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Worst January Ever

With one day left, this could be the worst January ever. Through yesterday's close, the Dow is down -6.2%. The record is -8.6% from 1916. The S%P 500 is down 7.7% which edges out the -7.6% from 1970. The Nasdaq is down -11.4% which easily beats the -8.6% from 1990.

Posted by edelfenbein at 9:37 AM

The Fed Cuts Again

Fifty points this time. Here's the statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.

I'm glad they did. The central bank has been way behind on this.

Posted by edelfenbein at 2:17 PM

Thoughts on the Economic Stimulus Package

From the Onion:

Congress agreed on an economic stimulus package that would give individual taxpayers a rebate of up to $600. What do you think?

Tom Nagle,
Systems Analyst
"Perfect. That should cover my moving costs to Toronto."

Posted by edelfenbein at 4:03 PM

Sysco’s Earnings

I’m on the road this week, so posting will be on the light side. There are a few things to mention. First, Sysco (SYY) reported earnings before the bell this morning. For their second-quarter, SYY earned 43 cents a share which was inline with forecasts. The stock is currently up a bit. For the most part, Sysco’s earnings are about as stable as they come. The longer I invest, the more I come to appreciate that.

I’m not a big fan of this stimulus package. I doubt it will do much good, and I really don’t see the need for it. This also helps explain why I’ve never been elected to anything.

I just finished The Misbehavior of Markets by Benoit Mandelbrot. It’s an interesting book. Mandelbrot asserts that much of the conventional understanding of the stock (EMH, CAPM) is completely and totally wrong. I think he’s right, although I’m a bit skeptical of any type of “fractal market analysis.” If I have time, I’ll go into it more detail.

And finally, meet Dirk Mueller, the new face of the stock market.

Posted by edelfenbein at 12:15 PM

Donaldson Increases Dividend 10%

Good news from Donaldson (DCI). The company raised its per-share dividend to 11 cents from 10 cents. This is the 22nd straight year that DCI has increased its dividend. The company has also increased its earnings for 18 straight years.

Posted by edelfenbein at 1:09 PM

Harley’s Earnings

Harley-Davidson (HOG) reported Q4 earnings of 78 cents a share, four cents below estimates. Last year, HOG made 97 cents for the fourth quarter. The numbers are ugly:

Worldwide retail sales of Harley-Davidson motorcycles were down 6.1 percent in the quarter, and 14.2 percent in the U.S. The company said the domestic heavyweight motorcycle market was down 9 percent in the quarter. Overseas, Harley's sales were up 17.4 percent.

Harley's shipments were down 12.5 percent to 81,206 units, a drop of 11,642 units.

For the year, profit fell to $933.8 million, or $3.74 a share, from $1.04 billion, or $3.93 a share, in 2006. Revenue slipped 1.3 percent to $5.73 billion from $5.8 billion in 2006.

Worldwide sales fell 1.8 percent in 2007, while U.S. sales were down 6.2 percent. The overall heavyweight market was down 5 percent for the year, Harley said. Internationally, Harley's sales finished the year up 13.7 percent.

Shipments for the year were down 5.3 percent to 330,619 motorcycle units, from 349,196 bikes in 2006. Harley-Davidson cut its bike shipments in the wake of expected falling sales and even idled its plants for a week in November.

HOG expects EPS growth of 4% to 7% this year which is more optimistic than analysts.

Posted by edelfenbein at 12:27 PM

The Yield Curve

Here's a colorful chart:

This is the point I'm trying to get across. I believe the Fed's rate cut was NOT a cut to prop up equity prices, but a response to the turmoil in the bond market. If anything, it was to pop the bond bubble--and as you can see from the post below, the Fed's job includes promoting "moderate long-term interest rates."

I'm not saying I agree with it, but try to look at this from the Fed's point of view. In just a few months, a flat yield curve completely unraveled.

Posted by edelfenbein at 10:46 AM

French Trader Surrenders $7.14 Billion

Ever heard of Jerome Kerviel? Me neither, but he's apparently the rogue trader behind Société Générale's $7.4 billion trading loss. That's more than Amaranth ($6.6 billion) and Nick Leeson ($1.4 billion).

The trades first came to management's attention on the evening of Jan. 18, when a compliance officer found a trade that exceeded the bank's limits, Mustier said. When Societe Generale called the counterparty, they were told the trade didn't exist.

The employee, who moved to the trading floor from the back office in 2006, helped with the investigations throughout the weekend, said Mustier. He said he doesn't know where the trader is now.

"He is in his thirties, very quiet and a loner," said Yves Messarovitch, an external spokesman for Societe Generale. "He had made his dream of becoming a trader come true."

Great, he sounds like a serial murderer. According to Bess Levin, he's hot (w/pic). I report, you decide.

Posted by edelfenbein at 11:44 AM

The Fed's Charter

Just in case anyone's curious, here's what it says:

FEDERAL RESERVE ACT

SECTION 2A—Monetary Policy Objectives

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]

Posted by edelfenbein at 10:41 AM

Soros “The worst market crisis in 60 years”

Now celebrating 10 years of predicting the end of the world, George Soros takes a huge dive into the pool of confirmation bias:

Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

Posted by edelfenbein at 10:15 AM

Earnings from Stryker and Danaher

After the close yesterday, Stryker (SYK) reported earnings of 66 cents a share, which was a 20% jump over last year. For 2008, the company forecasts earnings-per-share of $2.88. That means the stock is going for a P/E of 23.2. Stryker finished its seventh straight year of double-digit sales growth.

Danaher (DHR) reported earnings of $1.12 a share (excluding charges), which also matched expectations. The company expects Q1 EPS of 84 cents to 89 cents, and $4.30 to $4.40 for all 2008. That gives them a P/E of about 17.

Posted by edelfenbein at 9:39 AM

Editors at MarketWatch Keeping It Real

You can already see Murdoch's influence.

(Via ValleyWag)

Posted by edelfenbein at 9:35 AM

Bullpen IPO

Randy Newson, a rookie relief pitcher with the Cleveland Indians, is having an IPO.

Of himself.

He's selling 4% of his future earnings. There are 2,500 shares so you can buy 1/62,500th of Newson's future earnings for $20.

(Via Marginal Revolution)

Posted by edelfenbein at 3:49 PM

Buy at 10, Sell at 3

I have to admit that this is getting fun. The bears are getting smushed.

The saying “buy on rumors, sell on news” should be replaced with “buy at 10, sell at 3.” These intra-day moves are huge. Would you believe the Dow is now positive for the week?

Both Harley-Davidson (HOG) and Bed Bath & Beyond (BBBY) are doing well today. I’ll have more in a bit, but the Buy List is again ahead of the broader market. Stryker (SYK) reports after the close. Danaher (DHR) reports tomorrow and Harley-Davidson (HOG) follows on Friday.

I’m still amazed at the surge in the bond market. The five-year got to 2.4%. The 10-year note bounced off 3.3%. Wow, even after yesterday, the Fed is still above the 10-year.

Posted by edelfenbein at 3:44 PM

Another Rough Day

The market opened much lower again today, but the real action is in the bond market. Rates are plunging. The three-month T-bill just broke below 2% and the 10-year is below 3.5%.

The Fed's 17 interest rate hikes are being undone in front of our eyes.

Posted by edelfenbein at 9:43 AM

Good Day for Us

Our Buy List was down -0.21% for the day compared with a -1.11% drop for the S&P 500. Until late in the day, we were in the black. The Buy List has again outperformed the S&P 500 for the year. And like last year, we've done it with less volatility.

Here's how the S&P 500 did today.

Posted by edelfenbein at 4:37 PM

Wall Street Rocked By Panic Selling!

Posted by edelfenbein at 4:24 PM

What the Fed Wants to Do

I find myself in the unfamiliar position of defending the Federal Reserve. Please bear with me because this is strange for me but what they did today was exactly what they should have done. In fact, they should have done this a few weeks ago after the December jobs report.

I hear a lot of talk today about how the Fed is bailing out investors. Please. That misses the point. The Fed is not all powerful. Hard to believe but it’s true. In reality, they’re another player in the game. They’re just the most powerful.

The Fed isn’t panicking, nor is it trying to bail out investors—it’s in a fight with a bond market that’s refusing to cooperate. That’s where the panic is. Try to think of it from the Fed’s point of view. The central bank is ultimately here to protect the banking industry. The irony is that the Fed isn’t trying to bail out stock investors, it’s really catching up with a bond bubble, where people have made too much money.

Before today’s cut, the five-year T-note was 160 points below where the Fed Funds is. If you were a bank, you have zero reason to generate new loans. Just plop all your money in a long-term bond fund and you’re fine. The Fed can’t let that happen.

