Short-Term Rates on Growth and Value
Posted by Eddy Elfenbein on November 8th, 2010 at 2:08 pm

I was curious to see what the impact of changes in short-term interest rates is on growth and value stocks.

I used the Vanguard Growth (VIGRX) and Vanguard Value (VIVAX) funds as proxies and looked at how they reacted to changes in the 90-day T-bill. The data goes back to 1993.

I found that there were 1,737 days when short-term rates fell, 1,739 days when short-term rates rose and 950 days when short-term rates stayed the same. I then averaged out those periods to annualized periods.

When short-term rates fell, Value fell by 21.78% while Growth fell by 18.96%.

When short-term rates stayed the same, Value rose by 16.65% and Growth rose by 19.10%.

Finally, when short-term rates rose, Value rose by 42.54% and Growth rose by 36.13%.

S&P 500 to 1500?
Posted by Eddy Elfenbein on November 8th, 2010 at 11:35 am

Here’s a look at the S&P 500 along with its earnings.

The black line is the index and it follows the left scale. The yellow line is its trailing four-quarter operating earnings and it follows the right scale. I’ve arranged it so the two lines are scaled at a ratio of 16-to-1. This means that whenever the lines cross, the market’s P/E Ratio is exactly 16.

Why 16?

There’s nothing special about 16 except that historically that’s been about the average ratio.

Let me say a few things about the P/E Ratio. It’s far from a perfect measure of the market, but it’s still a very good measure. You also want to look at other measures like dividend, cash and interest rates, but for this post, I want to concentrate on earnings.

Earnings have rebounded quite sharply and stock prices have kept up. From here, however, the earnings growth is projected to tail off. Earnings will still grow, but not at the rate we saw before.

(Note that I prefer to look at operating earnings instead of as-reported earnings. I think this is a better metric for looking at the broad market.)

According to the latest forecasts, the S&P 500 is projected to earn $94.27 next year. At a ratio of 16-to-1, that translates to an S&P 500 of 1508. The index would have to rise by 23% over the next 14 months to get there, which is very reasonable.

But even if the market’s P/E Ratio drops to 14 by the end of next year, the S&P 500 would still have to rally close to 8% to get there. And that’s a very conservative estimate.

The only danger is a Double Dip which looks increasingly unlikely. In fact, the Double Dip hysteria of this summer made the Y2K frenzy of 1999 look like reasoned discourse.

Buy List Hits All-Time High
Posted by Eddy Elfenbein on November 8th, 2010 at 10:47 am

We had very good news on Friday. Thanks to a late market surge, our Buy List broke out to an all-time high.

For all of 2010, we’re up 14.54%. Including dividends, we’re up 16.03%. The S&P 500 is up 9.93%, or 11.77% including dividends.

We’re on our way toward beating the market for the fourth straight year. Best of all, we’ve done with ZERO trading during the year.

For the complete history of the Buy List (four years and a little over ten months), we’re up 33.36% compared with 8.77% for the S&P 500. Both of those numbers include dividends.

Sysco Earns 51 Cents Per Share
Posted by Eddy Elfenbein on November 8th, 2010 at 10:17 am

The last of our stocks reported earnings for this earning season. Before the bell, Sysco (SYY) said it earned 51 cents per share which matched Wall Street’s expectations. Thanks to food inflation, Sysco’s revenues rose 7.4% to 9.75 billion which beat consensus by $20 million.

From the company’s press release:

“I am pleased with the volume growth and productivity improvements our operating companies produced during the quarter,” said Bill DeLaney, Sysco’s president and chief executive officer. “While our overall sales increase and operating expense management were encouraging, we missed our goal for operating income growth, largely due to a decline in gross profit margin and higher pension costs. Our entire leadership team is focused on effectively leveraging sales growth as the fiscal year progresses.”

This is slightly disappointing, but it’s still an improvement over last earnings season when Sysco missed by a penny per share. This is still a decent stock and I expect a small dividend increase soon.

Here’s what I wrote over the summer:

If you’re looking for a decent bargain, shares of Sysco (SYY) look pretty good now that they’re under $29. Thanks to the market’s recent unpleasantness, the stock has gotten as low as $28.46.

