The Citigroup Rally
Posted by Eddy Elfenbein on April 14th, 2009 at 12:38 am

Citigroup (C) was up 76 cents on Monday, which doesn’t sound like much but it’s a 25% gain. Thanks to Goldman’s news, the stock will probably break $4 on Tuesday.
Looking over the past few weeks, the stock has had a wild ride. On March 5, Citi dropped to just 97 cents a share. One month before that, it was at $4 a share. Obviously, this isn’t much of a rally; it’s more accurate to say that the stock has backed off from peering into the abyss,
Citi reports this Friday. I have no idea what to expect. How’s this for a wide range? The Street high is a 14 cent profit. The low is $1.14 loss. Pardon me while I get my darts.

The Buy List Is Up for the Year
Posted by Eddy Elfenbein on April 13th, 2009 at 1:36 pm

Not a lot, but we’re up.
Through Friday, the Buy List was up 1.42% while the S&P 500 was down 5.1%.

Tom Delay, Evolution and Columbine
Posted by Eddy Elfenbein on April 13th, 2009 at 1:13 pm

Paul Krugman writes about Tom DeLay:

Going back to those tea parties, Mr. DeLay, a fierce opponent of the theory of evolution — he famously suggested that the teaching of evolution led to the Columbine school massacre — also foreshadowed the denunciations of evolution that have emerged at some of the parties.

These are the kinds of the things Krugman writes that are so frustrating. He’s a brilliant economist but too often drives off the reservation into dishonesty.
After reading Krugman’s account, are you led to believe that Tom DeLay said in a clear declarative sentence that Columbine was the result of the teaching of evolution? That he repeatedly said it and would say it again today if asked?
I really wonder how many people understand that saying something that’s factually correct isn’t good enough. An accurate fact can be presented in a dishonest way. I think if I said this to many political pundits, their heads would explode.
If I were to ask you what’s the sum of one plus one, and you said that it’s less than 20 trillion, that answer is factually accurate but dishonest. A certain linguist in the Boston area has made his career on such statements.
The person who engages in dishonesty hurts themselves in two ways. First, they’re being dishonest. Secondly, since they believe they’re presenting facts, they immune themselves over criticism of context.
Facts can imply something that isn’t true. They can be taken out of context. They can imply a false symmetry. Facts by themselves aren’t enough.
Krugman has an unusual fixation with Delay and blaming Columbine on the teaching of evolution. He’s mentioned this several times.
Enough of Krugman’s take. Here’s the full story. One week after the Columbine massacre, Addison L. Dawson wrote a letter to the editor to the San Angelo Standard-Times which mocked the idea that guns were to blame:

For the life of me, I can’t understand what could have gone wrong in Littleton, Colorado. If the parents would have only kept their children away from the guns, we wouldn’t have had such a tragedy. Yeah, it must have been the guns.
It couldn’t have been because over half our children are being raised in broken homes.
It couldn’t have been because our children get to spend on average 30 seconds in meaningful conversation with their parents each day. After all, we give our children quality time.
It couldn’t have been because we treat our children as pets and our pets as children.
It couldn’t have been because we place our children in daycare centers where they learn their socialization skills amongst their peers under the law of the jungle while 16 year old employees who have no vested interest in the children look on and make sure that no blood is spilled.
It couldn’t have been because we allow our children to watch on average 7 hours of television a day filled with the glorification of sex and violence that isn’t fit for adult consumption.
It couldn’t have been because we allow our children to enter into virtual worlds in which to win the game, one must kill as many opponents as possible in the most sadistic way possible.
It couldn’t have been because we have sterilized and contracepted our families down to sizes so small that the children we do have are so spoiled with the material that they come to equate the receiving of the material with love.
It couldn’t have been because our children who have historically been seen as a blessing from God are now being viewed as either a mistake created when contraception fails or inconveniences that parents try to raise in their spare time.
It couldn’t have been because our nation is the world leader in developing a “culture of death” in which 20 to 30 million babies have been killed by abortion.
It couldn’t have been because we give 2 year prison sentences to a teenagers that kill their own newborns.
It couldn’t have been because our school systems teach the children that they are nothing but glorified apes that have evolutionized out of some primordial soup of mud by teaching evolution as fact and by handing out condoms as if they were candy.
It couldn’t have been because we teach our children that there are no laws of morality that transcend us, that everything is relative, and that actions don’t have consequences. What the heck, the President gets away with it
.
Nah, it must have been the guns.

