Archive for May, 2010

• My Thoughts on Gold
  Eddy Elfenbein, May 13th, 2010 at 1:02 pm

  A reader writes:

  Hi Eddy,
  I LOVE your blog…I read it everyday and really enjoy your insights. The key is that you keep it just simple enough as to not get too wonky. Please keep it up.
  Question: isn’t it about time to short gold? I’m thinking I’d use a little ETF like GLL or DGZ and just sit on it for a while. With the market doing so well and me thinking that things will be looking up for a while, I’m thinking this a nice little play. Any thoughts? Any risks besides gold continuing on its upward path?

  This is a good topic and I’ve been getting lots of questions about gold recently. I want to take this opportunity to address the topic and I particularly want to focus on folks who may be new to investing.
  If you’re not familiar with investing in gold, it may surprise you that many in the pro-gold camp are—shall we say—not terribly helpful for their cause.
  Gold is one of those topics that seems to bring the loons out in full force. A sizeable portfolio of goldbugs see the entire world as corrupt and on the verge of bankruptcy, and gold is their only salvation. You can’t help wondering about the distance between their financial and religious beliefs.
  Gold is an endlessly fascinating subject. Gold has been used as a store of wealth for thousands of years. Gold never rusts. I mean never! You can take gold out of an Egyptian pyramid and stick it in your cavity (though you might want to clean it first).
  Gold is incredibly soft. One ounce can be stretched for 50 miles. It can be pounded down to a few MILLIONTHS of an inch thickness.
  Gold is very heavy. Despite what you see in the Treasure of the Sierra Madre (“Badges? We ain’t got no badges!”) gold dust wouldn’t have blown away.
  Gold has been found on every continent on earth. Gold has also had strong religious connections. It’s mentioned in the Bible more than 400 times. Karl Marx writes of commodity fetishism, which is meant to have a religious connotation. And I won’t even get into Freud’s talk of the psychological connection of gold to feces (no, I’m not making this up).
  When Moses came down from Sinai with the Ten Commandments, the Jews were making a golden calf to worship. God instructed Moses to overlay a sanctuary for him in pure gold. In other words, gold had its bases covered—it was on both sides!
  Plato mentions the gold/silver ratio to be 12. Recent historical evidence suggests that Isaac Newton was mainly an alchemist. The other stuff he did was just playing around on the side, and was probably an offshoot of his efforts to makes gold. Pieces of his hair have traces of lead and mercury.
  Newton was also Master of the Mint and inadvertently put England in the gold standard. This means that one of the greatest geniuses in human history was also a civil servant who made economic policy based on a forecast. A forecast that was dead wrong.
  In the 1964 film, Goldfinger, Auric Goldfinger plans to irradiate all the gold in Fort Knox thus increasing the value of his gold. He would have been a lot better off doing nothing, since gold increased dramatically over the next 16 years.
  There’s more gold at the New York Fed, waaaay below 33 Liberty Street, than in Fort Knox. Gold is also a really good conductor. So despite its high prices, it’s used in many electronics.
  What you need to understand about investing in gold is that you’re not really investing in gold. You’re investing against the U.S. dollar. It’s not that gold goes up, it’s that the value of a dollar goes down.
  Actually, it’s even more subtle than that. What you’re doing is you’re betting against the interest rate on the dollar. I know this sounds odd, but any currency you carry around in your wallet has an interest tied to it. That’s essentially what the currency is—that rate—and it’s the reason why anyone would want to use it. Gold can be seen as the way to keep all those currencies honest.
  People mistakenly believe that gold is all about inflation. That’s not quite it, but high inflation is usually very helpful for gold. What gold really likes is to see is very low real (meaning after inflation) interest rates. Gold is almost like a highly-leveraged short on short-term TIPs.
  Here’s a good rule of thumb. Gold goes up anytime real rates on short-term U.S. debt are below 2% (or are perceived to stay below 2%). It will fall if real rates rise above 2%. When rates are at 2%, then gold holds steady. That’s not a perfect relationship but I want to put it in an easy why for new investors to grap. This also helps explain why we’re in the odd situation today of seeing gold rise even though inflation is low. It’s not the inflation, it’s the low real rates that gold likes.
  This chart shows the three-month Treasury bill rate minus the one-year inflation rate (low is good for gold, high is bad):
  
