Archive for March, 2008

• A Couple of Bookies
  Eddy Elfenbein, March 19th, 2008 at 1:06 pm

  In the movie Trading Places, the Duke brothers explain to Eddie Murphy the essence of their investment business. Murphy shoots back, “You two sound like a couple of bookies to me.”
  He’s right; fundamentally, it’s the same idea. Now Bloomberg has a story about one Wall Street’s firm’s growing interest in gambling. Cantor Fitzgerald has a Cantor Gaming unit that’s involved in sports books.
  Bloomberg writes:

  The firm is seeking Nevada state approval for field tests of a handheld device for playing digital card games and roulette in a casino’s public spaces, such as pools and nightclubs. Officials of closely held Cantor Fitzgerald say it could eventually be used anywhere.

  It makes sense for them to be involved in this. Basically, their business is math. I believe that I once read that the entire field of statistics has always been driven by gambling.

  “It’s all about processing,” said Lee Amaitis, 57, head of Cantor Gaming, from London. “All you’re doing is math. If you have an engine that can drive random generating results, you can process bets.”

• Up In Smoke
  Eddy Elfenbein, March 19th, 2008 at 11:40 am

  WSJ, November 1, 2007

  Attendees say Mr. Cayne has sometimes smoked marijuana at the end of the day during bridge tournaments. He also has used pot in more private settings, according to people who say they witnessed him doing so or participated with him.

  AP, March 18, 2008

  Dow Rises 420 Points

• Re: “Bear Stearns is fine.”
  Eddy Elfenbein, March 19th, 2008 at 8:20 am

  There’s some controversy surrounding Jim Cramer’s “Bear Stearns is fine” comment from last Tuesday. Cramer has said that he was referring to Bear Stearns as a depository institution, not as an investment. He claims that he was telling the questioner that his money was safe at Bear Stearns’ money management arm. Cramer also says that he called Bear’s stock “worthless “on Friday.
  Mick Weinstein at Seeking Alpha, whom I respect greatly, agrees with Cramer. I’m sorry but it doesn’t wash with me. Let me say that I think it’s very possible that that what’s Cramer intended. But, to a reasonable person, there’s no reason to see it that way.
  Mad Money is a show dedicated to Cramer’s discussion of stocks. That’s the appeal. Only a few times have I heard him discuss larger money management issues. Plus, there was a stock chart of BSC up on the screen. That strongly implies to an average person that he meant the shares.
  If he was referring to Bear’s deposits, Cramer didn’t mention basic facts, like you should immediately speak with your broker, or check up on the firm’s deposit insurance. Anyone who has spent five minutes studying for a Series 7 knows about SIPC. At no point did Cramer make an effort to clear up would could be confusing. Plus, he goes the extra step of saying that “Bear Stearns is not in trouble.”
  In today’s WSJ, James Stewart writes that “Bear Stearns didn’t have a retail brokerage operation and didn’t cater to individual investors.” The firm did (and I suppose, does) have a small retail operation but that’s only for high net worth individuals. I looked at Bear’s website and they don’t even have an office here in Washington, DC. Once any trouble hit, I would think that those brokers informed their clients as soon as possible. In high-net worth money management, clients aren’t typically kept in the dark.

• Raise the Price
  Eddy Elfenbein, March 19th, 2008 at 8:08 am

  I really don’t see how Bear shareholders will approve the $2 deal. Apparently, I’m not alone. The stock is currently at $6 and it went as high as $8 yesterday.
  Part of that the buying is being driven by BSC creditors (hedge funds, mainly) who don’t mind taking a small equity loss in exchange for a big debt gain—they just want the deal done. No one knows how much equity Bear truly has, but there’s around $300 billion of Bear Stearns bonds out there. If the whole mess goes to a bankruptcy court, then the stock holders go to the back of the line.
  Of course, the debtor’s strategy could backfire if the price goes too high and JPM gets cold feet. Still, I doubt that would happen. As always, one shouldn’t fight the Fed.
  I would say that the most likely outcome is that JP Morgan will sweeten the offer. To add some context, it’s really not that much for them. The company’s market value has already increased by $20 billion this week. The offer for Bear will cost them $236 million. What’s the big deal if they double or even triple it? Plus, it could win them some goodwill. Dimon is a very smart guy, and it might be a shrewd move to get out in front of what could become very unpleasant. If I were him, I’d meet with Joe Lewis, Legg Mason and other major BSC holders. He’s already won big. He can afford to be magnanimous.
  On top of that, let’s not forget that JPM owns a gigantic call contract of whenever-$2s, and there’s also the building deal. Plus, it’s not unreasonable for the U.S. credit market to recover over the next few weeks. That could be a huge boon for BSC’s debt. To quote Michael Scott, it’s win-win-win. In fact, taxpayers could win as well.
  I think we ought to move beyond the question of whether the Fed should be involved in—what I’ll call—a quasi-bailout. Instead, let’s look at the deal that was made, and it makes JPM look Putin-esque. The WSJ reminds us that it’s not uncommon for the government to make money off bailouts:

