The Ever-Collapsing Dollar
Posted by Eddy Elfenbein on January 3rd, 2011 at 11:56 am

On Google, “collapse of the dollar” currently returns over 1.5 million items. Funny, for something that’s about to happen — or I should say, always has been about to happen — it hasn’t happened yet.

If a person only followed market commentary but not prices, would they have any clue that the dollar rose last year?

So Far, So Good
Posted by Eddy Elfenbein on January 3rd, 2011 at 11:08 am

The market is off to a good start for 2011.

We’re still in the Santa Claus Rally period which runs from December 22 to January 7. Historically, the market has made 40% of its gains during this period.

Some of the market’s best days on average come during this stretch. For example, January 2 is the market’s second-best day (the best is October 20 which has often done well due to the market snapping back after big falls). December 31 is the seventh-best day and January 6 is the twelfth-best day. This is, indeed, the most wonderful time of the year.

Compounded with the new year is the turn-of-the-month effect. Historically, if you had been in the market for just a seven-day run each month—the last four trading days plus the first three trading days—you would have outperformed the market. For the rest of the month, the market is down. Also, the December-to-January turn has been the top-performer. Obviously, taxes and trading costs would have eaten your gains if you really had gone in and out of the market so frequently.

Another simple idea has worked well over the past 11 years — just invest on the first day of the month:

An S&P report recently found that someone who invested $10,000 in the S&P 500 on Dec. 31, 1999, and left the money there until Dec. 1, 2010, would have just $8,209. An investor who was in the market only on the first day of every month over the same time — for example, buying at the close on Dec. 31 and selling at the close of the first trading day in January — would have $13,816.

That’s nearly 70 percent more than buying and holding the whole time. S&P didn’t include reinvesting dividends in either scenario because of the complications of figuring out which companies paid dividends on the first trading day of the month for 11 years. But even if you include all possible dividends for the buy-and-holders, the first-day trade strategy came out 33 percentage points ahead.

December ISM = 57.0
Posted by Eddy Elfenbein on January 3rd, 2011 at 10:08 am

Moe good news for the economy. The December ISM Index came in at 57.0. Last month, it was 56.6.

The ISM is a good economic indicator to follow. I like that it comes out at the beginning of the month and that it’s not endlessly revised like GDP and employment numbers are.

It’s also very simple: If the ISM is over 50, the economy is growing. If it’s below 50, the economy is contracting. The ISM also has a decent track record of dating recession. Whenever the ISM is below 45, there’s a very good chance that the official recession dating committee will call that a recession.

“Yet Groner Felt No Urge To Keep Up With The Neighbors
Posted by Eddy Elfenbein on January 3rd, 2011 at 9:43 am

I originally posted this back in March, but since Abbott Labs (ABT) is now on the Buy List, I thought it a good time to revisit the story of Grace Groner.

In 1935, she invested $180 in ABT. She died last year at the age of 100. That ABT position had grown to $7 million.

Groner was born in a small Lake County farming community, but by the time she was 12 both of her parents had died. She was taken in by George Anderson, a member of one of Lake Forest’s leading families and an apparent friend to Groner’s parents.

The Andersons raised her and her twin sister, Gladys, and paid for them to attend Lake Forest College. After Groner graduated in 1931, she took a job at nearby Abbott Laboratories, where she would work as a secretary for 43 years.

It was early in her time there that she made a decision that would secure her financial future.

In 1935, she bought three $60 shares of specially issued Abbott stock and never sold them. The shares split many times over the next seven decades, Marlatt said, and Groner reinvested the dividends. Long before she died, her initial outlay had become a fortune.

Marlatt was one of the few who knew about it. Lake Forest is one of America’s richest towns, filled with grand estates and teeming with luxury cars, yet Groner felt no urge to keep up with the neighbors.

Morning News: January 3, 2011
Posted by Eddy Elfenbein on January 3rd, 2011 at 7:58 am

Stocks Rally, Dollar Strengthens on Economic Outlook

European Manufacturing Expands Faster Than Estimated, Led by German Gains

China and Spain: A Brighter Future Through Win-Win Cooperation

Hong Kong Share Trading at Record on China Policy Concern, IPOs

Commodities Beat Stocks, Bonds, Dollar in 2010

The New Speed of Money, Reshaping Markets

Wheat Advances on Flooding in Australia, Dry Weather in U.S.

