Archive for November, 2008

• Jim Rogers: Oil Bull Market Has Years to Go
  Eddy Elfenbein, November 12th, 2008 at 2:24 pm

  In the last four months, oil has dropped by $90 a barrel. I think it’s time to remind folks what the experts were telling us. Let’s start with billionaire Jim Rogers:

  Jim Rogers: Oil Bull Market Has Years to Go
  The bull market for oil has many years to go before it peters out, says billionaire Jim Rogers, chairman of Rogers Holdings.
  There are several factors for this view, but the primary one is that “known sources of petroleum are dwindling,” Rogers told Bloomberg in an interview.
  Global oil supplies could fall far short of need and expectations in the next 20 years, reported the International Energy Agency in mid-May. The agency long expected supply to rise to meet demand of 116 million barrels a day by 2030.
  It now expects oil output to struggle to reach 100 million barrels in that time frame.
  These market conditions will make life difficult for airlines — and airline stocks — well past 2010 and will also impact Federal Reserve policy in the coming months, Rogers said.
  Rogers has proved astoundingly prescient since suggesting that investors buy into the older, industrial economy back in 1999 when gold and oil were coming off 25-year lows and when the Internet stock market was soaring.

• When Did the Recession Begin?
  Eddy Elfenbein, November 12th, 2008 at 12:58 pm

  The common media definition of a recession is two consecutive quarters of negative GDP growth. Technically, that’s not correct. For example, at the beginning of this decade, we never had two straight quarter of falling GDP. Three of out five were negative, yet it certainly felt like a recession to me, and lots of other folks.
  The National Bureau of Economic Research is the widely-regarded outfit in charge of dating business cycles. While they regard quarterly GDP as “the single best measure of aggregate economic activity,” NBER prefers to use monthly numbers to pinpoint the precise beginning and ending of business cycles.
  This is what NBER has to say about their guidelines:

  The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

  It’s not a perfect science establishing when a recession begins because we have to indentify two points: One, when does the economy not just slow down, but actually contract; and two, we need to look at the entire economy not just high-profile sectors like real estate.
  NBER has already said that a recession has begun, but now it has to decide when. A decision probably won’t be made public for another year, so in the service of goodwill, I’ll try to help them out. The difficulty this time around is that the GDP figures aren’t so clear cut. Employment, for example, clearly peaked about one year ago, but exports segments of the economy still did well. GDP growth for last year’s fourth quarter was -0.17%, but I strongly doubt the committee will target a date that far back for the start of the recession. The reason is that GDP grew by 0.87% in the first quarter and another 2.82% in the second quarter (these are annualized numbers). The committee has never before overridden such strong numbers. I just don’t see them dating a starting point before then.
  The issue becomes much clear by the third quarter when GDP came in at -0.25%. I also think that number will be revised lower in the months ahead. My advice is to date the start of the recession in May–right in the middle of the second quarter. There were two important events in May. The unemployment rate jumped from 5% to 5.5%. That was the largest monthly jump since 1980.
  The other reason isn’t a metric that NBER uses but I think they ought to consider, and I’m referring to when the stock market broke down in May. The S&P 500 peaked last October 9 at 1565.15, however it showed some strength from mid-March to mid-May. Since May 20, however, the market has been in almost continuous retreat.
  I think the stock market has evolved as a better gauge of broader economic cycles due to the democratization of Wall Street. When the market goes up, people are wealthier and they spend more. When they see their 401k’s rise, they feel more confident about buying big-ticket items. When the opposite happens, they feel less confident. Up through May, the market had suffered a break, but only since May 20 has it really deflated. That’s when the troubles started to hit everyone.

• Trying to Cross Wall Street
  Eddy Elfenbein, November 11th, 2008 at 3:47 pm

  From Dealbreaker.
  

