« April 2008 | Main

Guess What Stock Market Is at a New High?

I'll give you a hint.

Toronto.

Give up?

Much of the momentum on the TSX has been caused by strength in resource stocks. The energy sector has climbed 40 per cent since January while the price for crude oil rose above US$125.

Investors have been turning to commodities stocks as a reliable investment alternative to international financial institutions, whose results have been bruised by the credit crisis.

“People were extremely nervous so they pulled in their horns, and they took their money out of risky investments,” said Bob Tebbutt, vice-president risk management at Peregrine Financial Group Canada.

“When people are nervous they automatically flock to things that are real — for example they flock to gold. It’s a risk place that they can put their money in and know that they’re theoretically going to get it back fairly easily.”

Posted by edelfenbein at 1:08 AM

Gazprom Meets Deep Purple

The New York Times has an article about the influence that Gazprom has on the Russian government. It’s not too much of a leap to say that Gazprom is the Russian government. The company’s president Dmitri Medvedev became Russia’s president last week. Putin, the former president, is now prime minister. And Viktor Zubkov, the former prime minister, will become the new head of Gazprom.

It’s hard to overemphasize Gazprom’s role in the Russian economy. It’s a sprawling company that raked in $91 billion last year; it employs 432,000 people, pays taxes equal to 20 percent of the Russian budget and has subsidiaries in industries as disparate as farming and aviation.

But I was most impressed to find that at the company’s 15th birthday party, they invited Medvedev’s band to play, Deep Purple.

“The gig at the Kremlin was fun, but it wasn’t wild,” Ian Gillan, Deep Purple’s frontman, wrote in an article for The Times of London after the show. “The young guys and more junior staff were all up on their feet, although they were looking nervously over at their bosses to see whether they could loosen their ties. It was as if they were asking, ‘How much fun are we allowed to have?’ ”

Posted by edelfenbein at 11:27 AM

Get Over The Gap

From IBD:

Trade Deficit: We have long been told that when the dollar "corrects," making our goods cheaper abroad, the trade deficit will begin to fall sharply. Well, it's finally happening. Now that it is, do you feel any better?

You shouldn't. Because even though the trade gap narrowed by $3.5 billion, or 5.7%, to $58.2 billion in March from February, it was a sign of weakness rather than strength.

Compared with a year earlier, March exports rose 15.5% — a good thing, we suppose. But imports increased just 7.9%, a gain that would have been a lot lower if not for oil.

True enough, the deficit appears to be declining — after hitting repeated records in recent years. Exports are booming while import growth has slowed noticeably, due mainly to the slumping dollar.

On the surface, this looks like a good thing. After all, don't we want to buy less from abroad and more from our own country? The answer is no if it means that the U.S. economy has slowed and is no longer pulling its weight in the world.

Journalists and pundits call the smaller deficit an "improvement," or "good news." It isn't. We run a trade deficit not because we're uncompetitive or others protect their markets, two great economic myths; we run deficits because we're such an attractive place for investors from around the world to park their money. The deficit, in other words, is a sign of strength.

As any economist can tell you, the flip side of our trade deficit is our capital surplus, which measures foreign investment flows into and out of the U.S. When we run a trade deficit, by definition we must run a capital surplus — and vice versa.

Last year, for instance, we rang up a record $708.5 billion deficit for both goods and services. But we imported the equivalent of $738.6 billion in investment capital to offset that. This was used to buy Treasury notes, bonds and stocks, and to fund real estate, plants, equipment and worker training.

That foreign capital created jobs and added to our ability to consume. It may even have helped keep us out of recession.

So what does it say that our deficit is now shrinking?

On the whole, it means foreign investors find the U.S. economy a less inviting place to be, maybe because of the housing meltdown and concern over the upcoming election. But if the trend continues, it means we're all going to have to consume less and save more to make up for the decline in foreign capital.

That might not be a bad thing, but don't let anyone tell you it will be painless. In the short run, a falling trade deficit will boost GDP. Indeed, based on Friday's data, it's likely first-quarter GDP growth will be revised up from the first estimate of 0.6% to roughly 1.2%.

But in the long term, having less foreign investment means our economy will grow more slowly. That's the downside.

