Saturday August 23, 3:38 pm ET By Jeannine Aversa, AP Economics Writer
Fed conference speakers say US central bank too responsive to Wall Street on bailout issues
JACKSON, Wyo. (AP) -- Do Washington policymakers listen too much to Wall Street? A possible bailout of Fannie Mae and Freddie Mac, on the heels of similar action involving investment firm Bear Stearns, seems to send a loud signal to financial companies that the government will clean up their messes.
That's the feeling of some analysts and academics here Saturday, the final day of a high-profile economics conference. The Federal Reserve's handling of the worst financial crisis to hit the country in decades spurred much debate.
"The Fed listens to Wall Street," said Willem Buiter, professor of European political economy at the London School of Economics and Political Science. "Throughout the 12 months of the crisis, it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole," he wrote in a paper presented to the conference.
Critics like Buiter worry that the Fed's unprecedented actions -- including financial backing for JPMorgan Chase & Co.'s takeover of Bear Stearns Cos. -- are putting taxpayers on the hook for billions of dollars of potential losses. They also say it encourages "moral hazard," that is, allowing financial companies to gamble more recklessly in the future.
Fed Chairman Ben Bernanke, who spoke to the conference on Friday, defended the Fed's actions, saying they were "necessary and justified" to avert a meltdown of the entire financial system, which would have devastated the U.S. economy.
The important thing many people don't seem to understand is that the Fed is not a part of the government. The Federal Reserve is made up of the world's largest banks, so is it any surprise that they come running to Wall Street and the financial industry? When you see what the Fed is made up of, it...
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WASHINGTON, Aug 20 (Reuters) - U.S. consumers should brace for the biggest increase in food prices in nearly 20 years in 2008 and even more pain next year due to surging meat and produce prices, the Agriculture Department said on Wednesday.
Food prices are forecast to rise by 5 percent to 6 percent this year, making it the largest annual increase since 1990. Just last month, USDA forecast food prices would climb between 4.5 and 5.5 percent in 2008.
"It's a little bit of a surprise how strong some of the numbers were in July," USDA economist Ephraim Leibtag, who prepared the forecast, said in an interview.
"We've been waiting for some moderation, but especially with some of the meat prices and how much has come through relatively recently (at the retail level) leads me to believe the overall number may be a little bit higher for the year," he added.
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Prices are expected to rise by 4 percent to 5 percent in 2009, lead by red meat and poultry. The forecast, if correct, would be the third straight year where food prices have surged at least 4 percent.
Short-term, the biggest factor contributing to higher food prices is most likely the federal corn E85 subsidy. This isn't a whopping realization as its been discussed often over the past year, but it's important to follow and understand what drives up prices both in the short-term and long-term. Globally corn is a vital food and the U.S. is the leading producer and exporter of the grain, so it doesn't take too much common sense to understand that when the U.S. starts throwing a large portion of that corn to ethanol it's going to drive up prices. E85 is a whole other topic that I've gotten into before so I won't go into it too much, but this is the basic overview. Essentially, the government feels it knows which energy sources are the best and most "environmentally friendly" when in fact E85 has been a...
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NEW YORK (Reuters) - Investors dumped shares of Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.
A government move to recapitalize the two companies by injecting funds could wipe out existing holders of the largest U.S. home funding companies' common stock, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.
Shares of Fannie Mae sank more than 22 percent to a 19-year low on Monday, closing at $6.15, while Freddie's shares plunged 25 percent to $4.39. Some of their bonds sharply underperformed Treasuries. A $4 billion sale of new Freddie Mac debt drew weak bids compared with similar issues last week.
A spokeswoman for the U.S. Treasury said the department has no plans to use its authority to backstop the two funding agencies. That authority was greatly increased by a rescue plan approved at the end of July.
"The Barron's article overstated Freddie Mac's financial situation," Sharon McHale, a Freddie Mac spokeswoman, told Reuters. "We continue to be adequately capitalized."
My feeling is that in the long run Freddie and Fannie will either have to be nationalized or fail in the old school style of capitalism. This current strategy of blindly supporting the companies with an unlimited line of credit is downright foolish and is not at all sustainable. Given the trend of current events, if I were a betting man I would say that there's a very likely chance that Freddie and Fannie will become nationalized businesses. Clearly the government won't let them fail, but today's bailout strategy is only encouraging poor decisions rather than punishing them. There's only so much the Fed and Treasury can do without getting more heat than they already are, so in all likelihood I would expect the government to make it official and nationalize the businesses. Don't stop at watered down socialism, go for...
