Archive for June, 2008

  • Lehman Drops Bomb
    , June 9th, 2008 at 10:18 am

    Wall Street had been expecting Lehman Brothers to post a loss of a couple million here and there. Turns out, a couple million was really 2800 million. This is their first-ever loss since going public. The company is also going to raise $6 billion in new capital.
    Adding insult to injury, Jenny Anderson writes:

    Lehman Brothers, among the smallest players on Wall Street, announced on Monday that it will raise up to $6 billion in fresh capital from investors.

    Jeez, it’s one thing to lose money, but there’s no need to get phallic. The shares are getting smacked today, but they’re still above the panic low from March.
    Bess Levin is live-blogging the call.

  • RIP: Bo Diddley
    , June 6th, 2008 at 5:28 pm


    He also appeared in Trading Places.

  • Billionaire Drug Bust
    , June 6th, 2008 at 12:03 pm

    The Smoking Gun is on the scene:

    The billionaire apparently did little to conceal his drug transactions. On one occasion, in the lobby of Broadcom’s southern California headquarters, he directed an employee to provide cash to a courier “in exchange for an envelope containing controlled substances,” the indictment charges. On a drug-fueled 2001 private plane flight–during which Nicholas allegedly used and distributed narcotics–the pilot was forced to don an oxygen mask due to the “marijuana smoke and fumes.” According to a March 2008 Forbes story, Nicholas, with an estimated net worth of $1.8 billion, is ranked 677 on the list of the world’s wealthiest individuals.

  • Huge Jump in Unemployment
    , June 6th, 2008 at 9:56 am

    The government reported today that the unemployment rate jumped from 5.0% to 5.5%. Many news outlets are saying that this was the largest increase in 22 years. I broke down the data into a few more decimal places, and it’s actually the largest increase in 28 years. Nonfarm payrolls declined by 49,000.
    image673.png

  • Bernanke Bombs at Harvard
    , June 5th, 2008 at 9:07 am

    Poor Ben.

    “These, obviously, are not the kind of topics chosen by many recent Class Day speakers,” Bernanke said. “But, then, the class marshals presumably knew what they were getting when they invited an economist.”
    While the class marshals may have known what they were getting, it seemed many of the seniors present did not.
    “I’m annoyed, I’m irritated. I just think that a person who speaks for the class should be able to impart words from experience, especially someone who has risen so much and has come so far, from right where we are,” said Jennifer C. Arcila ’08, who was among the steady trickle heading out before the speech finished.

    Here’s the speech.
    (Via: Mankiw.)

  • The Buy List Is Still Rolling
    , June 4th, 2008 at 6:21 pm

    Thanks to Jos. A Bank Clothiers‘ (JOSB) big earnings report, that stock soared over 11% today. Net income jumped 18% in their fiscal first quarter. The company earned 53 cents a share, which topped the 46-cent estimate.
    This helped the 20 stocks on my Buy List gain an average of 1.17% today compared with a decline of -0.03% for the S&P 500. This is the 10th time in the past eleven days that we’ve beaten the market. Since May 20, we’re up 1.35% compared with a -3.46% decline for the S&P 500.

  • More on Momentum Losing Momentum
    , June 4th, 2008 at 1:28 pm

    The world’s easiest timing strategy, only invest after up days, was a huge winner for many decades, but not anymore.
    Check out the chart below:
    image670.png
    The blue line is what you would have earned if you had only invested on days following stock market advances (dividends aren’t included). The red line is for days following 0.5% advances. The green line is days following 1% advances, and the black is the S&P 500.
    By early 2000, the blue line had returned over 5,000-fold which lapped the S&P 500 by 60 times. Unfortunately, it’s not a very practical trading strategy, considering how often you have to go in and out of the market. Still, that’s one of the more astonishing figures I’ve ever calculated, especially considering how simple the rule is.
    Since 2000, however, the strategy has been a bust. The blue line is still below half its peak from eight years ago. It’s not just the burst of the tech bubble, the blue has done especially poorly in the past year. Here’s the blue line again, but only over the past few years (and no log scale):
    image672.png
    So what’s going on here? One answer is that an efficient market has simply caught up with a good idea and it no longer works.
    But I think another explanation could be, it’s the result of a subtle shift in the nature of the market. Instead of being trend-enforcing, the market has become trend-negating. Each up move is no longer confirmed, but is now fought. If so, I think that’s a healthy development for the market.
    But that’s just speculation on my part. What do you think?

