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« January 2008 | Main | March 2008 » February 29, 2008A Look at Government Spending Each year, the Congressional Budget Office releases its report on the federal budget which also includes historical stats. What I find interesting is that over the past 30 year, non-defense spending by the federal government, as a percent of GDP, hasn’t varied that much. I don’t mean to say that it hasn’t varied at all—it certainly has. But the stats are much more stable than you would think if you went by political rhetoric. Since 1976, the amount of federal spending, except for defense, has averaged about one-sixth of GDP. The numbers haven’t strayed too far from the average. About two-thirds of the time, spending has been between 15.9% and 17.1%.
I think it’s worth considering that if we had repealed all the laws regarding our budget process, and instead applied very strict mechanistic rules, the outcome would have been surprisingly similar. Interestingly, the amount of federal debt held by the public as a percent of GDP has declined slightly over the past two year.
Here's the data. Posted by edelfenbein at 11:52 PM After Hours: Mississippi John Hurt Posted by edelfenbein at 6:04 PM Proxy Battle at the NYT Get ready folks. Looks like there's some ol fashioned proxy wrastlin' brewing down yonder at the NYT: A dissident investor stepped up pressure on The New York Times Co. Friday, formally proposing its own slate of four directors and saying the company needs to take more drastic action to compete online. Good for them; we need to see more of this. The stock is about were it was 11 years ago. Posted by edelfenbein at 1:27 PM Natural Born Presidents One of the sillier parts of our Constitution is that only natural born citizens can become president. The New York Times reports that this could raise questions for John McCain, who was born in the Panama Canal Zone (McCain’s father and grandfather were Admirals). Most experts agree that as a legal challenge, this issue won’t go very far. One lawyer said that if she were on the Supreme Court, she’d rule in McCain’s favor, “But it is certainly not a frivolous issue.” Interestingly, Barack Obama was to an American mother and a Kenyan father. Again, there’s no doubt that he’s an American citizen. He was born in Hawaii on August 4, 1961, so this could be the first election were the two major candidates were not born in the continental U.S. That’s less than two years after Hawaii was granted statehood. So if he was just slightly older, then we’d have the first election were the two major candidates weren’t born on American soil. Posted by edelfenbein at 11:07 AM California Housing Market I have some bad news for California homeowners. The median price of a home in the San Fernando Valley has fallen 25%, from $655,000 to $500,000. The good news is that the median value is $500,000. Posted by edelfenbein at 10:47 AM Leap Day The market is having a lousy day today, but historically, Leap Day has been one of the better market days. A few months ago, I looked at how well the Dow did every day of the year. On average, the Dow has risen 0.1256% on Leap Day. In terms of the Presidential Election Cycle, we're still in a flat period. The Dow has historically been fairly quiet from August of the Pre-Election year through July of the Election year. After that, the market shoots ahead for another twelve months. Posted by edelfenbein at 10:39 AM February 28, 2008Indexed Jessica Hagy's Indexed blog is very cute. She has a book out as well. (Hat Tip: Barry Ritholtz) Posted by edelfenbein at 4:35 PM More Lousy GDP Numbers The revised GDP report came out today and it showed 0.6% growth for the fourth quarter, which was the same as the initial report. "The first quarter will be ugly," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. "The strength of exports is what would keep us out of a recession if we don't go into one." This was one of the smallest revisions I'm aware of. The GDP number was revised lower by 0.0025%. Here's a look at GDP growth based on a trailing three-quarter basis. I don't know why, but that often seems to be useful time frame.
Posted by edelfenbein at 11:15 AM February 27, 2008Bernanke Warns My favorite headline is back in the news today. Fed's Bernanke warns of more economic trouble Bernanke Warns of Worsening Economy Bernanke warns of sluggish US growth Europe shares drop as Bernanke warns on writedowns Bernanke warns of sluggish growth Bernanke Warns Economy Worsening Here are some previous warnings. Bernanke Warns on US Housing, Economy Bernanke warns stock investors Bernanke warns against ad hoc regulation of derivatives Bernanke warns of economic 'drag' Bernanke Warns of Possible 'Crisis' From Budget Gap Bernanke warns of worse to come in subprime fallout Bernanke Warns Inflation Remains A Significant Risk Bernanke warns of 'vicious cycle' in deficits Bernanke warns about economic isolationism Bernanke warns of falling economy Bernanke warns action needed soon on budget Bernanke warns US about burden of ageing population Bernanke Warns Of Growing Inequality Bernanke warns against protectionism Posted by edelfenbein at 2:37 PM The 90-Day Treasury Is Below 2% Ben's testimony worked! The yield on the 90-day T-Bill has slipped below 2% again. Six months ago, the yield was close to 5%. Posted by edelfenbein at 2:34 PM RIP: William F. Buckley
From the New York Times: William F. Buckley Jr., who marshaled polysyllabic exuberance, famously arched eyebrows and a refined, perspicacious mind to elevate conservatism to the center of American political discourse, died Wednesday at his home in Stamford, Conn. Readers' Comments My favorite Buckleyism came in the letters section of the National Review. A woman wrote in to say that she was fed up -- she could no longer stand Buckley's use of big words and Latin phrases. She said that by the time she finished one of his columns, she didn't know if he was "for or against." Buckley wrote: "Madam, I am against. Sincerely - WFB" In a more civilized time, here's Buckley threatening to punch Gore Vidal. Posted by edelfenbein at 11:48 AM The Dollar Falls to $1.50 Against the Euro Ben Bernanke is speaking again today on Capitol Hill. This is the start of his big semi-annual testimony before the House and Senate. I've gone to the previous few hearings (even snagging the seat right behind Ben), but honestly, it's not that interesting in person. The room is almost completely empty, and the questions from members of Congress are a bit embarrassing. Yesterday, the U.S. dollar, for the first time, traded below $1.50 to the Euro. The U.S. currency slumped against 15 of the 16 most-active counterparts after Fed Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of slower economic growth pose a ``greater threat'' than inflation. Here's Bernanke's entire testimony. This is a sample: As part of its ongoing commitment to improving the accountability and public understanding of monetary policy making, the Federal Open Market Committee (FOMC) recently increased the frequency and expanded the content of the economic projections made by Federal Reserve Board members and Reserve Bank presidents and released to the public. The latest economic projections, which were submitted in conjunction with the FOMC meeting at the end of January and which are based on each participant's assessment of appropriate monetary policy, show that real GDP was expected to grow only sluggishly in the next few quarters and that the unemployment rate was seen as likely to increase somewhat. In particular, the central tendency of the projections was for real GDP to grow between 1.3 percent and 2.0 percent in 2008, down from 2-1/2 percent to 2-3/4 percent projected in our report last July. FOMC participants' projections for the unemployment rate in the fourth quarter of 2008 have a central tendency of 5.2 percent to 5.3 percent, up from the level of about 4-3/4 