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RECENT ENTRIES My Boldest Prediction Yet Latest Phony Concern: Delistings “Pinching” Exchanges Q2 GDP Revised to 3.3% FDIC May Tap Treasury An Interest Rate What? Citigroup to Cut Costs The Best Central Banker in the World Today Looking at China's Savings How Investment Banks Can Cut Costs Tyler Cowen on the Economy SYNDICATE THIS SITE

Write down this time and day, and note that I'm calling a bottom in Pakistan's stock market.

In other news, Pakistan has barred stocks from trading below yesterday's close.

One more prediction, this won't end well.

(Via: Birthday Boy Joseph Weisenthal).

Posted by Eddy at 10:22 AM | Permalink

One of things I enjoy about the financial media is finding stories that are negative no matter what the outcome is. For example, you’re read a story about “red lining” and how banks are shutting out lower-income borrowers. Then a few years later, you’ll read a story about “predatory lending,” and how banks are taking advantage of lower-income borrowers. The completely contradict each other, but end results is always bad news. Or worse, it “raises concerns.” One day I hope to write a book, " How Media Alarmism is Killing Our Children."

If you want to be taken seriously as an economic analyst or policy maker, you need to spend much of your day being “worried” and/or “concerned.” You don’t have to do anything. Just say that this latest development “raises troubling questions.” (See Bernanke Warns.)

Probably the classic example is the worry of corporate consolidation and mega-mergers seamlessly turns into a worry about junk IPOs. I would think you can worry about one of these, but not both. Apparently the latest concern is a wave of stock delistings:

The combination of more delistings and fewer new listings has pinched the big U.S. exchange operators, as the financial meltdown topples some of their clients and spooks others.

Midway through this year, more companies than in previous years had been bumped from the Nasdaq Stock Market and, to a lesser extent, from the New York Stock Exchange because they failed to meet the minimum requirements.

Meanwhile, tumbling stock markets have brought the IPO market to a crawl, compounding the pain for Nasdaq OMX Group and NYSE Euronext, which derive up to 15 percent of their overall revenue from listing fees.

"It's a negative" for the exchanges, said Ed Ditmire, analyst at Fox-Pitt Kelton. "But it ebbs and flows with the economic cycle."

More Nasdaq-listed companies have been delisted for non-compliance so far this year than in either of the previous two years, according to Nasdaq data. Some 54 stocks were bumped as of Aug. 7, compared to 48 in all of last year and 52 in 2006.

At larger rival NYSE, data show 11 companies had been delisted due to non-compliance as of July 1. That compares to 21 delistings in all of last year and 14 in 2006.

Let me get this right: A growing wave of delistings is 11 for the first half of this year compared with 21 for all of last year?

Posted by Eddy at 10:08 AM | Permalink

The government just revised second-quarter GDP to 3.3% from the original 1.9%. That's a pretty hefty increase.

Record exports and the temporary stimulus from the tax rebates prevented the economy from stalling as housing slumped and companies cut expenditures. Consumer spending is now waning and slower growth abroad dims the outlook for foreign sales, signaling last quarter will be the year's highpoint.

"Outside of trade, the economy is considerably weaker," said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. "When you look at the spending, it looks terrible for the second half of the year."

I'm not too interested in the debate of, "are we or are we not in a recession." Consider, however, a few facts.

Imports have now declined for three straight quarters, and four of the last five.

Fixed investment has declined for four straight quarters.

Residential investment has fallen for 10 straight quarters.

Posted by Eddy at 9:30 AM | Permalink

The FDIC is designed to protect investors' deposits up to $100,000. The FDIC's fund currently has $45.2 billion which insures about $4.5 trillion.

Sooo...who protects the FDIC? If you said "the taxpayer," congratulations, you can move to the head of the class.

Federal Deposit Insurance Corp. Chairman Sheila Bair said Tuesday her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.

Ms. Bair said the borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank. The borrowed money would be repaid once the assets of that failed bank are sold.

The last time the FDIC borrowed funds from Treasury came at the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered. That the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis.

"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses, but just for short-term liquidity purposes," Ms. Bair said in an interview. Ms. Bair said such a scenario was unlikely in the "near term."

She said she did not expect the FDIC to take the more dramatic step of tapping a separate $30 billion credit line with Treasury, which has never been used.

