Archive for April, 2008

  • Another 25 Points
    , April 30th, 2008 at 2:24 pm

    The Fed cuts. Here’s their statement:

    The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
    Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
    Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. 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 remains high. It will be necessary to continue to monitor inflation developments carefully.
    The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act 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 no change in the target for the federal funds rate at this meeting.
    In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.

  • Apparantly Short Sellers Are the New Terrorists
    , April 30th, 2008 at 12:33 pm

    From the NYT:

    In the days when square-rigged galleons plied the spice route to the East, the Dutch outlawed a band of rebels that they feared might plunder their new-found riches.
    The troublemakers were neither Barbary pirates nor Spanish spies — they were certain traders on the stock exchange in Amsterdam. Their offense: shorting the shares of the Dutch East India Company, purportedly the first company in the world to issue stock.
    Short sellers, who sell assets like stocks in the hope that the price will fall, have been reviled ever since. England banned them for much of the 18th and 19th centuries. Napoleon deemed them enemies of the state. And Germany’s last kaiser enlisted them to attack American markets (or so some Americans feared).

    There’s also a new academic study that suggests shorts may know what they’re talking about.

    We construct a long daily panel of short sales using proprietary NYSE order data. From 2000 to 2004, shorting accounts for more than 12.9% of NYSE volume, suggesting that shorting constraints are not widespread. As a group, these short sellers are well informed. Heavily shorted stocks underperform lightly shorted stocks by a risk-adjusted average of 1.16% over the following 20 trading days (15.6% annualized). Institutional nonprogram short sales are the most informative; stocks heavily shorted by institutions underperform by 1.43% the next month (19.6% annualized). The results indicate that, on average, short sellers are important contributors to efficient stock prices.

  • An Investing Lesson
    , April 30th, 2008 at 11:56 am

    Consider these recent headlines.

    Munich Re confirms Warren Buffett holds stake in co

    Buffett, Seeking Acquisitions, to Travel to Europe

    Mars, Buffett buying Wrigley for $23 billion

    Warren Buffett Predicts a Long US Recession

    So Warren Buffett not only thinks we’re in a recession, but he thinks it will be worse than feared. So what does he do? He buys.
    To quote George Bailey:

    Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicky and he’s not. That’s why. He’s picking up some bargains.

  • What If Bernanke Is Winning?
    , April 30th, 2008 at 10:57 am

    Here’s a scary thought. What if Ben Bernanke has been doing the right thing? Not only did GDP come in positive for the month, but core inflation has been running between 2% and 2.5%. Most shocking of all has been the decline in gold. The June contract dropped below $870 an ounce today. That’s a major fall from six weeks ago.

  • The Economy Grew But Just Barely
    , April 30th, 2008 at 8:41 am

    First-quarter GDP came in at +0.6%. That’s not a lot, but it is positive. Naturally, this number will be subject to several revisions and re-revisions of previous revisions.
    Even though we haven’t reached an official recession yet, which is usually defined as back-to-back quarters of negative GDP, the economy has had below-trend growth for six of the last eight quarters. Below is a table showing economic growth for the trailing eight quarters (not annualized but adjusted for inflation). You can really see how much economic growth has down-shifted.
    On a bizarre note, today’s GDP report showed that the economy grew by almost exactly the same rate in the first quarter of 2008 as in the first quarter in 2007. One year ago, the economy grew by 0.6009%. For this year’s first quarter, the number was 0.5966%.

  • Even Buffett Isn’t Perfect
    , April 30th, 2008 at 8:23 am

    Author Vahan Janjigian claims that even Warren Buffett isn’t perfect in his new book, Even Buffett Isn’t Perfect. David Kansas writes:

    And there have been memorable stumbles over the years: A Berkshire Hathaway investment in the retailer Pier I, in 2004, unhappily preceded a big drop in Pier I’s stock; more famously, a stake in Salomon Bros. in the late 1980s and early 1990s, though it eventually made money, caused more headaches than it was worth. (Salomon eventually became part of what is now Citigroup.)
    What’s remarkable about Mr. Buffett is that he has made so few mistakes while building Berkshire Hathaway into a stock-market titan. He strongly prefers that the investments of Berkshire Hathaway be referred to as such rather than credited to himself alone. Still, in the popular imagination it would be hard to slide a piece of paper between Mr. Buffett and his company.

