Author Archive

• Betting on Zarqawi’s Demise
  Eddy Elfenbein, November 20th, 2005 at 5:39 pm

  Tradesports is a Web site where you can buy futures contracts on real world events. As you may have heard, there are several unconfirmed reports that Mr. Zarqawi just got his ass blown up.
  Here’s how the contract for “captured or neutralized by December 31” has been trading.
  
  Something’s definitely up. I’m rooting for neutralized.
  What I find fascinating is that even when we don’t have a lot of hard news, the market is an excellent mechanism for analyzing and prioritizing information very quickly.
  Update: It looks like it’s not true.

• California Real Estate
  Eddy Elfenbein, November 20th, 2005 at 5:14 pm

  I was reading an article about the California real estate market, and this line stopped me cold:

  Nearly 2 percent of adults in California hold a license to sell residential property in the state, where $30,000 commissions on million-dollar homes have become commonplace.

• Who Owns an Idea?
  Eddy Elfenbein, November 20th, 2005 at 4:03 am

  Here’s an interesting article on “conceptual plagiarism.”

• Stan the Man
  Eddy Elfenbein, November 20th, 2005 at 3:11 am

  
  Happy Birthday to two of the greatest players of all-time. Tomorrow Ken Griffey Jr. turns 36, and Stan Musial turns 85! Not only do they share the same birthday, but they’re both from the same town—Donora, PA. In fact, Musial and Griffey’s grandfather were high school teammates!
  Stan the Man hit over .300 for 16 straight seasons. He was an all-star 20 times, and MVP three times (plus runner-up four times). Bob Costas said: “He didn’t hit a homer in his last at-bat (like Ted Williams); he hit a single. He didn’t hit in 56 straight games. He married his high school sweetheart and stayed married to her, never married a Marilyn Monroe (like Joe DiMaggio). He didn’t play with the sheer joy and style that goes alongside Willie Mays’ name. None of those easy things are there to associate with Stan Musial. All Musial represents is more than two decades of sustained excellence and complete decency as a human being.” Here’s Musial’s famous corkscrew stance (never worked for me!).
  I was happy to see Griffey have his best season in a long time this year (.301/35/92). Griffey and Musial have a combined 1,011 home runs. Of course, Griffey Sr. was another great Donoran, a three-time all-star and a key member of the Big Red Machine.

• Santa Claus Is Coming to Town
  Eddy Elfenbein, November 20th, 2005 at 2:31 am

  Smile. This is the best time of year for stocks.

  Why year’s end is so good for stocks has long been a subject of debate. Some trace it to days when farmers withdrew money to finance a harvest in late summer, then deposited profits afterward. Others point out that many companies, not just retailers, do the bulk of their business and make their largest profits at year’s end, as clients buy for the new year. Markets tend to rise ahead of expected January investment of retirement money in stocks. And crude-oil prices have a way of falling at year’s end, after the summer driving season, easing inflation fears. That is happening now — with crude oil down to a five-month low of $56.14 a barrel last week — and also happened last year.

  I think it’s mainly due to a surge of new money coming into the market. That probably explains the famous January Effect, when small-caps do much better than the rest of the market. My reasoning is that small-caps benefit the most from greater liquidity. In fact, small-caps do so well in January that they’re basically flat for the rest of the year.
  The market also had a strong four-year cycle, where stocks peak the summer after a presidential election and bottom out just before the mid-term election. Bear in mind, this is an average of several decades worth of data. Most of these “calendar rules” are so fleeting that they don’t provide any practical trading guidance.
  Here’s a much more useful stat: The market’s average return over five months is almost exactly equal to the average best day every five months. There are about 100 trading sessions in five months so that means that the market is flat for 99% of the time;100% of your profits come on just one day in 100.
  Maybe you can pick the 1-in-100. I can’t, and that’s why I’m always fully invested.

• Don’t Give Up on Actively-Managed Funds Just Yet
  Eddy Elfenbein, November 20th, 2005 at 2:09 am

  Mark Hulbert writes about a research paper that found that some fund managers are consistently able to beat certain types of markets.

• Corporate Crime Watch
  Eddy Elfenbein, November 19th, 2005 at 4:40 pm

  Whole Foods Market (WFMI) backs down on its threat to break the law—staying open on Thanksgiving in Massachusetts.
  The turkeys could not be reached for comment.

