Archive for May, 2011

  • Stock Returns and Record-Breaking Skyscrapers
    , May 26th, 2011 at 10:05 am

    A new academic paper by Gunter Löffler of University of Ulm:

    This papers shows that construction starts of record-breaking skyscrapers predict subsequent US stock returns. In the three to five years after the construction of a record-breaking new skyscraper began, per annum stock market returns are around 10 percentage points lower than in other years. The predictive ability is significant and relatively stable. It exceeds that of alternatives such as the prevailing historical mean, predictions based on dividend ratios, and recently suggested combination forecasts. The findings are robust against a wide range of specifications. Further analyses show that tower building also predicts international stock market returns. One explanation for these patterns is that tower building is indicative of over-optimism. Widespread over-optimism could lead not only to tower-building, but also to overvalued stock markets. The rational asset pricing explanation is that in periods of low risk aversion, financing of large-scale projects such as record-breaking towers is easier, and expected returns are lower. The explanations are difficult to separate empirically. There is no significant influence of financing conditions or sentiment on tower building. However, unlike in other models studied in the literature, imposing a non-negativity constraint on return forecasts does not increase predictive accuracy. This provides indirect evidence that the predictive content of tower building is at least partly related to overvaluation.

    The idea is that the plans to build a monster new building are correlated with the mindset of a market bubble. The Woolworth Building opened in 1913 right as everything was falling apart. The Empire State Building was built during the depths of the Great Depression. The Petronas Towers in Kuala Lumpur were built just in time for the East Asian meltdown.

    (HT: CXO Advisory)

  • Happy 115th Birthday, Dow Jones Industrial Average!
    , May 26th, 2011 at 9:01 am

    The Dow Jones Industrial Average ($DJIA) was born 115 years ago on May 26, 1896. To give you an idea of how long the Dow has been around, its birth is the mid-way point between the surrender of General Cornwallis at Yorktown and today.

    The index was the brainchild of Charles Dow, who was the editor of the Wall Street Journal. When the index started, it only had 12 stocks. The list grew to 20 stocks in 1916, and it reached its present total of 30 stocks in 1928.

    The index has only changed 48 times over the last 115 years. In fact, the Dow has had two separate streaks of going 17 years without a single change — once from 1939 to 1956, and again from 1959 to 1976.

    Only General Electric ($GE) is left of the original 12 from 1896, although some others have been long-time members. ExxonMobil or Standard Oil of NJ ($XOM) has been a member since 1928. Procter & Gamble ($PG) joined in 1932 and DuPont ($DD) was added in 1935. Actually, DuPont rejoined the Dow. A few other stocks like Coca-Cola ($KO) and International Business Machines ($IBM) were taken out only to be put back in.

    The Dow’s history with IBM is a good investing lesson. The keepers of the index decided to kick out IBM in 1939 only to change their minds 40 years later and bring it back. Over those 40 years, shares of IBM soared 22,000%.


    If IBM had been in the index, the Dow would have broken 1,000 in 1961 instead of 1972. By my rough estimate, the index would be over 4,000 points higher today. If that wasn’t bad enough, the Dow was subsequently punished by IBM’s addition in 1979 as that marked a period of slow growth for the company.

    I can’t hide my feelings. I think the Dow is a lousy index. I rarely refer to it here on the blog. The reason is that it’s just 30 stocks and the index is weighted by price instead of by market value. Perhaps that made sense 80 years ago, but it’s not needed today. The only reason the Dow is still in the news is because the index is owned by the Wall Street Journal.

    Still, I have to give credit for Charles Dow for starting the index. Anything that’s still quoted 115 years later deserves a tip of my cap.

    Here’s to 115 more!

    I remember the 1987 crash and it seemed like a bazillion points yet it’s barely a blip on the long-term chart. Here’s the Dow adjusted for inflation (the CPI only started in 1913). Even 60 years after the 1929 peak, the Dow was struggling to make an inflation-adjusted capital gain. Notice how the 2009 low nearly matched the 1966 high.

  • Morning News: May 26, 2011
    , May 26th, 2011 at 7:49 am

    ECB May Have Leeway for Greek Restructuring

    Euro Crisis Looms for Group of 8

    Qaddafi Reportedly Stashes Billions in Western Institutions

    Gold Knocked Off 3-week Peak by Silver Slide

    S.E.C. Adopts Its Revised Rules for Whistle-Blowers

    Lenovo’s Profit Triples on Corporate Demand

    Sony Forecasts $975 Million Profit for Year

    UBS Weighs Moving Investment Bank Out of Switzerland

    Citigroup Lags in Debt Deals as Pandit Rebuilds

    Tiffany Reports Strong First Quarter Results

    Burberry more than doubles profit, revenue up 27%

    The Yahoo Debate: Break Up or Not

    Martha Stewart Living Seeks Buyer or Partner

    Hedge Fund Star Calls for Microsoft CEO to Go

    Paul Kedrosky: Oil Prices and Finger Monkeys

    Todd Sullivan: ValuePlays TV 5/24/2011

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  • “Bond Yields Are So Low, There’s No Profit”
    , May 25th, 2011 at 1:20 pm

    I often hear investors whine that since bond yields are already so low, there’s almost no room to profit.