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The common argument against lifting federal restrictions of oil drilling in ANWR is that it would be years before oil was produced and it wouldn't provide any immediate relief. The way I see it, the exact same thing could be said with the ridiculous current and proposed subsidies for "green energy" or a windfall profits tax on "big oil". Of course the impact won't be immediate, it would be silly to expect a sudden increase in supply. But, the current price and price movements of oil is largely from speculation which is greatly fueled from the fact that we buy the majority of our oil from volatile, state-owned companies around the world. There is actually a good amount of oil in ANWR and the technology today is much better than it was ten years ago when people made the same argument that it wasn't worth drilling because the oil wouldn't be flowing for another ten years. It would take several years for oil to start pumping and I believe volatility would be greatly reduced because of it. Opening up ANWR would not solve all our problems, I'm not claiming that. Eventually, Americans will need to smarten up and lift the federal restrictions on nuclear, coal, and the land in the Midwest that's full of shale oil. Eventually people will realize that the Federal Reserve's idea that you can create wealth out of a printing press does contribute to higher energy prices through inflation.
Even so, opening up ANWR is a step in the right direction. When the state governor and the majority of Alaskans want it opened, it makes absolutely no sense for Congress to continue its restriction. At the very least, let the states decide which energy sources to produce and use. Continuing with an energy policy of "only what the federal government likes" is foolhardy, dangerous, and makes absolutely no sense. Like I said, ANWR is a step in the right direction. Not a long-term solution, but in the short and mid-term, it would lessen volatility, lower U.S. oil demand from unstable and anti-U.S. countries, and create a...
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My feeling is that Starbucks did lose its way which is why Howard Schultz came back on board as CEO. Over the past several years the company has focused too much on new store expansion while pretty much ignoring the store atmosphere which is really what made the company so popular in the first place. I am still invested in Starbucks even though it has performed very poorly since I first bought it a year or two ago. With Schultz back in charge I feel much more comfortable with the company's ability to work through the store closings and once again bring the focus to the atmosphere and service. The transition period of these store closings and a revamping of current stores will not be easy or cheap, but I feel that in the long run it is absolutely the right move and I am confident that Schultz knows how to make it work. There's no one who understands the company more or what got the company to where it is today.
I'm not expecting much upside movement in the stock price over the next 1-2 years, so I'm certainly not jumping in at this price. I'm waiting to see how the closings go and get a better idea of what the long-term picture looks like. Financially it will most likely be a painful process in the short-term, but if management can stay focused I think Starbucks will come out of it a stronger business. Starbucks was a great business that screwed up and lost touch with its "thing". Over the next few years Starbucks will either prove that it is a great business and work through these troubles, or that the concept just isn't workable anymore.
The thing to realize is that Starbucks is still producing very strong cash flow. So while earnings growth will certainly be slowed and possibly negative in the near future, the key items to watch are cash flow production and the balance sheet. So far, the balance sheet has stayed steady and cash flow production is quite strong. As long as Starbucks can produce...
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Aug. 11 (Bloomberg) -- The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.
The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the Federal Deposit Insurance Corp.'s fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for insuring deposits will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision is due by the fourth quarter.
``It's going to be a bloody, expensive mess for the banking industry,'' said Bert Ely, president of Ely & Co. Inc., a bank consulting firm based in Alexandria, Virginia. ``Healthy banks are paying for the mistakes made by failed banks.''
The pace of bank closings is accelerating as financial firms have reported almost $495 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31.
This is not a cheap thing going on with these banks. Playing with a system and allowing the federal government to just step in may very well lessen the pain in the short-term, but few are looking at the long-term picture and whether or not the system itself is flawed. It has gotten to the point where a $300 billion homeowner bailout bill is passed almost without a second thought. Seriously, $300 billion? Fannie Mae and Freddie Mac received an unlimited line of credit to the Treasury. We are constantly assured by Paulson and Bernanke that the company's are in fine shape and its simply a precaution. In their most recent quarterly reports both companies lost a huge amount more than expected. In the end, who is...
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Since we're in earnings season I thought I would expand a bit on the topic of watching for opportunities as companies report their quarterly results. I've talked quite often about looking for opportunities with stocks that have been hammered even after a good report. Today I thought it'd be a half-decent idea to discuss the situation of when a stock you're watching shoots up after releasing earnings. This situation is pretty common and can make life very frustrating for bargain hunters or people who just want to buy in at a good level.
For me, Dawson Geophysical is a great, recent example. The stock was trading at levels it hadn't seen (from a valuation standpoint) for years, the company was doing great, but of course I did not have the cash in my account to jump forward with opening a position. For someone like me who has an unpredictable flow of cash to use for investing, it makes the situation all the more frustrating. Dawson reported its earnings just a little more than a week ago. As you could probably guess from the context of this example, it was an exceptionally good report that beat estimates and gave Mr. Market a good amount of more confidence in the company. The next day the stock rocketed from the low $50s to more than $60 per share. After kicking myself for awhile, I decided to take another look at the valuation. To my surprise, the valuation remained quite attractive historically. Even though the stock had shot up, the valuation had not significantly changed. So despite the higher share price, Dawson remains high on my watch list.
