Archive for September, 2011

• The 30-Year Yield Is Close to Multi-Year Low
  Eddy Elfenbein, September 19th, 2011 at 12:05 pm

  The yield on the 30-year Treasury bond hit 3.2% today. That’s just above the 3.19% from September 6th which was the lowest yield in 32 months. On July 26th, the yield was at 4.34%.

  

• The Risks at AFLAC
  Eddy Elfenbein, September 19th, 2011 at 10:52 am

  At Seeking Alpha, Thomas Lott shares his thoughts on AFLAC ($AFL):

  Book per share today is $25.65. Compared to a $36 stock price, that is a 1.4x price to book ratio. Historically going back to 2001, the price to book has averaged around 2.6x. That does make AFL seem somewhat cheap. I think my problem as pointed out above is that bank losses have probably hurt the balance sheet since June 30th. AFLAC has begun to derisk, and the smart play for management is to sell down European bank bonds they own. Let’s just assume that their $706mm in losses is $1BB now, and that their capital gains have been cut in half (roughly $1BB of capital gains). That would imply a hit of around $2 per share to book to around $23.65. With the stock at $36, that is a price to book multiple of 1.5x.

  Read the whole thing. On balance, Lott likes the stock although he thinks there’s a chance it could fall to $22 if there’s a full panic in Europe. On the plus side, he calls it a buy below $30 per share and says it could hit $60 within two years. However, he’s curious as to why the company is so invested in Europe.

• Larry Summers: “The world must insist that Europe act”
  Eddy Elfenbein, September 19th, 2011 at 10:18 am

  In the Financial Times:

  At every stage of this process, from the first signs of trouble in Greece, to the spread of problems to Portugal and Ireland, to the recognition of Greece’s inability to pay its debts in full, to the rise of debt spreads in Spain and Italy, the authorities have played out the stalemate machine. They have done just enough beyond euro-orthodoxy to avoid an imminent collapse, but never enough to establish a sound foundation for a resumption of confidence. Perhaps inevitably, the gaps between emergency summits grow shorter and shorter.

  The process has taken its toll on policymakers’ credibility. As I warned European friends quite some time ago, authorities who assert in the face of all evidence that Greece can service on time 100 per cent of its debts will have little credibility when they later assert that the fundamentals are sound in Spain and Italy, even if their view on the latter point is a reasonable one. After the spectacle of European bank stress tests that treat assets where credit default swaps exceed 500 basis points as riskless, how can markets do otherwise than to ignore regulators’ assertions about the solvency of certain key financial institutions?

  Personally, I’m not so concerned with preserving the credibility of policymakers.

• Netflix Separates Its DVD and Streaming Business
  Eddy Elfenbein, September 19th, 2011 at 10:09 am

  A customer backlash truly works — or perhaps I should say that a customer and investor backlash truly works. Netflix ($NFLX) has announced today that it’s separating its online streaming and DVD-by-mail service. The new division will be called “Qwikster” (who thinks of these names?).

  The streaming business will continue to be called Netflix. Members who subscribe to both services will have two entries on their credit card statements. Instead of Netflix, the distinctive red envelopes will now say Qwikster.

  The stock fell from a high of $304 on July 13 to $154 last Friday. The company has been on the defensive ever since they announced a controversial price increase this summer.

  The problem was that the stock was enormously over-priced so any disruption could cause the shares to plunge. Last week, Netflix had to lower its Q3 subscriber forecast and that caused even more pain for the stock.

  Reed Hastings, the CEO, finally took hold of the issue and publicly said that they made a mistake:

  Acknowledging that he “messed up,” Hastings said he “slid into arrogance based upon past success” when he did not adequately explain the reasons behind the plan separation and effective price hike. He said the reason is that instant streaming and DVD-by-mail are becoming “two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.”

  Explaining the reasons behind the plan change “wouldn’t have changed the price increase, but it would have been the right thing to do,” Hastings wrote.

