Emotions Versus Finance
Posted by Eddy Elfenbein on November 5th, 2006 at 3:15 pm

The Washington Post looks at how ego and vanity are affecting the housing crash…er, slowdown.

Evidence is mounting that people set prices, particularly for housing, as much on ego and self-image as on an objective review of the market. That’s one reason for the phenomenon known as “sticky prices” — home sellers who won’t cut their demands enough to make a deal. It helps explain why the unsold inventory of homes has risen so high, and why, despite this rise, home prices in the Washington area have fallen only slightly. There were 24,741 homes for sale in September in Washington and the close-in suburbs, up from 13,950 a year earlier.
Economic researchers have found that emotions are a bigger influence than was previously believed in how people make financial decisions. For a long time, economists believed that human beings made decisions like robots, that people applied simple logic in making financial choices. But a body of research developed over the past two decades, known as neuroeconomics or behavioral economics, has shed light on how powerful a role the unconscious mind plays. New imaging technology, meanwhile, is allowing scientists to peer inside people’s brains while they wrestle with financial decisions.
These studies have illuminated a few key concepts: Many people will pass up sure profits for illusory ones. Some will turn down profits if they believe someone else is unfairly profiting more. Some will even refuse to sell if they believe they may come to regret it, because fear of future regret can be as powerful a motivator as money in the pocket today.
In other words, people will cling to prices they recall from a brighter day, even when market conditions have changed; they will walk away from a sale if they feel the buyer is getting too good a deal at their expense; and they are terrified that [if they sell now] the market will rebound and they will feel like fools.

Evaluating Greenspan
Posted by Eddy Elfenbein on November 4th, 2006 at 3:58 pm

Reason discusses Alan Greenspan’s legacy as Fed Chairman with Milton Friedman, Ron Paul, James Grant, Bryan Caplan and Jeff Saut. Here’s a sample:

Reason: Analysts often complain that Greenspan did nothing to help solve our low savings rates and our trade deficits. Is the Fed relevant to these problems? Are they problems at all?
Friedman: I do not think you or I can say what the right savings rate is or should be. There’s nothing wrong with a person, family, or country saying, “We have high enough income. We don’t need more. We’re going to spend it all.” We can have a perfectly prosperous and active economy along those lines. I don’t think it’s helpful to ask, “Is this rate right or wrong?” Instead we should ask, “Have we adopted polices that reduce incentives to save?”
In that respect, there’s a great deal to be done. The tax system distorts the incentive to save, sometimes pro-saving and sometimes anti. Government should ask itself how best to maintain institutions under which you have an undistorted market in savings.
So far as foreign balance of payments is concerned, we have to let the dollar float. You shouldn’t try to control the price of foreign exchange any more than you should try to control the price of other things. The country seems to have learned that price controls are not good.
I do not believe that [mass foreign holding of U.S. securities] is something to be feared. The only reason [a widespread loss of will to buy U.S. Treasury securities] would happen is if our central bank followed inflationary policies that made it undesirable to hold American securities, and that’s our fault, not theirs. I think the concern that has been expressed about foreign balance of payments is in large part mistaken and in large part reflects the defects of statistics available.
If you have a foreign owner of a bond or stock who loses confidence in the American economy and sells, whom do they sell it to? They have to sell it to people with a stronger confidence in the U.S. economy who are willing to hold on to it. If the foreigners dump bonds or stock and use dollars to buy other U.S. assets, there’s no net effect. If they use them to buy consumer goods, then that means an increase in balance of payments, a plus on income accounts.

Implied Tradesports Markets
Posted by Eddy Elfenbein on November 3rd, 2006 at 3:13 pm

This is a favorite topic of mine. In investing, we can look at two markets and imply a third. That’s basically how options work. Well…we can do the same for predictions markets.
At Tradesports, they offer futures contracts for how many seats they Democrats will pickup in the house. They offer contract for several different scenarios (i.e., greater than 14.5 seats, or greater than 19.5 seats). Assuming a logonormal distribution, we can find an implied mean and standard devation.
The chart above shows the mean number seats the Democrats looks to gain (black line) with plus and minus one standard deviation bands (red lines).
As of the last trade, the market believes the Democrats have a 60.2% chance of gaining at least 19.5 seats, and a 46.9% of gaining 24.5 seats. A 60.2% chance is +0.258 standard deviations, and a 46.9% chance is -0.078 standard deviations. So those 5 seats are worth 0.336 standard deviation. Therefore, one standard deviation is nearly 15 seats. The Democrats are now projected to gain over 23 seats, but the market still believes its wide open.

