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The Geography of Jobs

Cool graphic on jobs.

Posted by edelfenbein at 12:20 PM

S&P 500 Heads for Best Month in 17 Years

Since the March 9th closing low of 676.53, the S&P 500 has tacked on 29% through yesterday and we'll probably make it to 31% with today's gain. (BTW, the intra-day low was 666! AH AH AH AH AH!)

This will probably be the best month of the S&P 500 since December 1991. The index is still underwater for the year, but our Buy List is up 8.5% for the year and we're now running 10% ahead of the market.

Boo-yah!

Posted by edelfenbein at 11:07 AM

AFLAC’s Earnings Jump 20%

It’s been a tough year for Aflac’s (AFL) stock, but the company is still delivering on earnings. At one point, the stock was going for about two times this year’s estimate. Now that’s a scared market!

Now we have some results to look at. First-quarter net came in at $1.22 a share, six cents more than consensus. For last year’s Q1, AFL earned 98 cents. So they’re growing, there’s no doubt about that. With Aflac’s cash flow, there’s no need for them to dump any holdings at whatever price they can get.

Wall Street got itself freaked out because Aflac had investments in these “hybrid securities” in a lot of bum European banks. The company has said there’s nothing to worry about. Wall Street, however, is still very clearly worried.

Shareholders equity, a measure of assets minus liabilities, fell 21 percent to $5.2 billion as of March 31 from $6.6 billion at the end of 2008 on the declining value of holdings. The net unrealized loss on investments widened to $3 billion compared with $1.2 billion three months earlier. Unrealized losses, which don’t count against earnings, are monitored by ratings firms, regulators and investors as a measure of financial strength.

North American insurers posted more than $190 billion of writedowns and unrealized losses tied to the collapse of the mortgage market since the beginning of 2007, with Aflac accounting for $3.6 billion through the end of last year.

Aflac, whose policies supplement work and government- sponsored health-insurance plans, holds hybrid securities in 38 issuers spread across 15 countries across Europe and in Japan and Australia, Aflac said in February. About 20 percent of the portfolio is in the U.K., Aflac said.

In Japan, Aflac’s biggest market, the company sold new policies worth 27.5 billion yen ($293 million) falling from $264 million in the same period a year earlier. Premium income rose to $3 billion in the quarter from $2.6 billion as the yen strengthened against the dollar a year earlier.
U.S. sales of new policies fell to $351 million from $353 million first quarter of 2008, Aflac said in its statement.

As far as future guidance, the company expects 2009 operating EPS to grow at the low end of their 13% to 15% target, which translates to about $4.51 a share. That means the stock is trading at 6.6 times forward earnings. Of course, movements in the yen can affect things a lot. For Q2, Aflac sees operating EPS ranging for $1.11 to $1.14. At the current price, the stock yields 4.1%. As today's report shows, Aflac is an excellent stock to own.

Posted by edelfenbein at 9:59 AM

Today's Fed Statement

Just released:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Posted by edelfenbein at 2:20 PM

S&P 500 and Earnings

Here's a look at the S&P 500 (black line, left scale) over the last few years with its earnings (gold line, right scale).

The two lines are scaled at 16 to 1, meaning when the lines cross the market's P/E ratio is 16. I used 16 because it seems that the market has tracked that fairly well for the past few years. This market top wasn't marked by outrageous earnings multiples. The values were fine it was the fundamentals that were shaky.

Two points to note. I used to operating earnings. That seems to get some people bent out of shape but it's a much better tool for looking at the market as a whole. Also, AIG's massive loss took out $5.13 from earnings in Q4, so that distorts the picture a little.

Posted by edelfenbein at 3:28 PM

Poll Update

Thanks to everyone who participated in our last poll.

With over 200 votes cast, the median seems to be squarely in the 20% to 25% bracket. There's almost exactly the same number of votes above as there is below.

I realize that the “framing” of brackets answers probably violates every law of polling. Still, I was curious to see what my readers thought.

I'm surprised by how high the result is. A rate of 22% or 23% is fairly high compared with current law. I would have assumed CWS readers were a strong anti-lot.

Posted by edelfenbein at 1:44 PM

Early Stress Test Results

I don't want to sound unappreciative, but if this is what the stress test is about, wouldn't it have been a lot easier to look at the stock prices? "If you're stock is down by over 90%, please step forward." You know, wisdom of crowds and all that.

They could have asked me to do the stress test. I would have done for a lot less money.

PS I'll give you one for free. GM is in bad shape.

Posted by edelfenbein at 11:01 AM

Great News! Rate of Plunge In Home Value Slowing

I feel richer already:

Home Prices in 20 U.S. Cities Declined at Slower Pace

The decline in home prices in 20 major U.S. cities slowed in February for the first time since 2007, amplifying signals that the market may be stabilizing.

The S&P/Case-Shiller index’s 18.6 percent decrease compares with a record 19 percent decline the month before. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

Declining prices, Federal Reserve efforts to bring mortgage rates down, and government tax credits for first-time buyers may continue to support sales after an almost four-year slide. Still, mounting unemployment means purchases are unlikely to rebound quickly.

“We’re probably getting close to an inflection point,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who correctly forecast the drop in the index. Still, he said, “if we are indeed going to see a recovery in the second half,” the double-digit price drops will need to abate in the next few months.

Posted by edelfenbein at 10:59 AM

Super-rich ravaged by recession

Here's an interesting story I think we're going to see more of:

Britain's richest people lost 155 billion pounds in the past year because of a deep recession and the global financial crisis, a survey showed on Sunday.

The Sunday Times newspaper's 2009 Rich List, featuring the thousand wealthiest people based in Britain, also found the number of billionaires sank from 75 to 43 people in the last 12 months as the credit crunch took its toll.

The country's 1,000 richest people have a collective fortune of 258 billion pounds, according to the weekly newspaper. That compared with a record 413 billion pounds in last year's survey.

"I am beyond being surprised, except by the scale of the devastation," said Philip Beresford, who has compiled the annual list since 1989.

"It is extraordinary how people have seen their fortunes being whittled away. It is devastation all round."

Not all recessions are the same. Each has a particular slant to it and I think our current unpleasantness can be described as a Depression for the Ultra-Rich.

One of the fall outs for this will be on government finances. Our tax code has followed income inequality. As a result, millions of Americans have been removed from the tax rolls while lower marginal rates have been offset growth the rising income of the very wealthy.

Now we're at a reckoning because it's those upper incomes that are feeling the heat and the rest of the country no longer faces much of a tax burden. I believe that half of NYC's taxes are paid by just 40,000 households. Well, they're not going to have a good year this year. Just as the tech bust lead to the California recall, I wonder if the implosion of Wall Street will lead to similar political actions.

Today we learn:

New York City's net personal income tax revenues plunged 51 percent in the first 24 days of April, compared with the same period a year ago, the city comptroller's office said on Monday.

Posted by edelfenbein at 10:51 AM

Becton Dickinson Beats By Two Cents

Profits were down and sales were flat:

Medical-device maker Becton Dickinson and Co. said Tuesday its fiscal second-quarter profit fell 5.4 percent on a legal charge and lower sales.

For the quarter ended March 31, Becton Dickinson earned $261.3 million, or $1.06 per share, down from $276.2 million, or $1.09 per share, a year earlier. Revenue fell less than 1 percent to $1.74 billion from $1.75 billion.

Excluding legal charges to settle an antitrust case, the company said it earned $1.18 per share. Analysts polled by Thomson Reuters expected profit of $1.16 per share on revenue of $1.76 billion.

Sales in the company's medical segment fell 3 percent to $897 million while sales in the diagnostics segment rose 2 percent to $540 million. Biosciences unit sales rose 3 percent to $304 million. Overall U.S. sales fell 1 percent and foreign sales were flat as the stronger U.S. dollar cut into those markets.

The company reaffirmed its full-year outlook for an earnings-per-share boost of 9 percent to 11 percent. Based on the company's 2008 earnings from continuing operations of $4.46 per share, the guidance projects a 2009 profit of $4.86 to $4.95 per share. Analysts polled expect a 2009 profit of $4.94 per share.

Posted by edelfenbein at 10:11 AM

Baxter Working on Swine Vax

The Chicago Tribune reports:

With world health officials worried about the global outbreak of another deadly virus, Deerfield-based Baxter International Inc. once again finds itself involved in the action.

