« October 2008 | Main | December 2008 »

RIP: Tanta

This is just awful news. Doris Dungey, aka Tanta of Calculated Risk, died this morning. I’m absolutely speechless. This is from the New York Times:

The blogger Tanta, an influential voice on the mortgage collapse, died Sunday morning in Columbus, Ohio.

Tanta, who wrote for Calculated Risk, a finance and economics blog, was a pseudonym for Doris Dungey, 47, who until recently had lived in Upper Marlboro, Md. The cause of death was ovarian cancer, her sister, Cathy Stickelmaier, said.

Thanks in large part to Tanta’s contributions, Calculated Risk became a crucial source of prescient analysis as the housing market at first faltered, then collapsed and finally spawned a full-blown credit crisis.

Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on “Understanding the Securitization of Subprime Mortgage Credit.”

She wrote under a pseudonym because she hoped some day to go back to work in the mortgage industry, and the increasing renown of Tanta in that world might have precluded that. Tanta was Ms. Dungey’s longtime family nickname, Ms. Stickelmaier said.

Calculated Risk, which gets about 75,000 visitors a day, was started in early 2005 by a retired technology executive named Bill McBride. The housing market was soaring, but Mr. McBride sensed that the industry was about to peak, and he posted articles and data that made his case.

The blog quickly drew a lively and informed group of commentators, few livelier and none more informed than someone who called herself Tanta. She began by correcting some of Mr. McBride’s posts. “She would tell me either I was wrong or the article I was quoting was wrong,” he said Sunday. “It was clear she really knew her stuff. And she was funny about it.”

Tanta soon graduated from merely commenting to being a full-scale partner. Her first post, in December 2006, took issue with an optimistic Citigroup report that maintained that the mortgage industry would “rationalize” in 2007, to the benefit of larger players like, well, Citigroup.

“Bear with me while I ask some stupid questions,” Tanta wrote, and proceeded to assert that the industry was less likely to “rationalize” than fall apart, which it did. Citigroup was bailed out by the government last month.

She loved the intricacies of mortgage financing and would joke about being not just a nerd on the subject but a nerd’s nerd. She eventually wrote, for the Calculated Risk site, “The Compleat ÜberNerd,” 13 lengthy articles on mortgage origination channels, mortgage-backed securities and foreclosures that constituted a definitive word on the subject.

The rest of the time, Tanta liked to chew on the follies of regulators, the idiocies of lenders and — a particular favorite — clueless reporters, which according to her was just about all of them. She did not approve, she once wrote, of “parading one’s ignorance about mortgages in an article full of high-minded tut-tutting over ignorance about mortgages.”

In March 2006, Ms. Dungey was diagnosed with late-stage ovarian cancer.

Ms. Dungey was raised in Bloomington-Normal, Ill., had a graduate degree in English, and worked as a writer and trainer for a variety of lenders, including Champion Federal and AmerUs Mortgage.

One of Tanta’s last posts was written as the $700 billion bailout was first being debated in mid-September, and it seemed that the Treasury Department might buy bad assets directly from troubled banks.

Tanta argued that for every asset that banks unloaded on the government, the chief executives should be required to explain “why they acquired or originated this asset to begin with, what’s really wrong with it in detail, what they have learned from this experience, and what steps they are taking to make sure it never happens again.”

My deepest sympathies to her family.

Posted by edelfenbein at 9:38 PM

Krugman on What to Do

Paul Krugman favors lots more spending:

What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending.

The first task is the harder of the two, but it must be done, and soon. Hardly a day goes by without news of some further disaster wreaked by the freezing up of credit. As I was writing this, for example, reports were coming in of the collapse of letters of credit, the key financing method for world trade. Suddenly, buyers of imports, especially in developing countries, can't carry through on their deals, and ships are standing idle: the Baltic Dry Index, a widely used measure of shipping costs, has fallen 89 percent this year.

What lies behind the credit squeeze is the combination of reduced trust in and decimated capital at financial institutions. People and institutions, including the financial institutions, don't want to deal with anyone unless they have substantial capital to back up their promises, yet the crisis has depleted capital across the board.

The obvious solution is to put in more capital. In fact, that's a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country's GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets.

Posted by edelfenbein at 12:50 PM

Rescue Plan Strained by Lack of Staff

If you're looking for a job, there's one government agency that's desperately short of people:

President-elect Barack Obama has made his most important Treasury Department personnel choice, but Timothy Geithner has big personnel challenges of his own.

The current Treasury has so far struggled to keep up with the task of hiring enough people to handle the $700 billion financial rescue package passed by Congress in October. The man now in charge of running the Troubled Asset Relief Program, Assistant Secretary Neel Kashkari, said the department's Office of Financial Stability, with about 40 full-time employees, is operating at half-staff.

Federal banking regulators, who must approve the applications from banks before they go to Treasury, said there is a backlog of unprocessed applications for relief. Outside observers said the difficulty of quickly building a qualified staff may be one reason the Treasury abandoned its original plans to use the TARP to purchase assets from financial institutions, deciding instead to inject capital into the banking system.

So we have $700 billion that's to be spent by 40 people. I think I know how this story will end.

Posted by edelfenbein at 10:17 PM

Almanac Day

For reasons I may never know, I’m an extreme dataphile. I love numbers. Even better, numbers in charts! Or numbers in tables!! Historical data. Stock data. Sports data. Voting data. It really doesn’t matter, I’ll read it.

That’s why I’ve always been a big fan of the World Almanac. All of us dataphiles love the World Almanac. As I kid, I used to digest these books whole.

The new version always comes out around Thanksgiving time, and I made my annual trek to the book store to get it. Nope, I can’t even wait for Amazon.

I have on my bookshelf the last 20 World Almanacs, and I guess I’ll be collecting them for the rest of my life. I just spent the last few hours reading the newest version from cover to cover. Imagine Burgess Meredith in that classic Twilight Zone episode. That’s me, just World Almanacs.

Sigh....

Posted by edelfenbein at 8:23 PM

Heads You Lose, Tails You Lose

Six days ago, The New York Times ran an article looking at the victims of lower prices for crops. Here's a sample:

Now, with the suddenness of a hailstorm flattening a field, hard times are back on the American farmstead. The price paid for crops is dropping much faster than the cost of growing them.

The government reported this week that the cost of goods and services nationwide fell by a record amount in October as frantic businesses tried to lure customers. While lower prices are good for consumers in the short run, a prolonged stretch of deflation would wreak havoc as companies struggled to stay afloat.

In this lonesome stretch near the Texas border, farmers are getting an early taste of a deflationary world. They have finished planting next year’s winter wheat, turning the fields a brilliant emerald green. But it cost about $6 a bushel in fuel, seed and fertilizer to put the crop in. That is $1 more than they could sell it for today, and never mind other expenses like renting land.

This looming loss sharpens their regret that they did not unload more of this year’s crop back when they harvested it in May. They knew the boom would end, but not so soon.

Sounds pretty rough. Fortunately, just six days later, the same paper finds that food prices are expected to keep going up. Of course, that's also bad news:

Government and industry economists project that the overall cost of food will continue to climb in 2009, led by increases for meat and poultry. A big reason, they say, is that food companies still have not caught up with the prolonged run-up in commodity prices, which remain above historical averages despite coming down from their highs early this year.

