Archive for March, 2010

• Cornell Drains Fun Out Of Cinderella Run By Explaining How On A Long Enough Timeline The Improbable Becomes Probable
  Eddy Elfenbein, March 25th, 2010 at 12:06 pm

  The Onion:

  SYRACUSE, NY—Despite overcoming long odds as the lowest seed remaining in the NCAA Tournament, Cornell’s basketball team had on Wednesday squandered most of its underdog goodwill by using every opportunity to explain that, given a finite set of possible outcomes and a sufficient period of time, the sheer quantity of opportunities available to accomplish an improbable outcome makes its achievement likely if not almost certain. “It’d be foolish to ascribe any of the properties of a pan-dimensional function space to the NCAA Tournament,” said Cornell center Jeff Foote, who has averaged 14 points per game in the first two rounds. “However, bear in mind that we’re not talking about a null probability space. With eight teams in the Ivy League and 65 in the tournament, you eventually run out of possible permutations. One could even make the case for historical inevitability; we won, so we were always going to win. I think my good friend Baron d’Holbach would agree—that’s decidedly nonzero. Decidedly.” Foote excused himself after the interview upon receiving a fifth rejection-of-transfer letter from Harvard.

• Are We Still in a Recession?
  Eddy Elfenbein, March 25th, 2010 at 9:52 am

  One of the easiest and best indicators of how well the economy is doing is the ISM Purchasing Managers Index.
  Here’s a look at the index and you can see how well the dips line up with recessions (the shaded areas):
  
  The recession periods are determined by the National Bureau of Economic Research. They’ve already determined that the recession started in December 2007, but they haven’t yet given us an ending date.
  The ISM Index is useful to follow for a numbers of reasons. First, it comes out at the beginning of the month so it’s timely. Also, the index is scaled so that a number above 50 indicates the economy is expanding while below 50 indicates it’s contracting.
  Historically, the NBER committee’s dating has followed the ISM closely. (Here’s NBER’s official statement on what they look at when dating an economic cycle.)
  Here’s the historic odds that the economy is in recession for each ISM reading:
  ISM……………………….Recession Odds
  <40...............................93.9% 40-44............................62.5% 45-49............................22.8% 50-54.............................5.2% 55-59.............................1.7% 60+................................3.5% The real drop-off point is approximately 44.4. Any ISM reading at that or less has come during a recession over 80% of the time. At 44.5 or more, the number is just 8%. So where do we stand today? The ISM didn't fall below 44 until September 2008 so NBER was clearly persuaded the weakening jobs market. By June 2009, the ISM jumped above 45 and it's been above 50 for the last seven straight months. This, of course, doesn't mean it will stay that way. Predicting exactly what NBER will do is hard and odds are never perfect. However, going by the historical record it seems that the recession ended around the middle of last year. This may not be exactly welcome news to the 15 million people who are still unemployed.

• Yglesias Contra Wagner
  Eddy Elfenbein, March 24th, 2010 at 6:02 pm

  Matthew Yglesias has a provocative post in which he claims that the progressive effort to expand the welfare state is now mostly done. There are still lots of items on the progressive agenda but they no longer has to due with expanding the size of government.
  Here’s Matthew’s post in its entirety.

  The End of Big Government Liberalism
  For the past 65-70 years—and especially for the past 30 years since the end of the civil rights argument—American politics has been dominated by controversy over the size and scope of the welfare state. Today, that argument is largely over with liberals having largely won. The size of the US public sector is still going to look low by international standards, but this will be a bit misleading since the way the structure of the Affordable Care Act works is to use public money and public regulation to leverage a lot of formally private money. In practice, the United States will still be a small government country compared to Sweden or Denmark or France (which combines Danish-style taxes with a below-the-waterline iceberg of hidden state-directed economic activity), but not compared to the United Kingdom or Spain.
  Due to the bill’s almost comically delayed implementation, for several years we’re still going to have a lot of political tussling over it. And even once it’s in place, the system will continue to be debated and tweaked for years to come. But over time, I think American politics will come to look quite different and we’ll look back on this day as a turning point.
  The crux of the matter is that progressive efforts to expand the size of the welfare state are basically done. There are big items still on the progressive agenda. But they don’t really involve substantial new expenditures. Instead, you’re looking at carbon pricing, financial regulatory reform, and immigration reform as the medium-term agenda. Most broadly, questions about how to boost growth, how to deliver public services effectively, and about the appropriate balance of social investment between children and the elderly will take center stage. This will probably lead to some realigning of political coalitions. Liberal proponents of reduced trade barriers and increased immigration flows will likely feel emboldened about pushing that agenda, since the policy environment is getting substantially more redistributive and does much more to mitigate risk. Advocates of things like more and better preschooling are going to find themselves competing for funds primarily with the claims made by seniors.

