Something to Think About
Posted by Eddy Elfenbein on June 10th, 2009 at 7:55 pm

The suitor forced on Chrysler is named after a word meaning “authoritative and arbitrary command.” The term comes from the Latin fiat meaning “let it be done.”
(HT: Gary Alexander)

Taleb Watch
Posted by Eddy Elfenbein on June 10th, 2009 at 11:48 am

I think folks are beginning to catch on to what I and others have been saying for a long time—Nassim Taleb is fantastically overrated. He was on CNBC this morning:

The Obama administration’s attempts to fight the financial crisis with more cash is like treating a bad tooth with Novocain instead of a root canal, Nassim Taleb, author of “The Black Swan,” told CNBC Wednesday.
The main problem is the level of debt, and Taleb compared the authorities’ efforts with those of a not very skilled pilot who is trying to land a Concorde on a narrow strip, between an ocean of deflation and a mountain of hyperinflation.
“These people failed us, they’re going to fail us again,” Taleb told “Squawk Box.”
“They tell the banks to lend more but have less leverage,” and expect people to go out and consume while unemployment is rising, he added.
“The way to restart everything is restructuring, conversion of debt into equity, convince people that debt is not good,” Taleb said.
“Do not delay a root canal,” he added. “Don’t do piecemeal solutions to a problem that is fundamental.”
“The solution is there, convert debt to equity. Usually it happens with Chapter 11, let’s do it faster, and across the board,” Taleb said.

So China is to take an equity stake in the U.S. government?

Peter Schiff on Jon Stewart
Posted by Eddy Elfenbein on June 10th, 2009 at 8:27 am

Peter Schiff appeared on Jon Stewart’s show last. Unfortunately, it was a softball interview and Stewart bought the now-disproven line that Schiff was right. Dan Gross recently referred to Stewart as the most relevant financial reporter on television. He wasn’t last night.

Home Depot Raises Guidance
Posted by Eddy Elfenbein on June 10th, 2009 at 8:13 am

Interesting news out of Home Depot (HD) today. The company raised FY 2009 earnings guidance. Or more accurately, they said the earnings decline won’t be as bad as they originally thought.
Last year, HD earned $1.78 a share. In May, the company said that it expects to see EPS fall by 26% and sales to fall by 9%. That translates to full-year earnings of $1.32. Today they said to expect EPS to fall by 20% to 26%. A 20% drop works out to $1.42 which is slightly above Wall Street’s consensus of $1.40.
Make no mistake, this isn’t great news but it’s not awful and all the news until now has been awful. HD’s earnings peaked in 2007 at $2.83 a share so we’re going to see earnings fall in half—so has the stock price.
At its current price, I wouldn’t say Home Depot is a good buy, but it’s not unreasonable to see year-over-year earnings increases within a few quarters. If there’s more good news from HD, it could be a good buy before the end of the year.

The Market’s P/E Ratio Surges
Posted by Eddy Elfenbein on June 9th, 2009 at 12:21 pm

Here’s a look at the S&P 500 (black line, left scale) and its earnings (gold line, right scale).

The two axes are scaled at 16-to-1 so when the lines cross, the market’s P/E Ratio is 16. I think we’re at an interesting point where the stock market’s P/E Ratio doesn’t tell us much. The market has clearly sensed signs of recovery even though earnings are still plunging. As a result, the market’s P/E Ratio has jumped about 50% since March.
Does this mean that stocks are valued 50% more favorably? Not at all. I think the market is getting a better sense of where earnings will bottom. Analysts currently see earnings reaching a trough of about $38 for the third quarter. I can’t say if that’s right but it does seem reasonable.
The fourth quarter of 2008 was awful so once we get that behind us, the trailing earnings picture will look much better. According to S&P, AIG took out over $5 all by itself. The current outlook is that the S&P 500 will earn $54 for 2009. That strikes me as high but not out of reach.
For 2010, Wall Street sees earnings of $73.56. At 16 times earnings, that means an S&P 500 at 1177 which is about 25% higher than we are now.
One other point to note: Analysts have not been very good at getting earnings right. In a few weeks we’ll close the books on Q2. One year ago, Wall Street was expecting Q2 earnings of $26.73. Now they’re expecting just $13.49.

