Bernanke’s Testimony
Posted by Eddy Elfenbein on July 18th, 2007 at 10:51 am

Here’s the key part of Bernanke’s testimony today:

Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend. Such an assessment was made around the time of the June meeting of the Federal Open Market Committee (FOMC) by the members of the Board of Governors and the presidents of the Reserve Banks, all of whom participate in deliberations on monetary policy. The central tendency of the growth forecasts, which are conditioned on the assumption of appropriate monetary policy, is for real GDP to expand roughly 2-1/4 to 2-1/2 percent this year and 2-1/2 to 2-3/4 percent in 2008. The forecasted performance for this year is about 1/4 percentage point below that projected in February, the difference being largely the result of weaker-than-expected residential construction activity this year. The unemployment rate is anticipated to edge up to between 4-1/2 and 4-3/4 percent over the balance of this year and about 4-3/4 percent in 2008, a trajectory about the same as the one expected in February.
I turn now to the inflation situation. Sizable increases in food and energy prices have boosted overall inflation and eroded real incomes in recent months–both unwelcome developments. As measured by changes in the price index for personal consumption expenditures (PCE inflation), inflation ran at an annual rate of 4.4 percent over the first five months of this year, a rate that, if maintained, would clearly be inconsistent with the objective of price stability. Because monetary policy works with a lag, however, policymakers must focus on the economic outlook. Food and energy prices tend to be quite volatile, so that, looking forward, core inflation (which excludes food and energy prices) may be a better gauge than overall inflation of underlying inflation trends. (I’m glad Bernanke said this. There’s a myth that the Fed ignores food and energy. That’s simply not true. – Eddy) Core inflation has moderated slightly over the past few months, with core PCE inflation coming in at an annual rate of about 2 percent so far this year.
Although the most recent readings on core inflation have been favorable, month-to-month movements in inflation are subject to considerable noise, and some of the recent improvement could also be the result of transitory influences. However, with long-term inflation expectations contained, futures prices suggesting that investors expect energy and other commodity prices to flatten out, and pressures in both labor and product markets likely to ease modestly, core inflation should edge a bit lower, on net, over the remainder of this year and next year. The central tendency of FOMC participants’ forecasts for core PCE inflation–2 to 2-1/4 percent for 2007 and 1-3/4 to 2 percent in 2008–is unchanged from February. If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters.
At each of its four meetings so far this year, the FOMC maintained its target for the federal funds rate at 5-1/4 percent, judging that the existing stance of policy was likely to be consistent with growth running near trend and inflation staying on a moderating path. As always, in determining the appropriate stance of policy, we will be alert to the possibility that the economy is not evolving in the way we currently judge to be the most likely. One risk to the outlook is that the ongoing housing correction might prove larger than anticipated, with possible spillovers onto consumer spending. Alternatively, consumer spending, which has advanced relatively vigorously, on balance, in recent quarters, might expand more quickly than expected; in that case, economic growth could rebound to a pace above its trend. With the level of resource utilization already elevated, the resulting pressures in labor and product markets could lead to increased inflation over time. Yet another risk is that energy and commodity prices could continue to rise sharply, leading to further increases in headline inflation and, if those costs passed through to the prices of non-energy goods and services, to higher core inflation as well. Moreover, if inflation were to move higher for an extended period and that increase became embedded in longer-term inflation expectations, the re-establishment of price stability would become more difficult and costly to achieve. With the level of resource utilization relatively high and with a sustained moderation in inflation pressures yet to be convincingly demonstrated, the FOMC has consistently stated that upside risks to inflation are its predominant policy concern.

Today’s CPI Report
Posted by Eddy Elfenbein on July 18th, 2007 at 10:35 am

The government reported that headline consumer inflation rose by 0.2% last month. The core rate rose by 0.2%.

Buy List Earnings This Week
Posted by Eddy Elfenbein on July 17th, 2007 at 4:49 pm

The earnings parade will start for our stocks this week. Tomorrow, Amphenol (APH) reports. Then on Thursday, Danaher (DHR), Unitedhealth (UNH) and Harley-Davidson (HOG) report.
Except for Harley, none of the earnings should be a big surprise. The only surprise will be how the market reacts. For Harley, I think the current expectations are too low.

Crashing DealBreaker
Posted by Eddy Elfenbein on July 17th, 2007 at 1:28 pm

I was in New York last week and while riding in a cab, the driver spotted a printer left on the curb. He pulled over, hopped out, grabbed the printer, tossed it in the trunk, then hopped back in and kept driving. You had to see it—it was all one fluid motion. See, this is why I love NYC.
My destination was the offices of one of my favorite blogs, DealBreaker. I won’t bore you with the details, but after passing the reception area and security checkpoints (including retinal scan), I finally arrived at their palatial offices. I had no idea blogging was so profitable.
Naturally, I brought my camera to record to the events.
Here’s DealBreaker’s very talented Editor-In-Chief John Carney. Note the whiteboard in the background. They never use it. Instead, it serves as ironic symbolism of John’s alienation and disaffection from the mainstream media. (Plus, it’s cheap.) Here’s John quietly reflecting on the eloquence and understated humor of his previous post.

More John. Here he is on the phone. Probably putting the screws to some Wall Street bigshot. (You can see why CNBC loves him!)