Whole Foods Crashes
Posted by Eddy Elfenbein on November 3rd, 2006 at 11:33 am

Whole Foods Market (WFMI) is down over 23% in today’s session. I wonder if anyone saw this coming.

A Story of Two Bulls
Posted by Eddy Elfenbein on November 3rd, 2006 at 11:20 am

Not all Bull Markets look the same. The chart above shows the Morgan Stanley Cyclical Index (^CYC) and the Morgan Stanley Consumer Index (^CMR) since March 2003. While cyclical stocks have been highly volatile, especially in recent months, the conumser stocks have quietly rallied.

These Strange Employment Numbers
Posted by Eddy Elfenbein on November 3rd, 2006 at 10:56 am

Each month’s employment report grows increasingly bizarre. First, the government suddenly discovered 800,000 Americans who were employed yet the Feds somehow missed them. The details on that still haven’t been released.
Today we’re told that the nonfarm payroll number for August was revised higher by 42,000. The number for September was adjusted higher by 139,000. Plus, the economy added 132,000 new jobs last month. Add it all up, and the unemployment rate for October is now down to 4.415% which is lower than it was eight years ago.
I’m not sure why anyone pays attention to these numbers. I don’t see any value in them.

Reader Quiz: Gay Sex or Investing?
Posted by Eddy Elfenbein on November 2nd, 2006 at 2:16 pm

Today’s reader quiz: Are the following phrases associated with gay sex or investing? Good luck!
1. Working for a bulge bracket
2. Doing a mon back
3. Buying a naked straddle
4. Hanging with the odd lots
5. Looking for a double bottom
6. Going deep in-the-money
7. Sliding under the pink sheets
8. Front running the hedges
9. Hunting for bears
10. David Faber
11. Getting fined by Cox
Results next week.

Random Run Down Wall Street
Posted by Eddy Elfenbein on November 2nd, 2006 at 11:14 am

At DealBreaker, Bess Levin looks at Wall Street’s obsession with marathoning. Frankly, I’d think any sport where defecating oneself is acceptable would be popular on the Street. (Look, I’ve partied with bondtraders.) In today’s NYT, Daniel Gross examines another angle: they give away lots of free stuff (the marathons, not Wall Street).

Dell Hits $25
Posted by Eddy Elfenbein on November 2nd, 2006 at 10:19 am

Breifly. That’s the highest price in four-and-a-half months. Goldman upgraded the stock to neutral.

That said, in the absence of Dell restructuring — which we are not modeling into our assessment since there has been no inclination that Dell wants to do that — we think Dell’s choice is ultimately between growth and margins which in our model tops out at 7 percent normalized growth, 17 percent gross margin, and 6 percent operating margin, meaning that this is not the ‘Dell of old.’

Fair Isaac and Biomet
Posted by Eddy Elfenbein on November 2nd, 2006 at 9:18 am

After the bell yesterday, Fair Isaac (FIC) reported earnings of 60 cents a share. That was three cents higher than the Street was expecting. Charges related to stock-based compensation and one-time expenses pushed FIC’s net income down to 35 cents a share.

For the full fiscal year, net income fell to $103.5 million, or $1.59 per share, from $134.5 million, or $1.86 per share. Revenue rose to $825.4 million from $798.7 million.
Looking ahead, Fair Isaac said it expects first fiscal-quarter earnings per share of about 48 cents on revenue of about $210 million. The outlook includes stock-based compensation charges.
Analysts forecast quarterly profit of 59 cents per share on sales of $211.9 million.
For the full fiscal year, Fair Isaac said it expects earnings per share of about $2.10, including stock-based compensation expenses, on sales of about $870 million.
Wall Street expects full-year earnings of $2.44 per share on sales of $873.1 million.
Fair Isaac also said its board authorized a stock buyback program of up to $500 million.

The company also announced that its CEO, Thomas G. Grudnowski, has resigned.
The other big story is that Smith & Nephew has said that it’s in preliminary talks with Biomet (BMET) about a possible merger. Both companies have very similar market values. Interestingly, what may have lead Biomet down this path was then Dane Miller, the CEO, suddenly resigned earlier this year.