The five-year note is now well below the CPI. I know I’m beginning to sound like a broken record, but this problem is getting worse. Keep your eye on the Rydex Inverse Government Long Bond Strategy (RYJUX). It’s designed to double the moves of the T-bond market in the opposite direction.

Posted by edelfenbein at 1:23 PM

Fasten Your Seatbelts!

7:56 am: I’m going to abandon traditional blogging today in favor of quick updates. The market will open 90 minutes from now and the Dow futures are currently off 546 points, the S&P 500 futures are off 66 points and the Nasdaq futures are off 75 points.

8:00 am: A 0.75 rate cut? That’s what traders think. The futures indicate that traders now think there’s a 72% chance that the Fed will cut by 0.75%. The rest are looking for a 0.50% cut.

The Fed meets next week, but don’t be surprised to see a cut today.

8:10 am: Paulson is speaking right now. UnitedHealth (UNH) reported earnings, 92 cents a share up from 84 cents last year. This matched the Street's forecast. For 2007, UNH earned $3.42 a share. For 2008, they're looking for $3.95 to $4 a share.

8:15 am: Wachovia's Q4 net income plunged 98%. The stock is off 40% since the market peaked. Scary to think this used to be on our Buy List.

8:18 am: Like 1987? Mark Hulbert thinks so. I don't buy it.

8:19 am: For you Fibonacci enthusiasts, 2008 is eight years after the 2000 top, five years after the 2003 bottom, 21 years after 1987 and 34 years after the 1974 bottom.

8: 20 am: The Fed cut by 0.75! We're now at 3.5%. This is the biggest cut in 23 years. Here's the statement:

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.

8:45 am: The Dow futures are now down 376. Cramer is saying that Bernanke won't last long. Rick Santelli just called out Cramer as being a big-time bull. Cramer asked, "have you seen my show?"

8:50 am: My favorite headline of the day: Yahoo May Cut 700 Jobs as Growth Slows, Person Says. Doncha love that sourcing? A Person. The article says, "according to a person with knowledge of the plans." I don't understand how YHOO got over $30.

9:08 am: The Bank of Canada just cut rates as well. The opening bell is just 22 minutes away. Things got so bad in India that the exchange shut down. I said on CNBC last year that the Indian market was vastly overvalued.

9:14 am: It's not all hopeless. Johnson & Johnson (JNJ) just reported earnings of 88 cents a share, excluding charges. The Street was looking for 86 cents a share.

9:19 am: Remember, a lousy stock market crash always mean a recession. It usually does, but 1987, for example, was an exception.

9:20 am: Two analyst at Bernstein just upgraded six retailers, including Bed Bath & Beyond (BBBY). It's about time!

9:22 am: CNBC has Maria is Davos. It's snowing there and she's all bundled up. Too cute, she kinda looks like the little brother in Christmas Story (Randy?).

9:28 am: Here's your data point for the day. The yield on the S&P 500 is close to the five-year Treasury. The five-year (^FVX) is at 2.66%.

9:30 am: Ding Ding Ding Ding Ding Ding Ding Ding

9:32 am: Some members of the New York Giants rang the opening bell. There's a metaphor in there somewhere.

9:32 am: All 30 Dow stocks are down. The Dow is down 431. Only two S&P 500 stocks are up, BBBY and IACI.

9:38 am: The S&P 500 is at 1278. We're where we were in mid-2006.

9:41 am: The Dow is down 366.

9:45 am: Now there's talk of another rate cut coming at the meeting at the end of the month. There are still decent earnings out there. Precision Castparts (PCP) just beat by a penny.

9:53 am: Well, it looks like this has been greatly overrated. The Dow is now down 260. The S&P 500 is off 2.2%. That’s really not a huge move. In the last 10 years, the S&P 500 has had 22 days where it dropped by more than 3%.

9:59 am: The Volatility Index, the VIX, is back above 35. Since 1990, the market is positive when the VIX is below 22.66. Here's my post from two weeks ago on how volatility impacts the market.

10:02 am: At Real Money, James Althucher points out an interesting trade. Harrah’s (HET) is going private at $90 a share. The stock is at $88. If you short it and the deal is pulled, you can make a lot. If you’re wrong and the deal goes through, no biggie. You’re out $2. The private equity offer is from Apollo and TPG.

10:23 am: Bank of America’s (BAC) earnings were down 95%. For Q4, the bank earned a nickel a share, down from $1.16 last year. Revenue dropped 31%. The Street was all over the place, but the consensus was for 18 cents a share. These results included LaSalle which BAC bought last year.

10:24 am: The European markets are improving on the rate cut.

10:28 am: It’s a rally! The Dow is closing in on 12,000. Sheesh, Dow 11700 was so 30 minutes ago. Where have you been?

10:31 am: BigCharts.com, one of the best financial sites, seems to be down.

10:32 am: “A Whiff of Panic...” As usual, Barry has some sharp comments. As a rule of thumb, I'm usually 500-1000 points more bullish that Barry.

10:39 am: No Dow 12,000 for now. We seem to have hit a wall at around 11,950.

10:42 am: Historical footnote. It was 28 years ago yesterday that gold peaked at $875. That evening Jimmy Carter gave a rather downbeat State of the Union.

10:44 am: Not to show off, but our Buy List is down just 0.49% today. OK, I guess that is showing off.

10:52 am: Apple (AAPL) reports after the close. I don’t own it, but a good report could give the market a nice shot in the arm. The Street consensus is for $1.62 a share. People I’ve talked with say that’s way too low. We shall see.

10:56 am: The small-caps are holding up much better than the rest of the market. I wouldn't be surprised to see many small-cap indexes close in the black. There's an old saying on Wall Street, "if you can't sell what you want, sell what you can."

11:04 am: The banks love Bernanke. Citigroup (C) is now up for the day.

11:10 am: We’re back over 12000. Interestingly, money isn’t coming out of the short-end of the yield curve, but it is at the long-end. I still can’t believe the 10-year T-bond is below 3.6%. Now that’s a bubble.

11:15 am: How’s this for a crazy market? Two weeks ago, Bed Bath & Beyond (BBBY) gave us a nasty earnings warning. The stock dropped 4.4% on 18 million shares in volume. Today it’s rallying on an upgrade and Fed rate cut to above where it was before the warning.

11:17 am: CSX (CSX) reported blow-out earnings. In other news, the Oscar nominees have been announced.

11:24 am: In about a week, Nicholas Financial (NICK) will report earnings. This is a fascinating micro-cap stock. The stock is going for about $7 a share, which is 50 cents below book value. I won’t make a guess as far as its earnings, but I’ve been very impressed by NICK’s management.

11:26 am: The Buy List is now positive for the day, up 0.55%.

11:29 am: IIVI profit triples.

11:37 am: Reuters lists the intermeeting Fed cuts since 1994. UBS sees the Fed going to 2.25%.

11:37 am: How's this for a turnaround? Ambac (ABK) is up 31%, 40% above its open.

Posted by edelfenbein at 7:56 AM

This Is Why I'm Not a Trader

Warning: The F bombs reach Big Lebowski levels.

Welcome to the world of futures trading. I’ll try to translate what’s going on. It looks like he's long 10 E-mini futures contracts of the Russell 2000, that’s what the ER2 means. They’re traded almost all day on the Globex. The contract was, at the time, down about 24 points. So he’s out about $24,000. But it’s possible that he put up as little at $68,000.

In other words, he’s so fucking fucked right now it’s un-fucking-believable.

Update: Bess Levin calls him a fake.

Posted by edelfenbein at 12:48 AM

Myths About Recessions

In the Washington Post, Kevin Hassett looks at some myths about recessions. Here's a sample:

5. There is a regular business cycle.

In a pair of articles in the Quarterly Journal of Economics published in 1920 and 1921, Columbia University economist H.L. Moore hypothesized that the primary cause of economic cycles was the regular eight-year cycle of the modes of the planet Venus. This type of thinking, along with 19th-century English economist William Stanley Jevons's theory that the 10-year sunspot cycle causes economic fluctuations, perhaps accounts for the widespread notion that there is a regular business cycle.

Don't count on it. The term "business cycle" is imprecise. Economic fluctuations affect everyone, not just businesses, and they are, unlike astral cycles, anything but regular. In the nine recessions since 1949, the shortest time between two recessions has been three quarters (the recessions of 1980 and 1981-82), while the longest has been just short of 10 years (the recessions of 1991 and 2001). When the next recession ends, a good guess will be that the expansion that follows will be somewhere between one year and 10 years in length.

A better analogy might be to think of our economic future as being a road trip in a 1971 Ford Pinto. Our car might burst into flames in the next instant, there might be a truck in our lane around the bend, or we just might make it all the way to California.