• The Death of Buy and Hold?
  Eddy Elfenbein, November 11th, 2008 at 12:34 pm

  Last night, the Fast Money crew talked about the death of buy-and-hold investing. I agree that as a strategy, it’s in intensive care, but I’m not so sure it’s quite dead yet.
  First, whenever people start talking about the death of something, particularly with investing, it often the moment it’s about to surge. The classic example of this is Business Week’s “Death of Equities” cover from 1979.
  The other reason for my skepticism is a misunderstanding of the arguments for buy-and-hold. I often hear people say, “Ha! The market’s down! Where’s your buy-and-hold NOW?” Well, the case for buy-and-hold isn’t that the market always goes up. Rather, it’s that buy-and-hold beats anyone else’s ability to time the market consistently, successfully and in a practical way. It’s that last part in italics that’s often overlooked.
  If you can time market successfully, fine. Go do it. In my opinion, I’ve never seen anyone who can do it consistently, successfully and in a practical way.
  The other part of buy-and-hold obviously depends on what you buy and what you hold. Since I don’t believe in efficient markets, I don’t see buy-and-hold as synonymous with index investing. Many do. I think it’s certainly possible for investors to make reasonable decisions that will lead them to beat the market over the long haul. For example, if you had taken some basic steps like underweighting large-cap tech stocks at the height of the bubble, you’d be in far better shape today. Small-cap value stocks have had a pretty nice run over the last ten years (except for the last three months). This year, I avoided energy stocks and large-cap financial stocks, and it’s served us well.
  There’s also the issue of how long to hold a stock. I don’t see the importance of holding a stock forever, but I do see value in holding them for a considerable amount of time. Each year, I change five out of my 20 Buy List stocks. That’s translates to an average holding period of four years, which seems reasonable to me, though I can understand some buy-and-hold purists objecting.
  Lastly, there’s also the issue of how long it takes a stock’s performance to reflect its true value. I think this may be one of the least-understood topics in investing. I’ll give you a brief summary. Let’s say that the stock market gains, on average, 0.05% a day with a daily standard deviation of 1%. (These numbers aren’t accurate. My point here is descriptive. I’m also aware of the problem of stocks returns and the normal distribution, but I’ll out that aside for now). That means that 95% of a stock’s daily move is simply nonsense. It had zero bearing on the stock’s true worth.
  After 25 days, more than a month of trading, the stock’s average return should be 1%. The standard deviation, however, is now 5% (note: this rises by the square root of the number of days). So even after one month of patience, the noise value has dropped to 83%.
  At 625 days, or nearly two-and-a-half year, the average return and the standard deviation are both 25%. This means that even after holding a stock for 30 months, it’s perfectly reasonable to expect a loss or a minimal gain.
  As I mentioned before, I used those numbers for descriptive purposed. The real figures would show that even more patience is required. Buy-and-hold could be dead, but the evidence isn’t close to be full. The bottom line is that the long-term advantage of holding stocks is real, but it takes a long time to show up.

• 90 Years Ago
  Eddy Elfenbein, November 11th, 2008 at 11:00 am

  
  In Flanders fields the poppies blow
  Between the crosses, row on row
  That mark our place; and in the sky
  The larks, still bravely singing, fly
  Scarce heard amid the guns below.
  We are the Dead. Short days ago
  We lived, felt dawn, saw sunset glow,
  Loved and were loved, and now we lie
  In Flanders fields.

• Investor Quiz
  Eddy Elfenbein, November 10th, 2008 at 10:50 am

  Guess what stock was up over 430,000% in the last quarter of the 20th century, or nearly 40% a year?
  Give up?

  (more…)

• Now That’s a Price Target
  Eddy Elfenbein, November 10th, 2008 at 10:40 am

  Deutsche Bank lowered GM to a sell today. That’s not what caught my attention, although I’m not sure why anyone would have rated GM anything else but sell.
  No, what struck me was their new price target: $0.

• The Recession Is On
  Eddy Elfenbein, November 7th, 2008 at 2:18 pm

  Duh.

  The head of the panel that officially dates U.S. economic cycles said there’s no doubt now that a recession is under way following a surge in the unemployment rate to a 14-year high.
  “The evidence is more than compelling” Robert Hall, the Stanford University economist who leads the National Bureau of Economic Research’s business cycle dating committee, said in an interview. “It’s conclusive, in my personal opinion.”
  With today’s remarks, Hall joined fellow panelist and Harvard University Professor Martin Feldstein in calling a recession. The eight-member panel will meet at a later date to make an official determination because it needs additional details on gross domestic product figures, Hall said.
  Feldstein and other analysts have said the economic slump is likely to be deeper than the past two recessions, in 2001 and 1990-91. Today’s employment report reinforced that pessimism, with the unemployment rate climbing to 6.5 percent in October from 6.1 percent the previous month.

  By my estimate, I think they’ll say the recession began in May.

• The Pro-Obama Wealthy
  Eddy Elfenbein, November 5th, 2008 at 5:27 pm

  According to exit polls, the percentage of voters in households that make over $200,000 a year doubled from 2004 to 2008, rising from 3% to 6%.
  In 2004, those voters went for Bush over Kerry, 63% to 35%. This time, they voted for Obama over McCain, 52% to 46%. That’s an amazing 17-point pick up.

• NICK’s Earnings
  Eddy Elfenbein, November 5th, 2008 at 11:44 am

  Nicholas Financial (NICK) reported third-quarter earnings today, and it was basically what I expected. The company earned eight cents a share, which was a big drop from the 25 cents a share it earned in last year’s third quarter. Still, they’re making money, and that needs to be stressed. Revenues increased 7.4% to $13.5 million.
  I was impressed to see that most of the measures of their business were fairly stable compared with previous quarters. The big exception is NICK’s prevision for credit losses. That grew by 225% over last year’s third quarter, and it’s nearly 50% from the second quarter.
  This confirms my earlier view—NICK’s business is in a lot of trouble right now. However, any fear that the company is about to go under isn’t yet shown by the evidence. By my guess, I would say the current market price probably reflects a 50% chance that NICK will go bankrupt sometime in 2009.
  This investment will take awhile to be worthwhile, but it looks to reward patient investors.