The Buy List Is Now Up Over 10% YTD
Posted by Eddy Elfenbein on April 5th, 2010 at 10:23 am

The day is still young, but the CWS Buy List officially crossed the 10% line for the year. This is why I don’t try to time the market. I never would have said that we’d make 10% in a little over one quarter. Joey Banks (JOSB) is at another new high.

Vanity Fair’s Awful Interview With Erin Burnett
Posted by Eddy Elfenbein on April 5th, 2010 at 9:52 am

Vanity Fair just published an awful interview with CNBC’s Erin Burnett. I’m not exaggerating when I say that the interview is most about the interviewer. The interview is apparently about Mr. Eric Spitznagel’s momentous event of interviewing Burnett, and she’s somehow in the way.
Here’s one example:

If you watch enough cable news, it starts to seem like if AIG or Citibank goes under, we’re all going to be like Charlton Heston in Planet of the Apes, staring up in disbelief at the disembodied head of the Statue of Liberty and screaming “You blew it up! Damn you! Damn you all to heeeeeelll!” If we don’t save those companies from bankruptcy, are we headed towards an ape-run dystopia?
(Long pause.) I don’t know. I would say no, but banks and availability of credit are the most basic and important things for an economy. What if the banks had failed? Nobody keeps cash anymore. We think society moves forward, generation after generation, ahead and ahead and ahead. We don’t realize maybe how reliant we are on things that are far from hunting and gathering.

I counted the words. Erin won but the margin was less than 2-to-1.
(One more thing — it wasn’t the disembodied head, but you can clearly see much of the torso.)

March ISM = 59.6, Best Since 2004
Posted by Eddy Elfenbein on April 1st, 2010 at 10:02 am

More good news for the economy. The Institute for Supply Management released its index this morning and the reading was 59.6. This was better than economists’ expectations. It’s also the best number in close to six years. Last month’s ISM was 56.5.
As I explained recently, the ISM is one of the best indicators of how well the economy is doing. Anytime the ISM is 44 or less, it’s almost certain that we’re in a recession.
Now the problem is jobs and that report comes out tomorrow. Goldman just lowered its NFP estimates from 275,000 to 200,000. I’ll be happy with any positive number.

Exactly What Is the Spot Price of Gold?
Posted by Eddy Elfenbein on April 1st, 2010 at 9:09 am

Jesse’s Cafe American has a good post on how the gold market works:

When you ask even a relatively experienced and sophisticated precious metals trader “what is the spot price of gold or silver?’ you will generally hear a pause, and then they will come back with a price after checking their computer screen for the latest spot price from some ubiquitous and reliable provider of such quotes, or one of the lesser known, diverse providers of this information.
But when you say, “No what I was asking is ‘what is the spot price, where does it come from, who sets it?'” you will most often hear that this is the last physical trade, or the current market price of physical bullion.
Well, is it?
Actually despite what you might think or what you might have heard, it is not.
The reason for this is that there is no centralized and efficient market for the sale of physical bullion in the US at anything resembling a ‘spot price.’ What is their number, where are their prices and trades posted? Who is buying and selling what, TODAY, with the real delivery of bullion as the primary objective?

Read the whole thing.

What the Steep Yield Curve Means
Posted by Eddy Elfenbein on April 1st, 2010 at 7:38 am

Paul Krugman has a confusing post on the steep yield curve, at least it’s confusing to me. My rule is if I can’t follow what a Nobel laureate’s saying, then it’s a pretty good bet that it’s my fault.
Still, as I read Krugman he says that when he earlier discussed the yield curve, people thought it was “proof that the economy would recover soon,” but now people think it’s over “fears of default.” Yet Krugman writes that the reason for the steep curve “has nothing to do with either explanation.” But he essentially says that it’s the first reason—hopes for a recovery.
That’s only mildly confusing but where I really lose Krugman is when he seems to imply that the steep yield curve is the result of nominal short rates being near zero. I have no problem accepting that the curve should be positive but I don’t get how that ought to impact its unusual steepness. After all, the two-ten spread recently hit an all-time record.
I agree with Krugman’s view that we’ve become too inflation-phobic. When you have 15 million people out of work, it’s best to err on the side of higher inflation. I also agree that long-term inflation expectations are nothing to worry about. The ten-year TIPs spread is still mild. But I do believe the very steep yield curve is a result of higher inflation expectations. The hitch is that those expectations don’t say that inflation will go from a normal level to a danger level; they say that inflation will go from a dangerously low level to a normal level. The steep curve doesn’t merely reflect the future—half the variables are the present and the present ain’t normal.
The other issue I wanted to mention is that we shouldn’t focus on the 10-year TIPs spread. We should look at the TIPs curve leading up to ten years. It’s the expected forward inflation rate that I like to follow. Yet even when we do, I’m still in Krugman’s camp—inflation isn’t an important concern right now. (BTW, Krugman was very worried about inflation seven years ago.)

JOSB Update
Posted by Eddy Elfenbein on March 31st, 2010 at 12:02 pm

Shares of JOSB have been as high as $54.89 today. On the Buy List, there’s now a close running for top-performer YTD between JOSB, SEIC and MOG-A.
I see that NICK’s ask price fell below $7.40. That’s a great deal. This is the lull period between earnings. The next report isn’t due until early May. I expect a rally then.