  • What If the Stock Market Were a Bond?
    , June 3rd, 2008 at 1:35 pm

    Here’s an update of a post I did last year. I thought it would be interesting to see what the stock market’s historical performance would look like if the stock market were a bond.
    Let me explain what I mean.
    I took all of the monthly return data for the stock market going back to the 1920s. I then wanted to see what a bond would look like if we applied those exact same monthly changes to it.
    I assumed that it’s a bond of infinite maturity and pays a fixed coupon each month.
    There’s one hitch though. I have to choose a starting yield-to-maturity for December 1925. So this isn’t a completely kosher experiment because the starting point is based on my guess. If I choose a number that’s too high, then the historical performance won’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM is too low, the yield would gradually get pushed down to microscopic levels.
    Fortunately, the data makes my job easy. After eight decades, the window I have to work with is pretty narrow. If I start with 6.6%, that’s too high, and 6.5% is too low. After playing with the numbers, I settled on 6.538%.
    Even though this “bond” is complete make-believe, it reflects what the actual stock market really did for the past 83 years.
    Over the last eight decades, the yield has averaged about 10.2%, which is right in line with the market’s long-term total return. Through the end of May, it stood at 8.75%. Eight years ago, it got down to 4.9% (by comparison, long-term Treasuries were going for 6.5%).
    image669.png
    Last year, I wrote:

    I have to think that many investors would be better served if there were such an investment vehicle. If they knew that the market’s current yield was something like 7% or 8%, they might treat their investments very differently.
    What’s interesting is that investing in the 19th century wasn’t too far from this. Many stocks traded at or near “par” which was often $100 a share. Every year, the company would pay out an annual dividend, say $5 or $8 a share, sometimes none, sometimes $10 or $15. They dividend was the game, and there wasn’t nearly as much emphasis on long-term capital gains.

  • Soros Now Celebreating Ten Years of Gloom
    , June 3rd, 2008 at 11:30 am

    George Soros is currently testifying on Capitol Hill about the high cost of oil.
    The BBC reported: He warned that a “global credit crunch” was in the making and would probably lead the world into recession. Actually, that last part is from nearly ten years ago, but with Soros, he always sees disaster, the particulars may change. In 2000, he was warning us about the disintegration of the euro.

  • Wachovia’s CEO Ousted
    , June 3rd, 2008 at 10:56 am

    I’m glad we had Golden West Financial on our 2006 Buy List, and I was glad that Wachovia (WB) bought the company. For the tracking purposes of the Buy List, shares of Wachovia replaced the shares of Golden West. However, there was no way I was going to keep Wachovia on the 2007 Buy List. Fortunately, that decision proved correct.
    What was our good fortune was bad news for Wachovia’s CEO Ken Thompson. He was let go yesterday by the board of Wachovia. BusinessWeek reports:

    According to one Wachovia insider, Crutchfield’s downfall came when “he stopped listening” to his other executives. Likewise, it’s hard to believe Thompson didn’t get resistance from his own management team about buying Golden West—and ignored it.
    Because no one outside of Thompson and Golden West CEO Herb Sandler seemed to like the deal from the moment it was announced. Indeed, in the initial conference calls with analysts and investors after the deal, Thompson was on the defensive from the outset.
    For Thompson, the Golden West purchase gave him the beachhead in California he had long desired. It also gave him an array of creative mortgage products to pump through his broker channel. But the ink was barely dry on the Golden West deal in late 2006 when the housing bubble in markets including California and Florida began to deflate. And by early this year, the mounting losses from Golden West, coupled with deteriorating credit quality in the rest of the bank’s portfolio, began to hit Wachovia hard: The bank reported a $393 million loss in the first quarter and then amended the report in mid-May to say it really lost $708 million after a review of its portfolio of bank-owned life insurance. That forced the bank to cut its dividend by more than 40% and to sell $8 billion in new shares—a move that served to bolster Wachovia’s equity but diluted the value of existing shareholders’ stock.