NY Fed to hold meeting on derivatives with banks
Posted by Eddy Elfenbein on September 7th, 2005 at 12:52 pm

Next week, the Federal Reserve Bank of New York will meet with several top Wall Street firms to discuss credit derivatives. This market has grown rapidly in recent years and there are fears that Wall Street’s paper work is very far behind.

The Counterparty Risk Management Policy Group recently released a study which highlighted the problem of Wall Street’s growing back log. Alan Greenspan has praised credit derivatives as a good way of controlling risk. The difficulty is that hedge funds have moved into this market. With the rapid trading, no one is sure who owes what to whom. In fact, what’s left of Enron and Citigroup are currently in court fighting over a credit derivative. My guess is that we’re going to hear more about this issue in the next few months.

WSJ: Steel to Rise by 20%
Posted by Eddy Elfenbein on September 7th, 2005 at 10:35 am

Today, The Wall Street Journal reports that the price of steel could rise by up to 20% in the aftermath of Hurricane Katrina. This comes on top of another 20% price increase that came last week. The reason for the high prices is that there’s a limited supply of liquid hydrogen which is used to make higher-quality steel.

Air Products & Chemicals Inc., a major U.S. producer of hydrogen, says it can’t deliver liquid hydrogen to customers because of damage to its plant in New Orleans. The Allentown, Pa., company is uncertain when it can restart production.
Steelmaker Steel Dynamics Inc., of Fort Wayne, Ind., told customers Friday it is suspending future orders of value-added products such as cold-rolled, galvanized and painted sheet-steel products because Air Products was its main hydrogen supplier. U.S. Steel, Nucor and Netherlands-based Mittal Steel Co. said they have alternate supplies of hydrogen and don’t expect the shortage to affect them greatly.

The steel group had been a fairly poor industry over the past few decades. But the group has done extremely well is that last 2-1/2 years. Much of steel’s resurgence has been due to China’s insatiable appetite for steel.

The industry got a nice boost last week when Morgan Stanley reported a bright outlook for the sector. Morgan sees China being the critical factor which will help all metal stocks over the next five years.

Also, this weekend’s Barron’s noted that Congress will use a $100 million emergency relief fund to help rebuild Louisiana’s roads. That comes right after the huge highway bill that the president recently signed. Barron’s speculated that same of the big winners would include Texas Industries, Nucor and Caterpillar. The highway bill “guarantees a minimum of $227.6 billion for roads between now and 2009; the remaining $59 billion is for transit programs, such as commuter rail lines, and for pork projects, such as the Frank Sinatra waterfront walkway in Hoboken, N.J.”

The fall of the U.S. steel industry has been pretty dramatic. In fact, most of the major steel companies are no longer American. Mittal Steel is based in the Netherlands. Posco is based in Korea. Gerdau is Brazilian. The best U.S. steel stock is Nucor. Steel stocks are still well off their highs of six months ago, but it rally might not yet be over.

Microsoft sues European Commission
Posted by Eddy Elfenbein on September 7th, 2005 at 9:54 am

Microsoft continues its long-running legal battle with the European Commission. Now, Redmond is striking back.

The Commission imposed sanctions against the software giant, including a record 497 million-euro fine, in March 2004 in a case which also covered the bundling of Microsoft’s Media Player with Windows, but the company has not entirely carried them out.
Microsoft challenged the Commission’s decision — a case which has yet to go to hearing — and, separately, tried without success to get the sanctions suspended by the court.
Competition Commissioner Neelie Kroes had warned Microsoft it had to comply by June 1, 2005, or face new enforcement action.
Microsoft filed a compliance agreement by the deadline.
But it managed to soften a remedy which required it to share communications protocols — software rules of the road — with all rival makers of server software for small offices.
Essentially, the Commission and Microsoft agreed that those who received the protocols could not make them public.
The makers of open-source server software, who publish the source codes for all products they issue, cried foul at this, however, and Microsoft and the Commission decided to leave the issue to the Court of First Instance.

Seibel Beats the SEC
Posted by Eddy Elfenbein on September 6th, 2005 at 9:23 pm

Good news for investors. The courts have thrown out a claim by the SEC that Siebel Systems violated Regulation FD. Adopted in 2000, Reg FD (for fair disclosure) requires companies to tell the public the same info as Wall Street.

Kenneth Goldman, Seibel’s CFO, told a private group that Siebel’s business was looking good. The stock jumped 8% the next day. The SEC went after Seibel although the company felt that this was an unreasonable interpretation of the regulation. In fact, this was the second time that the SEC went after Siebel on Reg FD. Judge George Daniels said that “the statements relied upon by the SEC in its complaint do not support an allegation of nonpublic material disclosure.”

In his decision, Judge Daniels wrote:

Such an approach places an unreasonable burden on a company’s management and spokespersons to become linquistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company’s public statements. Regulation FD does not require that corporate officials only utter verbatim statements that were previously publicly made.

Here’s more on the potential aftermath of this ruling.

The PayPal Wars
Posted by Eddy Elfenbein on September 6th, 2005 at 2:49 pm

What happens when entrepreneurs build a better mousetrap? The government and business team up to put it out of business.

