Archive for September, 2012

  • Astrology in the Stock Market
    , September 19th, 2012 at 8:40 pm

    Heidi Moore, the ruler of Twitter, has a piece about investors who base their decisions on astrology. Yes, this is real.

    Starich charges $237 annually for her newsletter, which 300 traders subscribe to for news of what will happen to the stock prices of companies, or even bigger, to the Federal Reserve. She sees dark times ahead in the Fed’s horoscope.

    “They now have Saturn squared to Neptune, which is really bankruptcy,” Starich explains.

    Neptune represents money. But when Saturn shows up in a chart, it indicates restriction. So for the Fed, that means the “fiscal cliff is here, and there’s no place to go except to print more money or unravel these financial institutions,” Starich says.

    Of course, a lot of Wall Street traders, and others, don’t want it to be known that they’re relying on anything other than their own talent. Arch Crawford, a financial astrologer who actually got his start on Wall Street as a stock analyst at Merrill Lynch, recalls one subscriber asking for his newsletter in “brown paper wrappers.”

    Crawford warns his 2,000 subscribers particularly against the dangers of Mercury in retrograde, a time when the planet appears to be going in reverse across the sky. The phenomenon, which happens three times or more a year, indicates a month when communications will be screwed up. He warns his subscribers never to start anything new during that time. He points to the fact that Knight Capital launched a new software program in August, when Mercury was in retrograde, and the brokerage firm nearly went out of business. He also notes that most major market glitches have happened while Mercury was in retrograde.

    What I find fascinating is how they interpret some star pattern to concrete advice.

  • Bed Bath & Beyonds Earns 98 Cents Per Share
    , September 19th, 2012 at 4:24 pm

    Well, management at Bed Bath & Beyond ($BBBY) was right: Q2 was a lousy quarter. For the months of June, July and August, the company earned 98 cents per share. Sales rose 12.1% to $2.593 billion. They had warned us that earnings would range between 97 cents and $1.03 per share. Wall Street had been expecting $1.02 per share.

    For Q3, Bed Bath & Beyond sees earnings between 99 cents and $1.04 per share. Wall Street was again expecting $1.02 per share. For the entire year, the company sees earnings rising somewhere between the high single digits to low double digits.

    Bed Bath & Beyond Inc. today reported net earnings of $.98 per diluted share ($224.3 million) in the fiscal second quarter ended August 25, 2012, an increase of approximately 5.4% versus net earnings of $.93 per diluted share ($229.4 million) in the same quarter a year ago. Net sales for the fiscal second quarter of 2012 were approximately $2.593 billion, an increase of approximately 12.1% from net sales of approximately $2.314 billion reported in the fiscal second quarter of 2011. Comparable store sales in the fiscal second quarter of 2012 increased by approximately 3.5%, compared with an increase of approximately 5.6% in last year’s fiscal second quarter.

    During the fiscal second quarter of 2012, the Company repurchased approximately $199 million of its common stock representing approximately 3.1 million shares. As of August 25, 2012, the remaining balance of the current share repurchase program authorized in December 2010 was approximately $414 million.

    For the fiscal first half ended August 25, 2012, the Company reported net earnings of $1.87 per diluted share ($431.2 million), an increase of approximately 13.3% over net earnings of $1.65 per diluted share ($410.0 million) in the corresponding period a year ago. Net sales for the fiscal first half of 2012 were approximately $4.811 billion, an increase of approximately 8.8% from net sales of approximately $4.424 billion in the corresponding period a year ago. Comparable store sales for the fiscal first half of 2012 increased by approximately 3.3%, compared with an increase of approximately 6.3% in last year’s fiscal first half.

    Here are the sales and earnings figures for the past few quarters:

    Quarter Sales Gross Profit Operating Profit Net Profit EPS
    May-99 $356,633 $146,214 $28,015 $17,883 $0.06
    Aug-99 $451,715 $185,570 $53,580 $33,247 $0.12
    Nov-00 $480,145 $196,784 $50,607 $31,707 $0.11
    Feb-00 $569,012 $238,233 $77,138 $48,392 $0.17
    May-00 $459,163 $187,293 $36,339 $23,364 $0.08
    Aug-00 $589,381 $241,284 $70,009 $43,578 $0.15
    Nov-01 $602,004 $246,080 $64,592 $40,665 $0.14
    Feb-01 $746,107 $311,802 $101,898 $64,315 $0.22
    May-01 $575,833 $234,959 $45,602 $30,007 $0.10
    Aug-01 $713,636 $291,342 $84,672 $53,954 $0.18
    Nov-02 $759,438 $311,030 $83,749 $52,964 $0.18
    Feb-02 $879,055 $370,235 $132,077 $82,674 $0.28
    May-02 $776,798 $318,362 $72,701 $46,299 $0.15
    Aug-02 $903,044 $370,335 $119,687 $75,459 $0.25
    Nov-03 $936,030 $386,224 $119,228 $75,112 $0.25
    Feb-03 $1,049,292 $443,626 $168,441 $105,309 $0.35
    May-03 $893,868 $367,180 $90,450 $57,508 $0.19
    Aug-03 $1,111,445 $459,145 $155,867 $97,208 $0.32
    Nov-04 $1,174,740 $486,987 $161,459 $100,506 $0.33
    Feb-04 $1,297,928 $563,352 $231,567 $144,248 $0.47
    May-04 $1,100,917 $456,774 $128,707 $82,049 $0.27
    Aug-04 $1,273,960 $530,829 $189,108 $120,008 $0.39
    Nov-05 $1,305,155 $548,152 $190,978 $121,927 $0.40
    Feb-05 $1,467,646 $650,546 $283,621 $180,980 $0.59
    May-05 $1,244,421 $520,781 $150,884 $98,903 $0.33
    Aug-05 $1,431,182 $601,784 $217,877 $141,402 $0.47
    Nov-06 $1,448,680 $615,363 $205,493 $134,620 $0.45
    Feb-06 $1,685,279 $747,820 $304,917 $197,922 $0.67
    May-06 $1,395,963 $590,098 $148,750 $100,431 $0.35
    Aug-06 $1,607,239 $678,249 $219,622 $145,535 $0.51
    Nov-07 $1,619,240 $704,073 $211,134 $142,436 $0.50
    Feb-07 $1,994,987 $862,982 $309,895 $205,842 $0.72
    May-07 $1,553,293 $646,109 $154,391 $104,647 $0.38
    Aug-07 $1,767,716 $732,158 $211,037 $147,008 $0.55
    Nov-08 $1,794,747 $747,866 $203,152 $138,232 $0.52
    Feb-08 $1,933,186 $799,098 $259,442 $172,921 $0.66
    May-08 $1,648,491 $656,000 $118,819 $76,777 $0.30
    Aug-08 $1,853,892 $739,321 $187,421 $119,268 $0.46
    Nov-08 $1,782,683 $692,857 $136,374 $87,700 $0.34
    Feb-09 $1,923,274 $785,058 $231,282 $141,378 $0.55
    May-09 $1,694,340 $666,818 $142,304 $87,172 $0.34
    Aug-09 $1,914,909 $773,393 $222,031 $135,531 $0.52
    Nov-09 $1,975,465 $812,412 $245,611 $151,288 $0.58
    Feb-10 $2,244,079 $955,496 $370,741 $226,042 $0.86
    May-10 $1,923,051 $775,036 $225,394 $137,553 $0.52
    Aug-10 $2,136,730 $874,918 $296,902 $181,755 $0.70
    Nov-10 $2,193,755 $896,508 $305,110 $188,574 $0.74
    Feb-11 $2,504,967 $1,076,467 $461,052 $283,451 $1.12
    May-11 $2,109,951 $857,572 $288,948 $180,578 $0.72
    Aug-11 $2,314,064 $950,999 $371,636 $229,372 $0.93
    Nov-11 $2,343,561 $958,693 $357,020 $228,544 $0.95
    Feb-12 $2,732,314 $1,163,669 $550,765 $351,043 $1.48
    May-12 $2,218,292 $887,199 $313,398 $206,836 $0.89
    Aug-12 $2,593,015 $1,032,669 $365,137 $224,330 $0.98

  • Notes on My Gold Model
    , September 19th, 2012 at 3:34 pm

    By far the most-viewed post I’ve ever done was my post on a possible model for the price of gold.

    The model is based on the idea that gold follows an inverse relationship with real (meaning after inflation) interest rates.

    Here’s a look:

    In this chart, the gold line is the change in gold prices over the last year. The blue line is the three-month Treasury yield minus inflation. These two lines seem to move in the opposite direction.

    My model states that whenever real short-term interest rates are below 2%, gold rallies. Whenever the real short-term rate is above 2%, the price of gold falls. Gold holds steady at the equilibrium rate of 2%. For every one percentage point real rates differ from 2%, gold moves by eight times that amount per year. So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate.

    When I first developed this idea, I was really aiming for a model to create a model for the price of gold. I think an accurate model needs to incorporate two ideas — a breakeven interest rate and a volatility ratio. In my original model this was 2% and a ratio of eight.

    I believe those are useful long-term averages but I don’t believe those hold up well in the short-term. These aren’t constants. Gold has not done terribly well recently despite real interest rates being negative. I suspect that the breakeven rate has fallen from 2% and now may be close to 0%.

    Think of the breakeven rate as the global price to employ capital. The problems in Europe and the slowdown in China may have pushed the rate downward.

