Casinos and Luck
Posted by Eddy Elfenbein 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 Eddy Elfenbein 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.

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 Eddy Elfenbein on July 31st, 2008 at 2:31 pm

For the last 32 quarters, real GDP has grown at annualized rate of 2.18%.

That’s the slowest eight-year growth rate since…well, my quarterly data only goes back to 1947.

Nicholas Financial’s Earnings
Posted by Eddy Elfenbein 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.

Second-Quarter GDP Growth
Posted by Eddy Elfenbein on July 31st, 2008 at 9:38 am

The government reported today that GDP grew by 1.89% for the second quarter. This is the sixth time in the last eight quarters that GDP growth has come in less than 2.7%. The government also revised its numbers for each quarter going back to the start of 2005.
The revisions aren’t terribly dramatic but they mostly say that growth has been weaker than we thought. From the fourth quarter of 2004 to the first quarter of 2008, the original forecast had been that real GDP grew by 8.4%. Turns out it was just 7.9%. That may not sound like much but it’s over $50 billion that’s vanished with a keystroke. I know I miss it already.
We also learned that the fourth quarter of 2007 was in fact, a negative quarter, and the first quarter of 2007 was just barely positive. The newspaper definition of a recession is back-to-back quarters of negative growth. In reality, the official timers of recession use a much more sophisticated method for pinpointing the beginning and end of a recession. What we’re experiencing may be an extended period of low growth, but where the economy doesn’t experience much actual contraction.
Here’s real GDP growth, old and new (in trillions):

Least Coherent Sentence of the Day
Posted by Eddy Elfenbein on July 30th, 2008 at 2:20 pm

From an unnamed media company whose stock is 75% off its high:

Some experts have said that the law was wrong-headed in its effort to retain the hybrid nature of the mortgage finance giants, which are private companies with publicly traded stock, but which have an explicit guarantee of help from the government — an arrangement that critics say privatizes the profits but socializes the risk and any losses.

Let me take a deep breath to get my head around this, but the definition of the public company is one with publicly traded stock, therefore a private company can’t have publicly traded stock. Now if they meant private in the sense that it’s not nationalized, well that’s a different can of incoherence. If it were nationalized, then it wouldn’t be publicly traded. Is this really that hard?

S&P 500 and Earnings
Posted by Eddy Elfenbein on July 30th, 2008 at 10:47 am

Here’s a look at the S&P 500 (black line, left scale) and its earnings (gold line, right scale). The graph is scaled at 16-to-1.

I think it’s clear that the market isn’t undervalued, given its current condition. What will matter is if the downturn is earnings will really by over this quarter. Given the rate that earnings have been cut, that’s far from certain.

Fiserv’s Earnings
Posted by Eddy Elfenbein on July 29th, 2008 at 5:48 pm

Fiserv (FISV) just came out with a solid earnings report. For Q2, the company earned 83 cents a share from continuing ops. That beat the Street’s consensus by four cents a share. Revenue rose 38% to $1.30 billion. The company projects full-year EPS at $3.28 to $3.40.
Here’s a look at Fiserv’s stock (blue line, left scale) and earnings-per-share (gold line, right scale).

The red indicates the company’s EPS projection. I’ve scaled the graph at a ratio of 16-to-1, which is pretty conservative. That means that when the lines cross, the P/E ratio is 16.
You can see how far the company’s valuation has fallen even though earnings growth seems to be holding up well. That’s as good a definition as any for a good buying opportunity.

Obama Gives Bernanke Vote of Confidence
Posted by Eddy Elfenbein on July 28th, 2008 at 12:26 pm

Well, the election is over now. Bernanke wins 1-0.

“I think that Chairman Bernanke was handed a pretty tough hand and I think some of the decisions he’s made have been the right ones,” the presumptive Democratic nominee told Reuters in an interview on Saturday evening.

What Did Experts Have to Say at the Beginning of the Year?
Posted by Eddy Elfenbein on July 28th, 2008 at 11:29 am

If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me.

Generally, I’m not a big fan of the story, “so-and-so said to buy stock X, and it’s down therefore so-and-so is a moron.” Being wrong about the market doesn’t make you a moron. Claiming you didn’t say something you clearly did, however, does. Still, it’s worth taking a look at what the experts said that 2008 would have in store.
I dug up BusinessWeek’s article from last December, “Where to Put Your Cash in 2008.” Ah, those were innocent days!
William Greiner said that his favorite stock is Starbucks (SBUX). Youch! The stock is off by about 30% YTD. It gets worse. Tobias Levkovich said to buy financials. No comment needed. Jason Trennert had a year-end target for the S&P 500 of 1680. Leo Grohowski’s favorite stock was FCStone Group (FCSX) which is now down by about 60%. David Bianco had an S&P 500 target of 1700, and his favorite stock pick, Oracle (ORCL), is about flat for the year.
So what’s the lesson here? Is it that all these people are morons and we should never listen to them? Not at all. The great thing about investing is that you don’t need to predict the future. You don’t have to predict elections. You don’t even have to predict Fed policy. Successful investing isn’t about predicting what the market will do, it’s really a game of risk management. In fact, knowing that you can’t predict the future is the best starting point. Each investor should ask themselves, “given that I can’t predict what will happen 12 months from now, what’s the best way to position my portfolio to profit?”
That’s why I favor a diverse portfolio of financially sound companies trading at reasonable prices. I shouldn’t be making fun of anyone’s predictions since I have UnitedHealth Group (UNH) on my Buy List. The stock has gotten clobbered all year. Still, I’m a bit ahead of the market because I’ve diversified my Buy List. I love Nicholas Financial (NICK) and I bought some more last week. I have no idea why the stock is so low. All I know is that it is. I don’t know when it will go closer to its true value. It could be one day or one year. Or it could fall off a cliff. I don’t know, but I’ve loaded up my Buy List with enough stocks like NICK to bend the odds in my favor.
Today, Sohu.com (SOHU) made news because it reported amazing earnings results. Yet the stock is down today. That may not make a lot of sense, but that’s how the market can act in the near-term. This is a good time to revisit my investing philosophy from the FAQ page:

What’s your investing philosophy?
My investing philosophy is very simple: Investors ought to buy and hold great companies. It doesn’t get more complicated than that. Avoid trading in and out of stocks, and be well-diversified. Investors should own at least 12 stocks, and have a goal of owning 20.
Be prepared for bear markets. A lousy market can strike at any time without warning. All stocks go down. It doesn’t mean the stock is broken. Stocks are volatile by nature. That’s the price you pay for superior returns. If you can ride out the bad times, you’ll be rewarded. If you can’t bear to see your portfolio drop by 50%, do not invest in the stock market.