Baxter confirmed over the weekend that it is working with the World Health Organization on a potential vaccine to curb the deadly swine flu virus that is blamed for scores of deaths in Mexico and has emerged as a threat in the U.S.

Baxter, which has an emerging vaccine business, has worked with the U.S. and foreign countries in the past to develop vaccines for the H5N1 virus commonly known as bird flu.

Baxter has a cell-based technology that allows the company to produce vaccines more rapidly in the event of a pandemic than a decades-old method that uses eggs and can take weeks or months longer. Although the egg-based method has produced safe and effective vaccines, analysts say Baxter's method can cut production times in half compared with the older process.

"Upon learning about the swine flu outbreak in Mexico, Baxter requested a virus sample from WHO to do laboratory testing for potentially developing an experimental vaccine," company spokesman Christopher Bona told the Tribune.

Shares of Baxter International (BAX) are up nicely today.

Posted by edelfenbein at 12:11 PM

RIP: Portfolio

After two years:

Condé Nast will cease publication of Portfolio effective with its May issue and Portfolio.com will close in the second quarter of the year, it was announced today by Charles H. Townsend, President and CEO of Condé Nast.

“The pressures and realities of the continuous deep economic slump have lowered Portfolio’s revenue projections below what is needed to continue publication,” Mr. Townsend said. “Portfolio was an ambitious and innovative magazine and website, and we were proud to publish them. The challenges facing this launch however proved too great. Joanne Lipman is an extraordinarily skillful editor and William Li is a very talented publisher. We thank them and their staffs for their tremendous efforts. It is unfortunate we were unable to give Portfolio the time needed to fully mature.”

Portfolio and Portfolio.com were launched in May 2007. The magazine has published 21 issues since its launch. The magazine received a National Magazine Award in 2008 and has been nominated for multiple awards since.

I feel bad for Ryan Avent, an excellent blogger they had just hired.

Posted by edelfenbein at 10:56 AM

Foreign Journalists Look at America

Megan McArdle highlights this comically tone deaf article on America.

The crisis is also making itself felt in posh Georgetown, a historic residential neighborhood in Washington D.C. which is home to many politicians, lobbyists and attorneys. Anyone who forgets to lock his car at night can expect to see unwanted guests sleeping in it by the next morning.

I guess I missed that part. Time to load up on shares of Soylent Green (PEBL).

Posted by edelfenbein at 9:51 AM

For Serious Math Geeks

Greg Mankiw writes that stock prices "are approximately brownian motion."

Ironman at Poltical Calculations writes: "Since at least January 2008, stock prices moved away from approximating Brownian motion to instead follow more of a Lévy Flight."

Feel the chart love.

Posted by edelfenbein at 11:03 PM

The Real Swines

WHO Warns of Possible Pandemic as Mexico Seeks to Contain Swine Flu

We begin counting: Three, two..

Venture capital firm set to reap rewards on swine flu

Posted by edelfenbein at 8:16 PM

Weekend Poll

Posted by edelfenbein at 7:43 PM

JPM Is #1

Duff McDonald writes in Portfolio:

Goldman used to be special. Now, Goldman is merely a far smaller bank than J.P. Morgan. Sure, their results beat analyst expectations by nearly double in April. But their revenues only rose 13 percent. J.P. Morgan's top line gain? A cool 48 percent. More to the point, J.P. Morgan's investment bank brought in $1.4 billion in revenue in the quarter, tops on Wall Street.

Goldman had, for a time, the most badass leader on Wall Street in Hank Paulson. But Paulson is long gone.

Beyond generally seeming mealy-mouthed, the company's current CEO, Lloyd Blankfein, has of late been styling himself a little like Jamie Dimon, in particular in his late-to-the-game calls for compensation reform among the country's most overpaid paper-pushers.

But Dimon actually exudes real confidence instead of merely putting it on as a public-relations costume. Goldman's co-president, Jon Winkelreid, recently resigned in the wake of a bailout by his company because he was somehow—and this is really just extraordinary—insolvent. This despite being paid more than $100 million over the past decade.

As I asked recently, why isn't JPM now too big to fail? All those same arguments apply.

Posted by edelfenbein at 12:06 PM

Hamptons Home Prices Plummet

Posted by edelfenbein at 5:20 PM

Microsoft Revenues Fall

For the first time since it went public 23 years ago:

Microsoft, the world’s largest software company, on Thursday reported net income of $3.0 billion, or 33 cents a share, for its third quarter, ended March 31 — a 32 percent drop in profits from the $4.4 billion, or 47 cents a share, reported in the same period last year.

The company’s revenue fell 6 percent to $13.7 billion from $14.5 billion.

Posted by edelfenbein at 5:13 PM

Ugly Earnings from Danaher and SEI Investments

Danaher (DHR) isn’t doing as well I hoped. The economy is really putting the squeeze on them. Q1 earnings came in at 72 cents a share which was a penny shy of forecasts. In January, the company said to expect 70 to 80 cents a share.

What’s most troubling is that they lowered both ends of their full-year forecast by 40 cents a share. Danaher now sees FY 2009 EPS ranging from $3.30 to $3.70 a share. At the current, the stock isn’t outrageously overpriced, but I don’t see a lot of upside. Ultimately, I like Danaher due to their management, it’s not a value play. For now, I’m sticking with them.

SEI Investments (SEIC) also had a rough quarter. The company earned 18 cents a share, but there was a five cent charge. Adding that back in, SEIC beat the 22-cent consensus by a penny a share, but revenues dropped 26%. It looks like business is hurting across the board.

The good news is that like a lot of financials, SEIC has had a freaky rally since its March low. The bad news is that business has been turning downward for the past year.

Posted by edelfenbein at 5:08 PM

RIP: Geocities

Yahoo pulls the plug:

Not with a bang, but with a whimper. Yahoo! is unceremoniously closing GeoCities, one of the original web-hosting services acquired by Yahoo! in 1999 for $2.87 billion. In a message on Yahoo!'s help site, the company said that it would be shuttering Geocities, a free web-hosting service, later this year and will not be accepting any new customers. Existing customers will still be able to access use GeoCities but Yahoo! is encouraging these customers to upgrade to Yahoo!'s paid Web Hosting service.

GeoCities' traffic has been falling over the past year. According to ComScore, GeoCities unique visitors in the U.S. fell 24 percent in March to 11.5 million unique visitors from 15.1 million in March of 2008. Back in October, 2006, it had 18.9 million uniques.

There are plenty of other Website creation and hosting services out there, including blog platforms such as Wordpress, Blogger, and Typepad, as well as Website creation and hosting services such as Ning, Webs, Jimdo, Snapages, Weebly, and countless more. GeoCities never really kept up with the times, but always remained a decent pageview generator.

One of the pioneers of web-hosting sites, GeoCities gave users personal publishing tools and created "neighborhoods" within its web platform for users to be able to create pages, add a picture, text, a guest book and a website counter. Long before MySpace, Geocities was known as a place where teenagers, college students, and eventually others could impose their own garish taste upon the rest of the world. Here is one Geocities homepage we found from 1996: In honor of GeoCities and all that it has given the Web, whoever can come up with the worst GeoCities homepage design of all time will get a TechCrunch T-shirt.

Personally, I think we should have given them several billion dollars in bailout money.

Posted by edelfenbein at 3:10 PM

Is Oil to Blame?

James Hamilton has a great post on the consequences of the oil shock (it’s three weeks old, unfortunately I just noticed recently). He concludes that the rise in oil prices led to the recession.

The implication that almost all of the downturn of 2008 could be attributed to the oil shock is a stronger conclusion than emerged from any of the other models surveyed in my Brookings paper, and is a conclusion that I don't fully believe myself. Unquestionably there were other very important shocks hitting the economy in 2007-08, first among which would be the problems in the housing sector. But housing had already been subtracting 0.94% from the average annual GDP growth rate over 2006:Q4-2007:Q3, when the economy did not appear to be in a recession. And housing subtracted only 0.89% over 2007:Q4-2008:Q3, when we now say that the economy was in recession. Something in addition to housing began to drag the economy down over the later period, and all the calculations in the paper support the conclusion that oil prices were an important factor in turning that slowdown into a recession.

Of course the problems in the economy were building for a long time, and without an oil shock, they simply would have been put off and not fixed.

