Author Archive

  • The S&P 500 and Its Earnings
    , March 2nd, 2015 at 4:33 pm

    Here’s a look at the S&P 500 along with its earnings line. The S&P 500 is in black and it follows the left scale. The earnings line is in gold and it follows the right scale. The two lines are scaled at a ratio of 16-to-1 which means that whenever the lines cross, the market’s P/E Ratio is exactly 16. I don’t mean to imply that the market is fairly valued at 16 to 1. It’s simply a guidepost for this chart. The future part of the earnings line is based on analysts’ estimates.


    As you can see, the earnings for the S&P 500 have entered a slight rough patch. Earnings growth is expected to flatline from Q4 of 2014 through Q3 of 2015. This isn’t unprecedented, even this bull market. Earnings stagnated for the last half of 2012 and the first half of 2013, but the market did quite well.

    Starting in Q4 of this year, earnings growth is expected to ramp up again. I should add that I don’t trust the longer-term forecasts of analysts, but it’s interesting to see what the crowd expects. I also think it’s interesting how the long-term forecast usually boils down to returning to the trendline. Notice how nice and neat the last part of the yellow line is? Only a model could forecast that.

    In 2012 and 2013, the market bet that the earnings slowdown was transitory, and they were right. They’re making a similar bet now but difference is that the market is more richly valued today. See how the black line is currently well above the yellow line as opposed to mid-2012.

    If the analysts’ forecast is correct (HA!) and if the market trades at 16 times earnings at the end of 2016, that means the S&P 500 would gain less than 3% over the next 22 months.

  • Nasdaq 5,000
    , March 2nd, 2015 at 10:38 am

    Almost 15 years to the day, the Nasdaq hits 5,000:


  • Dividend Returns to Investors
    , March 2nd, 2015 at 10:14 am

    Here’s an interesting chart you don’t see often. This is the return to investors from dividends.

    This is different from the market’s dividend yield and it’s more accurate. This tells us how much money actually went to investors solely from dividends.

    I took the Wilshire 5000 Total Return Index and divided it by the regular Wilshore 5000. I then saw how much that had changed in the last year.

    In plainer terms, this isn’t just indicated dividend yield, what you most often see, but it’s the dividend yield adjust for increases or decreases in those dividends.

    During the worst of the financial crisis, the market’s indicated dividend yield rose to 4% or so. But that’s based on trailing dividends — what had been paid out. But those payout were cut. In real terms, dividends yielded investors 2.55%.

  • February ISM = 52.9
    , March 2nd, 2015 at 10:05 am

    The February ISM came in at 52.9. That’s low but still in the comfort zone. The ISM has now fallen for four straight months. The “danger area” is around the mid-40s so we’re still above that.

  • Growing Divide at the FOMC
    , March 2nd, 2015 at 9:54 am

    The Federal Open Market Committee is an unusual organization in that it has members from the Federal Reserve Board and also the regional bank presidents. They’re not the same thing and they sometimes conflict.

    Janet Yellen places a high premium on consensus, which is probably misplaced. In Washington, people seem to like consensus for the sake of saying they have a consensus.

    Lately, however, the reserve bank presidents have grown more hawkish about monetary policy. They think interest rates will need to rise by the middle of the year. But the Fed governors are much more reluctant. I understand the hawks’ view that deflation will soon pass, but I think there needs to be more evidence of that. But there has been more evidence that workers’ pay has increased. Plus there’s been high-profile news such as the workers at Walmart getting raises.

    Reuters notes:

    Seven of the Fed’s current 17 members have now said they at least want the option of a June tightening on the table, or have pushed in general for an earlier increase amid an expectation that wages and inflation will turn higher.

    By contrast, there’s a dwindling core of officials who say publicly that the economy and labour markets in particular still have a long way to go — only four Fed members have in recent weeks clearly said that rate hikes won’t be appropriate until much later in the year or even into 2016.

    The five members of the Fed’s Washington-based board of governors, including Yellen, have spoken less definitively, though governors including Jerome Powell have said they expected strong job growth to continue. Not all of the seven who point to June vote this year on the Fed’s ten-member policy setting committee, but all participate in policy discussions.