Exits Lag in the Fourth Quarter, but IPO Hype Boils for 2011

Facebook Worth $50 Billion After Goldman Investment

Bank of America to Take $3 Billion Mortgage Settlement Charge

Fiat May Increase Chrysler Stake to 51% Before IPO

The Social Web Index … All-Time Highs in Pressure and Price and Shame on Facebook

The S&P 500 Total Return Index
Posted by Eddy Elfenbein on January 2nd, 2011 at 11:21 am

For 2010, the S&P 500 gained 12.78%. The Total Return Index, which includes dividends, gained 15.06%. Over the last five years, the Total Return Index gained 11.99% and over the last ten years, it’s up by 15.07%.

Even after an explosive rally, the index is still more than 12% below its all-time high from 2007.

Measured from August 2000, the S&P 500 Total Return Index is up by 0.47%.

I prefer to follow my own invention, what I call the Highly Selective S&P 500 Total Return Index. See, things don’t look so bad now:

Wait ‘Til the Sun Shines, Nellie
Posted by Eddy Elfenbein on January 1st, 2011 at 1:07 am

Happy New Year! One of Wall Street’s very old traditions is to sing “Wait ‘Til the Sun Shines, Nellie” on the final day of trading of the year. Here’s a clip from last year.

The 2011 Buy List
Posted by Eddy Elfenbein on December 31st, 2010 at 9:11 pm

Here’s my 2011 Buy List. For tracking purposes, I assume it’s a $1,000,000 portfolio and that each position is worth $50,000. When I discuss how well the Buy List is doing, I’m referring to this list. Here’s each stock, ticker, starting price and number of shares:

The five new stocks are Abbott Laboratories (ABT), Deluxe Corp. (DLX), Ford (F), Oracle (ORCL) and JPMorgan Chase (JPM).

The five 2010 Buy List stocks I’m deleting for this year are Baxter International (BAX), Eaton Vance (EV), Eli Lilly (LLY), Intel (INTC) and SEI Investments (SEIC).

The average market value of the Buy List is $41.7 billion. The biggest is Johnson & Johnson (JNJ) at $170 billion. JPMorgan (JPM) and Oracle (ORCL) aren’t far behind at $166 billion and $158 billion respectively. The smallest by far is Nicholas Financial (NICK) at $168 million. The second smallest is Jos. A. Banks (JOSB) which is more than nine times larger than NICK.

The average forward P/E Ratio is 11.5 which is about 13% less than the S&P 500. Twelve of the 20 stocks pay a dividend. The average yield of the dividend-payers is close to 2.6%. Spread over 20 stocks, the Buy List yields 1.54%.

Only five stocks have remained on the Buy List for all five years: AFLAC (AFL), Bed Bath & Beyond (BBBY), Fiserv (FISV), Medtronic (MDT) and Sysco (SYY).

That’s it. The list is now “locked and sealed” and I can’t touch it until next year.

The 2010 Buy List
Posted by Eddy Elfenbein on December 31st, 2010 at 7:10 pm

The 2010 trading year has come to a close. I’m happy to report that our Buy List had another good year. The 20 stocks on the Crossing Wall Street Buy List gained an average of 14.71%. In contrast, the S&P 500 was up 12.78%. This is the fourth year in a row that we have beaten the market.

Including dividends, the Buy List gained 16.62% compared with 15.06% for the S&P 500. The dividend yield for the Buy List worked out to 1.67% while it was 2.02% for the S&P 500. For the year, our beta was 0.9479.

Over the five-year history of the Buy List, we’ve gained 34.03% to the S&P 500’s 11.99%. Our annual turnover has been just 25% which means we’ve only changed five stocks per year. The five-year beta is 0.9420.

Now I’ll restate the rules of the Buy List. I choose a portfolio of 20 stocks at the beginning of the year. After that, the Buy List is locked for the year and I can’t make any changes until the following year. For tracking purposes, I assume the Buy List is a $1 million portfolio equally divided among the 20 stocks. You can check the performance of the Buy List anytime at our Buy List page.

My goal is to show investors that by choosing stocks wisely and by sticking with high-quality stocks, they can beat the market—and that’s exactly what we’ve done. I try to beat the market by a few percentage points and to do it with less risk.

We were helped this year by having a well-diversified Buy List. Fourteen of the 20 stocks rose for the year, while six stocks (mostly healthcare) saw losses. We were over-weighted in healthcare which didn’t work to our benefit. Fortunately, some strong performers helped us out.

For the second year in a row, our smallest stock, Nicholas Financial (NICK), was our biggest winner. NICK gained 48.62% for the year. The second-biggest winner was Jos. A. Banks Clothiers (JOSB) which gained 43.35%.

Notes:
JOSB split 3:2 on August 19. The original purchase of 1,185.1150 shares at $42.19 became 1,777.6725 shares at $28.126666.
RAI split 2:1 on November 16. The original purchase of 943.9305 shares at $52.97 became 1,887.8610 shares at $26.485.

