Archive for December, 2006

• Damn It Feels Good to be a Trader
  Eddy Elfenbein, December 11th, 2006 at 7:26 am

  Check out these results from the big houses.
  
  This week begins around round of earnings reports from the brokers. Goldman (GS) leads off tomorrow, Bear Stearns (BSC) and Lehman (LEH) on Thursday and Morgan (MS) follows next Tuesday.
  The party, however, could be coming to an end. Bloomberg notes:

  Merrill’s Guy Moszkowski, the No. 1-ranked U.S. brokerage analyst by Institutional Investor magazine, estimates the combined profits of Goldman, Morgan Stanley, Lehman and Bear Stearns will fall 5.8 percent in 2007. Revenue will decline about 2 percent, compared with a 31 percent gain this year.
  Trading revenue, which accounts for about half of the firms’ total, will fall 3.7 percent next year, Moszkowski said. Revenue from investment banking, which includes securities underwriting and providing mergers advice, probably will rise 7.8 percent, he forecast. Asset management will gain 11 percent.
  Investment banking executives, including Goldman CEO Lloyd Blankfein, say their traders thrive on price swings. The volatility of U.S. Treasury bonds slipped this year to the lowest in five years and is the lowest in a decade for U.S. stocks, reducing the firms’ opportunity to make money on hedging and trading for clients and themselves. Trading volume in stocks on the S&P 500 fell in each of the past three months from a year earlier.

  Citigroup‘s (C) stock has badly lagged this sector. As I’ve said before, I think it would be a good move to spin off both Smith Barney and Salomon Brothers.

• Five Macroeconomic Myths
  Eddy Elfenbein, December 11th, 2006 at 7:03 am

  Nobel Prizer Edward Prescott looks at Five Macroeconomic Myths in today’s Wall Street Journal. Here’s #1, “Monetary policy causes booms and busts.”

  Greg Mankiw, former chairman of the Council of Economic Advisers, wrote the following in a 2002 paper: “No aspect of U.S. policy in the 1990s is more widely hailed as a success than monetary policy. Fed Chairman Alan Greenspan is often viewed as a miracle worker.” Or, as Mr. Mankiw later asks, was Mr. Greenspan just lucky?
  One of the mysteries of the 1990s is how to explain the economic boom when the increase in capital investments — as measured by the national accounts — grew at a subdued pace. The numbers simply don’t add up. However, it turns out that something special happened in the 1990s, and it wasn’t monetary policy. In a recent paper, Minneapolis Fed senior economist Ellen McGrattan and I show that intangible capital investment — including R&D, developing new markets, building new business organizations and clientele — was above normal by 4% of GDP in the late 1990s.
  This difference is key to understanding growth rates in the 1990s: Output, correctly measured, increased 8% relative to trend between 1991 and 1999, which is much bigger than the U.S. national accounts number of 4%. Associated with this boom in unmeasured investment is the huge amount of unmeasured savings that showed up in the wealth statistics as capital gains. This was the people’s boom, the risk-takers’ boom. We should hang gold medals around these entrepreneurs’ necks. So indeed, it does seem that Mr. Greenspan was lucky in that a boom happened under his watch; but we can at least say that he did a pretty good job of keeping inflation in check. Here’s hoping for the same performance from our current chairman.
  What about busts? Let’s begin with the assumption that tight monetary policy caused the recession of 1978-1982. This myth is so firmly entrenched that I could have called this downturn the “Volcker recession” and readers would have understood my reference. To accept the myth, you have to accept a consistent relationship between monetary policy and economic activity — and as we’ve just seen, this relationship is simply not evident in the data.
  Between 1975 and 1980, the inflation-corrected federal funds rate was low; at the same time, output trended upward until late 1978. So far, things look somewhat promising for the mythmakers. But looking closer at the data we see that output began its downward trend in late 1979 while monetary policy was still easy through most of 1980. Also, output continued its decline through 1982, when it began to climb at a time when monetary policy remained tight.
  These facts do not square with conventional wisdom. Our obsession with monetary policy in the conduct of the real economy is misplaced.
  One caveat: I am not saying that there are no real costs to inflation — there certainly are. And if we get too much inflation we can exact high costs on an economy (witness Argentina as an example). However, I am talking here of the vast majority of industrialized countries who live in a low-inflation regime and who are in no danger of slipping into hyperinflation. It is simply impossible to make a grave mistake when we’re talking about movements of 25 basis points.

  It’s true, the Fed doesn’t run the world. Please don’t tell the gold bugs.

• The Limits of Economics
  Eddy Elfenbein, December 9th, 2006 at 3:40 pm

  Here’s a fascinating article from Christopher Hayes on the limits of economics:

  The simple models have an explanatory power that is thrilling. Once you’ve grasped the aggregate supply/aggregate demand model, you understand why stimulating demand may lead, in the short run, to growth, but will also produce inflation. But the content of that understanding turns out to be a bit thin. Inflation happens because, well, that’s where the lines intersect. “A little economics can be a dangerous thing,” a friend working on her Ph.D in public policy at the U. of C. told me. “An intro econ course is necessarily going to be superficial. You deal with highly stylized models that are robbed of context, that take place in a world unmediated by norms and institutions. Much of the most interesting work in economics right now calls into question the Econ 101 assumptions of rationality, individualism, maximizing behavior, etc. But, of course, if you don’t go any further than Econ 101, you won’t know that the textbook models are not the way the world really works, and that there are tons of empirical studies out there that demonstrate this.”

• The Buy List So Far
  Eddy Elfenbein, December 8th, 2006 at 9:49 pm

  With three weeks left, our Buy List is up 10.88% for the year, compared with 12.94% for the S&P 500 (not including dividends). The Buy List is about 20% more volatile than the rest of the market.
  
  By looking at the current results of each stock on the Buy List, you can see why diversification is so important. Look at the spread of the results (from a high of 61% to a loss of -19%). Five stocks are currently up over 29%, yet eight stocks are down for the year.
  I should add that Biomet (BMET) finally made a new high today. This stock has been terrified of $40 a share, but nevertheless, it finally hit that number for the first time in 21 months.
  I’ll unveil the new Buy List for 2007 next Friday. The rules are, once the Buy List is set, I can’t touch it for the entire year.

• Good Stocks No One Knows About
  Eddy Elfenbein, December 8th, 2006 at 12:49 pm

  I’m always amazed at the number of stocks that have been great long-term performers, yet no one knows about them. Many highly profitable stocks are completely ignored by Wall Street. Here are a few examples:
  Hawkins (HWKN) is a small chemical company in Minnesota. The stock has creamed the market for decades (the gold line is the S&P 500). Hawkins has just 235 employees. They made $9 million last year, which Wal-Mart makes in about eight hours. No analysts cover it, and yesterday it had zero volume. They might as well be private equity.
  
  Here’s a good one. Weyco Group (WEYS) is a 110-year-old shoe company based in Milwaukee. Thirty-two years ago, you could have picked up a share for 20 cents (adjusted for splits totaling 54-for-1). Weyco also pays a dividend. One analyst covers it.
  
  Met-Pro (MPR) makes pollution control equipment. The company has a market cap of $160 million.
  

• Today’s Jobs Report
  Eddy Elfenbein, December 8th, 2006 at 10:18 am

  The media is reporting that the unemployment rate increased from 4.4% to 4.5% in November. This is technically true, but it owes some credit to rounding. I got the raw data and the jobless rate increased from 4.42% to 4.47%.
  Here’s what the past twenty-odd years have looked like:
  
  And here’s nonfarm payrolls over the past ten years:
  
  You can see that job growth is slower in this recovery than in the 90s.

• Hedge Funds Now An Official Cultural Phenomenon Fit to Print
  Eddy Elfenbein, December 8th, 2006 at 6:19 am

  
  So sayeth The New York Times:

  In October, John Wiley & Sons rolled out its latest how-to book, “Hedge Funds for Dummies.’’ Doug Ellin, the creator of “Entourage” on HBO, is seeking to transplant that show’s successful premise of dudes living large to the world of seeking alpha. And for those who just want to look like a hedge fund manager, Kenneth Cole offers the Hedge Fund — a leather loafer available in black or brown, recently available on its Web site at a clearance price of $119.98.
  Hedge funds have become the new cultural shorthand for fast money. In the 1980s, corporate raiders and bond traders, as represented by Gordon Gekko and Sherman McCoy, were models for those seeking to be masters of the universe. The 1990s brought the Internet entrepreneur and the day trader, two variations on the Generation X slacker who made millions without leaving his apartment, using only a computer and his savvy.

  Read the whole thing. “Wall Street Warriors” makes an appearance.

• Calls to Shut Down Wall Street
  Eddy Elfenbein, December 8th, 2006 at 6:04 am

  The death of Sean Bell has inspired a call to shut down Wall Street for a day:

  The December 12th Movement, a human rights group that organised the protest, wants Police Commissioner Raymond Kelly to step down and called for a “Day of black outrage” on December 22 that would “shut Wall Street down”.

• We’re Surrounded
  Eddy Elfenbein, December 7th, 2006 at 2:16 pm

  
  Starbucks (SBUX) has the White House completely surrounded. I’m not a conspiracy theorist, but this looks like it took some planning.
  Are they planning a coup?
  Update: Uh oh.

• If I Had No Soul….
  Eddy Elfenbein, December 7th, 2006 at 11:49 am

  
  No, I couldn’t. I just couldn’t.
  Let’s pretend this post never happened.