Archive for June, 2006

• Meriwether to Get Lifetime Achievement Award
  Eddy Elfenbein, June 5th, 2006 at 7:20 am

  This has got to be a joke.
  John Meriwether, the former head of Long Term Capital Management, is getting the Alternative Investment News‘ 2006 Lifetime Achievement Award.
  Let’s skip over the fact that someone is giving out lifetime achievement awards for hedge fund managers, but John Meriwether???
  This clown not only saw his fund blow up, but nearly took down the global financial system while doing it. That’s an achievement alright.

• More on the P/E Ratio
  Eddy Elfenbein, June 5th, 2006 at 6:11 am

  Barry Ritholtz was kind enough to link to my post about the P/E ratio of the S&P 500 hitting a 10-year low. I have to confess that I wasn’t trying to make a bullish call for stocks. I was simply pointing out that P/E ratios are at a 10-year low. I think it’s fascinating is that the bull market has seen its P/E ratio shrink over time. I believe that’s unprecedented. (Barry included a counter post from Scott Frew.)
  But I want to use this opportunity to make a few important points. The first is that ALL financial measurements are flawed. Some are worse than others. This doesn’t mean we ignore them, but we do have to recognize each one’s limitations.
  Of course, I was the one who raised P/E ratios in the first place so let’s zero is on that one. (Don’t get me wrong: I love the P/E ratio. I love despite the flaws). The first problem is that the P/E ratio mixes two types of data. One number—the price—is a fixed point number, it lives in a specific point in time. Earnings, however, is a rate. It tells how much money was made between two specific points. It’s as if we’re comparing dollars to miles-per-hour.
  This isn’t wholly unkosher, but we do have to look out for pitfalls. For example, P/E ratios often rise at the beginning of a bull market because prices tend to anticipate earnings. (Not only that, prices can even influence earnings.)
  The P/E ratio is also highly dependent on pay out ratios, meaning how much of its profits a company pays to its shareholders (the owners) in the form of dividends. When companies pay out a larger share of their profits as dividends, earnings multiples should be lower. According to Professor Robert Shiller’s latest data, only about one-third of corporate profits are paid out as dividends. That’s very near the lowest percentage in all his data, which stretches back more than 130 years. It’s far lower than 1929 or 1987.
  P/E ratios also influenced by long-term interest rates. This is for two reasons. The first is that borrowing costs are a major business expense, so if the cost of renting money falls, companies will be more profitable. The second, and more important reason, is that bonds compete against stocks for investors’ dollars. So higher bond yields means that stocks have to adjust and offer investors more “bang for the buck,” hence lower earnings multiples. The reverse is true for lower rates. It’s a never-ending battle between bonds and stocks. Periodically, gold likes to jump in the battle, too.
  Twenty-five years ago, long-term Treasury yields climbed over 15%, and it was common to see P/E ratios in the high-single-digits. While bond yields have crept up recently, we’re still in a period of low long-term yield relative to the last thirty years.
  And finally, the P/E ratio is a fine general gauge of market sentiment, but it’s still far from perfect. As Barry said, “cheap stocks can get cheaper.” That’s very true. Also, expensive stocks can get even more expensive. Much more. I’ll give you a good example. According to Dr. Shiller’s data (his P/E ratio data uses trailing earnings for the last 10 years), the P/E ratio reached 26 in February 1996. That was highest reading since October 1929.
  But if you sold out, you would have been kicking yourself. Four years after October 1929, the S&P 500 was down by two-thirds. But four years after February 1996, the S&P had doubled. Thanks for nothing Mr. P/E Ratio!
  As long-time readers know, I’m a perma-bull. This doesn’t mean I’m always bullish. It just means that I avoid timing the market. When you realize how many different variables affect the market stock, it’s simply overwhelming. The moral of the story is to look at all financial data, but don’t be a slave to any.

• Bon Voyonage
  Eddy Elfenbein, June 4th, 2006 at 12:04 am

  The WSJ looks at why the Vonage IPO sucked. In other news, Vonage sucks.

  In response to some written questions yesterday, the company said the IPO wasn’t mishandled and that it will not be deterred “from executing on our business plan and serving our customers.” The company also noted that it remains under a legally mandated quiet period.

  (Wince.)
  Update: Here come the lawsuits.

• A Primer on the Option-Grant Scandal
  Eddy Elfenbein, June 2nd, 2006 at 10:19 am

  Business Week offers a handy guide to the backdating scandal.

