Up and Down Wall Street
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SATURDAY, MAY 26, 2012
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Till the Cows Come Home
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By ALAN ABELSON
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The stock market can't quite bring itself to take a real flop that might clear the way for a decent bounce.

 


It figures. With the bulls absorbing more than the occasional pounding by this fickle and footloose stock market, it was inevitable that otherwise contented cows would take a break from being milked and swatting at swarms of pesky flies with their swishy tails and wander onto the streets udderly incensed at seeing their mates treated so rudely.






So it was last week that, reports the A.P., a mooing herd invaded Boxford, Mass., a nicely wooded town some 24 miles from Boston, and spotted a small but jolly afternoon get-together of youths in a backyard, scaring the living daylights out of them. Hell hath no wrath like a cow whose significant other has been mistreated, and the snorting bovines, blood in their eyes, sent the partygoers scrambling for cover.



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The thundering herd proceeded to knock over the open cans of beer the humans in their frantic escape had thoughtlessly left unattended on a picnic table and proceeded to slurp every last drop of the tiny puddles of Bud. They finally were induced by their owner to return to their comfy barn, a bit woozy no doubt, but none the worse for wear.





We might suggest that should you find yourself being intently gazed at by a stern-looking cow, the thing to do is to smile real friendly-like and try to convince her that you've always been rather bullish when it comes to investing, citing the fact that the market goes up 70% of the time. If that doesn't work, don't panic, just keep smiling, hum a few bars of "Till the Cows Come Home," calmly turn around, take a deep breath, and rush like mad to shimmy up the nearest tree.



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We only wish there were a similarly simple way to deal with a spooked stock market that can't quite bring itself to take a real flop that might clear the way at least for a decent bounce, but seems to have completely forgotten that it's supposed to climb a wall of worry. On that score, gosh knows, the air is thick with concerns.




Not the least of these is the parlous state of much of the Old World's economy. The 17 nations that make up the European Monetary Union, led by Germany and France, are better at jaw-jawing than problem-solving and seem in serious danger of running out of summits at which to hold their fruitless parlays. They held one last week that predictably was, as far as results go, pretty much a dud.



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Apart from a lot of moaning and wailing, their main accomplishment so far has been to drive the euro to a 22-month low. To be fair, the EMU's panjandrums soon may be able to add to their slender list of achievements Greece's exit from their ranks.



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One of our savvy readers whose bon mots we've passed along from time to time, Matthew Menken, predicts that "Merkel will never blink." He cites the German chancellor's Weltanschauung and conjectures that she feels in effect that "Italy and Spain would be better off as German colonies, and Greece is altogether expendable."



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If only Matthew would learn not to mince his words. Our own view has been a trifle more conciliatorywhen push comes to shove, the European Union will summon up enough imagination to avoid or at least significantly postpone dismemberment. But we must confess our conviction on that score has begun to wane, and it's always possible that the leaders (for want of a better inoffensive word) will go the brink once too often.



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Perversely, what give us fresh hope is that our own Treasury Department on Friday recognized what has become common knowledge, namely that "the deeper crisis now facing Europe is a significant risk to the U.S. outlook as our recovery remains vulnerable to events abroad." Boy, there's just no keeping a secret from Tim Geithner. Still, when even the Treasury discovers that Europe has its troubles, the worst just might be over.



Moreover, as Ashraf Laidi, of City Index Ltd., points out, speculative shorts on the euro in the currency-futures markets have hit an all-time high. A dyed-in-the-wool contrarian would certainly be tempted to see that as bullish for the euro and possibly, by implication, that perhaps the Continent isn't ready to go to hades in handbarrow.



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Just don't bet on it. The best advice we can cook up is keep your powder dry until you see how it all works out. You shouldn't have long to wait.


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MARK HULBERT, AMONG HIS other chores, is a regular contributor to our sister publication, The Wall Street Journal. Since some one whispered to us in the strictest confidence last week that Facebook's debut as a publicly owned company has not proved a rousing success (except for those prescient souls who sold at $43 a share), we couldn't wait to check out our source's validity (actually, we were worried we might have inadvertently come in possession of inside information). But, for once, one of our sources had the right dope, as laid out in delicious detail by our colleague, Andrew Bary (see "In Facebook's Fiasco, Hope for Reform").



