Archive for 2009

• Gold Vs. the S&P 500
  Eddy Elfenbein, May 20th, 2009 at 12:42 pm

  Here’s a look at how gold has done against the S&P 500:
  
  Here’s the same graph but I divided the two numbers (S&P 500 by gold):
  
  On the day of the inauguration, exactly four months ago, the ratio slipped below 1.0. The ratio has previously bounced off 1.0 on November 20. Since the inauguration, it’s closed above 1.0 only once and that was on April 17 which was the day of Citigroup‘s (C) **cough** “earnings” report.
  Interestingly, the S&P has stayed roughly even with gold over the past few weeks which puts the rally in a different light.
  My view is that we’ll test 1.0 again. If the market likes what it sees, then we might move much higher.

• Nouriel Roubini in TNR
  Eddy Elfenbein, May 20th, 2009 at 7:56 am

  Saturday Night Live recently had a strange skit about a talk show hosted by the Bee Gees. Honestly, it wasn’t terribly funny but what struck me was that one of the guests was supposed to be Nouriel Roubini (I think it was Fred Armisen).
  The Roubini character was the straight man in the skit, but it’s telling that he’s reached the point where he can be a typical “important person” you’d see on a talk show, even a parody of one.
  Roubini is probably the hottest economist in the world right now. More tellingly, we live in a time where there is a hottest economist in the world.
  Roubini just got another honor, a profile in the New Republic. It’s a pretty good profile. One complaint I have is that these profiles often try a tired formula—that the person’s ideas are an outgrowth of who they are. The New York Times tried that recently with Freeman Dyson and it didn’t work.
  The truth is that you often can’t see a connection between important thinkers and their personalities or backgrounds. This sort of game can easily descend in psycho-babble. It will read something like, “He’s ideas are outside the mainstream and in high school, he was…wait for it…an outsider. Hello, Theme!!”
  There’s even a theory that the stalemate in economics between investment (the male) and savings (the female) was finally broken by Keynes, the homosexual. That’s totally loopy to me but hey, it’s not my idea.
  I’ve never met Roubini, but I would think the interesting angle to take is that he seems to be the opposite of his ideas—the playboy professor with the buzzkill forecasts.
  Unquestionably, Roubini is an important thinker. However, I was glad to see the profile mention that Roubini hasn’t been as prescient as many people believe:

  Anirvan Banerji, an economist with the Economic Cycle Research Institute, has been particularly dismissive of Roubini’s forecasting abilities: “The average time between recessions is about five years in the postwar period,” he says. “So, if you forecast a recession one year and it doesn’t happen, and you repeat your forecast year after year … at some point the recession will arrive.”
  And Roubini has undeniably overshot. In 2004, he predicted that the oncoming recession would precipitate the crash of the dollar. The crisis has mainly buoyed it. On September 1, 2005, three days after Hurricane Katrina made landfall, Roubini told Reuters that economic disaster was imminent. What followed instead was a bump in financial activity that forestalled the recession for more than two years.

  If you’re waiting for Jon Stewart to do a sanctimonious takedown of Roubini, I wouldn’t hold your breath. Though I nearly choked when the profile mentioned Nassim Taleb, “who also predicted a catastrophe in his book The Black Swan.” The old adage is true: It’s not what books say that’s important, it’s what people assume they say that’s important.
  I’m glad to see Roubini get the attention, fame and fortune he deserves. But I have to add we shouldn’t judge economists by how accurate their macro forecasts are. That’s a losing game. Instead, we should focus on the power of their ideas to explain the economy, and see the connections that they see.
  If you want to be a prognosticator, then go on the record with specific advice. If not, then you should try to explain the economy as clearly as you can.

