Dec

20

Press Digest for Thursday

Pete @ 12:59 AM | | Leave a Comment

  • Why is the gold standard crazy?
    In short, you don’t get anything out of a gold standard that you didn’t bring with you. If your government is a credible steward of the money supply, you don’t need it; and if it isn’t, it won’t be able to stay on it long anyway. (See Argentina’s dollar peg). Meanwhile, the limitations on the government’s ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It’s a terrible idea, which is why there are so few economists willing to raise their voices in support of it.
  • Probe of Insider Trading at Bear Stearns
    The issue of redemptions has been a point of frustration for investors in the elegantly named High Grade Structured Credit Strategies and High Grade Structured Credit Strategies Enhanced Leverage funds. Investors, including wealthy individuals and savvy asset-management firms, began submitting redemption notices in February, when the first signs of trouble began to emerge in the subprime housing market. Investors were told the earliest they could redeem their money was at the end of June, according to the funds’ internal guidelines. But the June 30 redemption deadline was too late for most investors, as Cioffi and his team began barring investors from pulling money out the funds in early June.
  • Paulson to ‘Look Hard’ at Rating Agencies’ Subprime Role
    U.S. Treasury Secretary Henry Paulson speaks in Kansas City, Missouri, about the Bush administration’s efforts to ease the subprime mortgage crisis. Paulson said government regulators are examining the responsibility of credit-rating agencies giving high ratings to subprime mortgage securities that have plummeted in value.
  • Bill Gross Says U.S. Could See ‘Mild’ Recession in 2008
    Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., talks with Bloomberg’s Kathleen Hays from Newport Beach, California, about today’s action by the European Central Bank to ease the credit-market gridlock, the outlook for the U.S. economy and his investment strategy for mortgage and municipal bonds.
  • Achuthan Says Home Price Indicators Are ‘Pointing Down’
    Lakshman Achuthan, managing director of Economic Cycle Research Institute, talks with Bloomberg’s Carol Massar in New York about RealtyTrac Inc.’s November U.S. foreclosure report released today, outlook for the housing market and economy. Home foreclosures increased 68 percent in November from a year ago as adjustable-rate mortgages left subprime borrowers unable to meet higher payments. Foreclosure filings were down 10 percent from October’s total.
  • Time Person of the Year
    Vladimir Putin is Time Magazine’s 2007 person of the year, with Richard Stengel, Time Magazine managing editor and CNBC’s Trish Regan
  • Summers Wind
    Former Treasury Secretary Larry Summers says Washington should consider a tax cut to reduce chances of recession, reports CNBC’s Steve Liesman
  • December Ifo Dips
    German business sentiment dipped more than expected in December, the Ifo survey showed Wednesday. Hans-Werner Sinn, President of Ifo Institute, has more.
  • ECB’s Trichet calls for responsible inflation response
    “It’s our responsibility to make sure that this inflation is just temporary and doesn’t spill over into the cost of living, and particularly that it doesn’t affect wage negotiations. Because then, we’d have what we call second round effects, leading to inflation which would be long lasting, instead of being temporary and related to higher costs for oil and raw materials.”
  • The increasing use of atypical anti-psychotics among the elderly
    Rod Galloway gave his mother a second pill the morning after the visit with the doctor. Norma became even drowsier. Figuring that all she needed was fresh air, he took her to the store. No luck. He tried giving her a cup of tea and told her to sit on her bed and wait for him. When he returned, she hadn’t moved a muscle. Her coat was still on. While attempting to remove her coat, Norma suffered a grand mal seizure and was rushed to hospital, where she died 10 days later of heart failure, on Tuesday, Sept. 19, 2006. So convinced was Rod that Risperdal helped kill his mother that he complained to the B.C’s college of physicians and surgeons. While the college acknowledged — in the letter quoted above — that the drug probably caused the seizure, it was unwilling to link the drug to the heart failure, despite the fact that it is a recognized side effect of the drug.