  Hastings said the DVD service will be the same as ever, “just a new name.” But customers will see a video games upgrade option for game rentals on the Qwikster website. Andy Rendich, who has been working on Netflix’s DVD service for 12 years, and leading it for the past four years, will be the CEO of Qwikster.

  The real Qwikster, of course, is the stock market and how quickly it turned against Netflix. This apology may help in the short-term but the stock is still vastly overpriced.

• Greece Hits U.S. Stocks Again
  Eddy Elfenbein, September 19th, 2011 at 9:53 am

  After rising every single day last week, the stock market is sharply lower today. The S&P 500 rose from 1,154 to 1,216 last week and we’ve been as low as 1,193 this morning, so we’ve given some of our gains back but not all of them.

  As you might expect, investors are again worried about Europe. Again. Now we’re being told that it might take until October for a bailout plan to be in place. This is a repeat of the similar pattern we saw over the summer when stocks fell sharply on Monday due to the political uncertainty created over the weekend.

  Greece’s 10-year yield rose 163 basis points to 22.82 percent while two-year notes added 513 basis points to 60.0 percent. The notes rose for the first week in two months last week as traders trimmed bets for a pending default after the leaders of Germany and France signaled a commitment to keeping Greece in the euro area. They had climbed above 80 percent for the first time on Sept. 14 amid speculation the country wouldn’t be able to meet its obligations to investors.

  The policymakers seem to think they can solve this matter by an endless series of half-steps — just enough to claim that they’re doing something but not enough to truly change course.

  President Obama has introduced his plan to cut the deficit by over $3 trillion over the next ten years. The proposal includes tax increases and a New York Times article indicates that the president will veto any plan that relies on spending cuts alone.

  Under Mr. Obama’s proposal, $800 billion of the $1.5 trillion in tax increases would come from allowing the Bush-era tax cuts to expire. The other $700 billion, aides said, would come from a combination of closing loopholes and limiting deductions among individuals making more than $200,000 a year and families making more than $250,000.

  Mr. Obama’s plan will hover over Congressional budget-cutting negotiations that are under way over the next two months. A bipartisan Congressional committee is charged with coming up with its own cuts by Nov. 23; unless passed by Congress by Dec. 23, $1.2 trillion in cuts to defense and entitlement programs will go into effect automatically in 2013.

  Mr. Obama, however, is challenging the Congressional committee to go well beyond its mandate. “He’s showing them where they could find the savings,” one administration official said.

  This seems to be setting up Congress and the White House for another showdown, except this one will happen closer to an election.

• Morning News: September 19, 2011
  Eddy Elfenbein, September 19th, 2011 at 5:14 am

  Berlin Election Deals Blow to Merkel Coalition

  IMF’s Traa Says Additional Effort Needed to Cut Greek Deficit

  Greece Under Scrutiny for Next Aid Payment

  Italian Cuts Negative for Local Governments, Moody’s Says

  China to Limit Stimulus in Slump: Deutsche Bank

  Crude Drops to One-Week Low on Outlook

  Obama Plan to Cut Deficit Will Trim Spending by $3 Trillion

  Bernanke Joins King Tolerating Inflation

  Fed Runs Risk of Doing Less Than Investors Expect

  Moody’s Stays Negative on States, Local Governments

  Scrutinizing Google’s Reign

  UBS Trading Loss Was $2.3 Billion; Gruebel Stays as Chief

  Lloyds Director Departs for Resolution

  Payless Poised for Buyout at 76% Discount

  Jeff Miller: Weighing the Week Ahead: Expecting Magic from the Fed?

