Archive for 2011

  • The Bull Turns Two
    , March 9th, 2011 at 11:32 am

    Two years ago today, the S&P 500 closed at 676.53. That was the market’s lowest close since September 12, 1996. The Dow was in even worse shape. Adjusting for inflation, the Dow was basically unchanged over the preceding 43 years.

    As low as the market was, some folks were saying that it was headed still lower. In an article from exactly two years ago today, Bloomberg noted that David Rosenberg thought the S&P 500 “may bottom out at 600 in October.”

    Bloomberg quoted Nouriel Roubini as saying “it’s highly likely it goes to 600 or below.” His reasoning was that the S&P 500 would earn $50 in 2009 and investors would pay 12 times that.

    Sorry, professor. As it turned out, the S&P 500 earned $56.86 in 2009 but investors were willing to pay a lot more than 12 times earnings. In fact, the index broke 1,130 just before 2009 ended which was close to 20 times earnings.

    Why were investors willing to pay so much? Because earnings continued to recover. Last year, the S&P 500 earned $83.78 and Wall Street currently expects $96.19 for this year. Even now, the S&P 500 is trading at 13.65 times this year’s expected earnings which is a fairly modest valuation by historical standards.

    Did the perma-bears welcome the rally? Nope; they castigated it at every turn. This has been the most hated rally in Wall Street history:

    Analysts Turning Bearish on S&P 500 After 14% Rally
    Morgan Stanley Says S&P 500 to Drop 25%, Cuts Outlook
    S&P 500 Overvalued by 40%, Set to Fall, Smithers Says
    By Most Measures, Stocks No Longer Look Cheap

    But the numbers tell the truth. Since the end of February 2009, the market value of the Wilshire 5000 has increased by $6.6 trillion which is more than $20,000 per every American. The S&P 500 made its fastest double since the Great Depression and includes a 16% drop during the spring and summer of 2010.

  • The Analysts Come Up Short
    , March 9th, 2011 at 9:42 am

    What factors work best when looking at stocks? Three academics (Kateryna Shapovalova, Alexander Subbotin and Thierry Chauveau) took a look. Here’s an excerpt from their paper, “Returns Premia on Company Fundamentals.”

    Several accounting fundamentals do generate significant return premia, regardless of whether the sensitivities to the conventional systematic risk factors and price momentum are controlled for or not. Testing a large set of accounting fundamentals, we find that the book-to-price ratio, company size, past year sales growth and the amount of reinvested return on equity (“internal growth”) have the most pronounced impact on returns. Surprisingly, indicators related to earnings and their growth and analysts’ forecasts have relatively small impact. Besides, indicators computed over the past year contain more information than the long-term averages.

    This isn’t very surprising. It really doesn’t matter which value factor you look at; they all basically measure the distress factor — how much the market is discounting the stock. Much of what the analysts have to say is already factored in.

    With a study like this, I think the key is to see when a “price to something” variable is down but some other factor (like ROE) is still healthy.

    I should add that I really wish they’d ditch all that three-factor model stuff.

  • Morning News: March 9, 2011
    , March 9th, 2011 at 7:04 am

    Oil Falls a Second Day on OPEC Supply Speculation, Rising U.S. Stockpiles

    Brent Pushes to $114 as Libya Effect Persists

    Bond Yields Soar in Portugal as Euro Drops; Stocks, U.S. Futures Fluctuate

    Affordable Housing Highlighted in Curbing China’s Soaring Home Prices

    Birinyi Buying as Biggest Bull Market Since ’55 Hits Third Year

    Rising Gas Cost Finds the Nation Better Prepared

    George Soros Says U.S. Spending Cuts to Brake Economy

    Berkshire Takes $2.25 Billion in Dividends From Burlington

    BofA Segregates Almost Half of its Mortgages Into ‘Bad Bank’

    Daimler,Rolls-Royce EUR3.2 Billion Offer For Tognum Undervalues Co -Holder

    European Aerospace/Defense Giant EADS Swings to Fourth-quarter Profit

    Coffee Talk: Starbucks Chief on Prices, McDonald’s Rivalry

    Toyota Aims for 10 Million Annual Car Sales

    Paul Kedrosky: Does Saudi Arabia Have Spare Capacity?

