Archive for September, 2008

• Denouement on Wall Street
  Eddy Elfenbein, September 14th, 2008 at 7:08 pm

  It’s all falling apart.
  Bank of America in Talks to Acquire Merrill Lynch
  Lehman Inches Toward Bankruptcy After Potential Buyers Drop Out
  The WSJ writes:

  In a recent note to clients, Oppenheimer analyst Meredith Whitney pointed out that industry revenue was down 63% in the first half of 2008 from the first half of 2007, but expenses were cut by just 10% during that period. Non-compensation expenses, which include buildings and technology, actually rose 25% from the prior year.

  Remember when Sunday wasn’t the most newsworthy day on Wall Street.

• Why Lehman Brothers Is Not Bear Stearns
  Eddy Elfenbein, September 12th, 2008 at 10:05 am

  From the WSJ‘s Market Beat:

  Despite similarities in equity and credit markets’ perceptions of Lehman Brothers Holdings this week with views of Bear Stearns in its crisis of confidence during the week ended March 14, there are some glimmers of hope for Lehman in the differences.
  The magnitude of Lehman’s drop in the stock market and the widening of the spreads in the market for insuring against events of default certainly recall Bear’s last days. The major difference between Bear and Lehman is continued faith in the latter’s short-term liquidity.
  That may explain why the equity-options market on Lehman pivoted Wednesday, and some traders appeared to bet on the firm by buying call options. About 15,700 contracts giving the right to buy Lehman stock for $12.50 a share in October changed hands Wednesday, outweighing open interest. Even as the stock trades down 32% to $4.92, a greater number of calls have traded than puts, suggesting a bullish leaning among option analysts.
  While options traders also took both sides on Bear Stearns during its crisis, the bias was more clearly on the bearish put side. “We think Lehman is better off than Bear Stearns in a number of respects,” said Scott Sprinzen, credit analyst at Standard & Poor’s. “Their liquidity is stronger, just given the size of their cash position, and (there is) a lesser dependence on credit-sensitive short-term borrowings.”
  Reacting to the liquidity scare on Friday, March 14, Standard & Poor’s cut its rating on Bear Stearns’s short-term and long-term counterparty debt. The difference between the ratings agency’s tone on Bear and that on Lehman is hard to miss:
  “Ongoing pressure and anxiety in the markets resulted in significant cash outflows toward the week’s end, leaving Bear with a significantly deteriorated liquidity position at end of business on Thursday,” the agency wrote.
  Lehman’s prime-brokerage business is smaller than Bear’s relative to its more diverse portfolio, Mr. Sprinzen noted. And Lehman doesn’t depend on hedge-fund clients’ free credit balances to the same extent. In Bear’s case, the “run on the bank” by prime-brokerage clients was a major contributor to its fall.
  On the market for credit default swaps, the spreads on Lehman are not far from those on Bear Stearns when it closed Friday March 14. They have since narrowed from their worst levels of the day of 775 basis points to 745 basis points almost twice as wide as where they were Tuesday, according to Phoenix Partners Group. Still, the swaps have not yet started to trade “up front,” indicating traders would want cash on delivery, as happened with the Bear Stearns.

• Crossing Wall Street Seven Years Ago
  Eddy Elfenbein, September 11th, 2008 at 12:34 am

  

• The Money Honey Turns 41
  Eddy Elfenbein, September 10th, 2008 at 3:36 pm

  
  Happy Birthday Maria from everyone at Crossing Wall Street!

