• The Dow is Now Below 6900
    Posted by on March 2nd, 2009 at 11:35 am

    The Dow has been as low as 6852 today. For what it’s worth, 6765 is a Fibonacci number. I have no idea what this means, but if you mention it to someone at work today, it will guarantee to impress them.

  • Revenge of the Glut
    Posted by on March 2nd, 2009 at 10:31 am

    The other day I opened my credit card bill and I was surprised by how small it was. I didn’t realize how much I had cut back on consumption. It wasn’t a conscious effort, it just sorta of…happened.
    In macroeconomic terms, what I did was a bad thing. By saving, I’m not spending money which would become someone else’s income. Keynes called this as “the paradox of thrift.”
    Apparently, I’m not alone. The government reported that the national savings rate bumped up to 5% in January from 3.9% in December. A year ago, it was at 0.1%. Here’s a graphical look.
    In yesterday’s column, Paul Krugman said,”we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.”

  • Saving A Not So I, Not So G
    Posted by on March 2nd, 2009 at 10:15 am

    The Dow dropped below 7,000 this morning. Let’s thanks AIG (AIG) for delivering a quarterly loss of $61.7 billion. That’s the largest loss in the history of the world. To add some perspective, that’s a loss of nearly $23 a share for a stock that’s bouncing around 50 cents a share.

    In the quarter, A.I.G. took a $21 billion charge related to taxes and wrote down $25.9 billion in assets, including mortgage-back securities and credit-default swaps.
    The company’s general insurance business lost $2.8 billion compared with a profit of $2.1 billion in the quarter a year ago. Premiums dropped 16.3 percent to $9.2 billion and earnings from premiums fell 5.9 percent to $10.98 billion.

    The government is injecting more cash into the floundering insurance giant. This is the fourth time the Feds have come to the rescue. Uncle Sam currently owns 80% of AIG. The move was specifically designed so the credit agencies wouldn’t downgrade AIG, which would hurt the company even more.
    Larry Ribstein writes: “The government is bailing out AIG because AIG undermined a system that the government was supposed to be, but wasn’t, protecting. And now who’s in charge? The government, of course.”

  • NPR: Bad Bank
    Posted by on March 2nd, 2009 at 9:41 am

    This American Life followed up their earlier specials on easy-to-understand lessons on the credit crisis with another installment. The first “act” explains what a bank does in very simple terms. The second looks at two guys trying to clean up the toxic asset themselves–they’ve hit the street to buy mortgages.

  • Niall Ferguson Calls for a Great Restructuring
    Posted by on March 2nd, 2009 at 2:39 am

    Niall Ferguson has interesting article in the Australian. He says that we need to ditch our new-found love of Keynes and work on reducing debt not expanding it. He calls for nationalizing banks that no have pulse (ala Sweden) and modifying mortgages. I agree on the banks. On mortgages, Ferguson isn’t worried about moral hazard since he doesn’t believe this bad behavior will be repeated. Hmm. I’m not so sure about that. Still, it’s an interesting take if nothing for the boldness of vision.

  • This Just In…
    Posted by on March 2nd, 2009 at 12:31 am

    Campbell Soup (CPB) has a higher market value than Citigroup (C).

  • Was Google’s Stock Manipulated?
    Posted by on March 2nd, 2009 at 12:17 am

    I’m shocked, shocked to find that manipulation is going on in here!

    Has Google Stock Price Been Manipulated?
    Jerry Wenjiu Liu
    California State University, East Bay
    We present the evidence that the GOOGLE stock, one of the most important stocks in the 21st century, may have been illegally controlled by large Wall Street firms. We identify a group of smart traders, including financial firm proprietary traders and large traders who trade options with large orders. We find that they have advance information about the closing prices on post earning release and option expiration days. These smart traders sell options to the market which would become worthless after the key events, and their high success rate is difficult to be explained by normal trading behavior. Additional evidence from the tape, such as unusually high quoted depth and extremely low narrow quoted spreads during clustering option expiration days, provide direct proof that the GOOGLE stock price may have been manipulated to coordinate the institutional traders’ option selling activities.

    Your capital gains, sir.

