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Jos. A. Bank Down on Barron's Article

This week, Barron's criticized the inventory levels at Jos. A. Bank (JOSB):

Chief Executive Robert N. Wildrick did a great job of shaking up the century-old retailer after he took charge in 1999. Annual sales have since tripled, to $604 million, while per-share earnings have risen eightfold. The company expects to report about $2.67 a share when it finishes accounting for the fiscal year ended January 2008 (called the 2007 fiscal year, by retailing convention). While adding 50 new stores a year, the chain grew revenues at existing stores. In all but 11 of the past 77 months, the retailer reported higher comparable-store sales -- a measure that compares each store’s sales with its sales in the prior-year period. Frequent promotions drive the sales. These discounting binges make monthly comps erratic, varying by an average of seven percentage points around the median increase of 6%.

But comparable-store growth has been shrinking in the last two years. In fiscal 2005, comps grew more than 10%. In 2007, they grew less than 4%. The 2005 inflection in comps is intriguing, since that’s the year the company stopped using a controversial calculation method that had inflated its comps by not counting stores within 10 miles of a newly-opened store. Barron’s had previously criticized Bank’s comps approach (“Dressed for Success?“ Oct. 13, 2003). That may explain why the chain didn’t respond to our inquiries last week. More disturbing, Bank stopped reporting monthly comps after January of this year.

Along with softening comps, another sign of sputtering growth is Bank’s inventory accumulation. When we wrote about the company in 2003, it had about 350 days of inventory on hand (with a “day” of inventory equaling the quarter’s cost-of-goods-sold divided by 90 days). As of November 2007, Bank’s inventory had hit the 425-day mark while Men’s Wearhouse’s ending inventory was 292 days. The average of Bank’s starting and ending inventory for its November quarter was 397 days. Holiday sales probably reduced Bank’s number by the end of January, but the company hasn’t yet reported that balance sheet.

Posted by edelfenbein at 10:38 AM

Investors pull almost $100bn out of equity funds

From the FT:

Investors worldwide pulled close to $100bn (€63.3bn) out of equity funds in the first three months of this year – a record shift that accelerates a longer-term trend away from US and western European stock markets.

Equity funds suffered outflows of $98bn in the quarter ending March 28, according to Emerging Portfolio Fund Research, which tracks retail and institutional flows. The funds had inflows of $19bn during the same period last year and inflows of $49bn in the same period for 2006.

EPFR said the outflows were because “the credit squeeze linked to the US subprime debt mess weighed on investor confidence and global growth”.

The outflows also accelerate a trend for investors to put their money either in ultra-safe cash options such as money market funds, or into riskier markets and high-fee products such as hedge funds. They are abandoning the middle ground of mainstream equity and fixed income funds, especially in the developed markets.

Investors pulled $70bn from US, Japan and Western Europe funds during the quarter, compared with inflows last year and in most previous years.

Funds enjoying inflows were nearly all focused on Taiwan, Russia, the Middle East and Africa. Emerging markets funds as a group had outflows of $20bn, compared with a small outflow of $1.6bn in the same period last year.

Posted by edelfenbein at 10:29 AM

Let's Go Nats

Dad and I went down to the Nationals season opener last night at their brand-new ballpark. The park gets an A+ from me. They did a really good job, and the food is light years better than RFK.

Most importantly, the Nats won a thriller with a two-out bottom-of-the-ninth walk-off home run from Ryan Zimmerman. The place went absolutely bonkers. Hey, we're in first!

Here's a brief photo montage starting with Pop:

The scoreboard is roughly the size of Delaware. This picture below is taken during the opening ceremonies when they unfurled two huge flags. I snapped this right as an F-16 did a flyover, as you can tell from everyone looking up. I tried to take another picture of the plane, but F-16s are very, very fast. By the time I did, the pilot was probably back in the hangar drinking beers.

See that little tiny red dot stepping off the pitcher's mound. That's Bush.

This is the view behind us.

Posted by edelfenbein at 6:42 AM

Jimmy Cayne Cashes Out

Jimmy Cayne dumps all of his Bear Stearns (BSC) stock.

Only a year ago James E. Cayne’s stake in Bear Stearns was worth more than $1 billion. But on Thursday, Mr. Cayne, the chairman of Bear, disclosed that he had sold all of his shares in the troubled investment bank this week for just $61 million.

While the sale leaves Mr. Cayne a wealthy man, it nonetheless underscores the deep losses suffered by Bear’s shareholders after the company’s forced sale to JPMorgan Chase two weeks ago.

And for Mr. Cayne, the liquidation evokes a deep sense of loss. It represents a humiliating capitulation for a brash executive who, with his ever-present cigar, suspender-snapping ways and Friday golf outings in the summer, epitomized the classic, if outdated, picture of the Wall Street chieftain.

To the end, Mr. Cayne heeded the advice he often gave his colleagues at Bear: hold on to your stock. Whether the stock was flying high, as it was early last year, at $171, or plummeting, as it did in recent months, Mr. Cayne kept the vast bulk of his 5.6 million shares.

Posted by edelfenbein at 9:39 AM

Goodbye Moto

Instead of one big sucky company, we’ll now have two!

Motorola said Wednesday that it would split itself into two publicly traded companies as it struggles to boost its stock price and faces pressure from activist investor Carl C. Icahn.

Motorola said in a statement that it would separate its flagging cellphone unit from its broadband and mobility operations, which encompasses the servicing of wireless networks and the building of television set-top boxes. Motorola shareholders would receive stock in both companies.

“Creating two industry-leading companies will provide improved flexibility, more tailored capital structures, and increased management focus - as well as more targeted investment opportunities for our shareholders,” Gregory Q. Brown, Motorola’s chief executive, said in a statement.

Motorola said in January that it was considering a break-up as its stock has plunged 45 percent over the past year. Despite the success of its Razr cellphone, Motorola has lost market share to rivals like Nokia, Samsung and Apple.

It has also faced increasing pressure from Mr. Icahn, its second-largest shareholder. The activist investor recently sued Motorola to gain access to documents related to its board’s discussions about its cellphone business.

Mr. Icahn, who holds about 6.3 percent of Motorola shares, is also seeking four seats on the company’s board.

This makes some sense as the company’s stock has also split itself in two. I really don’t see the value of doing this. I’m always suspicious of the phrase “unlocking shareholder value.” The problem is, there has to be shareholder value in the first place that can be unlocked.

One of the reasons for the breakup, given by CEO Gregory Brown, was that the two separate units would benefit from increased focus from management. Why couldn’t they effectively manage both?

Posted by edelfenbein at 10:27 AM

Goldman: $460 Billion More in Credit Losses

From Bloomberg:

Wall Street banks, brokerages, and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.

"There is light at the end of the tunnel, but it is still rather dim," Goldman analysts including New York-based Andrew Tilton said in a note to investors yesterday. They estimated that residential mortgage losses will account for half the total and commercial mortgages for as much as 20 percent.

Earnings and share prices at US financial institutions tumbled in the past year as fallout from the mortgage crisis spread to other markets. Demand for mortgage-backed securities evaporated, leading to the collapse of Bear Stearns Cos., once that market's largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co. this month.

Posted by edelfenbein at 9:34 AM

Federal Reserve Announces Emergency Release Of Butterflies

The Onion Radio News is on the scene.

Posted by edelfenbein at 6:56 AM

JPMorgan Sweetens the Pot

I won’t say I predicted it, but I did, in fact, predict it.

Yesterday, JPMorgan Chase (JPM) announced that it will increase its bid for Bear Stearns (BSC) from $2 a share to $10 a share.

Last Wednesday, I wrote.

I would say that the most likely outcome is that JP Morgan will sweeten the offer. To add some context, it’s really not that much for JPM. The company’s market value has already increased by $20 billion this week. The offer for Bear will cost JPM $236 million. What’s the big deal if it doubles or even triples the offer? Plus, it could win JPM some goodwill.

Actually, they quintupled it. Before you go thinking that a newfound spirit of generosity and altruism has broken out on Wall Street, I should remind you that self-interest may be playing a part.

That $20 billion figure I mentioned was on Wednesday morning. By the end of the week, shares of JPM tacked on 25.8% which is an increase of $32 billion. I swear, Jamie Dimon must be some sort of financial Jedi. How did he pull this off? That $32 billion is far more than Bear was ever worth.

At any rate, even after raising its bit, JPMorgan is really just kicking a couple of pennies Bear’s way.

John Carney at DealBreaker said the real reason for the sweetened bid was to hold off a potential second run at Bear. That could be. Either way, JPMorgan Chase basically got one of the best deals imaginable. This will go down in Wall Street annals as a legendary deal.

Think of it this way, thanks to the folks at the Federal Reserve, this was the most harmonious cooperation between the public sector and free enterprise since Eliot Spitzer and Kristen (or was it Ashley?). Except now, the roles are reversed.

In the end, the Bear Stearns was done in by questionable liquidity. Unfortunately, the liquid in question was Kool-Aid and there was plenty to go around. Bear’s mismangement is simply staggering. While the deal was being worked out, Jimmy Cayne, Bear’s chairman, was at a bridge tournament in Detroit.

What’s scary is, this wasn’t the first time. Over the summer, when two of Bear’s hedge funds rammed the iceberg, Cayne, who was then CEO, was at a bridge tournament in Nashville. Not only that, but according to the Wall Street Journal, he was “without a cellphone or an email device.”

Sheesh. How does that happen?

(Less importantly, there are bridge tournaments in Nashville??)

The WSJ article also noted: “Attendees say Mr. Cayne has sometimes smoked marijuana at the end of the day during bridge tournaments. He also has used pot in more private settings, according to people who say they witnessed him doing so or participated with him.”

Thank you, Rupert. Now that’s reporting! So while Bear’s stock was making new lows, management was making new highs. Not surprisingly, BSC shareholders aren’t too pleased with their shares vaporizing into thin air. On Sunday, The New York Post reported, “Cayne’s armed hulk of a bodyguard trailed him everywhere and parked himself outside Cayne’s office all day, sources said.”

How much you want to bet that that source owns more than a few shares of BSC? Also, at what point, exactly, did the world of high finance start taking the form of the movie My Bodyguard? This can’t be a good development.

Ironically, 101 years ago, J.P. Morgan, the man, helped bailout the financial system during the Panic of 1907. It was at this time that people realize that it might not be a great idea to have our entire financial system dependent on one man. So, to make a long story short, Congress eventually passed the Federal Reserve Act of 1913.

Which leads us to last Tuesday. That’s when the Federal Reserve lowered interest rates by 75 basis points to just 2.25%. All told, rates have dropped by 300 points in just over six months. Until recently, Treasury Inflation Protected Securities (or TIPS) maturing as late at 2012 carried a negative yield.

What I find interesting is that the financial media refuses to discuss the possibility of a bond bubble. Everyone assumes the bond market is correct—it never suffers from exuberance, rational or otherwise. Another interesting note is that this Fed decision was the first time since 2001 that there were two dissenting votes.

