Archive for October, 2008

• The Dow to S&P Ratio
  Eddy Elfenbein, October 28th, 2008 at 3:00 pm

  Leaving aside arguments over price-weighted indexes, the Dow has recently been doing better—or rather—falling slightly less dramatically than the S&P 500. The two indexes generally move in tandem, but divergences aren’t unusual and we’re seeing one now.
  The ratio of the Dow to the S&P 500 is now at a six-year high. As of today’s close, the Dow is 9.64 times the S&P 500. (This is, of course, index value and not the market value of the two indexes.)
  If this trend continues, the ratio could soon reach a 32-year high—and if the trend continues further still, the ratio could break 10.0 for the first time in 42 years.
  
  If the Dow had performed as well as the S&P 500 since early 2006, it would be over 1,000 points lower today.

• Consumer Confidence Plunges to Record Low
  Eddy Elfenbein, October 28th, 2008 at 12:13 pm

  Consumer confidence is now at the lowest reading since the survey started in 1967:

  The survey’s “confidence index” fell to 38 in October, down from 61.4 in September, on a scale where a reading of 100 represents the consumer outlook on the economy in 1985. Expectations for the future also reached an all-time low. The survey dates to 1967.

  I think it’s interesting that the stock market is reflecting consumers attitudes. Years ago, not many Americans participated in the market. Today, it’s a general barometer of consumers’ feelings.

• Iceland Goes Full Volcker
  Eddy Elfenbein, October 28th, 2008 at 11:52 am

  The Icelandic Fed, and yes, there is such a thing, just raised interest rates to 18%.

  Iceland’s central bank has raised its key interest rate to 18% from 12% as it battles against financial collapse.
  The rise comes less than two weeks after Iceland cut rates from 15.5%.
  The central bank governor said the increase was part of its agreement with the International Monetary Fund, from which it borrowed $2bn (£1.3bn).
  Iceland’s prime minister said the country needed another $4bn in loans and had approached the European Central Bank and the US Federal Reserve.

• Goldman Was Considering Merging with Citi
  Eddy Elfenbein, October 27th, 2008 at 10:58 am

  This is just frightening:

  Goldman Sachs CEO Lloyd Blankfein called Vikram Pandit, his Citigroup counterpart, last month to discuss a merger, in a dramatic example of the secret manoeuvring that preceded the government bailout of the financial sector. The call, made at the tentative suggestion of the regulatory authorities or at least with their blessing, was shortly after Goldman won surprise approval to convert itself into a commercial bank on Sept. 21. The conversation was brief as Pandit rejected the proposal at once. A deal would have been structured as a Citi takeover of Goldman. Seperately, The Telegraph reports Goldman Sachs could this week appoint its smallest number of new partners since its flotation, as the bank downsizes in the face of the financial crisis.

• What’s America’s Most Overrated Product
  Eddy Elfenbein, October 25th, 2008 at 11:03 am

  Mart Nemko argues it’s the bachelor’s degree:

  Today, amazingly, a majority of the students whom colleges admit are grossly underprepared. Only 23 percent of the 1.3 million high-school graduates of 2007 who took the ACT examination were ready for college-level work in the core subjects of English, math, reading, and science.
  Perhaps more surprising, even those high-school students who are fully qualified to attend college are increasingly unlikely to derive enough benefit to justify the often six-figure cost and four to six years (or more) it takes to graduate. Research suggests that more than 40 percent of freshmen at four-year institutions do not graduate in six years. Colleges trumpet the statistic that, over their lifetimes, college graduates earn more than nongraduates, but that’s terribly misleading. You could lock the collegebound in a closet for four years, and they’d still go on to earn more than the pool of non-collegebound — they’re brighter, more motivated, and have better family connections.

  Of course, locking kids up in college does something very important: it reduces the labor supply. I remember reading in Road to Wigan Pier how the boys around 15 or 16 wanting to get into the mines. They thought staying in school was useless, boring and effeminate.

• The S&P 500’s Real Capital Gain
  Eddy Elfenbein, October 24th, 2008 at 9:10 pm

  The S&P 500 reached a cyclical high on February 9, 1966 at 94.06. With today’s close of 876.77, that’s a gain of 832.14%.
  Let’s look at inflation since then. We won’t get the October inflation report for a few more weeks, but from January 1966 through September 2008, the CPI is up 588.00%.
  That works out to a real capital gain of 35.49% stretched over 42.7 years. That’s an annualized gain of 0.71%.
  Obviously I’m playing with data a little bit since I’m measuring from a cyclical high to a cyclical trough. But it’s interesting that nearly your entire gain since then has been due to dividends.

• When Will It Turnaround?
  Eddy Elfenbein, October 24th, 2008 at 8:08 pm

  Now that the S&P 500 hit another new low today, investors are curious when things will finally turnaround. Is every rally just a bear market rally? The market hit a major intra-day level low exactly tow weeks ago, and we’ve been hovering above it ever since.
  I’m no technical analyst but it does seem that the market likes to test its recent lows, and if no new low is made, prices rally. Fortunately, we didn’t break through the intra-day low from October 10. What impresses me is that most of the rally since October 10 was in pretty bad stocks, while the higher quality stocks, like our Buy List, haven’t been doing too well. That just tells me that this two-week interlude was merely a reaction against the reaction.
  Today is also the 79th anniversary of Black Thursday, and it’s the 101st anniversary of J.P. Morgan bailing out the economy during the Panic of 1907. The panic ended when J.P. said so — I wish he were around today. Still, spotting a bottom is tough business, and the rally often begins when things look terrible.
  A perfect example is what happened 18 years ago. Note the chart below. The black line is the S&P 500 (left scale) and the gold line is earnings (right scale). The two axes are scaled at a ratio of 16 to 1.
  
