• The End of the Euro
    Posted by on February 27th, 2009 at 12:41 pm

    According to some, the euro could come to an end soon:

    Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.
    “People said subprime could never blow up but it did and now they’re saying the exact same thing about the eurozone,” said Howard. “There’s no stopping what is now a downward spiral.” He declined to discuss his investments.
    Hayman joins a growing number of investors seeing the possibility of a breakup of the $12 trillion euro bloc, conceived more than 10 years ago to cut unemployment, tame inflation and create a rival to the dollar. Societe Generale SA said this week Germany may refuse a bailout in an election year. ABN Amro Holding NV said Feb. 17 the crisis is “Europe’s subprime.”
    Euro-region bank loans to Eastern Europe topped $1.3 trillion in the third quarter last year, or about 9 percent of the bloc’s gross domestic product, ING Groep NV said Feb. 18, citing Bank for International Settlements data. Now lenders face losses after extending credit to finance everything from industrial development to domestic real estate.
    Irish banks took on debt equivalent to 11 times the nation’s own gross domestic product, Dutch-bank credit reached seven times GDP and Belgium four times, according to BNP Paribas SA.

  • More Troubles With Double Negatives
    Posted by on February 27th, 2009 at 12:23 pm

    This time from the White House.

    “This is the first step towards getting health-care reform done this year,” White House domestic policy adviser Melody Barnes told allies in one call. “We can’t underestimate the importance of rallying around this budget. It serves as a footprint for something bigger.”

  • Puzzling Quote of the Day
    Posted by on February 27th, 2009 at 12:11 pm

    From the New York Times:

    Mr. Pandit described the exchange as “bridge to profitability” that was intended to appease the markets. On a conference call Friday morning with investors, he said the bank was committed to its remaining businesses and strategy. Mr. Pandit also tried to squelch concern that the government would play a more influential role at the company. “We are going to run Citi for the shareholders,” he added.

    If you’re going to run Citi for the shareholders, that means you’re running it for the government.

  • Q4 GDP Revised Downard
    Posted by on February 27th, 2009 at 9:25 am

    The Feds just revised fourth-quarter GDP to -6.2% from its earlier estimate of 3.8% growth. This was the worst quarter since 1982; although the current quarter might be worse.

    Output fell 6.2 percent at an annualized rate in the fourth quarter of 2008, revised downward from a previous estimate of a 3.8 percent decline. The drop was even steeper than many economists had feared, and was much lower than the 0.5 percent contraction from the previous quarter.
    The announcement comes on the heels of a new budget from the Obama administration that assumes what some economists have called an unrealistically optimistic view of the near-term future of the American economy.
    The downward revisions came primarily because of a larger-than-anticipated contraction in inventories of unsold goods. A wider trade gap than previously reported — that is, fewer American goods being purchased abroad — also pushed G.D.P. downward. Lower consumer sales sliced off some of the previously reported economic output, as well.

    image779.png

  • Citi and Feds Reach Deal
    Posted by on February 27th, 2009 at 12:31 am

    The WSJ reports:

    Under terms being finalized late Thursday, the Treasury has agreed to convert some of its current holdings of preferred Citigroup shares into common stock, a move that could better protect shareholders against future losses.
    As a condition, the government is demanding that the New York company overhaul its board of directors, the people said. Treasury will call for Citigroup’s board to be comprised of a majority of independent directors. Chief Executive Vikram Pandit is expected to keep his job under the agreement.
    The government will convert its stake only to the extent that Citigroup can persuade private investors such as sovereign wealth funds do so as well, the people said. The Treasury will match private investors’ conversions dollar-for-dollar up to $25 billion.
    The size of the government’s new stake will hinge on how many preferred shares private investors agree to convert into common stock. The Treasury’s stake is expected to rise to up to 40% of Citigroup, the people said.

  • Department of Irony
    Posted by on February 26th, 2009 at 8:27 pm

    Good news! Congress has passed House Resolution 180 which supports “the goals and ideals of the third annual America Saves Week.”
    The vote was 415 to 2, which automatically make me think–who was the other guy besides Ron Paul? It turns out it was Jeff Flake of Arizona.
    Here’s part of the resolution:

    Resolved, That the House of Representatives–
    (1) recognizes the importance of savings to financial security;
    (2) supports the goals and ideals of `America Saves Week’;
    (3) acknowledges the tireless efforts of the late Congresswoman Stephanie Tubbs Jones to eliminate predatory lending, increase the nation’s savings rate, and improve the overall economic situation of all those residing in the United States; and
    (4) requests that the President issue a proclamation calling on the Federal Government, States, localities, schools, nonprofit organizations, businesses, other entities, and the people of the United States to observe the week with appropriate programs and activities with the goal of increasing the savings rates for individuals of all ages and walks of life.

    Meanwhile, here’s Obama’s $3.6 trillion budget.

  • The Sinking Mortgage Expert
    Posted by on February 26th, 2009 at 2:57 pm

    There’s got to be a metaphor in here somewhere.

