Saddest Investing Fact of the Day
Posted by Eddy Elfenbein on May 11th, 2010 at 4:17 pm

Oh boy:

A household with income under $13,000 spends, on average, $645 a year on lottery tickets, or about 9 percent of all income.

Intel’s Guidance
Posted by Eddy Elfenbein on May 11th, 2010 at 2:39 pm

Very good news:

Intel CEO Paul Otellini said Tuesday that the company’s revenue and net income per share should see a percentage increase in the low double digits over the next few years because of rising demand for its chips in personal computers and other gadgets.
On both measures, Intel Corp.’s numbers have declined over the past two years as business spending on PCs and computer servers collapsed amid the recession. However, strong buying by bargain-hunting consumers has helped lift Intel’s fortunes in recent quarters, and sales of server chips — some of Intel’s most profitable products — have improved.
Otellini told investors and financial analysts at a conference at Intel’s Silicon Valley headquarters that the forecast proves that PCs are “still a growth industry.”
It’s difficult to say, however, how the new guidance compares with analysts’ expectations.
Otellini’s forecast was based on a “compound annual growth rate,” a measure that includes multiple years of results. He did not specify the years.
Analysts polled by Thomson Reuters expected Intel’s recovery from the downturn to show a 23 percent increase in revenue and a more than doubling of earnings per share in 2010 over the year before. For 2011, the analysts expected less-dramatic growth of a 5 percent increase in both revenue and earnings per share, compared with their 2010 forecasts.

Guess What Index is 100 Points Above Its Thursday Low
Posted by Eddy Elfenbein on May 11th, 2010 at 2:13 pm

I’ll give you a hint: The S&P 500.

“Even if they fail miserably at a job, they still think they’re great at it.”
Posted by Eddy Elfenbein on May 11th, 2010 at 1:31 pm

New academic report proves that Gen Y is just awful.

Gen Y workers get a bad rap in the workplace, with many a geezer complaining that their work ethic is less developed than their sense of entitlement. But is that really fair?
Yes, according to new research that’s yielded actual data to back up that notion.
In a series of studies using surveys that measure psychological entitlement and narcissism, University of New Hampshire management professor Paul Harvey found that Gen Y respondents scored 25 percent higher than respondents ages 40 to 60 and a whopping 50 percent higher than those over 61.
In addition, Gen Y’s were twice as likely to rank in the top 20 percent in their level of entitlement — the “highly entitled range” — as someone between 40 and 60, and four times more likely than a golden-ager.
Harvey’s conclusion? As a group, he says, Gen Yers are characterized by a “very inflated sense of self” that leads to “unrealistic expectations” and, ultimately, “chronic disappointment.”
And if you think the Gen Yers in your workplace are oversensitive as well as entitled, Harvey’s findings back that up, too. Today’s 20-somethings have an “automatic, knee-jerk reaction to criticism,” he says, and tend to dismiss it.
“Even if they fail miserably at a job, they still think they’re great at it.”

One-Time Audit the Fed Passes the Senate 96-0
Posted by Eddy Elfenbein on May 11th, 2010 at 1:11 pm

Senator David Vitter’s amendment to audit the Federal Reserve failed by a vote of 37 to 62. However, Senator Bernie Sanders worked out a compromise to conduct a one-time audit of the Fed. That vote passed 96 to 0.

“At a time when the Federal Reserve has provided the largest taxpayer bailout in the history of the world, the largest financial institutions in this country, trillion-dollar institutions,” Mr. Sanders said in a floor speech, “the Sanders amendment makes it clear that the Fed can no longer operate in the kind of secrecy that it has operated in forever.”
He added, “For the first time the American people will know exactly who received over $2 trillion in zero or virtually zero-interest loans from the Fed, and they will know the exact terms of those financial arrangements.”
Mr. Sanders, a self-described socialist, has long demanded greater transparency at the central bank, and his original plan could have subjected the Fed to ongoing audits of some routine operations. But he agreed to scale back the proposal in the face of opposition by the White House, the Fed, the Treasury and some Senate colleagues.
The critics said that more aggressive audits would impede on the Fed’s independence and potentially interfere with its ability to set monetary policy. Mr. Sanders and other proponents of fuller audits of the Fed rejected those assertions and said they were providing sufficient safeguards to protect the central bank’s integrity.