    Actually, there’s lots of room. If a perpetuity (a bond yield that never matures) sees its yield drop in half, that means the price doubled. That’s even true if the yield drops from 1% to 0.5% or even 0.0001% to 0.00005%. It’s always a double.

    My point isn’t to suggest that you should expect perpetuities to double. Earlier today, Kelly Evans of the WSJ tweeted that it wouldn’t surprise her to see the 30-year T-Bond below 3%.

    Right now, the 30-year is yielding about 4.25%. A move from 4.25% down to 3% equals a rise in price by about 25%. Don’t let the math fool you. Big gains can still be made from low yields — assuming yields continue going lower.

  • Stock Size and Exchange Rates
    , May 25th, 2011 at 12:03 pm

    Here’s a post I’m aiming at new investors:

    I’m a big fan of the St. Louis Fed’s economic data page. They have gobs of data and yet can customize your graphs.

    I made the one below and it shows the S&P 500 divided by the Wilshire 5000 which is the blue line and it follows the left axis. This shows the relative performance of large-cap stocks. When the blue line is rising, large-caps are leading the market. When it’s falling, as it has for several years now, that means that small-caps are leading.

    The black line is the trade-weighted exchange rate index for the U.S. dollar and it follows the right axis.

    I think this is an interesting graph because at first blush, it’s not obvious that these two data sets should be related. But they are.

    Let me explain: Large-cap companies, especially the giants in the S&P 500, are heavily weighted toward the massive multinationals. The companies is the Wilshire 4500 (stocks in the Wilshire 5000 but not in the S&P 500) are much smaller, and by extension, have businesses that are more domestically focused. Of course, we’re talking about averages, not every stock.

    When the U.S. dollar rises against foreign currencies, that makes U.S.-made products less competitive on the world market. American companies that already have a broad global reach — think, Disney ($DIS) or General Electric ($GE) — will tend to do well relatively speaking. Domestic manufacturing, however, will suffer. This is reflected in the under-performance of small-cap stocks.

    It’s really not about size at all but rather something else: currencies. But size encompasses that bias. It’s also not a perfect match, but you can see that there’s a relationship that’s held up for ten years. While the lines aren’t dating, I think we can call them “it’s complicated.”

    The takeaway is that a lot of variables go into the soup that makes up equity prices, and many of these currents you can’t easily see. Your stock is an asset just like any other, and it’s competing against every investment in the world for capital.

    When the market makes a decision, it has its reason. It can be a terrible reason, but it’s a reason nevertheless.

  • RIP: Mark Haines
    , May 25th, 2011 at 10:53 am

    Sad news today. CNBC anchor Mark Haines has passed away at age of 65.

    Veteran journalist Mark Haines, a fixture on CNBC for 22 years, died unexpectedly Tuesday evening. He was 65 years old.

    Haines, founding anchor of CNBC’s morning show “Squawk Box,” was co-anchor of the network’s “Squawk on the Street” program, providing insight and commentary sometimes humorous and occasionally acerbic.

    CNBC President Mark Hoffman called Haines a “building block” of the financial networks’ programming. Hoffman said Haines died at his home.

    “With his searing wit, profound insight and piercing interview style, he was a constant and trusted presence in business news for more than 20 years,” Hoffman said in a statement to CNBC employees. “From the dotcom bubble to the tragic events of 9/11 to the depths of the financial crisis, Mark was always the unflappable pro.

    “Mark loved CNBC and we loved him back. He will be deeply missed.”

    I always loved Haines’ style. He refused to let guests bully him. Check out this classic clip when Barney Frank tried to bully Haines. Let’s just say Frank didn’t come out the winner:

  • Fastenal ($FAST) — A 299-Fold Winner
    , May 25th, 2011 at 8:09 am

    Here’s another edition in our continuing series of great companies that no one’s heard of. Well…in this case, many people have heard of Fastenal ($FAST) but few realize how greatly this stock has performed.

    Here’s the company description from Hoover’s:

    Some might say it has a screw loose, but things are really pretty snug at Fastenal. The company operates more than 2,360 stores in all 50 US states as well as in Canada, Mexico, Puerto Rico, Asia, and Europe. Its stores stock about 690,000 products in about a dozen categories, including threaded fasteners (such as screws, nuts, and bolts). Other sales come from fluid-transfer parts for hydraulic and pneumatic power; janitorial, electrical, and welding supplies; material handling items; metal-cutting tool blades; and power tools. Its customers are typically construction, manufacturing, and other industrial professionals. Fastenal Company was founded by its chairman Bob Kierlin in 1967 and went public in 1987.

