Archive for February, 2009

• Time for a Nice Shot in the Arm
  Eddy Elfenbein, February 28th, 2009 at 2:19 pm

  Barron’s has good things to say about one of our Buy List stocks, Baxter International (BAX):

  The giant health-care company, which specializes in blood-protein treatments and medical-delivery systems for hemophilia, infectious diseases and kidney failure, among other ailments, is one of the few large-cap companies that delivered double-digit earnings growth last year. Even better, it is expected to give a repeat performance this year.
  Baxter (ticker: BAX) has forecast 2009 sales growth of 7%, excluding any foreign-exchange impact, and fully diluted earnings of between $3.70 and $3.78 a share, before any special items, up from $3.38 last year. Cash flow for the full year is expected to exceed $2.6 billion.
  In an investment sector that is, by its nature, defensive, Baxter could be a real winner, with growth prospects that look unusually alluring at a time when more investors are seeking stocks perceived to be safe.
  Compared with the erosion in the broader market, the shares have been a bastion of strength the past 52 weeks, trading until days ago at roughly the same level they did a year earlier, and representing a market value of about $32 billion. At about 52 Friday, the stock was changing hands at 14 times estimated earnings for ’09 and about 12.3 times the forecast for ’10.
  There’s a strong case for the shares to reach 65 by year’s end, or nearly 20% above current levels, based on strong earnings growth, margin expansion and continuing share buybacks. Bulls note that management has a habit of providing conservative guidance, and that Baxter could well exceed its current expectations of 10% to 12% earnings growth.

• Warren Buffett’s 2008 Shareholder Letter
  Eddy Elfenbein, February 28th, 2009 at 11:17 am

  Here’s the latest shareholder letter from Warren Buffett. This is part of what he said to say about 2008:

  As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”
  By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.
  This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political
  challenge. They won’t leave willingly.
  Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

  I particularly enjoyed this nice little rant:

  For a case study on regulatory effectiveness, let’s look harder at the Freddie and Fannie example. These giant institutions were created by Congress, which retained control over them, dictating what they could and could not do. To aid its oversight, Congress created OFHEO in 1992, admonishing it to make sure the two behemoths were behaving themselves. With that move, Fannie and Freddie became the most intensely-regulated companies of which I am aware, as measured by manpower assigned to the task.
  On June 15, 2003, OFHEO (whose annual reports are available on the Internet) sent its 2002 report to Congress – specifically to its four bosses in the Senate and House, among them none other than Messrs. Sarbanes and Oxley. The report’s 127 pages included a self-congratulatory cover-line: “Celebrating 10 Years of Excellence.” The transmittal letter and report were delivered nine days after the CEO and CFO of Freddie had resigned in disgrace and the COO had been fired. No mention of their departures was made in the letter, even while the report concluded, as it always did, that “Both Enterprises were financially sound and well managed.”
  In truth, both enterprises had engaged in massive accounting shenanigans for some time. Finally, in 2006, OFHEO issued a 340-page scathing chronicle of the sins of Fannie that, more or less, blamed the fiasco on every party but – you guessed it – Congress and OFHEO.

  Nicely put. Warren should start blogging.

• Stat of the Day
  Eddy Elfenbein, February 27th, 2009 at 1:18 pm

  Shares of Citigroup (C) are currently trading at $1.52. The current divisor for the Dow Jones Industrial Average is 0.125552709. That means that Citigroup makes up just 12 of the Dow’s 7100 points.
  Will anybody miss this company?

• The End of the Euro
  Eddy Elfenbein, February 27th, 2009 at 12:41 pm

  According to some, the euro could come to an end soon:

  Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.
  “People said subprime could never blow up but it did and now they’re saying the exact same thing about the eurozone,” said Howard. “There’s no stopping what is now a downward spiral.” He declined to discuss his investments.
  Hayman joins a growing number of investors seeing the possibility of a breakup of the $12 trillion euro bloc, conceived more than 10 years ago to cut unemployment, tame inflation and create a rival to the dollar. Societe Generale SA said this week Germany may refuse a bailout in an election year. ABN Amro Holding NV said Feb. 17 the crisis is “Europe’s subprime.”
  Euro-region bank loans to Eastern Europe topped $1.3 trillion in the third quarter last year, or about 9 percent of the bloc’s gross domestic product, ING Groep NV said Feb. 18, citing Bank for International Settlements data. Now lenders face losses after extending credit to finance everything from industrial development to domestic real estate.
  Irish banks took on debt equivalent to 11 times the nation’s own gross domestic product, Dutch-bank credit reached seven times GDP and Belgium four times, according to BNP Paribas SA.

