Archive for April, 2009
A Black Swan Named Swine Flu
April 27th, 2009
Just when it seemed that investors were beginning to feel a bit more optimistic about the worse being over for the world economy a potential black swan named Swine Flu swooped in from the flock that has been circling overhead for the past couple of years. The world’s economy just can’t seem to catch a break.
The theory of the black swan was described by Nassim Nicholas Taleb in his 2007 book The Black Swan. Taleb regards many scientific discoveries as “black swans” — undirected and unpredicted. Taleb thinks that the rise of the Internet, the personal computer, World War I, and the September 11, 2001 attacks are examples of Black Swan events.
The heart of Taleb’s theory is that black swan events occur more often than pure mathematical probability analysis states that they should occur and by definition black swan events are catastrophic when they do occur. Humans seem to have a way to bring about the appearance of black swans through their arrogance and ignorance. Many humans act like they know a lot more about any subject than they actually do.
From a probability point of view, the financial events that lead to a world wide financial meltdown can be classified as black swan events. Those responsible at the big banks and at Wall Street investment banks for computing the risk of creating and packaging securities backed by home mortgages thought that the risk of enough loans going bad to seriously impact the performance of securitized loan packages was extremely low.
In fact, they thought that the probability was so low that they didn’t have to really worry about it and therefore mispriced risk. When trillions of dollars of these securities did go bad notwithstanding their complex mathematical models that computed risk levels as being almost nonexistent the resulting meltdown was considered a black swan event.
Now a potential black swan event named Swine Flu has descended upon the world. While the epicenter so far has been Mexico City, in just a few days the disease has spread to the US, Canada, the UK, Spain, New Zealand, and probably to additional countries. Today the World Health Organization looked set to raise its pandemic alert level, indicating it believes that large outbreaks are possible.
The stock market began to show some concern today. Airline and travel industry stocks were hammered, and there is a growing concern among traders that if the swine flu turns into a pandemic a weak world economy could be severely impaired.
“The threat of the pandemic will add further weakness to global trade,” said Justin Urquhart Stewart, investment director at Seven Investment Management in London. “We saw with SARS tangible percentage points knocked off the index, and that was in a buoyant time. Put that in a weaker time and it is likely to be more unpleasant.”
As the outbreak of swine flu is a new fast moving event with an uncertain outlook should it grow into pandemic proportions the recent rally in world stock markets could come to a brutal end.
Posted in Uncategorized | 
Sell the Bank Stress Test Report
April 26th, 2009
Stocks last week extended from a technical indicator perspective an already over extended rally to close at Dow 8,076.29. The Dow was up 119.23 on Friday, or 1.50% for the day. This was the seventh week in a row that Nasdaq stocks have been able to climb the wall of worry. The NYSE fell just a little short of a seven week run but advanced in six out of the last seven weeks.
Stocks had a volatile day up and down until after 2.00 PM when the bank stress test guidelines were released by the Fed. Guidelines is perhaps too generous of a term to use as the report actually continued little detail as to exactly how the stress test have been conducted. For whatever reason the market rallied after the news release and was firm going into the close.
While the nineteen banks included in the tests were told the results Friday afternoon the public will have to wait until the week of May 4th. Since the banks and the Washington honchos are now sharing this information rumors, leaks, misinformation, and perhaps even some real nitty gritty information will probably influence the markets volatility next week. I expect that an already nervous market will be even more nervous then usual as various bits and pieces of news about the street tests hit the street.
Since the market has had such a good run while the stress tests were being carried out I expect that the old Wall Street rule of selling on the news will kick in once the results are released. In my opinion, even though we have experienced an impressive rally it is still an impressive bear market rally so the sell off could be fast and severe should the test results spook the market in anyway.
While the talking heads seem to be all excited about a market that has turned around on improving fundamentals I expect that most of the perceived improvement has been of the engineered smoke and mirrors variety, such as he mark to model accounting changes for the banks, and as reality once again sets in the big bad bear will have his way.
Recession or Depression Proof Stocks
April 23rd, 2009
The best performing Fortune 500 stocks last year were stocks of two companies that offer extreme value with the going gets rough. The two stocks are Dollar Tree and Family Dollar Stores. Seems like there is nothing like real bargains to keep sales and profits growing during tough times.
1. Dollar Tree
Dollar Tree
Fortune 500 rank: 499
2008 revenue: $4.6 billion
2008 total shareholder return: 60.8%
A newcomer to the Fortune 500, Dollar Tree was also its best performing stock last year, returning nearly 61%. That was no small feat: As a group, the Fortune 500 sank 41%. The company cashed in on the recession, as a $1 (or less) price on everything from candy to glassware drove sales at more than 3,500 stores.
2. Family Dollar Stores
Family Dollar Stores
Fortune 500 rank: 359
2008 revenue: $6.98 billion
2008 total shareholder return: 38.9%
There’s nothing like a recession to draw customers into a dollar store. Family Dollar raked in $6.9 billion in sales last year, and its stock soared nearly 40%. An expanding assortment of goods – including ready-to-serve soups and Hanes underwear – helped boost business. The average amount spent per customer: $10.
Of the 500 companies in the Fortune 500 only 24 provided shareholders with a positive return. To see which companies were successful in gaining value even in a horrible year for most investors take a look at the Fortune slide show of top performing stocks for 2008.
