Archive for August, 2015
There Are No Hacks in the Market
Eddy Elfenbein, August 31st, 2015 at 1:32 pm
When I was in college, my friends often came up with crazy “can’t miss” business ideas. One week, they were going to sell imported leather goods. Another week, they were going to scalp concert tickets. They always knew somebody who knew somebody who probably knew somebody else.
It didn’t take long for me to realize that these business ideas rarely involved much work on their part. Instead, they were transactions that exploited some apparently unfilled gap in the market. Not surprisingly, these business ideas never worked out. The lesson is that there’s no way to hack the economy.
I thought of that as I read Josh Brown’s recent post “Computers are the New Dumb Money.” This past week was an unhappy one for computerized trading. Josh relayed the story of hearing a quant saying he “could write a program that crushes the market in my sleep.” Yeah, sure. A $20 trillion market can be so easily hacked.
To be sure, there are patterns that emerge which can be exploited for some time. Then it stops and the computers are never told when. As Josh said, “The problem with computers is that they can’t be programmed with humility.”
This is also why I tell investors to steer clear of stock screeners or any over-systemized investing approach. They may work, and they’ll keep on working—until they don’t. It’s a very reassuring thought that very few hedge funds have beaten Smuckers (SJM), the jelly people.
I take back what I said before; there really are ways to hack the economy. For example, hard work. A college student can wake up early on a Saturday and mow someone’s lawn. They can do a good job and get referrals. Pretty soon, the student can make some decent spending money.
In the stock market, there are hacks as well. For example, value investing. Time after time, academic studies have shown that it works, and in markets all around the world. For all the evidence, you’d think more people would pay attention. Instead, they’re buying BABA for a quick buck. It’s about to pop. I heard it from someone who heard it from someone….
Stocks Yielding 3% in the S&P 500
Eddy Elfenbein, August 31st, 2015 at 10:38 am
I count 112 stocks in the S&P 500 that are currently yielding more than 3%. Not all are utility stocks. Some of the 3%-ers include:
Johnson & Johnson (JNJ)
Procter & Gamble (PG)
General Mills (GIS)
Emerson Electric (EMR)
Waste Management (WM)
WSJ on Signature Bank
Eddy Elfenbein, August 31st, 2015 at 9:23 am
Signature Bank is a throwback to a simpler time in banking, a low-profile firm with a plain-vanilla business model focused on lending and deposits.
Then again, it is also one of the country’s quirkiest and fastest-growing banks, with an unusual collection of high-profile fans.
Among the bank’s admirers are former Congressman Barney Frank, who recently joined its board, and hip-hop producer Irv “Gotti” Lorenzo, who calls himself a Signature customer for life after the bank stood by him when he was facing money-laundering charges.
The New York bank, with its headquarters on Fifth Avenue in Manhattan, maintains only a handful of branches, most in the upper floors of office towers. By lending primarily to private businesses and affluent individuals in the New York metropolitan area, Signature has grown in its nearly 15 years of operation to about $30 billion in assets, making it now one of the 50-biggest banks in the U.S.
Investors, too, have discovered Signature: Its shares have increased more than 345% over the past decade, crushing the more-than-25% decline in the KBW bank index over the same period.
Fueled by 23 consecutive quarters of earnings growth, the bank has seen its asset growth outperform all other banks with more than $20 billion in assets as of the end of July, many of which have significantly more complicated structures and balance sheets.
“Banking in and of itself is a fairly simple business: You take deposits and make loans,” said Christopher McGratty, an analyst at Keefe, Bruyette & Woods. “These guys do that exceptionally well.”
Read the whole thing.
Morning News: August 31, 2015
Eddy Elfenbein, August 31st, 2015 at 7:07 am
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The S&P 500 Gained 0.91% Last Week
Eddy Elfenbein, August 30th, 2015 at 9:23 pm
I just have to point out that in all the recent drama, the S&P 500 gained 0.91% last week. If you hadn’t followed last week’s market and only looked at Friday’s closing numbers, you probably would have thought it was a dull week for trading.
The futures market for the S&P 500 is currently down about 1.1% so we can expect a lower open. Beware. There will be more volatility next week.
Today, Jon Hilsenrath reported in the WSJ that the Fed is still ready to raise rates later this year. That shouldn’t be much of a surprise. They’ve been sending strong signals lately. A minor, albeit unpleasant, stock market decline won’t change their minds.
During the Federal Reserve Bank of Kansas City’s annual economic symposium here, many policy makers signaled that stock-market volatility and China’s woes haven’t seriously dented their view that the U.S. job market is improving, and that domestic economic output is expanding at a steady, modest pace.
Inflation might remain low for longer thanks to falling oil prices and a strong dollar. Officials will continue to keep a close watch on markets and China. But they hope U.S. consumer-price inflation will start inching toward their 2% annual target as the economy’s untapped capacity gets used up, leaving them in position to start raising rates after several months of forewarning.
