Author Archive

  • First Marblehead
    , December 15th, 2005 at 2:25 pm

    Is First Marblehead (FMD) a screaming buy?
    Tom Brown, of BankStock.com, is one of my favorite banking analysts. He’s been a super bull on shares of First Marblehead for a long time. The company is a servicer of student loans. In June, the stock plunged after one of its clients, Collegiate Funding Services (CFSI), said it was going to offer its own private student-loans product.
    Shares of FMD are being hit again today as JPMorgan Chase (JPM) said it’s going to buy out Collegiate Funding. What does Brown have to say? “In all, this deal makes me more positive than ever on First Marblehead.” You can read the rest of his commentary here.

  • Charles Schwab Jumps to NASDAQ
    , December 15th, 2005 at 12:51 pm

    Charles Schwab (SCH) has decided to abandon the NYSE for the NASDAQ. That’s a nice victory for the Naz to get one of Wall Street’s own. The new symbol will be SCHW.

  • Not Satire But French
    , December 15th, 2005 at 12:46 pm

    A dumb French law is upsetting a dumber European Commission.

    France warned over ban on stock market listing for sports clubs
    The European Commission has decided to ask France formally to modify its legislation preventing football and other sports clubs from being listed on stock markets. It sees this as an unjustified barrier to the free movement of capital, in breach of the EC Treaty (Article 56).
    The Commission’s request is in the form of a reasoned opinion, the second stage of the infringement procedure under Article 226 of the Treaty. If France does not respond satisfactorily within two months, the Commission may decide to refer the case to the Court. Contacts with the French authorities will continue to see if a solution can be found, compatible with Community law.
    According to Le Monde, the French minister for sport reacted by saying that discussions would be taking place in the coming weeks to find a solution in line with both EU law and the “specificity of French sport”.

  • “I wait for the blowup, then invest”
    , December 15th, 2005 at 12:40 pm

    Fortune talks with Richard Rainwater.

    Rainwater is no crackpot. But you don’t get to be a multibillionaire investor—one who’s more than doubled his net worth in a decade—through incremental gains on little stock trades. You have to push way past conventional thinking, test the boundaries of chaos, see events in a bigger context. You have to look at all the scenarios, from “A to friggin’ Z,” as he says, and not be afraid to focus on Z. Only when you’ve vacuumed up as much information as possible and you know the world is at a major inflection point do you put a hell of a lot of money behind your conviction.
    Such insights have allowed Rainwater to turn moments of cataclysm into gigantic paydays before. In the mid-1990s he saw panic selling in Houston real estate and bought some 15 million square feet; now the properties are selling for three times his purchase price. In the late ’90s, when oil seemed plentiful and its price had fallen to the low teens, he bet hundreds of millions—by investing in oil stocks and futures—that it would rise. A billion dollars later, that move is still paying off. “Most people invest and then sit around worrying what the next blowup will be,” he says. “I do the opposite. I wait for the blowup, then invest.”
    The next blowup, however, looms so large that it scares and confuses him. For the past few months he’s been holed up in hard-core research mode—reading books, academic studies, and, yes, blogs. Every morning he rises before dawn at one of his houses in Texas or South Carolina or California (he actually owns a piece of Pebble Beach Resorts) and spends four or five hours reading sites like LifeAftertheOilCrash.net or DieOff.org, obsessively following links and sifting through data. How worried is he? He has some $500 million of his $2.5 billion fortune in cash, more than ever before. “I’m long oil and I’m liquid,” he says. “I’ve put myself in a position that if the end of the world came tomorrow I’d kind of be prepared.” He’s also ready to move fast if he spots an opening.

  • Today’s Inflation Report
    , December 15th, 2005 at 12:34 pm

    The government reported that inflation last month was the lowest since the Truman administration. I don’t get too worked up over the monthly inflation reports. I think too many market watchers overrate the threat of inflation.
    The fact is that we haven’t had a serious inflation problem in over 20 years. Some prices will rise and fall, but in general inflation isn’t a problem. When you look at the “core rate” of inflation, which excludes food and energy prices, inflation has been well-contained for a long time.
    Don’t get me wrong. Inflation is bad news. What Kryptonite is to Superman, inflation is to stocks. But as for now, there’s no real threat of inflation on the horizon.

