• Monthly Core CPI
    Posted by on October 22nd, 2014 at 10:33 am

    Here’s the annualized monthly core CPI. Today’s inflation report said that consumer prices rose 0.1% last month, and core prices were also up 0.1%.

  • Morning News: October 22, 2014
    Posted by on October 22nd, 2014 at 7:09 am

    Euro Declines as Investors Weigh Prospects for More ECB Easing

    Sterling Drops After BoE Minutes Show Rate Rise Reluctance

    S&P 500 Rallies Most in One Year on ECB Stimulus, Apple Earnings

    Currency Wars Evolve With Goal of Avoiding Deflation

    Enforcer at Treasury Is First Line of Attack Against ISIS

    Jobless Rate Below 5% in 15 States

    Ocwen’s Backdated Letters May Violate Consent Order

    Yahoo Sales Top Estimates

    Verizon’s Bright Horizon

    Coca-Cola Announces Growth Plan As Profit Falls 14%

    Target Eyes Holiday Turnaround on Free Shipping, Faux Fur

    Heineken Blames Europe’s Wet Weather For Slump In Beer Sales

    Cullen Roche: Can We Identify Good & Bad Forecasters?

    Jeff Carter: Don’t Have An Idea? Be a Joiner

    Be sure to follow me on Twitter.

  • RIP: Nelson Bunker Hunt
    Posted by on October 21st, 2014 at 11:26 pm

    The Texas tycoon Nelson Bunker Hunt has died at the age of 88. More than 30 years ago, he and his brother tried to corner the silver market:

    “A billion dollars ain’t what it used to be,” he said in 1980 after silver stakes he amassed with two brothers, Herbert and Lamar, fell to $10.80 from $50.35 an ounce. In barely two months, their holdings and contracts for purchases — corralling a third to half the world’s deliverable silver — had plunged from a $7 billion value in January to a $1.7 billion loss in March.

    With the Hunts unable to cover enormous margin calls, the debacle endangered financial markets and brokerage houses, forcing federal regulators and the nation’s banks to step in with a $1 billion line of credit, a bailout that saved the system from a stampede and the Hunts from an immediate meltdown.

    Here’s a post I did last year on silver:

    Silver — The Poor Man’s Gold

    Silver, which is often called “the poor man’s gold,” has failed to move up recently even though gold has regained a tiny bit of its luster. Last Tuesday, April 16th, spot silver got down to $22 per ounce. That was Ag’s lowest print since October 5th, 2010.

    Gold now trades at 62 times silver. During the worst of the financial crisis in 2008, gold got to more than 80 times silver. The Gold/Silver ratio has been an important ratio through history. Way back in antiquity, Plato mentioned that the ratio was 12-to-1. In 1792, the U.S. Congress, at the advice of Alexander Hamilton, passed the Coinage Act of 1792. This was the government’s first attempt at price-fixing (and not the last). The act defined a U.S. dollar as 371.25 grams of silver or 24.75 grams of gold. In other words, Hamilton pegged the Gold/Silver ratio at 15. In 1834, Congress had to bump it up to 16. The all-time high for the Gold/Silver Ratio came during the first Gulf War. On February 22, 1991, gold was going for 102 times silver.

    In 1979-80, there was an absolutely crazy rally in silver when two Texas brothers tried to buy all the silver in the world. What’s even crazier is that if it hadn’t been for those meddling exchanges, they would have gotten away with it.

    When Nelson Bunker Hunt and Herbert Hunt started their plan, silver was around $6 per ounce. By early 1980, it rose to $50 per ounce. Time Magazine estimated they made between $2 billion and $4 billion in just nine months. To pull this off, they had to borrow zillions of dollars. At one point, it was estimated that they held one-third of the world’s silver. Tiffany (TIF) took out a full-page article to denounce them.

    Since I’m probably the only person who knows this trivia, the Hunt brothers were the sons of the legendary oilman, Haroldson Lafayette “H.L” Hunt, Jr. Hunt the senior wrote a totally batshit-crazy novel based on his idea of a fascist utopia called “Alpaca.” It’s literally one of the worst books ever written. I remember one person calling it “1984, but Big Brother is the good guy.” I wish I were making this up.

    Not all the Hunts were nuts. Lamar Hunt was one of the most influential people in the development of modern football. He was the one who came up with the name “Super Bowl.”

    Anyway, back to silver. The Hunts were convinced that the Establishment was out to crush them and they were pretty much right. The exchange changed the margin requirement which forced the brothers to put up much more collateral. (By the way, one of my first jobs in this industry was making margin calls. That’s not a metaphor. I had to actually call people to tell them they had to sell or put up more money. Good times!)

    On March 27, 1980, the bottom fell out of the silver market. This is now known as “Silver Thursday.” The Hunts had to put up more money, but they couldn’t reach their margin requirement. The government was worried (tell me if you’ve heard this one before) that Wall Street banks were so much in debt to the Hunts that if the Hunts went under, so would the banks. In fact, a silver panic could start a banking panic.

    The Hunts had finally been broken, and even today, silver is still far short of its peak in 1980. The Hunts eventually become the models for brothers Randolph and Mortimer Duke in the movie Trading Places.