percent projected last July for the same period. The downgrade in our projections for economic activity in 2008 since our report last July reflects the effects of the financial turmoil on real activity and a housing contraction that has been more severe than previously expected. By 2010, our most recent projections show output growth picking up to rates close to or a little above its longer-term trend and the unemployment rate edging lower; the improvement reflects the effects of policy stimulus and an anticipated moderation of the contraction in housing and the strains in financial and credit markets. The incoming information since our January meeting continues to suggest sluggish economic activity in the near term. Posted by edelfenbein at 10:08 AM February 26, 2008Donaldson Raises Forecasts Again Donaldson (DCI) reported earnings yesterday of 42 cents a share which was in line with forecasts. I was surprised to see the stock trading lower in the after-hours market yesterday, but that seems to have had little effect on DCI’s open today. The shares rallied over 3% yesterday and are so far trading modestly higher today. I thought it was a pretty good quarter. This was Donaldson’s second quarter of their fiscal year, so for the first six months, the company’s earnings-per-share is 17% higher than last year. Sales are up 14%. This is from the company’s press release: “Our globally-diversified portfolio of filtration businesses provided the foundation to deliver another record quarter of sales and earnings,” said Bill Cook, Chairman, President and CEO. “Strength in our Engine Products businesses internationally plus continued growth in our international Industrial Products businesses, including Industrial Filtration Solutions and Special Applications Products, helped offset some of our weaker NAFTA markets.” The company also said that it expects 2008 EPS of $2 to $2.10 a share. That’s higher than what they first projected in November when they forecast $1.97 to $2.07. This is the second time Donaldson has increased its projection. In September, the company expected EPS of $1.92 to $2.01. Here’s a look at the stock (black line, left scale) and EPS (gold line, right scale).
Posted by edelfenbein at 10:32 AM Losing $100 Million a Day The Wall Street Journal reports that traders at Citigroup lost over $100 million a day on 15 separate occasions last year. "I think that the managements of many of the financial institutions simply didn't have a clue of what was going on," James D. Wolfensohn, a former World Bank president who now holds the title of "senior adviser" at Citigroup, said Sunday evening at a public event in Manhattan. This seems to be a classic case of not knowing what you don’t know. Citigroup’s last annual report acknowledged that it’s holding about $20 billion worth of securities that are tied directly or indirectly to global real estate. That’s all it says. No details or nothing. The company’s book value is $22.74 a share. Last May, the stock was going for over $55 a share. Posted by edelfenbein at 9:49 AM February 25, 2008The End of the Small-Cap Cycle? One of the market anomalies that can’t be easily explained by the Efficient Market Hypothesis is the out-performance of small-cap stocks. Still, I’m not much of a believer in the small-cap effect. The data is clear that it exists, but I suspect that much of the out-performance is simply a matter of liquidity. Also, the out-performance is very small and highly volatile. Small-cap stocks, as a whole, can lag the overall market for many years. In fact, the small-cap cycle has historically run about five to seven years. That's a bit long to base a trading strategy on. The graph below is a good proxy for the small-cap cycle; it shows the Russell 2000 divided by the S&P 500.
The small-cap cycle peaked on March 25, 1994, after which, small-cap issues declined until April 8, 1999. Notice that this happened while the rest of the market was still climbing. From that low, small-caps have had a great run, but that run could be over. The ratio hasn’t been able to surpass its high reached on April 19, 2006. This has now been almost two years. Of course, we never exactly know when a cycle has reached a turning point, but it's perfectly obvious in hindsight. I suspect that the cycle has turned in favor of large-caps. A major reason is that larger stocks offer more safety and that’s definitely on investors’ minds. Naturally, some of the worst abusers of the sub-prime mess have been large-cap stocks. Or at least, they used to be large-cap stocks. Posted by edelfenbein at 3:04 PM More on Momentum Stocks I’m afraid I’m becoming a momentum stock bore on this site, but it’s a subject that continually amazes me. The London Business School has done some more research: "Momentum, or the tendency for stock returns to trend in the same direction, is a major puzzle," the LBS three comment. Posted by edelfenbein at 11:56 AM Great Moments in Public Relations "I'm fairly confident that we're not going to do anything stupid. We have a history of not doing anything stupid." Angelo Mozilo, CEO of Countrywide Financial Countrywide Financial (CFC) had a rough 2007 with the stock being down by 78% and all. So what should a company do? Celebrate, of course! Countrywide Financial Corp., the nation's largest mortgage lender by loan volume, will host about 30 representatives of smaller mortgage banks for three nights next week at the Ritz-Carlton Bachelor Gulch ski resort in Avon. At one of the country's most-glamorous skiing spots, a regular room on a weekday starts at $750. Since July, Countrywide has laid off 11,000 people. The company has now said that the ski trip is off. Posted by edelfenbein at 10:51 AM Junk-Grade Fed? Here's an interesting editorial today from the New York Sun: What caught our eye in the markets last week was the verdict by Grant's Interest Rate Observer that, by its lights, the Federal Reserve Bank of New York was no longer a "presumptive triple-A" credit but rather one of "mid-grade junk" quality. This news didn't exactly rock the financial world, as Grant's is no kind of formal rating agency, even it if does have as elite and savvy a readership as any market newsletter could want. It wouldn't surprise us, though, were people — including some in Congress — soon to sit up and take notice of a worrying set of facts. Grant's was reacting to the sudden appearance on the Federal Reserve's balance sheet of $60 billion in lending under the new Term Auction Facility. The New York Fed's share of that $60 billion is no less than $44.9 billion. The TAF is a credit facility. Its purpose is to lend to banks under stress in the sub-prime credit crisis. The banks front collateral against which the Fed advances money. "The rub," Grant's writes, "is the quality of the collateral." It quotes a Financial Times interview with one financial strategist, Christopher Wood, as saying that banks "are increasingly giving the Fed the garbage collateral nobody else wants." Posted by edelfenbein at 10:06 AM February 22, 2008After Hours: The Carter Family - Are You Lonesome Tonight Posted by edelfenbein at 5:14 PM Hacking For Profits Here’s a strange story. In October, Oleksandr Dorozhko hacked into IMS Health’s computers to get inside information which he used to load up on puts on the company’s stock. He made a killing, about $300,000 off a $41,000 investment. The SEC tried to block him from taking his profits. A judge has ruled that what he did may be illegal but it’s not insider trading. Dorozhko may face more charges, but for now, he can keep his cash. The SEC argues that deception was involved in hacking into the computer system, which was designed to allow access only to authorized persons. Posted by edelfenbein at 11:26 AM February 21, 2008The Phillips Curve I'm not much of a believer in the Phillips Curve, the trade-off between employment and inflation, but with all the stagflation talk, it's worth taking a look.
