The Ticker
-
Andrew Lo On Fixing Finance
Continue reading… 12 CommentsAndrew Lo, hedge fund manager and director of MIT's Laboratory for Financial Engineering, is a long-time student of investor behavior, especially the sort that belies the notion that markets move with cool efficiency. Particularly today, he sees animal spirits lurching about in some worrisome ways that could have long-term consequences for markets and the economy. "The big message is that right now all, of us are in a state of emotional shell-shock," he says. That goes for investors, regulators, bankers, and anyone else unlucky enough to get caught up in the fear and uncertainty flowing through the current financial crisis.
In this two-part Q&A with U.S. News, Prof. Lo discusses the best way to build a robust regulatory system for the financial sector (see below.) He also considers what massive changes in the investment landscape over the past few years might mean for your investments (part two will post here Monday).
Let's talk hedge fund regulation. What sort of oversight is most appropriate?
We don't need more regulation; we need better regulation. The majority of the problems we see in the current crisis emanated not from the hedge fund industry, but from the banking sector, which is probably the most highly regulated industry in the world. The main theme of my work has been to create more transparency in the financial sector, because one of the problems that arose and is still causing problems in our banking system is the lack of transparency and the fear it breeds. One of the strongest kinds of fear is fear of the unknown. That's exactly where we're at today with people fearing what they don't know about "toxic assets," about defaults, about where some of these pricing models will lead us. -
We're All Bankers Now
Continue reading… 0 CommentsJust finished Richard Florida's interesting take in The Atlantic on how the current crisis might alter America's geography (economic and otherwise). The whole thing is worth a read, so check it out.
One bit jumped out: New York may be America's financial capital, but it's not the only place with a relatively high concentration of finance professionals. A surprising number of cities now rely on banking as a major source of jobs, and that could mean more economic pain in more places as damage in the sector unfolds. Florida says:
Lean times undoubtedly lie ahead for New York. But perhaps not as lean as you’d think—and certainly not as lean as those that many lesser financial outposts are likely to experience. Financial positions account for only about 8 percent of the New York area’s jobs, not too far off the national average of 5.5 percent. By contrast, they make up 28 percent of all jobs in Bloomington-Normal, Illinois; 18 percent in Des Moines; 13 percent in Hartford; 10 percent in both Sioux Falls, South Dakota, and Charlotte, North Carolina. Omaha, Nebraska; Macon, Georgia; and Columbus, Ohio, all have a greater percentage of population working in the financial sector than New York does.
-
Where Not To Spend Stimulus Cash
Continue reading… 1 CommentWalletPop culls the oddest of nearly 8,400 requests for stimulus cash sent to Ohio Governor Ted Strickland's office. Lots of the proposals make sense. A few get points for creativity including:
- $200,000 to train the economically challenged as Ultimate Impact Wrestlers. "We would need to obtain a building for training and shows as we have currently been using my garage for training and this [is] unheated."
- $8,000 to make "Hand folding Origami decorations by Senior Citizens to sell on Ebay and Amazon to assist in small increases in income for those that can not meet their monthly expenses."
- $40,000 to teach speed-reading to the Ohio State Highway Patrol which will "result in an on-the-job time saving of at least one hour per day on the average."
-
Stimulus Plans Can Work: Goldman Sachs
Continue reading… 1 CommentGoldman Sachs takes a look at the 2008 stimulus plan (remember that check from the government?) and finds that, yes, stimulus has an impact on consumption. It gets a bit wonky, but according to Goldman's models based on data dating back to the early 1960s, actual real consumption growth in the first half of last year should have shrunk by about a quarter point at an annual rate. Instead, it grew nearly 1 percent, and "the difference between actual and predicted consumption growth was one of the largest over the last 20 years," according to economist Seamus Smyth. (The second biggest was the second round of Bush tax cuts in the second half of 2003).
What matters here is that Goldman's model suggests more than 50 percent of the stimulus was spent, pumping somewhere around $50 billion into the economy. That reinforces Goldman's view that a similar fraction of the current stimulus will be spent this time around and the impact of economic activity "will be meaningful over the next few quarters."
-
Fertilzer Wars: Agrium Bids For CF Industries
Continue reading… 0 CommentsCanada's Agrium is offering $3.6 billion for CF Industries, or $72 a share in cash and stock. The offer, a 30 percent premium to CF's Tuesday closing price, is the latest twist to the ongoing consolidation of the fertilizer industry where demand for potash, nitrogen and other chemicals boosted stock prices skyward last year in expectation of a long-lived boom in demand thanks to record food production and limited supplies of some key ingredients used to maximize agricultural output. The explosion in share prices for fertilizer makers was one of the biggest stock stories of most of 2008 -- until the stocks cratered late in the year along with the rest of the market. Shares now trade roughly around 2007 levels for the majority of those companies, and buyouts among the few largest players seems likely to continue.