The Agriculture Department is forecasting that food prices will increase 3.5 to 4.5 percent in 2009, compared with an estimated 5 to 6 percent increase by the end of this year.

Some economists project even steeper increases next year. For instance, Bill Lapp, principal at Advanced Economic Solutions in Omaha, said he expected food prices to jump 7 to 9 percent next year.

Posted by edelfenbein at 5:57 PM

Happy Thanksgiving

Posted by edelfenbein at 11:25 AM

15 Stocks to Short

Tim Sykes, my favorite short-selling blogger, has 15 names that he calls potential shorts:

RDNT is also nearly a double off its lows

CSUN reported bad earnings, but was probly priced in considering the stock jumped big, no w a double off its lows in just 3 days…I don’t like earnings plays, but I’m watching.

JRCC is also a double off its lows, just a stock that’s gotten wrecked, no other reason, potential short.

SRI was a great short for a 15% gain, $1,700 profit, detailed post coming, now the stock is dead to me.

STXS looked like it was gonna roll over yesterday, spiked last few minutes, support everywhere so shorting doesn’t look too good.

PRST up from $1 to $2 after a death spiral, potential short

FMD is waaay up off its lows but its also a finance company, no thanks

NCT is another finance place, ow with solid intraday support everywhere, no thanks, I need spiking action, much more likely to reverse!

KFS is a finance spiker, but only its first up day, watching it

TWB had its first up day, $2 to $3 after being in a yearlong death spiral, please oh God let there be a further squeeze.

LNC is a finance company that was trading at $50 just a few weeks ago, no thanks

YGE is like CSUN, alternative energy bouncer, almost a double off its lows.

YRCW continues squeezes shorts, I won’t be one of them.

SSW is up a bit off its lows, but it’s a real company, no thanks.

Most of these are low-priced stocks that are hemorrhaging money. One stock I recognize is Presstek (PRST) which was THE STOCK TO OWN in 1995 and 1996. The stock jumped about 25-fold in two years. At its current price of $2, let's just say it's come down since then.

Posted by edelfenbein at 12:48 PM

Donaldson's First-Quarter Earnings

If you’re read this site for awhile, you know that I’m a big fan of Donaldson (DCI), the filtration company. The company has delivered record earnings for 19 straight years.

On Monday, Donaldson reported earnings for its fiscal first quarter and it looks like they’re on their way to a 20th record year. For Q1, Donaldson earned 60 cents a share That’s up from 53 cents last year. Revenue jumped 9.1% to $573.3 million. Wall Street was expecting 54 cents a share on revenue of $561.8 million.

Donaldson now expects full-year EPS to range from $2.16 to $2.36. Bill Cook, the CEO, said: “While we had a solid start to our new fiscal year, we also foresee a challenging global economic environment in front of us. As a result, we have been proactively managing our business and working aggressively to reduce our expense levels. Our progress to date is evident as our operating expenses decreased to 20.4 percent of sales this quarter compared to 22.0 percent in the fourth quarter of FY08. We expect that the combination of our continued focus on operating expense controls, product and process cost reductions, and the strength of our diversified portfolio of filtration businesses will allow us to achieve our 20th consecutive year of record earnings.”

The stock rose 7.0% on Friday, 6.5% on Monday, 6.7% yesterday and it’s up another 7.9% today.

Year.................Sales......................EPS
1999..............$944.14.................$0.65
2000..............$1,092.29..............$0.75
2001..............$1,137.02..............$0.83
2002..............$1,126.01..............$0.95
2003..............$1,218.25..............$1.05
2004..............$1,414.98..............$1.18
2005..............$1,595.73..............$1.27
2006..............$1,694.33..............$1.55
2007..............$1,918.83..............$1.83
2008..............$2,232.52..............$2.12

Here's the earnings call from Seeking Alpha.

Posted by edelfenbein at 12:42 PM

More on TIP Yields

Arnold Kling comments on the high short-term TIP yields:

The overall return on a seasoned TIP consists of three things. First, there is the coupon on the security. Second, there is the appreciation or depreciation of price. Third, there is the change in the accrued inflation factor. The coupon on the 1/15/09 TIP is 3.875 percent, so interest accumulates at that annual rate between now and then. So you can expect about 0.5 percent in interest (taking the number of days between now and January 15th, dividing by 365, and multiplying by the coupon rate). The price this morning was roughly 98.35, and if you hold it until January 15th it will effectively go to 100. So, you have a 1.65 percent gain from that. Annualize that number, and there's your double-digit yield.

The catch concerns the accrued inflation factor. Because the bond has been outstanding for almost ten years, the accrued inflation factor as of December 1st is 1.33 and headed down, because of the decline in the Consumer Price Index in October, to 1.32 on December 31 or a little less than a one percent drop.

I am guessing that the inflation factor for January 1st through 15th depends on the November CPI. If the November CPI declines by, say, one percent, then my guess is that the inflation factor would decline by another 0.5 percent. If that happens, then by my calculation your yield will be 0.5 + 1.65 - 1.5 = 0.65, over a period of roughly 50 days. At an annual rate, it is something just over 4.5 percent. Nice for a short-term Treasury, but nothing like double digits.

On the other hand, if we get an enormous drop in the CPI (keep in mind that gas prices are certainly going to be lower), you could actually lose money. If I'm doing the arithmetic right, with a 2.3 percent drop in the CPI, the accrued inflation factor would go down another 1.15 percentage points, and your total yield would be zero.

Posted by edelfenbein at 12:20 PM

Introducing the Free Lakota Bank

From their website:

The Free Lakota Bank is the world's first non-reserve, non-fractional bank that issues, accepts for deposit, and circulates REAL money...silver and gold. All of our deposits are liquid, meaning they can be withdrawn at any time in minted rounds.

At the Free Lakota Bank, we issue, circulate and accept for deposit only AOCS-Approved silver and gold currencies. Silver & gold are a store of value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Since we deal only in real money, we do not participate in any central bank looting schemes.

Money is made possible only by those who produce. Paper is not money, instead merely a promise to pay. We hope that some day the rest of the world will awaken from the American Dream: the dream that a person can sustain life by consuming more than producing. We call it the American Dream because you must be asleep to believe it. Well, that dream now has a silver lining; as people discover the dream is really a nightmare, the only solution is a return to value: value that comes from production and honest trade.

Posted by edelfenbein at 10:09 AM

Glad That's All Cleared Up

Posted by edelfenbein at 9:41 AM

Goldman's Forecast

Reuters reports:

Citigroup cut its 2008 target for the index to 850 points from 1,200 points. The 2009 target was cut to 1,000 points from 1,300 points.

Goldman cut its 2008 earnings-per-share estimate on the index to $55 from $65 -- its third estimate cut in less than three months. The 2009 estimate was cut to $53 from $68.

What's the point in making forecasts if you can instantly slash next year's estimate by 22%?

I don't mind estimates, and I don't mind people being wrong. But I do mind frivolousness. There's no value in that forecast whatsoever.

Posted by edelfenbein at 4:22 PM

High Yield Rates Soar

With T-Bills yielding less than 1 bip, look at the Vanguard High-Yield Corporate (VWEHX):

Posted by edelfenbein at 4:13 PM

Google: A Value Stock

Anyone notice that Google (GOOG) is going for 11.3 times next year's earnings?

Posted by edelfenbein at 1:01 PM

Assorted Links

Here are a few good links I want to pass along.