• The Credit Crisis Fallout Continues
  Eddy Elfenbein, September 10th, 2008 at 3:24 pm

  From The Telegraph:

  Credit crisis blamed for rising number of adulterous wives
  A lonely hearts website for married people claims twice as many wives are signing up as they were a year ago, many of them well-off and living in the Home Counties.
  It claims they are turning to adultery because the credit crisis had made their husbands “no fun”, causing them to work longer hours, worry about losing their jobs and shun social activities.
  This comes just days after an academic study found that couples are more likely to get divorced or separate if one of them gets the sack.
  Sara Hartley, a spokesman for IllicitEncounters.com, said one of the website’s new members summed up the mood by claiming she had previously coped with being a “golf widow” but now felt as if she was a “downturn widow”.
  “Her husband had barely paid her any attention since New Year, was no fun and seemed completely pre-occupied.
  “She said golf widows at least have happy husbands, but downturn widows are living with men who are starting early, working late, fearing for their jobs, constantly on the phone on holiday and withdrawing from their social lives.
  “Half of the new female members we spoke to claimed to be married to professionals or senior managers directly affected by City or economy issues, and all of them said they had joined because their husbands were no fun, and that any sort of passion or intimacy had simply dried up since the New Year.
  “They wanted to feel special again, and they craved company away from somebody who was distracted and disinterested.”
  The website, which was set up in 2003 and now has 235,000 members, said women were joining at a rate of 55 a day in 2007.
  But this year the figure has risen to more than 100 a day, and an average of 142 a day last week.

• Donaldson Reports 19th Straight Record Year
  Eddy Elfenbein, September 10th, 2008 at 11:56 am

  I wanted to mention Donaldson’s (DCI) earnings report from last week when I was out. This is a boring stock but it certainly knows how to deliver earnings. For the July quarter, which is the company’s fiscal fourth quarter, Donaldson earned 60 cents a share compared with 53 cents for last year’s fourth quarter.
  That’s a pretty nice increase although the 60 cents a share was a penny below Wall Street’s consensus. If we want to split hairs, the EPS came in at 60.26 so we’re not talking about a huge miss.
  For fiscal 2008, Donaldson earned $2.12 a share. If you recall, the company raised its 2008 forecast three times last year. This was Donaldson’s 19th straight record year!
  Bill Cook, the Chairman, President and CEO, said “We also set a new sales record in the fourth quarter, exceeding $600 million for the first time, and a new sales record for the year as we delivered our first $2 billion sales year. Our sales strength was broad-based again this quarter as Engine Products were up 13 percent and Industrial Products were up 20 percent. Geographically, sales grew 24 percent in Europe and 17 percent in Asia, driven by the combination of organic sales volume growth and the benefits of the stronger foreign currencies, and sales grew 9 percent in NAFTA.”
  “Our sales trends remain positive as we enter fiscal 2009. We expect to continue making progress on our operating improvement initiatives while continuing to invest in our business for future growth. Although we expect raw material costs to continue to increase, we will work to offset the impact through internal cost reduction efforts, raw material price indexing in some markets, and price increases in other markets. While we are cautious about global economic conditions, we believe that the combination of our business model and extensive diversification of our products, end markets, and geographies will lead to our 20th consecutive year of record earnings.”
  For 2009, the company sees EPS climbing 9%-11% which comes to $2.30 to $2.40. I think that’s a bit of low-balling so they can raise estimates later. Still, it’s good to be cautious. Bear in mind that Donaldson earned $1.83 a share in 2007 so that translates to growth of nearly 16%.
  So what about a P/E ratio? Well, that’s always the tricky part so some guesswork is needed. Donaldson’s stock has pulled back from over $51 in May to under $40 recently. That seems like a good buying opportunity. Given Donaldson’s historic P/E ratio and its ability to deliver consistent earnings growth, I would give the stock an earnings multiple of 20. Your mileage may vary. That places the stock at $46 to $48 a year from now. That’s a decent return from today’s price. Donaldson also pays a small quarterly dividend (11 cents a share), but it has increased it for 22 straight years.
  Here’s a look at Donaldson’s incredible earnings streak.