Agrium says the deal would create efficiencies worth $150 million or so within three years of closing, and the combined company would generate revenue near $14 billion.
Back in January, CF Industries announced its $2.1 billion bid for rival Terra Industries, which has been mired in a proxy battle after Terra's board balked at the offer. Agrium's bid is contingent on CF dropping out of that deal.
-
First Solar Stumbles
Continue reading… 3 CommentsFirst Solar, the thin-film solar panel maker considered by many to be the best name in solar stocks, can't escape the realities of the economy and credit markets. That's the message this morning after the Tempe, Ariz.-based company's earnings report, which included some generally healthy guidance tempered by some dire comments from CEO Mike Ahearn. Shares are off 19 percent this morning as analysts slash their ratings and price targets on the company after Ahearn said on the earnings call that "the short-term outlook for the solar industry in our view has never looked more difficult."
A quick roundup: S&P cut the stock to "hold" from "buy." Canaccord Adams, Citigroup, FBR Research cut price targets. ThinkEquity slapped a "sell" rating on the stock. And remember, this is after the company blew past expectations for fourth-quarter earnings! (Earnings release is here.)
So what's happening? The answer is a combination of expectations for the sector that were simply too high and the realization too late that the credit crisis is absolutely hammering investment in the solar sector. It's also the story of the messy rise of a young industry that got caught in one of the worst downturns in recent memory. Broadly, investors spent several years pouring money into the sector that hadn't produced much in the way of profits, clear sector leadership, or the ability to sustain growth without the help of a friendly investor base and favorable government subsidies.
Ahearn deserves credit for being up front regarding the industries troubles. From the transcript of the earnings call (via Seeking Alpha) he outlines why the situation has become so difficult:
Equity financing in solar projects ranging from building owners that purchase systems for their rooftops to institutional project investors is continuing but its become less predictable and in some cases more expensive than before the crisis ensued. In particular, we’re seeing larger, more sophisticated investors take an opportunistic approach to maximizing investor returns and this is causing them to compare solar project returns to other investment alternatives that provide higher yields and/or better liquidity.
As a result of these dynamics, a couple of things are happening to the fundamentals of the business model. Project pipelines are more uncertain than before, both in terms of realization and timing, which makes short-term results less predictable. And as stated in our last call, project finance costs are higher than before, putting downward pressure on its [goal] systems and module prices.
These conditions are pressuring the entire solar value chain, equipment suppliers, module manufacturers, as well as project developers, system integrators and distributors and as an example we mentioned on our last earnings call that although First Solar generally enjoyed a strong customer base, we consider a small number of our customers to be under financial stress. We currently believe the potential customer defaults translate to roughly 10 to 15% of 2009 volumes.
Basically, even though the government stimulus package included grants worth up to 30 percent of a projects cost, that still leaves the other 70 percent that has to be financed. Right now, that's still a looming uncertainty for lots of investor who formerly flocked to the solar space. As Ahearn mentions, there's little clarity on when institutional investors will again favor the sector.
-
The Price Of A Tea Party
Continue reading… 87 CommentsGiven the surge in interest around Rick Santelli's CNBC rant, and the growing chorus of anti-stimulus folks calling for the New American Tea Party to halt the flow of government cash to troubled (and sometimes irresponsible) homeowners, keep in mind this interesting bit of history on the original Tea Party -- notably, that it actually meant more expensive tea.
Care of The New Pamphleteers blog and the D.C. Examiner:
And did you know that the price of tea would actually decrease under the parliamentary act that sparked the Boston Tea Party? Clarendon notes the significance of this key fact that is likely little known to American students today:
"At the same time, Parliament imposed a new tax on tea, but one that would be paid in London as a surcharge. The Americans would actually see lower prices on tea, but the tea they purchased would already come pre-taxed. Historian Benson Bobrick says it 'remains a noble feature of the whole confrontation that immediate economic interest did not determine [the colonists'] response.'
"And Americans didn't take the bribe of lower tea in exchange for accepting a revenue tax. In Philadelphia, ships bearing tea couldn't find anyone willing to lead the ships into harbor. In Charleston, South Carolina, the tea was off-loaded, but was stored in moldy warehouses where the product quickly rotted and became useless. In New York City, storms prevented the tea-laden ships from docking."