A very recent example is Hansen (not again...). Yesterday the company released a solid earnings report and today the stock was up 7%. I've been buying shares in Hansen since 2006 so I can't exactly complain about the rise in share price, but this is another similar situation to Dawson. Hansen's P/E sits at approximately 13.5, still well below the competition and the industry average despite the company's stronger growth, bottom line margins, and balance sheet....
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** Gross sales up 15.5% to $324.1 million from $280.6 million in 2Q 2007 ** Net sales up 15.3% to $282.2 million from $244.8 million in 2Q 2007 ** Monster and Java Monster sales up 22.3% from 2Q 2007 ** Case sales up to 28.72 million from 26.95 million in 2Q 2007 ** International sales up to $19.5 million ($1.9 million in the U.K.) from $13.4 million in 2Q 2007 ** Gross profit margin 51.8% from 52.4% in 2Q 2007 ** Cost of sales $136.03 million from $116.51 million in 2Q 2007 ** Operating income margin 27.7% from 25.1% in 2Q 2007
** Net income up 31.1% to $50.2 million ($0.51 per share) from $38.3 million ($0.39 per share) in 2Q 2007 ** Profit margin 17.8% from 15.7% in 2Q 2007 ** Company purchased 1.7 million shares in quarter at average price of $29.46 per share (total share count numbers not provided in press release)
** Cash and short-term investments $205.02 million Press Release
Analysts were on average expecting an EPS of $0.52 with sales of $314.08 million. Hansen narrowly missed estimates, but this was far from a disappointing quarter. Considering how much the market has punished Hansen on speculation and fear only, this was a tremendous quarter. The profit margin increased yet again showing that this is a much stronger business than people have been crediting management for. The Monster brand has a very loyal following and the brand's strong performance this quarter only reiterates that. Monster is quickly gaining market share and management has been able to raise prices to offset higher costs. The Monster line is becoming very diversified in an intelligent way and I believe it will serve as all the more force to take over Red Bull's number one position over the energy drink market. The performance of Monster in this environment certainly makes me feel even more confident that it is not a fad as many have worried.
It's good to see that management bought back a good amount of shares over the past quarter, it would...
U.S. mortgage market giant Freddie Mac's chief executive dismissed internal warnings that could have protected the company from some of the financial problems now engulfing it, the New York Times said, citing more than two dozen current and former high-ranking executives and others.
In 2004, Chief Executive Richard Syron received a memo from Freddie Mac's chief risk officer warning him that the firm was financing questionable loans that threatened its financial health, the paper said.
Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Syron heightened those perils by ignoring repeated recommendations, the NY Times said.
In an interview with the paper, Freddie Mac's former chief risk officer, David Andrukonis, recalled telling Syron in mid-2004 that the company was buying bad loans that would likely pose an enormous financial and reputational risk to the company and the country.
Syron received a memo stating that the firm's underwriting standards were becoming shoddier and that the company was becoming exposed to losses, the paper said, citing Andrukonis and two others familiar with the document.
But Syron refused to consider possibilities for reducing Freddie Mac's risks, the paper cited Andrukonis as saying.
"He said we couldn't afford to say no to anyone," the paper quoted Andrukonis as saying. Over the next three years, Freddie Mac continued buying riskier loans, the paper said.
You gotta love how this story continues to build up. The thing that amazes me is that few people are catching on to the correlation between low interest rates and the huge malinvestment that has occurred over the past several years. Look at the chart on this page and compare it to the dates mentioned in the above article:
The subprime mortgage market starting heating up pretty much as soon as Alan Greenspan and the Fed lowered interest rates to 1% in an effort to stall a recession. When you factor in inflation (even the CPI as reported by the government), that is essentially giving away free money. If you go out onto the...
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One of the basic functions of a central bank is to act as the 'lender of last resort'. This facility is used to keep banks liquid during a period of distress.
For example, if a bank is experiencing a run on deposits, it will borrow from the central bank instead of trying to liquidate some of its assets to raise the cash it needs to meet its obligations. In other words, the central bank offers a 'helping hand' by providing liquidity to the bank in need.
The following chart is from the Economic Research Department of the St. Louis Federal Reserve Bank. Here is the link: http://research.stlouisfed.org/fred2/series/BORROW. This long-term chart illustrates the amount of money banks have borrowed from the Federal Reserve from 1910 to the present.
