Archive for May, 2009

  • The Credit Crisis Explained
    , May 5th, 2009 at 9:54 am

    The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

  • The Cyclicals Have Led the Charge
    , May 5th, 2009 at 8:10 am

    One thing to point out about this rally is that it’s been hugely led by cyclicals. Since March 9, the S&P 500 is up 34% but the Morgan Stanley Cyclical Index (^CYC) is up a stunning 98%. That’s a huge move for an index. Cyclicals have outperformed the market for 19 of the last 23 sessions.
    Too many analysts like to downplay a rally because it’s slanted one way or the other. But almost all rallies are initially geared toward one sector or another — and just because it starts that way doesn’t mean it will end up that way. Broad-based rallied are far more the exception than the rule.
    I like to follow the ratio of the CYC to the S&P 500 because it tends to move in long-term cycles (hence the name cyclicals). See the chart below, and note how dramatic the move has been over the last six months.
    image802.png
    I’ll warn you not to mistake this for a market-timing device. Instead, it’s a way to get a look at the internals of the market. I think the broader rally still has legs but I’m beginning to doubt that the cyclicals will continue their lead. They’ve earned a nice rest for now.
    P.S. The ratio reached its peak on July 19, 2007 at 0.7273. One month before, I warned investors that the cyclical party was coming to an end.

  • The California Problem
    , May 5th, 2009 at 1:22 am

    George Will has a good albeit scary column on the political economics of California. He calls Arnold Schwarzenegger, “the best governor the states contiguous to California have ever had.”
    Here’s a sample:

    Liberal orthodoxy has made the state dependent on a volatile source of revenue — high income tax rates on the wealthy. In 2006, the top 1 percent of earners paid 48 percent of the income taxes. California’s income and sales taxes are among the nation’s highest and its business conditions among the worst, as measured by 16 variables directly influenced by the Legislature. Unemployment, the nation’s fourth-highest, is 11.2 percent.

    I’m worried that the issue isn’t simply one of balancing a budget. I’m afraid that it’s deeper than that. It’s that the model of California’s society is fundamentally broken. Big government and high taxes combined with massive immigration and multiculturalism.
    I can’t help but think of New York during the 1970s when the city experienced a dramatic downfall. Crime exploded and the population imploded. In 1965, there was a blackout and the city was calm. Twelve years later, there was a blackout and massive looting.
    Think of all those great 70s movies that showed the grit and grim of New York, or Howard Cossell saying during the World Series, “There it is, ladies and gentlemen, The Bronx is burning.”
    This could be California’s future.

  • Re: S&P Nears 2009 High
    , May 4th, 2009 at 11:53 pm

    Thanks to a late-day surge, the S&P 500 broke 900 and closed at 907.24. The index is now positive for the year! (Slightly). Our Buy List is currently up 10.34%. Since March 9, the S&P 500 is up 34% which works out to a cool $2 trillion.

  • Inflation Nation
    , May 4th, 2009 at 10:37 pm

    Allan Meltzer has a good article in today’s New York Times on the threat of inflation created by the Fed’s policies. The Fed has tossed tons of money into the economy and there will be a reckoning. Policy is, of course, a matter of choices and the Fed has decided to put inflation concerns on the back-burner while trying to help the economy right now.
    Once the economy finally gets back on its feet, tough decisions will need to be made. What needs to be done isn’t hard to figure out—massively drain liquidity. Instead, it will be a question of political will. Meltzer is concerned that the Fed has “sacrificed its independence and become the monetary arm of the Treasury.” That’s a good point.
    I currently lean toward downplaying the impact of inflation. Why? Well, because everyone else sees it as inevitable. No one seemed terribly worried that Mine That Bird would come flying up the inside rail…so it happened.
    With Tall Paul in his corner, I think Obama realizes the importance of the Fed’s role in combating inflation. I guess there really is no such thing as an independent Fed.

