed guards loaded the jewels – including a 14-carat pink diamond ring worth roughly $15 million – into a Brink’s truck idling outside. Within hours the gems, some of which had been in Esmerian’s family for generations, had been carted away – seized as collateral for a loan gone bad.

Esmerian had borrowed the money two years earlier to finance the acquisition of Fred Leighton, known as the jeweler to the stars. Back then Fred Leighton consisted of a store on New York City’s Madison Avenue and a second boutique in Las Vegas, but Esmerian envisioned turning Leighton into an international brand with stores around the world.

It was a plan that tantalized a group of Merrill Lynch bankers. Heretofore, these bankers had made money collateralizing real estate, machinery, and other hard assets. But lately they had been making some less traditional plays: They had provided $500 million of financing to United Artists, which used the money in part to produce the Tom Cruise movie “Valkyrie.” The bankers also lent money to the Ranch, a custom-crush winery in Napa Valley.

For the Merrill bankers the deal with Esmerian was their introduction to the byzantine world of jewelry – a world they would regret entering. Jewels are funny things. Most people’s first brush with them is when they get engaged. It’s arguably the most idealistic and least objective moment in a relationship. Business deals – specifically ones consummated when credit is loose – are not all that different. And back in 2006, when Merrill Lynch and Esmerian hooked up, they were blind to each other’s faults. In Merrill, Esmerian (pronounced ess-mary-ann) thought he had found a partner who would stick by him in good times and bad. Instead, he says, he ended up with a bunch of “cowboys” who cared more about generating fees than building a business.

Similarly, Merrill felt comfortable with Esmerian because the deal was backed by millions of dollars of jewelry. In addition to Fred Leighton’s inventory, Esmerian had pledged his family’s cache of 101 jewels, known as the Special Collection, with an appraised value of $89 million. In a deal code-named Project Nile, the bankers agreed to lend Esmerian $176 million, payable over three years. What the bankers failed to detect was that they were funding a serial borrower who already had multimillion-dollar loans from Sotheby’s and Christie’s, and who would soon be accused by his siblings of playing fast and loose with, that’s right, the family jewels.

As with so many overheated romances, Esmerian and his bankers now find themselves in court. Merrill Lynch is suing Esmerian in an attempt to recover its money, an amount that the bank claims has ballooned, with unpaid interest, to $192 million. “We are in a dispute with Mr. Esmerian for one simple reason,” says Bill Halldin, a Merrill spokesman. “He failed to make monthly interest payments that he agreed to when he borrowed money.”

Esmerian, 68, is suing Merrill Lynch, contesting the bank’s ownership of the collateral and claiming the loan was faulty from the outset. “Merrill Lynch didn’t understand what they were getting into,” Esmerian says. “But I didn’t understand what I was getting into either. In my business, if you’re late making a payment it’s no big deal.”

Regardless of whose side you come down on, one thing is sure: The company is the real casualty. Fred Leighton has been operating under Chapter 11 bankruptcy protection since April 2008 and is running out of cash. In December the court stripped Esmerian of his powers and appointed a restructuring officer, who is evaluating bids for all or part of the company. Interested parties include Robert Pressman of Barneys New York fame and Michael Steinhardt, the hedge fund honcho, who is a longtime friend and supporter of Esmerian’s. Neither would comment.

The goal is to find an investor who will satisfy the various legal claims and fund the company’s operations until it can emerge from bankruptcy. But given the state of the economy, there is also the possibility that Fred Leighton will cease to exist. The whole sad saga – which features a cameo appearance by Martha Stewart’s former stockbroker – is a cautionary tale in the perils of trying to build a luxury brand from little more than a name. For every success like Burberry there is an Asprey, the jeweler to the British Crown that flamed out a few years ago.

Humble beginnings

Unlike Asprey, Fred Leighton never had an aristocratic pedigree. Instead the jewelry shop was the creation of a New York City cabdriver’s son named Murray Mondschein, who bought a store in 1959 that sold Mexican wedding dresses and artifacts. The store, located in Greenwich Village, was named Fred Leighton after its late owner. Believing that people would be more apt to buy from someone whose name was on the door, Mondschein changed his name to Fred Leighton.

Before long the store began stocking vintage jewelry, and by the 1970s, Leighton was fast becoming a legend in the business. At the time, estate jewelry was not as fashionable as it is today, but Leighton cultivated a celebrity clientele. “People went to Fred Leighton to buy from Murray’s hands,” says François Curiel, Christie’s jewelry specialist and the chairman of the auction house’s European operations.

Meanwhile Esmerian was cutting his teeth in the family business of jewelry wholesaling. Unmarried and without children, he is the last of four generations of jewelers. His great-grandfather was a lapidary in Constantinople in the late 1800s. His father, Raphael, was a respected jeweler and gem dealer in Paris and later New York City. Raphael designed one of the first fine jewelry lines for Neiman Marcus. After Raphael’s death in 1976, Esmerian, who grew up in Paris and New York, took over the family trade.

