• What are the Chances of a Depression in 2009?
    Posted by on December 30th, 2008 at 12:15 pm

    Intrade says it’s up to 30%.
    For their purposes a “depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters.”

  • Looking at Low Valuations
    Posted by on December 30th, 2008 at 11:27 am

    I want to show you the dramatic collapse in stock valuations by taking a close look at Pfizer (PFE), the drug company. I’m not recommending the shares to own, I simply want to show you how extreme the market’s judgments have become.
    Yesterday, shares of Pfizer closed at $17.29. Looking deeper, we see that the company has a very large cash horde of $26 billion, while a fairly modest long-term debt position of $7 billion. In this environment, it certainly pays to be cash-rich. Pfizer’s cash position works out to about $3.86 a share. That means you can pick up the company’s operations—the nuts and bolts of the business—for just $13.43 a share.
    Now, here’s a look at Pfizer’s stock along with its earnings-per-share. The black line is the stock and it follows the left scale. The gold line is the EPS and it follows the right scale.
    image751.png
    The graph is scaled at a ratio of 10-to-1, so when the lines cross, the P/E ratio is exactly 10. Not a pretty sight, but the earnings are moving in the right direction. As you can see, Pfizer’s P/E ratio has plunged far below 10, and that’s including the company’s generous cash balance.
    We can see that Pfizer’s earnings are climbing although the growth rate isn’t terribly strong. For 2009, Wall Street sees earnings coming in at $2.49 a share. Just by eyeballing the recent trend, that seems reasonable. So working with the $13.43 figure we can see that Pfizer is really going for about five times next year’s earnings, or an earnings yield of about 18.5%, which is several times what you can find in the bond market.
    Now let me point out a few caveats. Price/earnings ratio is hardly a perfect measure of value. Also, Pfizer is a company that faces many challenges so many of these numbers are simply guesses about the future. The important point is that the recession has left us with stocks that have much cheaper real valuations than a few months ago, even companies that aren’t so dependent on the credit markets. After all, Pfizer is still a cash-flow-positive company and that isn’t about to change anytime soon.
    Pfizer currently pays a 32-cent quarterly dividend. The company made some news recently by declining to raise its dividend for the first time in four decades. Going by yesterday’s close, that’s a dividend yield of 7.4%.
    If a five-year Treasury currently gets you just 1.5%, then the market is terrified of stocks like Pfizer.

  • Gazprom Is Feeling the Pain
    Posted by on December 30th, 2008 at 10:29 am

    Gazprom, the Russian energy giant, has fallen on hard times. The plunge in commodity prices has caused the company’s stock price to fallen by 76%. At one time, Gazprom wanted to become the largest and most powerful company in the world. Today, it might need a government bailout.
    As ugly as American capitalism can often appear in practice, nothing really comes close to Gazprom. The company is merely a collaboration of the Kremlin and business. There’s barely any recognizable difference. Like Lola, whatever Gazprom want, Gazprom gets.
    The worst thing that can happen to an enterprise like Gazprom is to see initial success in its operations. As gas prices rose, they thought they really had a sound business and used their cash flow to renationalize Russia’s oil industry. Once prices turned south, then the whole house of cards began to fall.
    For a time, Gazprom, a company that evolved from the former Soviet ministry of gas, had been embraced by investors as the model for energy investing at a time of resource nationalism, when governments in oil-rich regions were shutting out the Western majors. In theory, minority shareholders in government-run companies would not face the risk their assets would be nationalized.
    The New York Times reports:

    But with 436,000 employees, extensive subsidiaries in everything from farming to hotels, higher-than-average salaries and company-sponsored housing and resorts on the Black Sea, critics say Gazprom perpetuated the Soviet paternalistic economy well into the capitalist era.
    “I can describe the Russian economy as water in a sieve,” Yulia L. Latynina, a commentator on Echo of Moscow radio, said of the chronic waste in Russian industry.
    “Everybody was thinking Russia had succeeded, and they were wondering, how do you keep water in a sieve?” Ms. Latynina said. “When the input of water is greater than the output, the sieve is full. Everybody was thinking it was a miracle. The sieve is full! But when there is a drop in the water supply, the sieve is again empty very quickly.”