Take a look at the chart included in the article. Basically, banks have become far more dependent on the Federal Reserve in the past couple years than ever before. The thing to worry about is where this money comes from: out of thin air through a printing press, as well as taxpayers. A central bank put together with a fiat monetary policy is flat out dangerous yet very few people today even know how the Federal Reserve works and what type of monetary system we have today. Why have people given every ounce of trust to an unaudited organization with the tremendous power over money, credit, and interest rates? I don't think for a second that people truly understand how this system works.
All sorts of wacky excuses have been made up for what inflation is and what causes it. The idea that increased economic production, or too much production as the case may be, is bad for the economy is beyond ridiculous. It's the creation of the money, the dilution and debasement of the dollar, that is harmful to the economy. Increased production naturally would drive prices down, not up. However, if people really understood this basic lesson of free market economics, those at the Fed would have a very difficult time explaining why they are...
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Tuesday July 29, 3:11 pm ET By Christopher S. Rugaber, AP Business Writer
Appeals court overturns ruling allowing Whole Foods to buy Wild Oats, but doesn't undo deal
WASHINGTON (AP) -- Whole Foods' long-running effort to acquire its rival organic supermarket chain Wild Oats isn't completely out of the legal woods yet.
A three-judge federal appeals court panel on Tuesday overturned a lower court ruling from last year that allowed Whole Foods Market Inc. to acquire Boulder, Colo.-based Wild Oats Markets Inc.
The 2-1 ruling sends the case back to the lower court for further consideration, but doesn't halt Austin, Texas-based Whole Foods' integration of the Wild Oats chain or require that the deal be undone.
However, if the district court ultimately rules in favor of the Federal Trade Commission, which sought last year to block the deal, it could disrupt Whole Foods' efforts to combine the companies.
Antitrust laws at work...
I honestly don't have any idea what the motivation behind this is, but this is a ridiculous, foolish, unbelievable move. Whole Foods and Wild Oats together is far from a monopoly. Both companies have sizable market share, but the competition is increasing in larger stores as well as in independent local grocery stores. Heck, buying organic food at Wal-Mart isn't too uncommon these days. Honestly I don't know how Whole Foods and Wild Oats could "hobble competition."
What I find especially hilarious is that the FTC continually goes after Whole Foods while meanwhile a massive bailout of Fannie Mae and Freddie Mac is underway. Henry Paulson and Ben Bernanke have all but admitted that Fannie and Freddie are monopolies. And why don't we look at the Federal Reserve while we're at. The Fed controls money, credit, and interest rates and is made up of the world's largest banks. Hmmm... could there be a conflict of interest there when deciding interest rates? Maybe disrupt the markets a bit? This is pick and choose interventionism at its best. For some reason the FTC will not accept that Whole Foods and Wild Oats together are...
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Today Buffalo Wild Wings reported its 2Q 2008 results.
** Sales up 28.8% to $97.87 million from $76 million in 2Q 2007 ** Company-owned restaurants sales up 29.5% to $87.5 million ** Franchise royalties and fees up 22.9% to $10.41 million from $8.46 million in 2Q 2007 ** Company-owned SSS up 8.3%, franchise-operated SSS up 4.5% ** Cost of sales $89.73 million from $70.97 million in 2Q 2007
** Net income up 46% to $5.6 million ($0.31 per share) from $3.8 million ($0.22 per share) in 2Q 2007 ** Profit margin 5.74% from 5.02% in 2Q 2007 ** Diluted share count 17,906,000
** $73.97 million in cash ** No debt
** Cash flow from operating activities $14.63 million from $6.34 million in 2Q 2007 ** Cash flow from investing activities -$21.62 million from -$14.38 million in 2Q 2007 ** Cash flow from financing activities $0.48 million from $0.55 million in 2Q 2007
** Average company-owned restaurant weekly sales up 10.7% to $40,572 from $36,655 in 2Q 2007; average franchise-operated restaurant weekly sales up 5.4% to $46,390 from $43,998 in 2Q 2007 ** 10 new restaurants in quarter (4 company-owned, 6 franchise-operated) ** 515 restaurants in operation (169 company-owned, 346 franchise-operated) Press Release
Analysts were on average expecting an EPS of $0.27 on sales of $94.62 million. Buffalo Wild Wings managed to beat even the highest analyst estimates ($0.30 EPS, $95.67 million in sales). I must admit that this is the last thing I expected from the company this quarter. The doom and gloom surrounding restaurants added in with the shaky economic environment will do its part to weigh down on an investor's confidence in a business. But B-Dubs managed to whip up a fantastic quarter. And I mean fantastic. In terms of same-store sales, this was the company's strongest 2Q since 2004. Let me again say that given the environment today this is all the more impressive.
There's nothing I love to see more than improving margins and strong cash flow production. Management has done a very good job controlling costs and improving efficiency which should make the summer...
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