Posted by edelfenbein at 8:17 PM

Dow Futures -520

Although the market is closed here in the U.S., index futures are traded in foreign markets. At one point, the Dow futures were down 520 points. I should add that these futures aren't always a good indicator of where the U.S. market will go. Also, there will be another day of trading in most foreign markets by the time our markets open tomorrow morning.

Posted by edelfenbein at 7:48 PM

MLK Day

Here's a fascinating interview of Martin Luther King from 1957. If the interview was done after January 15, then King was just 28 years old. By the way, the other guest is a fascinating and often over-looked person, Judge J. Waites Waring.

Here's part one:

Here's part two:

Here's part three:

By the way, The Open Mind show is still going strong with the same host from 50 years ago, Richard D. Heffner.

Posted by edelfenbein at 11:20 AM

"Good Thing It's a Holiday"

That's the red-fonted headline at the Drudge Report. It's true, foreign markets are taking a beating today. The New York Times reports:

NEW DELHI — Asian and European markets nose-dived on Monday as hope that healthy local economies might escape the force of a United States recession evaporated and fear gripped investors instead.

Blue chip stocks lead the declines in most markets, dragging major indexes in Hong Kong, Shanghai and India down by more than 5 percent during the day, while those in South Korea and Australia fell by nearly 3 percent.

In Japan, which may be facing a new recession of its own, most indexes were off by more than 3 percent.

European shares sank 4 percent by late morning on Monday, putting them on track for their biggest one-day fall in more than four and a half years as fears of a recession in the United States rattled investors.

Shares in oil and financial companies took a hammering, Reuters reported.

By midday, the FTSEurofirst index of top European shares was down 3.9 percent at 1,304.98 points, a level not seen in eighteen months.

The FTSE 100 index of leading British shares fell by more than 300 points, or more than 5 percent, and Germany’s Dax index was down by more than 500 points, or more than 7 percent.

In Asia, Shanghai’s Composite Index closed down 5.1 percent at 4,914.44, and Hong Kong’s Hang Seng fell 5.5 percent to 23,818.86, the biggest fall since the Sept. 11, 2001 terrorist attacks in the United States.

Posted by edelfenbein at 10:01 AM

The Super Bowl Point Spread

Vegas sure doesn't waste time. The Patriots are 13 to 14 point favorites. But what I find interesting is that Vegas admits that this is higher than it should be in order to induce underdog bettors.

"The Patriots are still considered by far the best team in the league" said Jay Kornegay, sports book director at the Las Vegas Hilton."We obviously make that line to get equal action on both sides. To do that, because of the perception of the Patriots, we have to increase their number more than usual."

Same thing in the stock market. Lots of people buy stocks like Google, not because of any well-thought analysis, but because they want to be able to say they own shares of Google.

Posted by edelfenbein at 12:38 AM

Studying the Sex Biz

From the Economist:

Almost half of the (New Orlean)'s arrests for prostitution take place in just 0.3% of its street corners. The industry is concentrated in so few locations because prostitutes and their clients need to be able to find each other. Earnings are high compared with other jobs. Sex workers receive $25-30 per hour, roughly four times what they could expect outside prostitution. Yet this wage premium seems paltry considering the stigma and inherent risks. Sex without a condom is the norm, so the possibility of contracting a sexually transmitted infection (STI) is high. Mr Levitt reckons that sex workers can expect to be violently assaulted once a month. The risk of legal action is low. Prostitutes are more likely to have sex with a police officer than to be arrested by one.

And later:

One controversial finding is that prostitutes do better with pimps—they work fewer hours and are less likely to be arrested by the police or preyed on by gang members. The paper's discussant at the conference, Evelyn Korn of Germany's University of Marburg, said that her favourite result from the study was that pimps pay “efficiency wages”. In other words, pimps pay above the minimum rate required by sex workers in order to attract, retain and motivate the best staff. Mr Levitt said that a few prostitutes asked the researchers to introduce them to pimps.

Posted by edelfenbein at 7:31 PM

Weekend Reading

Here are two articles you might enjoy:

You know how the world is running out of oil? Well, it's not.

Also, capitalists are saving the planet.

Posted by edelfenbein at 1:27 PM

Erin Burnett on Conan

Posted by edelfenbein at 4:54 PM

The Dow Hates Bush?

Megan McArdle writes:

I'm surprised to see Mark Kleiman linking to this piece of silliness, which purports to "prove" that the Dow has fallen by 20% since GWB took office. Says Mark, "Turns out the "ownership society" hasn't even been good for the owners."

This little treasure comes from a website hilariously titled "Just the Facts", and achieves this result by using a market-weighted basket of global currencies. This is--what's the word I'm looking for? Right, right, utterly daft. Americans don't buy things in a market-weighted basked of global currencies. They shop in dollars. And we have a perfectly good mechanism for calculating the value of the Dow in dollars; it's called "inflation adjustment". The inflation-adjusted value of the January 2001 Dow in today's dollars is about 12,200; today's level is unambiguously higher.

But what about foreigners? I hear you cry? What about 'em? They hold almost no stocks--about $200 billion on a total market capitalization1 of 17.75 trillion.

What about the amount of foreign goods you can buy by selling your stocks? Trade is a relatively small part of the United States economy, and much of it is with places like Mexico and China, whose currencies haven't really altered much against ours. (To be fair, a lot of it is also with Canada and Japan, that have seen higher currency appreciation). Moreover, many of those places have dropped the prices of their goods and taken lower profits rather than lose sales volume. That's why, you may recall, everyone's complaining that our trade deficit is failing to adjust. Overall, the effect of the currency decline on the purchasing power of your stock investment is exceedingly modest unless you planned to blow every dollar on Paris vacations and BMW automobiles.

Her larger point is right, but I wouldn’t say that the Dow is “unambiguously higher.” The Dow Total Return Index stood 15,065.68 on January 19, 2001. Yesterday, it closed at 20,152.59. That’s a return of 33.76%.

From December 2000 to December 2007, the CPI increased by 20.71% (I don’t have the January-to-January numbers yet). That works out to a total real return of 10.81%, or 1.48% a year. That ain’t great, but it’s in the black.

Megan does a better job than me of trashing the lame Dow-in-euros argument. (I’ve tried to make a few times before.) I get paid in dollars not euros or gold or whatever. This Dow performance stat falls into what I call the “Daniel Gross/Larry Kudlow Law,” which states that you should never use financial market stats to backup a political argument. The financial markets are surprisingly apolitical.

If we were to measure from the start of the war, the stock market is much higher. Does that justify the war?

You can always come up with some commodity that has outperformed something else at some starting point. But the long-term evidence is crystal clear—common stocks outperform everything else.

If have a market for over 70 years, you’re going to have something that’s called the worst crash in 70 years. If you measure from the top of that market, it doesn’t prove anything except that markets are volatile, and I already knew that.

Posted by edelfenbein at 4:21 PM

Zimbabwe Introduces $10 Million Bill

The government of Zimbabwe is rolling out a $10 million bill for the purpose of...stemming currency shortages.

The $10 million bill is worth about $4 in the U.S. Here's the money quote (so to speak):

To put it in figures, the Reserve Bank of Zimbabwe cannot account for more than $65 trillion of the $67 trillion cash currently in circulation.

Posted by edelfenbein at 10:21 AM

Discover’s Horrible Spin-Off

Last month, Morgan Stanley’s CFO, Colm Kelleher, said “If you were to normalize our business and take out this $9.4 billion charge, you would see that we had a record year across the whole enterprise.”

In other words, if you ignore the losses, we’re doing quite well. Somehow, the market wasn’t terribly impressed. Since July, Morgan’s stock has plunged from $70 to $45.

But here’s the thing, their performance is even worse if you recall that Morgan spun-off Discover Financial Services (DFS). I’m usually a big fan of spin-offs, but Discovery has been a disaster. Since its July debut at $26, shares of DFS have plunged to $13 today.

Posted by edelfenbein at 10:05 AM

CEO of the Princeton Economics Department

Notice that GS ticks down a penny when she mentions it, then up a penny when he corrects her. Score one for EMH.

(Via Mankiw)

Posted by edelfenbein at 6:31 AM

Quote of the Day

Ben Bernanke on growing up Jewish in South Carolina:

Being a member of a minority taught him about discrimination and prejudice. “There was more than one request to see my horns,” he said years later.

Posted by edelfenbein at 5:57 PM

Dow -309.95

Wow...that sucked.

Posted by edelfenbein at 5:23 PM

The Ballad of Jim Cramer

That's really good. I like the catchy tune.

Posted by edelfenbein at 3:30 PM

The Bond Bubble Grows

The five-year T-note (^FVX) is under 3% today. Six months ago, it was going for 5%. Notice how you never hear the media talk about "irrational exuberance" or "runaway bubbles" in the bond market. Bond traders are always assumed to be right.

