Archive for 2011

• Morning News: November 2, 2011
  Eddy Elfenbein, November 2nd, 2011 at 6:00 am

  Referendum Will Confirm Greece in Euro: Papandreou

  Whispers of Return to Drachma Grow Louder in Greek Crisis

  Draghi Takes ECB Helm in Battle Mode as Debt Crisis Torments Policy Makers

  Euro-Area Manufacturing Production Contracts

  Spanish Debt Firefight May Focus on Regions

  Singapore Investors Lose Bid to Recoup Lehman-Related Losses on Appeal

  After Manager Miscues, Bond-Fund Investors Playing Catch-Up

  MF Global Asia Units Move to Limit Fallout

  In Corzine Comeback, Big Risks and Steep Fall

  BofA Retreats on Debit Fee, Citing Uproar

  Sony Forecasts $1.2 Billion Full-Year Loss

  Nissan Raises Profit Forecast, Beats Toyota

  Teva Declines to Lowest in a Week as Third-Quarter Profit Falls

  StanChart 3Q Revenue Growth Slowed But Still Strong

  Cullen Roche: Oil’s Endless Bid

  Joshua Brown: Investopedia’s History of Greek Default

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• The College Loan Bubble
  Eddy Elfenbein, November 1st, 2011 at 6:17 pm

  Two years ago I wrote about the scandalous nature of American higher-ed:

  Lately it’s been all the rage to complain about companies that are too big to fail. However, there’s another prominent American institution that’s also become too big to fail. It’s bloated, overstaffed and often fails to meet the most basic need of its customers.

  Welcome to American higher education.

  More Americans are wising up to the fact that college is a big fat waste of money. Sure, if you’re lucky enough, and smart enough, get into a big-name school, college is just fine. But for millions of other students, a four-year degree often puts them in a mountain of debt and doesn’t give them the skills they need in the job market.

  First, let’s consider how long it takes many students to finish college. Even after six years, only 54% of college students even get a degree. For high-school students in the bottom 40% of their class and who go to a four-year college, an amazing two-thirds hadn’t earned a diploma after eight-and-a-half years. Sheesh, that’s worse than Bluto! I can’t think of another industry that has such a dismal record.

  David Leonhardt recently wrote at the New York Times: “At its top levels, the American system of higher education may be the best in the world. Yet in terms of its core mission—turning teenagers into educated college graduates—much of the system is simply failing.” He’s exactly right.

  Still, tuition costs continue to skyrocket. Between 1982 and 2007, tuition and fees rose 439% compared with just 147% for median family income. The trend shows no sign of stopping. One year at Yale now goes for $47,500. The University of Florida system wants to raise tuition by 15%, the maximum allowed.

  Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit. The problem is compounded by the fact that hugely important financial decisions are placed on the backs of 19-year-olds, many of whom simply don’t have the life experience to weigh the implications of a gigantic, 20-year debt load. Heck, at least the irresponsible mortgage borrowers during the crazy days were adults (even though many acted like infants).

  One report shows that students from lower-income families need to pay 40% of their family income to enroll in a public four-year college. That’s a lot of coin to have some Marxist feminist theorist tell you about atavistic nature of late-stage capitalism. Please, you can watch the Oscars to learn that. Don’t think community colleges are a bargain, either. The average tuition is up to 49% of the poorest families’ median income from 40% in 1999-2000.

  The pro-college crowd likes to repeat the claim that college grads earn $1 million more, on average, over their working lifetime. Sure, this is true, but college grads start out in a big hole. On average, they don’t even catch up to high school grads until age 33.

  The debt load piled on students is scandalous. One in five students who graduated in the 1992–93 school with over $15,000 in debt defaulted on his or her loan within 10 years of graduation. We’re setting young people up for failure and ruin credit records. Thanks to the recession defaults are up 43% over the last two years. Many students go to grad school and pile on even more debt. The average law grad owes $100,000. Plus, many schools often use grad students as greatly underpaid professors in order to cut costs. Think of Lehman Brothers. Now imagine if they had a football team.

  The loans fall especially hard on minorities since colleges love to boast their “diversity.” For African-American students, the overall default rate is more than one-third. That’s five times higher than white students and over nine times higher than Asian students.

  What makes things even worse for many colleges is that the recent bear market put the squeeze on their endowments. Harvard’s endowment dropped by $11 billion and they announced they’re laying off 25% of their investment staff. Cornell’s endowment plunged 27% in the final six months of 2008. Yale lost $5.9 billion, or one-fourth its value. Lower endowments means…you guessed it, higher tuition.