  This is an interesting point and I hope Matthew is right but I have my doubts. Matthew is basically taking on Wagner’s Law which says that the size of government in a modern industrial state will continue to grow as a share of the economy. Perhaps there’s a Scandinavian upper limit of around 60%. If so, then we’ve still got a long way to go.
  I’m inclined to think the political push for greater government isn’t over. If healthcare reform is the first step to a single-payer system, and many smart people think it is, then it fundamentally alters the political system. Healthcare isn’t just another program, it’s a major change in attitude of how the citizen relates to the state. It could be the start of a self-reinforcing cycle of people seeing the government as responsible for other areas of their lives (“hey, I trust them with my health so why not this too”).
  Plus, my dystopian side can’t escape pondering the internal contradiction of the welfare state—it needs babies to work but ultimately produces smaller families. That often leads to more immigration which further undermines support for the welfare state. On top of that, military spending is out the window.
  Not very happy thoughts, but it’s an interesting point to think about. I believe that Matthew’s flavor of progressivism involves separating wealth creation from wealth distribution. I’m not so certain he’s in the majority.
  Julian Sanchez has more.

• Has Healthcare Become a Utility?
  Eddy Elfenbein, March 24th, 2010 at 2:03 pm

  Here’s a look at the P/E Ratios of the different sectors within the S&P 500:
  
  What really strikes me is how low the healthcare sector is relative to the other sectors. In fact, healthcare seems to be follow the utilities very closely. Does this mean that the healthcare sector is now a public utility?
  For readability, I had to knock out three groups; Materials, Financials and Consumer Discretionaries. During recessions, the P/E Ratio can lose some of its importance as a valuation metric.
  The Materials sector had a big loss for the fourth quarter of 2008 which eventually pushed the trailing four-quarter earnings down to just 0.42. That gave the index a P/E Ratio of over 400. Things have come back to normal somewhat and the P/E Ratio is now down to 24 on a trailing basis and 17.7 based on this year’s estimate.
  This Discretionaries had a similar effect as the P/E Ratio soared to 55. Now it’s back down to 19 trailing and 17.1 based on 2010’s estimate.
  As far as the financials, ugh, what can you say? The sector had losses for five straight quarters that totaled over 25, and the index got to as low as 81 a year ago. Even since then, the earnings have only been slightly positive. Based on trialing earnings, the financial sector is still going for over 33 times earnings. For 2010’s estimate, the sector is going for 16.3.
  Here’s a look at the sector’s P/E Ratios based on this year’s earnings estimate, which I think gives a better picture of their value:

  Materials	17.70
  Industrials	17.58
  Discretionary	17.11
  Financials	16.28
  Tech	15.94
  Staples	14.93
  Telecom	14.66
  Energy	12.75
  Healthcare	12.41
  Utilities	11.82

  Here’s the same chart above but this time I only have the four defensive sectors; utes, healthcare, staples and telecom.
  

• U.S. Homes Dropped to Lowest on Record
  Eddy Elfenbein, March 24th, 2010 at 9:16 am

  Ouch!

  Sales of new homes in the U.S. unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market.
  Purchases decreased 2.2 percent to an annual pace of 308.000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.
  The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6 percent this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a “long time” to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation.
  “It’s going to be a long, slow slog and the lagging sector will be new home sales because they have to compete with existing sales and foreclosures,” Bill Hampel, chief economist at the Credit Union National Association in Washington, said before the report. “New home sales probably have until the fourth quarter until they start recovering.”

  Also today, Lennar (LEN) said that its last quarterly loss narrowed. Last quarter, they lost four cents a share compared with a loss of 98 cents a share a year ago.
  At least you can say that things are improving for Lennar. Here are their fiscal year EPS results for ’07, ’08 and ’09 — -$12.31, -$7.00 and -$2.45. Yep, that’s improvement!
  The company also said its expects to make a profit this year which Wall Street wasn’t expecting, and neither was I.

• The SEC’s Porn Problem
  Eddy Elfenbein, March 24th, 2010 at 9:07 am

  From the NYT:

  It seems that the Securities and Exchange Commission may have a pornography problem even bigger than expected.
  Gawker reported that S.E.C. is investigating rampant pornography surfing by employees on their work computers.
  The blog writes:

  Now we’ve obtained reports of 16 investigations into porn-surfing by SEC employees and contractors (one of them is a woman!), including one man who said his daily porn viewing at work was limited to “no longer than an hour and a half a day.”

  The sixteen cases reported by Gawker follows a February article by The Washington Times, which first reported details of the S.E.C.’s internal investigation.
  In a semiannual report by the S.E.C.’s internal watchdog to Congress released in December, H. David Kotz, the S.E.C.’s inspector general outlines numerous cases of misconduct by former and current employees, including two instances of S.E.C. officials using their office computers to view pornography on the Internet

• Starbucks to Pay First Ever Dividend
  Eddy Elfenbein, March 24th, 2010 at 8:43 am

  At the beginning of year, I said that this is the year that investors will rediscover dividends. I’m happy to see that Starbucks (SBUX) has said that it will issue its first ever dividend payment.
  Next month, the coffee stock will pay 10 cents a share to its shareholders. That translates to a dividend yield of…not much…about 1.6%. Still, it’s something. The company has said that it plans to pay out about 35% to 40% of its net income in the form of dividends. I think this is a good move.
  What’s not a good move is that the company is also going to buyback shares. As a shareholder (I don’t own SBUX), I’d much rather have some tangible. Still, I’m happy to welcome SBUX to the world of dividend payers. As far as the stock goes, it’s way too pricey right now.

