• Investor Quiz
    Posted by on November 10th, 2008 at 10:50 am

    Guess what stock was up over 430,000% in the last quarter of the 20th century, or nearly 40% a year?
    Give up?

    Read more…

  • Now That’s a Price Target
    Posted by on November 10th, 2008 at 10:40 am

    Deutsche Bank lowered GM to a sell today. That’s not what caught my attention, although I’m not sure why anyone would have rated GM anything else but sell.
    No, what struck me was their new price target: $0.

  • The Recession Is On
    Posted by on November 7th, 2008 at 2:18 pm

    Duh.

    The head of the panel that officially dates U.S. economic cycles said there’s no doubt now that a recession is under way following a surge in the unemployment rate to a 14-year high.
    “The evidence is more than compelling” Robert Hall, the Stanford University economist who leads the National Bureau of Economic Research’s business cycle dating committee, said in an interview. “It’s conclusive, in my personal opinion.”
    With today’s remarks, Hall joined fellow panelist and Harvard University Professor Martin Feldstein in calling a recession. The eight-member panel will meet at a later date to make an official determination because it needs additional details on gross domestic product figures, Hall said.
    Feldstein and other analysts have said the economic slump is likely to be deeper than the past two recessions, in 2001 and 1990-91. Today’s employment report reinforced that pessimism, with the unemployment rate climbing to 6.5 percent in October from 6.1 percent the previous month.

    By my estimate, I think they’ll say the recession began in May.

  • The Pro-Obama Wealthy
    Posted by on November 5th, 2008 at 5:27 pm

    According to exit polls, the percentage of voters in households that make over $200,000 a year doubled from 2004 to 2008, rising from 3% to 6%.
    In 2004, those voters went for Bush over Kerry, 63% to 35%. This time, they voted for Obama over McCain, 52% to 46%. That’s an amazing 17-point pick up.

  • NICK’s Earnings
    Posted by on November 5th, 2008 at 11:44 am

    Nicholas Financial (NICK) reported third-quarter earnings today, and it was basically what I expected. The company earned eight cents a share, which was a big drop from the 25 cents a share it earned in last year’s third quarter. Still, they’re making money, and that needs to be stressed. Revenues increased 7.4% to $13.5 million.
    I was impressed to see that most of the measures of their business were fairly stable compared with previous quarters. The big exception is NICK’s prevision for credit losses. That grew by 225% over last year’s third quarter, and it’s nearly 50% from the second quarter.
    This confirms my earlier view—NICK’s business is in a lot of trouble right now. However, any fear that the company is about to go under isn’t yet shown by the evidence. By my guess, I would say the current market price probably reflects a 50% chance that NICK will go bankrupt sometime in 2009.
    This investment will take awhile to be worthwhile, but it looks to reward patient investors.

  • Our First First Black President
    Posted by on November 5th, 2008 at 10:54 am

  • How Stocks Work
    Posted by on November 4th, 2008 at 11:15 pm

    Felix Salmon put three questions to Jim Surowiecki on the mechanics of stock valuation. I have some differences with Surowiecki’s answers so here’s my take:
    Felix Salmon: What’s the relationship, in theory, between a company’s return on equity, on the one hand, and its stock price, on the other? Does a high return on equity mean a rising stock price, or is it a rising return on equity which means a rising stock price? Or, to put it another way: if one company has an ROE which is (expected to be) flat at 4%, and another company has an ROE which is (expected to be) flat at 14%, would you expect the latter to rise more than the former, or indeed either of them to rise at all?
    Eddy: A company’s share price is the net present value of all future cash flows. A company’s return-on-equity is a measure of profits for the next year relative to present equity, so the two are connected. However, a high ROE does not translate to a rising share price, but a rising ROE should. Regarding your question, I would assume that the market has discounted both stocks’ net present value which incorporates ROE. Therefore, I would only expect the stocks to rise at the pace of the risk-free rate plus the equity risk premium.
    This may help: ROE can be broken down into three parts; profit margin, asset turnover and leverage. It goes like this:
    Profit margin is earnings divided by sales. Asset turnover is sales divided by assets. Leverage is assets divided by equity.
    Earnings……….Sales…………..Assets
    —————X—————-X————–
    Sales…………….Assets………..Equity
    Note that the sales and assets cancel each other out to give you Earnings divided by Equity.
    FS: What’s the relationship between stock price, ROE, and risk-free rate of return? Would one expect ROEs in a country with a zero risk-free rate to be lower than ROEs in a country with a higher risk-free rate? How does that feed in to stock prices, if at all?
    Eddy: Again, a company’s share price is the net present value of all future cash flows. ROE is the best measure of the growth of future cash flows. How do we discount that? We discount it by the cost of capital which is risk-free rate plus an equity-risk premium. That’s why a lower risk-free rate tends to boost equity prices.
    According to the Gordon Model, it should look something like this:
    Price = Earnings/(Risk Free Rate + Equity Risk Premium – ROE)
    FS: How can a company with a positive ROE destroy economic value for shareholders?
    Eddy: All companies in all industries are in phantom competition with the cost of equity capital. Even though you can’t see it, you’re struggling against it every day. So even if a company manages to squeak out positive ROE, capital will not flow your way if you keep losing to everybody else.