Sysco is a conservative company. They pay a 25-cent quarterly dividend, so the current yield is about 3.5% which is well above the 10-year T-bond yield.

Sysco’s business had been feeling the squeeze of lower prices. The company saw three straight quarters of declining earnings (not a lot, but declining). They responded by cutting overhead and their earnings started to perk up. Last quarter was interesting because it was the first time since 2008 that sales also grew. That’s very good news because you can’t cut overhead forever; you need to start growing your sales.

Sysco has now beaten earnings for four straight quarters. Sysco reports late, so the next earnings report probably won’t come out until around August 10. Plus, Sysco’s fiscal year ends on June 30 so this upcoming report will be for their fiscal fourth quarter.

The company will probably earn around 60 cents per share, give or take, which comes out to $1.96 for the year. At $29 per share, that’s not bad. I don’t expect Sysco to grow its earnings by a lot for their next fiscal year, but they almost certainly should be higher than last year.

Sysco is a buy any time it’s below $30. Below $28 would be much better.

Here’s a final summary of earnings for our Buy List:

Morning News: November 8, 2010
Posted by Eddy Elfenbein on November 8th, 2010 at 7:18 am

Euro Hurt as Peripheral Debt Jitters Resurface

Oil Falls From Two-Year High in New York as Stronger Dollar Trims Demand

The Man Who Called the Financial Crisis—70 Years Early

China Says Fed Easing May Flood World Economy With ‘Hot Money’

G-20 Spat Risk Eases as U.S. Eschews Pushing Targets

Top US, South Korea Officials Hold Trade Pact Talks

Nikkei Hits 3-month Closing High

Irish Debt Woes Revive Concern About Europe

CEOs Most Optimistic on U.S. Profits in Bull Signal for S&P 500

Adidas sets targets to overtake Nike

AOL Hires Advisers for Options as it Eyes Yahoo

Bernanke at Jacksonville University
Posted by Eddy Elfenbein on November 5th, 2010 at 11:49 pm

Here’s a 53-minute video of Bernanke answering questions from students. It’s long, but he’s good at explaining complicated issues clearly.

Leucadia National 3Q earnings falls
Posted by Eddy Elfenbein on November 5th, 2010 at 8:01 pm

From AP:

Diversified holding company Leucadia National Corp. said Friday that its third-quarter net income fell 22 percent as it lost money on securities, and income related to associated companies fell.

Net income in the three months to Sept. 30 fell to $287.7 million, or $1.17 per share, down from $370.2 million, or $1.50 per share.

Revenue rose to $185.9 million from $143.4 million.

It lost a net $64,000 in securities, after a gain of $9.6 million a year earlier. The loss from operations rose to $62.2 million from $38.4 million. Income related to associated companies, net of taxes, fell to $324.7 million from $379.5 million.

Shares rose 29 cents, or 1.1 percent, to close at $27.30.

“Kehehehehehehehehehe Yourself!”
Posted by Eddy Elfenbein on November 5th, 2010 at 3:01 pm

That’s enough market stuff for one week. Have a great weekend and enjoy some classic Ernie and Bert.

The Yield Curve’s Reaction to QE2
Posted by Eddy Elfenbein on November 5th, 2010 at 11:01 am

I wanted to show you why the QE2 announcement was such a big deal. Here’s a look at the yield curve from before and after. The blue line is for Tuesday. The black line is yesterday.

I doesn’t look terribly dramatic, but the middle part of the curve got squished down while the end got pushed up. The spread between the middle and the end is at a record.

October Unemployment Unchanged at 9.6%
Posted by Eddy Elfenbein on November 5th, 2010 at 8:32 am

The good news is that nonfarm payrolls rose by 151,000. Private sector jobs increased by 159,000. Although there are still 14.8 million Americans who are unemployed, this was a better-than-expected report:

The job total numbers were revised higher for August and September. For August, instead of a loss of 57,000 jobs, it’s now 1,000. September’s loss was revised from 95,000 to 41,000.

Over the last 10 years, the U.S. labor market has grown by nearly 11 million, yet the number of jobs has increased by 1.7 million. That’s like an 84% unemployment rate of new workers.