• Deconstructing the GDP Data
    Posted by on August 5th, 2008 at 9:34 am

    There’s an interesting debate going on regarding the latest GDP report. The government’s initial estimate for second-quarter GDP growth showed that the economy expanding by 1.9%. The part that has that pessimists laughing is that measly 1.1% number for inflation. Inflation, of course, as measured by the CPI is running at a much higher rate, and would most likely push GDP growth into negative territory.
    The issue centers around imports prices. Brian Westbury writes:

    If import prices are added back into inflation, then the total dollar volume of imports must be added back into nominal GDP as well. This is the only way to compare apples to apples. Adding back imports pushes nominal GDP growth to 5.5% at an annual rate in Q2. Then, using the 4% inflation data (that includes import prices) means real GDP growth was still positive by 1.5%, or so.
    A second issue to think about is that unlike the Consumer Price Index (CPI) – which attempts to measure changes in the cost of the things we buy – GDP inflation is designed to measure changes in the prices of the things we produce, regardless of whether the purchasers are foreign or domestic. Due to oil, prices for the items Americans buy have been increasing much more rapidly than the items they produce. As a result, GDP inflation looks artificially low, when in reality it is not comparable to the CPI.

  • Bail Out the Oil Companies
    Posted by on August 4th, 2008 at 4:11 pm

    My fellow Americans, the time for action is at hand. In less than three months, we’ve witnessed horrendous losses for major oil stocks. This is deeply destabilizing for the entire economy. We need—no, we insist that the government step in and protect shareholders from these losses. Personally, I blame short-sellers and rumor mongers.
    Just look at some of these losses.
    Stock…………………………May 20……………….August 4………….Loss
    ExxonMobil (XOM)…………$94.56……………..$76.60…………..-19.0%
    Occidental Pete (OXY)……$97.85……………..$74.23…………..-24.1%
    ConocoPhillips (COP)……..$93.55……………..$79.45…………..-15.1%
    Chevron (CVX)……………..$103.09……………..$82.80…………..-19.7%
    Hey, they did it for Bear Stearns plus Phonie and Fraudie, why not the oil stocks? Will someone please think of the children!

  • Trade Debate
    Posted by on August 4th, 2008 at 3:34 pm

    This link shows a trade “debate” CNBC just had between Jagdish Bhagwati and Naomi Klein.
    Bhagwati is one of the most distinguished professor on trade in the entire world. He’s written about 38 billion books and articles, and has a roomful of awards and honors. (Although CNBC has a little trouble spelling his name.)
    Naomi Klein, by contrast, is a complete moron.
    For some background, here’s the NYT article they’re discussing, and here’s Jonathan Chait eviscerating Klein.

  • “Most Americans have not experienced any significant decline in the value of their homes — nor are they likely to.”
    Posted by on August 4th, 2008 at 11:42 am

    You know how the housing market is crushing everyone across the land? These guys say it’s really not that bad:

    We conclude that declines in house prices are highly likely to remain small. Our analysis reveals, unsurprisingly, that foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of collapsing prices. Our models predict that as foreclosures continue to climb in many states, house prices will remain flat or decline in those states — but will not collapse.
    One reason for this is that the effect of foreclosure shocks on house prices is small. Furthermore, other fundamental factors (such as employment growth and a slowing of the growth of the housing supply over the past year and a half) will cushion the impact of foreclosures.
    We constructed several forecasting models. Even under an extreme worst-case scenario for foreclosures, our conclusion was that U.S. house prices just aren’t going to fall by very much in the next two years. In our worst-case scenario, the average cumulative decline is about 5 percent, and only 12 states experience declines greater than 6 percent by the end of 2009.

    They criticize the Case-Schiller data as being skewed toward poor-performing areas, and that it’s weighted by value which also gives greater say to overpriced homes.

