Goldmine $achs
Posted by Eddy Elfenbein on July 14th, 2009 at 10:02 am

When J.P. Morgan formed U.S. Steel in 1901, Henry Adams said that he was “apparently trying to swallow the sun.” Now it looks like Goldman Sachs has swallowed the galaxy.
Goldman’s second-quarter earnings report was staggering. From April through June, Goldman earned $3.44 billion. That works out to $4.93 a share which is head and shoulders above Wall Street’s consensus of $3.53.

Chief Executive Officer Lloyd Blankfein made Goldman Sachs the highest-paying Wall Street firm in history before last year’s credit freeze led him to convert to a bank, accept government funds and report the first quarterly loss as a public company. This year Goldman Sachs has issued new stock, repaid the U.S. Treasury and reaped fees from selling stocks and bonds.
“Goldman’s got a sweet spot in here, they were the go-to players,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $13.8 billion including Goldman shares, before earnings were released. “For the time being, they’ve got kind of an open playing field all to themselves.”

The stock is down slightly this morning, but that’s following its big day yesterday.

BusinessWeek Could Be Sold for $1
Posted by Eddy Elfenbein on July 14th, 2009 at 9:54 am

From the FT:

McGraw-Hill could reap just $1 from a sale of Business Week, according to people familiar with the 80-year-old financial magazine’s losses.
The publisher has appointed Evercore, the boutique investment bank, to sell the business after concluding it was non-core, two people familiar with the decision said.
McGraw-Hill, which owns the Standard & Poor’s rating agency and a large educational publisher, would only say it was “exploring strategic options” for Business Week. Evercore did not return calls.

(Via: Ritholtz)

Will Someone PLEASE Pay Attention to Me?
Posted by Eddy Elfenbein on July 14th, 2009 at 12:52 am

Sorry Folks, the Fed is NOT a Private Bank
Posted by Eddy Elfenbein on July 13th, 2009 at 1:09 pm

I’m afraid that I don’t know exactly who Spencer Pratt and Heidi Montag are. I gather they’re celebrities of some sort, but perhaps not truly authentic celebrities.
In any event, what brought them to my attention was Mr. Pratt’s recent commentary on the Federal Reserve on Alex Jones’ InfoWars. Jones is someone I am familiar with; he uses his show to warn Americans of the growing danger posed by the New World Order.
The NWO is apparently a conspiracy so vast and complex that it actually reaches into the depths of human understanding of reason and logic to cruelly twist all of Mr. Jones’ arguments into errant nonsense.
If you jump to the eight minute mark you can hear Spencer tell us that the Federal Reserve is a private company just like Federal Express.

This seems to be a popular misconception about the Federal Reserve. Like many things said about the Fed, it’s not true—the Fed is not a private bank. The best way to describe it would be a hybrid quasi public system. Not surprisingly, the end result was part of a political compromise. If my business were run that way, I wouldn’t consider it private.
The members of the Fed’s board are appointing by the President and are confirmed by Congress. The FOMC, which is the policy committee, is mixed with board members and regional bank presidents.
The regional reserve banks do issue stock to member banks but it’s very different from owning shares in FedEx. For one, the banks can’t sell or trade the stock. The dividends are set at 6% a year. Everything after that goes to the Treasury. Plus, the banks have to invest 3% of their capital in the Fed.
Incidentally, FedEx’s CEO is Fred Smith who’s a member of Skull and Bones so perhaps it too is part of the New World Order.
(HT: LOLfed)

More Innumeracy from Jeremy Siegel
Posted by Eddy Elfenbein on July 13th, 2009 at 12:06 pm

