• UN wants new global currency to replace dollar
    Posted by on September 8th, 2009 at 11:05 am

    This is a pipe dream:

    In a radical report, the UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises.
    It added that the present system, under which the dollar acts as the world’s reserve currency , should be subject to a wholesale reconsideration.
    Although a number of countries, including China and Russia, have suggested replacing the dollar as the world’s reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion.
    In essence, the report calls for a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving.
    The proposals would also imply that surplus nations such as China and Germany should stimulate their economies further in order to cut their own imbalances, rather than, as in the present system, deficit nations such as the UK and US having to take the main burden of readjustment.
    “Replacing the dollar with an artificial currency would solve some of the problems related to the potential of countries running large deficits and would help stability,” said Detlef Kotte, one of the report’s authors. “But you will also need a system of managed exchange rates. Countries should keep real exchange rates [adjusted for inflation] stable. Central banks would have to intervene and if not they would have to be told to do so by a multilateral institution such as the International Monetary Fund.”
    The proposals, included in UNCTAD’s annual Trade and Development Report, amount to the most radical suggestions for redesigning the global monetary system.
    Although many economists have pointed out that the economic crisis owed more to the malfunctioning of the post-Bretton Woods system, until now no major institution, including the G20 , has come up with an alternative.

  • Buffett Sees More Trouble Ahead
    Posted by on September 8th, 2009 at 10:25 am

    The New York Times catches up with the Oracle of Omaha:

    After boldly buying when so many were selling assets, his conglomerate, Berkshire Hathaway, is pulling back, buying fewer stocks while investing in corporate and government debt. And Mr. Buffett is warning that the economy, though on the mend, remains deeply troubled.
    “We are not out of problems yet,” Mr. Buffett said last week in an interview, in which he reflected on the lessons of the last 12 months. “We have got to get the sputtering economy back so it is functioning as it should be.”
    Still, Mr. Buffett hardly sounded shellshocked in the wake of what he once called the financial equivalent of Pearl Harbor. (An estimated net worth of $37 billion would be a balm to anyone’s psyche.)

  • How the SEC Failed
    Posted by on September 8th, 2009 at 10:09 am

    Larry Ribstein points us to the SEC’s report on Bernie Madoff and it’s absolutely scathing. Here’s a sample:

    The investigation that arose from the most detailed complaint provided to the SEC, which explicitly stated it was “highly likely” that “Madoffwas operating a Ponzi scheme,” never really investigated the possibility of a Ponzi scheme. The relatively inexperienced Enforcement staff failed to appreciate the significance ofthe analysis in the complaint, and almost immediately expressed skepticism and disbelief. Most of their investigation was directed at determining whether Madoff should register as an investment adviser or whether Madoff’s hedge fund investors’ disclosures were adequate.
    As with the examinations, the Enforcement staff almost immediately caught Madoff in lies and misrepresentations, but failed to follow up on inconsistencies. They rebuffed offers of additional evidence from the complainant, and were confused about certain critical and fundamental aspects of Madoff’s operations. When Madoff provided evasive or contradictory answers to important questions in testimony, they simply accepted as plausible his explanations.

    Ouch! When you see the sheer incompetence of the government, it ought to serve as a great refutation to conspiracy theorists. Yet I have a feeling that logic and facts won’t make a dent in their efforts.
    Bonus: Madoffs get $13,800 property tax rebate

  • Oliver Stone Is Back
    Posted by on September 8th, 2009 at 8:28 am

    The New York Times looks at the return of Oliver Stone:

    While Mr. Stone’s youth was steeped in the ways of finance, thanks to his father’s profession, he did not inherit a facility for such matters. He did poorly in economics at Yale, and turned to filmmaking. He has spent the last several months researching the financial collapse by reading and by meeting with executives and academics.
    Earlier in the summer he brought Mr. LaBeouf to a cocktail party organized by Nouriel Roubini, a New York University economics professor and chairman of a consulting firm, and held in rented space at the Maritime Hotel in Chelsea. There Mr. Stone and Mr. LaBeouf discussed the financial collapse with hedge fund managers who are clients of Mr. Roubini’s firm.
    “In this financial crisis it was the traditional banks and the investment banks that had a larger role in doing stupid and silly things than the hedge funds,” said Mr. Roubini, who earned acclaim for being early in predicting the financial crisis. (Mr. Stone offered Mr. Roubini a small role in the film as a hedge fund manager.)

    I’m not surprised to hear that Stone did poorly in economics. It doesn’t sound like he’s gotten much better. The late Pauline Kael said she despised his movies. I’m not sure why anyone takes Stone seriously:

    “They control culture, they control ideas. And I think the revolt of September 11th was about ‘Fuck you! Fuck your order—’ ”
    “Excuse me,” a fellow-panelist, Christopher Hitchens, said. ” ‘Revolt’?”
    “Whatever you want to call it,” Stone said.
    “It was state-supported mass murder, using civilians as missiles,” said Hitchens, a columnist for Vanity Fair and The Nation.