  • Sentence of the Day
    Posted by on August 4th, 2008 at 11:29 am

    From Bloomberg:

    Standard & Poor’s analysts questioned their own ratings of mortgage-related debt products and said they were overworked as the number of deals increased, the Wall Street Journal reported, citing a draft version of a U.S. Securities & Exchange Commission report.
    In one e-mail, an unidentified S&P analytical staffer wrote that a mortgage or structured-finance deal was “ridiculous” and “we should not be rating it,” the Journal said, citing the 38-page draft SEC report.
    A colleague replied, “we rate every deal,” the newspaper said, citing the report. “It could be structured by cows and we would rate it,” the colleague wrote, the Journal said.

    I’d really like to see an email from folks who structured a deal in reference to the rating agencies.

  • How are those Stimulus Checks Doing?
    Posted by on August 4th, 2008 at 10:01 am

    Good news, thanks to those government stimulus checks, consumer spending increased by 0.6% in June!
    Oh, the downside is that inflation increased by 0.8%.
    The Federal Reserve meets again tomorrow, and no change in rates is expected, although I wouldn’t mind seeing rates climb 50 points from here.

  • Casinos and Luck
    Posted by on August 4th, 2008 at 9:47 am

    Every time I’m in a casino, I need to remind myself that some gaming stocks have been extraordinary performers over the long haul. There’s a reason why they’re so profitable. Thanks to the laws of probability, a game that’s even slightly in the house’s favor can be very lucrative. Still, I was shocked to run across this:

    Casino Blames Income Drop On Gamblers’ Luck
    UNCASVILLE, Conn. — Mohegan Sun officials said the casino’s net income in the third quarter dropped 89 percent compared with the same period last year, and they’re placing some of the blame on gamblers’ extraordinary luck.
    The Mohegan Tribal Gaming Authority reported net income of $5 million Thursday for the three months ending June 30.
    Mitchell Etess, Mohegan Sun’s president and chief executive officer, said the casino had an extremely long streak of bad luck.
    Gamblers played about $611 million at table games during the quarter, a 6.4 percent increase. The casino kept about 11.6 percent of that gambling money, nearly 5 percent less than it did during last year’s quarter.
    Table game revenues dropped more than 25 percent to $75.3 million in the third quarter from the year-ago period.

    Unless there’s more to this story, I don’t see how it’s possible that a casino can have a run of bad luck. The only explanation I can think of is that there have been several very large bets that have gone the wrong way. Outside that, with a sample size that large, the house should barely see any fluctuation in its take. If I were the casino, I’d be keeping a closer eye on its dealers.

  • P/E Ratios and Inflation
    Posted by on August 1st, 2008 at 10:15 am

    One of the most basic rules for valuing the stock market is that the overall P/E Ratio should be equal to 20 minus the inflation rate. I was curious to see how good a measure of the market this is. Given how simple it is, it’s not too bad.
    Here’s a look at where the rule would have valued the S&P 500 compared with its actual value.
    image701.png
    The trouble spots are when there’s serious deflation. Still, I wouldn’t recommend using this as a market timing device. The average error is about 10%.
    According to the latest numbers, the S&P 500 should be at 1,092.

  • The Eight Lean Years
    Posted by on July 31st, 2008 at 2:31 pm

    For the last 32 quarters, real GDP has grown at annualized rate of 2.18%.
    image700.png
    That’s the slowest eight-year growth rate since…well, my quarterly data only goes back to 1947.

  • Nicholas Financial’s Earnings
    Posted by on July 31st, 2008 at 11:35 am

    For the second quarter, Nicholas Financial (NICK) earned 15 cents a share. Since the stock is basically priced for Armageddon, I think this is good news.
    Revenue increased by 8% and EPS dropped from 27 cents to 15 cents. The major culprit isn’t hard to spot. The provision for credit losses nearly tripled from last year. Without that, pre-tax profit actually grew by about 4% over last year. The stock is now trading at less than 35 times this quarter’s earnings.