  • Bed Bath & Beyond Leads Its Industry
    , September 19th, 2012 at 10:58 am

    Spencer Jakab in the Wall Street Journal has some good things to say about Bed Bath & Beyond ($BBBY)

    Part of Bed Bath’s success stemmed from others’ failures, specifically the bankruptcy of competitor Linens N’ Things, plus smaller operations. But that is giving management short shrift. It did a good job of controlling costs and piling up cash for both organic growth and timely acquisitions, snapping up two companies in the recent quarter.

    That is amply reflected in Bed Bath’s share price. Although the stock sold off by 17% in June, when the company reported same-store sales decelerated in the fiscal first quarter, they have since clawed back around two-thirds of that.

    Now, for example, Bed Bath’s ratio of enterprise value, or market value plus net debt, to sales is 65% higher than the average of four indirect competitors: Pier 1 Imports, Macy’s, Williams-Sonoma and Target. Bed Bath is in the middle of the pack on multiple of price to earnings. But that comparison is flattered by margins that may have benefited from the vacuum in its retail category. Oppenheimer noted Tuesday that Bed Bath is relying more on coupons lately to drive sales growth, which could damp profitability.

    It would be natural, but premature, for some of the enthusiasm about housing’s rebound to carry over to Bed Bath. While home prices have recovered, existing- and new-home sales are far below peak levels. And the percentage of first-time buyers remains below historical norms. Those are the ones most likely to buy sheets, towels and small appliances in the wake of purchasing a home.

    Bed Bath has made the most of some tough years but now finds its valuation beyond compare.

    He also notes that BBBY will have 60% more stores by the end of this fiscal year than it had five years ago, while operating margins are higher now than at the height of the housing boom.

  • A Very European Break Up (She’s German, He’s Greek)
    , September 19th, 2012 at 10:36 am

  • September 19, 2012
    , September 19th, 2012 at 6:20 am

    Missed Opportunities Stoke Skepticism in EU Chiefs’ Crisis Fight

    Euro-Region Construction Output Fell for Second Month in July

    BOE Unanimous on QE Amid Divisions on Need for More Stimulus

    BOJ Eases Policy As Japan’s Recovery Prospects Fade

    China Stocks Rise First Time in Three Days as Gold Miners Rally

    American Real Estate Investors Seek Opportunities in European Debt Crisis

    Czech Liquor Ban Hurts Pernod, Ahold as Search Drags On

    Oil Drops for Second Day on Saudi Action, FedEx Outlook

    An Enigma in the Mortgage Market That Elevates Rates

    Yahoo Closes $7.6 Billion Deal With Alibaba Group

    Modest Market Return By Ex-Bankrupt Japan Airlines

    Inditex Profit Beats Estimates as Revenue Growth Accelerates

    Heineken Says Thai Billionaire Supports Its APB Offer

    Joshua Brown: The Three Costs of QE3

    Roger Nusbaum: Should Anyone Buy MLPs Yielding 19%?

    Be sure to follow me on Twitter.

  • The Fed Has Been Tightening
    , September 18th, 2012 at 12:46 pm

    If you’re curious about why the Federal Reserve did what it did last week (and it caught me off guard as well), this chart might shed some light. This is the real effective Fed funds rate, meaning it’s the overnight interest rate set by the Federal Reserve adjusted for inflation.

    As you can see, the real Fed funds rate has been rising in the past year. Of course, it’s gone from negative numbers to less negative numbers but the effect has been a tightening from the Fed. Interest rates have stayed where they are, but inflation (and this is headline CPI, not core) has trended downward. When rates stay the same and there’s disinflation, that’s an increase in real rates.

  • Morning News: September 18, 2012
    , September 18th, 2012 at 6:19 am

    Europe Banks Fail to Cut as Draghi Loans Defer Deleverage

    ECB’s Coene Says Widening Spreads May Force Spain to Ask for Aid

    In Greece, Restlessness Amid a Push for Cuts

    Oil Falls To $113, Extends Slide

    Defining Bernanke’s New Fed Target

    Morgan Stanley Infrastructure Fund Hit By Volcker Rule

    Apple Reaches $700 as IPhone 5 Shatters Sales Record

    Groupon Falls as Expenses Mount Amid Daily-Deal Fatigue

    Lowe’s Pulls $1.8 Billion Bid for Rona

    Lenovo Makes First Software Buy to Expand in Cloud Computing

    US HOT STOCKS: Office Depot, Tesla, Cliffs Natural Resources, AMN Healthcare

    Dole Food Sells Two Businesses To Itochu For $1.7 Billion

    Success of Crowdfunding Puts Pressure on Entrepreneurs

    Edward Harrison: More On Government Tax Coercion Versus Fiat Money Liberty

    Jeff Miller: Weighing the Week Ahead: Higher Hopes for Housing?

    Be sure to follow me on Twitter.