    Perhaps Russia should do what America would do: appoint a Czar. No wait, bad idea.

  • Is Social Security a Ponzi Scheme?
    Posted by on December 29th, 2008 at 2:23 pm

    Jim Cramer says it is.

    “To everybody in the press, who’s calling Bernie Madoff’s alleged $50 billion scam the ‘largest Ponzi scheme ever,’ I say give me a break,” Cramer said on his Dec. 17 show.
    According to Cramer, the largest Ponzi scheme in history is run by the federal government – Social Security.
    “We know the truth about Ponzi schemes,” Cramer said. “We all know the name of the biggest Ponzi scheme in history and it’s not even illegal. In fact, it is run by the U.S. government. And the name of it – well they call it Social Security.”

    Oh, please. Social Security is not a Ponzi Scheme. I’ll define a Ponzi Scheme as a fraud that has zero investments; it merely pays off initial investors with funds from new victims, I mean, “investors.”
    First, the funds from social security do go into Treasury securities, which are real investments. Plus, social security is currently running a very large surplus. How much longer will it continue to run a surplus? Well, that’s a good question. But the system can stay healthy as long as there are adjustments to benefits and how much is paid in. Those choices aren’t easy but that’s a big difference from what Bernie Madoff was doing.
    Think of it this way: If no new money was allowed into social security, it would still run. When the same happened to Madoff and Ponzi, their frauds were over.
    Social Security has a lot of problems, but this talk of it being a Ponzi Scheme is just silly.

  • The Danger of Models
    Posted by on December 29th, 2008 at 2:10 pm

    One of the market’s better timing strategies hasn’t been having a good run decade. I think all models are destined to fall at some point. Still, comparing the market’s return to the yield curve had a very nice run. Perhaps it will make a comeback. Let’s look at the numbers.
    From 1962 through 1999, when the spread between the 90-day T-bill and the 10-year T-bond was 150 or more points, the S&P 500 returned about 1,140%. That happened slightly less than half the time. When the spread was less than 150 points, the S&P 500 rose just 65%. That’s a pretty sharp divide.
    Since 2000, the S&P 500 has lost about 41% when the yield spread was over 150 points, and it’s been roughly flat when it’s been under 150 points.

  • The Santa Rally
    Posted by on December 29th, 2008 at 12:27 pm

    Several months ago, I took the entire history of the Dow Jones and broke down its performance by days of the year (btw, what the hell was I thinking??). As it turns out, the Santa Claus Rally is quite real.
    By far, the Dow’s best time of the year is the 17-day period from December 21 to January 7. Over that period, the Dow has gained 3.39%—that’s more than 40% of the Dow’s annual capital gain, even though we’re talking about a period that’s less than 5% of the year.
    The worst time of the year is from September 6 to October 29. Eighty years later, we still feel the effects of 1929.
    image534.png

  • The Weekend That Wall Street Died
    Posted by on December 29th, 2008 at 10:54 am

    Today’s Wall Street Journal has an excellent 4,000-word article on the weekend that Wall Street “died.” Personally, I think that’s a bit strong. A certain crucial aspect of Wall Street is no more, but Wall Street is far from dead.
    The other issue I have with the article is that it sees the collapse of Lehman as a battle of big personalities. That’s a favorite media take on things, especially when the personalities are big, which is also a Wall Street specialty.
    Unfortunately, the Panic of 2008 had causes that are far deeper and more complex. In fact, deeper and more complex than we probably understand right now. There’s no economic theory to explain what happened and why. Some day, there will be, but until then, some ideological humility is needed.
    Here’s a snippet from the article:

    Mr. Fuld had faced challenges to his firm before. Since taking Lehman’s reins in 1994, he expanded the 158-year-old bond house into lucrative areas such as investment banking and stock trading. Over the years, he had tamped unfounded rumors about the firm’s health and vowed to remain independent. “As long as I am alive this firm will never be sold,” Mr. Fuld said in December 2007, according to a person who spoke with him then. “And if it is sold after I die, I will reach back from the grave and prevent it.”
    In the summer of 2008, Mr. Fuld remained confident, particularly given the security of the Fed’s discount window. “We have access to Fed funds,” Mr. Fuld told executives at the time. “We can’t fail now.”

