Archive for March, 2007

• Buffett’s Letter to Shareholders
  Eddy Elfenbein, March 2nd, 2007 at 7:53 am

  Here’s this year’s letter to Berkshire shareholders from Warren Buffett.
  You can see all of the letters for the last 30 years here.
  Four years ago, Buffett warned that “derivatives are financial weapons of mass destruction.” But he may be changing his tune. In this year’s letter, he writes: “Why, you may wonder, are we fooling around with such potentially toxic material? The answer is that derivatives, just like stocks and bonds, are sometimes wildly mispriced.”

• The Newest Scapegoat: the Stars
  Eddy Elfenbein, March 2nd, 2007 at 7:02 am

  From Reuters:

  Think Wall Street has seen the worst of the sell-off? Not if the stars are right.
  That is the latest prognostication from financial astrologer Arch Crawford, who predicts the direction of financial markets using a mix of technical and fundamental analysis paired with close examination of planetary cycles.
  His current assessment: A lunar eclipse and an opposition of Saturn and Neptune are in the cosmic cards this week. Combined with some bearish market fundamentals, that should keep the world’s biggest stock market under a cloud, the stargazer wrote to clients.

  I’d also like to add that when the moon is in the Seventh House, and Jupiter aligns with Mars, peace will guide the planets, and love will steer the stars.*
  Naturally, I don’t see this happening anytime soon. But if it does happen, you’ll know what to expect.
  *Past performance is not a guarantee of future results.

• Dell. Still Sucking.
  Eddy Elfenbein, March 1st, 2007 at 9:52 pm

  Dell (DELL) just reported after the close. The company earned 30 cents a share, one-third less than last year’s fourth quarter. That was a penny ahead of Wall Street’s forecast, but six cents a share came from not paying employee bonuses.
  Just look at Dell’s trailing earnings-per-share. This is all you need to know.
  
  If you’re new to investing, do you see how the blue line goes down at the end? That’s not good. Try and avoid those.
  The New York Times notes:

  Historically, Dell has had operating margins that were higher than any computer maker except Apple because Dell sells computers directly to its customers and does not have to share profit with retailers. But over the last year, those margins have slipped to 5.5 percent from more than 8.2 percent.

  Here’s a look at Dell’s operating marging:
  
  Think of it this way: Dell used to be able to sell $100 worth of effort for around $113. Today, it goes for $106.
  The NYT:

  Revenue fell 5.1 percent, to $14.4 billion, from $15.18 billion a year earlier. The last time revenue declined at Dell was in 2001, in the recession that followed the technology boom.

  Here’s a look at trailing four-quarter sales:
  
  I wish I could give you more details but I can’t. The company hasn’t filed a quarterly statement in nine months. (That’s also not good.) No blance sheet. No comparisons with last quarter. Nothing. Oh, did I mention the SEC investigation? (That’s really not good.)
  I’m sure some of this will be revised soon, but here are the results for the last ten years:

  Quarter…..Sales….Oper. Income…..EPS
  1-97………$2,588………$198………..$0.0675
  2-97………$2,814………$296………..$0.0725
  3-97………$3,188………$346………..$0.085
  4-97………$3,737………$397………..$0.10
  1-98………$3,920………$429………..$0.11
  2-98………$4,331………$483………..$0.12
  3-98………$4,818………$539………..$0.14
  4-98………$5,173………$595………..$0.15
  1-99………$5,537………$600………..$0.16
  2-99………$6,142………$694………..$0.19
  3-99………$6,784………$650………..$0.18
  4-99………$6,801………$513………..$0.16
  1-00………$7,280………$625………..$0.19
  2-00………$7,670………$736………..$0.22
  3-00………$8,264………$818………..$0.25
  4-00………$8,674………$589………..$0.18
  1-01………$8,028………$588………..$0.17
  2-01………$7,611………$545………..$0.16
  3-01………$7,468………$544………..$0.16
  4-01………$8,061………$594………..$0.17
  1-02………$8,066………$590………..$0.17
  2-02………$8,459………$677………..$0.19
  3-02………$9,144………$758………..$0.21
  4-02………$9,735………$809………..$0.23
  1-03………$9,532………$811………..$0.23
  2-03………$9,778………$840………..$0.24
  3-03………$10,622…….$912………..$0.26
  4-03………$11,512…….$981………..$0.29
  1-04………$11,540…….$966………..$0.28
  2-04………$11,706…….$1,006……..$0.31
  3-04………$12,502…….$1,089……..$0.33
  4-04………$13,457…….$1,187……..$0.37
  1-05………$13,386…….$1,174……..$0.37
  2-05………$13,428…….$1,173……..$0.38
  3-05………$13,911…….$944………..$0.39
  4-05………$15,183…….$1,246……..$0.43
  1-06………$14,216…….$949………..$0.33
  2-06………$14,094…….$605………..$0.22
  3-06………$14,383…….$824………..$0.30
  4-06………$14,402…….$801………..$0.30

• Media Star
  Eddy Elfenbein, March 1st, 2007 at 5:00 pm

  I’ll be on CNBC’s On the Money tonight. I’ll be joining fellow bloggers John Carney of Deal Breaker and Jon C. Ogg of 24/7 Wall Street. The show starts at 7 pm. We’ll be on near the end.
  If anyone needs me, I’ll be in my trailer.
  Ta!
  Update: Here’s the vid.

