Author Archive

  • The Market Is Doubting the Fed’s Timetable
    , February 15th, 2012 at 10:26 am

    The Federal Reserve has said that it doesn’t see itself raising interest rates until late 2014. Well, that’s fine and good. Guys in suits can say whatever they want, but the market often has other ideas. Right now, the market thinks a rate increase may come sooner than the Fed realizes.

    As I’ve pointed out before, longer-term interest rates are slowly beginning to creep higher. For over three years, Benrnanke & Co. have kept overnight rates between 0% and 0.25%. Howard Packowitz at the WSJ notes that the futures market is doubting the Fed’s forecast:

    Fed-funds futures Tuesday priced in a 90% chance for the FOMC to lift the funds rate to 0.5% at its meeting in late June 2014, from a 94% chance at Monday’s settlement.

    An earlier rate hike is possible based on pricing of a shorter-dated contract. It priced in a 40% chance for a 0.5% rate after the late-January 2014 FOMC meeting, up from a 36% chance at Monday’s settlement.

    It’s still too early to say exactly what the Fed will do, but I think it’s very possible that the Fed will move before late 2014. This changing market sentiment is also what’s leading investors to take on riskier assets (this is a theme I discussed in last week’s CWS Market Review). In the meantime, watch how cyclical stocks perform relative to the broader market. That will most likely be an early indicator of higher rates.

  • Warren Buffett Loads Up on DirecTV
    , February 15th, 2012 at 7:04 am

    In its latest regulatory filing, Berkshire Hathaway ($BRKA) detailed its portfolio changes. Since our strategy here isn’t too different from Buffett’s, we sometimes make similar moves. For example, Berkshire raised its stake in DirecTV ($DTV) by five-fold. On the other hand, they cut their stake in Johnson & Johnson ($JNJ). Interestingly, Buffett is now totally out of ExxonMobil ($XOM).

    It also bought about 1.7 million shares in Liberty Media, veteran dealmaker John Malone’s media venture which has stakes in everything from baseball teams and satellite radio to bookstores and cable networks.

    Berkshire’s quarter was also notable for a number of large moves. It raised its stake in at least five companies by more than 20 percent, including recent newcomers to the portfolio like Intel and General Dynamics. It also took a new stake in kidney dialysis provider DaVita.

    In contrast, it slashed portfolio stalwart Johnson & Johnson by 23 percent. Berkshire had been its fifth-largest shareholder, according to Thomson Reuters data. It also sold its entire position in oil major Exxon Mobil.

    DirecTV is due to report its earnings tomorrow. Wall Street expects 92 cents per share for the quarter and $4.38 per share for the year. If the yearly forecast is correct, that means DTV is growing at 29% while going for just over 10 times earnings.

  • Morning News: February 15, 2012
    , February 15th, 2012 at 5:49 am

    Greece Fights to Win Aid With Pledges to Counter EU Doubts

    Portugal’s Debt Efforts May Be Warning for Greece

    Euro-Zone Economy Shrinks

    Austria Bank Capital Needs Decisive for Aaa Rating, Moody’s Says

    China Pledges to Invest in Europe Bailout Funds, Hold Euros

    China Yuan Down Late On PBOC Guidance; Strong Euro Limits Losses

    Italian Economy Slips Into Recession, Contracts 0.7 Percent

    Italian Oil Giant Eni Reports 2nd ‘Giant’ Mozambique Gas Find

    Fed Clears Capital One’s Deal for ING Direct

    Tentative Deal Reached to Preserve Cut in Payroll Tax

    French Banking Giant BNP Paribas’ Fourth-Quarter Profit Beats Estimates; Shares Surge

    Yahoo-Alibaba Talks Falter as Investor Steps Up Pressure

    Berkshire Takes Stakes in Liberty Media, DaVita as Weschler Joins Buffett

    Peugeot to Sell Property, Gefco Stake as 2011 Profit Falls

    Adidas Rises to Record as Puma Beats Forecast

    Edward Harrison: The Political Economy of a Greek Default (and Euro Zone Exit)

    Joshua Brown: Where Financial Firms Spend Ad Dollars Online

    Be sure to follow me on Twitter.

  • Tadas Viskanta on Why There’s Never Been a Better Time to Be an Individual Investor
    , February 14th, 2012 at 3:39 pm

    Tadas Viskanta of Abnormal Returns has a great post today on how Web 2.0 has unleashed a revolution for individual investors. Here’s a sample:

    This is not a novel theme for us. Indeed one thing we mention repeatedly in our forthcoming book is that investing has never been “cheaper or easier” to be an investor. Some of this has to do with the rise exchange traded funds. In other respects it has to do with the blossoming of the options markets. In large part, it has to do with technology. In short, never before have investors had access to data, analysis, opinion and social tools that are commonplace today. Let’s take these points one by one.

