Archive for 2011

• Oracle Strikes Back
  Eddy Elfenbein, September 29th, 2011 at 2:30 am

  This is amusing:

  Oracle Corp. (ORCL) fired back at Autonomy Corp. (AU.LN, AUTNY) Wednesday, saying the British business-analytics company’s chief executive didn’t tell the truth about an April meeting purportedly held to shop the business around.

  The dispute also concerns Oracle rival Hewlett-Packard Corp. (HPQ), which last month agreed to buy Autonomy in a deal valued at about $10.3 billion. Oracle has followed an increasingly common script in Silicon Valley by morphing into one of H-P’s fiercest competitors.

  Oracle on Wednesday repeated its contention that Autonomy approached its executives before H-P publicly made its offer. Oracle has said it rejected the Autonomy deal because the price was too high.

  Autonomy Chief Executive Mike Lynch later disputed Oracle’s version of events, which prompted the California-based software giant to issue a statment late Wednesday.

  According to Oracle, Lynch and investment banker Frank Quattrone met with Oracle mergers-and-acquisitions chief Douglas Kehring and President Mark Hurd. The Autonomy chief pitched his company with a PowerPoint presentation, Oracle said.

  “Either Mr. Lynch has a very poor memory or he’s lying,” Oracle’s statement said. “The Lynch shopping visit to Oracle is easy to verify. We still have his PowerPoint slides.”

  In an emailed statement, Lynch denied that the April meeting was intended to pitch a possible sale of the company.

  “In April there was a 30-40 minute meeting between Autonomy and Mark Hurd, which was set up by Frank Quattrone as an introduction to Mark Hurd,” Lynch said. “Oracle is an Autonomy customer. In the meeting, in response to a joke about Mr. Quattrone’s presence, it was made clear Autonomy was not for sale and there was no process underway.”

  Lynch added that Autonomy hadn’t yet engaged Quattrone’s company at the time and said there has been no contact with Oracle since then.

  Oracle shares were recently up 0.6% at $29.64 in after-hours trading. The stock is up 8.3% over the past year.

• Minimum Variance Portfolios
  Eddy Elfenbein, September 28th, 2011 at 4:58 pm

  Eric Falkenstein is probably the financial blogosphere’s biggest advocate of Minimum Variance Portfolios (MVP). The idea is that in investing risk and reward are not trade-offs. In fact, the lower the risk, the higher the reward. As counter-intuitive as this sounds, the numbers back it up.

  Falkenstein has shown that a portfolio constructed of the lowest-risk stocks in the S&P 500 has outperformed the index. I got the data off his site and here are the returns since 1998:

  

  Since the beginning of 1998 through August 2011, the S&P 500 has returned 31.59% while the Minimum Variance Portfolio has returned 211.18%. Annualized, that’s a lead of 8.7 to 2%.

  But here’s the kicker: the MVP has accomplished this with…well, minimum variance.

  Get ready for some math.

  In the table below, the blue dots indicate all of the daily changes in the chart above. The X-axis is the changes in the S&P 500. The Y-axis has the changes for the MVP.

  

  The key is that the MVP doesn’t go as high as the S&P 500 during an up day, nor does it fall as low as the index during a down day. I added the diagonal red line to show the 1-to-1 divide.

  Notice how the blue dots fall below the red line in the upper right quadrant and above the red line in the lower left quadrant. That’s what MVP is all about.

  The black is the linear trend and the formula is the classic linear equation (y=mx+b). The slope of the trend line is 0.558. What this means is that for every one unit the black line moves to the right, it climbs by 0.558 units, and for every one unit it falls, it drops by 0.558 units.

  In finance speak, that’s the beta of the portfolio, 0.558. If a portfolio has a beta of 1.0, it exhibits the same variance as the S&P 500. If it’s greater than 1.0, the portfolio swings greater than the market.

  Historically, our Buy List has a beta of 0.94.

  The b in the equation is the y-intercept, meaning that’s where the trend crosses the Y-axis when x=0. But more importantly for us, this also tells us how well the MVP has done against the S&P 500. Since it’s positive, the MVP has beaten the market by an average of three basis points per share, or 0.03%. (It’s actually about 2.5 basis points but Excel rounded up.)

  So despite having nearly half the variance as the overall market, the MVP has crushed the S&P 500 over the 13 years years.

