Retail Sales Unchanged
Posted by Eddy Elfenbein on September 14th, 2011 at 8:58 am

The futures indicate that the market will open higher this morning. The surprising news of this morning is that the Democrats lost the by-election to replace Anthony Weiner in New York’s ninth congressional district. This was seen as a relatively safe seat for the Democrats.

The retail sales report for August was unchanged from July. Wall Street was expecting an increase of 0.3% so this was a bit of a surprise. Some economists are concerned that the summer swoon had a larger impact on consumer spending than was first realized. Also, the initial retail sales report for July showed an increase of 0.5%. That was revised down to 0.3%.

The PPI report showed that wholesale inflation was flat last month which is welcome news for inflation hawks. The “core rate” rose by just 0.1%.

There’s more bad news for French banks this morning. These banks had the most exposure to the problems in Greece. Moody’s has downgraded the long-term debt of two major French banks, Société Générale and Crédit Agricole. Additionally, BNP Paribas is under review for a downgrade. Actually, some investors think Moody’s action could have been harsher.

Morning News: September 14, 2011
Posted by Eddy Elfenbein on September 14th, 2011 at 5:32 am

Risk Rises at ECB as Europe Banks Lose Deposits

From Europe, Mounting Pressure Over Greece’s Debt

French Banks Downgrade Revives Euro Debt Fears

European Shares Turn Positive on Euro Bonds Hopes

Asia Corporate Sentiment Slides on Global Worries

World Must Cut Deficits, Not Rely on China: Wen

Gold Declines as Stocks, Commodities Drop on European Debt Risk

Crude Oil Drops From Six-Week High on Concern Economic Recovery to Falter

Geithner Takes Tougher Tone on Europe

Banks Brace for a Season of Fall-Offs

RIM Poised to Miss Tablet Estimates as IPad Wins

Dell Sets $5 Billion Buyback

Demand at Target for Fashion Line Crashes Web Site

Soaring U.S. Poverty Casts Spotlight on ‘Lost Decade’

Joshua Brown: Short Interest Explodes, Face-Ripper™ Coming?

Phil Pearlman: If It Weren’t for the Sales Tax Break, Amazon Would be Getting Crushed By Best Buy

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The Power of Momentum
Posted by Eddy Elfenbein on September 13th, 2011 at 7:49 am

In a post yesterday, I criticized some sloppy analysis which tried to make overly broad statements based on long-term stock data. Here’s a good example of how long-term data ought to be used. The chart below shows the historical performance of stocks ranked by momentum decile (meaning 10% slices).

I took the numbers from Ken French’s data library. The reason why this is a more sound method is that we’re using long-term data to isolate one particular aspect of stock performance.

It turns out that stocks that are in motion have a very long record of continuing to stay in motion. Just to be clear, momentum is defined by performance over the 11-month period starting 12 months ago and ending one month ago. The month directly prior to each period is excluded. At the end of the month, the whole thing is repeated.

The deciles are perfectly ranked by momentum. The portfolio with the highest momentum did the best. The second-best came in second and so on, all the way down to the worst momentum which came in last.

Morning News: September 13, 2011
Posted by Eddy Elfenbein on September 13th, 2011 at 5:00 am

More Job Cuts Loom for European Banks With Fixed Pay

Wary Investors Start to Shun European Banks

I.M.F. Chief’s Change of Tune on Bank Capital

Italian Bonds Decline Before Debt Auction; German Bunds Fall

Gold Rebounds 1% on Persistent Euro Zone Worries

Nikkei Rises From 2 1/2-Year Low as Trichet Eases Europe Worry

Treasury Yield 8 Basis Points From Record Low on Debt Concerns

HP Extends $11.2 Billion Autonomy Offer

Microsoft May Disappoint With 19% Payout Boost

Detroit Sets Its Future on a Foundation of Two-Tier Wages

Broadcom’s Chip Valuation Signals 39% Gain for Cavium

Obama Team Backed $535 Million Solyndra Aid as Auditor Warned on Finances

Outsiders’ Ideas Help Bank of America Trim Jobs and Costs

More College Grads Defaulting on Student Loans

Todd Sullivan: Lehman and Used Car Sales

Howard Lindzon: Momentum Monday (09/12/11)…Why Visibility is Dead and Why Apple and Amazon Love It!

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Goldman Breaks Below $100
Posted by Eddy Elfenbein on September 12th, 2011 at 2:54 pm

Shares of Goldman Sachs ($GS) dropped below $100 very briefly today. This is an enormous drop off from the start of the year when the stock was at $168. Bear in mind that Goldman earned over $22 per share in 2009.

From the Department of Silly Analysis
Posted by Eddy Elfenbein on September 12th, 2011 at 12:59 pm

E.S. Browning’s “Abreast of the Market” column today features a very bullish forecast made by Professor Richard Sylla of NYU.

Using 10-year averages of annual market returns, including dividends and adjusted for inflation, Prof. Sylla and his colleagues found that U.S. stocks have risen and fallen in surprisingly consistent waves for more than 200 years. The pattern has become even steadier since World War II.

