Worst Paragraph of the Day
Posted by Eddy Elfenbein on November 16th, 2008 at 8:23 am

From Eliot “Client 9” Sptizer

No major market problem has been resolved through self-regulation, because individual competitive behavior doesn’t concern itself with the larger market. Individual actors care only about performing better than the next guy, doing whatever is permitted — or will go undetected. Look at the major bubbles and market crises. Long-Term Capital Management, Enron, the subprime lending scandals: All are classic demonstrations of the bitter reality that greed, not self-discipline, rules where unfettered behavior is allowed.

I think greed rules even where unfettered behavior isn’t allowed.

12% Real Yield
Posted by Eddy Elfenbein on November 14th, 2008 at 11:27 pm

Want to make 12% after inflation? Well, for two months….

The Recession Gets Serious
Posted by Eddy Elfenbein on November 14th, 2008 at 10:52 am

The Brits aren’t going to the pubs:

Robert Munro buys his booze at London liquor stores these days. As his expenses rise and Britain teeters on the edge of recession, the house painter is cutting back on nights out and pouring drinks at home.
“It’s gotten more and more expensive to just head down to the pub for a drink,” said Munro, 55, who is self-employed. “You’re paying silly prices for a pint — you can drink at home for half the price.”
Five British pubs are closing their doors every day, according to the British Beer & Pub Association, as pound- pinching drinkers embrace staying in as the new going out. That may hurt beer companies like Heineken NV and Carlsberg A/S more than distillers, such as Diageo Plc, because the brewers generate the majority of their U.K. sales at bars, where profitability can be double the level in retail outlets.

Corporate Bond Spreads
Posted by Eddy Elfenbein on November 14th, 2008 at 12:56 am

Here’s a fascinating look at corporate bond yields over the past 90 years. I got the data off the Federal Reserve Bank of St. Louis’ data bank. This chart shows the yields of Moody’s index of Aaa and Baa seasoned corporate bond yields.

You’ll notice that the gap has widened significantly. This signifies what we already know, that lenders have become extremely risk-averse. Here’s a look at the difference between the two yields:

The premium for high-quality lenders is as high as it’s been since the recession of the early 1980s. We’re still a long way from the spreads we had during the Great Depression.
That data series is based on monthly averages, so to zoom in a little, let’s look at the weekly data which begins in 1962.


According to the daily series, which goes back to 1986, the spread reached 312 basis points on October 27. That’s the widest spread found in the daily records. According to my calculations, the entire gain of the S&P 500 has come when the spread is 96 basis points or less. The spread has been more than that every day for almost a year.

GE’s Dividend Yield
Posted by Eddy Elfenbein on November 13th, 2008 at 11:27 am

Hmmm. Something tells me that GE’s 31-cent quarterly dividend payment isn’t quite sustainable.

When Investment Schemes Go Bad
Posted by Eddy Elfenbein on November 13th, 2008 at 10:18 am

They’re rioting in Columbia over the collapse of a pyramid scam:

Thousands of Colombians have taken part in violent protests in several cities to demand the return of money invested in disreputable financial schemes.
Police used batons and tear gas to control angry investors and curfews were declared in several cities.
In Popayan in the south-western department of Cauca, 2,000 depositors stormed an investment firm’s offices.
In Pereira, in Risaralda, police caught two men hurrying out the back door of a scheme’s office with suitcases of cash.
They offered one of the cases to the police to let them go.
The BBC’s Jeremy McDermott in Medellin says they are now in custody and that is the safest place for them, as conned investors have threatened to lynch them.

Jim Rogers: Oil Bull Market Has Years to Go
Posted by Eddy Elfenbein on November 12th, 2008 at 2:24 pm

In the last four months, oil has dropped by $90 a barrel. I think it’s time to remind folks what the experts were telling us. Let’s start with billionaire Jim Rogers:

Jim Rogers: Oil Bull Market Has Years to Go
The bull market for oil has many years to go before it peters out, says billionaire Jim Rogers, chairman of Rogers Holdings.
There are several factors for this view, but the primary one is that “known sources of petroleum are dwindling,” Rogers told Bloomberg in an interview.
Global oil supplies could fall far short of need and expectations in the next 20 years, reported the International Energy Agency in mid-May. The agency long expected supply to rise to meet demand of 116 million barrels a day by 2030.
It now expects oil output to struggle to reach 100 million barrels in that time frame.
These market conditions will make life difficult for airlines — and airline stocks — well past 2010 and will also impact Federal Reserve policy in the coming months, Rogers said.
Rogers has proved astoundingly prescient since suggesting that investors buy into the older, industrial economy back in 1999 when gold and oil were coming off 25-year lows and when the Internet stock market was soaring.

