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« January 2010 | Main | March 2010 » February 28, 2010Tobin Smith on ChinaTel Group (CHTL) Tobin Smith, formerly of ChangeWave Research, now of NBT Equity Research has a new reseach piece on ChinaTel Group (CHTL). Full disclosure: I own 1,000 shares of CHTL: Strong Buy $7-$8 target 2011 (with new deployment schedule/pro-forma TBD) Tobin Smith, Chief Research Officer With no indication from ANY of the funding parties or CHTL of a change in the equity funding schedule, I want to change the focus of the CHTL discussion to the POST-funding scenario. I can report my conversations with The Isaac Organization that indicate a willingness on their part to accelerate their equity contribution amount prior to March 30/$10M schedule. Reports from those close to the Excel Era group indicate ZERO funding issues or delays. Minor correction: the founder and Chairman of Excel Era and its holding company is Charles WANG, not Li. The Wang family is a very old, very prosperous and very private group. I will have the pleasure of interviewing Mr. Wang in the very near future and will bring what I can to light about their company and its relationship with ChinaTel Group, Inc. The Isaac Group move is important in that WITH the $240M of new stock purchased by Excel Era and say $40-$50M from the Isaac Group before March 30, CHTL (by OUR estimates) will have MORE than enough capital in the bank to complete up to a 15 city simultaneous deployment over the next 12-18 months. With capital to spare. Our new model for capex and opex for 12 cities (using $8k capex/opex per point of presence aka POPS) is $160M of capital net of cash flow from Beijing and Shanghai operations (currently over $5M a month from our research.) The ownership dilution of selling 49% of the company at a $1.3 billion value is ACCRETIVE to the stockholders equity account and of course the book value of CHTL. By our count we anticipate a dozen or more material announcements POST-funding from CHTL and/or Cect-Chinacomm over the next 90-120 days including:
March 2010-March 2011 The technology and telecom world will rapidly come to the understanding that the Chinacomm Network will be deploying the LARGEST 4G mobile Wi-Max broadband network in the world. A network that addresses over 300 million people and >50% of mainland China’s GDP producing regions. Virtually NO industry research firms are including the 29 city deployment in their world Wi-Max deployment forecasts. This virtual invisibility on the world’s tele/tech stage will change immediately. This deployment ALSO puts the Wi-max technology on a significantly faster ramp and deployment schedule than the competing GSM technology LTE. This makes the Wi-Max story eminently more interesting to the technology and telecom press. This combination of true game changing industry and corporate events we surmise will change the equity and industry research profile for BOTH ChinaTel Group, Inc. and CECT-ChinaComm in a substantial way. This higher profile from • Sell-side telecom/ISP analysts Will bring a much higher profile to CHTL, the ChinaComm Network and to mobile Wi-Max wireless broadband in the business and industry media. In turn this vastly higher Wall Street, industry and technology profile should rapidly reduce and eliminate the disparity between private and public market value of ChinaTel Group, Inc. ($440M public value vs. $1.3Billion private market value). Key Corporate Issues CHTL's two wholly owned foreign enterprise subsidiaries (WOFE’s pronounced “woofies”) will, from an accounting and operating standpoint, become operational. They will be injected with $100mm each. As mentioned it means CHTL will start to report its 49% share of Chinacomm revenues, cash flow and operating metrics like customer counts in its Q3 financials. This will once and for all lift the veil surrounding its operations with Chinacomm. CHTL gets to invoice Chinacomm and get paid around $75+ MILLION of outstanding invoices. The private sponsor of CHTL TrussGroup had been fronting the equipment and services for the first part of the Chinacomm network in Beijing. IF you look at the 2008-2009 financials you will notice that CHTL expensed all the work it did for Chinacomm in 2008 and 2009. Virtually ALL the bills paid will at full net gross profit to CHTL. That means for Q1 2010 CHTL for the first time will get to report its deployment revenues for its Chinacomm contract AND its 49% share of Chinacomm's Beijing operations. Key Message Points for The Mobile Internet (With acknowledgment to Mary Meeker and Morgan Stanley Internet research reports on the Mobile Internet We are at the right time: the Mobile Internet Growth Tsunami is ON—and this 5th mega cycle of the technology age wealth building is just starting. Which brings me to the Chinacomm Network and ChinaTel Group, Inc. There is NO QUESTION in my mind that one of the most PROFITABLE ways to ride the Mobile Internet wave is with ChinaTel Group, Inc. The Chinacomm Network is in the 1) Right Place (Wireless broadband and Mobile internet growth ground zero: China) The Chinacomm Network is competitively advantaged to gain 8-12% market share of the $50 billion China wireless broadband ISP and application service provider market by 2015 The Chinacomm Network will be best positioned to win significant market share in BOTH lucrative commercial and consumer/MVNO markets. China continues to have the MOST potential for mobile Internet user growth. Tobin Smith Posted by edelfenbein at 10:46 PM February 26, 2010Ford Motor: My Stock of the Decade With two months already under our belt this decade, I decided to get a jump on things and announce that Ford Motor (F) is my Stock of the Decade. You heard it here first. Now you may be thinking this is a bit pre-mature. I understand, but lets it’s never too early to get on a good story. While every business journalist writes a new column every time someone at Goldman Sachs hiccups, they’re ignoring one of the most remarkable business turnarounds in recent history. Just 15 months ago, shares of Ford reached a low of $1.01. The stock is currently close to $12 today. Most impressive of all, despite a nasty recession Ford is actually making a profit. Not a big profit, but a profit nonetheless. More money is coming in then going out. These days, that’s something to notice. Also, Ford hasn’t taken a dime in bailout money. Not only has Ford made a profit in its last two quarters, but the company has beaten Wall Street’s earnings forecast for the last four quarters in a row. In November, Wall Street was expecting a loss of 12 cents a share. Instead, Ford posted a profit of 26 cents a share. That impressed Wall Street so much that they expected 26 cents a gain when Ford reported earnings again a month ago. This time, Ford said it made 43 cents a share. In 2006, the company unveiled its “The Way Forward” strategy designed to get the company moving again. Later that year, Bill Ford stepped down as CEO and Alan Mulally came in. Shortly after he joined, he bet everything—and I mean everything—on a gigantic $23 billion loan. They even had to put up Ford’s name as collateral. So far, it's working. The company has slashed its workforce in half and shut down plants. Mulally sold off brands like Jaguar, Land Rover and Aston Martin and concentrated on smaller cars. Ford’s 7.45% bond due in 2031 had a yield to a maturity of 33.2%. Now it’s down below 9%. Still, Ford has a long way to go. Mulally said they won’t be solidly profitable until next year. But if all goes well, Ford could easily be a $20 stock. Posted by edelfenbein at 12:00 PM Krugman on Core Inflation Core inflation is one of those topics that people love to get angry about. I recently had a post mentioning that core inflation had its first substantial fall since 1982. When this was picked up by Seeking Alpha, several commentors wrote to say that of course prices are rising as anyone in the real world can plainly see. Paul Krugman writes that this misses the point of what core inflation tells us: First, let me clear up a couple of misconceptions. Core inflation is not used for things like calculating cost-of-living adjustments for Social Security; those use the regular CPI. Posted by edelfenbein at 10:09 AM February 25, 2010Maxine Waters Attempts Monetary Policy Posted by edelfenbein at 11:57 AM David Weidner's About-Face There's a very nice article in today's WSJ by David Weidner on some of the leading financial blog sites. These homespun sites break news, offer wit and insight that wasn’t even available a few years ago. Some have risen to the point of being must-reads on a daily basis. Unfortunately for Mr. Weidner, Abnormal Returns remembered what he wrote four years ago: By now you’ve heard just about all you can take about blogs. You know, the amateurish web sites that the media keeps yabbering on about, but no one actually reads. Posted by edelfenbein at 10:18 AM Madoff Relative Changes Name Bernie Madoff's daughter-in-law, Stephanie Madoff, wants to change her name. I certainly understand her reasons, but I as a student of market history I find it ironic what she wants to change it to -- Morgan. Posted by edelfenbein at 10:14 AM SEC Votes to Limit Short Sales The uptick rule is gone, but it's bizarre logic will live on: The rule applies to stocks that decline at least 10% in a single day. For such stocks, the SEC will allow short selling only if the price of the sale is above the highest bid price nationally. In other words, the short seller is blocked from dumping the shares at a cut-rate price. On any given day, only about 1.3% of stocks are down 10% or more, but those are the stocks where price discovery is most important. On October 10, 2008, 68% of stocks were down over 10%. Posted by edelfenbein at 9:26 AM February 24, 2010EV's Earnings Eaton Vance’s (EV) quarterly earnings jumped 87%. For the three months ended Jan 31, the company posted profit of $46.2 million, or 37 cents per share, compared with profit of $24.7 million, or 21 cents per share, in the year-ago quarter. Thirty-five years ago, you could have picked up a share of EV for about 1.7 cents. Since then, the stock is up more than 1700 fold. Posted by