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RECENT ENTRIES Goldman Goes A-Blogging The Geography of a Recession Academic Study on Media Bias in Financial Newspapers Mortgage Bankers Association Sells Headquarters at Big Loss Telegraph: Roubini Gets It Wrong The Goldman/AIG Battle Oopsie! Odd Lots Update on Turn-of-the-Month Investing Earnings Update SYNDICATE THIS SITE

Goldman Sachs' spokesman, Lucas van Praag, responds to the NYT's article at the Huffington Post. Here's a sample:

NYT assertion: "Goldman's demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash."

The facts: Relative to the size of AIG's overall business, Goldman Sachs was a small counterparty. We don't believe our marks were "aggressive," they reflected market prices at the time. We requested the collateral we were entitled to under the terms of our agreements. The idea that AIG collapsed because of our marks is not credible. In any event, the story later asserts that, by the spring of 2008, AIG's dispute with Goldman Sachs was just one of its many woes.

NYT assertion: "In addition, according to two people with knowledge of the positions a portion of the $11 billion in taxpayer money that went to Societe Generale, a French bank that traded with A.I.G, was subsequently transferred to Goldman under a deal the two banks had struck."

The facts: The assertion is false and misleading. Goldman Sachs provided financing to many counterparties, but in that role we would not have known whether a counterparty had obtained credit default protection, let alone from whom or in what amount.

(HT: Felix)

Posted by Eddy at 11:00 AM | Permalink

Posted by Eddy at 2:02 PM | Permalink

Media Bias in Financial Newspapers: Evidence from Early-Twentieth-Century France

Abstract:

The financial market was well developed in France in the years before World War I, and there were many newspapers that provided information to investors. Yet commentators at the time faulted the financial press for inaccuracy and biases, which they linked to the existence of payments made by companies for coverage in the editorial section. This paper tests whether the payment scheme induced a systematic bias in the coverage of companies listed on the Paris stock exchanges by newspapers. The results show that, although firms’ media coverage was affected, the performance of firms actually touted by the press was good. Thus, the media bias can also be explained by newspapers choosing the companies' exposures according to their editorial policy.

Posted by Eddy at 1:21 PM | Permalink

Ouch.

On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA's 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also is far below the $75 million financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. to finance the purchase.

Posted by Eddy at 11:58 AM | Permalink

There’s finally some big media pushback against the Great Predictors, all of whom missed one of the greatest stock rallies in history:

Never mind what Nouriel Roubini, the New York economist credited with having seen the economic meltdown coming, is predicting for next year – surprise, surprise, he’s pessimistic – let’s take a look at what he forecast at the time of the World Economic Forum in Davos this time last year.

Er, well, the great sooth sayer and now standing feature of this mountain top conference for the elite of business and finance thought that even if governments and central bankers did everything right in terms of fiscal and monetary policy, we’d all still be in recession across the advanced economies for all of 2009 and 2010. And for sure, the S & P was going to 600. Admittedly, it did get as low as 650, but now it’s back above 1,000. If you’d listened to Mr Roubini, you would have missed out on one of the greatest stock market rallies ever. As for recession, some economies were growing again by the second quarter of last year, and even Britain is now showing marginal growth.

Still, these forecasting errors are perhaps forgiveable for one who got the big call spot on. Except that he was making it as far back as 2002. Which all goes to show that if you say something consistently enough for long enough, eventually you will be proved right.

(HT: TBI)

Posted by Eddy at 11:49 AM | Permalink

The must-read story of the weekend was Gretchen Morgenson and Louise Story’s account of the battle between Goldman Sachs and AIG.

I have no independent love for Goldman Sachs and I’m perfectly happy to portray them as the villain. Still, I keep finding myself being attractive to another narrative—Goldman was smarter than everyone else.

Yves Smith and Tom Adams have more.

Posted by Eddy at 11:44 AM | Permalink

There was a confusing story but apparently 1 million people lost their jobs yesterday.

No wait, that’s not it. It turns out that the government reported that 1 million people lost their jobs yesterday.

No wait, that’s not it either. The government updated their jobs stats yesterday for the last six years and it turns out the Labor Department was off by 1 million.

