Stiglitz on Skidelsky on Keynes
Posted by Eddy Elfenbein on April 24th, 2010 at 8:08 pm

Here’s a good weekend read. This is Joseph Stiglitz’s review of Robert Skidelsky’s Keynes: The Return of the Master. Here’s a snippet:

It has become a commonplace to say, in the aftermath of the Great Recession, that ‘we are all Keynesians now.’ If this is so, then Keynes’s great biographer, Robert Skidelsky, should have much to say about the recession, its causes and the appropriate cures. And so indeed he does. I share with Skidelsky the view that, while most of the blame for the crisis should reside with those in the financial markets, who did such a poor job both in allocating capital and in managing risk (their key responsibilities), a considerable portion of it lies with the economics profession. The notion economists pushed – that markets are efficient and self-adjusting – gave comfort to regulators like Alan Greenspan, who didn’t believe in regulation in the first place. They provided support for the movement which stripped away the regulations that had provided the basis of financial stability in the decades after the Great Depression; and they gave justification to those, like Larry Summers and Robert Rubin, Treasury secretaries under Clinton, who opposed doing anything about derivatives, even after the dangers had been exposed in the Long-Term Capital Management crisis of 1998.
We should be clear about this: economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the ‘efficient market’ doctrines, even before they became fashionable in the Reagan-Thatcher era. Bruce Greenwald and I had explained that Adam Smith’s hand was not in fact invisible: it wasn’t there. Sanford Grossman and I had explained that if markets were as efficient in transmitting information as the free marketeers claimed, no one would have any incentive to gather and process it. Free marketeers, and the special interests that benefited from their doctrines, paid little attention to these inconvenient truths.

Check out the whole thing.

Felix Salmon: Goldman Sachs’s reputation is tarnished
Posted by Eddy Elfenbein on April 23rd, 2010 at 10:47 pm

Writing in the Washington Post, Felix Salmon says that the SEC’s charges against Goldman Sachs have tarnished the firms reputation.

The SEC, in making its complaint public instead of trying to quietly settle with Goldman, has used its subpoena power to put an end to the firm’s reputation once and for all. Among other things, the agency uncovered a series of damningly glib e-mails from a trader who referred to himself as “the fabulous Fab.”
And so far, Goldman’s desperate response has only made matters worse. It tried to paint a veteran saleswoman as someone who couldn’t understand simple e-mails about corporate structure. It used the word “sophisticated” 18 times in a single document, trying to shift the blame onto the victims of its scheme, because, well, they were sophisticated. And when its general counsel came onto its quarterly earnings call last Tuesday, he refused to answer most questions. The overriding impression Goldman is creating is one of a panicked company caught with its pants down — not of a professional banking organization rising effortlessly above the fray.
Goldman’s clients have known for years that the long-term-greedy investment bankers of the past were being marginalized by the short-term-greedy traders who have taken over the company’s upper echelons. But the company’s mystique overwhelmed this knowledge. Clients flocked to Goldman anyway, sometimes against their better judgment.
They won’t be doing that anymore: Goldman’s competitors will make sure of it. On the Friday that the SEC charges were announced, and again on the following Sunday, Blankfein left voicemail messages for all the firm’s employees, saying, in his characteristically combative way, that Goldman would fight the charges.

Ultimately, what a bank sells is trust so once you lose that, you’re out of business. Still, I think Felix overstates the case against Goldman. This isn’t over by along shot and Goldy still has a large reservoir of respect and admiration on Wall Street.
I’ve said before that Goldman has become the SEC’s “Great White Defendant.” I don’t think Goldman is a Buy but I wouldn’t sell them short either, literally or figuratively.

Quote of the Day
Posted by Eddy Elfenbein on April 23rd, 2010 at 11:32 am

The NYT reports on an IM written by an employee at S&P:

“We rate every deal. It could be structured by cows and we would rate it.”