The New Yorker does 12,000 on the bearded one.

The Wall Street Journal looks at the Morgan Stanley Panic.

The New York Times looks at the decline and fall of Citigroup. Hint: Rubin doesn't come out looking so good.

Every Stock Mutual Fund Has Lost Money in 2008, Except One

China's richest man disappears

China's second-richest person detained

Very cool NYT graphic tracking the bailout money.

Posted by edelfenbein at 12:47 PM

Time Magazine: February 15, 1999

Rubin, Greenspan and Summers. Diminished reputations all.

Posted by edelfenbein at 1:56 AM

Citigroup, Feds Reach Deal

Well, the deal is done. Citigroup reached a deal with the Feds whereby the government will backstop $306 billion of its crappy assets. Note that the assets are not being taken off the balance sheet (TARP is dead). In exchange, the government will get 8% preferred shares (i.e., our crappy assets). The government will also kick in another $20 billion of TARP money (Update: TARP lives!)

For its troubles, Citi will now have to comply with the exec comp restrictions plus it has to go along with the FDIC's mortgage modification program.

There’s a lot going on here so let’s look at the objectives. For one, the government is aware that other troubled banks are watching this deal. Even if other banks never get it, a bar has been set that will influence future behavior.

There’s also the question of preferred shares versus warrants. That could go either way. If it works and the price is good, the warrants could be a very good deal for taxpayers. Actually, it could be an insanely good deal. That’s a risk, however, I’m not inclined to take. For one, what price? Citi’s dropped something like 60% in the past few days. The warrants in this deal have a price of $10.61 which is the 20-day trailing price. Friday’s close was $3.77. You do the math. I don’t get why the preferreds pay 8% instead of the previous 5%. For taxpayers, I don’t see why we can’t get the same 10% that Buffett got from Goldman.

The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and capital.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:

* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.

Here's the Summary of Terms.

Posted by edelfenbein at 1:08 AM

Somali Pirates in Discussions to Acquire Citigroup

It had to happen sometime:

November 20 (Bloomberg) -- The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup.

The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned most recently from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said.

"You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything," said Ali.

The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS's are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody's and S&P have already issued their top investment grade ratings for the PRBS's.

Head pirate, Ubu Kalid Shandu, said: "We need a bank so that we have a place to keep all of our ransom money. Thankfully, the dislocations in the capital markets has allowed us to purchase Citigroup at an attractive valuation and to take advantage of TARP capital to grow the business even faster."

Shandu added, "We don't call ourselves pirates. We are coastguards and this will just allow us to guard our coasts better."

*CITI IN TALKS WITH SOMALI PIRATES FOR POSSIBLE CAPITAL INFUSION

*WILL REQUIRE ALL CITI EMPLOYEES TO WEAR PATCH OVER ONE EYE

*SOMALIAN PIRATES APPLY TO BECOME BANK TO ACCESS TARP

*PAULSON: TARP PIRATE EQUITY IS AN `INVESTMENT,' WILL PAY OFF

*KASHKARI SAYS `SOMALI PIRATES ARE 'FUNDAMENTALLY SOUND' '

*Moody's upgrade Somali Pirates to AAA

*HUD SAYS SOMALI DHOW FORECLOSURE PROGRAM HAD `VERY LOW' PARTICPATION

*SOMALI PIRATES IN DISCUSSION TO ACQUIRE CITIBANK

*FED OFFICIALS: AGGRESSIVE EASING WOULD CUT SOMALI PIRATE RISK

* FED AGREED OCT. 29 TO TAKE `WHATEVER STEPS' NEEDED FOR SOMALI PIRATES

Posted by edelfenbein at 12:04 PM

That's Like Rearranging the SIVs off the Balance Sheet

The New York Times on Citigroup:

Within the bank’s Manhattan offices, television screens have stopped displaying the company’s stock price. Traders have begun making jokes comparing Citigroup to the Titanic.

Also, remember that Goldman Sachs IPO from nine years ago?

Shares of The Goldman Sachs Group Inc. closed below their initial offering price of $53 on Thursday, a first since the company went public in May 1999.

The stock dipped as low as $49 in intraday trading, closing at $52.36.

The New York-based company’s shares reached a high of $247.97 on Oct. 31, 2007, creating a market value of $105 billion.

Posted by edelfenbein at 11:10 AM

It Happened

Yesterday's close:

Dow = 7,552.29

S&P 500 = 752.44

Ratio = 10.037

Posted by edelfenbein at 10:10 AM

Fun with Numbers

The S&P 500 hit an intra-day low this morning of 776.76. That’s the exact same level as the closing low from October 9, 2002, the previous bear market low. Incidentally, the closing Dow low of August 12, 1982 was 776.92.

The Dow is inches away from reaching 10 times the S&P 500 for the first time in 42 years.

Posted by edelfenbein at 12:23 PM

Buffett’s Stock Slump

The Drudge headline says “Now Buffett in stock slump!” Berkshire was down 12% on Wednesday. Now let’s take a look at BRKA divided by the S&P 500.

Not a bad slump.

Posted by edelfenbein at 12:10 AM

TIPs Yields

Here's a look at the current TIPs yields-to-maturity listed by maturity date.

Posted by edelfenbein at 9:56 PM

A 40-Year Look

The S&P 500 closed at a 68-month low today. Given that the CPI report came out today, here’s an interesting stat. Adjusted for inflation, the S&P 500 has advanced just 23.9% in 40 years. Annualized, that’s 0.54%.

This means that almost the entire gain came from dividends. I should add that this is a bit of playing with numbers since 40 years ago was a cyclical high, and I hope we’re near a cyclical low.

Inflation over the last 40 years has increased by 513.5%. The S&P 500 closed today at 806.58. On November 19, 1968, the S&P 500 closed at 106.14. So the index has grown by 660%.

Posted by edelfenbein at 4:09 PM

Heading Towards Deflations

The TIPs say deflation is coming and may stay around for a bit:

Yet, if you believe the yields on US Treasury inflation protected bonds, or Tips, we shall have a 2.2 per cent fall in prices in 2009, a 2.5 per cent decline in 2010 and only flat prices in 2011. If that turns out to be true, the real interest rate burden on even the highest-rated borrowers will be extremely hard to bear.

As a practical matter, long before we had significant "negative prints" of consumer prices, the Federal Reserve would just flat out buy Treasury bonds and monetise away with "quantitative easing". Gold dealers would replace hedge fund managers at the art auctions, model agency parties and Congressional hearings.

But there's more to the story. John Dizard says that the market is simply becoming less efficient:

What's really going on is another effect of the disappearance of dealer and arbitrageur capital. The dealers can't afford to make efficient markets, given their decapitalisation, downsizing, and outright disappearance. That means anomalies sit there for weeks and months, where they would have disappeared in minutes or seconds.

Here's another look at yield you can get for the TIP maturing in two months.

It's currently yielding 13.73%.

Posted by edelfenbein at 2:38 PM

Inflation and Stocks

With today’s report showing how steeply prices fell last month, I wanted to revisit the issue of inflation’s impact on stock prices. Let me add the important caveat that correlation doesn’t necessarily mean causation. The short answer is that inflation is bad for stocks. In fact, the only thing worse is deflation. What the market likes is inflation that's nice, steady, predictable and low.

