Archive for October, 2009

• Fannie Mae, Freddie Mac Price Targets Cut to $0
  Eddy Elfenbein, October 19th, 2009 at 3:59 pm

  Keefe, Bruyette & Woods lowered its rating on Fannie (FNM) and Freddie (FRE) to $0.
  They also downgraded the stock to “Underperform.” Of course, if you think it’s going to $0 that makes sense.
  Both stocks trade a little over $1.

• S&P 1100
  Eddy Elfenbein, October 19th, 2009 at 3:41 pm

  For a very brief moment, the S&P 500 jumped over 1,100, saw its shadow and ran back below.
  Someone’s been dumping lots of NICK today (and buying it as well). The stock is poised to have its biggest volume today in five months. The ask is currently at $6.88. I wouldn’t mind buying more if it goes lower.

• Rosenberg Rewrites History
  Eddy Elfenbein, October 19th, 2009 at 2:13 pm

  If you’re in the business of making market calls, you’re going to wrong. That’s just how it is. I’m wrong all the time. So is Jim Cramer. It happens. But I won’t tolerate someone trying to run away from their calls. There’s no excuse for that.
  For the second time, David Rosenberg is trying to rewrite history and claim that he was neutral at the bottom. First he claimed it a few weeks ago and again today. As Joe Wisenthal points out, Rosenberg claims he “turned agnostic” in March.
  Bullshit. That’s just complete bullshit.
  Check out these stories.
  March 9, 2009

  Merrill Lynch & Co.’s chief North American Economist David Rosenberg said today the S&P 500 may bottom out at 600 in October, lowering his estimate after the benchmark’s decline last week.

  April 2, 2009

  Based on the outlook for corporate profits and the typical trough P/E multiple that characterized recession bear markets, it would not surprise us to see the S&P 500 gravitate in a 475-650 range for an extended period of time.

  At every point, Rosenberg discounted the rally (see here, here and here). After the market experienced a stunning rally, this is what he said in September.

  I never did turn bullish enough at the lows, which is true. But I did turn neutral and while I did see the prospect of a complete throw-in-the-towel move towards 600 on the S&P 500, I can recall putting in print that the good news was that the bear market was about 95% over. Why quibble about another 60 points at that juncture. And, in the name of keeping an open mind, in my final report at Merrill Lynch, I played a game of Devil’s Advocate with myself … what if I was unduly bearish?
  I didn’t stay bearish at the lows, which is contrary to popular opinion. I was basically neutral. And I continued to — still do, by the way — frame what we have experienced in the context of a bear market rally as opposed to the onset of a new secular bull market (the first you rent, the second you own). I am always skeptical of rallies that are purely premised on technicals and liquidity but bereft of a solid economic foundation. While green shoots did appear in the economic data, all the growth we have seen globally, and in the U.S.A. in particular, has come courtesy of unprecedented government stimulus. We see nothing organically in the economy to get us excited.

  I’ll quibble about 60 points because it was a lot more than 60 points. We’re now up more than 400 points since then and Rosenberg said that bottom could come in October (i.e. now).
  You simply can’t say that you’re neutral but you see the prospects of a big move down. That statement makes no sense. It can be used to say anything, which is another way of saying it means nothing.
  If the market were at a new low now, then I doubt Rosenberg would say he had truly been agnostic in March.

• Buy List +38%
  Eddy Elfenbein, October 19th, 2009 at 12:28 pm

  Thanks to today’s rally, the Buy List is up 38.2% for the year. Sysco (SYY), Danaher (DHR) and Cognizant (CTSH) are all at new 52-week highs. Eaton Vance (EV) hit one earlier today and Amphenol (APH) isn’t far behind. Nicholas Financial (NICK) has traded at $7 a share several times over the past two months but can’t seem to get one penny above it.

• Loonie Closing in on Greenback
  Eddy Elfenbein, October 19th, 2009 at 11:23 am

  While Wall Street is celebrating the Dow being over 10,000, there’s another milestone coming up: The Canadian dollar is about to reach parity with the U.S. dollar.
  
  Seven years ago, a loonie was worth about 60 cents.

