Archive for 2013

• Morning News: November 14, 2013
  Eddy Elfenbein, November 14th, 2013 at 6:52 am

  Euro Zone Economy Stagnates as Growth Slows in Germany

  Top Japan Banks’ Second-quarter Earnings Leap Thanks to ‘Abenomics’ Bull Market

  JPMorgan’s Fruitful Ties to a Member of China’s Elite

  Spy Scandal Weighs on U.S. Tech Firms in China, Cisco Takes Hit

  New Catfish Inspections Are Posing a Problem for a Pacific Trade Pact

  Yellen Says Economy Performing Far Short of Potential

  Rejecting Billions, Snapchat Expects a Better Offer

  Swiss Chocolate Maker Barry Callebaut Opens Factory in Japan in Rare Foreign Investment Coup

  Macy’s Reverses Lackluster Quarter, Helped by Ad Campaign

  EADS Third-Quarter Profit Rises on Higher Airbus Jet Deliveries

  Apple Sticks to Winning Script in Samsung Damages Retrial

  Italy Investigates Apple for Alleged Tax Fraud

  Investment Manager Explains Why 99.5% of Americans Can Never Win

  Edward Harrison: The Deflationary Forward Guidance Threshold

  John Hempton: The FDA, Statistics and Fundamentalism

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• The Surge In Consumer Services
  Eddy Elfenbein, November 13th, 2013 at 11:38 am

  Here’s something I didn’t anticipate (which is a large category of things). The Consumer Services Sector has soared over the past few years, and it’s gotten stronger every day.

  

  What’s interesting is that this sector had basically kept up with the broader market for years. Starting in mid-2008, it started to break away. The index has barely taken a break in the last two years.

  Note that this is the Dow Jones U.S. Consumer Services Index which is similar (I believe) to the what the S&P calls its S&P 500 500 Consumer Discretionary Index.

• Morning News: November 13, 2013
  Eddy Elfenbein, November 13th, 2013 at 6:12 am

  U.K. Unemployment Falls to 7.6% in Move Toward BOE Threshold

  Central Banks Risk Asset Bubbles in Battle With Deflation Danger

  House Stalls Trade Pact Momentum

  Dollar Rises to 2-Month High Versus Yen on Fed Bets

  Gary Gensler’s Successor Has His Work Cut Out for Him

  It’s Getting Closer to Panic Time for Healthcare.Gov

  Starbucks Concludes Packaged Coffee Dispute With Kraft

  Baidu Faces Lawsuit Over Video Piracy

  CNPC, PetroChina to Buy Peru Oil, Gas Assets From Petrobras for US$2.6 Billion

  WTI Trades Near Five-Month Low as U.S. Supplies Seen Rising

  Jos. A. Bank Tries to Look Like a Catch for Men’s Wearhouse

  Rosneft Beats Rivals to Grab Enel’s $1.8 Billion SeverEnergia Stake

  Samsung Says It Will Supply Half Of The Smartphones In Africa This Year

  Joshua Brown: Everything You Need to Know About Stock Market Crashes

  Epicurean Dealmaker: The Invention of Leisure

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• The Effect of Inflation on Real Stock Returns
  Eddy Elfenbein, November 12th, 2013 at 11:54 am

  I’ve been doing more splicing of the Ibbotson data. Today, let’s look at the effect inflation has had on real stock returns. This may seem counter-intuitive but the more consumer prices rise, the worse stock prices have done. This makes sense since stocks are in competition with bonds, not consumer prices, and bonds do worse as inflation rises. At the other end, real stock markets have done very poorly under deflation. Historically, what the market appears to like best is low, stable inflation.

  Now let’s look at some numbers. I took all of the monthly returns from 1925 to 2012 and broke them into three groups; there were 75 months of severe deflation (greater than -5% annualized deflation), 335 months of severe inflation (greater than 5% annualized), and 634 months of stable prices (between -5% and +5%).

  The 75 months of deflation produced a combined real return of -46.77%, or -9.60% annualized. The 335 months of high inflation produced a total return of –70.84%, or -4.32% annualized. The 634 months of stable prices produced a stunning return of more than 177,000%. Annualized, that works out to 15.21%, which is more than double the long-term average.

  Here’s an interesting stat: The entire stock market’s real return has come during months when annualized inflation has been between 0% and 5.1%. The rest of the time, the stock market has been a net loser.

• One Full Year Above the 200-DMA
  Eddy Elfenbein, November 12th, 2013 at 10:50 am

  This Saturday will mark the one-year anniversary of the S&P 500’s last close below its 200-day moving average. This run represents both the market’s climb and its low volatility. The end result is a steady march upward.

