Archive for 2008

• Wall Strip on Hasbro
  Eddy Elfenbein, May 27th, 2008 at 7:35 am

  Julie looks at Hasbro (HAS). After nine long years, the stock finally made a new all-time high recently. In 1974, you could have picked up shares of Hasbro for about 2.4 cents each. That’s adjusting for many, many splits. Not including dividends, the stock is up about 140,000% since. In other words, there’s a lot of money to be made in toys…just ask any adult male.
  
  (Note to Julie: There’s no capital of Istanbul. It’s the capital city of Constantinople.)

• In Memoriam
  Eddy Elfenbein, May 26th, 2008 at 4:36 pm

  

  It is, in a way, an odd thing to honor those who died in defense of our country, in defense of us, in wars far away. The imagination plays a trick. We see these soldiers in our mind as old and wise. We see them as something like the Founding Fathers, grave and gray haired. But most of them were boys when they died, and they gave up two lives — the one they were living and the one they would have lived. When they died, they gave up their chance to be husbands and fathers and grandfathers. They gave up their chance to be revered old men. They gave up everything for our country, for us. And all we can do is remember.
  —Ronald Reagan

• Momentum Has Lost Some Momentum
  Eddy Elfenbein, May 23rd, 2008 at 11:04 pm

  Kirzner Fervor has a great post on building a trading strategy off the stocks market’s momentum. The bottom line is that historically, it’s worked very well, but the in recent years, the advantages have dissipated. Such is the story of much data-mining.
  After my initial post on the market’s ability to carry a one-day rally or sell-off into the next day, I had an emailer point out that the effect has worn off in recent years. I had meant to follow up on it, but I got distracted. Such is the story of much blogging.
  I’m still amazed at the historical effect of the stock market’s momentum. To quote myself:

  This means that the market’s entire gain (capital gains since 1950) has come on days following a 0.64% up move. The rest of the time (over 80%), the market is net flat. Half the market’s gain came on day’s following 3.2% up moves. On average, that happens slightly less than once a year.

• Maxine Waters Threatens to Nationalize Oil Companies
  Eddy Elfenbein, May 23rd, 2008 at 1:34 pm

  No, really. From the NYT:

  In one of the more pointed exchanges, Representative Maxine Waters, Democrat of California, seized on the record $40.6 billion profit of Exxon Mobil in 2007. She pounded on the company’s senior vice president, J. Stephen Simon, demanding to know if gas prices would be lower if the company earned a few billion dollars less.
  At another point, Ms. Waters brazenly suggested that perhaps the American oil industry should be nationalized, acknowledging that it was an “extreme step” but one that might be necessary if outsize profits and exorbitant gasoline prices continued.

  I have one small correction. Last year, ExxonMobil didn’t earn $40 billion, it earned $70 billion. Guess where that missing $30 billion went? I’ll give you a hint: Rep. Waters’ salary.
  Here’s the video:
  

• The Buy List Since 2006
  Eddy Elfenbein, May 23rd, 2008 at 12:18 am

  I don’t think I’ve done this yet, but here’s how the Buy List has performed since I started it in 2006. I had a small Buy List in 2005, but I didn’t formalize the system until the beginning of the 2006.
  The red line is the Buy List and the black line is the S&P 500. The graph is done as if it was a portfolio starting with $1 million on December 31, 2005 (dividends aren’t included). All told, we’re trailing the S&P 500, 11.70% to 9.27%. The Buy List is 1.25% more volatile than the S&P 500.
  
  We completely missed the last leg of the rally in 2007. Fortunately, we did a lot better during the sell-off. At one point in February, we pulled even with the S&P 500.
  The Buy List is a very conservative portfolio. The correlation of the daily changes with the S&P 500 is 0.83, which is pretty high.