Dec

19

Strategy: Price vs. Earnings Momentum

Teresa Lo @ 2:11 PM | | Leave a Comment

19-001.gifActive Traders tend to focus on price momentum while investors tend to favor fundamental strategies such as value or earnings growth (a.k.a. earnings momentum). Entire industries have sprung up around number crunching. It just feels more scientific, you know?

But nothing is ever as simple as it seems. Michael Mauboussin is Bill Miller’s guy. The Chief Investment Strategist at Legg Mason Capital Management has just released his latest piece, Death, Taxes and Reversion to the Mean [PDF]:

  • Analysts modeling future corporate financial performance should use past return on invested capital (ROIC) patterns, including a strong tendency toward mean reversion, as an appropriate reference class but rarely do. Full consideration of the difficulty in sustaining high returns should temper the optimism inherent in many models.
  • Some companies do post persistently high or low returns beyond what chance dictates. But the ROIC data incorporate much more randomness than most analysts realize.
  • We had little luck in identifying the factors behind sustainably high returns.

Mauboussin’s conclusions are supported by a number of previous academic papers: earnings growth is not something investors can count on. Obviously, this is problematic for a number of popular investing strategies that depend on identifying and forecasting the continuation of earnings momentum, namely CANSLIM and fundamental indexing (but to a much smaller extent).

In the end, only performance counts, so I thought it would be interesting to look at the year-to-date performance of several ETFs that reflect these major styles:

  • The (grey line on chart) CGM Focus Fund is one of those let’s-be-flexible-and-trade-whatever-moves-long-or-short funds. I think it’s safe to guess that price mometum factors heavily into their choices.
  • The (pink line on chart) CAN SLIM Select Growth Fund “seeks long-term capital appreciation and will invest primarily in common stocks of all sizes exhibiting accelerated earnings growth, market leadership, and other characteristics consistent with the CAN SLIM® Select List.”
  • The (green line on chart) PowerShares FTSE™ RAFI US 1000 Portfolio (Fund) is “based on the FTSE™ RAFI US 1000 Index. The Index is designed to track the performance of the largest U.S. equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The 1000 equities with the highest fundamental strength are weighted by their fundamental scores. The fundamentally weighted portfolio is rebalanced and reconstituted annually.”
  • The (blue line on chart) is the S&P 500 Index, EXCLUDING dividends and dividend reinvestment.

Obviously, one year does not a trend make. As they say, time heals all wounds, and time wounds all heels…

Dec

18

PODCAST: Railways as Defensive Investments

Teresa Lo @ 5:08 PM | | Leave a Comment

Bill Gates owns a ton of CN. Warren Buffett backed up the truck and loaded up on BNI. Since Buffett’s move in April, railways have turned in a so-so performance benchmarked against the S&P 500 index. But hey, at least they’re not down like financial and consumer discretionary stocks!

18-railways.gif

Are railroads a classic Peter Lynch investment? Hunter Harrison, CEO of Canadian National Railway was on The Current this morning. He provided insight into the company and discussed issues and macro trends facing the transportation industry:

Dec

18

Apparel & Accessories: The Tape vs. Analysts

Pete @ 2:00 PM | | Leave a Comment

While doing research, we often come across examples of why listening to the “tape” is much more important than analyst opinion. Let’s use the Apparel & Accessories sector as an example and explore how the lack of “reasons or explanations” for price movements can create potholes for investors.

The Tape Tells All

A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations. Stock-market postmortems don’t pay dividends. — Edwin Lefevre, Chapter 10, Reminiscences of a Stock Operator

It seems like nothing on Wall Street has changed since Livermore wrote the book in the 1920s. The question one should always ask is “Should I listen to what ‘experts’ recommend on TV, newspapers and on the internet or should I listen to what the markets are telling me? What is more important?”

If you agree with Lefevre, then price action — “the tape” — is the ultimate barometer and must be watched closely.

