Archive for September, 2009

• The Worse the Economy, the Better the Recovery
  Eddy Elfenbein, September 21st, 2009 at 2:15 pm

  Jim Grant has a typically smart piece in the WSJ. Although he’s known to be a pessimist, Grant has turned bullish recently:

  Americans are blessedly out of practice at bearing up under economic adversity. Individuals take their knocks, always, as do companies and communities. But it has been a generation since a business cycle downturn exacted the collective pain that this one has done. Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: “[T]he most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period.”

  Ah, our old friend Mr. Reversion to the Mean. He’s made smart people look dumb and dumb people look smart.

• Stimulus Program
  Eddy Elfenbein, September 21st, 2009 at 1:24 pm

  Not sure what to made of this one: French workers strip to try to save their jobs.

• Q&A With Doug Kass
  Eddy Elfenbein, September 21st, 2009 at 1:07 pm

  Dan Holland of Real Clear Markets sat down with the always-valuable Doug Kass. Here’s a sample:

  RealClearMarkets: You made a huge, once-in-a-lifetime call when you correctly predicted the stock market bottom back in early March-a generational low as you called it. Equities launched an extraordinary rally on cue with your call, and are up over 60 percent as of this interview. Was this good fortune, or was your call borne out of a repeatable investment process?
  Kass: Consider the market as a triangle. The bottom left angle is sentiment and the bottom right angle is valuation. On top is the most consequential angle (the one I weigh most heavily) – the fundamentals.
  In March, 2009, sentiment and valuation was clearly stretched to a negative extreme. Investors were fearful of “being in” — as a result, retail investors and institutional investors (especially of a hedge fund kind) were at record low net invested positions. At the same time, valuation was pushed down to nearly unprecedented low levels vis a vis “normalized” S&P earnings of about $70/share and were trading at a discount to replacement book value (compared to an historic average of about 140% of replacement book value).
  In terms of fundamentals, I had a specific Watch List which helped me gain comfort that stocks were creating a Generation Low. I believe, by following this list, that the process is repeatable.
  My Watch List indicators were getting “less worse” six months ago – and that a second derivative recovery was well underway, but, at the time, was being ignored as fear reigned.
  Here is a partial check list of (ignored) indicators that I was looking at six months ago which led to my adopting a more favorable stock market outlook:
  • Bank balance sheets were being recapitalized.
  • Bank lending was slowly being restored as the industry was experiencing record wide net interest spreads and margins.
  • Financial stocks’ performance was improving.
  • Commodity prices were beginning to rise- a sign that worldwide economic growth was mending.
  • Credit spreads and credit availability were slowly improving.
  • With affordability at record levels, the cost of home ownership versus renting becoming more favorable and with the Federal Reserve providing a low interest backdrop – a bottom in the housing markets was growing more likely.
  • Corporations’ draconian cost cutting was accelerating – sowing the seeds for upside margin and earnings surprise in 2009’s second half.
  • Corporations had cut inventories to the bone – a record low level of inventory to sales augured positively for corporate profits.
  • There was growing evidence of favorable reactions to disappointing earnings and weak guidance – a sign that the poor operating environment had been discounted.
  • Evidence of strength in China’s economy (two consecutive months of a rising PMI) and in its equity market (seen in strong absolute and relative strength in Chinese stock market.
  • Market volatility was starting to decline.
  • Hedge fund and mutual fund redemptions were easing.
  • Pension funds were far too skewed towards fixed income and provided the potential to buoy stocks in a reallocation in the months ahead.

• TARP Application: “Two Pages, Most of it White Space”
  Eddy Elfenbein, September 21st, 2009 at 11:51 am

  Vanity Fair looks at how the TARP Program was run. After making all the big boys participate, Treasury strong-armed smaller banks as well. Ray Davis, the head of Umpqua Bank, a financially sound bank in Oregon, got the message that he’d better play ball and take TARP money:

  The “application” was the paperwork for a capital infusion, and Davis was told it would be faxed over right away. By now he was sold on participating. “Here was somebody from the secretary of the Treasury calling,” Davis says, “and complimenting us on the strength of our company and saying you need to do this, to help the government, to be a good American citizen—all that stuff—and I’m saying, ‘That’s good. You’ve got me. I’m in.’”
  The most urgent task was to complete the application and get it back to Treasury the next day, and this had Davis in a sweat: “I pictured this 200-page fax that would take me three weeks of work crammed into one evening.” Imagine Davis’s surprise when a staff member walked in soon afterward with the official “Application for tarp Capital Purchase Program.” It consisted of two pages, most of it white space.

• The Long-Tail Effect Will Revolutionize Business. Yeah…About That.
  Eddy Elfenbein, September 21st, 2009 at 9:44 am

  Some folks at Wharton found that the Long-Tail Effect isn’t all it’s cracked up to be.

