Archive for 2006

  • Sector Correlation
    , November 7th, 2006 at 2:42 pm

    I wrote about this yesterday, but I wanted to follow up today. I mentioned how the energy sector has become the most unglued to the rest of the market. I ran the numbers, and I was right.
    Here’s the correlation of each industry group’s daily change to the S&P 500’s daily change:
    Financials………………78.74%
    Discretionary………….76.27%
    Industrials……………..75.75%
    Tech……………………..71.32%
    Materials……………….63.60%
    Staples…………………60.79%
    Healthcare…………….58.84%
    Utilities…………………38.10%
    Telecom………………..38.09%
    Energy………………….31.44%
    This is important because for a lot of institutional money managers, the name of the game is doing what everyone else isn’t (or can’t). These guys are paid on outperformance, so they hone in on ways to avoid what the broader market is doing. In financial theory, this is related to the concept of the alpha coefficient, as in Seeking Alpha.
    Let’s say you run a gazillion dollar hedge fund in Curacao. If everyone is zigging, you want to zag. Face it: Your ability to zag is what you’re all about. Bear in mind, you can own a small number of stocks and closely mimic the market. The number of stocks isn’t that important. You can also own a large number of energy stocks and be completely free of what the averages say.

  • Bernanke Warns
    , November 7th, 2006 at 11:50 am

    bennie.jpg
    Bernanke warns against protectionist trade policy
    Bernanke warns on threat to globalization
    Bernanke warns on danger of US deficits
    Bernanke Warns of Baby Boomer Retirement
    Fed Chairman Bernanke Warns Consumers To Carefully Weigh Options For Home Financing
    Greenspan home robbed

  • Politics and the Stock Market
    , November 7th, 2006 at 11:45 am

    Many years ago, Richard Nixon was asked what he’d be doing if he weren’t president. He said that he’d probably be on Wall Street buying stocks. One old-time Wall Streeter chimed in that if Nixon weren’t president, he too would be buying stocks.
    I write this as Americans head off to the polls for Election Day. Despite a lot of the commentary you might hear, the effect of partisan politics on the financial markets is very much overrated. Very much. To be sure, it’s there, but it really isn’t much to worry about, and it certainly shouldn’t affect your financial decisions.
    Barry Ritholtz posted a study by Ned Davis of how the markets have performed under different parties. This is interesting analysis, but in my opinion, I think they have it backwards. The assumption is that the political parties are like players on the field, and the stock market is the scoreboard. I think it’s just the opposite. The markets are the players; how the politicians behave is the scoreboard. That gets you a more interesting story.
    The data shows that the market has done better under Democrats than Republicans. But this is largely due to the influence of the two major crashes happening under Hoover and Nixon. Here’s a though: Maybe it’s not partisan. Perhaps we should just avoid Quaker presidents!
    It’s hard to say exactly how much partisanship influences the market. Of course, there’s the moment in U.S. history that’s indelibly marked on the national consciousness. I speak, of course, of 1948 when whatshisface beat that other guy, but the other guy won. The next day, the Dow fell 3.8%. So there you go.
    Make no mistake, public policy does influence the markets (and vice versa), but it’s usually in unanticipated ways. It’s usually not the typical Republican/Democratic debate. Instead, it’s usually the kind of things that no one really pays attention to. Sarbanes-Oxley, for example, passed the House 423-3, and the Senate 99-0. It’s the unanticipated things that are so scary, because…well, they’re not anticipated.
    Remember that when the new Senate meets in January, only about 10% of the members will be freshman. This isn’t a big change. In fact, our Constitution is designed against big changes. The ratio is the House will go from 8-7 Republican to something like 8-7 Democrat. If your city council did that, no one in town would care.
    I’m not saying that voting isn’t important, or that getting involved is a waste of time. I’m simply saying that this has to be put in proportion. Just because people talk about politics at the office or on the subway, doesn’t mean the market cares. The stock market has its own agenda and it’s not up for election.

  • Expeditors International of Washington Earned 29 Cents a Share
    , November 7th, 2006 at 9:33 am

    Expeditors‘ (EXPD) earnings came out before the bell. The company earned 29 cents a share for the third quarter which matched estimates. Last year, EXPD netted 22 cents a share. The shares are a bit pricey here. Since the beginning of the year, the stock is up over 40% for us. The shares are going for about 36 times next year’s earnings.

  • The Buy List YTD
    , November 6th, 2006 at 4:23 pm

    Today was one of the best days for our Buy List this year. The strange thing about today is that energy stocks started off horribly, as everything else rallied. But then after lunch, the energy sector rallied to close the gap.
    The thing about this market is that energy stocks are the most differentiated from the rest of the market. In other words, all the other sectors kinda sorta move together. But energy is off doing its own thing. Back in the day, tech stocks used to be like this.
    Since the Buy List doesn’t have any energy stocks, it’s pretty easy to tell if we’re going to have a good day or a bad day. All 20 of our stocks were up today. For the year, the Buy List is up 9.04%. The S&P 500 is up 10.53%. Our daily volatility is about 19% greater than the S&P 500.
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    Sometime next month, I’ll unveil the 2007 Buy List.

  • One Percent Days
    , November 6th, 2006 at 2:43 pm

    Here’s an example of how much Wall Street has changed over the past few years.
    The S&P 500 is currently up about 1% for the day. If it holds, this would be our third session in the past 12 weeks with a swing of more than 1%. Yet none of those days has been over 1.3%. For the six year period from 1998 through 2003, the market averaged a daily swing of over 1.3%.

  • Fiserv Reaches All-Time High
    , November 6th, 2006 at 12:19 pm

    The stock did nothing for months, and now it’s rolling. Shares broke $50 earlier today, and $51 isn’t too far away. We’re up over 17% for the year in Fiserv.

  • Maybe the World Isn’t Such a Dangerous Place
    , November 6th, 2006 at 10:00 am

    The WSJ notices that insurance prices are dropping:

    Homeowners’ insurance costs are falling in many parts of the nation. Car-insurance prices are rising at a slower rate than inflation. This year, companies are spending less than they did in 2005 to protect themselves against injuries to their employees, lawsuits aimed at directors and officers and liability claims in general. The cost of some life insurance, too, has fallen in recent years, as has insurance against terrorism.
    The trend isn’t universal. In hurricane-prone areas, homeowners still face higher insurance rates. And health-insurance costs continue to soar because of spiraling health-care costs.
    But the widespread declines in insurance rates indicate that many risks that directly touch Americans’ lives are on the decline. Car-collision claims have decreased in frequency, thanks in part to safer cars and safer driving. Workplace-injury claims are down, in part because of improved technology. Americans are living longer, meaning life insurers often face lower odds of making big payments on the term policies they write.
    Americans “are getting better at controlling risk,” says Richard Zeckhauser, a professor of political economy at Harvard University. “In general, technological advance has made the world a safer place.”

  • Emotions Versus Finance
    , November 5th, 2006 at 3:15 pm

    The Washington Post looks at how ego and vanity are affecting the housing crash…er, slowdown.

    Evidence is mounting that people set prices, particularly for housing, as much on ego and self-image as on an objective review of the market. That’s one reason for the phenomenon known as “sticky prices” — home sellers who won’t cut their demands enough to make a deal. It helps explain why the unsold inventory of homes has risen so high, and why, despite this rise, home prices in the Washington area have fallen only slightly. There were 24,741 homes for sale in September in Washington and the close-in suburbs, up from 13,950 a year earlier.
    Economic researchers have found that emotions are a bigger influence than was previously believed in how people make financial decisions. For a long time, economists believed that human beings made decisions like robots, that people applied simple logic in making financial choices. But a body of research developed over the past two decades, known as neuroeconomics or behavioral economics, has shed light on how powerful a role the unconscious mind plays. New imaging technology, meanwhile, is allowing scientists to peer inside people’s brains while they wrestle with financial decisions.
    These studies have illuminated a few key concepts: Many people will pass up sure profits for illusory ones. Some will turn down profits if they believe someone else is unfairly profiting more. Some will even refuse to sell if they believe they may come to regret it, because fear of future regret can be as powerful a motivator as money in the pocket today.
    In other words, people will cling to prices they recall from a brighter day, even when market conditions have changed; they will walk away from a sale if they feel the buyer is getting too good a deal at their expense; and they are terrified that [if they sell now] the market will rebound and they will feel like fools.

  • Evaluating Greenspan
    , November 4th, 2006 at 3:58 pm

    Reason discusses Alan Greenspan’s legacy as Fed Chairman with Milton Friedman, Ron Paul, James Grant, Bryan Caplan and Jeff Saut. Here’s a sample:

    Reason: Analysts often complain that Greenspan did nothing to help solve our low savings rates and our trade deficits. Is the Fed relevant to these problems? Are they problems at all?
    Friedman: I do not think you or I can say what the right savings rate is or should be. There’s nothing wrong with a person, family, or country saying, “We have high enough income. We don’t need more. We’re going to spend it all.” We can have a perfectly prosperous and active economy along those lines. I don’t think it’s helpful to ask, “Is this rate right or wrong?” Instead we should ask, “Have we adopted polices that reduce incentives to save?”
    In that respect, there’s a great deal to be done. The tax system distorts the incentive to save, sometimes pro-saving and sometimes anti. Government should ask itself how best to maintain institutions under which you have an undistorted market in savings.
    So far as foreign balance of payments is concerned, we have to let the dollar float. You shouldn’t try to control the price of foreign exchange any more than you should try to control the price of other things. The country seems to have learned that price controls are not good.
    I do not believe that [mass foreign holding of U.S. securities] is something to be feared. The only reason [a widespread loss of will to buy U.S. Treasury securities] would happen is if our central bank followed inflationary policies that made it undesirable to hold American securities, and that’s our fault, not theirs. I think the concern that has been expressed about foreign balance of payments is in large part mistaken and in large part reflects the defects of statistics available.
    If you have a foreign owner of a bond or stock who loses confidence in the American economy and sells, whom do they sell it to? They have to sell it to people with a stronger confidence in the U.S. economy who are willing to hold on to it. If the foreigners dump bonds or stock and use dollars to buy other U.S. assets, there’s no net effect. If they use them to buy consumer goods, then that means an increase in balance of payments, a plus on income accounts.