• 75,000 New Jobs
  Eddy Elfenbein, June 2nd, 2006 at 10:12 am

  
  The economy created just 75,000 new jobs last month which is much less than Wall Street was expecting. Economists expected an increase of 170,000.

• The Objection of Gross’ Affection
  Eddy Elfenbein, June 2nd, 2006 at 6:05 am

  I agree with John Carney at DealBreaker, it’s time we lay off Daniel Gross. Almost.
  Gross, as you may know, promised to eat the first chapter of Dow 36,000 if Bush nominated an A-list Wall Streeter as the next Treasury Secretary. Well, you don’t get much more A-list than Hank Paulson, so we all had a good laugh at Gross’ expense.
  But here’s a question: Of all the books to eat, why did Gross choose Dow 36,000? I mean, why not go for, say…Finnegan’s Wake? It still gets the point across, plus you get points for pretension. Or he didn’t even have to eat a book at all. I think a hat is more traditional. Or he could have gone with “I’ll eat Cleveland.” You really have lots of options to work with.
  But there’s something about Gross and Dow 36,000. He has a rather bizarre history with this book. I’m not sure what to call it. An obsession? Gross simply MUST reference it, no matter how tangential it is to his topic. He can’t not do it. As “wine-dark” is to sea,” so Dow 36,000 is to…well, everything! Especially everything Republican.
  Consider this from his Web site last year:

  Of course, very few of the proponents of HSAs actually have them. How many people at the American Enterprise have them? Probably the same number who think the Dow should be fairly valued at 36,000–which is to say, two.

  See! The book must be mentioned, even when it doesn’t help his argument. Perhaps the idea of Republican journalists entering financial economic theory is just too much. (Hassett, of course, is a professional economist.) How come Gross doesn’t refer to Paul Krugman’s “stock bubble” call of three years ago? I’d eat that column (someone’s got to).
  But no, it’s always Dow 36,000. There was this from a Slate article last December:

  There was a nice jobs report on Friday. The folks at CNBC are busting out the “Dow 11,000” hats again (though the “Dow 36,000” Windbreakers remain in deep storage).

  Why? What does that even mean?
  We can even go back in time. Here he is January 2003, attacking the Bush tax cut:

  Council of Economic Advisers Chairman Glenn Hubbard, the Bush administration’s one-man-economic-policy-band, apparently believes that this move will boost the market by 20 percent. “This will provide a lot of juice to the market,” said Kevin Hassett, a co-author of Dow 36,000, told the New York Times. But if they believe that this proposal will achieve such results, then I’ve got some calls on Dow 36,000 to sell them.

  Well, that’s no so bad. At least Hassett is mentioned so it’s not coming out of left field. Incidentally, was that another prediction?
  Here he is in the New York Times last December:

  In 2001, the stock market meltdown and a brief recession threw cold water on the widely held belief that the U.S. economy, juiced by a technological revolution, had entered a new era of limitless, inflation-free growth. But today, as bubble-era books like “Dow 36,000” collect dust on library shelves, evidence is mounting that there may be a New Economy after all.

  Yuck. I certainly hope he doesn’t eat a dusty copy. DealBreaker has been kind enough to offer to buy a new copy for him. Gross noted that at Amazon, the book is going for four cents. But look! He’s checked the price before:

  Why is Bush’s strategy stalled? I’d propose a few reasons:
  1) Long Muscle Memory. It’s been five years since the market peaked. Though the S&P 500 has notched up three years in a row, Americans remain scarred by the bad end of the ’90s boom. (The mere mention of the words Dow 36,000, a copy of which is available on Amazon.com for 11 cents, can cause a room to empty.) It took nearly two generations for investors to get over the debacle of 1929. Psychological recovery from the ’90s bubble is going to take time.

  Gross just can’t let it go. There were two other books written at the same time as Dow 36,000. One was Dow 40,000, the other was Dow 100,000. Neither had the benefit of being written by James Glassman.
  Here’s Gross again:

  And as we know from bitter experience (Dow 36,000, anyone?), optimism is always highest just when stocks are about to tank.

