Archive for August, 2006

• The Election Cycle Revisited
  Eddy Elfenbein, August 10th, 2006 at 6:03 am

  A few months ago, I wrote about the stock market’s election cycle. This is one of those bits of market trivia that I usually don’t have much faith in. But I have to admit that the evidence is pretty strong that the market follows a four-year cycle.
  The indexes seem to have had several major bottoms during mid-term election years (see here). In April, I crunched the data from Ibbotson and Associates to see what the average cycle looks like, and this is what I got:
  
  You can see that the market runs into a wall in the year after an election, and stays flat through most of the mid-term election year. The theory is that the incumbent president tries to make the economy look great for Election Day, and everything goes to hell shortly afterward. This data was based on the market’s total return (dividends included) from 1926 through 2005.
  The data I had was monthly, and I wanted to see if I could narrow it down some. I looked at all the daily closings for the Dow Jones from the start of 1929 through this past Tuesday. That’s roughly 19-1/3 election cycles. This is slightly different because it’s just one index and dividends aren’t included, but I do have the benefit of zeroing in on a specific day.
  This is the average Dow election cycle looks like:
  
  You can certainly see a similar pattern here. The market hits its low on September 30 of the mid-term year (not too far away!) and peaks on August 3 of the post-election year. In that 14-month period, the market declines an average of 9.4%. The market is up 46.8% over the other 34 months.
  What I really found surprising is that the bullish period is very heavily concentrated within the first 12 months.
  From September 30 of the mid-term to September 13 of the pre-election year, the Dow is up an average of 31.6%. To put that in perspective, the Dow averages a gain of 33.1% over the entire four-year period. So every four years, 95% of the market’s capital gains is squeezed into a one-year period (on average).
  If you’re curious, the market’s best day during the four-year cycle is September 21 of the election year (+1.15%, thank you 1932) and the worst day is October 19 of the pre-election year (-2.04%, thank you 1987). And most importantly, Leap Day is slightly positive (+0.12%).

• Nicholas Financial
  Eddy Elfenbein, August 9th, 2006 at 11:30 am

  For today’s edition of “Widdle Biddy Stocks That Ain’t No One Never Heard Of,” I give you Nicholas Financial (NICK).
  Nicholas is a Florida-based company that provides auto loans for used cars, a segment that’s often not served by larger lenders. I’m not joking when I say this is a small company, about 200 employees and a market value of $140 million. Citigroup, by comparison, is over 1,500 times larger.
  But dude, check out NICK’s results:
  Year…………Sales (mil)………EPS
  1997…………..$6.21…………$0.12
  1998…………..$7.94…………$0.13
  1999…………$10.42…………$0.22
  2000…………$14.07…………$0.34
  2001…………$17.80…………$0.45
  2002…………$20.22…………$0.50
  2003…………$22.38…………$0.54
  2004…………$25.50…………$0.64
  2005…………$32.83…………$0.80
  2006…………$42.68…………$1.01
  That grabs my attention. NICK has certainly found a niche for itself. The company recently reported first-quarter results (the fiscal year ends in March). Net income grew 29%. The company earned 29 cents a share compared with 23 cents last year. This brings their trailing four-quarter earnings up to $1.07 a share. That means that the company is going for less than 14 times earnings.
  There’s not much info on Nicholas, but here’s part of article on the company from 2004:

  The interest rate Nicholas can charge is dictated by state regulations, and it won’t go into a state where it can’t get a rate of at least 20 percent.
  Generally, Nicholas borrowers don’t qualify for traditional sources. The economy has made more people “credit-challenged,” but Finkenbrink says that doesn’t mean they are bad risks.
  “We try to finance people who may have had trouble because of a divorce, medical problems or job loss, as opposed to ‘credit criminals,'” he said.
  Creating relationships
  The company’s branch system is key. Branches require overhead, but they put employees in touch with customers.
  “Customers like to come into the office,” Finkenbrink said. “We create relationships, and employees often will counsel customers.”
  The result is low delinquency. For the past few years, about 1 percent to 2.5 percent of total loans due at any one time are more than 30 days past due, according to an April 14 research report from Atlanta-based Westminster Securities.
  Many larger companies pulled out of the sub-prime auto loan business in the 1990s when they failed to make a lot of money at it, said Will Lyons, Westminster director of equity research.
  Currently, GMAC and Ford Motor Credit dominate the industry, and Nicholas has only one-tenth of 1 percent of the market, according to an investors presentation by Nicholas.
  “Nicholas takes a personal approach to every loan they do,” Lyons said. “It costs a lot of money to do that, and big companies don’t want to take that kind of approach.”

  Here’s the chart:
  

• The Fed Pauses
  Eddy Elfenbein, August 8th, 2006 at 2:52 pm

  Seventeen and done…for now. Not a good move in my opinion.
  Here’s the statement:

  The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
  Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
  Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
  Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

  Lacker is the President of the Richmond Fed.
  Two other bank presidents, Moskow and Poole, were probably for another rate increase. Since the bank president’s rotate turns, those two won’t be able to vote until next year.
  Can you tell when the announcement came?
  

• The Fed’s Decision
  Eddy Elfenbein, August 8th, 2006 at 11:04 am

  At 2:15 we’ll find out what the Fed will do. For the first time in a while, there’s actually some drama to a Fed announcement.
  According to the latest futures contracts, the market believes there’s a 21% chance of a rate hike. Personally, I’m a little baffled. It’s seems pretty obvious that the Fed needs to get rates higher. We’ll know more this afternoon.

• My Favorite Links
  Eddy Elfenbein, August 8th, 2006 at 10:18 am

  I’m very bad in updating my links page but I finally got around to it. Please check out some of the other stock bloggers.
  Some of my favorites include Justin Walters and Paul Hickey over at Ticker Sense, Barry Ritholtz, John, Elizabeth, Joe, Muffie & Co. at DealBreaker, Herb Greenberg, David Phillips at 10-Q Detective and Michelle Leder at Footnoted.

• Hansen Cracks
  Eddy Elfenbein, August 8th, 2006 at 10:03 am

  
  Hansen Natural (HANS) has been one of the hottest stocks on Wall Street. But yesterday, the shorts finally caught up to the Monster Energy drink maker.
  The company’s earnings were in line with expectations (28 cents a share) yet the stock fell $10.40 a share, or 25%. Youch! And that doesn’t count the $10 a share it lost in the month before yesterday’s open. Shares of Hansen were up 332% in 2004, and 330% in 2005. The stock is “only” up 51% so far this year.
  I wonder what would have happened if the company missed earnings.

• Why Interest Rates Are So Important
  Eddy Elfenbein, August 7th, 2006 at 6:36 am

  On Tuesday, the Fed will make its big decision on interest rates. If you’re new to investing, the direction of interest rates is extremely important to the stock market.
  Stocks love falling rates, but rising rates act like Kryptonite. Consider these numbers:
  Since 1960, the yield on the 90-day Treasury bill has risen on 1,201 weeks. If we islotate those weeks, the market has climbed a total of 144% which works out to 3.9% a year. But on the 1,107 weeks when rates have fallen, the market has climbed over 650%. That comes to 10% a year, or 2.5 times better than when rates are rising.
  Rates have stayed the same on 121 weeks for a total return of 16.5%, or 6.8% annualized which is almost the exact average of the other two categories.
  Short-term rates hit their lowest point on June 19, 2003 at just 0.79%, and have risen ever since. Since then, the S&P 500 is up 28.6% or 8.4% a year.

• Efficient Couch Market Hypothesis
  Eddy Elfenbein, August 6th, 2006 at 9:32 pm

  I own Comfy Couch, the single most comfortable couch in the entire world. It’s plush and squishy and fits me juuusst right. Unfortunately, Comfy Couch is also the ugliest couch in the world. I’m serious, this thing is truly hideous.
  Well, I felt the time had finally come to depart with Comfy Couch. Comfy Couch, you see, is getting on in years, and she’s just not what she was. (On a side note, I inherited Comfy Couch from Tobin Smith, one of the market mavens on Bulls & Bears.)
  So I advertised Comfy Couch on Craig’s List under the “Free Stuff” section (“Ugly Ass Couch, Free!!”). I waited and waited, but no one wanted her. No e-mails, nothing. I even reposted the ad, but still there were no takers.
  Soooo…I changed strategy. I posted the ad under the “For Sale” section (Ugly Ass Couch, $30!!).
  Sold. That day.
  Efficient market, my ass! It’s like economics, but…freaky.
  You’re reading this, of course, on my free blog. Ah, irony!

• “Sometimes libertarians deserve to win an argument”
  Eddy Elfenbein, August 6th, 2006 at 11:23 am

  
  So says the Washington Post in its editorial on hedge fund regulation:

  There are three types of argument in favor of regulating hedge funds, and none is persuasive.
  The first invokes systemic risk: If a hedge fund collapses, the banks that lent to it may collapse, too, causing a chain reaction through the financial system. This danger is real, but the banks that lend to hedge funds have a strong incentive to manage it by limiting their exposure to hedge funds and by monitoring the risks that the funds take. Since the Long-Term Capital debacle, this is what banks appear to be doing. Regulatory prodding has encouraged the banks to get smarter, though in some cases the rules perversely permit hedge funds to borrow more if they take on extra risk — an example of how oversight of this complex industry can backfire.
  The second argument for regulating hedge funds is that they are havens of insider trading and other sorts of illegal manipulation. It’s true that some prominent cases of fraud involve hedge funds, but this isn’t surprising given their size. The law already empowers regulators to go after hedge fund managers who commit financial crimes. It’s not clear that extra regulations would add much.
  The third argument for regulation concerns investor protection. The SEC suggests that by registering and inspecting hedge funds it can reduce the danger that investors will lose money. Some hedge fund managers are happy to accept this line: To reassure anxious clients, some choose to register with the SEC anyway, and they calculate that submitting to mild regulation now may be smarter than waiting until the political storm that would follow the scandalous blowup of a crooked player in their industry. But this is a case of hedge funds and their customers trying to ensure their reputations by gaining a regulatory seal of approval. The regulators should decline to become a security blanket.

• Mixed Market
  Eddy Elfenbein, August 4th, 2006 at 11:19 am

  AP:

  Ceradyne 2Q Profit Doubles

  MarketWatch:

  Ceradyne net nearly triples