Posted by edelfenbein at 10:27 AM

Best Line of the Day

From a Nobel Prize Winner:

So Citigroup is profitable because investors think it’s failing, while Morgan Stanley is losing money because investors think it will survive. I am not making this up.

Posted by edelfenbein at 10:22 AM

The Worst Stock of the Decade

Congratulations to Velocity Express (VEXP), the single-worst performing stock of the decade...that’s still trading.

Since the beginning of decade, VEXP has had three reverse stock splits; a 1-for-50, a 1-for-15 and a 1-for-5. That adds up to 1-for-3,750.

VEXP closed last century at $8 a share but adjusting for splits that comes to $30,000. Today, it’s at 21 cents. Ouch! That’s a loss of 99.9993%. Heck, it’s more than Ivory Soap.

Those -99.99…% figures can be a little deceiving so let me add some perspective. Velocity’s loss is the equivalent of dropping in half 17 times. It’s like a 10% loss every month for the decade. If would have turned $1 million into $7.

But it’s still trading

Posted by edelfenbein at 12:08 PM

Zimbabwe Fed Raided Private Accounts

I'm no longer surprised by any news story out of Zimbabwe. Still, this is just crazy:

Zimbabwe's central bank governor admitted today that he took hard currency from the bank accounts of private businesses and foreign aid groups without permission, saying he was trying to keep his country's cash-strapped ministries running.

In a statement that would be unthinkable coming from most central banks, the governor of the Reserve Bank, Gideon Gono, appeared to be issuing a plea to keep his job in the face of growing criticism.

Gono said it was time "to let bygones be bygones" now that Zimbabwe has a new coalition government dedicated to reversing its economic decline.

The central banker said he gave the money he took from the hard currency accounts as loans to various ministries, and the private accounts would be reimbursed when the ministries repaid the loans. He said the bank's efforts "sustained the country" in its hour of need.

Posted by edelfenbein at 10:52 AM

Since March 9

Guess whose Buy List is beating the market by more than 10% since March 9 -- 35.88% to 25.65%.

Give up?

Posted by edelfenbein at 3:00 AM

The Attraction of Gold

Barry Ritholtz asked what are three things about gold that most people don't realize. Here's part of the email I sent him:

As you probably know, I’m not a big fan of gold as an investment but as a metal (ok, element), it’s endlessly fascinating.

Maybe one day some cognitive scientist will find a connection between our brains and gold. For whatever reason, gold has dazzled men for millennia.

For example, gold NEVER rusts. I mean never! You can take the gold out of an Egyptian pyramid and stick it in your cavity (though you might want to clean it first). It’s also non-toxic which helps.

Gold is incredibly soft. One ounce can be stretched for 50 miles. It can be pounded down to a few MILLIONTHS of an inch thickness.

Gold is very heavy. Despite what you see in the Treasure of the Sierra Madre (“Badges? We ain't got no badges!,” gold dust wouldn’t have blown away.

Gold has been found on every continent on earth. Gold has also had strong religious connections. It’s mentioned in the Bible more than 400 times. Marx writes of Commodity fetishism, which is meant to have a religious connotation. And I won’t even get into Freud’s talk of the psychological connection of gold to feces (no, I’m not making this up).

When Moses came down from Sinai with the Ten Suggestions, the Jews were making a golden calf to worship. God instructed Moses to overlay a sanctuary for him in pure gold. In other words, gold had its bases covered—it was on both sides!

Plato mentions the gold/silver ratio to be 12. Recent historical evidence suggests that Isaac Newton was mainly an alchemist. The other stuff he did was just playing around on the side, and was probably an offshoot of his efforts to makes gold. Pieces of his hair have traces of lead and mercury.

Newton was also Master of the Mint and inadvertently put England in the gold standard. This means that one of the greatest geniuses in human history was also a civil servant who made economic policy based on a forecast. A forecast that was dead wrong.

There’s more gold at the New York Fed, waaaay below 33 Liberty Street, than in Fort Knox. Gold is also a really good conductor. So despite its high prices, it’s used in many electronics.

Best - Eddy

I highly recommend Peter Bernstein's The Power of Gold: The History of an Obsession

Posted by edelfenbein at 1:52 AM

More on the Distribution of Stock Returns

Last week, I discussed the distribution of stock gains. I speculated that the fat tails is probably very significant. It hints that there may be "great stocks" whose returns make up an unusually large share of the market's gains.

I looked at the market's gains this decade. Here's the distribution of gains for over 3,500 stocks since December 31, 1999 (I used a log scale):

The x-axis shows is the stocks ranked from worst to best (left to right). The y-axis is the log of the gain.

The median stock is a loss of 20%. Over 57% of stocks are down for the decade. Even the stock at the 25th percentile is up about 70% which isn't that great for a decade's work.

Just by eyeballing the chart, the appears to be major turn northward at around point 3400 which corresponds with a gain of over 500%.

Here's the raw data. I'd welcome if anyone could make a histogram based on standard deviation points. I strongly doubt that it's symmetrical.

Update: Don Fishback was good enough to bring his charting skillz to us. Check out his post. What strikes me is the leftward tilt of the distribution. Lots of underperformers. It's like Wall Street is a reverse Lake Wobegon.

Another Update: A reader provides a graph of returns by standard deviation. Notice how the peaked is to the right of 0.

Posted by edelfenbein at 2:45 PM

Eaton Vance Takes a Hit

Shares of Eaton Vance (EV) got dinged today for over 11%. In this past weekend’s Barron’s, I noticed they ran a research piece from Sandler O'Neill saying that run in asset managers is overdone. That’s not really a big deal except that EV hasn’t been leading the market at all. The stock is up 70% since the market bottom in early March, but the stock was down a lot too.

I can’t be sure if the Barron’s piece caused today’s selloff, but Sandler O'Neill also made it clear that they’re raising their earnings estimates for the quarter and fiscal year.

Posted by edelfenbein at 12:22 AM

Memo to All CWS Employees

To: CWS All

From: Eddy

Subject: Cost-Cutting Initiative

Look folks, in case you haven't noticed, we're in the worst depression in 70 years. This means that all of us--you, me, my security detail--need to start cutting back on expenses. I'm ordering all department heads to cut their FY 2009 budgets by 0.0028%. I realize this will be painful and I want to thank everyone for their help.

Read here for more details.

Posted by edelfenbein at 2:26 PM

Citi Guys Slams Sysco

In NY Mag, a Citigroup exec slams the unwashed masses:

“No offense to Middle America, but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco out of a huge, shiny truck?” e-mails an irate Citigroup executive to a colleague.

Two things: First, saying "no offense but" is not an excuse to be offensive.

Secondly, and for the record, you could have bought Sysco (SYY) 35 years ago for $21-1/8. Today, the stock is at $22.30.

Oh, did I mention the splits totaling 144-for-1?

Let's just say that Citigroup hasn't been as strong a performer.

Posted by edelfenbein at 1:12 PM

Another Victory for Technical Analysis

The S&P’s rally begins almost exactly six years after the last turnaround. It even picks the devlish 666 as a bottom.

Then on Friday, the index finally surpasses gold for the first time in three months.

So of course we were due for a selloff!!

Posted by edelfenbein at 12:46 PM

The Battering of Quants

Bloomberg wakes up to the fact that momentum quant funds have been getting killed:

Companies with the most debt and lowest returns on assets are turning the biggest six-week rally in stocks since 1938 into a bloodbath for last year’s best- performing trading strategy.

Investors using so-called quantitative momentum strategies -- which speculate that the worst stocks in the past 12 months will continue to decline -- have become this year’s biggest losers after banks and companies that rely on consumer spending surged. Quant momentum managers may have lost 27 percent this month in the U.S., the most since at least 1993, while those in Europe may have dropped 20 percent in March and 24 percent in April, according to data compiled by JPMorgan Chase & Co.

“Not in a million years would we have expected this gyration to be as vicious and enduring as it has been,” Steven Solmonson, the head of Park Place Capital Ltd., a hedge fund that oversees $150 million, said in an interview from New York. “The quants got whipsawed badly.”

Posted by edelfenbein at 12:30 PM

Eli Lilly’s Earnings Jump 23%

Eli Lilly (LLY) is one of our new additions to this year’s Buy List. The company just reported decent earnings this morning. AP reports:

Eli Lilly & Co. said Monday flat costs and strong sales of several top-selling drugs boosted first-quarter profit 23 percent, surpassing Wall Street expectations.