When Did the Recession Begin?
Posted by Eddy Elfenbein on November 12th, 2008 at 12:58 pm

The common media definition of a recession is two consecutive quarters of negative GDP growth. Technically, that’s not correct. For example, at the beginning of this decade, we never had two straight quarter of falling GDP. Three of out five were negative, yet it certainly felt like a recession to me, and lots of other folks.
The National Bureau of Economic Research is the widely-regarded outfit in charge of dating business cycles. While they regard quarterly GDP as “the single best measure of aggregate economic activity,” NBER prefers to use monthly numbers to pinpoint the precise beginning and ending of business cycles.
This is what NBER has to say about their guidelines:

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

It’s not a perfect science establishing when a recession begins because we have to indentify two points: One, when does the economy not just slow down, but actually contract; and two, we need to look at the entire economy not just high-profile sectors like real estate.
NBER has already said that a recession has begun, but now it has to decide when. A decision probably won’t be made public for another year, so in the service of goodwill, I’ll try to help them out. The difficulty this time around is that the GDP figures aren’t so clear cut. Employment, for example, clearly peaked about one year ago, but exports segments of the economy still did well. GDP growth for last year’s fourth quarter was -0.17%, but I strongly doubt the committee will target a date that far back for the start of the recession. The reason is that GDP grew by 0.87% in the first quarter and another 2.82% in the second quarter (these are annualized numbers). The committee has never before overridden such strong numbers. I just don’t see them dating a starting point before then.
The issue becomes much clear by the third quarter when GDP came in at -0.25%. I also think that number will be revised lower in the months ahead. My advice is to date the start of the recession in May–right in the middle of the second quarter. There were two important events in May. The unemployment rate jumped from 5% to 5.5%. That was the largest monthly jump since 1980.
The other reason isn’t a metric that NBER uses but I think they ought to consider, and I’m referring to when the stock market broke down in May. The S&P 500 peaked last October 9 at 1565.15, however it showed some strength from mid-March to mid-May. Since May 20, however, the market has been in almost continuous retreat.
I think the stock market has evolved as a better gauge of broader economic cycles due to the democratization of Wall Street. When the market goes up, people are wealthier and they spend more. When they see their 401k’s rise, they feel more confident about buying big-ticket items. When the opposite happens, they feel less confident. Up through May, the market had suffered a break, but only since May 20 has it really deflated. That’s when the troubles started to hit everyone.

Trying to Cross Wall Street
Posted by Eddy Elfenbein on November 11th, 2008 at 3:47 pm

From Dealbreaker.

The Death of Buy and Hold?
Posted by Eddy Elfenbein on November 11th, 2008 at 12:34 pm

Last night, the Fast Money crew talked about the death of buy-and-hold investing. I agree that as a strategy, it’s in intensive care, but I’m not so sure it’s quite dead yet.
First, whenever people start talking about the death of something, particularly with investing, it often the moment it’s about to surge. The classic example of this is Business Week’s “Death of Equities” cover from 1979.
The other reason for my skepticism is a misunderstanding of the arguments for buy-and-hold. I often hear people say, “Ha! The market’s down! Where’s your buy-and-hold NOW?” Well, the case for buy-and-hold isn’t that the market always goes up. Rather, it’s that buy-and-hold beats anyone else’s ability to time the market consistently, successfully and in a practical way. It’s that last part in italics that’s often overlooked.
If you can time market successfully, fine. Go do it. In my opinion, I’ve never seen anyone who can do it consistently, successfully and in a practical way.
The other part of buy-and-hold obviously depends on what you buy and what you hold. Since I don’t believe in efficient markets, I don’t see buy-and-hold as synonymous with index investing. Many do. I think it’s certainly possible for investors to make reasonable decisions that will lead them to beat the market over the long haul. For example, if you had taken some basic steps like underweighting large-cap tech stocks at the height of the bubble, you’d be in far better shape today. Small-cap value stocks have had a pretty nice run over the last ten years (except for the last three months). This year, I avoided energy stocks and large-cap financial stocks, and it’s served us well.
There’s also the issue of how long to hold a stock. I don’t see the importance of holding a stock forever, but I do see value in holding them for a considerable amount of time. Each year, I change five out of my 20 Buy List stocks. That’s translates to an average holding period of four years, which seems reasonable to me, though I can understand some buy-and-hold purists objecting.
Lastly, there’s also the issue of how long it takes a stock’s performance to reflect its true value. I think this may be one of the least-understood topics in investing. I’ll give you a brief summary. Let’s say that the stock market gains, on average, 0.05% a day with a daily standard deviation of 1%. (These numbers aren’t accurate. My point here is descriptive. I’m also aware of the problem of stocks returns and the normal distribution, but I’ll out that aside for now). That means that 95% of a stock’s daily move is simply nonsense. It had zero bearing on the stock’s true worth.
After 25 days, more than a month of trading, the stock’s average return should be 1%. The standard deviation, however, is now 5% (note: this rises by the square root of the number of days). So even after one month of patience, the noise value has dropped to 83%.
At 625 days, or nearly two-and-a-half year, the average return and the standard deviation are both 25%. This means that even after holding a stock for 30 months, it’s perfectly reasonable to expect a loss or a minimal gain.
As I mentioned before, I used those numbers for descriptive purposed. The real figures would show that even more patience is required. Buy-and-hold could be dead, but the evidence isn’t close to be full. The bottom line is that the long-term advantage of holding stocks is real, but it takes a long time to show up.