The S&P 500 and Its Earnings
Posted by Eddy Elfenbein on February 12th, 2008 at 1:15 pm

Here’s a look at the S&P 500:

The chart follows a logarithmic scale. (If I were smarter, I’d know how to make a logarithmic chart in Excel where I could zoom in on my high and low points. Since I can’t, this will have to do.)
The black line is the S&P 500 and it follows the left scale. The blue line is earnings and it follows the right scale. Where the lines intersect is a P/E ratio of 15.85 (which is 10^1.2).
In my opinion, this really wasn’t a valuation bubble where valuations overshot prices. Instead, the fundamentals tumbled beneath prices.

The Porn IPO
Posted by Eddy Elfenbein on February 12th, 2008 at 9:46 am

From the Guardian:

The stock market is to provide its first listing for a pornography publishing group as the adult magazines empire founded by Express owner Richard Desmond next week seeks a listing on the junior Plus Market.
Interactive Publishing, a shell group, is floating at the same time as agreeing a reverse takeover deal with Trojan Publishing, a private business that has built up a large portfolio of top-shelf titles such as Asian Babes, Forty Plus and New Talent.
Before buying rights to about 30 former Desmond titles last year, Trojan acquired about a dozen mostly adult magazines from British Virgin Islands-registered AML Publishing Trust in June 2006. A month later it signed a deal with Penthouse, licensing rights to Forum, an adult magazine for which Alastair Campbell once wrote a column entitled Riviera Gigolo.

Gilead on Wall Strip
Posted by Eddy Elfenbein on February 11th, 2008 at 3:37 pm

Today, Julie looks at Gilead (GILD). What I find amazing about this company is that it’s able to maintain 40% net profit margins. That’s crazy. I think if you go any higher, you’re officially in the mafia.

Do Stock Prices Have Memory?
Posted by Eddy Elfenbein on February 11th, 2008 at 1:44 pm

Felix Salmon recently had a post about a bet between Justin Wolfers and Barry Ritholtz on the stock market and trends. Barry took the pro-trend view while Justin stood for random walks. (For the record, Justin won $20 from Barry.)

There’s an emerging amount of literature on this topic and it’s starting to point toward the trend camp. As strange as this may sound, stock prices seem to have a bit of “memory.” One day’s move has an impact on the next day’s move. It’s not big, but it’s there. If the market followed a random walk, this shouldn’t happen. In my mind, this is another chink in the armor of EMH that can’t be easily dismissed.

Here’s a good example of what I mean. Plus, I guarantee you that this is one of freakiest charts you’ll see all day:

Ok, some explanation is needed. I took every daily change of the S&P 500 from 1950 to today and ranked them, left to right, going from worst to best. The blue line shows the cumulative gain of the next day’s market.

As you can see, if you stayed in after bad days, the market kept going down. After flat days, the market remained somewhat flattish. And after good days, the market continued to rally. Whatever one day’s trend was, it followed through to the next day.

The blue crosses 1.0 at a point that corresponds with a daily gain of 0.64%. This means that the market’s entire gain has come on days following a 0.64% up move. The rest of the time (over 80%), the market is net flat. Half the market’s gain came on day’s following 3.2% up moves. On average, that happens slightly less than once a year.

The black line shows the market’s behavior two days later and it’s much closer to what we would expect, a growing line without any strong discernable trend. Actually, to the extent there is a trend, it seems to be a small reversal from what the market did two days before (notice the strong rise early on followed by a weaker rally). Roughly speaking, two days after the market drops more than 0.8%, the market rises at an annualized rate of nearly 28%.

If the market is trend sensitive, then these reversals are crucial. They appear to happen after extreme moves.