  In February, gold took a big hit when the Fed announced it was lifting the discount rate. This isn’t the all-important Fed funds rates, but you can see how nervous the market was over the threat of higher real rates.
  This rule of thumb also tells us that gold can rise very quickly and it can fall very quickly. One Ben and his pals at the Fed raise rates, gold is in for a world of hurt. The history of the price of gold is long boring periods with sharp dramatic spikes. The up part of the spike is fun. The downside, less fun.
  What’s tricky about gold is that it’s also impacted by geo-politics. Gold peaked in 1980 shortly after the Soviets invaded Afghanistan. It reached a low point not long before we did the same.
  The pricing of any commodity can be tricky because commodities are subject to substitution. Let’s say that gold, despite its high price, is the cheapest way to make a part for a certain kind of semiconductor. That will drive demand for gold. However, let’s say that once gold crosses a certain level, it’s no longer the cheapest way to make the part. Maybe unobtanium is a better way to go. That will, in turn, undermine gold’s value. It’s price impacts its price.
  This is a major difference between investing in equities and investing in commodities. Stocks are companies, filled with people aiming to make a profit. Gold is just a rock. It just sits there. In 10,000 years, it will still be a rock.
  My view is that the Federal Reserve will raise interest rates earlier than expected. I don’t know exactly when that will be but it will put gold on a dangerous path. For now, my advice is to stay away from gold, either long or short.

• Best. Stock. Name. Ever.
  Eddy Elfenbein, May 13th, 2010 at 12:14 pm

  I give you — Crazy Woman Creek Bancorp (CRZY)

• Progressive +40,000%
  Eddy Elfenbein, May 13th, 2010 at 11:34 am

  Here’s another entry in our series, “boring but highly profitable stocks.” Today’s entry is Progressive (PGR) the auto insurance company.
  Insurance stock? You’re thinking snores-ville right? Well, check this out. Thirty years ago you could have picked up a share for a split-adjusted price of five cents.
  
  The gold line is the S&P 500. It’s barely visible in comparison.

• Wendy’s Posts Loss
  Eddy Elfenbein, May 13th, 2010 at 10:09 am

  
  Now we know a little more about the turnaround at Wendy’s/Arby’s Group (WEN). The company just posted a loss for its first quarter (before charges). However, the company’s new focusing wasn’t fully implemented for the entire quarter.

  Revenue at Arby’s restaurants fell 12 percent in the quarter.
  The lackluster Arby’s showing weighed on overall results, as the owner of Wendy’s and Arby’s restaurants said Thursday that it lost $3.4 million, or a penny per share, for the three months ended April 4. That compares with a loss of $10.9 million, or 2 cents per share, last year.
  Removing 3 cents per share in charges, profit was 2 cents per share.
  Total revenue fell 3 percent to $837.4 million from $864 million.
  Wall Street expected the Atlanta company to earn 1 cent per share on revenue of $835.2 million. The estimates of analysts surveyed by Thomson Reuters generally exclude one-time items.

  The stock is down today about 3% although I don’t think the earnings report says much about WEN’s future. If this turnaround does work, it will take more time. On the other hand, we can see that this situation isn’t getting worse. I still view WEN as a highly speculative value stock.

• You Can’t Be Serious
  Eddy Elfenbein, May 12th, 2010 at 3:44 pm

  TheStreet.com is reporting the rumor-that-won’t-die

  Netflix is spiking as rumors surface yet again that Amazon is interested in acquiring the company. (BWAHAHAHA)
  These rumors have surfaced many times over the last several years in regards to Netflix, most recently in January. Each time analysts have dismissed the claims. (Duh)
  While anything is possible (note the Hewlett-Packard-Palm deal), Needham analyst Charles Wolf says it is unlikely.
  “Amazon would not acquire Netflix for its by-mail business, which will eventually go away” he says. While Netflix has a terrific digital-streaming business, its library consists of mostly older films. It can’t offer new releases as they are available because it is too expensive.
  Amazon, itself, has a streaming pay-per-view service for new releases, and it doesn’t seem like there is a barrier preventing Amazon to offer old movies, Wolf says. “So the company has little reason to buy Netflix.”

  The rumor is moronic, yet the shares are up 7.5% today. Once again, welcome to Wall Street-istan!!