Going back to 1926, there have been 72 months of deflation coming in below -5%. The inflation-adjusted total return for that period is an annualized loss of -9.6%.

Here's how it breaks out.

Inflation Rate............Real Stock Returns (annualized)
Below -5%..............................-9.6%
Between 0% and -5%.............20.9%
No Inflation.............................17.1%
Between 0% and 2%..............10.0%
Between 2% and 5%..............14.1%
Between 5% and 7.5%...........-0.2%
Between 7.5% and 10%.........-2.8%
Over 10%...............................-11.1

Basically, when inflation is over 5% or under -5%, the market averages a real 5.5% loss. When inflation is between -5% and 5%, it average a 15% gain.

Posted by edelfenbein at 1:48 PM

Gene Simmons Rings the Opening Bell

What else needs to be said?

Posted by edelfenbein at 12:48 PM

CPI Posts Biggest Drop in 61 Years

The headline rate dropped by 1% last month which was the most since monthly record began, although the numbers in the database go back to 1913. Consumer prices dropped for an extended period beginning in the 1920s and going into the 1930s. Wall Street was expecting a fall of 0.8%.

We knew a big drop was coming thanks to the fall in oil prices, however, the biggest surprise was the core prices also fell for the first time since 1982. Wall Street was expecting a 1% rise and it got a 0.1% loss.

Posted by edelfenbein at 11:42 AM

More on Corporate Bond Spreads and Their Impact on Equities

Michael Stokes stokes picks up on my post from last week, and finds that "high spreads have been bullish for the stock market, except when spreads reach extreme heights (like they have at this very moment)."

Posted by edelfenbein at 3:23 PM

If There Was Something We Could Have Done....

Citigroup hits 13-year low:

Posted by edelfenbein at 2:09 PM

Ken French on Why Commodities are a Bad Investment Idea

Posted by edelfenbein at 1:50 PM

Looking at Harvard's Endowment

Daniel Gross looks at the (mis)management of Harvard's endowment portfolio. Or as he says, "looks like it was chosen by someone who watched a few episodes of CNBC's Squawk Box and heard that the hot new investments were emerging markets, commodities, and private equity."

Gross writes:

The biggest position disclosed—all amounts and dollar values are as of Sept. 30—was $463 million in the iShares MSCI Emerging Market fund. As the six-month chart shows, that fund's off nearly 60 percent from this summer and down by about one-third from the end of September. Third-largest was a $233 million position in Weyerhauser, the wood-products giant that has fallen about 40 percent since the end of September. The top 10 included $232 million in the iShares MSCI Brazil Index Fund, off about 40 percent since the end of September; about $51 million in the iPATH MSCI India Index, off about one-third since the end of September; and $158 million in the iShares FTSE/Xinhua China Index, off about 30 percent since the end of September. For good measure, top 10 holdings also included index funds that were plays on South Africa's commodity-based economy and on the perennially emerging market of Mexico. Would it surprise you to learn that both of those investments, after fairing poorly in the third quarter, have fallen further in the fourth quarter?

I think Gross is being a bit unfair here. Harvard only has to disclose its position in publicly traded companies, and that's "only" $2.9 billion, or less than 8% of its portfolio. For any long-term investor, which Harvard certainly is, you can safely reserve 8% of your portfolio for play money.

Posted by edelfenbein at 1:39 PM

Obama to Detroit: Drop Dead

Or at least, that's what he should say. The UK Times sums it up well:

Rescuing ailing industries represents a retreat to comforting orthodoxies by the Democrats. The new administration might note that the British Government has learnt from experience. Labour in the 1970s supported British car manufacturing, when British Leyland faced a liquidity crisis. The company was a constant drain on public resources. Only later did Labour grasp that investment in manufacturing is wasteful if there is no demand for the product. Gordon Brown has rightly urged Mr Obama not to introduce protectionist trade policies, which would merely compound the crisis. They are not the only example of economic interventionism that should be avoided scrupulously.

Posted by edelfenbein at 1:32 PM

The Problem with Point Spreads

I’ve written before that football point spreads aren't too different from stock prices. The point spreads are merely set by the bookies so they can have even money on both sides of the bet. They’re not trying to predict the games. They’re trying to estimate how others will predict the game. That’s very close to how stock prices work.

One of the problems in the betting market is that a team doesn’t care how much it wins by, as long as they win. Outside of pride, the teams are indifferent (we hope) to point spreads.

Sunday’s game between the Steelers and Chargers was a big headache for folks in Las Vegas. On the surface, the Steelers won a tough game by the score of 11-10. By the way, that was the first game in NFL history to have that final score (one touchdown and extra point, one safety and four field goals).

The Steelers were favored to win by four points. On the final play of the game, with the Steelers up 11-10, Troy Polamalu grabbed a loose ball and ran to the end zone to give the Steelers an apparent 17-10 lead—and covering the spread.

The officials, however, overturned the touchdown saying the Chargers made an illegal forward pass. The Steelers, naturally, didn’t care since the game was over and they won. The league later admitted the mistake. There could have been as much as $10 million riding on that decision.

Here’s the final play of the game:

Posted by edelfenbein at 1:21 PM

The Real Price of Gas

Over the summer, the price for a oil of oil peaked at $147.27 a barrel. I know we're all supposed to be worry about this, but would you believe that oil just hit a 21-month low?

Crude oil for December delivery fell $2.09, or 3.7 percent, to $54.95 a barrel at 2:42 p.m. on the New York Mercantile Exchange, the lowest settlement since Jan. 29, 2007. Prices have tumbled 63 percent since reaching a record $147.27 on July 11.

Gasoline for December delivery tumbled 6.45 cents, or 5.2 percent, to $1.1746 a gallon in New York, the lowest settlement since the contract was introduced in October 2005.

Pump prices have followed futures lower. Regular gasoline, averaged nationwide, declined 1.8 cents to $2.087 a gallon, AAA, the nation’s largest motorist organization, said on its Web site today. It’s the lowest retail price since March 2005. Gasoline pump prices have dropped 49 percent from the record $4.114 a gallon reached on July 17.

Today's PPI report showed the biggest plunge on record thanks to gas prices dropping by nearly 25%. If we adjust for inflation, gas prices are much lower than they've been for much of the last 90 years.

Feeling nostalgic for the days of 17 cent gas in 1931, 20 cent gas during WWI, the gas below 30 cents during the first half of the 1950s, or the $1.40 gas of the early 1980s? If so, you'd be suffering from "money illusion," the tendency to confuse nominal and real (inflation-adjusted) prices. Gas is cheaper today in real dollars than any of those past prices.

Posted by edelfenbein at 12:55 PM

The Seasonality Timing System

Mark Hulbert writes:

The Seasonality Timing System (STS), for those of you not familiar with it, traces to research conducted by Norman Fosback in the early 1970s. Fosback, who currently edits a newsletter called Fosback's Fund Forecaster, found that the stock market has a bullish bias around the trading sessions immediately prior to each exchange holiday as well as those at the turns of each month. At all other times, his timing system calls for being out of stocks and safely invested in a money-market fund. It therefore incurs very little risk.

Over the 25-plus years that the HFD has tracked the STS, a portfolio that used it to switch between the DJ Wilshire and T-bills produced an 11.7% annualized return, vs. 10.6% for buying and holding. That's impressive enough, since very few market timing-strategies are able to even match the market's return, much less beat it.

