Archive for 2011

  • Morning News: September 12, 2011
    , September 12th, 2011 at 5:43 am

    Britain’s I.C.B. Recomends Gradual Banking Reform

    Germany Readies Surrender Over Greece

    Draghi’s Hands May Be Tied on ECB Stimulus

    Euro Falls To More Than 10-Year Low Vs Yen

    China’s False Promises

    SocGen Sovereign Debt Manageable, to Speed Changes

    India Industrial Output Grows at Slowest Pace Since ’09, Missing Estimates

    Oil Drops for Third Day on Concern Debt Crisis to Limit Growth, Fuel Need

    Technip Buys Global Industries in $937 Million Subsea Expansion

    Suzuki-Volkswagen Alliance Teeters

    Foster’s Rejects SABMiller’s Ex-Dividend Offer

    Dell Loses Orders as Facebook DIY Servers Gain

    Carol Bartz Resigns From Yahoo Board

    Brian Shannon: Stock Trading Ideas for 9/12/11

    Paul Kedrosky: What Caused the Recession of 1937-38?

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  • Crossing Wall Street Ten Years Ago
    , September 11th, 2011 at 8:46 am

    I want to draw your attention to a worthy organization named Tuesday’s Children which supports families that were impacted by the events of ten years ago.

  • Kenneth Rogoff on the Pro-Inflation Argument
    , September 10th, 2011 at 2:32 pm

    The Boston Globe has an interesting article about Kenneth Rogoff who makes the case that the economy needs some inflation right now. (Note: I’m not endorsing it, just highlighting the argument.)

    Here’s a sample:

    Like corruption, crime, and asbestos, “inflation” is a word that many Americans imagine in all-red capital letters, flashing across TV screens amid warnings of crisis. For anyone who remembers the gloomy, scary 1970s, when the inflation rate in the United States reached double digits, the word is shorthand for an economy that has spiraled out of control, the dollar losing value and prices climbing feverishly. “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man,” said Ronald Reagan in 1978, as nervous citizens imagined the day when they’d have to push a wheelbarrow full of cash to the grocery store in order to buy a loaf of bread.

    That particular nightmare never came to pass, thanks to drastic measures taken by the Federal Reserve. For the better part of the past 30 years, the dollar has stayed stable, reassuring American families and the nation’s trading partners, with the central bank standing guard over the economy and doing everything necessary to keep inflation low.

    You might say that Kenneth Rogoff has been one of the guards. As a research economist at the Federal Reserve during the first half of the 1980s, he helped ensure that the word “inflation” would never again flash across American TV screens. His reputation as a conservative-minded inflation hawk followed him from the Fed to the International Monetary Fund to his current position in the economics department at Harvard.

    But then came the financial crisis of 2008, and the ensuing slump. And as the economy has continued to stagnate, Rogoff, 58, has become the flag-bearer for an unlikely position: that as we struggle to help the economy find its way out of the darkness, inflation could be the answer. It’s time, Rogoff says, to put Reagan’s “hit man” to work for the good guys.

  • CWS Market Review – September 9, 2011
    , September 9th, 2011 at 8:54 am

    As ugly as trading has been since mid-summer, the stock market is finally showing some strength lately. I was particularly impressed by Wednesday’s huge rally and by the fact that we didn’t give it all back on Thursday. Up till now, every rally has been met with an equal or greater sell-off.

    Over the past month, the S&P 500 has made three major bottoms and each time, we failed to go lower. While that’s certainly no proof that a new up phase is at hand, it may indicate that the worst is past us. Bear in mind that the S&P 500 hasn’t made a new closing low in one month.

    In this issue, I want to take a step back and address some issues impacting the broader economy and how they affect the financial markets. Don’t worry. I’ll steer away from any “econospeak,” and I’ll try to make it very easy to understand. First, the good news is that corporate profits have rebounded fairly well since the worst days of the financial crisis three years ago.