This data is from 2000 to the present. The X-axis is the unemployment rate and the Y-axis is the trailing 12-month core CPI. The arrow points to the data from January and December. All the data I used is from the government so consider it at your own risk. Actually, I'm rather surprised by how well the curve holds up, meaning the dots seem to run diagonally from lower right to upper left. (Well, sort of...the R-squared is 0.3734.) If we're in stagflation, then this relationship should breakdown and the dots would start drifting to the upper right. So far, that isn't happening. At least, not yet. Posted by edelfenbein at 11:11 AM February 20, 2008How Does Inflation Impact Stock Prices? Since the market is digesting a troubling inflation report today, I wanted to look at how inflation impacts the market. I took the inflation-adjusted monthly market returns from 1925 to 2005 (thanks to my Ibbotson Yearbook), resorted them by inflation rate and look at the cumulative return by rate of inflation. As you might expect, high inflation is bad for equity prices. In fact, the only thing worse for stocks is deflation, which is really, really bad for stocks. Here’s my chart:
Stock returns do very poorly when deflation runs over 5.6% (data points 0 to 68). After that, stocks do quite well up to an inflation rate of 3.1% (data point 490). They then slow down a bit but still climb up to an inflation rate of 5% (data point 698). Now the trouble starts. Above 5%, stocks flat line up to an inflation rate of 12% (remember, I’m looking at the inflation-adjusted returns). After 12%, things get very ugly and stock returns plunge. So inflation isn’t good for stocks, but the troubling numbers we’re seeing are still a long way from being a major problem. Posted by edelfenbein at 1:41 PM Housing Indexes Calculated Risk has a great post looking at the differences in housing price indexes. As an admitted indexaholic (my name is Eddy, and I’m…), I’m afraid I have to resign myself to the fact that it’s basically impossible to come up with one simple index of house prices. The Case-Shiller Index has a monthly gauge of prices in 20 major markets. There’s also a quarterly national index. Calculated Risk writes, “OFHEO covers more geographical territory, OFHEO is limited to GSE loans, OFHEO uses both appraisals and sales (Case-Shiller only uses sales), and some technical differences on adjusting for the time span between sales.” The numbers from Case Shiller have been much gloomier recently. The reason is that lower-priced and non-GSE homes have fallen faster, which is probably because the lending standards were questionable. As long as home prices were rising, all the lending problems were invisible. Now that prices are falling, the problems are accelerating. The difficulty we’re having is that we’re not exactly sure what home prices, in aggregate, are doing. Posted by edelfenbein at 12:59 PM Obamanomics Now that it's very likely he could become president, what does Barack Obama want for his economic policy? I'm not sure if this is real policy or just pandering. Mr Obama’s plan would lower the corporate tax rate for companies that met criteria including maintaining their headquarters in the US, maintaining or increasing their US workforce relative to their overseas workforce, holding a neutral position in union drives among their employees and providing decent healthcare. Posted by edelfenbein at 12:04 PM Defaulting Before the Resets One of the big fears over the housing mess is that borrowers would default once their mortgages reset. It turns out, this is happening before the reset: Defaults for subprime loans issued in 2007 - none of which have reset yet - hit 11.2 percent in November. That represents perhaps 300,000 households, and is twice the default rate that 2006 loans had 10 months after being issued, according to Friedman, Billings Ramsey analyst Michael Youngblood. Posted by edelfenbein at 10:23 AM Today's Inflation Report Today's report on consumer prices shows that inflation is a still a problem. The headline rate was 0.4% and the core rate was 0.3%. Both were 0.1% above expectations.
Over the last four years, the headline CPI Index has grown at a 3.3% rate. The Fed Funds rate is currently targeted at 3%. To put the resurgence of inflation into some perspective, here's a look at the four-year trailing rate of the core CPI.
The line is clearly moving in the wrong direction, but we've seen a lot worse. Posted by edelfenbein at 9:55 AM The NASDAQ Stock Market on WallStrip The exchanges have been great stocks. NDAQ's earnings-per-share last quarter doubled. Posted by edelfenbein at 9:48 AM February 19, 2008A Quick Look at the Bear Market Here's a quick look at how some indexes have fared since the beginning of 2007.
