Could Oil Double From Here
Posted by Eddy Elfenbein on January 7th, 2008 at 10:10 am

I wouldn’t bet on it, but some folks are:

The fastest-growing bet in the oil market these days is that the price of crude will double to $200 a barrel by the end of the year.
Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period. The contracts, the cheapest way to speculate in energy markets, appreciated 36 percent since early December as crude futures reached a record $100.09 on Jan. 3.
While analysts at Merrill Lynch & Co. and UBS AG say the slowing U.S. economy will lead to the biggest drop in prices since 2001, the options show some traders expect oil to rise for a seventh straight year. Demand will increase 2.5 percent in 2008, according to the International Energy Agency. U.S. inventories fell to a three-year low on Dec. 28. Production from Mexico is declining and Saudi Arabia is behind schedule in opening its newest field.
“One hundred dollars a barrel is actually 14.9 cents a cup, so we’re still talking about oil being remarkably cheap,” said Matthew R. Simmons, chairman of Simmons & Co. International, a Houston-based investment bank that focuses on energy. Inventories “are tight as a drum and I don’t see how we get out of this box,” he said in a Bloomberg television interview last week. “Demand clearly isn’t starting to slow down.”

Amazon.com on Wall Strip
Posted by Eddy Elfenbein on January 7th, 2008 at 9:48 am

Which Is A Better Investment?
Posted by Eddy Elfenbein on January 7th, 2008 at 9:32 am

Ford’s stock or your mattress? Check the results:

Follow Up on Momentum Stocks
Posted by Eddy Elfenbein on January 4th, 2008 at 7:26 pm

A few weeks ago, I wrote about the tremendous success of momentum stocks. I wanted to follow up and show you how much better a momentum strategy has done against value-based strategies.
The following chart shows you how the top 10% of momentum stocks have done against the top 10% of book value, P/E ratio, dividend yield and price-to-cash flow. It ain’t close.

The purple line is the overall market. I got the data from Ken French’s data library. The major glitch is that the cash flow and P/E ratio series begin about 25 years after the others.
I was surprised to see how well the P/E ratio decile (red line) does. It’s the only strategy that puts up a fight against momentum. Since 1974, the P/E ratio decile has slightly beaten the momentum decile.
To give you a clearer picture, here’s the relative performance of the different strategies:

Today’s Jobs Report
Posted by Eddy Elfenbein on January 4th, 2008 at 2:30 pm

Employment was lousy last month. The unemployment rate is now 0.57% above its March low. Traditionally, that number doesn’t U-turn after that big a move. After an increase of 0.5%, the trend is usually here to stay, and it doesn’t stop until it increases by more than 2%.

A Word on Political Predictions Markets
Posted by Eddy Elfenbein on January 4th, 2008 at 11:18 am

It’s strange to see the political predictions markets like Intrade get so much attention recently (see here and here) because, until now, one of the very few people who gave them much attention was…me. As I’ve said before, I don’t place a great deal of faith in these markets, but I think they’re for fun and should be seen that way. (By the way, the top chroniclers of this scene is Chris Masse.)
Let me add a few random thoughts on these markets. The first is that they’re often called “predictions markets,” in fact, I just did, but that’s not quite correct. More accurately, they’re odds setting markets. I’ll hear people say, “Intrade said this will happen, and it didn’t, so Intrade doesn’t work” No, Intrade laid certain odds on an event happening. That doesn’t prevent a longshot from pulling through.
I also hear people say that it just follows the polls. For the most part, that’s true. But not always, and that’s where Intrade can be especially useful. For example, Mike Huckabee’s poll numbers are far better than odds would suggest. Why is that? I’m sure not. Perhaps the market isn’t correct and the Huckabee contract is a good value. Or maybe the market doesn’t see his popularity as lasting very long.
Three years ago, my Nationals got off to a blazing start in the NL East, 50-31 and a 5.5 game lead. They’re odds of winning the division, however, were still very low. The market thought that they would fade, and that’s exactly what happened.
Matthew Yglesias recently made an interesting observation, the markets are pretty boring. He’s right. Day-to-day, it is fairly dull. One thing to remember, though, is that these aren’t stocks, they’re futures. Futures are a strange animal. With futures prices, the underlying volatility can be extremely high, even though the prices can be somewhat stable.
The reason is the dispersion of returns. In others words, a political contract can potentially soar or crumble a great deal in a very short amount of time. I don’t mean just before expiration, I mean at any time. This is also why futures traders are all crazy people. If some candidate had a bad night last night, they’re futures could have fallen dramatically and the market takes that into account.
The price of the futures is the sum total of the odds of very wide-ranging possibilities. Let’s say the McCain contract is at 24 cents. That could be the sum of, say, a 30% chance of going to zero in a week and a 10% chance of going to 90 cents in a week, and many, many others. Unlike stocks, futures are a zero-sum game. If you take from one, you give to another. What would make the futures markets much more exciting would be an options market on the futures, but that would be seriously nerdy. And no one wants that.

