Today’s GDP Revision
Posted by Eddy Elfenbein on February 28th, 2007 at 10:19 am

The government updated its fourth-quarter GDP report today. Instead of growing by 3.5%, it turns out that the economy only grew by 2.2%. That’s the biggest revision in ten years. Still, if you look at it in the larger context, it’s not that big of a change.
Here, if you squint real hard, you might be able to make it out:

What’s interesting is that this is the third straight quarter of below-trend GDP growth. But it’s not that far below trend. From September 2003 to March 2006, the economy grew at annualized rate of 3.4%. For the last three quarters, it has averaged 2.2% growth. That’s slower growth, but there’s still no evidence of a recession.

Boo Hoo!
Posted by Eddy Elfenbein on February 28th, 2007 at 7:36 am

Oh, boo hoo, people! You think this is crash? Please, this ain’t no crash.
We’ve become so used to no volatility, we forgot what a normal market acts like. I’m sorry, but this was nothing compared to the olden days, say 1999. Yesterday may have been the worst day in four years, but going back ten years, it was ranks just twelfth. Twelfth, people!
Back then, we would have laughed at this. Four hundred points? Please, that was a lunch break. There were three days worse than this in August ‘98 alone.
Let’s see how bad the big bad bear is. For the year, the S&P 500 is now down 1.36%. OMG! Throw in dividends, and it’s down 1.05%. Are you heading for the hills now?
So what went wrong? I dunno. When in doubt, I blame the Fed. It’s easy to do, and there’s always a chance someone accidentally told the truth. But this time, we have two Fed chairmen in play, old and new, Benilocks and the Maestro.
The former Fed chair is the more likely suspect. He was in the Far East, and according to the AP, Greenspeak was in top form:

Former U.S. Federal Reserve Chairman Alan Greenspan warned Monday that the American economy might slip into recession by year’s end. . . .
“While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 . . . with some slowdown,” he said.
Greenspan said that while it would be “very precarious” to try to forecast that far into the future, he could not rule out the possibility of a recession late this year.

Perhaps there’s a chance that the media could possibly use what some might believe is possibly the most provocative headline: “Greenspan Warns of Likely U.S. Recession.”
(H/T: BOTW)
All observers agreed that the trouble started in China. The market there fell by nearly 9%, which was the worst day there in a decade. OK, so what caused China to wobble?
According to Bloomberg:

Stocks fell yesterday after the State Council, China’s highest ruling body, approved a special task force to clamp down on illegal activities in the market. Investors were concerned the Chinese government would impose further measures as the National People’s Congress, China’s legislature, meets next week.

Let me get this right. My portfolio took a hit because of the Chinese National People’s Congress? Talk about globalization. First, the bird flue, now a special task force of the State Council. Now there’s a winning combo, discarded 19th century economic theory and 21st century securities regulation!
I’m sorry, but I can’t accept that some Communist bureaucrat is the reason for the loss of half-a-trillion dollars. What kind of connection does a company like Graco (GGG) have to Shanghai margin requirements? Outside the occasional takeout, I’m guessing it’s pretty slim.
Let’s look at the indexes for some clues. It wasn’t a size issue. The S&P 500 and Small-Cap 600 (^SML) were down nearly identical amounts (3.47% and 3.50%). But the Mid-Cap 400 (^MID) was only down 3.08%.
Nor was it a valuation issue. The Growth Index (^SGX) was down 3.49% and the Value Index (^SVX) was down 3.45%.
Here’s the most telling fact about yesterday: There were 4.24 billion shares traded on the NYSE; 4.19 billion was down volume, just 45 million was up volume. That wasn’t a typo, 45 million. Declining volume led advancing volume by more than 93-to-1. Declining issues led advancers by more than six-to-one.
This was no boat accident. And it wasn’t China either. It was a broad-based sell-off.

Today’s S&P 500
Posted by Eddy Elfenbein on February 27th, 2007 at 11:18 pm

Here’s a spreadsheet detailing the performance of every stock in the S&P 500 today.
Goldman Sachs (GS) fell 6.65%, making it the eighth-worst performing stock in the index today.
Pfizer‘s (PFE) dividend yield is now 4.61%, which is roughly equal to the 30-year Treasury bond (^TYX). Seven years ago, Pfizer yielded 1.4% while the 30-year T-bond yielded 6.2%.

CNBC from 2:59 to 3:04
Posted by Eddy Elfenbein on February 27th, 2007 at 8:38 pm

Watch as the CNBC crew reacts to the Dow’s plunge. Or rather, reacting to the NYSE’s computers catching up to the Dow’s plunge.

-416.02
Posted by Eddy Elfenbein on February 27th, 2007 at 6:21 pm

I’m currently writing to you from the ledge of the 87th Floor of the Crossing Wall Street Tower.
The good news is that this is a terrific view. The downside, of course, is the market today. The crackup yesterday in China has spread to the U.S. At one point, the Dow was off by 546 points. The Dow bounced off that level and finished 416 points lower.
The S&P 500 fell to 1399.04, a drop of 3.47%, which is the index’s worst day since March 24, 2004.
In about 30 seconds, the Dow lost over 200 points.

