Author Archive

  • Today’s Fed Statement
    , November 2nd, 2011 at 12:55 pm

    Here’s the latest:

    Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

    To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

    The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

    The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

  • Stock Correlation Is Soaring
    , November 2nd, 2011 at 9:26 am

    As the Beatles once sang “All Together Now,” so it is for stocks. The Implied Correlation Index for the S&P 500 has been soaring lately. This means that the options market expects stocks to behave similarly.

    The Chicago Board Options Exchange S&P 500 Implied Correlation Index posted its biggest gain in two years of data this week, sending its closing average since Oct. 11 to 78.21, according to data compiled by Bloomberg. That’s the highest level for the first 16 days of a reporting season, data show.

    Traders are betting U.S. equities will move in unison as investors react to news about Europe’s attempts to end its debt crisis. More than 400 stocks in the S&P 500 moved in the same direction in three of the last four days. Investors first snapped up shares when Europe’s leaders agree to expand the region’s bailout fund and then fled equities when Greece said it would hold a referendum on the plan.

    “It’s been brutal,” Philip Orlando, who helps oversee about $350 billion as chief equity market strategist at Federated Investors Inc. in New York, said in a phone interview yesterday. “October was easy. It’s a little more difficult now given this knee-jerk reaction to the stunning Greek development over the last 24 hours. A lot of folks like us are trying to get our hands around this and figure out what it means.”

    The last time equities moved together to such a degree was in October 1987, when the index plunged a record 20 percent on Oct. 19, according to data compiled by New York-based JPMorgan Chase & Co. The Credit Suisse Fear Barometer, a gauge of prices to sell three-month S&P 500 calls while buying puts, soared 40 percent from Oct. 3 to Oct. 27 for the biggest gain during that period since November 2008.

  • Wright Express Earns 99 Cents Per Share
    , November 2nd, 2011 at 9:05 am

    Our second earnings report this morning comes from Wright Express ($WXS). The company earned 99 cents per share for the third quarter which was six cents more than estimates.

    For the fourth quarter, Wright expects earnings between 88 cents and 94 cents per share. Wall Street was expecting 94 cents per share.

  • Becton, Dickinson Earns $1.39 Per Share
    , November 2nd, 2011 at 6:37 am

    Becton, Dickinson ($BDX) just reported earnings for its fiscal fourth quarter of $1.39 per share which matched Wall Street’s expectations. A year ago, the company earned $1.24 per share for its fiscal fourth quarter. That’s an increase of 12.1%. For the fiscal year, BDX earned $5.62 per share compared with $4.94 per share last year.

    In the BD Medical segment, worldwide revenues for the quarter were $1.055 billion, representing an increase of 10.0 percent compared with the prior-year period. Revenues increased 3.8 percent on a foreign currency-neutral basis. Segment revenue growth reflected strong Diabetes Care and international safety sales, along with solid sales of Pharmaceutical Systems products. For the twelve-month period ended September 30, 2011, BD Medical revenues increased 5.6 percent, or 2.3 percent on a foreign currency-neutral basis.

    In the BD Diagnostics segment, worldwide revenues for the quarter were $642 million, representing an increase of 8.6 percent compared with the prior-year period, or 3.8 percent on a foreign currency-neutral basis. Revenues reflected solid growth in both the Women’s Health and Cancer and the Infectious Disease product offerings within the Diagnostic Systems unit. For the twelve-month period ended September 30, 2011, BD Diagnostics revenues increased 7.0 percent, or 3.9 percent on a foreign currency-neutral basis.

    In the BD Biosciences segment, worldwide revenues for the quarter were $354 million, representing an increase of 9.6 percent compared with the prior-year period. Revenues increased 4.7 percent on a foreign currency-neutral basis, primarily driven by instrument and reagent sales in the Cell Analysis unit. For the twelve-month period ended September 30, 2011, BD Biosciences revenues increased 6.7 percent, or 3.2 percent on a foreign currency-neutral basis.

    For the new fiscal year, Becton expects diluted earnings-per-share to range between $5.75 and $5.85 per share. That’s significantly below Wall Street’s forecast of $6.19 per share. Sometime later this month the company will likely raise its dividend for the 39th year in a row.

  • Morning News: November 2, 2011
    , 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
    , 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
    , 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
    , 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
    , 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
    , 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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