When Ralph talks about jewels he sounds like a boy showing off his baseball cards. A favorite piece is a pair of horse heads sculpted by Herbert Haseltine for the heiress Barbara Hutton out of 24-karat gold and embedded with diamonds, rubies, sapphires, and emeralds. The horses held a mythical place in Ralph’s childhood. His father supplied Haseltine with the stones. Esmerian bought the horse heads from a private dealer about eight years ago.

Esmerian first met Leighton at an auction in the early 1970s, and the two became friendly. Esmerian would drop by the New York store on Saturday mornings to sip coffee with Leighton. Before long he was loaning the store pieces on consignment. By 2005, Leighton was looking to retire, and Esmerian jumped at the chance to buy his company. Through a friend Esmerian had met a Merrill Lynch broker, who put him in touch with Josh Green and Ryan Bell, two young bankers who worked for a division called Merrill Lynch Mortgage Capital, which specialized in collateralizing loans against hard assets. (Green and Bell would not comment for this article.)

According to Esmerian, Green and his colleagues were “salivating” at the prospect of owning a luxury jeweler. And on Nov. 4, 2005, Merrill lent Esmerian $56 million to buy Esmerian’s sister, sister-in-law, and her children (his brother is deceased) out of a family trust that owned much of the jewelry that would be used to collateralize the debt. On March 29, 2006, the bank lent a further $100 million, which went to buy Fred Leighton, and also made available a $25 million revolving credit facility for working capital.

As part of the agreement with Merrill Lynch, Esmerian was to hire a seasoned CEO to run Fred Leighton. Overtures to Simon Critchell, a former Cartier executive, didn’t pan out. In December 2007, Esmerian threw his backers for a loop when he hired Peter Bacanovic, who had been Martha Stewart’s stockbroker at Merrill Lynch during the ImClone scandal. Bacanovic had subsequently served five months in federal prison and five months of house arrest for obstructing a government investigation into Stewart’s sale of ImClone stock. Bacanovic also had no retail experience. What he did have was connections, and Esmerian, who had met Bacanovic through his lawyer, hoped the socialite-broker would turn his wealthy friends into clients.

First, though, Bacanovic was tasked with opening a new store in Beverly Hills. According to Tom Shull, the court-appointed restructuring officer, the Beverly Hills store, which opened in December, four months behind schedule, was millions of dollars over budget. “That put a lot of financial pressure on the company,” Shull says. Nicol Bini, the architect who designed the store, says it opened on time and within budget. Bacanovic, who stepped down from Fred Leighton in January, declined to comment.

There were other problems. For years, the business had been largely dependent on Leighton and his daughter, Mara. When they walked out the door, so did a lot of sales. Esmerian had planned to keep the Leightons on as consultants for five years, at an annual salary of $175,000 each. But according to a lawsuit filed by the Leightons, Esmerian never paid them for consulting work and also failed to pay $374,000 owed to them as part of the acquisition. Esmerian says the Leightons were badmouthing him to customers, so he terminated their contract. Leighton says that Esmerian wanted to do things his own way.

The bill comes due

By late 2007, Esmerian was in serious financial difficulty. The loan was crippling for a company of Fred Leighton’s size. In its best year Fred Leighton had an annual profit of $7.6 million, yet Esmerian was required to make interest payments north of $10 million. So why would the bankers make that deal? Merrill Lynch says sales of jewelry from the Special Collection, a separate cache of stones that Esmerian controlled, were also earmarked to pay down the loan.

Nevertheless on Sept. 10, 2007, Esmerian missed debt payments totaling $2.7 million. On the 27th of that month, Merrill seized the collateralized jewels. On Oct. 3, the firm summoned Esmerian to its lawyer’s office for what one source called a “come-to-Jesus meeting.” On one side of a conference table at Cadwalader Wickersham & Taft sat Esmerian and his CFO, Satyajit Bose. On the other side sat Merrill’s workout specialists. The bankers listed 21 transgressions, including the missed debt payments, delinquent financial reporting, and the delayed opening of the Beverly Hills store.

Over the next few months attempts at a compromise proved futile. Merrill proposed temporarily suspending interest payments with the understanding that the missed sums would be rolled into the principal, but Esmerian, concerned that he wouldn’t be able to meet the new terms, never signed the proposal. Instead Esmerian spent the remainder of the fall reaching out to angel investors, including Apollo Management and Soros Private Equity, but found no takers. Apollo and Soros both declined to comment.

In January 2008, Merrill lowered the boom: It sued Esmerian and moved ahead with plans to auction the jewelry it held as collateral. Christie’s was hired and spent the next four months putting together a catalogue and traveling exhibition that featured the jewels, including a diamond brooch made for Empress Eugnie, the wife of Napoleon III.

In its lawsuit Merrill alleged that Esmerian double- and triple-pledged the collateral and accused him of secretly trying to sell some of the jewels and pocket the proceeds. One eye-opening moment came when Merrill executives stumbled across a catalogue for a jewelry auction that Sotheby’s was holding in Hong Kong. In the catalogue was a diamond butterfly brooch that was part of the Special Collection that made up the collateral on Merrill’s loan.