  • Pujols Versus A-Rod
    Posted by on September 5th, 2009 at 6:06 pm

    Here’s a look at the home run race between Alex Rodriguez and Albert Pujols. The horizontal axis shows the number of home runs and the vertical axis shows the age.
    image851.png
    A-Rod is 4-1/2 years older than Pujols and he currently has 215 more home runs. That’s a nice safe lead, but I wouldn’t say it’s safe. A-Rod has struggled lately. He hit “only” 35 home runs last year and has just 24 so far this year. The big unknown is who will stay healthy. Ken Griffey Jr. would probably be well over 700 home runs if he had stayed off the DL.
    The chart shows that for the most part, A-Rod has been on a faster track than Pujols, although Pujols has had the lead a few times (he got his 250th when he was 19 days younger than A-Rod).
    Both players are still well ahead of Hank Aaron’s pace, although Hammerin’ Hank had some of his best years when he was over 35. I don’t care what the record books say but I don’t recognize Bonds as the Home Run King.

  • 80 Years Ago
    Posted by on September 4th, 2009 at 11:15 am

    The great bull market peaked 80 years ago yesterday — September 3, 1929. The Dow closed at 381.17. The crash didn’t come until October. Three years later, the Dow was down to 41.22.
    The Dow didn’t make a new high until November 23, 1954.

  • The State of Macro
    Posted by on September 4th, 2009 at 10:31 am

    Paul Krugman has a very good article in the New York Times on the state of macroeconomics and how the profession got blindsided by the credit crisis. As an economics writer, there simply isn’t anyone better at bringing complex issues to the average reader. As a partisan political writer, well, that’s a different matter.
    I only have two minor quibbles. The first is that I think Krugman overstates the importance that economic ideas have on theory. Just because a lot of professors who write in journals and show up at conferences believe in efficient markets doesn’t mean that impacts policy at all. That’s a tough line to draw from theory to results.
    The second point is that I think he overstates the faith in efficient markets. I could be wrong here, but I’ve rarely met a trader of professional investors who believes in, or even cares about, efficient markets. Krugman makes it sounds as if this were a widely held doctrine that was suddenly exposed by the housing bubble. For many economists, that could be correct. I would think the tech bubble, which Krugman doesn’t mention, was a better refutation of efficient markets.
    Anyway, those are minor points. It’s a good read.

  • Most Folks Trade Too Much
    Posted by on September 4th, 2009 at 10:13 am

    Wise words from David Merkel:

    Most people and investment managers trade too often. They sell their winners too rapidly, and panic too soon on their losers. Now, I’m not advocating “buy and forget,” or Buffett’s statement, “Our favorite holding period is forever.” Buffett has had a huge opportunity loss on many of his “permanent” holdings. Granted, when you are managing that much money, it is tough, so I give him a pass, not that he needs it from me. (Rather, I am the needy one. If you ever read me, Mr. Buffett, sir, would you send me an e-mail? I have one favor to ask.)
    Measure twice, cut once. Risk control is best done on the front end, analyzing what you will buy, rather than having strict sell rules that limit losses. Many who have strict sell rules die the death of a thousand cuts. Careful selection matters more, in my opinion. What should you aim for at present?
    * A strong balance sheet
    * Cheap price versus earnings and book
    * An industry that is needed even in bad times.
    * Earnings quality — low earnings from accrual entries.

    You can also check out David’s list of buy candidates.

  • The Market and Future Earnings
    Posted by on September 2nd, 2009 at 11:17 am

    I was playing with some numbers I got off Robert Shiller’s website. I was curious to see historically how long it’s taken the market to earn back its value. The P/E ratio is concerned with past earnings, but I wanted to see how good the market is at valuing future earnings.
    It turns out, the market is generally worth about its earnings for the next 40 quarters, or 10 years. This makes sense since the historic P/E ratio is around 14-16, so going by normal growth, it ought to take roughly ten years to earn your money back. Let me add that the market has been known to be wrong about such things.
    Here’s a look at the S&P 500 compared with its earnings ten years hence. Because of that restriction, the chart has to stop in the late 1990s.
    image850.png
    From the 1929 peak, it took the market 24 years to earn its money back. In 1942 and 1982, it took less than seven years.

  • Morning News
    Posted by on September 2nd, 2009 at 10:47 am

    I’m relieved to see that Donaldson (DCI) has come off its rotten open from this morning. This is typical after bad news—a sharply lower open followed by a rally. Let’s hope it holds.
    Danaher (DHR) is in the news today. The company said it’s cutting 3,300 jobs and it will close 30 facilities which more than previously planned. The company also said it’s paying $1.1 billion for MDS’s instruments business. The shares are up today.
    Joe Bank (JOSB) is also doing nicely today. The company just reported earnings of 68 cents a share, 14 cents better than estimates. Sales were up close to 10%. A year ago, the company earned 48 cents a share so that’s very nice growth. This stock is insanely erratic, but it’s been good to us this year. JOSB is up over 70% since January 1.