Don't believe it? Just look at Germany and Japan. They've run huge trade surpluses for years, yet their economies have grown slowly at best since at least 1990. They export lots of their capital, as all trade surplus nations do, so they have less to grow on. We import it — and grow faster.

As such, should we root for a smaller deficit? Well, a smaller trade deficit doesn't have to be a negative. If it got smaller because Congress wised up and created private investment accounts for Social Security — which would raise the U.S. private savings rate — that might be a good thing.

But making the deficit smaller isn't necessarily a laudable goal, since doing so often covers for other bad policies such as raising taxes, devaluing the dollar and reverting to protectionism.

All these things, by the way, have been proposed as "remedies" for the trade deficit, mostly by wrongheaded Democratic candidates and talk-show hosts. What they'd do, in fact, is shrink the deficit by shrinking the U.S. economy. We'd rather keep the deficits.

Posted by edelfenbein at 10:31 AM

Schwarzman's Subprime Analogy

Oh Steve:

[It’s like] being a noodle salesman in Nagasaki when they dropped the A-bomb - not a lot of noodles left, and not a lot of people either.

My prediction: This will not end well.

Posted by edelfenbein at 1:23 PM

Nicholas Financial's Earnings

Yesterday, Nicholas Financial (NICK) reported quarterly earnings of 20 cents a share. That's for the company's fourth quarter which ended on March 31. For the same quarter one year before, NICK earned 29 cents a share. Revenue dropped 6% to $12.7 million.

Yes, I still think this is an absurdly undervalued stock. For the entire fiscal year, NICK earned 94 cents a share. That still means the company is going for about seven times earnings. Nicholas Financial has now reported revenue increases for 18 straight years.

Posted by edelfenbein at 3:09 PM

The Cyclicals are Still Overpriced

Here's a look at something I wrote a lot about last year, it's the ratio of the Morgan Stanley Cyclical Index (^CYC) to the S&P 500 (^GSPC):

The ratio peaked on July 19 and started falling for the next few months. It eventually reached a bottom on January 9 and has been steadily climbing ever since.

Posted by edelfenbein at 12:38 PM

Signs of Health in the Credit Markets

From Bloomberg:

In the course of a three-and-a-half- hour dinner at Manhattan's Smith & Wollensky steakhouse, Emil Assentato went from also-ran to the top of the world's fastest-growing credit market.

By the end of the meal, Assentato, 58, the head of Cie. Financiere Tradition's North American securities business who races cars on weekends, had persuaded more than a dozen credit- derivatives brokers led by Donald Fewer and Michael Babcock to defect from rival GFI Group Inc., court documents allege. In the end, 21 would leave for Tradition with the promise of $130 million over three to five years, about $6 million apiece.

Tradition's attack did more than decimate GFI's credit- default swap desk. It also raised the bar for the "extraordinary" pay commanded by derivatives brokers who match buyers and sellers between banks, according to affidavits filed by New York-based GFI in a suit against Tradition. As Wall Street buckles under the biggest credit-market losses in history, brokerage firms are seeking to tap the $10 billion of fees generated by middlemen, who spend as much as $500 million a year entertaining traders with strippers, football games and evenings at trendy Manhattan bars, based on court records and interviews with industry officials.

Posted by edelfenbein at 10:42 AM

Harry & David's Withdraws IPO

Another victim of the stock market, Harry & David's has withdrawn its IPO due to "market conditions." Although the market has improved considerably over the past two months.

Posted by edelfenbein at 10:37 AM

Looking at Inflation

In today’s NYT, David Leonhardt makes some interesting points about inflation. The things that are rising in price and the ones we pay most attention to. The ones that are flat or falling, we tend to ignore.

There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise.

When you dig into the Consumer Price Index, you start to realize just how many things fall into this category. The price of major appliances has been flat over the last year. Furniture is 1 percent less expensive. A decade ago, a basic four-door Toyota Corolla LE cost $16,018, according to the company. The 2009 basic model costs $16,650, and it’s a safer, more powerful, more fuel-efficient car than its predecessor.

To top it all off, most people don’t buy any of these items very often. “People tend to remember things they do frequently,” says Stephen Cecchetti, an economist at Brandeis University who studies inflation. “And what do you buy more frequently than gas and food?”

