Today’s Fed Statement
Posted by Eddy Elfenbein on December 13th, 2011 at 2:44 pm

Snore.

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

The only thing here that’s marginally noteworthy is that the Fed nearly admits that it can’t do much about high unemployment despite being part of its dual mandate.

An Equity Premium Quandry
Posted by Eddy Elfenbein on December 13th, 2011 at 12:47 pm

Here’s something I’ve been thinking about and I’m honestly not sure if it leads anywhere.

Below is a chart I made at the St. Louis Fed’s FRED site. The blue line shows the Wilshire 5000 total return index dividend by the AA Corporate Bond total return index. In other words, it’s how much better stocks are doing than the long-term bond market.

The red line is short-term interest rates. For this, I chose the 1-month AA non-financial rate. Note that this is a rate, not an index.

Perhaps this relationship is illusionary but I’m curious if the relationship between long-term rates and equities is itself dependent on short-term rates.

I also think it’s interesting that financially speaking, the 2000-2001 recession last for a much longer time than the gray bar suggests. The later recession, however, lasted roughly as long. In both cases, the market saw the recession before it officially started.

Morning News: December 13, 2011
Posted by Eddy Elfenbein on December 13th, 2011 at 5:31 am

EU Banks Selling ‘Crown Jewels’ for Cash

Cameron’s Backers Look Past ‘History of Antipathy’

U.K. Inflation Slows on Food, Transport Costs

Pondering a Dire Day: Leaving the Euro

Gold Falls to 7-Week Low on Europe Anxiety

China’s 150 Million Electric Bikes Bolstering Lead

Rating Agency Warnings Bring Down the Markets

Bernanke’s Legacy at Fed: Still a Lagging Indicator

Intel Sees Opportunity in Shortage of Drives

Jive Software Raises $161.3 Million in IPO After Pricing Above Its Range

Sony Shopping is ‘Wrong Direction’ in Apple War

WaMu Ex-Officials Settle FDIC Lawsuit

U.S. Judge Grants Delay in Challenge to AT&T Deal

Google Acquisition of Motorola Delayed in Europe

No Hit Toy to Brighten Retailers’ Christmas

Jeff Carter: Do You Fund Start Ups or Store Fronts?

Cullen Roche: The Role of The Entrepreneur in a Capitalist Economy

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Where Do Profits Come From?
Posted by Eddy Elfenbein on December 12th, 2011 at 3:31 pm

I was listening to today’s EconTalk podcast with Russ Robert and he was talking with Mike Munger about the source of profits. Munger made a good point that profits aren’t about exploitation; they’re really about correcting errors:

I think it is important, and the reason I wanted to start with that, as you pointed out, hilarious joke, that we need to recognize what the source of profits are. The source of profits is correcting errors. The economy around us is full of errors. And what I mean by errors is a maladjustment, a divergence between what we are actually producing and what we “should” produce in order to use the stuff that we have–our mental resources, physical capital, labor–to produce the highest possible level of satisfaction of what the public wants. So, there’s this unobservable thing that nobody knows and nobody can know, and that is: What is it that a consumer-sovereignty oriented society would produce? How are we going to allocate our resources? There’s all sorts of mistakes in the way we are allocating resources. If we not making iPods, if we are not making things that people want to buy, even if they don’t know that they want to buy it. The genius of Steve Jobs was to say: Here’s the way people want to buy these things. They don’t know it, but if we do it, we correct this mistake.

Tim Tebow’s Pass Plays
Posted by Eddy Elfenbein on December 12th, 2011 at 3:07 pm

I’m not sure if there’s a market lesson here, but here’s a look at all of Tim Tebow’s pass plays from yesterday.

During the second and third quarters, Tebow failed to complete a single pass in nine attempts. Yet in the fourth quarter and overtime, he was amazingly accurate. At one point, he completed ten straight passes.

For his first 16 passes (the fist 48 minutes of the game), Tebow had a passer rating of 13.5. For his last 24, he had a rating of 111.6.

First Quarter
2nd-13, DEN12 10:26 T. Tebow passed to L. Ball to the left for 10 yard gain
3rd-3, DEN22 9:57 T. Tebow incomplete pass to the right
2nd-9, DEN10 6:03 T. Tebow passed to D. Thomas to the left for 12 yard gain
2nd-11, DEN21 4:49 T. Tebow incomplete pass to the left
3rd-16, DEN16 4:42 T. Tebow passed to M. Willis to the left for 23 yard gain
2nd-6, CHI39 2:44 T. Tebow incomplete pass to the right
3rd-6, CHI39 2:26 C. Tillman intercepted T. Tebow for no gain

Second Quarter
1st-10, CHI15 8:15 T. Tebow incomplete pass to the left
3rd-6, CHI11 7:31 T. Tebow incomplete pass to the left
1st-10, DEN42 5:44 T. Tebow incomplete pass to the right
1st-10, DEN33 0:29 T. Tebow incomplete pass to the right
2nd-10, DEN33 0:25 T. Tebow incomplete pass to the right
1st-10, DEN47 0:00 T. Tebow incomplete pass down the middle