  The Wharton researchers find that the Long Tail effect holds true in some cases, but when factoring in expanding product variety and consumer demand, mass appeal products retain their importance. The researchers argue that new movies appear so fast that consumers do not have time to discover them, and that niche movies are not any more well-liked than hits.
  According to Netessine, the Long Tail effect may be present in some cases, but few companies operate in a pure digital distribution system. Instead, they must weigh supply chain costs of physical products against the potential gain of capturing single customers of obscure offerings in a rapidly expanding marketplace. Companies, they add, must also consider the time it takes for consumers to locate off-beat items they may want.
  “There are entire companies based on the premise of the Long Tail effect that argue they will make money focusing on niche markets,” says Netessine. “Our findings show it’s very rare in business that everything is so black and white. In most situations, the answer is, ‘It depends.’ The presence of the Long Tail effect might be less universal than one may be led to believe.”

  The researchers used data from Netflix who made their numbers available as past of a $1 million competition to improve predicting consumer ratings by 10%.

• Looking Ahead to Bed, Bath & Beyond’s Earnings Report
  Eddy Elfenbein, September 21st, 2009 at 9:36 am

  Bed, Bath & Beyond (BBBY) is due to report its fiscal second-quarter earnings on Wednesday. I’ve been eagerly awaiting this earnings report because last earnings report was surprisingly strong. The company was certainly helped by Linens ‘N Things going under, so I’m curious if last quarter’s earnings were an outlier or if BBBY’s business is truly recovering.
  For the fiscal first quarter, Wall Street was expecting earnings of 25 cents a share, but Bed, Bath & Beyond actually earned 34 cents a share for a large earnings beat. This also topped the result from the first quarter of one year before which broke a five-quarter run of lower year-over-year declines. After the earnings report, the stock got a nice one-day bounced but didn’t really start to rally for another two weeks. Since then, the stock has been on an impressive run.
  For the second quarter, the consensus on the Street is for earnings of 47 cents a share, which is a penny higher than one year ago. I’m expecting 50 cents a share. There’s a lot to like about BBBY. The balance sheet has $857 million in cash, or $3.27 a share, and zero debt. In July, the company was highlighted in Barron’s and Time.
  The smart thing that BBBY did was to fight Linens ‘N Things on price. The downside is that there are too many coupons out there and it’s hurting their margins. Net margins for the last four quarters are down to 6% compared with 10% four years ago. That effectively erases the benefits of 66% jump in sales.

• Quote of the Day
  Eddy Elfenbein, September 20th, 2009 at 12:44 pm

  From David Merkel:

  Auction rate preferred securities — when I was younger, I wondered how they worked. By the time I figured that out, the market failed.

• David K. Levine Responds to Krugman
  Eddy Elfenbein, September 19th, 2009 at 12:19 pm

  At the Huffington Post:

  More to the point: our models don’t just fail to predict the timing of financial crises – they say that we cannot. Do you believe that it could be widely believed that the stock market will drop by 10% next week? If I believed that I’d sell like mad, and I expect that you would as well. Of course as we all sold and the price dropped, everyone else would ask around and when they started to believe the stock market will drop by 10% next week – why it would drop by 10% right now. This common sense is the heart of rational expectations models. So the correct conclusion is that our – and your – inability to predict the crisis confirms our theories. I feel a little like a physicist at the cocktail party being assured that everything is relative. That isn’t what the theory of relativity says: it says that velocity is relative. Acceleration is most definitely not. So were you to come forward with the puzzling discovery that acceleration is not relative…
  Of course some people did predict the crisis. Some might even have been smart enough to know that if they consistently predict the opposite of a consensus point forecast, eventually they will be right when everyone else is wrong. If I say every year: there will be war; there will be an asset market crash; there will be a recession; there will be famine; we will run out of oil – eventually I’ll be right. These kind of predictions are only meaningful if more people than can be attributed to random good luck got it right at the right time or if whatever method they used to reach that conclusion is replicable. Or does the ability to replicate results fall under the category of “not very interesting because that would be an elegant theory?”

• Trader Quits Job to Run Hot Dog Stand
  Eddy Elfenbein, September 18th, 2009 at 4:37 pm

  This doesn’t seem kosher:

  “I’ve heard lots of people moaning about their jobs,” said Mr Brause. “As soon as people get to management level they dream of this, and this was a dream of mine for a while because I was pretty fed up with my job too. The office politics was terrible.”
  But as the sausages sizzled on a hot plate, Thomas said quitting his high-powered job had not made life less stressful.
  “I work 14-hour days,” he said. “I get up at 0530. This is more stressful than before! I did my previous job for 24 years so I was very used to it. Now, I have to learn a lot of things and cope with circumstances I’ve never seen before.
  “But I would say I’m happier. If you’re not happy with your job, it’s bad for you. I lost everything but it was an opportunity. So now I’m here – and I’ll see where I am in a year’s time.”

• Beeker Goes Down
  Eddy Elfenbein, September 18th, 2009 at 4:26 pm

  
  From Dennis Kneale: “newflash to friends fans & foes: my 8pm show, “cnbc reports,” just got cancelled. let the blogosphere dance with joy! me? i’m devastated.”
  Finally. I hope the network moves toward the kind of journalism that David Faber does, and away from the gimmicks of Kneale.