Even though the stock market is down, much of the damage has been contained to banking stocks and cyclical stocks (particularly homebuilders). Consumer stock have largely been unaffected. Posted by edelfenbein at 1:54 PM Paul Krugman’s Favorite Word Aaron Schiff looks at Paul Krugman's favorite word. (Hat Tip: Felix Salmon) Posted by edelfenbein at 10:33 AM Rules for Sovereign Wealth One of the issues in today’s market is the role of Sovereign Wealth Funds. Many of these funds are run by not-so-friendly countries and they’ve placed several sizeable investments in western firms. The question many governments have is, how to deal with it. We don’t know exactly what these funds are or their objectives. Since this business is inherently international, the Financial Times opines in favor or global standards of conduct. I think that’s a terrible idea. Unless there are anti-trust or national security concerns, the decision to sell any company should rest with the shareholders and the shareholders alone. If the great sultan of Petrostan wants to blow a few billion on some American bank that lost its shorts investing in subprime, that’s between the sultan and the shareholders. I also think that owning parts of the west would be beneficial for these countries. It’s harder to kill off all the infidels when they’re the ones responsible for your quarterly dividend payments. Posted by edelfenbein at 10:29 AM I'm Back! I’m back—tanned, rested and ready. Actually, I’m slightly burnt, but that aside, Florida was wonderful. Here are a few items this morning. In case you missed this, the Wall Street Journal had a great story on “Joe Herrick of Gutterman Research.” That’s the nom de conference call of some hoaxer who manages to slip into real corporate conference calls. When it’s Joe’s turn to ask a question, he lays out some hyper-wonky question to senior management. Stammering and jargon ensues. Some CEOs are on to Joe and they find him highly annoying. Joseph Weisenthal calls him his “personal hero.” I agree, it’s pretty amusing. Most conference calls are dull, and they’re more about showcasing the analysts instead of the company. Medtronic (MDT) reported earnings this morning of 63 cents a share, two cents better than what the Street was expecting. These results exclude very large charges dealing with legal issues and acquisitions. The company earned 61 cents a share last year. Here’s a look at Medtronic’s sales and earnings for the past few quarters: Quarter...........EPS.............Sales The company also said that it wouldn't be surprised to see Wall Street's full-year estimate rise from $2.52 a share to $2.54 a share. On Sunday, The New York Times profiled David Swenson, the very successful manager of Yale's endowment. His advice to investors is, "Don’t try anything fancy. Stick to a simple diversified portfolio, keep your costs down and rebalance periodically to keep your asset allocations in line with your long-term goals." I agree with him and that’s pretty much the philosophy of this website. Although I disagree with his view that superior performance is impossible for individual investors. I don’t believe for a second that the little guy is “shut out.” In fact, I think the smaller investor has many advantages over professional investors. No individual investor has to struggle to “make” a quarter or beat a benchmark. Plus, individuals are probably less willing to follow the Wall Street crowd. The rules for beating the market are the same for everyone, buy and hold good companies going for a good price. Posted by edelfenbein at 9:06 AM February 14, 2008Is Obama Good for Business? We better start asking now. Business Week writes: So what would an Obama Presidency look like for business? "It would be a pragmatic, center-left administration," says Democratic political strategist Steve McMahon, who is unaligned with a Presidential candidate this year. "He's been pretty clear that business would have a seat at the table, but business wouldn't be able to buy all the chairs." In October, George Will profiled Austan Goolsbee, one of Obama's top economic advisers. Posted by edelfenbein at 11:09 AM February 13, 2008UNH on Sale If you can pull yourself away from the Roger Clemens' testimony, share of UnitedHealth (UNH) are on sale today. New York's Attorney General, Andrew Cuomo, has the company in his sites: New York Attorney General Andrew Cuomo said on Wednesday he is conducting an industry-wide probe of health insurers into an alleged scheme to defraud consumers by manipulating reimbursement rates. I can't speak to the merits of the case, but the company has already projected EPS this year between $3.95 and $4. If you're willing to wait, this is a good entry point. Posted by edelfenbein at 12:29 PM DC Ward and Precinct Primary Results My psuedo-state had its primary! Here's a spreadsheet of the unofficial results by each ward and precinct in the city of Washington. The Democrats are listed up top and the Republicans are below. (In Washington, it's hard to tell if you have all the Republican votes, or if no one voted.) On Democratic side, Obama creamed Hillary by more than 3-to-1. He won all eight wards and all 142 precincts. He even got majorities in every precinct too. Because no one cares about us, there were no exit polls. So I got some demographic data off the web and ran a few regressions to see if I could estimate the breakdown. My results show that African-Americans went for Obama by 86%, while whites and Hispanics both went 59% for Obama. Yep, that'll pretty much carry you across the goal line. There were 114,001 Democratic votes to just 5,803 Republican votes, that's an edge of close to 20-to-1. Still, the GOP primary was for 19 delegates which seems absurdly high. By comparison, Virginia's GOP primary had about 80 times the number of voters for just 63 delegates. John McCain easily won the DC GOP primary, getting about four times as many votes as Mike Huckabee. Although Huckabee did pull out a narrow two-vote victory in DC's 7th ward (56 to 54). Barack Obama got about 15,000 votes in the same ward. The 9th Precinct in upper Northwest is DC's most right-wing precinct which ain't saying much. Kerry beat Bush in the 9th, 60%-38%. Still, it's the Utah of Washington and McCain carried it with 87% of the vote. I live in the 24th precinct where Obama beat Hillary by about 2-to-1. There were 881 Democratic voters to just 40 GOP votes. McCain got 29 votes. Ron Paul came in second with five. Huckabee had four and Guiliani got two. Here's a "heat map" of Obama's support made by Adam Baily at DCist.com. The Nation's Capital is clearly the ultimate blue state:
Posted by edelfenbein at 6:34 AM February 12, 2008Life Imitates the Onion Seattle Times, February 12, 2008 Starbucks stores to shut 3 hours on Feb. 26 for retraining baristas The Onion, March 14, 2004 Starbucks To Begin Sinister 'Phase Two' Of Operation Posted by edelfenbein at 4:32 PM The SI Swimsuit Indicator
This year's cover features Marisa Miller which could be very bullish for stocks. When an American, such as Ms. Miller, appears on the cover, the Dow has gained an average of 13.9%. When there's no American on the cover, the Dow has only gained 7.2%. To think that some people still believe in EMH. (Via Bespoke). Posted by edelfenbein at 1:27 PM The S&P 500 and Its Earnings Here's a look at the S&P 500:
The chart follows a logarithmic scale. (If I were smarter, I'd know how to make a logarithmic chart in Excel where I could zoom in on my high and low points. Since I can't, this will have to do.) The black line is the S&P 500 and it follows the left scale. The blue line is earnings and it follows the right scale. Where the lines intersect is a P/E ratio of 15.85 (which is 10^1.2). In my opinion, this really wasn't a valuation bubble where valuations overshot prices. Instead, the fundamentals tumbled beneath prices. Posted by edelfenbein at 1:15 PM The Porn IPO From the Guardian: The stock market is to provide its first listing for a pornography publishing group as the adult magazines empire founded by Express owner Richard Desmond next week seeks a listing on the junior Plus Market. Posted by edelfenbein at 9:46 AM February 11, 2008Gilead on Wall Strip Today, Julie looks at Gilead (GILD). What I find amazing about this company is that it's able to maintain 40% net profit margins. That's crazy. I think if you go any higher, you're officially in the mafia. Posted by edelfenbein at 3:37 PM Do Stock Prices Have Memory? Felix Salmon recently had a post about a bet between Justin Wolfers and Barry Ritholtz on the stock market and trends. Barry took the pro-trend view while Justin stood for random walks. (For the record, Justin won $20 from Barry.) There’s an emerging amount of literature on this topic and it’s starting to point toward the trend camp. As strange as this may sound, stock prices seem to have a bit of “memory.” One day’s move has an impact on the next day’s move. It’s not big, but it’s there. If the market followed a random walk, this shouldn’t happen. In my mind, this is another chink in the armor of EMH that can’t be easily dismissed. Here’s a good example of what I mean. Plus, I guarantee you that this is one of freakiest charts you’ll see all day:
Ok, some explanation is needed. I took every daily change of the S&P 500 from 1950 to today and ranked them, left to right, going from worst to best. The blue line shows the cumulative gain of the next day’s market. As you can see, if you stayed in after bad days, the market kept going down. After flat days, the market remained somewhat flattish. And after good days, the market continued to rally. Whatever one day's trend was, it followed through to the next day. The blue crosses 1.0 at a point that corresponds with a daily gain of 0.64%. This means that the market’s entire gain has come on days following a 0.64% up move. The rest of the time (over 80%), the market is net flat. Half the market's gain came on day's following 3.2% up moves. On average, that happens slightly less than once a year. The black line shows the market’s behavior two days later and it’s much closer to what we would expect, a growing line without any strong discernable trend. Actually, to the extent there is a trend, it seems to be a small reversal from what the market did two days before (notice the strong rise early on followed by a weaker rally). Roughly speaking, two days after the market drops more than 0.8%, the market rises at an annualized rate of nearly 28%. If the market is trend sensitive, then these reversals are crucial. They appear to happen after extreme moves. Posted by edelfenbein at 1:44 PM W.R. Berkley’s Earnings W.R. Berkley (BER) just reported its fourth-quarter earnings. For the last three months of the year, net income dropped to from $198.1 million to $184.1 million. On a per-share basis, that’s a fall from 98 cents to 97 cents. With insurance companies, it’s better to look at operating results. Here, BER saw its number drop from $193.7 million to $183.2 million, which is actually a penny per share increase to 97 cents a share. That beat Wall Street’s estimate by two cents a share. For the full year, Berkley’s operating income was $3.73 per share which was a nice increase over the $3.46 per share from 2006. Wall Street currently sees BER earnings $3.86 for 2008 which is a pretty small increase. Still, it means that the shares are going for less than eight times this year’s earnings. This is a good company going for a good price. Posted by edelfenbein at 12:56 PM Changes to the Dow The gatekeepers of the Dow Jones Industrial Average (^DJI) have decided to boot Altria (MO) and Honeywell (HON) from the index. The two new additions will be Bank of America (BAC) and Chevron (CHV). Chevron was in the index from 1930 to 1999, though for much of the time it was known as Standard Oil of California. Honeywell was first included in the index in 1925. Altria was added in 1985. Personally, I would get rid of Alcoa (AA) and General Motors (GM). Here's a look at all the changes to the Dow going back to the original rail index. The Dow is often criticized for being unrepresentative of the market. That's true and I prefer to the use the S&P 500 (^GSPC) which is market-weighted. Still, the Dow isn't that bad. The index that should be ignored is the Nasdaq (^IXIC). That index is dominated by a few big names that are highly correlated to each other and little else. Being added to the Dow isn't much of a buy signal. Here's what happened since AIG (AIG), Pfizer (PFE) and Verizon (VZ) were added in 2004:
Here's what happened when Microsoft (MSFT), Intel (INTC), SBC (SBC) and Home Depot (HD) were added in 1999:
The Dow is zero for the last seven. Posted by edelfenbein at 9:09 AM February 8, 2008Calling All Technical Analysts Is this a good chart?
How about now?