This is obviously theoretical, but if I ran a bank, I'd rather short the five-year note than borrow at the Fed Funds rate.

Posted by edelfenbein at 2:08 PM

Earnings from Amphenol and Clarcor

Two earnings reports from Buy List stocks to pass along.

Amphenol (APH) had a great report but the stock is pulling back this morning. For Q4, APH earned 55 cents a share, three cents more than the Street was expecting. Last year, APH made 43 cents a share for Q4. Even better, the company gave good guidance going forward:

For 2008, the company expects a profit between $2.18 and $2.25 per share on revenue between $3.1 billion and $3.18 billion. Last year, profit reached $353.2 million, or $1.94 per share, and sales hit $2.85 billion.

Analysts project earnings of $2.22 and revenue at $3.13 billion, according to Thomson Financial.

"We are cautiously optimistic (Yuck! I hate the phrase! – EE) about continuing improvement in the short term and very confident about the long term outlook for continued growth and profitability," the company said in a statement.

For the current quarter, Amphenol anticipates net income of 50 cents to 52 cents per share and revenue between $740 million and $755 million.

Analysts expect a profit of 51 cents per share and revenue of $741 million.

Personally, I was looking for a little better guidance than what we got. Although, APH had a pretty strong run from August to December, so maybe it’s simply profit-taking today. Assuming $2.22 a share for 2008, that’s a P/E of 16.5, which isn’t bad for APH.

After the closing bell yesterday, Clarcor (CLC) reported earnings of 53 cents a share.

For the quarter ended Dec. 1, Clarcor earned $26.7 million, or 53 cents per share, compared with $26.7 million, or 52 cents per share, for the same quarter in 2006. The company had fewer shares outstanding in the recent period.

Analysts polled by Thomson Financial expected income of 51 cents per share.

Sales rose 2.4 percent to $238.3 million from $232.6 million in the year-ago period.

Operating margins were 16.8 percent in both periods. Clarcor said foreign currency fluctuations improved the recent quarter's sales by $6 million.

For the full year, Clarcor earned $90.7 million, or $1.78 per share, compared with $82.7 million, or $1.59 per share, for 2006. Sales rose to $921.2 million from $904.3 million the year before.

The company also said that it expects 2008 EPS of $1.85 to $2.05 (sheesh, kinda wide range). The Street consensus is for $1.92.

Here's a spreadsheet of Clarcor's results for the past few years.

Posted by edelfenbein at 11:20 AM

The Education of Ben Bernanke

Behold! Roger Lowestein's 8,000 word article on Ben Bernanke. Here's a very small sample:

Bernanke grew up in the small town of Dillon, S.C., at the tail end of the segregation era (in high school he wrote a schoolboy’s novel about whites and blacks coming together on the basketball team). His father and his uncle ran a local drug store. Folks trustingly called them Dr. Phil and Dr. Mort. Ben, who skipped first grade, was obviously smart from the get-go. He played the saxophone, just as Greenspan did, and waited tables two summers and worked construction another. The Bernankes were observant Jews, and Ben’s folks fretted when he got into Harvard that if he strayed from home he might wander from his religious teachings. It was never a risk. Judaism is important to Bernanke, though, as with other personal subjects, he does not discuss it. As a doctoral candidate at M.I.T., he blossomed into a star, and at the tender age of 31 he received a tenured position in the economics department at Princeton.

His academic research was steeped in the increasingly sophisticated discipline of econometrics, which uses computer models to simulate (and predict) the economy. By contrast, Greenspan often relied on his hunches. The difference is partly generational, but Bernanke is clearly more comfortable working with mathematical formulas than with anecdotal examples. (One looks in vain in his Depression writings for stories of banks that failed or of workers who lost their jobs.)

Posted by edelfenbein at 8:07 AM

"The first thing we do, let's kill all the lawyers"

Retirees claim Morgan Stanley broker gave bad advice

ROCHESTER, N.Y. (AP) - A group of investors is suing Morgan Stanley, claiming a broker gave them bad financial advice when he persuaded them to retire early from Eastman Kodak Company and Xerox Corporation.

In a lawsuit filed today in state court, seven former employees maintain that they were promised ample savings for early retirement by broker Michael James Kazacos. They say the savings never materialized and many of them are now almost broke.

The lawsuit seeks more than $$140 million in compensatory damages and class-action status. It claims the retirees were persuaded to retire beginning in the late 1990s and told they could live off the returns their money would generate if invested with Morgan Stanley.

Posted by edelfenbein at 7:14 AM

Market Hits New Low

The S&P 500 closed today at 1373.20, the lowest close since November 3, 2006 which was the Friday before the mid-term election.

July 1, 1999 was the first time the S&P 500 closed above this level.

Posted by edelfenbein at 4:24 PM

You Know It's a Gold Rally When....

People sell their fillings.

Down the street at First National Pawn, customers have walked in carrying jewelry, coins and other items scrounged up to take advantage of the bullish prices, said manager Ryan Johnson.

"People have been digging around," he said.

Some have even rummaged up their old teeth with gold fillings. Johnson said they often drop the teeth into soda pop to separate out the gold fillings. That gold can then be smelted and used later for jewelry or other products.

Gold business picked up at the pawnshop about three weeks ago and has been brisk as the price continued climbing.

"It's skyrocketing, but we expect it to go higher," Johnson said.

Posted by edelfenbein at 11:51 AM

The Real Total Return of the S&P 500

Here's a look at the real total return of the S&P 500, meaning adjusting for inflation and dividends:

We’re up a lot, but we still have a long way to go. Those are monthly numbers so it only goes through the end of 2007. It doesn’t reflect our little swoon at the beginning of the year.

The long-term real rate return for commons stocks has been about 7% (notice I said “long-term”). Over the last twelve years, stocks have returned an average of 6.92% a year.

Posted by edelfenbein at 10:32 AM

This Can't Be Good....

Katie Holmes is ringing the opening bell.

My gut says sell. My thetans say buy!

Posted by edelfenbein at 9:31 AM

So What if We Had a Flat Tax?

Last month, the CBO released a report on historical effective tax rates. I ran through the data with an odd goal in mind. I wanted to see if I could replicate the existing tax burden with a simple flat tax.

I don’t mean to say that I’m a flat tax advocate. I simply wanted to look at what Americans actually pay and see if I could mimic the real thing with the simple rules of a flat tax.

The answer is, not really, at least not very accurately. The CBO report only gave me eight data points to work with.

Still, this type of analysis has value. In fact, there are emerging fields of study, like Chaos Theory, that look to find simple rules that lie beneath highly complex structures.

Here’s what I was able to come up with. The graph below is my Faux Flat Tax going back to 1979. The blue line follows the left scale and is the flat tax rate. The black line follows the right scale and is the standard household deduction. The deduction is in 2005 dollars.

For 2005, I come up with a tax rate of 31.85% and a deduction of $35,725. So every penny a household makes under that, is completely tax free. Every penny above it is taxed at 31.85%. That includes everything—income taxes, social security, Medicare, corporate taxes, the whole shebang. And most importantly, we can abolish the IRS (wait for applause).

I realize these aren’t quite the numbers that most flat taxers have in mind, but my goal is mimicry. I took the current tax code "as is" and tried to be revenue neutral. Obviously, if I had more data points I could be more accurate.

Looking at the table does reveal some interesting information. When the two lines rise, the tax code becomes more progressive (higher taxes on the rich and less on the poor). When both lines fall, the reverse happens.

What I find interesting is that despite using just eight data points, there seems to be some continuity through the years. So even if I had many more data, I think this is a reasonable approximation of what a clear-the-table flat tax would look like.

Notice, for example, how the two lines tended to track each other for most of the 1980s and early 90s. So there was some method to the madness. I’ve scaled the graph so when the lines follow each other, the tax changes had minimal impact on a household making about $80,000. I’m sure no one planned it that way, but that relationship held up for several years and a few tax overhauls. The relationship only broke down over the past few years as we’ve seen larger deductions and lower tax rates.

One of the drawbacks of my flat tax is no matter how impressive my R-square is (.9994 in 2005), any small deviation can be rather unpleasant for certain taxpayers. That’s the messiness of using a simple model to replace a complex one. The flat tax doesn’t quite capture the right “bend” of the current tax burden. For example, under my flat tax, households making $123,500 would have a tax hike of nearly $3,000. I don’t think they would be terribly impressed by my stab at being revenue neutral.

As a general rule, my flat tax is close to the current burden but it tends to be slightly more progressive. The major reason is due to social insurance taxes. Since so many lower income workers are completely exempt from any taxation under my theoretical flat tax, it’s made up for with higher taxes at the upper end. The Top 1% pays about 30% more taxes while the other groups in the Top 20% pay about 5% to 10% more taxes.

