Friday, 18 January 2008

Parsing the Expected & the Unexpected

This week has seen an avalanche of economic and company specific data. Some of it expected, some of it unexpected. For example it was expected that Merrill Lynch would have a shocker of a quarter. From Bloomberg:

Merrill Posts Record Loss on $16.7 Billion Writedown

Merrill Lynch & Co., the biggest U.S. brokerage, reported a record loss after $16.7 billion of writedowns on assets infected by subprime mortgages.

The fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with earnings of $2.35 billion, or $2.41, a year earlier, the New York-based firm said today in a statement. The loss was almost three times bigger than analysts estimated and resulted in the first full-year loss since 1989, sending Merrill down 10 percent in New York trading, the biggest decline since the 2001 terrorist attacks....

The fourth-quarter's writedowns included $11.5 billion to account for the plummeting value of subprime mortgages and related bonds called collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3.1 billion, saying provider ACA Capital Holdings Inc.'s credit rating had been slashed below investment grade, making it a less- reliable counterparty....

The emphasis in bold is mine. I haven't seen other financial institutions do this kind of thing yet but given that AMBAC and MBIA are on borrowed time with respect to their AAA credit ratings, there is potential for some very serious repercussions from this.

How about some unexpected? On the positive unexpected side, weekly jobless claims dropped significantly. From the Department of Labor:



In the week ending Jan. 12, the advance figure for seasonally adjusted initial claims was 301,000, a decrease of 21,000 from the previous week's unrevised figure of 322,000. The 4-week moving average was 328,500, a decrease of 11,750 from the previous week's revised average of 340,250.

The advance seasonally adjusted insured unemployment rate was 2.1 percent for the week ending Jan. 5, an increase of 0.1 percentage point from the prior week's unrevised rate of 2.0 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Jan. 5 was 2,751,000, an increase of 66,000 from the preceding week's revised level of 2,685,000. The 4-week moving average was 2,725,750, an increase of 28,250 from the preceding week's revised average of 2,697,500.

Initial Claims were not only down, they were significantly down, however continuing claims remain elevated. I heard rumblings that seasonal factors may have distorted the initial claims number. A couple more weeks of low numbers could mean an upward revision to December payrolls next month.

Next, the market was expecting continued crappy housing data, just not this crappy, from the US Census Bureau, firstly Permits:

Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 1,068,000. This is 8.1 percent below the revised November rate of 1,162,000 and is 34.4 percent below the revised December 2006 estimate of 1,628,000.

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 1,006,000. This is 14.2 percent (±8.3%) below the revised November estimate of 1,173,000 and is 38.2 percent (±4.9%) below the revised December 2006 rate of 1,629,000.

Privately-owned housing completions in December were at a seasonally adjusted annual rate of 1,302,000. This is 7.7 percent (±10.3%)* below the revised November estimate of 1,411,000 and is 31.0 percent (±5.8%) below the revised December 2006 rate of 1,887,000.

Sorry, didn't have time to add pretty graphs and stuff, but you can go to Calculated Risk for their always excellent analysis on US Housing.

Then, as expected there was Bernanke on the Hill testifying before Congress and calling for fiscal stimulus, however the big one that caught everybody by surprise was the awful Philly Fed index. Analysts had expected it to come in at -1.0 but came in at -20.9. From the Philadelphia Fed:

Indicators Suggest Weakening

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, fell sharply from a revised reading of -1.6 in December to -20.9, its lowest reading since October 2001

The graph below comes from Calculated Risk. As they note, the current reading does not conclusively prove a US recession is either imminent or in progress (e.g note the -20 reading in 1995), however I don't need much more convincing.


ducati998 said...

Let me respectfully disagree. I admit to initially thinking that ducati knew what he was talking about. But as the months progressed it became more and more obvious that the didn't. I would ask anyone who can be bothered, to go back through the BHP thread and see ducati's analysis of BHP's FY07 results. It is woefully amateurish.

The reason he doesn't post anywhere anymore is because I took him to task with some analysis on his blog. He put out his usually vitriolic analysis of a company that did not deserve it. I pointed out several glaring errors in his calculations and his understanding of balance sheets. He tried to defend himself but just ended up digging himself into a bigger hole. After a couple of days of back and forth on his blog about this particular stock he deleted his blog altogether and has not posted here since either.

Ducati called himself an arb trader but I suspect that is merely just a mask for the fact that he does not have the courage of his convictions to buy stocks based on the fundamentals he presumes to know. There are a few others on this forum, such as ROE, that know far more about fundamentals and estimating a company's intrinsic value than ducati ever did.


While you were not expected to know why I closed my blog, it most certainly was nothing to do with you.

If, you had disagreed with my BHP analysis, then where was the counter-argument, or, as you perceive yourself as the expert, the correct analysis?

Interested in your response.

The Fundamental Analyst said...

Welcome back from the dead duc, and thanks for dropping by. No doubt you've had plenty of time to concoct a good story as to why your blog mysteriously disappeared.

I'm certainly not an expert on BHP but I know enough to know that you aren't either.

However if you don't mind, I'd like to leave the comments section of my blog for comments about the posts themselves.

Since you quoted a post from ASF, why don't we pick up on it over there? If you don't feel comfortable with that, send me a pm.

ducati998 said...


The reason that I quoted your post from ASF was that I was quite disappointed at your cowardly behaviour.

tech/a, BSD and others all disagreed with me, disliked me etc.....the crucial difference is that they did it to my face and at the time of my posts.

You on the other hand, said nothing, but decided to join the herd AFTER the fact.