And for this, no one in the Labor Department lost their job.

Posted by Eddy at 3:45 PM | Permalink

The snow is still coming down in Washington. We’re well over eighteen inches now. The snow started coming down about 11 am yesterday and is expected to stop sometime tonight.

Since I’m snowbound, here are a few links to pass on:

Football games have 11 minutes of action.

Not sure what this is, but it's cool.

So it turns out Blankfein’s bonus wasn’t $100 million, just $9 million.

Arnold Kling and Nick Schulz at Cato.

Fresno tops list of 'drunkest' cities in America

What are the odds of a cow making it to the Super Bowl?

Barry Ritholtz on the economics of book writing.

Gen Y too lazy and unfocused to hire

Moe Tkacik on credit crisis literature.

Posted by Eddy at 1:42 PM | Permalink

A few of you asked if the turn-of-the-month gains were mainly caused by the turn of the year. It turns out that January is the big winner, but other months also did very well.

Here are the average gains for each seven-day turn-of-the-month period (the month listed is the month being turned to):

Here are the numbers:

Posted by Eddy at 10:00 PM | Permalink

Here's a quick note on the latest earnings forecasts from S&P. For 2009, it looks like the S&P 500 will earn $57.03 a share. A year ago, Goldman Sachs cut its 2009 EPS forecast from $53 to $40.

S&P's current forecast for 2010 EPS is $77.94. That means that the market is currently going for 13.6 times this year's earnings. If you compare that to AAA bond yields which are averaging about 5.3% now, I think stocks look very good here.

Posted by Eddy at 8:21 PM | Permalink

This is just too depressing:

After struggling for eight hours to counter a rapidly growing budget shortfall, the Los Angeles City Council put off a decision to cut 1,000 jobs Wednesday and, through other actions, managed to add $4 million to the problem.

Unable to take more straightforward action on a shortfall that has grown to $212 million this year, the council voted to seek another list of possible job cuts and, after hearing pleas from a chamber packed with protesting employees and residents, promised not to act on layoffs for 30 days.

Members also postponed the elimination of three city departments as they search for new sources of revenue, including uncollected debts and federal stimulus funds.

Council leaders had hoped to strike a compromise between the group's budget hawks, who have been calling for layoffs for more than a week, and the doves who sought to save the jobs of civilian employees. But Councilmen Greig Smith and Bernard C. Parks, who favored the job cuts, said the series of votes had only added to the crisis.

Posted by Eddy at 1:01 PM | Permalink

The S&P 500 is back to where it was late Friday, around the 1070 to 1075 area. This also puts us back to where we were about two months ago. Personally, I want to see the market pull back because I'm in a buying mood. I've also been very pleased with Nicholas Financial's (NICK) positive response to its earnings. The last two days have seen heavy volume.

Also, Reynolds American (RAI) had an awful earnings report, but don't worry about it. I was expecting bad news. That's why the stock is so cheap. The important news is that they're forecasting $4.80 to $5.00 per share. If that forecasts holds up, RAI should be much higher by the end of the year.

Posted by Eddy at 10:40 AM | Permalink

Since 1932, most of the S&P 500’s capital gain has come during a seven-day period at the turn of each month—specifically, the last four trading days and the first three trading days of each month. This represents about one-third of the total trading days. During the rest of the month, the stock market actually lost money.

Here are the numbers: Since the beginning of 1932, the S&P 500 has gained nearly 14,000% which is about 6.5% annualized. Investing in just the last four days and first three days of each month would have returned over 63,000% (not including trading costs). Annualized, that’s 8.6%. However, if you consider that it’s really only 32% of the time, the true annualized rate is over 28%.

The rest of the month -- the other 68% of the time -- has resulted in a combined loss of close to 78%.

Let me add some important caveats. First, I’m not offering this as trading advice. I’m merely showing that the market has historically experienced outsized gains at the turn of each month. Remember that trading in and out of the market is costly and these results don’t include taxes or commissions.

Secondly, this only refers to capital gains not dividends. A very large part of the market’s total return is due to dividends, and if you’re only invested one-third of the time, you’re going to lose out.

