Archive for November, 2010

  • Morning News: November 23, 2010
    , November 23rd, 2010 at 7:50 am

    Stock Futures Lower as Korean Tensions Rise, GDP Awaited

    Canada Inflation Quickens to 2-year High in October on Surge in Gasoline

    Dollar Bears Go Into Hibernation as QE2 Attacks Prove Unfounded

    Irish Rescue Plan Shifts Focus to Portugal, Spain

    F.B.I. Agents Raid 3 Hedge Fund Offices

    China Bans Hoarding of Oil, Coal to Cool Prices

    Rescue of Ireland Would Dwarf Greece’s Bailout on Cost of Shoring Up Banks

    J. Crew Reportedly Close to Massive Buyout

    Netflix Offers Stream-only Service, Hikes Prices

    HP Results Show Seesawing Nature of Tech Recovery

    Momentum is a Drug, Value is in The Eye of the Beholder and Certainty is Death

  • More Evidence on the Return of Risk
    , November 22nd, 2010 at 2:51 pm

    Thanks to the Fed’s assistance, investors are increasing their appetite for risk:

    The riskiest junk bonds are providing a refuge for investors concerned that inflation will accelerate as the Federal Reserve attempts to bolster the economy.

    Debt issues from iStar Financial Inc., the commercial real- estate lender, and Atlanta-based credit-card processor First Data Corp. are leading returns of 0.22 percent this month for bonds rated CCC and lower, while higher-ranked BB tier debt is down 0.76 percent, Bank of America Merrill Lynch index data show. Investment-grade debt losses average 1.15 percent.

    The lowest-tier notes offer yields of about 11.5 percent, compared with 6.4 percent for BB bonds, providing a buffer in case consumer prices rise at a faster pace as the Fed prints money to buy $600 billion of Treasuries. When inflation accelerated in 2006, returns on the CCC bonds were 18.6 percent, almost double the 9.9 percent gain for BB debt and 4.64 percent for high-grade securities.

    “The wider the spread the more cushion you have” against rising consumer prices eating into interest payments, said James Serhant, senior vice president and head of high-yield fixed income at Hartford Investment Management Co. in Hartford, Connecticut, who oversees the $448.6 million Hartford High Yield Fund.

  • Netflix Is Worth Nearly $10 Billion
    , November 22nd, 2010 at 1:33 pm

    At 1:30 pm, the stock market is having a rough day. The Dow is off more than 119 points and the S&P 500 is down nearly one full percent.

    Perhaps the most fantastically overpriced stock on the market is Netflix (NFLX) which has just bounded up to another 52-week high. The stock is up more than $100 per share since I called it “The Absolute Worst Stock to Buy Right Now.” Yeesh–not one of my better calls. I thought it was overpriced then and I think it’s even more so now.

    The guys at Bespoke list some of the companies that Netflix is now larger than. This includes companies like Sara Lee (SLE) and ConAgra (CAG). Netflix is now worth close to $10 billion.

    Only three stocks from the Buy List are up for the day: Eaton Vance (EV), Sysco (SYY) and Joey Banks (JOSB). Nicholas Financial (NICK) has been as low as $9.60 today which is off since it’s down $1 from its recent high despite there being no news on it.

  • Stocks and Bonds Part Ways
    , November 22nd, 2010 at 10:24 am

    Bloomberg reports:

    For the first time since the financial crisis started, U.S. shares are moving independently of the bond market, a sign that profits and valuations are guiding investors more than concern about the economy.

    The 30-day correlation coefficient measuring how often the Standard & Poor’s 500 Index moves in tandem with 10-year Treasury yields fell to minus 0.42 from a record 0.89 in June, data compiled by Bloomberg show. Readings of 1 indicate prices are moving together, while zero shows no link and minus 1 means they are going in opposite directions. Stocks and debt are ending a lockstep relationship that began in July 2007 and lasted through the worst recession since the 1930s.

    This is exactly what I said would happen with QE2. The Federal Reserve wants investors to leave secure assets like bonds and turn to riskier assets like stocks.