But what makes the STS really shine is that its market-beating return was produced while being in the stock market for only about one third of the days it was open. On a risk-adjusted basis, the STS almost doubles the return of a buy-and-hold.

Posted by edelfenbein at 11:54 AM

GE's Confirms Dividend

I said before that it looks like GE will cut its dividend. What do I know? The company came out today and confirmed that it will pay its 31 cent dividend through 2009. That works out to a dividend yield of 7.7%. That's more than twice the 10-year Treasury. GE currently has one of the largest dividend yields among major industrial companies.

Posted by edelfenbein at 11:48 AM

Ron Paul at Today's Hearing

I think Bernanke tends to treat Paul's questions as if he were a first-year econ student, which is probably correct.

Paul: But does the subject of a new (dollar) regime ever come up?

Gavel: Bang, bang.

Posted by edelfenbein at 11:38 AM

Yahoo Cuts off its Wang

I’ve never understood the market’s love affair with Yahoo (YHOO). While the stock was around $30, I said that it should be half that much. At one point last week, the shares fell below $10—and that’s still too high. I’ll give them credit for making money, but they don’t make too much. Earnings-per-share will probably drop for the third straight year.

After a little over a year running things, Jerry Yang is leaving the CEO slot. It’s about time. This guy really had no idea what he was doing. Not surprisingly, the stock is up strongly today. That’s got to be embarrassing.

In February, Microsoft offered to buy Yahoo for $31 a share, which was a 62% premium over its price. In one the classic business blunders of all time, Yahoo said no, they wanted $37. Microsoft went up to $33. Again, Yahoo said no, they wanted $37. Then Microsoft said forget about it. Forget $33. Forget $31. Forget it all. Once Yahoo’s stock started plunge, Yang said, “hey, you can still buy us!”

If you want to more why Yahoo is in such a bad place, you can Google the details.

Posted by edelfenbein at 11:17 AM

First, the Good News

The S&P 500 closed above its 5-1/2-year closing low from 21 days ago. The bad news is that in the last 21 days, it’s risen only 0.21%. Annualized, that works out to 3.8%.

Since the Tuesday before last, the S&P 500 is down 15.4%. Now if I could only remember what happened on Tuesday, November 4.

One last point: Adjusted for inflation, the Dow is up an annualized rate of 0.68% from its 1929 high.

Posted by edelfenbein at 10:07 PM

Cognizant Technology Solutions

Cognizant Technology Solutions (CTSH) has some of the most impressive financials of any stock you’re likely to see. Recently, the company’s earnings growth rate has dropped from about 50% to a year, to just 19% for the last earnings report. The stock, however, has plunged by over 60% since early 2007.

Here’s a chart showing the stock price (blue line, left scale) and the earnings-per-share (gold line, right scale). The two axes are scaled at a ratio of 50-to-1 which means that when the lines cross, the P/E ratio is 50. Using 50 is obviously a very high multiple. But as you can see, that’s what the stock was following for a long time.

The stock is currently going for less than 10 times next years’ earnings. Here’s what I wrote about Cognizant two years ago:

One of the more fascinating companies in the world today is Cognizant Technology Solutions (CTSH). The company, along with Wipro and Inforsys, is one of the foremost names associated with IT outsourcing, particularly to India.

While Cognizant is officially based in lovely Teaneck, NJ, its heart truly lies in the subcontinent. The company currently has over two dozen development centers in India. The growth in this business is simply astounding. The IT/outsourcing sector of the Indian economy is expected to grow from $17.2 billion in 2004, to $50 billion by 2009.

For any company looking to cut costs and have someone else handle their IT problems, Cognizant is great place to go. Half of their business is clients in the financial services sector. In fact, JP MorganChase, one of the scions of Wall Street, is a major client. Another 20% of Cognizant’s business comes from health care companies like UnitedHealth.

Cognizant was spun off from Dun & Bradstreet a few years ago and it hasn’t looked back since. As someone who pores over lots of financial statements, I can tell you that Cognizant’s results are extremely impressive. The company has consistently been able to grow its earnings over 50% a year. That’s no easy trick. Also, the company has a solid balance sheet and its operating margins are often around 20%.

For Q4, the company expects non-GAAP earnings of 43 cents a share. That would be a growth of rate of 18%, and the fifth straight quarter of slowing growth.

For number geeks, here's a spreadsheet with CTSH's financials.

Posted by edelfenbein at 1:51 PM

Citi to Cut 50,000 Jobs

The news coming out of Citigroup (C) seems to be from bad to worse. At one point, I thought it would be good to break up the bank into four different companies. Now, I'm not sure even that would help. The company has just recently announced that it will cut 50,000 jobs. Shares of Citi are now in the single digits.

The company is having a townhall meeting with its employees today. Here's a look at the slideshow.

Posted by edelfenbein at 11:03 AM

Belt Tightening: Wall Street’s Version

As you may have noticed, things are a bit tight on Wall Street these days. Now we hear that the CEOs understand the virtue of self-sacrifice. Lloyd Blankfein, the head of Goldman Sachs, for example, will forgo his executive bonus this year. His base salary is $600,000. Last year’s bonus was $70 million. So he’s giving himself a 99% pay cut. Deutsche Bank and UBS have also given up bonuses this year for the top brass.

I’m not sure why there’s such a focus on CEO pay. All I can say is that politicians loves to complain about it and it seems to have some resonance among voters. If regulators think CEO pay is somehow connected to the mortgage mess, then they’re proving to me that they shouldn’t be in the regulation business.

Posted by edelfenbein at 10:47 AM

Buy a Bank for $10 Million, Get $3.4 Billion from the Feds

Wish I thought of it:

Hartford Financial Services Group Inc. said it’s buying a Florida bank for $10 million so the insurer can be eligible for the Treasury rescue program. Hartford, based in the Connecticut city of the same name, expects to qualify for $1.1 billion to $3.4 billion under Treasury guidelines, the company said in a statement distributed today by Business Wire.

Posted by edelfenbein at 9:39 PM

Worst Paragraph of the Day

From Eliot "Client 9" Sptizer

No major market problem has been resolved through self-regulation, because individual competitive behavior doesn't concern itself with the larger market. Individual actors care only about performing better than the next guy, doing whatever is permitted -- or will go undetected. Look at the major bubbles and market crises. Long-Term Capital Management, Enron, the subprime lending scandals: All are classic demonstrations of the bitter reality that greed, not self-discipline, rules where unfettered behavior is allowed.

I think greed rules even where unfettered behavior isn't allowed.

Posted by edelfenbein at 8:23 AM

12% Real Yield

Want to make 12% after inflation? Well, for two months....

Posted by edelfenbein at 11:27 PM

The Recession Gets Serious

The Brits aren't going to the pubs:

Robert Munro buys his booze at London liquor stores these days. As his expenses rise and Britain teeters on the edge of recession, the house painter is cutting back on nights out and pouring drinks at home.

"It's gotten more and more expensive to just head down to the pub for a drink," said Munro, 55, who is self-employed. "You're paying silly prices for a pint -- you can drink at home for half the price."

Five British pubs are closing their doors every day, according to the British Beer & Pub Association, as pound- pinching drinkers embrace staying in as the new going out. That may hurt beer companies like Heineken NV and Carlsberg A/S more than distillers, such as Diageo Plc, because the brewers generate the majority of their U.K. sales at bars, where profitability can be double the level in retail outlets.

