Morning News: April 19, 2013
Posted by Eddy Elfenbein on April 19th, 2013 at 7:23 am

IMF’s Lagarde Says ECB Has More Room to Ease

Japan PM Reveals Growth Strategy Based on Working Women, Health Care

Russia, Japan Edge Toward Breakthrough In Gas Supplies

Senate Energy Committee Endorses MIT Physicist Ernest Moniz to Be Energy Secretary

U.S. Weekly Jobless Claims Edge Higher

Advisers’ Senior Credentials Rules Urged by U.S. Consumer Bureau

Blackstone Said to Pull Out of Dell Bid on Falling PC Sales

GSK Accused Of Abusing ‘Dominant Position’

Public Offering Values SeaWorld at $2.5 Billion

Microsoft to IBM Struggle to Manage Mobile-Computing Shift

After Apple’s Rise, a Bruising Fall

A 5-Second Guide To What’s Happening In Markets Today

Correlation, Causality, and Casuistry

Credit Writedowns: Why The Reinhart-Rogoff Paper Was Flawed Right From The Start

Howard Lindzon: Apple…The Prologue… I Blame Tim Cook and…and Elon Musk is The New King

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Morning News: April 18, 2013
Posted by Eddy Elfenbein on April 18th, 2013 at 7:46 am

Japanese Exports Rise, but Demand for Goods Is Lackluster

Germany Backs Cyprus Aid as Schaeuble Cites Default Risk

Euro Zone Crisi Has Increased I.M.F.’s Power

SEC to Move Past Financial Crisis Cases Under New Chairman White

Fed Says ‘Moderate’ Growth Across U.S. Was Led by Housing

Student Borrowers Retreat From Home Buying, Report Says

Rich Ricci, the Investment Chief of Barclays, to Step Down

Toyota to Start Making Lexuses in U.S.

Chinese Smartphone Sales Boost TSMC

EBay Sales, Forecasts Miss Estimates as PayPal Growth Slows

Morgan Stanley Beats Estimates on Brokerage-Revenue Gains

As J.C. Penney Battles Macy’s For Martha Stewart, Experts Ask: Is She Worth It?

Forget Gold, the Gourmet-Cupcake Market Is Crashing

Phil Pearlman: Reconcilable Differences

Joshua Brown: “Markets Are Debates Between People Who Are Speaking With Money”

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Ford’s Big Bet on China
Posted by Eddy Elfenbein on April 17th, 2013 at 12:09 pm

The Dow By Presidential Election Cycle
Posted by Eddy Elfenbein on April 17th, 2013 at 11:32 am

I recently downloaded all of the historical closing prices for the Dow Jones Industrial Average going back to 1896. That’s over 30,000 data points.

Today let’s take a look at how the Dow has performed over four-year presidential cycles. Below is what the average cycle looks like. I set the index to start at 100 at the beginning of the post-election year.

The cycle hits a rough patch beginning on August 4th of the post-election year (not too far away for us) and continues to September 30th of the mid-term. Over that span, the Dow loses an average of 4.1%.

But then things get much better. From September 30th of the mid-term until September 7th of the pre-election year, the Dow has rallied for an average gain of 21.2%. That means that nearly two-thirds of the Dow’s entire gain over four years has come in a little less than one year.

After that, the Dow slumps again. From September 7th of the pre-election year until July 24th of the election year, the Dow drops an average of 3.2%. Then things get better again. From July 24th to the end of the year, the Dow gains an average of 10.2%. If we stretch that rally until August 4th of the post-election, back to where we started, the Dow gains 17.7% in a little over one year.

After that, the Dow historically hasn’t done much of anything during the election year until July 24th. From September 7th of the pres-election year until July 24th of the election year, the Dow has lost an average of 3.2%. After that, the Dow races for a 10% rally by the end of the year (that’s a little over four months). If we stretch that rally until August 4th of the pre-election year, where we started, the Dow jumps 17.7% in a little over one year.

So we have four nearly equal periods of one year each—two bull runs and two bears.