    Here’s a look at the S&P 500 (in black) compared with an ETF of long-term Treasuries (in gold):

    It’s almost like a mirror image. In fact, I’m not quite sure what Bloomberg is referring to as a “period of positive correlation” during June. But let’s leave that aside for now because what we’re also seeing is that within stocks, investors are moving to riskier classes.

    Check out the difference between the small-cap Russell 2000 (gold) and the S&P 500 (black) over the last three months.

  • “After all, I am just another heartless Wall Street bastard myself.”
    , November 22nd, 2010 at 9:36 am

    I want to give a quick shout-out to The Epicurean Dealmaker, one of best and funniest blogs about Wall Street, for making it into John Cassidy’s article in the most recent New Yorker:

    Given the code of silence that Wall Street firms impose on their employees, it is difficult to get mid-level bankers to speak openly about what they do. There is, however, a blog, The Epicurean Dealmaker, written by an anonymous investment banker who has for several years been providing caustic commentary on his profession. The biography on his site notes, “I facilitate, justify, and advise parties to M&A transactions, when I am not advising against them.” In March, 2008, when some analysts were suggesting that the demise of Bear Stearns would lead to a change of attitudes on Wall Street, TED—the shorthand appellation the author uses—wrote, “I, for one, think these bankers will be even more motivated to rape and pillage the financial system in order to rebuild their ill-gotten gains.” Seven months later, on the eve of the bank bailout, TED opined, “Let hundreds of banks fail. Let tens of thousands of financial workers lose their jobs and their personal wealth. . . . The financial sector has had a really, really good run for a lot of years. It is time to pay the piper, and I, for one, have little interest in using my taxpayer dollars to cushion the blow. After all, I am just another heartless Wall Street bastard myself.”

    In September, TED and I met at a diner near my office. He looked like an investment banker: middle-aged, clean-cut, wearing an expensive-looking gray suit. Our conversation started out with some banter about the rivalry between bankers and traders at many Wall Street firms. As the traders came out on top in recent years, TED recalled, “they would say, ‘You guys are the real parasites, going to expensive lunches and doing deals on the back of our trading operations.’ ” He professed to be unaffected by this ribbing, but he said, “In my experience, the proprietary traders are always the clowns who make twenty million dollars a year until they lose a hundred million.”

    In September, 2009, addressing the popular anger about bankers’ pay, TED wrote that he wouldn’t “attempt to rationalize stratospheric pay in the industry on the basis of some sort of self-aggrandizing claim to the particular socioeconomic utility or virtue of what I and my peers do,” and he cautioned his colleagues against making any such claim: “You mean to tell me your work as a [fill in the blank here] is worth more to society than a firefighter? An elementary school teacher? A combat infantryman in Afghanistan? A priest? Good luck with that.” The fact was, TED went on, “my pay is set according to one thing and one thing only: the demand in the marketplace for my services. . . . Investment bankers get paid a lot of money because that is what the market will bear.”

    While not inaccurate, this explanation raises questions about how competition works in the financial industry. If Hertz sees much of its rental fleet lying idle, it will cut its prices to better compete with Avis and Enterprise. Chances are that Avis and Enterprise will respond in kind, and the result will be lower profits all around. On Wall Street, the price of various services has been fixed for decades. If Morgan Stanley issues stock in a new company, it charges the company a commission of around seven per cent. If Evercore or JPMorgan advises a corporation on making an acquisition, the standard fee is about two per cent of the purchase price. I asked TED why there is so little price competition. He concluded it was something of a mystery. “It’s a commodity business,” he said. “I can do what Goldman Sachs does. You can do what I can do. Nobody has a proprietary edge. And if you do have a proprietary edge you’ll only have it for a few weeks before somebody reverse engineers it.”

    After thinking it over, the best explanation TED could come up with was based on a theory of relativity: investment-banking fees are small compared with the size of the over-all transaction. “You are a client, and you are going to do a five-billion-dollar deal,” he said. “It’s the biggest deal you’ve ever done. It’s going to determine your future, and the future of your firm. Are you really going to fight about whether a certain fee is 2.5 per cent or 3.3 per cent? No. The old cliché we rely on is this: When you need surgery, do you go to the discount surgeon or to the one you trust and know, who charges more?”