Higher sales volume and increased prices helped boost revenue from many of Lilly's drugs. Those factors helped offset a reduction in revenue caused by the stronger dollar, the company said.

Sales of the antidepressant Cymbalta, Lilly's second-best seller, grew 17 percent to $709 million, and the insulin Humalog saw revenue rise 11 percent to $450.6 million.

Lilly earned $1.31 billion, or $1.20 per share, compared with profit of $1.06 billion, or 97 cents per share, during the same period a year earlier. Revenue rose 5 percent to $5.05 billion.

Analysts polled by Thomson Reuters expected profit of 99 cents per share on revenue of $5.05 billion.

That’s a huge earnings beat. The company also reiterated its full-year EPS forecast of $4 to $4.25 which means the stock is far from fully valued. The stock also pays a dividend close to 6%. Eli Lilly is a great buy.

Posted by edelfenbein at 9:26 AM

The Allure of Outrage

Clay Shirky has a very good and honest post on the narcotic allure of moral posturing. I think this is a bigger problem that many people realize.

What I find so frustrating about such much political discourse is that people don’t want to be proven right—they want to be proven better.

(HT: Felix)

Posted by edelfenbein at 7:19 PM

Rabbit Hood

They really don't get much better than this:

Posted by edelfenbein at 4:54 PM

Event Risk Is Driving Markets

Peter Boockvar from a recent speech:

If the DJIA goes to 10,000, great! But if gold goes to $2000 at the same time, maybe not so great. If the stock market was left to its own devices, than I would say 400-500 in the S&P would be its inevitable destination as 10x ’09 earnings of about $40-50 would be a fair multiple based on previous bear market bottoms. Unfortunately, our officials won’t let it happen as any recovery that may soon ensue will be darkened by the insidious hidden tax of inflation, debasement of our currency and excessive sovereign debt that will take more and more tax dollars (aka, money sucked out of the private sector and shifted to government) to finance.

We all have to understand that the Fed and Treasury have embarked on a grand experiment. We now have a marketplace where fundamental analysis is being trumped by huge event risk of a different kind, Washington, DC kind, where some new acronym program, some reckless comment from a Congressman or some new asset class Bernanke Capital Management deems attractive to him, is driving markets.

(Note: I originally misidentified the speaker as Barry Ritholtz. This has since been corrected).

Posted by edelfenbein at 4:43 PM

Best Question of the Day

The award goes to Alea.

The New York Times writes: A.I.G. Chief Owns Significant Stake in Goldman.

Alea asks, "Is Owning 0.00535714% of Goldman Sachs Significant?"

Posted by edelfenbein at 11:44 AM

My Weak Defense of the Federal Reserve

I'm not a terribly big fan of the Fed, but here's a weak defense of monetary policy over the past several years. Core CPI inflation has not only remained low, but it's also been surprisingly consistent. That's an important point and we should give credit where it's due.

This chart shows Core CPI (in blue) along with an exponential trendline (in black). The takeaway is that an analyst could have ignored all the data on M2 or M3 and production and all that jazz. Instead, just assume that prices would rise 0.18% each month and that would be a pretty good way to go.

A reader adds:

Just to let you know, there's a little flaw in this analysis: the 0.18 would have only been known *with insight*. In a nutshell, things look more predictable with insight.

The correct way to do this is to measure the size of the inflation surprise: i.e. for each month in I.1995:IV.2009 compute a best estimate of next month's cpi using all information available up to that point.

You'll find that w/o insight (even) Core CPI is a tough one to get right, but perhaps more worryingly so, has gotten tougher to get since 2001.

(No Seeking Alpha repost)

Posted by edelfenbein at 10:39 AM

Buy List YTD

Through today, the Buy List is up 3.54% compared with a loss of 4.20% for the S&P 500 (dividends not included). The red line is the Buy List, the black is the S&P 500.

It's still early, but it's a good start to the year.

Posted by edelfenbein at 4:36 PM

Yahoo Finance - Historical Quote FAIL

There’s not much I like about Yahoo, but I know Yahoo Finance is wildly popular among individual investors. It’s just about all they got. If I were them, I’d sell it to a brokerage.

I don’t have the exact details, but their historical quotes are massively screwed up. When you click on historical quotes, you can see an adjusted price column that accounts for dividends. That’s great, but I don’t think the dividends are ever adjusted for stock splits. As a result, you get massively wrong historical numbers.

As I said, I’m not sure about this but let’s look at Public Service Enterprise Group (PEG) which is one of those great performing utilities that no one ever talks about. The dividends have increased every year like clockwork. Since 1982, there have been two splits; a 3-for-2 in 1987 and a 2-for-1 last year.

Here's a log chart since 1982. The black line is the regular price adjusted for the two splits, the blue line is the dividend adjusted price:

As you go back in time, the lines get wider apart to adjust for dividends but there's no way it should move that dramatically.

Looking at their numbers, the stock price rose 147% during the 1990s while the adjust price rose 648%. That means that dividends accounted for gains of over 200%, or an average of 11.7% a year. There’s no way that can be right.

I know people use Yahoo Finance to get track of their gains and losses. Don’t do it.

Posted by edelfenbein at 2:52 PM

Wall Street Imitates the Simpsons

Selma on the Simpsons in 1994

Hey, relax. I told you, I got money. I bought stock in a mace company just before society crumbled.

The WSJ today:

Fear and Greed Have Sales of Guns and Ammo Shooting Up

Posted by edelfenbein at 11:46 AM

Baxter and Amphenol

Two of our Buy List stocks reported earnings this morning, and they were both pretty good.

Amphenol (APH) earned 43 cents a share down from 54 cents a share last year. They had a two-cent benefit, so the 41 cents was a penny better than expectations (though FactSet said consensus was 39 cents. Hmm. No consensus on consensus).

Revenue fell 14.4% to $660 million which was a bit better than the $654.8 million consensus. The company sees Q2 EPS coming in between 41 and 43 cents, and revenues between $660 million and $675 million. The stock seems a bit pricey right now, but terribly overpriced.

The other earnings report came from Baxter International (BAX). First-quarter EPS came in at 83 cents which is a nice improvement from 67 cents a year ago. Sales actually fell 1.8% but if you discount currency moves, they were really up about 6%.

For the year, BAX sees EPS coming in between $3.72 and $3.78. They raised the low end by two cents. For Q2, they see earnings in a range of 93 cents to 95 cents a share.

Both stocks are doing well this morning.

Posted by edelfenbein at 11:21 AM

To All the Goldman H8trs

Seesh, why all hate on Goldman (GS) lately? Face it, Goldman is going to thrive and survive. I’ve never seen an institution that so many people admire yet want to fail at the same time. OK, maybe second to the Yankees.

Their orphan quarter wasn’t some secret conspiracy. It was perfectly public. The Feds forced them to be a bank holding company so they changed their fiscal year, presto four-month reporting.

Just because it’s a large, powerful, filthy rich and highly opaque bank that seems to run the government is no reason to fear them.

Posted by edelfenbein at 11:05 AM

JPMorgan Chase Is Still Ticking

The other day I said I had no idea what JPMorgan Chase’s (JPM) earnings would be. It turns out, my prediction was correct. The bank earned over $2.1 billion for the first three months of the year, or 40 cents a share.

The news is reporting that the Street’s consensus was for 32 cents a share. That was the average, but analysts were all over the map. I think the Street is just happy to see a profit -- any profit. I should remind you that JPM hasn't posted a single earnings loss during this mess. For last year’s Q1, they made 67 cents a share.

The best news is that banking isn’t dead. The bank said that loan losses will continue growing from credit cards and mortgages. The Bear and WaMu acquisitions are clearly helping out. It's kinda cool when your trading can make up for all the bad stuff.

Jamie Dimon said JPM wants to pay back its TARP money as soon as they can. He also said that the bank will sit out Timmy’s little public/private plan. If JPM won’t bite, who else will?

Posted by edelfenbein at 10:50 AM

Regulators and Redskins

Rational expectations:

We examine the correlation between federal government activity and the performance of the D.C. area's National Football League team, the Washington Redskins. We find a significantly positive, non-spurious, and robust correlation between the Redskins' winning percentage and the amount of federal government bureaucratic activity as measured by the number of pages in the Federal Register. Because the Redskins' performance is prototypically exogenous, we give this surprising result a causal interpretation. Drawing upon public choice theory and behavioral economics, we provide a plausible explanation for the causal mechanism: bureaucrats must make "logrolling" deals in order to expand their regulatory power, and a winning football team acts as a commonly shared source of joyous optimism to lubricate such negotiations. We do not find the same correlation when examining Congressional activity, which we attribute to legislator loyalty to their home state's team(s).