Let me explain how I got my numbers. I apologize but this is going to get mathy. In the data files of the CEO report, Table 1A has the effective tax rates and Table 1C has the pre-tax income for eight subsections; the five income quintiles, plus the highest 10%, 5% and 1%.

Since those last three groups are included in the Top Quintile, I used some basic math to extrapolate four new subgroups; the highest 1%, 1% to 5%, 5% to 10% and 10% to 20%. So now I have a grand total of eight data points with which to replicate 114 million households. Here goes.

If you run a scatter plot with the X-axis being the eight income points and the Y-axis being the tax paid (income times effective tax rate), you get this:

That's for 2005. Using the trend line function, I added a linear trend line and the linear equation is also included. In the equation, y = mx + b, m is our flat tax rate and b/m is the deduction. As you can see, that's how I got 31.85%.

Here's a spreadsheet I used for the computations. Columns B through I have the effective tax rates for the eight income groups. Columns K through R have the household incomes (note that the definition for household income changed in 1986). Columns T through AA are the taxes paid. In column AC, I used the LINEST function to get "m" which is the flat tax rate. Column AD has "b," and Column AE has the deduction (AD/AC).

Posted by edelfenbein at 7:48 AM

At 92, Anna Schwarz Blames the Fed

Still going strong at 92, Anna Schwartz lays into the Federal Reserve:

"They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence," she told The Sunday Telegraph. "There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says.

Posted by edelfenbein at 6:43 AM

The Subpime Crisis Graphs

If you're completely confused, the BBC has an excellent explanation of subprime crisis. Lots of graphs. Here's one of the U.S. housing market:

Posted by edelfenbein at 2:32 PM

The S&P Nears a 14-Month Low

The S&P 500 is back below 1390 again. We're over 11% off the October 9 closing high of 1565.15.

We're very close to the lowest close of 2007, which was 1386.95 (March 16). Before that, we'd have to go back to November 2006.

Posted by edelfenbein at 1:34 PM

2008 Index of Economic Freedom

From the Wall Street Journal:

The nearby table shows the 2008 rankings but doesn't tell the whole story. The Index also reports that the freest 20% of the world's economies have twice the per capita income of those in the second quintile and five times that of the least-free 20%. In other words, freedom and prosperity are highly correlated.

The 2008 Index finds that while global economic liberty did not expand this year, it also did not contract. The average freedom score for the 157 countries ranked is nearly the same as last year, which was the second highest since the Index's inception. This is somewhat of an achievement considering the rising protectionist and anti-immigration sentiment in the U.S., the uncertainty created by spiking global energy prices, Al Gore's highly effective fear mongering about global warming, and the continuing threat of the Islamic jihad.

Posted by edelfenbein at 11:13 AM

Hot CEOs Mean Hot Profits

A new academic study finds that more profitable companies have more attractive CEOs.

Using photographs of the highest and lowest ranked Fortune 1000 companies’ CEOs, psychologists Nicholas Rule and Nalini Ambady quizzed ordinary college students to determine which of the pictured faces were characteristic of a leader.

Without knowledge of the pictured individuals’ job titles, and by rating the faces on competence, dominance, likeability, facial maturity and trustworthiness, the students were able to distinguish between the successful and the not-so-successful CEOs.

Despite the ambiguity of the images, which were cropped to the face, put into grayscale and standardized in size, ratings of power- and leadership-related traits from CEOs’ faces were significantly related to company profits.

"These findings suggest that naive judgments may provide more accurate assessments of individuals than well-informed judgments can," wrote the authors. “Our results are particularly striking given the uniformity of the CEOs’ appearances.” The majority of CEOs, who were selected according to their Fortune 1000 ranking, were Caucasian males of similar age.

Could be, but color me skeptical.

(Via Joe Weisenthal)

Posted by edelfenbein at 10:50 AM

Citigroup’s Loses $10 Billion

Today is Reckoning Day for Citigroup (C). The company just reported its worst loss ever. Thanks to subprime investments gone bad, Citigroup incurred a write down of $18 billion. For the quarter, Citi lost nearly $10 billion, or $1.99 a share. That’s like burning $100 million every day. I think it’s safe to assume that Citigroup tried to thorw out as much garbage as it could, but I still expect to see more. The Street was looking for a loss of $1.03 a share. For last year’s Q4, Citi reported a profit of $1.03 a share.

The company also said that it will cut its quarterly dividend from 54 cents a share to 32 cents a share. That’s not as bad as I thought. Going by yesterday’s close, that implies a yield of 4.4% which beats most of the yield curve. Citigroup also announced job cuts of 4,200.

The big problem for Citigroup is its eroding capital base. That’s why it has turned again to outside investors for a capital infusion. The Wall Street Journal reports:

A new round of investments announced Tuesday includes $12.5 billion of preferred securities. The Government of Singapore Investment Corp., or GIC, will buy $6.88 billion, which follows the government fund's plan to invest $9.6 billion in Switzerland's UBS AG. Other investors include former Chairman and Chief Executive Sandy Weill and Prince Alwaleed bin Talal bin Abdulaziz Alsaud, already one of Citi's biggest investors.

Citigroup also announced it would offer public investors about $2 billion in newly issued convertible preferred securities.

I thought the last bit was interesting. I’m not sure how much demand there is from investors to sink more money into Citigroup, but we’ll find out.

Posted by edelfenbein at 8:18 AM

Not So Efficient Markets

Here’s an interesting setback for the Efficient Market Hypothesis. Researchers ran a wine tasting and found that people preferred wines they thought were more expensive. Not wines that are more expensive, just wines they think are pricier.

Researchers scanning the volunteers' brains while they drank confirmed they enjoyed the pricier wines more. The experiment helps explain how marketing practices can influence both the preferences of consumers and the enjoyment registered by their brains, said Antonio Rengel, one of the study's authors.

“The lesson is a very deep one, not only about marketing but about the human experience,” said Rangel, an associate professor of economics at the California Institute of Technology in Pasadena. “This study shows that the expectations that we bring to the experience affect the experience itself.”

On a related note, I’m raising the price of Crossing Wall Street to $1 million a year.

Posted by edelfenbein at 7:35 AM

Maybe the Economy Isn't So Dead Yet

Today's action:

Morgan Stanley Cyclical Index (CYC) +2.24%
Morgan Stanley Consumer Index (CMR) -0.27%

That's a huge spread for one day, but I doubt it will last. I still think the cyclicals will underperform the market for a long stretch.

Posted by edelfenbein at 4:01 PM

Risk Premiums in the Bond Market

A good way of gauging the market’s appetite for risk is by looking at the difference in bond yields of high-grade and lower-grade bonds. Here’s a look at AAA and BBB bond yields since 1962:

Notice how the BBB yields are always just a bit more. But that gap varies over time. Here’s a closer look since at the same graph but since 2003:

Now, here's a look at the risk premium for BBB bonds. By rate premium, I mean the difference between the AAA and BBB bond yields. For example, if AAA bonds are going for 10% and the BBBs are going for 12%, the premium would be 20%.

As you can see, the risk premium seems to bounce between two points. It's either less than 10%, or more than 20%. That's a very rough generalization but there's not much in between.

When the premium rises above 20%, that means that investors are demanding more money to take on greater risk. The high premium signals fear with investors are generally coincides, and often causes, a recession.

The risk premium shot over 20% shortly after 9/11 and eventually got as high as 25% in mid-2003. However, the premium gradually drifted lower although it never felt below 11%. Just recently, the premium jumped over 20% for the first time in over four years.

Posted by edelfenbein at 12:48 PM

Citigroup Could Write-Down $24 Billion

This is going to be an ugly week for bank earnings. At CNBC, Charlie Gasparino writes:

Citigroup could write down as much as $24 billion due to subprime and credit-related losses, CNBC has learned. In addition, the company could lay off as many as 20,000 workers as part of a comprehensive plan to slash costs and raise capital.

The plans will be unveiled Tuesday, when it reports fourth-quarter earnings. At the same time, Citigroup could also announce that it is cutting its dividend payment.

Citigroup also intends to raise as much as $15 billion from various foreign and domestic entities including Saudi Arabian Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, as America's biggest bank grapples with heavy mortgage market losses.

Alwaleed has owned his Citi stake since the early 1990s and helped engineer a previous rescue plan for the bank more than a dozen years ago. According to a report on the Wall Street Journal's Web site, he is likely to keep his total stake in the bank below 5 percent to avoid regulatory scrutiny.

By raising so much captial, Citigroup CEO Vikram S. Pandit is hoping layoffs can be kept to a minimum.

In my opinion, the truly scary part is that we don’t know what we don’t know. These products are so opaque, it’s difficult for anyone to properly analyze what’s truly happening. I also think this ruins the chance that Robert Rubin will be part of any future Democratic administration.

