The Tasgall Group

For this week’s discussion, I bring you two long term charts… (more…)

From Bloomberg:

Goldman, Wall Street’s most profitable firm, paid employees an average of $521,000 each last year. The firm earned more than either of its biggest rivals, Merrill Lynch & Co. or Morgan Stanley, with half as many employees. Bonuses are typically paid out at the start of the year and vary from about $50,000 for junior analysts to $5 million or more for investment bankers and star traders.

Damn there’s a lot of money sloshing around out there…

Back in a previous post, I linked to a web page that will calculate the odds of a recession based on research by the Federal Reserve.

The inputs for the calculation are the yields for the 10 year bond, 3 month bond, and the Fed Overnight rate.? Unfortunately I’m too lazy to want to go plug those things in regularly, so I threw together a little script that would automatically download the rates and do the calculation for me.? I’ve created a new page on this blog that contains the script:? Recession Calculator.? I have also added the page to my Daily News Briefing.

It’s worth noting that this model does underestimate the real odds of a recession.? Also, all three rates are inverted right now.

Back on July 26 I wrote a quick note about Scottish Re (SCT) emphasizing the amount of cash they held relative to the market cap. Apparently the long downtrend was prescient about the prospects of the company at large. On July 31the stock price went into free-fall when they announced revisions to earnings and the CEO resigned.

The stock quickly dropped from $15 to a low of $3.50. Wow. After about two weeks of recovery it seems to have stabilized in the $6 to $8 range. In my previous post I said “wait for an uptrend” and that seems to have been the right approach — simply buying because of fundamentals would have been the equivalent to trying to catch a falling knife.

It’s also interesting to me to look at the technical indicators on the SCT chart. Having RSI below 30 is typically a sign of being over-sold, where SCT had an RSI below 30 for almost 3 months!

After all the carnage the stock was up 15% on Friday on rumors of a buyout. I don’t think Scottish is an Enron or a WorldCom… it is still a strong company and worth watching for a trend change (assuming they’re not bought outright). I might consider it again if it spends some time consolidating at current prices then breaks out above $8.

On the LTCM disaster:

I don’t yet know the balance between whether this was a random event or whether this was negligence on theirs and their creditors’ parts. If a random bolt of lightning hits you when you’re standing in the middle of the field, that feels like a random event. But if your business is to stand in random fields during lightning storms, then you should anticipate, perhaps a little more robustly, the risks you’re taking on.

– Michael Covel (quoting someone else)

Many, many people are talking about the Fed Funds Rate, but I have a feeling most don’t even know that the rate is not set by Bernanke or the FOMC… they set a “target” rate for the Fed’s open market activities.

You can see here that the number in practice does deviate from the target slightly on a day-to-day basis. Even though the target rate is 5.25% there are several days where the average rate was 5.31% or even 5.17%.

There’s nothing sinister or conspiratorial here, it’s just the fact that the Fed is in less control than everyone thinks. They are subject to some variance just like the rest of the markets…

To quote NowAndFutures.com: “The Federal Reserve Bank is a private company, authorized in 1913 by a Congressional Act called the Federal Reserve Act of 1913. In a very real sense, it outsourced the control of U.S. money and banking to bankers themselves.”

John Hussman has a good article on jokes and how investors are following the wrong story line. He argues that “stagflation” is now present in the economy and it’s going to take a while for everyone to realize it.

Hussman’s analysis is insightful… when the consensus changes (like he’s arguing it will) that changes the way the markets behave, react to news, etc.

If you don’t have too much too look at and think about yet, add the Baltic Dry Index to your list of things to watch. The index is a representation of dry freight rates for ocean going shipments of things like coal, grain, or cement.

The BDI is good to watch because it acts as a leading indicator of economic activity. It can’t be manipulated like official Government statistics, and it isn’t subject to speculative over-buying or selling like the futures markets. We might see “conundrums” regarding the price of bonds or their rates, but it would be very difficult to misunderstand a change in the price of bulk shipping.

Right now you can look at the index and see that it is still climbing since mid-2005. That’s either economic growth or inflation… or both.

They also have the individual Capesize, Supramax, and Panamax rates which are the ingredients of the BDI shipping rates. For example, Panamax rates would be the shipping rates for the largest ships that can still fit through the Panama Canal.

There are good articles on the BDI here, here, and here.

In a fairly odd turn of corporate governance, Horizon Lines (HRZ) has declared its first ever dividend and is also issuing new shares — both announced within two weeks of each other. The news of the new shares has pushed the price down 3.3% today and 11% from its recent high.

Now, if you know you’re going to raise cash by issuing new shares (a 15% dilution, no less!), why would you bother declaring a dividend at all? The point of a dividend is to return cash to shareholders… There is a catch-22 in there somewhere…

HRZ has a nice position as a mid-cap in the transportation sector. It has a strong balance sheet and operates as a Jones Act shipper which basically limits their competition as a shipper to Alaska, Hawaii, Guam and Puerto Rico.

Chicken producers got slammed last year in the wake of the Avian Bird Flu Health-Crisis. The sales for Sanderson Farms and Tyson Foods all dipped a bit, but it looks like demand could be picking back up as people start going back to chicken.

I like Gold Kist as a smaller player with strong fundamentals and a decent technical position. It looks like a bottom was put in back in April, and there was buying strength even as the broad market turned down in May.

You can see what other companies produce chicken, many are diversified into other food production as well (like Hormel).