Esmerian argued that Merrill’s plan to unload all the jewels at one time would result in a fire sale. Merrill was unmoved. So, hours before the auction was to begin on April 15, 2008, Esmerian played his trump card. He filed for Chapter 11 bankruptcy protection, essentially freezing Fred Leighton’s assets and halting the auction. (With the court’s approval, Esmerian has since sold Empress Eugnie’s brooch to the Louvre for $10.5 million, more than double its estimated value in the Christie’s catalogue.)

Esmerian’s financial problems leading up to bankruptcy created additional headaches for him. Over the past three decades he had run up big debts with Sotheby’s and Christie’s, which serve as de facto bankers to estate jewelers. Traditional banks tend to shy away from the industry because they find it difficult to value the inventory. In January, Christie’s sued Esmerian in an attempt to recover a $7.75 million balance on a decade-old $25 million loan. Three months later Sotheby’s seized the Edward Hicks painting “Peaceable Kingdom,” which Esmerian had pledged as collateral against an $11 million loan, and sold it for $9.6 million. The painting, along with 200 other works, had been promised as a gift to the American Folk Art Museum in New York City.

By the fall, Esmerian’s own family had joined the fray. In October 2008 they filed a suit accusing him of misappropriating money from a family trust as far back as 1992. By 2001, the suit alleges, the trust had loans of $28 million. When the stock market crashed that year Esmerian liquidated the entire trust portfolio to satisfy margin calls. The lawsuit says Esmerian never received the proper consent from his siblings for this financial engineering.

In an effort to make his siblings solvent again, Esmerian pledged 101 pieces of jewelry, called the Siegman Collection, to the trust. There was one problem: The Siegman Collection, the siblings charge, is identical to the Special Collection that Esmerian pledged as collateral to Merrill Lynch. To them it appeared that he was double dipping. Esmerian says his siblings gave him permission to borrow from the trust and that he paid them $12 million each to buy out their holdings.

The fate of Fred Leighton

There are, of course, two sides to every breakup. While Merrill’s lawsuit portrays Esmerian as a mountebank who was running a shell game, Esmerian accuses the bankers of knowingly inflating the value of the collateral to win approval from the bank’s internal credit committee. In Esmerian’s suit, which he filed in October 2008, he also raises questions about the loan’s economic viability. One internal Merrill Lynch document cited in the suit warns, “Interest is too high, resulting in insufficient cash flow.”

Esmerian further claims the bankers told him he’d never be able to repay the loan until he took the company public. A spokesman for Merrill Lynch says that charge is untrue and that the loan was later modified to require Esmerian to kick in additional equity to provide a cushion against the debt.

On Dec. 18, 2008, Esmerian suffered a heartbreaking setback. Following a scathing review of Esmerian’s leadership by a Merrill Lynch-paid consultant, the court stripped Esmerian of his management role and installed Tom Shull. A turnaround expert who helped steer Macy’s and Barneys New York out of bankruptcy, Shull immediately slashed $2.5 million in costs by paring advertising, reducing travel budgets, and otherwise tightening belts. He strengthened the inventory management systems and simplified the commission structure. He also started cutting prices. Fred Leighton, which had never before run big sales, in March marked everything in its cases down 40%. (Attention, Kmart shoppers!)

It may be too little too late. Since peaking in 2003, sales at Fred Leighton have halved to $20 million, and after bankruptcy expenses the company is barely breaking even. While Shull acknowledges the high-end jewelry market is likely to remain depressed for a while, he is hopeful that the company will find an investor to keep it alive. Of course, if Merrill Lynch has its way, Fred Leighton’s precious jewels will be liquidated to pay debts. Merrill, now part of Bank of America (BAC, Fortune 500), has bigger problems than the fate of a few high-priced baubles. It has disbanded the division that made the Fred Leighton loan, and most of the bankers involved in the deal have left the firm.

And what of Esmerian? At best he was careless; at worst he was cunning. Perhaps it was his privileged upbringing that led him to have so little respect for other people’s money – even his own family’s. To Esmerian the jewels he collected were as precious as living things, and it mattered to him a great deal that they reside with those who appreciate their beauty. The downside to such snobbery is that no one is more deserving than the beholder.

In Esmerian’s case, what was his was his, but what was yours was also his. People who know him, however, say his motives were pure. “Ralph is a true lover of jewelry,” says Gail Freeman, a private dealer who has worked with him for over two decades. “He cares more about the art than the business.”

That’s why he needs a good business partner, says Shull, who is recommending that any new owner retain Esmerian as a creative director. “Ralph needs someone who will push back and say, ‘If we take 20% off this item, we’ll sell it.’ In retail you need to move the goods.” That’s true even if those goods are damaged.  

Click here for original article.

