Archive for August, 2008

  • The Fed Chills
    , August 5th, 2008 at 2:16 pm

    Still at 2% and still one dissent:

    The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
    Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
    Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
    Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act 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; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

  • Great Moments in Business: A Five-Act Play
    , August 5th, 2008 at 11:22 am

    November 14, 2006

    Icahn Joins WCI Communities

    March 13, 2007

    Icahn to launch $22-per-share offer for WCI

    April 6, 2007

    WCI Board Rejects Icahn Bid

    May 12, 2007

    WCI Twists Icahn’s Arm For More Cash

    August 4, 2008

    WCI files for Chapter 11

  • The Law of Supply and Demand Finally Catches Up to Oil
    , August 5th, 2008 at 10:42 am

    It had to happen soon or later. The Law of Supply and Demand has finally caught up to the oil market. The price for a barrel of oil has plunged recently from over $147 to under $120. One of the major reasons for the decline is that consumers are changing their behavior. Irwin Kellner notes:

    In March, the yearly decline was a bit over 3%. That was the biggest drop in miles driven since 1942. May’s drop of nearly 4% over last year was the most ever, according to the Transportation Department
    While significant, this drop in miles driven is only the beginning of what appears to be a prolonged reduction in gasoline consumption. Wait until the mix of vehicles on the road changes.
    As you know, people are now shunning SUVs and pickup trucks in favor of small cars. The object, of course, is to improve fuel efficiency.
    As these gas-guzzling behemoths are replaced by small cars, the average vehicle on the road will get better gas mileage, thus further reducing gasoline use even if miles driven levels off.
    To this add a likely increase in the number of vehicles on the road that are hybrids, pure battery powered, use natural gas, hydrogen or solar power and you can see the potential for an even larger drop in gasoline consumption.
    As for lifestyle changes, fewer people are traveling large distances on their vacations.
    Restaurants report less dining out. And while it’s not so easy to sell one’s house these days to move closer to one’s job, many are opting to work at home, while others are taking mass transit to work, bicycling, or even walking.

  • Deconstructing the GDP Data
    , August 5th, 2008 at 9:34 am

    There’s an interesting debate going on regarding the latest GDP report. The government’s initial estimate for second-quarter GDP growth showed that the economy expanding by 1.9%. The part that has that pessimists laughing is that measly 1.1% number for inflation. Inflation, of course, as measured by the CPI is running at a much higher rate, and would most likely push GDP growth into negative territory.
    The issue centers around imports prices. Brian Westbury writes:

    If import prices are added back into inflation, then the total dollar volume of imports must be added back into nominal GDP as well. This is the only way to compare apples to apples. Adding back imports pushes nominal GDP growth to 5.5% at an annual rate in Q2. Then, using the 4% inflation data (that includes import prices) means real GDP growth was still positive by 1.5%, or so.
    A second issue to think about is that unlike the Consumer Price Index (CPI) – which attempts to measure changes in the cost of the things we buy – GDP inflation is designed to measure changes in the prices of the things we produce, regardless of whether the purchasers are foreign or domestic. Due to oil, prices for the items Americans buy have been increasing much more rapidly than the items they produce. As a result, GDP inflation looks artificially low, when in reality it is not comparable to the CPI.

  • Bail Out the Oil Companies
    , August 4th, 2008 at 4:11 pm

    My fellow Americans, the time for action is at hand. In less than three months, we’ve witnessed horrendous losses for major oil stocks. This is deeply destabilizing for the entire economy. We need—no, we insist that the government step in and protect shareholders from these losses. Personally, I blame short-sellers and rumor mongers.
    Just look at some of these losses.
    Stock…………………………May 20……………….August 4………….Loss
    ExxonMobil (XOM)…………$94.56……………..$76.60…………..-19.0%
    Occidental Pete (OXY)……$97.85……………..$74.23…………..-24.1%
    ConocoPhillips (COP)……..$93.55……………..$79.45…………..-15.1%
    Chevron (CVX)……………..$103.09……………..$82.80…………..-19.7%
    Hey, they did it for Bear Stearns plus Phonie and Fraudie, why not the oil stocks? Will someone please think of the children!

