Author Archive

  • Morning News: February 23, 2012
    , February 23rd, 2012 at 5:26 am

    Fitch Downgrades Greece on Debt Swap Plan

    German Business Confidence Hit 7-Month High in February

    Commerzbank Plans Capital Boost With Swap

    Royal Bank of Scotland Posts Loss Twice as Big as Expected

    Italian Consumer Confidence Rose More Than Forecast in February

    Buffett’s Berkshire Muscles into Thai Reinsurance

    S&P 500 Gets 9% Cheaper as Record Profit Restores $3.2 Trillion to Stocks

    Winners and Losers From a Tax Proposal

    Responding to Critics, S.E.C. Defends ‘No Wrongdoing’ Settlements

    The Volcker Rule, Made Bloated and Weak

    GM-Peugeot Still Seen as European Money-Losers

    H-P Profit Tumbles 44%; No Quick Fix, Says CEO

    Greek Bailout Leaves Europe on Road to Disaster: Clive Crook

    Jeff Miller: Big Market Worries: Profit Margins

    Global Macro Monitor: The Current Housing Bust is Much Worse Than The Great Depression

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  • GDP-Linked Bonds Are Complete BS
    , February 22nd, 2012 at 7:58 pm

    Professor Robert Shiller is again arguing for GDP-linked bonds. These bonds would be based on 1/1,000,000,000,000th of a country’s Gross Domestic Product. The shorter name is “Trill” for one-trillionth.

    Shiller argues that we can solve the debt crisis by replacing treasury bills with Trills. The first mistake is that a debt problem is caused by…well, too much debt. A Trill is simply a different debt instrument. Changing the instrument of debt doesn’t change the existence of debt.

    The other problem with Trills is that they don’t make any sense for the issuer. When Shiller first wrote about this two years ago, David Merkel noted that the rational price for a Trill is infinite, and Felix Salmon repeats this again today. Lots of people are confused on this point, but David and Felix are exactly right.

    Of course, no one is going to pay an infinite price. Instead, when a rational price is infinite, it means that it’s not rational to issue a Trill to begin with.

    Think of it this way: You’re in business and you want a loan. Let’s say that the loan is at 5%. This means that both you and the lender believe that you can get a return-on-equity of at least 5% with that money. If you don’t think you can, there’s no need for you to borrow it, and there’s no incentive for the loaner to lend it. With a Trill, it’s impossible for the borrower to ever exceed the interest payments. It’s a never-ending cycle. It would be as if you, the business person, had instead earned a 12% return-on-equity on the lender’s money. So now you owe 12% to the lender. What’s the point?

    Here’s a comment I had left at David’s site on one of his Trill posts:

    A few quick points.

    There’s no way to pay off a Trill except by running a budget surplus or by issuing conventional debt, thus negating the need for Trills.

    There might also be a slight risk premium due to the uncertainty of each coupon payment. It might be small but even a small amount comes of out taxpayers’ wallets.

    The Q3 GDP for 1983 has been revised 10 times since it first came out. The last time was in 2009. Imagine the headache for Trills.

    I keep coming back to your point that Trills would be worth an infinite amount. I think that’s exactly right. For the borrower, Trills are irrational. The US Treasury can get the exact same thing for less.

  • State Favorability Ratings
    , February 22nd, 2012 at 12:35 pm

    Below are the results of Public Policy Polling’s poll of states’ favorability ratings. They asked voters across the country what their impressions were of each state.

    I thought the results were fascinating. A few months ago I asked readers, “If we had to, which state should we boot from the union?” The results were somewhat similar.

    State +/- Margin
    Hawaii 54-10 44
    Colorado 44-9 35
    Tennessee 48-14 34
    South Dakota 42-8 34
    Virginia 45-13 32
    Montana 39-7 32
    Alaska 46-17 29
    Oregon 43-14 29
    North Carolina 40-11 29
    Pennsylvania 40-11 29
    Washington 43-17 26
    Kentucky 42-16 26
    Iowa 42-17 25
    Oklahoma 40-16 24
    Vermont 39-15 24
    Wisconsin 40-17 23
    Wyoming 34-11 23
    Florida 43-21 22
    North Dakota 33-11 22
    Missouri 32-11 21
    New Hampshire 37-18 19
    Indiana 31-12 19
    Idaho 30-11 19
    Nebraska 29-11 18
    Arizona 39-22 17
    Michigan 38-21 17
    Maine 32-15 17
    Ohio 34-18 16
    Delaware 32-16 16
    Maryland 31-15 16
    South Carolina 34-19 15
    New Mexico 30-15 15
    Kansas 28-13 15
    New York 40-29 11
    Georgia 31-20 11
    Minnesota 27-17 10
    Rhode Island 26-16 10
    Texas 40-31 9
    Massachusetts 35-27 8
    West Virginia 23-15 8
    Arkansas 25-20 5
    Connecticut 26-22 4
    Nevada 28-26 2
    Alabama 27-26 1
    Louisiana 24-24 0
    Utah 24-27 -3
    Mississippi 22-28 -6
    New Jersey 25-32 -7
    Illinois 19-29 -10
    California 27-44 -17

    I think it’s interesting that New York and Texas are two of the most liked and disliked states.