• This Just In…
  Eddy Elfenbein, May 19th, 2009 at 5:51 pm

  People With Higher IQs Make Wiser Economic Choices, Study Finds

  People with higher measures of cognitive ability are more likely to make good choices in several different types of economic decisions, according to a new study with researchers from the University of Minnesota’s Twin Cities and Morris campuses.
  The study, set to be published online in the Proceedings of the National Academy of Sciences this week, was conducted with 1,000 trainee truck drivers at Schneider National, Inc., an American motor carrier employing 20,000. The researchers measured the trainees’ cognitive skills and asked them to make choices in several economic experiments, and then followed them on the job.
  People with better cognitive skills, in particular higher IQ, were more willing to take calculated risks and to save their money and made more consistent choices. They were also more likely to be cooperative in a strategic situation, and exhibited higher “social awareness” in that they more accurately forecasted others’ behavior.

  I’m looking forward to authors’ follow-up study, “Your Ass and a Hole in the Ground: A Study on Dissimilarities.”

• The VIX and Market Returns
  Eddy Elfenbein, May 19th, 2009 at 4:17 pm

  Most commentators assume that low volatility is good for the market. That’s not necessarily the case. All a high low or VIX is at predicting is high or low volatility, not direction.
  CNBC reports:

  Historically, the S&P has seen an average of 3% and 6% gains respectively over the 3 and 6 months that follow a crossover below 30.

  That’s a completely useless stat. The general market averages close to those returns anyway. Given the historical sample size, that study simply measures noise and nothing else.
  Here are some numbers I came up with:
  Since 1990, when the VIX is below 15 (about 31% of the time), the S&P’s annualized return is 7.8%.
  When the VIX is between 15 and 20 (27% of the time), the S&P’s annualized return is 2.8%.
  When the VIX is between 20 and 25 (22% of the time), the S&P’s annualized return is -1.5%.
  When the VIX is over 25 (20% of the time), the S&P’s annualized return is 11.1%.
  To the extent there’s a tipping point, it seems to be a VIX of 13. Above 13, the S&P shows an annualized return of 3.0%, below 13 it jumps to 14.1%. However, 13 is a very low VIX reading; it’s been below 13 about 18% of the time.
  Outside that, there doesn’t seem to be much of a trend.

• Amazon at $77
  Eddy Elfenbein, May 19th, 2009 at 1:17 pm

  Amazon (AMZN) is at $77 a share!
  Really? Is that real money, or Monopoly money or Canadian euros??
  If they mean actual U.S. dollars, I wouldn’t pay half that much.

• Volatility Chills
  Eddy Elfenbein, May 19th, 2009 at 12:10 pm

  The Volatility Index (VIX), which is also known as the “fear index,” dipped below 30 today for the first time in eight months. Personally, I’m glad I’m not in my 20s anymore.
  
  At one point, the VIX nearly hit an intra-day high of 90. A lower VIX isn’t necessarily good for the bulls or bears, but it does show that the market is very different from a few months ago.

• Medtronic’s Earnings — Blah
  Eddy Elfenbein, May 19th, 2009 at 11:47 am

  Despite getting some great press for Barron’s, Medtronic’s (MDT) earnings report was rather uninspiring. Their fiscal Q4 earnings came in at $250 million or just 22 cents a share. That’s a huge drop from the 78 cents a share they made a year. However, if you knock out all the charges, and there were many, the company made 82 cents a share which was in line with the Street.
  The Wall Street Journal reports:

  Revenue slipped 0.8% to $3.83 billion. In February, the company had said it expected revenue of about $3.84 billion. Excluding currency fluctuations, revenue grew 5%. Sales of heart-rhythm devices fell 5% as ICD sales declined 3.2%. The spinal business grew 1%.
  Cardiovascular revenue was flat amid a 15% fall for stents, the scaffoldings that prop open arteries. The company said late Monday that the Endeavor stent was the first coronary stent to receive the European Economic Area’s CE mark of approval for treating patients with acute coronary syndrome, which includes unstable angina and heart attacks.

  What’s more, the company is cutting 1,500 to 1,800 jobs. For this fiscal year, Medtronic projects earnings at $3.10 to $3.20 per share where the Street was looking for $3.20.
  I have to agree that the stock is cheap, but I think it will become even cheaper. If you’re looking to add shares, wait for it to drop below $30.
  Here’s a look at MDT’s sales and earnings for the past several quarters:
  Quarter………..EPS………….Sales
  Jul-01…………$0.28………..$1,455.70
  Oct-01………..$0.29………..$1,571.00
  Jan-02………..$0.30………..$1,592.00
  Apr-02………..$0.34………..$1,792.00
  Jul-02…………$0.32………..$1,713.90
  Oct-02………..$0.34………..$1,891.00
  Jan-03………..$0.35………..$1,912.50
  Apr-03………..$0.40………..$2,148.00
  Jul-03…………$0.37………..$2,064.20
  Oct-03………..$0.39………..$2,163.80
  Jan-04………..$0.40………..$2,193.80
  Apr-04………..$0.48………..$2,665.40
  Jul-04…………$0.43………..$2,346.10
  Oct-04………..$0.44………..$2,399.80
  Jan-05………..$0.46………..$2,530.70
  Apr-05………..$0.53………..$2,778.00
  Jul-05…………$0.50………..$2,690.40
  Oct-05………..$0.54………..$2,765.40
  Jan-06………..$0.55………..$2,769.50
  Apr-06………..$0.62………..$3,066.70
  Jul-06…………$0.55………..$2,897.00
  Oct-06………..$0.59………..$3,075.00
  Jan-07………..$0.61………..$3,048.00
  Apr-07………..$0.66………..$3,280.00
  Jul-07…………$0.62………..$3.127.00
  Oct-07………..$0.58………..$3,124.00
  Jan-08………..$0.63………..$3,405.00
  Apr-08………..$0.78………..$3,860.00
  Jul-08…………$0.72………..$3.706.00
  Oct-08………..$0.67………..$3,570.00
  Jan-09………..$0.71………..$3,494.00
  Apr-09………..$0.78………..$3,830.00

• The ungovernable state
  Eddy Elfenbein, May 18th, 2009 at 10:37 pm

  There’s an election tomorrow in California. If several initiatives pass, the state budget deficit will be $15.4 billion. If they fail, it will be $21.3 billion.
  The state is royally screwed. It’s not economics, it’s the state’s political culture.
  Between democracy, immigration and big government, you can choose any two. You can’t have all three.
  The Economist reports:

  The broken budget mechanism and the twin failures in California’s representative and direct democracy are enough to guarantee dysfunction. The sheer complexity of the state exacerbates it. Peter Schrag, the author of “California: America’s High-Stakes Experiment”, has counted about 7,000 overlapping jurisdictions, from counties and cities to school and water districts, fire and park commissions, utility and mosquito-abatement boards, many with their own elected officials. The surprise is that anything works at all.
  As a result, there is now a consensus among the political elite that California’s governance is “fundamentally broken” and that the state is “ungovernable, unless we make tough choices”, as Antonio Villaraigosa, the mayor of Los Angeles and a likely candidate for governor next year, puts it.

  Notice that what needs to be done is perfectly clear. We all know the answer. Like any tragedy, the problem is simply a lack of will.

• My Lunch with Timmy
  Eddy Elfenbein, May 18th, 2009 at 4:35 pm

  I went to see Treasury Secretary Tim Geithner be interviewed by Newsweek editor Jon Meacham today at the National Press Club. The back story is that after 76 years, Newsweek is relaunching itself. The new issue is out today and the magazine is smaller and more “engaged,” though it’s also more expensive. Today’s interview was part of their rebranding campaign.
  The folks at Clusterstock were invited and they generously passed their invitation onto me. This was an odd day to see the Treasury secretary be interviewed since the Washington Post ran a story this morning on the sad state of affairs at the department. The article’s message was clear: Geithner is a weak manager and the White House has the whole department on a tight leash.

  Government officials, inside the Treasury and out, say the unresolved issues are piling up in part because of vacancies in the department’s top ranks. But some of the officials also cite the Treasury’s ad-hoc management, which is dominated by a small band of Geithner’s counselors who coordinate rescue initiatives but lack formal authority to make decisions. Heavy involvement by the White House in Treasury affairs has further muddied the picture of who is responsible for key issues, the officials add.

  To his credit, Meacham led off by mentioning the article and asked Geithner about it. This turns to problem I have with Geithner—he seems to have the soul of a bureaucrat. He speaks too quickly and he avoids the heart of nearly every question.
  This is, of course, what people in power are paid to do. But when someone as artful as Obama does it, you feel that the question has been answered. With Geithner, you simply feel like he’s evading you and he has contempt for the question. On top of that, he seems so damn ineffectual. Once you see the package at work, it doesn’t inspire much confidence. Especially when you compare him with his boss, the gap is downright embarrassing.
  So what was his answer? He garbled on about more time, things were progressing nicely, yadda yadda yadda and the administration was “ahead of the curve.” You just knew that phrase was coming. Still, he never addressed the issue at hand which is him—and ironically, that answers the question.
  When asked about the economy, Geithner said that things were stabilizing but there’s still a lot of pain out there. (Gee, thanks for that, Tim.) When asked about the efficacy of the Fed, he said that it’s performed “very well over time,” but didn’t comment more about the current Fed. Bernanke’s term as Fed Chair expires next year.
  The closest Geithner came to being emphatic was we he reiterated the administration’s view that something had to be done quickly and be done big, so the issue of the debt and deficit weren’t top priorities. I would have like to see Meacham press him further about how the stimulus us being spent, but no such luck.
  Meacham asked Geithner how much money he makes as Treasury secretary. Geither said that he’s generously compensated and that he makes under $200,000. Ugh. Here’s a question that can be answered with a specific number and its public information, yet even here, Geithner still bobs. Fortunately, he went on to say that he doesn’t favor compensation caps for bankers. Instead, he supports altering scope of incentives, but still he was vague on that point outside of the usual boiler plate like “say on pay.”
  Meacham threw a bit of a curveball by mentioning critics to the left of the administration, specifically Paul Krugman, and the charge that they’re too soft on bankers. Geithner completely dodged the whole thing.
  Perhaps the most illuminating part was when Meacham turned to the issue of California and states in general. Geithner said they’re in close consultation with the states. When Meacham pressed him about a federal bailout, Geithner said that he wouldn’t use the words “federal” or “bailout,” and repeated that he was in close consultation with the states. I’m not sure what to take from that.
  Meacham concluded by asking Geithner about being named one of “Barack’s Beauties” by People. At this point the Treasury Secretary simply blushed. Meacham made some joke about Alexander Hamilton probably never blushed, and Geithner being in “close consultation” with People.
  All in all, I would rather have seen Geithner (or anyone) interview Meacham. In addition to being a thoughtful observer of religion in America, he recently won the Pultizer Prize for American Lion, his book on Andrew Jackson. Plus, he’s in the middle of trying to revamp one of the country’s oldest and most influential news magazines.

• Geithner at the National Press Club
  Eddy Elfenbein, May 18th, 2009 at 10:33 am

  I’m heading off to the National Press Club to hear Tim Geithner be interviewed by Newsweek’s Jon Meacham.
  This is rather a delicate time for the Treasury Secretary. The Washington Post ran an article this morning saying there’s no coherence at the Treasury Department. The claims are that he’s a weak manager, important slots are still unfilled, important decisions are made on an ad hoc basis and the White House grants it little autonomy.
  The article states that the White House even reviewed the department’s design for its web site (btw, the right side bar needs a wider margin).
  I’ll have a complete report when I get back.