Having said that, here’s a graph showing what turn-of-the-month investing looks like. The S&P 500 is the red line. The blue line is performance during the seven-day period and the rest of the month is the black line.

Here's a look at the average daily gains.

Why has the market shown this performance? It's hard to say. One idea is that we're seeing a pattern that's simply the result of random behavior. If you splice and dice any data long enough, you're bound to find some anomaly.

My hunch, however, is that there's something to the turn-of-the-month effect. Perhaps it's new money coming in or maybe positive business news is more likely to be announced.

Still, as powerful as the historical data is, I think the effect is too transient to base any investment strategy on.

Posted by Eddy at 7:03 AM | Permalink

In October, AFLAC (AFL) said to expect Q4 EPS between $1.08 and $1.16. Well...they made $1.18 a share which was three cents higher than the Street.

For the full year, the company earned $1.5 billion, or $3.19 per share, compared with profit of $1.25 billion, or $2.62 per share, during the same period a year prior. Revenue rose to $18.25 billion from $16.55 billion.

The company expects profit growth in 2010 to between $5.24 and $5.56 per share. Analysts expect profit of $5.29 per share.

Also, the company said its board of directors declared the first quarter cash dividend of 28 cents per share, which is payable March 1 to shareholders of record at the close of business on Feb. 16.

Going by the company’s projection, the stock is going for about 9.0 to 9.5 times this year’s earnings.

One other thing to note: AFLAC announced a Q1 dividend of 28 cents a share which is what it’s been for all of 2009. I believe AFLAC has the longest current streak of double-digit dividend increases. I can’t be positive, but I’ve looked hard and I haven’t found anyone who’s done it longer. Since the year isn’t over, the streak hasn’t been snapped just yet, but I hope the board keeps the streak going. If the board raises the dividend to 32 cents for the next three quarters, then the streak will live on.

Also, Fiserv's (FISV) earnings were in line:

Fiserv Inc.'s (FISV) fourth-quarter earnings soared 90% as it shed prior-year charges and revenue rose slightly.

Chief Executive Jeffrey Yabuki called the period strong, adding that record December sales helped drive growth in sales, which topped expectations, helping push shares up 1.3%, to $47 in after-hours trading.

For 2010, the company expects earnings of $3.96 to $4.07 a share, bracketing Wall Street's average estimate of $4.05, according to Thomson Reuters.

Fiserv provides information technology to the financial and insurance industries. It offers services that include electronically posting checks, opening accounts and tracking loans. The company has previously been able to generate stable revenue despite continuing economic pressure on the financial sector.

Fiserv reported earnings of $118 million, or 76 cents a share, up from $62 million, or 39 cents a share, a year earlier. Earnings from continuing operations, excluding integration costs and other items, rose to 94 cents from 89 cents. Revenue climbed 2.1%, to $1.06 billion.

Analysts polled by Thomson Reuters expected earnings of 94 cents with revenue of $1.04 billion.

Excluding items, operating margin fell to 28.1% from 30.1%.

I like companies that make projections for the year ahead. Like AFLAC, Fiserv is going for a reasonable price based on next year's earnings.

Posted by Eddy at 6:37 AM | Permalink

Over the last 84 years, the after-inflation return of the stock market (including dividends) has been about 6.6% a year. Historically, that number has been about 7%, but thanks to recent years it's come down a lot.

What this means is that, on average, stock investors have doubled their money in real terms every 11 years. Of course, that's an average. Over the last 11 years, the stock market hasn't made any money in real terms.

Here's a look at the inflation-adjusted total return along with a 7% trendline:

Here's a look at the same chart, but I divided the black line by the blue line.

In other, this shows how the market is doing relative to its long-term trend. Interestingly, there are long stretches where this line looks somewhat similar to a P/E Ratio graph which shouldn't be that surprising.

Looking at this chart, you can really see how poorly the stock market has done over the past decade. I also think it's interesting that the peaks and troughs seem to line up at 2.0 and 0.5, but I may be seeing a connection where there isn't one.

