Archive for June, 2006

• Goldman’s Earnings
  Eddy Elfenbein, June 13th, 2006 at 11:13 am

  Goldman Sachs (GS) had even more impressive earnings than Lehman Brothers (LEH), but like Lehman, the stock is down.
  Don’t miss John Carney at DealBreaker blogging the GS conference call. Also, we know that Blankfein will replace Paulson, Charlie Gasparino looks at who will take Blankfein’s place.

• Dissecting the Bear
  Eddy Elfenbein, June 13th, 2006 at 7:28 am

  
  Since May 5, the S&P 500’s market value has fallen by $807 billion. That’s a nice chunk of change. Percentage-wise, it comes to -6.74%.
  What’s interesting to note is that since the stock market peaked, long-term interest rates have actually declined. Gold is down by $100 an ounce. This is not a market worried about inflation. If we use some reasonable assumptions, in just five weeks, the market has become convinced that around $50 billion of next year’s corporate profits will not materialize.
  The Big Bad Bear, however, hasn’t treated everyone equally. Here’s the performance of the 10 industry sectors since May 5:
  Utilities………………..+0.78%
  Staples………………..-1.61%
  Telecom………………-2.00%
  Health Care………….-2.28%
  Financials…………….-5.60%
  Discretionary……….-5.68%
  Industrials……………-8.71%
  Energy………………..-11.41%
  Tech…………………..-12.12%
  Materials…………….-13.30%
  Two observations. First, it’s almost the mirror image of the market before May 5. The other is that it’s a pretty wide gap. The bottom three groups, combined, make up just 27% of the S&P 500’s value, but have contributed more than half the losses. The rest of the market has suffered nary a scratch.
  So is this a major turning point? A new period of leadership for defensive stocks? It’s hard to say. These turning points don’t make their appearances widely known. Afterall, the energy stocks have been outperforming the S&P 500 for over seven years, and materials stocks have been ahead of the index for nearly six years. The trends last a long time.
  The two major defensive sectors, staples and health care, have been almost completely ignored by the bull market. Since mid-October 2002, the health care sector is up 7.2% and staples are up 10.9%, while the S&P 500 has grown by 38%.
  A month ago, the market was beginning to think that the Fed would hold off raising rates at the end of June. But now, it’s convinced that another rate hike is coming. Interestingly, the yield on the 30-year T-bond now closely follows the price of oil. The correlation is up to 80%, which is a 15-year high.
  Today, the PPI report showed that wholesale prices rose 0.2% in May. The core rate was up 0.3%, slightly above expectations of a 0.2% increase. Gold is below $600 an ounce, and copper has lost 13% in the last four days.
  While the market is somewhat concerned about inflation, the main reason for the correction is a growing concern about the health of the economy.

• Crossing Broadway
  Eddy Elfenbein, June 13th, 2006 at 7:18 am

  
  Burleigh Grimes, a musical comedy about Wall Street, opens today off Broadway.
  The show features music from (the very brillant) David Yazbek and stars Wendie Malick (Nina from Just Shoot Me), Mark Moses (Paul Young from Desperate Housewives) and James Badge Dale (Chase Edmunds from 24)

  Set in a world where no bad deed goes unrewarded, BURLEIGH GRIME$ follows George Radbourn (James Badge Dale), a Wall Street newbie who doesn’t recognize that his mentor, Burleigh Grimes (Mark Moses), may not be entirely sincere in appearance or agenda. A hard-driving stock market force, Grimes is a relentless man of infinite calculation, further assisted in his financial schemes by media powerhouse Elizabeth Bigley (Wendie Malick).
  In an arena where the naive and sentimental face ruin, George struggles for survival under the hand of Grimes’ flexible business tactics, while also dealing with the arrival of his college sweetheart, Grace Redding (Ashley Williams), who will soon have to face some difficult choices of her own.

  That’s not all. Guess who else shows up?

  The production also features a series of specially scripted guest video cameos by Jim Cramer, host of CNBC’s “Mad Money.”

