The Higher Ed Bubble
Posted by Eddy Elfenbein on June 15th, 2010 at 11:12 am

I’ve written before that the benefits of a college degree are greatly exaggerated. The Los Angeles Times has an article titled “Is a college degree still worth it?”
Here’s a sample:

After spending tens of thousands of dollars on higher education, often taking on huge debts along the way, many face a job market that doesn’t seem to need them. Not only is the American economy producing few new jobs of any kind, but the ones that are being added are overwhelmingly on the lower end of the skill and pay scale.
In fact, government surveys indicate that the vast majority of job gains this year have gone to workers with only a high school education or less, casting some doubt on one of the nation’s most deeply held convictions: that a college education is the ticket to the American Dream.

Flowers Foods
Posted by Eddy Elfenbein on June 14th, 2010 at 2:10 pm

Flowers Foods (FLO) is another example of a fairly boring stock that’s done incredibly well for investors. Despite having a market value in excess of $2 billion, Flowers is almost completely ignored by Wall Street. The stock is practically invisible on stock message boards.
So what do they do? Here’s what the company has to say:

Headquartered in Thomasville, Ga., Flowers Foods is one of the nation’s leading producers and marketers of packaged bakery foods for retail and foodservice customers. Among the company’s top brands are Nature’s Own, Whitewheat, Cobblestone Mill, Blue Bird, and Mrs. Freshley’s. Flowers operates 40 bakeries that are among the most efficient in the baking industry.

Now let’s look at some results. Thirty years ago, you could have picked up one share of FLO for about 17 cents (that’s adjusted for ten, yes ten, 3-for-2 splits). Today the stock is going for about $25 so that’s a gain of over 14,000% or more than 18% a year. That doesn’t include a dividend which usually yields between 2% and 4%.
Speaking of which, the company just raised its quarterly dividend by 14%, raising it from 17.5 cents a share to 20 cents a share. Going by the new dividend, the stock now yields about 3.2%.
In February, Flowers said that it expects 2010 EPS to increase by 10% to 15% over 2009’s total which came in at $1.38. That translates to a target of $1.52 to $1.59. They reaffirmed this guidance last month as well.
I don’t think Flowers is a take-it-to-the-bank buy right here, but I’d love to see it drop to around $20 a share. This is definitely one to watch.
Year…………………………Sales………………………..EPS
2000…………………….$1,562.88……………………-$0.42
2001…………………….$1,299.49…………………….$0.09
2002…………………….$1,328.61…………………….$0.42
2003…………………….$1,453.00…………………….$0.51
2004…………………….$1,551.31…………………….$0.54
2005…………………….$1,715.87…………………….$0.66
2006…………………….$1,888.65…………………….$0.81
2007…………………….$2,036.67…………………….$1.02
2008…………………….$2,414.89…………………….$1.28
2009…………………….$2,600.85…………………….$1.41

Managing Currency Risk
Posted by Eddy Elfenbein on June 14th, 2010 at 11:50 am

I noticed this brief article at Dow Jones. It notes that Coca-Cola uses hedges to protect itself from the weaker euro.

Coke’s hedges protect it against the euro for all of 2010, he said. Coke’s hedges aren’t new. The company has long used hedges to protect itself against volatile currencies. Coke already has some currency hedges in place for next year. Multinational companies stand to get hurt from the weaker euro as they convert their earnings in local currencies into dollars. Hedges can help limit the effects of currency fluctuations.

This isn’t a new strategy but it’s interesting to note how you can use investments to lower your currency risk.
A weaker dollar tends to help large-cap stocks since that sector is loaded with multinationals that generate more of their sales outside the U.S. Conversely, a strong dollar tends to help small-cap stocks which tend to be more tied to cyclical industries.

The Buy List’s Ugly Spring
Posted by Eddy Elfenbein on June 14th, 2010 at 10:47 am

I like to tout my Buy List when it does well, so I feel obligated to acknowledge when we don’t do well—and we haven’t been so hot lately. We’re still barely positive for the year and ahead of the market, but our lead has shrunk since April 16. Since then, the S&P 500 has dropped by -8.43% while our Buy List is off by -11.38% (not including dividends).
Make no mistake, I haven’t altered my strategy and I’m still committed to our stocks. I’m merely pointing out that the market hasn’t done well and are stocks are feeling the brunt of the pain. Some of this is probably because higher-quality stocks fared well during more turbulent times. Through Friday, our Buy List is up 0.18% compared with a loss of 2.11% for the S&P 500. That’s still a lead of 229 basis points but the lead was at 615 basis points on April 16.
Here’s how each stock has done since April 16:

Where Are the Men?
Posted by Eddy Elfenbein on June 14th, 2010 at 9:40 am

The Atlantic writes on The End of Men:

Since 2000, manufacturing has lost almost 6 million jobs, more than a third of its total workforce, and has taken in few young workers. The housing bubble masked this new reality for a while, creating work in construction and related industries. Many of the men I spoke with had worked as electricians or builders; one had been a successful real-estate agent. Now those jobs are gone too. Henderson spent his days shuttling between unemployment offices and job interviews, wondering what his daughter might be doing at any given moment. In 1950, roughly one in 20 men of prime working age, like Henderson, was not working; today that ratio is about one in five, the highest ever recorded.