  • James Grant on Central Bankers
    , December 15th, 2005 at 10:09 am

    From Forbes:

    When interest rates were falling and inflation was subsiding for most of the past quarter-century, the reputation of the world’s central bankers was inflating. No more the bungling authors of the Great Inflation of the 1970s, the likes of Trichet (and, of course, Alan Greenspan) were triumphantly rehabilitated. In April the government of France was able to borrow for 50 years at 4% in euros, a currency that has been in physical existence for only four years. Has any prettier compliment ever been paid to a steward of paper money?
    “Monetary policy needs to be forward-looking,” said Rachel Lomax, deputy governor of the Bank of England, in a March speech, “because interest rates act with a lag. No monetary policymaker can avoid taking a view of the future.” The British central banker’s words sum up the difference between Warren Buffett, appraiser of values, and Alan Greenspan, stargazer.
    Instead of guessing about the future, value-minded investors observe the present, in company-specific terms: What is a business worth? What does it own, and what does it owe? What does it earn? They invest in what they can see, not in what they imagine they can predict.
    The world over, measured inflation rates are running neck-and-neck with nominal interest rates. It’s a race that interest rates are bound to lose. At the very least, no saver listening carefully to the noises emanating from governments and central banks can harbor much optimism about earning a satisfactory inflation-adjusted rate of return.

  • NYT: Greenberg Cheated Defrauded Foundation
    , December 15th, 2005 at 9:49 am

    Hank Greenberg, the former head of AIG, was a Wall Street icon for decades. Today Gretchen Morgenson reports that Spitzer is on his tail and it doesn’t look good for Hank:

    Eliot Spitzer, the New York attorney general, submitted a report yesterday as part of his lawsuit against Maurice R. Greenberg, the former chief executive of American International Group, contending that Mr. Greenberg unfairly enriched himself and other A.I.G. executives in a series of transactions that violated the will of Cornelius Vander Starr, the company’s founder, and defrauded a foundation he created.
    The questionable transactions took place more than 35 years ago as the far-flung insurance operations built by Mr. Starr starting in 1919 were being melded into A.I.G., the report said. After Mr. Starr died in 1968, Mr. Greenberg and his colleagues, as executors of his estate, benefited by selling assets at fire-sale prices to companies they controlled, it stated.
    Almost immediately, the report said, these executives turned around and sold the assets at far higher prices to A.I.G., which then set some of them aside for use as a compensation pool for the company’s executives. Because those shares ultimately amounted to 12 percent of A.I.G.’s outstanding stock, Mr. Greenberg was able to cement his control of the company.
    According to the report, Mr. Greenberg and his associates cheated the Starr Foundation, set up by Mr. Starr to benefit educational and cultural institutions, by selling assets that were worth more than $30 million for just $2 million. The Starr Foundation is one of the largest charitable organizations in the nation, with $3.5 billion in assets.

  • The Market Today
    , December 14th, 2005 at 8:31 pm

    So…I saw Kong.
    My verdict: Two paws up. Way up.
    Special effects: Amazing. They even make it look like Jack Black “acts.” I couldn’t even see the strings.
    Naomi Watts: Fay who?
    Peter Jackson: Frickin genius. Lucusian.
    Criticisms: Not many. Kong is bit sensitive for my taste. You know, sunrises and bad poetry. A few scenes come close to being Kong & Maude. Personally, I like my Kongs rough around the edges. They should look and act like Soviet commissars. I’m old school that way.
    I won’t give away the ending, but the Empire State Building lives. Outside that, you’re on your own.
    By the way, don’t see it if you have a “thing” about giant insects swarming all over you and devouring your flesh. Just trust me.
    Speaking of which, on Wall Street today…
    The S&P 500 broke out to its highest close in over four years. The rally liveth. Bonds soared as the 10-year T-bond yield fell below 4.5%.
    All the sector spyders were up today except for the Material Spyders (XLB). As usual, the Energy Spyders (XLE) were the extreme. Almost everyday, they’re either the best- or worst-performer. Today, they were the best.
    Thanks to General Dynamics‘ (GD) purchase of Anteon (ANT), shares of CACI International (CAI) surged over 13.5%.
    Although the Nasdaq fell slightly today, the S&P 500 rose 0.42% and our Buy List added 0.95%. We gained our lead back for December, 2.41% to 1.86%.

  • Time Warner to Sell Braves
    , December 14th, 2005 at 3:14 pm

    Case and Icahn are already having an impact on Time Warner (TWX). Dick Parsons is going to sell the Atlanta Braves. Wouldn’t it be funny if A-Rod bought them? He could probably swing it.