But combine the less noticeable trends with some true price declines, like a 5 percent drop in women’s clothing over the last year, and an inflation rate of 4 percent starts to seem more reasonable. Inflation really has gotten worse recently — it was only 2 percent a year and a half ago — but it’s not as bad as it feels.

The whole idea of trying to measure inflation is a very difficult task. The reason is that if, say, chicken rises more than beef, consumers will start eating more beef and less chicken. In other words, as prices change, the weighting for each grouping changes.

Posted by edelfenbein at 9:37 AM

The World's First Billion Dollar Home

Pretty sweet.

Posted by edelfenbein at 3:11 PM

Shorting Puts

I've always thought that shorting puts is a fascinating options strategy. A few years ago, I edited a book on the topic. Here's part of the intro:

It then occurred to me that there is a great way to acquire stocks without trading what you've got or using borrowed funds. Simply stated, the method involves the sale of long-term options on highly rated companies, using the premiums received to further your investment program. There is no interest paid on the funds received; the funds never have to be repaid (because they have not been borrowed); and the equity requirements needed to do this are much lower than those for regular margin buying. Although I adapted and perfected this technique to suit my own needs and situation, it can be used by any investor who has built up some measure of equity and would like to acquire additional stocks without contributing additional capital. As we shall see later, the potential benefits far outweigh any incremental risks, especially when appropriate hedges and proper safeguards are incorporated.

What makes this technique so effective is that it exploits the fact that option prices do not reflect the expected long-term growth rates of the underlying equities. The reason for this is that standard option pricing formulas, used by option traders everywhere, do not incorporate this variable. With short-term options, this doesn't matter. With long-term options, however, this oversight often leads the market to overvalue premiums. Taking advantage of this mispricing is the foundation of my strategy.

I have been using this technique for the past four years-very cautiously at first, because of the newness of these long-term options (they were only invented in 1990) and the almost complete lack of information regarding their safety and potential. It was this lack of analysis that led me to start my own research into the realm of long-term equity options. Having determined their relative risk/reward ratio, I am now very comfortable generating several thousand dollars a month in premiums which I use to add to my stock positions. I am often told that what I am doing is much akin to what a fire or hazard insurance company does, generating premiums and paying claims as they arise. A better analogy might be to a title insurance company, for with proper research, claims should rarely occur.

Now I learn that Warren Buffett is using the same strategy:

Buffett arranged his multibillion-dollar positions by selling puts on these indexes. Berkshire will only have to make payments if the respective indexes fall below the levels they were issued at. "In the meantime, the premiums we have received are ours to invest freely," Buffett says in the quarterly report. At the end of 2007, the conglomerate had $4.5 billion in premiums and $4.6 billion in liabilities.

Berkshire has continued to enlarge its position. In the first quarter, it increased premiums by 8.5%, or $383 million, by selling more puts, and increased its liability by 34.8% to $6.2 billion. Berkshire recorded a first-quarter loss on the contracts of $1.2 billion.

The indexes Buffett is bullish on haven't fared well in the past year, given the turmoil in the credit markets. Over the last 12 months, the S&P 500 has fallen 7.9%, the FTSE dropped 4.1%, the Euro Stoxx is down 12.1% and the Nikkei has plunged 19.2%. His positions reveal that he is confident that the European, Asian and U.S. markets will move far higher in next 10 years and beyond.

Buffett warned that Berkshire's earnings may "swing widely because of the accounting regulations that govern the reporting of derivatives contracts," but that "that these contracts will prove profitable over the 15- to 20-year periods they cover, even if we exclude the investment income we can expect to earn on the $4.9 billion that we hold." Buffett did not disclose the exact size of this global bet, only remarking that "we’re talking billions and billions and billions and billions of dollars of these things."

Posted by edelfenbein at 10:25 AM

Morgan Stanley Is Being Sued Over James Brown's Estate

How can you not like this story?

Brown’s estate has been at the centre of legal controversy. The 16-month scrap over his money has included allegations of embezzlement by some of his managers, wives, partners and offspring, as well as a fight over the veracity of the will.

It was drawn up by a lawyer who is serving 30 years in jail for murdering a strip-club dancer.

Two court-appointed trustees of Brown’s estate filed a lawsuit this week against Morgan Stanley at a court in South Carolina, the singer’s home state.

