Archive for April, 2008

• Triple-A Failure
  Eddy Elfenbein, April 24th, 2008 at 11:07 am

  I’m currently working my way through Roger Lowenstein’s 5,000-word Triple-A Failure in a preview of the Sunday New York Times. I highly recommend it. Here’s the opening:

  In 1996, Thomas Friedman, the New York Times columnist, remarked on “The NewsHour With Jim Lehrer” that there were two superpowers in the world — the United States and Moody’s bond-rating service — and it was sometimes unclear which was more powerful. Moody’s was then a private company that rated corporate bonds, but it was, already, spreading its wings into the exotic business of rating securities backed by pools of residential mortgages.
  Obscure and dry-seeming as it was, this business offered a certain magic. The magic consisted of turning risky mortgages into investments that would be suitable for investors who would know nothing about the underlying loans. To get why this is impressive, you have to think about all that determines whether a mortgage is safe. Who owns the property? What is his or her income? Bundle hundreds of mortgages into a single security and the questions multiply; no investor could begin to answer them. But suppose the security had a rating. If it were rated triple-A by a firm like Moody’s, then the investor could forget about the underlying mortgages. He wouldn’t need to know what properties were in the pool, only that the pool was triple-A — it was just as safe, in theory, as other triple-A securities.
  Over the last decade, Moody’s and its two principal competitors, Standard & Poor’s and Fitch, played this game to perfection — putting what amounted to gold seals on mortgage securities that investors swept up with increasing élan. For the rating agencies, this business was extremely lucrative. Their profits surged, Moody’s in particular: it went public, saw its stock increase sixfold and its earnings grow by 900 percent.
  By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace.
  Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.

• Economic Perception Datapoint of the Day
  Eddy Elfenbein, April 23rd, 2008 at 9:35 am

  From yesterday’s PA exit poll:

  Is National Economy in a Recession?
  Yes: 88%
  No: 11%
  National Economic Conditions:
  Slowing Down: 11%
  Moderate Recession: 47%
  Serious Recession: 42%

  Remarkably, every group listed above voted for Hillary by a 54-46 margin. In other words, your perception of how well the economy is doing had zero relevance on how you voted.
  But I am amazed that 42% of Keystone Staters think we’re in a serious recession. We certainly could be heading towards one, but it’s way too early to make that call. The unemployment rate is barely above 5%. To add some perspective, the unemployment rate for March is lower than every single month (save one) from 1975 to 1996.
  Irrational pessimism anyone?

• Harris Teeter Finally Opens in Adams Morgan
  Eddy Elfenbein, April 23rd, 2008 at 8:20 am

  We in Adams Morgan have been promised a Harris Teeter since, oh, about the Taft Administration. After countless delays, Washington’s first Harris Teeter opened this morning. I captured the details.
  Here’s the ribbon ceremony:
  
  OMG, it blows away anything else we have in the neighborhood, especially the gawdawful Safeway. Here the fruits and vegetables get my approval:
  
  Look, a real salad bar! Check out the chrome. I bet they had salad bars like this on Star Trek:
  
  Here’s the Jewel in the Crown. The vino section. It’s two freakin aisles!
  

• Lincare & UnitedHealth
  Eddy Elfenbein, April 22nd, 2008 at 2:55 pm

  Lincare (LNCR) has been one of our worst Buy List stocks this year, but Q1 earnings were pretty good. The company earned 79 cents a share compared with 59 cents last year. Wall Street was expecting just 71 cents. On the downside, Lincare said that it now expects a $100 million impact from Medicare price reductions. Earlier, the company expected an impact of $65 million to $70 million.
  The bad news today came from UnitedHealth (UNH). The company had been pretty consistent in saying it would earn $3.95 to $4 a share for this year. Well, not anymore. For the first quarter, UNH earned 78 cents, which was two cents below Street estimates. But the company lowered its full-year guidance to $3.55 to $3.60 per share. Ouch, that’s a major downgraded. The shares are getting rightly punished today.

