Archive for March, 2009

  • Banks and Toasters
    , March 27th, 2009 at 9:18 am

    Paul Krugman has a good op-ed today on the problems facing the financial industry. This one paragraph caught my attention:

    The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

    He’s right. Banking has changed dramatically over the last 30 years. But that Golden Age wasn’t so golden. The reason banks offered toasters to new accounts wasn’t due to bad marketing, but due to outdated regulations. That’s the only way they could pass cost savings on to depositors.
    Free toasters from banks weren’t some happy relic of a bygone era, they were the one of reasons why the modern financial world came about. Interest rates were regulated and you couldn’t even pay interest on a checking account. Also, bank locations were far less convenient to today’s world with ubiquitous ATMs.
    Let’s not fool ourselves into thinking the past was better than it was. I think it’s much better for banks to be in the banking industry rather than the household appliance industry.

  • Did New Homes Sales Improve?
    , March 26th, 2009 at 9:02 am

    Barry Ritholtz has a great post on the supposed improvement in new homes sales.
    The media reported that sales grew up 4.7% in February, but that’s not what the government report said. The report said that sales grew by 4.7% plus or minus 18.3%. Um…that’s a pretty big plus or minus you got there.
    Barry quotes the Commerce Department, “the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.”
    Kind of a different story now.

  • Q4 GDP -6.3%
    , March 26th, 2009 at 8:55 am

    The final revision to fourth-quarter GDP came in at -6.3%. I wouldn’t be surprised to see a similar number for the first quarter. The economy may show some improvement, though still not positive, in the second quarter.

    The U.S. economy shrank in the fourth quarter more than previously estimated, leading to the biggest plunge in corporate earnings in a half century and underscoring why companies are slashing payrolls this year.
    Gross domestic product contracted at a 6.3 percent annual rate from October to December, the weakest since 1982, the Commerce Department said today in Washington. Profits dropped 16.5 percent from the prior quarter, the most since 1953.
    Another report showed the number of people collecting jobless benefits this month reached a record 5.56 million as firings mounted. Still, recent reports showing a rebound in sales indicate last quarter’s slump may give way to smaller declines in growth. A let-up in the recession would set the stage for President Barack Obama’s stimulus plan and Federal Reserve measures to take hold in the second half.
    “It’s a pretty dismal result,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. “Given the slight improvement we’re seeing in some of the recent indicators, I suspect the first quarter will be a little better than the fourth.”

  • I Guess Jon Stewart Was Right
    , March 26th, 2009 at 7:51 am

    The Daily Show With Jon Stewart M – Th 11p / 10c
    Words of Advice
    Daily Show Full Episodes Economic Crisis Political Humor
  • The Death of Equities: Part of a Never-Ending Series
    , March 25th, 2009 at 9:48 pm

    John Authers has an interesting article in today’s Financial Times. In it, he questions the received wisdom of investing in stocks for long-term financial planning.
    This is a serious question because even if stocks are the best long-term investment, and I believe they are, the fact is that it takes longer than people realize to see the benefits. The cream rises to the top but it can take an awfully long time. Stocks had a miserable period from the mid-60s to the early-80s, and the last nine years haven’t been much fun either.
    It seems pretty unreasonable to tell folks to have patience when the time frame needed can be half a person’s pre-retirement planning. Arthurs writes:

    Further, recent experience challenges that basis of modern finance, the ‘efficient markets hypothesis’, which in its strongest form holds that prices of securities always reflect all known information. This implies that stocks will react to each new piece of information, yet without following any set trend – a description that cannot be applied to the events of the past 18 months. On these foundations, theorists worked out ways to measure risk, to put a price on options and other derivatives and to maximise returns for a given level of risk.
    This theory also showed that stocks would outperform in the long run. Stocks are riskier than asset classes such as government bonds (which have a state guarantee), corporate bonds (which have a superior claim on a company’s resources) or cash. So the argument was that those who invested in them would in the long run be paid for taking this risk by receiving a higher return. That is now in question.