• The Coming Satellite Image Boom
  Eddy Elfenbein, March 23rd, 2010 at 11:02 am

  One of the fun parts about looking for profitable stocks is that you come across industries that you never knew existed. For example, there are two publicly traded companies— GeoEye (GEOY) and DigitalGlobe (DGI)—that operate in the field of providing satellite images for customers. Think Google Earth.
  This is an appealing business because it has many applications from oil & gas to disaster rescue and government intelligence. What strikes me is that this could be a great business model because the entry costs are high (getting a satellite up there) and the variables costs are low (click!).
  Last April, the Denver Business Journal reported that business might soon get much better for this sector:

  A new government intelligence strategy to buy more commercial space-surveillance images could drive growth and satellite development for two Colorado employers that dominate the industry in the United States.
  U.S. military and spy agencies will buy more imagery from commercial vendors to use as unclassified intelligence they can publicly disseminate or share with allies. The federal government also will scale back earlier plans to build its own satellites for such purposes, making commercial vendors more important to its long-term intelligence strategy.
  That’s according to Dennis Blair, director of the Office of the Director of National Intelligence, whose office oversees all of the nation’s 16 intelligence-gathering agencies, such as the CIA, and who advises the president.
  Longmont-based DigitalGlobe Inc. and Dulles, Va.-based GeoEye Inc., which employs 130 people in Thornton, are the only domestic companies that gather and sell high-resolution images taken by orbiting satellites.
  Government contracts are already the companies’ largest revenue generator, but Blair’s directive is seen as an unprecedented commitment.
  “The federal government appears to have decided to stop dating the industry and marry it,” said Jeff Evanson, a commercial satellite industry analyst with Minneapolis-based Dougherty & Company LLC.

  Here we are a year later and things are going well. GEOY recently reported Q4 earnings of 55 cents a share compared with a loss of 20 cents a share a year before. Revenue jumped 80% to $73.2 million. The company also said it got $215 million in financing from Cerberus Capital Management LP which it will use to get its new satellite off the ground.
  I’m curious if the best way to play this is to invest in both stocks.

• No, the Political Futures Markets Didn’t Fail
  Eddy Elfenbein, March 23rd, 2010 at 9:17 am

  Just after the healthcare bill passed, Daniel Gross shows up to deliver his annual misunderstanding of the political futures markets:

  Is there a larger lesson here? (Aside from the obvious one, which is political futures markets usually aren’t very good at predicting what actually will happen in the future?) I think so. And it’s this: Don’t short Obama. In fact, that’s been the lesson of Obama’s entire career so far.
  Think of Obama as a stock. When he came onto the national scene, he was small and undercapitalized. Some investors (i.e., donors and organizers) went long, but plenty of the heaviest hitters bet against him. During the campaign, the prospects of his success were continually downplayed by the Clintons, the national media, and the Republicans.

  Leaving aside his schoolgirl crush on the president, we have to once again say that political futures markets are not “predictions markets,” they merely odds setting markets. They attempt to place the odds that some event will happen in the future. And guess what, those odds can change!
  Just because the odds for healthcare’s passing went from low to high doesn’t mean the markets got it wrong. Perhaps it was an accurate reflection of reality. As far as I follow these things, that seems to be pretty much what happened. After Scott Brown won in Massachusetts, lots of people thought healthcare was dead. The outlook changed and the futures market followed.
  Also, the futures markets were correct in the end. The contract to pass healthcare cross 50 three weeks ago, and was running around 97 moments before the roll call, which had a margin of just four votes. Doesn’t sound like failing to me. Also, just because something happen doesn’t mean it wasn’t a long shot. That’s what odds are about. Shares of DuPont (DD) are at a new high today. Does that mean that the stock market has failed?
  There are problems with the political futures markets. These markets tend to be very small and illiquid. I also think Intrade does a very poor job of selecting what real world events to follow. They should steer clear of things like who will be the Vice-Presidential or Supreme Court pick. That outcome is solely determined by one person’s judgment. The markets work better when they’re trying to determine the outcome of something with many more variables. Even the outcome of the healthcare bill was largely determined by Nancy Pelosi’s determinations (or intransigence, depending on your point of view).
  The markets didn’t fail. They adjusted. That’s what markets do.

• Odd Lots
  Eddy Elfenbein, March 22nd, 2010 at 4:09 pm

  Gary Gorton vs. Michael Lewis
  Ritholtz’s Agenda for Financial Reform
  Seabreeze’s Kass on U.S. stocks: ‘I have been wrong’
  Buffett Better Credit Risk than Obama
  RIP: Shirley Eleanor Nash
  WW II bombs threaten AC/DC concert
  Goat grabbing competition held in Kyrgyzstan
  10 Luxury Business Hotels That Will Make You Forget You’re On Business