Technical Analysis Strikes Out
Posted by Eddy Elfenbein on October 19th, 2009 at 11:17 am

A new paper finds that technical analysis is pretty much a dud around the world.

Technical analysis is not consistently profitable in the 49 countries that comprise the Morgan Stanley Capital Index once data snooping bias is accounted for. There is some evidence that technical trading rules perform better in emerging markets than developed markets, which is consistent with the finding of previous studies that these markets are less efficient, but this result is not strong. While we cannot rule out the possibility that technical analysis compliments other market timing techniques or that trading rules we do not test are profitable, we do show that over 5,000 trading rules do not add value beyond what may be expected by chance when used in isolation.

(HT: Alea)

22 Years Since the 1987 Crash
Posted by Eddy Elfenbein on October 19th, 2009 at 11:02 am

It was 22 years ago today — October 19, 1987 –that the market busted. The Dow plunged 508 points, also on a Monday.
As it turned out, the crash was an excellent buying opportunity as the market can surging for another 12-1/2 years.

If you bought the day after the crash, you would have improved your annualized return by 1.25%.

You Know It’s Bad…
Posted by Eddy Elfenbein on October 19th, 2009 at 12:46 am

…when the Catholic Church files for bankruptcy.

Catholic Diocese of Wilmington files for Chapter 11
Catholic Diocese of Wilmington Inc filed for Chapter 11 bankruptcy protection, court documents showed.
In a filing with the U.S. Bankruptcy Court for the District of Delaware on Sunday, the diocese listed estimated assets in the range of $50 million to $100 million and estimated liabilities in the range of $100 million to $500 million.

Time to Bury MPT
Posted by Eddy Elfenbein on October 18th, 2009 at 11:10 pm

Any idea for ditching Modern Portfolio Theory gets a thumbs-up from me, and it gets two thumbs up if it’s from David Merkel.
David says it’s time to put MPT and beta in their grave. He suggests a “contingent claims theory.” If I have him right, we ought to view equity, not as a separate animal, but as simply the next point on the process of debt. Equity is the folks who get paid last so they get the highest yield.
I like the logic, but my question is—what if a firm has little or no debt?
Update: David responds:

Good question. The total volatility of a firm can be broken up into three pieces: financial leverage, operating leverage, and sales volatility. Saturday’s piece dealt with financial leverage and its costs. An unlevered firm in the financial sense still possesses operating leverage and volatility of sales. Different unlevered firms have different costs of equity capital because they have different levels of sales volatility, and different degrees of operating leverage.
That will manifest itself in option implied volatility, which is a crude measure of what people would pay to gain and lose exposure to the equity of the company. The cost of equity should be positively related to that. More volatile companies should have a higher cost of equity.
Another way to look at it is to ask what is the effect on the firm if the company issues or buys back equity. How much does the generation of free cash flow change relative to the price paid or received for equity?

We go to gain a little patch of ground that hath in it no profit but the name
Posted by Eddy Elfenbein on October 18th, 2009 at 2:26 pm

Christopher Hitchens reviews Peter Hart’s The Somme: The Darkest Hour on the Western Front:

From Hart’s book I was able to learn and grasp (and even picture) the historic importance of the “creeping,” or perhaps better say “staggered,” barrage. The descriptions one has so often seen, of entire ranks and files of British infantry lying dead almost symmetrically, like so much freshly scythed wheat, are all true. But these men were being expended while the British artillery struggled to evolve a system of covering bombardment that “walked” in front of them, smashing trench after trench and clearing them a path. Painstakingly leading us through a series of terrible engagements, Hart succeeds in showing how the gunners got steadily better (as did the guns). He also succeeds in giving one an enhanced respect for the German soldiers who held positions under this unbelievable rain of fire and were still—almost always—ready to fight. Sometimes they were too stunned and deafened and dazed to do anything but surrender, or rather, try to do so. An unpleasantly recurrent theme in the diaries and letters of British soldiers—Niall Ferguson has also been able to be honest about this often-avoided question—is the casual or even gloating way in which the Tommys boasted of killing German prisoners.

In America, World War II is really the Great War, but I’ve become convinced that World War I was the worst thing to ever happen in the history of the world.

Stephen Colbert on Dow 10,000
Posted by Eddy Elfenbein on October 17th, 2009 at 1:19 pm

(HT: Kedrosky)

The Idiot-Maker Rally
Posted by Eddy Elfenbein on October 16th, 2009 at 9:29 am

The stock market’s rally since March caught a lot of people off guard. I’m still waiting for the mega-bears to grovel before Jon Stewart and promise to do better. I’m not holding my breath.
John Carney at Clusterstock has a great round-up of folks who were made to look silly by the rally.

Investor Quiz
Posted by Eddy Elfenbein on October 15th, 2009 at 1:49 pm

How many times has the Dow crossed 10,000?

Read more…

Inflation Still Contained
Posted by Eddy Elfenbein on October 15th, 2009 at 1:11 pm

The government reported on consumer prices for September:

Inflation pressures remained modest in September even though gasoline prices edged higher.
The Labor Department said Thursday that consumer prices rose 0.2 percent last month, matching economists’ expectations. Prices excluding energy and food were also up 0.2 percent, slightly higher than the 0.1 percent increase analysts had forecast.
Over the past 12 months, consumer prices are actually down 1.3 percent, reflecting a severe recession which has kept a lid on price pressures across a wide range of products and services.

The core inflation rate, which ignores food and energy prices, comes in for a lot of ribbing, but it is useful. Take a lot at the headline inflation rate (blue) compared with the core rate (black) and you can see how much more stable it is:

The core rate hasn’t left range between 1% and 3% in 14 years.

Earnings from Baxter and Amphenol
Posted by Eddy Elfenbein on October 15th, 2009 at 11:02 am

Earnings season is kicking into high gear and we had two earnings report from our Buy List stocks this morning.
First up is Baxter International (BAX). For the third quarter, the company earned 98 cents a share which is one penny ahead of estimates. The problem is that sales came in at $3.15 billion which is just below estimates of $3.19 billion. The company said to expect Q4 earnings between $1.02 and $1.04. The consensus is $1.04. The stock is down about 3.5% today which doesn’t make a lot of sense to me.
This was a good report and BAX is doing very well. Since Baxter usually provides precise guidance, it doesn’t often deliver a big earnings surprise. The stock is currently going for about 13 times next year’s earnings which is a good deal.
Amphenol (APH) is also lower today after beating earnings. The company reported earnings of 47 cents a share which was a big drop from 63 cents a share one year ago. Fortunately, that came in four cents above the Street’s estimates. Sales dropped 17% but analysts were expecting an even large drop.
For Q4, APH sees earnings ranging between 47 and 49 cents a share, and revenue between $720 million and $735 million. The Street was expecting earnings of 47 cents a share on revenue of $711.6 million.
Finally, Donaldson (DCI) doesn’t report until November but the shares are up today thanks to an upgrade from Credit Suisse. The analyst raised his price target from $28 to $41.