Archive for January, 2008

• Maybe the Economy Isn’t So Dead Yet
  Eddy Elfenbein, January 14th, 2008 at 4:01 pm

  Today’s action:
  Morgan Stanley Cyclical Index (CYC) +2.24%
  Morgan Stanley Consumer Index (CMR) -0.27%
  That’s a huge spread for one day, but I doubt it will last. I still think the cyclicals will underperform the market for a long stretch.

• Risk Premiums in the Bond Market
  Eddy Elfenbein, January 14th, 2008 at 12:48 pm

  A good way of gauging the market’s appetite for risk is by looking at the difference in bond yields of high-grade and lower-grade bonds. Here’s a look at AAA and BBB bond yields since 1962:
  
  Notice how the BBB yields are always just a bit more. But that gap varies over time. Here’s a closer look since at the same graph but since 2003:
  
  Now, here’s a look at the risk premium for BBB bonds. By rate premium, I mean the difference between the AAA and BBB bond yields. For example, if AAA bonds are going for 10% and the BBBs are going for 12%, the premium would be 20%.
  
  As you can see, the risk premium seems to bounce between two points. It’s either less than 10%, or more than 20%. That’s a very rough generalization but there’s not much in between.
  When the premium rises above 20%, that means that investors are demanding more money to take on greater risk. The high premium signals fear with investors are generally coincides, and often causes, a recession.
  The risk premium shot over 20% shortly after 9/11 and eventually got as high as 25% in mid-2003. However, the premium gradually drifted lower although it never felt below 11%. Just recently, the premium jumped over 20% for the first time in over four years.

• Citigroup Could Write-Down $24 Billion
  Eddy Elfenbein, January 14th, 2008 at 10:03 am

  This is going to be an ugly week for bank earnings. At CNBC, Charlie Gasparino writes:

  Citigroup could write down as much as $24 billion due to subprime and credit-related losses, CNBC has learned. In addition, the company could lay off as many as 20,000 workers as part of a comprehensive plan to slash costs and raise capital.
  The plans will be unveiled Tuesday, when it reports fourth-quarter earnings. At the same time, Citigroup could also announce that it is cutting its dividend payment.
  Citigroup also intends to raise as much as $15 billion from various foreign and domestic entities including Saudi Arabian Prince Alwaleed bin Talal, Citigroup’s largest individual shareholder, as America’s biggest bank grapples with heavy mortgage market losses.
  Alwaleed has owned his Citi stake since the early 1990s and helped engineer a previous rescue plan for the bank more than a dozen years ago. According to a report on the Wall Street Journal’s Web site, he is likely to keep his total stake in the bank below 5 percent to avoid regulatory scrutiny.
  By raising so much captial, Citigroup CEO Vikram S. Pandit is hoping layoffs can be kept to a minimum.

  In my opinion, the truly scary part is that we don’t know what we don’t know. These products are so opaque, it’s difficult for anyone to properly analyze what’s truly happening. I also think this ruins the chance that Robert Rubin will be part of any future Democratic administration.

• Oopsie
  Eddy Elfenbein, January 12th, 2008 at 1:16 pm

  From the Chicago Sun-Times:
  

  Ace employee makes $152 million accounting error
  BY SANDRA GUY
  Ace Hardware discovered that a mid-level employee made innocent but enormously expensive and incorrect entries in ledger books that eventually led to a $152 million accounting error, Ace Hardware CEO Ray Griffith said today.
  The poorly trained employee, who worked in the finance department at the co-op’s headquarters in Oak Brook, is no longer employed at Ace Hardware, Griffith said.
  The accounting error initially was revealed last summer.
  Ace Hardware will be forced to restate its earnings for fiscal years 2004, 2005 and 2006, and will correct its numbers for fiscal 2007.
  Investigators hired by Ace Hardware’s board of directors told the board of their findings Tuesday, and Griffith revealed the situation to Ace Hardware store owners today. The five-month investigation cost roughly $10 million.
  The unidentified employee, who had worked at Ace Hardware for at least eight years, made journal entries of a “sizeable amount” that “masked” a difference in numbers between two ledger books.
  The ledgers looked as though they were reconciled, but were not.
  The journals are the general ledger and the perpetual inventory journal.
  “Numbers were flowing through one of the ledgers but not flowing into the other,” Griffith said.
  About 25 percent of the error, or $34.6 million, dates back to 1995, Griffith said. The remainder, $117.4 million, occurred from 2002 through 2006.
  The employee did nothing fraudulent, and no inventory or money is missing, Griffith said.
  The person was not properly trained or equipped to do the job, and Griffith conceded that that was Ace Hardware’s fault.
  “We are embarrassed by it,” Griffith said. “We did not provide the training, oversight or checks and balances to help that person do [his or her] job,” Griffith said. “[The employee’s] only intent was to try to do the best job for the boss and for our company.”
  Part of the problem is the increasingly complex and competitive situation that hardware stores face, Griffith said.

• Mississippi Fred McDowell
  Eddy Elfenbein, January 12th, 2008 at 12:04 pm

• Mishkin: Stop Obsessing about the Fed
  Eddy Elfenbein, January 11th, 2008 at 2:41 pm

  I have to agree with Frederic Mishkin of the Fed:

  I think there is too much focus on what decision will be made about the federal funds rate target at the next FOMC meeting. What is important for pricing most financial assets is the path of monetary policy, not the particular action taken at a single meeting.

  One of the great myths of the market is the over-agency of the Federal Reserve. In reality, the Fed is much less powerful than is commonly believed.
  I think some people have to believe that there’s some mysterious group that’s in charge and running things. Ron Paul even blames the Fed for higher oil prices.
  Nobel Laureate, Edward Prescott, wrote in the Wall Street Journal:

  I am not saying that there are no real costs to inflation — there certainly are. And if we get too much inflation we can exact high costs on an economy (witness Argentina as an example). However, I am talking here of the vast majority of industrialized countries who live in a low-inflation regime and who are in no danger of slipping into hyperinflation. It is simply impossible to make a grave mistake when we’re talking about movements of 25 basis points.

• Zacks Earnings Commentary
  Eddy Elfenbein, January 11th, 2008 at 10:07 am

  Here’s an interesting breakdown of the upcoming earnings season from Zacks.

• Goldman Sachs sees recession in 2008
  Eddy Elfenbein, January 10th, 2008 at 11:04 am

  From Reuters:

  Goldman Sachs on Wednesday said it expects the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter.
  In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent.
  The unemployment rate will rise to 6.5 percent in 2009 from the current 5 percent, it said.
  The weakening economy will force the Fed to lower policy rates by an additional 1.75 percentage points from the current 4.25 percent. Starting in September, the Fed cut rates at the last three meetings of the Federal Open Market Committee, reducing the target rate on loans between banks by 1 percentage point from 5.25 percent.

  I think that might be right.

• AFLAC Hits New High
  Eddy Elfenbein, January 10th, 2008 at 11:00 am

  Financial stocks may not be doing well, but AFLAC (AFL) continues to rally.
  

• Bennie and the Feds
  Eddy Elfenbein, January 9th, 2008 at 11:46 pm