(HT: Ribstein.)

Posted by edelfenbein at 8:39 PM

I’m Sorry But I Just Don’t Get Seasteading

Here’s another Tax Day post.

As person who enjoys highly theoretical or just plan off-the-wall propositions, it pains me to say that I just don’t get seasteading.

If you’re not familiar with it, this is a radical libertarian venture that aims to build libertarian city-states...are you ready...floating on the high seas. Think of John Galt, but on a raft.

I don’t want to be too dismissive of seasteading. Here’s Patri Friedman making the case.

For myself, count me out. First, I do in fact love my country and feel loyalty to it no matter how batty its laws are. Secondly, I share Arnold Kling’s thought that a lot problems we have on land will follow them at sea.

Still, I think dry land is the way to go. I would try to hunt for some speck in the Pacific Ocean. There are about a billion islands out there just waiting to be made into a libertarian paradise. Come to think of it, I never saw much government on Gilligan’s Island or Lost.

The U.S. has a bunch of possessions out there. So do France and Britain. Why not try to buy one? The Northern Mariana Islands have a couple of uninhabited islands (see Pagan Island).

Even if you don’t want to buy one, just go there and set up your own community. When someone official starts to bother you, do what everyone else does—secede. Sure, that will involve some government, but probably less than running a big boat.

Posted by edelfenbein at 4:52 PM

The Libertarian Way to Fight Pirates

In Article I, Section 8 of the Constitution, Congress has the power to issue Letters of Marque. As I understand it, this is an authorization from a government to individuals to let them seize assets from a foreign ship. “Here (scribble), go nuts.”

I always thought this was some curio still left in the Constitution. I even joked with a friend recently that this would be the best way to fight the pirates.

I joked too soon. I give you, Ron Paul:

Rep. Ron Paul (R-Texas) has called for the use of congressional letters of marque to allow private security forces to patrol international waters and assume liability for such operations.

"The whole mess over there is a reflection of our foreign policy as well because we've been involved in Somalia for a long time," Paul said on Fox News on Wednesday.

I wonder if it would apply to blimps. Shouldn’t they be Emails of Marque? So many questions. Anyway, Happy Tax Day.

Posted by edelfenbein at 1:21 PM

Taleb Idiocy Watch

I hope to be credited as the person who starts this. Mark my words: More people are going to realize that Mr. Black Swan/Napoleon Dynamite has no idea what he's talking about.

Private-equity firms and the stock market share characteristics of Ponzi schemes, “Black Swan” author Nassim Nicholas Taleb said.

Leveraged buyouts, the principal tool of private-equity investing, and buying stocks on margin should be restricted for the protection of small investors and the economy, Taleb said in a Bloomberg Television interview.

“We want economic life to be organized to be as distant from that Madoff model as we can,” Taleb said, referring to Bernard Madoff, who pleaded guilty last month to directing the largest Ponzi scheme, bilking investors of about $65 billion.

LBOs are “too close to Madoff” because “you rely on new investors to pay off the other ones,” Taleb said. “The stock market has some mild Ponzi characteristics. We have to make sure that innocent people are not harmed by this Ponzi-attribute.”

The financial system needs to be simple because regulators can’t protect investors from complex financial products, Taleb said.

“Regulators are fundamentally dumb,” he said. “Traders will go around them. I want the system where regulators can be stupid without you and I being harmed by it.”

(EP and Joe W have more).

Posted by edelfenbein at 11:05 AM

Audi Vs. BMW

Posted by edelfenbein at 9:50 AM

The Last Five Years In One Chart

Here are the daily changes of the S&P Banking Index:

Posted by edelfenbein at 10:51 PM

Bernanke at Morehouse

Here's the text of Ben Bernanke's speech at Morehouse College. I'll warn you, it's long but he explains the financial crisis in easy-to-understand terms.

Posted by edelfenbein at 1:39 PM

Why Isn't JPMorgan Chase Too Big to Fail?

On Thursday, JPMorgan Chase (JPM) will report its Q1 earnings. The results will probably be “not horrible.” Which isn’t bad, not to mention horrible.

The reason I mention JPM is that the bank hasn’t reported a single money-losing quarter since the crisis broke. That puts them in small company. In fact, the bank has beaten estimates fairly consistently. They were also very fortunate to gain both Bear Stearns and WaMu at very good prices.

As you might expect, the shares have responded very favorably. JPM has more than doubled from its March low. So I have to wonder, is JPMorgan Chase now too big to fail?

The bank’s market cap is well over $120 billion. Their assets are over $2.1 trillion. The bank has been smart and lucky so now it’s gotten very big. All of the same arguments about the size Citigroup apply to JPM, so where’s the outcry?

Just asking....

Posted by edelfenbein at 12:22 PM

Here's an Idea: The Government Is Auctioning Off Money on Ebay

No, not that money. This kind.

Funny, once upon a time this too was a toxic asset.

Posted by edelfenbein at 2:25 AM

Great Stock Theory

Mebane Faber’s new book, The Ivy Portfolio, has two great graphs showing the distribution of stock returns. (Nick Gogerty has posted them here.)

We often talk about the market as a whole, but in reality, the large majority of stocks don’t do much at all. The real gains come from a very modest slice of the market. According to the chart, one-quarter of the market accounted for all the gains.

In short, stock returns have a fat tail. This is why I place so much emphasis on consistency of performance because it’s those “great stocks” that make the difference. The other lesson is that too much diversification really isn’t that helpful.

Posted by edelfenbein at 2:14 AM

The Citigroup Rally

Citigroup (C) was up 76 cents on Monday, which doesn’t sound like much but it’s a 25% gain. Thanks to Goldman’s news, the stock will probably break $4 on Tuesday.

Looking over the past few weeks, the stock has had a wild ride. On March 5, Citi dropped to just 97 cents a share. One month before that, it was at $4 a share. Obviously, this isn’t much of a rally; it’s more accurate to say that the stock has backed off from peering into the abyss,

Citi reports this Friday. I have no idea what to expect. How’s this for a wide range? The Street high is a 14 cent profit. The low is $1.14 loss. Pardon me while I get my darts.

Posted by edelfenbein at 12:38 AM

The Buy List Is Up for the Year

Not a lot, but we're up.

Through Friday, the Buy List was up 1.42% while the S&P 500 was down 5.1%.

Posted by edelfenbein at 1:36 PM

Tom Delay, Evolution and Columbine

Paul Krugman writes about Tom DeLay:

Going back to those tea parties, Mr. DeLay, a fierce opponent of the theory of evolution — he famously suggested that the teaching of evolution led to the Columbine school massacre — also foreshadowed the denunciations of evolution that have emerged at some of the parties.

These are the kinds of the things Krugman writes that are so frustrating. He’s a brilliant economist but too often drives off the reservation into dishonesty.

After reading Krugman’s account, are you led to believe that Tom DeLay said in a clear declarative sentence that Columbine was the result of the teaching of evolution? That he repeatedly said it and would say it again today if asked?

I really wonder how many people understand that saying something that’s factually correct isn’t good enough. An accurate fact can be presented in a dishonest way. I think if I said this to many political pundits, their heads would explode.

If I were to ask you what’s the sum of one plus one, and you said that it’s less than 20 trillion, that answer is factually accurate but dishonest. A certain linguist in the Boston area has made his career on such statements.

The person who engages in dishonesty hurts themselves in two ways. First, they’re being dishonest. Secondly, since they believe they’re presenting facts, they immune themselves over criticism of context.

Facts can imply something that isn’t true. They can be taken out of context. They can imply a false symmetry. Facts by themselves aren’t enough.

Krugman has an unusual fixation with Delay and blaming Columbine on the teaching of evolution. He’s mentioned this several times.

Enough of Krugman's take. Here’s the full story. One week after the Columbine massacre, Addison L. Dawson wrote a letter to the editor to the San Angelo Standard-Times which mocked the idea that guns were to blame:

For the life of me, I can't understand what could have gone wrong in Littleton, Colorado. If the parents would have only kept their children away from the guns, we wouldn't have had such a tragedy. Yeah, it must have been the guns.