  • The Plunging Price of Risk
    , December 14th, 2005 at 1:07 pm

    There’s a major bear market going on, but most investors don’t see it. It’s not the stock market, but it’s in the stock market. The price of one of the most important commodities has fallen dramatically and it’s having a major impact on your investments. It’s the price of risk. The free market prices risk-taking just like it does everything else—and right now, risk-taking ain’t worth a whole lot.
    First, let me back up and explain what I mean. Risk is a funny concept and it confuses many investors (including some pros). When we talk of risk we mean two things: The chance that something will happen, and the consequences of it happening.
    Let’s assume there are two companies that are similar in every way. Both are expected to earn $1 a share next year. But Company A is expected to earn $1 a share, plus or minus a penny, and Company B is expected to earn $1 a share, plus or minus 10 cents. Which one will have the higher share price? The market will usually give a premium to Company A. Why? Because the market favors certainty—even if the expected payoff it equal. Amos Tversky said that people don’t mind uncertainty so much, but they HATE to lose. As a result, the risk-takers need to be paid.
    We can’t see it, feel it or hear it, but risk is ever-present. Risk can be worth untold billions and it’s traded everyday. You use it in nearly economic decision you make. Looking at Companies A and B, the question arises, “how much of a premium should Company A receive?” Well in today’s market, that premium is low.
    Here’s another good example. Today, you can buy a one-year Treasury bill with a yield of about 4.30%. If you want a 30-year Treasury bond, you’d get a yield of about 4.64%. Not much difference. The risk-taker—the one sacrificing her money for 29 years longer than the non-risk taker—is only being paid 0.34% a year for her efforts.
    If people aren’t paid to take risks, guess what? They don’t take them! The economy has a love/hate relationship with risk-takers. It’s sort of a Prisoner’s Dilemma writ large. Taking risks is what ultimately moves the entire economy along. You can even view the markets as one giant risk-control machine.
    Time risk is just one risk, but there are many, many others. That’s another odd thing about risk. We use one word when we’re really referring to many different things. This is another way in which risk confuses us. James Glassman and Kevin Hassett conflated two different types of risks in their book “Dow 36,000,” which argued that the market was greatly undervalued. (It wasn’t.)
    In addition to time risk, bonds also have default risk. But in this bear market for risk, it seems to be hitting the price for all risks. The low price of default risk can be seen by comparing corporate bond yields with government yields. Corporate bonds aren’t guaranteed, but government bonds are (the government conveniently controls the printing press). The average spread between corporate AAA bonds and a 10-year Treasury is now less than 100 basis points (or 1%). Not too long ago, it was more than twice that. And after 9/11, the price for risk-taking exploded. The spread reached over 260 basis points. The spread for the riskiest bonds, junk bonds, has widened some this year, but it’s still lower than the historical average.
    Then there’s also the VIX (^VIX). The VIX measures the implied volatility of stock prices. This is still risk, but it’s yet another kind. We can determine implied volatility by looking at how much option traders are demanding for risk. Right now, the volatility of the stock market is low. Very low. The current VIX reading is below 11, and it’s close to its lowest readings since the rock-bottom days of the mid-90’s. Back in the bubble days, it was common to see the VIX sail over 40.
    Stock volatility isn’t necessarily tied to other risk prices, like the yield spreads. After all, we had a flat yield curve when the VIX was soaring. But why is everything coming together right now?
    Look at how the major stock industry groups are behaving (I’ve talked about this before). Except for energy, the industry groups are acting very much like each other. They’re just bunching together. Normally, market sectors show some correlation, but nothing this strong.
    In 1999, the beta (a measure of systemic risk) of the S&P 500 Tech Index (^SPLY) was 1.47. In 2000, it was 1.79. This year, it’s 1.06. I don’t think this is a bad thing, and I tend to avoid seeing timing opportunities in this. But it’s a darn curious thing to see. Risk, across the board, is retreating.
    I don’t have an answer, but here are a few thoughts. Perhaps the U.S. markets are exporting risk to the emerging economies in exchange for our ballooning trade deficit. Risk tends to follow opportunity. As our economy has become more stable, we don’t have the need for large risk premiums. So we trade it with economies like China. Markets in Latin American have been particularly strong this year. We need their goods, they need our risk.
    Then there’s the curious issue of gold. Why is it soaring when inflation doesn’t seem to be upon us? Rates are still low and the dollar is rallying. What’s going on? Gold is a weird one for risk purposes. The price of gold is much more volatile than stock prices. That’s not surprising since it’s a popular vehicle for speculators. But gold is also the least risky asset, in terms of the chance of losing its intrinsic value. Perhaps the rally in gold isn’t a bellwether of inflation, but a reckoning for the risk market.