Morning News: April 17, 2013
Posted by Eddy Elfenbein on April 17th, 2013 at 7:41 am

The Market Is Flashing Signs Of ‘Deep Instability’

Cyprus Finance Minister Sees Gold Sale Within Next Months

Tesco to Exit U.S. After First Profit Drop in About 20 Years

Gold Wipes $560 Billion From Central Banks as Equities Rally

Harvard Duo Defend Case For Austerity

Bank of America Earnings Rise, but Fall Short of Forecasts

Intel’s Profit Falls 25%; Outlook Less Dire

Goldman CFO: 1st-Quarter Activity Levels Mixed as Quarter Progressed

In Dell Deal, Curbing One Skewed Incentive Creates Another

J&J Earnings Beat Analyst Estimates on Sales of New Drugs

Mattel Profit Soars on Strong American Girl Sales

Macy’s Wins Temporary Bar on Some Penney Stewart Sales

Thermo Fisher to Pay $13.6b For Calif. Firm

Cullen Roche: Bernstein: The Fed Will be Behind the Curve When It’s Time to Tighten

John Hempton: Mt Gox, Bitcoin, Hordes of Chaos, Demons and Armies of Orcs…

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The Attraction of Gold
Posted by Eddy Elfenbein on April 16th, 2013 at 9:25 pm

I wanted to say a few things about people who invest in gold. There are some people, not all, who are quite simply unreasonably attracted to gold. They make Goldfinger look like an amateur.

Maybe one day some cognitive scientist will find a connection between our brains and gold. For whatever reason, gold has dazzled men for millennia.

For example, gold NEVER rusts. I mean never! You can take the gold out of an Egyptian pyramid and stick it in your cavity (though you might want to clean it first). It’s also non-toxic which helps.

Gold is incredibly soft. One ounce can be stretched for 50 miles. It can be pounded down to a few MILLIONTHS of an inch thickness.

Gold is very heavy. Despite what you see in the Treasure of the Sierra Madre (“Badges? We ain’t got no badges!”), gold dust wouldn’t have blown away.

Gold has been found on every continent on earth. Gold has also had strong religious connections. It’s mentioned in the Bible more than 400 times. Marx writes of commodity fetishism, which is meant to have a religious connotation. And I won’t even get into Freud’s talk of the psychological connection of gold to feces (no, I’m not making this up).

When Moses came down from Sinai with the Ten Suggestions, the Jews were making a golden calf to worship. God instructed Moses to overlay a sanctuary for him in pure gold. In other words, gold had its bases covered—it was on both sides!

Plato mentions the gold/silver ratio to be 12. Recent historical evidence suggests that Isaac Newton was mainly an alchemist. The other stuff he did was just playing around on the side, and was probably an offshoot of his efforts to makes gold. Pieces of his hair have traces of lead and mercury.

Newton was also Master of the Mint and inadvertently put England in the gold standard. This means that one of the greatest geniuses in human history was also a civil servant who made economic policy based on a forecast. A forecast that was dead wrong.

There’s more gold at the New York Fed, waaaay below 33 Liberty Street, than in Fort Knox. Gold is also a really good conductor. So despite its high prices, it’s used in many electronics.

Earlier I mentioned Goldfinger. The Ian Fleming book was published in 1959. The plot (made into a classic 1964 movie) featured a crazy idea -– to blow up all of the U.S. gold at Fort Knox, making it radioactive and worthless. That would make Auric Goldfinger’s gold worth more. But here’s the odd part — he didn’t need to stage all that drama to make money. If he had just held on to his gold for 20 years, it would have been worth 25 times as much.

I highly recommend Peter Bernstein’s The Power of Gold: The History of an Obsession

The First Black Friday
Posted by Eddy Elfenbein on April 16th, 2013 at 12:48 pm

If you got slammed by gold’s sudden drop over the past couple of days, take comfort in the fact that things have been worse. Much worse.

In 1869, Ulysses Grant was in the White House. The government was struggling with massive domestic debt, incurred by four years of civil war and subsequent efforts at Southern reconstruction. To raise money for these expenditures, the Treasury had issued vast quantities of “greenbacks” (paper currency), which Grant promised to redeem for gold as soon as was practical. This he then proceeded to do: over the course of some six months at the start of his administration, the government paid out its gold reserves little by little, thus easing the debt while keeping the price of the precious metal under tight control. If the government wanted the price of gold to go down, it released more of its holdings; if it wanted it to go up, it paid out less.

Enter two unscrupulous speculators, Jay Gould and James Fisk. Their scheme was to corner the gold market by means of insider information. They reasoned that if they could find out beforehand exactly what the Treasury was planning to do as regards the gold supply, they would be able to buy up the yellow metal when the price was low and then sell when it was high. This would not only net them huge profits but also drive up the rate of traffic by wheat farmers on the Erie Railroad, of which Gould was president. Both men were well versed in incestuous economic dealings; both were very much in league with Boss Tweed’s Tammany Hall, and Gould would later post bond when Tweed was indicted.

But to pull it all off, they needed a hook. This was provided in the form of Abel Corbin, Grant’s brother-in-law. It’s not clear whether Corbin fully knew what the pair was up to, but he nonetheless served as their point of entry to the Oval Office, where they tried to persuade Grant to tip his hand regarding the government’s gold policy. This Grant, to his credit, refused to do. But Gould and Fisk now seemed, in the eyes of the financial community, to have the president’s ear. Thus when they started buying up large quantities of gold in early September 1869, prices spiked.