It couldn't have been because over half our children are being raised in broken homes.

It couldn't have been because our children get to spend on average 30 seconds in meaningful conversation with their parents each day. After all, we give our children quality time.

It couldn't have been because we treat our children as pets and our pets as children.

It couldn't have been because we place our children in daycare centers where they learn their socialization skills amongst their peers under the law of the jungle while 16 year old employees who have no vested interest in the children look on and make sure that no blood is spilled.

It couldn't have been because we allow our children to watch on average 7 hours of television a day filled with the glorification of sex and violence that isn't fit for adult consumption.

It couldn't have been because we allow our children to enter into virtual worlds in which to win the game, one must kill as many opponents as possible in the most sadistic way possible.

It couldn't have been because we have sterilized and contracepted our families down to sizes so small that the children we do have are so spoiled with the material that they come to equate the receiving of the material with love.

It couldn't have been because our children who have historically been seen as a blessing from God are now being viewed as either a mistake created when contraception fails or inconveniences that parents try to raise in their spare time.

It couldn't have been because our nation is the world leader in developing a "culture of death" in which 20 to 30 million babies have been killed by abortion.

It couldn't have been because we give 2 year prison sentences to a teenagers that kill their own newborns.

It couldn't have been because our school systems teach the children that they are nothing but glorified apes that have evolutionized out of some primordial soup of mud by teaching evolution as fact and by handing out condoms as if they were candy.

It couldn't have been because we teach our children that there are no laws of morality that transcend us, that everything is relative, and that actions don't have consequences. What the heck, the President gets away with it
.
Nah, it must have been the guns.

The letter was later read by Paul Harvey on the radio and then by Tom Delay in Congress on June 16, 1999 during a debate on gun control. (You can see the in the Congressional Record on page H4366.) The words are often credited to DeLay and not Dawson, though DeLay’s reading of it certainly implies an endorsement.

After DeLay spoke, Barney Frank lambasted the letter by saying it was blaming the teaching of evolution for the shooting. That’s where Krugman got his line.

First, let’s say a few things about the letter. It’s fatuous and not terribly intelligent. However, by reading it during a debate about control, DeLay was clearly doing the same things that Krugman is doing—mocking the idea of blaming Columbine on one issue.

The listing of cultural problems makes the point clear. In fact, Dawson is being facetious about it which underscores that he's tossing out many other suggestions. He’s not saying it’s evolution but the sum total of problems in the culture, where the debate in Congress was focusing on guns.

Do you think if DeLay were asked, yes or no, was Columbine due to Darwin, he would say yes? Re-read what Krugman wrote. The only "famously" part is due to Krugman mentioning it time and time again.

If you believe that Tom DeLay blamed Columbine on the teaching of evolution, well...you have your evidence. If you want to write that, go right ahead. But you shouldn’t be such a cheap date. Here’s the key point: I would never write it and neither would many other people because it’s dishonest and not up to professional standards. An editor should not have allowed it to pass. I should hope the Times feels that same way.

Posted by edelfenbein at 1:13 PM

Mystery Toilet Flush

Listen at the 19 second mark. It might just be symbolic.

(HT: Joe W)

Posted by edelfenbein at 2:52 PM

Bed Bath & Beyond Expectations

Here's part of my latest at Real Money:

Bed Bath & Beyond (BBBY - commentary - Cramer's Take) got a huge boost on Wednesday thanks to its better-than-expected fiscal fourth-quarter earnings. The shares jumped 24.3% to close at a six-month high of $31.70.

As good as Wednesday was, I still don't believe the shares are overpriced. Investors should take notice because BBBY is poised to go a lot higher.

The figure that got traders so excited was BBBY's net earnings of 55 cents a share, which topped Wall Street's consensus by an impressive 11 cents a share. This was a big surprise since the company had already pegged fiscal fourth-quarter earnings in a range between 40 cents and 46 cents per share.

Even the company's own bean counters didn't see this one coming. Mind you, BBBY's earnings were still down quite a bit from a year ago -- an 18% drop -- but investing is an expectations game.

Here are the earnings results going back a few years:

Posted by edelfenbein at 1:52 PM

Rhetorical Question of the Day

If people are always complaining that their political philosophy is being sold out by elected officials who espouse that philosophy, is the problem the officials or might it reflect a defect in the philosophy?

Posted by edelfenbein at 10:49 AM

The Meredith Whitney Bubble

In today's WSJ, David Weidner tries to deflate the Meredith Whitney Bubble. Actually, I think she did a pretty good job. Weidner, however, let's this one in: "Economists Nouriel Roubini and Nassim Taleb famously predicted the huge upheaval in the financial industry."

Sorry, but Taleb didn't predict anything. I've both of his books and nowhere does his discuss the events that have happened.

Speaking of Taleb, he had a piece in the Financial Times the other day and went into full Napoleon Dynamite mode:

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

This is precisely why I have a hard time taking Taleb seriously. Every time I read him, all I hear is the same thing:

Don: Hey, Napoleon, what'd you do all last summer again?
Napoleon: I told you! I spent it with my uncle in Alaska hunting wolverines!
Don: Did you shoot any?
Napoleon: Yes, like 50 of 'em! They kept trying to attack my cousins. what the heck would you do in a situation like that?
Don: What kind of gun did you use?
Napoleon: A frickin' 12-gauge, what do you think?

Posted by edelfenbein at 9:53 AM

Roubini Vs. Cramer

First Jon Stewart, now Nouriel Roubini:

"Cramer is a buffoon," said Roubini, a New York University economics professor often called Dr. Doom. "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame."

Cramer recently wrote in a blog that Roubini is "intoxicated" with his own "prescience and vision" and said Roubini should realize that things are better since the stock market's recent bottom in early March.

The Standard & Poor's 500 index has rallied 17 percent since then.

Roubini said in 2006 that the worst recession in four decades was on its way. He has attracted attention for his gloomy - and accurate - predictions of the U.S. financial market meltdown.

Roubini said the latest surge is just another bear market rally following the pattern of other rallies after the government intervened. He expects the market will test the previous low because of worse than expected macroeconomic news, disappointing earnings and because banks will fail after the stress tests come out.

"Once people get the reality check than it's going to get ugly again," Roubini said.

Roubini said Cramer should keep quiet.

"He's not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong," Roubini said in an interview with The Associated Press.

I really can’t get enough of rich guys insulting each other.

Roubini made the comments before appearing with bank analyst Meredith Whitney and Canadian bears Ian Gordon and Eric Sprott at a Toronto event titled "A Night with the Bears." They all correctly predicted the current financial meltdown. (Could have fooled me)

Whitney, among the most bearish of bank analysts, said that some of the 19 banks undergoing government stress tests may not pass.

"I think the big banks will get through and some of the smaller banks may not," Whitney said in interview with The AP.

Gordon, author of The Long Wave Analyst newsletters, told the event's audience of 1,500 that he expects the Dow Jones industrial average to plummet to 1,000 based on the idea that economic events repeat themselves in regular sequence every 60 years or so.

Sprott, a Canadian hedge fund owner, told the predominantly business crowd that systemic risk remains and that investors should buy gold.

Posted by edelfenbein at 11:43 AM

Gold Revisited

The other day, I asked how should one value gold. Specifically, what metrics should you follow to see if gold is overpriced or underpriced? My post was reposted at Seeking Alpha. As I expected, nearly all the comments were completely useless rants from gold bugs. Yes, I know why gold is used, but that doesn’t tell me anything about the current price.

One comment, however, stood out and I felt I should acknowledge this from silveraxis who blogs here.

The proper way to value gold is based on its monetary qualities, or in other words what it could purchase. Many people use inflation rates such as CPI as a proxy for fair value of gold but this is not very sophisticated for several reasons, the most significant of which include accuracy issues as well as the fact that the aboveground stockpile of gold grows every year. I prefer to use a ratio of gold to the global economy, stock markets, U.S. Treasury debt and/or global asset base.

Global economy is reasonably estimated using global nominal GDP (currently around $55 trillion). There are also available figures for Treasuries and stock markets (an effective if rudimentary approach is simply to use the S&P 500 as it is already market cap weighted).