This is the Dow starting from a few days after the crash of October 1929. Posted by edelfenbein at 2:21 PM Department of Strained Metaphors The goal of monetary is famously described as taking away the punchbowl once the party gets started. Dallas Fed president Richard Fisher explains his dissenting vote: In the current financial-market turmoil, credit markets have been cutting back on lending to important segments of the nation's economy. As a result, "instead of taking the punchbowl away, the Fed is now faced with the task of replenishing the punch," Dallas Fed president Richard Fisher said Thursday. Yes, but cutting 125 points in eight days is less like tequila and closer to doing lines of blow off the hooker's ass. Posted by edelfenbein at 1:26 PM February 7, 2008The $72 Billion Social-Climber If you get a chance, I recommend Irwin M. Stelzer's article on Jérôme Kerviel and Société Général. It's a complex story and there's more going on than appears. The scandal seems to have taken on a Tom Wolfe-like angle with socio-political dimensions as well. Posted by edelfenbein at 12:30 PM Trading Is Like Sex and Drugs It's official, we're all trading junkies. The New York Times reports: It is easy to dismiss Jérôme Kerviel, the rogue trader at Société Générale, as a fluke. If trading is like sex, then think of Crossing Wall Street as your friend with benefits. Posted by edelfenbein at 12:15 PM Buy List Updates There are a few news items to pass along for stocks on our Buy List. Danaher (DHR) was upgraded at Deutsche Bank from Hold to Buy. Joe Banks (JOSB) reported that same-store sales dropped 1.2% in January. The company forecasts earnings growth of 12% to 14% for 2008. Yesterday, Fiserv (FISV) reported Q4 earnings of 69 cents a share (after charges), two pennies below the Street. The company sees 2008 EPS of $3.33 to $3.47. That seems like low-balling to me. The Street was looking for $3.46. Posted by edelfenbein at 11:15 AM Dow Jones Channels Emily Litella Do you remember Gilda Radnor’s SNL character Emily Litella? She was the older lady who would do news commentary on an item that she invariably misheard. This led her to discuss topics such as free Soviet jewelry, Presidential erections or making Puerto Rico a steak. Yesterday, Dow Jones reported that Warren Buffett said that if the current account deficits continue, the dollar will be "worthless." One small problem. He actually said it will be "worth less." Nevermind. (Via DealBreaker) Posted by edelfenbein at 10:38 AM That's Our Ballmer Here's a small tidbit on Steve Ballmer I noticed in an article on Microsoft/Yahoo: Ballmer doesn't delay when he decides on a purchase. Tellme Networks Inc. CEO Mike McCue held meetings with Ballmer for two days before the Super Bowl professional football championship last year and figured his group would hear back after the game. Posted by edelfenbein at 10:20 AM Astrologers offer Year of the Rat stock tips From Reuters: Forget about graphs, charts and economic forecasts. Wary investors in Asia are turning to feng shui masters to tell them which way the markets will head in the Chinese Year of the Rat. The rat is the symbol of money? Not to me. They're just rats. Posted by edelfenbein at 9:47 AM February 6, 2008We're Holding Up Well Our Buy List is down 8.68% for the year, but we're holding up much better than the rest of the market. Since January 14, the S&P 500 is down 6.34%. We're only off 2.54%. Posted by edelfenbein at 4:39 PM Independent Research and Blogs: A Quite Modest Proposal Five years ago, Wall Street and the SEC reached the famous Global Settlement. This came as a result of the conflict of interest between equity research and investment underwriting. The settlement required funding of “independent research.” The result has been a disaster and few people will admit it. Basically, nobody wants this research. At one point, Goldman’s website got a grand total of 408 unique visitors in one month. That’s just pathetic. The money allocated for state government “education programs” has done even worse. In Georgia, $4.3 million was spent on commercials that were little more than political ads for the incumbent. While this has been happening, an impressive stock blog culture has blossomed and become a real part of Wall Street. And most of these blogs, like mine, are completely free. If investors want independent research, they now know where to find it. Here’s my proposal: Instead of wasting money on political ads or over-paid consultants that nobody reads, let’s fund something that’s already working. Each year, the trustees of the of independent research funds should award prizes of, say, $10,000 each, to the best finance bloggers. A committee could decide the awards. The Global Settlement was for $1.4 billion so I think they could scrape together a little cash to fund some worthy blogs. It would be a small slice of what’s already being spent and it would certainly have a much greater impact on research that is truly independent. Posted by edelfenbein at 2:50 PM Department of Irony At the same time, Google is complaining about the Microsoft/Yahoo merger, Time Warner announces plans to split up AOL. To add some context, check out this concern from eight years ago: Others say the deal could also raise flags over the combined AOL Time Warner's ability to limit access to Internet content. "From the consumer point of view, there may be questions about whether you'll have to be an AOL subscriber to get Time magazine," says Charlene Li, an analyst with Forrester Research (FORR) . "That combination of media with the access is one through which you may be able to block access to your competitors' subscribers." Posted by edelfenbein at 2:10 PM The Black Swan I finally got around to reading The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb. It’s fascinating, albeit, infuriating book. In it, Taleb critics the idea that financial markets follow the classic bell curve. As a result, much of understanding about markets—everything from risk control to options values—is completely wrong. While this is an intriguing idea, and I believe he’s correct, The Black Swan is largely unreadable. Taleb’s writing isn’t merely bad, it’s downright offensive. The entire book is written in a smug and obnoxious style filled with pointless asides. He’s argument is barely coherent and nearly every page includes parentheticals or scare quotes that simply aren’t needed. Taleb, like all writers, ought to adhere to Mark Twain’s dictum: eschew surplusage Taleb could have written the book in 50 pages, tops. He also could have spared us his opinion on everything I don’t care about. Taleb constantly reminds us that he’s an aesthete, which you would think would lead him to be a better writer. He’s one of the people, and I’m sure you’ve met someone like this, who needs to call everything by its less-well-known variant. Do you remember the guy in college who did one semester abroad and came back suddenly using “lift” and “petrol”? That’s Taleb. Now imagine 300 pages of it. Muslims are “Moslems”; he’s “Levantine” not Lebanese. First and second become “primo” and “secondo” (I had to Google it).Strangely, even Daniel Kahneman is routinely called “Danny.” Leaving the writing aside, the subject is very important. The question that I think it most interesting is, how do we quantify the risk of outliers—meaning, very rare events. Or, due to their nature, is that impossible? Interestingly, we’re been watching a Black Swan event unfold (fly out?) before us in real time. The subprime crisis has exposed many financial firms to far more risk than they believed. All the major investment banks report their “value at risk,” or if you’re a cool kid, their VAR. They all use different equations to reach their VAR but basically, it designed to measure how much money is at risk with a 95% confidence level. But this is where some problems are coming. For example, Merrill Lynch’s VAR indicated that it couldn’t be expected to lose more than $5.8 billion in a single quarter. Well, they lost $8.4 billion. I don’t have any answers to the issues Taleb raises, but it’s not an academic point. The worst part of the subprime debacle is that we don’t know what we don’t know. The odd thing about Black Swans is that even if we suspect their existence, then they no longer exist. Posted by edelfenbein at 12:55 PM How the Market Behaves After Big Down Days I once remember hearing that the market tends to retrace one-third of its previous days trend after a large move. I decided to put that theory to the test. Yesterday, the S&P 500 lost 3.2%. This was the 38th time the index has done that since 1950. Here's an average of how those 37 previous sell-offs played out.