The one to put a stop to these shenanigans was George Boutwell, Grant’s Secretary of the Treasury. Honest and intelligent, he quickly saw through Fisk and Gould’s scam and approved the sale of $4 million worth of government gold to lower prices. Grant, too, realized what was up and told his brother-in-law to cut ties with his sketchy partners. But thieves’ honor prevailed, and Corbin tipped off Gould, who then was able to sell off his gold before the market crashed. Fisk, too, escaped serious economic damage, even though Gould omitted to tell him the news. The only one screwed was Corbin—together with grain farmers (whose prices fell 50%), stockholders (the market lost 20% in a single week), and countless ordinary Americans (who found themselves out of work in the ensuing economic turmoil). On Black Friday, September 24, 1869, gold prices went from a high of $162 to a low of $133 in a matter of hours.

What became of Gould and Fisk? Neither was prosecuted, thanks to a good lawyer and support from Tammany Hall. Gould went on to a glorious career as a railroad and communications magnate; Fisk was shot dead in an argument over a prostitute a few years later. As for Grant, his name was permanently besmirched: the years of his administration were branded ¨The Era of Good Stealings.¨

The Dow’s Average Return by Day of Year
Posted by Eddy Elfenbein on April 16th, 2013 at 12:06 pm

As I mentioned before, I crunched all of the Dow’s daily closings for the last 117 years. Today, let’s take a look at the Dow’s return by Day of the Year.

This chart shows what the Dow does, on average, throughout the year. To make things clearer, I began the chart at 100 as the start of the year.

There’s an old Wall Street saying that investors ought to “sell in May and go away.” Well, there does appear to be some truth to that. From May 6th to October 29th, the Dow has gained, on average, only 0.3%. That’s just shy of half the year. For the other half, the Dow has gained an average of 6.96%.

For the worst part of the year for the Dow, we can zero in the stretch from September 6th to October 29th. Over that span, the Dow has lost an average of 2.51%. I re-ran the numbers to see where the market’s early September peak was in relation to Labor Day. The answer is that it comes on the Wednesday immediately following Labor Day. After that, the market has had a tendency to slide for the next seven weeks.

The best brief period of the year for the Dow has been the famous Santa Claus rally. From December 21st to January 7th, the Dow has gained an average of 2.91%. That’s pretty impressive when you consider that makes up 40% of the Dow’s annual gain, yet it comes in just half a month, and that includes two holidays.

Just to be clear, these numbers don’t include dividends. Also, I don’t believe there’s any advantage for investors in trading around these events. I just think it’s fascinating that after 117 years, some definite patterns have evolved.

This Is What Gold’s Been Saying
Posted by Eddy Elfenbein on April 16th, 2013 at 11:08 am

Today’s inflation report confirms what the gold market has been saying — there are deflationary pressures in the economy. After a blip up in February, consumer prices fell in March.

The message is that real interest rates are too high.

The stock market is gaining back some ground today after yesterday’s plunge. Gold is also making up some lost ground, but it’s still around $1,390 an ounce.

Of the major stocks, Coke ($KO) is doing especially well after a good earnings report. Shares of Microsoft ($MSFT) have been very steady at $28.60 or so since the stock dropped last Thursday. The company will report earnings later this week.

March Industrial Production Rose 0.4%%
Posted by Eddy Elfenbein on April 16th, 2013 at 10:46 am

We got more promising economic news this morning. The government reported that industrial production rose by 0.4% last month. While total production was up, factory production unexpectedly dropped by 0.1%.

The median estimate for total industrial production of the 82 economists surveyed by Bloomberg called for a 0.2 percent gain. Projections ranged from a drop of 0.5 percent to an increase of 0.7 percent. The prior month was revised up to a 1.1 percent increase from a previously reported 0.8 percent advance.

Manufacturing, which makes up 75 percent of total production and accounts for about 12 percent of the economy, was restrained by declines in production last month of metals, computers, electrical equipment and furniture.

One of the bright spots in March was auto making. The output of motor vehicles and parts increased 2.9 percent after a 2 percent gain a month earlier, today’s report showed. Excluding autos and parts, manufacturing production dropped 0.3 percent, the biggest decline since October, after a 0.8 percent rise.

Cars and light trucks sold at a 15.2 million annual pace in March, capping the strongest three months for purchases since early 2008, data from Ward’s Automotive Group showed.

Here’s the chart on industrial production. There are two things to notice: the index hasn’t yet reached a new peak, and the index correlates very well with the economic cycle.