• More Troubles With Double Negatives
  Eddy Elfenbein, February 27th, 2009 at 12:23 pm

  This time from the White House.

  “This is the first step towards getting health-care reform done this year,” White House domestic policy adviser Melody Barnes told allies in one call. “We can’t underestimate the importance of rallying around this budget. It serves as a footprint for something bigger.”

• Puzzling Quote of the Day
  Eddy Elfenbein, February 27th, 2009 at 12:11 pm

  From the New York Times:

  Mr. Pandit described the exchange as “bridge to profitability” that was intended to appease the markets. On a conference call Friday morning with investors, he said the bank was committed to its remaining businesses and strategy. Mr. Pandit also tried to squelch concern that the government would play a more influential role at the company. “We are going to run Citi for the shareholders,” he added.

  If you’re going to run Citi for the shareholders, that means you’re running it for the government.

• Q4 GDP Revised Downard
  Eddy Elfenbein, February 27th, 2009 at 9:25 am

  The Feds just revised fourth-quarter GDP to -6.2% from its earlier estimate of 3.8% growth. This was the worst quarter since 1982; although the current quarter might be worse.

  Output fell 6.2 percent at an annualized rate in the fourth quarter of 2008, revised downward from a previous estimate of a 3.8 percent decline. The drop was even steeper than many economists had feared, and was much lower than the 0.5 percent contraction from the previous quarter.
  The announcement comes on the heels of a new budget from the Obama administration that assumes what some economists have called an unrealistically optimistic view of the near-term future of the American economy.
  The downward revisions came primarily because of a larger-than-anticipated contraction in inventories of unsold goods. A wider trade gap than previously reported — that is, fewer American goods being purchased abroad — also pushed G.D.P. downward. Lower consumer sales sliced off some of the previously reported economic output, as well.

  

• Citi and Feds Reach Deal
  Eddy Elfenbein, February 27th, 2009 at 12:31 am

  The WSJ reports:

  Under terms being finalized late Thursday, the Treasury has agreed to convert some of its current holdings of preferred Citigroup shares into common stock, a move that could better protect shareholders against future losses.
  As a condition, the government is demanding that the New York company overhaul its board of directors, the people said. Treasury will call for Citigroup’s board to be comprised of a majority of independent directors. Chief Executive Vikram Pandit is expected to keep his job under the agreement.
  The government will convert its stake only to the extent that Citigroup can persuade private investors such as sovereign wealth funds do so as well, the people said. The Treasury will match private investors’ conversions dollar-for-dollar up to $25 billion.
  The size of the government’s new stake will hinge on how many preferred shares private investors agree to convert into common stock. The Treasury’s stake is expected to rise to up to 40% of Citigroup, the people said.

• Department of Irony
  Eddy Elfenbein, February 26th, 2009 at 8:27 pm

  Good news! Congress has passed House Resolution 180 which supports “the goals and ideals of the third annual America Saves Week.”
  The vote was 415 to 2, which automatically make me think–who was the other guy besides Ron Paul? It turns out it was Jeff Flake of Arizona.
  Here’s part of the resolution:

  Resolved, That the House of Representatives–
  (1) recognizes the importance of savings to financial security;
  (2) supports the goals and ideals of `America Saves Week’;
  (3) acknowledges the tireless efforts of the late Congresswoman Stephanie Tubbs Jones to eliminate predatory lending, increase the nation’s savings rate, and improve the overall economic situation of all those residing in the United States; and
  (4) requests that the President issue a proclamation calling on the Federal Government, States, localities, schools, nonprofit organizations, businesses, other entities, and the people of the United States to observe the week with appropriate programs and activities with the goal of increasing the savings rates for individuals of all ages and walks of life.

  Meanwhile, here’s Obama’s $3.6 trillion budget.

• The Sinking Mortgage Expert
  Eddy Elfenbein, February 26th, 2009 at 2:57 pm

  There’s got to be a metaphor in here somewhere.