  School financing has exploded in recent years, doubling in just ten years. Total student debt now stands at over half a trillion dollars. The average borrow took out a loan worth $19,200. That’s a 58% jump since 1993.

  Naturally, the government is set to make a bad situation worse. Last week, the House of Representatives voted to elbow Sallie Mae (SLM) out of the student loan biz and shift all student loans to a government-run, taxpayer financed system. So instead of government subsidized loans run through banks to students, we’ll now have a government monopoly. Hmmm…what could possibly go wrong?

  I got a better idea. It’s a real simple government program. I call it, “Dude, you really shouldn’t be going to college.” Best of all, the program is very cheap. The costs are solely a postcard and my consulting fee. If don’t want to listen to me, fine, then listen to the folks at the ACT who say that only 23% of students have the skills to do well in college.

  The good news is that Americans are catching on to the college scam. Admissions applications are dropping at elite school. Applications are off by 20% at Williams College. Middlebury saw a 12% decline and Swarthmore had a 10% drop. I believe this is just the beginning.

  Gleen Reynolds proposes a solution in today’s New York Post:

  I think we should return to the days when student loans were dischargeable in bankruptcy, starting five years after graduation. This will allow graduates who are unable to pay to get out from under what is otherwise a potential lifetime of debt-slavery. If you buy a house to flip, and wind up losing your shirt, we let you go bankrupt, take a credit-rating hit, and scrub the debt away. Why should graduates be forbidden from doing the same? The five-year delay means that you can’t use immediate post-graduation poverty as an excuse (as some medical students used to do), but still provides an out.

  But the real incentive-alignment part is this: Put the institutions who issued the degrees on the hook for the money they received. Making them eat the entire loan balance would probably bankrupt a lot of colleges (though that should tell us something about the problem right there), but sticking them with even a small fraction — say, 10% or 15% — would be enough to inspire a much greater degree of concern for how much debt students take on while in school, and for how likely they are to find gainful employment after graduation.

• Fiserv Earns $1.16 Per Share
  Eddy Elfenbein, November 1st, 2011 at 5:47 pm

  Ah, my favorite autumn singing group — the beat and raise choir.

  Fiserv ($FISV) just reported Q3 earnings of $1.16 per share which was two cents better than Wall Street’s estimate.

  The company also increased its full-year EPS guidance from $4.42 to $4.54 to a new range of $4.54 to $4.60. Last year, Fiserv made $4.05 per share so this is very good growth.

  Since the company has made $3.31 per share for the first three quarters of this fiscal year, their new full-year guidance translates to a Q4 guidance of $1.23 to $1.29 per share. Wall Street had been expecting $4.53 per share for the year and $1.25 per share for Q4.

  Nothing’s changed with Fiserv’s business except that the stock was at $65 four months ago. This is a very solid company.

  

• S&P 500 Total Return Index
  Eddy Elfenbein, November 1st, 2011 at 11:27 am

  Through October, the S&P 500 is down 0.35% but including dividends, it’s up 1.30%. Here’s a look at the total return index of the S&P 500 going back to 1997.

  

• October ISM = 50.8
  Eddy Elfenbein, November 1st, 2011 at 10:15 am

  The October ISM just printed at 50.8 which is a decline from 51.6 for September. Economists were expecting a reading of 52.

  Whenever the ISM is over 50 it means the economy is expanding. When it’s below 50, it’s contracting. The ISM has fallen between 50.0 and 52.0 a total of 89 times; just five have been recessions.

  

• Morning News: November 1, 2011
  Eddy Elfenbein, November 1st, 2011 at 6:14 am

  Europe Debt Crisis Threatens Asian Growth

  China PMI Drops to Lowest in Almost 3 Years

  Markets Tumble as Greece Sets Referendum on Latest Europe Aid Deal

  Euro Weakens on Renewed Greek Default Concern; Dollar, Yen Gain

  Italian Bonds Slide, Premium to Bunds Reaches Record, Amid Greece Concern

  Czech PMI Falls to Lowest in 22 Months as Export Orders Dry Up

  Japan Acts Alone to Weaken Its Currency

  Report Says New York Fed Didn’t Cut Deals on A.I.G.

