Morning News: September 30, 2011
Posted by Eddy Elfenbein on September 30th, 2011 at 5:05 am

Chinese Stocks Plummet on News of Justice Department Inquiry

Japan’s 10-Year Bonds Fall, Post Weekly Drop, Before Auction

Germany Approves Bailout Expansion, Leaving Slovakia as Main Hurdle

German Retail Sales Decline More Than Forecast

China’s Manufacturing Steady in September

Ireland Weighs Payback for Averting Bank Default

S&P, Fitch Downgrade New Zealand, Citing External Debt

Deal Would Unite S&P With DJIA

Banks to Make Customers Pay Fee for Using Debit Cards

Outsize Severance Continues for Executives, Even After Failed Tenures

McGraw-Hill in Talks to Lead Stock Indexes Joint Venture

Nokia Cuts 3,500 Manufacturing Jobs

Sumitomo Mitsui Banking Corp. to Make Consumer Lender Promise Wholly Owned Unit

Jeff Carter: Environmental Dust Up in Nebraska

Roger Nusbaum: The Australian Permanent Portfolio?

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Michael Lewis on California
Posted by Eddy Elfenbein on September 29th, 2011 at 7:00 pm

In February, I joked: “I’m not saying the Chinese market is a total scam. I’m just saying Michael Lewis may be paying them a visit sometime soon.”

Lewis is a brilliant writer and he has the ability to shine a light on dysfunctional systems and economies. This time, he looks at the former state-of-the-future, California:

David Crane, the former economic adviser—at that moment rapidly receding into the distance—could itemize the result: a long list of depressing government financial statistics. The pensions of state employees ate up twice as much of the budget when Schwarzenegger left office as they had when he arrived, for instance. The officially recognized gap between what the state would owe its workers and what it had on hand to pay them was roughly $105 billion, but that, thanks to accounting gimmicks, was probably only about half the real number. “This year the state will directly spend $32 billion on employee pay and benefits, up 65 percent over the past 10 years,” says Crane later. “Compare that to state spending on higher education [down 5 percent], health and human services [up just 5 percent], and parks and recreation [flat], all crowded out in large part by fast-rising employment costs.” Crane is a lifelong Democrat with no particular hostility to government. But the more he looked into the details, the more shocking he found them to be. In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. Over the past 30 years the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, and it is about to fall a lot more. In 1980 a Cal student paid $776 a year in tuition; in 2011 he pays $13,218. Everywhere you turn, the long-term future of the state is being sacrificed.

Good Interview with Stryker’s CEO
Posted by Eddy Elfenbein on September 29th, 2011 at 1:33 pm

Good Economic News
Posted by Eddy Elfenbein on September 29th, 2011 at 9:18 am

This morning we got some positive economic news. The second-quarter GDP growth rate was revised up from 1% to 1.3%. Bear in mind that Q2 began six months ago and ended three months ago.

Also, jobless claims fell sharply last week from 428,000 to 391,000. Wall Street was expecting 420,000.

Here’s a look at real GDP over the past few years. As I’ve mentioned before, the economy isn’t doing well but there’s still very little definite evidence that the economy is entering a Double Dip.

Morning News: September 29, 2011
Posted by Eddy Elfenbein on September 29th, 2011 at 5:21 am

Germany to Vote on Euro Rescue Fund

Greek Bonds Lure Some, Despite Risk

Norway to Cut Bank Support Amid Europe Crisis

Gold Reverses Losses, Up 1% as Jewelers Buy

Call by Fed for Money-Fund Curbs

Bernanke: Unemployment Poses ‘National Crisis’

Sony Says It Expects ‘Huge Impact’ on Profit From Euro Slump

Amazon’s Tablet Leads to Its Store

BOA, Merrill Pledge Support for Lehman Exit Plan

H&M Profit Drop Beats Estimates as Margin Damage Is Limited

Facebook, Twitter Usage Increases Companies’ Security Risks

A Start-Up Takes On Procter & Gamble Over a Name

Reebok To Pay Settlement Over Health Claims

Yale Endowment Posts 22% Gain to End Fiscal Year at $19.4 Billion

Pragmatic Capitalism: More on “Japan in Fast Forward”

Paul Kedrosky: The Gazillion Euro Question

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Oracle Strikes Back
Posted by Eddy Elfenbein on September 29th, 2011 at 2:30 am

This is amusing:

Oracle Corp. (ORCL) fired back at Autonomy Corp. (AU.LN, AUTNY) Wednesday, saying the British business-analytics company’s chief executive didn’t tell the truth about an April meeting purportedly held to shop the business around.

The dispute also concerns Oracle rival Hewlett-Packard Corp. (HPQ), which last month agreed to buy Autonomy in a deal valued at about $10.3 billion. Oracle has followed an increasingly common script in Silicon Valley by morphing into one of H-P’s fiercest competitors.

Oracle on Wednesday repeated its contention that Autonomy approached its executives before H-P publicly made its offer. Oracle has said it rejected the Autonomy deal because the price was too high.

Autonomy Chief Executive Mike Lynch later disputed Oracle’s version of events, which prompted the California-based software giant to issue a statment late Wednesday.

According to Oracle, Lynch and investment banker Frank Quattrone met with Oracle mergers-and-acquisitions chief Douglas Kehring and President Mark Hurd. The Autonomy chief pitched his company with a PowerPoint presentation, Oracle said.

