Author Archive

• Assorted Links
  Eddy Elfenbein, June 9th, 2011 at 12:21 am

  Here are a few unconnected items that I wanted to pass on.

  The first is an interesting post from Andrew Ross Sorkin at DealBook that defends Goldman’s ($GS) CEO Lloyd Blankfein from the charge of lying to Congress. Sorkin is careful to say that Goldman did a lot of bad things, but if you look at what he said, it stands up to the facts:

  Based on the subcommittee’s report, which was referred to the Justice Department, I wrote a column raising questions about Mr. Blankfein’s comments. At the time, his testimony seemed ridiculous in the face of evidence that Mr. Levin presented, which showed that the firm had regularly made large bets against the subprime market.

  But upon further reporting — talking with executives at Goldman, who pointed me to other documents, and with officials in Washington, and then poring through the report, following the footnotes to the original sources and then cross-referencing them against other public records — I have come to a different and perhaps unsatisfying conclusion for those readers looking for a big scalp: Mr. Blankfein wasn’t lying.

  This is interesting for several reasons. The first is that Goldman is the most prestigious house on Wall Street so anything they do is important. But it’s also noteworthy because Goldman is so widely hated and many of the charges against them are absurd. I have no independent feelings for Goldman but as an investor, I keep my eyes open for opportunities where perception and reality part ways.

  The next is Ben Bernanke’s speech the other day. Some people’s reaction to Bernanke is similar to their reaction to Goldman Sachs. There’s plenty of room to criticize the Fed, but I like hearing Bernanke’s speeches. I’m always amazed at the difference between what Bernanke says and what people say he says. He’s very clear about views and what his goals are.

  Bernanke is up front that the economy isn’t doing well and he explains why, but he also says that the economy should pick up in the second half of the year. We’ll see. He also goes into a detailed explanation of what’s driving commodity prices higher. The speech is long but it will give you a good idea of what Bernanke thinks.

  At the end of Bernanke’s speech, JPMorgan’s CEO Jamie Dimon asks a question (well, more like makes a statement):

  We’re glad to see Jamie come out of his shell.

• Remember That GM IPO?
  Eddy Elfenbein, June 8th, 2011 at 11:18 am

  From the Washington Post of November 27, 2010:

  GM reclaimed its old stock ticker with fanfare last Thursday after weeks of anticipation on Wall Street. The company could barely keep up with demand for the newly issued stock as investors clamored for a piece of the American icon. In response, during the week of the IPO, GM said it was expanding its offering by 31 percent.

  Unlike LinkedIn’s puny IPO, GM’s ($GM) was the biggest in history.

  

  As a general rule, IPOs are a bad deal for investors.

• Q1 Earnings Summary
  Eddy Elfenbein, June 8th, 2011 at 10:14 am

  The first quarter is now in the far distant past (in Wall Street time), but it was a very good earnings season. Dirk van Dijk looks at the details:

  The first quarter earnings season is almost done. We now have 496 (99.0%) of the S&P 500 reports in. Net income growth is 17.12%. While that is down from the extremely strong 30.9% that 495 of those firms posted in the fourth quarter, it is still a very strong growth rate. Almost all of the growth slowdown is from a failure of the Financial sector to repeat the massive growth they posted in the fourth quarter.

  It’s not that the Financials are having a bad quarter, but they do face much tougher comps this time around. The 8.7% year-over-year growth they are reporting is not exactly awful (although it is below the rest of the S&P 500), it is that it pales in comparison to the 161.8% growth posted in the fourth quarter. That is despite a very strong sequential growth of 22.0%.

  If we back out the Financials, total net income is up 19.2%, down just slightly from the 19.8% those firms reported in the fourth quarter. Looking ahead to the second quarter, growth is expected to continue to slow, falling 10.1%. Back out the Financials and growth is expected to be 12.6%.

  Before the first quarter earnings season started, it was expected that growth would be just 6.7% for the S&P 500 as a whole, and 10.2% excluding Financials. Given the upward estimate momentum (more below) it seems highly likely to me that the actual growth in the second quarter will be significantly higher than the 10.1%/ 12.6% now expected.

  Once again, the big story has been margin expansion but that trend is quickly coming to an end. Wall Street currently expects the S&P 500 to earn $95.49 for 2011 and $109.41 for 2012.

• It’s Even Worse Than I Thought
  Eddy Elfenbein, June 8th, 2011 at 9:19 am

  From Bloomberg:

  About 33 percent of investors surveyed said they didn’t know how they pay for the investment advice they receive, and 31 percent said they thought their adviser or broker provided investment advice for free. Those who were unsure of how they pay for advice were most likely to be unhappy with their financial adviser, with 47 percent reporting dissatisfaction, the study said. About 27 percent of those who said they pay commissions reported being dissatisfied.

  Thirty-one percent think their investment advice comes for free? Oh dear lord.

• Stocks and War
  Eddy Elfenbein, June 8th, 2011 at 8:05 am

  An academic paper looks at the war puzzle:

  We study a number of large international military conflicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the conflict will result in a war. We find that in cases when there is a pre-war phase, an increase in the war likelihood tends to decrease stock prices, but the ultimate outbreak of a war increases them. In cases when a war starts as a surprise, the outbreak of a war decreases stock prices. We show that this paradox cannot be explained by uncertainty about investment decisions, nor by the expectation about a quick end of the war or ambiguity aversion. A connection of this puzzling phenomenon to mean-variance preferences of investors is suggested.