  • Ugly Earnings Reports from McDonald’s
    Posted by on October 21st, 2014 at 9:22 pm

    Earlier today, McDonald’s ($MCD) posted its third-quarter results and they weren’t pretty. Net profits plunged 30% to $1.09 per share. Revenue fell 5% to $6.99 billion. The Street had been expecting $7.19 billion.

    Excluding a bunch of charges, the burger giant earned $1.51 per share which was 14 cents better than expectations. That’s about the only sliver of good news. The details of MCD’s report are not good. Same-store sales fell by 3.3% which was more than expected. Compare that to Chipotle where same-store sales grew by 19.8%.

    In Europe, McDonald’s same-store sales were down 1.4%, and in China, they dropped by 22.7%. There was a scandal in China involving a supplier changing expiration dates. (When it rains, it pours…)

    The company realizes they’re in trouble and need to turn themselves around. The shares lost 0.63% today. The big dividend is helping temper some of the decline. MCD now yields 3.74%.

  • The S&P 500 Jumps 1.96%
    Posted by on October 21st, 2014 at 6:59 pm

    The S&P 500 rose 1.96% today to close at 1,941.28. This was the index’s best day all year. In fact, it was the index’s best day in more than a year. The last time the S&P 500 had a better day was on October 10, 2013 when it rallied 2.18%.

    Looking at the chart below you can see how much daily volatility has picked up. Over a three-month period, from April to July, the S&P 500 didn’t have a single day where it rose or fell by more than 1%. In the last 19 days, it’s happened 10 times.

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  • Joe Weisenthal to Host Show on Bloomberg
    Posted by on October 21st, 2014 at 6:28 pm

    Nine years ago, Barron’s wrote a small piece on two newfangled financial “bloggers.” This was a fairly novel concept at the time. The two bloggers were me and Joe Weisenthal. I’m still here but Joe has gone on to bigger and better things.

    I’m very happy by today’s news that Joe will be heading to Bloomberg to host a TV show and edit for a site about the markets. No one is more dedicated to financial news than Joe. I look forward to the show and I know he’ll do a great job.

  • Icahn on eBay
    Posted by on October 21st, 2014 at 6:21 pm

  • The VIX Rallies and Crashes
    Posted by on October 21st, 2014 at 3:23 pm

    In two weeks, the Volatility Index rallied from the mid-teens to the low-thirties — and back down again to the mid-teens.

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  • Competition and Monopolies
    Posted by on October 21st, 2014 at 2:51 pm

    Last month, Peter Thiel wrote a provocatively-titled op-ed for the Wall Street Journal, “Competition is for Losers.” In it, Thiel says that textbooks are all wrong: capitalism has little interest in competition. Rather, capitalism wants monopolies—and this, Thiel claims, is a good thing. He highlights Google as an example of a company that dominates search but uses its vast monopoly profits to fund dozens of worthy enterprises.

    I think Thiel is onto something-mostly-but I have some notes of caution. For example, his use of the word monopoly is unconventional. Thiel isn’t referring to the strict legal definition of a monopoly but to a company that has little to no real competition. I also think his description of non-monopolies is unduly bleak, as if these are starving castaways fighting over scraps of meat.

    But it’s an interesting topic. Consider: Is Harley-Davidson a monopoly? Well, in the legal sense, of course not. There are lots of motorcycle companies. Yet Harley is a brand so differentiated that it can be thought of as a pseudo-monopoly. Harley buyers would never view their hogs as just another bike. Harley is quite aware of this (a good portion of their revenue is apparel).

    Thiel says that true differentiation is often claimed but rarely achieved. I’m not so sure about that. I think I differ from him in that I believe high-efficiency can be enough to differentiate an enterprise. There are some companies that follow the message of the old country song, “Do What You Do Do Well.” But we agree that firms desire to avoid competition, and this can be done by separating themselves from everyone else.

    Thiel likes creative monopolies and he gives the example of Apple, but he also lists companies like the old AT&T and IBM in the 1960s, two companies which are no longer monopolies. The idea of a former monopoly should be a contradiction, but it happens quite frequently. Indeed, Thiel writes, “the history of progress is a history of better monopoly businesses replacing incumbents.” I have to agree.

    A few months ago, I wrote about competitive advantage, an important topic that’s often discussed incorrectly:

    Ideally, you want to have a business with high barriers to entry and low barriers to exit, and you want to differentiate yourself with whatever it is you do. You can do that by exclusivity or by price. That’s your competitive advantage. Once you get that, then you get better managers, better advertising and a stronger brand name. But it starts with a competitive advantage.

    I think people often have difficulty with the concept of competitive advantage because they want to see sinister forces at work. And make no mistake: I do believe the tempering forces of free enterprise can sometimes break down and give a particular firm a lasting advantage that has nothing to do with its own inherent merit. It could be that they were in the right place at the right time.

    For example, many years ago, the Japanese government gave AFLAC a monopoly on selling cancer insurance, and this translates into a huge market share today. Naturally, this is unsettling to those of us raised on the idea that the world wants a better mousetrap. But the truth is, it doesn’t. It wants the one it’s heard of. Just like in politics, the incumbent holds a lot of power.

  • S&P 500 Breaks Above 200-DMA
    Posted by on October 21st, 2014 at 11:07 am

    The S&P 500 is now back above its 200-DMA, though it’s still short of its 50-DMA. This doesn’t necessarily mean the storm has passed, but the bulls aren’t going down without a fight.

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