The FDIC said Tuesday its "problem" list of banks at risk of failure had grown to 117 at the end of June, compared with 90 at the end of March.

The FDIC's deposit insurance fund reimburses depositors who lost money in a bank failure, typically up to $100,000. The fund's balance fell in the second quarter to $45.2 billion. That is just 1.01% of all insured deposits, low by historical standards.

Here's the key table in the FDIC's report.

Posted by Eddy at 8:37 AM | Permalink

Posted by Eddy at 2:49 PM | Permalink

From Bloomberg:

Citigroup Inc., the biggest U.S. bank by assets, banned off-site meetings among investment- banking employees and cut back on color photocopying to reduce expenses as revenue declines.

Just to be clear, according to their most recent 10-Q, Citi has assets of $2.1 trillion.

Posted by Eddy at 1:20 PM | Permalink

Imagine a country whose central bank responded to growing inflation by raising interest rates, strengthening the currency and trying to win investor confidence. This may be shocking to some U.S. investors, but proper monetary policy is still being practiced. Just not here in the United States. I’d give the award for Best Central Banker in the World Today to Mexico’s Guillermo Ortiz.

This is a story that truly ought to be better known. Mr. Ortiz has now been at the helm of the Mexican central bank for over ten years and despite many obstacles (consider that 70% of Mexicans don’t even use banks), he’s emerged as the anti-Greenspan. Mr. Ortiz previously served Finance Minister where he helped clean up the mess surrounding the peso devaluation in 1994.

What impresses me about Oritz, who earned has a Ph.D. from Stanford, is that he’s made it unequivocally clear that the Banco de Mexico (or Banxico) intends to fight inflation until its wins. In the last three months, the bank has raised rates three times. Interest rates now stand at 8.25%, an amazing 625 basis points higher than in the U.S. even though inflation rates are roughly similar.

Make no mistake; the Mexican economy has its share of problems. Growth is slowing and inflation is on the rise. Of course, much of this is understandable considering their raucous, hung-over neighbors to the north—nearly 80% of Mexico’s exports go to the U.S. Still, my money’s on Ortiz. He’s even had the chutzpah to criticize our monetary policy as being “very lax.” Don’t expect to hear anything like that from Senators McCain or Obama.

And what about that hopeless currency, the peso? Well, it’s on a roll this year. The peso is already up 7.5% for the year and earlier this month, it reached a six-year high. In my opinion, the rate gap between the U.S. and Mexico will only grow. The futures market seems certain that the Fed will hold steady for the rest of the year, but I think Banxico could very well raise rates again. Their next meeting is on September 19.

The most recent report for Mexican GDP showed that Q2 growth came in at 2.8%, which isn’t horrible but it was below expectations. The economy isn’t so fragile as to ward off monetary tightening. Retail sales are weak and the stock market is still hurting—the Bolsa is at a seven-month low. Of course, that comes on the heels of an enormous rally so some consolidation would be expected. Consider that shares of EWW, the Mexican ETF, more than quadrupled in five years.

What’s really hurting the economy is that less money is being sent home from workers living abroad. And by abroad, you can probably guess what country I mean. Speaking of which, Ortiz also favors, sit down for this one, stricter immigration controls in the U.S. so Mexico can hold on to its workers. Ortiz said, “I think Mexico needs its people. It would be best to keep its people in Mexico, and it would give incentives for Mexico to create the jobs that are needed.” Increíble!

I’m guessing Ortiz has some sympathy for Hank Paulson. When the Mexican financial system imploded, Ortiz was called into to clean up the mess. Paulson certainly has a tough task, but look at what Ortiz was facing—inflation reached 52% and investment fell by one-fourth. Thing got so bad that the former president basically can’t show his face Mexico and he’s been exiled to Ireland. By contrast, Senor Greenspan now works at Pimco! Thanks to Ortiz, Mexico righted itself and paid back its bailout money to the United States. In fact, Uncle Sam made a half-billion dollar profit.

The thing about finance, public or private, is that it’s really an issue of establishing confidence. If investors think you’re serious, then they’ll invest with you. So far, Ortiz seems to winning the battle of establishing credibility. The yield on Mexico’s long-term benchmark bond recently fell to its lowest level since June 6.

