The National Mall
Posted by Eddy Elfenbein on December 30th, 2006 at 10:10 pm

I saw President Ford’s funeral procession earlier today. Even the monuments seemed to be in a somber mood.

2007 Buy List
Posted by Eddy Elfenbein on December 30th, 2006 at 6:55 am

Here’s my 2007 Buy List. For tracking purposes, I assume it’s a $1,000,000 portfolio and each position is worth $50,000. Here’s each stock, ticker, starting price and number of shares. This is what I’m refering to when I write on how the Buy List is doing.

Fifteen stocks return from 2006. The five new stocks are Amphenol, Graco, Jos. A Bank Clothiers, Nicholas Financial and WR Berkley. The sells are Brown & Brown, Dell, Expeditors, Home Depot and Wachovia.
The total market cap of all the companies is $288 billion, which is much smaller than last year. UnitedHealth is the largest at $72 billion. Nicholas Financial is by far the smallest at $117 million. The average dividend yield is 0.55%.
That’s it. The list is now “lock and sealed,” and I can’t touch it until next year.

The 2006 Buy List
Posted by Eddy Elfenbein on December 29th, 2006 at 7:33 pm

The 2006 trading year has come to a close. All in all, it was a very good year for our Buy List.

The 20 stocks on the Buy List were up an average of 10.68%, while the S&P 500 was up 13.62%. Including dividends, the Buy List was up 11.43%, and the S&P 500 was up 15.80%. The daily volatility of the Buy List was 19.22% greater than the S&P 500. The Buy List had a “beta” of 1.0404, and its daily changes were 76% correlated with the S&P 500.

I track the Buy List as if it were a $1 million portfolio. Here’s how each stock did during 2006:

* Expeditors split 2-for-1 on June 26.
** The original position was Golden West Financial (GDW), which was bought out by Wachovia at the end of the third quarter. The merger called for Golden West shareholders to get 1.051 shares of Wachovia stock, plus $18.65 cash for each share of Golden West. At the beginning of 2006, we tracked 757.5758 shares of Golden West priced at $66 each. With the merger, we then had 796.2122 shares of WB (757.5758*1.051), plus $14,128.79 in cash (757.5758*$18.65). For track record purposes, I assumed the entire cash position was immediately converted into shares of Wachovia. Going by the September 29 closing price of $55.80 for WB, the cash was exchanged for another 253.2041 shares ($14,128.79/$55.80). So we then had a total position of 1049.4163 shares of WB with a cost basis of $47.64554 ($50,000/1049.4163).

Here’s how the Buy List did against the S&P:

Stock Exchange to Close on Tuesday
Posted by Eddy Elfenbein on December 29th, 2006 at 11:18 am

It’s official. The markets will be closed on Tuesday in honor of President Ford’s funeral. Trading will resume on Wednesday.

Stocks Against Bonds
Posted by Eddy Elfenbein on December 29th, 2006 at 8:36 am

December has brought a major change to the financial markets, although it’s largely gone unnoticed. For the first time since June, the stock and bond markets have become decoupled. In other words, stocks are going up while long-term bonds are going down.
Yesterday, the yield on the thirty-year Treasury bond (^TYX) broke 4.8% for the first time in seven weeks. Despite this, the S&P 500 (^GSPC) has continued to rally, and it now stands just shy of a six-year high.
This is important because the bond market often acts as an early warning sign for the stock market. Decoupling usually precedes bad news for stocks. For example, stocks and bonds became negatively correlated beginning on April 25, shortly before the May 5 top. The negative correlation lasted until June 15, which was two days after the S&P 500’s low for the year. It’s as if the two asset groups were competing against each for investors’ money, and the bond market was winning.
But all that changed on June 16. From there until late-November, stocks and bonds (BTTRX is my bond proxy) had an amazing 79% correlation. Basically, the two asset classes stopped fighting with each other and marched higher arm-in-arm. It was a nice, smooth rally.
The truce finally came to an end. Since November 30, stocks and bonds have had a 60% negative correlation. This is a brief period, so it may not mean much, but something is definitely up. I don’t think the stock market is about to collapse, but we’ve had a 16% rally since June. It may be time for a breather.

10 Best Business Movies
Posted by Eddy Elfenbein on December 28th, 2006 at 9:53 pm

From The American:
Barcelona
Jerry Maguire
Lost in Translation
Once Upon a Time in the West
The Shop Around the Corner
Trading Places
One, Two, Three
Mildred Pierce
Working Girl
Glengarry Glen Ross
Under the American’s rules, the films aren’t allowed to be “openly hostile to capitalism.” That’s a far bigger handicap than I realized.

Jeff Matthews Ridicules Amazon So We Don’t Have To
Posted by Eddy Elfenbein on December 28th, 2006 at 5:06 pm

Jeff Matthews notices a theme in Amazon’s Christmastime press releases:

12/26/2006 “Amazon.com’s 12th Holiday Season is Best Ever”
12/26/2005 “Amazon.com, Inc. today announced that the 2005 holiday season finished as its best ever…”
12/27/2004 “Amazon.com’s Tenth Holiday Season is Best Ever…”
12/26/2003 “Amazon.com Wraps Up Its Ninth Holiday With Busiest Season Ever.”
12/26/2002 “Amazon.com today announced it has finished its busiest holiday season ever…”

“The best Christmas EVER!” Don’t you have to be Claymation to say stuff like that?