• Technical Analysis Strikes Out
  Eddy Elfenbein, October 19th, 2009 at 11:17 am

  A new paper finds that technical analysis is pretty much a dud around the world.

  Technical analysis is not consistently profitable in the 49 countries that comprise the Morgan Stanley Capital Index once data snooping bias is accounted for. There is some evidence that technical trading rules perform better in emerging markets than developed markets, which is consistent with the finding of previous studies that these markets are less efficient, but this result is not strong. While we cannot rule out the possibility that technical analysis compliments other market timing techniques or that trading rules we do not test are profitable, we do show that over 5,000 trading rules do not add value beyond what may be expected by chance when used in isolation.

  (HT: Alea)

• 22 Years Since the 1987 Crash
  Eddy Elfenbein, October 19th, 2009 at 11:02 am

  It was 22 years ago today — October 19, 1987 –that the market busted. The Dow plunged 508 points, also on a Monday.
  As it turned out, the crash was an excellent buying opportunity as the market can surging for another 12-1/2 years.
  
  If you bought the day after the crash, you would have improved your annualized return by 1.25%.

• You Know It’s Bad…
  Eddy Elfenbein, October 19th, 2009 at 12:46 am

  …when the Catholic Church files for bankruptcy.

  Catholic Diocese of Wilmington files for Chapter 11
  Catholic Diocese of Wilmington Inc filed for Chapter 11 bankruptcy protection, court documents showed.
  In a filing with the U.S. Bankruptcy Court for the District of Delaware on Sunday, the diocese listed estimated assets in the range of $50 million to $100 million and estimated liabilities in the range of $100 million to $500 million.

• Time to Bury MPT
  Eddy Elfenbein, October 18th, 2009 at 11:10 pm

  Any idea for ditching Modern Portfolio Theory gets a thumbs-up from me, and it gets two thumbs up if it’s from David Merkel.
  David says it’s time to put MPT and beta in their grave. He suggests a “contingent claims theory.” If I have him right, we ought to view equity, not as a separate animal, but as simply the next point on the process of debt. Equity is the folks who get paid last so they get the highest yield.
  I like the logic, but my question is—what if a firm has little or no debt?
  Update: David responds:

  Good question. The total volatility of a firm can be broken up into three pieces: financial leverage, operating leverage, and sales volatility. Saturday’s piece dealt with financial leverage and its costs. An unlevered firm in the financial sense still possesses operating leverage and volatility of sales. Different unlevered firms have different costs of equity capital because they have different levels of sales volatility, and different degrees of operating leverage.
  That will manifest itself in option implied volatility, which is a crude measure of what people would pay to gain and lose exposure to the equity of the company. The cost of equity should be positively related to that. More volatile companies should have a higher cost of equity.
  Another way to look at it is to ask what is the effect on the firm if the company issues or buys back equity. How much does the generation of free cash flow change relative to the price paid or received for equity?

• We go to gain a little patch of ground that hath in it no profit but the name
  Eddy Elfenbein, October 18th, 2009 at 2:26 pm

  Christopher Hitchens reviews Peter Hart’s The Somme: The Darkest Hour on the Western Front:

  From Hart’s book I was able to learn and grasp (and even picture) the historic importance of the “creeping,” or perhaps better say “staggered,” barrage. The descriptions one has so often seen, of entire ranks and files of British infantry lying dead almost symmetrically, like so much freshly scythed wheat, are all true. But these men were being expended while the British artillery struggled to evolve a system of covering bombardment that “walked” in front of them, smashing trench after trench and clearing them a path. Painstakingly leading us through a series of terrible engagements, Hart succeeds in showing how the gunners got steadily better (as did the guns). He also succeeds in giving one an enhanced respect for the German soldiers who held positions under this unbelievable rain of fire and were still—almost always—ready to fight. Sometimes they were too stunned and deafened and dazed to do anything but surrender, or rather, try to do so. An unpleasantly recurrent theme in the diaries and letters of British soldiers—Niall Ferguson has also been able to be honest about this often-avoided question—is the casual or even gloating way in which the Tommys boasted of killing German prisoners.

  In America, World War II is really the Great War, but I’ve become convinced that World War I was the worst thing to ever happen in the history of the world.