• Doubling Down at Dearborn
  Eddy Elfenbein, March 1st, 2007 at 1:17 pm

  Mulally is betting the house:

  Ford said its restructuring plan would likely cost $11.18 billion, with more than half of the expenses devoted to programs for laid-off workers.
  In a filing with the Securities and Exchange Commission on Wednesday, the No.2 U.S. automaker estimated that it would spend $5.96 billion on a jobs bank and other “personnel-reduction programs,” $2.74 billion to scale back its pensions, $2.2 billion for fixed asset impairment charges and $281 million to idle plants.
  The company also disclosed that it had pledged all its buildings, trademarks, intellectual property, shares in the main company, and shares in Volvo, Jaguar, Aston Martin, Ford Motor Credit and other operations as collateral for a $23.4 billion line of credit to fund its restructuring plan and cover losses expected until 2009.

• Eek!
  Eddy Elfenbein, March 1st, 2007 at 11:53 am

  That wasn’t a fun opening. Things are better now.
  

• The Carry Trade
  Eddy Elfenbein, March 1st, 2007 at 10:24 am

  One of the key drivers of the market lately has been the “yen carry trade.” A carry trade is when you can borrow money in a currency with low interest rates and turnaround and invest the proceeds in a currency with higher rates. You “carry” the proceeds from one asset to another. It’s like free money. That is, as long as the interest rates don’t move against you.
  The popular carry trade has been to use the Japanese yen. The Bank of Japan used to have interest rates set at 0%, but it’s gradually raised rates to 0.5%. Switzerland has also been a popular currency of choice.
  For example, a 10-year government bond in Japan goes for about 1.6%. In the U.S., 10-year Treasuries yield 4.5%, and in the U.K., Her Majesty’s 10-year bonds yield about 4.7%. The fear is that the carry trade will suddenly unwind—investors will close out of their carry trades all at once. So how much money is in the carry trade?

  Japan’s top financial diplomat Hiroshi Watanabe said he was closely monitoring yen carry trades and the impact from their possible reversal. He estimated the size of the carry trade at between 10-20 trillion yen but said there were no statistics available.

  10-20 trillion? So he’s closely monitoring it, but he had no frickin idea.

• Who Got Rich Off the Glitch?
  Eddy Elfenbein, March 1st, 2007 at 9:55 am

  Roger Ehrenberg at Information Arbitrage points out that some traders were doing quite well, thank you, from the NYSE’s computer glitch.
  

  See the black line – that’s the spot DJIA. See the blue line – that’s the March DJH07 futures contract traded on the CBOT. So, let’s walk through this together. In the morning the spot and futures markets pretty much tracked each other. Then look what happened – uh oh, the spot market is falling behind, while the futures market is reflecting the true market sentiment. They are starting to diverge, then wider, wider still, FOR ABOUT TWO HOURS, until BANG – the alternative cash system kicks in and the flood of sell orders drops the spot index like a stone. So this technical “glitch” was really, at its core, a timing delay. Then the futures market, as if it knew what was going to happen, ran up, after which the spot market followed with a significant lag. After a little sputtering and some continued dislocation late in the day yesterday, they tracking each other once again today. Whew.
  So what does this mean? A savvy futures trader that saw the divergence could have positioned themselves to profit from the inevitable meltdown in the spot market, and the subsequent run-up after the futures rallied ahead of the spot market. AND HAD ABOUT TWO HOURS TO DO IT.

• Greenspan Clarifies
  Eddy Elfenbein, March 1st, 2007 at 9:25 am

  
  I thought this is what he said all along, but now Greenspan wants to be perfectly clear. Or, at least, as clear as he ever is:

  “By the end of the year, there is the possibility, but not the probability of the U.S. moving into recession,” Greenspan said, according to notes taken by Bernard Key, a former economics professor at Tama University in Tokyo, who attended the event.
  Greenspan’s comments may be an attempt to clarify remarks he made on Feb. 26 that some traders say contributed to a global plunge in stocks the following day. He told an audience in Hong Kong three days ago that he couldn’t rule out a recession this year in part because slowing growth in profit margins suggests the expansion might be winding down, the Associated Press reported.
  His earlier statement was “probably misinterpreted, that’s why we see a clarification today,” said Glenn Maguire, chief Asia economist for Societe Generale SA in Hong Kong. “To hint at the possibility of a recession won’t make Bernanke’s life any easier,” he added, referring to Greenspan’s successor.

• We Finally Found the Culprit Behind the Market’s Sell-Off. You!
  Eddy Elfenbein, March 1st, 2007 at 7:34 am

  No, it wasn’t Greenspan. Or the computers. Or the carried away carry trades.
  Nope, it was none of the things.
  The Wall Street Journal has determined that Tuesday’s crack-up was all your fault. By you, of course, I mean the investing public. Yep, it turns out that you (they) are insuffiently virtuous (who knew?):

  This week’s plunge in stocks and the prices of risky debt raises the possibility that investors, who had been displaying an unusual appetite for risk, are becoming risk-averse. Such a development could have big consequences for the U.S. and world economies.
  In recent years, investors have poured money into risky investments from subprime mortgages and emerging-market debt to Chinese stocks. In the process, they have accepted ever-narrower returns, or “risk premiums.” That has helped distressed companies avoid bankruptcy, financed a record leveraged-buyout spree, fueled surging profits on Wall Street, enabled poor countries to finance domestic spending and even made insurance easier for consumers to obtain.

  Self-interest may somehow be playing a role here.