  

• Morning News: November 12, 2013
  Eddy Elfenbein, November 12th, 2013 at 6:32 am

  U.K. Inflation Slows More Than Forecast to Least in a Year

  Compared to CFTC, Heading TARP May Have Been Easy Job

  U.S. Nears Energy Independence by 2035 on Shale Boom, IEA Says

  Gold Extends Drop to Three-Week Low on Outlook for U.S. Stimulus

  Dollar Holds Most Gains

  Alibaba Breaks Sales Record Amid China Singles-Day Rebate

  Here Are Six Reasons Twitter’s Stock Will Be Volatile

  Shire of Ireland to Pay $4.2 Billion for U.S. Drug Maker

  Vodafone Adds to Network Spending as Sales Miss Estimates

  News Corp Misses Revenue Target As Australian Income Slumps

  Transocean Yields to Icahn, Pursuing a Trendy Strategy

  World Trade Center Tower Debuts in Manhattan Leasing Test

  More Anxious Retailers Will Open Earlier on Thanksgiving

  Cullen Roche: Hatzius: Baseline for Taper is March 2014

  Credit Writedowns: Low Inflation is Creating a QE Trap

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• Transocean Soars
  Eddy Elfenbein, November 11th, 2013 at 5:22 pm

  I had been looking at Transocean ($RIG) as a possible candidate for next year’s Buy List. Unfortunately, a lot of RIG’s big discount evaporated over the past few days.

  The company said Monday that it has agreed to support a dividend of $3 per share and reduce the size of its board. It is also looking to boost margins by $800 million through cost-cutting efforts and other measures. Transocean’s stock jumped 3.8% to $55.47 in early Monday trading.

  Icahn, a minority shareholder in Transocean, had previously pushed for a $4 per share dividend but Transocean’s shareholders rejected it. Icahn, known for shaking up companies in which he invests, had also wanted several board changes.

  

  Transocean isn’t out of the running for the Buy List, but its candidacy obviously isn’t as strong.

• Are We in a Bubble?
  Eddy Elfenbein, November 11th, 2013 at 10:44 am

  The latest rage on Wall Street is to pronounce that stocks are in a bubble. This is rather unusual in that true bubbles are very rare. This is, of course, different from stocks dropping in a routine lousy market. That happens every few years.

  Do I think that stocks are in a bubble? Honestly, I don’t know. And more importantly, I don’t much care. Let me explain.

  For one, it’s odd to make a judgment about the aggregation of 6,000 publicly traded stocks. Our Buy List is pretty well diversified and that’s just 20 stocks. Where the entire S&P 500 is headed isn’t that important for a disciplined stock picker.

  Also, even if the market is about to plunge, it’s very difficult to get the timing just right. Lots of people saw the housing bubble but they were very early. The bubble kept on going. Recently I noted that if an investor bought an S&P 500 index fund just prior to the Financial Crisis, say in March 2008, and held on to today, they would have made a decent return by historical standards. Time may not heal investing wounds, but it sure can help a lot.

  

  When looking at valuation metrics, I urge investors to look at as many as they can, but never be a slave to just one. I’m particularly leery of metrics like the Cyclically Adjusted P/E ratio, also known as CAPE. The CAPE looks at the stock market’s current value weighted against the last ten years of earnings. The idea is to smooth out the economic cycles. I think this is a bad idea because stocks and earnings are themselves cyclical.

  Also, the inclusion of so much prior data is, in my opinion, an unfair anchor to carry. The historic plunge in corporate earnings in 2008-09 will still be a part of CAPE for another five years. If we look at operating earnings or dividends, we can see what an outlier that profit data is. Interestingly, the market’s dividend yield has remained fairly consistent for the last decade, except for the worse parts of the Financial Crisis.

  After two of the biggest bear markets in history is precisely when so many people are scared of another bubble. I’m reminded of people saying that shortly after 9/11 was actually the safest time to fly. Bubbles are now, apparently, everywhere.

  

  I think the best way to look at the issue is to divide bear markets into two categories. One is where price shoots far above value. That’s your classic bubble ala 1987 or 2000. The second is when value crumbles beneath price. That happened in 1990 and 2008.

  You might be surprised to hear me say that 2008 wasn’t a bubble. That’s right; stock valuations really weren’t that excessive. It was the fundamentals that turned out to be terrible. Believe it or not, stock valuations were above average in 1929, but not out of sight. The frothiest part of the bull market occurred in the last six months. The 1920s was not a decade of stock euphoria.