Nevertheless, the market roared its approval and surged—perhaps in homage to Mr. Cayne—420 points. The two best days of the past five years came exactly one week apart.

The course of events has probably left you feeling a bit rattled. That’s understandable. Standard & Poor’s recently said that the stock market’s volatility has reached its greatest point in 70 years. At one point last week, the yield on the three-month T-bill hit 0.2%.

But I should remind you that times like these are often great buying opportunities. Since 1950, the entire capital gain of the S&P 500 has come when the yield spread between the three-month and the 10-year Treasury is over 65 basis points. Today, that spread is over 230 basis points.

Not every stock is reeling from the credit crises. Many of the best companies aren’t overly leveraged and they see a bright year ahead. A great example is Donaldson (DCI) of Minneapolis, Minn.

I have to warn you, Donaldson is about as dull as they come. The company makes…hold on to something…filtration systems! Woo!

Yeah, I know, it’s pretty boring. But consider a few facts. Donaldson has reported record earnings for 18 straight years. Does that grab your attention?

Last month, the company reported earnings of 42 cents a share, which was in line with the Street’s consensus. That was for the second quarter of their fiscal year, so for the first half, sales were up 14% and EPS was up 17%. That kinda beats the 0.2% from T-bills.

On top of that, Donaldson increased its 2008 projection to $2 to $2.10 a share. That’s higher than what they first projected in November when they forecast $1.97 to $2.07. Not only that, this is actually the second time Donaldson has increased its projection. In September, the company expected EPS of $1.92 to $2.01.

Always pay attention when companies warn or increase estimates. They're a lot like cockroaches: For every one you see, there are five more scurrying around the woodworks.

This credit crisis, too, shall pass. Ten years ago, when the financial system was heading for the cliffs, frightened investors left high-quality stocks. Shares of Donaldson dropped in half. But the stock is up over five-fold since.

Posted by edelfenbein at 12:55 PM

Bove: Bear Will End Up Costing JPM $65 a Share

Richard Bove said that when you add it all up, Bear will eventually cost JPMorgan Chase $65 a share.

While some may think that JPMorgan is getting Bear Stearns at a bargain price, "I do not," Bove said in a note to clients. "Bear Stearns is a deeply troubled company which would have no value if the Federal Reserve had not stepped in to bail it out."

JPMorgan does not need Bear Stearns mortgage operation, has a "much stronger investment banking business," and the Bear Stearns New York headquarters is "just another piece of Manhattan real estate that it must rid itself of," Bove said.

While JPMorgan Chase may want Bear Stearns' prime brokerage business, it is likely that the unit's best customers have already left for Goldman Sachs, he said.

Bove currently has a "Market Perform" rating and $44 price target on JPMorgan Chase. The target implies he expects shares to drop about 6 percent over Monday's $46.55 close.

"What is most disturbing about this deal is that it uses a great deal of Morgan capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that is best described as sclerotic," he said.

Posted by edelfenbein at 10:04 AM

Pot Takes Out Ad on Kettle

Fox Business Network has taken out a big ad in the NYT and WSJ to question Cramer's credibility over his Bear Stearns call. Here's the PDF.

(Via: The Stalwart)

Posted by edelfenbein at 8:14 AM

Boozing British Bankers

The Independent is on the scene:

Rumour-mongering and rogue traders; buy-outs and bonus cuts: it's been quite a week for bankers. And, yesterday, as drizzle fell and storm clouds gathered over the capital, the pub was the only place the nervous denizens of Canary Wharf wanted to be.

They emerged from their offices, loosening their ties, to toast a long Easter weekend which, regardless of the turmoil which preceded it, will at least bring respite to anxiety. "We are meant to be at work but we've come here for some solace," a group of Lehman analysts said.

Lunchtime had just begun but they, along with many other suited drinkers, were on their fourth round of beers at the packed All Bar One branch under Reuters' FTSE-100 ticker.

Well done, lads. Well done.

Posted by edelfenbein at 10:16 AM

JPMorgan offers Bear Stearns staff bonuses

Reuters reports:

JPMorgan Chase & Co is offering bankers at Bear Stearns Cos bonuses to stay and support the controversial takeover, a person familiar with the situation said on Thursday.

JPMorgan Chief Executive Jamie Dimon met with hundreds of Bear Stearns executives late Wednesday, his first meeting with bank employees since the takeover was agreed to on Sunday.

At the meeting, Dimon, aiming to head off an exodus of Bear Stearns staff, proposed incentives to bank employees who stay and support the deal. He also expressed confidence that the deal would be completed as proposed, said the source, who was briefed on the meeting and is familiar with JPMorgan's thinking.

Employees who are offered jobs by JPMorgan would receive a bonus that includes JPMorgan shares. Employees who are not offered jobs will receive at least a cash bonus of about 30 percent of their 2007 compensation if they stay through the completion of the deal, the source said.

It is unclear whether Bear Stearns employees, who own about 30 percent of the firm, were swayed by the offer.

Well, allow me to clear it up—yes, they were swayed. The only question now is how much.

The most important number to consider in this deal is that JPM’s stock is up 25.8% this week. That’s an increase of $32 freakin billion, which is far more than Bear was ever worth. The BSC folks don’t want to hold on to their stock, they want JPM’s.

Posted by edelfenbein at 7:59 AM

Why Is the Stock Market Closed for Good Friday?

Today is Good Friday and the stock market is closed. I have no idea why this is since most of the rest of the country is open for business. I live in Washington, DC and the Feds will shut down for practically anything. But not today—it’s only Wall Street.

When I got my first job as a broker, I remember my branch manager saying that it was some sort of ancient inter-confessional deal to have one Friday off for the Easter/Passover season. That could be right but I’ve never found anything to back it up. Today, however, a closed market on Good Friday is more likely so traders can follow their brackets without interruption.

(By the way, there’s some doctoral dissertation waiting to written on the effect of fantasy sports on finance. Every trader I’ve ever known has had several fantasy football or baseball teams going. Wall Street is quite good at alternate reality; real reality is still a bit iffy.)

The stock exchange closed for two hours in honor of the death of J.P. Morgan (the man, not the stock—that’s doing fine, thank you very much).

The stock exchange used to have a brief Saturday session that was discontinued in 1952. Interestingly, the Saturday sessions have nearly been erased from history. If you look at many data files, like the Dow or S&P historical data at Yahoo Finance, the Saturday sessions aren’t there.

Poor Saturday, it’s gone down the memory hold.

Posted by edelfenbein at 7:39 AM

Pop!

Gold has not had a good week. The April contract closed at $1004.30 on Tuesday. It dropped $59 yesterday and it's down another $25.30 today.

From Karl Marx in 1867:

A commodity appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing, abounding in metaphysical subtleties and theological niceties.

Posted by edelfenbein at 3:17 PM

Santelli TV

I love this guy. Santelli needs his own reality show. This needs to happen.

Posted by edelfenbein at 2:49 PM

The Long Shot

Matthew Yglesias comments on the absurdity of John Meriwether blowing up, yet again. He includes this parable:

Imagine I find a kind of gambling machine somewhere that works kinda sorta like an enormous roulette wheel. It has 100,000 possible outcomes, and on 99,999 of those outcomes it pays off at a 1:1 ratio. But on the 100,000th outcome, you lose at a 1:300,000 ratio. Obviously, placing a bet on that machine would be foolish.

Not to me.

I’d lay down $1,000, let it roll for 20 spins and walk away a billionaire.

Addendum: Or there’s a very remote chance that I’d go in the roulette business. I'd be cool with either outcome.

Posted by edelfenbein at 7:47 AM

The Return of Volatility

According to a recent report by S&P, market volatility is at a 70-year high. I think that’s merely going by 1% daily changes. Other measurements indicate that volatility has indeed risen, but it’s more accurate to say that volatility has returned to normal from an unusually calm period.

The VIX still hasn’t reached the heights of 1998 to 2002. The index has closed above 30 for a few times recently, but it did it fairly regularly a few years ago.

I think the effect of volatility on equity returns is not very strong. The current VIX seems to have an effect on the dispersion of returns, but not the direction.

Posted by edelfenbein at 7:42 AM

How NCAA Tournament Seeds Have Fared

The Chicago Tribune looks at how the NCAA tournament seeds have fared since 1985. I love the idea of a big tournament that invites a huge number of teams. It seems the most democratic, but there are some gaps in justice. For example, the #8 or #9 seed is really screwed because they always must play a #1 in the second round. Only 12 #8 or #9 teams have made it past the second round.

On the other hand, #12 is a pretty good seed. Those teams have a losing, but respectable record against the #5 seeds. A total of 14 number #12 seeds have made it past the second round.

My guess is that the seeds increase linearly while quality increases geometrically. The difference between a #12 and a #5 is probably about the same as a #1 and a #3.

If we wanted to be hard-headed, we could really make it a 12-team tournament and the results would be almost the exact same. Twenty of the 23 winners have been #1, #2 or #3 teams. Of course, that would ruin a lot of the fun.

I’ve noticed that no matter what happens, the media talks about how the first weekend was a “Cinderella Weekend.” But going by history, there’s nothing that surprising by having at least one #14 beat a #3, or having a #2 or #3 lose in the second round.

It’s fun to root for the Cinderella teams (we have a couple of local teams ranked in the double-digits), but history says that the odds are against them.

Posted by edelfenbein at 7:45 PM

"Mama - just killed my fund"

Sung to the tune of 'Bohemian Rhapsody' by Queen

Is this the real price? Is this just fantasy? Financial landslide No escape from reality

Open your eyes
And look at your buys and see.
I'm now a poor boy (poor boy)
High-yielding casualty
Because I bought it high, watched it blow
Rating high, value low
Any way the Fed goes
Doesn't really matter to me, to me

Mama - just killed my fund
Quoted CDO's instead
Pulled the trigger, now it's dead
Mama - I had just begun
These CDO's have blown it all away
Mama - oooh-hoo-ooo
I still wanna buy
I sometimes wish I'd never left Goldman at all.

(guitar solo)

~~~

I see a little silhouette of a Fed
Bernanke! Bernanke! Can you save the whole market?
Monolines and munis - very very frightening me!
Super senior, super senior
Super senior CDO - magnifico

I'm long of subprime, nobody loves me
He's long of subprime CDO fantasy
Spare the margin call you monstrous PB!
Easy come easy go, will you let me go?
Peloton! No - we will not let you go - let him go
Peloton! We will not let you go
(let him go !)
Peloton! We will not let you go - let me go
Will not let you go
let me go (never) Never let you go - let me go Never let me go – ooo
No, no, no, no, No, NO, NO ! -
Oh mama mia, mama mia, mama mia let me go
S&P had the devil put aside
for me
For me, for me, for me

~~~

So you think you can fund me and spit in my eye?
And then margin call me and leave me to die Oh PB - can't do this to me
Just gotta get out - just gotta get right outta here

Ooh yeah, ooh yeah
No price really matters
No liquidity
Nothing really matters - no price really matters to me
Any way the Fed goes.....