Remember when it was all about bulls and bears, not cows and squids?
(HT: TBI)

Precision Castparts +300,000%
Posted by Eddy Elfenbein on April 23rd, 2010 at 7:54 am

Precision Castparts (PCP) had a pretty good day yesterday. It hit a new 52-week high and it looks like it’s on track for a new all-time high. Here’s a chart of the stock going back to 1974.

Precision Castparts has beaten the S&P 500 by such a dramatic margin that the index looks like a flat line in comparison.

SEC Employees Watched Porn as Economy Crashed
Posted by Eddy Elfenbein on April 22nd, 2010 at 8:54 pm

So this is why they missed Madoff (…and Stanford and Enron and and Rothstein and WorldCom and…well, you get the point):

An agency watchdog says senior employees of the Securities and Exchange Commission spent hours surfing pornographic websites on government-issued computers while they were being paid to police the financial system.
SEC Inspector General David Kotz says in a memo obtained by The Associated Press that the behavior violates agency and government-wide ethics rules.
The memo reports 33 violations in the past five years — 31 of which took place in the two and a half years since the financial system teetered and nearly crashed.
It says one supervisory accountant looked at pornographic websites about twice a day and saved images on his SEC computer to view during work hours.

I hope everyone got their taxes in on time!
In other news: “Firm used debt proceeds for strippers, payroll”

The Securities and Exchange Commission filed an emergency enforcement action on Tuesday to halt an alleged fraudulent scheme by two owners of an Albany, New York, brokerage who sold debt in unregistered offerings and used the proceeds for its operations and to hire strippers.
Chairman Timothy McGinn and President David Smith, owners of McGinn, Smith & Co Inc, sold about $120 million in more than 25 unregistered debt offerings, according to a complaint filed in a New York federal court.
The proceeds, not enough to repay investors their principal or interest payments, went to supporting the firm’s struggling operations and to meet payroll, the SEC said.
They also used funds to hire strippers for a “sexually themed cruise” and other personal activities.
“McGinn and Smith deceived investors about the true purpose behind these offerings,” said Andrew Calamari, associate director of the SEC’s New York regional office. “They falsely promised investors a profitable payday but secretly siphoned off money for their own payroll.”

Diversity Helped Us Out Today
Posted by Eddy Elfenbein on April 22nd, 2010 at 5:59 pm

Today was a good lesson on the benefits of diversification. Even though Baxter International (BAX) got severely pounded (-13.3%), our Buy List, as a whole, didn’t do so poorly. All told, we were down -0.20%.
It’s not great but it could have been a lot worse. Several of our stocks closed at new 52-week highs like Bed, Bath & Beyond (BBBY), Fiserv (FISV), Joe Banks (JOSB), Sysco (SYY) and Wright Express (WXS). Plus, Reynolds American (RAI) and SEI Investments (SEIC) made new highs earlier in the day.
Joe Banks is now a 51.62% winner on the year for us. Also, if you’re looking for a solid dividend, you might want to check our Reynolds American. The current yield is about 6.3%.
Finally, Barron’s had some nice things to say about Gilead:

HIV drugs are Gilead’s bread and butter. The company’s top two HIV treatments — Truvada and Atripla — accounted for 69% of revenue in 2009. Strong demand for the drugs has helped Gilead build a cash hoard of $4.6 billion. Sales of the company’s antiviral products rose 19% in the first quarter.
But with patent expirations looming over the next decade for the company’s top three HIV drugs, investors are no longer giving the company full credit for its powerful earnings stream. The stock fetches just 11.2 times 2010 estimates.
Carr says the market is overlooking the company’s recent progress on follow-on drugs to the current regimen. “Assuming development continues to go well, they will be on the market and well established before Atripla patent expiration,” Carr says.
Gilead is already the dominant leader in HIV treatment. In the U.S., for instance, of the 581,000 patients being treated for HIV, 76% of those patients are on a Gilead product, the company says.
Gilead’s key advantage is its unique once-a-day HIV pill. “Right now they have the best shot at launching the next two one-pill-once-a-day drugs for HIV,” Carr adds.
As the company’s pipeline comes into focus over the next year, investors’ confidence in Gilead should improve, driving the price/earnings multiple higher.

