Archive for January, 2008

  • Cayne Out at Bear
    , January 8th, 2008 at 7:22 am

    He’s going. Finally.
    Cayne has been CEO since 1993. Except for the past year, shareholders don’t have much to complain about.
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  • Bill Gates’ Last Day
    , January 7th, 2008 at 4:59 pm

  • Boo-Yah
    , January 7th, 2008 at 4:10 pm

    Crossing Wall Street: February 25, 2007

    I think the markets may be underestimating Senator Obama’s chances. I have no special insight here; it just seems that way. I should add that my judgment in these matters is pretty bad.

    Maybe not so bad. At the time, Intrade had “Obama to Win” at just 23 cents. Today, it’s at 66 cents.

  • Volatility’s Impact on the Stock Market
    , January 7th, 2008 at 2:43 pm

    The New York Times ran this graph on the stock market’s volatility yesterday. I heard Dylan Ratigan the other day describing how volatile the market is. Actually, the market’s volatility isn’t very high on an historical basis. It’s just much higher than it’s been.
    Here’s a look at how well the S&P 500 has done by VIX level, which is an index of implied volatility. I took all the daily returns of the S&P 500 since 1990, and reordered them, not by date, but by VIX level. The Y-axis is the cumulative gain.
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    The magic point is 22.66. When the VIX is below that, the market does well. Above that, not so much. Before last July, the stock market had gone over years with only breaking the magic mark twice. Since then, we’ve been above it about half the time.
    This comes as a bit of a surprise to me because I’ve generally felt that volatility doesn’t have much impact by itself. Perhaps I have to reconsider, though my chart only includes data since 1990. I wouldn’t mind seeing more.
    (Note: Since I wanted to include the VIX numbers on the X-axis, the graph is actually a scatter-plot, so it’s a bit distorted. Here’s a view sans X-axis labels.)

  • Could Oil Double From Here
    , January 7th, 2008 at 10:10 am

    I wouldn’t bet on it, but some folks are:

    The fastest-growing bet in the oil market these days is that the price of crude will double to $200 a barrel by the end of the year.
    Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period. The contracts, the cheapest way to speculate in energy markets, appreciated 36 percent since early December as crude futures reached a record $100.09 on Jan. 3.
    While analysts at Merrill Lynch & Co. and UBS AG say the slowing U.S. economy will lead to the biggest drop in prices since 2001, the options show some traders expect oil to rise for a seventh straight year. Demand will increase 2.5 percent in 2008, according to the International Energy Agency. U.S. inventories fell to a three-year low on Dec. 28. Production from Mexico is declining and Saudi Arabia is behind schedule in opening its newest field.
    “One hundred dollars a barrel is actually 14.9 cents a cup, so we’re still talking about oil being remarkably cheap,” said Matthew R. Simmons, chairman of Simmons & Co. International, a Houston-based investment bank that focuses on energy. Inventories “are tight as a drum and I don’t see how we get out of this box,” he said in a Bloomberg television interview last week. “Demand clearly isn’t starting to slow down.”

  • Amazon.com on Wall Strip
    , January 7th, 2008 at 9:48 am

  • Which Is A Better Investment?
    , January 7th, 2008 at 9:32 am

    Ford’s stock or your mattress? Check the results:
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  • Follow Up on Momentum Stocks
    , January 4th, 2008 at 7:26 pm

    A few weeks ago, I wrote about the tremendous success of momentum stocks. I wanted to follow up and show you how much better a momentum strategy has done against value-based strategies.
    The following chart shows you how the top 10% of momentum stocks have done against the top 10% of book value, P/E ratio, dividend yield and price-to-cash flow. It ain’t close.
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    The purple line is the overall market. I got the data from Ken French’s data library. The major glitch is that the cash flow and P/E ratio series begin about 25 years after the others.
    I was surprised to see how well the P/E ratio decile (red line) does. It’s the only strategy that puts up a fight against momentum. Since 1974, the P/E ratio decile has slightly beaten the momentum decile.
    To give you a clearer picture, here’s the relative performance of the different strategies:
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  • Today’s Jobs Report
    , January 4th, 2008 at 2:30 pm

    Employment was lousy last month. The unemployment rate is now 0.57% above its March low. Traditionally, that number doesn’t U-turn after that big a move. After an increase of 0.5%, the trend is usually here to stay, and it doesn’t stop until it increases by more than 2%.
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  • A Word on Political Predictions Markets
    , January 4th, 2008 at 11:18 am

    It’s strange to see the political predictions markets like Intrade get so much attention recently (see here and here) because, until now, one of the very few people who gave them much attention was…me. As I’ve said before, I don’t place a great deal of faith in these markets, but I think they’re for fun and should be seen that way. (By the way, the top chroniclers of this scene is Chris Masse.)
    Let me add a few random thoughts on these markets. The first is that they’re often called “predictions markets,” in fact, I just did, but that’s not quite correct. More accurately, they’re odds setting markets. I’ll hear people say, “Intrade said this will happen, and it didn’t, so Intrade doesn’t work” No, Intrade laid certain odds on an event happening. That doesn’t prevent a longshot from pulling through.
    I also hear people say that it just follows the polls. For the most part, that’s true. But not always, and that’s where Intrade can be especially useful. For example, Mike Huckabee’s poll numbers are far better than odds would suggest. Why is that? I’m sure not. Perhaps the market isn’t correct and the Huckabee contract is a good value. Or maybe the market doesn’t see his popularity as lasting very long.
    Three years ago, my Nationals got off to a blazing start in the NL East, 50-31 and a 5.5 game lead. They’re odds of winning the division, however, were still very low. The market thought that they would fade, and that’s exactly what happened.
    Matthew Yglesias recently made an interesting observation, the markets are pretty boring. He’s right. Day-to-day, it is fairly dull. One thing to remember, though, is that these aren’t stocks, they’re futures. Futures are a strange animal. With futures prices, the underlying volatility can be extremely high, even though the prices can be somewhat stable.
    The reason is the dispersion of returns. In others words, a political contract can potentially soar or crumble a great deal in a very short amount of time. I don’t mean just before expiration, I mean at any time. This is also why futures traders are all crazy people. If some candidate had a bad night last night, they’re futures could have fallen dramatically and the market takes that into account.
    The price of the futures is the sum total of the odds of very wide-ranging possibilities. Let’s say the McCain contract is at 24 cents. That could be the sum of, say, a 30% chance of going to zero in a week and a 10% chance of going to 90 cents in a week, and many, many others. Unlike stocks, futures are a zero-sum game. If you take from one, you give to another. What would make the futures markets much more exciting would be an options market on the futures, but that would be seriously nerdy. And no one wants that.