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January 6, 2009 Earnings Preview: Bed Bath & Beyond Bed Bath & Beyond Inc. reports results for its fiscal third quarter on Wednesday. The following is a summary of key developments and analyst opinion related to the period. Posted by Eddy at 1:20 PM | Permalink Where Do You Place Johnny Cash? Tyler Cowen asks: "Where is the geographic center of Johnny Cash's moral and musical universe?" I'm particularly pleased with my answer. Johnny Cash walks the line. Posted by Eddy at 12:11 PM | Permalink More Financial History The Economist opens its vault: Having fully admitted the disappointments, we find some justification for regarding 1928 as a year of no small promise for the future. Quite possibly it will be remembered in history as a year in which the foundations of recovery were laboriously laid. Posted by Eddy at 12:06 PM | Permalink Iceland to Sue Britain From the 1950s through much of the 1970s, Britain and Iceland were involved in the Cod Wars, which was an overgrown fishing dispute. Now the financial mess has brought these two rivals back to confrontation. Iceland’s state-run Kaupthing bank will sue the British government for its decision to force the bank’s British subsidiary into a form of bankruptcy, the Icelandic Prime Minister’s office said Tuesday. Honestly, it's hard for me to read that last sentence without laughing. Posted by Eddy at 11:05 AM | Permalink The Price of Forecasts Here's Paul Farrel highlighting absurdly bullish forecasts from 10 years ago. Let me again make my claim that overly bullish forecasts are routinely held to account, but absurdly bearish ones are rarely held accountable. Here's some advice: If you ever go in the econ-predictions biz, be pessimistic and vague. Then claim anything that goes wrong as something you predicted. By the way, are we allowed to start making fun of this? Posted by Eddy at 12:28 AM | Permalink Prepayments and the Subprime Market Here's the abstract of a recent paper: This paper demonstrates that the reason for widespread default of mortgages in the subprime market was a sudden reversal in the house price appreciation of the early 2000s. Using loan-level data on subprime mortgages, we observe that the majority of subprime loans were hybrid adjustable rate mortgages, designed to impose substantial fi nancial burden on reset to the fully indexed rate. In a regime of rising house prices, a fi nancially distressed borrower could avoid default by prepaying the loan and our results indicate that subprime mortgages originated between 1998 and 2005 had extremely high prepayment rates. Most important, prepayment rates on subprime mortgages were extremely high (i) not just for ARMs but FRMs as well, (ii) even before the reset dates on hybrid-ARMs and (iii) despite prepayment penalties on the contract. However, a sudden reversal in house price appreciation increased default in this market because it made this prepayment exit option cost-prohibitive. In short, prepayments sustained the subprime boom and the extremely high default rates on 2006-2007 vintages were largely due to the inability of these mortgages to prepay (an option that was available for mortgages of earlier vintages). Posted by Eddy at 12:01 AM | Permalink January 5, 2009Two Days in 2009 and We’re Kicking Butt With two days under our belt, the Buy List already has a lead over the S&P 500, 4.12% to 2.68%. Obviously, a two-day lead doesn’t mean much, but I mention it because the Buy List was helped out enormously today by the 27.7% jump in Nicholas Financial (NICK). Since NICK is such a low-priced stock, the bid/ask spread can make a big difference on how well the Buy List does each day. Some days we’re punished, but some days, like today, it’s a big, big help. Posted by Eddy at 11:16 PM | Permalink Meg Whitman for Governor? Meg Whitman stepped down from the boards of Procter & Gamble Co., eBay Inc. and Dreamworks Animation SKG Inc. effective Dec. 31, her spokesman said. Posted by Eddy at 3:28 PM | Permalink The Gold-to-Silver Ratio In 1792, the U.S. Congress, at the advice of Alexander Hamilton, passed the Coinage Act of 1792. This was the government’s first attempt at price-fixing. The act defined a U.S. dollar as 371.25 grams of silver or 24.75 grams of gold. In other words, gold was worth 15 times as much as silver. So how did they do? Well, not too well. The guys at Bespoke posted a chart looking at the ratio of gold to silver over the past few years. The ratio has exploded in the past year, rising from under 50 to nearly 80 today. They conclude: “Based on the ratio of gold to silver over the last ten years, a reversion of the mean trade would be to go long silver and short gold.” Posted by Eddy at 11:29 AM | Permalink Best Paragraph of the Day James Surowiecki on Wall Street con games: In David Mamet’s movie “House of Games,” the grifter played by Joe Mantegna explains to a former mark, “It’s called a confidence game. Why? Because you give me your confidence? No. Because I give you mine.” So the bankers gave us their confidence, in the form of mortgages and other forms of credit, and we gave them ours. This culture of credulity did plenty of damage to the economy, but now it has given way to something even more corrosive; namely, endemic mistrust. Because if there’s one thing worse than too much confidence it’s not enough. Fraud impoverishes a few; fear impoverishes the many. As long as mistrust prevails, people will keeping pulling money out of the system—sometimes even at gunpoint. Posted by Eddy at 11:16 AM | Permalink Renaissance Waives Fees James Simons, the Grand Poobah of Renaissance Technologies, said he's going to waive the fees on his futures fund which was down 12% last year, or as Simons called his performance, "less than stellar." The break in fees for this year adds up to $30 million for his $3 billion futures fund. In light of Simons move, I'd also like to announce that I'm waiving all user fees for this blog due to the Buy List's less-than-stellar performance. Simons' Medallion Fund, I should add, was up 80% last year.