Posted by edelfenbein at 10:03 AM

Oopsie

From the Chicago Sun-Times:

Ace employee makes $152 million accounting error
BY SANDRA GUY

Ace Hardware discovered that a mid-level employee made innocent but enormously expensive and incorrect entries in ledger books that eventually led to a $152 million accounting error, Ace Hardware CEO Ray Griffith said today.

The poorly trained employee, who worked in the finance department at the co-op’s headquarters in Oak Brook, is no longer employed at Ace Hardware, Griffith said.

The accounting error initially was revealed last summer.

Ace Hardware will be forced to restate its earnings for fiscal years 2004, 2005 and 2006, and will correct its numbers for fiscal 2007.

Investigators hired by Ace Hardware’s board of directors told the board of their findings Tuesday, and Griffith revealed the situation to Ace Hardware store owners today. The five-month investigation cost roughly $10 million.

The unidentified employee, who had worked at Ace Hardware for at least eight years, made journal entries of a “sizeable amount” that “masked” a difference in numbers between two ledger books.

The ledgers looked as though they were reconciled, but were not.

The journals are the general ledger and the perpetual inventory journal.

“Numbers were flowing through one of the ledgers but not flowing into the other,” Griffith said.

About 25 percent of the error, or $34.6 million, dates back to 1995, Griffith said. The remainder, $117.4 million, occurred from 2002 through 2006.

The employee did nothing fraudulent, and no inventory or money is missing, Griffith said.

The person was not properly trained or equipped to do the job, and Griffith conceded that that was Ace Hardware’s fault.

“We are embarrassed by it,” Griffith said. “We did not provide the training, oversight or checks and balances to help that person do [his or her] job,” Griffith said. “[The employee’s] only intent was to try to do the best job for the boss and for our company.”

Part of the problem is the increasingly complex and competitive situation that hardware stores face, Griffith said.

Posted by edelfenbein at 1:16 PM

Mississippi Fred McDowell

Posted by edelfenbein at 12:04 PM

Mishkin: Stop Obsessing about the Fed

I have to agree with Frederic Mishkin of the Fed:

I think there is too much focus on what decision will be made about the federal funds rate target at the next FOMC meeting. What is important for pricing most financial assets is the path of monetary policy, not the particular action taken at a single meeting.

One of the great myths of the market is the over-agency of the Federal Reserve. In reality, the Fed is much less powerful than is commonly believed.

I think some people have to believe that there's some mysterious group that's in charge and running things. Ron Paul even blames the Fed for higher oil prices.

Nobel Laureate, Edward Prescott, wrote in the Wall Street Journal:

I am not saying that there are no real costs to inflation -- there certainly are. And if we get too much inflation we can exact high costs on an economy (witness Argentina as an example). However, I am talking here of the vast majority of industrialized countries who live in a low-inflation regime and who are in no danger of slipping into hyperinflation. It is simply impossible to make a grave mistake when we're talking about movements of 25 basis points.

Posted by edelfenbein at 2:41 PM

Zacks Earnings Commentary

Here's an interesting breakdown of the upcoming earnings season from Zacks.

Posted by edelfenbein at 10:07 AM

Goldman Sachs sees recession in 2008

From Reuters:

Goldman Sachs on Wednesday said it expects the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter.

In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent.

The unemployment rate will rise to 6.5 percent in 2009 from the current 5 percent, it said.

The weakening economy will force the Fed to lower policy rates by an additional 1.75 percentage points from the current 4.25 percent. Starting in September, the Fed cut rates at the last three meetings of the Federal Open Market Committee, reducing the target rate on loans between banks by 1 percentage point from 5.25 percent.

I think that might be right.

Posted by edelfenbein at 11:04 AM

AFLAC Hits New High

Financial stocks may not be doing well, but AFLAC (AFL) continues to rally.

Posted by edelfenbein at 11:00 AM

Bennie and the Feds

Posted by edelfenbein at 11:46 PM

Hey European Central Bank: STFU!

Bundchen Denies She Only Accepts Euros

RIO DE JANEIRO, Brazil (AP) — Euros? Dollars? Pounds? Gisele Bundchen insists she's perfectly happy with them all, again denying reports that the Brazilian supermodel is shunning the weak U.S. dollar in favor of European currency.

Bundchen — known to U.S. sports fans as the girlfriend of quarterback Tom Brady — has been struggling for months to knock down recurring reports that she insists on being paid in euros, which have been rising against the dollar.

"The story of the euro is a lie," she told the Brazilian newspaper O Globo in comments published Wednesday. "I work with many international companies, I earn salaries in different currencies, that's all."

Posted by edelfenbein at 11:17 PM

10 Tips on How to Clear Your Credit Report

From MSNBC. Here's a sample:

1. Reflect on the ways errors can creep in. Sometimes automated processes take over and creditors send inaccurate information about people’s bill-paying habits to one of the major credit bureaus. In other cases, people’s identities accidentally get mixed up at the credit bureau when a staffer enters a Social Security number incorrectly. And sometimes people with fabulous credit histories become victims of blatant identity theft.

2. Check out your credit report. You can examine your credit report carefully all on your own without paying a dime. Order free annual reports from the three major credit bureaus (Equifax, Experian and TransUnion) by visiting AnnualCreditReport.com or calling 1-877-322-8228. (Note: This is the only place where you can get free credit reports once a year without any strings attached. The “free” credit reports advertised by other sources aren’t really free!)

3. Contact the credit bureau first. If you find mistakes in your report, take the matter up with the credit-reporting agency immediately. Rather than dispute the mistake via an online form, send a letter that includes your complete name and address, a description of each item you dispute, an explanation of why you dispute it and a request for deletion or correction of the information.

4. Keep good records. Along with your letter, enclose copies (NOT originals) of documents that support your position, as well as a photocopy of your credit report with the items in question circled. Send the letter and enclosures by certified mail, return receipt requested, so you can document what the credit bureau received. Keep copies of all correspondence, and jot down and save notes about each phone conversation you have.

Posted by edelfenbein at 11:09 PM

The Nasdaq's Losing Streak

The Nasdaq Composite (^IXIC) looks to snap its eight-session losing streak today.

The Dow's record is 12 straight down days which happened twice, once in 1941:

28-Jul-41 130.06
29-Jul-41 129.19
30-Jul-41 128.95
31-Jul-41 128.79
1-Aug-41 128.22
4-Aug-41 128.17
5-Aug-41 128.14
6-Aug-41 128.10
7-Aug-41 128.09
8-Aug-41 127.48
11-Aug-41 126.01
12-Aug-41 125.81
13-Aug-41 125.65

And another in 1968:

8-Jan-68 908.92
9-Jan-68 908.29
10-Jan-68 903.95
11-Jan-68 899.79
12-Jan-68 898.98
15-Jan-68 892.74
16-Jan-68 887.14
17-Jan-68 883.78
18-Jan-68 882.80
19-Jan-68 880.32
22-Jan-68 871.71
23-Jan-68 864.77
24-Jan-68 862.23

Strange. Today is the 40th anniversary of the second one.

Posted by edelfenbein at 3:32 PM

Meanwhile, Back on Planet Wall Street

The 10-year T-bond yield (^TNX) is at a 46-month low. This brings us to Elfenbein's Rule of Financial Journalism #11587: You will never hear the words and "bonds" and "bubble" used in apposition in any financial media anywhere at anytime. The bond market is always assumed to be right.

The headline CPI rose 4.31% from November 2006 to November 2007 (the most recent data). That's over 50 basis points above the current 10-year yield.

Posted by edelfenbein at 1:53 PM

Hillary and Single Women

One of my goals with this blog is to address the misinterpretation of data, so I apologize for this tangent into polling data.

One of the themes coming out of the New Hampshire primary is Hillary Clinton’s base support among single women. I can already see three Maureen Dowd columns coming. The problem is that it’s partially correct and not the whole story.

Going by yesterday’s exit poll, Senator Clinton’s support is really with all women, especially older women and very especially, older white women. That’s where the gap really opens up. Younger men simply don’t vote for her. Put it this way, more than two-thirds of Hillary’s support came from women. Hillary’s win wasn't based on the power of the Sex and the City/Hear me Roar crowd, it was the power of the granny vote. And that's a powerful voting bloc. I think a reasonable estimate is that one in four Hillary votes came from a grandmother.

In the Democratic primary, the median age of voters is close to 50 and there were over 30% more women participating. Women are older, they vote more and they like Hillary. Among voters over 65, Hillary creamed Obama, 48% to 32%. Plus, Hillary had a 12-point lead among women. Still, even though Obama ost the women's vote badly, a majority of his votes were also from women. That's how large the gender disparity is. Combine the age and gender effect and you can see how Hillary pulled it off.