This issue seems to confuse many people. In a traditional sense, the Federal Reserve is already audited. Current law bars an audit of the Fed’s open market operations. The belief is that such an audit would undermine the Fed’s independence.
The idea is that auditing the Fed’s open market operations would really serve as a policy veto. I’ll give you an example. Let’s say you conduct an audit of the Department of Bureaucracy. The auditors room through the books and find out that the DOB spent $1.2 million on a ham sandwich. You’ll notice that this is in no way a policy decision. The auditors have made a judgment that this was too much too spend for a ham sandwich. But the Federal Reserve is a different animal. Perhaps it was the Fed’s intent to buy a ham sandwich for $1.2 million. Sure, it may sound crazy but this is what central banks do. That was the policy decision. What the Fed does is buy and sell stuff so an audit (so the argument goes) opens up auditors to not merely audit, but question the Fed’s policy decisions. Those policy decisions (again, so the argument goes) are already held accountable when the Fed Chair appears before Congress.
Personally, I think the Fed’s independence is given a level of sacredness it doesn’t deserve. Quite simply: If the people want 20% inflation, they should get it. The Fed is a creation of Congress and Congress should be able to do whatever it wants with the Fed. The central bank is not independent. I fail to see why it’s so important that the Fed “remain independent.” I would agree that the Fed needs latitude to act, but not independence.

Volatility Does Not Equal Risk
Posted by Eddy Elfenbein on May 11th, 2010 at 12:36 pm

I don’t easily go about criticizing Finance Blogger King Felix Salmon (especially after he said such nice things about me), but I have to speak up when he equates volatility with risk. Felix says that stocks aren’t a good buy and adds that “when an asset class gets more volatile, it gets riskier.”
Hmmm. Let’s take a step back. Risk is a very peculiar concept in finance. The problem is that we use this one word “risk” to describe many different things. What does risk mean? Well, you can take your pick. There’s the risk of what you don’t know. There’s systemic risk. There’s the risk that you won’t do as well as everybody else. There’s the risk that you’ll lose everything. The list of risks goes on and on.
Gold is a good case study on which to contemplate the meaning of risk. Gold is popular with goldbugs because it’s the least risky investment possible. In this sense, we’re defining risk as an investment losing its inherent value. In other words, gold can’t go bankrupt. Governments? Sure, they go belly up all the time, but even in our Mad Max future, gold will still be around.
But in another sense of the word risk, gold is highly risky. Gold tends to be very volatile. It bounces up a lot each day. On the other hand, gold tends to have a very low, and even negative, beta. So which is it? Is gold risky or not? It really depends on the kind of risk you’re talking about.
My point is that there’s no evidence that greater equity volatility leads to poorer performance. The risk of a market plunge is the kind of risk that matters. Except at very low levels, the historical evidence is that volatility doesn’t much affect future returns. Only when the VIX gets down below 13 does that market show some outperformance.
I know it seems counter-intuitive but volatility does not equal danger.

Gilead Announces $5 Billion Buyback
Posted by Eddy Elfenbein on May 11th, 2010 at 10:48 am

Groan:

Gilead Sciences Inc. (GILD) announced a 3-year, $5 billion stock-buyback effort, with the board and management considering the move “an appropriate and strategic use of the company’s cash.”
A host of companies have been boosting or initiating repurchase plans in recent months as the need to hoard cash recedes. The drug maker, known more for its HIV treatments, announced Tuesday it has completed a $1 billion buyback effort authorized in January, buying 24.1 million shares for an average $41.43.
The stock was up 1.6% premarket at $39.00 and was down 11% this year through Monday. Gilead’s market value is about $35 billion.
The drug maker plans to fund the repurchase program with future profit as Gilead said on Tuesday that the company has made significant progress with its HIV pipeline programs to develop a new treatment regimen, which it expects to file for regulatory approval this year.
Gilead reported last month its first-quarter profit jumped 45% on strong sales of its HIV drugs as well as higher royalties from flu-treatment Tamiflu because of worldwide initiatives to plan for a possible influenza pandemic.

