• Indexed
    Posted by on February 28th, 2008 at 4:35 pm

    Jessica Hagy’s Indexed blog is very cute. She has a book out as well.
    (Hat Tip: Barry Ritholtz)

  • More Lousy GDP Numbers
    Posted by on February 28th, 2008 at 11:15 am

    The revised GDP report came out today and it showed 0.6% growth for the fourth quarter, which was the same as the initial report.

    “The first quarter will be ugly,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “The strength of exports is what would keep us out of a recession if we don’t go into one.”
    The report, combined with figures today showing claims for unemployment insurance jumped last week, reinforced traders’ expectations that the Federal Reserve will cut interest rates again. Investors see a 100 percent chance of at least a half- point reduction in the benchmark rate to 2.5 percent by the end of the next meeting on March 18. Odds of a three-quarter point cut rose to 36 percent, from 10 percent.
    Fed Chairman Ben S. Bernanke, testifying to the Senate Banking Committee today, signaled he’s ready to lower interest rates again to sustain the expansion.
    The median estimate in a Bloomberg News survey of 74 economists was for a 0.8 percent increase in GDP.

    This was one of the smallest revisions I’m aware of. The GDP number was revised lower by 0.0025%.
    Here’s a look at GDP growth based on a trailing three-quarter basis. I don’t know why, but that often seems to be useful time frame.
    image618.png

  • Bernanke Warns
    Posted by on February 27th, 2008 at 2:37 pm

    My favorite headline is back in the news today.
    Fed’s Bernanke warns of more economic trouble
    Bernanke Warns of Worsening Economy
    Bernanke warns of sluggish US growth
    Europe shares drop as Bernanke warns on writedowns
    Bernanke warns of sluggish growth
    Bernanke Warns Economy Worsening
    Here are some previous warnings.
    Bernanke Warns on US Housing, Economy
    Bernanke warns stock investors
    Bernanke warns against ad hoc regulation of derivatives
    Bernanke warns of economic ‘drag’
    Bernanke Warns of Possible ‘Crisis’ From Budget Gap
    Bernanke warns of worse to come in subprime fallout
    Bernanke Warns Inflation Remains A Significant Risk
    Bernanke warns of ‘vicious cycle’ in deficits
    Bernanke warns about economic isolationism
    Bernanke warns of falling economy
    Bernanke warns action needed soon on budget
    Bernanke warns US about burden of ageing population
    Bernanke Warns Of Growing Inequality
    Bernanke warns against protectionism
    Greenspan home robbed

  • The 90-Day Treasury Is Below 2%
    Posted by on February 27th, 2008 at 2:34 pm

    Ben’s testimony worked! The yield on the 90-day T-Bill has slipped below 2% again. Six months ago, the yield was close to 5%.

  • RIP: William F. Buckley
    Posted by on February 27th, 2008 at 11:48 am

    WFB2578.jpg
    From the New York Times:

    William F. Buckley Jr., who marshaled polysyllabic exuberance, famously arched eyebrows and a refined, perspicacious mind to elevate conservatism to the center of American political discourse, died Wednesday at his home in Stamford, Conn.
    Readers’ Comments
    Mr Buckley, 82, suffered from diabetes and emphysema, his son Christopher said, although the exact cause of death was not immediately known. He was found at his desk in the study of his home, his son said. “He might have been working on a column,” Mr. Buckley said.
    Mr. Buckley’s winningly capricious personality, replete with ten-dollar words and a darting tongue writers loved to compare with an anteater’s, hosted one of television’s longest-running programs, “Firing Line,” and founded and shepherded the influential conservative magazine, “National Review.”
    He also found time to write 45 books, ranging from sailing odysseys to spy novels to celebrations of his own dashing daily life, and edit five more. Two more books, one a political novel, and the other a history of the magazine called “Cancel Your Own Goddam Subscription” are scheduled to be published in 2007.
    The more than 4.5 million words of his 5,600 biweekly newspaper columns, “On the Right,” would fill 45 more medium-sized books.

    My favorite Buckleyism came in the letters section of the National Review. A woman wrote in to say that she was fed up — she could no longer stand Buckley’s use of big words and Latin phrases. She said that by the time she finished one of his columns, she didn’t know if he was “for or against.”
    Buckley wrote: “Madam, I am against. Sincerely – WFB”
    In a more civilized time, here’s Buckley threatening to punch Gore Vidal.

