The Power of Rumors

Posted by T.W. Hanson - Feb 22nd, 2008 at 21:02

rumors

Late in today’s trade, the equity markets reversed course.  Stocks that had been down for most of the day moved sharply higher in the last thirty minutes of trading.  The reason for this was a rumor of a split and bailout for one of the major bond insurers.  The rumor came from someone at CNBC who falsely speculated last week that the bond insurers would likely be downgraded this week.

I am not judging the behavior of CNBC, the reporter or the market’s behavior.  However true the rumor may be, what is of note is how billions of dollars moved around on rumors coming from a source that was wrong the week before.

This is one more example of how trying to time the market is dangerous, even for professionals.

Inflation: This Week’s CPI Numbers

Posted by T.W. Hanson - Feb 21st, 2008 at 21:02

cpi

Earlier this week, the Bureau of Labor and Statistics released data on the change in the prices for goods and services for the month of January. The numbers showed the continuation of a disturbing trend. Prices continue to rise at uncomfortably high rates.

There are two numbers cited in the CPI (consumer price index) to which economists pay attention: the “CPI” and the “Core CPI”. The CPI is a measure of the prices of a fixed basket of goods and services, and it rose 4.3% from January 2007 to January 2008. The Core CPI is a measure of the prices of a fixed basket of goods and services excluding food and energy, and it rose 2.5% in the past twelve months.

People will use both numbers to try to convince you of different things. Some will say that inflation is wildly out of control because it is increasing at 4.3%. Others will say that 2.5% inflation isn’t that far from historical levels and is perfectly tolerable and healthy.

Know the difference between the numbers and interpret what they mean for yourself.

There are good things and bad things about using both numbers. Historically, people have followed the Core CPI more closely. Energy costs are historically volatile and can skew data from month to month. Another reason why people look at the ex-energy number is the potential for double counting its effects. When you buy almost any good, energy was used in its production and transportation. This is being reflected in its final price. Food is another volatile commodity with a long term stable trend. Panic over inflation because droughts in Australia moved U.S. grain prices for a season aren’t necessarily warranted.

However, there are changes in the global economy such that there is a very credible case to be made that there has been a secular shift in energy and food price trends. Increasing demand and the realization that there is a finite supply of these commodities is distorting long term historical trends, meaning that ignoring food and energy price appreciation is no long an option.

This means that average prices for goods and services increased on average somewhere between 2.5% and 4.3% in the past year. Keep this in mind when people are citing these numbers. Know when they are taking them out of context to further their own agendas.

Sharper Image K.O.

Posted by T.W. Hanson - Feb 20th, 2008 at 22:02

sharper image

Sharper Image, the maker of massaging chairs, digital clock thermometers, nose hair trimmers and other fine products, filed for protection under chapter 11 of the bankruptcy code today. Liquidation is a possibility, meaning their assets may be sold to pay off creditors. I fear this is a sign of things to come. Companies, like some homeowners, have lived beyond their means for the past few years. In coming months, it is highly likely that corporate default rates and bankruptcy filings will increase. This is not good for the stock or bond market and is a factor you should consider when investing in any company with a significant debt burden.

In the meantime, get whatever you need from Sharper Image, as its doors may close forever. Hopefully you will be able to live with other gadget stores like Brookstone.

The Little Book That Beats the Market

Posted by Tad Johnson - Feb 18th, 2008 at 19:02

Joel Greenblatt makes a bold claim : using his simple stock picking strategy (referred to as the magic formula) you can beat the market average with less risk. In his own words,

I believe that using the magic formula and the principles behind the formula to guide your future investments will remain one of your very best investment alternatives. I believe that if you are able to stick with the magic formula strategy through good periods and bad, you will handily beat the market averages over time. In short, I believe that, even after everyone knows the magic formula, your results will continue to be not only “quite satisfactory,” but with a little luck, extraordinary.

Not surprisingly, this little book has caused a bit of a stir in the investment community since it was published a few years ago. A walk through Yahoo’s investment forums will yield an active community of magic formula practitioners. And I’m awfully tempted to become one myself.

I’m now on my second reading of the book, and the theories behind the magic formula are very enticing. Of course, the difference between writing about the book and actually investing real money is great. So far I haven’t done the later.

If nothing else, Greenblatt’s book is an entertaining (and brief) explanation of the basics of stock investing. I would highly recommend reading it.

Access to Wall Street Titans - Blank Check Companies

Posted by T.W. Hanson - Feb 17th, 2008 at 23:02

Blank Check

If you have heard of a special purpose acquisition company (SPAC), you need not read any farther. If not, it may be a good idea to look at one of the few segments of Wall Street doing well.

These SPACs are publicly traded companies with one purpose in life: acquire something. They raise money based on the strength of their management teams and the likelihood of finding an attractive target. Current SPAC management teams include Donald Drapkin, Nelson Peltz and Joseph Perella. You can type their names into google and find lists of deals and accomplishments.

The great thing about buying SPAC equity in a troubled market is that you get Treasury-like returns with a free option to take part in the deals of Wall Street’s most fabled individuals. The mechanisms in these instruments are somewhat complicated, but relevant to you is this option. When the SPAC announces its target and you as a shareholder are called to vote on the acquisition, you can either take part in the deal or take your portion of a trust account that has been accruing in value based on Treasury or Treasury-like securities. If high yield savings accounts and cd yields continue to plunge, these types of securities make more and more sense.

SPACs have purchased companies like Jamba Juice, American Apparel, Great Lakes Dredge and Dock, Navois Maritime, GLG Partners and others.

It should be noted that their historical returns have historically trailed the equity markets. The future is always uncertain and regulation of these companies is in flux. Make sure to always do your diligence, especially in these complicated types of structured securities and companies.

Enjoy the NYT’s take on these securities as well.

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