Archive for January, 2009

  • Geithner Is Confirmed
    , January 26th, 2009 at 6:24 pm

    The Senate votes to confirm Geithner 60-34.

  • Cyclical Stocks Still Have a Long Way to Fall
    , January 26th, 2009 at 3:59 pm

    Here’s a look at the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500 (^SPX). For such a simple metric, I think is an often-revealing look at the market’s mentality. What it tells us is how well economically sensitive stocks are performing compared with the overall market.
    About two years ago, I started warnings investors that cyclical stocks were heading towards a top. On July 19, 2007, the CYC reached its peak ratio against the S&P 500 at 0.7273. Since then, all most all kinds of stocks have down poorly but cyclical stocks have down much worse. Through Friday, the S&P 500 is down 46.4% from July 19, 2007, but the CYC is down 62.3%.
    The other reason why I like to follow this ratio is that it tends to move in multi-year waves, as one would expect from looking at economic cycles. Until the ratio starts to show some improvement, I’m not going to be terribly optimistic for the broader economy. The ratio is currently around 0.51 which is still well above typical cycle lows.
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  • Blame China
    , January 26th, 2009 at 12:56 pm

    Sebastian Mallaby claims China’s currency policy was a major cause of the housing bubble:

    Geithner is correct that China manipulates its currency. What’s more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China’s cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.
    China’s leaders protest that they are being unfairly scapegoated. Yet while there are rival accounts of the origins of the crisis, neither has the explanatory force of the blame-China narrative.

  • A Capital-less Financial System
    , January 26th, 2009 at 12:19 pm

    Here’s a sample of a fascinating article from Ricardo Caballero at the Financial Times Economists Forum:

    Forcing institutions to raise capital, be it private or public, at panic-driven fire sale prices threatens enormous dilutions to already shell-shocked shareholders, further exacerbating uncertainty and fuelling the downward spiral. This is self-defeating.
    The question then is whether it is feasible to run a (nearly) capital-less financial system until panic subsides. If it is, then a solution to the financial crisis is in sight since it would free up trillions of dollars of hard to raise funds, covering more than even the most extreme estimate of losses.
    I believe it is feasible to run such a system for a while, because, essentially, distressed financial institutions need (regulatory) capital for two basic purposes: To act as a buffer for negative shocks, and to reduce their risk-shifting incentives by exposing them to their losses.
    However these two functions can be replaced, respectively, by the provision of a comprehensive public insurance, and by strict (and intrusive) government supervision while this insurance is in place.
    A few days ago the UK announced a policy package that almost got it right, by pledging to insure banks’ balance sheets and other private liabilities.
    Unfortunately, it backfired and caused a worldwide run on financials because it did not dissipate, and even exacerbated, the fear of forced capital raising (or nationalisation).
    The events following Lehman’s demise should have taught us that this fear needs to be put to rest until we can return to normality. Financial institutions are too intertwined to predict with any precision the impact of diluting any significant stakeholder, and the markets are too fearful to feed them more uncertainty. Strong guarantees with strict supervision, and the commitment of no further capital injections at fire sale prices (directly or through convertible bonds) should go a long way in building a foundation for a sustained recovery.

  • Buy List Updates
    , January 26th, 2009 at 10:48 am

    There are a couple of items to pass along this morning. Danaher’s (DHR) earnings were down from last year, but the company still beat estimates. Excluding charges, DHR made $1.11 a share, seven cents more than what the Street was expecting. The stock has been up by as much as 11% this morning.
    Moog (MOG-A) also has a good earnings report, but it lowered its revenue estimate for this year. The company’s Q1 EPS came in at 70 cents which is up from 64 cents last year, plus it’s two cents more than Street expectations. Moog cut its revenue outlook for the year from $2 billion to $1.95 billion. The shares are up about 5% so far today.
    Stryker (SYK) was downgraded from Buy to Hold by Needham. The company reports earnings tomorrow (Andrew Leckey has a good summary of SYK). Bed Bath & Beyond (BBBY) was downgrade by J.P. Morgan from neutral to underweight, although the downgrade doesn’t seem to be hurting the shares at all.
    Overall, the Buy List is having a good morning.