The letter was later read by Paul Harvey on the radio and then by Tom Delay in Congress on June 16, 1999 during a debate on gun control. (You can see the in the Congressional Record on page H4366.) The words are often credited to DeLay and not Dawson, though DeLay’s reading of it certainly implies an endorsement.
After DeLay spoke, Barney Frank lambasted the letter by saying it was blaming the teaching of evolution for the shooting. That’s where Krugman got his line.
First, let’s say a few things about the letter. It’s fatuous and not terribly intelligent. However, by reading it during a debate about control, DeLay was clearly doing the same things that Krugman is doing—mocking the idea of blaming Columbine on one issue.
The listing of cultural problems makes the point clear. In fact, Dawson is being facetious about it which underscores that he’s tossing out many other suggestions. He’s not saying it’s evolution but the sum total of problems in the culture, where the debate in Congress was focusing on guns.
Do you think if DeLay were asked, yes or no, was Columbine due to Darwin, he would say yes? Re-read what Krugman wrote. The only “famously” part is due to Krugman mentioning it time and time again.
If you believe that Tom DeLay blamed Columbine on the teaching of evolution, well…you have your evidence. If you want to write that, go right ahead. But you shouldn’t be such a cheap date. Here’s the key point: I would never write it and neither would many other people because it’s dishonest and not up to professional standards. An editor should not have allowed it to pass. I should hope the Times feels that same way.

Mystery Toilet Flush
Posted by Eddy Elfenbein on April 9th, 2009 at 2:52 pm

Listen at the 19 second mark. It might just be symbolic.

(HT: Joe W)

Bed Bath & Beyond Expectations
Posted by Eddy Elfenbein on April 9th, 2009 at 1:52 pm

Here’s part of my latest at Real Money:

Bed Bath & Beyond (BBBY – commentary – Cramer’s Take) got a huge boost on Wednesday thanks to its better-than-expected fiscal fourth-quarter earnings. The shares jumped 24.3% to close at a six-month high of $31.70.
As good as Wednesday was, I still don’t believe the shares are overpriced. Investors should take notice because BBBY is poised to go a lot higher.
The figure that got traders so excited was BBBY’s net earnings of 55 cents a share, which topped Wall Street’s consensus by an impressive 11 cents a share. This was a big surprise since the company had already pegged fiscal fourth-quarter earnings in a range between 40 cents and 46 cents per share.
Even the company’s own bean counters didn’t see this one coming. Mind you, BBBY’s earnings were still down quite a bit from a year ago — an 18% drop — but investing is an expectations game.

Here are the earnings results going back a few years:

Rhetorical Question of the Day
Posted by Eddy Elfenbein on April 9th, 2009 at 10:49 am

If people are always complaining that their political philosophy is being sold out by elected officials who espouse that philosophy, is the problem the officials or might it reflect a defect in the philosophy?

The Meredith Whitney Bubble
Posted by Eddy Elfenbein on April 9th, 2009 at 9:53 am

In today’s WSJ, David Weidner tries to deflate the Meredith Whitney Bubble. Actually, I think she did a pretty good job. Weidner, however, let’s this one in: “Economists Nouriel Roubini and Nassim Taleb famously predicted the huge upheaval in the financial industry.”
Sorry, but Taleb didn’t predict anything. I’ve both of his books and nowhere does his discuss the events that have happened.
Speaking of Taleb, he had a piece in the Financial Times the other day and went into full Napoleon Dynamite mode:

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

This is precisely why I have a hard time taking Taleb seriously. Every time I read him, all I hear is the same thing:

Don: Hey, Napoleon, what’d you do all last summer again?
Napoleon: I told you! I spent it with my uncle in Alaska hunting wolverines!
Don: Did you shoot any?
Napoleon: Yes, like 50 of ’em! They kept trying to attack my cousins. what the heck would you do in a situation like that?
Don: What kind of gun did you use?
Napoleon: A frickin’ 12-gauge, what do you think?

Roubini Vs. Cramer
Posted by Eddy Elfenbein on April 8th, 2009 at 11:43 am

First Jon Stewart, now Nouriel Roubini:

“Cramer is a buffoon,” said Roubini, a New York University economics professor often called Dr. Doom. “He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame.”
Cramer recently wrote in a blog that Roubini is “intoxicated” with his own “prescience and vision” and said Roubini should realize that things are better since the stock market’s recent bottom in early March.
The Standard & Poor’s 500 index has rallied 17 percent since then.
Roubini said in 2006 that the worst recession in four decades was on its way. He has attracted attention for his gloomy – and accurate – predictions of the U.S. financial market meltdown.
Roubini said the latest surge is just another bear market rally following the pattern of other rallies after the government intervened. He expects the market will test the previous low because of worse than expected macroeconomic news, disappointing earnings and because banks will fail after the stress tests come out.
“Once people get the reality check than it’s going to get ugly again,” Roubini said.
Roubini said Cramer should keep quiet.
“He’s not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong,” Roubini said in an interview with The Associated Press.

I really can’t get enough of rich guys insulting each other.