    Analysts on Wall Street still have pretty optimistic earnings forecasts for the rest of this year and into next year as well. For Q3, analysts see earnings for the S&P 500 coming in at $24.95. For Q4, they see profits of $26.23. That translates to profit growth of 15.72% and 19.61% respectively. In other words, earnings aren’t merely expected to grow but the rate of growth is expected to increase as well. I should caution you that these forecasts aren’t terribly reliable beyond a few months. The other good news is that corporate balance sheets are, as a whole, pretty strong.

    The big question, however, is “Why is the economy still doing so poorly, especially on the jobs front?” The answer is that it all comes down to housing. I’m making a huge generalization here, but economic recoveries in this country have often been fueled by the housing sector.

    Think of it this way: A developer’s decision to build a new 123-unit housing development or a brand-new 214-unit high-rise glass condo has a major ripple effect on the local economy. Except for a large government project, few things are as economically powerful as a new real estate construction project. You’re getting a big injection of money concentrated in one area all at once. Just think of how the cash flows through the local economy: the local contractors and sub-contractors get work. Those folks, in turn, spend their new cash at local stores and restaurants. What happens is that it starts a virtuous cycle.

    It doesn’t end there. The other aspect that feeds off housing is the financial sector. Most Americans have far more invested in their homes than in the stock market. New homeowners take out mortgages, then savers get their interest and the banks get their profits. Once again, the virtuous cycle feeds upon itself and everyone is happy.

    Yet this time, the housing sector is a bust because during the housing bubble, we built too many homes. Way too many homes! The Wall Street Journal recently reported, “Sales of newly built homes, which peaked at 1.3 million units in 2005, were running at an annual rate of just 298,000 units in July and are on pace to post the lowest count this year since record keeping began in 1963.”

    Obviously, those excess homes won’t get tossed into the garbage, so no one is willing to plunk down the cash to get a new development going. That oversupply of homes is weighing on the housing market like a ton of bricks. And not just the housing market; it also weighs on all those areas that rely on the housing market. Home prices are depressed and many Americans are underwater with their mortgages or barely in the black.

    The issue of bad mortgages has put enormous huge strain on banks as well. For example, we recently saw the financial world turn sharply against Bank of America ($BAC). This is an odd perception/reality dynamic because BAC is clearly far from being a sound institution, but it’s very hard to answer the question, “Do they need more capital?” (Bloomberg: Moynihan Tries to Keep Bank of America Intact as Mortgage Loans Fall Apart.) The bank said no, but investors said yes. Take a wild guess who won.

    Now we have this strange disconnect in financial markets which I’ve labeled the “Fear Trade.” This is when bonds, gold and volatility are up but stocks are down. Since corporate profits have been decent, P/E Ratios are especially depressed. As I mentioned in last week’s CWS Market Review, a Double Dip recession is far from certain. This week, in fact, we had better-than-expected news for the ISM Services index. We also learned that the trade deficit hit a three-month low. The trade deficit report was so good that Goldman Sachs has said there’s a sizable upside risk to their 1% GDP forecast for Q3.

    Strategists on Wall Street currently estimate that the S&P 500 will close this year at 1,353 which is a 14% run from here. One month ago, the consensus was that we’d finished the year at 1,401. So despite the market’s lousy mood, Wall Street really hasn’t pared back its estimates very much.

    Now I want to focus on two upcoming earnings reports. On Tuesday, September 20th, Oracle ($ORCL) will report its fiscal first-quarter earnings. I was shocked by how low ORCL’s share price was recently. For a few days, it dipped below $25, but Oracle’s business continues to be very strong. The company told us to expect Q1 earnings between 45 cents and 48 cents per share. Oh, please! That’s obviously too low. The consensus on Wall Street is for 47 cents per share. I’m expecting at least 51 cents per share.

    Oracle is a remarkably profitable company, plus they’re sitting on nearly $30 billion in cash. By the way, don’t believe any rumors that Oracle is going to buy Hewlett-Packard ($HPQ). That’s just crazy. My take is that Oracle is a very good buy below $30 per share.