  • The Missing Risk Premium
    , September 17th, 2012 at 11:17 am

    Imagine if there was a well-established scientific principle that was taught in schools, had won Nobel Prizes and was accepted across-the-board by experts, yet it was completely and totally wrong.

    While this may sound far-fetched, this is the basis of Eric Falkenstein’s new book, “The Missing Risk Premium,” and he makes a convincing case.

    Instead of science, Falkenstein looks at economics and argues that the “risk premium,” the reward for investors who shoulder risk, does not exist. This isn’t small potatoes he’s taking on. The risk premium stands front and center in the world of financial economics, and Falkenstein shows us that there’s very little empirical evidence it even exists.

    We’ve long known that stocks have beaten bonds over the long run. So academics attempted a model to explain this fact. Their model says that the reason why stocks have beaten bonds is due to risk. Of course, they’re just slapping the name “risk” on to something better described as “that which we do not know.” It’s like calling a black hole “Cleveland.”

    The model further states that risk can be quantified and the more of it you take, the better you’ll do. So one would expect that stocks with higher risk should do better than stocks with lower risk. But that’s not the case at all. In fact, stocks with the highest risk do the worst, and stocks with the lowest do the best (Falkenstein is a proponent of minimum volatility investing.)

    Just because the measurement of risk explains the gap between stocks and bonds, when applied to individual stocks, it says nothing. Falkenstein goes beyond the world of stocks and looks at several areas where there’s no payoff in taking more risk, or the payoff is actually negative.

    I think the example of horse racing probably explains this best. Researchers have found that betting on the long-shot has had the worst payoff. My guess is that in any given race, the long-shot will draw interest from bettors who simply want to bet on the long-shot, no matter how good the horse really is. Betting and winning on the favorite may offer a higher payout (losing money somewhat slower), but it’s not as much fun at hitting the rare long shot. This is what probably draws many investors to obviously overpriced risky stocks. They simply want to be in the game, and they’re willing to ignore the numbers. The lottery is the same way.

    What caught my attention is that one of the few areas where a risk premium does appear to exist is at the short end of the yield curve. My guess is that what’s happening is that the characteristic of the asset takes on an over-sized image in the mind of investors. As a result, they’ll over pay for a long shot simply because it’s the long shot. Or they’ll overpay for a risk-free asset simply because it’s risk free. This only works at the extreme and going half way won’t get you half the results.

    Some of these concepts Falkenstein covered in his first book, Finding Alpha. This book, however, is much shorter and less technical. Regular readers of his blog (Falkenblog) will also surely recognize many of these arguments.

    One of the most eye-raising aspects of the book is where Falkenstein discusses the many small losses that individual investors suffer between the stock gains they see reported on CNBC, and the returns they get. Investors are constantly dinged by things like bad timing, transactional costs, bid-ask spreads and taxes. Once you throw in variables like survivorship bias, Falkenstein says that the historical databases we have return bare little resemblance to what made its way towards investors’ pockets. This topic alone could serve as a useful book.

    Falkenstein does say, and I’m inclined to agree, that a risk premium exists between stocks and bonds exists but only for the highly-efficient investor. My guess is that the equity risk premium is probably between 1% and 2% which is far less than what’s accepted by many economists.

    Falkstein’s meta-thesis is that investors aren’t greedy; they’re envious. In other words, they don’t simply want the most they can get. They want more than their neighbors. Once you adopt this frame of reference, it undermines the idea that greater wealth can be purchased with greater risk.

    My only criticism of The Missing Risk Premium is that this is a self-published book, and the editing is somewhat sloppy. Also, some language explaining difficult concepts is unnecessarily convoluted. Still, the argument presented is strong and clear and will hopefully convince the world that better returns aren’t paid for with pain.

  • The Stock Market Opens With Week With a Sluggish Start
    , September 17th, 2012 at 9:37 am

    The stock market looks to open flat to lower this morning. Stocks, of course, have had a good run since Ben Bernanke’s move last week. Over the last four trading sessions, the Dow has added 339 points.

    The bond market is, once again, not pleased with Spain. After some squabbling among finance ministers, yields on the 10-year Spanish bond rose to its highest level in four months.

    Bloomberg picks up this cutting quote from Joachim Fels, the chief economist at Morgan Stanley in London: “Experience suggests that just as day gives way to night, improvement gives way to policy complacency, which is then followed by renewed crisis.” That pretty much sums it up.

    The major economic report this morning showed that the Empire State Manufacturing Index fell to its lowest point in three-and-a-half years. As the name suggests, this covers economic activity in the State of New York. The one bright spot in the report is that the outlook for the future improved greatly since August.

    For reasons not immediately clear, Occupy Wall Street has pledged to disrupt the morning commute for many Wall Streeters. Today is the movement’s one year anniversary.