  • Donaldson’s Earnings Streak Set to End
    Posted by on February 26th, 2009 at 1:26 pm

    Today is a sad day for lovers of high-quality stocks. Donaldson (DCI) lowered its 2009 EPS forecast to a range of $1.70 to $1.90, which means that the company will almost certainly end its 19-year streak of delivering record earnings.
    Donaldson isn’t very well known, but it’s a remarkable company. Their market cap is about $2 billion and they’re in the S&P 400 Mid-Cap Index (^MID). Donaldson is the filtration business which is about as dull as they come.
    Last year, the company earned $2.12 a share and the outlook for this year (the fiscal year ends in July) was a range of $2.16 to $2.36. So even before today, the streak looked to be in jeopardy.
    For the second quarter, Donaldson earned 43 cents a share which was a mere penny a share more than last year’s Q2. Net income was actually down, but the company has fewer shares outstanding.
    I’m not particularly worried about Donaldson. I don’t think they’re in any more trouble than anyone else. I was also happy to see this nugget from their press release:

    In addition, since a significant portion of our pay is ‘at risk’ and paid based on our actual financial performance, executive officer compensation is expected to be reduced by 30 to 50 percent this year due to lower incentive payouts. In addition, officer base salaries have been frozen at January 2008 levels.

    Here’s a look at Donaldson’s stock along with its EPS line in blue. The two axes are scaled at 20 to 1.
    image778.png
    Here’s the earnings streak:

    Year………….Sales……………..EPS
    1990…………$422.9……………$0.19
    1991…………$457.7……………$0.21
    1992…………$482.1……………$0.23
    1993…………$533.3……………$0.26
    1994…………$593.5……………$0.30
    1995…………$704.0……………$0.37
    1996…………$758.6……………$0.42
    1997…………$833.3……………$0.50
    1998…………$940.4……………$0.57
    1999…………$944.1……………$0.66
    2000…………$1,092.3…………$0.76
    2001…………$1,137.0…………$0.83
    2002…………$1,126.0…………$0.95
    2003…………$1,218.3…………$1.05
    2004…………$1,415.0…………$1.18
    2005…………$1,595.7…………$1.27
    2006…………$1,694.3…………$1.55
    2007…………$1,918.8…………$1.83
    2008…………$2,232.5…………$2.12

  • WSJ: Stocks Drop to 50% of Peak
    Posted by on February 25th, 2009 at 4:34 pm

    The Wall Street Journal notes that the S&P 500 is now half of its peak. This is the only the second time in history that has happen. The first time was the grandaddy — 1929.
    Bespoke writes:

    Ultimately in the bear that started in 1929, the S&P 500 dropped a whopping 86.19% from its all-time high. This low occurred 679 trading days after the all-time high was reached, or about two years and nine months. The current decline has lasted one year and four months.
    But by far the most depressing aspect of the 50%+ decline back in the 1930s was how long it took for the index to make a new all-time high. Following the peak in 1929, the S&P 500 went 6,251 trading days before hitting a new all-time high 25 years later.

    I’m a glass-is-half-full kind of guy so can’t we turn that around? If the market does fall by 86%, think of the buying opportunity!

  • P/E Ratios Don’t Need to Be Cyclically Adjusted
    Posted by on February 25th, 2009 at 1:40 pm

    The Cyclically Adjusted Price/Earnings Ratio (or CAPE) has been getting a lot of attention lately. It was originally developed by Benjamin Graham, and Robert Shiller has been the latest proponent.
    In today’s Financial Times, John Authers writes:

    Long-term measures of value are also finely poised. Take the cyclical price/earnings ratio, which compares share prices with average earnings during the past decade, rather than to the most recent year’s earnings. This evens out bumps in earnings multiples caused by the profit cycle, and has proved to be a great market timing vehicle – highs and lows for this metric have overlapped almost perfectly with highs and lows for the market.
    Robert Shiller, the Yale university economist, has done much to popularise the measure. According to his calculations, it makes US stocks look distinctly cheap. The cyclical p/e, at 13.38 entering this week, is below its average since 1870 of 16.34. It is also at its lowest since 1986.
    However, this should not be treated as a short-term buying signal because cyclical p/es have dropped to as low as 6 at the bottom of previous bear markets. This would imply that stocks could fall 50 per cent more, before hitting bottom.

    I don’t think adjusting earnings multiples for the economic cycle is a sound idea. The obvious reason is that stock prices are themselves cyclical. I dispute Authors points that CAPE has been “a great market timing vehicle.” In fact, I think it’s been pretty bad.
    According to data off Professor Shiller’s website, when the market’s CAPE was below 21, the market returned 1.35% annualized and adjusted for inflation. When it was above 21, the market did slightly better, growing by 1.82% annualized and adjusted for inflation.
    For the unadjusted 12-month P/E Ratio, the market grew by 1.79% when it was below 21, and it contracted by -1.29% when it was above 21. In other words, the traditional P/E Ratio told you a lot more about how well the market was valued.
    Neither metric, however, comes close to the easiest—momentum. If the market fell in the previous month, then it has continued to fall by an annualized and adjusted for inflation rate of -8.36%. If the market has been rising, then it continues to grow by a rate of 10.09%.