    The FOMC meets again later this month and is expected to removed the “patient” wording from its policy statement. I bet Yellen isn’t thrilled about that move but for consensus reasons, she may have to go along. The last time the Fed raised rates was June 2006. The futures market currently thinks a rate increase will come in September or October.

    Why are higher rates so important? It all comes down to competition. Higher short-term rates provide strong incentive for investors’ money. When rates are at 0% and many stocks yield 2%, then the stock market is a no-brainer. But when they both get you 2%, then you need to be a lot more careful.

  • Best Month in Four Years
    , March 2nd, 2015 at 9:28 am

    Friday turned out to be a very good day for our Buy List. Ross Stores (ROST) climbed 6.8% on Friday to close at a new all-time high. While the S&P 500 fell 0.07% on Friday, our Buy List advanced 0.30%.

    February was a very good month for the stock market. The S&P 500 rose 5.5% for the month which was its best month since October 2011. That comes after falling 3.1% in January. For the month, our Buy List rose 8.7%. That’s very good, but as usual, I don’t want to get carried away by such short-term outperformance.

    The government reported that personal income rose 0.3% in January while spending fell by 0.2%. That means that the national savings rate increased. After adjusting for inflation, which was really deflation in January, consumer spending rose by 0.3%. It’s tempting to see the virtues of one’s personal financial as similar to the macro-economy, but that’s not necessarily the case. We actually want to see an increase in personal spending.

    The ISM report comes out later this morning. It’s fallen for the last three months.

  • Morning News: March 2, 2015
    , March 2nd, 2015 at 7:10 am

    Eurozone Consumer Prices Fall Again; Jobless Rate Hits Lowest Level Since 2012

    European Stocks Firm After China Rate Cut

    U.K. Manufacturing Growth Accelerates to Fastest in Seven Months

    Mihail Fridman Says UK Threat to Block North Sea Deal ‘Not Rational’

    China, Commodities Bust To Force Royal Bank of Australia’s Hand

    Near Fed Majority Backs June Liftoff Yellen Hasn’t Yet Endorsed

    Obamacare’s Survival Hangs on Four Words at U.S. High Court

    SEC Plans to Slevel Playing Field For Newer ETF Firms

    Wal-Mart’s Pay Hike Will Have Massive Ripple Effects in America

    NXP’s $40 Billion Freescale Merger Fuels Chipmaker Deal Frenzy

    Wells Fargo Puts a Ceiling on Subprime Auto Loans

    Apple’s Looming Watch Spurs Frenzy of Upgrades for Android Timepieces

    Berkshire Insurance ‘Superstar’ Could Fill Buffett’s Shoes

    Jeff Miller: Weighing the Week Ahead: Will the Economic News Alter Fed Policy?

    Epicurean Dealmaker: Uncle Warren Explains It All to You

    Be sure to follow me on Twitter.

  • Finally, a Raise
    , March 1st, 2015 at 7:37 pm

    American workers are finally getting something they haven’t had in a long time — a raise.

    Here’s CNBC’s Alex Rosenberg:

    After years of seeing salaries stagnate, U.S. earners are finally starting to make slightly more, with signs pointing to further wage increases to come. Yet the additional compensation could be bad news for the businesses that find themselves forced to pay up. The extra labor expense is expected to cut into profit margins, and consequently diminish returns for investors, according to some analysts.

    “What’s happening is that Wall Street and Main Street have switched places,” Eddy Elfenbein of Crossing Wall Street wrote to CNBC. “Workers are finally getting wages while corporate profit growth has stalled. In the early stages of the recovery, it was the other way around—profits soared while jobs stagnated.”

    Indeed, employee compensation is finally showing signs of life.

    In a much heralded boost, average hourly earnings for private workers rose to $24.75 in January, a 2.2 percent year-over-year increase. And thanks to a mix of higher wages and more people working, total compensation of employees in the fourth quarter rose 4.7 percent year over year, according to the revised U.S. growth report report released on Friday.

    Here’s the monthly increase in real average hourly earnings:

  • Warren Buffett’s Shareholder Letter
    , February 28th, 2015 at 9:14 am

    Here’s the latest shareholder letter from Warren Buffett.

  • Q4 GDP Revised Down to +2.2%
    , February 27th, 2015 at 9:30 am