  • Some Numbers to Consider
    , March 8th, 2011 at 9:10 pm

    From the WSJ:

    New Chinese government figures show its national debt load remains low compared with other major economies. But including the debts of local governments and many parts of the state-owned banking sector, as many economists say is proper, shows the constraints facing Beijing in the fight against inflation, its top economic priority.

    In a report issued during the annual session of the National People’s Congress, China’s legislature, the Ministry of Finance said central government debt at the end of 2010 was $1.03 trillion. That number is equal to about 17% of China’s gross domestic product, far below the levels of the U.S., Japan, and major European countries.

    China’s government debt is mostly held domestically. In contrast, about half of the U.S. federal government’s debt is held by China and other foreigners, a source of anxiety among policy makers and the public who fear it makes the U.S. vulnerable to pressure from foreign creditors.

    China, meanwhile, sits on foreign-exchange reserves that have grown to $2.85 trillion.

  • Buy List +1.53%
    , March 8th, 2011 at 7:16 pm

    Today was a huge day for the Buy List. We were up 1.53% compared with just 0.89% for the S&P 500. For the year, the Buy List is up 6.50% compared with 5.10% for the S&P 500.

    Here’s a look at how our stocks performed today:

    Symbol Gain/Loss
    LUK 4.22%
    DLX 3.53%
    MOG-A 3.48%
    F 3.28%
    SYK 2.78%
    WXS 2.70%
    JPM 2.68%
    JOSB 2.12%
    ORCL 2.01%
    MDT 1.67%
    FISV 1.55%
    BDX 1.19%
    AFL 0.76%
    JNJ 0.51%
    GILD 0.46%
    ABT 0.41%
    RAI 0.32%
    SYY 0.14%
    BBBY -0.63%
    NICK -0.88%

  • The S&P 500’s 50-DMA Streak Is In Jeopardy
    , March 8th, 2011 at 10:13 am

    The market is currently up today. If this rally holds up, today will be the 129th day in a row that the S&P 500 has closed above its 50-DMA.

    However, the streak is starting to look a bit tired. Yesterday was the first time we closed within 1% of the 50-DMA since November.

    Here’s another look at the longest 50-DMA streaks going back to 1932:

    Begin End Days
    4-Jan-95 10-Jan-96 257
    10-Apr-58 25-Nov-58 159
    14-Dec-42 21-Jun-43 156
    24-Jul-06 27-Feb-07 149
    4-Nov-60 12-Jun-61 148
    5-Apr-35 20-Sep-35 140
    2-Sep-10 08-Mar-11 129
    29-Nov-63 1-Jun-64 126
    31-Mar-89 25-Sep-89 123
    23-Nov-70 17-May-71 120
    25-Jan-83 12-Jul-83 116

  • Raven Industries — Up 210-Fold
    , March 8th, 2011 at 8:39 am

    One of the lessons I give investors is that little-known stocks or “boring” companies can be great investments. In fact, many of these types of investments have a distinct advantage over more glamorous sectors.

    The problem with investing in an embryonic industry is that there are so many players and improvements occur so rapidly that it’s hard to know who will win out.

    I’ll give you a good example. Check out the number of defunct car companies. Not many made it past about 1922 or so. Ever since I remember, we’ve always talked about the Detroit’s “Big Three.” So we went from many dozens to three, even though they’re not really three anymore.

    So I tend to shy away from high-flying stocks in popular sectors. I like predictable businesses in industries I know will be around. The lesson for investors is to concentrate on how well a business is run and not so much on finding the next “Google.” It really is astonishing to see how little interest there is in well-run but dull businesses.

    Recently, I gave you the example of Seaboard (SEB). Here’s another little-known gem, Raven Industries (RAVN).

    For starters, they’re based in Sioux Falls, SD, so I like them already.

    The company has a market cap of just under $1 billion. They’re not in any of the major indexes—and only a few analysts on the Street follow the stock. Raven has less than 1,000 employees and daily trading volume averages about 66,000 shares. In other words… Snoozesville.

    Here’s a company description from Hoovers:

    Quoth the Raven, “Reinforced plastic, electronics, flow control devices, and balloons!” Raven Industries’ engineered films division does make reinforced plastic sheeting for various applications, including hot air balloons! Its electronic systems division offers electronic manufacturing services, as well as design support, material procurement and management, and eco-stress testing. An applied technology leg manufactures high-tech agricultural aids, from global positioning system (GPS)-based chemical spray equipment to field computers and steering systems. Raven’s Aerostar subsidiary produces high altitude research balloons, parachutes, and protective wear used by US agencies. Goodrich is a major customer.

