More on TIP Yields
Posted by Eddy Elfenbein on November 26th, 2008 at 12:20 pm

Arnold Kling comments on the high short-term TIP yields:

The overall return on a seasoned TIP consists of three things. First, there is the coupon on the security. Second, there is the appreciation or depreciation of price. Third, there is the change in the accrued inflation factor. The coupon on the 1/15/09 TIP is 3.875 percent, so interest accumulates at that annual rate between now and then. So you can expect about 0.5 percent in interest (taking the number of days between now and January 15th, dividing by 365, and multiplying by the coupon rate). The price this morning was roughly 98.35, and if you hold it until January 15th it will effectively go to 100. So, you have a 1.65 percent gain from that. Annualize that number, and there’s your double-digit yield.
The catch concerns the accrued inflation factor. Because the bond has been outstanding for almost ten years, the accrued inflation factor as of December 1st is 1.33 and headed down, because of the decline in the Consumer Price Index in October, to 1.32 on December 31 or a little less than a one percent drop.
I am guessing that the inflation factor for January 1st through 15th depends on the November CPI. If the November CPI declines by, say, one percent, then my guess is that the inflation factor would decline by another 0.5 percent. If that happens, then by my calculation your yield will be 0.5 + 1.65 – 1.5 = 0.65, over a period of roughly 50 days. At an annual rate, it is something just over 4.5 percent. Nice for a short-term Treasury, but nothing like double digits.
On the other hand, if we get an enormous drop in the CPI (keep in mind that gas prices are certainly going to be lower), you could actually lose money. If I’m doing the arithmetic right, with a 2.3 percent drop in the CPI, the accrued inflation factor would go down another 1.15 percentage points, and your total yield would be zero.

Introducing the Free Lakota Bank
Posted by Eddy Elfenbein on November 25th, 2008 at 10:09 am

From their website:

The Free Lakota Bank is the world’s first non-reserve, non-fractional bank that issues, accepts for deposit, and circulates REAL money…silver and gold. All of our deposits are liquid, meaning they can be withdrawn at any time in minted rounds.
At the Free Lakota Bank, we issue, circulate and accept for deposit only AOCS-Approved silver and gold currencies. Silver & gold are a store of value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Since we deal only in real money, we do not participate in any central bank looting schemes.
Money is made possible only by those who produce. Paper is not money, instead merely a promise to pay. We hope that some day the rest of the world will awaken from the American Dream: the dream that a person can sustain life by consuming more than producing. We call it the American Dream because you must be asleep to believe it. Well, that dream now has a silver lining; as people discover the dream is really a nightmare, the only solution is a return to value: value that comes from production and honest trade.

Glad That’s All Cleared Up
Posted by Eddy Elfenbein on November 25th, 2008 at 9:41 am

Goldman’s Forecast
Posted by Eddy Elfenbein on November 24th, 2008 at 4:22 pm

Reuters reports:

Citigroup cut its 2008 target for the index to 850 points from 1,200 points. The 2009 target was cut to 1,000 points from 1,300 points.
Goldman cut its 2008 earnings-per-share estimate on the index to $55 from $65 — its third estimate cut in less than three months. The 2009 estimate was cut to $53 from $68.

What’s the point in making forecasts if you can instantly slash next year’s estimate by 22%?
I don’t mind estimates, and I don’t mind people being wrong. But I do mind frivolousness. There’s no value in that forecast whatsoever.

High Yield Rates Soar
Posted by Eddy Elfenbein on November 24th, 2008 at 4:13 pm

With T-Bills yielding less than 1 bip, look at the Vanguard High-Yield Corporate (VWEHX):

Google: A Value Stock
Posted by Eddy Elfenbein on November 24th, 2008 at 1:01 pm

Anyone notice that Google (GOOG) is going for 11.3 times next year’s earnings?

Assorted Links
Posted by Eddy Elfenbein on November 24th, 2008 at 12:47 pm

Here are a few good links I want to pass along.
The New Yorker does 12,000 on the bearded one.
The Wall Street Journal looks at the Morgan Stanley Panic.
The New York Times looks at the decline and fall of Citigroup. Hint: Rubin doesn’t come out looking so good.
Every Stock Mutual Fund Has Lost Money in 2008, Except One
China’s richest man disappears
China’s second-richest person detained
Very cool NYT graphic tracking the bailout money.

Time Magazine: February 15, 1999
Posted by Eddy Elfenbein on November 24th, 2008 at 1:56 am

Rubin, Greenspan and Summers. Diminished reputations all.

Citigroup, Feds Reach Deal
Posted by Eddy Elfenbein on November 24th, 2008 at 1:08 am

Well, the deal is done. Citigroup reached a deal with the Feds whereby the government will backstop $306 billion of its crappy assets. Note that the assets are not being taken off the balance sheet (TARP is dead). In exchange, the government will get 8% preferred shares (i.e., our crappy assets). The government will also kick in another $20 billion of TARP money (Update: TARP lives!)
For its troubles, Citi will now have to comply with the exec comp restrictions plus it has to go along with the FDIC’s mortgage modification program.
There’s a lot going on here so let’s look at the objectives. For one, the government is aware that other troubled banks are watching this deal. Even if other banks never get it, a bar has been set that will influence future behavior.
There’s also the question of preferred shares versus warrants. That could go either way. If it works and the price is good, the warrants could be a very good deal for taxpayers. Actually, it could be an insanely good deal. That’s a risk, however, I’m not inclined to take. For one, what price? Citi’s dropped something like 60% in the past few days. The warrants in this deal have a price of $10.61 which is the 20-day trailing price. Friday’s close was $3.77. You do the math. I don’t get why the preferreds pay 8% instead of the previous 5%. For taxpayers, I don’t see why we can’t get the same 10% that Buffett got from Goldman.

The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and capital.
As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.
With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.
We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:
* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.

Here’s the Summary of Terms.

Somali Pirates in Discussions to Acquire Citigroup
Posted by Eddy Elfenbein on November 22nd, 2008 at 12:04 pm

It had to happen sometime:

November 20 (Bloomberg) — The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup.
The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned most recently from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said.
“You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything,” said Ali.
The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS’s are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody’s and S&P have already issued their top investment grade ratings for the PRBS’s.
Head pirate, Ubu Kalid Shandu, said: “We need a bank so that we have a place to keep all of our ransom money. Thankfully, the dislocations in the capital markets has allowed us to purchase Citigroup at an attractive valuation and to take advantage of TARP capital to grow the business even faster.”
Shandu added, “We don’t call ourselves pirates. We are coastguards and this will just allow us to guard our coasts better.”
*CITI IN TALKS WITH SOMALI PIRATES FOR POSSIBLE CAPITAL INFUSION
*WILL REQUIRE ALL CITI EMPLOYEES TO WEAR PATCH OVER ONE EYE
*SOMALIAN PIRATES APPLY TO BECOME BANK TO ACCESS TARP
*PAULSON: TARP PIRATE EQUITY IS AN `INVESTMENT,’ WILL PAY OFF
*KASHKARI SAYS `SOMALI PIRATES ARE ‘FUNDAMENTALLY SOUND’ ‘
*Moody’s upgrade Somali Pirates to AAA
*HUD SAYS SOMALI DHOW FORECLOSURE PROGRAM HAD `VERY LOW’ PARTICPATION
*SOMALI PIRATES IN DISCUSSION TO ACQUIRE CITIBANK
*FED OFFICIALS: AGGRESSIVE EASING WOULD CUT SOMALI PIRATE RISK
* FED AGREED OCT. 29 TO TAKE `WHATEVER STEPS’ NEEDED FOR SOMALI PIRATES