    1. Easier: Investors today can with a brokerage account and a computer is now only a few mouse clicks away from a globally diversified portfolio of ETFs that in terms of expenses rivals what institutions paid a decade ago. For all intents and purposes the expense ratio on the big ETFs is closer to 0.0% that 1.0%. Many brokers now allow online trading of individual bonds and overseas securities.
    2. Cheaper: Brokerage commissions continue to get driven towards $0 over time. In fact, many brokers today provide commission-free trading of a range of ETFs. Options strategies that would have been cost-prohibitive a few years ago are now viable strategies today. Do you remember when you used to have to pay extra for real-time quotes? Today those are a commodity.
    3. Richer: The range of asset classes, sectors and strategies available via ETFs is truly dizzying. It is even for interested parties hard to keep up. Will most of these more exotic strategies fail? Probably. But sometimes a strategy, like low volatility investing, that is based in deep academic research, becomes available to investors.
    4. More social: Blogging and microbloggging (StockTwits & Twitter) has opened up the world of idea generation to the masses. Anyone with a computer these days can put their ideas out there. The blogosphere and Twittersphere is a meritocracy, albeit imperfect, where the smartest and most generous contributors rise to the top. The social model is pushing into things like earnings estimates with Estimize and institutional-grade services like SumZero. Many bloggers these days make fun of the raft of ‘free’ webinars that go on these days. But if you think about it the software and Internet speeds were not there to make mass online seminars possible not all that long ago.
    5. Smarter: The raw material for investment analysis and trading is of course data. Financial and price data is for the purposes of most individual investors is free these days. Many firms are using data in interesting ways. In the area of fundamental data some firms like Trefis and YCharts are making fundamental analysis easier. A firm like AlphaClone allows you track the moves of (and invest) like the big hedge funds. When it comes to portfolio level data firms like Wikinvest are aggregating account data making analysis easier for investors.

  • Retail Sales Report Weighs on the Market
    , February 14th, 2012 at 11:19 am

    The stock market is giving up some ground this morning.

    In mediocre news, today’s retail sales report wasn’t so bad. This had been particularly concerning since the holiday shopping season was rather sluggish. The Commerce Department said that retail sales rose by a seasonally adjusted 0.4% in January.

    Retail sales are important to watch because consumer spending constitutes about two-thirds of the economy. So if folks are out there putting some cash out, that probably reflects an improving jobs market and increased confidence.

    The weak spot in today’s report was car sales. If we were exclude car sales plus sales figures at gas stations, retail sales rose by 0.6%. That’s the best number in three months.

  • Morning News: February 14, 2012
    , February 14th, 2012 at 6:31 am

    Italy, Spain Cut by Moody’s; U.K. Top Rank at Risk

    6 European Nations Get Downgrades

    German Investor Confidence at 10-Month High

    Immigrants Lose in Spanish Housing Market

    Greek Economy Shrinking Rapidly

    Oil Rises to Three-Week High as Iran Threat Counters Europe Debt

    For California, Attorney General Insisted on Better Terms in Foreclosure Deal

    At Volcker Rule Deadline, a Strong Pushback From Wall St.

    Boeing Signs Record $22.4 Billion Order With Lion Air

    Google Deal for Motorola Mobility Gets Clearance

    Capital One’s Deal for ING Direct Still in Limbo

    Chesapeake Eyes $12 Billion in Asset Sales Amid Cash Squeeze

    Empire State Building Owners File $1 Billion IPO, REIT Plan

    Apple Hits $500, Flirts With $500 Billion Valuation

    Pragmatic Capitalism: Financial Stress Index on the Rise

    Roger Nusbaum: We Own Apple

    Be sure to follow me on Twitter.

  • Obama Wants to Raise Taxes on Investors
    , February 13th, 2012 at 1:56 pm

    President Obama released his 2013 budget today. Bloomberg has the details:

    President Barack Obama’s budget plan calls for taxing dividends received by high-income taxpayers as ordinary income, raising the top rate to 39.6 percent from 15 percent.

    The proposal, in the president’s fiscal 2013 budget released today, would reverse his previous policy that called for taxing dividends more lightly than wage income. Obama would treat dividends as ordinary income for married couples making more than $250,000 a year and individuals making more than $200,000.