  From his Web site, more parentheses:

  Now, as deputy chief of staff at the White House and director at OMB, Bolten has been present in the room when every decision on fiscal policy was made–the reckless tactics, the reckless spending, the creation of the Medicare drug program, the absurd Social Security reform proposals, and so on. Brad DeLong has rightly dubbed the Bush administration fiscal policy as a “clown show.” I think it’s clear who the Bozo of the bunch. But Bolten has been putting on the red noses, frizzy wigs, and oversized shoes with the rest of them. Kevin Hassett may earnestly believe in what he says. (He also may earnestly believe that the Dow would be fairly valued at 36,000 today). But it doesn’t mean a reporter should (a) credit it; and (b) end the piece with it.

  I could go on. There are more D36K mentions here and here.
  Gross is one of my favorite business writers (look, he’s on my blogroll). But he clearly has an obsession. It’s madness! It’s hysteria! Wait…what was Dow 36,000 about again?

• The Return of Volatility, Part III
  Eddy Elfenbein, June 1st, 2006 at 3:26 pm

  One of the interesting aspects of market volatility is that it’s not linear. By that, I mean that when the market becomes more volatile, the volatile stocks get REALLY volatile. When volatility fades, volatile stocks then only become slightly more volatile than the market.
  Here’s a chart of the trailing 50-day average swing (standard deviation) of the S&P 500 (yellow line) and the Nasdaq (black line):
  
  Notice how the Nasdaq used to be two and three times more volatile than the S&P 500. But today, the two are practically identical.

• UnitedHealth expects 2006 revenue of $72 billion
  Eddy Elfenbein, June 1st, 2006 at 3:22 pm

  From Reuters:

  UnitedHealth Group Inc. on Thursday reiterated its expected 2006 per share earnings of $2.88 to $2.92 a share with total revenue near $72 billion and operating earnings between $6.8 billion and $6.9 billion, according to a regulatory filing.
  The company also said that it expects its UnitedHealthcare unit to produce 2006 revenue of about $35 billion and its Ovations unit to produce about $25 billion in 2006 revenue, according to the filing with the U.S. Securities and Exchange Commission.
  UnitedHealth forecast providing 5.7 million to 6 million seniors with prescription drug benefit plans under Medicare Part D by year end, generating full-year revenue of $5.7 billion to $6 billion.
  UnitedHealth shares rose $1.20, or 2.7 percent, to $45.16 in afternoon trade on the New York Stock Exchange, where health-insurer stocks broadly were trading higher.

• Crocs Shoe Company Co-Founder Arrested
  Eddy Elfenbein, June 1st, 2006 at 2:43 pm

  From the AP:

  A Crocs shoe company co-founder who resigned as a director last week was arrested on misdemeanor charges of threatening to slit his former brother-in-law’s throat, police said.

  That’s only a misdemeanor?

  George Brian Boedecker Jr., 44, was arrested May 27, a day after the confrontation in the law office of his sister’s ex-husband, David Moorhead, the Daily Camera reported in Thursday editions.
  According to a police report, Moorhead said Boedecker called him and said, “I’m going to slit your throat,” then went to Moorhead’s office and tried to start a fight. Moorhead told investigators Boedecker appeared drunk, the report said.

• Reader Q&A
  Eddy Elfenbein, June 1st, 2006 at 2:34 pm

  Dear Sir:
  I am a new investor and know squat about the market. I came across your site via Google and after reading through your site, I had a couple of questions. They are quite naïve I am sure. What would you recommend for a short term gain of at least 50%? Does it exist? Let’s say I have $5,000 to invest. Would you (suggest) any stocks or shares that would return double my money by the end of the year or sooner? Note that I encased “suggest”, as I know you are not here to recommend as you stated. I have called (2) brokers to date, and they really make me nervous with their tactics. Whatever info you can provide would be helpful. To be honest, I have about $20,000 I can invest, BUT that $20,000 NEEDS to be returned at least two fold under a year. I must be really making you laugh about now with my expected returns, but I have to ask. Thanks for your help sir.

  No, no…we would never laugh at you. But I have to be honest—you have to bring your expectations back down to earth! Holy Toledo! According to the best statistics, it’s reasonable to assume that the stock market goes up about 10% a year. It doubles, on average, every seven years. Sometimes better, sometimes worse.
  I would never, EVER say a stock could double by the end of the year. It’s ahistorical, and I would be highly suspicious of anyone who made that claim.
  To quote Gordon Gekko (pbuh): You’re walking around blind without a cane, pal. A fool and his money are lucky enough to get together in the first place.
  Don’t be that fool!
  Best regards,
  Eddy