Facebook trading at $19.45

By late afternoon, Facebook shares were off by 3.5%. [...] Credit Suisse cut its price target on the stock to $24 from $34, keeping its rating at neutral.

So, let me see if I get this straight...

Yesterday, Facebook was trading at $20.23 and CS's price target was $34 (i.e., they expected 68% appreciation).

Today, Facebook is trading at $19.45 (3% lower) and CS's price target is $24 (i.e., they expect 23% appreciation).

There are so many logical fallacies contained within those two sentences that I don't even know where to start.  Somebody pleaese remind me how these clowns have jobs, let alone the high-paid influential jobs they have.

Facebook trading at $34

Down 11%. So much for the IPO, suckers.

Spirit Airlines will not survive

Who can possibly imagine that immediately after the Jerry Meekins PR fiasco is the right time to raise carry-on bag fees to a whopping $100? What is the executive management of Spirit smoking? I believe the firm will not survive to the end of the year.

Kodak files for Chapter 11

http://www.marketwatch.com/story/kodak-files-for-bankruptcy-2012-01-19

Sears Holdings will not survive

Just goes to prove that if you merge two weak companies, you get an even weaker larger company.

* At a time when holiday season sales overall have turned out better than expected, Sears Holdings was an exception. It will close 100 to 120 Sears and Kmart stores after disappointing holiday sales.

* Its stock, having already lost 37% of its value this year, tumbled 20% to $36.61 in early trading.

* Sears plans to take as much as $2.4 billion of charges in the fourth quarter on asset write downs and other items.

* Comparable sales in the eight weeks through December 25 fell 4.4% drop at Kmart and 6% at Sears. In contrast, the National Retail Federation holiday forecast was a 3.8% increase.

* Fourth-quarter EBITDA is now expected to be less than half the year-earlier fourth quarter's.

* Adjusted pre-tax profit is down to about 10% of its five-year peak.

http://www.marketwatch.com/story/sears-holdings-to-shut-up-to-120-stores-2011-12-27

I was at a Sears on December 24 (through no fault of my own). Sears stores suck. No big surprise in any of these numbers.

AMR Bankrupt

American Airlines parent AMR, the only major US airline operator to not file for bankruptcy during the last decade, surrendered to the stark realities of a souring global economy on Tuesday and sought Chapter 11 protection from creditors today.  The filing came as AMR gave in to the burden of the industry's highest labor and operating costs. The company’s shares plunged to 26 cents, down 84%. (MW)

AAPL to plummet tomorrow

Steve Jobs resigns

HP

Hewlett Packard may follow IBM and dump its PC division.  It's also discontinuing its WebOS operation (even though I saw an ad about how awesome WebOS is just earlier this week).  Translation: the $1.2 billion Palm purchase just vanished like a fart in the wind.

Follow-up 8/19:  As of noon today, HP is down 20% today on a generally flat day, as the market absorbs how bad this news really was.

Market News

Borders inches closer to liquidation

Yesterday's bidding deadline passed without offers to keep the second largest US bookstore operator in business.

Netflix, LinkedIn highlight tech losses

Netflix fell 3.74% after Pacific Crest Securities analyst Andy Hargreaves cut his rating to sector perform from outperform. [...] LinkedIn gave up $4.73 a share, or 4.3%, to fall to $105.23 after J.P. Morgan analyst Doug Anmuth cut his rating to neutral from overweight.  I think both of these are still way overpriced and have a long way farther to fall.

29 of 30 DJIA components down

Decline lead by Bank of America which fell  3.6% to $9.64.

Citigroup gives up on its stock price

Citigroup (currently trading at $4.41) on Monday announced a 1-for-10 reverse stock split of its common shares effective after markets close on May 6.  Separately, the banking giant said it plans to reinstate a quarterly dividend of a penny a share in the second quarter.

AT&T to acquire T-Mobile for $39B

AT&T, the #2 US wireless carrier is purchasing T-Mobile USA from Deutsche Telekom for $39B, with $25B in cash and the remainder in AT&T common stock, which will give Deutsche Telekom a roughly 8% stake in AT&T. Regulatory approval is expected to take at least a year due to concerns about market share and price-competition for consumers. If the acquisition is approved, AT&T would have about 130 million wireless subscribers, vaulting it above Verizon Wireless, currently the #1 wireless carrier with a little more than 100 million subscribers. Sprint Nextel Corp., the #3 wireless carrier, was immediately seen as a big loser. The company was said to have been in talks of its own to acquire T-Mobile, and now there are concerns about the company’s status as a weakened player among the carriers with nationwide footprints.