  Todd Sullivan: August Industrial Production

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• Morning News: September 16, 2011
  Eddy Elfenbein, September 16th, 2011 at 5:43 am

  India Raises Rates, Breaks Ranks With BRICs

  UK’s Brown: Euro Area Cannot Survive In Present Form

  NYSE Owners Lose Big on German Embrace

  China Consolidates Grip on Rare Earths

  5 Central Banks Move to Supply Cash to Europe

  UBS Trader Gets No Miracle as Loss Leads to Arrest

  Geithner Presses Euro Zone to Leverage Bailout Fund

  Delta One Desks Are Big Moneymakers

  Goldman to Close Global Alpha Hedge Fund

  Barclays to Open London Precious Metals Vault

  Citic IPO to Raise Up to $1.94 Billion; ManU Scores Singapore Listing Approval

  Esprit Shares Tumble 20% After Dismal Earnings

  Air France Splits $12 Billion Order Between Airbus, Boeing

  Silver Lake Is Said to Weigh Buying Yahoo

  Paul Kedrosky: Taleb: People Kept Telling Me I Was an Idiot

  James Altucher: Ten Scams You Encounter Every Day

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• Morning News: September 15, 2011
  Eddy Elfenbein, September 15th, 2011 at 5:36 am

  Greece Is to Remain in Euro: Sarkozy, Merkel

  European Stocks Gain on Backing for Greece

  China Ties Aiding Europe to Its Own Trade Goals

  Italy Gives Final Approval to Austerity Plan

  U.K. Retail Sales Fall

  Crude Oil a Tad Lower; US Stocks Data, Euro Woes Weigh

  Europe Won’t Allow a Lehman-Like Collapse, Geithner Says

  Supercommittee to Get Push From Senators to Increase Savings

  Automakers and U.A.W. Still Talking

  US Orders Bank Of America To Pay $930,000 To Fired Whistleblower

  UBS Says It Had $2 Billion Loss From Unauthorized Trading

  Groupon Back on Track for Its IPO

  Facebook Delays IPO

  Toys R Us Holiday Mantra: In Exclusives We Trust

  Jeff Miller: Finding the Best Information about Europe

  Stone Street: Financial Regulation: One Step Forward, Twelve Steps Back – FINRA’s Bid for More Power

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• Benford’s Law and Greece
  Eddy Elfenbein, September 14th, 2011 at 9:17 am

  I’ve written about Benford’s Law before. The law predicts the frequency at which first numbers ought to appear in a random distribution. The law has been used to catch folks who have fudged their data.

  Tim Harford highlights some researchers who have turned Benford’s Law on Greece’s economic data:

  Manipulated data often fail to satisfy Benford’s Law. A manager who must submit receipts for expenses over £20 may end up filing claims for lots of £18 and £19 expenses – and the data will then contain too many ones, eights and nines. A forensic accountant can easily check this, and while not an infallible check (fraudster Bernard Madoff filed Benford-compatible monthly returns), it’s an indicator of possible trouble.

  Which brings us back to the data Greece submitted to the European statistics agency. According to Rauch and his colleagues, Greek data are further from the Benford distribution than that of any other European Union member state. Romania, Latvia and Belgium also have abnormally distributed data, while Portugal, Italy and Spain have a clean bill of health.

  Would a Benford-style analysis have helped spot Greece’s problems? In principle, yes. In practice, one wonders whether politics would have trumped statistics. A shame: according to Benford’s Law, Greece’s data were particularly odd in 2000, just before it joined the euro.

  (H/T: Jason Zweig)

• Retail Sales Unchanged
  Eddy Elfenbein, September 14th, 2011 at 8:58 am

  The futures indicate that the market will open higher this morning. The surprising news of this morning is that the Democrats lost the by-election to replace Anthony Weiner in New York’s ninth congressional district. This was seen as a relatively safe seat for the Democrats.

  The retail sales report for August was unchanged from July. Wall Street was expecting an increase of 0.3% so this was a bit of a surprise. Some economists are concerned that the summer swoon had a larger impact on consumer spending than was first realized. Also, the initial retail sales report for July showed an increase of 0.5%. That was revised down to 0.3%.

  The PPI report showed that wholesale inflation was flat last month which is welcome news for inflation hawks. The “core rate” rose by just 0.1%.

  There’s more bad news for French banks this morning. These banks had the most exposure to the problems in Greece. Moody’s has downgraded the long-term debt of two major French banks, Société Générale and Crédit Agricole. Additionally, BNP Paribas is under review for a downgrade. Actually, some investors think Moody’s action could have been harsher.