(Hat Tip: Ritholtz)

Posted by edelfenbein at 4:57 PM

The Three-Month T-Bill Now Yields 0.5%

I don't know what to say. If you invest one million dollars, that works out to a yearly gain of $5,000.

The government can now rent $70,000 a day for the grand total of $1.

Posted by edelfenbein at 2:29 PM

A Couple of Bookies

In the movie Trading Places, the Duke brothers explain to Eddie Murphy the essence of their investment business. Murphy shoots back, “You two sound like a couple of bookies to me.”

He’s right; fundamentally, it’s the same idea. Now Bloomberg has a story about one Wall Street’s firm’s growing interest in gambling. Cantor Fitzgerald has a Cantor Gaming unit that’s involved in sports books.

Bloomberg writes:

The firm is seeking Nevada state approval for field tests of a handheld device for playing digital card games and roulette in a casino's public spaces, such as pools and nightclubs. Officials of closely held Cantor Fitzgerald say it could eventually be used anywhere.

It makes sense for them to be involved in this. Basically, their business is math. I believe that I once read that the entire field of statistics has always been driven by gambling.

"It's all about processing," said Lee Amaitis, 57, head of Cantor Gaming, from London. "All you're doing is math. If you have an engine that can drive random generating results, you can process bets."

Posted by edelfenbein at 1:06 PM

Up In Smoke

WSJ, November 1, 2007

Attendees say Mr. Cayne has sometimes smoked marijuana at the end of the day during bridge tournaments. He also has used pot in more private settings, according to people who say they witnessed him doing so or participated with him.

AP, March 18, 2008

Dow Rises 420 Points

Posted by edelfenbein at 11:40 AM

Re: "Bear Stearns is fine."

There’s some controversy surrounding Jim Cramer’s “Bear Stearns is fine” comment from last Tuesday. Cramer has said that he was referring to Bear Stearns as a depository institution, not as an investment. He claims that he was telling the questioner that his money was safe at Bear Stearns’ money management arm. Cramer also says that he called Bear’s stock “worthless “on Friday.

Mick Weinstein at Seeking Alpha, whom I respect greatly, agrees with Cramer. I’m sorry but it doesn’t wash with me. Let me say that I think it’s very possible that that what’s Cramer intended. But, to a reasonable person, there’s no reason to see it that way.

Mad Money is a show dedicated to Cramer's discussion of stocks. That's the appeal. Only a few times have I heard him discuss larger money management issues. Plus, there was a stock chart of BSC up on the screen. That strongly implies to an average person that he meant the shares.

If he was referring to Bear’s deposits, Cramer didn’t mention basic facts, like you should immediately speak with your broker, or check up on the firm’s deposit insurance. Anyone who has spent five minutes studying for a Series 7 knows about SIPC. At no point did Cramer make an effort to clear up would could be confusing. Plus, he goes the extra step of saying that “Bear Stearns is not in trouble.”

In today’s WSJ, James Stewart writes that “Bear Stearns didn't have a retail brokerage operation and didn't cater to individual investors.” The firm did (and I suppose, does) have a small retail operation but that’s only for high net worth individuals. I looked at Bear’s website and they don’t even have an office here in Washington, DC. Once any trouble hit, I would think that those brokers informed their clients as soon as possible. In high-net worth money management, clients aren’t typically kept in the dark.

Posted by edelfenbein at 8:20 AM

Raise the Price

I really don’t see how Bear shareholders will approve the $2 deal. Apparently, I’m not alone. The stock is currently at $6 and it went as high as $8 yesterday.

Part of that the buying is being driven by BSC creditors (hedge funds, mainly) who don’t mind taking a small equity loss in exchange for a big debt gain—they just want the deal done. No one knows how much equity Bear truly has, but there’s around $300 billion of Bear Stearns bonds out there. If the whole mess goes to a bankruptcy court, then the stock holders go to the back of the line.

Of course, the debtor’s strategy could backfire if the price goes too high and JPM gets cold feet. Still, I doubt that would happen. As always, one shouldn’t fight the Fed.

I would say that the most likely outcome is that JP Morgan will sweeten the offer. To add some context, it’s really not that much for them. The company’s market value has already increased by $20 billion this week. The offer for Bear will cost them $236 million. What’s the big deal if they double or even triple it? Plus, it could win them some goodwill. Dimon is a very smart guy, and it might be a shrewd move to get out in front of what could become very unpleasant. If I were him, I’d meet with Joe Lewis, Legg Mason and other major BSC holders. He’s already won big. He can afford to be magnanimous.

On top of that, let’s not forget that JPM owns a gigantic call contract of whenever-$2s, and there’s also the building deal. Plus, it’s not unreasonable for the U.S. credit market to recover over the next few weeks. That could be a huge boon for BSC’s debt. To quote Michael Scott, it’s win-win-win. In fact, taxpayers could win as well.

I think we ought to move beyond the question of whether the Fed should be involved in—what I’ll call—a quasi-bailout. Instead, let’s look at the deal that was made, and it makes JPM look Putin-esque. The WSJ reminds us that it’s not uncommon for the government to make money off bailouts:

During the 1995 peso crisis, the Clinton administration offered Mexico $20 billion in loans, with the country's oil revenues as security. The International Monetary Fund offered another $18 billion. Critics condemned the loans as a bailout. In the end, Mexico didn't require the entire amount, and the country's finances recovered. The U.S. ended up making a profit on the interest payments.

The government also turned a profit from the Air Transportation Stabilization Board, an entity set up after the Sept. 11 attacks to support the airline industry. The board ultimately provided a total of $1.56 billion in loan guarantees to six carriers. The government earned just under $350 million from fees and stock sales, according to the Treasury Department.

Last year, the Fed made a profit of $34 billion. It’s very possible that the central bank could make money on whatever they’ll get from Bear’s book. I still don’t understand who gets what. This seems to be a classic case of we don’t know what we don’t know. Perhaps the best move for the Fed is to hold the bonds to maturity.

Posted by edelfenbein at 8:08 AM

Has Bill Miller Lost His Magic

Legg Mason Value Trust (LMVTX) has badly lagged the market since the beginning of 2006. It has only gotten worse recently.

Posted by edelfenbein at 7:42 AM

Today Compared with March 11

The S&P 500 had another great day today. Today's rally was more broad-based than the rally from last week.

Here's a look at how the stocks in the S&P 500 fared. The X-axis is March 11, the Y-axis is today.

Here's a spreadsheet listing how every stock in the S&P 500 did today.

Posted by edelfenbein at 10:25 PM

Ftizgerald Was Wrong

There are second acts in American lives. Joe Weisenthal writes:

Google's New Banking Partner?

Qatalyst. Release.

"The launch of Qatalyst is an important development for the technology industry," said Eric Schmidt, Chairman and CEO of Google. "Frank and his team bring unparalleled industry knowledge, a unique 25-year market perspective and candid, insightful judgment that CEOs greatly value on important strategic initiatives. I look forward to working with him again and am very enthusiastic about Qatalyst's prospects for success."

That Frank would be Frank Quattrone, continuing the comeback/American dream.

Posted by edelfenbein at 4:56 PM

The Best Day in Five Years

Remember how I said that last Tuesday was the best day in five years. Well, I've changed my mind. I meant to say that this Tuesday was the best day in five years.

Date...............Gain
18-Mar-08.......4.24%
11-Mar-08.......3.71%
17-Mar-03.......3.54%
13-Mar-03.......3.45%
18-Sep-07.......2.92%
13-Nov-07.......2.91%
28-Nov-07.......2.86%
2-Apr-03..........2.61%
17-Aug-07.......2.46%
6-Aug-07.........2.42%
21-Mar-03.......2.30%
16-Jun-03........2.24%
1-Oct-03..........2.23%

Posted by edelfenbein at 4:29 PM

"Open the Kimono"

Wow! I just heard Lehman's CFO, Erin Callan, use the phrase "open the kimono" in a CNBC interview with Maria Bartiromo. By my math, that's +1 to any company's P/E.

By the way, Portfolio has just dubbed Ms. Callan as "Wall Street's Most Powerful Woman." I was waiting for Maria to ask about that.

Posted by edelfenbein at 4:17 PM

The Fed Cuts By 0.75%

The Fed Funds rate is now down to 2.25%. Here's the statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

Posted by edelfenbein at 2:19 PM

FactSet Research Systems

The popular belief seems to be that FactSet (FDS) is somehow a proxy for bad news in money management. The company’s results, however, continue to upset that thesis.

For Q2, FDS just reported a sales increase of 22% and adjusted EPS rose from 52 cents to 62 cents. Breaking down to the decimals, that’s an increase of 20.4%, and it beat the Street by two cents a share.

The company also said that Q3 revenues would be between $145 million to $149 million which is higher than the Street’s estimate. Best of all, that assumes no money from Bear Stearns (which is a safe assumption).

The shares are up over 20% but it's really just making up for a lot of lost ground.

This is from the earnings call:

Randy Hugen - Piper Jaffray Companies

Okay. And then, finally, was Bear Stearns a top 10 client?

Philip A. Hadley

No. Our largest client is less than 3% of our total ASV. And Bear Stearns was significantly less than 1%.

If you were to add some history to it, as similar in size as what Roberson Stevens was to us in the last cycle. It seems like every cycle one soldier goes down and that just happens to be the one in this cycle. Hopefully only one.

Posted by edelfenbein at 2:07 PM

The Pro Bailout Case

In Slate, Elizabeth Spiers argues in favor of the Bear bailout:

The alternative would have been to let Bear slide into a Chapter 11 bankruptcy, which would have happened quickly. Among other things, Moody's, S&P, and Fitch all downgraded Bear on Friday, potentially forcing the firm to put up additional collateral to meet the requirements of a credit-default swap triggered by the downgrades—collateral it didn't have. Bear notionally holds $13 trillion in derivatives contracts, and even if credit-default swaps were only a small fraction of that, any sort of credit event would have been catastrophic for both Bear and its buyers, the latter of whom would find themselves holding guarantees from a firm that was not in a position to guarantee anything.

Bear's client assets would also have been frozen in the event of a bankruptcy, crippling not just the brokerage but many of the hedge funds that have collateral at the firm. (Fear of this happening is part of reason that the run on the bank—or run on the brokerage, rather—happened in the first place.) Taxpayers would have ended up footing the bill for assets that were federally insured, effectively a different kind of bailout.

Posted by edelfenbein at 11:34 AM

Inside the Demise of Bear Stearns

The Wall Street Journal has an excellent recap of the crisis that led to JPMorgan’s purchase of Bear Stearns. As this story initially broke, you got the feeling that this simply had to happen and there wasn’t much else policy makers could so. Yet, as I read the story, it becomes clear how arbitrary the whole mess was. I’m not sure it had to happen.

The more the sources stress the urgency, the more skeptical I become. Why was time so critical? If the problem is liquidity, then I would think that some breathing room could help out. Also, if tax dollars can be used to facilitate this deal, what’s to prevent them from propping up, say, Wal-Mart or General Motors?

My real enjoyment from these stories is figuring out how it was put together and seeing if you can see who the unnamed sources are. In every story, there are many motives. Naturally, anyone involved in the deal will want to speak with the WSJ as soon as possible to get their version of the story out.

The article begins:

The past six days have shaken American capitalism.

Cute. That, of course, comes from John Reed’s famous book on the Russian Revolution, Ten Days that Shook the World. Reread that sentence again, but this time, take out the word “American.”

Now let’s start looking for clues:

The mood changed daily, as did the apparent scope of the problem. On Friday, Treasury Secretary Henry Paulson thought markets would be calmed by the announcement that the Federal Reserve had agreed to help bail out Bear Stearns. President Bush gave a reassuring speech that day about the fundamental soundness of the U.S. economy. By Saturday, however, Mr. Paulson had become convinced that a definitive agreement to sell Bear Stearns had to be inked before markets opened yesterday.

Bear Stearns's board of directors was whipsawed by the rapidly unfolding events, in particular by the pressure from Washington to clinch a deal, says one person familiar with their deliberations.

"We thought they gave us 28 days," this person says, in reference to the terms of the Fed's bailout financing. "Then they gave us 24 hours."

The “person” person is clearly a key source. Note that they're playing up the sense of urgency. We’re being told that a deal simply had to be done before markets opened. This is the key goal of the story—explaining why a month delay was unacceptable.

The terms of the Bear Stearns sale contained some highly unusual features. For one, J.P. Morgan retains the option to purchase Bear's valuable headquarters building in midtown Manhattan, even if Bear's board recommends a rival offer (That’s a nice trick.). Also, the Fed has taken responsibility for $30 billion in hard-to-trade securities on Bear Stearns's books, with potential for both profit and loss.

The question now looming over the transaction: Has the government set a precedent for propping up failing financial institutions at a time when its more traditional tools don't appear to be working?

Actually, there’s no question involved at all. Take that last sentence and delete the first word and the question mark.

Cutting interest rates -- which the Fed is expected to do again today, by between a half percentage point and a full point -- hasn't yet done much to loosen capital markets gummed up by piles of bad debt.

Even though the transaction ultimately could leave taxpayers on the hook for losses, the political response so far has been fairly positive. "When you're looking into the abyss, you don't quibble over details," said New York Democratic Senator Charles Schumer.

Sorry Chuck, but I do. This is the closest relationship between government and private enterprise since Eliot Spitzer, although the roles now seem reversed.

Last Tuesday, we’re told, Wall Street started to turn against Bear.

That same day, the market began turning on Bear Stearns. Phones were ringing off the hook at rival firms such as Goldman Sachs Group Inc., Morgan Stanley and Credit Suisse Group. Clients of those firms were growing worried about trades they had entered into with Bear Stearns -- about whether Bear Stearns would be able to make good on its obligations. The clients asked the other investment banks whether they would be willing to take the clients' places in the trades. But credit officers at Goldman, Morgan Stanley and others -- worried themselves about Bear Stearns's condition -- began to say no.

At Bear Stearns, Chief Financial Officer Samuel Molinaro, along with company lawyers and Treasurer Robert Upton, were trying to make sense of the situation. They felt comfortable with their capital base of roughly $17 billion and were looking forward to reporting Bear Stearns's first-quarter earnings, which had been respectable amid the market carnage.

One theory began developing internally: Hedge funds with short positions on Bear -- bets that the company's stock would fall -- were trying to speed the decline by spreading negative rumors.

Sounds like they were spreading the truth.

Bear Stearns's hope was that the Fed would make a loan from its discount window to provide several weeks of breathing room. That, the firm hoped, would perhaps halt a run on the bank by allowing it to swap bonds for the cash necessary to return to customers.

The Fed's standard preference in dealing with a troubled institution is to first seek a private-sector solution, such as a sale or financing agreement. But the possibility of a bankruptcy filing Friday morning created a hard deadline.

A trigger point was looming for Bear Stearns in the so-called repo market, where banks and securities firms extend and receive short-term loans, typically made overnight and backed by securities. At 7:30 a.m., Bear Stearns would have to begin paying back some of its billions of dollars in repo borrowings. If the firm didn't repay the money on time, its creditors could start selling the collateral Bear had pledged to them. The implications went well beyond Bear Stearns: If other investors questioned the safety of loans they made in the repo market, they could start to withhold funds from other investment banks and companies.

The $4.5 trillion repo market isn't a newfangled innovation like subprime-backed collateralized debt obligations. It is a decades-old, plain-vanilla market critical to the smooth functioning of capital markets. A default by a major counterparty would have been unprecedented, and could have had unpredictable consequences for the entire market.

But why is the unprecedented action that was taken better than the unprecedented of allowing a default in the repo market? Obviously, no one likes a default, but the risk of a default is priced in. Now the market has to price in the participant’s political influence as well.

Federal Reserve Bank of New York President Timothy Geithner worked into the night, grabbing just two hours of sleep near the bank's downtown Manhattan headquarters. His staff spent the night going over Bear's books and talking to potential suitors including J. P. Morgan. The hard reality was that even interested buyers said they needed more time to go over the company.

The pace and complexity of events left Bear's board of directors groping for answers. "It was a traumatic experience," says one person who participated. Sleep deprivation set in, with some of the hundreds of attorneys and bankers sleeping only a few hours during a 72-hour sprint. Dress was casual, with neckties quickly shorn.

A detail like “two hours of sleep” strongly suggests that Geithner was a source, as was “one person” from Bear’s board.

J.P. Morgan's effort to buy Bear kicked into high gear on Friday afternoon, just hours after the big bank and the Fed had provided Bear with the 28-day lifeline. Steve Black, co-head of J.P. Morgan's investment bank, returned early from vacation in the Caribbean, spearheading the bank's efforts with his J.P. Morgan counterpart in London, Bill Winters.

Mr. Black's role was pivotal. He was a longtime associate of J.P. Morgan Chief Executive James Dimon. And Mr. Black had a long relationship with Bear's CEO, Mr. Schwartz, dating back to the 1970s, when the two were fraternity brothers at Duke University.

There’s a nice little nugget. So the whole deal was started over a 30-year-old keg party. So I’m guessing Black was a source as well.

Wait a second, don’t Black and Schwartz really have the same name? Freaky....

On Saturday, the deal started to come together.

That evening, Mr. Black got on the phone to Mr. Schwartz, Bear Stearns's CEO. J.P. Morgan would be willing to buy Bear Stearns, subject to the conclusion of due diligence, he told Mr. Schwartz. The J.P. Morgan executives didn't set a specific price, instead providing a dollars-per-share range, according to people familiar with the matter. At the high end was a figure in the low double digits, these people say.

So how did it go from the low double digits to the low single digits? It's not really clear. JPMorgan started to get cold feet. Now for the climax:

Finally, they came to a conclusion. J.P. Morgan wouldn't buy Bear Stearns on its own. The bank needed help before it would do the deal.

Mr. Paulson was frequently on the phone with Bear and J. P. Morgan executives, negotiating the details of the deal, the senior Treasury official said. Initially, Morgan wanted to pick off select parts of Bear, but Mr. Paulson insisted that it take the entire Bear portfolio, the official said.

This was no normal negotiation, says one person involved in the matter. Instead of two parties, there were three, this person explains, the third being the government. It is unclear what explicit requests were made by the Fed or Treasury. But the deal now in place has a number of features that are highly unusual, according to people who worked on the transaction.

In addition to its option to purchase Bear's headquarters building, J.P. Morgan has the option to purchase just under 20% of Bear Stearns's shares at a price of $2 each. That feature gives J.P. Morgan an ability to largely block a rival offer, says a person with knowledge of the contract.

The deal also is highly "locked up," meaning that J.P. Morgan cannot walk, even if there is a heavy deterioration in Bear's business or future prospects. Bear Stearns holders can, of course, vote the deal down. But the effect that would have on J.P. Morgan's ongoing managerial oversight and the Fed's guarantees is largely unknown.

"We're in hyperspace," says one person who worked on the deal. All these matters are very likely to be litigated in court eventually, this person adds.

The Fed spent the weekend putting together a plan to be announced Sunday evening, regardless of the outcome of Bear's negotiations, that would enable all Wall Street banks to borrow from the central bank. Mr. Bernanke called the Fed's five governors together for a vote Sunday afternoon. All five voted in favor, using for the second time since Friday the Fed's authority to lend to nonbanks.

The steps were announced at the same time the Fed agreed to lend $30 billion to J.P. Morgan to complete its acquisition of Bear Stearns. The loans will be secured solely by difficult-to-value assets inherited from Bear Stearns. If the assets decline in value, the Fed -- and therefore the U.S. taxpayer -- will bear the cost.

Posted by edelfenbein at 10:06 AM

"Bear Stearns is fine."

From last Tuesday....

Posted by edelfenbein at 8:19 PM

Nicholas Financial Is Below $6

The earnings yield for Nicholas Financial (NICK), based on trailing earnings, is about 17%. That's about 20 times what a T-bill can get you.

Posted by edelfenbein at 2:41 PM

Guess What Investment Bank Hasn't Updated Their Website?

Give up.

Posted by edelfenbein at 2:26 PM

Sign of a Bottom?

Abby Joseph Cohen won't make any more predictions for the S&P 500.

Abby Joseph Cohen, the most bullish investment strategist on Wall Street this year, will stop making Standard & Poor's 500 Index forecasts for Goldman Sachs Group Inc.

She was succeeded in the role by David Kostin, Goldman's U.S. investment strategist, spokesman Ed Canaday said in a telephone interview. Kostin today predicted the S&P 500 may fall 10 percent to 1,160 before rebounding to 1,380 by year's end. Cohen, as chief investment strategist, last predicted the benchmark for American equities would end 2008 at 1,675, representing a 32 percent rally from its current level.

The 56-year-old Cohen now has the title "senior investment strategist" and contributor to the portfolio strategy team, according to Canaday. Her prediction for the S&P 500 this year was the highest among 14 Wall Street forecasters followed by Bloomberg.

"She will continue to meet with our clients around the world and provide commentary on financial markets focusing more on longer-term market activity," Canaday said in an e-mailed statement.

Posted by edelfenbein at 12:59 PM

50-Year Low

The yield on the three-month T-bill is at a 50-year low.

"People are confused. They are in a reactive mode," said Lou Brien, market strategist at DRW Trading in Chicago.

The yield on three-month T-bills, considered by economists as a "risk-free" benchmark return on U.S. assets, was last quoted at 0.84 percent, down 36 basis points from late Friday. It reached a low of 0.63 percent earlier.

"It's a complete place to hide out," Brien said.

Posted by edelfenbein at 12:42 PM

Just In Case No One Noticed...

Today is a good time to slip out bad news.

Goldman Sachs to reveal $3bn hit

Goldman Sachs, Wall Street's most powerful investment bank, will this week announce asset writedowns worth about $3bn (£1.5bn), its biggest jolt to date from the crisis threatening to engulf the world's financial markets.

Goldman, which has largely thrived amid the turmoil elsewhere on Wall Street, is expected to report a fall in first-quarter earnings of about 50 per cent. The writedown will underline how the financial turbulence is now affecting even the most stellar performers.

The bank's $3bn write­down will be based partly on the declining value of its 4.9 per cent stake in Industrial & Commercial Bank of China (ICBC), which is held separately on Goldman's balance sheet. The share price of ICBC, which conducted the world's biggest ever initial public offering in 2006, has fallen by about 14 per cent in recent months.

Goldman invested $2.3bn for its minority shareholding in ICBC, which is listed on the Hong Kong and Shanghai stock exchanges.

Goldman will also take a hit of about $1.6bn in its leveraged loans business, which has seen a marked decline in recent months amid a dearth in demand for trading bank debt. A further $1.1bn will be written down in connection with assets owned by Goldman's principal investment area, the bank's private equity arm.

Posted by edelfenbein at 12:26 PM

Chart of the Day

Posted by edelfenbein at 9:49 AM

Why $2?

Here’s a question I can’t help asking myself: How and why was $2 decided upon? I mean…jeez! That’s around $250 million, meaning there are problem some people who could have bought BSC outright. I guess the easy answer is because that’s what Jamie Dimon said, and no one was in a position to argue with him. It’s really no difference from being given away. Interestingly, Bear Stearns doesn’t pay golden parachutes for top execs in the case of a takeover.

I’m not sure if that price can last. If I were a BSC shareholder, I’d be furious. At some point, lawyers will most certainly be involved. One investor somehow made it onto yesterday’s call and let it be known that he’ll vote against the deal. He ain’t alone. About one-third of BSC shares are owned by employees. Also on the call, Bear insisted that’s its book value is around $80 a share. But the thing about Bear’s equity is that it only has value with in a context which, possibly, JP Morgan can provide.

Imagine if you have a Maserati. Sweet, right? Now imagine if you have it at the South Pole. Now it’s completely worthless. The car might as well be a big freakin’ rock. It only has value where you can use it, or sell it. If Bear doesn’t have capital and access to capital, then everything it owns is of no value. To continue with my bad metaphor, the role of JPM is to transport the Maserati from the tundra to a nice highway.

If we were to consider the value of Bear’s sweet crib (see pic below), then JPM is basically being paid to take on BSC. It’s not far from the government nationalizing the bank. The only difference is that they did it through the vehicle of JPM.

One more note, If I were in charge of the ECB (that’s a mighty big if), I’d be buying dollars like crazy.

Posted by edelfenbein at 9:11 AM

Official Presentation: JP Morgan Acquiring Bear Stearns

From Seeking Alpha.

John Carney blogs the call.

DealBook has a handy Q&A. Here's a good question:

Can Bear’s shareholders stop it?

Absolutely. There will be a shareholder vote and Bear’s shareholders can vote no. But there appears to be a unique provision in the merger agreement that Bear is required to re-hold the vote over the course of 12 months if Bear’s shareholders vote no the first time. Only after twelve months of meetings and no votes can the transaction be definitively rejected. A bit shaky under Delaware law, but given the circumstances, I find it hard to see how the Delaware courts would refuse to enforce it.

If, after 12 months, there is still a no vote it appears that the JPMorgan and Fed guarantees go away. Talk about a pill to swallow. This would likely leave shareholders with the only alternative to try and seek back money through the bankruptcy process. But the bankruptcy process is unlikely to be fruitful even though Bear has a building worth about a billion dollars. And of course, the delay may find Bear in an improved position such that the acquisition no longer makes sense.

It all sets up some interesting arbitrage opportunities. Perhaps Bear has negotiated a better deal than the market thinks – negotiating itself a year to shop for a higher offer.

And Bear will still have the option to accept a higher bid if someone chooses to make it. Here, I note the irony that Kohlberg Kravis Roberts was reportedly part of the other bidder group looking at Bear this weekend. K.K.R. started at Bear Stearns and in 1976 the management there rejected a proposal by the trio to start a separate buyout unit within the investment bank. The trio then went out to start K.K.R. In hindsight, yet another bad decision.

Of course, the more interesting question is whether Bear should have held out a few more days for some form of contingent consideration instead of settling for $2 by threatening the Federal Reserve with a Chapter 11 and its systemic ramifications. Perhaps we will find an answer on Monday if Bear does indeed trade over the $2 price.

But I do know one thing. If I were Alliance Data Systems, I would announce early tomorrow morning the long-expected termination of my deal to be acquired by the Blackstone Group. No one will care.

Posted by edelfenbein at 8:06 AM

Who Traded 55,000 Bear $30 Puts Tuesday?

Steven Smith asks the question:

This past Tuesday, when Bear Stearns was trading around $65 a share, there was huge put volume in the March $30 strike.

Over 55,000 contracts traded that day at an average price of 15 cents a contract. This is an extremely unusual trade in terms of the number of contracts and how far out-of-the money those options were at the time. This begs the question of why someone would execute such a transaction.

First, it's important to understand that buying a put gives you the right to sell the stock at the strike price. So to buy a put that requires the stock to decline over 50% is essentially a bet that the company is possibly on the brink of going out of business or about to deliver some terrible news.

Remember, these options expire on March 20, so that left only 10 days for some event to occur that would cause these puts to go into the money and have some value. So it appears that as rumors began swirling early in the week that Bear was having liquidity problems and might possibly be bordering on insolvent, someone took that to heart and bought the puts as disaster insurance. And today came news that several banks, including Goldman Sachs, would no longer act as a counterparty to any transactions with Bear. The inability to execute trades would essentially put Bear Stearns out of business.

Posted by edelfenbein at 7:40 AM

Bear Stearns Goes for $2

The Panic of 1907 was eventually resolved when J.P. Morgan organized a group of bankers to keep the credit markets functioning. The U.S. Treasury kicked in $25 million to the cause. In other words, the government wasn’t powerful enough to lead this itself. It had to transfer money to private bankers.

One of the repercussions of Morgan’s aid was that some people felt that it might not be a great idea to have one person act as a lender of last resort. The Panic of 1907 eventually led to the creation of the Federal Reserve.

One hundred and one years later, the Federal Reserve combined with JP Morgan Chase (JPM), the company, not the man, to bail out the economy.

Scratch that, this isn’t a bailout. JP Morgan is buying Bear Stearns for $2 a share. What if I told you last week, when shares of BSC were at $70, that they would soon be less than a gallon of gas? You might have thought that gas was the one that rose.

The idea that this move will create some sort of moral hazard simply doesn’t wash. This company was effectively wiped out. Few bankers are going to feel comforted by a $2 share price. Last year, shares of Bear were going for $150 a pop. Today, they’re worth less than a gallon gas.

The Fed did what it’s supposed to do. The problem with Bear failing is counter-party risk which means that if Bear went under, a lot of other folks would have taken a big hit as well. Really, there wasn’t much of a choice.

The WSJ reports:

To help facilitate the deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns's less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company. Fed officials wouldn't describe the exact financing terms or assets involved. But if those assets decline in value, the Fed would bear any loss, not J.P. Morgan.

Sorta like 1907.

Posted by edelfenbein at 7:23 AM

The Fed Cuts the Discount Rate

The FOMC meets tomorrow:

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

Posted by edelfenbein at 7:17 AM

Hope for the Dollar

If there’s ever a story that involves exchange rates and Chilean strippers, you know I’m on it.

Bikini-clad pole dancers, mini- skirted hostesses and a deal on foreign exchange await customers at Passapoga, a Santiago nightclub, who pay with U.S. dollars.

At banks and foreign-exchange bureaus, $1 fetches less than 430 pesos. Passapoga pays 600 pesos.

“This campaign has had considerable success,” said Jaime Retamal, 55, the club's manager. “Customers come from all over, but a lot from the U.S.”

The dollar has lost a quarter of its value against the peso in the past three years, increasing U.S. travelers' expense for hotels, taxis and restaurants in Chile. Passapoga is discounting the exchange rate to discourage Americans from cutting back on nightclub visits.

Posted by edelfenbein at 7:15 AM

Chart of the Day

Sometimes the chart tells the whole story.

Update: Whoa! Bear was just sold for $2.

Posted by edelfenbein at 1:54 PM

Where Have We, As a Nation, Gone Wrong?

The economy must truly be bad:

Girl Scouts Say Cookie Sales Down

Girl Scout and Brownie troops say cookie sales are noticeably down this year as their customers struggle to pay for groceries, gasoline and home heating fuel.

Becky Santos, leader of Brownie Troop 74 in Barrington, said her group sold 300 boxes outside a Wal-Mart recently, down from 500 in the same location last year. Sue Cusack, the troop's co-leader, said she and her daughter also made fewer door-to-door sales, with some repeat customers buying one box instead of two.

Jan Arsenault of Barrington said she scaled back her purchase because of the economy but couldn't resist two boxes.

Not Samoas. Please lord, NOT THE SAMOAS!!

Posted by edelfenbein at 12:48 PM

UnitedHealth Cautions

UnitedHealth's (UNH) stock got creamed this week after WellCare (WCG) and Humana (HUM) lowered their guidance. Naturally, people have been expecting an earnings warning from UNH bot the company has so far stuck to its 2008 forecast of $3.95 to $4 a share.

Finally today, UNH didn't warn, but it did caution:

UnitedHealth Group management is continuing to actively monitor a variety of trends affecting the sector. Factors the Company is assessing include:

* Membership trends in risk-based commercial markets and Medicare Advantage product offerings, including Special Needs Plans which serve higher acuity seniors;
* Benefit buy-downs and continued local pricing dynamics in commercial markets;
* U.S. Government data showing influenza and influenza-like illness running at high levels across all populations through the first two months of 2008;
* Medicare Part D plan performance; and,
* The impact of the Federal Reserve decision to reduce interest rates in the first quarter of 2008.

Based on data from the first two months of 2008, the Company’s estimates of medical costs incurred in 2007 appear to have been accurate. Through the first two months of 2008, the commercial medical cost trend has performed consistent with the Company’s expectations, with the exception of a higher than expected impact from influenza. The Company also noted that the net unrealized capital gain position in its investment portfolio has continued to strengthen in 2008. The Company’s Enhanced Medicare Part D program performance is consistent with the Company’s plan for the approximately 100,000 participants in these offerings at UnitedHealth Group.

As evidenced by recent market commentary, there may be pressure on first quarter and full year 2008 results. However, given that it is still early in the year, management believes it is premature to draw adverse conclusions.

Posted by edelfenbein at 9:53 AM

Gold futures hit $1,000

Finally.

Gold futures hit $1,000 an ounce for the first time Thursday morning as the dollar continues to decline and crude oil prices rise.

Gold futures hit the benchmark after the dollar fell below 100 yen during Asian trading Thursday, its weakest against the Japanese currency in 12 years. The dollar also sank to all-time lows against the euro.

Gold has been pushing up against the $1,000 an ounce mark for weeks mainly due to the weaker dollar. Interest rate cuts - and the prospect of more on the way - have weakened the dollar so much that foreign investors can buy dollar-based commodities like gold more cheaply.

Posted by edelfenbein at 9:37 AM

The Oil Bubble

Ronald Bailey says that oil may be ready for a big fall:

Although U.S. crude oil inventories have fallen, gasoline inventories are at their highest since March, 1993, notes Tim Evans, an energy futures analyst at Citigroup's Futures Perspective. World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007 while world oil consumption rose by just 2 percent. In fact, world production is projected to be 3.3 percent higher in the second quarter and 4.1 percent higher in the third quarter than the same periods a year ago. On the other hand, world demand is projected to rise by just 1.6 percent over the next six months.

In fact, demand is falling in some countries. According to economist John Kemp at the commodities firm Sempra Metals, the U.S. consumed 4 percent less petroleum in January 2008 than it did the year before. Evans agrees, noting that the U.S. demand for petroleum products began falling off last July. Interestingly, this drop in U.S. oil consumption began before crude prices turned vertical and before we began to see weakness in the broader economy. Even China's thirst for oil is abating somewhat. Its demand for oil, which once rose at 10 percent per year, has now dropped to 6 percent per year. In addition, world surplus oil production capacity has gone from a very tight 1.5 million barrels per day a couple of years ago to more than 3 million barrels today, says petroleum economist Michael Lynch.

Posted by edelfenbein at 5:21 PM

StockTickr Interview

Here's an interview I did with Dave Mabe over at StockTickr.

Posted by edelfenbein at 5:07 PM

Client #6 Was Allegedly the Duke of Westminster

You just knew that a peer had to be involved.

The escort agency at the heart of the scandal surrounding New York was allegedly also used by the Duke of Westminster.

The peer was last year exposed as an alleged client of the Emperor Club VIP's prostitutes.

Zana Brazdek, then 26, told The News of the World that the duke, Gerald Cavendish Grosvenor, paid her £2,000 for two hours.

Posted by edelfenbein at 3:31 PM

Another SocGen Employee Held by Police

From Bloomberg:

Societe Generale SA, the French bank stung by a record trading loss of 4.9 billion euros ($7.6 billion), said another employee has been taken into police custody as part of the investigation into unauthorized trades.

Police also searched the La Defense headquarters, just outside Paris, of France's second-biggest bank this morning, Societe Generale spokeswoman Laura Schalk said in an interview.

Paris prosecutors' spokeswoman Isabelle Montagne confirmed that a broker from a subsidiary of Societe Generale is now being questioned by police. The employee may be held for up to 24 hours, Montagne said. She declined to name the broker or the subsidiary.

Posted by edelfenbein at 9:13 AM

"FBN is just plain dumb"

Liza Featherstone looks at Fox Business News:

At times, FBN is just plain dumb. Some of the Murdoch Playmates are genuine bimbos, while others play their dopey roles convincingly, and the choice of material they’re given isn’t pretty. One morning, Alexis Glick, the lusciously made-up anchor—also a Columbia graduate who has worked as an equity analyst for Goldman Sachs and directed New York Stock Exchange floor operations at Morgan Stanley, though you’d never guess it from her breathless on-air persona—dizzily conducts an inspiring interview with a woman who has broken the glass ceiling in the all-important industry of competitive beach volleyball. A few other critical, breaking stories on FBN, as the American economy careened into chaos and uncertainty, included a check-cashing fraud involving a corpse, and “the Meanest Mom on the Planet” (she sold her teenage son’s car after finding booze under the seat!). There’s no doubt that CNBC is more journalistically serious than Fox. Almost any random dial-flipping will provide the contrast, but here’s just one: While CNBC featured New York Times columnist David Leonhardt explaining substantive economic policy differences among the Republican candidates, Fox was reporting that despite her scandalous pregnancy, people are still watching Jamie Lynn Spears’s TV show.

According to Neilson, just 6,300 people watch FBN.

Posted by edelfenbein at 7:58 AM

Jim Rogers: Abolish the Fed

Jim Rogers isn't shy about his opinions:

Listen, investment banks have been going bankrupt since the beginning of time. If people make mistakes -- if you bail out every investment bank that gets in trouble, that's not capitalism, that's socialism for the rich.

Posted by edelfenbein at 7:48 AM

History Says the Rally Will Continue

Yesterday was the 33rd best day for the S&P 500 since 1950. Looking at the average of the top 32 days shows that the market has historically continued to rally a bit after the big surge. For the following nine days, the S&P 500 has averaged an additional gain of 1.78%.

Posted by edelfenbein at 7:38 AM

Fire Sale at the Times?

The Wall Street Journal reports that the New York Times is considering selling some assets. Well…it’s about time. This move is clearly in response to pressure from hedge funds that are pushing for seats on the company’s board. The funds now own as much stock as the Sulzberger family.

In the media, pressure from hedge funds is often portrayed in a negative light, as if some slick-haired Gordon Gekko types are bullying a loveable family run enterprise. In the case of the New York Times, the funds are the only ones willing to hold the company accountable. The current management has run the company into the ground, and an asset sale should have happened a long time ago. Jack Welch, for example, wanted to buy the Boston Globe, but the Times shot him down. Now, I doubt the Times could sell the Globe even if they wanted to.

Here’s what sclerotic companies like the Times don’t get: Even if shareholders don’t control the board, they still have a vote. They can vote by selling and that’s exactly what has happened. Shares of NYT are basically where they were 12 years ago. How could anyone think that’s serving shareholders well?

There’s also an interesting wrinkle. One of the NYT’s non-core assets is a stake in the Boston Red Sox. You read that right. That’s like Sauron owning a stake in the Hobbit’s favorite pub. Given the Bosox recent World Series wins, I would think that the franchise could go for a nice sum. Speaking of Sauron, maybe Steinbrenner is interested?

The Times could also let go of the IHT and even About.com. Some analysts have floated ideas of the Times being bought out by fill-in-the-blank (Buffett, Google, Bloomberg). Interesting, but I doubt it. Even if a major deal came to pass, it doesn’t avoid the major issue that the Times can’t survive in its present form. It will exist, but I don’t think it will be a New York-focused general news publication. The future lies in smaller, niche pubs.

Posted by edelfenbein at 7:18 AM

Best Day Ever

Yesterday was the best day for the stock market in five years, but this week, we're celebrating the 75th anniversary of the best day ever.

Well, technically it wasn't a one-day gain. When FDR became president on March 4, 1933, there was a national bank holiday. The stock exchange shut down at didn't reopen until March 15. When trading resumed, stocks soared. The Dow closed at 62.1 which was a 15.34% gain over the close from 12 days before.

The Dow has never done better. By contrast, yesterday's move doesn't rank in the top 150. The rally of March 1933 was so strong that the Dow doubled by July.

In March 1933, the U.S. effectively ended the gold standard. It's interesting that yesterday's rally was sparked, in part, by the Fed's securities-lending program.

Posted by edelfenbein at 7:17 AM

Today's S&P 500

Here's how every stock in the S&P 500 did today.

Posted by edelfenbein at 9:26 PM

Things that Sound Like Chewbacca

Vacuum Cleaner
Nightstand
Dog
Cat
Boxer
Baby
Dude Getting Tasered
Hatchback
Trash Can
Hippie Chick

Posted by edelfenbein at 4:57 PM

The Best Day in Five Years

Today was the best day for the S&P 500 in five years.

Date...............Gain
11-Mar-08.......3.71%
17-Mar-03.......3.54%
13-Mar-03.......3.45%
18-Sep-07.......2.92%
13-Nov-07.......2.91%
28-Nov-07.......2.86%
2-Apr-03..........2.61%
17-Aug-07.......2.46%
6-Aug-07.........2.42%
21-Mar-03.......2.30%
16-Jun-03........2.24%
1-Oct-03..........2.23%

The last time the S&P 500 was up this much was October 15, 2002.

Posted by edelfenbein at 3:46 PM

UNH at Three-Year Low

UnitedHealth Group (UNH) is plunging today on news that WellPoint (WLP) has cut its earnings forecast. If you recall, UNH is company that does nothing but make huge profits and awful headlines.

For the record, UnitedHealth has said that it expects 2008 EPS of $3.95 to $4 a share. The company has publicly made this estimate not once, but twice. That would be a yearly increased of 13% to 14% over 2007. Not bad.

But now the stock is down to $40 a share. Today, it reached its lowest point since 2004. In 2005, the company made $2.48 a share. So the stock is the same price, but profits are about 60% higher.

In the above chart, the blue line is the stock price and it follows the left scale. The yellow is the EPS and it follows the right. The red part is the estimate. When the lines cross, the P/E ratio is 17.5.

Posted by edelfenbein at 11:29 AM

The Fed Opens the Spigots

Let's throw money at them until they stop complaining!

The Federal Reserve, struggling to contain a crisis of confidence in credit markets, plans to lend up to $200 billion in exchange for mortgage-backed securities.

The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems. The Fed said in a statement it will hold auctions of Treasuries in exchange for debt including AAA rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks.

Today's steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. While they fall short of the calls by some analysts for the Fed to make outright purchases of mortgage debt, the central bank left the door open to expanding the effort.

"This is the most significant step the Fed has taken so far," said David Resler, chief economist at Nomura Securities International Inc. in New York. "This relieves some of the pressure" in the credit markets, he said.

Posted by edelfenbein at 11:25 AM

The Credit Crisis Subtext of the Spitzer Story

I think this might be ironic, and not the Alanis kind either:

The members decided that even though Client 9 had a credit of $400 to $500 with the ring, they wouldn't let him keep the appointment until his latest deposit arrived. Client 9 made the calls himself.

On Feb. 13, according to the affidavit, Client 9 made a hotel reservation in D.C. under his name and left a key for a woman named "Kristen."

Client 9 was eventually told his deposit had arrived and "Kristen" was on her way from New York. Client 9 responded, "Great, OK, wonderful."

Client 9 discussed with the prostitution ring a way for him to have credit stored up so that he wouldn't have to worry about sending in a deposit in the future.

Then they discussed a way for "Kristen" to get his hotel room key once she arrived.

"Kristen" was sent to room 871, which Client 9 was leaving ajar; Client 9 wanted to be reminded of what she looked like and was told "American, petite, very pretty brunette, five feet five inches, and 105 pounds."

Was Spitzer done in by tougher credit standards? If only some banks were as prudent as whorehouses.

Check out their rates (conveniently listed in pounds, dollars and euros). You can pay with cash, credit card, wire transfer or money order. I wonder if the rates count as core or non-core inflation.

Posted by edelfenbein at 6:01 PM

L'Affaire Spitzer

I don't have much to add about today's big story, but I'll simply say that I've never been a big fan of Eliot Spitzer. He's a nasty guy and he ruthlessly pursued a baseless case against Dick Grasso. According to Charlie Gasparino's book, "King of the Club," Spitzer's aides told reporters that Grasso had an affair with his secretary. Charming.

Posted by edelfenbein at 3:58 PM

Little Tycoons

At the Ariel Community Academy in Chicago, each incoming first-grade class gets $20,000. The children are eventually put in charge of managing it and picking the stocks.