• Gold to $1,000?
  Eddy Elfenbein, November 19th, 2005 at 4:18 pm

  This week’s Barron’s includes an interview with John Hathaway, a manager who thinks gold can go to $1,000 an ounce:

  Haven’t some gold stocks been hurt by strength in local currencies?
  Certainly the South Africans were hurt because the rand went from something like 13 to the dollar to six to the dollar over a period of a year and a half or two years. That’s like cutting the gold price in half. Even though the dollar price of gold has gone up, the rand price of gold is just now getting back to where it was a few years ago. To a lesser extent, strength in the Australian dollar and the Canadian dollar until recently squeezed margins for operations in those countries. But you get around that problem if gold is rising in all those currencies, which it is doing. But we have reached a point where gold isn’t really linked to foreign-exchange rates because a lot of people are concerned about paper currencies in general.
  Yet Central Banks have been selling gold.
  Central-bank selling fills the gap between supply and demand. They have been selling at steady pace. What they have is an arrangement so their selling is orderly and doesn’t spook the market. Under that arrangement, there is a quota system of 500 metric tons a year for five years. The selling is transparent, the market knows it is there, and if the program wasn’t in place, gold could easily be $200 or $300 higher. We are in the second year of that five-year agreement, and it is hard to imagine where all that gold is going to come from.
  Who’s buying?
  They sell it into the market. We keep some of our gold in Switzerland, and I went to the facility where we keep it and basically it was a large refining company. They were melting down bars from the Swiss Central Bank, and at the other end of the production line there were semi-finished gold watch cases and jewelry for China, the Persian Gulf and India. That’s where it is going. Central bankers are selling their best asset into the markets and it is going into non-monetary forms, and they will never get it back. They are just bureaucrats and not even held accountable for what they do on a financial basis. It has been such a bad trade for the last five years, you would think that at some point they would begin to say maybe we should hang on to what we have. But again, their general agenda is not to have gold as a monetary asset or at least not talk about it if they have it, because what is still true is that a rising price of gold is not a favorable reflection on public financial policies, monetary and fiscal.
  What’s the impact of gold exchange-traded funds on the market?
  It is potentially huge. Right now there’s about $3.5 billion in gold ETFs, which isn’t bad considering the first one came out a little over a year ago. As we discussed, gold shares can be risky, yet gold is not necessarily an investment for those who are risk-seeking or risk-tolerant. Gold is essentially financial insurance. It is noncorrelated. It has hundreds of years of history of being noncorrelated with financial assets, which means that when financial assets are doing well gold doesn’t do well. From 1980 to 2000, that was the case, but in the 1970s and 1930s, gold did very well. What the ETF does is open the door for people who should have exposure to gold. It makes it easy for a college endowment that would never typically open up a commodities account or open up an arrangement with a bullion dealer to own gold. The ETF paves the way for an entirely different class of investors to come into gold, not gun slingers looking for huge returns but people who just want to protect capital, which gold does very well. Eventually, this will do a tremendous amount for the gold price. The more money that comes into the ETFs, the more it is going to create momentum for the underlying commodity. Barclays is trying to bring out a silver ETF, and the Silver Users Association, which includes companies such as Kodak and Dow Chemical, are opposed to it because of concern it is going to take the price up.
  What risks are working in gold’s favor?
  There is a lot of financial risk in the system. The level of household debt, the housing bubble, the amount of U.S. Treasuries held by foreign central banks, the valuation of the stock market, the overvaluation of the bond market, are all legitimate reasons to be concerned, not that I wish for worst-case outcomes. Secular credit expansions, which is what we had from 1982 through 2000, are often accompanied by an ever-decreasing perception of risk. Frankly, we’ve been in a bear market since 2000, and people still don’t realize it. Yet bear markets have a life of their own, and they really don’t end until a certain psychology takes hold and people just hate financial assets.

  All gold rallies start differently, but they all end the same way.

• The SarBox Fight
  Eddy Elfenbein, November 19th, 2005 at 4:00 pm

  If you want to try something really fun, just mention the words “Sarbanes-Oxley” to a CFO. Be sure to stand back from a safe distance. If you’re not familiar with “SarBox,” this is the law that was designed to improve corporate disclosers. I won’t say that the law is a complete disaster, but let’s put it this way—it passed the Senate 99-0. Now many companies, smaller firm in particular, are complaining about unnecessary accounting costs.
  This is probably a reason why we’ve seen more public companies decide to go private. So a law designed for more transparency leads to less. In fact, Georgia-Pacific’s CEO said that Sarbanes-Oxley was a factor that led to him sell the company to Koch Industries.
  Earlier this week, Alan Murray wrote in the Wall Street Journal that the SarBox bashing was getting out of hand, and deserved some perspective:

  A recent study by Foley & Lardner LLP found that all the costs associated with being a big public company averaged $14.3 million last year. That was up 45% from the year before, due largely to the requirements of Sarbanes-Oxley. But for a company like Georgia-Pacific, it’s still not that big a number.

