Author Archive

• Morning News: August 29, 2014
  Eddy Elfenbein, August 29th, 2014 at 6:06 am

  How Draghi Seeking QE Trade-Off May Find Austerity Trap

  Euro Sags Ahead of Inflation Test, Ukraine Nerves Weigh

  Yen at 120 Seen Needed by UBS Wary of Weimar-Japan Redux

  US Economy Grew at Brisk Rate in 2nd Quarter

  Wanda Teams With Tencent, Baidu to Challenge Alibaba

  Instagram Like2Buy Merges Social Media and Shopping

  Malaysia Airlines to Eliminate 6,000 Jobs Amid Overhaul

  Abercrombie & Fitch Sheds Once-Prized Logo From Clothing

  Tesco Slumps as Retailer Slashes Dividend 75% on Forecast

  Jessica Alba ‘The Honest Co’ Valued at $1 Billion

  Virgin Raises Private-Equity Cash to Keep Qantas Pressure

  Morgan Stanley Plans Natural Gas Export Plant in New Commodities Foray

  Businesses Are Winning Cat-and-Mouse Tax Game

  GaveKal Capital: The Modern Day Widow Maker Trade

  Ben Carlson: How Framing Affects Investment Decisions & Outcomes

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• Industrials and Long-Term Rates
  Eddy Elfenbein, August 28th, 2014 at 12:45 pm

  This time, here’s a look at the relationship between industrial stocks and long-term interest rates.

  

  The blue line is the Industrials ETF divided by the S&P 500 ETF. The black line is the yield on the 30-year Treasury.

• Value Stocks and Short-Term Rates
  Eddy Elfenbein, August 28th, 2014 at 9:57 am

  Here’s a small addendum to yesterday’s post on how the stock market behaves. This chart shows the Vanguard Value Index divided by the Vanguard Index 500 fund. That’s the black line and it follows the right scale. The numerical value of the black line is irrelevant, but what’s important is that whenever the black line is moving up, it means that value stocks are outperforming the overall market. When it’s declining, value stocks are lagging.

  The red line is the yield on the 90-day Treasury (left scale). Note how the two lines have a decently strong correlation. As I tried to stress in yesterday’s post, these cross-market relationships are far from overwhelming, but something is clearly going on. The correlation is especially strong in the near-term. Rising rates are good for value. Falling rates are not.

  

  I think it’s interesting to note that ever since the Fed brought interest rates to the floor, there doesn’t seem to have been any great trend toward growth or value. I could be wrong, but to my eyes it mostly looks like noise.

  I would think that over the very long term, value stocks would outperform the stock market, but there’s no reason to expect short-term rates to rise indefinitely. At least, I hope not.

• Q2 GDP Revised to +4.2%
  Eddy Elfenbein, August 28th, 2014 at 9:35 am

  Some good economic news this morning. Wall Street was surprised when the initial report for Q2 GDP came in at 4%. Today it was revised higher to 4.2%. A lot of economists had been expecting a downward revision.

  Domestic demand increased at a brisk 3.1 percent rate, instead of the previously reported 2.8 percent pace. It was the fastest pace since the second quarter of 2010 and suggested the recovery was becoming more durable after output slumped in the first quarter because of an unusually cold winter.

  Third-quarter growth estimates range as high as a 3.6 percent rate.

  Economists polled by Reuters had expected the second-quarter GDP growth pace would be revised down to 3.9 percent. The economy contracted at a 2.1 percent pace in the first quarter.

  Gross domestic income, which measures the income side of the growth ledger, surged at a 4.7 percent rate, consistent with strong job gains during the quarter. That was the fastest increase since the first quarter of 2012.

• Morning News: August 28, 2014
  Eddy Elfenbein, August 28th, 2014 at 4:43 am

  Russian Hackers Said to Loot Gigabytes of Big Bank Data

  Philippine Q2 GDP Growth Fastest in Five Quarters, Rate Hike Likely

  SEC Shelves Plan for Private Asset-Backed Bond Disclosure

  Lending Club Could Be One of Silicon Valley’s Biggest Tech IPOs of 2014

  Vivendi receives GVT bids from Telecom Italia, Telefonica

  Kia Struggles as Sibling Hyundai Speeds Ahead

  Kia Motors To Build $1 Billion Car Assembly Plant In Mexico

  Market Basket Revolt Ends as Arthur T. Demoulas Wins Bid

  Are Uber’s Aggressive Recruitment Tactics Legal?

  Qantas Result Challenges Alan Joyce Leadership

  Weaker Corporate Tax Receipts Worsen U.S. Budget Picture

  Snapchat Founders Likely Billionaires With New, Reported Investment

  Drones Could Rule the Skies Over Disney

  Cullen Roche: Malkiel’s Mendacity

  Roger Nusbaum: Is This Bull Market Real?