edelfenbein at 3:15 PM RIP: Peter Calvocoressi Here's an obituary of Peter Calvocoressi, one of the major figures at Bletchley Park, the famous British code-breaking effort during World War II: His account of his wartime work at Bletchley Park, Top Secret Ultra, appeared in 1980. In it Calvocoressi emphasised the decisive role played by Ultra in intercepting communications: “Ultra took the blindfold off our eyes so that we could see the enemy in detail in a way in which he could not see us.” I love how the Brits do their obituaries. The second-to-last paragraph is brilliant: The range of jobs that he undertook was wide, and his habit of leaving them was partly due to the breadth of his interests and partly perhaps to a conviction that he knew best: although in theory he respected independent and individual attitudes, he also felt an obligation to guide others along the paths he selected for them. This cannot always have made him an easy colleague. Posted by edelfenbein at 2:09 PM Bernanke's Testimony Here's today's Semiannual Monetary Policy Report: Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Congress. I will begin today with some comments on the outlook for the economy and for monetary policy, then touch briefly on several other important issues. The Economic Outlook Although the recession officially began more than two years ago, U.S. economic activity contracted particularly sharply following the intensification of the global financial crisis in the fall of 2008. Concerted efforts by the Federal Reserve, the Treasury Department, and other U.S. authorities to stabilize the financial system, together with highly stimulative monetary and fiscal policies, helped arrest the decline and are supporting a nascent economic recovery. Indeed, the U.S. economy expanded at about a 4 percent annual rate during the second half of last year. A significant portion of that growth, however, can be attributed to the progress firms made in working down unwanted inventories of unsold goods, which left them more willing to increase production. As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services. Private final demand does seem to be growing at a moderate pace, buoyed in part by a general improvement in financial conditions. In particular, consumer spending has recently picked up, reflecting gains in real disposable income and household wealth and tentative signs of stabilization in the labor market. Business investment in equipment and software has risen significantly. And international trade--supported by a recovery in the economies of many of our trading partners--is rebounding from its deep contraction of a year ago. However, starts of single-family homes, which rose noticeably this past spring, have recently been roughly flat, and commercial construction is declining sharply, reflecting poor fundamentals and continued difficulty in obtaining financing. The job market has been hit especially hard by the recession, as employers reacted to sharp sales declines and concerns about credit availability by deeply cutting their workforces in late 2008 and in 2009. Some recent indicators suggest the deterioration in the labor market is abating: Job losses have slowed considerably, and the number of full-time jobs in manufacturing rose modestly in January. Initial claims for unemployment insurance have continued to trend lower, and the temporary services industry, often considered a bellwether for the employment outlook, has been expanding steadily since October. Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce. Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40 percent of the unemployed have been out of work six months or more, nearly double the share of a year ago. Increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year, but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time. Slack in labor and product markets has reduced wage and price pressures in most markets, and sharp increases in productivity have further reduced producers' unit labor costs. The cost of shelter, which receives a heavy weight in consumer price indexes, is rising very slowly, reflecting high vacancy rates. In addition, according to most measures, longer-term inflation expectations have remained relatively stable. The improvement in financial markets that began last spring continues. Conditions in short-term funding markets have returned to near pre-crisis levels. Many (mostly larger) firms have been able to issue corporate bonds or new equity and do not seem to be hampered by a lack of credit. In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects. In conjunction with the January meeting of the Federal Open Market Committee (FOMC), Board members and Reserve Bank presidents prepared projections for economic growth, unemployment, and inflation for the years 2010 through 2012 and over the longer run. The contours of these forecasts are broadly similar to those I reported to the Congress last July. FOMC participants continue to anticipate a moderate pace of economic recovery, with economic growth of roughly 3 to 3-1/2 percent in 2010 and 3-1/2 to 4-1/2 percent in 2011. Consistent with moderate economic growth, participants expect the unemployment rate to decline only slowly, to a range of roughly 6-1/2 to 7-1/2 percent by the end of 2012, still well above their estimate of the long-run sustainable rate of about 5 percent. Inflation is expected to remain subdued, with consumer prices rising at rates between 1 and 2 percent in 2010 through 2012. In the longer term, inflation is expected to be between 1-3/4 and 2 percent, the range that most FOMC participants judge to be consistent with the Federal Reserve's dual mandate of price stability and maximum employment. Monetary Policy Over the past year, the Federal Reserve has employed a wide array of tools to promote economic recovery and preserve price stability. The target for the federal funds rate has been maintained at a historically low range of 0 to 1/4 percent since December 2008. The FOMC continues to anticipate that economic conditions--including low rates of resource utilization, subdued inflation trends, and stable inflation expectations--are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. We have been gradually slowing the pace of these purchases in order to promote a smooth transition in markets and anticipate that these transactions will be completed by the end of March. The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets. In response to the substantial improvements in the functioning of most financial markets, the Federal Reserve is winding down the special liquidity facilities it created during the crisis. On February 1, a number of these facilities, including credit facilities for primary dealers, lending programs intended to help stabilize money market mutual funds and the commercial paper market, and temporary liquidity swap lines with foreign central banks, were allowed to expire.1 The only remaining lending program for multiple borrowers created under the Federal Reserve's emergency authorities, the Term Asset-Backed Securities Loan Facility, is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS. In addition to closing its special facilities, the Federal Reserve is normalizing its lending to commercial banks through the discount window. The final auction of discount-window funds to depositories through the Term Auction Facility, which was created in the early stages of the crisis to improve the liquidity of the banking system, will occur on March 8. Last week we announced that the maximum term of discount window loans, which was increased to as much as 90 days during the crisis, would be returned to overnight for most banks, as it was before the crisis erupted in August 2007. To discourage banks from relying on the discount window rather than private funding markets for short-term credit, last week we also increased the discount rate by 25 basis points, raising the spread between the discount rate and the top of the target range for the federal funds rate to 50 basis points. These changes, like the closure of most of the special lending facilities earlier this month, are in response to the improved functioning of financial markets, which has reduced the need for extraordinary assistance from the Federal Reserve. These adjustments are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about the same as it was at the time of the January meeting of the FOMC. Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures. Notwithstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time.2 Most importantly, in October 2008 the Congress gave statutory authority to the Federal Reserve to pay interest on banks' holdings of reserve balances at Federal Reserve Banks. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally. The Federal Reserve has also been developing a number of additional tools to reduce the large quantity of reserves held by the banking system, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate paid on reserves and other short-term interest rates. Notably, our operational capacity for conducting reverse repurchase agreements, a tool that the Federal Reserve has historically used to absorb reserves from the banking system, is being expanded so that such transactions can be used to absorb large quantities of reserves.3 The Federal Reserve is also currently refining plans for a term deposit facility that could convert a portion of depository institutions' holdings of reserve balances into deposits that are less liquid and could not be used to meet reserve requirements.4 In addition, the FOMC has the option of redeeming or selling securities as a means of reducing outstanding bank reserves and applying monetary restraint. Of course, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments. I provided more discussion of these options and possible sequencing in a recent testimony.5 Federal Reserve Transparency The Federal Reserve is committed to ensuring that the Congress and the public have all the information needed to understand our decisions and to be assured of the integrity of our operations. Indeed, on matters related to the conduct of monetary policy, the Federal Reserve is already one of the most transparent central banks in the world, providing detailed records and explanations of its decisions. Over the past year, the Federal Reserve also took a number of steps to enhance the transparency of its special credit and liquidity facilities, including the provision of regular, extensive reports to the Congress and the public; and we have worked closely with the Government Accountability Office (GAO), the Office of the Special Inspector General for the Troubled Asset Relief Program, the Congress, and private-sector auditors on a range of matters relating to these facilities. While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation. Accordingly, we would welcome a review by the GAO of the Federal Reserve's management of all facilities created under emergency authorities.6 In particular, we would support legislation authorizing the GAO to audit the operational integrity, collateral policies, use of third-party contractors, accounting, financial reporting, and internal controls of these special credit and liquidity facilities. The Federal Reserve will, of course, cooperate fully and actively in all reviews. We are also prepared to support legislation that would require the release of the identities of the firms that participated in each special facility after an appropriate delay. It is important that the release occur after a lag that is sufficiently long that investors will not view an institution's use of one of the facilities as a possible indication of ongoing financial problems, thereby undermining market confidence in the institution or discouraging use of any future facility that might become necessary to protect the U.S. economy. An appropriate delay would also allow firms adequate time to inform investors through annual reports and other public documents of their use of Federal Reserve facilities. Looking ahead, we will continue to work with the Congress in identifying approaches for enhancing the Federal Reserve's transparency that are consistent with our statutory objectives of fostering maximum employment and price stability. In particular, it is vital that the conduct of monetary policy continue to be insulated from short-term political pressures so that the FOMC can make policy decisions in the longer-term economic interests of the American people. Moreover, the confidentiality of discount window lending to individual depository institutions must be maintained so that the Federal Reserve continues to have effective ways to provide liquidity to depository institutions under circumstances where other sources of funding are not available. The Federal Reserve's ability to inject liquidity into the financial system is critical for preserving financial stability and for supporting depositories' key role in meeting the ongoing credit needs of firms and households. Regulatory Reform Strengthening our financial regulatory system is essential for the long-term economic stability of the nation. Among the lessons of the crisis are the crucial importance of macroprudential regulation--that is, regulation and supervision aimed at addressing risks to the financial system as a whole--and the need for effective consolidated supervision of every financial institution that is so large or interconnected that its failure could threaten the functioning of the entire financial system. The Federal Reserve strongly supports the Congress's ongoing efforts to achieve comprehensive financial reform. In the meantime, to strengthen the Federal Reserve's oversight of banking organizations, we have been conducting an intensive self-examination of our regulatory and supervisory responsibilities and have been actively implementing improvements. For example, the Federal Reserve has been playing a key role in international efforts to toughen capital and liquidity requirements for financial institutions, particularly systemically critical firms, and we have been taking the lead in ensuring that compensation structures at banking organizations provide appropriate incentives without encouraging excessive risk-taking.7 The Federal Reserve is also making fundamental changes in its supervision of large, complex bank holding companies, both to improve the effectiveness of consolidated supervision and to incorporate a macroprudential perspective that goes beyond the traditional focus on safety and soundness of individual institutions. We are overhauling our supervisory framework and procedures to improve coordination within our own supervisory staff and with other supervisory agencies and to facilitate more-integrated assessments of risks within each holding company and across groups of companies. Last spring the Federal Reserve led the successful Supervisory Capital Assessment Program, popularly known as the bank stress tests. An important lesson of that program was that combining on-site bank examinations with a suite of quantitative and analytical tools can greatly improve comparability of the results and better identify potential risks. In that spirit, the Federal Reserve is also in the process of developing an enhanced quantitative surveillance program for large bank holding companies. Supervisory information will be combined with firm-level, market-based indicators and aggregate economic data to provide a more complete picture of the risks facing these institutions and the broader financial system. Making use of the Federal Reserve's unparalleled breadth of expertise, this program will apply a multidisciplinary approach that involves economists, specialists in particular financial markets, payments systems experts, and other professionals, as well as bank supervisors. The recent crisis has also underscored the extent to which direct involvement in the oversight of banks and bank holding companies contributes to the Federal Reserve's effectiveness in carrying out its responsibilities as a central bank, including the making of monetary policy and the management of the discount window. Most important, as the crisis has once again demonstrated, the Federal Reserve's ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has by virtue of being both a bank supervisor and a central bank. The Federal Reserve continues to demonstrate its commitment to strengthening consumer protections in the financial services arena. Since the time of the previous Monetary Policy Report in July, the Federal Reserve has proposed a comprehensive overhaul of the regulations governing consumer mortgage transactions, and we are collaborating with the Department of Housing and Urban Development to assess how we might further increase transparency in the mortgage process.8 We have issued rules implementing enhanced consumer protections for credit card accounts and private student loans as well as new rules to ensure that consumers have meaningful opportunities to avoid overdraft fees.9 In addition, the Federal Reserve has implemented an expanded consumer compliance supervision program for nonbank subsidiaries of bank holding companies and foreign banking organizations.10 More generally, the Federal Reserve is committed to doing all that can be done to ensure that our economy is never again devastated by a financial collapse. We look forward to working with the Congress to develop effective and comprehensive reform of the financial regulatory framework. Posted by edelfenbein at 10:07 AM "You need 3-4 Good Companies to Invest in Over Ten Years" I came across this interview with Peter Lynch, the legendary former manager of Fidelity's Magellan fund. Here's an excerpt: Against that, there's the argument that less than 15% of investment managers beat the index, and the rest lag behind it. Posted by edelfenbein at 9:54 AM February 23, 2010How to Make 25.2% Annualized Go back in time to June 1938. Buy a brand new Action Comics #1 for 10 cents. Then sell it yesterday for $1 million. Over 71-3/4 years, that's a return of 999,999,900% which works out to about 25.2% a year. Posted by edelfenbein at 4:49 PM Consumer Confidence Plunges The market is getting smacked around this morning thanks to an awful report on consumer confidence. The Conference Board, a New York-based research group, said its Consumer Confidence Index fell to 46.0 in February from 56.5 in January. The present situation index hit a 27 year low of 19.4. I can't say exactly why but I'm very skeptical of this report. I realize I sound like a person who refuses to believe the data that counters his bias, but this report just doesn't ring right. It's too much of an outlier. The market seems to agree with me. Stock prices are down but nothing dangerous. These consumer confidence reports are subject to revisions, and revisions of the revisions. I'll need to see more data before I'm fully convinced that were headed back down the drain. Posted by edelfenbein at 12:03 PM 23-F: 29 Years Ago Today It’s hard to believe that there was a fascist coup attempt in Western Europe just 29 years ago but today is the anniversary of the Francoist attempt in Spain. The botched coup is known as 23-F. Like 9/11 it’s named after its date. Here's some video: Incidentally, these guys aren’t fascists is the modern sense meaning American politicians you don’t like. These boys are the real deal. Franco had been dead only six years. The Monty Pythonesque looking figure at the center of things is Lieutenant Colonel Antonio Tejero. The national assembly was in the midst of electing a new prime minister when Tejero comes barging in. The very brave defense minister is the one standing up to him. Tejero had about 200 national guardsmen with him. The plan was that high ranking generals would join in. Only one did, the top general in Valencia. King Juan Carlos went on television, in his military uniform, and said in no certain terms that the coup was unconstitutional. The deputies were freed the next morning. Tejero was arrested and thrown in jail for 15 years. Posted by edelfenbein at 9:01 AM Gary Gorton on the Financial Crisis Yale professor Gary Gorton has an excellent Q&A on the financial crisis. I highly recommend it. It’s long but readable and very thorough. Here's the WSJ: It’s wrong to blame this crisis on subprime mortgage lending, he says. Rather, this crisis is best seen as the