“Either Mr. Lynch has a very poor memory or he’s lying,” Oracle’s statement said. “The Lynch shopping visit to Oracle is easy to verify. We still have his PowerPoint slides.”

In an emailed statement, Lynch denied that the April meeting was intended to pitch a possible sale of the company.

“In April there was a 30-40 minute meeting between Autonomy and Mark Hurd, which was set up by Frank Quattrone as an introduction to Mark Hurd,” Lynch said. “Oracle is an Autonomy customer. In the meeting, in response to a joke about Mr. Quattrone’s presence, it was made clear Autonomy was not for sale and there was no process underway.”

Lynch added that Autonomy hadn’t yet engaged Quattrone’s company at the time and said there has been no contact with Oracle since then.

Oracle shares were recently up 0.6% at $29.64 in after-hours trading. The stock is up 8.3% over the past year.

Minimum Variance Portfolios
Posted by Eddy Elfenbein on September 28th, 2011 at 4:58 pm

Eric Falkenstein is probably the financial blogosphere’s biggest advocate of Minimum Variance Portfolios (MVP). The idea is that in investing risk and reward are not trade-offs. In fact, the lower the risk, the higher the reward. As counter-intuitive as this sounds, the numbers back it up.

Falkenstein has shown that a portfolio constructed of the lowest-risk stocks in the S&P 500 has outperformed the index. I got the data off his site and here are the returns since 1998:

Since the beginning of 1998 through August 2011, the S&P 500 has returned 31.59% while the Minimum Variance Portfolio has returned 211.18%. Annualized, that’s a lead of 8.7 to 2%.

But here’s the kicker: the MVP has accomplished this with…well, minimum variance.

Get ready for some math.

In the table below, the blue dots indicate all of the daily changes in the chart above. The X-axis is the changes in the S&P 500. The Y-axis has the changes for the MVP.

The key is that the MVP doesn’t go as high as the S&P 500 during an up day, nor does it fall as low as the index during a down day. I added the diagonal red line to show the 1-to-1 divide.

Notice how the blue dots fall below the red line in the upper right quadrant and above the red line in the lower left quadrant. That’s what MVP is all about.

The black is the linear trend and the formula is the classic linear equation (y=mx+b). The slope of the trend line is 0.558. What this means is that for every one unit the black line moves to the right, it climbs by 0.558 units, and for every one unit it falls, it drops by 0.558 units.

In finance speak, that’s the beta of the portfolio, 0.558. If a portfolio has a beta of 1.0, it exhibits the same variance as the S&P 500. If it’s greater than 1.0, the portfolio swings greater than the market.

Historically, our Buy List has a beta of 0.94.

The b in the equation is the y-intercept, meaning that’s where the trend crosses the Y-axis when x=0. But more importantly for us, this also tells us how well the MVP has done against the S&P 500. Since it’s positive, the MVP has beaten the market by an average of three basis points per share, or 0.03%. (It’s actually about 2.5 basis points but Excel rounded up.)

So despite having nearly half the variance as the overall market, the MVP has crushed the S&P 500 over the 13 years years.

If you’re interested in learning more, here’s a link to Eric’s book, Finding Alpha: The Search for Alpha When Risk and Return Break Down. And here are the 47 stocks currently in the MVP (it’s rebalanced every six months):

The Plunge of Major Financials
Posted by Eddy Elfenbein on September 28th, 2011 at 10:23 am

Check out how sharply Goldman Sachs ($GS), Citigroup ($C), Bank of America ($BAC), and Morgan Stanley ($MS) have fallen since the start of the year:

Durable Goods Orders Fell 0.1% in August
Posted by Eddy Elfenbein on September 28th, 2011 at 9:49 am

The futures indicate that the stock market will open modestly higher today. Yesterday was a very good day for stocks although we lost a lot of our gains as the day wore on.

This morning, the Commerce Department reported that durable goods orders fell in August by 0.1%. This isn’t a huge drop but in July, orders soared by 4.1%.

The important number to watch in the durable goods report is orders of “non-defense capital goods.” This is a good barometer for telling us how much businesses are spending.

One of the major problems in this economy is that businesses are sitting on tons of cash but they’re not willing to spend it. The good news is that orders of non-defense capital goods increased by 1.1% in August after falling 0.2% in July.

Morning News: September 28, 2011
Posted by Eddy Elfenbein on September 28th, 2011 at 6:20 am

EU Barroso Calls For Use Of Fiscal Policy To Boost Growth

Greek Vote Approves a Despised Property Tax

Greek Strikes Maintain Momentum

Nagging Fears on Europe Slow a Wall Street Rally

Euro Crisis Makes Fed Lender of Only Resort

Obama Jobs Plan May Prevent 2012 Recession

Dallas Fed President Fisher Says Central Bank Is Under Attack From Ron Paul, Barney Frank

Health Insurers Push Premiums Sharply Higher

Free Checking Falls to 45% of Customer Accounts, Bankrate Says

Taiwan Semiconductor Shares Climb After New York Chip Venture with Intel

For Bank of America, a $50 Billion Claim of Havoc Looms

Time Warner Balks at European Media Prices

SABMiller a Step Closer to Snaring Australia’s Foster’s

United Feeling Merger Pains

Tasgall Group: Granger Things Have Happened

Szelhamos Rules: You Know What I Like

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