In court papers, the trustees allege that Joseph Lizzio, a Morgan Stanley banker who continues to work for the Wall Street group, breached his fiduciary duty to his client by failing to check with Brown whether an employee was allowed to withdraw funds from his account.

Posted by edelfenbein at 10:19 AM

Commodity Prices in Historical Perspective

Here's an interesting report on commodity prices from Wachovia. They point out that surges in commodity prices are fairly common. In fact, that latest rally pales in comparison to some recent rallies. The report also includes the CRB Index adjusted for inflation (Exhibit 2), a chart I've run a few times here. Over the long haul, commodity prices have consistently underperformed inflation.

Posted by edelfenbein at 10:06 AM

Best Lede I've Read Today

From Reuters:

At least two analysts said Bank of America will likely lower its purchase price for Countrywide Financial , with Friedman, Billings Ramsey analyst saying the bank may bring down its deal price to the $0 to $2 level or completely walk away from the deal.

I like that: They're lowering their offer to the $0 level. Didn't that also happen in Godfather 2?

Posted by edelfenbein at 3:12 PM

How Much Not to Have Tea With Him

From Reuters:

How would you like a film role with Johnny Depp, tea with Alan Greenspan or tennis lessons from Andre Agassi?

It's all up for sale in an online auction to benefit the Robert F. Kennedy Memorial, a human rights advocacy group.

Tea with Greenspan and his wife, NBC correspondent Andrea Mitchell, was going for $11,000, according to the Web site here. Bidding ends on May 7.

Last year tea with Greenspan went for $45,000, promoters of the event said. No word on whether the winner received investment tips.

If their home is in foreclosure, then yes, they probably did get investment advice.

Here's the page to place a bid.

Posted by edelfenbein at 12:20 PM

RIP: Robert Vesco

Robert Vesco, one of the great financial swindlers, is dead. Given that it's Vesco, I guess I should say that he's allegedly dead. It's takes a real genius to flee to Cuba. Then get arrested in Cuba for double-crossing Castro.

If Mr. Vesco indeed eluded the American authorities until his final day, it was the fitting end to his nearly four decades on the run. He was wanted for, among other things, bilking some $200 million from credulous investors in the 1970s, making an illegal contribution to Richard M. Nixon’s 1972 presidential campaign and trying to arrange a deal during the Carter administration to let Libya buy American planes in exchange for bribes to United States officials.

Mr. Vesco last made the news a decade ago when he was sentenced to prison in Cuba, where he had taken sanctuary, for a financial scheme. He emerged in recent years and lived a quiet life in Havana until he contracted lung cancer. After about a week in a hospital, friends say, he died and was buried in an unmarked grave.

Given the controversial nature of the man, none of his friends dared be identified for fear of running afoul of the Cuban authorities. While word of Mr. Vesco’s death could be the final ruse of a 72-year-old modern-day buccaneer who had every reason to drop off the radar, it would have to be an elaborate one.

Posted by edelfenbein at 11:57 AM

JobVent On NICK

I noticed this posting on Nicholas Financial (NICK) at JobVent, a site where you can complain about your company.

Certainly one of the poorest managed companies I've ever experienced. The executive management is way too young and inexperienced and has never worked in any significant roles for other companies, so they only know one way to manage - through fear & intimidation. They install branch managers and expect them to turn a branch around in 60 days or they're pretty much out the door. Talk about cheap? This company expects its employees to scrub the toilets, change the light bulbs, sweep the floors, etc..You name it they are too cheap to out-source to a 3rd party. Probably could be a highly successful company if the CEO would get out of the way, hire some outside executive management and spend more time developing employees.

Obviously, since I don't know the source, I can't say how reliable it is. However, sometimes these rants can tell you a lot about the firm.

Posted by edelfenbein at 11:15 AM

Yahoo Plunges

I don't have much to add to the Yahoo/Microsoft story beyond the obvious. I can't believe Yahoo (YHOO) can be so out-of-touch. Microsoft (MSFT) was willing to pay $33 a share, and Yahoo wanted $37. I wouldn't have paid $15. The company simply isn't worth it. Yahoo is going to get smacked, and they really deserve it.