    Buffett also owned US Air which was a major blunder. To his credit, Buffett has been very candid about his mistakes. This is from his 1996 Chairman’s Letter:

    When Richard Branson, the wealthy owner of Virgin Atlantic Airways,
    was asked how to become a millionaire, he had a quick answer: “There’s
    really nothing to it. Start as a billionaire and then buy an airline.”
    Unwilling to accept Branson’s proposition on faith, your Chairman decided
    in 1989 to test it by investing $358 million in a 9.25% preferred stock of
    I liked and admired Ed Colodny, the company’s then-CEO, and I still do. But my analysis of USAir’s business was both superficial and wrong. I was so beguiled by the company’s long history of profitable operations, and by the protection that ownership of a senior security seemingly offered me, that I overlooked the crucial point: USAir’s revenues would increasingly feel the effects of an unregulated, fiercely-competitive market whereas its cost structure was a holdover from the days when regulation protected profits. These costs, if left unchecked, portended disaster, however reassuring the airline’s past record might be. (If history supplied all of the answers, the Forbes 400 would consist of librarians.)

  • RIP: Albert Hofmann
    , April 30th, 2008 at 7:07 am

    Albert Hofmann, the inventor of LSD, has died at the age of 102. The story of the development of drugs, legal and illegal, is one of the more fascinating business stories of the 20th Century. It’s fashionable today to say that we live in the Digital Age. Sometimes I think we live in the Drug Age. (For example, check out the amazing story of Aspirin.)
    Hofmann developed LSD in 1938 when he was working for Sandoz (now Novartis, but I doubt you’ll find that fact in their annual reports) and took the first hit in 1943. For a while, the drug was seen an aid for the psychiatry profession, hence Timothy Leary and the Army tests. In fact, LSD was perfectly legal up until 1966.
    Of all the major stock sectors, the major pharmaceutical stocks have probably had the best long-term performance of any sector. In recent years, stocks like Merck and Pfizer and others have stumbled, but for decade after decade, these types of stocks were world beaters. New leaders will emerge, but this sector has been a great triumph of free enterprise, and I think it will continue to be so.

  • Crossing Wall Street: It’s Like Reading Tomorrow’s Newspaper Today
    , April 29th, 2008 at 7:27 pm

    After the bell, SPSS (SPSS) reported earnings of 51 cents a share. This caught everyone off-guard since Wall Street’s consensus was for 44 cents a share. The stock is up nicely after-hours.
    Actually, there was one outlet that wasn’t surprised. This guy’s analysis is brilliant. Almost godlike.
    I could go on, but Mensa may call.

  • The Decline and Fall of Financials
    , April 29th, 2008 at 2:55 pm

    Look at the stunning decline in the S&P 500 Financial Index (^SPSY).
    Notice how the line went from being somewhat smooth to being extremely jagged. Barry Ritholtz notes that there have been an amazing 12 rallies of 5% or more in the Financials Index since it topped out.
    Here’s a look at the daily changes. Sometimes a chart says it all:

  • One and Done
    , April 29th, 2008 at 1:43 pm

    The Fed meets again today and tomorrow. According to the futures market, there’s about a 70% chance that the Fed will cut by 25 basis points tomorrow. That would bring rates down to 2%. There’s close to a 30% chance that the Fed won’t make any cut.
    Assuming the Fed cuts by 25 points, the futures market believes there’s about a 55% chance of no further action at their June meeting. There’s about a 10% chance of another 25-point cut, and there’s close to a 30% chance of no cut at either meeting.
    Interestingly, if the Fed stops at 2%, this will mark the third straight easing cycle where the Fed stopped at a round number. In the early-90s, they went down to 3%, and a few years ago, they went down to 1%.