Another Defeat for Humans
Posted by Eddy Elfenbein on June 10th, 2010 at 2:48 pm

Artificial Intelligence beats the pros in investing:

The ability to predict the stock market is, as any Wall Street quantitative trader (or quant) will tell you, a license to print money. So it should be of no small interest to anyone who likes money that a new system that works in a radically different way than previous automated trading schemes appears to be able to beat Wall Street’s best quantitative mutual funds at their own game.
It’s called the Arizona Financial Text system, or AZFinText, and it works by ingesting large quantities of financial news stories (in initial tests, from Yahoo Finance) along with minute-by-minute stock price data, and then using the former to figure out how to predict the latter. Then it buys, or shorts, every stock it believes will move more than 1% of its current price in the next 20 minutes – and it never holds a stock for longer.

Yes, I think it’s call front-running — acting on information before anyone else. The strategy was invented by Nathan Rothschild 200 years ago when he used carrier-pigeons to get the 411 on the Battle of Waterloo.
Personally, I’m more impressed than someone actually reads the articles at Yahoo Finance.

Bernanke Warns
Posted by Eddy Elfenbein on June 9th, 2010 at 3:37 pm

Some recent headlines:
Bernanke Warns Congress Not To Cut Spending, Cautions About ‘Fragile’ Recovery
Bernanke Says the Federal Debt Is ‘Unsustainable’
Bernanke warns about creating new bubbles
Bernanke Warns Deficits Threaten Financial Stability
Bernanke warns US economy still faces ailing housing and employment
Fed’s Bernanke warns of risk to bank independence
Bernanke Warns of Small-Bank Risks
Bernanke warns of political meddling
Bernanke warns of lower lending

Here’s more and more and more and more and more.

The World Cup: How to Get Out of the First Round
Posted by Eddy Elfenbein on June 9th, 2010 at 12:10 pm

The World Cup starts on Friday and I was curious as to America’s chances of making it to the knockout tournament.
Let’s go over the rules: The World Cup is divided into two parts. In the first stage, the 32 teams are divided into eight groups of four teams each. The four teams play each other in a round-robin tournament and the two teams that do the best advance to the knockout stage. In the round-robin, you get three points for a win and one point for a tie. If teams have the same number of points, the tie-breakers are (in order) goal differential, total goals, head-to-head and then they draw lots.
(I’ve only looked at the results since 1998 and they came very close to drawing lots in 2002 but ultimately didn’t need to. Paraguay edged out Slovenia 3-1 at the same time South Africa lost to Spain 3-2. Paraguay advanced on account of having scored one more goal.)
The current format started in 1998. For this year, the U.S. is in Group B which has England, Algeria and Slovenia. The quality ranking is generally considered to be England, us, Slovenia then Algeria.
So what do we need to do to advance? In the round-robin, you can score anywhere from zero to nine points (eight is mathematically impossible). Here are how the teams have done by point totals in the round-robin since the current format started in 1998:
Points……………Advancing
0…………………..0-8
1…………………..0-14
2…………………..0-6
3…………………..1-13
4…………………..7-7
5…………………..11-0
6…………………..7-0
7…………………..14-0
9…………………..8-0
The bubble seems to be four points. That’s what we got in 2002 and we made it to the knockout round. We even made it to the Final 8 after we beat Mexico. After that, we lost to Germany.
Theoretically, it’s possible to get five points and not advance, but that would be highly unusual. Conversely, it’s possible to get two points and advance. It’s possible to advance without winning a game as Chile did in 1998 (three ties). In all practical senses, if you get five points (a win and two ties), you’re in.
So if we lose to England on Saturday, we’re not out of it. Coming away with a tie would be great and a win, of course, would be spectacular. The tough games will come against Algeria and Slovenia in particular. There’s little room for error in the games you’re supposed to win. If we go 1-1-1, then our destiny may not be in our own hands.
Even if we do advance, that’s only the beginning. Here’s how the teams have done in the championship round by points scored in the round-robin:
3…………………..0-1
4…………………..4-7
5…………………..7-11
6…………………..6-7
7…………………..13-13
9…………………..15-6

