Bernanke Bombs at Harvard
Posted by Eddy Elfenbein on June 5th, 2008 at 9:07 am

Poor Ben.

“These, obviously, are not the kind of topics chosen by many recent Class Day speakers,” Bernanke said. “But, then, the class marshals presumably knew what they were getting when they invited an economist.”
While the class marshals may have known what they were getting, it seemed many of the seniors present did not.
“I’m annoyed, I’m irritated. I just think that a person who speaks for the class should be able to impart words from experience, especially someone who has risen so much and has come so far, from right where we are,” said Jennifer C. Arcila ’08, who was among the steady trickle heading out before the speech finished.

Here’s the speech.
(Via: Mankiw.)

The Buy List Is Still Rolling
Posted by Eddy Elfenbein on June 4th, 2008 at 6:21 pm

Thanks to Jos. A Bank Clothiers‘ (JOSB) big earnings report, that stock soared over 11% today. Net income jumped 18% in their fiscal first quarter. The company earned 53 cents a share, which topped the 46-cent estimate.
This helped the 20 stocks on my Buy List gain an average of 1.17% today compared with a decline of -0.03% for the S&P 500. This is the 10th time in the past eleven days that we’ve beaten the market. Since May 20, we’re up 1.35% compared with a -3.46% decline for the S&P 500.

More on Momentum Losing Momentum
Posted by Eddy Elfenbein on June 4th, 2008 at 1:28 pm

The world’s easiest timing strategy, only invest after up days, was a huge winner for many decades, but not anymore.
Check out the chart below:

The blue line is what you would have earned if you had only invested on days following stock market advances (dividends aren’t included). The red line is for days following 0.5% advances. The green line is days following 1% advances, and the black is the S&P 500.
By early 2000, the blue line had returned over 5,000-fold which lapped the S&P 500 by 60 times. Unfortunately, it’s not a very practical trading strategy, considering how often you have to go in and out of the market. Still, that’s one of the more astonishing figures I’ve ever calculated, especially considering how simple the rule is.
Since 2000, however, the strategy has been a bust. The blue line is still below half its peak from eight years ago. It’s not just the burst of the tech bubble, the blue has done especially poorly in the past year. Here’s the blue line again, but only over the past few years (and no log scale):

So what’s going on here? One answer is that an efficient market has simply caught up with a good idea and it no longer works.
But I think another explanation could be, it’s the result of a subtle shift in the nature of the market. Instead of being trend-enforcing, the market has become trend-negating. Each up move is no longer confirmed, but is now fought. If so, I think that’s a healthy development for the market.
But that’s just speculation on my part. What do you think?

What If the Stock Market Were a Bond?
Posted by Eddy Elfenbein on June 3rd, 2008 at 1:35 pm

Here’s an update of a post I did last year. I thought it would be interesting to see what the stock market’s historical performance would look like if the stock market were a bond.
Let me explain what I mean.
I took all of the monthly return data for the stock market going back to the 1920s. I then wanted to see what a bond would look like if we applied those exact same monthly changes to it.
I assumed that it’s a bond of infinite maturity and pays a fixed coupon each month.
There’s one hitch though. I have to choose a starting yield-to-maturity for December 1925. So this isn’t a completely kosher experiment because the starting point is based on my guess. If I choose a number that’s too high, then the historical performance won’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM is too low, the yield would gradually get pushed down to microscopic levels.
Fortunately, the data makes my job easy. After eight decades, the window I have to work with is pretty narrow. If I start with 6.6%, that’s too high, and 6.5% is too low. After playing with the numbers, I settled on 6.538%.
Even though this “bond” is complete make-believe, it reflects what the actual stock market really did for the past 83 years.
Over the last eight decades, the yield has averaged about 10.2%, which is right in line with the market’s long-term total return. Through the end of May, it stood at 8.75%. Eight years ago, it got down to 4.9% (by comparison, long-term Treasuries were going for 6.5%).

Last year, I wrote:

I have to think that many investors would be better served if there were such an investment vehicle. If they knew that the market’s current yield was something like 7% or 8%, they might treat their investments very differently.
What’s interesting is that investing in the 19th century wasn’t too far from this. Many stocks traded at or near “par” which was often $100 a share. Every year, the company would pay out an annual dividend, say $5 or $8 a share, sometimes none, sometimes $10 or $15. They dividend was the game, and there wasn’t nearly as much emphasis on long-term capital gains.

Soros Now Celebreating Ten Years of Gloom
Posted by Eddy Elfenbein on June 3rd, 2008 at 11:30 am

George Soros is currently testifying on Capitol Hill about the high cost of oil.
The BBC reported: He warned that a “global credit crunch” was in the making and would probably lead the world into recession. Actually, that last part is from nearly ten years ago, but with Soros, he always sees disaster, the particulars may change. In 2000, he was warning us about the disintegration of the euro.

