Author Archive

• How Well Does the VIX Predict Volatility?
  Eddy Elfenbein, March 8th, 2012 at 11:09 am

  Traders often refer to the Volatility Index, otherwise known as the $VIX. Yesterday, I tweeted that you can “(t)ake whatever today’s $VIX is. Divide it by 3.46. That’s the market’s view of the 1 stand dev range +/- for the next 30 days.”

  This works because the VIX is an annualized number for the market’s view of the S&P 500’s volatility over the next month. The way we get an annualized number down to one month is by taking the square root of 12 which is roughly 3.46.

  So how has this worked out? Pretty well. Jake at EconomPicData was kind enough to post this chart. This shows how the S&P 500 has done for the next month compared with one standard deviation bonds as predicted by the market.

  

  If anything, it looks like the VIX has been too conservative. The red line appears to stay within the blue bands more often than 68% of the time.

• Morning News: March 8, 2012
  Eddy Elfenbein, March 8th, 2012 at 5:52 am

  60% of Greek Bond Holders Committed to Debt Swap

  Japan Contraction Was Smaller Than Expected

  Emerging-Market Engines Falter

  Bank Indonesia Maintains Rate

  Have Oil Speculators Already Priced In War With Iran?

  Treasury to Sell $6 Billion in AIG Stock

  ‘Sterilized’ Bond Buying an Option in Fed Arsenal

  Services Power Job Growth

  Auto Overcapacity Gives Leaders Another Issue to Ponder

  Chrysler CEO Declines 2011 Pay; Company Now Worth $7.5 Billion

  AB InBev Fourth-Quarter Profit Beats Estimates

  At Airline, a Pensions Compromise

  Retail Giant Carrefour Cuts Dividend, Trims Store Conversions

  Cost of Gene Sequencing Falls, Raising Hopes for Medical Advances

  Jeff Carter: Return of the Bear?

  Edward Harrison: Model on Food Prices and Social Unrest Predicts Crisis in 2013

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• The Dollar Tanks on WSJ’s Fed Story
  Eddy Elfenbein, March 7th, 2012 at 3:01 pm

  The U.S. dollar took a hit earlier today after the WSJ came out with a story about a policy that the Federal Reserve is considering. Let’s take a closer look at the story and try to piece together what’s going on behind the scenes.

  The story is by Jon Hilsenrath and it begins:

  Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

  So obviously someone big inside the Fed is chatting with Hilsenrath, and we can safely assume that the inside info has the approval of Bernanke himself. In fact, Ben could be the source; “Federal Reserve officials” is pretty vague. The info isn’t the kind of inside bickering you’d find if it weren’t approved. It’s just straight policy.

  Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates.

  This second sentence tell us what they’re thinking but now let’s look at the “why.”

  The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.

  This is interesting because the Fed is acting in public to take on its critics. The next question a critical reader must ask is: “Why is this coming out now?”

  Fed officials are set to meet next week and have signaled that they are unlikely to launch new programs at that meeting.

  Bingo. So nothing’s on the agenda, but the Fed doesn’t want people to think that nothing is being considered.

  Moreover, it is far from certain the Fed will launch another program later on. If growth or inflation pick up much, officials seem unlikely to launch a bond-buying program because the economy might not need the extra help or because doing more could spur higher inflation. But if growth disappoints or inflation slows substantially, Fed officials might at some point decide to act again.

  Classic both sides of the argument. After that, Hilsenrath probably didn’t get any more from his source at the Fed. In the article, he turns to quoting Michael Feroli, an economist with J.P Morgan Chase.

  This all sounds like a trial balloon sent by the Fed. This is very well played by the central bank. The Fed seems to be covering itself from its critics while not really committing itself to do anything.

  The closest the Fed has come to QE3 is its Operation Twist which will be winding down at the middle of this year. There’s a slight chance the Fed will prolong it until the end of this year. However, if the Friday jobs report is a doozy, that would be a massive game-changer. The next concern would be a revival of inflation, and the Fed could reasonably claim that it has a strategy.

• An Estimate for Friday’s NFP
  Eddy Elfenbein, March 7th, 2012 at 11:25 am

  It’s hard making an accurate forecast for this Friday’s jobs report but let’s take a look at a way we can make a reasonable guess.

  The weekly jobless claims have a strong correlation to the monthly non-farm payrolls report (actually, it’s negative; check out the chart below). I took the four-week moving average and compared it to the last 36 months’ worth of data and here’s what I got. (I excluded May 2010 due to census hiring.)

  

  My regression shows that when weekly jobless claims are 458,000, the NFP for the month is zero.

  For every 10,000 that jobless claims are below 458,000, there are 34,000 new jobs for that month. The r-square of the regression is 0.875.

  The current four-week moving average is 354,000 so that translates to (oddly enough) 354,000 net new jobs for February. That’s far more than the current Wall Street consensus of a 250,000 gain. I should add that there’s one more jobless claims report coming out tomorrow.

• Mylan Sees Profit Doubling By 2018
  Eddy Elfenbein, March 7th, 2012 at 10:43 am

  One of the great open secrets of investing is to listen to what companies have to say about their own projections. The hitch is that you should only pay attention to what credible companies have to say.

