Stocks and Sectors

David Merkel submits:

Part I

One of the things you learn as a fundamental investor is that the quality of accounting derived from accrual entries is always lower than that for cash entries. There is an implicit assumption behind every accrual entry that someone will make good in the future to pay cash, whether the amount is fixed or estimated.

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Tom Armistead submits:

General Electric (GE) was for many years an iconic company, considered good as gold in the glory days when Jack Welch was at the helm. The company’s strength was seriously questioned during the meltdown in early 2009, and the last time I looked into buying it, shares were trading at 6.66, on 3/6/09. I didn’t buy any. It has since recovered to close Friday at 16.35. At the current price, GE represents a chance to follow the smart money into financials, with substantial gains if the company can regain its former performance and stature.

Buffett and GE – the smart money in this case would be Warren Buffett. Here is an excerpt from the 8-K, from October 2008:

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Richard Suttmeier submits:

US Treasuries, yields remain low, more supply next week. Gold is struggling to stay above $1200 with the euro above its 120-month simple moving average at 1.206. Crude oil is inching up towards annual pivot at $77.05. For the Dow support is below 10,000 with my annual pivot at 10,379. Bank Failure Friday now totals 78 closed banks year to date.

US Treasury Yields have declined since the end of March with the 10-Year versus 2-Year spread flatter by 33 basis points. As this happened the 30-Year fixed rate mortgage has widened 38 basis points over the 10-Year yield to 158 over. This widening has thus occurred since the Federal Reserve stopped buying mortgage-backed securities. What’s misleading is that the mortgage rate is down from 4.99 to 4.78, while the 10-Year yield is down from 3.88 to 3.29. With the yield at 3.29 the 30-Year fixed rate mortgage should be 4.39 given my “Mortgage Mulligan” program. Next week the US Treasury auctions $28 billion 3-Year notes on Tuesday, $24 billion 10-Year notes on Wednesday and $16 billion 30-Year bonds on Thursday June 10th. For the 10-Year my quarterly support is 3.467 with this week’s resistance at 3.192.

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Karl Denninger submits:

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Variant Perceptions submits:

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Bruce Krasting submits:

The following graph is derived from data in Fannie Mae’s (FNM) most recent monthly report. It compares the default rate experienced by Fannie on its book of conforming loans to the default rate on “enhanced” loans. The enhanced default rate is 4Xs higher than the regular default rate. Enhanced loans have performed very poorly over time.

Click to enlarge all images

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Wall Street Cheat Sheet submits:

The Federal Reserve Bank of New York is out with a report which shows the credit ratings agencies did in fact rubber stamp “shitty” mortgage backed securities (MBS). This report is going to hurt firms like Moody’s (NYSE: MCO) which are already under investigation by the Securities and Exchange Commission. S&P (NYSE: MHP) and Fitch will be shaking too.

If you’re not interested in academic reading on this nice holiday weekend, here is your Cheat Sheet to the NY Feds findings:

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The Prudent Investor submits:

GRAPH: European banks have leveraged themselves to the hilt in parallel with the long-term trend of decreasing interest rates. Note that the process gained speed in 2002 when the ECB shifted into easy money mode like the Federal Reserve. Note that corporate leverage ex financials stayed flat. Chart courtesy Goldman Sachs (click to enlarge)

As I am still flat-bedded with a gastro-intestinal dysfunction I ask you to draw your own conclusions abuot the survival chances of the European banking sector when it will inevitably run into tighter money later this year. The dropping Euro already adds to consumer prices with gasoline prices reaching levels last seen in summer 2008 and Austrian TV announced last week that milk products will rise by 20% to 30% in June.

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Mark J. Perry submits:

The United States is one of the only countries in the world with 30-year fixed rates for mortgages, and Arnold Kling suggests that this is "an artifact of government intervention, and that without it we would have a simpler, safer mortgage finance system." For example, Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. That type of five-year mortgage is much more typical around the world than the U.S. system of fixed-rates for 30 years.

The reason the 30-year fixed-rate mortgage has to be a creation of government intervention, and not the market, is that it is a one-sided loan arrangement that bestows huge benefits on the borrower, but with almost no compensating benefits for the lender/bank/thrift, i.e. it’s "pro-borrower and anti-lender."

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Fred Wilson submits:

The House has passed a bill this past week that would change the taxation of carried interest from capital gains treatment to ordinary income treatment. The Senate has not weighed in on the debate but it is expected to do so soon. The New York Times has a story about it in Saturday’s business section. I’ve written about this issue in the past, roughly three years ago when it first surfaced as an issue. I am in favor of taxing carried interest as ordinary income and I’d like to explain why I think it is good policy.

I agree with Victor Fleischer’s basic premise that carried interest is a fee for managing other people’s money. It is a fee based on performance, but it is a fee nonetheless. It is not fair or equitable to other recipients of fee income to give a special tax break to certain kinds of fees and not to others.

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