The Fed’s Decision
Posted by Eddy Elfenbein on August 8th, 2006 at 11:04 am

At 2:15 we’ll find out what the Fed will do. For the first time in a while, there’s actually some drama to a Fed announcement.
According to the latest futures contracts, the market believes there’s a 21% chance of a rate hike. Personally, I’m a little baffled. It’s seems pretty obvious that the Fed needs to get rates higher. We’ll know more this afternoon.

My Favorite Links
Posted by Eddy Elfenbein on August 8th, 2006 at 10:18 am

I’m very bad in updating my links page but I finally got around to it. Please check out some of the other stock bloggers.
Some of my favorites include Justin Walters and Paul Hickey over at Ticker Sense, Barry Ritholtz, John, Elizabeth, Joe, Muffie & Co. at DealBreaker, Herb Greenberg, David Phillips at 10-Q Detective and Michelle Leder at Footnoted.

Hansen Cracks
Posted by Eddy Elfenbein on August 8th, 2006 at 10:03 am

Hansen Natural (HANS) has been one of the hottest stocks on Wall Street. But yesterday, the shorts finally caught up to the Monster Energy drink maker.
The company’s earnings were in line with expectations (28 cents a share) yet the stock fell $10.40 a share, or 25%. Youch! And that doesn’t count the $10 a share it lost in the month before yesterday’s open. Shares of Hansen were up 332% in 2004, and 330% in 2005. The stock is “only” up 51% so far this year.
I wonder what would have happened if the company missed earnings.

Why Interest Rates Are So Important
Posted by Eddy Elfenbein on August 7th, 2006 at 6:36 am

On Tuesday, the Fed will make its big decision on interest rates. If you’re new to investing, the direction of interest rates is extremely important to the stock market.
Stocks love falling rates, but rising rates act like Kryptonite. Consider these numbers:
Since 1960, the yield on the 90-day Treasury bill has risen on 1,201 weeks. If we islotate those weeks, the market has climbed a total of 144% which works out to 3.9% a year. But on the 1,107 weeks when rates have fallen, the market has climbed over 650%. That comes to 10% a year, or 2.5 times better than when rates are rising.
Rates have stayed the same on 121 weeks for a total return of 16.5%, or 6.8% annualized which is almost the exact average of the other two categories.
Short-term rates hit their lowest point on June 19, 2003 at just 0.79%, and have risen ever since. Since then, the S&P 500 is up 28.6% or 8.4% a year.

Efficient Couch Market Hypothesis
Posted by Eddy Elfenbein on August 6th, 2006 at 9:32 pm

I own Comfy Couch, the single most comfortable couch in the entire world. It’s plush and squishy and fits me juuusst right. Unfortunately, Comfy Couch is also the ugliest couch in the world. I’m serious, this thing is truly hideous.
Well, I felt the time had finally come to depart with Comfy Couch. Comfy Couch, you see, is getting on in years, and she’s just not what she was. (On a side note, I inherited Comfy Couch from Tobin Smith, one of the market mavens on Bulls & Bears.)
So I advertised Comfy Couch on Craig’s List under the “Free Stuff” section (“Ugly Ass Couch, Free!!”). I waited and waited, but no one wanted her. No e-mails, nothing. I even reposted the ad, but still there were no takers.
Soooo…I changed strategy. I posted the ad under the “For Sale” section (Ugly Ass Couch, $30!!).
Sold. That day.
Efficient market, my ass! It’s like economics, but…freaky.
You’re reading this, of course, on my free blog. Ah, irony!

“Sometimes libertarians deserve to win an argument”
Posted by Eddy Elfenbein on August 6th, 2006 at 11:23 am

So says the Washington Post in its editorial on hedge fund regulation:

There are three types of argument in favor of regulating hedge funds, and none is persuasive.
The first invokes systemic risk: If a hedge fund collapses, the banks that lent to it may collapse, too, causing a chain reaction through the financial system. This danger is real, but the banks that lend to hedge funds have a strong incentive to manage it by limiting their exposure to hedge funds and by monitoring the risks that the funds take. Since the Long-Term Capital debacle, this is what banks appear to be doing. Regulatory prodding has encouraged the banks to get smarter, though in some cases the rules perversely permit hedge funds to borrow more if they take on extra risk — an example of how oversight of this complex industry can backfire.
The second argument for regulating hedge funds is that they are havens of insider trading and other sorts of illegal manipulation. It’s true that some prominent cases of fraud involve hedge funds, but this isn’t surprising given their size. The law already empowers regulators to go after hedge fund managers who commit financial crimes. It’s not clear that extra regulations would add much.
The third argument for regulation concerns investor protection. The SEC suggests that by registering and inspecting hedge funds it can reduce the danger that investors will lose money. Some hedge fund managers are happy to accept this line: To reassure anxious clients, some choose to register with the SEC anyway, and they calculate that submitting to mild regulation now may be smarter than waiting until the political storm that would follow the scandalous blowup of a crooked player in their industry. But this is a case of hedge funds and their customers trying to ensure their reputations by gaining a regulatory seal of approval. The regulators should decline to become a security blanket.

Mixed Market
Posted by Eddy Elfenbein on August 4th, 2006 at 11:19 am

AP:

Ceradyne 2Q Profit Doubles

MarketWatch:

Ceradyne net nearly triples

July Unemployment at 4.8%
Posted by Eddy Elfenbein on August 4th, 2006 at 8:47 am

The jobs report just came out. The unemployment rate for July was 4.8%. The economy created 113,000 new jobs which was below expectations of 135,000. The futures markets are now decidedly against a rate hike next week.
I just dug into the numbers a little bit. The unemployment rate was reported at 4.8%, but it was really 4.755%, so it rounds up to 4.8%. This is small consolation to the unemployed, but the jobless rate is basically the same as it was in April.
Here’s the chart:

Nonfarm payrolls were revised higher by small amounts in May and June (8,000 and 11,000 respectively). In the last four months, the economy has created an average of 112,000 new jobs. In the 30 months prior to that, new job growth averaged 167,000. For contract, in the 1990s, new job growth average over 250,000 a month for seven years. Here’s what nonfarm jobs have looked like since 2000:

The yield on the 10-year T-Bond is now down to 4.9%.

Now It’s Medtronic’s Turn
Posted by Eddy Elfenbein on August 3rd, 2006 at 11:35 am

Shares of Medtronic (MDT) are getting slammed today. The company said that sales for the first quarter came in below expectations. Analysts were looking for sales of $2.98 billion while the company said that sales were $2.9 billion.
Medtronic also said that earnings will range from 53 cents to 55 cents a share. The Street was looking for 57 cents a share.
In May, the company raised 2007 estimates to $2.40 to $2.48 a share.
Earnings are due on August 22.

My Problem with the Mankiw Method
Posted by Eddy Elfenbein on August 3rd, 2006 at 6:31 am

As a rule of thumb, I try not to get in the habit of pointing out oversights made by Harvard professors. Having said that, I have a minor quibble with Professor Greg Mankiw.
In the interest of full disclosure, Professor Mankiw is the Robert M. Beren Professor of Economics at Harvard, and he’s also the former chairman of the President’s Council of Economic Advisors.
Me? I often blog while wearing bunny slippers.
Anywho, Dr. Mankiw developed the “Mankiw Method,” which is a simple back-of-the-envelope equation for determining the appropriate target for the Fed funds rate:

Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment)

The Mankiw Method certainly has its benefits. It’s easy to follow, and in my opinion, it would have done a better job than the Fed over the past few years.
There is, however, one major problem with the Mankiw Method. According to the equation, inflation’s impact on interest rates is greater than 1.0. I feel this is a big mistake. What it means is that for every 1% increase in inflation, interest rates rise by 1.4%. Consequently, as inflation increases, real interest rates also rise independent of unemployment.
As long as inflation is low, the equation works well. But once inflation starts creeping up, then we start seeing problems. In February 1991, unemployment stood at 6.6% and core inflation reached 5.6%. According to the Mankiw Method, real interest rates should be 1.5%. In July 2004, unemployment was at 5.5% and core inflation was running at 1.8%. Again, the Mankiw Method would recommend a real rate of 1.5%.
To restate my earlier sentence, for everyone 1% increase in inflation, real rates rise by 0.4%. This seems like extra punishment for an economy just for inflation.
The blog, Political Calculations, also has some issues with the Mankiw Method, which the professor addresses.