  • Poll Update
    , May 4th, 2009 at 7:00 pm

    Thanks again to everyone who participated in my latest poll on how much tax should a family earning $40,000 pay. I was curious to see what the median or middle answer would be. Since I used 5% blocks, I’d have to estimate that it was about 8.2% which comes to a tax bill of $3,280.
    The earlier poll asked how much should a family making $250,000 pay, and that median came to about 22.6% or $56,500.
    There are lots of ways to reconcile the two answers but one would be (roughly, not exactly) a flat rate of 25% on income above $27,000.

  • S&P Nears 2009 High
    , May 4th, 2009 at 1:48 pm

    The S&P 500 got up to 899.01 today which is the highest its been since early January.
    image801.png

  • The Boston Globe May Be No More
    , May 4th, 2009 at 1:15 pm

    I was a rookie broker in Boston and I loved that Boston was an authentic two-paper town. Whenever you got on the T you could easily find a Boston Herald but it was much harder to find a Boston Globe. The Herald was far more populist and conservative, while the Globe was a bastion of liberalism. It’s hard to imagine that the Glove may soon go away.

    The paper’s circulation dropped 14 percent in the most recent six-month period. The Globe is expected to lose $85 million this year, the company says.
    Boston residents have long resented the takeover of the Globe by a company based in New York, with which the region competes in sports, banking and cultural bragging rights.
    The notion that Boston, home to some of the country’s top universities, could lose its major daily would have been unthinkable before the recent nationwide plunge in advertising revenue. That dive has triggered a wave of newspaper bankruptcies and the closing of the Rocky Mountain News and the Seattle Post-Intelligencer.
    A Globe shutdown would leave the city with only one daily newspaper, the tabloid Boston Herald, which has just 10 news reporters and is battling its own financial difficulties.

    I can’t help thinking of this scene:

  • Cognizant Seen Posting Higher Q1 Profit
    , May 4th, 2009 at 11:48 am

    Cognizant Technology Solutions (CTSH) reports tomorrow. Here’s a preview from Reuters:

    IT service provider Cognizant Technology Solutions Corp (CTSH.O) is expected to post a higher first-quarter profit as it benefits from a stable and diversified customer base, even as the sector has been hit by delays in client decision-making and sluggish demand.
    Analysts expect Cognizant to back its 2009 revenue outlook, citing its ability to handle pricing pressure and the offshore focus maintained by its largest customer, JPMorgan Chase (JPM.N).
    “JPMorgan, among other banks, is probably in a better shape, and on top of that the bank seems to be continuing to have a very strong commitment to its offshore strategy,” Cowen & Co analyst Moshe Katri said by phone.
    JPMorgan accounts for about 4 percent to 6 percent of Cognizant’s revenue, according to Katri. Other key customers include Pfizer Inc (PFE.N), eBay Inc (EBAY.O) and Credit Suisse (CSGN.VX).
    “The better sentiment around financials and stock markets is an incremental positive as Cognizant gets 45 percent of revenue from the financial services sector,” UBS analyst Jason Kupferberg said.
    For the first quarter, analysts on average expect the company to earn 37 cents a share, excluding items, on revenue of $735.4 million, according to Reuters Estimates. The company posted a profit of 34 cents a share in the year-earlier quarter.
    In February, Cognizant had forecast 2009 full-year revenue of at least $3.1 billion. Analysts are expecting $3.06 billion.

    Cognizant is our second-best performing stock this year. It’s up more than 40%.

  • Buffett Attacks the Stress Test
    , May 4th, 2009 at 10:59 am

    From the BBC:

    US investor Warren Buffett has hit out at the government’s “stress tests” of US banks, saying they do not properly assess the industry’s health.
    Mr Buffett’s Berkshire Hathaway company holds stakes in three banks that underwent the tests.
    He said the tests ignored differences in business models, but added it was right the government try to save banks.
    The results of the stress tests were due to be published on Monday, but have been delayed until Thursday.
    Referring to Berkshire Hathaway’s holdings in Wells Fargo, US Bancorp and SunTrust Banks, he said, “I think I know their future, frankly, better that somebody that comes in to take a look.
    “They may be using more of a checklist-type approach.”

    I was also glad to hear Buffett criticize the crazy practice of stock buy-backs.