Tuesday, January 25, 2011

Tuesday Newsreel for 01/25/11

Headlines are magical things.  They lead to discovery of the world's wonders. 

Societe Generale doesn't want to be on the systemically important TBTF list.  The extra capital requirements would crimp their profitability.  Being on such a list would earn a bank closer scrutiny from credit analysts, probably hurting its credit rating and increasing its cost of capital.  A better solution is to let TBTF firms fail.  I'll bet SocGen wouldn't like that either.  What on earth are they worried about?

NYSE Euronext is bringing liquidity and transparency to the bond market.  Nice work by NYX.  Now the bond market will look more like the stock market, with bid-ask spreads on central exchanges.  The Bond Liquidity Providers program looks like a market-maker type arrangement similar to specialist firms on the NYSE equity floor.  I'll guess that the first firms to sign up will be the Fed's primary dealers.

Economists see growth everywhere; I see inflation.  Whatever aggregate revenue they're tracking is driven by rising prices, not demand for more goods.  Consider that distressed home sales are rising.  That shows how easy it is for desperation to be misinterpreted as growth just because it looks like frenetic "activity."

Class I railroads are minting money.  UNP had its best year ever.  CNI grew its operating income faster than its gross revenue.  CSX's profit gain was double its revenue gain, which in turn rose faster than its expenses.  Wow.  Rail is one hot sector.  I should have bought those stocks when Warren Buffett bought Burlington Northern.  Rail looks especially attractive now that steadily rising diesel prices make trucking look uneconomical by comparison. 

Announcements of the death of the "new normal" are premature.  Nationwide employment still isn't recovering.  Home values are still falling.  The U.S. economy is looking more like a stagflationary neverland every day. 

Full disclosure:  No positions in Societe Generale, NYX, UNP, CNI, or CSX.