The Float

Pedantic Language Post #2

A moment ago, we were subjected to an all-too-familiar error in usage, courtesy of CNBC's perfectly pleasant Sue Herrera (emphasis added in bold):

You know if you've been in gold lately, you know that that metal has literally been on fire.

We assume the problem with that formulation is self-evident. But just for kicks: Unless Herrera and her trader friends have roasted their gold something fierce, the yellow metal has decidedly not "literally been on fire."

Figuratively? Yes. Metaphorically? We'll give her that too. But literally? No.

Melissa Francis: Unserious

It's things like this that make us wonder why we fail to hit the mute button.

To her everlasting discredit, this was Melissa Francis a couple minutes ago on CNBC in discussing the federal government's proposed/pending stimulus package (emphasis added in bold):

It just seems like an ill-conceived plan, I mean it's going to take forever to get the [money] into consumers and then they're hoping they're going to spend it on consumer goods. I mean, why not cut out the middle man and the government can go buy zillions of sweaters and put them out in a park somewhere? It seems like bad government planning at its finest.

That's just deeply unserious on so many levels. Look, there are reasonable arguments to be made about (and against) this particular package. And we're pretty sure we smell "politics" (i.e., elected officials of both parties dong something rather than just standing there) in all of this. That's life in a democratic republic. Government ain't perfect. Not even close. And this package won't be either.

But how about all that great planning Wall Street did over the last couple years? How about the superb balance sheet management demonstrated by households?

To put a little twist on Ronald Reagan's 1981 inaugural address: Government clearly isn't the solution to all our problems. But it sure as heck isn't the only source of them either. And whatever the limitations and imperfections of the proposed stimulus package, non-ideological observers of the current scene recognize as much.

UPDATE: And while we're at it, what's with the "out in a park somehere" reference? Was that some sort of cold-blooded dig at the poor or homeless? We'd like to think it wasn't, but we sense some serious id at work here...

Two Strange Conceits

We've been struck by the recent appearance (and repetition) of a couple odd notions among the financial commentariat.

First, we've noticed the reappearance of an age-old premise concerning market timing: If you'd missed the five (or ten, or twenty) best days in the last "x" years, your returns would be "y." If you'd missed the five (or ten, or twenty) worst days in the last "x" years, your returns would be "z." Predictably, the gap between "perfect" market timing and "disastrous" market timing is enormous, especially over any meaningful period.

But let's be serious here: Is there a goofier idea in the known universe? Can you imagine any actual investor operating anywhere near such outlying extremes? After all, the "best" and "worst" days in any period tend to cluster around each other during periods of high volatility (such as the one we're in right now*). So missing the best days is likely to correlate with missing the worst ones.

Let's lose the "best and worst days" conceit. Surely we can find subtler, more realistic ways of helping rank-and-file investors understand the difficulties of effective market timing.

Second, we see some version of the "Are we in (or are we about to enter) a recession?" Where to begin with this one. First of all, the NBER's definition of a recession** is inherently arbitrary. (It's perfectly defensible, but arbitrary nonetheless.) So when CNBC anchors ask their guests whether we're in--or will enter, or will narrowly avoid--a recession, what they're really asking is to make distinctions between one arbitrary level and another. The question might as well be: "Do you think GDP growth with be higher or lower than +1.2% in 2008?"