First, we screen the companies in the Apparel / Accessories industry using some minimum criteria for liquidity:

  1. Minimum 50 Day Average Volume of 250,000
  2. Minimum stock price of $5

This created a list of 19 companies. Next, I compared Wall Street analyst recommendations on these companies versus their actual price performance. Analyst recommendation data from Reuters was used. The scale was from 1 to 5:

  1. Buy (1)
  2. Outperform (2)
  3. Hold (3)
  4. Underperform (4)
  5. Sell (5)

Symbol Company Name Estimated Rec
COH Coach, Inc. 2.044
COLM Columbia Sportswear Company 2.6
GIL Gildan Activewear Inc. (USA) 1.636
HBI Hanesbrands Inc. 1.667
ICON Iconix Brand Group, Inc. 1.6
JNY Jones Apparel Group, Inc. 3.2
KWD Kellwood Company 2.8
LIZ Liz Claiborne, Inc. 2.909
LULU Lululemon Athletica inc. 2.5
MFB Maidenform Brands, Inc. 2.6
OXM Oxford Industries, Inc. 2.6
PVH Phillips-Van Heusen Corporation 1.818
RL Polo Ralph Lauren Corporation 2.188
TRLG True Religion Apparel, Inc. 2
UA Under Armour, Inc. 2.357
VFC V.F. Corporation 2.5
VLCM Volcom, Inc. 1.857
WRNC The Warnaco Group, Inc. 2.286
ZQK Quiksilver, Inc. 2.462

The table reveals many ‘buy and outperform’ ratings. Since analysts are supposed to perform in-depth research to help investors, one would expect a large percentage of these stocks would perform much better than the market in general. But a look at the tape tells us something else.
Read more

Dec

18

Press Digest for Tuesday

Teresa Lo @ 8:00 AM | | Leave a Comment

  • China’s economy smaller in new study: World Bank
    The Bank had in the past extrapolated figures on China and India using the purchasing power method, but the latest report is based on more extensive data. “These results are more statistically reliable estimates of the size and price levels of both economies,” the Bank said. “The previous, less reliable, methods led to estimates of their GDPs (gross domestic product) that were 40 percent larger than the results of the new, improved methods and benchmark.”
  • Bears Capitulate as Treasuries Thwart Chart Watchers
    [Editor: Geez, Louise! No wonder brokerage firms figure technical analysis is useless!] Historically, the shift between bull and bear markets hasn’t been immediate, Yamada said. Her analysis of long-term cyclical trends stretches back to 1790, when Alexander Hamilton served as the first U.S. Treasury Secretary. The 8 percent return since mid-June is “an extension of the trading range environment, which is characteristic of every reversal from falling rate cycles to rising rate cycles,” she said. “We’re talking about a 26-year cycle that historically has taken two to 14 years to reverse.”
  • Italians Dressed in Sunday Best Forced to Dine in Soup Kitchens
    [Editor: So Greenie's plan isn't really a new thing...] Almost 9 percent of employed Italians are in danger of falling into poverty, a 2006 Istat report shows. Relative poverty is defined as a household of at least two making less than 970 euros a month…. Rising interest rates have compounded difficulties. One in four homeowners can no longer afford their mortgage payments, which have risen 50 percent in two years, consumer association Adiconsum says. The government’s 2008 budget, if approved, will create a 10 million-euro fund to help about 400,000 families that risk losing their homes.
  • Subprime Securities Market Began as ‘Group of 5′ Over Chinese
    Lippmann was a Wall Street renaissance man, with a strong appetite for sushi and an online restaurant guide so comprehensive one blogger labeled him “the Robert Parker of raw fish.” He opened the kitchen of the $2.3-million Manhattan loft he lived in then, complete with six burners, two grills and 20- foot island, to an Italian cooking class. The goal of Lippmann’s group on that winter evening in 2005: to design a new financial product that would standardize mortgage-backed securities, including those based on high-yield subprime loans, paving the way for their rapid growth. Of the firms participating that night, Lippmann’s Deutsche Bank is based in Frankfurt, UBS in Zurich and the others in New York.
  • Michael R. Sesit: KISS Investing Means Keep It Simple, Smarty
    Montier says he measures a stock’s appeal according to some valuation criteria; its momentum, which gauges the strength of its price movement; and balance-sheet data indicating a company’s financial soundness, such as its so-called F score, which takes account of profitability, debt and operating efficiency. A fourth item would be a corporation’s capital discipline, such as how much money it is paying out in dividends and stock buybacks or keeping as retained earnings.
  • Morgan Stanley Asia chairman says US heading to recession
    The US is heading for a recession and the rest of the world would be “dead wrong” to think this will not impact on growing Asian economies, Morgan Stanley senior executive Stephen Roach said Sunday. In an interview with Sky News in Australia, Roach said the US Federal Reserve Bank would “most assuredly” cut interest rates again soon to boost the economy, following last week’s 25 basis points reduction. “The US is going into recession,” he said.
  • Plastics
    [Podcast] A podcast edition of a special report The Current did on plastics, and possible health hazards associated with their everyday use (part 1 of 2).
  • Letters, and plastics, revisited
    [Podcast] Due to overwhelming response, The Current took another look, with more detail, at the issue of plastics.
  • Interview with Colonel Morris Davis
    [Editor: This is a really good interview. Not what you'd expect.] As chief prosecutor at the US military commissions, Colonel Morris Davis was a true believer, a vocal supporter of what his government was doing at Guantanamo Bay. But later he resigned to protest the way in which the United States was prosecuting and interrogating its prisoners. He joined The Current to discuss this turn of events.

