Archive for June, 2010

  • Mid-Year Report Card
    , June 30th, 2010 at 4:38 pm

    The first half of the year is now over. Overall, it’s been an ugly time for the stock market. The S&P 500 is down -7.57% for the first half and our Buy List is down -4.00%.
    To reiterate the rules of the Buy List, it’s a list of 20 stocks that I choose at the beginning of each year. Once the list is set, I can’t make any changes throughout the year. I assume the portfolio is equally weighted at the start of the year.
    Here’s a look at each stock on our Buy List, the price at the beginning of the year, the price at the close of today and the profit/loss:

    Symbol Buy Current Profit
    AFL $46.25 $42.67 -7.74%
    BAX $58.68 $40.64 -30.74%
    BDX $78.86 $67.62 -14.25%
    BBBY $38.61 $37.08 -3.96%
    EV $30.41 $27.61 -9.21%
    LLY $35.71 $33.50 -6.19%
    FISV $48.48 $45.66 -5.82%
    GILD $43.27 $34.28 -20.78%
    INTC $20.40 $19.45 -4.66%
    JNJ $64.41 $59.06 -8.31%
    JOSB $42.19 $53.99 27.97%
    LUK $23.79 $19.51 -17.99%
    MDT $43.98 $36.27 -17.53%
    MOG-A $29.23 $32.23 10.26%
    NICK $6.89 $8.23 19.45%
    RAI $52.97 $52.12 -1.60%
    SEIC $17.52 $20.36 16.21%
    SYK $50.37 $50.06 -0.62%
    SYY $27.94 $28.57 2.25%
    WXS $31.86 $29.70 -6.78%

    Our biggest winner is Jos. A Bank Clothiers (JOSB), followed by Nicholas Financial (NICK) and SEI Investments (SEIC).
    Our biggest loser is Baxter International (BAX) followed by Gilead Sciences (GILD).
    Here’s how the Buy List has done compared with the market during the first half of the year. I track the Buy List as if it’s a $1 million portfolio.
    We had a great start to the year. By April 15, we were up 14.1% which was more than 5% ahead of the S&P 500. Since then, our Buy List has shed -15.88% compared with -14.93% for the S&P 500.
    Including dividends, the Buy List is down -3.19% for the year while the S&P 500 is down -6.65%. Four the four-and-a-half years of the Buy List combined, we’re up 11.26% versus a loss of -9.15% for the S&P 500.
    Finally, if this matters to anyone, the beta for this year is running at 0.917. Historically, our beta is 0.938.

  • Some Context
    , June 30th, 2010 at 3:49 pm

    We’re now 1.05% of our way through the millennium. That’s the same ratio that a three-year Treasury will do for you.

  • The Market’s Mid-Year Cycle
    , June 30th, 2010 at 3:31 pm

    Earlier we pointed out that the stock market has had a very dramatic effect at the turn of each month. Since 1932, most of the S&P 500’s capital gain has come during a seven-day period at the turn of each month—specifically, the last four trading days and the first three trading days of each month. This represents about one-third of the total trading days. During the rest of the month, the stock market actually lost money.
    Investing in just the last four days and first three days of each month would have returned over 63,000% (not including trading costs). Annualized, that’s 8.6%. However, if you consider that it’s really only 32% of the time, the true annualized rate is over 28%. The rest of the month—the other 68% of the time—has resulted in a combined loss of close to 78%.
    It is important which month we’re talking about. The most dramatic surge comes at the turn of the year. During that seven-day stretch, the market has gained an average of 1.59%. The mid-year seven-day period is the fourth-best averaging a gain of 0.60%.
    A few years ago, I ran the numbers on the entire history of the Dow and found that the Dow gains 1.37% between June 27 and July 6. Historically, there’s been an average gain of 4.17% from June 27 to September 6. Historically, the Dow has peaked on September 6 and pulled back until late October (and it’s not just 1929 distorting the series that causes this).
    Please note that I don’t see these historical quirks as useful trading strategies. What I think is important is that the market clearly sees turning points at the different times of the year.

  • The Higher Ed Bubble Continues
    , June 30th, 2010 at 10:09 am

    More evidence that the advantages of a college degree are vastly overrated:

    “Some universities are getting paid to have people show up, take a class, and flunk out,” says Lee. “If you bought cars, and half the cars didn’t work within the first six months, and you couldn’t get your money back, people would be pretty outraged.”