Dow 12,500
Posted by Eddy Elfenbein on December 28th, 2006 at 12:15 pm

Yesterday, the Dow closed above 12,500 for the first time ever. But the Dow has actually been a laggard. If the Dow had merely kept pace with the Wilshire 5000 over the last four years, which is the broadest measure of the market, then the index would currently be over 14,300.

Markets and Morality
Posted by Eddy Elfenbein on December 28th, 2006 at 9:34 am

Here’s a quick thought exercise. Assume that in your town or city, or even country, voters are evenly divided between two public policy decisions. Let’s ignore what the choices are, but instead, I will tell you that one choice is a more abstract, theoretical choice, while the other is grounded in real-world understanding. Given your biases, which would you be inclined to support?
There are few guarantees in life, however, if we were to ask the platonic financial economist, he or she will always and forever—one million times out of a million—argue for the abstract decision. To many financial economists, all investors’ problems are simply a problem of emotions. The people always suffer from insufficient self-denial.
It’s a huge mistake to interpret the judgments of the financial markets as moral judgments, but this happens all the time. To choose an obvious example, it’s easy to think the collapse of the Internet boom was punishment for earlier greed. You would get few thoughtful people to admit to that in public, but they do, perhaps unwittingly, believe it.
You can also find this in the financial media all the time. For example, when the housing market soars, it’s due to greedy, irrational Americans bidding up prices. We’re told that the root cause is always the victory of emotions over reason.
But what happens when the bond market soars? Nope, no judging here. Bond traders are somehow always right. You can wait a long time before you will hear the words “bond bubble.” The same holds true for oil.
The uncrowned king of this school of thought is Robert Shiller of Yale. The best part of being a member of this school is that you never have to be right. One only needs to look worried. Finger-wagging is good too. Also, you can earn extra points if you find new things to worry about.
But when you closely look at investment bubbles, they’re often less irrational than they appear. Remember, eBay is higher now than it was six years ago, but GE is down. Which one was the bubble? I have my answer.
The real mob mentality is crowd of observers trying to be the lone voice of reason in a sea of madness. Consider this Lawrence Summers’ editorial from earlier this week:

The headlines and opinion writers focus on how the U.S. is badly bogged down in wars in Afghanistan and Iraq; on an increasingly unstable Middle East and dangerous energy dependence; on nuclear proliferation that has already occurred in North Korea and that is coming in Iran; on the potential weakness of lame-duck political leaders; on record global trade imbalances and rising protectionist pressures; on increased levels of public and private-sector borrowing combined with record low saving in the United States; and on falling home prices and middle-class economic insecurity.
At the same time, financial markets are pricing in an expectation of tranquility as far as the eye can see. Stock prices in the U.S. are at all-time highs (uhm…no Larry, they’re not). The risk premiums that corporations or developing countries have to pay to borrow money are at or near historic lows. In addition, estimates of the volatility of the stock, bond and foreign exchange markets inferred from the prices of options are near record lows.

Summers has brought professional worrying to a new level. Our reason to be concerned is that…(drumroll)…we’re overly cautious! He’s confusing the lack of volatility with a carefree attitude. Actually, it’s just the opposite. But Summers’ argument is that overcautiousness is the very reason to be worried.
When you turn financial analysis into moral judgments, you misunderstand an important aspect of the market’s nature. The market has zero moral intelligence. The market simply moves capital from less productive assets to more productive. Trying to find a morality tale beneath the suface won’t help you explain what’s going on.

Bill Miller’s Streak to End
Posted by Eddy Elfenbein on December 28th, 2006 at 8:23 am

After 15 years, Legg Mason’s Bill Miller will lose to the S&P 500. He made some bad calls this year on housing and tech.

Miller’s $21 billion Legg Mason Value Trust was up 6.7 percent as of yesterday, trailing the 16.5 percent gain of the S&P 500. The mutual fund is the worst performer of 108 “multicap value” funds tracked by Bloomberg that buy stocks managers perceive as being cheap. Miller’s fund, which holds fewer than 45 stocks, was hurt by Amazon.com Inc. and UnitedHealth Group Inc.
“It’s not the right portfolio for 2006,” said Jeff Tjornehoj, a Denver-based analyst at Lipper who tracks the fund industry. “Perhaps it will be the right portfolio for 2007.”
The Legg Mason fund has beaten the S&P 500 every year since 1991, rising at an average annual rate of 15.8 percent, compared with 11.9 percent for the U.S. stock benchmark. Miller also manages the $6.7 billion Legg Mason Opportunity Trust, which is lagging behind the S&P 500 this year with its 14.2 percent return. Miller, 56, declined to comment.