Dec

17

Press Digest for Monday

Pete @ 4:14 PM | | Leave a Comment

  • Intercontinental to End Futures Floor Trading
    ICE’s decision affects several dozen futures contracts that traded at the New York Board of Trade in Lower Manhattan. ICE bought that market, which specializes in agricultural commodities like sugar, cocoa, coffee and cotton, in January 2007, renaming it ICE Futures U.S. Since ICE’s purchase of Nybot, about 85% of the futures trading activity on that exchange has gone to ICE’s electronic systems.
  • Wheat Hits $10 a Bushel
    US wheat futures rose more than 3% in early Monday trade, passing the $10 a bushel mark for the first time. Wheat prices doubled in 2007. Steven Bell from GLC Hedgefunds, talks about food inflation.
  • ABLA Finalist - Olam CEO
    The commodity cycle is likely to continue, says Sunny Verghese, CEO of Olam International. He speaks to CNBC’s Martin Soong and Sri Jegarajah about the structural factors that affect the global commodity cycle.
  • Castle of Lehman Sees U.K. Economy Growing 1.7% in 2008
    Alan Castle, chief U.K. economist at Lehman Brothers, talks with Bloomberg’s Naga Munchetty from London about the outlook for U.K. economic growth, consumer spending and his forecast for the euro-pound exchange rate in 2008. The difference between the London interbank offered rate that banks charge each other for three-month loans and the central bank’s target is hovering near the widest this decade, a sign that financial institutions remain skittish about lending to each other.
  • The Credit Roundtable
    Protecting corporate bond values, with Tara Innes, AIG Investments vice president/investment grade research analyst and CNBC’s Becky Quick.
  • Credit Crunch Hits Quants
    Quantative funds were among the first big names hit by the credit crisis in August. Liquidity problems first hit Goldmans’ Equity Opportunities Fund, followed by AQR Capital Management. Karsten Schroeder, CEO of Amplitude Capital, talks about these funds.
  • China’s art buying rage
    Newly-rich investors are snapping up costly Chinese works of art. Chinese collectors buy out of a sense of patriotism, with desire to bring pieces back to their homeland. Many also view Chinese art as a solid long term investment.
  • Darwin’s children
    Human evolution has speeded up over the past 80,000 years. That raises awkward questions about the concept of “race”.
  • The uncomfortable rise of the rupee
    The migration of capital from the rich world to the poorer one is a sign of a bleaker season to come in the world’s biggest markets. This would, then, seem an inauspicious moment for India to bet its future on export-led growth. If it cannot resist the inflow of foreign capital, it should try instead to make room for it—by observing fiscal restraint—and to make the most of it—by investing it wisely. India may then have an economy worthy of a more expensive rupee; and its children may have better things to do than hang around at traffic lights trying to change a buck.