The concept is simple: Ariel's experts manage a $20,000 portfolio for each class until sixth grade, briefing them regularly along the way, and then begin turning over the decisions to the children. Upon graduation from eighth grade, each class returns the initial investment amount to the school for another first-grade class and donates, invests or pockets the profits.

After giving half the gains to community charity programs or school initiatives, each student can then take the rest in cash or invest it in a Section 529 college savings plan, in which case they are given an additional $1,000. Last year, 80 percent of graduates invested their $150 shares in a 529.

Given the success of stocks like Crocs, Apple and Hansen Natural, I think it might be worth listening to what kids have to say.

Here's how Wrigley's (WWY) has performed over the long haul:

Posted by edelfenbein at 2:46 PM

TIPS to Bernanke: Drop Dead

The yield on Treasury Inflation-Protected Securities due in July 2012 is now negative. This means that investors are willing to take a negative real return in exchange for the (ahem) security of owning dollars.

This means that liquidity has dried up all over the world to such an extent that investors are willing to pay a huge "liquidity premium" (meaning, they can dump their TIPS almost whenever they want) that's greater than the real return of the bond.

Posted by edelfenbein at 2:17 PM

Your Oil Datapoint of the Day

Chevron (CHV), Exxon Mobil (XOM) and ConocoPhillips (COP) collectively made $10 million last quarter.

An hour.

(But that includes parking....)

Posted by edelfenbein at 1:54 PM

Nicholas Financial Trading Well Below Book Value

Shares of Nicholas Financial (NICK) have dropped to $6.78, that's about 12% below book value.

Posted by edelfenbein at 11:18 AM

Anatomy of a hedge fund collapse

Fortune has an interesting article on the collapse of the Tequesta Mortgage fund. What's interesting is that the fund steered clear of the risky investments that others were taking. The reason is fell was due to the credit markets drying up.

In one case, Citigroup seized collateral from Tequesta and put it up for sale in a bid-list auction. According to a trader at another firm, however, Citigroup's mortgage trading desk offered to sell Tequesta's bonds to regional brokerage firms at prices even lower than listed prices. In another instance, Tequesta's portfolio managers were told by Citigroup rivals that its seized bonds had been offered to other hedge funds for more than $25 below where they had been trading in the previous days.

Under that kind of pressure, Tequesta decided by early March that they'd have to shut the mortgage fund down. Tequesta, according to a firm executive, still has several portfolios open. Ross declined comment to Fortune.com on his future plans. But as long as the credit markets remain in their current miserable state, there are going to be more stories like Tequesta's.

There's a saying that if you can't sell what you want, sell what you can.

Posted by edelfenbein at 10:46 AM

An Emergency Rate Cut?

Is an emergency Fed rate cut on the way? Goldman says we can't rule it out:

An emergency interest rate cut from the Federal Reserve is possible ahead of its March 18th policy meeting, according to a Goldman Sachs research note on Monday.

Goldman said its view on Fed policy changed on Friday.

The government reported on Friday that a second straight month of job losses and the Fed announced new steps to inject liquidity into the financial system as credit availability remains tight.

Goldman said the Fed would drop the benchmark federal funds target rate to 2 percent by late April, most likely in two 50 basis-point steps at the next two meetings.

"We cannot rule out an intermeeting rate cut today," the Monday note said.

Posted by edelfenbein at 10:00 AM

Highlights of the Congressional Hearings

There seems to be a disturbing trend:

“Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual — like an island tribe sacrificing a virgin to a grumbling volcano,” Rep. Tom Davis of Virginia said.

And later:

An investor advocate who also testified, Nell Minow of Corporate Library, appeared amused by Davis’ comparison of the hearing to a tribal sacrifice.

“These are not scapegoats and they are certainly not virgins,” she said.

Ouch.

Posted by edelfenbein at 7:08 AM

When It Rains, It Pours

The FBI is investigating Countrywide.

Posted by edelfenbein at 7:00 AM

The Unknown Billionaire

Never heard of Chuck Feeney? Well, that's the way he wants it.

He once owned six luxurious homes from the French Riviera to Mayfair to Park Avenue. These days, he owns none, instead hunkering down in a cramped one-bedroom rental in San Francisco with his second wife, Helga, his former secretary.

He raked in billions selling duty-free cognac, perfume and designer labels. But you won't catch Feeney in a Hermes tie or Gucci loafers. He once met the prime minister of Ireland with his drugstore glasses held together by a paper clip.

Feeney doesn't own a car and prefers buses to taxis. Until he turned 75, he flew coach. Now, making excuses for wobbly knees, he upgrades with frequent flier miles.

Fine dining? "There are restaurants you can go in and pay $100 a person for a meal," he muses. "I get as much satisfaction out of paying $25. I happen to enjoy grilled cheese and tomato sandwiches."

Niall O'Dowd, a friend of Feeney and editor of Irish-America magazine, reflects: "The way he copes with his wealth is to never remove himself from his working-class persona. He keeps grounded by acting like it hasn't happened to him -- like basically he is still the same guy.

Posted by edelfenbein at 6:52 AM

After Hours: Some Chick

I have no idea who this young woman is, but she has a beautiful voice. Enjoy.

"You Are My Sunshine" was written by a country singer named Jimmie Davis. It was such a big hit that it propelled him into the Louisiana governor's mansion.

The song is often considered a children's song which I don't think it is. The young woman above does an excellent job capturing its melancholy.

Davis died in 2000 at the age of 101.

Posted by edelfenbein at 7:48 PM

Trade of the Year

Here's an observation on political markets. This is a clip of Larry Kudlow, Robert Reich and Steve Moore discussing what a great job John McCain did at the CNBC/MSNBC/WSJ debate in October.

After hearing that, you could have run out and bought a McCain-to-win contract for just 5.2 cents. Today, you'd be sitting on a profit of...oh, about 1,700%.

See, it pays to listen to Larry. And that's just at 97 cents; your McCain contract still has a very good chance of hitting $1 by Labor Day.

But there's something else. That day, October 9, was the exact high of the stock market (if you watch the clip again, you can see the "record high" alerts). This was also the debate where McCain said, "I'm glad whenever they cut interest rates, I wish interest rates were zero."

There is a serious economic argument in favor of 0% interest rates. This is known as the "Friedman Rule." To be fair to the late professor, I don't think that's what McCain was thinking about.

Was that debate the turning point of McCain's campaign (going up) and the stock market (going down), and are they related?

Personally, I think it's just a coincidence. B-Riz has more.

Posted by edelfenbein at 4:20 PM

Blankfein Earns $100 Million

Lloyd Blankfein, the CEO of Goldman Sachs, made $100 million last year. His salary was just $600,000. The rest comes from stock and bonuses. Here's the SEC filing.

Posted by edelfenbein at 4:14 PM

Three-Month T-Bill Hits 1.1%

Wow! This morning, the yield on three-month T-bills (^IRX) dropped to 1.1%. That's just stunning. The Fed is miles behind the rest of the market. The T-bill rate has since ticked up to 1.4%.

The five-year yield dropped below 2.4%. Think about that. There are people who are so scared that they're willing to lock-in a 2.4% return for the next five years.

Posted by edelfenbein at 2:10 PM

Futures Say 98% Chance of 0.75% Rate Cut

From Bloomberg:

The U.S. dollar has declined against 14 of the world's 16 most-actively traded currencies this year on bets the Federal Reserve will continue to cut interest rates to avert a recession. Futures show traders see a 98 percent chance the Fed will lower its target rate 0.75 percentage point to 2.25 percent on March 18. The balance of bets is on a half-point cut.

Posted by edelfenbein at 12:17 PM

Rumors of a Rumor

Barry Ritholtz passes this along. The British are apparently concerned over rumors of rumors.

I apologize for the misspellings (favourite?) but these English don't quite have our language down yet.

Rumour of second bail out rumour coming in Ambac

Word is that CNBC have heard from a source close to the fire escape that the Monolines are worried that there will be no new rumours about possible rescues around until the recent rescues are proved to have failed.

That means that there'll be no Friday evening prop for the stock markets.

A source close to the industry said that a consortium is "being put in place to work on new rumours but we can't be sure that these rumours will actually be ready for another five business days."

News of the rumoured rumour of salvation sent MBIA and AMBAC up .01% in pre-market trading. Hank Paulson was rumoured to be delighted with the patriotic rumours, a source close to him on his lifeboat off the coast of Hawaii said Thursday. Ben Bernake has placed pencils in his ears and is wearing his favourite underpants on his head.

-David McCreadie and Dan Davies

Pity they lost the empire.

Posted by edelfenbein at 11:44 AM

Société Générale Changes the Calendar

If you're old enough, you may remember seeing pictures of how the Kremlin doctored Russia history to keep up with the latest power struggles within the Politburo. Some comrade who could be seen storming the Winter Palace one year was magically photo-shopped out the next.

Well, now Société Générale is keeping that practice alive in the 21st century. The company had its huge loss this year, but the firm is magically transferring it to 2007.

It is not often that a major international bank admits it is violating well-established accounting rules, but that is what Société Générale has done in accounting for the fraud that caused the bank to lose 6.4 billion euros — now worth about $9.7 billion — in January.

In its financial statements for 2007, the French bank takes the loss in that year, offsetting it against 1.5 billion euros in profit that it says was earned by a trader, Jérôme Kerviel, who concealed from management the fact he was making huge bets in financial futures markets.

In moving the loss from 2008 — when it actually occurred — to 2007, Société Générale has created a furor in accounting circles and raised questions about whether international accounting standards can be consistently applied in the many countries around the world that are converting to the standards.

Posted by edelfenbein at 11:37 AM

Hedge Fund Lost 22% Last Month

Think you had a rough February? I bet it wasn't as bad as the folks at Saracen Energy Partners LP. Thanks to rotten bets on natural gas, the fund lost 22% last month.

There's simply no excuse to have that much exposure. One of the most important rules of investing is diversification. And no, diversification does not mean buying Google AND Apple. You need to be well-diversified across industry groups as well. Check out the Buy List for a good example.

Posted by edelfenbein at 11:31 AM

Another Rotten Jobs Report

The employment outlook is getting worse. The government reported today that the unemployment rate dropped from 4.9% to 4.8% last month, but the numbers behind the numbers show that it wasn't a good month for payrolls. The report on non-farm payrolls showed a loss of 63,000 jobs. Over the last four months, the economy has created just 16,000 new jobs. The economy needs to create 200,000 new jobs each month just to keep up with population growth.

The number of jobs as a percent of the civil labor has been declining since the end of 2006. If we had merely kept that pace, then the economy would have over 1.6 million more jobs right now.

Posted by edelfenbein at 10:56 AM

The Market Makes a New Low

Posted by edelfenbein at 4:21 PM

Department of Pathetic

Ugh.

Ask.com scales back in makeover

In a dramatic about-face, Ask.com is abandoning its effort to outshine Internet search leader Google Inc. and will instead focus on a narrower market consisting of married women looking for help managing their lives.

As part of the new direction outlined Tuesday, Ask will lay off about 40 employees, or 8 percent of its work force.

