The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The national deficit is too great for entitlement programs like Social Security and Medicare to escape unharmed. That means an impact is looming on many Middle Class Americans who may not be expecting it. WSJ’s Neil Hickey reports.

July 12, 2011

Dan Gross lays out the details of the huge, embarrassing, 50% discount to value that that News Corp properties are suffering under the reign of its autocrat: Rupert Murdoch.

“Murdoch’s willingness to skirt rules and play rough has also caused shareholders harm. Last year, it paid $500 million to settle a lawsuit from a rival in the ad supplement business that it accused it of antitrust violation. The missteps in handling the hacking scandal will exact a financial cost — the company shut down what had been a profitable newspaper. But the missteps can also inhibit the ability of other parts of the Murdoch empire to expand in regulated industries. Last week, for example, News Corp. withdrew from a bid to increase its stake in BSkyB, the lucrative satellite television business in the U.K.

As a result, as Tara Lachapelle, Danielle Kucera and Alex Sherman of Bloomberg report, investors now value the company as significantly less than the sum of its parts:

By valuing each of News Corp.’s businesses separately, the New York-based media conglomerate would be worth $62 billion to $79 billion, estimates from Barclays Plc and Gabelli & Co. show, indicating News Corp. trades at an almost 50 percent discount to its units. ‘There’s just sort of this generic Murdoch discount, which encompasses the concern that he will make decisions that are not consistent with other shareholder interests,’ said Michael Morris, an analyst at Davenport & Co. in Richmond, Virginia.

That’s the Murdoch Discount.”

Ouch!

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Source:
News Corp: The Murdoch Discount and the Murdoch Premium
Daniel Gross
Yahoo Contrary Indicator, July 18, 2011
http://finance.yahoo.com/blogs/daniel-gross/news-corp-murdoch-discount-murdoch-premium-200342587.html

Some interesting reading material for your afternoon pleasure:

• Wall Street’s Euthanasia of Industry (Michael Hudson)
• Mastering the Hedge Fund Machine (New Yorker)
• BofA Mortgage Settlements Magnify Capital Strain as $50 Billion Gap Looms (Bloomberg)
• The U.S. Is Not Drowning In Debt (Moneyland) see also Wall Street’s Shocking Debt Denial (The Daily Beast)
• Dearth of Demand Seen Behind Weak Hiring (WSJ)
• Four things Republicans used to believe (Market Watch)
• As ethanol’s ravages grow, phony ‘reform’ emerges (Examiner)
• Murdochs Empire Has Troubles That Money Can’t Dispel (NYT) see also How We Broke the Murdoch Scandal (News Week)
• 3-D Printing: A Game-Changing Technology? (Washington’s Blog)
• Harnessing the Power of Feedback Loops (Wired)

What are you reading?

Insight on the credit situations in Europe and the U.S., with Sean Egan, Egan-Jones Ratings Company and Alison Deans, former Neuberger Berman CIO

Monday, 18 July 2011 8:22 AM ET

I always find these charts instructive in terms of where we are over the longer cycle in terms of valuation relative to economic activity of the US.

The two biggest changes post-1996 has been the increasing US exposure to overseas growth, and rates that started low went to ultra low.
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Market Capitalization as % of GDP

click for larger charts

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Market Cycles Above and Below Trend Line

We’ve been doing a lot of behind the scenes tweaks to FusionIQ, and there are some wicked cool features coming in the fall.

Meanwhile, the redesigned home page is up — its much lighter, cleaner, and easier to read. We are bringing the same critical eye to the redesign of the interior as well. I want this to be insanely easy to use, with as short a learning curve as possible (I’ve been pushing ofr this for a long time, and its finally coming to fruition) .

We also set up a freebies for casual surfers: I really like the free technical analysis and stock screen report we’ve generated — punch in any NYSE/Nasdaq symbol, and you receive a free report on that stock via email. We also set up a free 30 day trial of the system (credit card reqd). Play with the system for 29 days, then cancel — no cost to you.

Surf over and check it out

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Barry Ritholtz, author of Bailout Nation, says Fed Chairman Ben Bernanke is in danger of adopting the worst policies of his predecessor Alan Greenspan.

Mon 07/18/11 06:45 AM EST — Gregg Greenberg

My Sunday WP column, titled Note to investors: It takes longer to bounce back from a credit crisis, led to an excellent question that I did not address:

Barry,

I enjoyed reading this article today. However, I thought some about the statement that credit bubbles do not leave physical infrastructure after they burst, and I wondered what your thoughts were about the excess housing inventory left over from this crisis?  Isn’t housing productive in some way, if even to keep people off the streets and reduce the crime rate?

-wtkasch

That is a worthwhile question, and while the short answer is “only a little,” its worth going into some details.

New home account for roughly 15% of all RE sale transactions. The dominant transaction is for Existing Home Sales (EHS). At 85%, this is the largest part o f the market by far. So while there was some legitimate capacity built, it was a rather small percentage relative to the railroad tracks or fiber optics I used as an example in the column.

The new home supply created was in excess of family formation, so the inventory amounts to more supply than there is demand. The net impact of the excess building is ongoing pressure on prices.

Think of highly leveraged debt purchases of homes as akin to buying lots of stock on margin — if and when the share price falls, you end up with an asset worth less than the margin call, leaving behind nothing usable, only a debt obligation.

