Opinion & Analysis

Archive for 2010

Priceline vs Expedia

In 1 on March 10, 2010 at 3:22 pm

Recapping some of the insights from this writer, let’s take a look at Expedia & Priceline, two travel-booking companies.



  1. Priceline. http://www.google.com/finance?q=priceline earned $3 billion in revenues  in 2009 with expected earnings to grow 17% in 2010. EBITDA is expected to reach nearly $950 million in 2010, up 12% YoY.
  2. Expedia earned $2.3 billion in fees with expected revenues to grow 19% this year with expanding margins.

Accordingly, if one were to value Expedia at EBITDA, then their shares are worth $45, 93% above the current share price. Taking into account that many internet companies trade at less than half that yield, Expedia is still worth 50% above the current share price.

Source

http://seekingalpha.com/article/192388-priceline-is-properly-valued-while-expedia-is-undervalued

China’s Exports Rise 46%

In 1 on March 10, 2010 at 2:45 pm

Seriously, talk about a great headline. A 46% increase in exports, more than 50% of it attributed to Western nations, signals that the markets are starting to turn around.Exports of textiles, steel products, televisions and motorcycles also rose.

Source

http://www.nytimes.com/2010/03/11/business/global/11yuan.html?hp

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Volcker Rule: A half-solution to a non-problem

In 1 on February 10, 2010 at 4:16 pm

The so-called Volcker Rule is a financial reform proposal by Paul Volcker, President Obama’s economic advisor. The “Volcker Rule” would bar bank and financial holding companies from putatively high-risk activities like private equity investing, managing hedge funds, and proprietary trading. As the President noted,

“Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers.”

The implications:

  • If Goldman Sachs & Morgan Stanley thought it would hurt their bottom line, they can easily avoid it. The rule only applies to depositary institutions so the aforementioned companies  can simply return their tiny deposit base & stop accessing the Fed’s discount window.
  • It would reduce liquidity and trading volumes on exchanges
    • It would be impossible to know how much bank trading volume is proprietary versus nonproprietary because it is not identified on arrival at the exchange
    • Morgan Stanley analysts estimated the plan would shave NYSE Euronext’s 2010 earnings by 2%
      • Shave Nasdaq OMX’s earnings 3 percent
  • Private equity firms would benefit from less (if not eliminate) competition from banks
  • Banks might still be allowed to own hedge funds, private-equity funds, and  money-market funds–as long as they are run for clients, with client money. But, as Bear Stearns showed, firms will bail out its internal hedge funds even when it didn’t legally have to

    • A senior banker put it to a NY Times reporter more bluntly: “I can find a way to say that virtually any trade we make is somehow related to serving one of our clients. They can go ahead and impose the rule on Friday, and I can assure you that by Monday, we’ll find a way around it. Nothing will change unless the definition is ironclad.”

The issue at hand is that it is a real solution to a non-problem. Firms that combine elements of commercial banking, broker-dealers & prop trading can pose systemic hazards but this rule focuses on the least problematic issue–commercial banks are simply not significantly involved in private equity or hedge fund-like investing.

Tony James, president of Blackstone, notes:

I think it’s too vague to know, frankly. I don’t think it’s going to in any way make the system more systemically safe. [...] Prop trading, hard to know how that’s defined, I don’t know how you define the role between what’s hedging and what’s really speculative bets. [...] think it’s one of those admirable goals and I think that will be in the details.”

Instead, according to Naked Capitalism, many of the credit bubbleʼs excesses can be traced to the “shadow banking” sector–the intersection between commercial banking & investment banking business models. “Shadow banks” take illiquid credit and interest rate risk (like commercial banks), but fund themselves principally through the wholesale markets (like investment banks). With lower capital requirements & funding advantages, some estimate it compromises of 60% of the US credit system.  This is the real problem:

While it seems like Congress will reject the Volcker reform, it is possible that similar bills will surface this year.

Source:

http://www.nakedcapitalism.com/2010/02/how-the-volcker-rule-misses-the-shadow-banking-system.html

http://online.barrons.com/article/review.html

http://blogs.reuters.com/financial-regulatory-forum/2010/02/09/us-stock-exchange-heads-take-aim-at-volcker-rule/

http://blogs.reuters.com/felix-salmon/2010/02/03/the-volcker-rules-loopholes/

http://dealbook.blogs.nytimes.com/2010/02/02/davos-bankers-seek-united-message-on-volcker-rule/

Mortgage bankers group sells D.C. offices to Bethesda company

In 1 on February 7, 2010 at 8:46 pm

The Mortgage Bankers Association, its membership expert in real estate, sold its $90 million headquarters in downtown Washington on Friday for $41 million.