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Government Auctions Off 605 Diamonds With a Past

Saturday, March 21st, 2009

March 21, 2009


By ALAN FEUER


The New York Times

It is not so easy these days buying what the government is selling. One could argue that this holds true for low-yielding Treasury bonds and economic forecasts alike.

Some government commodities, though, are not only simple to obtain – they are actually priced to sell: Items seized during federal crimes, for instance, like the 605 loose diamonds that were auctioned off on Friday beneath the crystal chandeliers in the Grand Ballroom of the New Yorker Hotel.

While crime does not always pay the criminal, it does, in circumstances such as these, pay the government, the auction house and – if he or she can wangle a bargain from the process – the buyer, too.

“Whatever economic climate you’re in, there’s always opportunity,” said Rick Levin, a Chicago auctioneer who brought the diamonds to market after they were seized in 2003 from two Manhattan jewelers in a sting operation that was devised to combat money-laundering for Colombian drug cartels.

His diamonds, sold on behalf of the federal Department of the Treasury and divided into more than 100 lots, – had once belonged to Roman and Eduard Nektalov, a father-and-son team who sold gems in diamond district in Manhattan and were targets of Operation Meltdown, a federal investigation into the laundering of drug money. In 2003, the two men, members of a prominent family of Bukharian Jews, were arrested after trading the stones to an undercover agent for $500,000 cash.

Within months, Eduard Nektalov was shot point-blank in the back of the head as he walked up Avenue of the Americas between 47th and 48th Streets. Roman Nektalov, his father, was convicted in the money laundering case months later.

The noir-ish story, though, with all its gruesome details, was scarcely mentioned as dozens of buyers – many of them Hasidic and Bukharian Jews who work in the diamond trade – filtered into the ballroom of the New Yorker, at 34th Street and Eighth Avenue. The auction itself began at 10:15 a.m. when Rob Nord, a professor of bid calling at the Missouri Auction School (”The Harvard of Auctioneering”), started with Lot 1: four diamonds varying in weight from 1.1 to 1.4 carats.

“I brought my plastic,” said Mandy Ellis, who had flown in from Dallas, where, she said, she “dealt in a little real estate.” Ms. Ellis had come to spend money – “Whatever Saks didn’t get from me yesterday,” she said.

Terrence Byrne, a retired city bus driver, had driven in from Queens, because, as he put it, “I dropped a bundle in the market and I need a good investment.” Next to him was his wife, Julia, who reminded him they had also come to buy a diamond for her 25th wedding anniversary gift. (Mr. Byrne bought Lot 8, a 2.6-carat diamond, for $5,500.)

The Kodak brothers, Brad and Creighton, own a chain of three jewelry stores in northern New Jersey and had come in search of a deal. “We’re here for real value,” Creighton Kodak said. (They left when Lot 6 was on the block, deciding that the prices were, in general, too steep.)

Since most of the money flows back into government coffers to investigate further criminal schemes, Mr. Levin – a quick-talking salesman type – suggested there were patriotic, as well as financial, aspects to the sales.

Mr. Levin, who, on average, takes a 10 percent cut from his auctions, has been very busy of late. In the last few years alone, he has sold for the government smuggled horses in Arizona, stolen cab medallions in Boston, 54,000 pounds of smoked Chinese scallops, a shipping container of blue jeans, illegally marketed Freon and a million packs of untaxed cigarettes.

Tapping what could be a growing market, Mr. Levin recently secured a contract with the Federal Deposit Insurance Corporation to auction furniture, fixtures and equipment seized from failed banks around the country.

As Mr. Nord droned on in his Gatling gun baritone, four tuxedoed “ringmen” prowled the ballroom whooping loudly when they spotted a bid. By the end of the day, the auction brought in nearly $750,000. Mr. Levin turned philosophical – and somewhat self-promotional.

He was saying that with so many inscrutable toxic assets on the market these days the opportunity to purchase hard items, in an open setting, was refreshing.

“Auctions are the best way known to mankind to buy and sell things,” he insisted. “There’s a real-time ability to actually know what something’s worth.”

Click here for original article.

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An Imaginary Life

Monday, March 16th, 2009

Diamonds, it’s not about you. It’s about her!




Note: Thank you TROPFEST for the wonderful video!

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U.S. Department of the Treasury Announces Seized & Forfeited Diamond Auction

Saturday, March 14th, 2009

By: Rachel Lieberman, Israel Diamond Industry Portal

VSE Corporation and Rick Levin & Associates will conduct an auction of loose diamonds on behalf of the U.S. Department of the Treasury and the Internal Revenue Service, Criminal Investigation Division.

Up for auction are 605 loose diamonds that were seized during the investigation of a money laundering scheme in New York City’s Diamond District. One of the diamond dealers was convicted in a case involving dealings with Colombian drug traffickers. The proceeds from the auction will be returned to the IRS’s Criminal Investigations Division for the continuation of law enforcement efforts.

The auction will take place at 10 a.m. on Friday, March 20, 2009, at the New Yorker Hotel, in New York City. Registration will begin at 9 a.m. on the day of the sale.