Just So I Have This Right…
Posted by Eddy Elfenbein on April 22nd, 2010 at 2:21 pm

Netflix (NFLX) increased the top end of its full-year guidance by 13 cents per share, and the stock responded by rising 1,500 cents per share. That’s a marginal P/E Ratio of…OMG…and it comes on top of an already richly valued stock.
I admit I was wrong today and offer my congratulations to the longs. Admitting your errors is important. I haven’t changed my outlook. I still believe Netflix is a Strong Sell and now, only more so.
There’s an important lesson here and that it’s hard to argue with an irrational mob. Under the Deep Market Truths I posted recently, I wrote “a trend can last much longer than you thought possible.”

President Obama’s Speech
Posted by Eddy Elfenbein on April 22nd, 2010 at 12:24 pm

Here’s the text of the speech President Obama gave today at Cooper Union:

It’s good to be back in the Great Hall at Cooper Union, where generations of leaders and citizens have come to defend their ideas and contest their differences. It’s also good being back in Lower Manhattan, a few blocks from Wall Street, the heart of our nation’s financial sector.
Since I last spoke here two years ago, our country has been through a terrible trial. More than 8 million people have lost their jobs. Countless small businesses have had to shut their doors. Trillions of dollars in savings has been lost, forcing seniors to put off retirement, young people to postpone college, and entrepreneurs to give up on the dream of starting a company. And as a nation we were forced to take unprecedented steps to rescue the financial system and the broader economy.
As a result of the decisions we made – some which were unpopular – we are seeing hopeful signs. Little more than one year ago, we were losing an average of 750,000 jobs each month. Today, America is adding jobs again. One year ago, the economy was shrinking rapidly. Today, the economy is growing. In fact, we’ve seen the fastest turnaround in growth in nearly three decades.
But we have more work to do. Until this progress is felt not just on Wall Street but Main Street we cannot be satisfied. Until the millions of our neighbors who are looking for work can find jobs, and wages are growing at a meaningful pace, we may be able to claim a recovery – but we will not have recovered. And even as we seek to revive this economy, it is incumbent on us to rebuild it stronger than before. That means addressing some of the underlying problems that led to this turmoil and devastation in the first place.

Read more…

Don’t Pity Goldman’s Victims
Posted by Eddy Elfenbein on April 22nd, 2010 at 11:54 am

John Carney has a great piece in the Daily Beast pointing out that the alleged victims of Goldman Sachs were hardly victims:

The crucial question in the SEC’s case against Goldman is whether Rhineland should have been told that Paulson was ultimately the short-seller in this deal or that he had played an important role in selecting the securities that went into Abacus. While it’s not clear that in 2007 anyone would have been worried about a little-known hedge fund being short a deal if they weren’t already worried about Goldman being short, Rhineland certainly should have asked how the portfolio was constructed.
So why didn’t Rhineland—or the managers who controlled it from Dusseldorf—make these inquiries? Most likely, because IKB was playing the game even more aggressively.

Fortunately, David Letterman has Goldman’s Top 10 excuses:

J&J’s Amazing Dividend Streak Continues
Posted by Eddy Elfenbein on April 22nd, 2010 at 10:39 am

Johnson & Johnson (JNJ) just announced its 48th straight annual dividend increase. The company is raising its quarterly dividend by 10.2%, increasing it from 49 cents per share to 54 cents per share. I’ll give Alan Brochstein credit for getting it right on the nose. The stock now yields 3.3%.
As I pointed out earlier, a person who bought JNJ 25 years ago is now getting close 100% a year just in dividends.