  • The Dollar Falls to $1.50 Against the Euro
    Posted by on February 27th, 2008 at 10:08 am

    Ben Bernanke is speaking again today on Capitol Hill. This is the start of his big semi-annual testimony before the House and Senate.
    I’ve gone to the previous few hearings (even snagging the seat right behind Ben), but honestly, it’s not that interesting in person. The room is almost completely empty, and the questions from members of Congress are a bit embarrassing.
    Yesterday, the U.S. dollar, for the first time, traded below $1.50 to the Euro.

    The U.S. currency slumped against 15 of the 16 most-active counterparts after Fed Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of slower economic growth pose a “greater threat” than inflation.
    Kohn’s comment “confirmed the Fed will keep cutting interest rates,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s biggest currency trader. “That brought more downward pressure on the dollar.”
    The dollar fell to $1.5047 per euro before trading at $1.5017 at 7:47 a.m. in Tokyo from $1.4979 yesterday in late New York. The U.S. currency traded at 107.24 yen, following a 0.7 percent decline yesterday.
    Boyton forecasts a dollar drop to $1.55 per euro in the next three months. He’s more bearish than the consensus. The dollar will rebound to $1.48 per euro by the end of March and to $1.40 by year-end, according to the median forecast in a Bloomberg News survey of 41 analysts.
    The U.S. currency has lost about a quarter of its value in the past five years, according to the Fed’s U.S. Trade Weighted Major Currency Dollar index, which comprises seven currencies of U.S. trading partners. The weaker dollar has made U.S. goods cheaper abroad, boosting exports to a record and shrinking the nation’s trade deficit last year for the first time since 2001.

    Here’s Bernanke’s entire testimony. This is a sample:

    As part of its ongoing commitment to improving the accountability and public understanding of monetary policy making, the Federal Open Market Committee (FOMC) recently increased the frequency and expanded the content of the economic projections made by Federal Reserve Board members and Reserve Bank presidents and released to the public. The latest economic projections, which were submitted in conjunction with the FOMC meeting at the end of January and which are based on each participant’s assessment of appropriate monetary policy, show that real GDP was expected to grow only sluggishly in the next few quarters and that the unemployment rate was seen as likely to increase somewhat. In particular, the central tendency of the projections was for real GDP to grow between 1.3 percent and 2.0 percent in 2008, down from 2-1/2 percent to 2-3/4 percent projected in our report last July. FOMC participants’ projections for the unemployment rate in the fourth quarter of 2008 have a central tendency of 5.2 percent to 5.3 percent, up from the level of about 4-3/4 percent projected last July for the same period. The downgrade in our projections for economic activity in 2008 since our report last July reflects the effects of the financial turmoil on real activity and a housing contraction that has been more severe than previously expected. By 2010, our most recent projections show output growth picking up to rates close to or a little above its longer-term trend and the unemployment rate edging lower; the improvement reflects the effects of policy stimulus and an anticipated moderation of the contraction in housing and the strains in financial and credit markets. The incoming information since our January meeting continues to suggest sluggish economic activity in the near term.

  • Donaldson Raises Forecasts Again
    Posted by on February 26th, 2008 at 10:32 am

    Donaldson (DCI) reported earnings yesterday of 42 cents a share which was in line with forecasts. I was surprised to see the stock trading lower in the after-hours market yesterday, but that seems to have had little effect on DCI’s open today. The shares rallied over 3% yesterday and are so far trading modestly higher today.
    I thought it was a pretty good quarter. This was Donaldson’s second quarter of their fiscal year, so for the first six months, the company’s earnings-per-share is 17% higher than last year. Sales are up 14%. This is from the company’s press release:

    “Our globally-diversified portfolio of filtration businesses provided the foundation to deliver another record quarter of sales and earnings,” said Bill Cook, Chairman, President and CEO. “Strength in our Engine Products businesses internationally plus continued growth in our international Industrial Products businesses, including Industrial Filtration Solutions and Special Applications Products, helped offset some of our weaker NAFTA markets.”
    “Overall, we are on track with our business plan for the balance of fiscal 2008. We see sufficient strength across our Engine Products and Industrial Products businesses to increase our sales forecast for both segments and anticipate achieving our first $2 billion revenue year. In addition, we remain confident that we will deliver our 19th consecutive year of record earnings.”

    The company also said that it expects 2008 EPS of $2 to $2.10 a share. That’s higher than what they first projected in November when they forecast $1.97 to $2.07. This is the second time Donaldson has increased its projection. In September, the company expected EPS of $1.92 to $2.01.
    Here’s a look at the stock (black line, left scale) and EPS (gold line, right scale).
    image616.png

  • Losing $100 Million a Day
    Posted by on February 26th, 2008 at 9:49 am

    The Wall Street Journal reports that traders at Citigroup lost over $100 million a day on 15 separate occasions last year.