And So It Goes….
Posted by Eddy Elfenbein on June 14th, 2010 at 9:30 am

From the June 14, 1910 edition of the New York Times:

Wall Street’s Childish View
Incidentally the proposal of this plan has called forth from some men well known in Wall Street their views of the estimates which Wall Street, as a whole, customarily forms regarding public opinion. “The majority of Wall Street men,” said the head of one large institution yesterday, “are infantile in their estimates of public opinion and of the means by which it can be swayed. I have been struck by this fact ever since I have myself been in Wall Street. In the eyes of many all that is necessary to change public opinion on any matter is to draw up a set of resolutions signed by a sufficiently large number of men whose names are well known in the world of finance. It not infrequently happens, it seems to me, that the very moves by which Wall Street expects to change public sentiment around to the Wall Street way of looking at things have directly the opposite effect.”

In closely related news, Barry Ritholtz notes:

Over the weekend, we noted that, according to a recent poll, Goldman Sach’s reputation is worse than even BP’s. Following that, I caught the tail end of a radio interview over the weekend, where some wire house senior executive (didn’t get the name) was complaining about the negative coverage his firm received in the press.
Really? You think the corporate-owned wimpy US press has been too hard on you? Just because you nearly brought down the entire global economy through your recklessness, then took trillions in taxpayer money as a reward for your irresponsibility, then — instantly — returned to business as usual. Somehow, you think everyone should be going easy on you?

100 Years Ago Today
Posted by Eddy Elfenbein on June 14th, 2010 at 8:59 am

On June 14, 1910 trading nearly came to standstill. Why? An airplane was flying over Manhattan.
Over the course of the last century, airplane technology has improved dramatically. The attention-span of traders, not so much.
(Scroll down to read “Wall Street’s Childish View.”)

Democracy at Work
Posted by Eddy Elfenbein on June 11th, 2010 at 4:36 pm

Everybody Predicted the Financial Crisis
Posted by Eddy Elfenbein on June 10th, 2010 at 11:33 pm

BusinessWeek has a story on the emerging optimism of folks who, we’re told, predicted the financial crisis. I’ve never understood the fetish the media has for finding gurus.
More importantly, if you look closely at the predictions these folks made, none of them was right, and more than a few were comically wrong. Specifically, the story mentions Michael Panzner, Nouriel Roubini, Gary Shilling, Robert Prechter, Peter Schiff, Nassim Nicholas Taleb, Marc Faber, Stephen Roach, Meredith Whitney, David Rosenberg, Jeremy Grantham and James Grant.
Some like Grant and Roubini are interesting to listen to though I don’t credit Roubini with predicting the crash. However, he was closer than anybody. Rosenberg has been massively wrong. Still others like Prechter, Taleb and Roach, I can’t even take seriously.
I’ll repeat what I’ve said before, it always pays being a perma-bear. All you need to do is be vague and never give a date. Disaster is just around the corner. Then, whenever anything bad happens, immediately take credit for predicting it. With investing, there’s always something to worry about.
I’d also add that be able to predicting complex events like the credit crisis doesn’t mean you’ll be better at seeing other events. The event will often be so unusual that the skill set needed to see it and the problems underneath is a very poor prerequisite for seeing other complex events. Time and chance happeneth to us all.
Being right most likely means that you have some advantage at the center of a bubble. Predicting the markets isn’t like shooting foul shots. If you get one in the bucket, it doesn’t say much about how you’ll do next. In fact, if you get the last event right, you’re probably at a disadvantage in seeing the next turn of the market because your biases have been confirmed.
Both George Soros and Nassim Nicholas Taleb said that what we’re in is worse than the Great Depression. Not only is that empirically incorrect, it’s incorrect by a lot. The fall in GDP this time around is much less than the 1930s. Here’s a prediction for you: Neither will be held accountable for this prediction.

Another Defeat for Humans
Posted by Eddy Elfenbein on June 10th, 2010 at 2:48 pm

Artificial Intelligence beats the pros in investing:

The ability to predict the stock market is, as any Wall Street quantitative trader (or quant) will tell you, a license to print money. So it should be of no small interest to anyone who likes money that a new system that works in a radically different way than previous automated trading schemes appears to be able to beat Wall Street’s best quantitative mutual funds at their own game.
It’s called the Arizona Financial Text system, or AZFinText, and it works by ingesting large quantities of financial news stories (in initial tests, from Yahoo Finance) along with minute-by-minute stock price data, and then using the former to figure out how to predict the latter. Then it buys, or shorts, every stock it believes will move more than 1% of its current price in the next 20 minutes – and it never holds a stock for longer.

Yes, I think it’s call front-running — acting on information before anyone else. The strategy was invented by Nathan Rothschild 200 years ago when he used carrier-pigeons to get the 411 on the Battle of Waterloo.
Personally, I’m more impressed than someone actually reads the articles at Yahoo Finance.