Posted by edelfenbein at 11:10 AM

Media Self-Absorption Watch

Check out this unintentionally hilarious paragraph from a completely fatuous editorial in today’s Washington Post.

Chelsea has been winning kudos in this campaign as an effective surrogate for Hillary Rodham Clinton, but I keep wondering whether she's an effective representative for us. Like me, Chelsea's a twentysomething (28 to my 29), a member of the generation that, as it happens, I spend a lot of time learning and writing about. We're ironic, sarcastic and self-deprecating, a reflection of the pop culture and politics that played out while we grew up in the 1980s, 1990s and onward. We were weaned on Chevy Chase movies ("Spies Like Us," of course, being the best), grunge and MTV's "The Real World" (seasons 1 and 2 only, please) and trained by the Onion, Jon Stewart and Stephen Colbert to detect spin in the most banal comments. People my age shed privacy at the nearest high-speed Internet connection and, more often than not, display the very grown-up qualities of self-awareness and self-reflection.

Allow me to translate: "Me! Me! Me! Me! Me! Me!"

I have a feeling that self-awareness somehow escaped this writer. His description of his generation probably accurately describes about, say, 0.3% of the population.

I'm having a hard time deciding what's the worst sentence. Maybe this?

Maybe Chelsea reached this workplace ideal of neatly combining altruism with affluence at her first job at McKinsey, an elite consulting firm, where she specialized in health care, or possibly now, at her hedge fund.

I won't even go into the part where he talks about his near-stalking of Ms. Clinton. After that, it gets kinda creepy.

Posted by edelfenbein at 9:22 PM

Virtual Recession Sparks NY Times Ad Sales Halt

ScrappleFace has the scoop:

With the nation on the verge of "a near-virtual likely recession", The New York Times stopped selling advertising today in an effort to help readers conserve “what little money they have left.”

"We realized we were sending mixed messages,” said Times publisher Arthur Ochs Sulzberger, Jr., “Our reporters and columnists say ‘Economic disaster is upon us’, but our advertisers say ‘Spend, buy, borrow’.”

“Our integrity,” he said, “demands that either we stop reporting on predictions of a very-probable, possibly-imminent, almost-certain recession-like economy, or we stop encouraging people to buy stuff, take on debt and live it up as if the world were not practically about to end.”

The moratorium on advertising sales will continue at least through January 2009, Mr. Sulzberger said, when he anticipates a positive change in what he called “the chief economic indicator,” a housing benchmark determined by which political party controls the White House.

Posted by edelfenbein at 11:03 AM

What Recession?

An editorial from the New York Sun:

The common definition of a recession is two consecutive quarters of negative economic growth, as we reminded readers in a January 24, 2008, editorial, "Recession Looms?" Well, despite the determination of politicians in Washington to deliver a "stimulus" to counter a recession, despite the persistence of the huffing and puffing from Paul Krugman about how the economy is about to go into a recession, despite the harrumphing of even the likes of Alan Greenspan, somehow the recession is proving elusive.

That is certainly the indication from the Department of Commerce, which yesterday announced that the gross domestic product in the first quarter of 2008 grew at a seasonally adjusted annualized rate of 0.6%. That's a real rate of growth, which means that the economy grew faster than inflation, which was itself not negligible. It was the same real growth rate that the government measured in the fourth quarter of 2007.

We'd like to see stronger growth, like, say, in the third quarter of 2003, when the economy started to get the feel of the Bush tax cuts and grew at an astonishing seasonally adjusted annualized rate of 7.5%. Or the year that began in April of 1983 and ended in March of 1984, when President Reagan's supply-side measures began to work their incentives and when the American economy grew consistently at a supercharged rate of more than 8%.

But two consecutive quarters of 0.6% growth is not bad, when measured against, say, the fourth quarter of 1990 and the first quarter of 1991, when real GDP shrank at an annualized rate of 3% and 2%. That was negative growth, not merely slow growth. Another genuinely bad patch was in spring and summer of 1980. In the second quarter of 1980, growth was negative 7.8%.

What we're seeing now — a national unemployment rate of 5.1% in March, a stock market whose indexes are up nearly 5% for the month of April — does not a recession make. In the early 1980s, we saw double-digit unemployment rates. In the early 1990s, the unemployment rate reached 7.8%. A 5.1% national unemployment rate is not a recession. There may yet be a recession, but Mr. Krugman & Co. will have to wait a bit more.

