Archive for 2007

  • Reader Q&A
    , December 4th, 2007 at 1:53 pm

    I always like getting e-mails from readers. I get a lot so I try to respond to as many as I can. Please feel free to e-mail me if you have any questions or comments. If I do post you e-mail, I will not include your name.
    Here’s a recent e-mail I got. I’m posting it because it’s a good question and slso because my responses kept getting bounced.

    I am a frequent reader of your blog and have enjoyed many of the entries. Your investment style appears sound and a handful of your tips and articles have been quite conducive to my financial situation. Thank you. I have a question for you. I would like to find a fairly simple means of playing a rally in the US dollar. It may be versus a basket or a particular currency, for example, the euro. This may not be your cup of tea and so a simple ‘I do not know’ will suffice. If you have an opinion please email me at this address.
    Thanks for the kind words!
    You’re in luck! There is a simple way to play the U.S. dollar. PowerShares has an exchange trade fund that tracks the dollar. It’s the PowerShares DB US Dollar Index Bullish (UUP).
    Here’s the description from Yahoo Finance:
    The investment seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Long US Dollar Futures Index. The index is comprised solely of long futures contracts. The futures contract is designed to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The fund is nondiversified.

  • Next Week’s Fed Meeting
    , December 4th, 2007 at 12:30 pm

    The Federal Reserve meets again next Tuesday and Wall Street expects another rate cut. According to the latest from the futures market, Wall Street thinks there’s about a 60% chance for a 0.25% rate cut and a 30% chance for a 0.50% rate cute.
    I think the Fed erred last time by only cutting by 0.25%, and I would prefer to see the Fed cut by 0.50% this time. Unlike a lot of folks, I don’t think it’s absolutely critical for the Fed to get it exactly right all the time. Twenty-five basis points isn’t that big a deal in an economy this large. Still, the market needs some relief.
    The odds of a recession have clearly increased over the past few weeks. Three months ago, Wall Street was expecting fourth-quarter earnings growth of 8.8%. Today that number is down to just 1.1%. Also, economically cyclical stocks have underperformed the market since July. I think that will continue.
    It’s hard to overstate the importance of interest rates on stock prices. A few weeks ago, I looked at all the data going back to 1962. If you took all the days when the three-month T-bill rate fell, the S&P 500 rose over 2,000%. On days when rates rose—a nearly identical time frame—the S&P lost nearly 60%.

  • The Worst Columns on Subprime
    , December 3rd, 2007 at 12:30 pm

    Garrison Keillor now moves into second place for worst subprime column.

    I sit in wonderment at the story of W. Lance Anderson, the president of NovaStar Financial in Kansas City, who while handing out subprime mortgages to any applicant wearing shoes and a shirt managed to sink the company’s stock from $40 in June to $1.72. This is a man who earned $1.7 million in salary and bonuses last year, plus $711,386 in deferred compensation, plus more dough in various arrangements that dopes like me can’t quite grasp. Meanwhile, all the little investors in NovaStar are cutting back on Christmas gifts and canceling their winter vacations in Daytona Beach.
    I myself would never invest money in a company headed by a man named W. Lance Anderson. The very name inspires distrust. What’s the W for? Wolfgang? Whoopee? Weasel? A man who goes by W. Lance is likely to wear tinted glasses and two-toned shoes, smoke Kools, and have a gun fetish. Nonetheless, a small army of hopeful investors bought into the idea that you can make money on bad loans and now they are left holding the bag while W. Lance goes on to his next great idea, perhaps a scheme for making purses from dog poop, and I wish him and his family well, but I will not be there for him at the IPO.

    Purses from dog poop! Get it? No one wants a purse made out of dog poop! Comic gold, Garrison.
    I wonder if the 85% of subprime borrowers who are doing just fine see their lenders in quite the same way.
    This is all part of the normal cycle. Someone freaks out about redlining. Soon, something must be done. Aggressive lending is encouraged. Then suddenly, someone freaks out about predatory lending. Again, something must be done.
    If you’re curious, the worst subprime article award goes to Jim Rokakis, the treasurer of Cuyahoga County, Ohio. In a truly revolting article, he blames the death of a little girl and an elderly man on predatory lenders.

    Twenty years ago, the Slavic Village neighborhood of Cleveland was a tightly knit community of first- and second-generation Polish and Czech immigrants. Today, it’s in danger of becoming a ghost town, largely because a swarm of speculators, real estate agents, mortgage brokers and lenders saw an opportunity to make a buck there.
    You could say it was because of them that 12-year-old Asteve’ “Cookie” Thomas lost her life on Sept. 1, shot in Slavic Village when she stumbled into the crossfire of suspected drug dealers.

    No, you can’t say it was because of them. You could, however, blame her death on the suspected drug dealers who fired at her.
    Someone should tell Mr. Keillor that there are apparently lots of things made out of dog poop these days.

  • Is a Falling Dollar All Bad?
    , December 3rd, 2007 at 10:45 am

    Tyler Cowan had an interesting article in the New York Times on Friday saying that a lower dollar isn’t all bad for the economy. He’s right. There are lots of good things that come from a weaker currency. For starters, it generally helps a country’s export sector.
    Matthew Yglesias looks at the issue from a social justice standpoint and sees some benefits. Personally, I’m a bit leery of a country trying to devalue its way to prosperity, particularly because it involves picking winners and losers.
    Of course, the currency is always being manipulated in some form, but I still don’t see how Treasury officials can better investors than the market. A lower dollar isn’t too much of a surprise given that our national debt is growing by $1 million a minute. I think when you get right down to it, people don’t like the idea of their currency getting pummeled on the world stage. It just looks bad.
    Cowan writes:

    But from a broader perspective, the value of the dollar hasn’t fallen quite as much as it might seem. Since President Bush started his second term in January 2001, to Nov. 20 of this year, the dollar has dropped 19.8 percent — if we weight the dollar by how much America trades with individual countries. That is a noticeable decline, but it is hardly a radical economic event. There are still many bargains, travel and otherwise, in Asia and Latin America for people paying in dollars.
    A falling dollar does mean price inflation in the United States. Just as it costs more for an American to buy a fancy meal in Paris, so do French wines and German cars have a higher markup when they are sold in New York. But imports are only 16 percent of the American economy, and most foreign suppliers have been reluctant to risk their position in the American market by raising prices a great deal. Furthermore many price increases from Europe come on luxury goods and thus they fall on wealthy American buyers, who can afford it most easily. Wal-Mart serves a more working-class clientele and it is stocked with goods from Asia, where currency values have remained weaker against the dollar.

    Of course, one of the benefits of a lower dollar is it allows certain lobbies to bitch and whine. The head of Airbus recently said that the weak dollar is “life threatening.” Sure pal, I feel your pain. And while you’re at it, why don’t you try building a plane on time for a change.
    The Wall Street Journal notes this morning that the dollar could be ready to rally:

    But currency markets are hard to forecast, and there is a case to be made that the dollar could be near a bottom.
    One argument: Comparing what a dollar now buys in the U.S. (at U.S. prices) and abroad (at foreign prices) suggests that the dollar is undervalued. “You can’t go to Europe and not think it’s really expensive, and a European can’t come to the U.S. and not think it’s for sale,” says Brad Setser, an economist at the Council on Foreign Relations.
    The Organization for Economic Cooperation and Development calculates that $1 converted into euros could buy a basket of goods and services in France that would cost only 80 cents in the U.S. A dollar converted to yen would buy things that would cost 82 cents in the U.S. Over time, markets are expected to narrow such gaps by pushing up the dollar and pulling down the euro and yen.
    Goldman Sachs economist Jim O’Neill says that by this measure, the dollar hasn’t been so undervalued against major currencies since 1995. “You don’t get these degrees of misalignment for long,” he says.

    You don’t get these degrees of misalignment for long. But China wants to find out how long “long” is. Bloomberg also writes that a survey of economists expects a 7% rise for the dollar next year,
    Almost exactly one year ago, I took a look at the dollar’s impact on the stock market:

    The stock market has been freaked out lately due to the falling dollar, and the evidence shows that stocks prefer a strong greenback.
    Since 1973, the dollar has risen on 4,189 days, fallen on 4,130 and stayed the same on 130. On the days of the higher dollar, the S&P 500 has risen a collective 2,356%, which is about 21.3% on an annualized basis.
    On days of a falling dollar, the S&P 500 dropped over 55%, which works out to 4.8% on an annualized basis.
    For the 130 days when the dollar is unchanged, the market is up 6.7%, or about 14.1% annualized.
    Think of it this way, a weak dollar is basically the equivalent of a bear market for stocks.

  • Public Service Announcement
    , December 2nd, 2007 at 1:25 pm

  • Best Science Article I’ve Read Today
    , December 1st, 2007 at 12:15 pm

    And the best science headline I’ve read all month:

    Surfer dude stuns physicists with theory of everything

  • The Turnaround at Dell
    , November 30th, 2007 at 10:22 am

    Dell’s (DELL) rebound isn’t going as smoothly as had Wall Street hoped. The company just reported a decent earnings increase, 34 cents a share compared with 27 cents last year. Wall Street, however, was looking for 35 cents. As a result, the stock is getting clobbered today.
    The company recently revised all of its financial numbers for the past few years. Here’s a summary of Dell’s new financial data.
    Investors need to understand that businesses don’t turnaround very easily. Often the departure of a CEO is really a symptom of larger problems. Hewlett-Packard’s (HPQ) turnaround is closer to the exception. We sometimes think of stocks as athletes that have an off-night. There usually aren’t short-term earnings glitches. You’ll notice that small problems are like cockroaches, there are several more for each one you see.
    Michael Dell took over as CEO with the departure of Kevin Rollins. The problems at Dell continue to be one of costs. Business Week notes:

    But expenses as a percentage of revenue, a key measure of how well the company is managing costs, rose noticeably. Selling, general, and administrative expenses rose to 12.2% of revenue from 10.6% a year ago. Total operating expenses rose to 13.2% of revenue, up from 11.5% a year ago. “People are disappointed that the revenue increase did not flow through to the bottom line,” says Brent Bracelin, analyst at Pacific Crest Securities. “It doesn’t look like the company has trimmed enough fat.” Dell’s operating income of $829 million was 5.3% of revenue, well below the 8% level that Dell posted in years past.
    Earlier this year, Dell said it wants to reduce its workforce by about 10%, but as of Nov. 2, Dell had cut only about 2.5% of the 84,000 employees it had on Aug. 3. Carty insisted, though, that the company “is still driving to that [10% reduction] number.” Carty added: “We’ve identified a considerable amount of low-value work.” The company also is working to automate certain tasks to help it eliminate more employees. “We have more manual work going on than we need,” he said. At the same time, he said that other initiatives, such as acquisitions or “new strategies,” may mean keeping or hiring certain kinds of employees.
    Gross margin performance, too, didn’t meet some analysts’ expectations. Gross margin inched up to 18.5% of revenue, from 16.6% a year ago, but still fell below the 19% analysts were projecting. The company blamed component costs, saying they didn’t decline as steeply as the company was projecting. Shaw Wu, analyst at American Technology Research, questions why that’s the case, when some of Dell’s main competitors, including HP and Apple (AAPL) have recently enjoyed the benefits of low component costs.

  • Three-Month T-Bill Hits 2.8%
    , November 29th, 2007 at 12:46 pm

    I’m amazed at the plunge in Treasury yields. The three-month T-Bill rate touched 2.8% this morning. We’re approaching the low of 2.40 from August. I don’t see how the Fed can keep rates so far above the market. Something has to give.

  • Bloomberg Profile of Jim Simons
    , November 28th, 2007 at 9:36 am

    Jim Simons doesn’t talk with the media much. You can tell why.

    Renaissance is under increasing pressure to stay ahead of the pack — and to keep its secrets under wraps. Save current employees and a few former ones, nobody knows precisely how the firm makes its millions. Medallion stopped taking new money from outside investors in 1993 and returned pretty much the last of their capital 12 years later. Today, the fund is run almost exclusively for the benefit of Renaissance staff.
    The wise-cracking Simons himself is mum on virtually all of its details.
    What can he say about Medallion’s trading strategy?
    “Not much,” Simons says with a chortle, and then takes a drag on one of the Merit cigarettes he often smokes.
    What kind of instruments does it trade?
    “Everything.”
    How many different strategies does it use?
    “A lot.”
    Simons says his Ph.D.s laugh when they read the far-fetched theories about what their fund might be doing. One chat room participant speculated that Renaissance uses audio hookups to futures exchanges and analyzes the noise from the pits with voice-recognition software.

    (Hat Tip: Altucher)

  • Buy List Update
    , November 28th, 2007 at 7:28 am

    The Buy List continues with a very impressive fourth-quarter rally in terms of relative performance. Through yesterday, the Buy List was down 0.32% for the year while the S&P 500 is up 0.70%. That’s a gap of just 1.02%.
    But on October 18, the Buy List was getting creamed by the S&P 500, 8.59% to 1.77%. That’s a gap of 6.82%.
    It looks like we have an outside chance of catching the index before the year is out. That was something I wouldn’t have believed just five weeks ago.
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    Yesterday, the Buy List jumped 1.93% compared with 1.49% for the S&P 500. The big help came from Donaldson (DCI) which jumped 8.5%.
    Donaldson announced earnings of 53 cents a share for its fiscal first quarter compared with 43 cents last year. Analysts were expecting 48 cents a share. The company also said it expects full-year earnings (their fiscal year ends in July) of $1.97 to $2.07 a share. That would make their 19th straight record year.