Archive for October, 2008

• Remember What I said About Greed Being Good. Um…Maybe Not.
  Eddy Elfenbein, October 17th, 2008 at 10:35 am

  
  A sequel to Wall Street is moving ahead. According to the Telegraph, the film will be very timely:

  The story, which will be set during the current credit crisis, will see Gordon Gekko released from prison into a Wall Street which is in meltdown.

  Ideally, Gekko would have his own show on CNBC.
  (Via: WSF).

• Finally
  Eddy Elfenbein, October 17th, 2008 at 10:29 am

  Alea notes that the TED Spread finally falls below 400.

• Those Crazy Hand Signals Traders Use
  Eddy Elfenbein, October 17th, 2008 at 10:16 am

  
  Ever wonder what those crazy hand signals are that traders use? Here’s a primer from Britain:

  With the introduction of electronic trading, hand signals have disappeared from the London Stock Exchange. But traders on some exchange floors around the world still like to wave their hands and fingers about to strike a deal.
  Hands out in front but pulling towards you: I’m buying
  Hands out in front, palms out, pushing away: I’m selling
  Combination of finger signals indicates the buying/selling price (a closed fist indicates a zero). Then,
  Touch the face: signals the amount to buy/sell
  Finger to chin: multiples of 1
  Finger to forehead: multiples of 10
  Fist to forehead: multiples of 100

  I’m afraid I’d accidentally buying 10 billion shares of something.

• Buy American. I Am.
  Eddy Elfenbein, October 17th, 2008 at 10:13 am

  
  The Oracle makes the case for stocks:

  Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
  You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
  Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
  Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

• -733.08
  Eddy Elfenbein, October 15th, 2008 at 9:06 pm

  The Dow dropped today by 733.08 points to close at 8577.91. That’s a loss of 7.87%. By percentage, this was worse than both October 9 (-7.33%) and September 29 (-6.98%). This was the worst day for the Dow since October 26, 1987, and it was the ninth-worst day ever. Three of the 19 worst days have come in the last 13 sessions.
  The S&P 500 fell by 9.03% today which was much worse than the Dow. The Dow has outperformed the S&P 500 on all three big plunges. It also performed on October 7, which was only a drop of 5.11%.
  The Dow has been steadily outperforming the S&P for nearly three years. In fact, last week the Dow-to-S&P ratio hit a 5-1/2 year high. The ratio hasn’t broken 9.5 yet, but it seems as if it’s about to. The ratio hasn’t been over 10 since 1966.

• Unitedhealth Group Moves Up Earnings Data
  Eddy Elfenbein, October 15th, 2008 at 4:34 pm

  Unitedhealth Group (UNH) just said that it will report earnings tomorrow, instead of next week as originally planned. Something could be up, but I’ve lost a lot of faith in this company. Previously, the company said it expects 2008 EPS of $2.95 to $3.05. Since that translates to a P/E ratio of about 7, I don’t the market trusts them either.

• Acceleration Matters
  Eddy Elfenbein, October 15th, 2008 at 2:54 pm

  Here’s a look at some historical data of the S&P 500 since 1950.
  The day after a down day, the S&P 500 has dropped at annualized rate of 12%. The day after that, it’s risen at an annualized rate of 11.3%.
  The day after an up day, the S&P 500 has climbed at an annualized rate of 27.9%. The day after that, it’s risen at an annualized rate of 4.3%.
  So in both cases we see a reversion to the long-term trend, and interestingly, both show next-day adjustments of about 23%.
  After two consecutive down days, on the third day, the market drops at an annualized rate of 8.5%. But if the second day’s drop is greater than the first day’s, then the third-day loss is at an annualized rate of 17.8%. If the second day’s drop is less then first, then the third day shows a small annualized gain of 4%.
  After two consecutive up days, the market rises at annualized rate of 21.8% on the third day. Here’s comes the kicker: If the second day’s gain is greater than the first, then the market gains an annualized rate of 42.2% on the third day. If the second day’s gain is less than the first, the third day’s gain is just 5.6%.
  Acceleration matters, but it’s not everything. Turnarounds are also very good.
  When the market goes down, then up, the third day’s gain is an annualized 36.6%. In fact, that represents nearly the entire gain of the stock market even though those days come about less than one-quarter of the time.
  On down-then-up occasions, when the second day’s gain is greater than the first day’s loss, then the third day gains an annualized 49.8%. When the second day’s gain is less than the first day’s loss, the third day gains merely 24.1% annualized.

• Roubini Hasn’t Been So Correct
  Eddy Elfenbein, October 15th, 2008 at 11:45 am

  Megan McArdle:

  If you keep predicting a recession, eventually you will be right. Every time there was the slightest downturn in the numbers, Paul Krugman predicted a recession. Eventually he was right. Do we give him credit for the one he got right, or the multiple ones he got wrong? To liberals, the answer seems obvious. Which gives credence to the conservative belief that liberals are people who cannot do basic math.
  A more interesting question is what to do about doomsayers like Nouriel Roubini, who got the magnitude of the crisis right, but has similarly been predicting a financial holocaust for five years, with changing scenarios which mostly did not come to pass. Obviously, he was right that the global financial system was shaky. On the other hand, his understanding of why the global financial system was shaky does not seem to have been strong enough to predict the source of the failure–the current account deficit and the dollar have been at best minor players, at least in the way that he was worried about way back in 2004.

  Finally, someone is criticizing Roubini. His status as a financial visionary is wholly undeserved. He’s been screaming about the downfall of capitalism for years now.
  Here’s my complaint about making predictions–there’s a lack of balance. Basically, you can call for the world to end for years, then step back and take any crisis and claim vindication. It’s like the people who said they were right about Iraq. But the disaster they saw coming was millions of Arabs rushing to Saddam’s side and a Stalingrad-like siege of Baghdad.
  Also, Robert Shiller is a similar story. He never said what people think he said about the stock market. But if you make a bullish prediction and you’re wrong, well then forget about it. Glassman will forever be linked to Dow 36,000. His mistake was being specific. In June 2003, Krugman said the stock market was in a bubble, and he was fantastically wrong. Yet that disappears down the memory hole.
  So here’s the lesson, if you ever make a forecast always be gloomy and vague.

• Money Galore
  Eddy Elfenbein, October 15th, 2008 at 9:47 am

  This month’s Portfolio estimates that the James Bond franchise has generated nearly $14 billion in profits. The authors estimate that $12 billion came from the movies, $812 million from video games and $1 billion from books.

• Pennies From Heaven
  Eddy Elfenbein, October 14th, 2008 at 1:42 pm

  Does the weather affect market volatility? Apparently, the answer is yes.

  The relationship between the weather and stock market returns has been well documented both empirically and theoretically. We extend this literature by considering for the first time the impact of weather conditions on stock market volatility. Specifically, we analyze historical volatility using the extensive data set of Hirshleifer and Shumway (2003) which consists of daily measures of cloudiness along with stock market index returns for 26 stock exchanges internationally between 1982 and 1997. The empirical results suggest that sunnier mornings can be associated with higher levels of time-varying market risk as approximated by the conditional daily volatility of returns from GARCH and EGARCH models. The analysis of the VIX, VXO, VXN and VXD implied volatility indices for the CBOE offers further support to this finding.