  If you’re interested in learning more, here’s a link to Eric’s book, Finding Alpha: The Search for Alpha When Risk and Return Break Down. And here are the 47 stocks currently in the MVP (it’s rebalanced every six months):

  Company	Symbol
  3M CO	MMM
  ABBOTT LABS	ABT
  AMERISOURCEBERGE	ABC
  BAXTER INTL INC	BAX
  BECTON DICKINSON	BDX
  CAMPBELL SOUP CO	CPB
  CEPHALON INC	CEPH
  CLOROX CO	CLX
  COCA-COLA CO	KO
  COLGATE-PALMOLIV	CL
  CONAGRA FOODS	CAG
  CONS EDISON INC	ED
  CR BARD INC	BCR
  DOMINION RES/VA	D
  DUKE ENERGY CORP	DUK
  DUN & BRADSTREET	DNB
  GENERAL MILLS IN	GIS
  GENUINE PARTS CO	GPC
  HJ HEINZ CO	HNZ
  HOSPIRA INC	HSP
  IBM	IBM
  INTEGRYS ENERGY	TEG
  JM SMUCKER CO	SJM
  JOHNSON&JOHNSON	JNJ
  KELLOGG CO	K
  KIMBERLY-CLARK	KMB
  KRAFT FOODS INC	KFT
  KROGER CO	KR
  L-3 COMM HLDGS	LLL
  LABORATORY CP	LH
  MCCORMICK-N/V	MKC
  MCDONALDS CORP	MCD
  MEDTRONIC INC	MDT
  MILLIPORE CORP	MIL
  PEPSICO INC	PEP
  PFIZER INC	PFE
  PINNACLE WEST	PNW
  PROCTER & GAMBLE	PG
  PROGRESS ENERGY	PGN
  QUEST DIAGNOSTIC	DGX
  RAYTHEON CO	RTN
  REYNOLDS AMERICA	RAI
  SOUTHERN CO	SO
  WAL-MART STORES	WMT
  WATSON PHARM	WPI
  WISCONSIN ENERGY	WEC
  XCEL ENERGY INC	XEL

• The Plunge of Major Financials
  Eddy Elfenbein, September 28th, 2011 at 10:23 am

  Check out how sharply Goldman Sachs ($GS), Citigroup ($C), Bank of America ($BAC), and Morgan Stanley ($MS) have fallen since the start of the year:

  

• Durable Goods Orders Fell 0.1% in August
  Eddy Elfenbein, September 28th, 2011 at 9:49 am

  The futures indicate that the stock market will open modestly higher today. Yesterday was a very good day for stocks although we lost a lot of our gains as the day wore on.

  This morning, the Commerce Department reported that durable goods orders fell in August by 0.1%. This isn’t a huge drop but in July, orders soared by 4.1%.

  The important number to watch in the durable goods report is orders of “non-defense capital goods.” This is a good barometer for telling us how much businesses are spending.

  One of the major problems in this economy is that businesses are sitting on tons of cash but they’re not willing to spend it. The good news is that orders of non-defense capital goods increased by 1.1% in August after falling 0.2% in July.

• Morning News: September 28, 2011
  Eddy Elfenbein, September 28th, 2011 at 6:20 am

  EU Barroso Calls For Use Of Fiscal Policy To Boost Growth

  Greek Vote Approves a Despised Property Tax

  Greek Strikes Maintain Momentum

  Nagging Fears on Europe Slow a Wall Street Rally

  Euro Crisis Makes Fed Lender of Only Resort

  Obama Jobs Plan May Prevent 2012 Recession

  Dallas Fed President Fisher Says Central Bank Is Under Attack From Ron Paul, Barney Frank

  Health Insurers Push Premiums Sharply Higher

  Free Checking Falls to 45% of Customer Accounts, Bankrate Says

  Taiwan Semiconductor Shares Climb After New York Chip Venture with Intel

  For Bank of America, a $50 Billion Claim of Havoc Looms

  Time Warner Balks at European Media Prices

  SABMiller a Step Closer to Snaring Australia’s Foster’s

  United Feeling Merger Pains

  Tasgall Group: Granger Things Have Happened

  Szelhamos Rules: You Know What I Like

  Be sure to follow me on Twitter.

• The 50-DMA Is In Sight
  Eddy Elfenbein, September 27th, 2011 at 2:55 pm

  I’ll feel much better when the S&P 500 finally crosses above its 200-day moving average. The 50-DMA, however, may be broken very soon.

  

  The 200-DMA is running about 1,281 right now but the 50-DMA is currently at 1,208.