12 Million Percent Profit
Posted by Eddy Elfenbein on March 31st, 2010 at 11:27 am

That’s what micro-caps have done since the Great Depression.
Here’s a breakdown of market performance by size decile. The smallest have done the best and the biggest have done the worst.

Here’s the annualized return by size decile:

Joey Banks – Kicking It
Posted by Eddy Elfenbein on March 31st, 2010 at 7:33 am

More good earnings news for JoS. A. Bank Clothiers (JOSB). FY 2009 earnings-per-share came in at $3.84 up from $3.17 the year before and $2.72 the year before that. That’s very nice growth.
The company didn’t give quarterly results (those come out tomorrow) but by walking back the cat, I figure the fourth-quarter earnings come to $1.91 a share which is 12 cents more than Street expectations.
The odd thing here is that this is for Joe’s fiscal fourth quarter which is November, December and January. In other words, it’s a long time ago. Since companies often take longer with their Q4 report, Joe’s next earnings report will probably be out in just nine weeks or so. Also, since their fourth quarter covers the holiday season, it accounts for about half their annual profit. This is a big deal and JOSB did well.

Net sales reached a record of $770.3 million in fiscal year 2009, representing a 10.7% gain as compared with net sales of $695.9 million in fiscal year 2008. Comparable store sales increased 6.3% during fiscal year 2009, while Direct Marketing sales increased 12.2%. The Company ended fiscal year 2009 with $21.9 million in cash, $169.7 million in short-term investments and no debt.
“We are pleased to announce another solid year of sales and earnings growth,” commented R. Neal Black, President and CEO of JoS. A. Bank Clothiers, Inc. “Our core strategy to provide our customers with high quality men’s clothing at a great value and to actively promote this value through a diverse advertising and marketing campaign has again produced favorable results for fiscal year 2009. We have continued to be successful in expanding our market share, growing our profits and controlling our expenses, while further strengthening our balance sheet. Additionally, with this quarter’s results, we have achieved earnings growth in 33 of the past 34 quarters when compared to the respective prior year periods, including 15 quarters in a row,” continued Mr. Black.

Happy MBS Day!
Posted by Eddy Elfenbein on March 31st, 2010 at 7:10 am

Today is the last day of the first quarter, but more importantly, it’s the last day that the Federal Reserve is buying mortgage-backed securities from Freddie and Fannie. The Fed has spent $1.25 trillion on buying this garbage from the GSEs but after today, no more!
It turns out that when you dump huge, gigantic amounts of money at something there tends to be an effect. In this case, mortgage rates have remained very low. Now some people worry that without Ben buying up anything that moves mortgage rates will soar. I doubt that will happen. Sure, rates will probably creep up (a 30-year fixed is around 5% right now) but the market knew this day was coming and it’s had some time to adjust. Also, the Fed still has the ability to jump back in if things quickly head south.
So who will now buy mortgage-backed securities? One answer is that banks, of all people, might do it with all the cash that the Fed has recently injected. Plus, even though the official Fed is going away, its shadow will still be around in the move of Fannie and Freddie buying out delinquent loans. This will be a lot of cash in investors’ hands.
Some people are worried that higher mortgages rates will ruin any gains made by a still-weak housing market, and we might go back exactly where we were. Once again, I’m a doubter. The mortgage market is much healthier that it was. Mortgage spreads have plunged from 18 months ago. For now, it looks like private investors are ready to take the place of the Fed in the mortgage market.

What If the Stock Market Was an Inflation-Protected Bond?
Posted by Eddy Elfenbein on March 30th, 2010 at 11:40 am

Who’s up for a very off-the-wall post? Good, you’re at the right place.
As I mentioned yesterday, I just got the new Ibbotson Yearbook which is a great resource for historical stock market data.
A few years ago, I took the historical performance data of the stock market and wanted to see what it would look like if the stock market were a bond. In order words, what if a bond performed exactly the same way the stock market had? What would its yield-to-maturity look like through the decades?
I took all of the monthly return data going back to the 1920s and assumed we had a bond of infinite maturity that paid a fixed coupon each month.
Let me stress that even though this bond is complete make-believe, the results are what the stock market actually did. I ran this scenario again but this time I changed the bond to an inflation-protected bond. Here’s what it looks like:

There were three major troughs; 1929 around 2.7%, 1968 at 3.3% and 2000 at 3.5%.
The highest peak came in 1932 at 15%. There were other peaks in 1949 at 12.5%, 1982 at 12.9% and last year at 13%. At the end of 2009, the yield-to-maturity stood 9.3%. Thanks to the rally, that’s come down some since.
There’s one hitch with this study. I have to choose a starting yield-to-maturity for December 1925. So this isn’t a completely kosher experiment because the starting point is based on my guess. If I choose a number that’s too high, then the historical performance won’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM is too low, the yield would gradually get pushed down to microscopic levels.
Based on trial and error, I used 6.76% as a starting point. That made the graph symmetrical with an historical average yield of 6.79%.