Goldman’s P/E Ratio = 5.7
Posted by Eddy Elfenbein on June 9th, 2010 at 12:04 am

Wow, the trailing Price/Earnings Ratio for Goldman Sachs (GS) is 5.74.
For the year, Wall Street expects Goldman to earn $19.57 a year, then $20.57 in 2011.
At Goldman’s current price, this year’s earnings estimate represent 14.2%, and 14.9% for next year. The stock is just 7% above its book value.
I’m not saying that Goldman is a bargain but the market certainly doesn’t have much faith in the bank’s future earnings potential.

Becky Quick: Obama Sullied Office with Ass-Kick Remark
Posted by Eddy Elfenbein on June 8th, 2010 at 1:36 pm

The relevant part starts around 5:40.

In other news, CNBC did special reports on porn and weed.

Arden Group
Posted by Eddy Elfenbein on June 8th, 2010 at 11:48 am

Here’s another little-known stock with an amazing track record. Arden Group (ARDNA) runs 18 Gelson’s supermarkets in Southern California.
The company has a market value of about $280 million and it’s almost entirely ignored by Wall Street. In fact, it’s not uncommon for Arden to trade a few hundred shares a day.
Twenty-eight years ago, the stock was going for about 84 cents a share. In September 2008, ARDNA reached a high of $199.99 a share. That’s a gain of about 24,000% which easily beat the S&P 500’s gain of about 1,000% over the same period.
The stock has plunged all the way to $88 a share. It reached a new 52-week low last week. For some reason, the company pays a microscopic dividend of 25 cents a quarter.
Here’s Arden’s EPS for the last few years.
Year……….EPS
2000………….$3.41
2001………….$3.79
2002………….$4.14
2003………….$4.90
2004………….$6.70
2005………….$5.87
2006………….$7.16
2007………….$9.24
2008………….$7.80
2009………….$6.84

Europe’s Effect on the US
Posted by Eddy Elfenbein on June 8th, 2010 at 10:40 am

Chicago Fed President Charles Evans made some interesting remarks about the economy. He said that the problems in Europe are bad but they made not hurt us that much:

There are a few channels through which the European sovereign debt problems could influence us here. European efforts to lower debt will likely weigh on their economic growth over the medium term. This will translate into less demand by Europeans for U.S. products. In addition, the dollar already has appreciated relative to the euro. This means that European consumers find our products to be relatively more expensive than before. At the same time, prices for European goods in terms of the dollar have fallen, boosting our demand for European imports. All of these channels work in the direction of lowering U.S. net exports, which, all else being equal, would tend to reduce the outlook for U.S. GDP growth.
However, a couple of factors suggest that these trade effects of the European fiscal situation on the U.S. economy are likely to be limited. Although the euro-11 economy is large, it represents only about 15 percent of U.S. exports. In comparison, our single largest trading partner, Canada, accounted for over 19 percent of domestic exports last year. And while the dollar has appreciated almost 18 percent relative to the euro since late November, the broad dollar exchange rate that is a trade-weighted average across all currencies has appreciated only 5.1 percent over the same period.
Nonetheless, if events in Europe evolve so that they have a more severe and broad impact on financial markets, then the scope of the problems for the U.S. could be magnified. Fortunately, our direct exposure to European debt is limited. But an intensification of liquidity or solvency problems in Europe and some related spillover losses in U.S. markets could cause a marked increase in investor risk aversion. More lenders could pull back on intermediation, restricting the flow of credit to fund worthy spending projects of U.S. firms and households.

Intel Looks Good Below $20 a Share
Posted by Eddy Elfenbein on June 8th, 2010 at 10:22 am

Intel (INTC) dropped below $20 a share this morning. The stock has been as low as $19.88. Bear in mind that the company has solidly beaten estimates for the last three quarters.
Just one month ago, Intel said it was “highly confident” that it would achieve its goal for the second quarter.