  • The Peter Schiff Backlash Begins
    , January 26th, 2009 at 10:05 am

    I’ve been saying for some time that I’m not particularly impressed with Peter Schiff and his hyper-bearish calls. Fortune just had an article on how prescient Schiff has been: “As one of the few talking heads who loudly, relentlessly, and more or less accurately sounded the alarm about the mortgage bubble and its consequences – in the process becoming the latest bearish commentator to earn the moniker “Dr. Doom” – Schiff has suddenly emerged as a cult hero and something of a minor celebrity.”
    Well, Dr. Doom has predicting disaster for several years now, and what we’re seeing now isn’t quite what Schiff predicted. Jonas Elmerraji of the Rhino Stock Report writes:

    While Schiff has proved himself as an economist, his ability to parlay those predictions into profits for his clients was questionable for 2008. For the last few years, he’s been betting big on overseas investments and precious metals – two areas that got hit as hard or harder than the S&P last year.
    According to Morningstar, the average international equity fund performed 7% worse than the average U.S. stock fund in the last year.
    Just look at the iShares MSCI Belgium (EWK), the worst performing ETF last year according to SmartMoney.com, or the iShares FTSE/Xinhua China 25 ETF (FXI), which lost 49% in 2008.
    Another of Schiff’s investment strategies has been to exit the U.S. dollar in favor of more fundamentally sound currencies. This too has proved untimely since anxious treasury investors have driven up the dollar in the last year.
    And some, like Seeking Alpha contributor Todd Sullivan, are quick to remind investors that Peter Schiff has been bearish on the market since at least 2002, when the S&P was poised to move up 48% over the next five years.

    Mish breaks it down in list form:

    12 Ways Schiff Was Wrong in 2008
    * Wrong about hyperinflation
    * Wrong about the dollar
    * Wrong about commodities except for gold
    * Wrong about foreign currencies except for the Yen
    * Wrong about foreign equities
    * Wrong in timing
    * Wrong in risk management
    * Wrong in buy and hold thesis
    * Wrong on decoupling
    * Wrong on China
    * Wrong on US treasuries
    * Wrong on interest rates, both foreign and domestic
    That’s a lot of things to be wrong about, especially given all the “Peter Schiff Was Right” videos floating around everywhere. The one thing he was right about was the collapse of US equities and no part of his investment strategy sought to make a gain from that prediction.
    Peter Schiff concludes many of his articles, books, etc. with the claim he saw this coming and “positioned his clients accordingly”.

  • The Obama Plan
    , January 25th, 2009 at 11:46 am

    President Obama has laid out his plans to revive the economy, and the price tag will be “at least $820 billion.” Something tells me that the “at least” part means “at the very, very least.”
    Obama’s goal is to create four million jobs. Dean Baker works out the math and says that the plan comes down to $65,000 per job.
    In my mind, the empirical evidence in favor a stimulus package is, at beat, inconclusive. The major problem, however, is that the recovery plan is no longer theoretical—we can see what it is. A lot of this spending isn’t for short-term fiscal stimulus, it’s merely larger government. The Washington Post opines:

    Helping hire, equip and pay police, a $4 billion item under the bill, might be a good idea, but writing checks to individual households for the same amount would do more to stimulate the economy. Ditto for $16 billion in Pell Grants for college students, $2.1 billion for Head Start and $50 million for the National Endowment for the Arts. All of those ideas may have merit, but why do they belong in an emergency measure aimed to kick-start the economy?

    The short answer is, they don’t belong. I expect the plan to sail through Congress. The only upside I see is that future economists will now have another bit of evidence to weight.

  • Contra Geithner
    , January 23rd, 2009 at 12:38 pm

    Joe Weisenthal makes the case against Geithner:

    We know that not everyone would’ve made the same decision here. We’ve worked with people in our professional life, who everytime they encountered something legally or ethically murky opted to make the conservative choice that wasn’t immediately beneficial to them. They do exist, believe it or not. We suspect a guy like Warren Buffett would’ve asked for a professional opinion on the tax issue, were he in that same position.
    Again, it’s not that Geithner is so bad, it’s just that his mindset is apparently similar to the people who got us here. Substitute “Moody’s” for “TurboTax” and it should be be obvious.
    It’s moot at this point. The speed of the banking crisis means the full Senate will sign off on today’s finance committee vote. But we will soon have a Treasury Secretary who was basically of the same mindset as everyone else, rather than a real clean break from the failed, convenient thinking of the past.