The average loss for the sell-off is 5.01%. After that, nearly every day is an up day. By the ninth day, the S&P 500 is down 3.48%, which is indeed, a retracement of about one-third. The market still trends higher to the 17th day where it's down just 3.01%, or about a 40% retracement. At that point, the linger effects of the sell-off seem to dissolve. Posted by edelfenbein at 10:56 AM February 5, 2008Strange Market Fact of the Day Never underestimate the power of momentum on Wall Street. Since 1950, every penny of gains in the S&P 500 has come on days following 0.64% up moves. That happens roughly once every five market days. In other words, if you invested only on days following 0.64% up days, and sat in cash the other 81% of the time, you would have easily beaten the market. Warning: I'm not advocating such a strategy. That's your classic sinkhole of back-testing. I merely want to show you how trend sensitive Wall Street can be. Posted by edelfenbein at 1:49 PM Nicholas Financial Reports Earnings Nicholas Financial (NICK) reported earnings today. For the December quarter, the company's third, NICK earned 22 cents a share which is a big drop from the 27 cents a share it made in last year's third quarter. The big difference was the 106% rise in "provision for credit losses." That's about an increase of 12 cents a share. If these results are as bad as it gets for NICK, consider that the stock is going for 32 times this past quarter's earnings. Posted by edelfenbein at 11:34 AM The Myths of Innovation Here’s an interesting article from the Sunday New York Times. It questions the idea that innovation comes from a sudden burst—a Eureka moment—but instead is the result of gradually building smaller insights. “The most useful way to think of epiphany is as an occasional bonus of working on tough problems,” explains Scott Berkun in his 2007 book, “The Myths of Innovation.” “Most innovations come without epiphanies, and when powerful moments do happen, little knowledge is granted for how to find the next one. To focus on the magic moments is to miss the point. The goal isn’t the magic moment: it’s the end result of a useful innovation.” Posted by edelfenbein at 10:07 AM Politics and the Markets Richard Nixon was once asked what he would do if he weren’t president. He said that he’d probably be on Wall Street buying stocks. One old-time Wall Streeter was asked what he thought of that. He said that if Nixon weren’t president, he too would be buying stocks. Today is Super Duper Tuesday. There are about a million primaries going on in several different states. I don’t have much to say about politics, but I would strongly caution anyone from drawing investing conclusions from today’s results. People love to talk politics, and people love to talk stocks, but the two really don’t have that much to do with each other. Policy, of course, can have a major impact on stocks but when it does, it’s the kind of policy that’s barely a part of the permanent Republican-Democrat debate. Sarbanes-Oxley, for example, passed the Senate 99-0, and the House 423-3 (Ron Paul being one of the three). Stocks have done well under Democratic and Republican presidents. Stocks have also crashed under Democratic and Republican presidents. The closest thing to a constant I can find is that the stock market really doesn’t like Quaker presidents (Nixon and Hoover), but the sample size is kinda small. My advice is to ignore any chatter you may hear that so-and-so is good or bad for the market. The assumption is that politicians are like players on a football field, and the stock market is the score. I think it’s exactly the opposite. What’s really interesting isn’t how the market responds to politicians, it’s how politicians respond to the markets. The stock market is running unopposed this year. Posted by edelfenbein at 9:49 AM February 4, 2008Will Ferrell on CNBC This is a bit old, but here's Will Ferrell causing havoc on Power Lunch. Posted by edelfenbein at 1:46 PM Profile of Steve Schwarzman This must be the season for gigantic profiles of financial bigwigs. Now, the New Yorker's James B. Grant takes 10,000 words to look at Steve Schwarzman. Here's a teeny, tiny bit: There were no dance performances on Yale’s all-male campus, but the New England women’s colleges were filled with aspiring dancers. It occurred to Schwarzman that with these women he could stage a dance performance, and charge admission. “Put attractive women in tights and you’d sell out,” he said. He got in touch with Walter Terry, the dance critic for Saturday Review, and persuaded him to attend. He scheduled the performance for a weeknight, when nothing else was competing for students’ attention. The event sold out, and Terry wrote about it in Saturday Review, in the issue of March 29, 1969. In the article, Schwarzman, asked about his future, said, “I can’t afford the arts right now. That takes money. So I’m going to a school of business administration.” You gotta admit, that's good advice. Posted by edelfenbein at 12:00 PM Google Attacks Microsoft/Yahoo Deal This is a bit pathetic. Google is complaining about the potential merger between Yahoo and Microsoft. At Google's blog, the company's lawyer asks, "Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC?" That question makes little sense. He's implying a relationship between the deal and Microsoft's future attempts at breaking the law. By that logic, how do we know that this deal won't lead to Microsoft selling crack? If Microsoft wants to overpay for Yahoo, that's their business. Posted by edelfenbein at 9:26 AM February 1, 2008Mstislav Rostropovich Posted by edelfenbein at 4:42 PM ExxonMobil's Earnings One of the big stories today is ExxonMobil's (XOM) record earnings. For 2007, the company earned $40.6 billion, the most ever for an American company. For the fourth-quarter, the earned $11.7 billion, which is also a record. Despite the huge numbers, it's really not as impressive as it sounds. First, XOM's net increased by less than 3% last which is less than the growth of the economy. In real terms, this year's profit is less than last year's. Thanks to fewer shares, EPS rose by 10.2%. Also, the company's profit margins slipped slightly from 10.5% to 10%. Finally, the company paid over $100 billion in combined taxes for the year. Posted by edelfenbein at 3:07 PM Bottomfishing in Homebuilders I'm not much of a fan of bottomfishing for investments. There are two reasons. First is that stocks can go much lower than you assume. It's very hard to know where it will end. The second is that when the selling does end, it usually takes a knowledge of the company or industry that only very few people have. A lower stock price doesn't mean that a stock is cheaper. Strangely, much of the evidence suggests just the opposite. Having said that, here's a look at the battered Homebuilders ETF (XHB). For those brave souls who bought a few days ago, they're already seeing some nice gain.
