Lockhart: Time to Start Thinking About Raising Rates
Posted by Eddy Elfenbein on June 3rd, 2010 at 9:54 am

I’ve been saying that the Federal Reserve will probably raise interest rates before most people expect. Since last March, we’ve been in a Golden Period for stocks investors with very low interest rates and steeply low equity prices. Of course, equity prices are now no longer as low as they used to be. This may soon come to an end and today we got confirmation from Dennis Lockhart, the president of the Atlanta Fed.

The U.S. economy is almost strong enough to allow the Federal Reserve to begin thinking about raising interest rates, Atlanta Fed President Dennis Lockhart said on Thursday.
While he noted unemployment would likely remain elevated for some time, Lockhart said the U.S. central bank should not wait too long before beginning to tighten the reins.
“The time is approaching when it will be appropriate to consider recalibrating interest rate policy. I do not believe that time has yet arrived,” Lockhart told .
“As the economy continues to improve and financial markets find firmer ground, extraordinarily low policy rates will not be needed to promote recovery and will become inconsistent with maintaining price stability.”
In response to the most severe financial crisis in generations, the Fed not only slashed interest rates effectively to zero but also undertook a host of emergency measures such as buying up Treasury and mortgage bonds.
Lockhart’s comments mark a significant change in tone for the regional Fed president, who has been among the most dovish on the central bank’s policy in recent months. They suggest firmer growth in the United States is catching the attention of Fed policymakers, despite the renewed risks to the outlook from the turmoil surrounding European debt markets.

The timing of a rate increase is still an issue. I think it could happen by the end of the summer. I also think the Fed may raise the Fed Funds rate by 50 or 75 basis points.

Bullet Bob Feller
Posted by Eddy Elfenbein on June 2nd, 2010 at 2:56 pm

At my town’s Memorial Day parade, I caught a glimpse of 91-year-old baseball great Bob Feller, the pride of Van Meter, Iowa. He was born eight days before Armistice Day.
Feller rocked the baseball world during the summer of 1936 when he debuted for the Cleveland Indians at the tender age of 17. He won his first start as he struck out 15 St. Louis Browns. Three weeks later, he struck out 17 Philadelphia Athletics (while walking nine).
Over his career, Feller pitched three no-hitters including the only one thrown on Opening Day. He also tied the record for throwing 12 one-hitters.
The day after Pearl Harbor, Feller joined the U.S. Navy. He was the first major leaguer to volunteer for combat service. Feller served on the USS Alabama.
After the war, he returned to baseball and struck out 348 batters in 1946. He probably would have broken a lot of records had it not been for the war. Feller also helped the Tribe win the 1948 World Series (they haven’t won one since).

The Decline and Fall of Fannie Mae
Posted by Eddy Elfenbein on June 2nd, 2010 at 12:16 pm

Yesterday, shares of Fannie Mae (FNM) closed at 93 cents. That’s a gigantic fall from the stock’s high of $87.
Still, it’s important to remember how successful Fannie Mae had been in the years before its undoing. In 1981, you could have picked up a share of FNM for just 53 cents (adjusted for splits). So after nearly 30 years, you’d have a 75% profit not including dividends.
Maybe that’s a small consolation but it’s something to think about.

Joe Bank Earns 85 Cents a Share
Posted by Eddy Elfenbein on June 2nd, 2010 at 9:47 am

I was wrong about JoS. A. Bank Clothiers (JOSB). I was expecting the company to beat earnings by four cents per share. Instead, they beat by 14 cents per share. I’ll try to do better next time:

Clothing maker JoS. A. Bank Clothiers Inc. said Wednesday its fiscal first-quarter net income rose 38 percent as revenue improved.
Net income for the quarter ended May 2 rose to $15.8 million, or 85 cents per share, from $11.5 million, or 62 cents per share, last year.
Revenue rose 10 percent to $178.1 million from $161.9 million from last year.
Analysts polled by Thomson Reuters, on average, predicted a profit of 71 cents per share on revenue of $175.3 million.
Revenue in stores open at least one year, a key measure of a retailer’s financial health, rose 10.4 percent.
JoS. A. Bank operates 479 stores in 42 states and the District of Columbia.

Stocks and Hemlines
Posted by Eddy Elfenbein on June 1st, 2010 at 5:29 pm

The New York Times reports that lower hemlines are in. Devotees of the Hemline Theory believe that hemlines tend to be follow the opposite of equity prices.