Posted by edelfenbein at 10:52 AM

Corporate Bond Spreads

Here’s a fascinating look at corporate bond yields over the past 90 years. I got the data off the Federal Reserve Bank of St. Louis’ data bank. This chart shows the yields of Moody’s index of Aaa and Baa seasoned corporate bond yields.

You’ll notice that the gap has widened significantly. This signifies what we already know, that lenders have become extremely risk-averse. Here’s a look at the difference between the two yields:

The premium for high-quality lenders is as high as it’s been since the recession of the early 1980s. We’re still a long way from the spreads we had during the Great Depression.

That data series is based on monthly averages, so to zoom in a little, let's look at the weekly data which begins in 1962.

According to the daily series, which goes back to 1986, the spread reached 312 basis points on October 27. That's the widest spread found in the daily records. According to my calculations, the entire gain of the S&P 500 has come when the spread is 96 basis points or less. The spread has been more than that every day for almost a year.

Posted by edelfenbein at 12:56 AM

GE's Dividend Yield

Hmmm. Something tells me that GE's 31-cent quarterly dividend payment isn't quite sustainable.

Posted by edelfenbein at 11:27 AM

When Investment Schemes Go Bad

They're rioting in Columbia over the collapse of a pyramid scam:

Thousands of Colombians have taken part in violent protests in several cities to demand the return of money invested in disreputable financial schemes.

Police used batons and tear gas to control angry investors and curfews were declared in several cities.

In Popayan in the south-western department of Cauca, 2,000 depositors stormed an investment firm's offices.

In Pereira, in Risaralda, police caught two men hurrying out the back door of a scheme's office with suitcases of cash.

They offered one of the cases to the police to let them go.

The BBC's Jeremy McDermott in Medellin says they are now in custody and that is the safest place for them, as conned investors have threatened to lynch them.

Posted by edelfenbein at 10:18 AM

Jim Rogers: Oil Bull Market Has Years to Go

In the last four months, oil has dropped by $90 a barrel. I think it's time to remind folks what the experts were telling us. Let's start with billionaire Jim Rogers:

Jim Rogers: Oil Bull Market Has Years to Go

The bull market for oil has many years to go before it peters out, says billionaire Jim Rogers, chairman of Rogers Holdings.

There are several factors for this view, but the primary one is that "known sources of petroleum are dwindling," Rogers told Bloomberg in an interview.

Global oil supplies could fall far short of need and expectations in the next 20 years, reported the International Energy Agency in mid-May. The agency long expected supply to rise to meet demand of 116 million barrels a day by 2030.

It now expects oil output to struggle to reach 100 million barrels in that time frame.

These market conditions will make life difficult for airlines — and airline stocks — well past 2010 and will also impact Federal Reserve policy in the coming months, Rogers said.

Rogers has proved astoundingly prescient since suggesting that investors buy into the older, industrial economy back in 1999 when gold and oil were coming off 25-year lows and when the Internet stock market was soaring.

Posted by edelfenbein at 2:24 PM

When Did the Recession Begin?

The common media definition of a recession is two consecutive quarters of negative GDP growth. Technically, that’s not correct. For example, at the beginning of this decade, we never had two straight quarter of falling GDP. Three of out five were negative, yet it certainly felt like a recession to me, and lots of other folks.

The National Bureau of Economic Research is the widely-regarded outfit in charge of dating business cycles. While they regard quarterly GDP as “the single best measure of aggregate economic activity,” NBER prefers to use monthly numbers to pinpoint the precise beginning and ending of business cycles.

This is what NBER has to say about their guidelines:

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

It’s not a perfect science establishing when a recession begins because we have to indentify two points: One, when does the economy not just slow down, but actually contract; and two, we need to look at the entire economy not just high-profile sectors like real estate.

NBER has already said that a recession has begun, but now it has to decide when. A decision probably won’t be made public for another year, so in the service of goodwill, I’ll try to help them out. The difficulty this time around is that the GDP figures aren’t so clear cut. Employment, for example, clearly peaked about one year ago, but exports segments of the economy still did well. GDP growth for last year’s fourth quarter was -0.17%, but I strongly doubt the committee will target a date that far back for the start of the recession. The reason is that GDP grew by 0.87% in the first quarter and another 2.82% in the second quarter (these are annualized numbers). The committee has never before overridden such strong numbers. I just don’t see them dating a starting point before then.

The issue becomes much clear by the third quarter when GDP came in at -0.25%. I also think that number will be revised lower in the months ahead. My advice is to date the start of the recession in May--right in the middle of the second quarter. There were two important events in May. The unemployment rate jumped from 5% to 5.5%. That was the largest monthly jump since 1980.

The other reason isn’t a metric that NBER uses but I think they ought to consider, and I’m referring to when the stock market broke down in May. The S&P 500 peaked last October 9 at 1565.15, however it showed some strength from mid-March to mid-May. Since May 20, however, the market has been in almost continuous retreat.

I think the stock market has evolved as a better gauge of broader economic cycles due to the democratization of Wall Street. When the market goes up, people are wealthier and they spend more. When they see their 401k’s rise, they feel more confident about buying big-ticket items. When the opposite happens, they feel less confident. Up through May, the market had suffered a break, but only since May 20 has it really deflated. That’s when the troubles started to hit everyone.

Posted by edelfenbein at 12:58 PM

Trying to Cross Wall Street

From Dealbreaker.

Posted by edelfenbein at 3:47 PM

The Death of Buy and Hold?

Last night, the Fast Money crew talked about the death of buy-and-hold investing. I agree that as a strategy, it’s in intensive care, but I’m not so sure it’s quite dead yet.

First, whenever people start talking about the death of something, particularly with investing, it often the moment it’s about to surge. The classic example of this is Business Week’s “Death of Equities” cover from 1979.

The other reason for my skepticism is a misunderstanding of the arguments for buy-and-hold. I often hear people say, “Ha! The market’s down! Where’s your buy-and-hold NOW?” Well, the case for buy-and-hold isn’t that the market always goes up. Rather, it’s that buy-and-hold beats anyone else’s ability to time the market consistently, successfully and in a practical way. It’s that last part in italics that’s often overlooked.

If you can time market successfully, fine. Go do it. In my opinion, I’ve never seen anyone who can do it consistently, successfully and in a practical way.

The other part of buy-and-hold obviously depends on what you buy and what you hold. Since I don’t believe in efficient markets, I don’t see buy-and-hold as synonymous with index investing. Many do. I think it’s certainly possible for investors to make reasonable decisions that will lead them to beat the market over the long haul. For example, if you had taken some basic steps like underweighting large-cap tech stocks at the height of the bubble, you’d be in far better shape today. Small-cap value stocks have had a pretty nice run over the last ten years (except for the last three months). This year, I avoided energy stocks and large-cap financial stocks, and it’s served us well.

There’s also the issue of how long to hold a stock. I don’t see the importance of holding a stock forever, but I do see value in holding them for a considerable amount of time. Each year, I change five out of my 20 Buy List stocks. That’s translates to an average holding period of four years, which seems reasonable to me, though I can understand some buy-and-hold purists objecting.