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So, you might well wonder, what does Mark Hulbert, who puts out something called the Hulbert Financial Digest (we always marvel at the ingenious names people come up with) have to do with the Facebook fiasco? The answer is nothing. But Mark, a gentleman as well as a scholar, is an old hand at sizing up companies and their securities, and his analysis is unfailingly worthy of notice.



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So much for a brief explanatory note for why, reluctant as we are to join the trashing crowd, we thought Mark's piece in case you missed it in the Journal's MarketWatch feature an especially intriguing approach to determining where the shares of a new issue, in this case Facebook (ticker: FB), should sell.



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As he says, a recent study of IPOs by Jay Ritter, a finance professor at the University of Florida, and two researchers at the University of California (Davis), Professor Martin Kenney and Donald Patton, make that job a lot easier.



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They found that revenue growth of the average company taking the plunge into public ownership between 1996 and 2010 grew by 212% in the five years following their IPO. Mark reckons that assuming Facebook repeats that pattern, annual revenues five years hence should weigh in at a not exactly shabby $11.58 billion.



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Facebook, he notes, is often compared to Google (GOOG). Assuming that its price-to-sales ratio in five years is on a par with Google's 5.51-to-1, that means that Facebook's market cap in half a decade will rise to $63.8 billionroughly 30% less than what it is today. Assuming further that the total number of its shares stays constant translates into a per-share price of $23.26, a good slug lower than Friday's closing quote of $31.91. "Ouch!" As Mark exclaims.



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And if you assume that the company's five-year return is equal to the stock market's long-term average return of 11%, that gives you a less-than-gangbuster price of only $13.80. Which prompts Mark to utter a "Double Ouch."



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Just for the heck of it, switch your valuation yardstick from sales or returns and instead use earnings. The results, alas, aren't anything to shout whoopee about, either. Assuming profit margins stay around the same level as they are currently, and assuming, too, that the P/E ratio will match that sported by Google last we checked, according to Mark's calculations Facebook's shares should be changing hands at $16.66 each (that merits another "Ouch!" we might interject).



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It's always possible, of course, for Facebook's revenues and earnings, Mark concedes, to grow more vigorously than the run-of-the-mill IPO did in the 1996-2010 stretch.



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But it pays to keep in mind that Facebook already is a corporate heavyweightbigger in fact than all but 47 other publicly traded companies. It'll really have to sweat to grow not just faster, but a lot faster, in the next five years.



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And, Mark adds, his "back-of-the-envelope calculations" could very well be too optimistic rather than too pessimistic. Anyway he looks at it, Facebook is overpriced. And always, as we said, the gentleman, he doesn't even mention all the baggage it totes around in the form of lawsuits, regulatory investigations, and those screechy sounds emanating from Congress.
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Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved



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REVIEW & OUTLOOK

May 23, 2012, 7:11 p.m. ET

A Mess the 45th President Will Inherit

Taxpayers now stand behind derivatives clearinghouses. 



President Obama's standard gripe is that the economy has performed so poorly during his term because of the financial crisis he inherited from George W. Bush. But this week it is Mr. Obama who has bequeathed to his successors a landmark in financial regulation. It is bound to haunt them, though not as much as it will haunt taxpayers.


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J.P. Morgan's recent trading loss and the resulting Washington blather about tighter regulation have grabbed headlines. Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives tradingnot behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net.



.As we noted in May 2010, the authority for this regulatory achievement was inserted into Congress's pending financial reform bill by then-Senator Chris Dodd. Two months later, the legislation was re-named Dodd-Frank and signed into law by Mr. Obama. One part of the law forces much of the derivatives market into clearinghouses that stand behind every trade. Mr. Dodd's pet provision creates a mechanism for bailing out these clearinghouses when they run into trouble.