Here’s how the Buy List did throughout the year:

CWS Market Review – December 31, 2010
Posted by Eddy Elfenbein on December 31st, 2010 at 8:38 am

We have only today left in 2010! Before I get into the meat of today’s CWS Market Review, I want to wish everyone a happy, healthy and prosperous New Year. Our Buy List is about to close out its fourth-straight market-beating year, and I’m excited to continue our streak in 2011.

Today I want to discuss an issue that isn’t getting a lot of coverage in the financial media: the stunning drop in the stock market’s volatility . I can’t think of a previous period where the market has moved from such frenetic trading to such placid behavior in such a short period of time. If the financial crisis can be said to have a “denouement,” the last three months have been it.

Let’s look at some numbers. The average daily changes for this week so far have been (in order) +0.06%, +0.08%, +0.10% and -0.15%.

I apologize if those numbers just put you to sleep, but this is about as dull a market can get. Personally, I don’t mind dull. Lack of news is good news and the best news is that the market has been going up…albeit very, very slowly. Before Thursday’s pullback, the market had advanced for 17 out of 20 sessions.

Let me put some of this volatility in perspective. During the craziest period of the financial crisis, which is roughly the two months following the implosion of Lehman Brothers, the S&P 500 was rising or falling by more than 4% per day roughly half of the time. In other words, it was perfectly normal for the Dow to swing by more than 500 points on any given day.

The trading was so crazy that there were two separate 10% rallies just two weeks apart. A few days after that, there were four-straight sessions of changes by 6% or more. We hadn’t seen that kind of volatility in decades.

Slowly, however, the volatility began to fade. During 2009, the S&P 500 had an average daily swing of 1.7%. For this year thru October, the average daily swing was just 1.2%. There was a minor rise in volatility over the summer. To the Double Dip crowd, it was a clear warning sign that disaster was imminent. Fortunately, cooler heads prevailed and now we can see that it was merely a transient blip.

Despite how much volatility has fallen, it’s gotten even lower recently. Over the last 19 trading sessions, the average daily swing has been less than 0.3%. During that time, the market hasn’t gone up or down by more than 0.6%. So in the last four weeks, we haven’t had one single daily swing reach half of what the market was averaging for the year! Wow.

What does this lack of volatility mean for us? I think the role of volatility is overvalued in the stock market. Commentators often portray high volatility as bad and low volatility as good, but I don’t think it works that way. I view volatility as the perceived chance that a trend will continue, but it’s not a comment on what that trend is.

For example, a high volatility period may reflect growing disagreement among market participants that the economy will or won’t enter a Double Dip. As the infighting becomes more intense, volatility increases. Once market participants reach a broad consensus, volatility recedes. That’s what I think has been happening. Investors now broadly agree that the recession has passed and that we’re in a slow recovery with inflation well-contained. Volatility will rise again once a new narrative asserts itself.

The economic news continues to be hopeful. The latest report from the Chicago Purchasing Managers Index showed the highest reading since 1988. This index only covers folks in Indiana, Illinois and Michigan, but it’s usually a good bellwether for how the rest of the country is doing.

There are two economic reports coming next week that will tell us more about how the recovery is proceeding. First, on Monday, we’ll get a look at the ISM Index. I expect a reading between 55 and 57, perhaps higher.

Second, on Friday we’ll get the important jobs report. This is a toughie; I really don’t know what to expect. The jobs market continues to be dismal. We haven’t seen much positive data, though jobless claims just fell to a two-year low. I think Wall Street will be paying close attention. As I’ve said before, higher profit margins have been good, but we need to see top-line growth soon and that means we need to see more jobs.

Wall Street is definitely becoming more optimistic for next year. JPMorgan Chase recently raised its GDP growth forecast for 2011 from 3% to 3.5%. Goldman Sachs raised its forecast from 2.6% to 3.5%. The Federal Reserve now expects growth between 3% and 3.6%.

S&P currently expects the S&P 500 to earn $94.79 next year. Based on current prices, that translates to a forward P/E ratio of 13.3. Flip that over and you get an earnings yield of 7.5% which is more than twice the yield on the 10-year Treasury bond. The message is clear: Stocks are still the safe place to be.

Let me also remind you that the new Buy List goes into effect on Monday morning (you can see the new list at the website). For tracking purposes, I consider each yearly Buy List to be a separate universe, so I assume the Buy List begins afresh as a $1 million portfolio invested equally in the 20 different stocks. The gains or losses from the previous year don’t carry over though 15 of the stocks remain the same.

Once all the numbers are in, I’ll have a complete summary of how well the Buy List did in 2010. That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

Best – Eddy