  Murray follows up in today’s WSJ:

  The strong response to this week’s column on Georgia-Pacific’s planned merger with privately held Koch Industries has made me feel sorry for Paul Sarbanes and Michael Oxley. The Democratic senator and the Republican congressman have given their names to legislation that provokes amazingly strong emotions in the corporate world. My advice to the two gentlemen: Stay out of the for-profit sector.
  That’s not to say all the responses were critical of the bill. (As always, some letters have been edited.) Daniel Posin, a law professor at Tulane Law School, writes:
  “I think when you get all through, Sarbanes Oxley says to people who seek to manage other people’s businesses: ‘Have some internal controls (even if it’s inconvenient).’ “
  The responses also underscored my point that Sarbanes Oxley is a much bigger problem for small businesses than it is for big ones. A few of the many emails on this point:
  Brett Ayers, Assistant Vice President, First Bank, in Chapel Hill, N.C.:
  “While I tacitly agree with some of your article in regards to the legislation that is Sarbanes-Oxley, I also think that, as you stated, the legislation needs to be confined to larger-cap companies. Companies like the one I work for with $1.75 billion in loans and other assets get a huge bite taken out of our bottom line for little or no improvement in our overall internal controls.”
  Stephen M. Bainbridge, professor at the UCLA School of Law:
  “It is true that for large public corporations, SOX-related costs are a relatively small additional burden. (Of course, for want of a nail….) But while SOX compliance costs admittedly are difficult to determine, mainly due to a lack of disclosure, the best available evidence suggests that those costs tend to be relatively fixed. According to one study by ARC Morgan, for example, companies with annual sales of less than $250 million incurred $1.56 million in external resource costs simply to comply with one SOX provision (the internal controls required by section 404).”
  Lewis D. Levetown:
  “SOX creates tremendous head wind in a smaller environment as key executives have to spend a disproportionate amount of time on compliance issues, greatly reducing the amount of time available for the more important issues of running the enterprise.”

  Here’s a more in depth critique of Sarbanes-Oxley.

• The Market Today
  Eddy Elfenbein, November 18th, 2005 at 5:13 pm

  We did it. The S&P 500 jumped 0.44% today to close at a four-year high. Our Buy List rose 0.56%. For November, we’re up 6.33% to the S&P 500’s 3.42%.
  Let’s look at our biggest winners for the month: Quality Systems (+24.2), Expeditors (16.8%) and Fair Isaac (12.9%). The biggest dogs have been Dell (-6.4%), Donaldson (-3.6%), Medtronic (-0.7%) and Frontier Airlines (-0.1%).
  Frontier had a weird day today. It opened much higher but lost ground to close just five cents higher. More good news for Frontier may be coming. Oil briefly fell below $56 a barrel today. Oil is now down about 20% from its high. I’d like to thank Congress for being a perfect contrarian indicator.
  The VIX (^VIX), the volatility index, dipped below 11 today. That’s a very low reading. I’ve been paying more attention to the IPO market recently. Except for Baidu.com, some of the best IPOs this year have been stocks you wouldn’t expect:

  The best performer of the year was also one of the most talked about, Chinese Web search engine Baidu.com Inc., which has gained 171 percent since its IPO. But the stock remains well below its first day gain of 353.9 percent, illustrating the risk of chasing high-profile IPOs.
  Several other top performers got off to quieter starts. Rail-car maker FreightCar America Inc., electronic payment technology provider VeriFone Holdings Inc., apparel retailer Citi Trends Inc. and medical device maker China Medical Technologies., advanced no more than 12.1 percent in their market debuts but have since more than doubled in value.
  “The nice thing is you did not have to buy at the IPO price to make money on those companies,” said Taulli, of DealflowSearch.com. “Even if they did go up 10 or 15 percent on the first day you would have made a nice, tidy profit, which is not easy. It wasn’t easy this year to make a nice, tidy profit.”

  Lastly, I wanted to comment on gold. The gold bugs have been very excited about gold’s rise, but I’m not impressed. Over the last 22 months, the price of gold is up 13.9%, which works out to around 7.3% annualized. If a company had grown its earnings by that amount, people would be complaining.