Archive for September, 2007

• The Fed’s Irresponsible Move
  Eddy Elfenbein, September 21st, 2007 at 2:20 pm

  Here’s a dissenting view from Vitaliy N. Katsenelson:

  I’ve seen this movie before, and it doesn’t end pretty. That’s what I thought on Sept. 18 when Federal Reserve Chairman Ben Bernanke took the road so often traveled by his predecessor, Alan Greenspan, and threw the financial markets a sop in the form of a big cut in interest rates. It was clearly what the markets wanted, as the immediate 336-point jump in the stock market confirmed. But popular decisions are not always the right decisions. (Just consider Greenspan’s popular 2001 interest rate cuts, which actually caused the current housing bubble.)
  Indeed, at the core of today’s credit mess—whether in housing or the now battered markets for commercial paper—lies a glut of global liquidity. That has dramatically altered our perception of risk and fueled an unwillingness to accept traditional credit limits. If a homeowner couldn’t qualify for a conventional mortgage, brokers were more than happy to offer an exotic loan the borrower could never realistically pay off. If a loan was too risky to be sold as investment-grade, investment banks could always concoct elaborate bundles of good and toxic credits that (supposedly) eliminated the risk.
  Nowhere was this disregard of financial reality more apparent—or damaging—than in housing. The housing bubble was fueled by many years of low interest rates, which eventually priced many people out of their dream homes. But instead of settling for less or renting, people pursued their American dream (the house with a white picket fence, 2.7 kids, and 1.2 dogs) with a vengeance, taking out adjustable-rate, interest-only—or even worse, negative-amortization loans.

• Wall Street Turns 20
  Eddy Elfenbein, September 21st, 2007 at 12:54 pm

  
  The iconic movie turns 20.

  Since its release in December, 1987, “Wall Street” has been required viewing for anyone working in finance and a standard way of framing the go-go ’80s of junk bonds and power ties – an era that some say has returned during the recent private equity-led mergers and acquisitions boom.
  With a twentieth-anniversary DVD released on September 18 and a sequel currently in development, “Wall Street” is again a topic of conversation.
  The film is best-known for its lasting character, Gordon Gekko, played by Michael Douglas, who netted an Academy Award for Best Actor for the role. And its most famous line -“Greed, for lack of a better word, is good,” typically shortened to just “Greed is good” – is a favorite of headline writers and Wall Streeters alike.

  Here’s an interesting tidbit about the famous “greed is good” line. The original source comes from a speech by Ivan Boesky, but it was hardly in the form of macho Nietzschean posturing. What Boesky said was “Greed is all right; by the way, I think greed is healthy. You can be greedy and still feel good about yourself.”
  Feel good about yourself? It’s interesting that he framed it terms of self-image, as if that’s the most important standard. He’s being more Oprah than Michael Milken. The iconic statement from the 1980s is more closely related to the self-absorption of the 1990s.

• Questions for Greenspan
  Eddy Elfenbein, September 21st, 2007 at 10:28 am

  Caroline Baum has some questions for Alan Greenspan. Here are a few:

  4. In that same vein, you write you were “struck by how relatively easy it was to bring inflation down.” When you assumed the Fed chairmanship in August 1987, the consumer price index was rising at an annual rate of 4.3 percent. In January 2006, the month you left, the CPI was rising 4 percent.
  You inherited a core CPI, which excludes food and energy, of 4.2 percent and cut it in half. That computes to a decline of 0.1 percentage point a year. If lowering inflation was such a chip shot, why don’t you have more to show for your effort?
  5. When you were Fed chairman, you wondered out loud about “irrational exuberance” in the stock market, even though Bob Rubin, whom you call one of your “foxhole buddies” (the other was Larry Summers), said such comments were inappropriate for a government official.
  When Leslie Stahl asked you about your personal investments, you refused to comment on the stock market. Aren’t you confusing your role as a public servant and private citizen?
  6. You say it’s improper for a president to comment on monetary policy, yet you actively tried to influence fiscal policy. You told Leslie Stahl you were an “economic consultant” to Bill Clinton, that you are “very knowledgeable about lots of different subjects.” And no one else is?
  You told Al Hunt you “give advice because they ask me.” Your successor, Ben Bernanke, has made a point of not offering pronouncements on fiscal policy. What part of “no comment” don’t you understand?