  And here I was worried that Cramer was going to go Hollywood!
  Burleigh Grimes is playing at New World Stages/Stage 3, 340 West 50th Street, between 8th and 9th Avenues.

• Penny Stock Buyer Winds up CEO
  Eddy Elfenbein, June 13th, 2006 at 6:26 am

  A penny-stock investor’s unusual path to the CEO’s office.

• The NYT vs. Math
  Eddy Elfenbein, June 12th, 2006 at 9:48 pm

  A recent New York Times article makes a big deal about the one-week falloff of the Dow. Robert Ferguson, a newbie blogger, shows that it’s really no big deal (warning: math ahead):

  Roughly, the DJI has a mean weekly return of about zero. Its annual standard deviation of return is about 15%, more or less. Assuming weekly returns are independent as an approximation, a 15% annual volatility corresponds to a 2.08% weekly volatility. A weekly return of -3.2% is only 1.54 standard deviations from the mean.
  Assuming normality, the probability of a result 1.54 standard deviations below the mean or worse is 6.2%. This sounds pretty low, but Mr. Sommer did not pick this week at random. He scoured recent history for the worst week and found that it was the worst since about a year ago.
  The real question is how likely is at least one weekly decline of at 3.2% or worse in a year.
  Roughly this size negative return or worse should occur about three times a year (0.062*52=3.2). In fact, the probability that it would occur at least one week a year is about (1-(1-0.062)^52)=0.964, or about 96.4%.
  Something that is expected to happen at least once a year with probability 96.4% is not unusual.

• Dead Cat Splat
  Eddy Elfenbein, June 12th, 2006 at 3:47 pm

  
  We’ve given it all back. The Nasdaq is now below its low from last week, and is at its lowest point since October. This is the seventh straight down day for the index. Lehman Brothers (LEH) is down 6% today.

• S&P Share Buybacks Surge in 1Q
  Eddy Elfenbein, June 12th, 2006 at 1:43 pm

  From AP:

  NEW YORK — Share buybacks among companies in the Standard & Poor’s 500 climbed over 22 percent in the first three months of this year versus the prior-year period, a trend that boosted their first-quarter earnings per share by roughly 4 percent, Standard & Poor’s said Monday.
  S&P 500 companies spent $100.2 billion buying back their own shares in this year’s first quarter, the most they’ve spent on buybacks since the fourth quarter of 2005, when they spent a record $104.3 billion, Standard & Poor’s said. A total of 108 companies reduced their diluted shares outstanding by at least 4 percent.
  The recent surge in share buybacks comes as companies have built up hefty cash holdings, yet face a lack of attractive investment opportunities.
  Earlier this month, media company Tribune Co. said it would go ahead with a $2 billion buyback, while network gear maker Cisco Systems Inc. said it would buy back up to $5 billion of its own stock.
  “Given the current cash reserves and associated short-term rewards, the trend and its impact are expected to continue through the remainder of 2006,” said Howard Silverblatt, senior index analyst at Standard & Poor’s. Over the past 18 months, S&P companies have spent $515 billion to buy back their shares, he said.
  Companies buy back their own stock for several reasons, such as to boost shareholder value by reducing the number of shares outstanding, to reissue shares for mergers and acquisitions, and to cover workers who are exercising their stock options.
  But Standard & Poor’s said more companies are motivated by a desire to bolster earnings per share, a trend that raises concerns about the quality of earnings and where the company’s profit growth is coming from.
  “The most relevant question an investor can ask is what the company will do with the repurchased shares,” adds Standard & Poor’s Silverblatt. Repurchased shares “sit in the corporate treasury, where, subject to regulator timing, (they) can be reissued at the discretion of the company.” Paying a premium for a company’s stock when growth is coming from interest income and reduced share count “is not acceptable,” Silverblatt added.

• The Best-Selling Business Books
  Eddy Elfenbein, June 12th, 2006 at 12:17 pm

  The top 20 according to Amazon:
  Freakonomics : A Rogue Economist Explores the Hidden Side of
  Everything
  by Steven D. Levitt, Stephen J. Dubner
  The Tipping Point: How Little Things Can Make a Big Difference
  by Malcolm Gladwell
  Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money–That the Poor and Middle Class Do Not!
  by Robert T. Kiyosaki, Sharon L. Lechter
  Blink : The Power of Thinking Without Thinking
  by Malcolm Gladwell
  Good to Great: Why Some Companies Make the Leap… and Others Don’t
  by Jim Collins
  Jim Cramer’s Real Money: Sane Investing in an Insane World
  by James J. Cramer
  Never Cold Call Again : Achieve Sales Greatness Without Cold Calling
  by Frank J. Rumbauskas Jr.
  How to Win Friends & Influence People
  by Dale Carnegie
  The Official Guide for GMAT Review, 11th Edition
  The Official SAT Study Guide
  by The College Board
  Now, Discover Your Strengths
  by Marcus Buckingham, Donald O. Clifton
  Rich Dad’s Advisors: The ABC’s of Real Estate Investing : The Secrets of Finding Hidden Profits Most Investors Miss
  by Ken McElroy
  Getting Things Done : The Art of Stress-Free Productivity
  by David Allen
  Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
  by T. Harv Eker
  Cashflow Quadrant: Rich Dad’s Guide to Financial Freedom
  by Robert T. Kiyosaki, Sharon L. Lechter
  Revolutionary Wealth
  by Alvin Toffler, Heidi Toffler
  Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!
  by Robert T. Kiyosaki, Sharon L. Lechter
  The Five Dysfunctions of a Team: A Leadership Fable
  by Patrick M. Lencioni
  Who Moved My Cheese? An Amazing Way to Deal with Change in Your Work and in Your Life
  by Spencer Johnson, Kenneth H. Blanchard (Foreword)
  The Little Book That Beats the Market
  by Joel Greenblatt, Andrew Tobias (Foreword)

• The North Korean Fund
  Eddy Elfenbein, June 12th, 2006 at 11:52 am

  Thanks, I’ll pass.

  London-based Chosun Development & Investment Fund LP is trying to raise US$50 million (euro40 million) to exploit, as it says on its Web site, “opportunities in the Democratic People’s Republic of Korea…one of the last frontiers of global investing.” It claims to be the first such fund dedicated to investing in North Korea.
  Nestled in a politically volatile corner of East Asia, North Korea is the world’s lone outpost of totalitarian communism, its dictator Kim Jong Il seen by some as a brutal madman bent on developing nuclear weapons.
  Its economy, beset by chronic power shortages and still recovering from a deadly famine in the 1990s, is widely regarded as decades behind the industrialized world. Nearly 20 years ago, North Korea even defaulted on its foreign bank loans.
  Such obstacles haven’t deterred Chosun Fund, as it’s known for short. (Chosun is what North Korea calls itself.)

  A few years ago, the North Koreans had a bond offering which offered zero interest and–I’m not making this up–an “expression of affection” from the government.
  I proposed a counter offer of an “expression of affection,” and I raised them “a laurel and hearty handshake.” I never heard back.
  When the bonds come due in ten years, there will be a lottery and the winner will get some interest.
  By the way, Kim Il-sung is the official President of North Korea despite dying 12 years ago.

• Moral Hazard Interruptus
  Eddy Elfenbein, June 12th, 2006 at 11:48 am

  Pimco’s Paul McCulley on moral hazards and central banking.

  The great Hyman Minsky famously declared that stability is de-stabilizing. The experience of recent years reinforces the truth of that proposition, particularly when stability is bought with moral hazard. A little moral hazard is, to be sure, a necessary lubricant for global capitalism. And a little more than a little is the only path to cutting off fat-tailed deflationary risks. But way too much is not, in the words of Mae West, just about right.

  As they say, read the whole thing.