Posted by Eddy at 11:41 PM | Permalink

Here's a look at the Federal government's receipts (red) and outlays (blue) as a percent of GDP. I got these numbers from the president's budget. The numbers after 2009 are forecasts.

I broke the outlays into defense (green) and non-defense (black).

A few observations.

It's stunning how far defense spending has fallen. In 1958, over 10% of the economy went to the Pentagon and that was for a peacetime military. Before 9/11, it had dropped to just 3%. Even with two wars, we're only back to 4.6% which is less than what Reagan defense buildup wanted to build up from. I wouldn't be surprised to see us under 3% in another 10 years.

From 1951 through 2008, budget receipts (the red line) averaged slightly over 18%, but what's fascinating is how consistent that was. For the entire time period, the standard deviation was under 1%. Perhaps we ought to take nearly six decades of data as a hint, and aim to raise that much every year. Obama plans to keep up within the historical norm. His forecast goes to 18.6% by 2014 and 19% by 2015. Of course, he may be long gone by then.

From 1975 through 2008, nondefense spending made up an average of 16.25% of GDP with a standard deviation of less than 0.7%. But this is where Obama really becomes an outlier. This year's non-defense spending will jump to 20.1% of GDP which is twice its share of 45 years ago.

Posted by Eddy at 5:18 PM | Permalink

This is another very good earnings report from Nicholas Financial (NICK):

Nicholas Financial, Inc. announced that for the three months ended December 31, 2009, net earnings, excluding change in fair value of interest rate swaps, increased 117% to $2,747,000 as compared to $1,267,000 for the three months ended December 31, 2008. Per share diluted net earnings, excluding change in fair value of interest rate swaps, increased 109% to $0.23 for the three months ended December 31, 2009 as compared to $0.11 for the three months ended December 31, 2008. See reconciliations of the non-GAAP measures (below). Revenue increased 8% to $14,365,000 for the three months ended December 31, 2009 as compared to $13,254,000 for the three months ended December 31, 2008.

For the nine months ended December 31, 2009, net earnings, excluding change in fair value of interest rate swaps, increased 97% to $7,114,000 as compared to $3,616,000 for the nine months ended December 31, 2008. Per share diluted net earnings, excluding change in fair value of interest rate swaps, increased 91% to $0.61 for the nine months ended December 31, 2009 as compared to $0.32 for the nine months ended December 31, 2008. See reconciliations of the non-GAAP measures (below). Revenue increased 6% to $42,216,000 for the nine months ended December 31, 2009 as compared to $39,878,000 for the nine months ended December 31, 2008.

According to Peter L. Vosotas, Chairman and CEO, “We are pleased with our third quarter results. These results were favorably impacted by an increase in revenues of 8%, a reduction in the net charge-off rate of 25% and a 20% reduction in the cost of borrowed funds. During the third quarter we opened our 50th branch location in Gastonia, North Carolina. We expect to open a second branch location in Nashville, Tennessee and a branch location in Grand Rapids, Michigan, during our fourth quarter ending March 31, 2010. The Company continues to evaluate additional markets for future branch locations, and subject to market conditions, could open additional branch locations during the year. The Company remains open to acquisitions should an opportunity present itself,” added Vosotas.

This is what I wrote last month:

Let’s make some assumptions for the next earnings report. If the pre-tax yield for the last quarter hit 7% on receivables of $230 million that comes to about $4 million pre-tax for the quarter. With the new shares post stock dividend, that’s 35 cents a share. After taxes, that’s about 22 cents a share.

For the first six months of the fiscal year (ends March 31), NICK made 40 cents a share. So we’re probably talking about stock on its way to making around 80 cents a share for the year during an awful recession. As I see it, this company is almost like an 11% or 12% bond and the credit quality is improving.

I was close. The pre-tax yield was actually 8% but receivables only rose $226 million. That's an increase of 1.6% from last quarter. Even though the portfolio isn't growing, the quality is improving. The average cost of borrowed funds dropped down to 3.92%. Best of all, the provision for credit losses fell again. It's now at 5.34%. This is the fifth straight quarter it's fallen.