With the shift, the Oakland-based company will return to its roots by concentrating on finding answers to basic questions about recipes, hobbies, children's homework, entertainment and health.

The decision to cater to married women primarily living in the southern and midwestern United States comes after Ask spent years trying to build a better all-purpose search engine than Google.

The quest intensified after Internet conglomerate InterActiveCorp bought Ask and its affiliated Web sites for $2.3 billion in 2005. But Ask.com remained an also-ran, despite spending tens of millions of dollars on an advertising blitz about dozens of new products that impressed many industry analysts.

Through January, Ask ran the Internet's fifth largest search engine in the United States with a 4.5 percent market share, according to comScore Media Metrix. Google dominates the industry with a 58.5 percent share.

"No matter what (Ask) did, it just wasn't enough to get people to leave Google," said Chris Winfield, who runs a search engine consulting firm, 10e20. "This looks they are raising the white flag."

(Hat Tip: Felix)

Posted by edelfenbein at 1:09 PM

Buffett Is Now World's Richest

Buffett is #1.

Berkshire Hathaway Inc. Chairman Warren Buffett beat out Bill Gates for the top spot on Forbes magazine's annual list of billionaires worldwide, ending a 13-year reign for Microsoft Corp.'s co-founder.

Buffett's wealth increased $10 billion to about $62 billion in the 12 months through Feb. 11, mostly from a gain in his company's shares, Forbes said in a statement released yesterday.

"He is the iconoclastic investor of his generation," said Ken Murray, who runs Blue Planet Investment Management in Edinburgh, which oversees about $250 million in financial stocks. He doesn't hold Berkshire. "The fantastic amount of wealth he has accumulated puts him up there with Carnegie and Morgan."

The fortune of Gates, 52, rose $2 billion to $58 billion. The Microsoft chairman fell to third on the list behind Mexican telecommunications mogul Carlos Slim, 68, who has an estimated net worth of $60 billion.

Poor Bill, if he had only graduated from Harvard.

Posted by edelfenbein at 11:05 AM

P/E Ratios By S&P 500 Sectors

Notice how the P/E ratios across the ten S&P 500 industry groups seem to be converging.

I apologize for the teeny legend, but I couldn't think of a better way to squeeze it on the graph. Here's a look at the same data (no legend), but by relative P/E ratio. That simply divides each sector P/E ratio by the S&P 500's P/E ratio.

Posted by edelfenbein at 8:24 AM

Fidelity Fined By SEC

You know it's coming...

The Securities and Exchange Commission's order settles a long-running case against the nation's largest mutual fund manager, which was found to have accepted more than $1.6 million in perks from 2002 to 2004.

Perks? But what kind of perks?

The gifts included tickets to the Super Bowl...

closer...

...and Rolling Stones concerts,

I can feel it...

private jet trips to exotic destinations,

almost there...

and fine wine and cigars, the SEC said.

just a little bit more

The agency said some Fidelity traders accepted...

Bingo!

illegal drugs and trips to strip clubs paid for by brokers, and one trader's illegal gambling was facilitated by a broker.

Remember, past performance is not a guarantee of future results. The SEC even nailed Peter Lynch.

Posted by edelfenbein at 7:56 AM

Bond Yields Premiums

Since mid-October, the spread between low-risk bond yields and higher-risk bond yields has widened dramatically. Here's a look at the difference between BAA bond yields and AAA bond yields.

The ratio is the AAA yield divided by the BAA yield. The ratio is now at its lowest level in nearly five years.

Since 1986, the market is net down when the ratio is below 0.85.

Posted by edelfenbein at 6:59 AM

75 Years Ago

We have nothing to Fe'AH...

Here's part 2.

Money quotes:

So first of all let me assert my firm belief that the only thing we have to fear. . .is fear itself. . . nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.

In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days. In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunken to fantastic levels: taxes have risen, our ability to pay has fallen, government of all kinds is faced by serious curtailment of income, the means of exchange are frozen in the currents of trade, the withered leaves of industrial enterprise lie on every side, farmers find no markets for their produce, the savings of many years in thousands of families are gone.

More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment.

Yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.

Primarily, this is because the rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failures and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

Posted by edelfenbein at 9:39 PM

The Buy List YTD

The Buy List had a very good day today. We gained 1.05% compared with 0.52% for the S&P 500. Over the last four days, the S&P 500 is off 2.48% while we're only down 1.02%.

For the year, our Buy List is down 8.81% compared with a loss of 9.17% for the S&P 500.

Posted by edelfenbein at 4:49 PM

WaMu protects exec bonuses from subprime fallout

So few corporate boards are willing to stand up for incompetent executives. Thank you, WaMu!

The board's committee said in light of the challenging business environment and the need to evaluate performance across a wide range of factors it will take a three-step approach to rewarding its executives including subjectively evaluating company performance in credit risk management.

In January, Seattle-based Washington Mutual said it awarded Killinger 3.2 million stock options for 2008 to provide a "strong incentive to restore shareholder value".

WaMu's share price sank 70 percent in 2007 as mortgage losses soared.

Posted by edelfenbein at 12:15 PM

Danaher Reaffirms Q1 Forecast

Good news from Danaher (DHR). The company reaffirmed its first-quarter earnings estimate of 84 to 89 cents a share. That doesn’t include a five-cent charge related to its acquisition of Tektronix. Wall Street’s consensus is for 88 cents a share.

The stock has pulled back sharply this year, but the shares had a pretty good run over the past few years, so some consolidation isn’t a big surprise. Management has been pretty good about controlling Wall Street’s expectations. For the past few years, Danaher usually meets or just barely beats expectations.

Danaher has been a pretty shrewd dealmaker. Larry Culp, the CEO, said that the company may take advantage of the lower prices that the stock market is offering.

CEO Larry Culp told the Citigroup Global Industrial Manufacturing conference the company's portfolio transformation toward higher-margin global businesses such as medical instruments is continuing, and deals are set to play a prominent role.

"We're optimistic about M&A in this environment," Culp said. "You go back to the last time we saw a slowdown, we were very active in '02."

"But I wouldn't say our pipeline has changed materially," he added. "Valuations in the public markets have come down ... (but) it may be a little early to really see the things in the pipeline come into the zone where they're actionable."

Posted by edelfenbein at 12:04 PM

The Dow/Nasdaq Ratio Hits a 3-1/2 Year High

The Dow/Nasdaq ratio closed yesterday at 5.428, which just barely passed the peak from August 8, 2006. The ratio is now at its highest level in 3-1/2 years.

I should add that the ratio has been very steady over the past few years. Here's a chart of the ratio going back to 1980:

Over the last 15 years, that ratio has been between 4.5 and 5.5 for 74% of the time.

Posted by edelfenbein at 3:44 PM

The S&P 500 Is Close to a New Low

Another rough day has pushed the S&P 500 below 1310. The lowest close since the October 9 high (1,565.15) came on January 22 when the S&P 500 closed at 1310.5. In other words, the bear market may not be over. Of course, it's hard to tell when it truly is over.

Posted by edelfenbein at 2:45 PM

The Yield Curve Unravels

I ran a chart like this a few weeks ago, but it's worth revisiting.

The collapse of the yield curve is simply stunning. Not that long ago, all of the lines were fairly stable. Now, they're plunging (at least, the blue and black) and there seems to be no end in sight.

Posted by edelfenbein at 12:46 PM

More on Efficient Markets

People spend more time on buying a toaster than on buying a house.

Of course, they're really nice toasters.

Posted by edelfenbein at 2:54 PM

The Bubblephobes

Robert Shiller writes in yesterday’s NYT about the collective failure to see the housing bubble. Obviously, some folks will insist that they saw everything coming, and it was perfectly predictable.

One of the problems I have with this idea, and I’ve mention this before with Shiller’s other work, is the curious idea that a bubble is somehow a problem that needs to be fixed.

Just because prices go up very rapidly doesn’t mean something is a bubble. Oddly, the only time we can be certain that it’s a bubble is when the air deflates and the asset prices go down. In other words, to the bubble-phobes, the problem isn’t the bubble, it’s the downside, and we only know what after the fact.

How can we be sure it’s a bubble when an asset inflates? In the 1950s, stock prices soared and they never really came back down. The phrase “permanently high plateau” hasn’t had a good record since the 1920s, but I think that’s an accurate description of what happened in the 1950s.

Is gold a bubble right now? What about oil? Or the euro? Or could it be that we’re simply adjusting to a new era of commodity prices? I don’t know and for now, I’m happy to consider these open questions. I will note, however, that adjusted for inflation, commodity prices have historically plunged.

For me, the best definition of a bubble is a price that’s going up because it’s going up. The certainly happened with tech stocks in the 1990s. But I’d rather not have Alan Greenspan tell me what the prices of tech stocks ought to be.

There’s also the counter argument that bubbles aren’t merely not bad, but actively good. In his book, Pop!: Why Bubbles Are Great For The Economy, Daniel Gross writes how bubbles and their ugly aftermath have often helped lay the ground work for future prosperity. A bubble creates enormous excess capacity which can later be used to bring down the cost of apply a new technology.

Shiller writes, “The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world.” Actually, the collapsing house of cards is the recognition of the bubble. After all, the bubble could have gone for another three years. Perhaps free enterprise spot it early and cut it off. Hooray for markets!

Posted by edelfenbein at 2:32 PM

Oil Hits Inflation-Adjusted High

The WSJ reports that oil is at an all-time high even after adjusting for inflation.

Crude-oil futures have topped the inflation-adjusted high set in April 1980, as the dollar's descent continues to send investors into the commodities markets.

Light, sweet crude for April delivery traded as high as $103.95 a barrel on the New York Mercantile Exchange, topping a 1980 trade of $103.76 in 2008 dollars. The April contract recently traded at $103.59. Brent crude on the ICE futures exchange was trading up $1.72 at $101.82.

The 1980 record predates the creation of the crude futures market on Nymex, and represents a deal on the cash market.

Oil began to take off Monday morning after the U.S. dollar fell from a stable position overnight against the euro. Shortly after 9 a.m. EST, the dollar hit a new low, and oil began to rise rapidly. A fresh record for crude in real dollars came minutes later, and deals above the 1980 high were completed at about 9:55 a.m. EST.

"It doesn't look like it's going to come down anytime soon," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Posted by edelfenbein at 1:00 PM

Buffett on the Dream Business

More from the Chairman's Letter (page 8):

Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.

At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.

A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

(Hat Tip: Climateer Investing)

Posted by edelfenbein at 10:50 AM

Yes, Virginia...I mean No, Virginia...I mean...

From page 18 of Buffett's Chairman's Letter:

(Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find them anywhere except at the finance departments of some leading business schools.)

From Megan McArdle's Asymmetrical Information:

Yes, Virginia, markets are efficient.

Posted by edelfenbein at 10:40 AM

Buffett's Letter

Here's the yearly Chairman's Letter to Berkshire shareholders. It's always worth a read.

Here are the letters going back 30 years.

Posted by edelfenbein at 12:09 AM