In the Wall Street Journal, Jason Zweig criticizes Jeremy Siegel’s use of historical statistics when looking at long-term market returns. Siegel’s book “Stocks for the Long Run,” purports to tell us that stocks have returned 10% a year on average since 1802.
Well…it might not be that way.
Before inspecting the details, I’m suspicious of any study that goes back before the 1920s. The capital markets were simply not mature enough to use in such studies.
The problem Zweig highlights is how few stocks comprise the study Siegel relies on. Zweig notes that Siegel ignores 97% of stocks that were trading in that time frame—and most of those stocks he uses were blue chips. All those ignored dud stocks would certainly have lowered the 10% per year number.
Zweig also finds that Siegel raised the average dividend yield from the 1802 to 1870 period from 5% to 6.4%. That’s a huge increase and it alters the long-term results very significantly.
I’m glad to see someone else finally criticizing Siegel’s work, and Stock for the Long Run in particular. I’ve been doing this for a few years. Here’s a post I wrote in 2006 detailing Siegel’s misunderstanding of the concept of standard deviation:

Jeremy Siegel is a distinguished professor of finance at the Wharton Business School. He’s written many important articles and books on investing and finance (here’s my review of his last book, “The Future for Investors”). However, I’m afraid Dr. Siegel misunderstands a basis mathematical concept.
This is from his most-recent “The Future For Investors” column:

Stock returns are composed of the sum of the average real return on safe bonds, such as U.S. government bonds, which has been about 3 percent, plus an extra risk premium that has averaged between 3 percent and 4 percent per year. This risk premium has propelled stocks above other asset classes in investor returns.
But this premium may be overly generous. Although stocks are indeed much riskier than bonds in the short run, in the long run they are safer. In fact my studies have shown that over periods 20 years or longer, a portfolio of diversified stocks has been more stable in purchasing power than a portfolio of long-term government bonds. As a result, a long-term stock investor gets rewarded for risk that basically only a short-term stock investor endures.

He says that over periods of 20 years or longer, a diversified portfolio of stocks has been more stable than a portfolio of long-term bonds. The problem is, that’s not what his research indicates.
In Chapter 2 of his book, “Stocks for the Long Run,” Siegel looks at how stocks and bonds have performed over long periods. His point is that stocks are more volatile than bonds in the short-term, but over time, stocks have a very good track record of beating bonds. That’s a very important point for all investors.
But then, he makes a critical error. On page 33, he writes:

As the holding period increases, the dispersion of the average annual return on both stocks and bonds falls, but it falls faster for stocks than bonds. In fact, for a 20-year holding period, the dispersion of stock returns is less than for bonds and bills, and becomes even smaller as the holding period increases.

His numbers are right, but his conclusion is wrong. By dispersion, he’s referring to standard deviation. If you recall from your high school math, standard deviation measures variation against the mean. What his data shows is that the variation of returns decreases as you have progressively longer holding periods. That’s a tautology. It must happen, but it doesn’t say anything about inherent risk.
What Siegel says is that the variation of stock returns against the mean of stock returns decreases faster than the variation of bonds returns against the mean of bond returns. (That’s a mouthful!) But at no point are we comparing stocks against bonds. It’s merely stocks against themselves and bonds against themselves. Siegel is using the wrong instrument to make his point.
Let’s say we have an asset class that has returned, on average, 10% a year for 100 years. The one-year holding periods might be very volatile. However, the two-year and three-year holding periods will become progressively less volatile. But there’s no insight here, the holding periods have to. They’ll eventually zero in on 10% a year.
Siegel compares the rate at which stocks “zero in” to the rate at which bonds “zero in.” He says that since stocks zero in on their long-term average faster than bonds zero in on theirs, stocks are safer. They may indeed be safer, but his point doesn’t support that conclusion.

By the way, it’s Siegal’s error here that led to the disastrous book Dow 36,000. Here’s my explanation.

Best Video Title
Posted by Eddy Elfenbein on July 13th, 2009 at 11:36 am

I found this at Barry’s joint this morning:

Or maybe they won’t.