    The other earnings report will come from Bed Bath & Beyond, ($BBBY) on the following day. Three months ago, the company gave us an outstanding earnings report, plus they raised their full-year forecast which shows you that good companies can prosper during rough times. For the upcoming earnings report, BBBY told us to expect earnings to range between 77 and 82 cents per share. My numbers say that 82 cents is about right.

    For this fiscal year (ending in May), BBBY should earn about $3.70 per share. I want to caution you that the stock has already done pretty well (it’s our second-best performer this year), so it’s not a screaming bargain right now. I’m going to hold my buy price on BBBY at $58 per share.

    That’s all for now. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: September 9, 2011
    , September 9th, 2011 at 4:16 am

    Ghost of Lehman Haunts G-7 Amid Debt Crisis

    Europe’s Markets Trade Lower

    Europe Pushing Greece To Cut Deficit By Further 0.7% Of GDP -Source

    China Inflation Moderated in August

    Fed Chief Describes Consumers as Too Bleak

    US Jobs Plan: Barack Obama Unveils $450 Billion Package

    Settlement Said to Be Near for Fannie and Freddie

    Deutsche Telekom, AT&T at Odds Over Deal

    Tullow, Shell Discovery Opens New French Guiana Oil Play

    Bank of America Cutbacks May Hit 40,000

    Who to Run Yahoo? Strong Candidates Abound, But First — a Vision, Please

    Wal-Mart to Bring Back Layaway for Holidays

    Judge Widens Antitrust Suit Against Private Equity Firms

    Jeff Miller: Obama on Jobs

    Phil Pearlman: Some Quick Comments on Yahoo! and How I am Playing It Here

    Joshua Brown: The Latest Scam – $100 Trade Confirmation Fees

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  • Ben Bernanke the Comedian
    , September 8th, 2011 at 6:18 pm

    (H/T: Courtney Comstock)

  • Bernanke Speaks in Minneapolis
    , September 8th, 2011 at 1:52 pm

    As I’ve said before, Bernanke speaks pretty clearly. Here’s a key part of his talk:

    Why has this recovery been so slow and erratic? Historically, recessions have tended to sow the seeds of their own recoveries as reduced spending on investment, housing, and consumer durables generates pent-up demand. As the business cycle bottoms out and confidence returns, this pent-up demand, often augmented by the effects of stimulative monetary and fiscal policies, is met through increased production and hiring. Increased production in turn boosts business revenues and increased hiring raises household incomes–providing further impetus to business and household spending. Improving income prospects and balance sheets also make households and businesses more creditworthy, and financial institutions become more willing to lend. Normally, these developments create a virtuous circle of rising incomes and profits, more-supportive financial and credit conditions, and lower uncertainty, allowing the process of recovery to develop momentum.

    These restorative forces are at work today, and they will continue to promote recovery over time. Unfortunately, the recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis. These two features of the downturn, individually and in combination, have acted to slow the natural recovery process.

    Notably, the housing sector has been a significant driver of recovery from most recessions in the United States since World War II, but this time–with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines–the rate of new home construction has remained at less than one-third of its pre-crisis peak. Depressed construction also has hurt providers of a wide range of goods and services related to housing and homebuilding, such as the household appliance and home furnishing industries. Moreover, even as tight credit for builders and potential homebuyers has been one of the factors restraining the housing recovery, the weak housing market has in turn adversely affected financial markets and the flow of credit. For example, the sharp declines in house prices in some areas have left many homeowners “underwater” on their mortgages, creating financial hardship for households and, through their effects on rates of mortgage delinquency and default, stress for financial institutions as well.

