Archive for August, 2005

• Reuters: China Defends Yuan Policy
  Eddy Elfenbein, August 30th, 2005 at 9:37 am

  China defended its currency regime on Tuesday ahead of a visit to the United States by President Hu Jintao, but hinted at possible future changes by saying it would “develop and perfect” the exchange rate.
  Some U.S. politicians and industry groups complain that the yuan’s small revaluation last month will do little to address the yawning U.S. trade deficit, and hope President Bush will press Hu on the matter when they meet next week.
  In a briefing about Hu’s trip, He Yafei, director-general of the Foreign Ministry’s department of North American and Oceanian affairs, said the reforms to the yuan, also known as the renminbi, fit China’s reality.
  “We will further develop and perfect the renminbi exchange system with a firm heart,” He said.
  He said that currency issues were a matter of national sovereignty and that Beijing had always taken a responsible attitude toward the exchange rate.
  “We have taken into consideration the practical situation of China’s economic development and how to maintain the financial and economic stability of the region and the world,” He said.
  Critics accuse Beijing of keeping the yuan undervalued so as to make its exports cheaper on the world market.
  On July 21, the central bank revalued the yuan by 2.1 percent and dropped the dollar peg in favor of managing the exchange rate with reference to a basket of currencies.
  Hu visits the United States from September 5 for talks also expected to feature concerns over Taiwan and the trade deficit.

• Greenspan Warns
  Eddy Elfenbein, August 30th, 2005 at 8:58 am

  
  Financial Times

  Greenspan Warns Successor

  The Telegraph

  Greenspan Warns of the Dangers from Capital Gains

  NewsHour

  Greenspan Warns of Growing Risks to U.S. Economy

  Smart Money

  Greenspan Warns of Rise in Risk Tolerance

  Myrtle Beach Sun News

  Greenspan Warns Homeowners

  BBC News

  Greenspan Warns on Protectionism

  The Washington Post

  Greenspan Warns End of US Housing Boom Inevitable

  Globe and Mail

  Greenspan Warns on Deficits

  Financial Times

  Greenspan Warns on Dangers in US Housing Market

  The Spoof

  Alan Greenspan and Jessica Simpson Burned in Effigy After Warning of House Price Crash

• Police Arrest NYSE Member for Death Threat Against Fellow Member
  Eddy Elfenbein, August 29th, 2005 at 2:40 pm

  Wall Street can be a tough place. According to police, Edward A. Reiss made a death threat against William Higgins. Higgins has been opposed to the New York Stock Exchange’s plan to buy Archipelago.
  Here’s more on Reiss:

  “In the past 10 years, electronic technology has transformed the Exchange at lightening speed,” says Ed.
  Although Ed marvels at the computerization of the floor, there have been no advances in saving shoe leather. He’s in constant motion, running from the Main Room to the Garage and back, shouting and gesticulating in a lingo unique to the Exchange.

• Bayou Hedge Fund
  Eddy Elfenbein, August 29th, 2005 at 10:17 am

  Two weeks ago, Eric Dillon went to the offices of Bayou Management. He’s a money manager and he wanted to find out what was happening at the hedge fund. The fund had abruptly shut down, and despite promising to return everyone’s money, no money had been dispersed. Also, no phone calls were being returned. Dillon knocked on the Bayou’s front door, but no one came. He came in through an unlocked back door, and on the CFO’s desk, he found a letter that began, “This is my suicide note and confession.”
  The Wall Street Journal has the whole story. Also, Gretchen Morgenson wrote about Bayou on Sunday.

• Foreigners are Pouring Cash into Emerging Markets
  Eddy Elfenbein, August 29th, 2005 at 9:48 am

  The Economist has an interesting article on the sudden interest in emerging markets.

  Between the beginning of June and the week ending August 17th, emerging-market equity funds took in a net $6.94 billion. That brings the year’s total to $8.74 billion, nearly three times 2004’s level and more than the previous high of $8.6 billion for all of 2003. Bond funds tell the same story, with total net inflows this year of $4.74 billion, a record.

  Many emerging markets are doing very well, plus the risk is much lower than it was eight years ago.

• Google Watch
  Eddy Elfenbein, August 29th, 2005 at 9:19 am

  UBS lowers its earnings estimate due to the secondary stock offering.
  

  For 2006 and 2007, UBS lowered the earnings-per-share estimates on Google to $7.57 and $9.30, respectively, down from $7.60 and $9.43, citing the impact of an offering of about 14 million shares expected in the third quarter.

• Bankruptcy Abuse Prevention and Consumer Protection Act
  Eddy Elfenbein, August 29th, 2005 at 9:05 am

  There’s another hurricane headed towards Wall Street. On October 17, the new bankruptcy law goes into effect. The old law is considerably more liberal, so many companies are expected to file before the deadline. Both Northwest Airlines and Delphi have said that they’re contemplating filing under the old law. The new law is aimed at reducing abuses of bankruptcy proceedings and it makes declaring bankruptcy more difficult. But like all laws, there will be unexpected side effects.

  Certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act will give airlines and other troubled companies less breathing room than in the past to settle their debts and continue in business, rather than liquidate. Among other things, they will have a harder time deferring payment of utility bills to conserve cash. In addition, new restrictions on executive compensation will make it tougher to retain or hire the top-notch managers required to pull off a corporate turnaround.
  Some of the provisions may seem esoteric, but they are sweeping in their implications. For instance, the law imposes an 18-month limit on the incumbent management’s exclusive right to propose a reorganization plan. This ability to control the ball is the debtor’s most powerful means of persuading contending groups of creditors to compromise. Under the new arrangement, one faction might obstruct negotiations until it gets a shot at proposing its own, self-serving plan.

  One of the fears is that distressed companies will dump their real estate holdings to raise money. That could put undue stress on the overheated real estate market.

  The new law’s consumer-related provisions stirred considerable controversy. The no-less-important corporate rule changes received negligible attention, outside the circle of bankruptcy specialists. Now investors must live with the consequences. That will mean dealing with dramatically increased uncertainty, at least until the bankruptcy courts handle a fair number of cases under the new rules.

• Katrina Slams Louisiana
  Eddy Elfenbein, August 29th, 2005 at 8:42 am

  Hurricane Katrina has made landfall in Louisiana and it’s already causing damage on Wall Street. For the first time ever, crude oil futures soared over $70 a barrel. More than 40% of U.S. oil production operations were closed down this weekend. The stock futures are currently pointing to a weak open today.
  Before Katrina is done, she could cost insurers $30 billion. Several of the major insurance companies should open lower today.
  The big concern right now is that Katrina is heading towards refining operations. Not only are operations shut, but we also expect to see a lot of damage. Naturally, gas prices could go even higher.
  If that isn’t enough, remember that September is historically, the market’s worst month. Septembers in post-election years are particularly bad.

• A-Rod
  Eddy Elfenbein, August 28th, 2005 at 10:39 pm

  Alex Rodriguez has the best shot of anyone to break Hank Aaron’s all-time home run record. In 23 seasons, Hammerin Hank hit 755 home runs. A-Rod is already up to 38 this season which gives him a lifetime total of 419. Even though he’s only slightly more than halfway to Aaron, his start is pretty amazing. Earlier this year, Rodriguez became the youngest player to hit his 400th home run. On his 30th birthday last month, A-Rod had more home runs, runs batted in, runs scored and hits than the respective all-time leaders did by their 30th birthdays.

  Since the all-star break, A-Rod has actually picked up the pace. At this rate, he could hit another 10 home runs before the end of the season. If he then added another 46 next year, he’d move into a three-way tie with Willie Stargell and Stan Musial at 475. To be very optimistic, he could get his 500th homer before his 32nd birthday on July 27, 2007. Jimmie Foxx currently holds the mark for youngest to 500. Double-X did it just one month before his 33rd birthday. But Foxx’s career is a good reminder against projecting too optimistically into the future. Foxx’s home run output quickly dwindled and he ended with 534.

  When A-Rod only hit 36 home runs last year, I thought that was only natural because Yankee Stadium is so much bigger than the Ballpark in Arlington. But this year, A-Rod has adjusted very well to the Bronx. He’s currently hitting .360 at home with 23 home runs. If he stays healthy (that’s a big if), Rodriguez could hold several all-time marks before his career is done.

• Be Warned: Mr. Bubble’s Worried Again
  Eddy Elfenbein, August 26th, 2005 at 1:18 pm

  Robert Shiller is worried about a housing bubble. I also think the housing market is overheated, but Shiller is far too much of a bear for me. He gets a lot of credit for “predicting” the stock market crash in his book “Irrational Exuberance,” but Shiller had been bearish since 1996. He’s a bear who’s always warning about a bubble.

  The problem I have with Shiller’s real estate analysis is that he’s compiled a chart going back to the 19th century. It’s very unfair to compare today’s prices to prices so long ago. Today, we have a very mature and sophisticated financial marketplace. There are countless regulations, plus, believe it or not, we have smarter consumers. Borrowers have dozens of options, and the mortgage market is gigantic. The old real estate industry was supported by thousands of tiny George Bailey-type savings and loans. To compare today’s prices to the real estate market of so long ago, ignores the huge advances that have been made.

  In Shiller’s world, it’s nothing but boom and bust. But you can have an asset soar and not always have a bubble. The stock market soared in the 1950’s. In fact, the period from 1949 to 1956 was probably one of the greatest bull markets of all-time. But people don’t think of it as a bull market because it never crashed. Also, just because an asset is overpriced, doesn’t mean it’s about to crash. Prices can stay high for a long time.

  The boom in real estate has been driven by important changes. We’ve had the lowest interest rates in decades, plus housing prices were cheap due to the surge in tech stocks. I don’t believe that everyone in American woke up one day and suddenly became “irrational.” I saw Shiller on the news today and he claimed the public’s opinion was one great big, “don’t worry, housing prices will go up for ever!” Bears always do this. I don’t know one person in 10,000 who would say that.

  We know housing prices have gone up a lot. They certainly can’t keep up this growth rate, and prices are probably due to fall (Shiller expects a 40% correction). But there are several ways out of a bull market besides a bursting bubble.