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• Ross Stores Reaches Nine-Month High
  Eddy Elfenbein, August 27th, 2014 at 11:58 am

  Ross Stores ($ROST) is finally getting some love from investors. ROST has been as high as $75.53 this morning. The shares were at $62 just six weeks ago.

  

• Morning News: August 26, 2014
  Eddy Elfenbein, August 26th, 2014 at 4:31 am

  Europe Bank Cleanup Driving $1.72 Trillion of Asset Sales

  Nene Sees 1.8% South African Growth With Budget Under Strain

  Napa Mops Up Wine and Tallies Its Losses After Quake

  Deep Tax Cuts Opens Northern Front for U.S. Companies

  Surging U.S. Stocks Echo Dot-Com Rally With Cheaper P/E

  Slowing Home Sales Show U.S. Market Lacks Momentum

  Time Warner Prepares To Offer Buyouts At Turner Cable Division

  Roche to Acquire InterMune for $8.3 Billion

  Accor H1 Profit Rises, Summer Business Trends Stable

  What’s Twitch? Gamers Know, and Amazon Is Spending $1 Billion on It

  Shareholders Sour on GrubHub Filing

  Ann Taylor (ANN) Shares Soar on Activist Investor Pressure

  HP $48 Million Lawyer-Pay Plan to Sue Autonomy Shot Down

  Howard Lindzon: Kill All The Data Scientists! …and The Timeline is Everything.

  Joshua Brown: The Challenge

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• NY Post: AT&T Reaches Deal with Feds on DTV Merger
  Eddy Elfenbein, August 25th, 2014 at 5:04 pm

  Here’s some potentially good news about the AT&T/DirecTV merger. The New York Post is reporting that AT&T has reached a deal with the feds on the conditions by which they can buy DirecTV.

  Agreeing to comply means the Department of Justice will likely clear the AT&T deal in October. The FCC still has not ruled on the merger.

  The move will allow AT&T to add DirecTV’s 20 million satellite-TV subscribers to its 5.7 million U-Verse TV service subscribers, which currently spans 22 states.

  This merger has caused concern among those who believe the convergence of the few remaining telecom and cable giants will cause a rise in prices.

  The deal has raised some eyebrows among consumer activities. We still don’t know what these conditions entail. It may mean the companies will have to spin-off some assets. If the Justice Department approves the merger, then it will mostly like get approval from the FCC. Still, nothing is guaranteed.

  DTV closed today at $85.47. The merger deal is for $95. So that’s an 11% premium but I have no idea what the timeframe is.

• The S&P 500 Breaks 2,000
  Eddy Elfenbein, August 25th, 2014 at 10:18 am

  Moments ago.

  

• The Small-Cap Cycle Could Be Over
  Eddy Elfenbein, August 25th, 2014 at 10:05 am

  I want to expand on something I mentioned in Friday’s newsletter. Since March 4, small-cap stocks have been lagging the overall market. This is notable because small-caps had been leading the S&P 500 for over 15 years. It’s been an extremely impressive run.

  Let’s look at some numbers. The ratio of the Russell 2000 Index to the S&P 500 reached a low on April 8, 1999. Technical analysts will note that the trough ratio was just a hair below 0.3. Since then, small-caps have shined.

  

  In fact, the impressive behavior of small-caps alters how we ought to look at the great stock bust-up of 2000 to 2009. While it’s certainly true that the S&P 500 reached a peak in March 2000—adjusted for inflation, we still haven’t topped it—but that’s not the whole picture.

  The furious rally of the late 1990s was largely driven by tech stocks and large-cap techies in particular. If we exclude a small number of very big stocks, the market’s painful nine years wasn’t quite so painful. When looking at broad market indexes we should always be mindful that a small group can distort the larger picture. Sectors like small-cap value sector have actually done quite well.

  That’s why I took notice when the Russell/S&P Ratio reached its last peak on March 4 of this year, almost 15 years to the day after the cycle low. In those 15 years, the Russell 2000 has gained 202% while the S&P 500 is up by just 39%. That’s a five-to-one pounding. But since March 4, the S&P 500 is up 6% while the Russell 2000 is down by 4%. That was enough to bring the ratio down from 0.6450 to 0.5758.

  So is the small-cap cycle over? Unfortunately, I can’t say just yet. I thought the cycle had run its course a few times before. Shirley, small-caps couldn’t still lead the market, but they did. Sadly, we may not know if the cycle is truly over for years. It took 30 months for the Russell/S&P Ratio to beat its peak from April 2011. All we can say for certain is that the last six months have witnessed a sharp turn toward big-caps. Historically, once a new cycle starts, it often lasts for many years.