Night Reading

by CC June 30, 2011 12:18 am • Commentary



  • 8:30 a.m. ET all times: Weekly jobless claims are out. Economists expect only a slight drop to 422,000. Way, way too high.
  • 9:45 a.m.: The Chicago PMI comes out, which is supposed to be a precursor to the national ISM manufacturing index coming on Friday. Doesn’t look promising.


  • Kansas City Fed President Thomas Hoenig works his jaw.

Earnings: We get reports from:

  • Apollo Group
  • Constellation Brands
  • Darden Restaurants
  • Smith & Wesson


  • Greece’s parliament does some more votin’, this time on implementing the austerity measures they barely passed on Wednesday. Good times.


Great work, window dressers of America, just a little further to go!

We have managed, after three straight days of furious rallying on fumes and vapors, and not just the kind that make Michelle Caruso-Cabrera don the safety goggles, to bring the S&P 500 just one little 1.4% rally away from breaking even for the quarter.

The number to shoot for on Thursday, ladies and gentlemen, is 1325.83 on the S&P. Take that sucker out and your quarterly statements are going to look a lot prettier.


For Greece, the focus will move to implementation, with another vote due on Thursday. Meanwhile, the French plan to roll over Greek debt falls far short of being a Brady-style solution for Greece and has yet to receive the ratings firms’ blessings. Further negotiations with the euro zone and International Monetary Fund aren’t likely to be easy. That might mean a continued twin shortfall on both Greek overhauls and funding.

At the same time, there is a body of evidence that the global economy is slowing. Chinese manufacturing is close to stagnating, the HSBC Purchasing Managers Index shows; even the purring motor of the German economy has shifted down a gear. Southern Europe is crawling along. In many developed countries, fiscal policy is being tightened to repair strained balance sheets. In many emerging economies, interest rates are rising to contain inflation. The Federal Reserve’s second bond-purchase program, known as quantitative easing, is winding down, potentially removing support for risky assets as net Treasury bond supply picks up. The market now expects Fed policy to remain on hold well into 2012. The Bank of England has dropped hints of more quantitative easing.


Whenever you hear a Bailout being discussed, look to see who it is that is actually being bailed out. It is not the Greek people or even the Greek government — rather, it is the creditors of Greece. These are the banks mostly in Europe, primarily in Germany and France, but also includes Japan, China and the US.

Thus, it is no surprise that Greek people are rioting and the banks are rallying. They are the  beneficiaries of the Greek austerity, of the EU’s largesse, of the various rescue.

Capital Gains and Games

NEW YORK (Reuters) – The United States would immediately have its top-notch credit rating slashed to “selective default” if it misses a debt payment on August 4, Standard & Poor’s managing director John Chambers told Reuters.
Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.
“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”

Here’s a milestone Goldman Sachs won’t be celebrating.

Amid growing concern about the firm’s second-quarter earnings and a debt default in Greece, shares of the investment bank are trading at their book value, or roughly $129 a share.

The price represents a tough turnabout for Goldman Sachs.

Since April 2009, the Wall Street firm has commanded a premium to its book value, a crucial financial measure that refers to the liquidation value of a company’s assets if it were forced to sell everything. It has been a point of pride for Goldman that it has traded above this mark, especially since all its big competitors have fallen or stayed below this level since the financial crisis.

“The market no longer believes that Goldman should command a premium,” said a Rochdale Research analyst, Richard X. Bove, who has a sell rating on the stock, in part because it was trading above book value.

To some opportunistic buyers, the current price could mean Goldman is a value play. Some investors look to buy stocks when they trade below book value, a signal the shares could be a bargain.

By Mr. Bove’s estimates, Goldman still has a way to go before it reaches bargain status. For one, Goldman faces uncertainty about its second quarter, ending this week. The firm is heavily dependent on trading revenue and the markets have been a slump for weeks now, which is expected to take a bite out of profits across Wall Street.

“This stock will be a screaming buy when it reaches $100 a share,” he said.


ON MONDAY, news surfaced that a small investment fund, GSV Capital, had purchased $6.6m worth of private shares of Facebook, valuing the popular social network at $70 billion. The shares of GSV Capital, which are publicly traded, shot up 42% on the news, adding $14m to the fund’s market value. That suggests the stock market believes Facebook is worth roughly twice its current private market valuation.

The case of GSV Capital is just one illustration of the enormous pent-up demand in the stock market for social-networking issues, and Facebook is at the top of investors’ wish list. No wonder these companies are beginning to flock to the public markets. The latest in line is online gamemaker Zynga, which is reportedly ready to file for an initial public offering (IPO) as early as this week. Facebook is expected to go public next year.


CANADIAN hedge fund Muddy Waters scored a spectacular success earlier this month after accusing Sino Forest, a Chinese timber company, of doctoring its accounts. Muddy Waters had shorted Sino Forest stock, which is listed on the Toronto Stock Exchange, and made a tidy profit as the price fell. Other hedge funds are keen to repeat the trick. But while Muddy Waters engaged in painstaking research, according to today’s Wall Street Journal, many other funds are hiring Hong-Kong-based firms to “fish” for dodgy Chinese firms.

There is no dictionary definition for a hedge fund, but generally an investor would expect the fund manager to be using his or her expertise and judgment to seek outsize returns. The fishing strategy outlined in the WSJ, on the other hand, seems to involve nothing more than exploiting economies of scale, and taking advantage of the regulatory flexibility afforded hedge funds.

It would be inefficient for an individual investor to fish for a Chinese company worth shorting. Although Sino Forest shows the payoffs can be large, a needle-in-a-haystack fishing exercise has a low probability of success. However a hedge fund, with the combined resources of many investors, and a healthy dose of leverage, may have the resources to pay for research into hundreds of firms. Unlike a mutual fund, the hedge fund also has no limitations (other than its financial resources) on taking short positions. It is in a position to fully exploit the fruits of any research.

There is certainly skill and expertise involved in such a strategy—researchers apparently include a former Interpol corporate crime investigator—but it’s all in the hands of the Hong Kong firm. The hedge funds simply hire this expertise. Does that matter if the strategy reaps returns?