Verizon stock was essentially unaffected by the news.  Sprint Nextel on the other hand is down over 15%.

Borders files for bankruptcy

Borders, the 40-year-old retail chain that helped define the age of the book superstore, filed for bankruptcy today. The company will close some 200 of its 650 stores.

The troubles of Borders are rooted in a series of strategic missteps, executive turnover and a failure to understand the digital revolution — problems in many ways of Borders’ own making. But as those in the volatile industry digested the news that most saw coming, they were acutely aware of the bigger picture: that in a fast-evolving bookselling environment there is slim margin for error.

Southwest to buy Airtran

That was unexpected.  A sign of even more consolidation coming to the industry?  Maybe the industry as a whole can actually become profitable in the long-term?  Is this bad news for consumers?

A Review of Jimmy Stewart is Dead by Laurence Kotlikoff

I loved the author's The Coming Generational Storm, so I was really looking forward to reading this.  I was sadly disappointed.  Perhaps Professor Kotlikoff suffered blunt trauma to his head in the intervening years?  Because I cannot believe that the insightful author of The Coming Generational Storm could produce this nonsense.  This is the kind of ivory tower, pie-in-the-sky, impractical, oversimplified tripe that gives academics a bad name.

Where to start? Perhaps the most important criticism is that the scheme outlined in this book provides no replacement for the fractional reserve system, which generates 97% of the money circulating in our economy.  Individual entities functioning as lenders cannot create money through fractional reserve accounting. Only banks as they exist today can do that.  If only individual entities loan money (which by the way would require them to take time away from whatever specialized work allows them to make money and become experts on lending - another catastrophic failure of Kotlikoff's idea), we could only create 3% of the loans that currently exist. The real economy would have to shrink by 97%!

In light of a failure so abysmal, perhaps it's not necessary to say anything else, but the other flaws in his system while perhaps not as catastrophic do illustrate how little thought he's given this conception.

* Without risk-taking banks can only make a profit through the fees they charge on the pass-through products he proposes. Many of them would be completely unworkable. As the most obvious example: who would PAY to have a bank hold their cash? DUH!

* His idea that people would buy pass-through products that would replicate credit default swaps and life insurance would require everybody to become a PhD quant.  What makes him think this would work any better than the current system?

* Finally, our system failed because of human's intrinsic nature to find and take advantage of the misincentives and flaws that are endemic to any human enterprise. The idea that smart guys won't find the holes in his system and exploit them just like the current parade of criminals did with our existing system is naive to say the least.

In short, the premise of this book is irreparably broken.  The book is not worth the paper it's written on.

SAP to buy Sybase

SAP has agreed to pay $65 a share for Sybase ($5.8 billion in cash) handing the maker of mobile and database software a premium of more than 55%.

United and Continental approve merger

Will be world's largest airline.

Directors at Continental and United airlines have approved a stock-swap deal that would combine them into the world's largest airline.  The deal values Continental at some $3.2 billion.  The Sunday board actions were described by a person with knowledge of the votes, who declined to be identified because the companies plan an announcement on Monday.  The combined airline will be called United, based in United's hometown of Chicago, and run by Continental CEO Jeffery Smisek. United CEO Glenn Tilton will be chairman.

HP to buy Palm

HP and Palm announced that they have entered into a definitive agreement under which HP will purchase Palm at a price of $5.70 per share of Palm common stock in cash for an enterprise value of approximately $1.2 billion. The transaction has been approved by the HP and Palm boards of directors.

Two thoughts:
1) This is a great plan for HP because we all know how well the acquisition strategy worked out for Fiorina.
2) At least it's a good buy at $5.70 a share for a company that IPO'd at $38, moving to a high of $165 and closing at $95 on its opening day.  

China's Geely to Buy Volvo From Ford for $1.8 billion

http://www.foxnews.com/leisure/2010/03/28/chinas-geely-buy-volvo-ford/?test=latestnews

Not again!?

Lehman used Repo 105 for no articulated business purpose except "to reduce balance sheet at the quarter–end." Rather than sell assets at a loss, "[a] Repo 105 increase would help avoid this without negatively impacting our leverage ratios." Lehman’s Global Financial Controller confirmed that "the only purpose or motive for [Repo 105] transactions was reduction in the balance sheet" and that "there was no substance to the transactions."

But the decision not to disclose the effects of those judgments does give rise to colorable claims against the senior officers who oversaw and certified misleading financial statements – Lehman’s CEO Richard S. Fuld, Jr., and its CFOs Christopher O’Meara, Erin M. Callan and Ian T. Lowitt. There are colorable claims against Lehman’s external auditor Ernst & Young for, among other things, its failure to question and challenge improper or inadequate disclosures in those financial statements.

