Jeremy Siegel’s Outlook for 2008
Posted by Eddy Elfenbein on December 17th, 2007 at 1:48 pm

Jeremy Siegel is always worth listening to. Here’s part of his outlook for next year:

Economic Growth
But the impact of the crisis on the psychology of consumers and business will leave their mark. I predict that GDP will slow in the first half of next year to between 1% and 2%, and rise in the second half, as risk premiums come down and the cost of capital falls. Overall I expect 1.5% to 2.5% GDP growth in 2008 and I believe the economy will avoid a recession.
Stocks and Bonds
I think the stock market will have another winning year in 2008. For every percentage point that stock returns fall below 8% (my prediction) this year, they should exceed 8% next year (meaning, for example, if stocks gain 6% this year, they should finish 2008 up 10%).
And I believe that financial stocks, which have plummeted 18% so far this year, will outperform the S&P 500 Index next year as the credit crisis fades.
Interest Rates
What does all this mean for interest rates? The Fed cut the Fed funds rate to 4.25% on December 11, but it will have to do more in the coming months. I believe that the Fed will get rates down to 3.5%, before ratcheting them upward in the second half of next year.
Treasuries did well in 2007, as interest rates on top-rated securities plunged in light of the credit crisis. But as the risk spreads narrow, money will flow away from government bonds and their interest rates will rise. I recommend investors cash in governments and top rated corporate bonds now – you got a nice ride that you won’t get next year.

Why the Dollar Might Rally
Posted by Eddy Elfenbein on December 17th, 2007 at 11:44 am

From today’s WSJ:

The belief that the Fed would be forced to sharply reduce interest rates to stimulate economic growth has weighed heavily on the dollar. That is because lower interest rates reduce returns on fixed-income holdings in the currency, making the dollar less attractive to investors.
Instead, investors are focusing on the possibility that further interest-rate cuts might not unfold as expected. Currency strategists say there is a strong belief the Fed will ultimately work to keep prices in line.
One recent challenge to the gloomy view on the economy came Thursday, when data showed retail sales in November were more resilient than predicted. The figures suggested “we don’t really have a freefall in the U.S. economy,” says Adnan Akant, a currency specialist at money manager Fischer Francis Trees & Watts. “It’s slowing down but not falling out of bed.”
Then on Friday, government data showed inflation last month was stronger than expected. That generated a fresh wave of dollar buying, pushing the greenback up about 1.4% against the euro in a day. Since late November, when the dollar weakened to a record low versus the euro, it has strengthened about 3%. Still, the dollar remains 8.5% weaker against the euro since the start of the year. Late Friday in New York, one euro fetched $1.4423.
The speed of Friday’s move startled some investors. “Today has been kind of shocking for much of the market,” said John Taylor, head of FX Concepts, a hedge fund that specializes in currency trading. Mr. Taylor says his firm has started shifting its positions from bets that the dollar will weaken to wagers that it will strengthen in coming weeks.
“One, the Fed is now scared of inflation, and two, the numbers keep looking pretty good,” he says. The dollar “has shown more vigor than we thought.”

Wall Strip Visits Facebook
Posted by Eddy Elfenbein on December 17th, 2007 at 11:02 am

Eugene Fama on Momentum Stock
Posted by Eddy Elfenbein on December 16th, 2007 at 9:41 pm

From The Region:

Region: Let me ask you about momentum. You’ve said that it’s the strongest challenge to the hypothesis of market efficiency. Can you elaborate on that?
Fama: There’s evidence that if you rank stocks every month based on their last year of returns, the very extreme winners tend to win for a few more months and the losers tend to lose for a few more months.
That seems to be true in U.S. data beginning around 1950. We don’t have foreign data going back that far, but it tends to be there in major foreign markets except for Japan. It doesn’t tend to be there in the U.S. data for the ’30s and ’40s. So there’s some chance that it is just a chance result. There are so many people looking for anomalies in the data, that may just be the biggest one that they’ve found. Maybe it won’t be there in the future. We don’t know yet.
Region: Is there an opportunity to make money there?
Fama: Well, there isn’t much of an opportunity to make money, because as I said, you do this every month. And if you rank and trade stocks every month, the turnover of these portfolios is enormous.
Region: The costs will eat up the profits.
Fama: Right. The costs will kill you. So the people who have written these papers have said, basically, “This is interesting, but forget about trading on it.” But it’s still interesting.

Bernice Johnson Reagon
Posted by Eddy Elfenbein on December 14th, 2007 at 4:25 pm

It’s Friday and the market is closed. I am so outta here. Let’s start the weekend with the great Bernice Johnson Reagon.