    “I think that the managements of many of the financial institutions simply didn’t have a clue of what was going on,” James D. Wolfensohn, a former World Bank president who now holds the title of “senior adviser” at Citigroup, said Sunday evening at a public event in Manhattan.
    Mr. Wolfensohn said in an interview yesterday he was referring generally to Wall Street firms, not to Citigroup in particular.
    Citigroup’s latest disclosures come as analysts and investors are clamoring for Vikram Pandit, Citigroup’s new chief executive, to unveil his widely anticipated turnaround plan. Mr. Pandit has been mum, but tonight he is hosting 15 to 20 Wall Street analysts in a private “meet and greet” cocktail hour at Citigroup headquarters. The gathering has irked some investors, who weren’t invited and who note that Citigroup hasn’t yet scheduled a public investor day since Mr. Pandit took over.
    After sifting through the annual report, Oppenheimer analyst Meredith Whitney slashed her 2008 earnings estimate on Citigroup by more than 70% to 75 cents a share, cautioning that even the lowered projection “could still prove optimistic.” She said the bank’s suffering share price could fall below $16 — or to about 70% of its book value. That level was last seen “during the last credit cycle of 1990-1991,” she added.

    This seems to be a classic case of not knowing what you don’t know. Citigroup’s last annual report acknowledged that it’s holding about $20 billion worth of securities that are tied directly or indirectly to global real estate. That’s all it says. No details or nothing.
    The company’s book value is $22.74 a share. Last May, the stock was going for over $55 a share.

  • The End of the Small-Cap Cycle?
    Posted by on February 25th, 2008 at 3:04 pm

    One of the market anomalies that can’t be easily explained by the Efficient Market Hypothesis is the out-performance of small-cap stocks.
    Still, I’m not much of a believer in the small-cap effect. The data is clear that it exists, but I suspect that much of the out-performance is simply a matter of liquidity. Also, the out-performance is very small and highly volatile. Small-cap stocks, as a whole, can lag the overall market for many years. In fact, the small-cap cycle has historically run about five to seven years. That’s a bit long to base a trading strategy on.
    The graph below is a good proxy for the small-cap cycle; it shows the Russell 2000 divided by the S&P 500.
    image615.png
    The small-cap cycle peaked on March 25, 1994, after which, small-cap issues declined until April 8, 1999. Notice that this happened while the rest of the market was still climbing.
    From that low, small-caps have had a great run, but that run could be over. The ratio hasn’t been able to surpass its high reached on April 19, 2006. This has now been almost two years. Of course, we never exactly know when a cycle has reached a turning point, but it’s perfectly obvious in hindsight.
    I suspect that the cycle has turned in favor of large-caps. A major reason is that larger stocks offer more safety and that’s definitely on investors’ minds. Naturally, some of the worst abusers of the sub-prime mess have been large-cap stocks. Or at least, they used to be large-cap stocks.

  • More on Momentum Stocks
    Posted by on February 25th, 2008 at 11:56 am

    I’m afraid I’m becoming a momentum stock bore on this site, but it’s a subject that continually amazes me. The London Business School has done some more research:

    “Momentum, or the tendency for stock returns to trend in the same direction, is a major puzzle,” the LBS three comment.
    “In well-functioning markets, it should not be possible to make money from the naïve strategy of simply buying winners and selling losers. Yet there is extensive evidence that momentum profits have been large and pervasive”.
    The numbers certainly back up the claim. In one of LBS’s studies, which analysed all fully-listed stocks between 1955 and 2007, the shares which had outperformed the market most in the previous 12 months went on to generate an annualised return of 18.3pc while the market’s worst laggards rose by 6.8pc on average.
    Over that period the market as a whole rose by 13.5pc a year.
    Arguably, those figures, impressive as they are, are conservative. That’s because the portfolios created were weighted by company size (like FTSE’s indices). Using an equally weighted portfolio in which smaller companies have the same impact as bigger ones resulted in a 25.6pc rise for last year’s winners and a 12.2pc rise for the losers.
    To make sure that the results were not just a by-product of this smaller company effect, Dimson et al re-ran the study using only the 100 biggest companies.
    Even restricting the universe to the blue-chips, the method worked well.
    The previous year’s out-performers went on to give a 16.5pc return while the losers rose by 8.9pc.