Eric M. Jackson’s book, The PayPal Wars: Battles With eBay, the Media, the Mafia, and the Rest of Planet Earth, details the story of PayPal. The company was originally started with a vision of how technology could create an extra-governmental currency system. Soon, eBay and government regulators drove the company from its original goal. It’s a sad story and it ends when PayPal is ultimately bought out by eBay.

Today’s Market
Posted by Eddy Elfenbein on September 6th, 2005 at 12:50 pm

The market is doing quite well today. The Dow is up over 100 points and crude oil has finally pulled back a few dollars. Right now, oil is going for less than $66 a barrel. These days, that’s considered a bargain. Today, the market is being led by tech stocks and the cyclical sector. The top industry groups are Real Estate, Paper, Water Utilities and Heavy Construction. Perhaps the best news is that the insurance sector is finally beginning to recover.

Insurance stocks took a big hit last October from Hurricane Spitzer. The industry has been a bargain ever since.

The New New Orleans
Posted by Eddy Elfenbein on September 6th, 2005 at 10:26 am

The rebuilding of New Orleans will be one of the largest public works projects in history, and that will mean municipal bonds.

Rated Baa2 by Moody’s Investors Service and BBB+ by Standard & Poor’s — in other words, almost junk — New Orleans already carried what the rating companies call a “high debt burden” and low financial reserves. So it would probably be a good idea for the state to set up a special authority to sell several billion dollars in bonds designed to help rebuild the city.
This is going to take lots of money, and Americans being an impatient lot, probably not as much time as you might think. We’ll know more when the water subsides.

Price-Gouging?
Posted by Eddy Elfenbein on September 6th, 2005 at 9:49 am

The Department of Energy has a Web site (http://gaswatch.energy.gov/)
for people to report oil price-gouging. Although the Web site doesn’t say what, if anything, the DOE will do about it. On the other hand, Jerry Taylor of the Cato Institute defends price-gouging:

What has really set the moralizers off this time is the revelation that the gouging is often both tightly targeted and coldly calculated. The industry calls it “zone pricing.” Essentially, oil companies examine small geographic areas, consider how much retail competition exists, estimate the willingness of motorists to look elsewhere for gasoline, and price accordingly. Consumer activists are aghast that oil companies would go so far to extract every penny they can out of a gallon of gas.
Price discounting, however, clearly benefits the consumers who receive the discounts. But how about those consumers who pay prices higher than the discount? Economists of all stripes who’ve studied the effect of differential pricing based on the willingness of consumers to search for lower prices have concluded that consumers overall are likely to benefit if sales are higher with price discrimination than without it. That’s because those consumers less sensitive to prices pay more of the fixed costs of doing business.
Regardless, most people view the practice of zone pricing in gasoline markets as unfairly taking advantage of consumers. Yet many of those same people — who will curse a blue streak if you put them in front of a camera and ask them about “Big Oil” — are as we speak putting their houses on the market and enthusiastically gouging the living daylights out of anyone looking for a new home. And what’s more, they’re zone pricing! Surprisingly, however, no one ever rages against real estate price gouging. In fact, the opposite is the case. Business reporters gush about returns and politicians pledge to do whatever it takes to keep the real estate bubble afloat.

Ballmer Threatens to “Kill” Google
Posted by Eddy Elfenbein on September 6th, 2005 at 9:38 am

According to court documents, Steve Ballmer, Microsoft’s CEO, threatened to “kill” Google and “bury” its chief executive. When Mark Lucovsky, a Microsoft engineer, told Ballmer that he was defecting to Google, Lucovsky claimed that Ballmer said: “F**king Eric Schmidt is a f***ing p****. I’m going to f***ing bury that guy. I have done it before, I will do it again. I’m going to f****ing kill Google.”

I’m sure he was speaking metaphorically. Lucovsky said that Ballmer then picked up a chair and tossed it across the room.

Market Reactions to Katrina
Posted by Eddy Elfenbein on September 5th, 2005 at 10:23 pm

This week, we’ll get some clues as to how broad an economic impact Hurricane Katrina had. The market will digest reports on unemployment claims, oil inventories and store sales. There’s also talk that the Federal Reserve will hold off raising interest rates. There’s no question that the Hurricane is having a major economic impact.

Unleaded gasoline now averages $2.86 a gallon nationwide, an increase of about 15 cents in less than a week, costing consumers an additional $57 million a day. That is still below the inflation-adjusted high of $3.11 a gallon reached 25 years ago, but it is getting close enough to become a significant threat to consumer spending in other areas, and not just in the United States.
Some local economies will no doubt benefit from the fact that New Orleans will be out of commission for months. Tourists who might have visited the Big Easy will go elsewhere, corporate conferences will be relocated and cities throughout the South will witness a tightening of their rental housing markets as evacuees from New Orleans reestablish their lives elsewhere.

Two other important events will be Chicago Fed President Michael Moskow’s speech on Wednesday. Also, on Thursday, Intel will provide revenues guidance for this quarter.