    I asked him how he and his co-workers felt about making loads of money when much of the country was struggling. “A lot of people don’t care about it or think about it,” he replied. “They say, it’s a market, it’s still open, and I’ll sell my labor for as much as I can until nobody wants to buy it.” But you, I asked, what do you think? “I tend to think we do create value,” he said. “It’s not a productive value in a very visible sense, like finding a cure for cancer. We’re middlemen. We bring together two sides of a deal. That’s not a very elevated thing, but I can’t think of any elevated economy that doesn’t need middlemen.”

  • Ireland To Get Bailed Out
    , November 22nd, 2010 at 8:54 am

    Now it’s Ireland’s turn for a bailout. This is a tough one since Ireland had been the shining star of the benefits of European economic integration. Sure, we all kinda knew that Greece was a mess, but Ireland? They were supposed to be the good student doing it right.

    European Union officials, who had been pushing Ireland to accept help, quickly agreed to the request late Sunday, committing a staggering amount of funds to an ailing member for the second time in six months.

    The total amount of the package was not announced, but several officials said it would be €80 billion to €90 billion, or $109 billion to $123 billion. Last spring, Europe disbursed €110 billion to Greece to save it from bankruptcy.

    What happened is that Ireland, like many countries, bailed out its banks two years ago. The problem was that Irish banks were in much bigger trouble than everyone thought, and now the bailouters need a bailout. The reason it’s taken so long between 2008 and today is that only now have investors wised up and started to dump Irish bonds. Up until two weeks ago, the Irish government was telling us that nothing was wrong. The lesson is that markets, for all their noise, are more honest than governments.

    Now there are worries that Spain and Portugal are next. The Prime Minister of Luxembourg, Jean-Claude Juncker, said “Speculative actions against Portugal and Spain are not justified, though it can’t be excluded.” Hate to break this to you, Jean-Claude, but if they can’t be excluded, they are by a certain measure, justified. For reasons unclear, Mr. Juncker is a big-time muckety muck in European affairs.

    There’s an odd perception/reality game in these situations. If people think Ireland will be bailed out, the yield spreads on Irish debt will narrow and that will greatly help the country’s fiscal situation. If the EU had elected to “Bear Stearnsify” Ireland, well…things would be very different right now.

  • Morning News: November 22, 2010
    , November 22nd, 2010 at 7:54 am

    Ireland is Second Euro Nation to Seek Aid as Banks Wobble

    Stock Index Futures Rise After Irish Bailout

    After Ireland, traders turn to Portugal, Spain

    Lack of Hiring to Restrain U.S. Economy in 2011, Survey Shows

    Yuan Loses to Taiwan Dollar as Growth Rates Converge at 10%: China Credit

    Economists See ‘Sub-par’ Growth Ahead

    Top Banks Face $100 Billion Basel Shortfall

    China Takes Aim at Inflation Expectations

    Orascom Telecom to Sell Tunisia Stake in $1.2B Deal

    Comcast’s Plans for Executives Offer Clues to Future of NBC

    On The Inequality Of Wealth

  • Happy Birthday Otto
    , November 22nd, 2010 at 7:04 am

    I’d like to wish a belated happy birthday to Otto von Habsburg who turned 98 on Saturday.

    For the last 88 years, he’s been the pretender to the Austrian throne. His father, Charles I, was the last Emperor of Austria and King of Hungary. Charles became emperor after Franz Joseph, who was born in 1830, died in 1916. He had been on the throne since 1848.

    The heir had been Archduke Franz Ferdinand, but in 1914…well, you probably know what happened. After that, Charles was next in line, and Otto after Charles.

    If things had worked out differently, Austria would have had two kings for 156 of the last 162 years.

    Here’s a picture of Otto with Franz Joseph. In others, he’s a picture of a man alive today with a man born 180 years ago.

  • Reader Poll: Which State Would You Kick Out?
    , November 19th, 2010 at 4:24 pm


  • Time to Shut Down the Laptop
    , November 19th, 2010 at 4:01 pm

    The weekend is here. Enjoy some classic E&B: