Author Archive

  • Dow and the S&P 500
    , January 9th, 2009 at 6:36 pm

    On November 20, the Dow’s ratio to the S&P 500 broke 10-to-1 for the first time in over four decades. What did that mean?
    I’m not sure but it did happen to coincide with the market’s bottom. Both indexes have rallied nicely since then.
    image759.png
    The black line is the Dow and it follows the left scale. The blue line is the S&P 500 and it follows the right scale. The lines are scaled at 10-to-1.

  • Dennis Kneale Asks if Steve Jobs has PMS
    , January 9th, 2009 at 1:44 pm


    Stay classy, Dennis.

  • Today’s Jobs Report
    , January 9th, 2009 at 1:23 pm

    The jobs report today was terrible. The good news is that the market was expecting it, so stocks aren’t getting clobbered.
    Here’s some perspective: On average, 16,000 people lost their job every day for the last four months of the year. That’s like a decent-sized town getting wiped out every day.
    Here’s the NFP (in thousands):
    image757.png
    That trend does not look good. Eleven million Americans are now unemployed. Over the last three years, the labor force has grown by 4.44 million, yet employment has grown by 555,000.
    image758.png

  • Daron Acemoglu
    , January 9th, 2009 at 12:42 pm

    Arnold Kling points to some thoughts from Daron Acemoglu on what caused our blindness:

    The first is that the era of aggregate volatility had come to an end. We believed that through astute policy or new technologies, including better methods of communication and inventory control, the business cycles were conquered. Our belief in a more benign economy made us more optimistic about the stock market and the housing market. If any contraction must be soft and short lived, then it becomes easier to believe that financial intermediaries, firms and consumers should not worry about large drops in asset values.
    Even though the data robustly show a negative relationship between income per capita of an economy and its volatility and many measures did show a marked decline in aggregate volatility since the 1950s, and certainly since the prewar era, these empirical patterns neither mean that the business cycles have disappeared nor that catastrophic economic events are impossible. The same economic and financial changes that have made our economy more diversified and individuals firms better insured have also increased the interconnections among them. Since the only way diversification of idiosyncratic risks can happen is by sharing these risks among many companies and individuals, better diversification also creates a multitude of counter-party relationships. Such interconnections make the economic system more robust against small shocks because new financial products successfully diversify a wide range of idiosyncratic risks and reduce business failures. But they also make the economy more vulnerable to certain low-probability, “tail” events precisely because the interconnections that are an inevitable precipitate of the greater diversification create potential domino effects among financial institutions, companies and households. In this light, perhaps we should not find it surprising that years of economic calm can be followed by tumultuous times and notable volatility.

  • Stryker Delivers
    , January 9th, 2009 at 10:28 am

    Good news from Stryker (SYK).

    The company reaffirmed that it expects a 2008 profit, excluding special items, of $2.82 to $2.84 per share, an increase of 18 percent from 2007.
    For 2009, the Kalamazoo, Michigan-based company forecast earnings of $3.12 to $3.22 per share, up 10 percent to 14 percent from expected 2008 results. Analysts’ average forecast is $3.15.

    Check out this trend in EPS growth:
    2002: $0.88
    2003: $1.12
    2004: $1.43
    2005: $1.75
    2006: $2.02
    2007: $2.40
    2008: $2.82 to $2.84 (est)
    2009: $3.12 to $3.22 (est)

  • The Politics of Fear?
    , January 9th, 2009 at 8:30 am

    Remember how George Bush used the “politics of fear” during a national crisis to “scare voters” into approving his pre-existing agenda? Maybe it’s just me. Anyway, here are some choice quotes from Obama’s speech yesterday:

    We start 2009 in the midst of a crisis unlike any we have seen in our lifetime.
    I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible.
    If nothing is done, this recession could linger for years.
    We could lose a generation of potential and promise.
    a bad situation could become dramatically worse.
    we won’t get out of it by simply waiting for a better day to come, or relying on the worn-out dogmas of the past.
    Only government can break the vicious cycles that are crippling our economy.
    If we act with the urgency and seriousness that this moment requires.
    we need to act boldly and act now to reverse these cycles
    This must be a time when leaders in both parties put the urgent needs of our nation above our own narrow interests.
    For every day we wait or point fingers or drag our feet, more Americans will lose their jobs. More families will lose their savings. More dreams will be deferred and denied. And our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.
    I know the scale of this plan is unprecedented, but so is the severity of our situation.
    God Bless America

    Wow, I’m sold.

  • Anti-TARP Day
    , January 9th, 2009 at 8:11 am

    Today seems to be Anti-TARP day. The first salvo comes from a congressional oversight committee:

    The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system, not answered questions asked by a government watchdog, and has done nothing to help struggling homeowners, a report being released Friday charges.
    In the most scathing criticism yet of Treasury’s implementation of the $700 billion financial-rescue package, a draft report being issued by the five-member congressional oversight panel said there appear to be “significant gaps” in Treasury’s ability to track hundreds of billions of dollars of taxpayer money.
    “The panel’s initial concerns about the [Troubled Asset Relief Program] have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury,” said the draft report, which found that the department has “not yet explained its strategy” for stabilizing the financial markets.
    The report faults Treasury on a variety of fronts: having no ability to ensure banks lend the money they have received from the government; having no standards for measuring the success of the program; and for ignoring or offering incomplete answers to panel questions.

    Even harsher news comes from this Bloomberg article:

    Henry Paulson may be the most powerful manager of money in the world and he still couldn’t do for taxpayers with the $700 billion bailout of American banks what Warren Buffett did for his shareholders in investing in Goldman Sachs Group Inc.
    The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
    Paulson’s warrant deals may give U.S. taxpayers, who are funding the bailouts, less profit from any recovery in financial stocks than shareholders such as Goldman Sachs Chief Executive Officer Lloyd Blankfein and Saudi Arabian Prince Alwaleed bin Talal, owner of 4 percent of Citigroup Inc., said Simon Johnson, former chief economist for the International Monetary Fund.
    The transactions are “just egregious,” said Johnson, a fellow at the Peterson Institute for International Economics in Washington. “You want to do it the way Warren does it.”

  • Bank of England Cuts Rates to Lowest Level Since ’94
    , January 8th, 2009 at 9:39 am

    That would be 1694 when the bank was started:

    The Bank of England cut the benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain’s recession.
    The Monetary Policy Committee, led by Governor Mervyn King, trimmed the bank rate by a half point to 1.5 percent. The result matched the median forecast of 60 economists in a Bloomberg News survey. The pound rose against the euro and the dollar.

  • Wallstrip Unstripped
    , January 7th, 2009 at 10:04 pm

    Wallstrip has come to the end of the road:

    Like much of Wall Street, Wallstrip is pulling in its horns.
    The finance-focused, comedy video Web site, which CBS’s interactive unit acquired in May 2007, won’t be producing any more episodes, PEhub.com said Wednesday, citing an undisclosed source. CBS plans to “take the DNA from WallStrip and apply it” to Bnet, another CBS property, the source told PEhub.
    WallStrip, cheerily hosted by Julie Alexandria, produced three Web episodes a week, usually focusing on a company whose stock was trading at or near an all-time high. These days, few stocks fit that description, thanks to the sharp downturn in the market.
    A source confirmed to DealBook on Wednesday that Wallstrip is scrapping its regular schedule, but details of the overhaul haven’t been announced yet. The Web site and the community will remain, the source said.
    Howard Lindzon, the manager of a small hedge fund who helped create Wallstrip, told The New York Times in early 2007 that the Web site targets a space “between Jim Cramer and the bottom of the market.”
    When it was acquired by CBS, one of Wallstrip’s producers said the Web site had yet to produce any self-sustaining ad revenue. It is unclear if it was ever profitable.

    This is sad; I’m a huge WallStrip fan.

  • The Strange Death of Risk Management
    , January 7th, 2009 at 4:43 pm

    I just got around to reading Joe Nocera’s recent article on the life and death of risk management, and the titanically overrated blowhard Nassim Nicholas Taleb. The media tends to like these “Big Think” articles as it feeds into the Malcolm Gladwell-style of bring Big Ideas to the masses. Gladwell, in fact, was one of the first to highlight Taleb a few years ago in the New Yorker.
    If you’re not familiar with Taleb, he has one idea and one idea alone. Actually, it’s not even his idea. The man who really impresses me Benoit Mandelbrot. Anyway, the idea is that stock returns don’t follow the normal distribution (the bell curve). That’s it—that’s the Big Think idea.
    Here’s the deal: If stocks don’t follow a bell curve, then a lot of the ways we measure risk are flawed. For Taleb, of course, it’s much more than that. His idea (meaning Mandelbrot’s) is really an impossible to comprehend discourse on the human soul. In short, everyone else is a moron and only Taleb gets it.
    He highlighted his idea in his two awful books, Fooled by Randomness and the Black Swan. I’ve actually read both books and I’m curious how many people who bought the books have actually read them. My hunch is that these could be part of the great unread books of the world. The reason is that the books are so bad that they’re barely literate. Taleb goes on and on about how he’s such an aesthete living in a world of philistines, yet he can’t write a single coherent page. Now expand that 400 pages. If people knew just how tedious these books are, I doubt they would receive so much praise.
    Taleb and others now claim that Value at Risk, or VaR, played a large role in the credit mess. Sorry, that simply isn’t the case. Risk models are perfectly fine to use as long as you’re aware of the limitations. Every financial ratio or metric is like that. Just because it has some flaw is no reason to blame the movement of the economy on the misuse of math. Nocera points out that once Goldman Sachs saw problems with their VaR numbers, they adjusted. No big deal and Goldman is still in business today. Nocera quote one risk manager, “VaR is a peacetime statistic.” Exactly.
    Here’s an excerpt from the article:

    “VaR was inevitable,” Gregg Berman of RiskMetrics said when I went to see him a few days later. He didn’t sound like an intellectual charlatan. His explanation of the utility of VaR — and its limitations — made a certain undeniable sense. He did, however, sound like somebody who was completely taken aback by the amount of blame placed on risk modeling since the financial crisis began.
    “Obviously, we are big proponents of risk models,” he said. “But a computer does not do risk modeling. People do it. And people got overzealous and they stopped being careful. They took on too much leverage. And whether they had models that missed that, or they weren’t paying enough attention, I don’t know. But I do think that this was much more a failure of management than of risk management. I think blaming models for this would be very unfortunate because you are placing blame on a mathematical equation. You can’t blame math,” he added with some exasperation.

    Here’s another good snippet:

    And yet, instead of dismissing VaR as worthless, most of the experts I talked to defended it. The issue, it seemed to me, was less what VaR did and did not do, but how you thought about it. Taleb says that because VaR didn’t measure the 1 percent, it was worse than useless — it was downright harmful. But most of the risk experts said there was a great deal to be said for being able to manage risk 99 percent of the time, however imperfectly, even though it meant you couldn’t account for the last 1 percent.

    Howard has more. As usual, he’s bang on.