Mexico is a country with many deep rooted economic problems, however, the country has taken many steps in the right direction. For example, the election of the pro-market government of Felipe Calderon (cue Larry Kudlow) is helping to bring long-overdue economic reforms like privatizing the oil industry. Unfortunately, Calderon supports some poorly considered ideas like price controls. Unlike the United States, the Mexican government seems to be serious about fiscal discipline. Their legislature...er, not so much. One issue in particular that Ortiz wants addressed is reducing the government’s fuel subsidies. Good luck with that one, but at least he’s trying. (Incidentally, Ortiz wants to reduce the subsidies even though he thinks that will increase inflation in the near-term.)

The government recently announced that its current account deficit widen to over $2 billion which came as a shock to economists who were expecting a shortfall of $750 million. The trade deficit declined but that was helped by the increase in oil prices. The Mexican economy faces several significant challenges ahead. Most importantly, inflation is simply too high. But I think Ortiz realizes the difficulties and his current policies will help Mexico be well-prepared for the future.

Posted by Eddy at 11:58 AM | Permalink

John Hempton at Bronte Capital has a novel explanation for China’s stratospheric savings rate. He says it’s due to their one-child policy. In any pre-Industrial economy, you’re retirement savings plan was very simple, you had children. Now you can’t so to compensate, you save, save, save. Hempton’s reckons “that the average Chinese person is saving maybe 46 percent of their income”.

This is an issue for us in the West because, as the theory goes, all that savings needs to be invested somewhere. And there’s simply too much money lying around, sooner or later it will go into dumb areas. Today, we’re at the later part. Hempton writes:

My thesis - which will be expanded in future posts is that the brokers have become the intermediaries between this endless demand for products to save in (China, Petrodollars etc) and the endless willingness of the profligate in the West to spend. What they do is - through their trading, their securitisation and through other things they turn the complex financial instruments of the West (mostly but not entirely debt) into vanilla instruments that the Chinese and petrodollars want to buy.

In the Telegraph, Ambrose Evans-Pritchard notes a study by HSBC which claims that China is forcing its banks to buy dollars. In effect, the Chinese Fed is using its banking sector as a way to intervene in the currency markets.

Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.

This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.

"China has used the pretext of reserve requirement hikes to help slow yuan appreciation. We estimate that the PBOC [central bank] intervened by about $49.6bn in June," said Daniel Hui, the bank's Asia strategist.

Beijing has also slashed the amount of foreign debt banks operating in China can hold. The effect is to oblige the banks to become net buyers of dollars, halting the flow of foreign "hot money".

Posted by Eddy at 9:45 AM | Permalink

From Andrew Ross Sorkin:

When Wall Street seeks to save money — “every dollar saved is a dollar made,” is the current catchphrase — it often turns to management consultants to help figure out which divisions should stay and which should go.

So McKinsey & Company published a helpful report last week on how investment banks can cut up to $2 billion in noncompensation costs. (We wouldn’t want to cut compensation, would we?)

“Initiatives to curb expenditures need not be extremely demoralizing to frontline employees,” McKinsey says, trying to find ways to save money without affecting the worker bees. So what does it recommend? Getting rid of the consultants. Yep, you read that correctly.

Interesting. When Google went public, it tried to cut cost by eliminating the investment banks.

Posted by Eddy at 9:13 AM | Permalink

From Saturday's NYT:

Emerging from the current slowdown isn’t just a matter of political will or smart central banking. If the recipe for success requires smooth adjustment into new growth sectors, more savings from disposable income, cleaning up the housing mess, well-functioning energy markets, and more effective financial intermediation — all in the right combinations and in the right sequences — neither the government nor the Federal Reserve can control this process. The Fed can add regulatory and monetary clarity, but there isn’t any magic bullet. Beware of anyone who tells you there is.

The Japanese failed to break out of their recession quickly because they didn’t promptly close down or clean up their problem banks. So far, the Fed and other regulators show no signs of making this mistake; they have been vigilant in resolving crises as they occur. But that’s not enough to guarantee a successful transition. The American economy will be tested for its deftness — and the test will be difficult precisely because there isn’t a single enemy on which to focus.