• Richard Fisher on Dissenting
  Eddy Elfenbein, September 27th, 2011 at 2:17 pm

  At the last FOMC meeting, Dallas Fed President dissenting from approving the Fed’s policy statement. Today, he explained why. Here’s part of his speech:

  One other factor gave me pause and that was, and remains, the moral hazard of being too accommodative. For years, I have been arguing that monetary policy cannot solve the problem of substandard economic performance unless it is complemented by fiscal policy and regulatory reform that encourages the private sector to put to work the affordable and abundant liquidity we are able to create as the nation’s monetary authority. These actions are not within the Fed’s purview; they are the business of Congress and the president. Chairman (Ben) Bernanke said it well in his recent speech at Jackson Hole (Wyo.): “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Both within the FOMC and in public speeches, I have argued that until our fiscal authorities get their act together, further monetary accommodation―be it in the form of quantitative easing or performing “jujitsu” on the yield curve through efforts such as Operation Twist―will represent nothing more than pushing on a string.

• The S&P 500 is +2.25% at Noon
  Eddy Elfenbein, September 27th, 2011 at 12:03 pm

  

• The Upcoming Third-Quarter Earnings Season
  Eddy Elfenbein, September 27th, 2011 at 10:52 am

  This is, thankfully, the final week of the third quarter. In a few weeks, the third-quarter earnings season will begin.

  For last year’s Q3, the S&P 500 reported earnings of $21.56. Wall Street currently expects earnings of $24.72 for this year’s Q3 which represents an increase of 14.7%. For the second quarter, the S&P 500 earned $24.86 so sequential earnings may decline slightly.

  Earnings growth for the fourth quarter is actually expected to accelerate to 18.7%. But I wouldn’t be surprised to see those estimates get pared back between now and the end of the year.

  Here’s the expected earnings third-quarter growth for the 10 S&P 500 sectors:

  Consumer Discretionary 12.6%
  Consumer Staples 7.8%
  Energy 50.3%
  Financials 2.8%
  Health Care 11.4%
  Industrials 10.5%
  Information Technology 15.2%
  Materials 27.7%
  Telecommunication Services 2.2%
  Utilities 1.7%

• Share Traders More Reckless Than Psychopaths, Study Shows
  Eddy Elfenbein, September 27th, 2011 at 9:43 am

  From Spiegel:

  Two weeks ago, yet another case of rogue trading shocked the financial world when UBS trader Kweku Adoboli was arrested for allegedly squandering some $2.3 billion with a risky and unauthorized investment scheme. The 31-year-old, who had been based in London for the Swiss bank, remains in jail. The bank’s chief executive Oswald Grübel, meanwhile, has resigned over the scandal — the third major embarrassment to rattle the institution in just a few years.

  The situation mirrors a similar scandal at French bank Société Générale, where another young “rogue trader,” Jérôme Kerviel, gambled away billions in 2010. He is still serving a three-year jail sentence. But why do these situations keep arising in the financial world?

  According to a new study at the University of St. Gallen seen by SPIEGEL, one contributing factor may be that stockbrokers’ behavior is more reckless and manipulative than that of psychopaths. Researchers at the Swiss research university measured the readiness to cooperate and the egotism of 28 professional traders who took part in computer simulations and intelligence tests. The results, compared with the behavior of psychopaths, exceeded the expectations of the study’s co-authors, forensic expert Pascal Scherrer, and Thomas Noll, a lead administrator at the Pöschwies prison north of Zürich.

  Appetite for Destruction

  “Naturally one can’t characterize the traders as deranged,” Noll told SPIEGEL. “But for example, they behaved more egotistically and were more willing to take risks than a group of psychopaths who took the same test.”

  Particularly shocking for Noll was the fact that the bankers weren’t aiming for higher winnings than their comparison group. Instead they were more interested in achieving a competitive advantage. Instead of taking a sober and businesslike approach to reaching the highest profit, “it was most important to the traders to get more than their opponents,” Noll explained. “And they spent a lot of energy trying to damage their opponents.”

  Using a metaphor to describe the behavior, Noll said the stockbrokers behaved as though their neighbor had the same car, “and they took after it with a baseball bat so they could look better themselves.”

  The researchers were unable to explain this penchant for destruction, they said.

  Speaking of traders, Cullen Roche of Pragmatic Capitalist points us toward this video which made the rounds yesterday. Lots of people think this trader in the video is some sort of brave truth teller.

  My take is that his comments are silly and frivolous. He doesn’t say anything more than “things are bad because they’re bad because they’re not good.” Sadly, this sort of thing is popular these days.

  Felix Salmon has more.