    This week, FAST split its stock 2-for-1. This is the seventh split since it went public. The totals are six 2-for-1 splits and one 3-for-2 split which adds up to 96-for-1.

    Shortly after the IPO and one week after the market crash in October 1987, shares of FAST closed at $10-3/8 (yuck…I hated those fractions). Adjusted for splits, that’s 10.81 cents per share. This year, the company will earn about that much each month.

    FAST closed yesterday at $32.32 per share. So in less than 24 years, the stock is up 299-fold. An initial investment of $10,000 would be worth nearly $3 million today — and that doesn’t include dividends. Annualized, that works out to 26.8% per year for nearly a quarter of a century.

    Last month, Fastenal said that Q1 profits rose 42% and revenue jumped 23%. The company earned 54 cents per share which was three cents better than estimates (those numbers aren’t adjusted for this week’s 2-for-1 split). Wall Street currently expects full-year earnings of $1.17 per share.

    Here’s a look at the long-term chart. FAST has beaten the S&P 500 so badly that the index looks like a flat line in comparison.

  • Morning News: May 25, 2011
    , May 25th, 2011 at 7:48 am

    French Minister to Seek Top I.M.F. Job

    Why The BRIC Revolt At The IMF Is A Huge Deal With Devastating Implications

    OECD Cuts Japan GDP Forecast Again, Urges Easy Monetary Policy

    Greece Should Hold Referendum on Reform Program, SEV Head Says

    China’s Utilities Cut Energy Production, Defying Beijing

    South African Rand Slumps to Lowest Versus Dollar in More Than a Week on Risk Aversion

    Gold May Climb as Concern About European Sovereign Debts Increases Demand

    U.S. Suit Sees Manipulation of Oil Trades

    Tumult? AIG’s ‘Re-IPO’ Remains on Go-Ahead

    Russian Internet Firm Yandex Leads IPO Pack

    Summary of Reported EPS for First Quarter of ’11 for S&P 500

    Costco 3Q Profit Rose 6%; Sales Growth Offset Lower Margins

    Toll Reports Second-Quarter Net Loss After ‘Disappointing’ Selling Season

    Liberty Media Plans A Hands-Off Role At Barnes & Noble

    An Econometric Approach to Tactical Asset Allocation

    Brian Shannon: Stock Market Video Analysis 5/24/11

    Stone Street: Goodbye Ruble Tuesday

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  • Target Vs. TJX Companies
    , May 24th, 2011 at 2:34 pm

    I really don’t have anything profound to say with this post but I was struck by the large divergence between Target ($TGT) and TJX Companies ($TJX).

    Normally, companies in the same industry tend to track each with some minor variation — and these companies did until about three years ago. Since then, TJX has raced ahead of Target, and the gap has grown even larger this year.

    Target still has a larger market cap than TJX does ($34 billion to $21 billion). TJX’s stock dropped earlier this month after missing earnings by two cents per share. That broke an impressive streak of meeting or beating. Meanwhile, Target had a good earnings report last week although it hasn’t experienced the profit growth recently that TJX has.

    TJX now has a distinct valuation premium over Target. Target currently goes for 11.74 times Wall Street’s consensus for this year’s earnings, and 10.88 times next year’s. TJX goes for 13.69 times this year’s estimate and 12.24 times next year’s.

    This is a good example of the lesson I’ve told investors many times — don’t concentrate so much on what a company does. Instead, focus on how well they do it. I can’t tell you how many times investors ask me about some stock that’s supposed to be the next “fill in the blank.”

    TJX isn’t the next anything, but they executed their business very well and the stock has been handsomely rewarded.

  • Putting LinkedIn’s Price Into Context
    , May 24th, 2011 at 2:01 pm

    How expensive are shares of LinkedIn ($LNKD)?:

    Surging demand for social-media stock and a comeback in venture-capital IPOs propelled LinkedIn to a high of $122.70 in its first day of trading from an initial price of $45. With a market value of $8.45 billion, the company must boost revenue by 148 percent a year, twice its growth rate since 2009, to bring its price-sales ratio in line with the Dow Jones Internet Services Index by 2013, Bloomberg data show.

    “This is not something we even consider investing in,” said Haverty, who helps oversee $35 billion in Rye, New York. “This is a sideshow. It’s a magic show,” he said. “The only question for the investor is how soon they should sell.”

    I think when most people say “this time is different,” they really mean, “this time is different because now I own the stock.”