The voting gap between single and married people was relatively small. Hillary won both, singles 40% to 39%, and married 38% to 33%.

It’s true that single women were stronger Hillary supporters than married women (51% of single women were for here compared with 45% of married women), but not as much as the gap that single men were for Obama over married men (50% of single men supported him compared with 34% of married men). Both gender's singles were simply more in favor of their gender's choice.

But here’s the point being missed. A portion of “single women” must also include widows. The presence of so many older women voters must make that group somewhat large. As you can see in the data, pollsters use the phrase “unmarried” not "never married."

The pollsters also compare “mothers” with “women with no children.” Again, this can be misinterpreted. The category is mothers with children under 18. A women without children is often a women with adult children. Probably 20% of the voters were women over the age of 55. I think a fair amount would fall into the category of “women with no children.”

Of course, if there were more grandmothers working in the media, and fewer single women, the story coming out of New Hampshire might be a little different.

Posted by edelfenbein at 12:10 PM

Erin Burnett: Opium Head

Posted by edelfenbein at 9:45 AM

Did the Futures Markets Fail?

I just wrote about this a few days ago, but here it is again. Daniel Gross asks: "Why were the political futures markets so wrong about Obama and Clinton?"

The answer is that they weren’t wrong. They’re not predictions markets, they’re odds-setting markets. There's a big difference.

Going on the little evidence it had, the futures market declared Hillary a longshot, and she beat the odds. That’s not a market failure. That’s...beating the odds.

That's like saying Google's IPO was a failure because the stock has climbed so much since then.

Posted by edelfenbein at 12:41 AM

My Favorite NH Primary Stat

Among voters under 24, Ron Paul did better than Hillary. Different sets of course, but you get the point.

Here are the exit polls (GOP and Dem).

Posted by edelfenbein at 10:07 PM

Footnote of the Year

I’m a big fan of Michelle Leder’s Footnoted.org, a site devoted to uncovering the, sometimes bizarre minutiae of SEC filings.

Michelle’s readers voted one of Qwest’s amended employment agreements as the 2007 Footnote of the Year. The agreement allows the CEO’s daughter to use the corporate jet to commute to high school.

The main reason for the change? Allowing Mueller’s wife and stepdaughter to use Qwest’s jet for their personal use. As the Rocky Mountain News reported, the stepdaughter attends high school in California and Qwest is based in Denver. “The amendment reflects a great appreciation for his family situation as his daughter wraps up her current schooling in California,” Qwest spokesman Bob Toevs told the newspaper. Whether Toevs was able to say that with a straight face is open to debate.

My guru on all things corporate jet-related estimates that this perk could cost Qwest as much as $600K, assuming normal charter rates for the Falcon 2000. “Wish I could have gone to high school like this,” he writes. As for me, it certainly beats the B-64 bus that I used to take to high school.

Oh, and the stock? Not looking so good.

Posted by edelfenbein at 9:53 AM

How to Make Money Sleeping (Sort Of)

Recently, two economists found that the stock market does much better when Congress isn’t in session than when it is.

From 1897 to 2000, $1 invested in the Dow when Congress was in session became a grand total of $2. When Congress wasn’t in session, the $1 became $216.

Well, I’ve taken this one step further. I found that the stock market does better when the stock market isn’t in session.

I measured how the S&P 500 has fared in day sessions (opening bell to closing bell) versus night sessions (closing bell to the follow morning’s opening bell).

For this decade, the cumulative total of the day sessions is -11.52%. The night sessions add up to a gain if 8.94%.

For the decade (and century and millennium), the total S&P 500 is still down 3.61%.

Long-time readers of this blog know that I’m a proponent of the less-is-more strategy of investing. It’s not that I’m lazy. Or at least, that’s not all of it. But during the last eight years, many investors have been doing their best work when they’re sound asleep.

If anyone needs me, I’m going to take a nap.

Posted by edelfenbein at 7:58 AM

Cayne Out at Bear

He's going. Finally.

Cayne has been CEO since 1993. Except for the past year, shareholders don't have much to complain about.

Posted by edelfenbein at 7:22 AM

Bill Gates' Last Day

Posted by edelfenbein at 4:59 PM

Boo-Yah

Crossing Wall Street: February 25, 2007

I think the markets may be underestimating Senator Obama's chances. I have no special insight here; it just seems that way. I should add that my judgment in these matters is pretty bad.

Maybe not so bad. At the time, Intrade had "Obama to Win" at just 23 cents. Today, it's at 66 cents.

Posted by edelfenbein at 4:10 PM

Volatility's Impact on the Stock Market

The New York Times ran this graph on the stock market's volatility yesterday. I heard Dylan Ratigan the other day describing how volatile the market is. Actually, the market's volatility isn't very high on an historical basis. It's just much higher than it's been.

Here's a look at how well the S&P 500 has done by VIX level, which is an index of implied volatility. I took all the daily returns of the S&P 500 since 1990, and reordered them, not by date, but by VIX level. The Y-axis is the cumulative gain.

The magic point is 22.66. When the VIX is below that, the market does well. Above that, not so much. Before last July, the stock market had gone over years with only breaking the magic mark twice. Since then, we've been above it about half the time.

This comes as a bit of a surprise to me because I've generally felt that volatility doesn't have much impact by itself. Perhaps I have to reconsider, though my chart only includes data since 1990. I wouldn't mind seeing more.

(Note: Since I wanted to include the VIX numbers on the X-axis, the graph is actually a scatter-plot, so it's a bit distorted. Here's a view sans X-axis labels.)

Posted by edelfenbein at 2:43 PM

Could Oil Double From Here

I wouldn't bet on it, but some folks are:

The fastest-growing bet in the oil market these days is that the price of crude will double to $200 a barrel by the end of the year.

Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period. The contracts, the cheapest way to speculate in energy markets, appreciated 36 percent since early December as crude futures reached a record $100.09 on Jan. 3.

While analysts at Merrill Lynch & Co. and UBS AG say the slowing U.S. economy will lead to the biggest drop in prices since 2001, the options show some traders expect oil to rise for a seventh straight year. Demand will increase 2.5 percent in 2008, according to the International Energy Agency. U.S. inventories fell to a three-year low on Dec. 28. Production from Mexico is declining and Saudi Arabia is behind schedule in opening its newest field.

"One hundred dollars a barrel is actually 14.9 cents a cup, so we're still talking about oil being remarkably cheap,'' said Matthew R. Simmons, chairman of Simmons & Co. International, a Houston-based investment bank that focuses on energy. Inventories "are tight as a drum and I don't see how we get out of this box," he said in a Bloomberg television interview last week. "Demand clearly isn't starting to slow down."

Posted by edelfenbein at 10:10 AM

Amazon.com on Wall Strip

Posted by edelfenbein at 9:48 AM

Which Is A Better Investment?

Ford's stock or your mattress? Check the results:

Posted by edelfenbein at 9:32 AM

Follow Up on Momentum Stocks

A few weeks ago, I wrote about the tremendous success of momentum stocks. I wanted to follow up and show you how much better a momentum strategy has done against value-based strategies.

The following chart shows you how the top 10% of momentum stocks have done against the top 10% of book value, P/E ratio, dividend yield and price-to-cash flow. It ain't close.

The purple line is the overall market. I got the data from Ken French's data library. The major glitch is that the cash flow and P/E ratio series begin about 25 years after the others.

I was surprised to see how well the P/E ratio decile (red line) does. It's the only strategy that puts up a fight against momentum. Since 1974, the P/E ratio decile has slightly beaten the momentum decile.

To give you a clearer picture, here's the relative performance of the different strategies:

Posted by edelfenbein at 7:26 PM

Today's Jobs Report

Employment was lousy last month. The unemployment rate is now 0.57% above its March low. Traditionally, that number doesn't U-turn after that big a move. After an increase of 0.5%, the trend is usually here to stay, and it doesn't stop until it increases by more than 2%.

Posted by edelfenbein at 2:30 PM

A Word on Political Predictions Markets

It’s strange to see the political predictions markets like Intrade get so much attention recently (see here and here) because, until now, one of the very few people who gave them much attention was…me. As I’ve said before, I don’t place a great deal of faith in these markets, but I think they’re for fun and should be seen that way. (By the way, the top chroniclers of this scene is Chris Masse.)

Let me add a few random thoughts on these markets. The first is that they’re often called “predictions markets,” in fact, I just did, but that’s not quite correct. More accurately, they’re odds setting markets. I’ll hear people say, “Intrade said this will happen, and it didn’t, so Intrade doesn’t work” No, Intrade laid certain odds on an event happening. That doesn’t prevent a longshot from pulling through.

I also hear people say that it just follows the polls. For the most part, that’s true. But not always, and that’s where Intrade can be especially useful. For example, Mike Huckabee’s poll numbers are far better than odds would suggest. Why is that? I’m sure not. Perhaps the market isn’t correct and the Huckabee contract is a good value. Or maybe the market doesn’t see his popularity as lasting very long.

