Count De Monet
Posted by Eddy Elfenbein on June 25th, 2008 at 4:21 pm

At Christie’s, they were looking to sell Monet’s “Le Bassin aux Nymphéas” (above) for $36 million to $47 million. The winning bid was for $80.4 million.

No Change
Posted by Eddy Elfenbein on June 25th, 2008 at 2:15 pm

Here’s the Fed’s latest statement:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

Ron Isana summed it up well by saying that this statement has nothing for everyone.

Quote of the Day
Posted by Eddy Elfenbein on June 25th, 2008 at 10:16 am

The Oracle of Omaha speaks:

Warren Buffett is in Toronto, fielding questions from a crowd of 300 executives. One asks what makes people want to sell their companies to him.
The Berkshire Hathaway Inc. chief executive officer replies that he tells a prospective seller to think of the company as a work of art.
“You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever,” he says at the February meeting. “Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.”

Why Soccer Will Never Be Really Big Here
Posted by Eddy Elfenbein on June 24th, 2008 at 2:39 pm

I just looked at the numbers of the Euro 2008 tournament. So far, there have been 28 games. The team that scores first has gone 20-3-3! Two other games have been 0-0 ties. Remarkably, the Turks have won two of the tournament’s three come-from-behind victories.
That’s one of the problems I have with soccer, come-from-behind wins are so rare. The U.S. is a country built on the idea of coming from behind to upset the champs.
I admire the athleticism of the players, and I think it’s fascinating that most of them look like guys you could see walking down street (unlike a pro football or basketball player). But I’m sorry, there has to be more scoreboard action. If you score the first goal, you basically have the game wrapped up. Do they just run out the clock? In baseball, scoring the first is good, but it’s just a start.
I’m curious what the equivalent start you need in baseball or football to have something close to a 20-3-3 record. My guess is that you need a 6-0 lead in baseball, and a 17-0 lead in football.

From Another Credit Crunch
Posted by Eddy Elfenbein on June 24th, 2008 at 11:54 am

The New York Times from November 1991:

Is the credit crunch real? Are banks denying creditworthy businesses the loans they need to invest the economy out of the recession?
The idea certainly appeals to the White House, which is in hot pursuit of a villain or three to explain why the stalled recovery is not the President’s fault. But many economists remain skeptical. The fall in the volume of bank loans, they point out, could be explained equally well by a recession-induced decline in the demand for credit.
Or at least it could until now. Minds are bound to be changed by the release of the first serious analysis of the crunch hypothesis, by Ben Bernanke of Princeton University and Cara Lown of the New York Federal Reserve Bank. The study, to be published in the January issue of the Brookings Papers on Economic Activity, confirms that a scarcity of bank capital has indeed affected the supply of loans. But the two economists believe that the full weight has been felt only in the Northeast. And they say the impact on jobs and incomes may be smaller than anecdotes of businesses’ drying up for want of liquidity would suggest.

Have Lunch With Warren Buffett
Posted by Eddy Elfenbein on June 24th, 2008 at 11:42 am

For charity, you can have lunch with Warren Buffett. The current bid on eBay is $77,100.
That’s less than two-thirds of one Berkshire share.

Junk Default Recoveries Maybe Lower Than Usual
Posted by Eddy Elfenbein on June 24th, 2008 at 10:31 am

I’ve been surprised by the wide yield spread between low-risk bonds and high-risk bonds. Just look at the downward drift of Vanguard’s High-Yield Corporate Bond Fund (VWEHX).

I called Vanguard and the fund pays a dividend yield of 8.61%. Wow, that creams just about anything else you can find today.
Of course, they’re called junk for a reason. High-yield bonds have a greater risk of defaulting than investment grade debt. In today’s Wall Street Journal, Liz Rappaport says that if defaults do happen, the amount recovered could be less than it has been in the past.

A report to be published Tuesday by Moody’s Investors Service argues that the explosion of loans issued by junk-rated companies in the past few years means that if they default, the recoveries on these loans might be less than in the past.
The highest-priority loans, called first-lien senior secured bank loans, will likely recover on average 68 cents on the dollar upon default in this downturn, compared with a historical average of 87 cents, Moody’s said.

Here’s the money quote:

Now, Moody’s expects loan investors to fare almost as badly as investors in riskier junk bonds have done in previous busts. “It doesn’t matter what you call something,” says Kenneth Emery, author of the report. “What matters is where you sit in the liability structure.”

Historically, it’s fairly rare for a bond, even a junk bond, to default. The long-term rate for junk is about 2.6%, but for investment grade bonds, the default rate is just 0.1%. However, defaults can often spike dramatically higher. There have been times when the junk default rate has hit 15%, while it’s never gone above 1.6% for the highest-grade bonds.
Reuters reports today:

The U.S. default rate on junk bonds, high-yield debt that is below investment grade, rose to 1.89 percent in May, a 26-month high, from 1.64 percent in April. The rate is expected to rise to 4.7 percent within a year and there is a 20 percent chance it could go as high as 8.5 percent, S&P said.

Goldman Admits It Goofed
Posted by Eddy Elfenbein on June 24th, 2008 at 9:34 am

You don’t find the word “goofed” in many financial headlines, especially ones dealing with Goldman Sachs, but Reuters has the goods:

Goldman cuts financials, admits goofed on upgrade
Goldman Sachs & Co strategists urged stock investors on Monday to “underweight” U.S. financial and consumer shares, admitting it was wrong when it upgraded both sectors just seven weeks ago.
The downgrades sparked selling in the two sectors as investors feared that weakening consumer demand and deterioration in the credit markets will weigh on profitability.
“We boosted our consumer discretionary and financials weights in May on the belief the sectors would benefit from bank recapitalizations and fiscal stimulus,” Goldman strategists led by David Kostin wrote. “Our thesis was clearly wrong in hindsight.”

Good for them for reversing their call. One of the biggest mistakes investors make is refusing to admit defeat on an investment. People will hang on to the worst sorts of stocks just so because they don’t “want to take a loss.” Stocks don’t have egos. Sometimes it’s best just to let it go.
Here’s a look at how the S&P 500 Financials and Consumer Discretionary Indexes have done since the beginning of last year.

This chart reminds me of another big mistake investors make: “It’s already down so much, it can’t possibly go any lower?”

UNH Under $27
Posted by Eddy Elfenbein on June 23rd, 2008 at 3:07 pm

Unitedhealth Group (UNH) got down to $26.35 today. That’s the lowest price in over four years. The company said that it expects earnings this year of $3.55 to $3.60 per share.
I’m going go out on a limb here and say, I don’t think the market believes that.

Aussie Power Crisis Leads to Flat Beer
Posted by Eddy Elfenbein on June 23rd, 2008 at 2:40 pm

Talk about globalization. Thanks to demand from China, a town in Australia is booming. That is, until an explosion cut off natural gas supplies.

Hotels are turning off heaters, dirty laundry is piling up and restaurants and bars expect shortages of beef and draught beer. The crisis may shave a quarter point off Australia’s gross domestic product as mines and processing plants cut production, slowing the state’s commodities-driven boom, estimates Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney.

It’s a nightmare deciding what stays on and what stays off. My favorite quote:

”When it gets to the stage where you can’t pour a beer in a pub, you know this crisis has the potential to affect every aspect of business,” says Bradley Woods, CEO of the Australian Hotels Association’s West Australian branch.