Archive for March, 2007

• Kvetchin’ Gretchen
  Eddy Elfenbein, March 15th, 2007 at 9:26 am

  Did anyone see Lost last night? Wouldn’t there be tons of dead animals around that sonic wall thing? Also, am I the only person who thinks about these things?
  ANYWAY
  Larry Ribstein rips into Gretchen Morgenson:

  All of this highlights what I’ve been saying about Morgenson for many months. It’s not about her views, or about whether her targets are behaving well or badly. It’s about the journalism: shoddy, hysterical, unsophisticated, misleading, and often just simply poor. More importantly, it’s about the standards of her employer, which persists not only in highlighting her opinions, but in putting them on the front page as “news.”

  Dealbreaker has more.

• Harley and the Subprime Market
  Eddy Elfenbein, March 15th, 2007 at 8:26 am

  From Forbes:

  Americans not only bought homes they couldn’t afford, they also spent money they didn’t have on Harleys.
  In a note on Wednesday, Edward Aaron, an analyst for RBC Capital Market, said that Harley-Davidson’s financial unit has seen increased delinquencies and losses on loans given out over the past few years.
  One reason for that phenomenon, he said, is the same reason that the subprime lenders are in financial turmoil — that is — they lent money to risky borrowers.
  “While we don’t know which borrowers are accounting for the acceleration of loss rates in Harley’s loan securitizations, it’s stands to reason that the lower credit quality customer’s would be accounting for most of that change,” he said.
  That doesn’t mean Harley is on the verge of implosion, Aaron said in an interview. But it may cause the motorcycle company’s earnings to sputter over the next few years.

  This is old news. Herb Greenberg wrote about Harley’s finance unit years ago.

• Finally….
  Eddy Elfenbein, March 14th, 2007 at 9:11 pm

  The book I’ve been waiting my whole life for.

• What If the Stock Market Was a Bond?
  Eddy Elfenbein, March 14th, 2007 at 2:55 pm

  Here’s an unusual post. But it’s my blog, so deal.
  I was curious what the historical stock market performance would look like if the stock market was a bond.
  Strange? Let me take a step back and explain.
  I have the monthly total return figures (including dividends) for the stock market going back to the 1920s. I wanted to take those same monthly changes, apply them to an imaginary bond and see what the yield would have been through the years.
  I assumed that it’s a bond of infinite maturity and pays a fixed coupon each month. Actually, the amount of the coupon doesn’t matter, as long as it’s the same each month.
  I have to think that many investors would be better served if there were such an investment vehicle. If they knew that the market’s current yield was something like 7% or 8%, they might treat their investments very differently.
  What’s interesting is that investing in the 19th century wasn’t too far from this. Many stocks traded at or near “par” which was often $100 a share. Every year, the company would pay out an annual dividend, say $5 or $8 a share, sometimes none, sometimes $10 or $15. They dividend was the game, and there wasn’t nearly as much emphasis on long-term capital gains.
  There’s one hitch though. I have to choose a starting yield-to-maturity for December 1925. So this isn’t a completely kosher experiment because the starting point is based on my guess. If I choose a number that’s too high, then the historical performance won’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM is too low, the yield would gradually get pushed down to microscopic levels.
  Fortunately, the data makes my job easy. If I start with 6.6%, the market’s yield gets
  out of control by the 1970s. If I start with 6.5%, the yield goes to rock bottom levels by today. By my judgment, the best looking line starts with 6.538%.
  Here’s what it looks like:
  
  I have to stress that even though this “bond” is complete make believe, this reflects what the actual stock market really did for the past eighty-two years.
  Over the last eight decades, the yield has averaged about 10.2%, which is right in line with the market’s long-term total return. Through February 2007, it stood at 8.3%. Seven years ago, it got down to 5% (by comparison, long-term Treasuries were going for 6.5%).

• Reader Quiz
  Eddy Elfenbein, March 14th, 2007 at 1:37 pm

  OK class, here’s a short quiz. Let’s say the stock market sells off. We’re told it’s because investors have grown complacent about risk and bid up prices to irrational levels.
  If that’s true, which stocks should do better—growth or value?
  
  Despite the selling, growth is outperforming value.

• It’s Not Over Over There
  Eddy Elfenbein, March 14th, 2007 at 10:07 am

  More selling in Asia. Once again, the Indian market bore the brunt of the selling:
  
  Here’s a roundup of the Asian markets.

