Archive for December, 2007
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Goldman’s Earnings
Eddy Elfenbein, December 18th, 2007 at 10:44 amGoldman Sachs (GS) just wrapped up another phenomenal year. I honestly don’t know how they do it. The numbers really boggle the mind.
For their fourth quarter, Goldman earned $7.01 a share, 40 cents ahead of the Street. For FY 2007, the company earned $24.73 a share. Last year, they made $19.69 a share and the year before that, they made $11.21 a share. By comparison, Morgan, Merrill and Bear are all expected to post losses this quarter.
The stock is going for just seven times earnings. Next year, however, could be more difficult for Goldman.
By the way, what’s the point in having elections if someone from Goldman Sachs is always appointed to run the economy? (And it’s not just us). -
FactSet’s Earnings
Eddy Elfenbein, December 18th, 2007 at 10:23 amAnother Buy List stock reported earnings today. For its fiscal first quarter, which ended in November, FactSet Research Systems (FDS) earned 58 cents a share. That’s a 24.7% increase over last year. Strangely, the stock plunged over 3% at the open, but it seems to have recovered some.
Revenues came in at $134.1 million which was just slightly ahead of the Street. The numbers for this company are very solid—operating margins at 31%. For the second quarter, FDS expects:
Revenues are expected to range between $137 million and $141 million.
Operating margins are expected to range between 30.5% and 32.5%. This operating margin guidance holds currencies constant and assumes no change in the expected outcome of performance based stock options.
The effective tax rate is expected to range between 34.0% and 35.0%.
This is a very impressive company. -
Burton Malkiel on CNBC
Eddy Elfenbein, December 17th, 2007 at 7:31 pmHere’s Burton Malkiel discussing the global economy.
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Malthus Strikes Back
Eddy Elfenbein, December 17th, 2007 at 2:10 pmToday is an historic day. For the first time ever, a bushel of wheat is going for more than $10.
But in real terms, wheat is very cheap. This is from a great article in The Economist on the amazing story of wheat (no, really):In 1815 a gigantic volcanic eruption at Tambora in Indonesia led to the famous “year without a summer”. New England had frosts in July. France had bitter cold in August. Wheat prices reached a level that would never be seen again in real terms, nearly $3 a bushel. Thomas Robert Malthus was then at the height of his fame and the harvest failure seemed to bear out his pessimism. In 1798 he had forecast a population crash, based on the calculation that it was impossible to improve wheat yields as fast as people made babies (each new baby can make more babies; each new field of grain leaves less new land to cultivate).
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Jeremy Siegel’s Outlook for 2008
Eddy Elfenbein, December 17th, 2007 at 1:48 pmJeremy Siegel is always worth listening to. Here’s part of his outlook for next year:
Economic Growth
But the impact of the crisis on the psychology of consumers and business will leave their mark. I predict that GDP will slow in the first half of next year to between 1% and 2%, and rise in the second half, as risk premiums come down and the cost of capital falls. Overall I expect 1.5% to 2.5% GDP growth in 2008 and I believe the economy will avoid a recession.
Stocks and Bonds
I think the stock market will have another winning year in 2008. For every percentage point that stock returns fall below 8% (my prediction) this year, they should exceed 8% next year (meaning, for example, if stocks gain 6% this year, they should finish 2008 up 10%).
And I believe that financial stocks, which have plummeted 18% so far this year, will outperform the S&P 500 Index next year as the credit crisis fades.
Interest Rates
What does all this mean for interest rates? The Fed cut the Fed funds rate to 4.25% on December 11, but it will have to do more in the coming months. I believe that the Fed will get rates down to 3.5%, before ratcheting them upward in the second half of next year.
Treasuries did well in 2007, as interest rates on top-rated securities plunged in light of the credit crisis. But as the risk spreads narrow, money will flow away from government bonds and their interest rates will rise. I recommend investors cash in governments and top rated corporate bonds now – you got a nice ride that you won’t get next year. -
Why the Dollar Might Rally
Eddy Elfenbein, December 17th, 2007 at 11:44 amFrom today’s WSJ:
The belief that the Fed would be forced to sharply reduce interest rates to stimulate economic growth has weighed heavily on the dollar. That is because lower interest rates reduce returns on fixed-income holdings in the currency, making the dollar less attractive to investors.
Instead, investors are focusing on the possibility that further interest-rate cuts might not unfold as expected. Currency strategists say there is a strong belief the Fed will ultimately work to keep prices in line.
One recent challenge to the gloomy view on the economy came Thursday, when data showed retail sales in November were more resilient than predicted. The figures suggested “we don’t really have a freefall in the U.S. economy,” says Adnan Akant, a currency specialist at money manager Fischer Francis Trees & Watts. “It’s slowing down but not falling out of bed.”
Then on Friday, government data showed inflation last month was stronger than expected. That generated a fresh wave of dollar buying, pushing the greenback up about 1.4% against the euro in a day. Since late November, when the dollar weakened to a record low versus the euro, it has strengthened about 3%. Still, the dollar remains 8.5% weaker against the euro since the start of the year. Late Friday in New York, one euro fetched $1.4423.
The speed of Friday’s move startled some investors. “Today has been kind of shocking for much of the market,” said John Taylor, head of FX Concepts, a hedge fund that specializes in currency trading. Mr. Taylor says his firm has started shifting its positions from bets that the dollar will weaken to wagers that it will strengthen in coming weeks.
“One, the Fed is now scared of inflation, and two, the numbers keep looking pretty good,” he says. The dollar “has shown more vigor than we thought.” -
Wall Strip Visits Facebook
Eddy Elfenbein, December 17th, 2007 at 11:02 am -
Eugene Fama on Momentum Stock
Eddy Elfenbein, December 16th, 2007 at 9:41 pmFrom The Region:
Region: Let me ask you about momentum. You’ve said that it’s the strongest challenge to the hypothesis of market efficiency. Can you elaborate on that?
Fama: There’s evidence that if you rank stocks every month based on their last year of returns, the very extreme winners tend to win for a few more months and the losers tend to lose for a few more months.
That seems to be true in U.S. data beginning around 1950. We don’t have foreign data going back that far, but it tends to be there in major foreign markets except for Japan. It doesn’t tend to be there in the U.S. data for the ’30s and ’40s. So there’s some chance that it is just a chance result. There are so many people looking for anomalies in the data, that may just be the biggest one that they’ve found. Maybe it won’t be there in the future. We don’t know yet.
Region: Is there an opportunity to make money there?
Fama: Well, there isn’t much of an opportunity to make money, because as I said, you do this every month. And if you rank and trade stocks every month, the turnover of these portfolios is enormous.
Region: The costs will eat up the profits.
Fama: Right. The costs will kill you. So the people who have written these papers have said, basically, “This is interesting, but forget about trading on it.” But it’s still interesting. -
Bernice Johnson Reagon
Eddy Elfenbein, December 14th, 2007 at 4:25 pmIt’s Friday and the market is closed. I am so outta here. Let’s start the weekend with the great Bernice Johnson Reagon.
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Why Bears Always Have the Best Arguments
Eddy Elfenbein, December 14th, 2007 at 10:59 amPaul Kedrosky wonders why bears always have the best (or at least, most compeling) arguments:
Even though the stock market has rightly been called the triumph of the optimists, with bulls stomping bears over and over for one hundred years, stock market bears not only haven’t gone away, but they generally have the most compelling arguments. Their points seem so damn plausible, level-headed, empirical, and reasonable, while bulls come across as starry-eyed idealists.
Let’s consider some reasons why that might be:
1. Things fail more often than they succeed. Pace availability heuristics, it is easier to think of examples of things failing than succeeding, so it gives bears more fodder.
2. Bears have the past, and bulls have the future. Bears get to argue from data, while bulls argue from what might happen.
3. Apocalypse is seductive. There is something about the thought of imminent mass ruin that really gets people’s attention, as has happened with the overdone coverage (hello, Matt Drudge!) of the current credit problems in the market.
4. There is a Puritanical urge in America wherein people want to believe they (or better yet, their neighbors) will be punished for their prior success, etc., so it stands to reason that stocks will punish people after they make them a lot of money.
5. Bears have been generally wrong for so long that they have to know how to tell better stories.I agree, especially with points three and four. I’ve also noticed that a wildly bullish forecast that’s wrong will be mocked far more than a wildly bearish forecast. I call this the Elfenbein Asymmetrical Railing of a Lousy Forecast Syndrome.
Just a few days ago, Paul Krugman made fun of James Glassman being appointed head of our public diplomacy efforts. However, Krugman was wildly wrong about the market being a bubble in 2003. That call hasn’t seemed to tarnish his reputation. Robert Shiller’s reputation as a market sage is, in my opinion, completely unwarranted.
Bearish arguments are usually more interesting because they focus on the causes and the effect is left to each person’s imagination. It’s like in a horror movie where you rarely see the scary guy.
One day I hope to write a book called, “Alarmism and How It Threatens Your Children.”
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