Notice how the big drop in the Dow wasn’t mirrored by the S&P 500.

Update: Dow Jones blames it on the computers. Humans apparently are not at fault. (Whew!)
The S&P 500 was down 3.47%, while our Buy List lost 3.19%. For the year, the S&P is down 1.36%, and the Buy List is down 0.28%.
One of the biggest changes today came from the CBOE Volatility Index (^VIX). Look at this jump:

Every Dow industry group fell today. Of the 500 stocks in the S&P 500, 498 closed lower. Only Radio Shack (RSH) and Questar (STR) rallied today. Cyclical stocks were especially hard hit. The Morgan Stanley Cyclical Index (^CYC) fell 3.86%.

My timing was impeccable. Five days ago, I wrote another defense of the bull. But as I look at today’s market, I really haven’t changed my mind. I was happy to see that gold fell and money went towards bonds. The 10-year Treasury (^TNX) is nearly at 4.5%. This tells us that money isn’t leaving the market, but it’s merely going to higher ground.

The Importance of Rounding
Posted by Eddy Elfenbein on February 27th, 2007 at 11:32 am

This abstract wants to look at the impact that numerical rounding used in economic reports has on the markets. This may yield some interesting results.
I’ve noticed that the initial press articles on some data points are often slightly off-key because, say, inflation didn’t rise by 0.2%–it really rose by 0.015%. Because they’re fairly low numbers, I think the phenomenon is most common with the unemployment and inflation reports.
I should add that there’s probably a grad paper to be written (pay attention finance ABDs!!) about the impact of rounding in EPS reporting. I’ll bet there are many companies that always seems to land on the decimal of “point five” every quarter (i.e., they earn 52.5 cents a share, or 18.5 cents a share).
Maybe the media could look into it. After all, we live in an era when reporters can win the Polk Award for bravely uncovering some fairly minor accounting misstatements.

Greenspan Warns Redux
Posted by Eddy Elfenbein on February 27th, 2007 at 9:46 am

Poor, Alan. He just can’t keep still these days. Now he’s causing trouble in China. The former Fed head spoke at a conference in Hong Kong. Naturally, no one could understand a word he said. Not that there’s an English-Chinese language barrier, but there’s a more difficult Greenspan-Coherence barrier.
In any event, his speech didn’t go over well. The Chinese stock market got slammed today. The Shanghai Composite Index fell 8.8%. That would be like the Dow losing over 1,000 points.
It’s the return of Greenspan Warns!

Stocks Fall As Greenspan Warns
Recession possible in 2007, Greenspan warns
Greenspan warns of likely U.S. recession
Greenspan Warns of Possible Recession

So is it possible or is it likely?
For more Greenspan Warns, see here, here and here.

Harley-Davidson Lowers Its 2007 Outlook
Posted by Eddy Elfenbein on February 27th, 2007 at 9:23 am

Due to the strike, Harley-Davidson (HOG) is lowering its outlook for this year:

The company said it now expects earnings growth of 4 percent to 6 percent over 2006, when it posted a profit of $1.04 billion, or $3.93 per share. The company expects earnings growth to return to a rate of 11 percent to 17 percent in 2008 and 2009.
Harley-Davidson said in January that it expected revenue growth of between 11 percent and 17 percent each year through 2009.
Analysts polled by Thomson Financial forecast a 2007 profit of $4.33 per share and earnings in 2008 of $4.81 per share.

This is unfortunate news, but ultimately, it shouldn’t have a major impact on Harley’s business. The shares will take a hit today, but I’d be far more concerned if Harley saw lower demand for its bikes.

James Simons on C-Span
Posted by Eddy Elfenbein on February 26th, 2007 at 2:38 pm

Here’s a clip of James Simons, the legendary hedge fund manager, at yesterday’s National Governors Association’s Winter Meeting. Simons is a former math professor and founder Renaissance Technologies which runs the Medallion Fund.
I know he’s a genius and a multi-billionaire, but he still looks like he belongs on Seinfeld. Couldn’t you see him playing one of Jerry’s uncles or something? Maybe it’s me. Anyway, Simons begins speaking about nine minutes into the clip.

Fed on Hold for all of 2007
Posted by Eddy Elfenbein on February 26th, 2007 at 10:57 am

A new survey of economists shows that the Fed will stay on hold for much of the year. The National Association for Business Economics finds that:

1. Growth in gross domestic product is now expected to average 3.1% over the four quarters of 2007.
2. Headline consumer-price inflation will decline to less than 2.0% in 2007, largely as a result of lower oil prices. This would be the lowest inflation rate in five years.
3. The “core” inflation rate, which excludes food and energy prices, is expected to hold steady at 2.3%.
4. The nation’s unemployment rate should average 4.7% this year, only a tad higher than the 4.6% rate in January.

I’m not so sure growth will be that strong. The fourth-quarter GDP will be revised on Wednesday, and everyone expects a major downward revision. The only question now is how bad will it be. I’m expecting around 2% growth. The original report pegged GDP growth at 3.5%. This could mean that the economy experienced three straight quarters of below-trend growth. Unless things change, I expect the Fed to cut interest rates sometime this year.