  • Britain’s New 50% Top Tax Is Failing to Boost Revenue
    , February 22nd, 2012 at 12:08 pm

    The UK Telegraph reports:

    The Treasury received £10.35 billion in income tax payments from those paying by self-assessment last month, a drop of £509 million compared with January 2011. Most other taxes produced higher revenues over the same period.

    Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad.

    The self-assessment returns from January, when most income tax is paid by the better-off, have been eagerly awaited by the Treasury and government ministers as they provide the first evidence of the success, or failure, of the 50p rate. It is the first year following the introduction of the 50p rate which had been expected to boost tax revenues from self-assessment by more than £1billion.

    I’m not a believer in the Laffer Curve, the idea that higher tax rates produce less revenue. I concede that it might occur at extremely high rates like 70%. However, I think it’s perfectly reasonable to see a short-term effect and I’d guess that’s probably what we’re seeing in Britain.

    People respond to incentives. The rest is details.

  • Does the Stock Market Love Inflation?
    , February 22nd, 2012 at 10:13 am

    It appears so. Here’s a graph of the S&P 500 versus the 10-year inflation premium (the 10-year T-bond yield minus the 10-year TIPs yield). Since 2008, these two series have been waltzing partners.

    There’s no reason to expect a long-term relationship to last. After all, we’re comparing a price index to a yield. But, for whatever reason, whatever causes investors to expect more inflation seems to be highly aligned with higher equity prices. Correlation, of course, doesn’t mean causation.

  • Obama Wants 28% Corporate Tax Rate
    , February 22nd, 2012 at 9:20 am

    From the AP:

    President Barack Obama is proposing to cut the corporate tax rate from 35 percent to 28 percent and wants an even lower effective rate for manufacturers, a senior administration official says, as the White House lays down an election-year marker in the debate over tax policy.

    In turn, corporations would have to give up dozens of loopholes and subsidies that they now enjoy. Corporations with overseas operations would also face a minimum tax on their foreign earnings.

    Over the last 40 years, corporate taxes have fallen as a percentage of federal revenues. I can’t say if this has a realistic chance of becoming law. I would think that fighting for corporations during an election isn’t a good idea.

    Of course, corporations don’t pay taxes. A corporation is just a piece of paper. The companies pass the cost on to their customers. The benefit for the government is that it hides their taxes by imbedding it in a third-party’s prices.

  • Walmart’s Trading Range Lives
    , February 22nd, 2012 at 9:08 am

    A few weeks ago, I noted that Walmart ($WMT) has been trapped in the “Mother of All Trading Ranges” for the last 12 years. Not once in over 3,000 trading days has WMT closed above $64 or below $42. The last time it did was on January 19, 2000 when it closed at $64.06. More than 78% of the time, the stock been between $48 and $59.99.

    On Friday, the stock closed at $62.48 which is very close to the top of its range. It seemed like the strange range would finally be broken. But yesterday, Walmart’s disappointing earnings knocked the shares back to $60.07.

    By the way, Walmart’s sales rose by 5.8% to $122.29 billion. That means that Walmart averaged $1 million in sales. A minute. Also, despite what people may think of how corporations are run, Walmart’s profit margin was just 4.24%.

  • Bloomberg: Stocks Cheapest in 50 Years
    , February 22nd, 2012 at 8:09 am

    According to an article at Bloomberg, U.S. stocks are near the cheapest level relative to bonds in 50 years. Here’s how it works: If we take the market’s price/earnings ratio and flip it over to get earnings divided by price, then we have the earnings yield. When we compare that yield to the yield on the 10-year Treasury bond, the gap in favor of stocks is close to the widest its been since 1962.

    Earnings in the S&P 500 have more than doubled to $96.58 since 2009 and are projected to reach a record $104.28 this year, more than 11,000 analyst estimates compiled by Bloomberg show. The earnings yield, or annual profits divided by price, climbed to 7.1 percent, 5 percentage points more than the rate on 10-year Treasuries. That’s wider than in 97 percent of months in 50 years of Bloomberg data.

    I think this analysis is basically sound; however, there are a few problems. It says that stocks are cheap versus bonds. It doesn’t mean that stocks are cheap on an absolute level. In other words, it can mean that bonds are over-priced which I think is also true.

    On a philosophical level, we should remember that all prices are relative. We’ve been trained to think that all prices are expressed in dollars, but that’s a bit of a mind trick. All prices are relative to each other — dollar bills are just the middleman.

    Ideally, the earnings yield ought to be compared with rates longer than the 10-year bond. What’s interesting is that rates are unusually steep after ten years. The 20-year yield is currently 79 basis points over the 10-year, while the 30-year is 115 basis points above it.