Posted by edelfenbein at 2:35 PM The Kirk Report's Top 10 Stock Screeners Charles asked his readers for the best stock screeners. Here's what they gave him: 2. Amibroker 4. Morningstar 6. SmartMoney 8. StockCharts 10. Yahoo Finance I can't claim to be familiar with all of these, but Charles' readers prefer AAII by "a wide margin." Posted by edelfenbein at 1:27 PM Nominal GDP Wednesday's GDP report was awful. It now looks like the economy has entered a recession, or a best, a situation very close to one. Here's a look at nominal, meaning not adjusted for inflation, GDP growth. Some folks think this is where the Fed Funds rate ought to be. For the last quarter, nominal GDP growth came in at 3.2% (annualized) and the Fed is now down to 3%.
The problem with GDP is that one lousy quarter usually leads to another lousy quarter. The data series is very trend sensitive. For real GDP, the magic point seems to be 2.8%. In 1990-91 there were seven straight quarters below 2.8%. Then 26 of the next 34 were above 2.8%. This was followed by 11 straight quarters below 2.8% (in 2000 to 2003). Then nine out of 12 were above, and only three of the last nine were below. Over the last 60 years, 57% of the quarters have had growth above 2.8%. But one quarter with above 2.8% growth has a 66% chance of being followed by another above 2.8%. A quarter with less than 2.8% growth has a 44% chance of being followed by another one below 2.8%. Posted by edelfenbein at 12:33 PM J'accuse!
The strange case of Jerome Kerviel is getting stranger. The WSJ reports: Société Générale says wayward trader Jérôme Kerviel lost the bank $7.2 billion. But that was last week. He's now on his way to cult celebrity -- and he still hasn't lost his job. By calling him "the Che Guevara of Finance," do they mean that he personally shot countless people, including children, for “ideological crimes,” and tried to blow up the Statue of Liberty? Eh...probably not. "Let's be honest: No one likes banks...and people like the rich to get cheated," says Christophe Rocancourt, a celebrated French con man who swindled wealthy Americans in the 1990s by masquerading as a French member of the Rockefeller family, a film producer and various other people. Wow, I didn’t even know the PCF was still around! Those boys really did have a tough century. It wasn’t just anyone who opposed World War 2 and supported the wars in Indochina and Algeria, plus the Soviet invasion of Afghanistan. There are, however, some problems with their comparison. For example, Captain Dreyfus lost his job and was sent to Devil’s Island. Kerviel is probably looking at a move deal. Posted by edelfenbein at 12:11 PM The Worst Idea in the History of the World I'm exaggerating, but not by much: New Debit Card Borrows Against 401k Will the payouts be in cash or lotto tickets? Posted by edelfenbein at 11:10 AM Today’s Jobs Report The government just reported that the economy lost 17,000 jobs last month. This was the first decline in employment since 2003. The unemployment rate ticked down to 4.9% from 5.0%, but looking at the raw numbers, it really only dropped from 4.75% to 4.25%. It also looks like the BLS undated all the non-farm payroll numbers going back to 1990. I get a little annoyed seeing the government completely revised numbers from nearly 20 years ago. This revision could have happen earlier but it’s the first I’ve seen of it. Not surprisingly, payrolls weren’t as strong as previously believed. Here’s a look at the old and new numbers:
On the chart, the gaps looks small, but don't let that fool you. There are about 400,000 jobs less than previously thought. Here's a look at the number of jobs as a percent of the population. The regular unemployment rate only counts people in the labor force.
Posted by edelfenbein at 9:40 AM The Risk Cycle AEI recently published an interesting report on the economy. It's a bit long, but here's a sample: The temptation during the last half of 2007 was to view the problems tied to falling house prices as contained and manageable. At first, it was just a subprime crisis, but by the end of 2007, it had become clear that the subprime crisis was expanding into a real-estate sector crisis that, in turn, had been magnified by the securitization of claims on real estate whose value was falling. Every financial statement by a bank or investment bank that failed to specify underlying assumptions about the path of real-estate prices was and is subject to constant revision. Fourth-quarter reports by U.S. commercial and investment banks all reflect the sharply elevated losses attributed to worsening conditions in the real-estate market that, in turn, reduced the value of derivative securities on the balance sheets of U.S. financial institutions. Posted by edelfenbein at 9:05 AM The Surge in Tobacco Stocks This November will mark the 10th anniversary of the Master Tobacco Settlement. The settlement was an outrageous agreement between the four largest tobacco companies on several state governments. The tobacco companies have to make huge payments to state governments. As a result, their business has to be protected. The government's revenues are too dependent on them. Now cigarette prices are kept artificially high and the industry is well-protected. As you can see, the major tobacco stocks have done very well since the settlement was signed.
Posted by edelfenbein at 9:01 AM Microsoft Bids for Yahoo I've made of this story for months and now it's coming true. Microsoft (MSFT) is offering $44 billion for Yahoo (YHOO). This comes out to $31 a share. I honestly don't see how this makes sense at all. Before taking a detailed look at the businesses, just look at the numbers. For the last three years, Yahoo's earnings-per-share have dropped from 58 cents to 52 cents to 47 cents. This year, the consensus is for 45 cents. I just don't get how that equals $31. Years from now, business students will study how Yahoo was in perfect position to dominate the Internet, but they lost. Google didn't have to win. The future was in Yahoo's lap, but they went for Hollywood instead. Two earnings reports to pass along. AFLAC (AFL) earned 78 cents a share, two cents below estimates. Still, that’s a nice jump over the 66 cents they made last year. The company said that it’s looking to grow EPS by 13% to 15% this year, which works out to EPS of $3.70 to $3.76. Yesterday, SEI Investments (SEIC) reported earnings of 35 cents a share. That was inline with forecasts. The stock responded by dropping 80 cents a share. Also, Leucadia (LUK) is buying a large stake in AmeriCredit (ACF) which is an auto finance firm. Leucadia is a shrewd investor and I note this because ACF is in the same industry as our own Nicholas Financial (NICK). NICK will release its earnings on Tuesday. Posted by edelfenbein at 8:38 AM |
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