latest of a series of banking crises throughout history. Banks borrow (or take deposits) short-term, promising to give money to their customers if they want it. They invest that money long-term, lending to businesses and consumers. This “intermediation” process is vital to the smooth functioning of the economy. But if depositors or others from whom banks have borrowed short-term demand their money back — a demand often sparked by panic — banks can’t instantly respond, and bad things ensue. In the old days, these runs were prompted by anxious depositors. Deposit insurance helped solve that problem. In our time, banks were reliant on short-term borrowing known as repurchase agreements — and the folks who held those panicked. Tyler Cowen has more. Posted by edelfenbein at 8:52 AM Medtronic Beats By a Penny and Narrows Range Medtronic (MDT) just released a decent earnings report. After charges, earnings for their fiscal third quarter came in at 77 cents a share which was a penny higher than the Street. Sales rose 10% to $3.85 billion. More importantly, Medtronic narrowed the range of their 2010 estimate to $3.20 to $3.22 per share from $3.17 to $3.22 per share. The Street had been looking for $3.18. This means the stock is now going for 13.6 times 2010 earnings. Not bad. Posted by edelfenbein at 8:27 AM February 22, 2010Geithner Refuses To Come Down Off Capitol Dome Sad. WASHINGTON—Three days after a sulking Timothy Geithner climbed to the top of the U.S. Capitol dome, the treasury secretary remained steadfast Monday in his refusal to come down. "You all hate me," said Geithner, his arms crossed as he shouted at the crowd of onlookers gathered on the Capitol lawn below. "What do you care if I stay up here? You'll just make fun of me if I come down anyway. Well, I'm not coming down—not ever!" Federal security teams monitoring the situation said they believed Geithner might be planning an extended stay atop the dome, as evidenced by what appeared to be a burlap sack containing various snacks, a six-pack of root beer, and several copies of The Economist. Posted by edelfenbein at 6:32 PM A Conspiracy of Ignorance I’m not very impressed by the various people who now claim to have predicted the credit crisis. The point I like to make is that if a person really thinks they predicted it then they probably don’t understand what happened. The complex nature of the credit crisis prevented itself from being predicted. And no, predicting a crisis every year or saying that housing was a bubble doesn't qualify as predicting the credit crisis. Far too many people want to see the credit crisis as the result of a massive conspiracy engineered by Goldman Sachs or the Fed or George Soros or the Illuminati or who knows what else. Actually, you could say there was a large conspiracy in one sense. No one—not the government, not the banks, not investors—had any idea of the consequences of their actions. Given the large number of contributory factors — the Fed's low interest rates, the Community Reinvestment Act, Fannie and Freddie's actions, Basel I, the Recourse Rule, and Basel II — it has been said that the financial crisis was a perfect storm of regulatory error. But the factors I have just named do not even begin to complete the list. First, Peter Wallison has noted the prevalence of "no-recourse" laws in many states, which relieved mortgagors of financial liability if they simply walked away from a house on which they defaulted. This reassured people in financial straits that they could take on a possibly unaffordable mortgage with virtually no risk. Second, Richard Rahn has pointed out that the tax code discourages partnerships in banking (and other industries). Partnerships encourage prudence because each partner has a lot at stake if the firm goes under. Rahn's point has wider implications, for scholars such as Amar Bhidé and Jonathan Macey have underscored aspects of tax and securities law that encourage publicly held corporations such as commercial banks — as opposed to partnerships or other privately held companies — to encourage their employees to generate the short-term profits adored by equities investors. One way to generate short-term profits is to buy into an asset bubble. Third, the Basel Accords treat monies set aside against unexpected loan losses as part of banks' "Tier 2" capital, which is capped in relation to "Tier 1" capital — equity capital raised by selling shares of stock. But Bert Ely has shown in the Cato Journal that the tax code makes equity capital unnecessarily expensive. Thus banks are doubly discouraged from maintaining the capital cushion that the Basel Accords are trying to make them maintain. This litany is not exhaustive. It is meant only to convey the welter of regulations that have grown up across different parts of the economy in such immense profusion that nobody can possibly predict how they will interact with each other. We are, all of us, ignorant of the vast bulk of what the government is doing for us, and what those actions might be doing to us. That is the best explanation for how this perfect regulatory storm happened, and for why it might well happen again. Posted by edelfenbein at 2:59 PM Business at AIG Is Stabilizing It's amazing what $183 billion will do. American International Group Inc., the troubled financial firm that threatened to bring down the U.S. economy, is showing stable revenue for its insurance units and improving its ability to repay taxpayers 17 months after a bailout that swelled to $182.3 billion. Tim Geithner said that it's possible that the government might in fact possibly lose some money on AIG depending, of course, on its eventual outcome. The GAO said we're out $30 billion. Posted by edelfenbein at 11:11 AM Wall Street Loves to Round Up Last week, the WSJ highlighted a fascinating study. Two academics looked thousands of earnings reports down to the tenth of a cent. They found an unusual dearth of earnings-per-share that fell on the 0.4 cent level. This implies that a larger-than-expected amount of companies were trying to round up their EPS to the next whole cent. (T)he overall effect is striking. In theory, each digit should appear in the 10ths place 10% of the time. After reviewing nearly 489,000 quarterly results for 22,000 companies from 1980 to 2006, however, the authors found that "4" appeared in the 10ths place only 8.5% of the time. Both "2" and "3" also are underrepresented in the 10ths place; all other digits show up more frequently than expected by chance. Missing earnings can be a big deal. As is often the case, the scandal isn’t that people are breaking the rules. The scandal is what the rules allow. Companies have enormous latitude with their earnings reports. This is one of the reasons why I stress investing in high-quality companies. I have much greater faith that companies like AFLAC (AFL) or Johnson & Johnson (JNJ) won’t abuse the rules. Posted by edelfenbein at 9:44 AM The New Yorker Profiles Krugman Clocking in at over 10,00 words, it's pretty much what you'd expect: Krugman was bemused by the reactions. True, he had accused Chicago economists of espousing ridiculous ideas in part because of financial incentives—sabbaticals at the Hoover Institution, job opportunities on Wall Street. But when those economists responded with anger he was surprised. “There was no personal invective in what I wrote,” he says. “I never insulted anybody’s personality. It was always at the level of ideas.” Krugman has a peculiar blind spot when it comes to scorn. Even as he delights in the scorn of others (a recent blog post was titled “Today in Exquisite Insults”), he imagines himself to be a rather dry, abstract writer who takes little interest in individuals. There is, it’s true, an understanding in some parts of academia that calling a colleague’s ideas stupid is not supposed to be taken personally, but Krugman goes well beyond this. Posted by edelfenbein at 8:43 AM 30 Years Ago Today Posted by edelfenbein at 7:18 AM February 20, 2010World Markets Pause for Man Who Hits Ball with Stick For a few minutes, Tiger Woods was bigger than Ben S. Bernanke. Posted by edelfenbein at 1:21 PM February 19, 2010The World's Biggest Debtor Nations From CNBC: 20. United States 19. Australia 18. Hungary 17. Italy 16. Greece 15. Spain 14. Germany 13. Finland 12. Norway 11. Hong Kong 10. Portugal 9. France 8. Austria 7. Sweden 6. Denmark 5. Belgium 4. Switzerland 3. Netherlands 2. United Kingdom 1. Ireland Posted by edelfenbein at 1:25 PM Weakest Inflation Since 1982 Today's CPI report shows that seasonally adjusted core prices had their biggest drop since 1982:
The AP is calling this "the first monthly decline since December 1982," although there were two microscopic monthly declines in 2008. Posted by edelfenbein at 9:59 AM February 18, 2010Many ETFs Swing and Miss This is kind of scary. Outside of S&P 500 ETFs, many exchange traded funds have significant tracking errors: Last year, 54 ETFs showed tracking errors of more than three percentage points, up from just four funds the prior year. And a handful of the 54 missed by more than 10 percentage points. Posted by edelfenbein at 11:15 PM Reuters: Only 19% of Americans Are Confident Stock Investors Yet they all write for Seeking Alpha: Fewer than two in 10 Americans are confident of their ability to invest in the stock market, although 60 percent still believe equities are important in a portfolio. Posted by edelfenbein at 10:43 PM Odd Lots UBS: World’s Largest Trading Floor A Look at the Tax Returns of the Top 400 Taxpayers School used student laptop webcams to spy on them at school and home Behind the Scenes at Footnoted.org America's Most Dangerous Drivers By Profession Flesh-Eating Vultures Descend on Luxury Condo Building Posted by edelfenbein at 6:27 PM Fed Raises Discount Rate This is the Discount Rate not the Fed Funds rate: The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs. Was this news leaked? Posted by edelfenbein at 4:33 PM 2-Year/10-Year Treasury Spread Hits All-Time Record The gap in yield between Treasury 2- and 10-year notes, known as the yield curve, steepened to a record as reports showed that Philadelphia region manufacturing and U.S. leading indicators rose.