    The spread was last this wide in the four months before the S&P 500 (SPX) reached a 12-year low in March 2009, data compiled by Bloomberg show. The benchmark gauge for American equities has increased 101 percent since then, including an 8.3 percent increase in 2012, the best start to a year since 1997.

    Low valuations and signs of recovery have failed to lure individuals back to equities. Stocks are trading at a 14 percent discount to their average price-earnings ratio over the past five decades. The multiple has been stuck below the mean of 16.4 times earnings since May 2010, the longest stretch below the average since the 13 years beginning in 1973, data compiled by Bloomberg show.

    (…)

    Capital investments surged in 2006 as the total debt-to- assets ratio in the S&P 500 was climbing to 38.8 in the third quarter of 2007, the highest point since at least 1998, data compiled by Bloomberg show. The ratio is about 32 percent lower now. Companies spent the past three years paying down debt and cutting costs, boosting the S&P 500 profit margin to 13.8 percent, compared with 8.3 percent in 2009, the data show.

    S&P 500 companies increased cash and equivalents for 12 straight quarters to $998.6 billion in the third quarter, 60 percent more than in September 2007, just before the index reached an all-time high of 1,565.15, according to S&P. The total excludes financial, utility and transportation companies.

    I caution investors that while this analysis is very useful, don’t get too caught up in models. All this is based on projections. Outside of a few months, forecasters don’t really have a good idea of what’s going to happen. They’re usually good at predicting that an existant trend will continue. But they’re not so good at spotting the turning points which is the most important part.

  • Morning News: February 22, 2012
    , February 22nd, 2012 at 5:49 am

    Greek Bailout Wins Two Cheers From Wary Investors

    Greek Crisis Raises New Fears Over Credit-Default Swaps

    New Bailout Is a Reprieve for Greece, but Doubts Persist

    A Battle for Mongolia’s Copper Lode

    Oil Trades Near 9-Month High After Iran Denies Access to UN Team

    Obama Offers to Cut Corporate Tax Rate to 28%

    Watchdog Targets Overdraft Charges

    High-End Retailers Report Strong Profits, but Walmart Still Struggles

    Dell Earnings and Forecast Fall Short of Wall St. Views

    Kraft’s Net Rises 54% on Higher Prices

    Alibaba Offers to Take Web Portal Unit Private

    Ford Pours $3.8 Billion into Pension Plan, Eyes Shift to Bonds

    Peugeot in Alliance Talks After Report of GM Discussions

    Shell Offers to Buy Cove Energy for $1.6 Billion

    Joshua Brown: What a Waste.

    Paul Kedrosky: The Unexpected Physical Consequences of Technology

    Every Face Punch in Road House!

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  • After Market Updates
    , February 21st, 2012 at 9:54 pm

    Ultimately, the stock market gave back some of its gains this afternoon. The S&P 500 closed at 1,362.21 which was just shy of the post-crash high close of 1,363.61 from May 2nd of last year.

    Today’s market was split between large-cap stocks which fared the best and small-cap stocks which fared the worst. The small-cap Russell 2000 was down 0.66% today while the S&P 500 was up 0.98 points or 0.07%. The mega-cap S&P 100 was up 0.27%.

    Interestingly, shares of Apple ($AAPL) gained $12.73 or 2.54%. That’s a market cap gain of $11.87 billion. Each point in the S&P 500 is worth $9.05 billion. That means that Apple’s gain was worth 1.31 points in the S&P 500. The index gained 0.98 points so without Apple, the index would have closed just slightly lower today.

    In Buy List news, Johnson & Johnson‘s ($JNJ) CEO resigned:

    William C. Weldon, who presided over Johnson & Johnson during one of the most tumultuous periods in its history, will step down as chief executive in April, the company announced Tuesday.

    Alex Gorsky, head of the medical device and diagnostics business, will take over as chief executive. Mr. Weldon will remain as chairman.

    The news of Mr. Weldon’s retirement comes as Johnson & Johnson has struggled to emerge from a swarm of product recalls, manufacturing lapses and government inquiries that tarnished the name of a company that was once one of the nation’s most trusted household brands. In 2010, the company recalled millions of bottles of liquid children’s Tylenol and other medications, as well as tens of thousands of artificial hips and millions of contact lenses.

    Much of the blame for Johnson & Johnson’s stumbles fell on Mr. Weldon, the son of a Broadway stagehand and seamstress who became chief executive in 2002 after spending his entire career at the company. Critics said the company’s once-vaunted attention to quality slipped under his watch. The company said in a statement that neither Mr. Weldon nor Mr. Gorsky was available for comment.

    Oracle ($ORCL) was downgraded by JMP Securities. They’re paring back their earnings estimates but they add that the stock is not unreasonably valued.

    WSJ‘s “Market Beat” notes that DirecTV ($DTV) may soon join the streaming bandwagon.