Wells Fargo Bank Sues Itself
Posted by Eddy Elfenbein on July 11th, 2009 at 11:43 pm

That’s one way to control for risk:

You can’t expect a bank that is dumb enough to sue itself to know why it is suing itself.
Yet I could not resist asking Wells Fargo Bank NA why it filed a civil complaint against itself in a mortgage foreclosure case in Hillsborough County, Fla.
“Due to state foreclosure laws, lenders are obligated to name and notify subordinate lien holders,” said Wells Fargo spokesman Kevin Waetke.
Being a taxpayer-subsidized, too-big-to-fail institution, it’s possible that one of the few ways for Wells Fargo & Co. (WFC: 22.91, -0.34, -1.46%) to know what it is doing is to notify itself with a court filing.
In this particular case, Wells Fargo holds the first and second mortgages on a condominium, according to Sarasota, Fla., attorney Dan McKillop, who represents the condo owner.
As holder of the first, Wells Fargo is suing all other lien holders, including the holder of the second, which is itself.

Sounds like a Coen brothers movie.
(Via Calculated Risk Via Howard.)

The Real World in Washington
Posted by Eddy Elfenbein on July 11th, 2009 at 6:12 pm

They’re currently filming the Real World in Washington.
I saw a few of the housemates strolling along Florida Avenue yesterday. Here’s a bad picture of some of the girls:

If you squint carefully you can make out the cameraman stalking them in the bushes, which looks kind of creepy (as opposed to me and my cellphone).

Crossing Wall Street Turns Four
Posted by Eddy Elfenbein on July 11th, 2009 at 5:58 pm

Happy fourth birthday to Crossing Wall Street! This is my 4,289th post.
Here’s my very first:

Europe Vs. Gillette and P&G
The European Constitution finally ended its nasty losing streak yesterday when it was approved by voters in Luxembourg. Even if the good people of the Grand Duchy had voted against the referendum, the Eurocrats don’t seem terribly interested in losses at the polls. The Constitution is quite popular as long as no one actually has to vote on it. That’s why the Luxembourgian Yes vote (or Jo vote?) is so important. It keeps “the process” alive. And that’s the important thing—the process. The Constitution has already been shot down by voters in Holland and France, yet the EU leaders insist that “the process” continues, which I take to mean as “vote until you get it right.”
However, there’s another election coming this Tuesday that might similarly be ignored by the Brussels Busybodies. In Boston, Gillette’s shareholders will meet to vote to approve their merger with Procter & Gamble. The deal will almost certainly be approved. Warren Buffett, Gillette’s largest shareholder, has called it a “dream deal.” That’s a nice endorsement to have.
But the merger has hit an unexpected snag—the EU doesn’t like it. Now let’s recount the action: We have two U.S.-based businesses agreeing to a friendly merger. The deal has been approved by U.S. regulators, and it will certainly be approved by shareholders. But the regulars in another country (or entity, at least) object. And what’s the sticking point?
Toothbrushes.
I’m not making this up. Gillette owns the Oral-B brand of battery-powered toothbrushes, and P&G has its own Crest brand. The EU thinks that if the two are combined, the new cowboy superpower will have a competition-stifling command of the global toothbrush market. Think of the horror. Across the continent, mom-and-pop toothbrush makers will be driven out of business by uncouth Americans. Oral care has generally not been a major concern for Europeans, so I guess this is progress of some sort, but it’s a disturbing trend nonetheless.
This isn’t the first time Europe has interfered with American business. As the economy has gone global, so have the bureaucrats. Four years ago, the EU blocked General Electric’s merger with Honeywell. But the issue there was at least something cool, aircrafts. But toothbrushes?
If you had to sum up the pettiness of the European bureaucracy, this would be as good as any. But this is what the Global Economy looks like. Gillette and P&G will have no problem finishing their merger. The Europeans might delay it for a while, and the companies will probably have to sell off some units. But now, every time two businesses even think about merging, they’ll have to consider what might happen in Brussels, not to mention, Luxembourg.

The Power of Free
Posted by Eddy Elfenbein on July 10th, 2009 at 10:24 pm

From Virginia Postrel’s review of Chris Anderson’s Free: The Future of a Radical Price:

Monty Python created a YouTube channel with their most popular skits in hopes of enticing fans to buy their DVDs. Their shows and movies soon hit Amazon’s best-seller list, with increased sales of 23,000 percent.