Archive for September, 2005

  • The Flattening Yield Curve
    , September 20th, 2005 at 1:48 pm

    The Federal Reserve is about to raise interest rates by 0.25%. This will be the eleventh straight rate increase from the Fed. Since banks make much of their money from the difference between long-term and short-term interest rates, the narrowing yield curve is hurting the earnings outlook for many banks. This has hurt smaller regional banks in particular because they tend to be more dependent on the yield curve for their profits.

    One of my favorite banks, Commerce Bancorp, saw its shares take a big hit last Monday. The company said that earnings over the next two quarters will be below expectations. I still like the stock and I think market grossly overreacted. Commerce said it will only be two pennies a share below expectations. But this shows you that some investors are already afraid of the yield curve. The New York Times notes that in the past year, the yield spread between the two-year note the 10-year bond has closed from 168 basis points to just 26 basis points.

    Here’s a chart showing the banking sector (black line) against the S&P 500 (gold line). While the banking sector has beaten the broad market over the past few years, the banks have started to lag the S&P 500 over the past few months. Once the Fed stops raising interest rates, and the yield curve widens, the banking sector could stage an impressive rally.
    Banks and S&P 500.bmp

  • Baidu Loses Important Court Case
    , September 20th, 2005 at 10:54 am

    More bad news for Baidu. First, the company’s stock valuation gets slammed by two Wall Street firms. Now, the Chinese search engine loses an important legal battle. The company must pay a small fine and it can no longer direct Web surfers to sites where they can download music illegally. This is particularly sensitive because the Chinese government hasn’t been very good on protecting patents. This has been a sore spot in East/West business dealings and hopefully, this case may signal a change.

    Baidu’s stock has been incredibly popular and the site is a big hit in China, especially among the country’s youth. Google owns 2.6% of Baidu’s stock and some people think that Google’s follow-on offering is designed to raise money for a Baidu buyout. Baidu plans to appeal the court’s ruling.

  • Blame Katrina Part II
    , September 20th, 2005 at 10:22 am

    Hurricane Katrina is being blamed for even more earnings shortfalls. It’s not so much the insurance companies that are using the “blame Katrina” excuse, but it’s coming from some unlikely sources. Earlier, Books-A-Million blamed Katrina for its earnings (although the company is based in Alabama and doesn’t have any stores in New Orleans). Now, a mattress company and a cosmetics company are blaming Katrina for their poor earnings.

  • Brokers on a Roll
    , September 20th, 2005 at 9:55 am

    First, Lehman Brothers had a great quarter. Then Bear Stearns delivered impressive results. Now, Goldman Sachs reports strong earnings.

  • No Housing Bubble
    , September 19th, 2005 at 2:50 pm

    In today’s Wall Street Journal, Chris Mayer and Todd Sinai argue that there’s no housing bubble.

    We, along with Charles Himmelberg, a research economist at the Federal Reserve Bank of New York, computed annual housing costs for 46 housing markets from 1980 to 2004 in a study due to be published this fall in the Journal of Economic Perspectives. Our findings are striking. In none of the hottest housing markets did the ratio of the cost of owning to rent in 2004 exceed the average over the sample period in their own market by more than 13%. The highest was in Portland, Ore. Miami’s ratio was 12% above average. But the ratios in the other oft-cited “bubble” cities such as Boston, L.A., New York and San Francisco were no more than 3% above their long-run averages. A similar pattern arises when we compare a city’s cost of housing to its mean family income.
    By contrast, in the late ’80s, immediately prior to the large house-price declines of the early ’90s, the ratio of the annual cost of owning to rent peaked 52% above the long-run average in San Francisco and New York. Boston and L.A. topped out, respectively, at 37% and 42% above the long-run average. Even allowing for growth in house prices during 2005, it is clear that while owning a house is not cheap, it is not inordinately expensive by historical standards.

  • Google’s $10 Million Man
    , September 19th, 2005 at 2:26 pm

    The New York Times has more on Kai-Fu Lee, the man at the center of the Google/Microsoft battle.