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Specifically, the law authorizes the Federal Reserve to provide "discount and borrowing privileges" to clearinghouses in emergencies. Traditionally the ability to borrow from the Fed's discount window was reserved for banks, but the new law made clear that a clearinghouse receiving assistance was not required to "be or become a bank or bank holding company." To get help, they only needed to be deemed "systemically important" by the new Financial Stability Oversight Council chaired by the Treasury Secretary.




Last year regulators finalized rules for how they would use this new power. On Tuesday, they began using it. The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club.



After further review, regulators will make final designations, probably later this year, and will announce publicly the names of institutions deemed systemically important.



We're told that the clearinghouses of Chicago's CME Group and Atlanta-based IntercontinentalExchange were voted systemic this week, and rumor has it that the council may even designate London-based LCH.Clearnet as critical to the U.S. financial system.



U.S. taxpayers thinking that they couldn't possibly be forced to stand behind overseas derivatives trading will not be comforted by remarks from Commodity Futures Trading Commission Chairman Gary Gensler. On Monday he emphasized his determination to extend Dodd-Frank derivatives regulation to overseas markets when subsidiaries of U.S. firms are involved.



Readers know Mr. Gensler as the chief regulator of MF Global, which was run into bankruptcy by his old Beltway and Goldman Sachs pal Jon Corzine. An estimated $1.6 billion is still missing from MF Global customer accounts. What an amazing feat Mr. Gensler will have performed if, through his agency's oversight, he can manage to have U.S. customers eat the cost of Mr. Corzine's bets on foreign debt and have U.S. taxpayers underwrite bets in foreign derivatives trading.



If there's one truth we've learned about government financial backstops, it's that sooner or later they will be used. So eventually taxpayers will have to bail out one derivatives clearinghouse or another. It promises to be quite a mess. And if the 45th president spends his first term whining about his predecessor's mistakes, he'll have a point.

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Europe's slump deepens as Kabuki summit falls short Once again


Europe's leaders have swooped into Brussels and vanished hours later without offering any clear way out of the pulsating crisis at hand.
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French president Francois Hollande achieved his coup de theatre. The French media gently accused him of staging a choreographed spat with chancellor Angela Merkel over eurobonds, knowing that Germany will not share its credit card with the debtor states until there is a fully-fledged United States of Europe – anathema to France. Photo: AP



By Ambrose Evans-Pritchard, International business editor


8:32PM BST 24 May 2012

 


Greece scarcely made it on to the agenda. The hard decisions have been delayed until the next summit in late June. There was no agreement on use of the European bail-out fund (ESM) to shore up Club Med banking systems and take the strain off the sovereign states.




Mario Draghi, president of the European Central Bank, said the EU is at a "crucial moment" in its history. "We have reached a point in which the process of European integration needs a courageous leap of political imagination in order to survive," he said. Yet no such leap was in evidence. The eurozone is no closer to equipping itself with federal debt machinery and a genuine lender of last resort.




French president Francois Hollande achieved his coup de theatre. The French media gently accused him of staging a choreographed spat with chancellor Angela Merkel over eurobonds, knowing that Germany will not share its credit card with the debtor states until there is a fully-fledged United States of Europeanathema to France. "While Germany sees eurobonds as the end point, we see them as the starting point," said Mr Hollande.




His eyes are on France's legislative elections in mid-June. He has already fudged campaign pledges to withdraw troops from Afghanistan. He risks haemorrhaging support to the Left Front of Jean-Luc Melenchon if he yields on calls for eurobonds, a "growth compact", and an EU "Tobin tax" on financial transactions.




Officials at the Elysee fear a Red-Rose coalition if Mr Holland's socialists fail to win an outright majority, evoking memories of Leon Blum's Front Populaire in 1936 that set off a run on the French banking system and forced the country off the Gold Standard.


May 25, 2012, 6:09 am
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The Gandhian Knot
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By DAN MORRISON

Bikas Das/Associated Press
Ahead of an event in January in Kolkata, India, marking Mohandas K. Gandhi’s death, children donned costumes to look like the renowned leader.