• Cranky Octogenarian Opens Mouth
  Eddy Elfenbein, March 14th, 2007 at 8:33 am

  
  From the AP:

  Two weeks ago, Greenspan’s comments about the possibility of a recession occurring at the end of this year contributed to a 416-point fall in the Dow Jones industrial average.
  The Dow had another big losing day on Tuesday, falling by 242.66 points, the second biggest drop of the year. But this decline was not driven by anything Greenspan said but rather investors worries about the subprime mortgage market.
  During his appearance Tuesday, Greenspan talked about past market crises but not the most recent turmoil and he made no forecasts about the possibility of a recession.
  Greenspan did put forward a proposal on how to reduce the growing inequality of incomes in the United States – admit more skilled immigrants into the country.

• From the Goldman Sachs Conference Call
  Eddy Elfenbein, March 13th, 2007 at 10:09 pm

  I thought this was an interesting answer from CFO David Viniar:

  Michael Hecht – Banc of America
  I just wanted to follow up on FICC. You guys noted the record results in credit and mortgages. I was just wondering if you could talk a little bit more about the traction there in terms of it being more environmental versus share gains? Particularly in mortgages, are you seeing the best traction in sub-prime versus prime versus commercial or non-U.S.?
  David A. Viniar
  I think we have handled the turmoil in the market pretty well. Again, in mortgages, you have to remember to size it, and I’ve talked about this, so with sub-prime first. Sub-prime is part of mortgages, which is part of FICC, which is part of trading, which is part of Goldman Sachs. So the size of mortgages in all of Goldman Sachs is modest, while the business is important, like all of our businesses. Credit businesses are a little bit bigger than the mortgage business, but we really haven’t seen any contagion to the credit markets. The credit markets continue to be quite robust. Credit spreads continue to be tight. There continues to be a lot of liquidity in those markets.

  Courtesy of Seeking Alpha.

• 100 Years Ago Today
  Eddy Elfenbein, March 13th, 2007 at 11:34 am

  Think your portfolio is having a tough time. Well, buck up. Today marks the 100th anniversary of the beginning of the Panic of 1907.
  On March 13, 1907, the Dow CRASHED from 86.53 to 83.12. That may not sound like a lot, but it was a fall of 3.94%, which beats our wimpy 3.29% drop from two weeks ago. The next day, March 14, saw the really big action. The Dow plunged to 76.23, a drop of 8.29%. That’s a two-day drop of 11.9%. Today, that would be like the Dow losing 1,500 points in 48 hours. The drop of March 14 still ranks as the seventh-worst day in the Dow’s history.
  The index shot up 6.69% on March 15, but all was not safe. The Dow fell 6.23% on March 25. Here’s a look at Dow during March 1907:
  
  That was only part of it. In 22 months, the Dow fell by half. Here’s how the market did in 1906 and 1907:
  
  J.P. Morgan helped end the panic by providing a loan to the U.S. government. This led people to think that it really might not be a good idea to have the government dependent on one guy’s terms. Soooo, in 1913 Congress passed the Federal Reserve Act.
  And we haven’t had any trouble since.

• Goldman’s Earnings
  Eddy Elfenbein, March 13th, 2007 at 10:00 am

  Goldman Sachs (GS) was supposed to report lower earnings today. This was supposed to be the quarter when the party ended for the big Wall Street houses. Well, it didn’t happen. Or at least, it hasn’t happened yet.
  Goldman’s earnings blew away the Street’s estimates. The company earned $6.67 a share compared with $5.08 a share last year. That’s just amazing. Let me put that into context for you. Wall Street was looking for a decline to $4.89 a share. In fact, the highest estimate of any analyst was for $5.60 a share. Goldman still beat that by more than a dollar. This is the seventh straight quarter that Goldman has beaten earnings.
  After the company reported earnings two quarters ago, the stock rose for 12 straight days. On the 13th day, it fell by a penny a share. Then it continued to rise for 12 of the next fourteen days.
  Here’s a look at how the Big Five firms on Wall Street have done over the past four years:
  
  Notice how all the stocks started to take a hit recently. Investors were clearly bracing themselves for bad news. Also, Guy Moszkowski, a high-profile analyst at Merrill Lynch, recently downgraded several stocks in the sector.
  (You can also see why investors were so unhappy with Phil Purcell at Morgan.)
  Goldman is now going for about 10 times next year’s earnings. Lehman (LEH) reports tomorrow.