Posted by Eddy at 10:45 AM | Permalink The Frank Pentangeli Defense Harry Markopolos won't testify in front of Congress today due to illness. This is strangely similar to The Godfather Part 2. (H/T: Naked Shorts). Posted by Eddy at 2:03 AM | Permalink Down with Financial History Paul Kedrosky has a very good post on the uselessness of financial history. I think he’s exactly right. Finance people tend to be very loose with historical comparisons. I’ll often hear that some situation is “eerily similar” to some year. I don’t buy it—all these historical scenarios are incredibly different. That’s also why I don’t buy the “madness of crowds” explanations about speculative bubbles (there’s another overrated book). Paul writes: I’m torn on the subject, but I’m also increasing skeptical of any and all comparisons to prior historical periods. I don’t buy trough P/E, or recession length, or relative valuation, or interest rate, or sectoral rotation arguments, or… you get the picture. I love data, but I’m increasingly close to being an outright nihilist when it comes to over-reliance on historical financial data without any truly coherent supporting rationale. We are in a grand experiment with no real history to draw on, and anyone who pretends otherwise is deluded or selling something, or both. My view is all these models and comparisons are useful fictions. To put it succinctly: Some are more useful than others. The danger is thinking they’re overly determinant. All comparisons need to be put in context, and context changes constantly. The more I study investing, the more I admire a truly independent mind. David Merkel has more. Posted by Eddy at 1:36 AM | Permalink Dubai, Do Sell Posted by Eddy at 1:14 AM | Permalink Lewis and Einhorn in the NYT The must-read article from yesterday is Michael Lewis and David Einhorn’s two-parter (here and here) in the New York Times. For the most part, I think they describe the problems fairly well. My issue is that I’m not entirely satisfied when a highly complex issue is reduced to the long-term good being sacrificed for short-term gain. Whenever I hear problems put in a neat package like that, I’m suspicious. It’s like hearing that a problem is due to “a lack of communication.” Call me skeptical. The more I look at the credit mess, the more bewildering I find it. For proposed solutions, Lewis and Einhorn have some good ideas and some not-so-good ideas. For example, when firms get into trouble, let them fail. However, they don’t go all they way and instead suggest nationalizing a failed firm. Well, that’s not letting it fail. When I think of letting a company fail, I mean the real thing. I think the supposed “chaos of bankruptcy” is overrated. Going into bankruptcy protection is a very well-defined area of our legal system. Airlines can exist for a long time in Chapter fill-in-the-blank. The question I have is can the FDIC come up with a way to protect counter-party risk in a failed firm ala deposit insurance. Plus, an off-with-their-head strategy, as Lewis and Einhorn propose, could cause even more mischief from execs who have nothing left to lose. Lewis and Einhorn also suggest regulating credit-default swaps but they’re a little thin on the details. More specifically, there are no details. They also propose breaking up “any institution that becomes too big to fail.” Hmmm. Again, that’s a lot easier said than done. Particularly when you consider that firms often (though not always) become large through success. Therefore the government has to effectively punish success. I have some issues with that. Posted by Eddy at 1:09 AM | Permalink January 4, 2009Ed Reed In today’s playoff game, Raven’s safety Ed Reed had two interceptions, including one he returned for 64 yards and a touchdown. What’s remarkable about Reed is his ability to return inceptions for big yardage. He has 43 career regular season inceptions, which ties him for 58th place all-time. For yardage, however, Reed has 1,144 yards which ranks him sixth all-time. In week 12 of this season, Reed returned a pick 107 yards for a touchdown to set an all-time record for the longest interception return in the history of the NFL. The previous record was 106 yards. Set by Ed Reed in four years ago. Posted by Eddy at 11:50 PM | Permalink January 2, 2009Not Getting the Year Off on the Right Foot Posted by Eddy at 1:14 PM | Permalink Madoff Statue Returned! The thieves brought it back. And attached a note: "Bernie the Swindler, Lesson: Return Stolen Property to rightful owners. Signed by - The Educators." The copper statue was reported stolen from Madoff's $9.2 million mansion on Dec. 22 - about a week after the Wall Street money man was accused of scamming investors in a $50 billion Ponzi scheme. Posted by Eddy at 12:04 PM | Permalink What's the Difference Between a Recession and a Depression? Hebert Hoover used the word "depression" instead of "panic" to describe the events of his administration. Since then, there's been a battle to define what's a recession and what's a depression. Most seem to define a depression as a 10% drop in GDP. The Economist says that it's "a decline in real GDP that exceeds 10%, or one that lasts more than three years." America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933. Output also fell by 13% during 1937 and 1938. The Great Depression was America’s deepest economic slump (excluding those related to wars), but at 43 months it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months.
Posted by Eddy at 11:16 AM | Permalink Belarus Ruble Plunges 20% Think you're having a tough day? Check out Belarus. Belarus' central bank sharply devalued the Belarusian ruble Friday, allowing the currency to plunge 20 percent in a move that will stop the hemorrhaging of its reserves. |
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