Archive for May, 2008

• The Buy List Since 2006
  Eddy Elfenbein, May 23rd, 2008 at 12:18 am

  I don’t think I’ve done this yet, but here’s how the Buy List has performed since I started it in 2006. I had a small Buy List in 2005, but I didn’t formalize the system until the beginning of the 2006.
  The red line is the Buy List and the black line is the S&P 500. The graph is done as if it was a portfolio starting with $1 million on December 31, 2005 (dividends aren’t included). All told, we’re trailing the S&P 500, 11.70% to 9.27%. The Buy List is 1.25% more volatile than the S&P 500.
  
  We completely missed the last leg of the rally in 2007. Fortunately, we did a lot better during the sell-off. At one point in February, we pulled even with the S&P 500.
  The Buy List is a very conservative portfolio. The correlation of the daily changes with the S&P 500 is 0.83, which is pretty high.

• Pfizer Hits 10-Year Low
  Eddy Elfenbein, May 22nd, 2008 at 4:24 pm

  Shares of Pfizer (PFE) closed today at their lowest level since September 1997. The dividends would have given you about a 26% return. For years this was a stock that could do no wrong.
  

• Do 1.3 Million People Really Make Their Living Off Ebay?
  Eddy Elfenbein, May 22nd, 2008 at 9:48 am

  Here’s a good article from Daniel Gross. You know how eBay always says that 1.3 million people make their living off eBay. Well, it’s not exactly true.

• How Economists Invest
  Eddy Elfenbein, May 22nd, 2008 at 9:40 am

  Check out how the American Economic Association structures its investment portfolio. They’re doing pretty well.
  (Via: Mankiw.)

• More Than You Ever Cared to Know About P/E Ratios
  Eddy Elfenbein, May 21st, 2008 at 12:40 pm

  I want to expound on what I said the other day about the use of Price/Earnings Ratios. It works like this, picking stocks (good), timing the market (bad).
  I also criticized the idea of using P/E ratios based on ten years’ worth of earnings. Now I want to show you why.
  First off, I got this historical data off Robert Shiller’s website which has monthly numbers going back 140 years.
  Now I have to explain my analysis carefully, and I have to apologize because it’s not easy to do. Plus, whenever I attempt this, I get dozens of emails asking what the hell I’m talking about. (Note, dear reader, I’m criticizing my articulational abilities, not your comprehensional skillz.)
  Deep breath. I take all of the monthly data of stock market returns and P/E ratios. I then resort the data, not by time, but this time by P/E ratio, highest to lowest. Then, I calculate all those individual monthly returns. Basically, it’s a stock market graph, not by time, but by declining P/E ratio.
  If the P/E ratio has an impact on the market, I would expect the line to droop down early on, then rally frenetically with lower ratios. If the P/E ratio has no impact, then I expect that the line would rise in a smooth diagonal line. Here’s a look at how the 10-year and 1-year P/E Ratios stack up:
  
  As you can see, the 1-year P/E ratio has some impact on market returns, but not much. The market shows a net loss up to the 390th data point which corresponds to a P/E ratio of about 17.8. That means that all over the market’s net gains have come when the P/E Ratio is less than 17.8. According to Shiller’s data, that’s almost the entire time since 1996.
  Still, I’m not impressed by the one-year’s performance. Compare that to this dramatic graph showing the market’s performance ranked by the previous day’s gain.
  The 10-year P/E has, in my opinion, almost no impact on equity prices. The blue line barely wiggles on its way down the P/E Ratio scale. Knowing what the 10-year ratio was gave you zero input on what stock prices were about to do.

• Hauser’s Law
  Eddy Elfenbein, May 21st, 2008 at 10:22 am

  In yesterday’s WSJ, David Ranson has a bizarre article expounding on, what he calls, Hauser’s Law, which is named in honor of economist Kurt Hauser. The law states: “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”

  And the article includes this nifty chart:
  

  Zubin Jelveh goes off on the chart because it implies that the variation in marginal rates have zero impact on the bottom line. It’s true that other taxes besides income taxes have played an increasingly significant role in U.S. tax policy. But what I understood Hauser’s Law to mean is that none of that matters. The tax code will always produce the same amount.

  I’m fairly sympathetic to rules like Hauser’s Law. Especially with social sciences, I tend to believe that there situations where no matter what the rules are, they’ll produce the same results. (Some of you may recall Elfenbein’s 17th Law which states that U.S. GDP growth has been remarkably stable over the last 40 years and about 3.1%.)

  The problem I have with Hauser’s Law is that it doesn’t seem to include state and local taxes, which should raise the bar by quite a lot. Also, why should we look to the nation as a whole? To find out if there’s an upper limit, I think we should look at what state has the highest rate. For that matter, perhaps we should look at foreign countries.

  While tax revenues may been fairly stable over the past 50 years, that doesn’t mean we couldn’t generate more if we wanted to.

• Scary Government Fact of the Day
  Eddy Elfenbein, May 20th, 2008 at 4:34 pm

  From Megan McArdle:

  If you want to know just how ridiculous our agricultural programs are, consider this: for about half a century, we priced milk based on how far the cow was from Eau Claire, Wisconsin. No, I swear, I am not making this up. Apparently, the USDA scientifically determined that Eau Claire was the perfectest place in the entire world to keep cows, and that therefore the farther you were from that fabled city, the harder you must find it to produce milk.

• Inflation Watch: $175 Burger on Wall Street
  Eddy Elfenbein, May 20th, 2008 at 2:11 pm

  Forget about $130 oil, there’s a $175 burger.

  The burger can be enjoyed at the Wall Street Burger Shoppe on Water Street between Broad Street and Coenties Slip.
  Kevin O’Connell, the restaurant’s co-owner and chef, told WCBSTV.com he came up with the idea when a friend suggested he create a luxurious version of the American classic.
  “He kind of challenged me and it was a question of how do you make a burger that was worth that kind of money,” he said. “It actually turned out to be a really awesome thing to eat.”
  The burger is made with Kobe beef and topped with seared fresh foie gras, an assortment of exotic mushrooms, shaved black truffle, and golden truffle mayonnaise – another of his creations made from chopped black truffles, truffle oil, and gold flakes.

• Investing on the First Day of the Month
  Eddy Elfenbein, May 20th, 2008 at 11:12 am

  Since the start of this decade, the S&P 500 is now down -2.9% (toss in dividends, it’s up +11.7%). However, investing in just the first day of the month has delivered a return of 35.4%.
  
  I should add that the out-performance is not just due to the market’s implosion at the beginning of the decade. As market turned around, the first day of the month held its own. From March 11, 2003 to October 9, 2007, the S&P 500 gained 95.5%. The first day of the month gained 25.2%.
  That’s a pretty heft contribution from just one day in the month. Consider that on the trading calendar, the first day of the month is less than 5% of the time.

• Tanta on Robert Shiller
  Eddy Elfenbein, May 20th, 2008 at 10:25 am

  Tanta at Calculated Risk has a great post on Robert Shiller’s recent editorial in the New York Times. I’ve often taken exception to Shiller’s arguments. I believe that too often he sees bubbles are serious defects in the economy, and they’re the result of the moral failings of the public. Me? I just think bubbles happen. Anyway, give Tanta a read.