  • Press Release from the NY Fed
    Posted by on November 4th, 2008 at 3:02 pm

    Wonderful:

    Michael Alix has been named a senior vice president in the Bank Supervision Group of the Federal Reserve Bank of New York. He will serve as a senior advisor to William L. Rutledge, executive vice president, Bank Supervision Group. Mr. Alix’s appointment was made by the Bank’s board of directors and is effective, November 3, 2008.
    Most recently, Mr. Alix worked for the Bear Stearns Companies, Inc., where he served as chief risk officer from 2006-2008 and global head of credit risk management from 1996-2006. His prior experience included eight years at Merrill Lynch & Company where he was a director, Asia chief credit officer and a vice president, head of North America financial institutions credit. He began his career with the Irving Trust Company where he served as an assistant vice president and lending officer.
    Mr. Alix holds an M.B.A in finance from the Wharton School of the University of Pennsylvania and a bachelor’s degree in economics from Duke University. He is a resident of New Jersey.

  • The S&P Crosses 1,000
    Posted by on November 4th, 2008 at 11:02 am

    There’s an election today! How come no one told me? Why wasn’t this in the news? Were there even debates?
    Since I live in Washington, DC, the Electoral College guarantees us the least-important votes in the Union. DC isn’t just a blue state, it’s the bluest blue state possible, and it’s getting bluer.
    For the last four straight elections, the Republican candidate has received 9% of the vote. I really don’t think McCain will be able to top that. Thirty-six years ago, Nixon got 21.5% of the DC vote which seems impossible now.
    The good news today is that for the first time in three weeks, the S&P 500 is back over 1,000. That’s over 19% higher than our intra-day low from October 10.
    Update: Today’s intra-day high was 19.7% above the intra-day low from four weeks ago.

  • Global Marginal Tax Rates Are Falling
    Posted by on November 3rd, 2008 at 3:56 pm

    The Danes pay the most:

    Worldwide, top personal tax rates have fallen from an average of 31.3% in 2003 to 28.8% in 2008. But European Union (EU) taxpayers still pay the highest rates, at an average of 36.4%, followed by taxpayers in the Asia Pacific countries with an average of 34.6% and those of Latin America at 26.9%, KPMG said.
    At a country level, the highest tax rates in the world are paid by the people of Denmark, with a top rate of 59% for the whole six years, followed by those of Sweden, whose rate came down last year from 57% to 55%, and those of the Netherlands, who have paid 52% for the whole period.
    Excluding those countries which levy no tax at all, the lowest EU rate is in Bulgaria, with a newly introduced flat rate of 10%, down from 24%. In Asia Pacific the lowest is in Hong Kong, with 16% and in Latin America it is in Paraguay with 10%.
    Of the 87 countries surveyed, 33 have cut their rates in the past six years and only seven have a higher top rate in 2008 than they did in 2003.
    Among the large western European economies, France has made the most significant cut in its rates, from 48.1% in 2003 to 40% in 2007. Germany has gone from 48.5% to 45%, having briefly stood at 42% in 2005 and 2006.
    But across the EU it has been the introduction of flat rate taxes in the Eastern European states that has had the most impact, KPMG said. As well as Bulgaria’s new flat rate of 10%: Estonia has cut its rates from 26% in 2003 to a flat 21% in 2008; Slovakia has gone from 38% to a flat 19%; Lithuania last year fell 6 points to 27% and this year a further 3 points to a flat 24%; Romania has cut rates from 40% to a flat 16%; and the Czech Republic, this year, introduced a flat rate tax set at 15%.

    I have a feeling that marginal rates will soon be rising in the U.S.