VARANASI, India I recently stumbled upon a small war being waged over a piece of Mohandas K. Gandhi’s legacy.



It’s a battle between earnest socialists and a faction reportedly tied to India’s leading Hindu nationalist organization, with decades of social science research and some pricey real estate in the middle.



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Like all inheritance battles, the fight for control of the Gandhian Institute of Studies is messy, complete with allegations of bribery and profiteering. (One side says it’s defending Gandhism from fascists; the other says it’s rescuing Gandhi from Communists.) It’s also another example of how Gandhi’s patrimony is misused.


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Beyond nationalism and nonviolence, most people simply don’t know what Gandhi stood for, and his words are open to misinterpretation. Sixty-four years after the Mahatma’s assassination, anyone can claim to be a Gandhian.
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                                 J. Gaiger/Topical Press Agency — Getty Images
                        Mahatma Gandhi in 1931.
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With his simple clothes, hunger strikes and innate conservatism, Anna Hazare, the social activist whose anticorruption drive had the Indian government on the run last year, is invariably described as a Gandhian. This is despite his calls for the execution of corrupt bureaucrats and a “Walking Tallapproach to governance in his home village, where he is known for flogging local drunks into sobriety.




In the western state of Gujarat, where Gandhi was born, Chief Minister Narendra Modi has erected the Mahatma Mandir, a windowless convention center where he inks billion-dollar deals with foreign multinationals. Whatever you think of this model of development, it’s probably fair to assume Gandhi would have sooner starved to death than lend his name to it.



It is to be expected that any historical figure should suffer such symbolic tramplings — even when perpetrated by one, like Modi, whose state police took part in the communal massacres of more than a thousand Indian Muslims in 2002. And why shouldn’t Gandhi’s name be on a convention center, when his face already adorns India’s paper currency, including the 1,000-rupee bill?




In a forthcoming documentary called “Gandhi Lives” the filmmaker Aruna Har Prasad travels across India to find the many strands of Gandhi’s philosophy, his enduringbrand” and his living embodiments. Some of film’s most insightful moments come from an advertising guru, who muses about both Gandhi’s magnificent use of his own image during India’s freedom struggle and the growing distance between modern India and the one Gandhi idealized.



How distant? In a busy shopping mall, Prasad asks a young boy if he knows who Gandhi is. Of course, the boy answers: “He makes money.”



Or not. Muniza Khan, a scholar at the Gandhian Institute in Varanasi, has been living without electricity for years, since the faction that controls its campus ordered the power cut to her official quarters in an effort to drive her out. Khan, who is working from the offices of a parallel organization while the court battle over control of the institute continues, says a group tied to the five-million-member nationalist paramilitary organization Rashtriya Swayamsevak Sangh (R.S.S.) has rented out the institute’s grounds and cottages as a hostel for students of a private engineering college nearby.




Kusum Lata Kedia, an economist who now occupies the director’s bungalow on the 11-acre campus, told me the students were staying free of charge while undergoing informal training in eco-attitude and eco-education.” A protégé of one of the R.S.S.’s leading figures and 2006 winner of an award named for the organization’s founder, Kedia dismissed her opponents in the ongoing court case as “call girls, prostitutes and pimps.”



Kedia is co-author of a book, “India Was Never Subjugated,” whose cover features a phalanx of charging Indian soldiers. She assured me that, far from diminishing the Gandhian Institute, she had saved it from Communists — “unemployed small-timers, vagrants out for petty money.”





Tushar Gandhi, a great-grandson of the Mahatma — which is Sanskrit for “great soul’’told me the battle in Varanasi is ironic, because the R.S.S. “actually was the inspiration and source of the ‘Kill Gandhi and ‘Hate Gandhi movement.” (Gandhi’s assassin, Nathuram Godse, was a former member of the organization, which has never been formally linked to Gandhi’s murder.) “It would be a shame,” he said, “if the court was ever to rule in favor of the claim put forth by the R.S.S. group.”


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Dan Morrison is a journalist and the author of “The Black Nile.”