W.R. Berkley’s Earnings
Posted by Eddy Elfenbein on February 11th, 2008 at 12:56 pm

W.R. Berkley (BER) just reported its fourth-quarter earnings. For the last three months of the year, net income dropped to from $198.1 million to $184.1 million. On a per-share basis, that’s a fall from 98 cents to 97 cents. With insurance companies, it’s better to look at operating results. Here, BER saw its number drop from $193.7 million to $183.2 million, which is actually a penny per share increase to 97 cents a share. That beat Wall Street’s estimate by two cents a share.
For the full year, Berkley’s operating income was $3.73 per share which was a nice increase over the $3.46 per share from 2006. Wall Street currently sees BER earnings $3.86 for 2008 which is a pretty small increase. Still, it means that the shares are going for less than eight times this year’s earnings. This is a good company going for a good price.

Changes to the Dow
Posted by Eddy Elfenbein on February 11th, 2008 at 9:09 am

The gatekeepers of the Dow Jones Industrial Average (^DJI) have decided to boot Altria (MO) and Honeywell (HON) from the index. The two new additions will be Bank of America (BAC) and Chevron (CHV).
Chevron was in the index from 1930 to 1999, though for much of the time it was known as Standard Oil of California. Honeywell was first included in the index in 1925. Altria was added in 1985. Personally, I would get rid of Alcoa (AA) and General Motors (GM).
Here’s a look at all the changes to the Dow going back to the original rail index.
The Dow is often criticized for being unrepresentative of the market. That’s true and I prefer to the use the S&P 500 (^GSPC) which is market-weighted. Still, the Dow isn’t that bad. The index that should be ignored is the Nasdaq (^IXIC). That index is dominated by a few big names that are highly correlated to each other and little else.
Being added to the Dow isn’t much of a buy signal. Here’s what happened since AIG (AIG), Pfizer (PFE) and Verizon (VZ) were added in 2004:

Here’s what happened when Microsoft (MSFT), Intel (INTC), SBC (SBC) and Home Depot (HD) were added in 1999:

The Dow is zero for the last seven.

Calling All Technical Analysts
Posted by Eddy Elfenbein on February 8th, 2008 at 2:21 pm

Is this a good chart?

Read more…

Department of Strained Metaphors
Posted by Eddy Elfenbein on February 8th, 2008 at 1:26 pm

The goal of monetary is famously described as taking away the punchbowl once the party gets started. Dallas Fed president Richard Fisher explains his dissenting vote:

In the current financial-market turmoil, credit markets have been cutting back on lending to important segments of the nation’s economy. As a result, “instead of taking the punchbowl away, the Fed is now faced with the task of replenishing the punch,” Dallas Fed president Richard Fisher said Thursday.
Monetary policy acts with a lag, much like “good single malt whisky or perhaps truly great tequila,” Fisher told an audience in Mexico City.
“It takes time before you feel its full effect,” he explained.
“My dissenting vote last week was simply a difference of opinion about how far and how fast we might re-spike the monetary punchbowl,” Fisher said.

Yes, but cutting 125 points in eight days is less like tequila and closer to doing lines of blow off the hooker’s ass.

The $72 Billion Social-Climber
Posted by Eddy Elfenbein on February 7th, 2008 at 12:30 pm

If you get a chance, I recommend Irwin M. Stelzer’s article on Jérôme Kerviel and Société Général. It’s a complex story and there’s more going on than appears. The scandal seems to have taken on a Tom Wolfe-like angle with socio-political dimensions as well.

Trading Is Like Sex and Drugs
Posted by Eddy Elfenbein on February 7th, 2008 at 12:15 pm

It’s official, we’re all trading junkies. The New York Times reports:

It is easy to dismiss Jérôme Kerviel, the rogue trader at Société Générale, as a fluke.
So here is a sobering thought for Wall Street: There may be a bit of Mr. Kerviel in all of us.
A small group of scientists, including some psychologists, say they are starting to discover what many Wall Street professionals have long suspected — that people are hard-wired for money. The human brain, these researchers say, responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them.

If trading is like sex, then think of Crossing Wall Street as your friend with benefits.