Me: There's a corollary here. The let-them-fail attitude of Tea Partiers toward foreclosures could come with a hefty price tag. As Clive Crook pointed out last week, the bailout may be unfair (as bailouts, by their nature, tend to be) but instead of pricier tea, doing nothing could mean more damage to home prices:
-
Today In Confidence: There Isn't Any (And Bernanke's No Help)
Continue reading… 0 CommentsIt's not news that uncertainty and fear are running high at the moment, but it's a bit surprising just how down-in-the-mouth everybody is in the latest confidence surveys. The Conference Board's Consumer Confidence Index plunged to 25 in February, down from 37.4 in January and way below the slight dip to 35.5 expected by economists. The reading set another all-time low.
High Frequency Economics called the drop in confidence "breathtaking," and hints that the turmoil in stocks (three straight days down more than 1 percent before today's rise) is swamping factors like lower gasoline prices. HFE also says the dismal expectations index, if maintained at its February level, "is consistent with real consumers' spending falling by about 5% y/y. In Dec it was down 1.7% so there is still some way to go, unfortunately."
Action Economics says: The index remains far below prior cycle lows of 47.3 in February of 1992 and 50.1 in May of 1980, hence leaving a grim reminder of just how focused the public is on the "crisis environment" in this cycle, despite the confidence bounce we might have ordinarily seen from both a sharp drop in food and energy prices through December and the massive "stimulus" plan aimed at shoring up confidence.
-
American Express Buying Out Cardholders
Continue reading… 10 CommentsIt's another sign that the average American is in for a long stretch of tighter credit: On Monday, the AP reported American Express would offer some of its members $300 in exchange for paying off their balances and closing out their accounts.
Douglas A. McIntyre of 24/7 Wall Street says that won't be a plus for the economy:
Between the lines, that means that customers who are not likely to pay their balances are being dumped. That means more people in the economy without access to credit, which means less consumer spending.
No one expects Amex to put patriotism above profit, but as banks and credit card companies cut loose a large portion of their customer bases, the time it will take for the economy to recover will be stretched further into the future.
Also, while AmEx has been shifting its customer base toward more middle-income customers for a while, it's still widely associated with a better-heeled clientele. Makes you wonder what we're in for in the rest of the credit card space where lenders extended excess credit to a larger pool of riskier borrowers.
-
Ritz Camera Files For Bankruptcy
Continue reading… 40 CommentsToday's bankruptcy filing by Ritz Camera Centers shows just how tough it is out there for companies facing both a wary consumer and long-time challenges from shifting technology. The lucrative photo finishing business has been declining for some time, but the holiday season appears to have gotten even worse as camera customers cut back and sales at Ritz's chain of boating stores declined.
The Beltsville, Md.-based company is the largest camera chain in the country, with more than 1,000 stores in 45 states, including Wolf Camera, Kits Cameras, Inkley's and The Camera Shops in addition to stores bearing the Ritz name, plus a 137-store chain of boating supply stores, Boater's World Marine Centers. For now, the company is still operating and continues its attempt to revamp as it tries to secure $85 million of financing to keep restructuring.
Reuters quotes Chief Restructuring Officer Marc Weinsweig (if your company has an executive with that title, be wary) from an affidavit regarding the filing, who says the company's lenders forced Ritz to up its reserves in January, which cut its credit during what was a very poor holiday shopping season:
He said this came after the recession caused Ritz's 2008 holiday sales to be "materially lower" than a year earlier. Ritz was also hurt by losses at Boater's World, which suffered falling sales in 2008 as gas prices soared.
-
Economy To Get Worse This Year: NABE
Continue reading… 0 CommentsThere's good news and bad news about the economy in today's survey from the National Association of Business Economics.
First the bad: 2009 is going to be a tough year all the way through. Economic growth is expected to drop by 0.9 percent in 2009 as the current recession isn't expected to end until the middle of the year. Economists are "decidedly more pessimistic on the economic outlook for the next several quarters" thanks to tight credit conditions, falling home and stock prices, and the fearful consumer. Bottom line: "While a few reports offer some glimmer of hope, a meaningful recovery is not expected to take hold until next year." But 2010 looks better. "The good news is that economic activity is expected to turn up in the second half of the year and 2010 is expected to see modestly above-trend growth of 3.1%," the group says. The survey was taken between Jan. 29 and Feb. 12.