Intel Corp expects to double its earnings growth in the next few years and on Tuesday raised its long-term margin outlook, as the world’s top microchip maker spreads its chips beyond PCs to gadgets like smartphones and televisions.
Chief Executive Paul Otellini told investors on Tuesday that Intel is eager to establish a footprint in fast-growing — but intensely competitive — markets, diversifying beyond a PC market it now dominates.
“We are poised to take smart computing into whole new segments where it hasn’t been before,” Otellini said at the company’s annual investor meeting at Intel’s Santa Clara, California, headquarters.
The company also said it remains “highly confident” that it will achieve its financial goals for the current quarter despite rising concerns about European economies amid Greece’s financial crisis.

The Economics of the World Cup
Posted by Eddy Elfenbein on June 8th, 2010 at 9:45 am

Goldman Sachs has an interesting report on the economics of the World Cup.
Foreign Policy writes:

UEFA’s (Union of European Football Associations) selection of the 2012 Euro Cup host proved prescient, as well. Picking in 2007, Poland won the rights to host the tournament (OK, co-host with Ukraine, but since then UEFA has suggested Poland be the sole host, which the Poles have graciously declined to accept). Poland, however, was the only bid country that hasn’t suffered economic decline since — and yes, Greece was the first bid country eliminated.
Other notable findings: the Growth Environment Scores (a Goldman-devised figure of sustainable economic growth and productivity) of respective countries loosely correlate to soccer performance, but a much stronger connection exists between the improvement of economic conditions and national soccer teams. (Algeria, which did not qualify for the 2006 finals in Germany, posted the highest GES improvement among developing countries over the last four years.) The report also argues that success is partially dependent on the number of males aged 18-34 in countries, and provides a UN chart with predictions for 2050. If the claim is accurate, the Nigerian Super Eagles are going to be really, really good in a few decades.
Lastly, Goldman offers their own predictions of the semi-finals (I won’t spoil, though I will say it’s what my predictions are as well), and lists the probability (with their metrics) that each country will become World Cup champions.
It’s lengthy, but an extremely interesting read, and provides the best rundown of the Cup to come that I’ve seen. Check it out.

Bubbles Past, Present and Future
Posted by Eddy Elfenbein on June 7th, 2010 at 12:34 pm

Investment bubbles are often harder to spot than people think. Sure, in retrospect it looks easy. But at the time, events aren’t so obvious. In fact, after the fact can be difficult as well.
Let me show you what I mean. Consider Amazon.com (AMZN). The stock was a classic bubble when it rose from $1.50 (split-adjusted) in mid-1997 to over $100 by 1999. Naturally, the bubble burst and shares of Amazon fell all the way back to $6 shortly after 9/11.
So we all learned our lesson, right? But hold on, Amazon slowly recovered and traded as high as $150 just a few weeks ago (absurdly overvalued in my opinion, but that’s for another time). So even if you bought Amazon at its peak during the Internet craziness, you’d still have a modest profit today while many stock investors have had no profits at all. That is, if you held on to AMZN during some very unpleasant periods. The bubbleness is relative.
Yahoo (YHOO), by contrast, closed the first day of the new millennium at $118-3/4 (fractions, remember those). The stock closed Friday at $15 so YHOO is still off by more than 87%. So that’s a bubble, right. But I don’t think the bursting is quite done. Supposed Yahoo continues to fall, that would mean we’re in a bubble right now as well. But again, the future isn’t so obvious.
eBay (EBAY) is another problematic bubble. Back in the fun days, the stock rose from $2 to $25 in a little over six months. The bubble bust and the stock dropped to $7. Yet, by the end of 2004, eBay was closing in on $60. Again, if you had held on, you would have been in the black. The stock was back down to $10 last March.
So where’s the bubble? It depends where you stand.