Three years ago, my Nationals got off to a blazing start in the NL East, 50-31 and a 5.5 game lead. They’re odds of winning the division, however, were still very low. The market thought that they would fade, and that’s exactly what happened.

Matthew Yglesias recently made an interesting observation, the markets are pretty boring. He’s right. Day-to-day, it is fairly dull. One thing to remember, though, is that these aren’t stocks, they’re futures. Futures are a strange animal. With futures prices, the underlying volatility can be extremely high, even though the prices can be somewhat stable.

The reason is the dispersion of returns. In others words, a political contract can potentially soar or crumble a great deal in a very short amount of time. I don’t mean just before expiration, I mean at any time. This is also why futures traders are all crazy people. If some candidate had a bad night last night, they’re futures could have fallen dramatically and the market takes that into account.

The price of the futures is the sum total of the odds of very wide-ranging possibilities. Let’s say the McCain contract is at 24 cents. That could be the sum of, say, a 30% chance of going to zero in a week and a 10% chance of going to 90 cents in a week, and many, many others. Unlike stocks, futures are a zero-sum game. If you take from one, you give to another. What would make the futures markets much more exciting would be an options market on the futures, but that would be seriously nerdy. And no one wants that.

Posted by edelfenbein at 11:18 AM

Make Up Your Mind

"Stock Futures Point to Further Decline"
--headline, Associated Press, Jan. 3, 7:02 a.m.

"Stock Futures Point to Flat Open"
--headline, Associated Press, Jan. 3, 8:22 a.m.

"Stock Futures Point to Higher Open"
--headline, Associated Press, Jan. 3, 9:21 a.m.

(via: BOTW)

Posted by edelfenbein at 8:02 PM

Bed Bath & Beyond’s Earnings

Bed Bath & Beyond (BBBY) just reported earnings for their third quarter. This is the one that ended in November so the holiday sales aren’t included.

I’ve been a defender of BBBY—and I still like and own it—but this report isn’t a good one. Sales rose by 10.8%. Operating and net earnings are down from last year, but thanks to share buybacks, the per-share numbers are up slightly. EPS rose 4.6% from 49.86 cents to 52.16 cents. The market was expecting 52 cents a share.

BBBY has been pouring money heavily into share buybacks. The number of diluted shares has dropped by 7.2% over the past four quarters. Although sales rose by 10.8%, sales-per-share rose by 19.5%. That’s the good part. The bad part is they’re paying for those sales with lower margins. This is the ninth straight quarter of lower net profit margins, although margins are still higher then they were in 2001.

Decreasing margins are rough for any business. To show you what I mean, let’s compare this past quarter with the Q3 from two years ago.

Net margins dropped from 9.29% to 7.70%. That’s a rate drop of 17.12%, which means that you have to increase sales by over 20% just to stay flat. Total sales rose 23.89% and diluted shares dropped 11.98%. Put it all together and you get an EPS increase of 16.66%. That's the kind of headwind they're running against.

Now for the bad news. Wall Street was expecting Q4 earnings of 78 cents a share. BBBY said it will be between 64 and 67 cents a share.

For the fiscal fourth quarter of 2007, ending March 1, 2008, the Company estimates it will earn approximately $.64 to $.67 per diluted share based, in part, upon a projected flat comparable store sales percentage for the quarter. This would bring the Company's full year earnings estimate to a range from approximately $2.08 to $2.11 per diluted share. The fiscal 2007 fourth quarter and full year have one less week than last year's corresponding periods, as fiscal 2006 was a fifty-three week year.

Here are the earnings results going back a few years:

From the conference call, here's Senior of Investor Relations Ronald Curwin discussing Q4:

As we said in September the business environment remains challenging particularly in areas most affected by housing market issues. Concerns about the economy, consumer spending, energy prices, housing and credit availability in particular persist. Recall that in last year’s fourth quarter we reported earnings per share of $0.72 per share which included a $0.07 per share non recurring charge. Excluding this non recurring charge earnings per share for the fourth quarter fiscal 2006 would have been reported at $0.79 per share. Also affecting the comparability of our fourth quarter 2007 earnings is that last year’s fourth quarter include 14 weeks of sales including the week after Thanksgiving versus this year’s fourth quarter that will have 13 weeks of sales excluding the week after Thanksgiving. The exclusion of the week after Thanksgiving in this year’s fourth quarter will have a negative impact on net sales of approximately $175 million when compared to the fourth quarter of last year.

Assuming a relatively flat comp stores sales percentage for the fiscal fourth quarter and concerting one less week of sales a year ago resulting from the current year calendar shift we anticipate a 2 to 4% percentage decrease in net sales and we would now estimate fourth quarter earnings in the range of from $0.64 to $0.67 per diluted share which would bring the full year’s earnings estimate in the range of from $2.08 to $2.11 per diluted share.

By the way, BBBY doesn't take questions during their calls. C'mon fellas, remember who owns the company!

Posted by edelfenbein at 5:56 PM

No Change for the SPX

For the first time in five years, the S&P 500 registered no change for the day. Yesterday and today, we closed at 1447.16. The Dow, however, rose 12.76 points and the Nasdaq dropped 6.95 points.

The last time the S&P 500 had no change for the day was January 10, 2003. Before that was January 28, 1997. Many years ago, no change days were more frequent, but that’s obviously true when you’re dealing with a low number. For example, there were 11 such days in 1954 when the index was around 30. We’re only had four in the last 19 years.

Interestingly, the Dow had back-to-back closings at 2999.75 on July 16-17, 1990. That turned out to be the market’s high before we entered a nasty bear market.

Posted by edelfenbein at 4:30 PM

2007 in One Graph

Here's an interesting graph. This is the relative performance of the ten industry groups in the S&P 500. Talk about a wide divergence! Eight of the ten groups outperformed the index. The other two, financials and consumer discretionary (as in homebuilders), dramatically underperformed.

One more thing. Notice how smooth the discretionary line is. That's why quantifying risk is such a hard game to play.

Posted by edelfenbein at 2:32 PM

About That $100 Oil Trade

The big news yesterday was that oil hit $100 a barrel even though it was just one trade. Now it looks like the trade was done by a guy so he could...tell his grandchildren.

An independent trader 'seeking his moment of fame' caused oil prices to hit unprecendented levels of $100-a-barrel yesterday following a single deal.

The buyer, who was trading on his own money bought 1,000 barrels of crude oil from a colleague, which is the minimum allowed.

Strangely, he then sold then back almost immediately, making a loss of $600. The move left industry insiders questioning the reasons behind the deal.

Stephen Schork, a former trader at Nymex and editor of the oil market Schork Report told the Financial Times: "A local trader just spent about $600 in a trading loss to buy the right to tell his grandchildren he was the one who did it.

"Probably he is framing right now the print reflecting the trade," he added.

Posted by edelfenbein at 11:12 AM

Pat Robertson Predicts Stock Market Crash

God told him:

Religious broadcaster Pat Robertson predicted Wednesday that 2008 will be a year of violence worldwide and a recession in the United States, followed by a major stock-market crash by 2010.

Sharing what he believes God has told him about the year ahead is an annual tradition for Robertson.

However, God/Robertson's track record isn't what you would expect.

Last year, Robertson predicted that a terrorist act, possibly involving a nuclear weapon, would result in mass killing in the United States. Noting that it hadn't come to pass, Robertson said, "All I can think is that somehow the people of God prayed and God in his mercy spared us."

That's all he can think of?

Posted by edelfenbein at 10:23 AM

Oh Erin!

We already caught you.

Update: From Men's Health, 8 Ways to Impress Me By Erin Burnett (via Deal Breaker)

Posted by edelfenbein at 8:24 AM

How to Spot a Market Top

Ever heard the saying, "they don't ring a bell at the top?"

Think again.

"Stock" beats "sex" in Google China keyword searches

BEIJING (Reuters) - The names of three banks and the word "stocks" beat "sex" to become four of the most Googled words in China last year, according to a Google China list seen on Thursday.

China Merchants Bank, Industrial and Commercial Bank of China and China Construction Bank ranked second, third and sixth, according to a list supplied by Google China on its website (www.google.cn).

"On the Chinese mainland, it was money and technology that took the honours last year," the China Daily said, pointing out that "sex" was the most popular keyword for Google users in some other countries.

Fourth on the list was "stock", not surprising with Shanghai shares having risen 97 percent last year. At number 1 was "QQ", a Chinese instant message service and a brand of car.

China's Central Bank, the Ministry of Finance and Banking Regulatory Commission ranked first, third and fifth in the "Most Popular Departments" list, the Web site said.

In another list named