“There is good reason to believe that inflation will move higher as the forces holding inflation down—oil prices and import prices, particularly—dissipate further,” said Fed Vice Chairman Stanley Fischer in comments delivered to the conference, which ended Saturday.
Finally, today is Warren Buffett’s 85th birthday. We wish him a happy birthday. Here he is in 1962:
More Good Economic News
Eddy Elfenbein, August 28th, 2015 at 12:25 pm
This morning, we learned that personal income rose 0.4% last month while spending rose by 0.3%. This is one of our first looks at data for Q3.
Economists say that underlying strength, also highlighted by a rebound in business spending, buoyant housing and labor markets, as well as bullish consumer confidence, gives the economy muscle to weather the fallout from the markets rout.
The fairly upbeat consumer spending report also suggested the economy maintained some of its vigor from the second quarter, when it expanded at a 3.7 percent annual rate.
Last month, spending on long-lasting goods such as automobiles increased 1.1 percent, reversing June’s 1.1 percent drop. Auto purchases accounted for about half of the increase. Outlays on services like utilities rose 0.2 percent.
It seems like the market has calmed down today. We started lower, then went briefly green, then lower again. I won’t believe any move has legs until the VIX closes below 20. It’s currently at 26.
CWS Market Review – August 28, 2015
Eddy Elfenbein, August 28th, 2015 at 7:08 am
“Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer
I’m going to forego our normal format this week in order to better address this week’s dramatic stock market. Obviously, this was one of the most hectic and volatile weeks in recent stock market history.
I won’t bother to describe each of the market’s twists and turns. The short version is that the S&P 500 plunged and soared, then plunged and soared some more. Each day, the final 30 minutes of trading saw convulsions that were epic in their own right. The S&P 500 closed Thursday at 1,987.66—perhaps a tip of the cap to Black Monday 28 years ago.
Check out the action:
Instead, I want to step back and discuss how we go about investing and why we don’t let ourselves get rattled during times like this. I didn’t predict what was going to happen this week, but our entire strategy is based on the idea that weeks like this come along and that there’s not much you can do about it. Periodically, stocks drop. That’s all there is to it. As Hyman Roth said, “this is the business we’ve chosen.”
In another sense, we were completely prepared for this week. The 21 stocks on our Buy List were superior companies last week, and they remain so this week. That’s not to say that the Buy List didn’t go down. It did. But our style of investing doesn’t involve madly dipping in and out of the market. We don’t use exotic options or margins. Nor do we play with commodities.
Our philosophy is simple. We focus on stocks—very good stocks—and we hold onto them through the storms. Sometimes stocks drop for no good reason. As Jim Cramer said, “Every once in a while, the market does something so stupid it takes your breath away.”
I’ll give you an example. Let’s look at Express Scripts (ESRX). I should probably spend more time explaining how our Buy List stocks are in the top tier of publicly traded companies. Our stocks are the best of the best. That’s not easy to express without disappearing into a mess of numbers, but I’ll try.
At its low on Monday, ESRX was going for $68.06 per share. That’s a little over 11 times next year’s earnings. This is a company whose business model is barely impacted by what happens in China or at the Federal Reserve. Nevertheless, the shares plunged 20% in six minutes. It really does take your breath away.
Now for some numbers. Here are Express Scripts’s earnings-per-share since 2009; $1.79, $2.50, $2.97, $3.74, $4.33 and $4.88. I love those steady increases. A few weeks ago, Express Scripts raised their EPS range for this year to $5.46 to $5.54. How, in any sane world, could a company like this lose 20% of its value in minutes? There aren’t many companies that have consistently increased their earnings like that.
The lesson for investors is that markets move in two gears. Upward is slow and boring. Downward is fast and chaotic. Most of the market’s best days aren’t in good markets. Instead, they’re counter rallies during rough markets. When the S&P 500 is at an all-time high, the daily volatility is 36% less than normal.
This week’s market is hardly unique. We’ve had lots of periods far worse than this. What’s different is that we’ve never gone from a period as uneventful as this year’s market to one as stressful as this week’s. The S&P 500 had a six-month run of never leaving a 90-point band. You often heard me talk about how long the trading range had lasted. For so much of this year, the market was flat as a pancake. Then—WHAMMO! The S&P 500 lost 212 points in four days, and then it soared 120 points in the next two days!
Here’s an interesting stat. If we took all 919 trading days since the beginning of 2012, the S&P 500 had consecutively its ninth-worst, second-worst, worst and 41st-worst days. That was followed by the best and fourth-best.
Let me warn you that the chaos isn’t over just yet. We’re in for some more twists and turns. As impressive as the rallies were on Wednesday and Thursday, they were narrowly focused. In fact, 65% to 70% of companies in the S&P 500 lagged the index on both days.