  The market rallied while earnings continued to fall through 1990 and 1991. Due to the rising market, P/E ratios soared, but that would have been a false signal that stocks were overpriced. Earnings were still plenty lousy through 1992. It wasn’t until 1993 that earnings growth really got going. The yellow line finally caught up to the black line in 1994, but both kept on rising.
  The point is that the market can turnaround anytime now. I grew used to clients saying that they’re just “waiting for the smoke to clear.” It doesn’t work that way. The market has already crashed. It can certainly go down further, but most of the risk is gone.

• The 30-Year T-Bond Hits Lowest Yield Ever
  Eddy Elfenbein, October 24th, 2008 at 12:20 pm

  The 30-year T-Bond (^TYX) fell below 4%.

  Treasuries rose, sending the yield on the 30-year bond to the lowest since regular issuance of the securities began in 1977, as widening financial turmoil wiped more than $10 trillion off stock markets worldwide this month.
  U.S. notes rallied on speculation the global slowdown will deepen. The U.K. economy shrank more than forecast, a report showed today. Trading in U.S. stock-index futures was limited after declines of more than 6 percent. U.S. government securities returned 1.6 percent in October, the most since January, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as tumbling stocks spurred demand for the safest assets.

• It’s Official: The New York Times Is Junk
  Eddy Elfenbein, October 24th, 2008 at 11:25 am

  Their credit rating that is. Of course, credit ratings are also pretty much junk.

• Dollar Bill On Floor Sends Wall Street Into Frenzy
  Eddy Elfenbein, October 23rd, 2008 at 4:52 pm

  The Onion reports:

  Wall Street investors experienced a sudden surge in optimism Tuesday when, after six tumultuous weeks that saw record drops in the Dow Jones industrial average, a $1 bill was spotted on the floor of the New York Stock Exchange.
  The dollar bill was discovered in the northwest corner of the trading floor at approximately 12:05 p.m., and its condition was reported as “crinkled, but real.” Word of the tangible denomination of U.S. currency spread quickly across the NYSE, sending traders into a frenzied rush of shouting, arm-flailing, hooting, hollering, and, according to eyewitnesses, at least one dog pile.
  “With credit frozen and the commercial paper market poised on the brink of collapse, this is the most promising development I’ve seen on Wall Street in months,” said floor trader Tim Formato, one of hundreds who gathered around the $1 bill and excitedly called their clients to inform them that they were looking at actual U.S. tender. “I think I touched it.”
  According to witnesses, the trading floor was soon abuzz with energy, as traders pointed at the dollar and repeatedly shouted “Look!” and “Money!” A proposal to divide the $1 note into 1,300 equal pieces and distribute them amongst investors was considered, but ultimately rejected. Early reports estimate the dollar may have passed through as many as 65 hands before disappearing in the late afternoon.
  The bill’s absence, however, did not deter the growing enthusiasm from those on the trading floor. By 2:15 p.m., more than 60,000 shares had been purchased in the new publicly traded asset, DLR, after brokers placed a flurry of calls advising their investors to buy into the booming single-dollar market.
  By the close of day, economists were estimating the dollar bill’s net worth at just under $270 million.
  “We couldn’t be in a better situation right now,” trader Patrick Kady said. “Unless of course it had been a euro.”
  However, some financial advisers are warning against the rampant speculation the dollar has caused on Wall Street. Many have cautioned investors not to make rash decisions, such as liquidating all their low-risk government bonds in order to sniff the green paper bill for just a minute.
  “I bet it smells like rose petals,” mutual funds specialist Ken Stoute said. “My friend’s friend Tim Formato? He’s on the board at Westminster Securities and he says he touched it. He said it was warm and soft and wonderful. He said he knows where it is now, and I can put in an option on seeing it tomorrow for only $85.”
  Since the appearance of the dollar, the Dow has spiked an impressive 993 points—its largest gain ever. Initial numbers are showing the most sizable rises in technology stocks, a trend some are attributing to Microsoft’s CFO Chris Liddell, who toured the trading floor Tuesday morning with the bill stuck to his left shoe.
  The overall projection for the market following the incident has been positive, with many analysts claiming that the $1 bill may be an indication of other spare change lying around. This, coupled with reports out of Europe that there is a German college student who has not yet hit her credit card limit this month, could be enough to stabilize the Dow and jump-start the global economy once again.
  “This is just another sign that the U.S. economy is as strong and resilient as it has ever been,” said Richard Fuld Jr., former CEO of Lehman Brothers. “I’m just glad we finally have these credit and subprime mortgage loan crises behind us. This $1 bill will carry us through another 10 years of reckless, unregulated borrowing.”
  Added Fuld, “Just for God’s sake, don’t invest it in the stock market.”