HAVE you ever tried to undo a bunch of tangled wires or cords? If you don’t pull on the right wires in the right order, the mess becomes worse. If you pull too hard, the whole thing can break. But if your first pulls are good ones, the untangling becomes easier with each move.

That’s like our economy’s situation today. If we expect too much too quickly, we’ll make matters worse. But there is a way out of the mess, and it lies in our hands.

Be careful, and start pulling.

Posted by Eddy at 10:02 AM | Permalink

Felix Salmon regularly skewers Ben Stein's incoherence in each week's New York Times. (For the record, Stein's the one who appears in the NYT, Felix writes on his blog). This week, Felix finds this sentence:

They walk in rows of three, each on a cellphone, not even talking to the people next to her.

You truly do not want to know the context. What caught Felix's eye is that, up until that point, no female had been referenced. The "next to her" just appeared out of nowhere, which leads Felix to conclude that no one at the Times bothers to read his columns.

My take is that there was a previous sentence that had been edited out which had referred to the female, and the following sentence hadn't been fixed. I have to think that the reason for the deletion and the female reference are related, but I could be wrong.

Posted by Eddy at 9:50 AM | Permalink

Paul Kedrosky finds this gem from a French banker in 1907:

The U.S. is a great financial nuisance.

The Panic of 1907 was pretty ugly for investors. Here's what I wrote last year on its 100th anniversary.

Posted by Eddy at 9:46 AM | Permalink

Posted by Eddy at 5:27 PM | Permalink

Here's a cool map looking at gasoline prices around the world. I'm glad I don't live in Turkey ($11.17/gallon). On the other hand, I'm not about to move to Venezuela ($0.12 a gallon) either.

Posted by Eddy at 1:46 PM | Permalink

Doug Kass has an excellent article in the FT defending shorts:

Yet short-sellers have served as financial watchdogs, as many of their warnings have been spot on. The delusional dotcom boom in the late 1990s brought Cassandra-like utterings from the short-selling cabal that proved insightful but were largely ignored. After the subsequent 75 per cent collapse of the Nasdaq, a bull market in corporate fraud emerged and short-sellers such as David Rocker, founder of Rocker Partners, highlighted accounting problems at companies such as Sunbeam, Tyco and Lernout & Hauspie. Kynikos’ Jim Chanos played a role in uncovering the largest fraud in history when his contrary-minded analysis warned of Enron’s accounting shenanigans – which were emulated (but ignored by investors) in the banks’ recent dalliance with structured investment vehicles.

Short sellers have done the work that governments won't and can't. It's absurd for governments to limit their opportunities. .

Posted by Eddy at 11:42 AM | Permalink

In January 1980, the gold market peaked just a few days after the Soviets invaded Afghanistan. Now it looks like the commodities market has again peaked with a Russian incursion, this time into Georgia. In the short-term, it was a strategic victory for Putin, but the long-term might not be so kind. The BBC reports that investors are pulling out of Russia.

Russia has seen foreign reserves decline, a sign that the market is more nervous about investing in the region since the recent conflict in Georgia.

Central Bank figures show reserves were sharply down in the week ending 15 August, marking a fall of $16.4bn (£8.8bn) from $597.5bn a week earlier.

Tensions with the west have also been strained by Russia's objection to the US placing a missile defence in Poland. Georgia has urged the west to invest in the region as it seeks to rebuild.

According to the Financial Times, the latest drop in capital reserves is the largest "since comparable figures began" in 1998, though similar funds were taken out during the currency crisis.

Posted by Eddy at 10:10 AM | Permalink

From Mr. Buffett:

"You always find out who's been swimming naked when the tide goes out. We found out that Wall Street has been kind of a nudist beach," said Buffett, who was called the world's richest person by Forbes magazine.

Posted by Eddy at 9:48 AM | Permalink

Is it me or is everyday either a good day for commodities and commodity stocks and a rotten day for financials and value stocks, or an awful day for commodities and commodity stocks and a good day for financials and value stocks?

Posted by Eddy at 1:04 PM | Permalink

On December 10, 1998, the price for oil reached a low of $10.72 a barrel. That was the lowest price since 1986, and it turns out, it was the beginning of a huge turnaround for the price of crude.

So the low prices were good news, right? Well, not exactly. The New York Times was able to find the downside: Market Place; Commodities' Price Slide Victimizes Economies of Several Nations:

Victimizes?