This is not to minimize the pain or hardship felt by those who have been affected by the job losses on Wall Street, who face losing their homes in a foreclosure proceeding, or who have been affected by the flight of manufacturing jobs overseas. But the American economy and the capitalist system and open markets are remarkably robust.

President Bush has now presided over 26 consecutive quarters of positive GDP growth, beginning immediately after the quarter that included the terrorist attack of September 11, 2001. President Reagan was credited with the "Seven Fat Years" in a book of that name by Robert Bartley that derived its title from Genesis. President Bush has two more quarters to go to make it to 28 quarters of growth, which would be seven fat years of his own and leave responsibility for protecting the Bush boom to whomever America elects as the next president.

Posted by edelfenbein at 11:15 AM

Ricepec

Thailand, Vietnam, Cambodia, Myanmar and Laos are thinking about creating a rice cartel:

The plan appears to be in a nascent stage. “I think it’s time to do it, probably within the term of this administration,” Noppadon Pattama, Thailand’s foreign minister, said Wednesday.

But if successful, a cartel could have far-reaching consequences on the rice market, sustaining prices at their current historic highs and worsening a food crisis that is hurting Asia’s poorest consumers. The price of Thai B-grade rice, a benchmark variety, has nearly tripled in recent months and is now hovering at about $1,000 a ton.

Maintaining rice prices would please large-scale rice farmers and traders in countries like Thailand and Vietnam, but it would anger places like the Philippines, Singapore and Hong Kong, which rely heavily on imported rice. Plans for the cartel were front-page news in the Philippines on Thursday.

Posted by edelfenbein at 2:58 PM

The S&P 500 Total Return Index

Including dividends, the S&P 500 is down -5.0% for the year, and up 8.3% for the decade.

Here's the same chart adjusted for inflation. The CPI for April hasn't come out yet so I assumed 0.5%.

Posted by edelfenbein at 2:26 PM

Timmay Radio Is Born

If you’ve never heard of Tim Sykes, at this point, that’s probably your fault. He’s a one-man media, blogging and trading empire.

Tim has redesigned his site which now includes a podcast with yours truly. Enjoy.

Posted by edelfenbein at 1:30 PM

The Strange BBBY Rally

Ever since Bed Bath & Beyond (BBBY) reported its poor quarter a few weeks ago, the stock has rallied. The stock is now up about 20% from its low.

We often look to clear reasons to explain stock price movements. It's disquieting to think that sometimes there simply aren't any. Of course, I never thought BBBY should have been that cheap to begin with.

Posted by edelfenbein at 12:47 PM

Setting the Bar High

It's got to be rough for a company that earns $10.9 billion in a quarter, and the results are called disappointing.

Posted by edelfenbein at 12:43 PM

De Beers Finds Shipwreck, Treasure From Columbus Era

This is cool:

De Beers, the world's biggest undersea diamond miner, said its geologists in Namibia found the wreckage of an ancient sailing ship still laden with treasure, including six bronze cannons, thousands of Spanish and Portuguese gold coins and more than 50 elephant tusks.

The wreckage was discovered in the area behind a sea wall used to push back the Atlantic Ocean in order to search for diamonds in Namibia's Sperrgebiet or ``Forbidden Zone.''

``If the experts' assessments are correct, the shipwreck could date back to the late 1400s or early 1500s, making it a discovery of global significance,'' Namdeb Diamond Corp., a joint venture between De Beers and the Namibian government, said in an e-mailed statement from the capital, Windhoek, today.

The site yielded a wealth of objects, including several tons of copper, more than 50 elephant tusks, pewter tableware, navigational instruments, weapons and the gold coins, which were minted in the late 1400s and early 1500s, according to the statement.

Posted by edelfenbein at 10:34 AM

The S&P 500 and Earnings

Here's a chart of the S&P 500 (black line, left scale) and its earnings (yellow line, right scale). I scaled this graph at a ratio of 16-to-1, so whenever the lines cross, the P/E ratio is exactly 16. As you can see, even as the market has risen and sold off, the market is basically following earnings pretty closely.

Posted by edelfenbein at 10:14 AM