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Source:
Wall Street analysts and economists have this recession recovery wrong
Barry Ritholtz
Washington Post, July 17 2011
http://www.washingtonpost.com/business/wall-street-analysts-and-economists-have-this-recession-recovery-wrong/2011/07/14/gIQAVRTIGI_story.html

Media coverage of S&P downgrade threat;

• Reuters – S&P threatens downgrade of U.S. financial companies

Standard & Poor’s on Friday raised the pressure on debt negotiators in Washington, saying it could downgrade insurers, securities clearinghouses, mortgage agencies and a laundry list of other firms without a deal soon to lift the debt ceiling and cut the deficit. While S&P had already made clear it could downgrade the United States’ sovereign credit rating, the Friday move struck directly at the heart of the financial system, raising the prospect of knock-on effects should the country exhaust its ability to borrow to pay bills. The Treasury took the last available step Friday to try and extend that borrowing capacity. S&P on Friday put on review for possible downgrades a range of powerful financial firms — many of them little known to the public but crucial to the country’s financial infrastructure. U.S. government securities are central to the operations of most of the companies cited. They include the Depository Trust Co, which facilitates payment transfers among major banks, as well as several Federal Home Loan Banks and Farm Credit System Banks. They also singled out Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are central to the residential mortgage market. S&P characterized its targets as “entities with direct links to, or reliance on, the federal government.” Separately, the agency said the four remaining U.S. nonfinancial companies with triple-A ratings were not affected by the downgrade threat.

•The Associated Press – S&P warns it may downgrade Fannie, Freddie credit

Standard & Poor’s warned mortgage giants Fannie Mae and Freddie Mac on Friday that they may lose their top credit ratings if lawmakers don’t raise the U.S. government’s borrowing limit in time to avoid a default. S&P said government-controlled Fannie and Freddie, along with certain Federal Home Loan Banks and Farm Credit System Banks, could also default on their debts, given each institution’s “direct reliance on the U.S. government.” The rating agency this week threatened to lower the U.S. government’s credit rating if the White House and Congress can’t agree to raise the $14.3 trillion borrowing limit and avoid a default in the coming weeks. It said there was at least a one-in-two likelihood that it will lower the rating within the next 90 days.

Comment:

Essentially S&P has put every AAA rating that assumes a government backstop on watch. The main reason is the potential for a spike in volatility if no debt deal is reached. Critics will argue that S&P has never used volatility as a reason for a downgrade before. Even when volatility was rampant during the 1987 stock market crash, the Gulf Wars, September 11, the popping of the tech bubble or the 1,000 points daily gyrations in the Dow Jones Industrial Average in late 2008, this was not given as a reason for a downgrade.

If the potential for volatility is a new standard to put every government related AAA rating on credit watch, will S&P be doing this regularly? If they are making a political statement, will they reinforce the idea that ratings are arbitrary and undermine their already sagging credibility?

So why is S&P doing this? If volatility is reason enough for a downgrade, why not put every AAA in Europe on credit watch for the same reason?

•The Financial Times – Ratings easy to criticise, harder to exorcise
A similar recasting has happened in finance, too. In the decades leading up to the financial crisis, global debt markets grew as never before precisely because it was assumed that risks could be measured and managed. At the centre of this transformation were credit ratings. A simple proxy for risk, the use of credit ratings allowed regulators, banks and investors to have an easy-to-use reference point. This had benefits, and fuelled growth across the globe. But the existence of ratings led to sloppy risk assessments: the work was subcontracted to the likes of Fitch, Moody’s and Standard & Poor’s. The agencies have had no shortage of critics for failing to spot risks in the repackaging of billions of dollars of risky mortgages into top-rated mortgage-backed securities. Now, they are again in the spotlight. European politicians have attacked them for recent downgrades of eurozone sovereigns.

•The Atlantic – Should We Worry About a AAA-Rated Debt Bubble?

Investor love risk-free bonds, but is it possible to have so many of them?
In 1999, about $1.5 trillion AAA-rated securities were issued globally. In 2009, AAA-rated issuance peaked at over $6 trillion. Are we in bubble territory? … Tracy Alloway at the Financial Times Alphaville blogs says that this could be the most important chart in the world right now. Is this a clear indication that the rating agencies and investors are both out of their minds? The chart shows two things. First, AAA-rated security issuance has grown at an extremely rapid pace over the past decade. Second, the portion of bonds that are AAA-rated has also grown significantly, to more than 50% of all fixed-income bonds issued, from around 20% in 1991.*

Instead of garnering more confidence, the European bank stress tests spurred more concerns. This is not because only 8 banks failed, but more due to the reality that has been mostly fully revealed that banks not only have large sovereign holdings of iffy credits but also have huge exposure to the private sector of each of the troubled economies. European banks across the region are trading lower as they first respond to Friday’s release. Since gold really is money, it is touching $1600 for the 1st time on euro concerns and yields in Italy, Spain, Greece, and Portugal continue to go parabolic. Irish bonds are little changed today. The cost of insuring against French debt is now higher than Columbia, Mexico and the Slovak Republic. European officials hope to have a Greek deal by the end of the week but Trichet reiterated that the ECB won’t accept defaulted bonds as collateral for funding.