    As I noted, the financial crisis of 2008 and 2009 played a central role in sparking the global recession. A great deal has been and continues to be done to address the causes and effects of the crisis, including extensive financial reforms. However, although banking and financial conditions in the United States have improved significantly since the depths of the crisis, financial stress continues to be a significant drag on the recovery, both here and abroad. This drag has become particularly evident in recent months, as bouts of sharp volatility and risk aversion in markets have reemerged in reaction to concerns about European sovereign debts and related strains as well as developments associated with the U.S. fiscal situation, including last month’s downgrade of the U.S. long-term credit rating by one of the major ratings agencies and the recent controversy surrounding the raising of the U.S. federal debt ceiling. It is difficult to judge how much these events and the associated financial volatility have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence, and that they pose ongoing risks to growth.

    While the weakness of the housing sector and continued financial volatility are two key reasons for the frustratingly slow pace of the recovery, other factors also may restrain growth in coming quarters. For example, state and local governments continue to tighten their belts by cutting spending and reducing payrolls in the face of ongoing budgetary pressures, and federal fiscal stimulus is being withdrawn. There is ample room for debate about the appropriate size and role for the government in the longer term, but–in the absence of adequate demand from the private sector–a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring.

    The prospect of an increasing fiscal drag on the economy in the face of an already sluggish recovery highlights one of the many difficult tradeoffs currently faced by fiscal policymakers. As I have emphasized on previous occasions, without significant policy changes to address the increasing fiscal burdens that will be associated with the aging of the population and the ongoing rise in health-care costs, the finances of the federal government will spiral out of control in coming decades, risking severe economic and financial damage. But, while prompt and decisive action to put the federal government’s finances on a sustainable trajectory is urgently needed, fiscal policymakers should not, as a consequence, disregard the fragility of the economic recovery. Fortunately, the two goals–achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery–are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.

  • The Stock Market Since 9/11
    , September 8th, 2011 at 1:21 pm

    This Sunday will mark the tenth anniversary of 9/11. The stock market shut down for four-straight days, and once we reopened, stocks plunged lower. In fact, markets didn’t reach their bottom for another 18 months.

    It’s important to remember that even though most large-caps haven’t done that well over the last ten years, many small-caps have thrived which underscores my point of the importance of good stock-picking.

    Here’s a look at the total return of the Wilshire 5000 compared with the total return of the Wilshire 4500 (which is the first index sans the S&P 500).

    Since September 10, 2001, the Wilshire 5000 has gained 46.88% while the Wilshire 4500 has gained 105%.58. It was a bumpy road but the people who told investors not to panic after 9/11 were eventually proven right.

    David Berman adds:

    Although stocks suffered a lot when the market reopened in 2001, the really big moves in the market over the past 10 years have had nothing to do with the attacks.

    The financial crisis (the Lehman Brothers collapse on Sept. 15, 2008 seems like an important date to keep in mind; the third anniversary is approaching), deep recession and subsequent recovery with the extraordinary help from central banks seem like far more important factors on stock returns.

  • Bartz: Yahoo “f—ed me over”
    , September 8th, 2011 at 11:20 am

    Wow. Yahoo‘s ($YHOO) former CEO Carol Bartz has let loose in an interview with Fortune:

    FORTUNE — Here is what Carol Bartz thinks of the Yahoo (YHOO) board that fired her: “These people fucked me over,” she says, in her first interview since her dismissal from the CEO role late Tuesday.

    Last evening, barely 24 hours after Yahoo chairman Roy Bostock called Bartz on her cell phone to tell her the news, she called from her Silicon Valley home (“There are reporters at the gate…a lot of them.”) to tell Fortune, exclusively, how the ax came down.

    On Tuesday, Bartz was in New York, to speak at Citigroup’s (C) technology conference the next day, when she was supposed to call Bostock at 6 p.m. “I called him at 6:06,” she recalls. When he got on the line, she says, he started reading a lawyer’s prepared statement to dismiss her.

    “I said, ‘Roy, I think that’s a script,'” adding, “‘Why don’t you have the balls to tell me yourself?'”

    When Bostock finished reading, Bartz didn’t argue—”I got it. I got it,” she told the Yahoo chairman. “I thought you were classier,” she added.