With regards to CST. The disagreement was over two main issues;

*Capitalization of operating costs
*Useage of management Options

The discussion was never completed, due to my blog being discontinued.

To make the claims, quoted in your ASF post are simply lies.

To be honest, I had expected a higher standard of integrity from you, obviously, I was mistaken.

The Fundamental Analyst said...


It seems you want to lash out at someone, if you have decided on me, so be it. For the record I don't dislike you and never have. I enjoyed reading your blog and comments on economics.

However, I came to realise after a while that your grasp of company financial statements was not all it was cracked up to be.

Rather than be a coward I confronted you directly on CST, then you disappeared. So if you want to throw around accusations of cowardice, take a look in the mirror.

I will go over to ASF and qualify my earlier statements in light of your comments, alternatively you could do that yourself.

ducati998 said...


I am confronting you with your statement and allowing you the chance to reply...without making assumptions.

You, seemingly made the assumption that your challenge on my analysis of CST somehow influenced my decision to close my blog.


That you came to *realise* my quality or standard of analysis was *not all that it was cracked up to be*...

Of course you are entitled to your opinion.

However, using BHP as the example, why then, if it was flawed, as you allege, did you not;

*challenge on ASF
*point out flaws
*correct mistakes
*offer insightful analysis

Your *recognition* came not only a long time after the fact, but as part of a little *gang* attack long after I had left ASF

With your reference to my cowardice in regards to CST. I had already entered into discourse with you regarding the two contentious topics.

That we disagreed is normal.
It is easy to show that CST was capitalizing operating expenses.

It is easy to show that excessive grants of stock options to management are detrimental to owners of the common stock

Your evidence with regard to the non-expensing of operating costs was zero.

It amounted to your *opinion* and nothing else.

Thus, to then, months later, on ASF, claim that you were responsible for XYZ and that you knew all along etc, connotes extreme cowardice, and makes you a liar to boot.

The Fundamental Analyst said...


I see your absence has done nothing for your arrogance.

"However, using BHP as the example, why then, if it was flawed, as you allege, did you not;

*challenge on ASF
*point out flaws
*correct mistakes
*offer insightful analysis"

It is not incumbent on me to disprove everybody else's analysis, if I did that I wouldn't have time for anything else. Why do you presume yourself to be so special that I have to challenge you on BHP - a stock I don't own, nor intend to.

My recognition came long before you left ASF and closed your blog. The challenge on CST should show you that. Also, the day after you closed your blog a sent a pm to tech/a on September 19th 2007, stating:


I doubt you read Ducati's blog but I thought it might interest you to know that he deleted it.

Although you may think he is natural ally of mine I have bcome highly suspicious of his negative conclusions on just about every stock he analyzes.

I finally took him to task on an analysis he made of an ASX listed stock on his blog. His analysis was horrible but in the true arrogant style of ducati, rather than admit he made any errors he continued to dig himself further into a hole.

His final post on the subject just highlighted how little he understands the workings of balance sheets and cashflow statements. I went to great pains to point out his misunderstandings in a comment posted last night. Got up this morning and the blog has been deleted.

Click on the link above to see what I mean. Unfortunately the record of his capitulation has been deleted.

I'm not claiming my comments were the reason. He was receiving flak left right and center for patently false statements that anyone could see weren't true.

It's always bothered me that someone who purports to analyze stocks on a fundamental basis does not have the courage of his convictions to invest that way but instead sits on the fence and calls himself an arb trader.

Anyway, just thought you might be interested

tech/a should be able to confirm that if he hasn't deleted the message, if not Joe Blow or one of the mods could.

So you can see, initially I was not sure that I caused you to close your blog. But after some time it seemed like a very plausible explanation. Apparently it was a wrong assumption to make, although you've not offered any reason for me to change for my assumptions.

If you want to be shown that your shoddy analysis of CST was flawed, then just put your blog back up, comments and all, for everybody to see. No need to clog this blog up with your nonsense.

ducati998 said...


With regards to BHP. You state that it is not incumbent for you to to disprove my [or anyone elses's] analysis.

That is true.
However, if you are not willing to challenge it at the time, don't write about how you are the expert months after the fact.

On how I invest.

You have no idea how I invest. Thus, you have drawn erroneous conclusions based on abosolutely zero knowledge, to suit your own bias.....pathetic.

The challenge on CST showed me nothing as your "attack" was in large part ad hominen.

My reason for pulling you, was to allow you to defend your actions. Obviously you feel the best defense is to try and excuse your cowardly behaviour.

Fine, I hold you in total contempt for such cowardice.

If you wish to ressurect CST, we can do so. It will not take long to show that they were capitalizing operating costs.

tech/a is someone with whom I nearly always disagree, yet hold in respect.


Because all of our arguments were above board face-to-face.

This isn't tech/a argument. It is yours.


ducati998 said...

Well here's a second comment for you to moderate, seeing as how your cowardice has already resulted in comments being moderated.

I have left the first comment on ASF this morning.

The Fundamental Analyst said...


You really are starting to bore me. You've been publicly shown that you don't know what you're talking about with respect to CST, I don't feel the need to do it again.

The reason I have decided to moderate comments is because as I said in the beginning these comments sections are for comments on the posts themselves.

No more debate will be entered into over your bruised ego on this post. Any subsequent comments on that topic will be deleted.

You can contact me over at ASF.

Bob said...

Don't waste any time on duc, he's just a wannabe that has failed at every method he's tried.
He's tried technical and failed
He's tried discretionary and failed
He's tried fundamental and failed.

He's even tried to impress people with partial Latin quotes that make no sense.
Total loser.
Not worth wasting any time on.
Just put him on ignore, I do.