    In all, compared with current tax policies, today’s budget would raise $1.4 trillion over the next decade from high-income taxpayers.

    The dividend tax proposal would raise $206.4 billion over 10 years. Obama is proposing a top individual income tax rate of 39.6 percent in 2013, up from 35 percent. His budget would tax capital gains at a top rate of 20 percent, up from 15 percent. The top dividend tax rate is now 15 percent.

    Another 3.8 percent tax on the unearned income of couples earning $250,000 and individuals making at least $200,000 will take effect in 2013 as part of the 2010 health-care law.

    The administration’s fiscal 2012 budget had said that setting the top capital gains and dividend tax rates at 20 percent “reduces the tax bias against equity investment and promotes a more efficient allocation of capital.” Before 2003, all dividends had been taxed as ordinary income.

    The president also wants to institute the “Buffett Rule” which would require the people who make over $1 million per year to pay at least 30% tax. Michael Brendan Dougherty notes that it’s odd that a rule named after a person worth $39 billion will apply to folks who earn $1 million.

  • Sorry But Black-Scholes Did Not Cause the Financial Crisis
    , February 13th, 2012 at 12:20 pm

    The UK Guardian carries a remarkably silly story on the Black-Scholes options pricing formula called “The mathematical equation that caused the banks to crash.” I honestly don’t know where to begin, but claiming that the Black-Scholes options pricing model caused the financial crisis is economically illiterate.

    The best thing I can say about the story is that at one point, the text directly contradicts the headline:

    The equation itself wasn’t the real problem. It was useful, it was precise, and its limitations were clearly stated. It provided an industry-standard method to assess the likely value of a financial derivative. So derivatives could be traded before they matured. The formula was fine if you used it sensibly and abandoned it when market conditions weren’t appropriate. The trouble was its potential for abuse.

    That’s like saying subtraction caused the crisis. Well, not subtraction directly of course. But subtraction was abused.

    Look, options have been around for a long time. This site has an image of an options contract from 1959. Options were around decades before 1973 when the Black-Scholes formula came about. So why didn’t options cause a crisis before 2007?

    The article seems to blame the crisis on all financial models. But a financial model is only as good as the data you put in. If you put in garbage, well…that’s exactly what you get. It wasn’t the fault of modeling that their designers didn’t assume home prices would or could drop by 20%.

    We can point to the incredible growth of Credit Default Swaps. The CDS market grew from $3.7 trillion in notional value in 2003 to $62.2 trillion by 2007. But again, can that be blamed on a model?

    Instead, it’s far more interesting to ask what was driving the demand. Even if you make CDS’s illegal, a lot of folks out there wanted them. Why? Unfortunately, the answer isn’t so easy. The financial crisis was complicated and it had many players.

    Barry Ritholtz collected a list of culprits whose actions led to the financial crisis. You probably won’t be surprised to see that Alan Greenspan comes in at #1. And Black-Scholes doesn’t even make the top 25.

  • Apple Breaks $500
    , February 13th, 2012 at 10:55 am

    Shares of Apple ($AAPL) broke $500 today. The computer company has edged out ExxonMobil ($XOM) for being the largest company in the world (although XOM’s profit is larger). Three years ago, Apple was at $100 per share.

    I should remind investors that from the beginning of 1983 and continuing through the end of 1997, the S&P 500 increased more than six-fold while Apple’s stock lost money. Price matters. Since July 2009, boring Caterpillar ($CAT) has outperformed Apple.

  • Stocks Rise as Athens Burns
    , February 13th, 2012 at 9:15 am

    Over the weekend, the Greek parliament passed its highly unpopular “austerity budget.” They had to do this in order to get another 130 billion euros of bailout coins from the EU and IMF.

    Meanwhile, Athens burned as rioters took to the streets to protest. Party leaders put the squeeze on their members to vote for the budget. In fact, a number of MPs got expelled from their parties for not marching along.

    On Wednesday, European finance ministers are getting together to sign off on the Greek plan. Let me caution folks not to get too worked up about the news you may hear. The authorities there will do something. It may not be smart. It may not be timely. But they will do something. The German finance minister said that Greece “will be saved in one way or another.”

    The stock market had its biggest drop of the year on Friday. Perhaps the more compelling news is that the biggest drop of the year was a measly 69 bip downturn. That’s nothing compared with some of the volatility we saw six months ago.

    The market looks to rally this morning. My take is that we’re going to see higher stock and gold prices and lower bond prices for the next few weeks.