  • S&P 500’s P/E Ratio Hits Lowest Level in 19 Months
    , June 29th, 2010 at 11:19 pm

    Here’s a look at the S&P 500 (black line, left scale) along with its operating earnings (yellow line, right scale).
    The two lines are scaled at a ratio of 16 to 1 so when the lines cross, the S&P’s price/earnings ratio is exactly 16. The future earnings is the consensus from analysts.
    The current P/E Ratio is 14.49 which is the lowest level for the index since November 2008. To be fair, the market’s real P/E Ratio was a lot lower then since the earnings line was devastated by losses at AIG.
    Here’s the S&P’s P/E Ratio going back to the 1980s.
    We’re not too far from hitting 20-year lows.

  • The Yield on the Dow
    , June 29th, 2010 at 10:41 pm

    According to the Wall Street Journal, here are the indicated dividends for the 30 Dow stocks:

    AT&T Corp. $1.68
    Verizon $1.90
    Pfizer $0.72
    DuPont $1.64
    Merck $1.52
    Kraft Foods $1.16
    Chevron Corp $2.88
    Johnson & Johnson $2.16
    Coca-Cola $1.76
    McDonald’s $2.20
    Procter & Gamble $1.93
    Home Depot $0.95
    Intel $0.63
    Exxon-Mobil $1.76
    Travelers Cos. $1.44
    Caterpillar $1.76
    3M $2.10
    General Electric $0.40
    Boeing $1.68
    United Tech $1.70
    Wal-Mart Stores $1.21
    IBM $2.60
    Microsoft $0.52
    American Express $0.72
    Alcoa $0.12
    Walt Disney $0.35
    Hewlett-Packard $0.32
    J.P. Morgan Chase $0.20
    Bank of America $0.04
    Cisco Systems $0.00

    Using some complicated math, I added all the dividends together and got $38.05. The current divisor on the Dow is 0.132319125, so dividing by the divisor comes to 287.56.
    The Dow closed today at 9,870.30, so the indicated dividend yield is 287.56 divided by 9,870.30 or 2.91%. The closing yield on the 10-year Treasury (^TNX) is 2.97%.
    Of course the Dow’s dividends can be cut, but you’re really not getting much for the “safety” of Treasuries.

  • Cognizant Tech CEO
    , June 29th, 2010 at 5:25 pm

    One of my favorite tech stocks is Cognizant Technology Solutions (CTSH). This was a gigantic winner for our Buy List last year (up over 150%).
    I got rid of it for this year’s Buy List, although CTSH is up another 11.5% this year. Here’s the CEO on CNBC:

  • The Ten-Year Treasury Drops Below 3%
    , June 29th, 2010 at 10:07 am

    There’s not much to add that this chart doesn’t already say:
    The yield on the ten-year Treasury (^TNX) has fallen below 3% which it hasn’t done since the height of the financial crisis (roughly, November of 2008 to April 2009).
    The Dow is at 9900. I ran the numbers and found that the Dow currently yields 2.9%. Assuming the overall dividend number isn’t cut, the Dow needs to gain, on average, 10 points a year for the next 10 years to match what the 10-year is offering.
    Either stocks are very cheap or Treasuries are way too expensive (or possibly both). As I’ve said before, the 10-year Treasury has a major impact on stock prices.

  • QOTD
    , June 29th, 2010 at 9:39 am

    From Ambrose Evans-Pritchard:

    As for the Fed, I venture to say that a common jury of 12 American men and women placed on the Federal Open Market Committee would have done a better job of setting monetary policy over the last 20 years than Doctors Bernanke and Greenspan.

  • The Supremes Help Tobacco Stocks
    , June 28th, 2010 at 2:26 pm

    The market is doing very well for us today. AFLAC (AFL) spiked as high as $46.20 before pulling back below $45. It’s still holding on to a nice gain.
    Reynolds American (RAI) is getting a nice boost thanks to the Supreme Court’s decision in favor of the tobacco companies. All the major tobacco stocks are doing well today. RAI got as high as $54 a share earlier today.
    This is a very split market today. The consumer stocks are doing well while the economically sensitive stocks are down. The Morgan Stanley Consumer Index (^CMR) is up 0.52% while the Morgan Stanley Cyclical Index (^CYC) is down -0.65%.