    Unfortunately, Arthurs errs here by confusing EMH for CAPM which was developed by William Sharp (and others) in the 1960s.
    Stocks should outperform bond over the long haul simply because of the nature of the two asset classes. A bond is a loan and therefore implies that lender and borrower both believe that the borrower can get a better ROE than the interest rate charged on the loan. Not surprisingly, this is why stocks have beaten corporate bonds.
    While government bonds have won the race over the past decades, Felix Salmon rightly points out that we’re currently looking at a T-bond bubble and a trough for stocks.
    Jonathan Clements reiterates the long-term case for stocks:

    Over the past 60 years, gross domestic product has climbed 6.8% a year—and shares prices have climbed 7%, as measured by the Standard & Poor’s 500-stock index. On top of that 7% a year, investors also collected dividends.
    True, share prices didn’t climb in lockstep with the economy and, indeed, investors had to suffer through some horrendous bear markets. Still, as long as the economy continues to grow over the long haul, the stock market should remain a decent long-run investment.

    Felix adds: “I suspect the pendulum is going to swing back on that front, which means that stock-price growth could lag GDP growth indefinitely.” That could certainly happen for a little while, but I have to object to the word indefinitely. If the stock market were to trail GDP indefinitely well…there wouldn’t be anymore stock market. Why bother using the public markets to raise funds? There would be no point.
    The premium of stocks over long-term corporate is real albeit small and highly volatile. The lesson is that investors should always have a sizable portion of their assets in fixed income.

  • Will a Secondary Market Develop?
    , March 25th, 2009 at 11:07 am

    One question I have about the Geithner Plan—or more specifically, an outgrowth of the plan—is will a secondary market for these toxic assets develop?
    There’s been lots of talk of how individual investors can jump on board, and that’s fine. But what happens once Pimco suddenly wants to start ditching these assets? There’s a saying that in a bear market, if you can’t sell what you want, sell what you can. Could we suddenly see these assets flood the Street?
    Hey, what if banks start buying them back? Stranger things have happened. AT&T was broken up only to see the Baby Bells buy each other.
    As an investor, I would strongly be disinclined to take part in an auction. But I would like to see how some assets start trading. I just don’t know what will happen.

  • Obama’s Presser
    , March 25th, 2009 at 9:12 am

    At the 42:25 mark of this video, President Obama takes a question from a reporter with Ebony. Naturally, Richard Pryor and Tim Reid were three decades ahead of themselves (3:38 mark).

  • Dear Mr. Liddy, I Quit
    , March 25th, 2009 at 9:09 am

    The New York Times reprints a resignation letter sent from a Veep at AIG’s Financial Products division. All I can say is read the whole thing.

  • Pounding the Tables for Sysco
    , March 25th, 2009 at 8:41 am

    Barron’s has nice things to say about Sysco (SYY), one of our Buy List stocks:

    There’s no doubt that Sysco, the nation’s largest foodservice distributor, is facing tough times as cash-strapped consumers cut back on visits to restaurants, the company’s biggest customer.
    However, management has been able to pare expenses successfully — Sysco actually beat analysts’ estimates last month on cost-cutting measures — leaving it with a growing dividend, currently yielding 4.2%, and plenty of free cash. Also, as smaller rivals struggle, Sysco, with its heft, can more easily steal market share and buy troubled competitors.
    “It’s happened before; they come out stronger after a recession and pick up new customers,” says BB&T analyst Andrew Wolf. “Though this environment is really unprecedented, they have very strong free cash flow and operating culture to manage through this.”
    Indeed, the company has outperformed its peers in the last year. The stock lost 23% in the past 12 months, about half the 41.8% loss seen by the broader market, and ahead of its rivals tracked by the Dow Jones Food Retailer & Wholesalers Index, down 28.5%.
    With a forward price-to-earnings multiple of 12.5, near its historic lows, this is an excellent time for investors to get into this industry-leading “best of class” company, as Wolf calls it.

  • Bond Auction FAIL
    , March 25th, 2009 at 8:37 am

    The British government tried to auction off 1.75 billion pounds worth of 4.25% 40-year bonds. The total bids they got were only worth 1.63 billion pounds.
    That’s not a good sign. I don’t think Gordo will be around much longer.