Why Bears Always Have the Best Arguments
Posted by Eddy Elfenbein on December 14th, 2007 at 10:59 am

Paul Kedrosky wonders why bears always have the best (or at least, most compeling) arguments:

Even though the stock market has rightly been called the triumph of the optimists, with bulls stomping bears over and over for one hundred years, stock market bears not only haven’t gone away, but they generally have the most compelling arguments. Their points seem so damn plausible, level-headed, empirical, and reasonable, while bulls come across as starry-eyed idealists.
Let’s consider some reasons why that might be:
1. Things fail more often than they succeed. Pace availability heuristics, it is easier to think of examples of things failing than succeeding, so it gives bears more fodder.
2. Bears have the past, and bulls have the future. Bears get to argue from data, while bulls argue from what might happen.
3. Apocalypse is seductive. There is something about the thought of imminent mass ruin that really gets people’s attention, as has happened with the overdone coverage (hello, Matt Drudge!) of the current credit problems in the market.
4. There is a Puritanical urge in America wherein people want to believe they (or better yet, their neighbors) will be punished for their prior success, etc., so it stands to reason that stocks will punish people after they make them a lot of money.
5. Bears have been generally wrong for so long that they have to know how to tell better stories.

I agree, especially with points three and four. I’ve also noticed that a wildly bullish forecast that’s wrong will be mocked far more than a wildly bearish forecast. I call this the Elfenbein Asymmetrical Railing of a Lousy Forecast Syndrome.
Just a few days ago, Paul Krugman made fun of James Glassman being appointed head of our public diplomacy efforts. However, Krugman was wildly wrong about the market being a bubble in 2003. That call hasn’t seemed to tarnish his reputation. Robert Shiller’s reputation as a market sage is, in my opinion, completely unwarranted.
Bearish arguments are usually more interesting because they focus on the causes and the effect is left to each person’s imagination. It’s like in a horror movie where you rarely see the scary guy.
One day I hope to write a book called, “Alarmism and How It Threatens Your Children.”

Inflation’s Impact on the Stock Market
Posted by Eddy Elfenbein on December 14th, 2007 at 10:26 am

So how does inflation affect the market? Well, it’s not good. Inflation is a tax on capital. It’s a way for the government to get your money without asking. In fact, the only thing worse than inflation is deflation.
I took 80 years of monthly stock market return and ranked them by inflation (lowest to highest). Then I wanted to see the cumulative return as the rate of inflation increased. Here are the results.

At the far left are the most deflationary months, and the far right are the most inflationary. The blue line shows the after-inflation cumulative return of the market.
As you can see, deflation has a negative impact on equity prices. The market falls until about the 70th data point which corresponds with an annualized deflation rate of 5.5%. The vast majority of those months were in the 1930s.
Stocks rise very steadily until it hits a brick wall around data point 660. That corresponds with an inflation rate of 5.1%.

CPI Surge
Posted by Eddy Elfenbein on December 14th, 2007 at 9:25 am

The government just reported that consumer inflation surged 0.8% last month. That’s the fastest rate in more than two years. The year-over-year rate is now 4.31%, which is slightly more than where the Fed is. Still, I’m an inflation skeptic. The government’s numbers most certainly understate the rate of inflation, but I’m only concerned if inflation seems to be getting out of hand.
The core rate was just 0.3% last month. Yes, yes, I know the core rate comes in for a lot of criticism, but I think it’s important to watch. For nearly twelve straight years, the year-over-year core rate has never been greater than 3% or less than 1%. Also, long-term interest rates are still quite low.

In fact, more Fed rate cuts could be on the way. The rate on short-term Treasury bills are still far below the Fed Funds rate. Yesterday, the T-bill rate closed at 2.78%, the lowest since the August panic. The Fed is about 140 basis points above the market.

Bill Miller on Risk
Posted by Eddy Elfenbein on December 13th, 2007 at 3:03 pm

Via B-Ritz:

You also know that rising stock prices mean lower future rates of return and falling stock prices mean higher rates of return. So I was much happier in the summer of ’02 when you buy everything on sale than I was in the Spring of 2000 when a lot of things were super-expensive.
My view is that the evidence is overwhelming that most people are too risk averse. And that therefore they should be taking a lot more risk than they feel like is right.
The problem is that real risk and perceived risk are two different things. And that’s where people get into trouble, because they perceive risk to be high when prices are low, and they perceive risk to be low when prices are high. That’s the psychological problem that most people have.

Buy List Update
Posted by Eddy Elfenbein on December 13th, 2007 at 12:34 pm

Good news from Jos. A Bank Clothiers (JOSB). The company just reported earnings of 38 cents a share, which is a big jump from the 30 cents it made in the same quarter a year ago. The Street was looking for earnings of 33 cents a share. Sales rose 10% to $131.3 million.
This stock has had a bizarre year. For the first half of the year, it charged out of the gate and gave us a quick 57% profit. It then took it all back and we’re now in the red. But I still like JOSB and the numbers look good.
Late yesterday, Danaher (DHR) reaffirmed its Q4 outlook for EPS of $1.09 to $1.14. Sometimes investors ignore these “reaffirm” stories. I don’t. It’s one thing to say earnings will be good, but it’s nice to see a company follow-up on their forecast, even if it’s just reaffirming. DHR expects 2008 EPS to range between $4.30 to $4.40.