  During the 1995 peso crisis, the Clinton administration offered Mexico $20 billion in loans, with the country’s oil revenues as security. The International Monetary Fund offered another $18 billion. Critics condemned the loans as a bailout. In the end, Mexico didn’t require the entire amount, and the country’s finances recovered. The U.S. ended up making a profit on the interest payments.
  The government also turned a profit from the Air Transportation Stabilization Board, an entity set up after the Sept. 11 attacks to support the airline industry. The board ultimately provided a total of $1.56 billion in loan guarantees to six carriers. The government earned just under $350 million from fees and stock sales, according to the Treasury Department.

  Last year, the Fed made a profit of $34 billion. It’s very possible that the central bank could make money on whatever they’ll get from Bear’s book. I still don’t understand who gets what. This seems to be a classic case of we don’t know what we don’t know. Perhaps the best move for the Fed is to hold the bonds to maturity.

• Has Bill Miller Lost His Magic
  Eddy Elfenbein, March 19th, 2008 at 7:42 am

  Legg Mason Value Trust (LMVTX) has badly lagged the market since the beginning of 2006. It has only gotten worse recently.
  

• Today Compared with March 11
  Eddy Elfenbein, March 18th, 2008 at 10:25 pm

  The S&P 500 had another great day today. Today’s rally was more broad-based than the rally from last week.
  Here’s a look at how the stocks in the S&P 500 fared. The X-axis is March 11, the Y-axis is today.
  
  Here’s a spreadsheet listing how every stock in the S&P 500 did today.

• Ftizgerald Was Wrong
  Eddy Elfenbein, March 18th, 2008 at 4:56 pm

  There are second acts in American lives. Joe Weisenthal writes:

  Google’s New Banking Partner?
  Qatalyst. Release.

  “The launch of Qatalyst is an important development for the technology industry,” said Eric Schmidt, Chairman and CEO of Google. “Frank and his team bring unparalleled industry knowledge, a unique 25-year market perspective and candid, insightful judgment that CEOs greatly value on important strategic initiatives. I look forward to working with him again and am very enthusiastic about Qatalyst’s prospects for success.”

  That Frank would be Frank Quattrone, continuing the comeback/American dream.

• The Best Day in Five Years
  Eddy Elfenbein, March 18th, 2008 at 4:29 pm

  Remember how I said that last Tuesday was the best day in five years. Well, I’ve changed my mind. I meant to say that this Tuesday was the best day in five years.
  Date……………Gain
  18-Mar-08…….4.24%
  11-Mar-08…….3.71%
  17-Mar-03…….3.54%
  13-Mar-03…….3.45%
  18-Sep-07…….2.92%
  13-Nov-07…….2.91%
  28-Nov-07…….2.86%
  2-Apr-03……….2.61%
  17-Aug-07…….2.46%
  6-Aug-07………2.42%
  21-Mar-03…….2.30%
  16-Jun-03……..2.24%
  1-Oct-03……….2.23%

• “Open the Kimono”
  Eddy Elfenbein, March 18th, 2008 at 4:17 pm

  Wow! I just heard Lehman’s CFO, Erin Callan, use the phrase “open the kimono” in a CNBC interview with Maria Bartiromo. By my math, that’s +1 to any company’s P/E.
  By the way, Portfolio has just dubbed Ms. Callan as “Wall Street’s Most Powerful Woman.” I was waiting for Maria to ask about that.

• The Fed Cuts By 0.75%
  Eddy Elfenbein, March 18th, 2008 at 2:19 pm

  The Fed Funds rate is now down to 2.25%. Here’s the statement:

  The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.
  Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
  Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.
  Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.
  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.
  In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.