  • The Dangers of Calling a Bottom
    Posted by on March 1st, 2009 at 11:34 pm

    With the market at new lows, let’s look at the question of when will things change. Trying to pick the bottom, however, is a dangerous undertaking and is, in my opinion, best left alone.
    The market is strongly affected by valuations but it doesn’t turn on them. There are a few generalities that have held up well over the years. For example, the trend is like the tide, it’s much stronger than you think. A bull market can keep rising solely on its own momentum. Likewise, a bear market also keeps riding its own momentum. If you start thing, “it can’t go any higher/lower,” it probably will.
    I recently wrote about the effect of Price/Earnings Ratios on the market. The effect is rather weak especially compared with short-term momentum. If one month is horrible, the odds are that next month will be horrible as well. It’s really that simple and the first two months of this year bear that out.
    When the market finally does turn, it’s often in the midst of terrible news. The initial stage of a bull is generally disbelieved (I apologize for these qualifications). Prices start rises as earnings are often still falling when means that earnings multiples give out false sell signals. Everyone starts expecting the nascent rally to fall apart. Not only is a bell not rung at the bottom, it isn’t even rung several weeks afterward.
    To take one example, let’s look at Microsoft (MSFT). On Friday, the stock closed at $16.15. That’s the lowest price in over 11 years. The company has a gigantic cash horde worth $2.59 a share and not a dime in long-term debt. Take the cash out of the share price, and the company’s nuts and bolts are going for $13.59 a share.
    For fiscal 2008, the company made $1.87 a share (the fiscal year ends in June). Earnings for this year will probably be around 10% lower, give or take. So even by these admittedly simplistic calculations, the stock appears to be cheap. The problem is that you could have reached the exact same conclusion several months ago as well. The market will turn eventually but it will begin with a whimper not a bang.

  • Time for a Nice Shot in the Arm
    Posted by on February 28th, 2009 at 2:19 pm

    Barron’s has good things to say about one of our Buy List stocks, Baxter International (BAX):

    The giant health-care company, which specializes in blood-protein treatments and medical-delivery systems for hemophilia, infectious diseases and kidney failure, among other ailments, is one of the few large-cap companies that delivered double-digit earnings growth last year. Even better, it is expected to give a repeat performance this year.
    Baxter (ticker: BAX) has forecast 2009 sales growth of 7%, excluding any foreign-exchange impact, and fully diluted earnings of between $3.70 and $3.78 a share, before any special items, up from $3.38 last year. Cash flow for the full year is expected to exceed $2.6 billion.
    In an investment sector that is, by its nature, defensive, Baxter could be a real winner, with growth prospects that look unusually alluring at a time when more investors are seeking stocks perceived to be safe.
    Compared with the erosion in the broader market, the shares have been a bastion of strength the past 52 weeks, trading until days ago at roughly the same level they did a year earlier, and representing a market value of about $32 billion. At about 52 Friday, the stock was changing hands at 14 times estimated earnings for ’09 and about 12.3 times the forecast for ’10.
    There’s a strong case for the shares to reach 65 by year’s end, or nearly 20% above current levels, based on strong earnings growth, margin expansion and continuing share buybacks. Bulls note that management has a habit of providing conservative guidance, and that Baxter could well exceed its current expectations of 10% to 12% earnings growth.

  • Warren Buffett’s 2008 Shareholder Letter
    Posted by on February 28th, 2009 at 11:17 am

    Here’s the latest shareholder letter from Warren Buffett. This is part of what he said to say about 2008:

    As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”
    By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.
    This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political
    challenge. They won’t leave willingly.
    Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

    I particularly enjoyed this nice little rant:

    For a case study on regulatory effectiveness, let’s look harder at the Freddie and Fannie example. These giant institutions were created by Congress, which retained control over them, dictating what they could and could not do. To aid its oversight, Congress created OFHEO in 1992, admonishing it to make sure the two behemoths were behaving themselves. With that move, Fannie and Freddie became the most intensely-regulated companies of which I am aware, as measured by manpower assigned to the task.
    On June 15, 2003, OFHEO (whose annual reports are available on the Internet) sent its 2002 report to Congress – specifically to its four bosses in the Senate and House, among them none other than Messrs. Sarbanes and Oxley. The report’s 127 pages included a self-congratulatory cover-line: “Celebrating 10 Years of Excellence.” The transmittal letter and report were delivered nine days after the CEO and CFO of Freddie had resigned in disgrace and the COO had been fired. No mention of their departures was made in the letter, even while the report concluded, as it always did, that “Both Enterprises were financially sound and well managed.”
    In truth, both enterprises had engaged in massive accounting shenanigans for some time. Finally, in 2006, OFHEO issued a 340-page scathing chronicle of the sins of Fannie that, more or less, blamed the fiasco on every party but – you guessed it – Congress and OFHEO.

    Nicely put. Warren should start blogging.