(HT: Alea) Posted by edelfenbein at 1:03 PM There's a Constitution Laying Around Here Somewhere The WSJ: President Barack Obama on Thursday created a bipartisan commission to confront what he calls the federal deficit's "disturbing" trajectory. Correct me if I'm wrong, but don't we already have a bipartisan commission in charge of the confronting the deficit called Congress? Not that they're any good but why would a commission be any better? Posted by edelfenbein at 11:26 AM Courtier of the Hip Class Lots of people love Matt Taibbi's reporting. I find him entertaining, but not very worthwhile. I don’t see him as a journalist but as a courtier to the hip class. He distorts his stories to flatter their prejudices which is everything a journalist should not be. Taibbi consistently leaves out important details. He takes already known facts and bends them into dishonest narratives. Moreover, his sex and drug references sound forced and hint at a dramatic inferiority complex. Taibbi first attacked Goldman Sachs in July with his famous Vampire Squid article which was later shredded to pieces. Then in October, he went after naked short-selling and strolled into the propellers once again. Now he goes after Goldman again and compares their business to several con jobs. Taibbi includes this charmer about Goldman: “They raped the taxpayer, and they raped their clients.” See how edgy that is? Of course, he could also talk with some actual rape victims. Posted by edelfenbein at 10:55 AM The Hemline Theory Strikes Again!
The AP reports that long hemlines are back in fashion: So long, miniskirts. The up-to-there trend gave way to longer hemlines at New York Fashion Week. This is a change from four years ago when hemlines were rising. Posted by edelfenbein at 9:20 AM Sandler O'Neill Cut Estimates and Price Target Price for Eaton Vance From Barron's: Based on our math, we think Eaton Vance generated about $2 billion of net inflows during fiscal first quarter, translating into 5%-plus annualized organic growth. Though down from the $5.5 billion (15% growth) in fiscal fourth quarter (Oct.), the prior quarter included $3 billion-plus of lower-fee institutional mandates. Posted by edelfenbein at 9:06 AM Missy Francis Basis for Avery Jessup
The New York Post reports that former child star and CNBC anchor Melissa Francis was the basis for Avery Jessup, the love interest of Jack Donaghy on NBC's "30 Rock": Avery Jessup, the new love interest of Alec Baldwin's "30 Rock" character played by Elizabeth Banks, is based on a real person. A source close to the show said that Jessup, who hosts a fictional CNBC show called "Hot Box," was inspired by real-life CNBC anchor Melissa Francis. Our source said that Francis herself, who hosts morning show "The Call," pitched the idea to a "30 Rock" producer. "Francis was hoping to be asked to play the character herself, but they ended up going with Banks," our source says. As a girl, Melissa played Cassandra Cooper Ingalls on Little House on the Prairie. Jason Bateman played her brother James. Posted by edelfenbein at 8:51 AM The Federal Reserve’s Profit Machine Worried about the Federal Reserve’s profits? Maybe at some point, but for now the central bank is raking it in. Any profit the Fed makes over 6% goes directly to the U.S. Treasury. For the month of January, the Fed forked over $5.2 billion (see page 6). For the first four months of this fiscal year, the Fed has paid the Treasury over $24 billion which is twice as much as one year ago. For the 2009 calendar year, the Fed’s net jumped 46% to $52.1 billion, and $46.1 billion of that went to the Treasury. Posted by edelfenbein at 8:36 AM Self-Parody Alert From Nassim Taleb: Giving businessreaders my book: like giving vintage Bordeaux to drinkers of Diet Coke and listening to their comments about it [TBS-2nd ed] Oh dear lord. Let's ponder the irony that that thought was a Twitter tweet. Posted by edelfenbein at 7:43 AM February 17, 2010Minor Error from Krugman I'm only writing this so I can say that I'm correcting a Nobel laureate. It has no other purpose. Last month, Paul Krugman wrote: Remember, the great bank runs of the early 1930s began with a run on the Bank of the United States, which was only the 28th largest bank in the country at the time. The bank was actually called Bank of United States. They wanted the "the" in there, but state banking regulators objected fearing that depositors would assume the bank was backed by the government. Posted by edelfenbein at 11:20 PM Hunter S. Wannabe's Latest Lots of people love Matt Taibbi. In my book, his last two articles on Wall Street make him oh-for-two. Here's a snippet from his latest "Wall Street's Bailout Hustle." Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout. Or there's another way of saying it -- the government did the right thing in a very, very bad situation. Here's Tyler Cowen: Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see. Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period. Posted by edelfenbein at 10:17 PM 50 Straight Years of Dividend Increases The Dividend Growth Investor Blog lists ten stocks that have raised their dividend for 50 straight years; Diebold (DBD), American States Water (AWR), Dover (DOV), Northwest Natural Gas (NWN), Genuine Parts (GPC), Procter & Gamble (PG), Emerson Electric (EMR), 3M (MMM), Integrys (TEG) and Vectren (VVC). I should add that one of our Buy List stocks, Johnson & Johnson (JNJ), is at 47 years. The Dividend Growth Investor also notes that Parker-Hannifin (PH) would be on the list but it took a year off in 1991. At one point, Winn-Dixie (WINN) was at 56 straight years before the wheels came off their business. Kellogg’s (K) was at 44 years before it froze its dividend in 2001. Posted by edelfenbein at 4:25 PM Odd Lots Taste Test: Wal-Mart beats Whole Food Government jobs crowd out real jobs Corporate Insider Buying Picks Up Posted by edelfenbein at 4:03 PM Deere’s Earnings I just wanted to add a very quick note on Deere’s (DE) earnings. Today’s earnings report was quite good and the stock is rallying higher. Still, I’m very skeptical of the stock and I find the earnings report to be rather unusual. The good news is that EPS came in at 57 cents a share which tripled the Street’s expectation. That’s also up from a year ago when Deere earned 48 cents a share. The bad news is that Deere’s sales declined by 6% from last year’s fourth quarter. Partially offsetting the 6 percent revenue decline were costs for Deere, which declined 8 percent to $4.5 billion. And its lending unit generated $85.1 million net income in the quarter, nearly double the $46.8 million net income Deere generated from financial services a year ago. So Deere’s banking is improving. Somehow, I’m not encouraged. That represents about one-third of their net income. The company upped its 2010 forecast, implying a full-year EPS figure of $3.04 versus a Wall Street consensus of $2.58. That means the stock is going for about 19 times this year's earnings. Posted by edelfenbein at 3:50 PM Hoenig's Dissent At the FOMC meeting from three weeks ago, Thomas Hoenig was the only member to dissent from the final policy statement. The Fed released the minutes from that meeting today and this is what it had to say about Hoenig's position: Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to "warrant exceptionally low levels of the federal funds rate for an extended period." In recent months, economic and financial conditions improved steadily, and Mr. Hoenig was concerned that, under these improving conditions, maintaining short-term interest rates near zero for an extended period of time would lay the groundwork for future financial imbalances and risk an increase in inflation expectations. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express an expectation that the federal funds rate would be low for some time--rather than exceptionally low for an extended period. Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that moving to a modestly higher federal funds rate soon would lower the risks of longer-run imbalances and an increase in long-run inflation expectations, while continuing to provide needed support to the economic recovery. Here's more from a talk he gave today. German hyperinflation is one classic and often-cited example, and with good reason. When I was named president of the Federal Reserve Bank of Kansas City in 1991, my 85-year old neighbor gave me a 500,000 Mark German note. He had been in Germany during its hyperinflation and told me that in 1921, the note would have bought a house. In 1923, it would not even buy a loaf of bread. He said, “I want you to have this note as a reminder. Your duty is to protect the value of the currency.” That note is framed and hanging in my office. Posted by edelfenbein at 2:38 PM Mundell: Italy is Biggest Threat to Euro Posted by edelfenbein at 11:52 AM Never Answer Critics Nassim Taleb tweets: "The idea is to NEVER answer critics, just aim to stay in print --make sure people will be reading me long after they are dead." Unlike the other, more technical critics, I do not think much of Cowen’s intellect, abilities, & understanding of probability & random payoffs, but that irresponsible fool was the first to advertise the contribution of “prediction markets” in high moment applications, heavy-tailed environment. “Prediction markets” fail in fat-tailed domains because of a huge estimation error. Also note a blogger who got my point about predicting in Extremistan. The quote above is just part of a typically overheated response to Tyler Cowen's review of the Black Swan. Cowen's review, by the way, is mostly positive. Posted by edelfenbein at 11:30 AM Should Greece Ditch the Euro? Martin Feldstein writes that Greece ought to take a holiday from the euro. This is one of those fascinating ideas that economists like to come up with, but are completely unrealistic politically. If Greece were to leave the euro, it would be a precedent that Eurozone may not like. Here’s the problem. To really fix its problems, Greece needs some serious financial reforms, meaning higher taxes and/or lower spending. That would hurt the economy which is already in pretty bad shape. But if Greece had its own currency, then they could devalue. That’s not a great move but it’s better than the alternatives. The problem is that the eurozone has an integrated monetary policy but it’s not integrated politically. Now countries like Germany and France are balking at a bailout, but the fact is that those kinds of moves are inherent in monetary integration. If you want one currency, you have to take the good and the bad. Feldstein favors letting Greece leave the euro “with the right and the obligation to return at a more competitive exchange rate.” Of course, what if they don’t want back in? Furthermore, as Tyler Cown points out, this could lead to a run on Greek banks: “Who wants a Euro deposit to be converted into a drachma deposit?” Not me. For their part, the French have snapped into action. They blame us. Or more specifically, six “Anglo-Saxon” hedge funds. Now, can get California to ditch the dollar? Posted by edelfenbein at 11:03 AM U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion WASHINGTON—The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct. What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world's largest economy. "Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…" said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all." "It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless." According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, "Oh my God, he's right. It's all a mirage. All of it—the money, our whole economy—it's all a lie!" Screams then filled the Senate Chamber as lawmakers and members of the press ran for the exits, leaving in their wake aisles littered with the remains of torn currency. As news of the nation's collectively held delusion spread, the economy ground a halt, with dumbfounded citizens everywhere walking out on their jobs as they contemplated the little green drawings of buildings and dead white men they once used to measure their adequacy and importance as human beings. At the New York Stock Exchange, Wednesday morning's opening bell echoed across a silent floor as the few traders who arrived for work out of habit looked up blankly at the meaningless scrolling numbers on the flashing screens above. "I've spent 25 years in this room yelling 'Buy, buy! Sell, sell!' and for what?" longtime trader Michael Palermo said. "All I've done is move arbitrary designations of wealth from one column to another, wasting my life chasing this unattainable hallucination of wealth." "What a cruel cosmic joke," he added. "I'm going home to hug my daughter." Sources at the White House said President Obama was "still trying to get his head around all this" and was in seclusion with his coin collection, muttering "it's just metal, it's just metal" over and over again. "The president will be making a statement very soon," press secretary Robert Gibbs told reporters. "At the moment, though, his mind is just too blown to comment." A few U.S. banks have remained open, though most teller windows are unmanned due to a lack of interest in transactions involving mere scraps of paper or, worse, decimal points and computer data signifying mere scraps of paper. At a Bank of America branch in Spokane, WA, curious former customers wandered aimlessly through a large empty vault, while several would-be robbers of a Chase bank in Columbus, OH reportedly put their guns down and exited the building hand in hand with security guards, laughing over the inherent absurdity of the idea of $100 bills. Likewise, the real estate industry has all but vanished, with mortgage lenders seeing no reason to stop people from reclaiming their foreclosed-upon homes. "I don't even know what we were thinking in the first place," said former banker Nathan Collins of Brandon, MS, as he jimmyed open a door to allow a single mother and her five children to move back into their house. "A bunch of people sign a bunch of papers, and now this family has no place to live? That's just plain ludicrous." The realization that money is nothing more than an elaborate head game seems to have penetrated the entire country: In Wilmington, DE, for instance, a collection agent reportedly broke down in joyful sobs when he informed a woman on the other end of the phone that he had absolutely no reason to harass her anymore, as her Discover Card debt was no longer comprehensible. For some Americans, the fog of disbelief surrounding the nation's epiphany has begun to lift, with many building new lives free from the illusion of money. "It's back to basics for me," Bernard Polk of Waverly, OH said. "I'm going to till the soil for my own sustenance and get anything else I need by bartering. If I want milk, I'll pay for it in tomatoes. If need a new hoe, I'll pay for it in lettuce." When asked, hypothetically, how he would pay for complicated life-saving surgery for a loved one, Polk seemed uncertain. "That's a lot of vegetables, isn't it?" he said. Posted by edelfenbein at 10:01 AM February 16, 2010Odd Lots The Absurdly Arrogant Tweets Of Nassim Taleb Alan Blinder - It's Time for Financial Reform Plan C Hank Paulson - How to Watch the Banks Measuring the Speed of Light...With Chocolate 4 charged after uproar at Memphis Chuck E. Cheese Posted by edelfenbein at 4:44 PM JP Morgan Offices in Athens Bombed A bomb exploded outside the JP Morgan offices in Athens on Tuesday, causing minor damage to the building, police said. In September, there was a bombing outside the Athens Stock Exchange. Incidentally, JP Morgan's headquarters on Wall Street were bombed 90 years ago. The damage is still visible at 23 Wall Street. Posted by edelfenbein at 2:05 PM Good News! General Mills Expects 18% Sales Growth This is totally awesome good news! At an investor conference on Tuesday, General Mills Inc. said it expects its revenue to grow to $18 billion in fiscal 2015, up roughly 18 percent from its forecasted $14.7 billion in sales this year. Wait. By 2015? Let me get this right. They expect 18% sales growth over the next five years? Annualized that's 3.4%. A five-year Treasury currently yields 2.34%. Posted by edelfenbein at 12:37 PM Stocks and Earnings Estimates Briefing.com has an interesting chart showing the rise of the S&P 500 along with the rise in earnings estimates over the coming four quarters. It's not a perfect match, but clearly both have been going higher.
For 2010, analysts sees earnings for the S&P 500 at $78.92. The index is currently going for about 13.7 times this year's estimate. Posted by edelfenbein at 8:58 AM North Dakota's Socialist Bank From the AP: It has no automatic tellers or drive-up windows, doesn't issue credit cards, and tends only a few thousand checking and savings accounts. Its only location is a glass, steamboat-shaped headquarters near the Missouri River, where the business moved from its original 1919 home in a former auto assembly plant. Posted by edelfenbein at 8:36 AM February 15, 2010Odd Lots Three Greek buys from Altucher Brooklyn Decker can give the stock market a rise. Caring for Pets Left Behind by the Rapture School mistakes huge burrito for a weapon And finally, a bar watching Porter's interception: Posted by edelfenbein at 5:05 PM Inflation-Adjusted Prices at the Pump Joe Weisenthal notes that Energy Information Administration projects that gasoline will hit $3 a gallon later this year. Here's a look at the average retail price for gasoline (all grades) adjusted to today's dollar.