I think this sort of analysis is highly superficial yet (and?) it seems to be very popular. First, looking at very long-term market performance is interesting from a historical perspective but much of this data is far from rigorous. The stock market was a minor speck of the American economy in 1790. Equity markets in a modern sense didn’t develop until the 1920s. Plus, the markets were not very efficient through the 1960s. I like to look at long-term data as well, but it’s a mistake to draw precise conclusions from it.

If the market sticks to its long-term pattern, Prof. Sylla says, the Dow Jones Industrial Average could climb to 20250 by the end of 2020, up 84% from today. The Standard & Poor’s 500-stock index might hit 2300, up 99% from Friday’s close of 1154.23.

It’s one thing to say that stocks are below their long-term average. I’m fine with that and it’s something you can easily show. But as with many in the art of pseudo-forecast, Professor Sylla is hedging his call beyond reason.

Now a recovery with 6.5% average annual returns, equal to the historical inflation-adjusted average, would fit, he says. He isn’t saying stocks will rise that much each year, just that this could be the average.

Prof. Sylla does see a 25% chance that the next decade could fall well short of that.

Sorry–this is where you lose me. A 25% chance isn’t exactly small. Making any forecast and giving yourself a one-in-four chance of being WAY off the mark makes the other 75% totally worthless.

Greece Gets Ready to Default
Posted by Eddy Elfenbein on September 12th, 2011 at 12:20 pm

The stock market is down yet again today. The S&P 500 got as low as 1,141.53 today so it’s still above the August 8th closing low of 1,119.46. One interesting aspect of today’s sell-off is that gold is also down today.

The financial markets are beginning to adjust to the reality that Greece is going to default. Forbes writes: “Last week five-year Greek credit-default swaps indicated a 92% chance that the country would miss its debt payments.” This is having major spillover effects. The euro has been clobbered against the dollar and many other currencies. Now it looks like French banks are in serious trouble as Moody’s is considering downgrading them.

The National Association for Business Economics today cuts its forecast for U.S. GDP growth. They see the economy growing by 1.7% this year and 2.3% next year. That’s down from their earlier estimates of 2.8% for this year and 3.2% for 2012.

The Financial Sector ETF ($XLF) bounced off $12 per share. If it breaks below $12, I think it will be an outstanding buy. I also see that Nicholas Financial ($NICK) dropped below $10 per share which is less than its book value of $10.18.

Morning News: September 12, 2011
Posted by Eddy Elfenbein on September 12th, 2011 at 5:43 am

Britain’s I.C.B. Recomends Gradual Banking Reform

Germany Readies Surrender Over Greece

Draghi’s Hands May Be Tied on ECB Stimulus

Euro Falls To More Than 10-Year Low Vs Yen

China’s False Promises

SocGen Sovereign Debt Manageable, to Speed Changes

India Industrial Output Grows at Slowest Pace Since ’09, Missing Estimates

Oil Drops for Third Day on Concern Debt Crisis to Limit Growth, Fuel Need

Technip Buys Global Industries in $937 Million Subsea Expansion

Suzuki-Volkswagen Alliance Teeters

Foster’s Rejects SABMiller’s Ex-Dividend Offer

Dell Loses Orders as Facebook DIY Servers Gain

Carol Bartz Resigns From Yahoo Board

Brian Shannon: Stock Trading Ideas for 9/12/11

Paul Kedrosky: What Caused the Recession of 1937-38?

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Crossing Wall Street Ten Years Ago
Posted by Eddy Elfenbein on September 11th, 2011 at 8:46 am

I want to draw your attention to a worthy organization named Tuesday’s Children which supports families that were impacted by the events of ten years ago.

Kenneth Rogoff on the Pro-Inflation Argument
Posted by Eddy Elfenbein on September 10th, 2011 at 2:32 pm

The Boston Globe has an interesting article about Kenneth Rogoff who makes the case that the economy needs some inflation right now. (Note: I’m not endorsing it, just highlighting the argument.)

Here’s a sample:

Like corruption, crime, and asbestos, “inflation” is a word that many Americans imagine in all-red capital letters, flashing across TV screens amid warnings of crisis. For anyone who remembers the gloomy, scary 1970s, when the inflation rate in the United States reached double digits, the word is shorthand for an economy that has spiraled out of control, the dollar losing value and prices climbing feverishly. “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man,” said Ronald Reagan in 1978, as nervous citizens imagined the day when they’d have to push a wheelbarrow full of cash to the grocery store in order to buy a loaf of bread.

That particular nightmare never came to pass, thanks to drastic measures taken by the Federal Reserve. For the better part of the past 30 years, the dollar has stayed stable, reassuring American families and the nation’s trading partners, with the central bank standing guard over the economy and doing everything necessary to keep inflation low.

You might say that Kenneth Rogoff has been one of the guards. As a research economist at the Federal Reserve during the first half of the 1980s, he helped ensure that the word “inflation” would never again flash across American TV screens. His reputation as a conservative-minded inflation hawk followed him from the Fed to the International Monetary Fund to his current position in the economics department at Harvard.

But then came the financial crisis of 2008, and the ensuing slump. And as the economy has continued to stagnate, Rogoff, 58, has become the flag-bearer for an unlikely position: that as we struggle to help the economy find its way out of the darkness, inflation could be the answer. It’s time, Rogoff says, to put Reagan’s “hit man” to work for the good guys.