  • Kozlowski Gets 8-1/3 to 25 Years
    , September 19th, 2005 at 2:22 pm

    Bernie Ebbers got 25 years. Rigas got 15 years. Now Denny Kozlowski is getting 8-1/3 to 25 years.

    L. Dennis Kozlowski, whose $6,000 shower curtain and $15,000 umbrella stand made him a symbol of corporate greed, and his former top deputy Mark Swartz were sentenced to 8 1/3 to 25 years in prison for looting Tyco International Ltd.
    Justice Michael Obus sentenced the pair today in state Supreme Court in New York and rejected their request to remain free pending appeals. He ordered them to pay a total of $134.3 million in restitution.
    Kozlowski, 58, the former Tyco chief executive, and Swartz, 45, the former chief financial officer, were convicted in June of 22 felonies each. Their crimes included a dozen counts each of grand larceny, the most serious crime, for awarding themselves and others more than $150 million in unauthorized bonuses and misusing Tyco loan programs.
    “The heart of this case is basic larceny,” Obus said. He called the crimes “extremely serious charges.” Kozlowski and Swartz were also convicted of defrauding shareholders of more than $400 million.
    Obus distinguished the case from those involving corporate scandals at Enron Corp. and WorldCom Inc. “This is not about any other case,” he said.
    WorldCom and Enron filed and largest and second-largest bankruptcies in U.S. history, respectively, after their CEOs were ousted amid claims of accounting fraud. Tyco averted bankruptcy and has a market value of $59.3 billion.

    Next up, Lay and Skilling.

  • Oil above $66 Per Barrel
    , September 19th, 2005 at 1:41 pm

    Oil is much higher today due to Tropical Storm Rita which passing above Cuba. The storm could do more damage to the oil-producing infrastructure, not mention the already devastated areas of the Gulf Coast.

    In Florida, thousands began evacuating the Florida Keys as Rita built up speed off the Bahamas, about 430 miles from Key West. Rita, which strengthened Sunday into a tropical storm, had sustained winds of 60 mph and was forecast to be in the Straits of Florida between the Keys and northern Cuba on Monday, possibly as a Category 1 hurricane with winds of at least 74 mph, forecasters said.
    Long-range forecasts showed the system moving into the Gulf of Mexico late in the week as a hurricane, then possibly approaching Mexico or Texas. But forecasters warned those across the U.S. southern coast, which is still recovering from the impact of Hurricane Katrina, that long-term predictions are subject to large errors.
    If Rita strikes Texas, the biggest oil refiner in the country, it could spell serious disruption to the industry. Texas has 26 petroleum refineries with the capacity to pump a total of 4.6 million barrels a day, according to the U.S. Department of Energy.
    About half of oil production and 35 percent of gasoline production in the Gulf remains blocked in the wake of Hurricane Katrina, according to the Minerals Management Service.

  • Airline Bankruptcies
    , September 16th, 2005 at 3:51 pm

    Since 1978, over 100 airlines have filed for Chapter 11. Continental filed twice, and TWA did it three times. Here’s a list of airline bankruptcies over the years.

  • Consumer Confidence Plunges
    , September 16th, 2005 at 3:33 pm

    The big story today is the drop in consumer confidence. However, it didn’t merely drop, it plunged. The University of Michigan index fell from 89.1 in August to 76.9 for September. That’s larger than the drop after 9/11. The index is now at its lowest level since 1992. Nevertheless, I’m not too concerned. Katrina is still on everyone’s mind and I think it’s having a disproportionate impact. The real story, and the one that fewer people are talking about, is that the cleanup is moving along very well, and there’s even talk of Mardi Grad going off on time.

    At the UN today, Venezuela’s President Hugo Chavez, said that oil could rise to $100. BA! Even for Chavez, that’s pitiful. First off, Venezuela can’t even produce enough to meet its own quota. Venezuela must be the only country that lies about its production on the high side. On top of that, OPEC, of which Venezuela is a member, just lowered its demand forecast. Apparently, the OPEC boys didn’t “cc” Hugo.

    The good news is that oil is moving lower, so gasoline prices should follow. The market had a nice late rally today on very heavy volume. Who’s opinion do you want to take? The market’s or Hugo’s.