  It doesn’t seem like much of a paradox to me. Investors get skittish during the run-up to war and then optimistic once the bombing starts. Why should we expect nationalist feelings to stop at the market’s edge?

  War may be hell as Sherman said but it’s also what Heraclitus said — the father of us all. Ultimately, war focuses a society and by extension, the state. That resolution is a major boost to optimism and that spills over into stocks.

  A perfect example of the sell-off during the run-up and buying spree once the war starts happened during the Iraq war more than eight years ago. Here’s how the S&P 500 performed in 2003 and 2004:

  

  The market made a low in July of 2002, then tested it in October and in fact made a new low. Then it went back to retest it again in March of 2003. This time, the old low held and the market turned north and didn’t stop for four years.

  We’ve also established a recent March pattern. The 2003 closing low came on March 11. In 2000, the closing high for the Nasdaq Composite came on March 10. Then in 2009, the S&P 500’s closing low came on March 9.

  I’ve often noticed that investors always feel that they want to “wait and see what happens.” The thing is, they always feel this way — as if a resolved answer will be known to all in a matter of days. It doesn’t work that way.

  I think that’s what causes the jitters during a run-up to war. Investors think that they ought to remain neutral and “see how this plays out.” When the war starts, it creates a buying storm as the market works to make up for lost ground.

  (HT: CXO Advisory)

• Morning News: June 8, 2011
  Eddy Elfenbein, June 8th, 2011 at 7:19 am

  Merkel Called to Explain Greek Aid as ECB Clash Looms

  Greek Jobless Rate Breached 16 Percent for First Time on Record in March

  IMF Signals Support For Japan Sales Tax Hike

  Emerging Nations Warm to Lagarde for I.M.F. Role

  Saudi Oil Min Met Separately With 4 Mins Who Resist OPEC Boost

  World Food Prices Linger Near Record as Meat and Dairy Costs Gain, UN Says

  No News Is New News For Sterling

  Bernanke Says ‘Uneven’ Recovery Still Needs Stimulus

  Shrinking Valuations Drive Bank Payroll Cuts

  Buyout Firms Beaten in Takeover Auctions

  California’s Blue Shield Caps Income and Pays Rebates

  India’s ONGC, GAIL Keen To Buy Exxon Mobil Stake In Kazakhstan Oil Field

  Hon Hai Says IPad Production Advances to Start Paying Off in Second Half

  James Altucher: Some People Were Upset At Me

  Phil Pearlman: The Financials Always Mattered

  Be sure to follow me on Twitter.

• I’m Back!
  Eddy Elfenbein, June 8th, 2011 at 6:19 am

  I’m back on the office after a wonderfully relaxing week in New England. I figured I could take off the week after Memorial Day — what could possibly go wrong? The S&P 500 has now dropped five days in a row and the index closed at its lowest level since March 18.

  We’re now up just 2.17% for the year. I say “just” 2.17% to contrast it from where we were, but in reality, 2.17 for just over five months is about what to expect for a long-term stock returns. It’s 5.08% annualized (not including dividends).

• Morning News: June 7, 2011
  Eddy Elfenbein, June 7th, 2011 at 7:06 am

  China Official Warns on “Excessive” Holdings of U.S. Assets

  Europe’s Banks Too Fragile to Afford Greek Default

  Oil Rises; SocGen Sees 65% Chance OPEC to Raise Output Quotas

  Investor Demand For A Safe Harbor Boosts Gold

  U.S. Stock Futures Gain; International Paper Climbs on Temple-Inland Bid

  The Economic Perfect Storm That’s Killing Consumer Spending

  Big Names in Tech Back AT&T’s T-Mobile Bid

  Deal to Sell Goldman Unit Said to Be Near

  Paul Kedrosky: Groupon’s Eric Lefkofsky, Then and Now

  Joshua Brown: “Breaking News”

  Be sure to follow me on Twitter.

• Morning News: June 6, 2011
  Eddy Elfenbein, June 6th, 2011 at 6:51 am

  Geithner May Back Lagarde at IMF to Keep American at World Bank

  Egypt to Obtain $3 Billion IMF Loan

  Ruble Depreciates to One-Month Low Against Euro as Greece Aid Hopes Rise

  Bank Shares Take a Beating, and It May Not Be Over Yet

  Statoil to Sell Pipeline Stake for $3.2 Billion

  Fed Exit Should Start ‘Long Before’ Jobs Recovery Is Assured, Plosser Says

  Treasury Yields Near Lowest This Year on Economy, Greek Concern

  Ritholtz Hedges His Bets

  Stone Street: The Bane of Bain’s China Aspirations?

  Epicurean Dealmaker: You All Know Brutus and Cassius Are Honorable Men

  Be sure to follow me on Twitter.

• Sunset In Maine
  Eddy Elfenbein, June 5th, 2011 at 10:52 pm

  

  Or New Hampshire just got nuked.