• How Many Times Do I Have to Say it?
    Posted by on May 13th, 2008 at 2:02 pm

    The WSJ does it again. Every time someone comments on political markets, they have to say that these markets “fail” because the a contract going for over $0.50 didn’t pan out.

    John McCain’s presidential campaign is doomed — at least, if you still believe what political futures markets indicate.
    At the Irish electronic exchange Intrade, on which people bet on election outcomes and other events, the futures market suggests Mr. McCain has a 38% chance of becoming the 44th president. In the Iowa Electronic Markets, set up at the University of Iowa, Mr. McCain’s Republican Party gets a 41% chance of winning the popular vote for the White House.

    No. No. No.
    They’re NOT predictions markets, they’re odds-setting markets. That’s something quite different. A 38% chance of winning is not a doomed campaign. I think a baseball player who’s batting .380 would be doing pretty well.
    Google IPO’d at $85, today it’s at $585. That’s a $500 miss. Did the market fail? No, they adapted to new information.
    As I’ve said several times before, these market are really just for fun and should be seen as nothing more than that.
    Still, I don’t understand how people can so often miss this basic fact about the political markets. The markets move with new information. It doesn’t mean that a favored outcome is correct or incorrect. That’s not what the markets are trying to do. They’re trying to analyze new information as quickly as possible. They usually, but not always, do a pretty good job.

  • The Dow/S&P 500 Ratio
    Posted by on May 13th, 2008 at 1:03 pm

    Imagine if the Dow was 3,000 points higher than it is today. That’s where it would be if it had merely kept pace with the S&P 500 over the last few decades.
    The Dow used to be about 10 or 11 times the S&P 500 (I’m referring to the index number, not market cap), but the ratio slowly sank for a long time.
    The Dow/S&P 500 hit its low point in 1985 when the Dow was less than seven times the S&P. Since then, the Dow has had a bit of a comeback. In 2002, the ratio broke 9.5 for the first time in over 25 years.
    After falling back some from 2002 to 2004, the Dow has outpaced the S&P 500 over the last two years.
    image654.png

  • Is Open Source Good for a Companies Stock?
    Posted by on May 13th, 2008 at 11:02 am

    Oliver Alexy looks at the impact of open source on a company’s shares:

    But does giving ideas away help — or hurt — the company’s stock price? Will investors reward openness by driving up the company’s shares — or punish it by knocking the stock down?
    Looking for News
    To find out, I analyzed companies’ stock performance before and after they announced that they were making proprietary software open-source.
    First, I searched through news releases from January 1999, shortly after the start of the open-source movement, to April 2007, looking for announcements that fit the bill. I then weeded out a number of companies, mostly because their announcements contained other news that might affect the stock price. That left 38 announcements from 30 companies.
    Next, I analyzed the companies’ stock performance for 125 days prior to the announcement — to get a baseline for performance — and then watched the stock activity the day before the announcement and the day of the announcement. (I looked at the day before in case the markets had anticipated the news.)
    Make It Clear
    The results? Companies saw their stock price rise if they met one crucial condition: explaining how they expected their open strategy to bring in short-term revenue. Companies that clearly communicated a short-term revenue model saw an average stock-price increase of 1.6%. Companies that didn’t saw an average decline of 1.6%.

    That’s interesting though I’m a little uneasy about the robustness of that survey. It would be interesting to see if there could be more research done on a broader scale.

  • Guess What Stock Market Is at a New High?
    Posted by on May 13th, 2008 at 1:08 am

    I’ll give you a hint.
    Toronto.
    Give up?

    Much of the momentum on the TSX has been caused by strength in resource stocks. The energy sector has climbed 40 per cent since January while the price for crude oil rose above US$125.
    Investors have been turning to commodities stocks as a reliable investment alternative to international financial institutions, whose results have been bruised by the credit crisis.
    “People were extremely nervous so they pulled in their horns, and they took their money out of risky investments,” said Bob Tebbutt, vice-president risk management at Peregrine Financial Group Canada.
    “When people are nervous they automatically flock to things that are real — for example they flock to gold. It’s a risk place that they can put their money in and know that they’re theoretically going to get it back fairly easily.”

  • Gazprom Meets Deep Purple
    Posted by on May 12th, 2008 at 11:27 am

    The New York Times has an article about the influence that Gazprom has on the Russian government. It’s not too much of a leap to say that Gazprom is the Russian government. The company’s president Dmitri Medvedev became Russia’s president last week. Putin, the former president, is now prime minister. And Viktor Zubkov, the former prime minister, will become the new head of Gazprom.

    It’s hard to overemphasize Gazprom’s role in the Russian economy. It’s a sprawling company that raked in $91 billion last year; it employs 432,000 people, pays taxes equal to 20 percent of the Russian budget and has subsidiaries in industries as disparate as farming and aviation.

    But I was most impressed to find that at the company’s 15th birthday party, they invited Medvedev’s band to play, Deep Purple.