Wachovia’s CEO Ousted
Posted by Eddy Elfenbein on June 3rd, 2008 at 10:56 am

I’m glad we had Golden West Financial on our 2006 Buy List, and I was glad that Wachovia (WB) bought the company. For the tracking purposes of the Buy List, shares of Wachovia replaced the shares of Golden West. However, there was no way I was going to keep Wachovia on the 2007 Buy List. Fortunately, that decision proved correct.
What was our good fortune was bad news for Wachovia’s CEO Ken Thompson. He was let go yesterday by the board of Wachovia. BusinessWeek reports:

According to one Wachovia insider, Crutchfield’s downfall came when “he stopped listening” to his other executives. Likewise, it’s hard to believe Thompson didn’t get resistance from his own management team about buying Golden West—and ignored it.
Because no one outside of Thompson and Golden West CEO Herb Sandler seemed to like the deal from the moment it was announced. Indeed, in the initial conference calls with analysts and investors after the deal, Thompson was on the defensive from the outset.
For Thompson, the Golden West purchase gave him the beachhead in California he had long desired. It also gave him an array of creative mortgage products to pump through his broker channel. But the ink was barely dry on the Golden West deal in late 2006 when the housing bubble in markets including California and Florida began to deflate. And by early this year, the mounting losses from Golden West, coupled with deteriorating credit quality in the rest of the bank’s portfolio, began to hit Wachovia hard: The bank reported a $393 million loss in the first quarter and then amended the report in mid-May to say it really lost $708 million after a review of its portfolio of bank-owned life insurance. That forced the bank to cut its dividend by more than 40% and to sell $8 billion in new shares—a move that served to bolster Wachovia’s equity but diluted the value of existing shareholders’ stock.

Danaher Raises Guidance
Posted by Eddy Elfenbein on June 3rd, 2008 at 10:42 am

Danaher (DHR) bumped up the low-end of its previous guidance today. For Q2, the company now sees earnings of $1.04 to $1.07 per share. The old range was $1.02 to $1.07 per share. That’s not a big change, but it’s always good to see a reiterating during the quarter.
For last year’s second quarter, Danaher made 94 cents a share which was a penny better than Wall Street’s forecast. From its December high to its March low, the stock dropped by 24%.

The Black Swan Has Been Found
Posted by Eddy Elfenbein on June 3rd, 2008 at 10:25 am

The Elite Trader spots a very troubling chart pattern.
(Via: Ritholtz.)

Leucadia says boosts Jefferies stake to 30 pct
Posted by Eddy Elfenbein on June 2nd, 2008 at 12:34 pm

Always keep an eye on what Leucadia (LUK) is up to:

Leucadia National Corp, a holding company engaged in several businesses, disclosed on Monday it boosted its equity stake in U.S. investment bank Jefferies Group Inc to 30 percent.
Leucadia, in a filing with the Securities and Exchange Commission, said in April it acquired a 14 percent stake in Jefferies for $434 million after the banking and trading firm, which focuses on mid-cap and small companies, reported a second straight quarterly loss.
Those shares, combined with previously purchased Jefferies stock, gave Leucadia, a New York investment firm, a 20 percent stake.
According to the latest filing, since April 21 Leucadia acquired an additional 17.7 million shares on the open market for $321.9 million, raising its stake to 48.6 million shares. That equates to a 30 percent stake as of May 14.
In all, Leucadia says it has invested $794.4 million in Jefferies stock.

If You Have an Important Meeting Today
Posted by Eddy Elfenbein on June 2nd, 2008 at 9:28 am

From the Lancashire Evening Post:

Biscuits ‘could be key’ to business deals
The type of biscuit served in the boardroom could make or break a business deal, according to the world’s first “business biscuit study”.
Some 80% of business professionals believe that the outcome of a meeting can be positively influenced by the choice and quality of biscuit on offer.
The research was commissioned by hotel chain Holiday Inn who surveyed 1,000 business professionals across the UK about their boardroom biscuit habits.
Snackers voted the chocolate digestive their favourite boardroom biscuit, followed by shortbreads and with HobNobs claiming the third spot. Jammie Dodgers and Bourbons completed the top five.
The survey discovered that lawyers were most impressed by a good boardroom biscuit, closely followed by those in the media and marketing industry.
Things are not so clear-cut on the etiquette of dunking, with 52% of business professionals frowning on the practice.
And on the question of how many biscuits to take from the communal platter, most agree that two is the magic number.
The survey discovered that nothing says business failure quite like a crumbly biscuit with nearly 30% admitting they would turn their noses up at a disintegrating digestive.