Highlights from the NABE below:
-
Stocks Still Aren't Cheap
Continue reading… 0 CommentsOver at the NYT, David Leonhardt reminds us that stock prices still look rich by some measures even as we hover near November's lows. That's because price-to-earnings ratios may be sinking, but they're still barely cheaper than long-term averages. Based on historical 10-year averages of S&P earnings, Leonhardt also says stocks still haven't gotten as cheap as they did in past downturns. The bad news (bold is mine):
By this measure, the p-e ratio of the S.&P. 500 is now about 14.5. It’s below average, but not enormously so. By comparison, this ratio fell to 6 during the 1930s and 7 during the early 1980s. In short, stocks are a little less expensive than their historical average. But they are far more expensive than they were at the worst points of the other two worst recessions of the past century.
How could this be? The main answer is that stocks were incredibly expensive before the current crisis began — more expensive than at almost any other point in the last 100 years, save the bubbles of the 1920s and 1990s. They had a long way to fall. The fact that earnings are falling — and may well remain low for the next several years — doesn’t help either.
-
Noted: Rich People Are In Trouble
Continue reading… 2 CommentsThree is a trend right? Well, today's Wall Street Journal (sub. req.) is chock full of bad news hitting the top 1 percent. A quick round-up:
India's 'King of Good Times' Puts His Realm at Risk
Times are tough for India's "king of good times."
Vijay Mallya's United Spirits Ltd. and Kingfisher Airlines Ltd. have made him one of India's wealthiest and most-recognized businessmen -- an image he cultivates with a Formula One auto-racing team, parties with Bollywood actors and liberal use of his nickname. Yet this week, with his airline logging millions of dollars in losses and United Spirits' liquidity dropping sharply, Mr. Mallya and his partners put some of their own shares on the line to keep both businesses afloat.
Irish Mogul's Empire Totters As Slump Tames Celtic Tiger
Sir Anthony O'Reilly long has been a symbol of Irish resurgence, a national rugby hero and raconteur who conquered the U.S. corporate world before returning home to oversee a sprawling business empire. That empire now shows signs of unraveling.
Sir Anthony, once America's highest-paid chief executive while leading H.J. Heinz & Co., has seen the value of his holding in his Dublin-based global newspaper group, Independent News & Media PLC, plunge to $52 million from more than $1.1 billion just 18 months ago.
-
About That Santelli Rant . . .
Continue reading… 319 CommentsRick Santelli's rant today on CNBC about the Obama Administration's housing bailout is weird enough, but what really makes it special is the promo that airs before the clip. It's an ad for CNBC's upcoming special NEWBOs: The Rise of America's New Black Overclass.
So there you go: We now inhabit a world where commodity traders occupy the "silent majority" of hard-working Americans who just don't want to pay for other people's mortgages and we're ruled by a "new black overclass." Perspective please.
-
Banking Bears Bolt: Meredith Whitney, Richard Bove Change Jobs
Continue reading… 0 CommentsAmong the more retro trends inspired by the ongoing banking crisis is the creation of super-star analysts who punch above their weight class in terms of exposure and influence. As the banking and credit mess heated up, Meredith Whitney of Oppenheimer & Co. and Richard Bove of Ladenburg Thalman both emerged as closely watched voices who called problems in the sector ahead of time. Both changed jobs this week as a direct result of the ongoing saga in the industry they follow.
Whitney is striking out on her own at the Meredith Whitney Advisory Group specializing in bank research, and the FT reports she'll also apply for a broker-dealer license. Whitney rose to prominence in late 2007 when she warned Citigroup would have to cut its dividend and raise capital. That call sent Citigroup's shares slumping, and the bank did cut its dividend in January 2008. For the record, Whitney is still bearish on the sector, and predicts more capital raising will be needed before the crisis ends. This time, she'll be cashing in as the financial sector rebuilds. (She also made our list of Top 25 Market Movers.)
-
Priceline Bucks A Bad Economy
Continue reading… 0 CommentsIs naming your own price recession-proof? Shares of Priceline.com jumped nearly 17 percent this morning above $80 a share on earnings that barely noticed ongoing pain in the rest of the economy.
Fourth-quarter earnings of $1.29 a share were well above Wall Street consensus of $1.05. U.S. bookings managed to grow 31 percent from a year ago, and European travel climbed even faster through Priceline's Booking.com site. International hotel bookings climbed almost 35 percent thanks to a glut of available rooms. In all, customers bought nearly $1.5 billion worth of travel services through the site in the quarter, up almost 23 percent from a year ago.