Global assets are much harder to estimate but this is probably the most relevant ratio because it reflects gold's relative purchasing power. Clearly it wouldn't make sense for all of the world's gold to be worth more than every asset that could be purchased! Indeed, gold could only be realistically worth some fraction of total assets which throws some of the wilder (Jason Hommel, Ted Butler, etc.) gold price predictions right out the window. In any case, you basically add global stock market capitalization, real estate, private equity, debt collateral, fiat money in circulation, etc. but exclude all credit-based money, derivatives and other financial products that are zero sum (offsetting asset and liability). Let's say the current number for the global asset base is $150 trillion (probably a bit high but not that far off).

Now calculate the global market cap of gold: 5 billion ounces times $900 = $4.5 trillion. Thus the gold to global economy ratio is roughly 12 ($55T/$4.5T) whereas the gold to global asset ratio is currently around 33. Similar ratios can be computed for stock markets and U.S. Treasuries.

To determine if these ratios and thus the gold price is fair, too high or too low, you need to come up with similar ratios for various points in time, such as the 1980 high in gold, the 2001 low, under Bretton Woods (pre-1971), etc. as well as an average over time. If you do the math it basically says that gold is currently comparable to where it stood in the mid-1970's after the 1974 high and before the 1980 high. At the 1980 peak, the ratios were anywhere from 3 to 7 times lower. That implies if gold were to reach a similar extreme today, it could rise 3-7 times from current levels assuming the denominator (GDP, stocks markets, etc.) stays the same.

Alternatively, the average gold ratios over the past 40 years or so imply that fair value lies in the range between $500 and $1000. If we strip out most of the 1990's when the novelty of gold mine hedging and central bank leasing were at their peaks, these fair values become $600 to $1200. I believe at least several of the analysts that predict $1200 gold are basing their numbers on a similar model to the one I am describing.

Finally, my own studies indicate that the historical ratio of global asset values to gold may have been approximately 5 under the gold standard. In other words, gold might have typically represented approx. 10-20% of the world's material wealth in the past. Perhaps this could be viewed as the ultimate fair value of gold. If so, assuming a global asset base of $150 trillion would mean gold has a fair value of $3000 to $6000/oz. ($150T/5/5 billion ounces). Such a price assumes the adoption of a worldwide gold standard and no consequent deflation in asset prices, which may not be realistic. Perhaps $75T might be a better number given the already ongoing global asset meltdown in which case the fair value gold price under a gold standard could be $1500 to $3000.

Keep in mind all of the above gold prices are real and therefore don't need to be further adjusted for inflation because the ratios' denominators already account for changes in price over time.

This is a thoughtful answer and he’s clearly given the topic serious consideration. My major objection is that the variables needed seem to be very hard to come by and there must be very large room for error.

My view is still the same. I think the safest way to look at gold is to consider its price to be wholly irrational.

Posted by edelfenbein at 11:21 AM

A Medical Marijuana Stock

Oh dear lord. Check out Medical Marijuana, Inc. (CVIV.PK), formerly Club Vivanet:

Medical Marijuana, Inc. formerly Club Vivanet announced today that it filed a patent application for its invention, that potentially satisfies various governmental and the medical marijuana dispensaries' needs for tax collection in the medical marijuana industry.

I think I know how this story ends. The middle part is still up in the air, but the ending isn't.

(HT: Timbo)

Posted by edelfenbein at 3:10 PM

Not Buying Starbucks

I’m not buying this mini-rally for Starbucks (SBUX). The last three earnings reports have been AWFUL. Earnings come out on April 29 and 15 cents a share is looking pretty high. They might hit it since an earnings warning should have come out by now.

Earnings misses aren’t like athletes having a bad night. You can't just shake it off. One earnings miss usually leads to another. It’s because companies have big problems with their business models. Starbucks has started cutting back on expenses, but it’s far too early to say things have turned around.

Posted by edelfenbein at 2:39 PM

RIP: Greg Newton

This is awful news. I emailed Greg just a few days ago:

Our good friend and my personal confidant Greg Newton has passed away suddenly from a heart attack yesterday. He was driving to meet his fiancée Marsha where they were to begin a new life together in Florida.

I am devastated, and like many of you who listened to his wisdom and wit from our podcasts and his Naked Shorts blog, will miss him terribly.

Rest in peace my friend.

Dave

Naked Shorts was a wonderful blog that looked at Wall Street with wit and insight. He will be missed.

Posted by edelfenbein at 1:18 PM

How Do You Value Gold?

I’d welcome any feedback on these questions since I have no idea of the answer: How should one determine the price of gold? What are the variables or ratios that someone ought to use?

I have to say that I have no idea how to make a judgment on the price of gold. It seems to me to completely irrational and that’s why I like to avoid it. With an asset like a bond, you can input a few variables and try to determine if the current yield is too high or too low. Of course, your assumptions may be wrong, but you can plainly see what went wrong.

With stocks, there are all sorts of models to determine value. These can also be wrong, and many are, but at least everyone knows what a P/E Ratio is. But for gold, I have no idea where to start.

Part of this I have to blame on gold bugs who seem to be overwhelmingly irrational and incoherent. I apologize to the more thoughtful gold bulls but your voices are drowned out by the mob.

The only argument I can make out is that gold will go higher because we’re bankrupt and the dollar is worthless. But does that justify any price? At what point could that argument still hold up, yet the price is simply too high? I get the feeling that few gold bugs have ever considered that question.

Are there metrics that you can point to that show how gold’s price should have plunged for over $800 in 1980 to around $250 in 2001, then to over $1,000 last March? My feeling is that a huge weighting to the price of gold is undefinable speculation. It just is and there’s no way to make sense of it.

Any ideas?

Posted by edelfenbein at 12:09 PM

Population Growth and Wealth

Matthew Yglesias has an interesting post discussing the relationship between economic growth and population growth. He thinks that it’s possible to have long-term population decline alongside positive economic growth (though he says he’s not in favor of a declining population).

I’m not sure that’s correct. If a population is falling, then outside of war or disease, it must be due to either emigration or lower birth rates. That’s got to have a big impact on growth and innovation. In the other words, the size of GDP itself may boost per-capita GDP. If there’s heavy emigration, I would guess that would take a heavy toll on production since the émigrés would more likely be younger and more entrepreneurial.

If the falling population is due to declining birthrates, then that means the population is getting older. That would probably skew consumption away from innovative sectors. Not to mention that a falling population would place heavy pressure on a country’s social welfare obligations.

Yglesias posts a chart from Gregory Clark’s book, A Farewell to Alms: A Brief Economic History of the World which shows the lower population in pre-modern Britain led to higher wages. Sure, if all my neighbors are dropping dead from the plague my wages will rise, but that’s per-capita wealth which is very different from a growing economy.

The key part is the fitted line on Yglesias’s post that existed before Britain broke free from the Malthusian trap. I assume that the line would have to have a slope less than 0.5 (though it doesn’t appear that way). Either way, I think we can all agree that if another Great Plague comes along, wage growth won’t be a high priority.

Posted by edelfenbein at 1:52 PM

Doing Nothing Can Be Very Smart

Here’s an interesting note on the Dow Jones Industrial Average (^DJI). Periodically, the gate keepers of the index add or delete stocks to keep things fresh. But if they had simply left the index alone, it would have done far better.

Since 1930, nine of the 30 stocks are still left. Twenty have been bought out or merged and only Bethlehem Steel has gone bust. The index would have finished 2008 at 14,600 instead of 8776. On top of that, the Dow’s weird weighting by price instead of market value also would have hurt you.

I don’t have the numbers on this but my guess is that a lot of the untouched Dow’s gain is due to one stock, IBM (IBM). The company was removed from the index in 1939 and put back in 1979. In those 40 years, IBM gained an astounding 22,000%.

Warren Buffett once said, “Lethargy bordering on sloth remains the cornerstone of our investment style.” Now you can see why.

Posted by edelfenbein at 11:11 AM

Shorting Reason

Richard Posner has a good review of Animal Spirits by George Akerlof and Robert Shiller. Here's a snippet:

As one reads this book, one has the sense that deep down Akerlof and Shiller believe that being rational is the same as being right. That is a mistake. It prevents them from entertaining the possibility that what has now plunged the world into depression is a cascade of mistakes by rational businessmen, government officials, academic economists, consumers, and homebuyers, operating in an unexpectedly fragile economic environment, and that what is retarding recovery is not the "unreasoning fear" of which Franklin Roosevelt famously spoke but the rational fears--the reasoning fear, to use Roosevelt's idiom--of businesspeople, consumers, and officials who confront economic uncertainties for which no one had prepared them.

