• Something’s Brewing in China
    Posted by on February 15th, 2010 at 11:09 am

    Goldman’s chief economist, Jim O’Neill, thinks China is about to revalue its currency by as much as 5%. This would be a huge deal.
    For the second time, China has ordered its banks to increase their reserves. The country is desperately trying to contain bank lending which is skyrocketing. Consider that in January alone, banks used up nearly one-fifth of this year’s lending target.
    For the last 18 months, China has firmly kept the yuan in place, but the cracks are starting to show. Their export market is booming and assets continue to inflate. Most importantly, the rest of the world isn’t happy with Beijing.
    If China did revalue the yuan, it would help cool off their economy, and it would help our economy which is something we desperately need.
    Why have the Chinese been so stringent? Let’s say you’re a communist official in Beijing. Which choice would you rather face? A) Millions of unemployed young men in your central cities. B) Anything that’s not A.
    Now you get the idea. The migration of people from rural China to their major cities isn’t merely big, it’s the largest migration in human history. Think of Tom Joad, now multiply that by 100.

  • Looking at the Fed’s Exit Strategy
    Posted by on February 15th, 2010 at 9:49 am

    Since the financial crisis began, the Federal Reserve has exploded its balance sheet from less than $1 trillion to over $2.2 trillion. Last week, Ben Bernanke discussed the Fed’s exit strategy. James Hamilton has an interesting take on what the Fed plans. Essentially, all of the strategies boil down to one thing—borrowing from the public.
    As Arnold Kling has noted, the Fed is doing something very different here. It’s moving away from its basic function of being a central bank:

    The Fed should be engaging in ordinary open market operations, which means buying Treasuries. The only reason to buy anything other than Treasuries would be if it ran out of Treasuries to buy and still could not meet its overall target–whether that target is for the money supply, nominal GDP, or some weighted average of inflation and unemployment.
    When the Fed instead is selling Treasuries or paying interest on reserves in order to sterilize the effect of buying other stuff, it is not being a central bank. It is being a piggy bank.

  • Odd Lots
    Posted by on February 12th, 2010 at 3:06 pm

    Poll: 79% of Democrats support “gays” in the military, but only 44% of Democrats support “homosexuals” in the military.

    Senator Kudlow?

    Ignore anyone who tells you that debt levels don’t matter    .
    36 songs that use the same 4 chords
    Superbowl team: online finance’s best I’m honored to have been named a Defensive Coach along with many outstanding blogs.
    Adam Corolla – Businessman
    Marijuana Farm Found Inside UK Bank

  • Quote of the Day
    Posted by on February 12th, 2010 at 10:43 am

    From Arnold Kling: “The Fed has changed from a central bank to a piggy bank.”

  • Wright Express Beats By Two Cents
    Posted by on February 12th, 2010 at 10:39 am

    On Wednesday, Wright Express (WXS), one of the new stocks on this year’s Buy List, reported Q4 earnings, after costs, of 56 cents a share which was two cents higher than estimates. For 2009, net income pre share rose to $2.18 from $1.88 last year.
    On the earnings call, this is what they had to say about future projections:

    For the first quarter of 2010 we expect to report revenues in the range of 82 to $87 million. This is based on an average retail sales price of $2.78 per gallon. For the full year 2010, we expect revenues ranging from 360 to $370 million based on an average retail sales price of $2.80 per gallon.
    In terms of earnings for Q1 of 2009 we expected to report adjusted net income in the range of $21 to $23 million or $0.53 to $0.58 per diluted share. We expected adjusted net income for the full year 2010 in the range of 89 to $97 million or $2.26 to $2.46 per diluted share and approximately 39 million shares outstanding.

    If we take $2.36 as the midpoint, that means the stock is going for about 12 times this year’s earnings. The stock dropped initially on the news but rallied back yesterday. So far, it’s our biggest loser of the year.

  • The S&P’s P/E Ratio Falls to 18
    Posted by on February 12th, 2010 at 9:13 am

    With the recent dip in the stock market, the P/E Ratio of the S&P 500 is now down to 18. That number, however, is a bit misleading since earnings are still in the process of recovering from a nasty downturn.
    Here’s a look at the S&P 500 (left scale) along with its earnings line (right scale). The two scales are plotted at a ratio of 16-to-1 so when the lines cross, the P/E Ratio is exactly 16. The future earnings line is S&P’s estimate.
    image906.png
    The total earnings for 2009 will be about $57. Bear in mind that at one point, Goldman Sachs thought that it would be $40. I still think stocks are a good buy, but this is an instance where looking at the P/E ratio doesn’t tell us much. The recent earnings trend is such an outlier. Naturally, if the earnings forecast holds up, then I would expect stocks to be much higher one year from now.
    Remember that stocks are best measured by their alternatives. In this case, I think the more telling metric isn’t the Price/Earnings, but the yield curve. The spread between the 30-year T-bond the 90-day T-bill is over 450 basis points, which is gigantic. Even at 5-years out, a Treasury only offers a yield of about 2.3%. With the kind of competition, stocks are the best investment.

  • Unraveling the Profit Puzzle at Goldman Sachs
    Posted by on February 12th, 2010 at 9:10 am

  • Despite 10,000, the Dow Has Been Beating the S&P 500
    Posted by on February 9th, 2010 at 11:48 am

    Yesterday, the Dow closed below 10,000 for the first time in three month. As far as indexes go, I’m not a big fan of the price-weighted Dow. The cap-weighted S&P 500 is far superior.
    Still, I will give the Dow credit for beating the S&P 500 over the past four years. Here’s a look at the Dow/S&P 500 Ratio:
    image905.png
    For two days in November 2008, the ratio closed above 10. Before that, the ratio had last been above 10 in 1966.

  • Goldman Goes A-Blogging
    Posted by on February 9th, 2010 at 11:00 am

    Goldman Sachs’ spokesman, Lucas van Praag, responds to the NYT’s article at the Huffington Post. Here’s a sample:

    NYT assertion: “Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash.”
    The facts: Relative to the size of AIG’s overall business, Goldman Sachs was a small counterparty. We don’t believe our marks were “aggressive,” they reflected market prices at the time. We requested the collateral we were entitled to under the terms of our agreements. The idea that AIG collapsed because of our marks is not credible. In any event, the story later asserts that, by the spring of 2008, AIG’s dispute with Goldman Sachs was just one of its many woes.
    NYT assertion: “In addition, according to two people with knowledge of the positions a portion of the $11 billion in taxpayer money that went to Societe Generale, a French bank that traded with A.I.G, was subsequently transferred to Goldman under a deal the two banks had struck.”
    The facts: The assertion is false and misleading. Goldman Sachs provided financing to many counterparties, but in that role we would not have known whether a counterparty had obtained credit default protection, let alone from whom or in what amount.

    (HT: Felix)

  • The Geography of a Recession
    Posted by on February 8th, 2010 at 2:02 pm