The industry lobbying group has struggled financially in recent years, as the market collapsed and lending dried up, with members dropping out as they lost their jobs. Its membership fell to 2,500 from 3,000, officials said in 2008

“It’s a little bit of irony that in the middle of the mortgage crisis brought on by the bad lending practices of many members of the Mortgage Bankers Association that they got caught up in the same problem,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group

“Runs on the Country” vs “Runs on the Bank”

In 1 on February 7, 2010 at 8:35 pm

Remember the proverbial run on the bank?

Well, that was the norm before governments decided to backstop entire financial industries  residing within their territory. As a result, the post-Lehman version of “the bank run” will henceforth be referred to as “the country run” and for an example of one in practice, look no further than Greece. The Guardian reports that investors have pulled a stunning $11 to $13.7 billion since the Greek crisis commenced in earnest last November. If true, this is the beginning of the end for the troubled EMU-member country.

The Economist has this preview:

TAX-COLLECTORS and customs officers in Greece have already walked out in protest against planned austerity measures by the government. On Wednesday February 10th it will be the turn of civil servants, doctors and other state workers. A much bigger strike is expected later in the month and past experience suggests that protests could turn nasty. Yet unless Greece gets a grip on its public finances, the government will struggle to finance its loans. Similar anxieties are emerging elsewhere in Europe.

The same applies to  Portugal, Ireland, Greece and Spain  for possible sovereign debt crisis.

Birth-Death Ratio (in Reference to Unemployment Numbers)

In 1 on February 7, 2010 at 8:17 pm

What Does Birth-Death Ratio Mean?
A figure that represents the net number of jobs provided from newly started businesses (births) and business closings (deaths) during a period of time, typically a month in conjunction with government-sponsored jobs reports. Birth-death figures are put out by the Bureau of Labor Statistics (BLS) as part of the monthly employment report; they use a rolling average to determine the monthly total based on historical averages over the past several years.

Investopedia explains Birth-Death Ratio
The birth-death ratio is a major component of labor statistics because new businesses and small businesses create many jobs in the overall economy. It would be impossible to survey every company in the United States each month, sample sizes of about 150,000 are used and broad data is extrapolated from there.

Source

http://www.investopedia.com/terms/b/birth-death-ratio.asp

JPM’s Dimon on China’s Banks

In 1 on February 7, 2010 at 7:43 pm

Jamie Dimon, head of JPMorgan (JPM), on what he thinks about the Chinese banking system:

Like many others, they are struggling to do business in Asia. Considering to buy a stake in a bank in China and asked if it makes sense to do so at current prices. Jamie replied that the concept is ok, but not now, too expensive, adding that so far “in China it is a one way street” with them wanting to get all and letting you get nothing, and that there will be more and better opportunities when China has a downturn.

Also, too difficult to know what you are buying: many of them do not yet have integrated systems, possibly a meaningful amount of political loans, etc. [emphasis added]

 

Presidential First Years: Stock Market Returns

In 1 on January 20, 2010 at 11:56 pm

Based on his first year in office, Barack Obama has been a good friend to the stock market. Since 1897, the 33% return in the DJIA during his first year in office has been better than every other President except FDR, who saw a first year rally of 96%.

While conventional wisdom generally says the market likes Republicans better than Democrats, history suggests otherwise – at least during a President’s first year. Since 1897, the median return of the DJIA during the first year of a Democratic President’s term has been 22.6%. Under Republican Presidents, however, the median return of the DJIA has been a much more modest 0.4%.

50-for-1 Berkshire Hathaway Split

In 1 on January 20, 2010 at 10:46 pm

Berkshire Hathaway Inc.’s planned 50- for-1 stock split will put its shares within reach of investors Warren Buffett once called an “inferior” class.

The proposed split, announced today as part of Berkshire’s takeover of Burlington Northern Santa Fe Corp., would push the price of each Class B share to $66.51from $3,325.35, data compiled by Bloomberg show.

What’s interesting is that, even with the dual share system, Berkshire’s price has effectively prevented many smaller investors from owning shares in the company outright–though it would boost attendance at annual meetings and make Berkshire eligible for more indexes.

Buffett warned 25 years ago that it might also misalign the goals of the company and its investors. Buffett wrote in his 1983 annual report, when the Class A shares traded for about $1,300. “Would a potential one- share purchaser be better off if we split 100-for-1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group.”

Moody’s/REAL Commercial Property Index shows 1% increase

In 1 on January 20, 2010 at 10:41 pm
The latest release of the Moody’s/REAL Commercial Property Index, while showing a 1% increase in prices since October, the first gain in fourteen months, still continues to suggest that the nation’s commercial property markets are experiencing a tremendous downturn with prices declining a whopping 33.5% on a year-over-year basis and a stunning 43% since the peak set in October 2007.

The latest release of the Moody’s/REAL Commercial Property Index, while showing a 1% increase in prices since October, the first gain in fourteen months, still continues to suggest that the nation’s commercial property markets are experiencing a tremendous downturn with prices declining a whopping 33.5% on a year-over-year basis and a stunning 43% since the peak set in October 2007.