I've often been critical of Robert Shiller's work because I think he places too much emphasis on the short comings of investors. It's true that folks often get carried away with things especially when prices get moving.

The truth is that many times it has been "different this time" or we did "enter a new era." The speculation usually comes after a major change has taken place. Asset prices don't easily confirm to a simple morality tale of people getting greedy and overpaying for stuff. If you scratch the surface, you'll see that there are many concrete reasons (and government policies) that caused the animal spirits.

Just to give one example is that bubbles can often be confirmed by popular memes. The Nifty Fifty craze of the early 1970s specifically focused on companies that fostered social harmony (Xerox, McDonalds, Coke, Polaroid, Disney) which was a natural inclination after the turbulent 1960s.

The bubble of the 1990s seems to have been aided by the growth of the dubious first-mover-advantage theme. I remember being told countless times how some dot-com stock was “just like QWERTY.”

The story was that once a company became an industry standard, it would be the winner that took all. There was even a magazine called the Industry Standard. In 2000, the magazine sold more advertising than any magazine in America.

It didn’t last.

Posted by edelfenbein at 10:46 PM

Creditors Need to Take Some Risk

Tyler Cowen has a good op-ed in the NYT pointing out a key factor in the bailouts—the true recipients are the creditors and that might cause future problems:

What the banking system needs is creditors who monitor risk and cut their exposure when that risk is too high. Unlike regulators, creditors and counterparties know the details of a deal and have their own money on the line.

But in both the bailouts and in the new proposals, the government is effectively neutralizing creditors as a force for financial safety. This suggests a scary possibility — that the next regulatory regime could end up even worse than the last.

The more closely a financial institution is regulated, the more it will be assumed that its creditors enjoy federal protection. We may be creating a class of institutions whose borrowing is, in effect, guaranteed by the government.

Posted by edelfenbein at 11:28 PM

Weekend Poll

Update: This question comes from the work of Daniel Kahneman and Amos Tversky, though I changed the amounts in order to experiment.

By pure rules of expected return, people should to take the 50-50 bet for $3000. Although that’s what most folks said, there’s still a significant percentage that chose the guaranteed $1,000. Incidentally, I don’t blame anyone for taking the $1,000. It really comes down to each individual’s risk tolerance.

Posted by edelfenbein at 8:00 PM

The Jobless Rate Continues to Grow

I don't have much to add about today's awful jobs report. Let me say a few minor things. The official rate was reported as 8.5%. Technically, it was 8.543% which was only about 10,000 jobs away from 8.6%. At the present rate, that's less than half-a-day's job cuts. Over the last six months, the unemployment rate has ticked up 0.1% about every week.

Over the last nine years, the unadjusted adult population has grown by 23.3 million. The civilian labor force has grown by just 11.6 million which means that less than half of the increase in population is participating in the jobs market. The number of employed has grown by just 4.2 million. So even the increase that is participating in the job market, only 36% have jobs (bear in mind, I'm talking about the net increase).

Posted by edelfenbein at 10:53 AM

Cause Please Meet Effect

February 23, 2004

Greenspan says ARMs might be better deal

May 16, 2007:

Pimco hires Greenspan as consultant

April 4, 2009

PIMCO Distressed Mortgage Fund Down 34%

(HT: Joe W.)

Posted by edelfenbein at 9:58 AM

Mark-to-Market Is More Realistic

In honor of yesterday’s decision from FASB, we at Crossing Wall Street would like to review our legacy assets which include; three unicorns, eight hobbits (non-union), a half dozen minotaurs, two mermaids, a couple of CHUDs, several tic-tacs, true love and a smurf.

Posted by edelfenbein at 9:27 AM

Forbes and the Flat Tax

Now at his new perch at Reuters, Felix Salmon tweaks Steve Forbes for the news that Forbes magazine is cutting salaries by 10% for everything over $100,000:

This is taxing the rich! It’s class warfare! Why should those employees earning a six-figure salary be singled out for pay cuts? If you cut their pay, don’t you know that you’re going to reduce their incentive to work hard, and also the incentive for lower-earning employees to aspire to their position? And these are the most productive members of the firm! You’re punishing success! You should be giving the higher-paid employees a pay rise, instead — that will surely boost corporate revenues!

Come on Steve, walk the walk. If the rich can’t be treated equally with the poorer at Forbes, where is the hope for them in this world?

I know he's joking, but two things. Obviously, a cut in salary isn’t a tax. There’s a major difference between dealing with a private employer and government taxes. With the government, you have no choice.

Secondly, what Forbes is doing isn’t running away from the flat tax -- it’s exactly how his flat tax works. Forbes has called for a 17% flat tax on income only above a specific level (that’s changed over the years). You may not like his principles, but in this care Forbes is walking the walk.

Posted by edelfenbein at 3:00 PM

What Caused Oil to Boom?

A few months ago, I criticized the absurd 60 Minutes story which blamed speculators for the rise in oil prices. I said the story was "wretched, incoherent and it engages in the worst form of scapegoating."

As is often the case, conspiracy theories sell. If you have a high tolerance for imbeciles, check out some of the comments when Seeking Alpha posted my piece.

Now James Hamilton has looked into the behavior of the oil boom and bust and he comes to the conclusion that oil was impacted by...are you ready...supply and demand.

But while the question of the possible contribution of speculators and the Fed is a very interesting one, it should not distract us from the broader fact: some degree of significant oil price appreciation during 2007-08 was an inevitable consequence of booming demand and stagnant production.

(Via: Kedrosky.)

Posted by edelfenbein at 1:29 PM

S&P 500 Total Return Index

Even if we include dividends, the S&P 500 has lost money over the last 11 years.

And that's not even adjusting for inflation. Ugh!

Posted by edelfenbein at 1:13 PM

Daniel Gross on Dumb Money in the Newspaper Industry

Daniel Gross points out that the failure of many newspapers isn't always due to the decline of an industry, but to stupid moves from managers:

In 2007, legendary real estate investor Sam Zell decided that a talent for good timing in flipping office buildings made him an expert on the ailing newspaper industry. In December 2007, he closed on the $8.2 billion purchase of the Tribune Co., which owned the Los Angeles Times, the Chicago Tribune, and the Chicago Cubs. Zell put down just 4 percent of the purchase price—$315 million—and borrowed much of the rest, leaving the company with a $13 billion debt burden. This deal was the purest expression of the "dumb money" mentality. The only hope Zell had of making a dent in the debt load and keeping current on the $800-million-plus annual interest tab was to sell off trophy properties like the Cubs, office buildings, and big-city newspapers—assets that themselves don't throw off lots of income but whose purchase requires tons of cheap credit. Tribune Co. filed for bankruptcy Dec. 8, 2008.

Posted by edelfenbein at 8:30 AM

If There's No Media, Is It Still a Protest?

Here's a truly post-modern photo I saw over at DealBreaker.

Posted by edelfenbein at 11:42 AM

The Failure of the Junk Bond Market

Steve Sailer writes on anti-usury laws and comments on the failure of the junk bond market:

Also, a generation freed from limits on interest rates is typically going to push them too far, with widespread damage. We saw that with Mike Milken's junk bonds back in the 1980s, which worked pretty well at first, but generated so much profit that ever junkier junk bonds came out, culminating in the 1991 recession.

I have to disagree. Since junk bonds did so well during the 1980s, it suggests that credit had not been properly distributed and those who took the risk, were paid handsomely.

As with many cases, the junk bond market was simply pushed to far, though that was happening. The big problem was that the junk bond market got a very big push from the government. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (also known as Firrea) forced S&Ls to divest their junk bonds. That triggered an avalanche of selling which in led to the recession of 1990-91.

Research has shown that junk bond issuers outperformed the rest of the economy in terms of job growth, sales and productivity.

Incidentally, FIRREA also gave “both Freddie Mac and Fannie Mae additional responsibility to support mortgages for low- and moderate-income families.”

Posted by edelfenbein at 9:52 AM

It Can't Possibly Go Any Lower

After careful consideration, I've come to the conclusion that General Motors (GM) is a very strong buy.

For more details, read here.

Posted by edelfenbein at 7:51 AM