Treasury OKs TARP Repayment
Posted by Eddy Elfenbein on June 9th, 2009 at 10:36 am

The Treasury Department has announced that it will let 10 banks repay their TARP money. This is, of course, the money generously provided to banks that didn’t want it in the first place.
The entire stress test and TARP money was simply to prop up two banks, Citigroup and Bank of America. Perhaps others, but those were the two main suspects. The government couldn’t say that outright so they needed to play as if they were going to help out all of the largest banks. So all the big boys got dragged into this mess.
The Treasury hasn’t said what the ten banks are but we can assume it will include the healthy guys like GS, AXP, STT and JPM. Personally, I’m more concerned with who won’t be on the list. For the banks left taking government money, they’ll now have to be under the Treasury’s compensation guidelines.
I’ll also be curious as to what the non-TARPers will do with their dividends.

Fruit of the Doom
Posted by Eddy Elfenbein on June 9th, 2009 at 10:17 am

This just in:

Alan Greenspan is a fan of men’s underwear sales as an important economic indicator.

(HT: Mankiw)

Those Wacky Economists
Posted by Eddy Elfenbein on June 8th, 2009 at 3:18 pm

The New York Times:

President Obama was getting his daily economic briefing one recent morning when a fly distracted him. The president swatted and missed, just as the pest buzzed near the shoes of Lawrence H. Summers, the chief White House economic adviser. “Couldn’t you aim a little higher?” deadpanned Christina D. Romer, the chairwoman of the Council of Economic Advisers.

How to Fix Financial Television
Posted by Eddy Elfenbein on June 8th, 2009 at 10:34 am

Barry Ritholtz has a great post listing 15 ways to fix financial television. Here’s his list:

1. Stop Yelling. Stop interrupting. Stop Talking Over Each Other: This is not Jerry Springer, its serious business. Please treat it that way.
2. Bring us People We Don’t Have Access to. Where various FinTV channels do really well is when they bring us long, thoughtful interviews with the likes of Warren Buffett, WIlliam Ackman, David Einhorn, and others. This morning, CNBC had on James Rickard. More of this please.
3. S – L – O – W D – O – W – N
4. Risk: All traders have to appreciate the downside of trades. So too, does FinTV. Explain stop losses. Understand Risk/Reward. Recognize there are periods when Buy & Hold is a jumbo loser.
5. Lose the Octobox. ‘Nuff said.
6. Separate the Signal from the Noise. Understand that most of the day to day action is simply noise. Not every data release, slice of news, or rumor is significant. Stop treating them as if they are.
7. FactCheck: An awful lot of things on air get stated with authority and confidence. Most of them are junk. Why is it that the more dubious a proposition is, the greater the confidence the speaker musters? Consider fact checking as much of the statements that are made on air.
8. Accountability is important: Track record your guests, let us know how their past few calls have been. Are they Perma-bulls or bears? Are their stock picks awful? Are they money makers? If not let us know. (If not, why even have them on?)
9. Bring Back Louis Rukeyser: Not the man, but rather, his style. Wall $treet Week — Rukeyser hosted it from 1970 to 2005 — was plain-spoken, thoughtful and accessible. The investing public would appreciate something of that sort — again.
10. Sound FX: What is with all the bizarre sound effects every time a screen changes? Its financial news, not a video game. Kill ‘em.
11. Embed your video (on your own website or YouTube) instead of using WMP. At long last, thank you.
12. Most stock picks are losers. That is part of the challenge — like a baseball, a 350 hitter is an all star. Explain this to your audience.
13. Stop the Bull/Bear Debate: This is a vast over-simplification of the market, and does not serve your audience.
14. Partisanship: Leave your personal politics at home. Viewers don’t care what most of you think.
15. Respect the Audience: We are adults. Treat us that way.

Since I was one of the very few people who didn’t like Jon Stewart’s famous attack on CNBC, I need to stress that there’s much to criticize of the network.
I think Barry is particularly about with slowing down, respecting the audience and ditching the Octobox. CNBC simply moves too quickly to give viewers much information.
I’m not so bothered by the bull/bear debate or the political stuff as long as it’s moved to the after-hours shows. Larry Kudlow should not be on during market hours.
CNBC has increasingly taken on the look and feel of ESPN. That’s no accident. Sports and stocks hit similar parts of the brain. They’re both male-centered, data-heavy and they even have scoreboards. Trading is fun, that’s fine to admit, but it shouldn’t be treated as a circus.
What CNBC needs to add is more thoughtful commentary on the markets. The network has already done this type of work with David Faber’s specials. Those are very good and they should bring more of the type of programming to they’re day-to-day schedule.

Newsweek on Paul Wilmott
Posted by Eddy Elfenbein on June 6th, 2009 at 8:08 pm

The new-and-improved Newsweek has an excellent article on quant guru Paul Wilmott.