What worries analysts now is that the recent decline is a signal that prices will not turn around soon.

Matthew J. Sagers, the director of the energy service of Planecon, a consulting group specializing in the former Soviet Union and Eastern Europe, said the consensus on oil prices ''is that we are going to be here for several years.''

Mr. Brainard and other analysts argue that an extended period of lost economic growth and lower governmental revenues stemming from the drop in commodity prices will raise the pressure on many already troubled governments and economies. That could intensify investor concern and weaken currencies. To defend those currencies, central banks would have to raise their interest rates -- which would mean even slower growth.

The impact on Russia, for example, has been stark. The country's $87 billion in 1997 exports included $21.9 billion in oil, $16.4 billion in gas and $14 billion in metals -- about 60 percent of the total.

But the prices of every one of these commodities have fallen sharply and are still declining. The price of platinum, for which Russia is the second major supplier, has dropped almost 12 percent just since July. The price of oil plunged 36 percent -- from around $22 a barrel in October 1997 to around $14 in August -- and has fallen another 23 percent, to $10.72, since November.

At the time, Kofi Annan approved oil sales to Iraq for "humanitarian goods," which apparently including several palaces for Saddam. According to a CNN article from 1998:

But Benon Sevan, executive director of the program, turned down Iraq's request to improve its telecommunications system, saying Baghdad had not answered an October 30 letter requesting information on the subject.

Annan's endorsement also excluded $20 million to upgrade Iraq's banking system, a new item Baghdad had not previously discussed with the United Nations, according to a letter Sevan sent to Iraq's outgoing U.N. ambassador Nizar Hamdoon.

Mr. Sevan unfortunately couldn't be with us today. It turns out that according to the Volcker Report, he was taking cash bribes from Saddam.

Posted by Eddy at 11:39 AM | Permalink

This morning, Medtronic (MDT) posted adjusted fiscal first-quarter earnings of 72 cents a share which topped Wall Street’s forecast of 69 cents a share. For last year’s Q1, the company earned an adjusted 62 cents a share, so that’s an impressive increase. Revenues rose 18.5% to $3.71 billion. Sales for its spinal biz rose 33%. Revenue outside the U.S. grew by 24% and accounted for nearly 40% of all revenue.

This is the latest is a string of good news for the company. A few weeks ago, the board increased the quarterly dividend by 50%. In May, the company said it expects earnings-per-share for 2009 to range between $2.94 and $3.02. After today’s report I wouldn’t be surprised to see that range revised higher. If Q2 earnings come in at 70 cents a share or better, than I think MDT should easily earn $3 this fiscal year.

Here's a look at MDT's sales and earnings for the past several quarters:

Quarter...........EPS.............Sales
Jul-01............$0.28...........$1,455.70
Oct-01...........$0.29...........$1,571.00
Jan-02...........$0.30...........$1,592.00
Apr-02...........$0.34...........$1,792.00
Jul-02............$0.32...........$1,713.90
Oct-02...........$0.34...........$1,891.00
Jan-03...........$0.35...........$1,912.50
Apr-03...........$0.40...........$2,148.00
Jul-03............$0.37...........$2,064.20
Oct-03...........$0.39...........$2,163.80
Jan-04...........$0.40...........$2,193.80
Apr-04...........$0.48...........$2,665.40
Jul-04............$0.43...........$2,346.10
Oct-04...........$0.44...........$2,399.80
Jan-05...........$0.46...........$2,530.70
Apr-05...........$0.53...........$2,778.00
Jul-05............$0.50...........$2,690.40
Oct-05...........$0.54...........$2,765.40
Jan-06...........$0.55...........$2,769.50
Apr-06...........$0.62...........$3,066.70
Jul-06............$0.55...........$2,897.00
Oct-06...........$0.59...........$3,075.00
Jan-07...........$0.61...........$3,048.00
Apr-07...........$0.66...........$3,280.00
Jul-07............$0.62...........$3.127.00
Oct-07...........$0.58...........$3,124.00
Jan-08...........$0.63...........$3,405.00
Apr-08...........$0.78...........$3,860.00
Jul-08............$0.72...........$3.706.00

Posted by Eddy at 9:54 AM | Permalink