Previews and registration will take place at the New Yorker Hotel at 481 8th Avenue & 34th Street, New York, NY on Wednesday, March 18 from 9 a.m. to 4 p.m. and Thursday, March 19 from 9 a.m. to 4 p.m.

For the orginal article, click here.

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Self-Fulfilling Prophecy

Monday, March 9th, 2009

“A self-fulfilling prophecy is a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself. Self-fulfilling prophecy, in the beginning, is a false definition of the situation asking a new behavior which makes the original false conception come true. This specious validity of the self-fulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the beginning,” said Robert K. Merton in 1968 from his book Social Theory and Social Structure.

Maybe, I can say it plainer. Thought creates belief; belief creates behavior; behavior creates experience. This is not a fake experience. It is very real! It has consequences—in some cases deadly. At last count at least two very real people committed suicide because of Bernie Madoff. It is not an illusion that the world’s markets have lost over thirty trillion dollars! Take a look at it. 30,000,000,000,000. It is a three with thirteen zeros after it! The U.S. budget for 2008 was just under three trillion. Ten years’ worth of what it cost to run our country has been wiped off the books! Is this our imagination? No, it is very real. We made it so nothing spreads faster than fear—even light pales in comparison. Here’s a question: what have we lost that can’t be replaced? Jobs? Homes? Cars? Stuff? It can all be replaced. Lives? Can we get back all those service men and women who died in Iraq and Afganistan? We can’t get back our loved ones from the World Trade Centers either. My dad always told me life wasn’t fair, but that it was unfair to everyone made it fair. Today in an elevator I struck up a quick 45 second conversation with a woman. I wished her happy Friday Eve! (It’s Thursday today) It put a smile on her face. “What a wonderful way to look at it,” she said.

Our thoughts aren’t clouds. What we think as positive or negative has consequences. Seriously, would it really hurt our sense of reality if for one day a week all news agencies couldn’t report anything negative? What would the effect be? The media is trying to clean up its image by ending the week or nightly news with a making the difference story. Well, I’m sorry; it’s not making a difference! If you show blood and carnage for 25 minutes and then they hand me a cupcake to wash it down with, it doesn’t work! In an economics book I read once that advertisers showed it was easier to sell a product that is packaged as 95% fat free instead of contains 5% fat! Same news, same story, but one is easier to swallow. One gets us to buy. At the end of 2007 General Electric’s value was $500 billion. Today it’s 60 billion! It has lost almost 90% of its value! Why? Does anybody really truly believe G.E. is going out of business? No. But if we continue to pull back our support from the things and people we believe in, then our nightmares will become a reality. We went through the Great Depression once. Do we really want to live through a sequel? It’s up to you, what do you think? Really…what do you think? It matters!

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Show Me The Love: Falling Diamond Prices Equals Big Opportunity!

Friday, March 6th, 2009

March 6, 2009


They say that there are no atheists in foxholes. Well, I got news for you, there are no atheists or single men in foxholes! When bullets are flying, like the collapse of our economy, loss of wealth, rise of unemployment, women having octoplets (come on did you really need to complete a baker’s dozen plus one?), more and more couples are tying the knot! You can lose your job, your home, your pension, your life savings, but nobody, and I repeat, nobody wants to lose love! We can learn to live without a lot of things but love will never be on the list!

 

The good news is that for the first time in 28 years the price of “good” diamonds (defined as a diamond that will hold its value and/or appreciate over time) has DROPPED almost 6% over the last four years! This may not seem like a lot, but let me give you an example. The average “good” diamond sold in the United States in 2005 was a little less than half a carat and normally sold for $1700.00. This diamond would have traditionally appreciated in value/cost 6 ½% to 8 % per year. Translation to buy that diamond in 2006 would cost you not $1700.00 but a maximum of $1836.00! Then in 2009 it would cost $2312.83! That’s where the powers that be get you! “You’d better buy a diamond today because tomorrow it’s going to go up!” And, for “good” diamonds (not crummy ones) they were telling the truth! You can pay a little now or a lot more later. Your choice! Since the diamond market is not a free market (more of a monopoly) the dealer (Diamond Cartel) is holding all the cards! They wanted to raise the price and they did! Just like when the oil cartel kept manipulating the market to get oil to $147.00 a barrel-before it collapsed! Well, guess what? Supply super-exceeded demand! For the last few years diamond prices for the bread and butter sizes-1/3 carat to ¾ carat-have been flat! Then, the sky-rocketing prices of the one carat and larger stones that were being bought up as “safe havens” by investors, exiting the stock market are falling back to earth. Investors are now trying to dump their stock piles realizing cash is king!

 

What does it mean to you the average young man that wants to buy an engagement ring? It means the diamond you would have paid $2312.83 for this year is selling at 2004 prices! Or $1581.00! That is a $731.83 savings! Almost 50%! So when I say diamond prices are down 6% and you want to yawn, I am talking about 6% off of 2005 prices!! If you are looking for a big diamond, the savings are off the charts! If you followed my advice from May of last year when I recommended to hold off on making your diamond purchase (reference the Great Diamond Crash) you are in the money now!! You can actually buy a good beautiful, sparkly, gorgeous diamond without going to the poor house! Don’t get me wrong, good diamonds aren’t being given away; in fact they are still 300% more expensive than commercial grades (crummy diamonds). But they are at least affordable in dream sizes! So if you are like most couples these days and realize that it’s better to stay together and work as a team, now is the perfect time to buy your rock! Mark my words you will never see diamond prices like this again in your life time! People can live with a lot of things but regret isn’t one of them. Sometimes love means letting go but right now isn’t one of those times! Don’t let your love go, it may not come back!

by Fred Cuellar, author of the best-selling book “How to Buy a Diamond.”
More questions? Ask the Diamond Guy®

Reference:


NBC Nightly News April 19, 2009

Visit msnbc.com for Breaking News, World News, and News about the Economy

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Zale Board Ignores Opportunities

Friday, March 6th, 2009

UPDATE 3-Zale posts loss after charges, to close stores
| Nicholas White – White & Co


Implications:


With the industry in turmoil, Zale’s board ignores an opportunity to reinvent the company in the wake of an industry shake out that began after Christmas 2008.  Here’s more.


Analysis:


Zale stock closed under $1.00 as the DOW fell about 281 points to 6,594.44.  Zale’s decline in value comes a week after Finlay Enterprises announced that it was vacating the department store business and closing about 40 of its specialty retail stores.  Clearly, the $65 billion dollar fine jewelry industry is undergoing a major restructuring that is affecting large and small retail jewelers alike.  Yesterday, Robins Jewelers, a 16 store chain with stores in California, Texas, and Illinois, filed for bankruptcy.   That brings the number of retail jewelry bankruptcies to four including Christian Bernard, The Shane Company, and Fortunoff, with any number of firm’s financial viability in doubt including Finlay and Zale. 

After the hype subsides, the reality of what Finlay’s restructuring plan really means to bond holders and creditors will sink in.  that will lead to the inevitable conclusion that the company will probably be liquidated for a lot less that the secured creditors are owed.  Whether what remains of Finlay can survive is problematic at best, especially in this economy.   Let’s face it five local clientele stores in South Florida, thirty-five regional, up scale guild stores in the south east, and about 30 disparate Bailey Banks and Biddle stores , all operating under three different trade names,  doesn’t constitute much of a base for a national guild jewelry chain in the best of times.

Then there’s Zale.  Now trading at penny stock prices, the market has clearly written off the countries second largest jeweler after its dismal Christmas sales performance.   While the entire jewelry industry is suffering, it’s obvious to investors that Zale will lose a lot of money in 2009 and that current management is unlikely to turn the company around now or in the foreseeable future.  That investors have lost confidence in CEO Neil Goldberg, Chairman John Lowe, and major shareholder and director Richard Breeden is understandable.  After all under the leadership of these three new executives, Zale has lost more than 39% of its shareholders equity over the last four fiscal quarters.    It’s a simple accounting identity, shareholders equity is equal to the difference between assets and liabilities and on these three new leaders watch that has declined by about $324 million in 12 months.  Moreover, it could decline by another 20% to 25% by fiscal 2009 year end if last years performance is the measure. 

According to its second quarter balance sheet, Zale had $847.26 million in inventory.  That equates to a liquidation value of about $508 million at current estimates of recovery from a “going out of business” sale.  That more than covers the $390 million debt the company has outstanding.  But that margin could decline quickly as more distressed jewelry enters the marketplace and demand continues to plummet.  For instance, at 50% recovery debt holder’s liabilities would just be covered and 50% recovery values aren’t out of the question in this depressed economic environment.

What should Zale do?  Well the market has seen Goldberg and Breeden’s best shot.  So any management combination which includes these two executives won’t get much of an endorsement from the market.  Certainly, about the last thing shareholders need is a hedge fund manager ruling the board.  But that isn’t likely to change since Breeden Capital Management has lost about $200 million on Richard Breeden’s decision to invest in Zale about 18 months ago.   On the other hand, the company could change CEO’s, something they have done all too frequently over the last decade.  But it’s improbable an executive capable of turning Zale around would submit to either the board’s micro management or Breeden’s likely interference. 

That’s unfortunate, because no other company in the jewelry industry is in as good a position to lead the industry as Zale is today.  Many would take exception to that idea, but the logic is quite simple.  Zale has no where to go but up.  Granted a big change in direction could hasten a bankruptcy if it were wholly unsuccessful.   But if current trends continue, and they probably will, Zale’s slide into financial oblivion is almost a certainty anyway. 
 

Some analysts would argue that Signet Jewelers is model for the future, but I would disagree.  While it’s true Signet financial performance has been superior to most of its competition over the last decade, its superior performance wasn’t due to innovation as much as it was to meticulous management and dogmatic execution of a jewelry profit model that was pioneered by Zale in the 1960’s.  Simply put, they took Zale’s original model and out did them at their own game. 

But the industry is facing a completely new set of challenges in the 21st Century, tantamount of which is liquidity.  Few other retailing segments are as cash intensive as jewelry.  To say these businesses are “cash hogs” is an understatement.  In fact, liquidity has been a serious strategic problem for the entire industry including diamond cutting, polishing, manufacturing, wholesaling, and retailing for years.   Nonetheless, the industry has prospered, in part because cheap consumer credit kept good selling at the retail end and subsidized credit filling the pipe line.  How else could billions of dollars worth of large diamonds and finished goods set idly in diamantaire’s safes and retailer’s showcases.  But that has all changed, a fact industry participants are well aware of, but uncertain what to do about it.

Clearly this is a turning point in the industry and the innovation necessary to solve its problems will have to come from every part of the supply chain.  But the reality is the jewelry industry is all about small retailers and manufacturers which lack both the visibility and resources to foster industry wide change.  To quantify the fragmentation of the industry, current estimates indicate there are about 22,500 jewelry retail companies in the US and another 4,500 manufacturers/wholesales.  In terms of sales, the average jewelry retail company does less than $3.0 million, while the typical manufacture sells about $14 million per annum.   Those numbers are wildly distorted, but they are accurate insofar as they suggest the small size of jewelry industry participants compared to big department store retailers and non-jewelry manufacturers.  

Anyway, the point is there are only a handful of large jewelry retailers and even fewer manufacturers that could reinvent the industry, which includes Zale Corporation.  However, whether results to date will jolt Zale’s board into constructive action isn’t clear.  What is certain is that the company is in death spiral, much like an airplane that’s in a stall and the only thing that is going to prevent a crash is a pilot that not only knows how to fly, but is also is proficient in flying that type of plane. 

Zale closed at $0.92 per share having lost 95% of its value since March 6th 2008 when it closed at $18.22 per share.

Click here for original article.

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A Meaning of Life

Thursday, March 5th, 2009

To fail, to know the agony of defeat, to know you will never get up again, to know that you’ve lost is all and will never recover; but you do.

 

To succeed, to know the taste of victory, to be #1, top of the heap, to know that you are the master, to know you will never have to suffer again, to know from here on out there will nothing but gravy and be wrong.

 

To love and be loved, to doubt enough to be humble but not so much that you are disabled.


To trust even when you know you’re being taken for a ride because the ticket girl who doesn’t know you are the mark needs to feed her child.


To forgive when you haven’t done anything wrong, to give thanks when you’re doing the giving.


To laugh when it’s not funny, to cry when it is. To listen when you’d rather talk, to stand so others can sit.


To pray not when you are in trouble but to thank God for all you got.

 

To know that everything is temporary so you will give praise before the end.

To know that there are truly no endings just beginnings that start all over again.

To be the first to hug and the last to say goodbye.

To cherish every single minute and stop questioning why.

To be you even when all have turned against you and it would be easier to blame someone else.

To know you aren’t perfect but understand that’s what gives you wealth.

To grow until you can’t, to keep moving when you’d rather sleep.

To love for another moment, to know the night will let you dream.

To not just know joy but leave it where you’ve been.

To be at peace with yourself and the soul that lies within.

by Fred Cuellar, author of the best-selling book “How to Buy a Diamond.” More questions? Ask the Diamond Guy®

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Vol. 8.3 Iceland

Wednesday, March 4th, 2009

“Temperature is an entropically defined quantity that effectively determines the number of thermodynamically accessible states of a system within an energy range.”  Thanks Wikipedia; I think.

 

Question: When the weather is cold do people come together? Well, if you access birth records, you will find that July, August, and September are the big baby months. Babies like to show up when it’s hot and people like to make babies when it’s cold. Put ten people in a room and turn down the thermostat. Before long, everybody who liked having their own individual space will be huddled together for safety and warmth. Our environment has an enormous impact on how we live our lives. When the job market, the weather, and the stock market are hot, we all move around more, travel more, take more risks, and live life to the fullest. Action! But, when the environment gets cold–bitterly cold–we move indoors, we withdraw.

           
However, hard times, tough times, don’t have to break us. We can use them to make us stronger! Put an overweight person on a workout routine every day, monitor his food intake, and make sure he gets enough sleep. What will happen? He will shed pounds, water, and fat! He will get stronger and build muscles.

We should take a good look at the country of Iceland. Not just because they are a cold place but because they went bankrupt. Their system collapsed! They consumed more than they produced! They didn’t band together when times got tough. Instead, they argued with each other; they divided & their system collapsed. We may not be Iceland but the United States of America is starting to turn into the Divided States of America. We are allowing each other to suffer because we are only grateful we didn’t lose OUR job, OUR money in the stock market, or to some Ponzi scheme.  But they are us! When any one of us loses we lose. There is no us and them. Just us! We are in a room (a country) that has gotten very, very cold. We can all huddle together, take only what we need, share everything we got, and get through this together or we can argue, point fingers, not take responsibility, and freeze to death!