• Pfizer Hits 10-Year Low
  Eddy Elfenbein, May 22nd, 2008 at 4:24 pm

  Shares of Pfizer (PFE) closed today at their lowest level since September 1997. The dividends would have given you about a 26% return. For years this was a stock that could do no wrong.
  

• Do 1.3 Million People Really Make Their Living Off Ebay?
  Eddy Elfenbein, May 22nd, 2008 at 9:48 am

  Here’s a good article from Daniel Gross. You know how eBay always says that 1.3 million people make their living off eBay. Well, it’s not exactly true.

• How Economists Invest
  Eddy Elfenbein, May 22nd, 2008 at 9:40 am

  Check out how the American Economic Association structures its investment portfolio. They’re doing pretty well.
  (Via: Mankiw.)

• More Than You Ever Cared to Know About P/E Ratios
  Eddy Elfenbein, May 21st, 2008 at 12:40 pm

  I want to expound on what I said the other day about the use of Price/Earnings Ratios. It works like this, picking stocks (good), timing the market (bad).
  I also criticized the idea of using P/E ratios based on ten years’ worth of earnings. Now I want to show you why.
  First off, I got this historical data off Robert Shiller’s website which has monthly numbers going back 140 years.
  Now I have to explain my analysis carefully, and I have to apologize because it’s not easy to do. Plus, whenever I attempt this, I get dozens of emails asking what the hell I’m talking about. (Note, dear reader, I’m criticizing my articulational abilities, not your comprehensional skillz.)
  Deep breath. I take all of the monthly data of stock market returns and P/E ratios. I then resort the data, not by time, but this time by P/E ratio, highest to lowest. Then, I calculate all those individual monthly returns. Basically, it’s a stock market graph, not by time, but by declining P/E ratio.
  If the P/E ratio has an impact on the market, I would expect the line to droop down early on, then rally frenetically with lower ratios. If the P/E ratio has no impact, then I expect that the line would rise in a smooth diagonal line. Here’s a look at how the 10-year and 1-year P/E Ratios stack up:
  
  As you can see, the 1-year P/E ratio has some impact on market returns, but not much. The market shows a net loss up to the 390th data point which corresponds to a P/E ratio of about 17.8. That means that all over the market’s net gains have come when the P/E Ratio is less than 17.8. According to Shiller’s data, that’s almost the entire time since 1996.
  Still, I’m not impressed by the one-year’s performance. Compare that to this dramatic graph showing the market’s performance ranked by the previous day’s gain.
  The 10-year P/E has, in my opinion, almost no impact on equity prices. The blue line barely wiggles on its way down the P/E Ratio scale. Knowing what the 10-year ratio was gave you zero input on what stock prices were about to do.

• Hauser’s Law
  Eddy Elfenbein, May 21st, 2008 at 10:22 am

  In yesterday’s WSJ, David Ranson has a bizarre article expounding on, what he calls, Hauser’s Law, which is named in honor of economist Kurt Hauser. The law states: “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”

  And the article includes this nifty chart:
  

  Zubin Jelveh goes off on the chart because it implies that the variation in marginal rates have zero impact on the bottom line. It’s true that other taxes besides income taxes have played an increasingly significant role in U.S. tax policy. But what I understood Hauser’s Law to mean is that none of that matters. The tax code will always produce the same amount.

  I’m fairly sympathetic to rules like Hauser’s Law. Especially with social sciences, I tend to believe that there situations where no matter what the rules are, they’ll produce the same results. (Some of you may recall Elfenbein’s 17th Law which states that U.S. GDP growth has been remarkably stable over the last 40 years and about 3.1%.)

  The problem I have with Hauser’s Law is that it doesn’t seem to include state and local taxes, which should raise the bar by quite a lot. Also, why should we look to the nation as a whole? To find out if there’s an upper limit, I think we should look at what state has the highest rate. For that matter, perhaps we should look at foreign countries.

  While tax revenues may been fairly stable over the past 50 years, that doesn’t mean we couldn’t generate more if we wanted to.