We understand that the NBER's announcement of an official recession would itself have psycho-economic effects. But we're getting a little tired of the obsession with the recession question per se. That said, however, the larger economic questions--How long should we expect sluggish growth? What effect will the U.S. and the rest of the world have on each other? What are the appropriate policy responses to a period of non-trivially slower (or negative) growth?--are perfectly apt.

~~~~~~~~~~~~~~~~

*Here are the daily percentage changes in the S&P 500 thus far in 2008 (through yesterday's close): -1.44%, 0.00%, -2.46%, 0.32%, -1.84%, 1.36%, 0.79%, -1.36%, 1.09%, -2.49%, -0.56%, -2.91%, -0.60%, -1.11%, 2.14%, 1.01%.

**Two consecutive quarters of declining gross domestic product.

Friday Reading

Anything interesting happen this week?

• A quick summary of the politics and substance of the stimulus package from The Economist.
• More good stuff from the The Economist: "It's rough out there" (the current cover story/leader, on the present challenges in the financial markets) and "Somewhere over the rainbow" (on the excellent prospects for our "unexpectedly prosperous and peaceful world").
• A couple pieces from Bloomberg: One on Jeremy Grantham's current preference for cash over equities and another on the $230 billion of debt Wall Street can't seem to unload just yet.
• Great work by Slate's Daniel Gross on the sovereign wealth fund session at Davos, including bonus Larry Summers jokes.
• Veryan Allen, the blogosphere's favorite hedge fund booster, weighs in on alpha, beta, and the difference between investing and gambling.

Thursday Miscellany

There's no shortage of compelling stuff out there these days...

• Here's a telling recession-related time series from Calculated Risk.
• From Davos, Stephen Roach strikes again: "It's a dangerous, reckless and irresponsible way to run the world's largest economy.''
• Three great items from Yves Smith today: "Worrisome Signs for the Bond Insurer Bailout," "When Sensible People Advocate Continued Credit Dependence," and "Robert Reich Grasps the Enormity of the Problem."
• More from Calculated Risk: December existing home sales. Note that months of supply fell a little, but that key metric remains grossly elevated.
• And more on the December home sales numbers from the WSJ's Real Time Economics.

"E"--Still a Variable

On Tuesday we posted an item on the strangely oblivious claim that equities are "cheap" just because PE ratios aren't as nutty as they were in the late 1990s when some, with no demoninator whatsoever, were literally undefined. (See also this item from last Friday.)

In this morning's Wall Street Journal, Tom Lauricella and Peter McKay have a summary of yesterday's wild trading that includes the following passages late in the piece (emhasis added in bold):

In the U.S., after years of record profit growth, the debate on Wall Street is whether companies will be able to scratch out small profit gains this year or if a U.S. recession and global slowdown will lead to a decline in earnings.

The risk is that many analysts still expect earnings to rebound strongly. Profits for companies in the Standard & Poor's 500-stock index are likely to grow 18% in 2008, according to Thomson Proprietary Research. That's up from an October forecast of 12% earnings growth.

...

"It's amazing how long the consensus number looking for double-digit gains has held up," said Robert Doll, chief global investment officer for stocks at BlackRock Inc. "I'd say it's a greater than 50% chance that profits are negative" in 2008.

Is it amazing? We think that's putting it mildly.

Source

Tom Lauricella and Peter McKay, "Stocks Reverse Early Losses, Close Up 2.5%," Wall Street Journal, January 24, 2008 (subscription required)

Stop the Presses

Breaking news from CNBC (earlier this morning)...

Study: Republicans and Democrats Differ on Issues That Could Affect Health Policy

Charts of the Day

One of the remarkable features of the NASDAQ (and the NASDAQ 100 in particiular) in 2007 was just how much of the composite's performance was driven by four leading stocks: Amazon, Apple, Google, and Research in Motion.

Thus far, 2008 has delivered a jarring reminder of just how fleeting such outperformance can be. Here are two charts that tell the story in no uncertain terms. First: The Four Horsemen of Tech in 2007. Then: The same four stocks so far in 2008. (The second chart includes intraday numbers; we'll update the chart at the close of trading this afternoon. Update complete, with today's furious rally in full evidence.)

2007 Performance

• AAPL, +133.47%
• AMZN, +134.77%
• GOOG, +50.17%
• RIMM, +166.24%

2008 Performance YTD

• AAPL, -29.79%
• AMZN, -20.15%
• GOOG, -20.66%
• RIMM, -22.40%

Wednesday Reading

New normal edition...

• The WSJ's Real Time Economics offers some historical perspective on previous episodes of intermeeting rate cuts.
• Worth reading: Kevin Depew's Tuesday version of "Five Things You Need to Know."
• In some ways, it really is different this time. And not in a good way.
• Barry Ritholtz flags the E.S. Browning piece in this morning's WSJ. Interested readers should take a look at the Barry's interviews with Paul Desmond. Very interesting stuff.
• At Econbrowser, James Hamilton weighs in on the Fed's "emergency" slash. Here's a key passage:

[A] 75-basis-point cut cannot prevent a recession, if one is indeed already under way, any more than the 50-basis-point cut in April 2001 prevented that downturn. But, while many members of the public may believe in the Fed's omnipotence, I doubt that members of the FOMC share that illusion. I expect that Bernanke instead simply intends to do what he can to mitigate the damage.

My bottom line? I believe the FOMC cast its vote today with those who declare that a recession has already begun.

Toles Times Three

A little more levity, courtesy of the Washington Post's irrepressible Tom Toles...