Lastly, there’s also the issue of how long it takes a stock’s performance to reflect its true value. I think this may be one of the least-understood topics in investing. I’ll give you a brief summary. Let’s say that the stock market gains, on average, 0.05% a day with a daily standard deviation of 1%. (These numbers aren’t accurate. My point here is descriptive. I’m also aware of the problem of stocks returns and the normal distribution, but I’ll out that aside for now). That means that 95% of a stock’s daily move is simply nonsense. It had zero bearing on the stock’s true worth.

After 25 days, more than a month of trading, the stock’s average return should be 1%. The standard deviation, however, is now 5% (note: this rises by the square root of the number of days). So even after one month of patience, the noise value has dropped to 83%.

At 625 days, or nearly two-and-a-half year, the average return and the standard deviation are both 25%. This means that even after holding a stock for 30 months, it’s perfectly reasonable to expect a loss or a minimal gain.

As I mentioned before, I used those numbers for descriptive purposed. The real figures would show that even more patience is required. Buy-and-hold could be dead, but the evidence isn’t close to be full. The bottom line is that the long-term advantage of holding stocks is real, but it takes a long time to show up.

Posted by edelfenbein at 12:34 PM

90 Years Ago

In Flanders fields the poppies blow
Between the crosses, row on row
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.

We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.

Posted by edelfenbein at 11:00 AM

Investor Quiz

Guess what stock was up over 430,000% in the last quarter of the 20th century, or nearly 40% a year?

Give up?

Circuit City Stores (CC)

Circuit City Stores Inc., the nation's second-biggest electronics retailer, filed for bankruptcy protection on Monday but plans to stay open for business as the busy holiday season approaches.

It said it decided to file for bankruptcy protection because it was facing pressure from vendors who threatened to withhold products during the holiday shopping period. The company also said it cut 700 more jobs at its headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.

Posted by edelfenbein at 10:50 AM

Now That's a Price Target

Deutsche Bank lowered GM to a sell today. That's not what caught my attention, although I'm not sure why anyone would have rated GM anything else but sell.

No, what struck me was their new price target: $0.

Posted by edelfenbein at 10:40 AM

The Recession Is On

Duh.

The head of the panel that officially dates U.S. economic cycles said there's no doubt now that a recession is under way following a surge in the unemployment rate to a 14-year high.

"The evidence is more than compelling" Robert Hall, the Stanford University economist who leads the National Bureau of Economic Research's business cycle dating committee, said in an interview. "It's conclusive, in my personal opinion."

With today's remarks, Hall joined fellow panelist and Harvard University Professor Martin Feldstein in calling a recession. The eight-member panel will meet at a later date to make an official determination because it needs additional details on gross domestic product figures, Hall said.

Feldstein and other analysts have said the economic slump is likely to be deeper than the past two recessions, in 2001 and 1990-91. Today's employment report reinforced that pessimism, with the unemployment rate climbing to 6.5 percent in October from 6.1 percent the previous month.

By my estimate, I think they'll say the recession began in May.

Posted by edelfenbein at 2:18 PM

The Pro-Obama Wealthy

According to exit polls, the percentage of voters in households that make over $200,000 a year doubled from 2004 to 2008, rising from 3% to 6%.

In 2004, those voters went for Bush over Kerry, 63% to 35%. This time, they voted for Obama over McCain, 52% to 46%. That's an amazing 17-point pick up.

Posted by edelfenbein at 5:27 PM

NICK’s Earnings

Nicholas Financial (NICK) reported third-quarter earnings today, and it was basically what I expected. The company earned eight cents a share, which was a big drop from the 25 cents a share it earned in last year’s third quarter. Still, they’re making money, and that needs to be stressed. Revenues increased 7.4% to $13.5 million.

I was impressed to see that most of the measures of their business were fairly stable compared with previous quarters. The big exception is NICK’s prevision for credit losses. That grew by 225% over last year’s third quarter, and it’s nearly 50% from the second quarter.

This confirms my earlier view—NICK’s business is in a lot of trouble right now. However, any fear that the company is about to go under isn’t yet shown by the evidence. By my guess, I would say the current market price probably reflects a 50% chance that NICK will go bankrupt sometime in 2009.

This investment will take awhile to be worthwhile, but it looks to reward patient investors.

Posted by edelfenbein at 11:44 AM

Our First First Black President

Posted by edelfenbein at 10:54 AM

How Stocks Work

Felix Salmon put three questions to Jim Surowiecki on the mechanics of stock valuation. I have some differences with Surowiecki’s answers so here’s my take:

Felix Salmon: What's the relationship, in theory, between a company's return on equity, on the one hand, and its stock price, on the other? Does a high return on equity mean a rising stock price, or is it a rising return on equity which means a rising stock price? Or, to put it another way: if one company has an ROE which is (expected to be) flat at 4%, and another company has an ROE which is (expected to be) flat at 14%, would you expect the latter to rise more than the former, or indeed either of them to rise at all?

Eddy: A company’s share price is the net present value of all future cash flows. A company’s return-on-equity is a measure of profits for the next year relative to present equity, so the two are connected. However, a high ROE does not translate to a rising share price, but a rising ROE should. Regarding your question, I would assume that the market has discounted both stocks’ net present value which incorporates ROE. Therefore, I would only expect the stocks to rise at the pace of the risk-free rate plus the equity risk premium.

This may help: ROE can be broken down into three parts; profit margin, asset turnover and leverage. It goes like this:

Profit margin is earnings divided by sales. Asset turnover is sales divided by assets. Leverage is assets divided by equity.

Earnings..........Sales..............Assets
---------------X----------------X--------------
Sales................Assets...........Equity

Note that the sales and assets cancel each other out to give you Earnings divided by Equity.

FS: What's the relationship between stock price, ROE, and risk-free rate of return? Would one expect ROEs in a country with a zero risk-free rate to be lower than ROEs in a country with a higher risk-free rate? How does that feed in to stock prices, if at all?

Eddy: Again, a company’s share price is the net present value of all future cash flows. ROE is the best measure of the growth of future cash flows. How do we discount that? We discount it by the cost of capital which is risk-free rate plus an equity-risk premium. That’s why a lower risk-free rate tends to boost equity prices.

According to the Gordon Model, it should look something like this:

Price = Earnings/(Risk Free Rate + Equity Risk Premium - ROE)

FS: How can a company with a positive ROE destroy economic value for shareholders?

Eddy: All companies in all industries are in phantom competition with the cost of equity capital. Even though you can’t see it, you’re struggling against it every day. So even if a company manages to squeak out positive ROE, capital will not flow your way if you keep losing to everybody else.

Posted by edelfenbein at 11:15 PM

Press Release from the NY Fed

Wonderful:

Michael Alix has been named a senior vice president in the Bank Supervision Group of the Federal Reserve Bank of New York. He will serve as a senior advisor to William L. Rutledge, executive vice president, Bank Supervision Group. Mr. Alix’s appointment was made by the Bank’s board of directors and is effective, November 3, 2008.

Most recently, Mr. Alix worked for the Bear Stearns Companies, Inc., where he served as chief risk officer from 2006-2008 and global head of credit risk management from 1996-2006. His prior experience included eight years at Merrill Lynch & Company where he was a director, Asia chief credit officer and a vice president, head of North America financial institutions credit. He began his career with the Irving Trust Company where he served as an assistant vice president and lending officer.