  That’s why I took notice when Mylan ($MYL) recently said that it expects to double its earnings by 2018. That’s a bold forecast. Mylan is a generic drug maker and it has a remarkable track record. Over the last 34 years, MYL has clobbered the S&P 500 by a margin of 160,000% to 1,370%.

  Mylan said its sees EPS for this year ranging between $2.30 and $2.50. That’s a growth rate of 13% to 23%. It also means the stock is going for less than 10 times earnings. For next year, Mylan sees earnings of $2.75 per share. For 2018, Mylan said that its goal is earnings of $6 per share.

  Is that possible? Sure. But projecting that far out is a dangerous game. Just compare anything that was happening economically six years ago to today. Still, I’m impressed that Mylan made this forecast publicly. If it holds up, the stock should do very, very well.

• ADP + 216,000
  Eddy Elfenbein, March 7th, 2012 at 9:03 am

  We got a preview of Friday’s jobs report today when ADP ($ADP), the private payroll firm, said that employers added 216,000 jobs in February. This came in above economists’ expectations of 208,000.

  It looks like this news will give the market a lift this morning.

• Morning News: March 7, 2012
  Eddy Elfenbein, March 7th, 2012 at 5:55 am

  SocGen, Generali Join Greece Debt Swap

  Spain Lags Italy as Growth Concern Halts Rally

  An Architect of a Deal Sees Greece as a Model

  U.K. Banks Group Backs Away From Libor

  Red Sea-Negev Rail May Spur China Trade

  Oil Rebounds on China Demand Outlook

  Refinancing Fees Are Reduced for Some F.H.A. Borrowers

  House Passes Bill to Address China Subsidy

  Dividends Emerge in Pressing Apple Over Working Conditions in China

  Pandora Loss Widens As Costs Rise, Outlook Disappoints

  HSBC Sells General Insurance Business for $914 Million

  Web Sites Shine Light on Petty Bribery Worldwide

  World’s Richest Lose $11.3B, Mittal Falls Off Index

  Stanford Guilty of Bilking Investors of Billions

  Cullen Roche: Gary Shilling’s 6 Favored Asset Classes

  Jeff Miller: Weighing the Week Ahead: How Worried Should We Be?

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• Follow-Up on Community Health Systems
  Eddy Elfenbein, March 6th, 2012 at 4:48 pm

  Last month, I tweeted:

  $CYH is looking very attractive here at $20. Earnings due out on Feb 21. $$

  So far, I’m looking pretty smart. CYH is Community Health Systems. At the time, the stock was at $19.85.

  The earnings report I mentioned turned out to be good. Community Health earned 85 cents per share, two cents more than estimates.

  The stock did very well after the earnings report. Last week, CYH got as high as $25.74. It pulled back today and closed at $23.30. That’s 6.5 times this year’s earnings estimate.

• Finally, Some Volatility
  Eddy Elfenbein, March 6th, 2012 at 11:31 am

  This may come as a shock, people, but we actually have some volatility today. Unfortunately, it’s the bad kind. The market is again worried about concerns from Europe. (Will 2011 ever end?)

  The S&P 500 is currently down 17 points or 1.3%. If that holds up, it will be the biggest fall all year and it will be nearly twice as big as the second-biggest fall this year.

  There’s also a major divide in this market and it closely resembles the opposite of what we’ve seen most of this year. (Today is the opposite of what’s been happening this year which was the opposite of what happened late last year. So today resembles much of last year.)

  So far, 2012 has been characterized by low volatility, rising stocks prices led by cyclicals and small-caps. Today, cyclicals, small-caps, financials and gold are getting hit the hardest. Financials are the worst-performing sector. AFLAC ($AFL) is down about 4%.

  The only areas that are doing well are the defensive stocks. This means staples, utilities and many dividend stocks. On our Buy List, Reynolds American ($RAI) is slightly up while Sysco ($SYY) is slightly down.

• Morning News: March 6, 2012
  Eddy Elfenbein, March 6th, 2012 at 5:45 am

  Goldman Secret Greece Loan Reveals Two Sinners

  Large Private Sector Investors Agree to a Swap of Greek Debt

  Automakers Prepare for Deepening Slump in Europe

  IMF Sees Portugal Market Return in 2013

  In China’s Annual Assessment, Wen Is Optimistic

  In China, Sobering Signs of Slower Growth

  India’s Farm Minister Seeks Lifting of Cotton Exports Ban Citing Surplus

  Brent Crude Holds Above $123, Oil Creeps Toward Top of Asia’s Worry List

  Billionaires Buy Gasoline Ships as Cargoes Expand

  Camp David, Not Chicago, to Host G-8

  Fed Study of Student Debt Outlines a Growing Burden

  After Ratings Drop, Ford Reworks Touch Screens

  AIA Shares Slide After $6 Billion AIG Selldown

  German Utility Giant RWE’s Profit Slumps 34% on Nuclear Phase-Out

  Epicurean Dealmaker: Chesterton’s Fence

  Phil Pearlman: Setting Portfolio Stops for Shorter Term Traders

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