Panic in world markets: a photo gallery pic.twitter.com/vcRYfIijTh
— Andrew Palmer (@palmerandrew) August 24, 2015
I won’t even bother adjusting any of our Buy Below prices this week since I’d probably have to turn around and raise a bunch next week or the week after. The short version is that every stock on the Buy List is currently a buy. If you’ve got idle cash sitting around, there are lots of bargains. I’ll have more on that in a bit. The only exception is Stryker (SYK) which closed a few cents above its Buy Below. It could dip below at any moment, and it probably will.
A very important point to understand about this market is that it’s a market event much more than it is an economic event. This is an instance of financial markets impacting financial markets. Meanwhile, the overall economy appears reasonably healthy. A few weeks ago, I said that I expected Q2 to come in quite strong. I thought it could be as high as 3.0% to 3.5%. Unfortunately, the initial report showed growth of just 2.3%.
So was I wrong? Not so fast! This week, Q2 GDP was revised up to 3.7%. That was the third-best quarter for GDP since the start of 2012. Not only that, but Wednesday’s durable-goods report was quite strong. Orders for durable goods rose 2% last month, and that comes after a 4.1% increase for June. This week, the Census Bureau said that new-homes sales for July rose 25.8% over last year. The economy, of course, is still far from robust. But it is improving, and there’s no sign of a recession.
I’ve given up trying to predict when the Fed will raise rates. All we need to know is that rates are going up soon. Exactly when isn’t so important. Some people seem to think that this week was Wall Street’s way of telling Janet Yellen to back off. Yeah, I’m not so sure. The Fed seems to have made up its mind. The two-year Treasury yield, which is one of the most sensitive to a rate increase, fell from 0.7% last week to below 0.55% on Monday. Now it’s back up to 0.7%.
One of the more arresting facts of this past week was that there was almost no company-specific news for our Buy List stocks. We had no earnings reports or dividend announcements. There were a few analyst upgrades. CR Bard (BCR) was upgraded to a buy at Goldman Sachs. Keefe, Bruyette and Woods raised AFLAC (AFL) to outperform. They have a $68-per-share price target on AFLAC. Ross Stores (ROST) was upgraded to a buy at Buckingham Research. Perhaps the most intriguing news is that Ford Motor (F) is thinking about bringing back the Ford Bronco.
You’ll often hear investors say that they’re “waiting for the dust to settle.” But that’s an event that never occurs. No one rings a bell and tells you, “the dust, my lord, has settled.” A shortcut to watch is the Volatility Index (^VIX). The VIX closed Thursday at 26.10. I would say that the coast is clear once the VIX closes below 20. Closing below 15 would be better.
The VIX is the market’s implied volatility over the next month. I’ll make it simple. Take the VIX and divide it by 3.46. That’s the market’s view of one standard deviation over the next 30 days. Volatility doesn’t cause bad markets. Rather, bad markets cause volatility. Personally, I don’t mind some price swings. They help turn good stocks into bargains.
Speaking of which, let me discuss a few of the stocks on our Buy List. As I said, I consider any stock below our Buy Below to be a buy. Remember that our Buy Belows are not price targets, so don’t go thinking that the biggest gap between the current price and the Buy Below represents the best bargain.
I’ve harped on Ford Motor (F) many times before, but this is a very attractive price ($13.56). Ford now yields 4.4%. A few weeks ago, they beat earnings by 10 cents per share.
Earlier, I mentioned Express Scripts (ESRX). This is a very solid company. The stock has recovered since its Monday morning swan dive, but it’s still 10% below its 52-week high.
Signature Bank (SBNY) also looks quite cheap here. The shares are nearly 15% below their 52-week high. Signature is head and shoulders above most other banks.
Microsoft (MSFT) closed Thursday at $43.90 per share. That gives the shares a yield of 2.8%. Plus, the dividend will probably be raised again next month.
I also like AFLAC (AFL) below $60 per share. Before some downgrades, the stock finally had some traction. The duck stock is now down 6% since it raised guidance.
That’s all for now. Next week is the last trading week before Labor Day. Expect more market volatility next week. We’re going to get some of the key turn-of-the-month econ reports. The ISM report comes out on Tuesday. Productivity and factory orders are on Wednesday, as is the Fed’s Beige Book. That leads us up to the big August jobs report on Friday. This could be the last jobs report before the Fed raises rates at their September meeting. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
Morning News: August 28, 2015
Eddy Elfenbein, August 28th, 2015 at 6:49 am
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Q2 GDP Revised Higher to 3.7%
Eddy Elfenbein, August 27th, 2015 at 11:37 am
The second-quarter GDP was revised higher today to 3.7%. That’s a revision from the initial report of 2.3% growth. This probably helped calm the market’s nerves.
I now feel a bit vindicated. Before the initial report on Q2 GDP came out, I said I was expecting a good number, “perhaps 3.0% to 3.5%.”
This was the fourth-best quarter for GDP growth since the start of 2012.
Morning News: August 27, 2015
Eddy Elfenbein, August 27th, 2015 at 7:09 am
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