Mr. Alix holds an M.B.A in finance from the Wharton School of the University of Pennsylvania and a bachelor's degree in economics from Duke University. He is a resident of New Jersey.

Posted by edelfenbein at 3:02 PM

The S&P Crosses 1,000

There's an election today! How come no one told me? Why wasn't this in the news? Were there even debates?

Since I live in Washington, DC, the Electoral College guarantees us the least-important votes in the Union. DC isn't just a blue state, it's the bluest blue state possible, and it's getting bluer.

For the last four straight elections, the Republican candidate has received 9% of the vote. I really don't think McCain will be able to top that. Thirty-six years ago, Nixon got 21.5% of the DC vote which seems impossible now.

The good news today is that for the first time in three weeks, the S&P 500 is back over 1,000. That's over 19% higher than our intra-day low from October 10.

Update: Today's intra-day high was 19.7% above the intra-day low from four weeks ago.

Posted by edelfenbein at 11:02 AM

Global Marginal Tax Rates Are Falling

The Danes pay the most:

Worldwide, top personal tax rates have fallen from an average of 31.3% in 2003 to 28.8% in 2008. But European Union (EU) taxpayers still pay the highest rates, at an average of 36.4%, followed by taxpayers in the Asia Pacific countries with an average of 34.6% and those of Latin America at 26.9%, KPMG said.

At a country level, the highest tax rates in the world are paid by the people of Denmark, with a top rate of 59% for the whole six years, followed by those of Sweden, whose rate came down last year from 57% to 55%, and those of the Netherlands, who have paid 52% for the whole period.

Excluding those countries which levy no tax at all, the lowest EU rate is in Bulgaria, with a newly introduced flat rate of 10%, down from 24%. In Asia Pacific the lowest is in Hong Kong, with 16% and in Latin America it is in Paraguay with 10%.

Of the 87 countries surveyed, 33 have cut their rates in the past six years and only seven have a higher top rate in 2008 than they did in 2003.

Among the large western European economies, France has made the most significant cut in its rates, from 48.1% in 2003 to 40% in 2007. Germany has gone from 48.5% to 45%, having briefly stood at 42% in 2005 and 2006.

But across the EU it has been the introduction of flat rate taxes in the Eastern European states that has had the most impact, KPMG said. As well as Bulgaria’s new flat rate of 10%: Estonia has cut its rates from 26% in 2003 to a flat 21% in 2008; Slovakia has gone from 38% to a flat 19%; Lithuania last year fell 6 points to 27% and this year a further 3 points to a flat 24%; Romania has cut rates from 40% to a flat 16%; and the Czech Republic, this year, introduced a flat rate tax set at 15%.

I have a feeling that marginal rates will soon be rising in the U.S.

Posted by edelfenbein at 3:56 PM

S&P 500 Total Return Adjust for Inflation

Here's a look at how the S&P 500 has done including dividends and adjusted for inflation:

Historically, the market's real total return has been about 7% a year. The means it doubles every ten years, but in the last ten years, investors haven't made a dime.

Posted by edelfenbein at 2:33 PM

Vote Tomorrow and Get a Free Cup of Coffee at Starbucks

Posted by edelfenbein at 1:29 PM

The Fall of AIG

When economic historians pick through the rubble of the Panic of 2008, there will be lots of difficult questions to answers. The one I will never understand is how AIG (AIG) collapsed.

Sheesh...how frickin stupid do you have to be to ruin AIG?

Lehman and Bear I get, but let’s face it, insurance isn’t that difficult to make money in. Some companies make a lot more than others, but making a profit is a pretty easy concept in insurance. Manage your risk and charge more than you pay. Repeat.

Sure, a disaster can hurt or ruin your business, but you have to be an idiot to ruin it from the inside. Sure enough, that’s what AIG did. Actually, their insurance business was doing well. It was their idiotic forays in the CDS market that sank the company.

The Wall Street Journal looks at AIG’s collapse and Gary Gorton, the finance professor at the center of it all:

AIG's credit-default-swaps operation was run out of its AIG Financial Products Corp. unit, which had offices in London and Wilton, Conn. In essence, AIG sold insurance on billions of dollars of debt securities backed by everything from corporate loans to subprime mortgages to auto loans to credit-card receivables. It promised buyers of the swaps that if the debt securities defaulted, AIG would make good on them. AIG executives, not Mr. Gorton, decided which swaps to sell and how to price them.

The swaps expose AIG to three types of financial pain. If the debt securities default, AIG has to pay up. But there are two other financial risks as well. The buyers of the swaps -- AIG's "counterparties" or trading partners on the deals -- typically have the right to demand collateral from AIG if the securities being insured by the swaps decline in value, or if AIG's own corporate-debt rating is cut. In addition, AIG is obliged to account for the contracts on its own books based on their market values. If those values fall, AIG has to take write-downs.

Mr. Gorton's models harnessed mounds of historical data to focus on the likelihood of default, and his work may indeed prove accurate on that front. But as AIG was aware, his models didn't attempt to measure the risk of future collateral calls or write-downs, which have devastated AIG's finances.

The problem for AIG is that it didn't apply effective models for valuing the swaps and for collateral risk until the second half of 2007, long after the swaps were sold, AIG documents and investor presentations indicate. The firm left itself exposed to potentially large collateral calls because it had agreed to insure so much debt without protecting itself adequately through hedging.

The credit crisis hammered the markets for debt securities, sparking tough negotiations between AIG and its trading partners over how much more collateral AIG should have to post. Goldman Sachs Group Inc., for instance, has pried from AIG $8 billion to $9 billion, covering virtually all its exposure to AIG -- most of it before the U.S. stepped in.

Such payments continued after the government bailout. AIG already has borrowed $83.5 billion from the Federal Reserve, a little more than two-thirds of the $123 billion in taxpayer loans made available to AIG so far. In addition, AIG affiliates recently obtained from the government as much as $21 billion in short-term loans called commercial paper. Much of the $83.5 billion has been used to meet the financial obligations of the financial-products unit. If turmoil in the markets causes prices of many assets to fall further, the government might have to cough up more money to help keep AIG afloat. Cutting it off would risk renewing the market upheaval the policy makers have struggled to tame.

Posted by edelfenbein at 12:44 PM

Sysco’s Earnings

Even for a defensive stock, Sysco (SYY) tends to be pretty defensive. The quarterly numbers tend not to fluctuate much. For the September quarter, the company’s fiscal first quarter, Sysco earned 46 cents a share, which was a penny below Street estimates. Last year, it earned 43 cents a share.

While the S&P 500 is off by about 34% for the year, Sysco is “only” down around 18%. That’s a rough year but it’s a lot better than most. Sysco is currently going for about 13 times next year’s earnings.

Posted by edelfenbein at 12:22 PM

The Real Bubble

Arnold Kling spots the real bubble. It's not finance, but in macroeconomics:

I would not be surprised to see unorthodox theories of control gain traction. Perhaps, to justify current policy trends, a theory that socialized investment is necessary for stability.

To me. the logical thing for the economics profession to do is admit that we are nowhere near understanding what is happening. However, taking that position will not get you invited to panels.

I think that there are two questions. First, what are the generic causes and consequences of bubbles? Second, why did the specific bubble in real estate and mortgage finance occur? The first question is harder. But I would say that 99 percent of the economics profession cannot even correctly answer the second.

Posted by edelfenbein at 10:09 AM