    “The gig at the Kremlin was fun, but it wasn’t wild,” Ian Gillan, Deep Purple’s frontman, wrote in an article for The Times of London after the show. “The young guys and more junior staff were all up on their feet, although they were looking nervously over at their bosses to see whether they could loosen their ties. It was as if they were asking, ‘How much fun are we allowed to have?’ ”

  • Get Over The Gap
    Posted by on May 12th, 2008 at 10:31 am

    From IBD:

    Trade Deficit: We have long been told that when the dollar “corrects,” making our goods cheaper abroad, the trade deficit will begin to fall sharply. Well, it’s finally happening. Now that it is, do you feel any better?
    You shouldn’t. Because even though the trade gap narrowed by $3.5 billion, or 5.7%, to $58.2 billion in March from February, it was a sign of weakness rather than strength.
    Compared with a year earlier, March exports rose 15.5% — a good thing, we suppose. But imports increased just 7.9%, a gain that would have been a lot lower if not for oil.
    True enough, the deficit appears to be declining — after hitting repeated records in recent years. Exports are booming while import growth has slowed noticeably, due mainly to the slumping dollar.
    On the surface, this looks like a good thing. After all, don’t we want to buy less from abroad and more from our own country? The answer is no if it means that the U.S. economy has slowed and is no longer pulling its weight in the world.
    Journalists and pundits call the smaller deficit an “improvement,” or “good news.” It isn’t. We run a trade deficit not because we’re uncompetitive or others protect their markets, two great economic myths; we run deficits because we’re such an attractive place for investors from around the world to park their money. The deficit, in other words, is a sign of strength.
    As any economist can tell you, the flip side of our trade deficit is our capital surplus, which measures foreign investment flows into and out of the U.S. When we run a trade deficit, by definition we must run a capital surplus — and vice versa.
    Last year, for instance, we rang up a record $708.5 billion deficit for both goods and services. But we imported the equivalent of $738.6 billion in investment capital to offset that. This was used to buy Treasury notes, bonds and stocks, and to fund real estate, plants, equipment and worker training.
    That foreign capital created jobs and added to our ability to consume. It may even have helped keep us out of recession.
    So what does it say that our deficit is now shrinking?
    On the whole, it means foreign investors find the U.S. economy a less inviting place to be, maybe because of the housing meltdown and concern over the upcoming election. But if the trend continues, it means we’re all going to have to consume less and save more to make up for the decline in foreign capital.
    That might not be a bad thing, but don’t let anyone tell you it will be painless. In the short run, a falling trade deficit will boost GDP. Indeed, based on Friday’s data, it’s likely first-quarter GDP growth will be revised up from the first estimate of 0.6% to roughly 1.2%.
    But in the long term, having less foreign investment means our economy will grow more slowly. That’s the downside.
    Don’t believe it? Just look at Germany and Japan. They’ve run huge trade surpluses for years, yet their economies have grown slowly at best since at least 1990. They export lots of their capital, as all trade surplus nations do, so they have less to grow on. We import it — and grow faster.
    As such, should we root for a smaller deficit? Well, a smaller trade deficit doesn’t have to be a negative. If it got smaller because Congress wised up and created private investment accounts for Social Security — which would raise the U.S. private savings rate — that might be a good thing.
    But making the deficit smaller isn’t necessarily a laudable goal, since doing so often covers for other bad policies such as raising taxes, devaluing the dollar and reverting to protectionism.
    All these things, by the way, have been proposed as “remedies” for the trade deficit, mostly by wrongheaded Democratic candidates and talk-show hosts. What they’d do, in fact, is shrink the deficit by shrinking the U.S. economy. We’d rather keep the deficits.

  • Schwarzman’s Subprime Analogy
    Posted by on May 10th, 2008 at 1:23 pm

    Oh Steve:

    [It’s like] being a noodle salesman in Nagasaki when they dropped the A-bomb – not a lot of noodles left, and not a lot of people either.

    My prediction: This will not end well.

  • Nicholas Financial’s Earnings
    Posted by on May 9th, 2008 at 3:09 pm

    Yesterday, Nicholas Financial (NICK) reported quarterly earnings of 20 cents a share. That’s for the company’s fourth quarter which ended on March 31. For the same quarter one year before, NICK earned 29 cents a share. Revenue dropped 6% to $12.7 million.
    Yes, I still think this is an absurdly undervalued stock. For the entire fiscal year, NICK earned 94 cents a share. That still means the company is going for about seven times earnings. Nicholas Financial has now reported revenue increases for 18 straight years.

  • The Cyclicals are Still Overpriced
    Posted by on May 7th, 2008 at 12:38 pm

    Here’s a look at something I wrote a lot about last year, it’s the ratio of the Morgan Stanley Cyclical Index (^CYC) to the S&P 500 (^GSPC):
    image653.png
    The ratio peaked on July 19 and started falling for the next few months. It eventually reached a bottom on January 9 and has been steadily climbing ever since.

  • Signs of Health in the Credit Markets
    Posted by on May 7th, 2008 at 10:42 am

    From Bloomberg:

    In the course of a three-and-a-half- hour dinner at Manhattan’s Smith & Wollensky steakhouse, Emil Assentato went from also-ran to the top of the world’s fastest-growing credit market.
    By the end of the meal, Assentato, 58, the head of Cie. Financiere Tradition’s North American securities business who races cars on weekends, had persuaded more than a dozen credit- derivatives brokers led by Donald Fewer and Michael Babcock to defect from rival GFI Group Inc., court documents allege. In the end, 21 would leave for Tradition with the promise of $130 million over three to five years, about $6 million apiece.
    Tradition’s attack did more than decimate GFI’s credit- default swap desk. It also raised the bar for the “extraordinary” pay commanded by derivatives brokers who match buyers and sellers between banks, according to affidavits filed by New York-based GFI in a suit against Tradition. As Wall Street buckles under the biggest credit-market losses in history, brokerage firms are seeking to tap the $10 billion of fees generated by middlemen, who spend as much as $500 million a year entertaining traders with strippers, football games and evenings at trendy Manhattan bars, based on court records and interviews with industry officials.