    Geithner said he simply made a mistake on his taxes and apologized. Well, the apology is good but it misses the point, the mistake is the issue. Calling it one doesn’t diminish the significance. The Secretary of the Treasury should know how to do his taxes without making obvious, boneheaded mistakes.
    Larry Ribstein has more.

  • New Stock Options for Google Employees
    , January 23rd, 2009 at 10:35 am

    A few years ago, I criticized a Wall Street Journal story that claimed corporate executives were profiting off 9/11 by granting themselves new options after the market dropped. I thought this was a completely made-up scandal. The article described perfectly legal activity in such a way as make it seem sinister (see here for my original post).
    The reason why I mention this is that Google has essentially done the same thing the WSJ was complaining about two-and-a-half years ago. Here’s the AP story in full:

    Google Inc. is allowing its employees to swap their stock options for new ones that will give them a better chance to profit from their holdings.
    The Mountain View-based company outlined the exchange program Thursday in its fourth-quarter earnings report. Google suffered its first-ever decline in quarterly profit because of charges taken to account for its deteriorating investments in Time Warner Inc.’s AOL and Clearwire Corp.
    Google will have to absorb another hit to earnings to pay for the new options being made available to its 20,222 employees. Management expects the accounting charge to be about $460 million, assuming the new exercise price for the options is around $300.
    Google shares ended Thursday at $306.50. The new options are expected to be priced on March 2. The exchange program is scheduled to start Jan. 29 and expire March 3.
    A 47 percent drop in Google’s stock price during the past year drove the decision to give employees a chance to turn in options that have been awarded during the past few years. As of Sept. 30, about 8 million of Google’s 14.3 million outstanding stock options had an exercise price of at least $400, leaving roughly 17,000 employees with options that are “under water” and can’t be cashed in now at a profit.
    Google reasons employees will have greater incentive to remain at the company and worker harder if they have stock options that are more likely to yield a windfall.
    The special treatment comes as Google is eliminating some employee perquisites and even laying off a smattering of workers to shore up its profits during the recession.

    For the record, I don’t think there’s anything wrong in what Google is doing. But I’m curious if we’ll hear the same screams of protest that we got in the summer of 2006.
    To use the problematic logic from the WSJ’s original article, Google executives are “profiting off” the global economic turmoil. Worse, they’re giving themselves raises while they’re laying their own people off.
    Where’s the media outrage?

  • Aflac’s Press Release
    , January 23rd, 2009 at 10:12 am

    I’m glad to see AFLAC (AFL) making a public statement:

    “I think it’s also appropriate to comment on the status of the perpetual debentures, or so-called “hybrid securities” we own. Based on preliminary year-end numbers, our holdings of hybrid securities at fair value were $8.1 billion, or approximately 11.8% of our consolidated investment portfolio of $68.6 billion. We purchased the hybrid securities from 1993 to 2005. For GAAP accounting purposes, the perpetual debentures are held in the available-for-sale category. As such, they are marked to market and reflected on the balance sheet at fair value. By contrast, these perpetual debentures are carried at amortized cost for statutory accounting purposes. That means that the changes in the fair value of these hybrid securities are not included in, and therefore do not impact, the risk-based capital ratio.
    “As we discussed in our third quarter earnings announcement and conference call, the Securities and Exchange Commission (SEC) issued a letter on October 14, 2008, to the Financial Accounting Standards Board (FASB) on the topic of hybrid securities. The SEC’s letter noted that due to the debt characteristics of hybrid securities, a debt impairment model could be used for filings subsequent to October 14, 2008, until the FASB further addresses whether a debt or equity impairment approach is most appropriate. Aflac’s debt impairment approach is primarily based on an assessment of whether it is highly probable we will receive timely payment of interest and principal, whereas our equity impairment approach is based on the aging and degree of unrealized losses. With no pronouncement forthcoming from the FASB, we continued to apply our debt impairment model to the perpetual debenture investments as of December 31, 2008. Pending new guidance from the FASB, we will continue to use the debt impairment approach. In addition, for statutory accounting purposes, we will continue to evaluate our perpetual debenture holdings using the debt impairment approach, and we do not anticipate that approach changing.”