Third Quarter
2nd-10, DEN45 13:11 T. Tebow incomplete pass down the middle
3rd-10, DEN45 13:05 T. Tebow incomplete pass to the left
1st-10, DEN20 5:19 T. Tebow incomplete pass to the right

Fourth Quarter
1st-20, DEN27 11:12 T. Tebow passed to D. Thomas to the left for 14 yard gain
2nd-6, DEN41 10:34 T. Tebow passed to D. Thomas to the left for 9 yard gain
1st-10, 50 10:05 T. Tebow passed to M. Willis to the left for 14 yard gain
1st-10, DEN7 6:50 T. Tebow passed to E. Decker to the left for 23 yard gain
1st-10, DEN30 6:22 T. Tebow incomplete pass to the left
2nd-10, DEN30 6:18 T. Tebow incomplete pass to the right
3rd-10, DEN30 6:12 T. Tebow passed to E. Decker to the right for 1 yard gain
1st-10, DEN37 4:34 T. Tebow passed to L. Ball to the right for 6 yard gain
2nd-4, DEN43 4:05 T. Tebow passed to L. Ball to the right for 10 yard gain
1st-10, CHI47 3:42 T. Tebow passed to J. Johnson down the middle for 8 yard gain
2nd-2, CHI39 3:17 T. Tebow passed to J. Johnson to the left for 3 yard gain
1st-10, CHI36 3:11 T. Tebow passed to M. Willis down the middle for 19 yard gain
1st-10, CHI17 2:39 T. Tebow passed to D. Thomas down the middle for 7 yard gain
2nd-3, CHI10 2:08 T. Tebow passed to D. Thomas to the right for 10 yard touchdown.
1st-10, DEN20 0:56 T. Tebow passed to E. Decker to the left for 9 yard gain
2nd-1, DEN29 0:53 T. Tebow passed to L. Ball to the left for 11 yard gain
1st-10, DEN40 0:53 T. Tebow incomplete pass down the middle
2nd-10, DEN40 0:30 T. Tebow passed to M. Willis to the right for 19 yard gain
1st-10, CHI41 0:23 T. Tebow incomplete pass to the right
2nd-10, CHI41 0:18 T. Tebow incomplete pass to the left

Overtime
1st-10, DEN33 12:47 T. Tebow incomplete pass to the left
2nd-10, DEN34 12:37 T. Tebow passed to W. McGahee to the right for 2 yard gain
3rd-8, DEN36 12:12 T. Tebow passed to D. Thomas to the right for 10 yard gain
2nd-12, DEN44 11:15 T. Tebow passed to D. Thomas to the right for 16 yard gain

Intel Slides on Lower Guidance
Posted by Eddy Elfenbein on December 12th, 2011 at 1:12 pm

Intel ($INTC) is getting clipped today on news that it’s lowering guidance.

Intel, a technology bellwether, said it now expected fourth-quarter revenue of $13.4 billion to $14 billion. It had previously forecast revenue of $14.2 billion to $15.2 billion for the holiday quarter.

Analysts polled by FactSet were expecting revenue of $14.65 billion.

Intel is the world’s largest maker of microprocessors, the brains of computers. The company said it expected personal computer sales to be up from the previous quarter. But it said computer makers are reducing inventories and microprocessor purchases because of hard drive shortages.

Intel has been a supremely frustrating stock for us because I’ve played it exactly wrong — or perhaps we were too early. Still, I always want to look at our bad calls to see what we can learn.

I had Intel on last year’s Buy List and it started off as a good position for us. By April, it was an 18% winner for us. The stock then dropped about 25% and recovered to make us a slight gain for the year but it still trailed the overall market.

After a lot of consideration, I felt that my original thesis no longer held and I decide to boot it from the Buy List for this year. Once again, I was right — at first. Intel underperformed the market at the beginning of this year, then around April it started a large out-performance.

The stock has beaten earnings pretty consistently for the past few years. I had even considered adding back on for 2012. But I couldn’t help feeling that Intel had over-run its value. Only today, now that 2011 is nearly over, do we see some cracks in the company’s business.

The lesson for investors is that your thesis can be right but it may take a long time to see it pay off. I remember Peter Lynch saying that his stocks did best in the second or third year that he owned them.

Refining the Gold Model
Posted by Eddy Elfenbein on December 12th, 2011 at 12:09 pm

In this morning’s news roundup, I linked to an interesting post by Willem Weytjens who took my gold model and refined it with updated inputs. I’m happy to see this and I strongly encourage any stat geeks out there to run with this.

My goal for my model was to establish a model for a model of the price of gold. My original description has the price of gold rising eight-fold, in the opposite direction, for each percentage point real rates are from 2%.

As I said in my original post, “if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate.”

Weytjens found a better fit using a deflator of 2.15% and 2.2%, and a leverage ratio of 5.7 and 6.95. Check out his charts; the fit looks really good. He found that the model forecasts a gold price of $4,380 in two years.