Roubini made the comments before appearing with bank analyst Meredith Whitney and Canadian bears Ian Gordon and Eric Sprott at a Toronto event titled “A Night with the Bears.” They all correctly predicted the current financial meltdown. (Could have fooled me)
Whitney, among the most bearish of bank analysts, said that some of the 19 banks undergoing government stress tests may not pass.
“I think the big banks will get through and some of the smaller banks may not,” Whitney said in interview with The AP.
Gordon, author of The Long Wave Analyst newsletters, told the event’s audience of 1,500 that he expects the Dow Jones industrial average to plummet to 1,000 based on the idea that economic events repeat themselves in regular sequence every 60 years or so.
Sprott, a Canadian hedge fund owner, told the predominantly business crowd that systemic risk remains and that investors should buy gold.

Gold Revisited
Posted by Eddy Elfenbein on April 8th, 2009 at 11:21 am

The other day, I asked how should one value gold. Specifically, what metrics should you follow to see if gold is overpriced or underpriced? My post was reposted at Seeking Alpha. As I expected, nearly all the comments were completely useless rants from gold bugs. Yes, I know why gold is used, but that doesn’t tell me anything about the current price.
One comment, however, stood out and I felt I should acknowledge this from silveraxis who blogs here.

The proper way to value gold is based on its monetary qualities, or in other words what it could purchase. Many people use inflation rates such as CPI as a proxy for fair value of gold but this is not very sophisticated for several reasons, the most significant of which include accuracy issues as well as the fact that the aboveground stockpile of gold grows every year. I prefer to use a ratio of gold to the global economy, stock markets, U.S. Treasury debt and/or global asset base.
Global economy is reasonably estimated using global nominal GDP (currently around $55 trillion). There are also available figures for Treasuries and stock markets (an effective if rudimentary approach is simply to use the S&P 500 as it is already market cap weighted).
Global assets are much harder to estimate but this is probably the most relevant ratio because it reflects gold’s relative purchasing power. Clearly it wouldn’t make sense for all of the world’s gold to be worth more than every asset that could be purchased! Indeed, gold could only be realistically worth some fraction of total assets which throws some of the wilder (Jason Hommel, Ted Butler, etc.) gold price predictions right out the window. In any case, you basically add global stock market capitalization, real estate, private equity, debt collateral, fiat money in circulation, etc. but exclude all credit-based money, derivatives and other financial products that are zero sum (offsetting asset and liability). Let’s say the current number for the global asset base is $150 trillion (probably a bit high but not that far off).
Now calculate the global market cap of gold: 5 billion ounces times $900 = $4.5 trillion. Thus the gold to global economy ratio is roughly 12 ($55T/$4.5T) whereas the gold to global asset ratio is currently around 33. Similar ratios can be computed for stock markets and U.S. Treasuries.
To determine if these ratios and thus the gold price is fair, too high or too low, you need to come up with similar ratios for various points in time, such as the 1980 high in gold, the 2001 low, under Bretton Woods (pre-1971), etc. as well as an average over time. If you do the math it basically says that gold is currently comparable to where it stood in the mid-1970’s after the 1974 high and before the 1980 high. At the 1980 peak, the ratios were anywhere from 3 to 7 times lower. That implies if gold were to reach a similar extreme today, it could rise 3-7 times from current levels assuming the denominator (GDP, stocks markets, etc.) stays the same.
Alternatively, the average gold ratios over the past 40 years or so imply that fair value lies in the range between $500 and $1000. If we strip out most of the 1990’s when the novelty of gold mine hedging and central bank leasing were at their peaks, these fair values become $600 to $1200. I believe at least several of the analysts that predict $1200 gold are basing their numbers on a similar model to the one I am describing.
Finally, my own studies indicate that the historical ratio of global asset values to gold may have been approximately 5 under the gold standard. In other words, gold might have typically represented approx. 10-20% of the world’s material wealth in the past. Perhaps this could be viewed as the ultimate fair value of gold. If so, assuming a global asset base of $150 trillion would mean gold has a fair value of $3000 to $6000/oz. ($150T/5/5 billion ounces). Such a price assumes the adoption of a worldwide gold standard and no consequent deflation in asset prices, which may not be realistic. Perhaps $75T might be a better number given the already ongoing global asset meltdown in which case the fair value gold price under a gold standard could be $1500 to $3000.
Keep in mind all of the above gold prices are real and therefore don’t need to be further adjusted for inflation because the ratios’ denominators already account for changes in price over time.

This is a thoughtful answer and he’s clearly given the topic serious consideration. My major objection is that the variables needed seem to be very hard to come by and there must be very large room for error.
My view is still the same. I think the safest way to look at gold is to consider its price to be wholly irrational.

A Medical Marijuana Stock
Posted by Eddy Elfenbein on April 7th, 2009 at 3:10 pm

Oh dear lord. Check out Medical Marijuana, Inc. (CVIV.PK), formerly Club Vivanet:

Medical Marijuana, Inc. formerly Club Vivanet announced today that it filed a patent application for its invention, that potentially satisfies various governmental and the medical marijuana dispensaries’ needs for tax collection in the medical marijuana industry.

I think I know how this story ends. The middle part is still up in the air, but the ending isn’t.
(HT: Timbo)