• S&P 500 Total Return Adjust for Inflation
    Posted by on November 3rd, 2008 at 2:33 pm

    Here’s a look at how the S&P 500 has done including dividends and adjusted for inflation:
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    Historically, the market’s real total return has been about 7% a year. The means it doubles every ten years, but in the last ten years, investors haven’t made a dime.

  • Vote Tomorrow and Get a Free Cup of Coffee at Starbucks
    Posted by on November 3rd, 2008 at 1:29 pm

  • The Fall of AIG
    Posted by on November 3rd, 2008 at 12:44 pm

    When economic historians pick through the rubble of the Panic of 2008, there will be lots of difficult questions to answers. The one I will never understand is how AIG (AIG) collapsed.
    Sheesh…how frickin stupid do you have to be to ruin AIG?
    Lehman and Bear I get, but let’s face it, insurance isn’t that difficult to make money in. Some companies make a lot more than others, but making a profit is a pretty easy concept in insurance. Manage your risk and charge more than you pay. Repeat.
    Sure, a disaster can hurt or ruin your business, but you have to be an idiot to ruin it from the inside. Sure enough, that’s what AIG did. Actually, their insurance business was doing well. It was their idiotic forays in the CDS market that sank the company.
    The Wall Street Journal looks at AIG’s collapse and Gary Gorton, the finance professor at the center of it all:

    AIG’s credit-default-swaps operation was run out of its AIG Financial Products Corp. unit, which had offices in London and Wilton, Conn. In essence, AIG sold insurance on billions of dollars of debt securities backed by everything from corporate loans to subprime mortgages to auto loans to credit-card receivables. It promised buyers of the swaps that if the debt securities defaulted, AIG would make good on them. AIG executives, not Mr. Gorton, decided which swaps to sell and how to price them.
    The swaps expose AIG to three types of financial pain. If the debt securities default, AIG has to pay up. But there are two other financial risks as well. The buyers of the swaps — AIG’s “counterparties” or trading partners on the deals — typically have the right to demand collateral from AIG if the securities being insured by the swaps decline in value, or if AIG’s own corporate-debt rating is cut. In addition, AIG is obliged to account for the contracts on its own books based on their market values. If those values fall, AIG has to take write-downs.
    Mr. Gorton’s models harnessed mounds of historical data to focus on the likelihood of default, and his work may indeed prove accurate on that front. But as AIG was aware, his models didn’t attempt to measure the risk of future collateral calls or write-downs, which have devastated AIG’s finances.
    The problem for AIG is that it didn’t apply effective models for valuing the swaps and for collateral risk until the second half of 2007, long after the swaps were sold, AIG documents and investor presentations indicate. The firm left itself exposed to potentially large collateral calls because it had agreed to insure so much debt without protecting itself adequately through hedging.
    The credit crisis hammered the markets for debt securities, sparking tough negotiations between AIG and its trading partners over how much more collateral AIG should have to post. Goldman Sachs Group Inc., for instance, has pried from AIG $8 billion to $9 billion, covering virtually all its exposure to AIG — most of it before the U.S. stepped in.
    Such payments continued after the government bailout. AIG already has borrowed $83.5 billion from the Federal Reserve, a little more than two-thirds of the $123 billion in taxpayer loans made available to AIG so far. In addition, AIG affiliates recently obtained from the government as much as $21 billion in short-term loans called commercial paper. Much of the $83.5 billion has been used to meet the financial obligations of the financial-products unit. If turmoil in the markets causes prices of many assets to fall further, the government might have to cough up more money to help keep AIG afloat. Cutting it off would risk renewing the market upheaval the policy makers have struggled to tame.

  • Sysco’s Earnings
    Posted by on November 3rd, 2008 at 12:22 pm

    Even for a defensive stock, Sysco (SYY) tends to be pretty defensive. The quarterly numbers tend not to fluctuate much. For the September quarter, the company’s fiscal first quarter, Sysco earned 46 cents a share, which was a penny below Street estimates. Last year, it earned 43 cents a share.
    While the S&P 500 is off by about 34% for the year, Sysco is “only” down around 18%. That’s a rough year but it’s a lot better than most. Sysco is currently going for about 13 times next year’s earnings.

  • The Real Bubble
    Posted by on November 3rd, 2008 at 10:09 am

    Arnold Kling spots the real bubble. It’s not finance, but in macroeconomics:

    I would not be surprised to see unorthodox theories of control gain traction. Perhaps, to justify current policy trends, a theory that socialized investment is necessary for stability.
    To me. the logical thing for the economics profession to do is admit that we are nowhere near understanding what is happening. However, taking that position will not get you invited to panels.
    I think that there are two questions. First, what are the generic causes and consequences of bubbles? Second, why did the specific bubble in real estate and mortgage finance occur? The first question is harder. But I would say that 99 percent of the economics profession cannot even correctly answer the second.

  • The 28th Amendment
    Posted by on October 31st, 2008 at 10:43 pm

    How large should a representative assembly be relative to its population? My idea is that it should be the pi root of the population. I figure that since the Greeks invented democracy, it should have some connection to the ancients.

    Personally, I’d like to see this as a constitutional amendment (called the Elfenbein Amendment) that will formally determine the size of the U.S. House of Representatives, although I don’t believe it’s required. I think a simple law will do.

    I ran the idea passed John Derbyshire, and he had the best response—pi is appropriate given that the place is irrational.

    I’ve attached a spreadsheet showing what the historical root has been, and it’s often hovered around 3.14.

  • Voting During a Recession
    Posted by on October 31st, 2008 at 9:53 pm

    This will be the first time Americans will be voting for president during a recession in 48 years. The National Bureau of Economic Research hasn’t officially declared this a recession, but I’m assuming they’re mark the beginning of this current recession as starting sometime in the second quarter. If I had to guess, I’d say May or June.
    NBER has the dates of recessions going back to 1854 and this is the longest stretch without a recession election.
    Here are the previous recession elections:
    1860
    1876
    1884
    1896
    1900
    1920
    1932
    1948
    1960
    Several of those are now viewed as pretty historic elections. Notice how often there was a change of parties. It’s also pretty amazing how Harry Truman pulled it off 60 years ago.

  • The Nouriel Roubini Halloween Facemask
    Posted by on October 31st, 2008 at 12:46 pm

    Be afraid.
    Be very afraid.

  • Charlie Gasparino Gets Philosophical…I Think
    Posted by on October 30th, 2008 at 8:44 pm

  • The First Trading Day of the Month
    Posted by on October 30th, 2008 at 7:59 pm

    As we get set for the weekend, I’ll remind you the first trading day of the month has performed very well. Over the last 13 years, the S&P 500 is up 64.1%, but the combined return of the first trading day is up 68.6%. The first day of the month makes up slightly less than 5% of trading days.
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