John’s a wonderful guy and he even treated me to lunch. At one point, I tried to take a picture of Bess Levin, DealBreaker’s heartbreaker. But before I could, several large men wrestled me to the ground. Then Bess crushed my camera under the heel of her four inch leather stilettos. So in lieu of any Bess photos, I give you that mental image.
I did manage to get one shot of her messy desk. Naturally, dear reader, I’m as appalled as you are. And yes, that is a shuttlecock just under the screen.

Anyway, if you haven’t read DealBreaker, I highly recommend it. It’s one of the best and funniest sites on the Internets.

GE’s Balance Sheet
Posted by Eddy Elfenbein on July 17th, 2007 at 11:44 am

How big is General Electric (GE)? This should give you an idea.
I was scanning the earnings press release. Under “Assets” the company list $124.4 billion in the category of “Other.”

Wall Street Loves Obama
Posted by Eddy Elfenbein on July 17th, 2007 at 11:32 am

(Via Yglesias) Senator Obama’s top contributors are Lehman Brothers, $160,760; Citadel Investment Group, $152,150; Goldman Sachs, $103,550; JP Morgan Chase, $101,950 and Citigroup $61,125.
Here’s an old post looking at his investment portfolio.

The Exchange Rate’s Impact on the Stock Market
Posted by Eddy Elfenbein on July 17th, 2007 at 10:59 am

The U.S. dollar has been in freefall lately, but it seems to have little or no impact on the stock market’s rally. In fact, it seems to be helping.
I decided to do a little analysis and see how much the exchange rate, the dollar/euro in particular, impacts equity prices.
From the beginning of 1999 to the end of June, the euro and the stock market were traded on about 2100 days. On days when the euro rose against the dollar, the S&P 500 lost a combined 66%. Annualized, that works out to a loss of -22.88% a year. When the euro fell against the dollar, the S&P 500 gained an annualized 35.30%.
Here are the annualized rates for the S&P 500 sector groups:
……………………………Euro Up………………..Euro Down
Energy……………………9.28%…………………..17.58%
Discretionary…………-28.57%…………………..47.76%
Staples…………………..-5.07%……………………8.21%
Financials………………-27.26%…………………..51.23%
Healthcare……………..-12.84%………………….17.39%
Industrials……………..-21.50%…………………..40.90%
Tech……………………..-44.04%…………………..69.80%
Materials…………………..0.32%…………………..16.17%
Telecom………………….-24.73%…………………..19.24%
Utilities……………………-2.40%……………………7.43%

Dow Jones & News Corp. Reach Possible Deal
Posted by Eddy Elfenbein on July 17th, 2007 at 7:36 am

It could really be happening. The Dow Jones (DJ) board will be meeting tonight to decide on Rupert Murdoch’s $5 billion offer.
This deal should have happened three months, but it’s been needlessly held up by members of the Bancroft family. Murdoch offered them a 67% premium for a stock that has done nothing for years. No, that wasn’t good enough for them.
The problem is these super voting shares of stock give unfair say to family members. These shares, which have ten times the voting power of regular shares, are perfectly legal, but I don’t see how much good comes from them.
Christopher Bancroft is trying to sink the deal by running to every hedge fund manager so he can buy more super-voting shares. Time is running out and I hope the board approves Murdoch’s offer. Ultimately, a company should be run by its shareholders.

KKR Cancels Loan Deal for Maxeda
Posted by Eddy Elfenbein on July 16th, 2007 at 10:49 am

Here’s a small story that could be the start of a much larger story (cue scary music).
Kohlberg Kravis Roberts just canceled plans to sell $1.4 billion in loans for Maxeda, a Dutch department store. The reason is that investors are turning away from risky debt. This could snowball as risk-averse investors gradually turn away marginal borrowers. People who were burned on subprime don’t want it to happen again.
Bloomberg reports:

The deal is the third to be postponed or restructured by KKR in as many weeks as losses from the U.S. subprime mortgage rout make investors wary of financing leveraged buyouts. New York-based KKR is trying to raise 9 billion pounds ($18 billion) this week to finance its takeover of Nottingham, England-based drugstore chain Alliance Boots Plc.
KKR abandoned the debt sale for Amsterdam-based Maxeda after failing to entice investors by reducing prices for the debt and introducing covenants to restrict future borrowing. Citigroup Inc. and ABN Amro Holding NV have guaranteed to provide the financing.
“Due to current volatility of the credit markets, Citigroup and ABN Amro have decided to postpone syndication to a later stage when they expect markets to have stabilized,” Maxeda spokesman Arnold Drijver said today. The company’s financing “is in place,” he said.

I wish them well. The sad part is that they’re being punished for the lousy decisions of others.

Waitress Wins CNBC Stock-Picking Contest
Posted by Eddy Elfenbein on July 16th, 2007 at 7:08 am

Congratulations to Mary Sue Williams of St. Clairsville, OH.
The waitress and former welder (no really) won CNBC’s Million Dollar Portfolio Contest. Williams said she’s never watched the network or bought a stock in her life. Somehow, she overcame this to win the contest (that’s sarcasm).
By the way, several contestants were disqualified for cheating. I’m guessing they have bought stocks and watch CNBC all the time.