    Steering systems!

    Despite Raven’s low profile, the stock has been a massive performer over the last 30 years. Since March 1981, shares of RAVN are up 210-fold (that’s 20,900% for liberal arts majors). That’s an average of 19.5% per year. Raven has been slightly outperformed by Berkshire Hathaway (BRKA). Both stocks have beaten the S&P 500 so badly that the index looks like a girlie flat line in comparison.

    I’d bet Raven has done ever better than Buffett over the years since they pay out a dividend and Berkshire doesn’t. The company has sweetened its dividend for the last 24 years in a row. Expect #25 very soon.

    Currently, RAVN pays out a quarterly dividend of 16 cents per share which works to a yield of 1.2%. On top of that, Raven has also paid out a special dividend every so often. I love when companies do that. They’re basically saying “Yeah, we’ve so profitable, here’s some extra cash we don’t know what to do with.” In 2008 and 2010, RAVN paid special dividends of $1.25 per share.

    If you own Raven, the next time someone asks you where you’re investing, be sure to say, “Reinforced plastic, electronics, flow control devices, and balloons!”

    It’ll be our inside joke.

  • Smith Barney Name May Go Away
    , March 8th, 2011 at 7:06 am

    The financial crisis has unquestionably altered the face of Wall Street. Today’s WSJ reports that Morgan Stanley (MS) is considering getting rid of the name Smith Barney.

    If Smith Barney were to be dropped it would join a raft of Wall Street icons to disappear. Morgan Stanley itself killed off the Dean Witter name, and Citigroup offed Salomon Brothers. The financial crisis claimed the names Lehman Brothers and Bear Stearns.

    Morgan Stanley now holds 51% of the joint venture, Wall Street’s biggest brokerage force, and has said it plans to buy the rest in the coming years. Morgan Stanley Chief Executive James Gorman has made the retail brokerage business a key part of his strategy for the firm.

    A Morgan Stanley spokesman declined to comment specifically on a potential name change, but said “we regularly survey clients about a lot of things relevant to our brand, and I wouldn’t read a whole lot into this.”

    Here’s one of John Houseman’s Smith Barney ads with the famous tagline, “They make money the old fashioned way. They URRHNN it.”

  • Morning News: March 8, 2011
    , March 8th, 2011 at 6:47 am

    Oil Slips as OPEC Discusses Output; Goldman, Merrill Raise Price Forecasts

    German Factory Orders Rose in January on Surging Domestic Demand

    Hong Kong Stocks Advance to One-Month High as Banks, Gold Gain

    Greek, Spanish, Portuguese Bonds Drop as Debt Sales Test Investor Appetite

    U.S. Home Sales Accelerate as Prices Decline Amid Rebound

    Exchanges Duel for Customers

    Attorneys General Push for Loan Reductions, Seek Bank Deal Within 2 Months

    Debit Card Fees Prompt a Push Near Deadline

    Hitachi Rises on $4.3 Billion Sale of Hard-Drive Unit to Western Digital

    Boeing Deals Show Rising Clout of Asian Airlines

    Goldman’s Pariah Status Fades as Broadbent Joins BOE Monetary Policy Committee

    Subway Runs Past McDonald’s Chain

    Howard Lindzon: Discussing Disqus…The Case for Style, Instinct and Less Due Diligence

    Paul Kedrosky: LICs Heart BRICs

    Joshua Brown: TIME’s Embarrassingly Useless “Top 25 Financial Blogs” List

  • A Case of the Mondays
    , March 7th, 2011 at 2:35 pm

    This is just an ugly day of trading. The S&P 500 has been as low as 1,303. The index has to stay above 1,297 to remain above the 50-DMA.

    Once again, the cyclicals are getting whacked hard. The Morgan Stanley Cyclical Index (^CYC) has been down as much as 1.82%. The CYC-to-S&P 500 ratio will likely close at its lowest level since November.

    The Buy List is down with the overall market. Some cyclicals like Ford (F) and Moog (MOG-A) are getting dinged. I think Oracle (ORCL) looks very good below $32 per share.

    Outside the Buy List, I see that Cisco (CSCO) is now at its lowest level in 20 months. I hate to think of all that money wasted on share buybacks.