Do you know what the average cost of a home in Detroit Michigan is? $18,000.00! That was the price of the average home in the early 60’s! Half of Detroit has left! Streets are abandoned! Are we going to let our cities die because we are scared and don’t want to take responsibility for each other? How about this, let’s start by picking one thing and saving it! As soon as I’m done writing this article I’m going to open a checking account in Citibank. I’ll deposit $100.00. What if we all did this? President Obama got elected not because a few fat cats gave him piles of money, he got elected because practically everybody gave a little. We can’t hoard our money and expect our government to bail us out of OUR mess! We want out of this mess? Invest in America! Invest in us! Pick a bank, open an account for whatever you can afford. We can become a country again of action instead of a country of reaction!  Reaction to rumors, reaction to fear, reaction to the unknown. Do we want to play offense with our lives or defense? It’s time to take our power back!


Again I Repeat


We can become a country again of action instead of a country of reaction!  Reaction to rumors, reaction to fear, reaction to the unknown. Do we want to play offense with our lives or defense? It’s time to take our power back!

Talk to you next time!


Fred

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Independent Jewelry Appraisers

Wednesday, March 4th, 2009

Let’s start by defining what an Independent Jewelry Appraiser is. Here we go! An Independent Jewelry Appraiser is anyone who decides to call themselves one. No laws prohibit anyone from hanging out a shingle that they are qualified to appraise jewelry. Doctors and lawyers need licenses to practice. Not jewelry appraisers. Now, there are appraisal associations, schools you can go to, fancy looking plaques you can hang on the wall saying you are qualified to appraise the burial site of King Tutankhamun but wishing or saying something doesn’t make it so. Only in the movies can you click your heels together three times and say “there’s no place like home” and be transported where you want to go. A lot of jewelry appraisers couldn’t cut it in the jewelry world.  So, they became critics who take hush money from jewelers they secretly work for to sandbag the quality or value of an item from a competitor to undermine a sale!

 

Your typical predatory jewelry appraiser looks like your favorite uncle or like Barry Madoff. He’s nice, looks professional, compliments you, tells you how long he’s been in business, and says he is qualified to appraise anything. “It’s Appraisal Depot!” Coins from a sunken treasure chest? No problem. Antique silver, diamond encrusted butter knives that were owned by King Louis? Piece of cake! The predatory appraisers will always over value parts of what you bring in to gain your confidence, then under value or bury something else that they know will make you question your purchase.

 

So, how can you tell the honest appraisers from the dishonest ones?

  • 1.) They won’t ever tell you that they know exactly what a piece of jewelry is worth. The best they can do is to give you a broad range. To be exact the stones have to be pulled from the setting.
  • 2.) They will never offer to buy your jewelry or recommend a jeweler to you (even if you ask).
  • 3.) They will not have any disclaimers on their appraisals saying they will not be held responsible for any action that is taken with the appraisal. If they don’t stand behind their work, what’s the point!
  • 4.) They will never charge you a percentage of the appraised value as their fee. This will lead them to over value the merchandise to make more money.
  • 5.) They will up front ask if you want the Dump, Wholesale, Retail (fair market), or Premium value of your merchandise. Anyone who picks an exact number out of thin air without explaining it is incompetent or worse–a crook! Pure and simple.
  • 6.) They will always appraise the merchandise in front of you. If it needs to be cleaned they will ask you to join them.
  • 7.) They will never, never, never ask to pull a diamond that they are trying to appraise!!! Only switch-out artists do this. If you are only there for an appraisal and not a sale there is no reason for them to pull it unless they want to switch it!
  • 8.) If the stones are mounted he should only give you ranges in weight, clarity, and color. Investment grade quality cannot be determined or mounted merchandise. The highest grade for a diamond that is mounted is VS1 clarity, G in color. The appraiser may say that the quality could be higher but will never put it in writing. Off-makes (poorly proportioned stones) are easy to spot in a setting.
  • 9.) An appraiser will always weigh a loose stone FIRST & LAST in front of you to prove the stone has not been switched.
  • 10.) No honest appraiser will ever ask you to leave the merchandise with them to appraise unless you are reunited long lost buddies.

 

Very simple: Take appraisers’ word with a grain of salt. They are looking out for themselves. If they are honest they will explain their limitations; if they are dishonest they will act like God. Finally, if you are lucky enough to have bought a Fully Bonded Diamond the quality is 100% guaranteed so you have nothing to worry about. If you like it, keep it. If you ever don’t, get your money back! The only reason you ever get an appraisal anyway is when the seller puts an expiration date on the “Lifetime Guarantee”. If the jeweler backs the quality and purchase (no ifs, ands, or buts) then the only test any piece of jewelry needs to pass is the “It takes my breath away” test. If a piece of jewelry does that then put it on! None of us can last very long without our breath!

by Fred Cuellar, author of the best-selling book “How to Buy a Diamond.” More questions? Ask the Diamond Guy®

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