• Sector Forecasts
  Eddy Elfenbein, May 12th, 2010 at 1:41 pm

  This is from S&P. Here are the full-year operating forecasts for the S&P 500 and each sector on March 31 and again two days ago, with the percent change:

  Sector	3/31	5/10	Change
  S&P 500	$78.05	81.33	4.20%
  Discretionary	$15.21	16.06	5.58%
  Staples	$19.43	19.20	-1.19%
  Energy	$33.26	34.51	3.74%
  Financials	$13.17	15.03	14.12%
  Health Care	$30.48	29.72	-2.51%
  Industrials	$15.53	16.41	5.65%
  Technology	$23.75	24.73	4.13%
  Materials	$11.73	12.58	7.23%
  Telecom	$7.50	7.94	5.79%
  Utilities	$12.84	12.75	-0.70%

  You can see that the Financials have had the biggest improvement. The only sectors with lower forecasts are the defensive ones — Health Care, Staples and Utilities.
  Here’s the same table but with 2011 forecasts and the first date in April 6.

  Sector	4/6	5/11	Change
  S&P 500	$93.56	$94.51	1.02%
  Discretionary	$18.06	$18.52	2.56%
  Staples	$21.45	$21.54	0.41%
  Energy	$42.30	$41.21	-2.58%
  Financials	$18.10	$19.05	5.23%
  Health Care	$33.18	$32.67	-1.54%
  Industrials	$18.85	$19.01	0.84%
  Technology	$27.89	$28.42	1.89%
  Materials	$12.06	$15.51	28.56%
  Telecom	$8.30	$8.32	0.29%
  Utilities	$12.96	$12.90	-0.49%

  Here’s a look at the P/E Ratios based on the 2010 and 2011 estimates:

  Sector	2010	2011
  S&P 500	14.21	12.23
  Energy	12.37	10.36
  Materials	15.49	12.56
  Industrials	16.83	14.53
  Discretionary	16.61	14.41
  Staples	14.72	13.12
  Health Care	11.87	10.80
  Financials	14.20	11.21
  Technology	14.97	13.02
  Telecom	13.23	12.62
  Utilities	11.93	11.79

• Carney to CNBC.com
  Eddy Elfenbein, May 12th, 2010 at 1:33 pm

  
  Congratulations to John Carney formerly of Business Insider, formerly of DealBreaker who has joined cnbc.com. Guest of a Guest has the details:

  Following a ignominious and unexpected exit from softcore porn slide show purveyor Business Insider, writer John Carney has a new gig. He’ll be reporting for duty soon as a senior editor at CNBC.com and will serve as on air commentator for the site. No word yet on which channels he’ll be frequenting but with those looks he could be a serious threat for money honeys all across NBC Universal properties.

• The Argument for Stock-Picking
  Eddy Elfenbein, May 12th, 2010 at 12:12 pm

  Tadas Viskantas has an excellent article arguing that we’re entering the Golden Age of Stock-Picking.

• Goldman Sachs! The Musical
  Eddy Elfenbein, May 12th, 2010 at 10:46 am

  The New Yorker spots a musical. Here’s a sample

  CARL LEVIN (D-MICH):
  I want to know what you knew
  And exactly when you knew it
  And why you all believed
  You’d manage to get through it
  FABRICE TOURRE:
  We didn’t prey on our clients’ stupidity
  We showed them our prices and offered liquidity
  CARL LEVIN (D-MICH):
  To you it may have been a game
  To me it all seems pretty real
  I mean to make you feel shame
  For how you made this shitty deal
  FABRICE TOURRE:
  I’m not deceitful or conniving
  Did you see the picture of me skydiving?

• From the Department of No Surprise
  Eddy Elfenbein, May 12th, 2010 at 10:38 am

  An academic report:

  Recent financial collapses have focused policymakers’ attention on the financial industry. To date, empirical studies have concentrated on corporate issuer activity, such as securities offerings and class actions. This paper makes a first step in studying SEC enforcement against investment banks and brokerage houses. This study suggests that the SEC favors defendants associated with big firms compared to defendants associated with smaller firms in three ways. First, SEC actions against big firms are more likely to involve exclusively corporate liability, with no individuals subject to any regulatory action. Second, the SEC is more likely to choose administrative rather than court proceedings for big-firm defendants, controlling for types of violation and levels of harm to investors. Third, within administrative proceedings, big-firm employees are likely to receive lower sanctions, notably temporary or permanent bars from the industry. To explain this gap, the paper first investigates whether big-firm violations are qualitatively different from small firms’ violations, but finds no support for this. This paper next explores two hypotheses that could explain a systematic bias in enforcement patterns: that constraints in bureaucratic resources weaken the SEC’s negotiating position towards big firms, and that SEC officials favor prospective employers.