Just give us the money! The buyback works out to about $5.50 per share and Gilead doesn’t pay a dividend. At least, the stock is up today.

Dean Foods Plunges Below $10
Posted by Eddy Elfenbein on May 11th, 2010 at 10:26 am

A few weeks ago, I highlighted Dean Foods (DF) as a good value stock. The market, however, seems to have other ideas. Yesterday, the company missed its earnings estimate by five cents a share (23 cents versus 28 cents; in February Dean gave a range of 25 to 30 cents). The stock responded by dropping 28% and it’s down again today. DF is now below $10 a share. It’s never a good idea to tell Wall Street to expect one thing and deliver another.
Wall Street had been expecting Q2 earnings of 41 cents per share. Instead, Dean said it will range between 23 and 28 cents per share. The problem is that there’s a price war going on in the milk business and that’s hurting profit margins. Dean’s Q1 actually beat Wall Street’s revenue target. The issue is turning those sales into profits.
The WSJ reports:

Dean Foods Co. Chairman and Chief Executive Gregg Engles said gains by private-label producers are accelerating despite an improving economy, noting that in some regions, a half-gallon of his company’s milk costs more than a gallon of an unbranded product. Major retailers routinely use discounted staples such as milk, bread, eggs and meat to drive foot traffic, and private-label food products gained market share as consumers traded down during the recession.
Cheaper private-label products have been gaining food-industry market share for years, but Mr. Engles is acknowledging that the weak economy may have forced a long-term change in consumption that holds ramifications for margins and investment. Milk prices have firmed in recent months after a volatile period, but Mr. Engles said efforts to push through increases at the retail level have failed to stick.

Risk and Return: Not So Easy
Posted by Eddy Elfenbein on May 11th, 2010 at 9:50 am

Eric Falkenstein is the author of Finding Alpha which argues that, in the real world, risk and return are not related. In fact, if there is a relationship, it’s probably negative. The more risk you take on, the worse you’ll do.
As Eric explains, a good example of this is in corporate bonds. Both the riskiest bonds—high-yield junk bonds—and the least risky—rock-solid AAA bonds—don’t do as well as bonds rated as investment grade but just below top-shelf.
Why is this? Is it that both ends of the risk spectrum unusually crowded? Eric writes:

It may be that individual investors expect high returns when investing in high risk assets, only that this is a mass delusion, the triumph of hope over experience. If so, that isn’t the ‘expected return’ one talks about in academic finance, that is, a statistically rational expected return. It is important to think of a return premium as due to two things: randomness and alpha. Randomness or luck we all understand. Alpha, however, is a little trickier. It isn’t something you can buy, because due to competition, no one sells it for less than cost, meaning, the insiders who structure and sell any alpha idea will take out all the extra return, leaving nothing at best, a mean-mode trade* at worst. To get alpha, you don’t buy something passively, you have to actively negotiate, time, or structure an investment, and while people can help you, no one will singularly present you with an extra-normal return. Further, most alpha attempts are like karaoke ballads, well intentioned but ultimately awful, meaning, after fees most alpha is negative (how else do so many alpha-less brokers afford their nice cars!?).
It is difficult to see how the little risk is priced, the big one not, if risk is to have any consistent meaning. If the corporate spread is a function of risk at one end, why is it not at the other, more intuitive end? This is but another reason I think there is no general risk premium, as explained in my series of Camtasia videos on my book here.

Jon Stewart on the Crash
Posted by Eddy Elfenbein on May 11th, 2010 at 9:09 am