Morning News: December 12, 2011
Posted by Eddy Elfenbein on December 12th, 2011 at 4:51 am

Euro Undermined as Draghi Undoes Trichet Rates

European Leaders’ Fiscal Accord May Solve Next Crisis, Not This One

A Stark Step Away From Europe

Russian Economy Hampered by ‘Poor’ Business Climate, OECD Says

India’s Industrial Output Slumps, Pressures Central

Royal Bank of Scotland Report Blames Bank Managers for Collapse

European Banks Hunt for Ways to Raise Cash

Oil Drops as Europe Debt Outlook Counters Iran Calls for OPEC Output Cuts

Bank Credit Highest Since Before Lehman as U.S. Growth Continues

Fed to Weigh Publishing a Forecast on Rates

A Romance With Risk That Brought On a Panic

Etihad Orders More Boeing 787-9s, 777s in $2.8 Billion Deal

Whitehaven Buys Aston Resources

Pincus Faceoff With Zuckerberg Shows Fearsome Prelude to Zynga’s IPO

Gold Model Forecasts $4380 Gold Price

Howard Lindzon: The Year 2012…The World Is a Startup and/or Armageddon Gets a Rest

Stone Street: With Un-Verified Reviews (Almost) Everyone Loses, So Why Are They Still So Prevalent?

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Warren Buffett: If I See A Shirt I Like, I’ll Usually Just Buy It
Posted by Eddy Elfenbein on December 11th, 2011 at 11:52 am

The Onion has Oracle’s commentary:

I’m not really the kind of person to get caught up in the latest trends or fashions or anything like that. But some days, if I get out of work early and have a little time to kill before dinner, I’ll go do some window-shopping in the downtown Omaha area. Usually I just stick to browsing, but occasionally I’ll see a shirt I like, and if I try it on and it looks good, I’ll say, “What the heck,” and go ahead and buy it.

Because why not, right?

If you think about it, we’re only talking $50 or $60 tops here. I’ve had a steady income for years now, and I’m at the point in my life where I just refuse to feel guilty about treating myself to a decent shirt every once in a while. See, because it’s not even about the money. It’s about feeling good. So if I come across a nice blue button-down or a really sharp Tommy Hilfiger polo, I just think, “Warren, in the span of a lifetime are you really going to miss the $40 you spent on a shirt you might wear for upwards of 10 years?” Of course not.

Look, I’m old enough to understand that it’s okay to spend a little cash on something that makes you happy. To tell the truth, I wish I’d learned that lesson years ago.

Now, I’m not saying you should go hog wild and buy 200 shirts at a time or anything. That’d be crazy. And no matter how much money you have, spending $150 on a shirt is just plain silly: I’d bet you dollars to doughnuts that someone somewhere makes a shirt that looks just as nice for half the price. For example, the Men’s Wearhouse at Oak View Mall typically has nice dress shirts for decent prices by all the top name brands, like Ralph Lauren, Geoffrey Beene, and so on. It’s not cheap stuff by any means, but if you have a member card you can get a 15 percent discount, and why not take advantage of a good deal when you see one.

I don’t know about Men’s Wearhouses outside Omaha, but I assume they have a similar discount at their other locations, as well.

When you’re used to pinching pennies and watching where every dollar goes, it can be hard to let loose and just splurge on something. Believe me, I know. But, hey, I’ll drop $8 on a movie once in a while, and it doesn’t even have to be the greatest film in the world, either. And, sure, a $30 box of chocolates for your wife might be a bit extravagant, but the look on her face when you give it to her is more than worth it. (And, let’s be honest, that $30 isn’t exactly going to break the bank!)

I will say that I never buy just to buy. Having some extra sawbucks lying around doesn’t mean they need to be spent. In fact, just last week I walked into a Banana Republic—I like their sweaters a lot—looked around for about 15, 20 minutes, and walked right out. Seriously, just walked right on out.

But, yeah, if something catches my eye, I’m not going to ignore it. I’m going to try it on, see how it looks with the pants I’m wearing, maybe try on a pair of khakis to see if they go with it better. If I like the khakis enough, I’ll buy them, too. Even if it adds up to $160, it’s an outfit I’ll be able to wear many times, and I know I’ll feel confident every time I wear it. That sounds like a bargain to me.

After all, I work hard. I deserve it.

One more thing: I learned the hard way to always try clothes on first. That’s just smart shopping. Case in point: I recently bought this turtleneck at Eddie Bauer without seeing if it fit. Well, you know where that turtleneck is now? Collecting dust in my closet. Sometimes I wear it under a sports coat, but very rarely. Sixty-five dollars down the drain.

But you know what? It’s just 65 bucks, for crying out loud. Big deal.

Mercedes Benz
Posted by Eddy Elfenbein on December 9th, 2011 at 4:00 pm

It’s 4 pm and the markets are closed. Let Janis get your weekend started — and I figure we might as well help the German economy while we’re at it..