Ernst & Young was advised by Lee on June 12, 2008 that Lehman used $50 billion of Repo 105 transactions to temporarily move assets off balance sheet and quarter end. The next day ‐ on June 13, 2008 ‐ Ernst & Young met with the Lehman Board Audit Committee but did not advise it about Lee’s assertions, despite an express direction from the Committee to advise on all allegations raised by Lee.

http://lehmanreport.jenner.com/

Top 25 Market Cap Companies

1 Exxon Mobil XOM $316B
2 Microsoft MSFT $253B
3 Wal-Mart WMT $204B
4 Apple AAPL $203B
5 Procter & Gamble PG $183B
6 Johnson & Johnson JNJ $176B
7 General Electric GE $175B
8 Bank of America BAC $172B
9 JPMorgan Chase JPM $170B
10 International Business Machines IBM $162B
11 AT&T T $150B
12 Wells Fargo WFC $152B
13 Cisco Systems CSCO $148B
14 Chevron CVX $147B
15 Pfizer PFE $138B
16 Google GOOG $138B
17 Berkshire Hathaway BRK $136B
18 Coca-Cola KO $124B
19 Oracle ORCL $124B
20 Hewlett-Packard HPQ $121B
21 Intel INTC $116B
22 Merck MRK $114B
23 Citigroup C $113B
24 Pepsi PEP $100B
25 Philip Morris PM $94B

Wow! This is HUGE!!

Coca-Cola's (KO 52.75, -2.41, -4.37%) is acquiring all the assets and liabilities of Coca-Cola Enterprises (CCE 25.54, +6.36, +33.16%) North American business (KO currently has a 34% equity ownership in CCE). This reverses a business strategy of keeping bottling separate that has been in place for over a century.

Mathematica Links

Economics

Econometrics

Financial Engineering

Financial Risk Management

Moral Hazard: Reforming the Financial System

http://www.cfawebcasts.org/modules/Catalog/CourseDetails.aspx?ProductGroupID=7252

Why do we buy stuff from China again?

US product safety authorities plan to launch an investigation into the presence of the toxic metal cadmium [a known carcinogen] in children's jewelry imported from China after lab tests showed some pieces were made almost entirely [i.e., as much as 91% in some cases] out of the dangerous substance. (Source: CBC News)

I've said this before, and I'll say it again. There's no such thing as an economic free lunch. If it's cheaper to make in China, it's because they cut corners that we don't. Everybody thinks it can be done because labor in China is cheaper. If the exact same product could be produced in China for less, then every firm would do it ... which would bid up the cost of labor in China (and bid down the cost of labor in the US) to the point where the profit opportunity would disappear. Labor in China and labor in the US don't even need to come close to parity, since there are so many additional expenses associated with manufacturing abroad. It's basic economics.

AAPL overpriced again

Back at year-end 2007, I called a peak in AAPL when it hit $203 a share. It's been quite a roller coaster since then (down to $125 in spring 2008, rebounding to $190 in summer 2008, plunging to $78 early this year with the rest of the market) and is now around a 52 week high of $214. I believe it's peaked again.

Greece

Greece became the first country in the euro zone to see its debt rating cut to below A- as worries mounted over its ability to fix its deteriorating finances, sending Greek shares and government bonds sharply lower and weighing on the euro.

1 in 7 mortgages behind

Job losses caused more Americans to fall behind on their mortgage payments in the third quarter, leading to a record 14.41% of loans with at least one payment past due, the Mortgage Bankers Association's chief economist said on Thursday.

Risk and Time (John Norstad)

A very well written article on the fallacy of time diversification (i.e., the claim often made by financial planners that risk decreases over a longer time horizon). In fact, risk INCREASES. Everyone should read this.

http://homepage.mac.com/j.norstad/finance/risk-and-time.html#fallacy

US in trouble?

For the first time since I made my first 403(b) investment allocation in 1992, I've rebalanced my portfolio with the specific intent of protecting myself against a fall in US assets, rather than just diversifying. One fifth of my 401(k) account is now in TIPS (although even there, I am afraid the US Treasury won't make good on those) and foreign stocks.

Outright corruption at Moody's

http://www.mcclatchydc.com/politics/story/77244.html

Quote:

As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into a financial crisis. A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings. Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. .... "The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997. "This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said. After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.

[Thanks to MPC for the link]

The falling dollar

The Great Courses: Economics

In order to try to make my daily commute a tad more pleasant, I just purchased an Economics course on CD from The Teaching Company. Heard the first lecture on the drive in today; sounds good so far.