  I think there’s a natural tendency to reverse engineer a narrative that the world was enthralled to greed and everyone bought stocks without thought. That describes the feeling about Tech stocks in 1999, but it’s not an accurate description of today’s environment. The S&P 500 is going for about 17 times this year’s earnings. That’s about normal. The P/E Ratio has risen over the last two years, but it’s really gone from low to average, not from normal to nose-bleed territory.

  Analysts currently estimate that the S&P 500 will earn $120 per share next year. Now’s the time for skepticism. For one, analysts don’t have a great forecasting track record. The critical question is, could fundamentals soon fall apart? Are there hidden factors that might make the S&P 500 earnings, say, $90 or even less next year? This is the question to worry about.

  It’s also hard to predict things that are unexpected because, well, they’re not expected. If they were expected, they probably would be much less interesting. Also, it’s the unexpectedness of an event that makes it important.

  The things that worry me are the things we aren’t thinking about. For one, corporate profit margins are very high. I think it’s reasonable to expect that earnings growth will be below economic growth over the next several years. Though the high profit margins probably aren’t a reflection of corporate greed, rather they’re a natural byproduct of slow growth and low interest rates.

  Earnings recessions generally don’t announce themselves beforehand, but there are some useful warning signs. One good indicator is the yield curve. When short-term rates rise above long-term rates, the economy often runs into trouble soon after. For now, the yield curve is far from inverted.

  Another late cycle indicator is rising inflation. According to the latest numbers, that’s not a problem either. I also like to follow the monthly ISM reports. A reading below 45 is often a sign of trouble. Once again, we’re in the safe zone.

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• Scattered Thoughts on Twitter
  Eddy Elfenbein, November 11th, 2013 at 10:21 am

  Just about everything that could be said about Twitter’s IPO has been said. Still, I wanted to add a few scattered thoughts.

  Twitter is another good example of a stock where fundamental analysis is basically useless. By any reasonable valuation metric, Twitter is vastly overpriced. That’s not a novel insight. However, that doesn’t mean Twitter’s stock won’t do well.

  The reason is that fundamental analysis assumes a level of environmental consistency that doesn’t exist in Twitter’s business. Who knows what their business will look like in a few years? Yet I have a pretty good idea what Harris’s business will look like. This is why I’m staying away from Twitter. I simply can’t offer a reasonable estimate as to what their profit will be. But I do wish them well.

  After a big IPO like Twitter, you often hear that the company “left money on the table.” Perhaps. But I think that misses a few key points.

  Remember that Twitter floated a relatively small amount of shares. Look at it from their point of view. One issue is that the company has a lot of people working for them who were paper millionaires, and their wealth was very illiquid. The company doesn’t want to alienate long-time employees. Now that Twitter is public, those people are much wealthier, and even factoring in a lock-up period, their wealth is far more liquid than it was before.

  We also have to consider the major benefit of an inflated stock price. Twitter can now print money for free which they can use for acquisitions. In other words, their shares are a currency. Every central bank in the world longs for this. Expect to see Twitter roll up a lot of small tech firms, and they’ll use their stock to close the deal.

  When looking at stocks, we often talk about price versus value. But this is a good example of the two concepts blurring. An elevated stock price is itself a boost to value because it can aid your financial strategy. I wouldn’t say that a rich valuation can turn a bad company into a good one, but it has helped many good companies become better.

  There isn’t much better defense than owning stocks of firms that know what they’re doing.

• Morning News: November 11, 2013
  Eddy Elfenbein, November 11th, 2013 at 6:14 am

  Euro Zone’s Fizzling Growth Seen to Back Draghi Cut Case

  German Bonds Climb Before Growth Report as Yield Curve Steepens

  Online Shopping Marathon Zooms Off the Blocks in China

  Brent Rises After Iran Talks Fall Short of Agreement

  Yellen to Get Quizzed as Taper-Timing Debate Rages

  Supreme Court to Take Up Challenges to Union Practices

  Postal Service to Make Sunday Deliveries for Amazon

  A Helping of Holiday Creep

  Shire Buys U.S. Drug Firm ViroPharma for $4.2 BIllion

  Grifols to Acquire a Novartis Diagnostics Business Unit for U.S. $1,675 Million

  Transocean Reaches $1.1 Billion Dividend Accord With Icahn

  Panasonic Says Ready to Spend $1 Billion on New Deals

  If You Believe in Bitcoin, You Should Never Buy Anything in Bitcoin

  Jeff Miller: Weighing the Week Ahead: Do Sidelined Investors Face Upside Risk?

  Roger Nusbaum: The Dude Who Came Up With 4% Rule Tells Barron’s It Might Not Work and Allowing For The Possibility of Risk

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