Archive for August, 2009

• Traders Bet Rally Won’t Last
  Eddy Elfenbein, August 10th, 2009 at 8:43 am

  Historically, Septembers in the first year of a presidential administration have been tough for the stock market. For example, there was some unpleasantness in 1929, 1973 and 2001. Some traders are already bracing for trouble in September 2009:

  Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September, historically the worst month for U.S. equities.
  Traders are betting the VIX, a gauge of expected stock swings, will increase 13 percent in the next five weeks, according to futures prices compiled by Bloomberg. That’s the biggest spread since August 2008, right before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.
  (…)
  History shows that U.S. investors lose the most in September. The benchmark index for American equities fell 1.3 percent on average since 1928 that month, data compiled by Bloomberg show.

  (Via: Joe Weisenthal)

• Poseur Alert
  Eddy Elfenbein, August 9th, 2009 at 10:59 pm

  Check out this lede:

  In the coda of the Passacaglia and Fugue in C minor, composer Johann Sebastian Bach repeats the same chord sequence over and over again, leading the listener to anticipate one resolution, only to provide a tone completely different.

  Can you guess what the story is about? If you said, the Nationals 9-2 victory over the Diamondbacks, congratulations.

• The Semi-Good Jobs Report
  Eddy Elfenbein, August 7th, 2009 at 11:05 am

  After nearly two years of horrible jobs report, we finally got one that’s not so horrible. Though it’s not so good either.
  Let’s start with the good news. Nonfarm payrolls fell by 247,000 last month. That’s the shallowest decline in nearly a year. The unemployment rate ticked down from 9.5% to 9.4%. If you want to go out a few more decimal places, it fell from 9.507% to 9.360%.
  If we look at the numbers more closely, we see that the civilian labor force dropped by 422,000 last month (that’s seasonally adjusted) while the number of employed dropped by 155,000 (note that that is a different calculation from the NFP report).
  In other words, the increase in the employment rate is due to the fact that people are leaving the job market faster than people are losing jobs.

• Junk Stocks Rally
  Eddy Elfenbein, August 7th, 2009 at 10:18 am

  Reuters reports:

  The junk-stock rally lives on.
  The biggest winners since the U.S. stock market got another dose of bull market fever in mid-July have been the companies with the most beaten-down shares and the ones whose business outlooks are seen as the riskiest within the Standard & Poor’s 500 Index.
  This winners’ circle has been dominated by 81 S&P companies with unspectacular credit ratings of “BB” or lower, also categorized as high-yield “junk.”
  The stock prices of these junk-rated companies have jumped on average by between 21 percent and 29.5 percent between July 10 and Aug. 4.
  In comparison, investment-grade companies rated “BBB” or above have seen their shares rise between 9.50 percent and 19.25 percent, according to data from Bespoke Investment Group, a financial research firm based in Harrison, New York.

• The New York Times Fires Ben Stein
  Eddy Elfenbein, August 7th, 2009 at 10:09 am

  Apparently, you really need to go out of your way to get fired as a columnist at the NYT. This is vindication for Felix Salmon who’s been a constant critic of Stein. My only concern is that Stein wasn’t fired for his content but for appearing in a commercial.

• Recession Plunges Upper Middle Class Family into the Moderately Upper Middle Class
  Eddy Elfenbein, August 6th, 2009 at 1:27 pm

  Break out the world’s smallest violin:

  Stacey: It used to be, she’d be bored on a Saturday and she’d say, “Let’s go get our nails done,” and I’d say okay. Now, I’ll sometimes say no — or we’ll go, but we’ll only do our fingers, not our toes.
  She used to do gymnastics, which she still wants to do. And she wants to do ice skating. But the cost of these extracurricular activities is so expensive that we can only afford to do the one. Even that one is a strain. Every time she tests for a belt, every six weeks, it’s $45, and sparring equipment is $200.

  The horror.

  Michael: We want the kids to see D.C. And I thought, the zoo — that’s a cheap thing to do. Well we went, and by the time we paid for pizza, two cups of coffee, hot chocolate and parking, it came to $100. We’re not going to D.C. again.

  Did he say really parking? They live in Ashburn and they drove to the zoo ignoring the fact that there’s a metro stop by the zoo. They spent $100 on going to the zoo and it’s somehow D.C.’s fault.

• Spreads Continue to Tighten
  Eddy Elfenbein, August 5th, 2009 at 12:08 pm

  Want an explanation for the rally? Check out the dramatic widening and closing of the spread between long-term Treasuries and corporates. The gap is still over 300 points and it was often below 200 during 2004 to 2007.
  

