The Limits of Economics
Posted by Eddy Elfenbein on December 9th, 2006 at 3:40 pm

Here’s a fascinating article from Christopher Hayes on the limits of economics:

The simple models have an explanatory power that is thrilling. Once you’ve grasped the aggregate supply/aggregate demand model, you understand why stimulating demand may lead, in the short run, to growth, but will also produce inflation. But the content of that understanding turns out to be a bit thin. Inflation happens because, well, that’s where the lines intersect. “A little economics can be a dangerous thing,” a friend working on her Ph.D in public policy at the U. of C. told me. “An intro econ course is necessarily going to be superficial. You deal with highly stylized models that are robbed of context, that take place in a world unmediated by norms and institutions. Much of the most interesting work in economics right now calls into question the Econ 101 assumptions of rationality, individualism, maximizing behavior, etc. But, of course, if you don’t go any further than Econ 101, you won’t know that the textbook models are not the way the world really works, and that there are tons of empirical studies out there that demonstrate this.”

The Buy List So Far
Posted by Eddy Elfenbein on December 8th, 2006 at 9:49 pm

With three weeks left, our Buy List is up 10.88% for the year, compared with 12.94% for the S&P 500 (not including dividends). The Buy List is about 20% more volatile than the rest of the market.

By looking at the current results of each stock on the Buy List, you can see why diversification is so important. Look at the spread of the results (from a high of 61% to a loss of -19%). Five stocks are currently up over 29%, yet eight stocks are down for the year.
I should add that Biomet (BMET) finally made a new high today. This stock has been terrified of $40 a share, but nevertheless, it finally hit that number for the first time in 21 months.
I’ll unveil the new Buy List for 2007 next Friday. The rules are, once the Buy List is set, I can’t touch it for the entire year.

Good Stocks No One Knows About
Posted by Eddy Elfenbein on December 8th, 2006 at 12:49 pm

I’m always amazed at the number of stocks that have been great long-term performers, yet no one knows about them. Many highly profitable stocks are completely ignored by Wall Street. Here are a few examples:
Hawkins (HWKN) is a small chemical company in Minnesota. The stock has creamed the market for decades (the gold line is the S&P 500). Hawkins has just 235 employees. They made $9 million last year, which Wal-Mart makes in about eight hours. No analysts cover it, and yesterday it had zero volume. They might as well be private equity.

Here’s a good one. Weyco Group (WEYS) is a 110-year-old shoe company based in Milwaukee. Thirty-two years ago, you could have picked up a share for 20 cents (adjusted for splits totaling 54-for-1). Weyco also pays a dividend. One analyst covers it.

Met-Pro (MPR) makes pollution control equipment. The company has a market cap of $160 million.

Today’s Jobs Report
Posted by Eddy Elfenbein on December 8th, 2006 at 10:18 am

The media is reporting that the unemployment rate increased from 4.4% to 4.5% in November. This is technically true, but it owes some credit to rounding. I got the raw data and the jobless rate increased from 4.42% to 4.47%.
Here’s what the past twenty-odd years have looked like:

And here’s nonfarm payrolls over the past ten years:

You can see that job growth is slower in this recovery than in the 90s.

Hedge Funds Now An Official Cultural Phenomenon Fit to Print
Posted by Eddy Elfenbein on December 8th, 2006 at 6:19 am

So sayeth The New York Times:

In October, John Wiley & Sons rolled out its latest how-to book, “Hedge Funds for Dummies.’’ Doug Ellin, the creator of “Entourage” on HBO, is seeking to transplant that show’s successful premise of dudes living large to the world of seeking alpha. And for those who just want to look like a hedge fund manager, Kenneth Cole offers the Hedge Fund — a leather loafer available in black or brown, recently available on its Web site at a clearance price of $119.98.
Hedge funds have become the new cultural shorthand for fast money. In the 1980s, corporate raiders and bond traders, as represented by Gordon Gekko and Sherman McCoy, were models for those seeking to be masters of the universe. The 1990s brought the Internet entrepreneur and the day trader, two variations on the Generation X slacker who made millions without leaving his apartment, using only a computer and his savvy.

Read the whole thing. “Wall Street Warriors” makes an appearance.

Calls to Shut Down Wall Street
Posted by Eddy Elfenbein on December 8th, 2006 at 6:04 am

The death of Sean Bell has inspired a call to shut down Wall Street for a day:

The December 12th Movement, a human rights group that organised the protest, wants Police Commissioner Raymond Kelly to step down and called for a “Day of black outrage” on December 22 that would “shut Wall Street down”.

We’re Surrounded
Posted by Eddy Elfenbein on December 7th, 2006 at 2:16 pm

Starbucks (SBUX) has the White House completely surrounded. I’m not a conspiracy theorist, but this looks like it took some planning.
Are they planning a coup?
Update: Uh oh.

If I Had No Soul….
Posted by Eddy Elfenbein on December 7th, 2006 at 11:49 am

No, I couldn’t. I just couldn’t.
Let’s pretend this post never happened.

The Final Days at UNH
Posted by Eddy Elfenbein on December 7th, 2006 at 6:14 am

On the front page of today’s WSJ, James Bandler and Charles Forelle look at how UnitedHealth’s board gradually turned against CEO Bill McGuire during the options back-dating scandal. This is a good story, and I think I’ve misjudged what happened at UNH.
From reading today’s article, I don’t think McGuire believed he had done anything wrong. Of course, intent to break the law isn’t an issue for the courts, but it is an issue for me and how I value a company. I can’t say that UNH was guided by a culture of corruption. If McGuire did break the law—and it appears he did—it was probably a case of negligence and oversight. As far as the company goes, it looks fine. Business is booming.
Obviously, any wrong-doing should be punished, but McGuire never acted as a criminal. Even as the scandal broke, he responded quickly and prudently. Enron, to use an unpleasant comparison, was a criminal enterprise, pure and simple. The company was a fraud and its business was to deceive investors. By contrast, UnitedHealth has been a spectacularly successful company, thanks in large measure to McGuire’s leadership.
As an investor, the more important issue to me is how the board could have authorized such large options grants to their CEO. Look, I’m all for rich people being rich, but…come on. His options were worth over $1 billion. Now that he’s gone, that will no longer be a problem. Plus, it will take a long time to figure out exactly what he’ll be able to keep.
If anything, I’m more inclined to like UNH by seeing how responsibly it behaved during this ordeal. The company now has a new CEO and a (somewhat) clean slate. For the first nine months of this year, EPS has increased by 21.8%, from $1.74 to $2.12. But the stock is almost a mirror image, down 21.1%.
I’m going to unveil the 2007 Buy List next Friday, December 15. Expect to see UNH there.

Home Depot Back-Dated Options Back to 1981
Posted by Eddy Elfenbein on December 6th, 2006 at 8:13 pm

Home Depot’s (HD) internal review found unrecorded expenses of $200 million. Some of it going as far back as 1981.

All options granted since 2002 had an exercise price based on the market price of the company’s stock on that date, Home Depot said today.
Options granted from December 2000 through the end of 2001 had an exercise price based on the market price of the company’s stock on the date of a specific meeting or some other established criteria.
For annual option grants and certain quarterly grants from 1981 through November 2000, the company regularly reviewed closing prices for a given period and selected a date with a lower stock price, Home Depot said.
Backdating occurred “at all levels of the company” and involved managers who have since left, Home Depot said.

At least they were faithful to tradition.