• Cyclical Divergence
  Eddy Elfenbein, September 20th, 2007 at 2:54 pm

  Merrill Lynch tracks two cyclical indexes, one for Early Cyclicals (^XE) and one for Late Cyclicals (^XT). The Earlies are mostly big box retailers like Wal-Mart and Lowe’s while the Lates are your classic Johnny Lunch Bucket stocks like U.S. Steel.
  For about four years now, the Lates have clobbered the Earlies. Yet here’s the interesting part: There’s an especially large divergence today. The Early Cyclicals are down about 2% while the Late Cyclicals are basically flat.

• A Tale of Two Banks
  Eddy Elfenbein, September 20th, 2007 at 10:39 am

  Profits at Goldman Sachs (GS) were up 79%. The company earned $6.13 a share, far more than the $4.35 Wall Street was expecting.

  “They dominate the business in so many different ways,” said Michael Vogelzang, who helps manage $2.3 billion, including Goldman shares, as president and chief investment officer at Boston Advisors LLC. “Goldman will tell us what the state of the industry is because they have their hands in most of this stuff.”

  Meanwhile at Bear Stearns (BSC), profits dropped 61%.

  “Bear Stearns is in the worst shape on Wall Street because it has the most exposure to fixed income and least to international markets,” said Matt Albrecht, a New York-based equity analyst at Standard & Poor’s who recommends selling Bear Stearns shares. “Their reliance on the mortgage market isn’t going to help as that market continues to roil.”

• Connection?
  Eddy Elfenbein, September 20th, 2007 at 9:43 am

  $5 Bill to Have Splashes of Purple, Gray
  Dollar Falls to Record Low

• A Turn for Large-Caps
  Eddy Elfenbein, September 19th, 2007 at 1:01 pm

  This hasn’t been a pleasant decade for large-cap stocks. Consider General Electric (GE). The company’s earnings-per-share this year will be about 75% higher than in 2000, yet the stock is 30% below its 2000 high.
  But the outlook for large-caps may be changing. During the July-August correction, the S&P 100 fell less then the S&P 500, and it’s risen more off the August 15 bottom.

• Greenspan on the Daily Show
  Eddy Elfenbein, September 19th, 2007 at 9:26 am

  Here’s Alan Greenspan on the Daily Show last night. Jon Stewart basically gets him to admit that the Fed is not consistent with free market capitalism.

• Looking at the Fed’s Decision
  Eddy Elfenbein, September 19th, 2007 at 8:53 am

  I don’t quite understand the strong reactions to yesterday’s move by the Federal Reserve. To me, it seems perfectly reasonable for the Fed to cut rates by 50 points.
  I’ll put the easiest way I can. The Fed last raised rates in June 2006. From June 2006 to August 2007, the year-over-year core CPI has fallen from 2.64% to 2.13% (the data just came out). That’s 51 basis points. In other words, the Fed is just keeping up with inflation. If you keep rates the same while inflation goes down, you’re really tightening.
  You can skip all the mumbo-jumbo about commodities and gold and M2 and simply look at real interest rates (meaning after inflation). During a recession, the Fed Funds rate should exactly match the core CPI. During an expansion, it should be about 3% higher.
  Here’s a look at recent history:
  

• Missy Francis
  Eddy Elfenbein, September 19th, 2007 at 7:53 am

  
  Jon Friedman sits down with CNBC’s Melissa Francis:

  Francis doesn’t include her childhood TV fame anywhere in her official biography. “The only people who recognize me from [“Little House”] these days are CNBC viewers who are watching and suddenly make the connection,” she mused. “Then they say it’s nice to see a child actor who didn’t end up in rehab or robbing their local dry cleaner.”