  • Trade Debate
    , August 4th, 2008 at 3:34 pm

    This link shows a trade “debate” CNBC just had between Jagdish Bhagwati and Naomi Klein.
    Bhagwati is one of the most distinguished professor on trade in the entire world. He’s written about 38 billion books and articles, and has a roomful of awards and honors. (Although CNBC has a little trouble spelling his name.)
    Naomi Klein, by contrast, is a complete moron.
    For some background, here’s the NYT article they’re discussing, and here’s Jonathan Chait eviscerating Klein.

  • “Most Americans have not experienced any significant decline in the value of their homes — nor are they likely to.”
    , August 4th, 2008 at 11:42 am

    You know how the housing market is crushing everyone across the land? These guys say it’s really not that bad:

    We conclude that declines in house prices are highly likely to remain small. Our analysis reveals, unsurprisingly, that foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of collapsing prices. Our models predict that as foreclosures continue to climb in many states, house prices will remain flat or decline in those states — but will not collapse.
    One reason for this is that the effect of foreclosure shocks on house prices is small. Furthermore, other fundamental factors (such as employment growth and a slowing of the growth of the housing supply over the past year and a half) will cushion the impact of foreclosures.
    We constructed several forecasting models. Even under an extreme worst-case scenario for foreclosures, our conclusion was that U.S. house prices just aren’t going to fall by very much in the next two years. In our worst-case scenario, the average cumulative decline is about 5 percent, and only 12 states experience declines greater than 6 percent by the end of 2009.

    They criticize the Case-Schiller data as being skewed toward poor-performing areas, and that it’s weighted by value which also gives greater say to overpriced homes.

  • Sentence of the Day
    , August 4th, 2008 at 11:29 am

    From Bloomberg:

    Standard & Poor’s analysts questioned their own ratings of mortgage-related debt products and said they were overworked as the number of deals increased, the Wall Street Journal reported, citing a draft version of a U.S. Securities & Exchange Commission report.
    In one e-mail, an unidentified S&P analytical staffer wrote that a mortgage or structured-finance deal was “ridiculous” and “we should not be rating it,” the Journal said, citing the 38-page draft SEC report.
    A colleague replied, “we rate every deal,” the newspaper said, citing the report. “It could be structured by cows and we would rate it,” the colleague wrote, the Journal said.

    I’d really like to see an email from folks who structured a deal in reference to the rating agencies.

  • How are those Stimulus Checks Doing?
    , August 4th, 2008 at 10:01 am

    Good news, thanks to those government stimulus checks, consumer spending increased by 0.6% in June!
    Oh, the downside is that inflation increased by 0.8%.
    The Federal Reserve meets again tomorrow, and no change in rates is expected, although I wouldn’t mind seeing rates climb 50 points from here.

  • Casinos and Luck
    , August 4th, 2008 at 9:47 am

    Every time I’m in a casino, I need to remind myself that some gaming stocks have been extraordinary performers over the long haul. There’s a reason why they’re so profitable. Thanks to the laws of probability, a game that’s even slightly in the house’s favor can be very lucrative. Still, I was shocked to run across this:

    Casino Blames Income Drop On Gamblers’ Luck
    UNCASVILLE, Conn. — Mohegan Sun officials said the casino’s net income in the third quarter dropped 89 percent compared with the same period last year, and they’re placing some of the blame on gamblers’ extraordinary luck.
    The Mohegan Tribal Gaming Authority reported net income of $5 million Thursday for the three months ending June 30.
    Mitchell Etess, Mohegan Sun’s president and chief executive officer, said the casino had an extremely long streak of bad luck.
    Gamblers played about $611 million at table games during the quarter, a 6.4 percent increase. The casino kept about 11.6 percent of that gambling money, nearly 5 percent less than it did during last year’s quarter.
    Table game revenues dropped more than 25 percent to $75.3 million in the third quarter from the year-ago period.

    Unless there’s more to this story, I don’t see how it’s possible that a casino can have a run of bad luck. The only explanation I can think of is that there have been several very large bets that have gone the wrong way. Outside that, with a sample size that large, the house should barely see any fluctuation in its take. If I were the casino, I’d be keeping a closer eye on its dealers.