  • Department of Poetic Justice
    Posted by on December 29th, 2008 at 10:24 am

    Looks like Bernie got robbed.

    Swindler extraordinaire Bernard Madoff got a taste of his own medicine last weekend when a burglar stole a $10,000 statue from his posh, $9.4 million Palm Beach estate, according to a police report.
    The theft occurred sometime between 3 p.m. on Dec. 19 and 11:30 a.m. last Sunday, a week after Madoff confessed to ripping off $50 billion from investors in a decades-long Ponzi scheme.
    The five-foot, copper artwork overlooked the Madoffs’ inground pool, and portrays two young lifeguards sitting on a raised stand.

    From the looks of it, the real criminal was the artist. Oh, snap!

  • The 2009 Buy List
    Posted by on December 28th, 2008 at 2:12 am

    Here’s the Crossing Wall Street Buy List for 2009:
    AFLAC (AFL)
    Amphenol (APH)
    Baxter International (BAX)
    Becton, Dickinson (BDX)
    Bed Bath & Beyond (BBBY)
    Cognizant Technology Solutions (CTSH)
    Donaldson (DCI)
    Danaher (DHR)
    Eaton Vance (EV)
    Eli Lilly (LLY)
    FactSet Research Systems (FDS)
    Fiserv (FISV)
    Jos. A Bank Clothiers (JOSB)
    Leucadia National (LUK)
    Medtronic (MDT)
    Moog (MOG-A)
    Nicholas Financial (NICK)
    SEI Investments (SEIC)
    Stryker (SYK)
    Sysco (SYY)
    Once again, I’m only making five changes to the Buy List. The five new buys are:
    Baxter International (BAX)
    Becton, Dickinson (BDX)
    Cognizant Technology Solutions (CTSH)
    Eaton Vance (EV)
    Eli Lilly (LLY)
    Three of the new buys are in health care.
    The five sells are:
    Clarcor (CLC)
    Harley-Davidson (HOG)
    Lincare (LNCR)
    WR Berkley (WRB)
    Unitedhealth (UNH)
    I’ll start tracking the new list this Friday, January 2, 2009, the first day of trading of the new year. I’ll assume that all of the stocks are equally weighted with the closing price as of December 31 as the buy price. As usual, the rules state that I’m not allowed to make any changes to the Buy List throughout the year.
    My purpose is to show investors that by buying and holding a well-diversified portfolio of high-quality stocks, you can do well in the market. With only a few days left in 2008, we’re heading toward our second straight year of beating the S&P 500 while using less risk. Plus, our turnover is only 25% which is far less than most professional money managers.
    You can assume that I own any of the stocks on the Buy List. I won’t buy any of the new names until the new year.

  • The Christmas Bust
    Posted by on December 26th, 2008 at 10:27 am

    Despite huge discounts, many retailers had a lousy Christmas:

    “It’s been difficult, much more difficult than anyone expected,” Gilbert Harrison, chairman and chief executive officer of retail advisory firm Financo Inc., said today in a Bloomberg Television interview from West Palm Beach, Florida. Consumers “will spend on necessities, they’ll spend on what they need, but they’re being very particular in what they’ll buy.”
    Discounts of 70 percent off or more by Macy’s Inc., AnnTaylor Stores Inc. and other retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Including fuel, sales tumbled as much as 8 percent.
    More than a dozen retailers, including Circuit City Stores Inc., have sought bankruptcy protection this year as the credit squeeze and the U.S. recession dried up funding. The holiday results indicate further filings are possible, along with consolidation among similar companies, said Harrison.