At Least It’s a Profit
Posted by Eddy Elfenbein on June 1st, 2010 at 5:07 pm

The Buy List is positive for the year…by 14 basis points!!
But we’re still over 400 points ahead of the market.

HP to Cut 9,000 Jobs
Posted by Eddy Elfenbein on June 1st, 2010 at 2:17 pm

Here’s a post which I’d call “thinking out loud” since I can’t decide where I stand. Hewlett-Packard (HPQ) announced today that it’s cutting 9,000 jobs.

HP will take a $1 billion charge for paying severance and modernizing its data centers to provide more automated services to customers, it said today in a regulatory filing. The Palo Alto, California-based company plans to replace about 6,000 of the eliminated positions with workers in different countries.
“These sets of actions will enable HP to grow better than the market,” Ann Livermore, executive vice president for enterprise business, said today on a conference call. “This is a substantial opportunity for us and something that we think is a good opportunity for our clients as well.”
The job cuts come after HP raised its 2010 forecast last month for the third time since November as results beat analysts’ estimates on a revival in business spending. Chief Executive Officer Mark Hurd has expanded into more profitable services as the recession crimped corporate budgets for equipment. He bought Electronic Data Systems Corp. for $13.2 billion in 2008, vaulting HP to No. 2 in services behind IBM.

I’m a big fan of Mark Hurd. He’s done a great job in turning HPQ around after the disastrous tenure of Carly Fiorina (who will probably win California’s GOP Senate primary one week from today). Turnarounds rarely work but this one has. HPQ earnings have grown steadily over the past few years and the stock has outperformed a dismal market.
My worry is that the company might be taking on more than it can afford. I’m not thrilled with the EDS buy and I hate (HATE) the Palm buy. Still, leadership counts and I’m leaning towards trusting that Hurd knows what he’s doing. And as today’s news shows, the company hasn’t grown complacent.

Depressing Stat of the Day
Posted by Eddy Elfenbein on June 1st, 2010 at 1:25 pm

Here’s the inflation-adjusted total of the S&P 500. Even after an impressive rally, we’re still where we were more than 12 years ago.

ISM = 59.7
Posted by Eddy Elfenbein on June 1st, 2010 at 11:53 am

The Institute for Supply Management’s manufacturing gauge came out today and it was 59.7. Any reading above 50 indicates an improving economy. This was slightly down from the previous report of 60.4.

As I’ve written before, the ISM is one of the best reports for telling us if the economy is in a recession or not. Historically, the tipping point has been around 44-45. Reading below that have come during recessions, and above we’re in recovery. I continue to believe the Federal Reserve will raise interest rates before most people expect.

Debtor Nation
Posted by Eddy Elfenbein on June 1st, 2010 at 11:37 am

The NYT profiles a young woman who just graduated from NYU. She’s $97,000 in debt.
This is a scandal. It’s not merely lousy finance, but it’s also wrong to pile up debt on young people who may not realize the burden they’re placing on their future selves. Here’s what I wrote last year:

Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit. The problem is compounded by the fact that hugely important financial decisions are placed on the backs of 19-year-olds, many of whom simply don’t have the life experience to weigh the implications of a gigantic, 20-year debt load. Heck, at least the irresponsible mortgage borrowers during the crazy days were adults (even though many acted like infants).
One report shows that students from lower-income families need to pay 40% of their family income to enroll in a public four-year college. That’s a lot of coin to have some Marxist feminist theorist tell you about atavistic nature of late-stage capitalism. Please, you can watch the Oscars to learn that. Don’t think community colleges are a bargain, either. The average tuition is up to 49% of the poorest families’ median income from 40% in 1999-2000.
The pro-college crowd likes to repeat the claim that college grads earn $1 million more, on average, over their working lifetime. Sure, this is true, but college grads start out in a big hole. On average, they don’t even catch up to high school grads until age 33.
The debt load piled on students is scandalous. One in five students who graduated in the 1992–93 school with over $15,000 in debt defaulted on his or her loan within 10 years of graduation. We’re setting young people up for failure and ruin credit records. Thanks to the recession defaults are up 43% over the last two years. Many students go to grad school and pile on even more debt. The average law grad owes $100,000. Plus, many schools often use grad students as greatly underpaid professors in order to cut costs. Think of Lehman Brothers. Now imagine if they had a football team.