    Recruited in January 2009 after successfully building Autodesk (ADSK), Bartz never was the turnaround chief that the Yahoo board had wanted. Though she slashed costs and improved profit margins, she failed to improve revenue growth at a critical time when Yahoo has lost eyeballs and ad dollars to Google (GOOG) and Facebook. “They want revenue growth,” says Bartz about the Yahoo board, “even though they were told that we would not have revenue growth until 2012.”

    As Bartz sees it, Yahoo’s search partnership with Microsoft (MSFT)—a deal she negotiated two years ago to offload costs—has Yahoo paying Microsoft 12% of its search revenue and limits current growth but will help the company long-term. She attributes the directors’ impatience to the criticism they faced when they turned down a lucrative deal to sell Yahoo to Microsoft in 2007, before she arrived. “The board was so spooked by being cast as the worst board in the country,” Bartz says. “Now they’re trying to show that they’re not the doofuses that they are.” (Bostock, who is vice chairman of Delta Air Lines (DAL) and on Morgan Stanley’s (MS) board as well as Yahoo’s, declined to comment.)

    After Tuesday’s call from Bostock, Bartz says, she had two hours to let Yahoo know whether she would resign or allow the board to fire her. She called her husband, Bill, her three children–a son and two daughters—and her longtime assistant, Judy Flores. Learning that Yahoo’s lawyers had gone to the St. Regis hotel to hand her papers, she ditched that hotel and booked herself into another. “Am I stupid?!” she asks, making clear that she took her career crisis into her own hands.

    It was that evening when she pulled out her iPad and wrote an email to Yahoo’s 14,000 employees:

    To all,

    I am very sad to tell you that I’ve just been fired over the phone by Yahoo’s Chairman of the Board. It has been my pleasure to work with all of you and I wish you only the best going forward.

    Carol

    What does Bartz think of her successor, Tim Morse? “He’s a great guy,” she says. Morse was chief financial officer under Bartz, and now he is interim chief of a company whose stock has risen 6% since he replaced her. Asked whom she thinks the board might appoint long-term, she replies, “They should bring me in. I knew what to do.”

    Sometimes it’s difficult to know when Bartz is being serious. As I prod her to tell me what she might do next, I mention her age, 63—”fuck you, yeah,” she replies. And when I ask her if she’s on any other public company boards besides Cisco (CSCO), where she is lead independent director, she says, “I’m on Yahoo’s board.” She tells me that she plans to remain a Yahoo director—which might be unlikely since she has now called her fellow directors “doofuses.”

    “I want to make sure that the employees don’t believe that I’ve abandoned them. I would never abandon them,” Bartz says. Besides, she adds, “I have way too many purple clothes.”

    She’s referring to the color of Yahoo’s logo. “I wish the Yahoo people the best,” she adds, “because it’s a fantastic franchise.”

  • RIP: Keith Tantlinger
    , September 8th, 2011 at 10:02 am

    Keith Tantlinger died recently at the age of 92. Don’t worry if you’ve never heard of him; you’re not alone. But his invention (or innovation, really) changed the world.

    Nearly six decades ago, Keith W. Tantlinger built a box — or, more accurately, the corners of a box. It was a seemingly small invention, but a vital one: it set in motion a chain of events that changed the way people buy and sell things, transformed the means by which nations do business and ultimately gave rise to the present-day global economy.

    Mr. Tantlinger’s box, large, heavy and metal, is known as the shipping container. Though he did not invent it (such containers had been in use at least since the 19th century to haul heavy cargo like coal), he is widely credited with having created, in the 1950s, the first commercially viable modern one.

    The crucial refinements he made — including a corner mechanism that locks containers together — allowed them to be hefted by crane, stacked high in ships and transferred from shipboard to trucks and trains far more easily, and cheaply, than ever before.

    Thus, without ever intending to, Mr. Tantlinger, an engineer who died at 92 on Aug. 27 and who had long worked out of the limelight, helped bring about the vast web of international trade that is a fact of 21st-century life. More than any other innovation, the modern shipping container — by turns venerated and castigated — is now acknowledged to have been the spark that touched off globalization.