• Financial Analysts Offer To Talk About Recession For $5
  Eddy Elfenbein, April 22nd, 2008 at 12:09 pm

  From The Onion:

  NEW YORK—With the nation almost certainly headed toward a recession, a coalition of top financial analysts announced Monday that they would be willing to discuss the economic future of the U.S. at any time for a negotiable fee of $5. “There are many complicated factors that will dictate the direction the economy will take in the coming months,” said commodity trading adviser Lucas Brockton, who repeatedly urged reporters at the press conference to leave any empty soda cans with him before they left. “We are more than happy to talk about these factors at length just as soon as we can get a wink from Mr. Lincoln, if you catch my drift.” As of press time, the analysts were considering an offer of $3.50 and half a turkey sandwich.

• Texas Passes New York on Fortune 500 List
  Eddy Elfenbein, April 22nd, 2008 at 10:15 am

  From the AP:

  Texas is king of the hill when it comes to corporate headquarters.
  The Lone Star State passed New York as home to the most big companies in the latest list compiled by Fortune magazine.
  Texas now boasts 58 headquarters, three more than New York, the previous No. 1, and California, with 52.
  Business experts say it’s a matter of simple economics – Texas attracts companies with its low taxes, affordable land and large labor force.

• Deutsche Bank Gets Mean
  Eddy Elfenbein, April 21st, 2008 at 4:04 pm

  This, my friends, is an outrage:

  Germany’s biggest bank today banned staff from visiting brothels on expenses and putting hotel TV porn channels on their company credit card.
  The crackdown came in new rules issued to executives as Deutsche Bank cuts costs after losing at least £2billion so far in the global credit crunch.
  “Deutsche Bank does not approve of any adult entertainments and such expenditures will not be reimbursed”, according to the memo leaked to news magazine Spiegel.
  According to Spiegel, the new edict was aimed at senior staff in the bank’s communications and social responsibility department.
  The memo further warns that the bank’s credit cards must not be used for such purposes.
  Whether the ruling was prompted by a recent upsurge in executives seeking erotic relief from subprime deals that have gone bad was not specified.
  Further belt-tightening at the bank includes prior approval from a boss before a taxi can be taken, a limit of £50 on a business meal and train rides in Germany must all be second class if they are under one hour.
  In the UK, the rule for bank employees is second class unless the journey is over two hours.
  One further stiupulation is that employees stepping off of overnight flights who are expected in work or at a business meeting are now to shower at the airport instead of booking a hotel room to do so.
  The reason for the memo: apparently there have been “minor infringements” of late which the bank wants to stamp out in hard times.

• More Q1 Earnings Reports
  Eddy Elfenbein, April 21st, 2008 at 3:27 pm

  Just to bring you up to speed, there are a few Buy List earnings reports due this week. Lincare Holdings (LNCR) reports after the bell today. SEI Investments (SEIC) and Unitedhealth (UNH) report tomorrow, and AFLAC (AFL) reports on Wednesday.

• Decline and Fall
  Eddy Elfenbein, April 21st, 2008 at 3:15 pm

  Two years ago, Crocs (CROX) went public at $10.50. By last October, it got to $75. Now it’s back down to $10.29, slightly below its IPO price.
  But it was a fun ride while it lasted.
  

• Isaac Newton: Master of the Mint
  Eddy Elfenbein, April 21st, 2008 at 11:07 am

  In Vanity Fair, Christopher Hitchens writes on Sir Isaac Newton, who not only had some rather bizarre ideas on gravity, but some truly whacked-out thoughts on sex and religion, and of course, gold.

  In contrast with this clarity and purity, however, Newton spent much of his time dwelling in a self-generated fog of superstition and crankery. He believed in the lost art of alchemy, whereby base metals can be transmuted into gold, and the surviving locks of his hair show heavy traces of lead and mercury in his system, suggesting that he experimented upon himself in this fashion, too.

  But his gold obsession didn’t end there. Newton also served as Master of the Mint and he had to deal with one of the great questions that men have pondered for centuries–what’s the correct price ratio of gold to silver.
  Great Britain didn’t formally adopt the gold standard until 1819, but it was in effect set over one hundred years before when Newton overvalued gold. For the previous 500 years, Britain had been on the silver standard.