Make Up Your Mind
Posted by Eddy Elfenbein on January 3rd, 2008 at 8:02 pm

“Stock Futures Point to Further Decline”
–headline, Associated Press, Jan. 3, 7:02 a.m.
“Stock Futures Point to Flat Open”
–headline, Associated Press, Jan. 3, 8:22 a.m.
“Stock Futures Point to Higher Open”
–headline, Associated Press, Jan. 3, 9:21 a.m.
(via: BOTW)

Bed Bath & Beyond’s Earnings
Posted by Eddy Elfenbein on January 3rd, 2008 at 5:56 pm

Bed Bath & Beyond (BBBY) just reported earnings for their third quarter. This is the one that ended in November so the holiday sales aren’t included.
I’ve been a defender of BBBY—and I still like and own it—but this report isn’t a good one. Sales rose by 10.8%. Operating and net earnings are down from last year, but thanks to share buybacks, the per-share numbers are up slightly. EPS rose 4.6% from 49.86 cents to 52.16 cents. The market was expecting 52 cents a share.
BBBY has been pouring money heavily into share buybacks. The number of diluted shares has dropped by 7.2% over the past four quarters. Although sales rose by 10.8%, sales-per-share rose by 19.5%. That’s the good part. The bad part is they’re paying for those sales with lower margins. This is the ninth straight quarter of lower net profit margins, although margins are still higher then they were in 2001.
Decreasing margins are rough for any business. To show you what I mean, let’s compare this past quarter with the Q3 from two years ago.
Net margins dropped from 9.29% to 7.70%. That’s a rate drop of 17.12%, which means that you have to increase sales by over 20% just to stay flat. Total sales rose 23.89% and diluted shares dropped 11.98%. Put it all together and you get an EPS increase of 16.66%. That’s the kind of headwind they’re running against.
Now for the bad news. Wall Street was expecting Q4 earnings of 78 cents a share. BBBY said it will be between 64 and 67 cents a share.

For the fiscal fourth quarter of 2007, ending March 1, 2008, the Company estimates it will earn approximately $.64 to $.67 per diluted share based, in part, upon a projected flat comparable store sales percentage for the quarter. This would bring the Company’s full year earnings estimate to a range from approximately $2.08 to $2.11 per diluted share. The fiscal 2007 fourth quarter and full year have one less week than last year’s corresponding periods, as fiscal 2006 was a fifty-three week year.

Here are the earnings results going back a few years:

From the conference call, here’s Senior of Investor Relations Ronald Curwin discussing Q4:

As we said in September the business environment remains challenging particularly in areas most affected by housing market issues. Concerns about the economy, consumer spending, energy prices, housing and credit availability in particular persist. Recall that in last year’s fourth quarter we reported earnings per share of $0.72 per share which included a $0.07 per share non recurring charge. Excluding this non recurring charge earnings per share for the fourth quarter fiscal 2006 would have been reported at $0.79 per share. Also affecting the comparability of our fourth quarter 2007 earnings is that last year’s fourth quarter include 14 weeks of sales including the week after Thanksgiving versus this year’s fourth quarter that will have 13 weeks of sales excluding the week after Thanksgiving. The exclusion of the week after Thanksgiving in this year’s fourth quarter will have a negative impact on net sales of approximately $175 million when compared to the fourth quarter of last year.
Assuming a relatively flat comp stores sales percentage for the fiscal fourth quarter and concerting one less week of sales a year ago resulting from the current year calendar shift we anticipate a 2 to 4% percentage decrease in net sales and we would now estimate fourth quarter earnings in the range of from $0.64 to $0.67 per diluted share which would bring the full year’s earnings estimate in the range of from $2.08 to $2.11 per diluted share.

By the way, BBBY doesn’t take questions during their calls. C’mon fellas, remember who owns the company!

No Change for the SPX
Posted by Eddy Elfenbein on January 3rd, 2008 at 4:30 pm

For the first time in five years, the S&P 500 registered no change for the day. Yesterday and today, we closed at 1447.16. The Dow, however, rose 12.76 points and the Nasdaq dropped 6.95 points.
The last time the S&P 500 had no change for the day was January 10, 2003. Before that was January 28, 1997. Many years ago, no change days were more frequent, but that’s obviously true when you’re dealing with a low number. For example, there were 11 such days in 1954 when the index was around 30. We’re only had four in the last 19 years.
Interestingly, the Dow had back-to-back closings at 2999.75 on July 16-17, 1990. That turned out to be the market’s high before we entered a nasty bear market.

2007 in One Graph
Posted by Eddy Elfenbein on January 3rd, 2008 at 2:32 pm

Here’s an interesting graph. This is the relative performance of the ten industry groups in the S&P 500. Talk about a wide divergence! Eight of the ten groups outperformed the index. The other two, financials and consumer discretionary (as in homebuilders), dramatically underperformed.

One more thing. Notice how smooth the discretionary line is. That’s why quantifying risk is such a hard game to play.