Overall, this is a very good report. Assuming the trends continue, then NICK should be able to earn $1 a share for this calendar year. I still believe these shares are very underpriced.

Posted by Eddy at 11:15 AM | Permalink

The Buy List is recovering today along with the rest of the stock market. Sysco (SYY), which has been a frustrating stock recently, is up today thanks to a good earnings report. For the third straight quarter, the company beat expectations. Sysco earned 45 cents a share which was three cents more than the Street expected. Sales fell for the fifth straight quarter. Reuters writes: “Operating expenses fell 7 percent to $1.23 billion. Sysco has been cutting costs by reducing headcount, bonuses and commissions to offset weak demand.”

Moog (MOG-A) also reported earnings today. This stock gained nearly 50% from its October low to its January high. The company earned 47 cents a share which matched Wall Street’s estimate. This is a big drop from last year.

Moog's profits slid to $21.6 million, or 47 cents per share, during the quarter that ended on Jan. 2, down from $30.3 million, or 70 cents per share, a year earlier. The company's sales rose to $495.2 million from $446.1 million, aided by Moog's acquisitions last year of a British flight controls business and the Fernau navigation aids unit.

Much of the drop in earnings came from the company's space and defense business, one of Moog's strongest performers last year, where operating profits fell by 45 percent to $7.5 million on a 3 percent drop in sales.

Earnings also declined at Moog's components group, where profits were down 19 percent to $12.1 million, despite a 4 percent increase in revenues to $84.9 million.

Operating profits jumped by 30 percent to $17.6 million at the company's aircraft controls business, where sales grew by 7 percent to $175 million. Earnings at Moog's industrial systems business were nearly flat at $11.2 million, despite a 24 percent increase in sales at $136.4 million. The firm's medical device business, which lost $2.2 million a year ago, returned to profitability with a $139,000 operating profit as sales jumped by 47 percent to $29.4 million.

Posted by Eddy at 12:15 PM | Permalink

Score one for the British media. The Times somehow floats the idea that Goldman's CEO Lloyd Blankfein is going to get a $100 million bonus. Not only is this nuts, there's absolutely zero evidence for it. Still, the Times runs with their story which is the potential backlash against a fairy tale.

Goldman Sachs, the world’s richest investment bank, is facing a potential political storm over how much it pays its chief executive, Lloyd Blankfein.

Bankers in Davos for the World Economic Forum (WEF) told The Times they understood that Mr Blankfein and other top Goldman bankers outside Britain were set to receive some of the bank’s biggest-ever payouts, in defiance of President Obama’s attempt to shame banks into cutting bonuses. “This is Lloyd thumbing his nose at Obama,” said a banker at one of Goldman’s rivals. (That's the kind of quote journalists kill for.)

Mr Blankfein took home his biggest bonus so far in 2007, when he was paid $67.9 million. Goldman’s profits last year were $1.8 billion higher than in 2007. This leaves the bank with a justification to pay him even more although payouts will be made in shares rather than cash to make them more politically palatable. Some rival bankers claim Mr Blankfein could receive up to $100 million, though even a much lower figure could prove politically explosive. (Who the hell is "some rival banker"? How on earth did they get that number?)

Lucas van Praag, Goldman’s spokesman, said:”Although the Board has yet to detemine executive compensation, given everything we have said and done on the subject, the idea that the directors would award Lloyd Blankfein $100 million, or anything close to it, beggars belief.”

In other news, the editors of the Times could potentially drown a bag of cats this afternoon. According to their unnamed business rivals, this would hurt the Times' image.

Posted by Eddy at 11:45 AM | Permalink

Good news! Real Q4 GDP growth came in at 5.7%. That's the best growth in over six years. This probably means that the recession is over, even though it still doesn't feel like it.

Interestingly, the GDP report also showed that nominal GDP increased by a slight 0.81% over the fourth quarter in 2008. This comes after three straight declines. If it weren't for the lag time, this metric would make a good interest rate peg for the Federal Reserve.

Here's a look at the Fed fund rates over the same period.

You can see that in the period of 2002 to 2004, the Fed Funds rate was well below nominal GDP growth.

Posted by Eddy at 6:02 PM | Permalink