• NYT: Why the Bear Is Alive and Well
    Posted by on September 9th, 2008 at 11:00 am

    Over the weekend, Paul J. Lim wrote in the New York Times:

    If there’s a silver lining to bear markets, it is that they make stocks cheap for the next wave of investors. But so far in this downturn, it isn’t working out that way.
    Based on the price-to-earnings ratio, stocks have actually become more expensive even as share prices have come tumbling down. In fact, the P/E ratio for the Standard & Poor’s 500-stock index, based on earnings over the previous four quarters, has risen to just over 24 from around 19, according to S.& P.

    Superficially, that’s correct. The problem is that the earnings decline is heavily weighted toward certain sectors — most particularly financials.
    We don’t have the final numbers in yet, but the earnings of the financial stocks in the S&P 500 will probably be about -0.01. The S&P 500 Financials Index is currently around 300. So that’s a P/E ratio of…negative a lot. Consider that financials make up about 16% of the index, and I think we’ve found the squeaky wheel. Compare that with Health Care which is currently going for 15.6 times earnings or Staples (18.0), Tech (18.1) and Industrials (13.8).
    Bear markets generall come in one of two forms. Either stock prices shoot past reality as they did in 1987 and 2000. Or fundamentals crumble beneath prices, which is what happen in 1990 and is happening again.

  • United Shares Plummet on Six-Year Old Story
    Posted by on September 9th, 2008 at 10:55 am

    Yesterday, a financial newsletter circulated a story that United Airlines was seeking bankruptcy protection, which lead to a sell-off in its shares. The story was correct but there was one important detail — it was from 2002.

    Investors clearly took the article as news that the Chicago-based airline had once again sought protection from creditors, a scenario that had grown less remote in the past year as jet fuel prices skyrocketed.
    United had refuted a report by late morning in New York, but not before the stock lost more than 75 per cent of its value. The shares appeared to trade at 1 cent, the default price assigned following its halt.

    UAL.png

  • RIP: Georges Yared
    Posted by on September 8th, 2008 at 4:54 pm

    I wanted to express my condolences to the family and friends of Georges Yared. I always enjoyed Georges’ market commentary and found him to be a sane voice in often insane times. He will be missed.

  • Chart of the Day
    Posted by on September 8th, 2008 at 11:32 am

    Here’s the S&P 500 Energy Index divided by the S&P 500 Financial Index.
    image709.png

  • The Fannie and Freddie Take Over
    Posted by on September 8th, 2008 at 11:01 am

    John Hempton at Bronte Capital has an excellent summary of the takeover of Fannie and Freddie. It’s odd to say this, but the markets forced the government’s hand. The WSJ looks at the events leading up to the takeover.

    In the end, Fannie Mae and Freddie Mac had no choice.
    Summoned to separate meetings on Friday with Treasury Secretary Henry Paulson and other top officials, the two mortgage giants were told they could either agree to a government takeover or one would be foisted upon them.
    “We have the grounds to do this on an involuntary basis, and we will go that course if needed,” Mr. Paulson told senior executives at the two companies, who had little idea such a move was coming, according to three people familiar with the meetings.
    There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn’t survive in their present forms, and that any collapse would be devastating to the economy.
    The decision was hashed out over weeks of meetings. They included a conclave of Federal Reserve officials during their annual retreat at Jackson Hole, Wyo.; a mid-August polling of bond-market players by Morgan Stanley bankers advising Treasury; and a marathon session over the Labor Day weekend, fueled in part by Diet Coke and Coke Zero.
    Dozens of bankers and lawyers were involved in the process. One junior banker joked that the round-the-clock schedule was tougher than prison — at least there, you got three square meals a day.
    In the end, Mr. Paulson, Federal Reserve Chairman Ben Bernanke and James Lockhart, head of the companies’ regulator, the Federal Housing Finance Agency, concluded that the two companies had lost the confidence of the markets and couldn’t survive as currently structured. No one could say how much money from the Treasury, either via a loan or an equity investment, would be enough to get them through the housing mess. Hence, the need for the government to step in and stabilize what has become a vital cog for the housing and mortgage market.

    I’m not against the government’s move and I see that it had to happen. Don’t believe any of the nonsense that this will “cost the taxpayer” fill-in-the-blank billions of the dollars. It won’t at all. What the companies needed as much as money is time and that’s what the government has given them.
    This is sorta of like sausage-making. I only care about the end result and I’d rather not know how it happens. My problem is that the takeover should (must!) lead to full privatization. This can’t be a trip to the repair shop because the problem will happen again. That’s not a prediction. It will happen again.

  • I’m Back
    Posted by on September 8th, 2008 at 10:51 am

    I’m back to blogging after a great week at the beach. Although I had to leave the Outer Banks a bit early to escape Hurricane Hanna.
    So what did I miss? Sarah Palin turned the McCain campaign around. The feds took over Fannie and Freddie and the Panthers stunned the Chargers on the last play of the game!
    The Buy List did pretty well in my absence. We had good earnings from both Donaldson (DCI) and Jos. A Banks (JOSB). I’ll have more once I catch up on all my email.

  • I am Outta Here
    Posted by on August 30th, 2008 at 11:18 am

    I’m off to the Outer Banks for the week. I’ll be returning next Monday–tan, rested and ready.
    In the meantime, please check out the many fine bloggers on my blogroll. Before I go, I’ll leave you with this:

    Have a happy and safe Labor Day!

  • Ouch!
    Posted by on August 29th, 2008 at 3:57 pm

    From the FT:

    Merrill Lynch’s losses in the past 18 months amount to about a quarter of the profits it has made in its 36 years as a listed company, according to Financial Times research that highlights the extent of the global banking crisis.
    Since the onset of the credit crunch last year, Merrill has suffered after-tax losses of more than $14bn as its balance sheet has been savaged by almost $52bn in writedowns and credit-related losses.
    Merrill’s total inflation-adjusted profits between its 1971 listing and 2006 were about $56bn, according to figures from Thomson Reuters Fundamentals and an FT analysis of reported earnings.
    The $14bn in losses for 2007 and the first two quarters of 2008 equal half of Merrill’s profits since the beginning of the ­decade.

  • A Sell Signal
    Posted by on August 29th, 2008 at 1:10 pm

    From Marketwatch:

    Mitch Williams to Ring the NASDAQ Stock Market Opening Bell

    Afterward, he walked the next five traders.

  • Did the Political Markets Fail?
    Posted by on August 29th, 2008 at 11:50 am

    Barry and Felix weigh in on Intrade’s call on the Palin selection. As I’ve said many times, the futures markets are not predictions markets. They’re really odds setting markets.
    The markets didn’t “fail” simply because a low-priced contract paid off. Did the markets fail when Google was at $100 a share? Not at all, the long-shot paid off.
    Futures markets aren’t particularly useful in this instance because the Veep pick is entirely the selection of one person. They’re more useful with events that are transparent, like an election or the Super Bowl. The markets can’t read Senator McCain’s mind, particularly when he’s trying to give off false signals (hence the dance with Lieberman) and go for an unconventional pick.
    The political markets work because they can process lots of information very quickly. With a Veep selection, however, there’s no information. So with these types of events, you have to expect hyper-volatility as the decision time approaches.