  Year………….Sales……………..EPS
  1990…………$422.9……………$0.19
  1991…………$457.7……………$0.21
  1992…………$482.1……………$0.23
  1993…………$533.3……………$0.26
  1994…………$593.5……………$0.30
  1995…………$704.0……………$0.37
  1996…………$758.6……………$0.42
  1997…………$833.3……………$0.50
  1998…………$940.4……………$0.57
  1999…………$944.1……………$0.66
  2000…………$1,092.3…………$0.76
  2001…………$1,137.0…………$0.83
  2002…………$1,126.0…………$0.95
  2003…………$1,218.3…………$1.05
  2004…………$1,415.0…………$1.18
  2005…………$1,595.7…………$1.27
  2006…………$1,694.3…………$1.55
  2007…………$1,918.8…………$1.83
  2008…………$2,232.5…………$2.12

• Curious Intrade Contract
  Eddy Elfenbein, September 10th, 2008 at 9:51 am

  Intrade runs a series of contracts based on “presidential decisions.” This includes oil futures and long-term interest rates, which aren’t exactly presidential decisions, but I supposed there’s some kind of presidential impact.
  Anyway, one of the contracts is for troop level in Iraq on June 30, 2010, which is a presidential decision. According to the contract rules, each point is the equivalent to 2,000 troops. If there are over 200,000 troops in theater by the middle of 2010, the contract will be 100.
  The current price for a Democratic president — presumably Barack Obama — is 45. For a non-Democratic president — presumably Senator McCain — the contract is 34. So does this mean that the crowd’s wisdom is that John McCain would be more willing to withdraw American troops than Barack Obama? I find that hard to believe, but perhaps I’m missing some Nixon-to-China effect. Or maybe the market is simply very inefficient here. It’s happened before.
  One other point to mention is that the respective contracts will expire at 0 if the candidates don’t win. Fair enough. However, the McCain-to-win and Obama-to-win contracts are roughly the same right now. I don’t get why there’s such a difference in the troop level contract.
  Update: OK, I completely misread this one. A reader writes: “There is no special explanation, what you see is what you said you would expect, Obama is more likely to withdraw troops. Think of it as a stock, if someone were to tell you a stock would be $100 this time next year, one is $45 and one is $34 (completely random), which would be more likely? Of course the $45, like Obama is priced.”

• The Palin Fund
  Eddy Elfenbein, September 9th, 2008 at 2:39 pm

  Here’s the governor’s financial disclosure form. The last two pages have the First Dude’s IRA and 401K.

• Nouriel Roubini Blames Free Market Ideologues for Socialism, or Something Like That
  Eddy Elfenbein, September 9th, 2008 at 1:54 pm

  Stand back.

  Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)
  The now inevitable nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trends was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise.
  Today instead the US has performed the greatest nationalization in the history of humanity. By nationalizing Fannie and Freddie the US has increased its public assets by almost $6 trillion and has increased its public debt/liabilities by another $6 trillion. The US has also turned itself into the largest government-owned hedge fund in the world: by injecting a likely $200 billion of capital into Fannie and Freddie and taking on almost $6 trillion of liabilities of such GSEs the US has also undertaken the biggest and most levered LBO (“leveraged buy-out”) in human history that has a debt to equity ratio of 30 ($6,000 billion of debt against $200 billion of equity).

  A little overheated, no? It actually gets worse.

• Investing in Volatility
  Eddy Elfenbein, September 9th, 2008 at 12:35 pm

  Did you know you can invest in volatility? Some hedge funds are finding it quite profitable this year.

  Hedge funds that profit from turbulence in the financial markets are beating stock, bond and commodity investments for the first time in five years.
  Volatility hedge funds returned 7.3 percent this year through August, according to the Newedge Volatility Trading Index, which started in 2003. Hedge funds overall lost 4.8 percent in the same period, according to Hedge Fund Research Inc. in Chicago.

  The size of daily fluctuations have increased this year.

  The S&P 500 fluctuated by more than 1 percent on 71 trading days this year, the most since 2003 and exceeding the 61-day annual average since 1928, said Howard Silverblatt, an analyst at S&P in New York. The index may have its most volatile year since 2002, when there were 125 swings of more than 1 percent.

  I wouldn’t say we’re in a highly volatile environment, but that volatility has returned to normal after a period of very low volatility.