-
5 Reasons Housing Stocks Are Still In Trouble
Continue reading… 2 CommentsIs anyone out there still trying to catch the falling knife that is shares of U.S. home builders? It's tempting to watch the stocks drop like rocks and think, "I'll get back in when the damage is done." Well, investors have been saying that (and getting burned) for a good chunk of the last year. The optimists are in for more pain. At this point, buying shares of homebuilders is largely a bet that the bottom is close for the housing market. It isn't, so you shouldn't. Here are 5 reasons to keep avoiding the sector:
Obama's foreclosure plan is no help for Wall Street. The $75 billion plan could help nine million Americans avoid foreclosure. That's good news if it works, but investors looking for a chance to bottom-feed on builders are disappointed today. The SPDR S&P Homebuilders ETF (XHB) is down more than 2 percent today and more than 15 percent so far this year.
Home sales are still plunging. Today we get housing start data for January, and it's uniformly grim. U.S. builders began construction on the fewest homes on record during the month. Starts slumped 17 percent to an annual rate of 466,000, the Commerce Department said. Goldman Sachs economists called the drop "shocking" by itself, and even more troubling since it's the third straight month of double-digit declines in sales.
[See also: Good New For Stocks: Earnings Expectations Look More Reasonable]
Leadership is lagging. Luxury builder Toll Brothers normally trades at a premium to the rest of the group, but earlier this month Citigroup's Josh Levin noted that Toll had slipped below both its peer group and its book value. Part of the reason, he says, is worries over the impact of the falling stock market on buyers for higher-priced homes (They're unfounded, Levin says, because home buyers worry more about income than net worth when buying a home). There's still a case against Toll, however, since pricey homes aren't going to be moving anytime soon.
-
Is R. Allen Stanford Really John Cleese?
Continue reading… 9 CommentsRobert Allen Stanford, the Houston financier accused of defrauding investors out of some $8 billion, is in hot water today as his dodgy financial dealings come to light.
My question is this: Is it too early to start casting?
-
Stanford Group: Madoff II?
Continue reading… 2 CommentsRobert Allen Stanford, head of Stanford Financial Group, looks like he's about to replace Bernard Madoff in the financial scandal headlines. His "massive ongoing fraud" in selling some $8 billion worth of high-yielding certificates of deposit from an Antigua-based bank has regulators coming after the Houston-based financial company. Federal agents raided his offices Tuesday morning.
From the NYT:
In the complaint, filed in Federal District Court in Dallas, the S.E.C. accused Mr. Stanford and two associates — James M. Davis, a director and chief financial officer of Stanford Group and the Antigua-based bank affiliate, and Laura Pendergest-Holt, the chief investment officer of both organizations — with misrepresenting the safety and liquidity of the uninsured C.D.’s.
The C.D.’s were sold by Stanford International Bank through the firm’s registered broker-dealer and investment adviser, which are in Houston. Both the bank, which claims $8.5 billion in assets and 30,000 clients in 131 countries, and the brokerage unit, which operates about 30 offices in the United States, were named in the S.E.C. suit. Stanford Financial asserts that it advises about $50 billion in assets.
The WSJ links to the SEC's statement on the charges, and points out that it appears Stanford lost money in the Madoff scandal. From the WSJ:
The SEC said that Stanford suffered losses in the alleged Madoff fraud, contradicting Stanford's assurances to its investors that it had no direct or indirect exposure. According to the SEC, Messrs. Stanford and Davis were told on Dec. 15 that Stanford companies had a loss of roughly $400,000 based on indirect exposure to Mr. Madoff.
-
Valentine's Day Stock Roundup
Continue reading… 8 CommentsNothing says "romance" like reviewing your portfolio, but with Valentine's Day just a few hours away (you already made reservations, right?) take a minute to check out some investing ideas that might just help you pay for it.
First off, there's a pretty good chance that a post-Valentine's boost isn't in the cards for retailers. Brand Keys, a researcher, predicts that "Valentine's Day will be the first major holiday of 2009 to feel the economic pinch." Its survey says the average price "consumers placed on love" is a measly $108. That's down 15 percent from last year. Men are expected to spend $140 on the big day versus $166 in 2008. Women are expected to spend $90 versus $166 last year. As for where they're spending, dinner and drinks won't be scaled back but traditional tokens - flowers, candy, jewelry, and lingerie - look less popular. Also, if you're thinking of blowing off Valentine's crowds altogether, you're not alone. Some 15 percent of those surveyed plan on staying home this year, nearly four times the 2008 number.
Here's a quick round-up of some of the more amorous picks in a love-lorn market:
