Sign of the Times
Posted by Eddy Elfenbein on November 15th, 2007 at 6:32 pm

The dollar’s prestige continues to suffer:

In a video for the movie “American Gangster,” hip-hop maestro Jay-Z thumbs through a wad of 500-euro notes on a night of cruising through the concrete canyons of New York, a city where the euro isn’t legal tender.

The Cyclical Bear Market
Posted by Eddy Elfenbein on November 15th, 2007 at 4:31 pm

Over the summer, I had several posts about how the outperformance of cyclical stocks was soon going to end. I particularly looked at how the Morgan Stanley Cyclical Index (^CYC) was doing relative to the S&P 500 (^SPX)
Here’s part of a column I wrote for Real Money five months ago.

The boilermaker index has been on fire recently. The CYC is up over 22% this year and up over 40% in the past 11 months. Going back to the March 2003 low, the CYC has jumped 180%, which doubles the S&P 500. Not too shabby.
But the best has come recently.
This year, the CYC has already set an amazing 40 new highs. In April it burst through 1000, and it’s quickly closing in on 1100. Like all good rallies, however, this must come to an end, and I’m afraid it won’t be pretty.
The important thing to remember is that cyclical stocks are…well, cyclical. They move up, and they move down. Personally, I like the “up” part the best. Historically, each cycle has lasted around five to seven years, so the clock is running out on this latest cycle, which began in September 2000 just as the tech sector was returning from its romp through Bubblestan.
Another important fact to remember is that cyclicals have a nice habit of outperforming the stock market when the market itself is doing well but underperforming when stocks take a beating.

The end finally came on July 19. Since then, the CYC is down -13.4% while the S&P 500 is down just -6.6%.

I think the underperformance will continue for a few years.

My Favorite Links
Posted by Eddy Elfenbein on November 15th, 2007 at 2:39 pm

I don’t do this often enough, but please visit my links page to read some of my favorite stock bloggers. Here are some blogs I’ve been reading lately:

Modest Inflation Last Month
Posted by Eddy Elfenbein on November 15th, 2007 at 11:55 am

The Wall Street Journal reports:

The consumer price index rose 0.3% in October, the Labor Department said Thursday, matching September’s increase. The core CPI, which excludes volatile food and energy prices, advanced 0.2% for a fifth-straight month. The headline and core gains matched Wall Street expectations, according to a Dow Jones Newswires survey.
Unrounded, the CPI rose 0.293% last month. The core CPI advanced 0.159% unrounded.
Consumer prices were up 3.5% from a year ago. The core CPI was up 2.2% compared to the same month a year ago, up from 2.1% in September.
Still, that remains near the 2% top end of the Federal Reserve’s assumed comfort zone for annual core inflation. The Fed’s preferred gauge, the core price index for personal consumption expenditures, is within that range at 1.8% annual growth through September.

The government’s inflation data comes in for a lot of well-deserved ribbing. Still, the overall trend of inflation is tame. The United States is in no danger of slipping into hyper-inflation.
Even after high inflation was defeated in the early 1980s, the core CPI rate was often over 5% and that didn’t impede growth. The year-over-year core rate hasn’t gone over 3% or under 1% in over a decade.

The Yield Curve Widens
Posted by Eddy Elfenbein on November 14th, 2007 at 12:28 pm

Eighteen months ago, the long end of the yield curve was almost perfectly flat. Today, some daylight can finally be seen between the long-end yields. Even though the 30-year yield isn’t to new lows, the five-year yield certainly is.

Attention Math Nerds
Posted by Eddy Elfenbein on November 13th, 2007 at 1:58 pm

Here’s a spreadsheet of some multiple regressions I ran.
I looked at the daily changes of the 10 S&P industry groups against each other. The regressions are the columns not the rows. (I’m afraid I’m out of my depth mathematically, so if anything looks off, please let me know.)
Healthcare and Staples seem to be strongly related. I like to think of them as subsets of one large group called Defensives. Also, Energy and Materials are strongly related. I was surprised to see such a strong connection between Financials and Consumer Discretionary stocks.

Fear the Yen
Posted by Eddy Elfenbein on November 13th, 2007 at 12:27 pm

Here are some stunning stats from Ken Fisher in yesterday’s Financial Times:

Forget the falling dollar. What we should fear is a rising yen. The most amazing statistic you never heard is: the year-to-date daily correlation between ups and downs in the global stock market versus spreads between the yen and the euro is 93 per cent. That is beyond eye-popping.

I had no idea it was that strong:

The 2007 year-to-date daily correlation coefficient between changes in the yen/euro spread and the MSCI World Index – best reflecting the total developed world stock market – is 0.93. For the S&P 500, it is 0.89, for the FTSE 100, 0.86, and for Germany’s DAX, 0.87. All higher than most people can fathom.
The correlation of the MSCI World to the yen/sterling spread is lower, at 0.75, but is still sky-high. To the Australian dollar it is 0.86 and to the Canadian dollar 0.81. All breathtakingly high. Only to the U.S. dollar, which everyone fears, is it materially lower at 0.37.

Yay Me!
Posted by Eddy Elfenbein on November 13th, 2007 at 12:09 pm

This is a bit scary of me to say, but the Buy List has been doing incredibly well lately. We’ve beaten the S&P 500 for 14 of the last 17 days. Now I promise not to get too cocky because I’m still trailing the market for the year. In fact, just mentioning this makes me think that I’ll jinx it.
Last week, I noted that the Buy List had its best day relative to the S&P 500 for the year. It was only the third time we’ve beaten the market by over 1% in a day. Well yesterday was the best day ever against the S&P 500. We were up 0.16% while the S&P 500 was down -1.00%.
I’m stunned that these days are coming so close together. I build the Buy List to roughly conform to the overall market, but just do a little bit better (hopefully). Our daily correlation usually runs about 85%. Since October 18, the S&P 500 has dropped -6.55% while we’ve dropped just -1.54%. For the year, we still trail the S&P 500, 1.47% to 0.20%. But we’ve closed the gap enormously.
The big story yesterday was the fall in energy and materials stocks. That’s the major missing piece on the Buy List, so whenever those sectors trail, we tend to lead the market. Yesterday was a strange day because the dollar has its best day in over a year. Also, the Dow fell below 13,000 but its fall, in percentage terms, was half of the S&P 500. Outside of a few stocks, the market had a blah day.
Two small things to pass on. SEI Investments (SEIC) made news when it said it would provide financial guarantees for some of its money market funds. Also, Sysco (SYY) said it will raise its quarterly dividend by 15.8% to 22 cents a share.

Still a Bull
Posted by Eddy Elfenbein on November 13th, 2007 at 11:13 am

He’s a chart of why I still like the stock market. The black line is the S&P 500 and it follows the left scale. The yellow line is its earnings and it follows the right scale. I scaled it at 16.66 to 1 which has been roughly the average P/E ratio for the past few months.
The part of the yellow line in the future is obviously projections. You can see that the market is anticipated to recover from a modest dent in earnings growth.

Breakfast at Wall Strip
Posted by Eddy Elfenbein on November 13th, 2007 at 9:12 am

Lindsay does a great Audrey Hepburn. Next, I hope they do My Fair Isaac. (“I could have bouuuught all night…”)