In the last 11 years, real prices at the pump have more than doubled. Posted by edelfenbein at 2:42 PM Volcker Keeping It Real From CNBC: "If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it -- not save it," Volcker said on CNN. Posted by edelfenbein at 12:45 PM Lilly's Latest Drug is a Flop Bad news for one of our Buy List stocks. Eli Lilly's (LLY) latest blood thinner drug is a massive flop. Lilly's problem continues to be its lousy pipeline of new drugs. “A research philosophy is fraught with risk and opportunity,” Mr. Fernandez said in an interview. “And over the last five years, Lilly has seen more of the risk of drug development than they have the reward.” Posted by edelfenbein at 11:25 AM Something’s Brewing in China Goldman’s chief economist, Jim O’Neill, thinks China is about to revalue its currency by as much as 5%. This would be a huge deal. For the second time, China has ordered its banks to increase their reserves. The country is desperately trying to contain bank lending which is skyrocketing. Consider that in January alone, banks used up nearly one-fifth of this year’s lending target. For the last 18 months, China has firmly kept the yuan in place, but the cracks are starting to show. Their export market is booming and assets continue to inflate. Most importantly, the rest of the world isn’t happy with Beijing. If China did revalue the yuan, it would help cool off their economy, and it would help our economy which is something we desperately need. Why have the Chinese been so stringent? Let’s say you’re a communist official in Beijing. Which choice would you rather face? A) Millions of unemployed young men in your central cities. B) Anything that’s not A. Now you get the idea. The migration of people from rural China to their major cities isn’t merely big, it’s the largest migration in human history. Think of Tom Joad, now multiply that by 100. Posted by edelfenbein at 11:09 AM Looking at the Fed’s Exit Strategy Since the financial crisis began, the Federal Reserve has exploded its balance sheet from less than $1 trillion to over $2.2 trillion. Last week, Ben Bernanke discussed the Fed’s exit strategy. James Hamilton has an interesting take on what the Fed plans. Essentially, all of the strategies boil down to one thing—borrowing from the public. As Arnold Kling has noted, the Fed is doing something very different here. It’s moving away from its basic function of being a central bank: The Fed should be engaging in ordinary open market operations, which means buying Treasuries. The only reason to buy anything other than Treasuries would be if it ran out of Treasuries to buy and still could not meet its overall target--whether that target is for the money supply, nominal GDP, or some weighted average of inflation and unemployment. Posted by edelfenbein at 9:49 AM February 12, 2010Odd Lots Poll: 79% of Democrats support "gays" in the military, but only 44% of Democrats support "homosexuals" in the military. 36 songs that use the same 4 chords Superbowl team: online finance’s best I'm honored to have been named a Defensive Coach along with many outstanding blogs. Marijuana Farm Found Inside UK Bank Posted by edelfenbein at 3:06 PM Quote of the Day From Arnold Kling: "The Fed has changed from a central bank to a piggy bank." Posted by edelfenbein at 10:43 AM Wright Express Beats By Two Cents On Wednesday, Wright Express (WXS), one of the new stocks on this year’s Buy List, reported Q4 earnings, after costs, of 56 cents a share which was two cents higher than estimates. For 2009, net income pre share rose to $2.18 from $1.88 last year. On the earnings call, this is what they had to say about future projections: For the first quarter of 2010 we expect to report revenues in the range of 82 to $87 million. This is based on an average retail sales price of $2.78 per gallon. For the full year 2010, we expect revenues ranging from 360 to $370 million based on an average retail sales price of $2.80 per gallon. If we take $2.36 as the midpoint, that means the stock is going for about 12 times this year's earnings. The stock dropped initially on the news but rallied back yesterday. So far, it’s our biggest loser of the year. Posted by edelfenbein at 10:39 AM The S&P's P/E Ratio Falls to 18 With the recent dip in the stock market, the P/E Ratio of the S&P 500 is now down to 18. That number, however, is a bit misleading since earnings are still in the process of recovering from a nasty downturn. Here’s a look at the S&P 500 (left scale) along with its earnings line (right scale). The two scales are plotted at a ratio of 16-to-1 so when the lines cross, the P/E Ratio is exactly 16. The future earnings line is S&P’s estimate.
The total earnings for 2009 will be about $57. Bear in mind that at one point, Goldman Sachs thought that it would be $40. I still think stocks are a good buy, but this is an instance where looking at the P/E ratio doesn’t tell us much. The recent earnings trend is such an outlier. Naturally, if the earnings forecast holds up, then I would expect stocks to be much higher one year from now. Remember that stocks are best measured by their alternatives. In this case, I think the more telling metric isn’t the Price/Earnings, but the yield curve. The spread between the 30-year T-bond the 90-day T-bill is over 450 basis points, which is gigantic. Even at 5-years out, a Treasury only offers a yield of about 2.3%. With the kind of competition, stocks are the best investment. Posted by edelfenbein at 9:13 AM Unraveling the Profit Puzzle at Goldman Sachs Posted by edelfenbein at 9:10 AM February 9, 2010Despite 10,000, the Dow Has Been Beating the S&P 500 Yesterday, the Dow closed below 10,000 for the first time in three month. As far as indexes go, I’m not a big fan of the price-weighted Dow. The cap-weighted S&P 500 is far superior. Still, I will give the Dow credit for beating the S&P 500 over the past four years. Here’s a look at the Dow/S&P 500 Ratio:
For two days in November 2008, the ratio closed above 10. Before that, the ratio had last been above 10 in 1966. Posted by edelfenbein at 11:48 AM Goldman Goes A-Blogging Goldman Sachs' spokesman, Lucas van Praag, responds to the NYT's article at the Huffington Post. Here's a sample: NYT assertion: "Goldman's demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash." (HT: Felix) Posted by edelfenbein at 11:00 AM February 8, 2010The Geography of a Recession Posted by edelfenbein at 2:02 PM Academic Study on Media Bias in Financial Newspapers Media Bias in Financial Newspapers: Evidence from Early-Twentieth-Century France Abstract: Posted by edelfenbein at 1:21 PM Mortgage Bankers Association Sells Headquarters at Big Loss Ouch. On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA's 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also is far below the $75 million financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. to finance the purchase. Posted by edelfenbein at 11:58 AM Telegraph: Roubini Gets It Wrong There’s finally some big media pushback against the Great Predictors, all of whom missed one of the greatest stock rallies in history: Never mind what Nouriel Roubini, the New York economist credited with having seen the economic meltdown coming, is predicting for next year – surprise, surprise, he’s pessimistic – let’s take a look at what he forecast at the time of the World Economic Forum in Davos this time last year. (HT: TBI) Posted by edelfenbein at 11:49 AM The Goldman/AIG Battle The must-read story of the weekend was Gretchen Morgenson and Louise Story’s account of the battle between Goldman Sachs and AIG. I have no independent love for Goldman Sachs and I’m perfectly happy to portray them as the villain. Still, I keep finding myself being attractive to another narrative—Goldman was smarter than everyone else. Yves Smith and Tom Adams have more. Posted by edelfenbein at 11:44 AM February 6, 2010Oopsie! There was a confusing story but apparently 1 million people lost their jobs yesterday. No wait, that’s not it. It turns out that the government reported that 1 million people lost their jobs yesterday. No wait, that’s not it either. The government updated their jobs stats yesterday for the last six years and it turns out the Labor Department was off by 1 million. And for this, no one in the Labor Department lost their job.
Posted by edelfenbein at 3:45 PM Odd Lots The snow is still coming down in Washington. We’re well over eighteen inches now. The snow started coming down about 11 am yesterday and is expected to stop sometime tonight. Since I’m snowbound, here are a few links to pass on: Football games have 11 minutes of action. Not sure what this is, but it's cool. So it turns out Blankfein’s bonus wasn’t $100 million, just $9 million. Arnold Kling and Nick Schulz at Cato. Fresno tops list of 'drunkest' cities in America What are the odds of a cow making it to the Super Bowl? Barry Ritholtz on the economics of book writing. Gen Y too lazy and unfocused to hire Moe Tkacik on credit crisis literature. Posted by edelfenbein at 1:42 PM February 4, 2010Update on Turn-of-the-Month Investing A few of you asked if the turn-of-the-month gains were mainly caused by the turn of the year. It turns out that January is the big winner, but other months also did very well. Here are the average gains for each seven-day turn-of-the-month period (the month listed is the month being turned to):
Here are the numbers:
Posted by edelfenbein at 10:00 PM Earnings Update Here's a quick note on the latest earnings forecasts from S&P. For 2009, it looks like the S&P 500 will earn $57.03 a share. A year ago, Goldman Sachs cut its 2009 EPS forecast from $53 to $40. S&P's current forecast for 2010 EPS is $77.94. That means that the market is currently going for 13.6 times this year's earnings. If you compare that to AAA bond yields which are averaging about 5.3% now, I think stocks look very good here. Posted by edelfenbein at 8:21 PM Los Angeles 1781 - 2010 After struggling for eight hours to counter a rapidly growing budget shortfall, the Los Angeles City Council put off a decision to cut 1,000 jobs Wednesday and, through other actions, managed to add $4 million to the problem. Posted by edelfenbein at 1:01 PM Back to 1070 The S&P 500 is back to where it was late Friday, around the 1070 to 1075 area. This also puts us back to where we were about two months ago. Personally, I want to see the market pull back because I'm in a buying mood. I've also been very pleased with Nicholas Financial's (NICK) positive response to its earnings. The last two days have seen heavy volume. Also, Reynolds American (RAI) had an awful earnings report, but don't worry about it. I was expecting bad news. That's why the stock is so cheap. The important news is that they're forecasting $4.80 to $5.00 per share. If that forecasts holds up, RAI should be much higher by the end of the year. Posted by edelfenbein at 10:40 AM Seven Days Each Month Since 1932, most of the S&P 500’s capital gain has come during a seven-day period at the turn of each month—specifically, the last four trading days and the first three trading days of each month. This represents about one-third of the total trading days. During the rest of the month, the stock market actually lost money. Here are the numbers: Since the beginning of 1932, the S&P 500 has gained nearly 14,000% which is about 6.5% annualized. Investing in just the last four days and first three days of each month would have returned over 63,000% (not including trading costs). Annualized, that’s 8.6%. However, if you consider that it’s really only 32% of the time, the true annualized rate is over 28%. The rest of the month -- the other 68% of the time -- has resulted in a combined loss of close to 78%. Let me add some important caveats. First, I’m not offering this as trading advice. I’m merely showing that the market has historically experienced outsized gains at the turn of each month. Remember that trading in and out of the market is costly and these results don’t include taxes or commissions. Secondly, this only refers to capital gains not dividends. A very large part of the market’s total return is due to dividends, and if you’re only invested one-third of the time, you’re going to lose out. Having said that, here’s a graph showing what turn-of-the-month investing looks like. The S&P 500 is the red line. The blue line is performance during the seven-day period and the rest of the month is the black line.
Here's a look at the average daily gains.
Why has the market shown this performance? It's hard to say. One idea is that we're seeing a pattern that's simply the result of random behavior. If you splice and dice any data long enough, you're bound to find some anomaly. My hunch, however, is that there's something to the turn-of-the-month effect. Perhaps it's new money coming in or maybe positive business news is more likely to be announced. Still, as powerful as the historical data is, I think the effect is too transient to base any investment strategy on. Posted by edelfenbein at 7:03 AM February 3, 2010Good Earnings for AFLAC and Fiserv In October, AFLAC (AFL) said to expect Q4 EPS between $1.08 and $1.16. Well...they made $1.18 a share which was three cents higher than the Street. For the full year, the company earned $1.5 billion, or $3.19 per share, compared with profit of $1.25 billion, or $2.62 per share, during the same period a year prior. Revenue rose to $18.25 billion from $16.55 billion. Going by the company’s projection, the stock is going for about 9.0 to 9.5 times this year’s earnings. One other thing to note: AFLAC announced a Q1 dividend of 28 cents a share which is what it’s been for all of 2009. I believe AFLAC has the longest current streak of double-digit dividend increases. I can’t be positive, but I’ve looked hard and I haven’t found anyone who’s done it longer. Since the year isn’t over, the streak hasn’t been snapped just yet, but I hope the board keeps the streak going. If the board raises the dividend to 32 cents for the next three quarters, then the streak will live on. Also, Fiserv's (FISV) earnings were in line: Fiserv Inc.'s (FISV) fourth-quarter earnings soared 90% as it shed prior-year charges and revenue rose slightly. I like companies that make projections for the year ahead. Like AFLAC, Fiserv is going for a reasonable price based on next year's earnings. Posted by edelfenbein at 6:37 AM February 2, 2010The Very Long View Over the last 84 years, the after-inflation return of the stock market (including dividends) has been about 6.6% a year. Historically, that number has been about 7%, but thanks to recent years it's come down a lot. What this means is that, on average, stock investors have doubled their money in real terms every 11 years. Of course, that's an average. Over the last 11 years, the stock market hasn't made any money in real terms. Here's a look at the inflation-adjusted total return along with a 7% trendline:
Here's a look at the same chart, but I divided the black line by the blue line.
In other, this shows how the market is doing relative to its long-term trend. Interestingly, there are long stretches where this line looks somewhat similar to a P/E Ratio graph which shouldn't be that surprising. Looking at this chart, you can really see how poorly the stock market has done over the past decade. I also think it's interesting that the peaks and troughs seem to line up at 2.0 and 0.5, but I may be seeing a connection where there isn't one. Posted by edelfenbein at 11:41 PM An Historical Look at the Budget Here's a look at the Federal government's receipts (red) and outlays (blue) as a percent of GDP. I got these numbers from the president's budget. The numbers after 2009 are forecasts. I broke the outlays into defense (green) and non-defense (black).
A few observations. It's stunning how far defense spending has fallen. In 1958, over 10% of the economy went to the Pentagon and that was for a peacetime military. Before 9/11, it had dropped to just 3%. Even with two wars, we're only back to 4.6% which is less than what Reagan defense buildup wanted to build up from. I wouldn't be surprised to see us under 3% in another 10 years. From 1951 through 2008, budget receipts (the red line) averaged slightly over 18%, but what's fascinating is how consistent that was. For the entire time period, the standard deviation was under 1%. Perhaps we ought to take nearly six decades of data as a hint, and aim to raise that much every year. Obama plans to keep up within the historical norm. His forecast goes to 18.6% by 2014 and 19% by 2015. Of course, he may be long gone by then. From 1975 through 2008, nondefense spending made up an average of 16.25% of GDP with a standard deviation of less than 0.7%. But this is where Obama really becomes an outlier. This year's non-defense spending will jump to 20.1% of GDP which is twice its share of 45 years ago. Posted by edelfenbein at 5:18 PM Nicholas Financial Earns 23 Cents a Share This is another very good earnings report from Nicholas Financial (NICK): Nicholas Financial, Inc. announced that for the three months ended December 31, 2009, net earnings, excluding change in fair value of interest rate swaps, increased 117% to $2,747,000 as compared to $1,267,000 for the three months ended December 31, 2008. Per share diluted net earnings, excluding change in fair value of interest rate swaps, increased 109% to $0.23 for the three months ended December 31, 2009 as compared to $0.11 for the three months ended December 31, 2008. See reconciliations of the non-GAAP measures (below). Revenue increased 8% to $14,365,000 for the three months ended December 31, 2009 as compared to $13,254,000 for the three months ended December 31, 2008. This is what I wrote last month: Let’s make some assumptions for the next earnings report. If the pre-tax yield for the last quarter hit 7% on receivables of $230 million that comes to about $4 million pre-tax for the quarter. With the new shares post stock dividend, that’s 35 cents a share. After taxes, that’s about 22 cents a share. I was close. The pre-tax yield was actually 8% but receivables only rose $226 million. That's an increase of 1.6% from last quarter. Even though the portfolio isn't growing, the quality is improving. The average cost of borrowed funds dropped down to 3.92%. Best of all, the provision for credit losses fell again. It's now at 5.34%. This is the fifth straight quarter it's fallen. Overall, this is a very good report. Assuming the trends continue, then NICK should be able to earn $1 a share for this calendar year. I still believe these shares are very underpriced. Posted by edelfenbein at 11:15 AM February 1, 2010More Buy List Earnings The Buy List is recovering today along with the rest of the stock market. Sysco (SYY), which has been a frustrating stock recently, is up today thanks to a good earnings report. For the third straight quarter, the company beat expectations. Sysco earned 45 cents a share which was three cents more than the Street expected. Sales fell for the fifth straight quarter. Reuters writes: “Operating expenses fell 7 percent to $1.23 billion. Sysco has been cutting costs by reducing headcount, bonuses and commissions to offset weak demand.” Moog (MOG-A) also reported earnings today. This stock gained nearly 50% from its October low to its January high. The company earned 47 cents a share which matched Wall Street’s estimate. This is a big drop from last year. Moog's profits slid to $21.6 million, or 47 cents per share, during the quarter that ended on Jan. 2, down from $30.3 million, or 70 cents per share, a year earlier. The company's sales rose to $495.2 million from $446.1 million, aided by Moog's acquisitions last year of a British flight controls business and the Fernau navigation aids unit. Posted by edelfenbein at 12:15 PM Absurb Story of the Day Score one for the British media. The Times somehow floats the idea that Goldman's CEO Lloyd Blankfein is going to get a $100 million bonus. Not only is this nuts, there's absolutely zero evidence for it. Still, the Times runs with their story which is the potential backlash against a fairy tale. Goldman Sachs, the world’s richest investment bank, is facing a potential political storm over how much it pays its chief executive, Lloyd Blankfein. In other news, the editors of the Times could potentially drown a bag of cats this afternoon. According to their unnamed business rivals, this would hurt the Times' image. Posted by edelfenbein at 11:45 AM |
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