Dec

17

The Real Yield: Negative Interest Rates

Teresa Lo @ 8:00 AM | | Leave a Comment

I was watching CNBC Asia last night and someone mentioned that real interest rates are expected to go negative in Hong Kong early next year.

On the heels of last week’s poor U.S. November CPI number, I though it was a good time to update our Real Yield chart (last updated in July).

Guess what? Real rates* in the U.S. are now negative.

16-real_rates1.gif
Real 10-Year T-Note yield since 2005

16-real_rates2.gif
Real 10-Year T-Note yield since 2000

*Methodology
Subtract the 12-month change in the consumer price index from the month-end CBOE 10-year Treasury Note yield ($TNX), and presto, we have a back-of-the-envelope calculation of the real 10-year yield.

We use the CPI-U: all urban consumers, all items, INCLUDING food and energy, non-seasonally adjusted, 1982-1984=100. Series ID: CUUR0000SA0

Dec

16

Thankyou, Dr. Brett

Teresa Lo @ 4:04 PM | | Leave a Comment

Astute readers will notice that the site has undergone plenty of unannounced changes in a short while. Why?

16-lemons.jpg

A few weeks ago, Dr. Brett had a “moment” when he told it like it really was. That got me thinking. Then last week, Pete sent me a link to a post by John Andrews. While Andrews is in the search engine optimization business, I saw right away that his analysis was astute and 100% applicable to the market for trader education and trading systems:

A “Market for Lemons”, a Nobel Prize, and Snake Oil SEO
Akerlof analyzed the used car market, showing that the information disparity surrounding the value of a used car led to a collapse of the market as a used car market, creating instead a “market for lemons”. The used car salesman knew how good (or bad) a used car really was. The buyer could not determine that until after the car was purchased. Because of this “information asymmetry” in the used car market, used car salesmen could overprice “lemons” - the low value used cars that looked ok. Poor quality cars no longer priced as poor quality. Actually good used cars became too expensive for buyers to chance, as poor quality cars at middle-quality prices presented better perceived value and higher profits for salesmen. As non-selling good cars were removed from the market, masquerading “lemons” dominated, setting the tone for the used car market, and further blocking actually good used cars from appearing. In the end, the used car market becomes a market for lemons, not a used car market.

Dr. Akerlof went on to become the co-winner of the 2001 Nobel Prize in Economics. In the same paper, Dr. Akerlof explained how valuable information and products are driven away:

The Costs of Dishonesty
The Lemons model can be used to make some comments on the costs of dishonesty. Consider a market in which goods are sold honestly or dishonestly; quality may be represented, or it may be misrepresented. The purchaser’s problem, of course, is to identify quality. The presence of people in the market who are willing to offer inferior goods tends to drive the market out of existence — as in the case of our automobile “lemons.” It is this possibility that represents the major costs of dishonesty — for dishonest dealings tend to drive honest dealings out of the market. There may be potential buyers of good quality products and there may be potential sellers of such products in the appropriate price range; however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.

The bottom line is this: the market for trader education and trading systems is basically a market for lemons. In order to get sales, the vendor must either make incredible performance claims OR price it cheap enough for a potential buyer “to chance”.

I am willing to do neither; therefore, it is time to make lemon-aid…

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