  Retreat From Debit-Card Fees Continues

  MF Global Suspended From LME Trade, CME Clearing on Filing

  MF Global Bankruptcy Leaves Star Bankers Adrift

  Time Warner Trims Its Excesses

  British Security Firm G4S’ Bid for Danish ISS Scuppered by Shareholder Backlash

  Japanese Brokerage Giant Nomura Posts First Loss in Two Years

  Allstate Adds Corporate Debt, Shuns ‘Too-Low’ Treasury Yields

  Edward Harrison: Greek Referendum Could Mean CDS Greek Default Trigger

  Paul Kedrosky: Doing Austerian Math

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• More on Stocks Against Bonds
  Eddy Elfenbein, October 31st, 2011 at 1:45 pm

  Here’s another look at the epic battle of stocks against bonds. As a proxy for the long-term bond markets, I used Vanguard’s Long-Term Investment-Grade Index Fund (VWESX) and for stocks, I used Vanguard’s 500 Index (VFINX). It’s not perfect but it’s good enough to make my point.

  The graph below shows VFINX divided by VWESX so whenever the line is rising, stocks are outperforming bonds.

  

  As you can see, bonds have held their own for a long time which runs counter to established wisdom that there’s a “premium” in holding equities. I still think there is an equity premium but it’s much smaller than most folks realize. Furthermore, the premium is very volatile so it’s not unusual to experience long phases where bonds beat stocks.

  Despite how well the stock market has done since the March 2009 low, it’s dead even with corporate bonds since May 8, 2009.

  Since July 13, 2007, corporate bonds have gained 46.74% while stocks have lost 9.38%.

• Even More Innumeracy from Jeremy Siegel
  Eddy Elfenbein, October 31st, 2011 at 11:43 am

  When Wharton Professor Jeremy Siegel takes on math, it’s usually not pretty. I’ve caught him making basic math errors a few times before.

  He’s still doing it.

  In the Bloomberg article I linked to before, Siegel has a long quote:

  “The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” he said. “If you missed the rally in bonds, well, then that’s it.”

  He may be right about the direction of bonds, but he’s simply and obviously incorrect about the mathematical impossibility of bonds outperforming.

  Just because yields are low doesn’t mean they can’t go lower.

  Let’s take a 30-year bond with a coupon of 10%. If the bond sees its price jump by 50%, that brings the yield down to 6.28%.

  But if we take a 30-year bond with a coupon of 5% and if its price soars by 50%, that brings the yield down to 2.59%.

  In other words, as yields go lower each basis point is worth a greater price.

  Yes, bond yields are low, but there’s absolutely no rule in the realm of mathematics that prevents bonds from seeing the sames kinds of returns they’ve experienced.

• For the First Time on 150 Years….
  Eddy Elfenbein, October 31st, 2011 at 9:43 am

  The 30-year return of bonds has beaten stocks (from Bloomberg):

  The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.

  Fixed-income investments advanced 6.25 percent, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.

  The combination of a core U.S. inflation rate that has averaged 1.5 percent this year, the Federal Reserve’s decision to keep its target interest rate for overnight loans between banks near zero through 2013, slower economic growth and the highest savings rate since the global credit crisis have made bonds the best assets to own this year. Not only have bonds knocked stocks from their perch as the dominant long-term investment, their returns proved everyone from Bill Gross to Meredith Whitney and Nassim Nicholas Taleb wrong.

  “The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Bianco said in an Oct. 26 telephone interview. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”

  Part of this stat is due to timing — 30 years ago was the trough of the bond market. However, I think this underscores a point I’ve made for some time: the expected return of stocks over bonds is smaller than most experts believe. If I had to guess, I’d say that the equity premium of stocks over long-term bonds is probably 1.5% to 2%.

• Morning News: October 31, 2011
  Eddy Elfenbein, October 31st, 2011 at 5:57 am

  Berlusconi Defiant as EU’s Focus Shifts to Italy

  Draghi Takes ECB Helm in Battle Mode

  Danish Banks May Shun $76 Billion Cash Lifeline

  Iceland Passes Final Hurdle in $11.4B Payout

  Sarkozy Criticized for Seeking China’s Help

  Japanese Officials Intervene to Weaken Yen

  Japanese Companies Question Long-Term Effect of Yen Intervention

  Oil Declines, Paring Biggest Monthly Increase Since May 2009

  As Meeting Approaches, Fed Panel Is Divided on Direction

  Chinese Internet Portal Sohu.com Profit Rises 14%

  Panasonic Swings to Net Loss

  Barclays Q3 Profit Climbs Amid Sovereign Crisis

  MF Global Said to Be in Deal Talks With Interactive Brokers

  Cable Is Holding Web TV at Bay, Earnings Show

  Jeff Miller: Weighing the Week Ahead: Will the Modest Economic Rebound Continue?

  James Altucher: I Surrender

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