• Scientists Crack Two-Envelope Problem
  Eddy Elfenbein, August 5th, 2009 at 10:33 am

  Here’s a fascinating story. Two Australian scientists have cracked the legendary two-envelope problem.
  Let’s say that there are two envelopes with money in them, one has twice as much as the other. You can open one see how much is there. You now have the option of switching or holding, what do you do?
  The CW says it doesn’t matter, you’re just playing the odds so why bother. Well, these two researchers have a way to beat the odds:

  The formula relates a particular amount of money (y) found in the first envelope to the probability (P) that you should switch envelopes to gain in the long term.
  For example, if you open the first envelope and see $10, the formula might tell you that the probability you should switch envelopes is 0.1 – that is once in every 10 games played.
  The formula calculates a smaller probability of switching the larger the original amount (y) is.
  Using the previous example, if y is $100, the probably might drop to 0.01, or 1 in every 100 games.
  Random strategy
  What’s key to this strategy is that the decision when exactly to switch – in which game – must be random, says McDonnell, who studies random processes in telecommunications and the brain.
  McDonnell says their solution is different to those that have gone before because of this random element.
  “Our solution is to switch randomly,” he says.
  “Each time you are offered two envelopes, you observe the amount in one envelope, and then the larger the amount observed, the less likely it is that you should switch, but the choice is still random.”
  “The key result is that this kind of random switching leads to a long-run financial gain in comparison with either (i) never switching or (ii) switching randomly in a manner that ignores the observed amount in the opened envelope.”

  So is there a stock market connection? You betcha.

  In real life, the actual gain will obviously depend on how much money is actually put in the envelopes, says McDonnell.
  Abbott says the growth in money seen in the two envelope problem appears to have some similarities to a theory known as “volatility pumping”.
  “Volatility pumping is a way of switching between poor investments and yet winning an exponentially increasing amount of money,” he says.
  “It suggests the power of changing your portfolio of stocks periodically, buying low and selling high.”

• Siegel Responds to Criticisms on Stock Market Data
  Eddy Elfenbein, August 5th, 2009 at 9:57 am

  Professor Jeremy Siegel has responded to Jason Zweig’s criticisms of the data he’s used for long-term stock performance.

  The problem Zweig highlights is how few stocks comprise the study Siegel relies on. Zweig notes that Siegel ignores 97% of stocks that were trading in that time frame—and most of those stocks he uses were blue chips. All those ignored dud stocks would certainly have lowered the 10% per year number.
  Zweig also finds that Siegel raised the average dividend yield from the 1802 to 1870 period from 5% to 6.4%. That’s a huge increase and it alters the long-term results very significantly.

  Siegel responds by pointing to research by Bill Goetzmann and Roger Ibbotson. I happen to be familiar with that data and I still think Zweig’s larger point holds.
  The research data collected by Goetzmann and Ibbotson is impressive but I see it as only a start. For example, for months between 1815 and 1834, the data set comprises only a handful of stocks. It’s often less than 20 stocks and sometimes less than 10. The dividend series begins in 1825 and some years it includes less than 20 stocks. I don’t think we should rely on research with so little data.
  The problem is that the stock market wasn’t close to a market in the sense we regard it. In fact, common stocks were viewed as similar to bonds. The shares would trade around par value and each year you’d find out what the dividend was. The idea of constant capital gains is a 20th century notion.
  Siegel writes:

  Researchers agree that the biggest source of uncertainty in early stock data is the dividend yield, which was not always reported. As a result, G-I formed two series of dividend yields, one assuming that those stocks for which they could not find dividends had zero dividends (3.77%), and another which uses the dividend yield of those stocks for which they could find dividends (9.27%). They conclude “The true dividend return to a capital-weighted investment in all NYSE stocks is undoubtedly somewhere in between these two extremes.” My dividend yield, which the article claims is unrealistically high, is 6.4%, actually less than the midpoint of their two estimates.

  Pointing out those two data sets that are so far apart is precisely the problem. Selecting a number between them doesn’t help. Sure, 5% and 6.4% are within the bookends, but the difference between the two is extreme, especially when compounded over decades. The fact is that Siegel is basing his arguments on very thin data sources.

• The Total Track Record
  Eddy Elfenbein, August 4th, 2009 at 8:27 pm

  Here’s a look at the complete record of the Buy List for the last three years, seven months and four days. Not including dividends, we’re down 1.43% compared with a loss of 19.44% for the S&P 500. From the market’s peak on October 9, 2007, our Buy List is off by 15.09% while the S&P 500 is down 35.75%.