• Nicholas Financial Is Now Trading Below Book Value
    Posted by on December 6th, 2007 at 3:27 pm

    Shares of Nicholas Financial (NICK) are now down to $7.20. According to the most recent 10-Q, the company’s book value is $7.50 a share.

  • It Was Only a Matter of Time
    Posted by on December 6th, 2007 at 1:12 pm

    Tired of those socially responsible funds? Well, Focus Shares gives us a sin-based ETF. You guessed it…the Sindex.
    *Groan*
    The ticker symbol is PUF.
    *Double Groan*
    Here are the stocks in the Sindex:
    ABV UN AmBev -PN (ADR)
    AOI Alliance One International Inc.
    ASCA Ameristar Casinos
    BF.B Brown-Forman Corp.
    BTI UA British American Tobacco (ADR)
    BUD Anheuser-Busch
    BYD Boyd Gaming Corp.
    BYI Bally Technologies Inc
    CEDC Central European Distribution
    CG Loews Corp. – Carolina Group
    DEO UN Diageo (ADR)
    HET Harrah’s Entertainment
    IGT International Game Technology
    ISLE Isle of Capris Casinos Inc
    LVS Las Vegas Sands
    MGM MGM Mirage
    MO Altria Group, Inc.
    MPEL Melco PBL Entertainment Macau Ltd.
    PENN Penn National Gaming Inc
    PNK Pinnacle Entertainment
    RAI Reynolds American Inc.
    SGMS Scientific Games
    SHFL Shuffle Master
    STZ Constellation Brands
    TAP Molson Coors Brewing Company
    UST UST Inc.
    UVV Universal Corp.
    VGR Vector Group
    WMS WMS Industries
    WYNN Wynn Resorts Ltd

  • High-Yield Defaults Could Quadruple
    Posted by on December 6th, 2007 at 9:34 am

    Here’s a stunning story. Moody’s says that high-yield bond defaults will quadruple next year, and that’s assuming the economy doesn’t go into a recession. If it does fall into a recession, defaults could rise tenfold.

    The global default rate will rise to 4.2 percent by November from 1 percent now, the lowest since 1981, Kenneth Emery, director of corporate default research at Moody’s, wrote in the report e-mailed today. His forecast is based on an assumption the U.S. economy slows without falling into recession. In a recession, defaults may approach 10 percent, he said.
    “We’re certainly looking for an economic slowdown next year and a pick-up in default rates,” said Simon Ballard, macro credit strategist at ABN Amro Asset Management in London. “Any default rate above 3.5 percent would require a very bearish outlook on the U.S. economy.”
    More than one in 10 of the borrowers to which Moody’s assigns ratings are treated as “distressed” by bond traders, the highest proportion since global defaults reached 10.5 percent in 2002. At that time, bondholders charged as much as 11.4 percentage points above government rates to buy high-risk, high-yield debt, double the current average of 5.73 percentage points, according to Merrill Lynch & Co. indexes.

  • JOSB Same-Store Sales Up 15%
    Posted by on December 6th, 2007 at 9:12 am

    From MarketWatch:

    JoS. A. Bank Clothiers Inc., (JOSB) the Hampstead, Md., retailer, reported that for November, same-store sales rose 15% while total sales increased 25% to $63.1 million from $50.6 million in the year-earlier month. A survey of analysts by Thomson Financial produced a consensus estimate of same-store sales up 2.2% in the month.

  • The Incredible Power of Momentum Stocks
    Posted by on December 6th, 2007 at 8:18 am

    I’m a big fan of Professor Ken French’s data library. I’ve used data from his library at this site many times.
    If you’re not familiar with Dr. French, he’s a well-known finance professor at the Tuck School at Dartmouth. He’s also known for his long-time association with Eugene Fama at the University of Chicago.
    I was digging around some of the files in the library and I was completely stunned by the incredible outperformance of stocks with high momentum, meaning stocks that are surging have a tendency to keep on surging. I was aware of some of the academic literature on this subject, but I have to confess that I was completely dumbfounded by the results.
    I know that stocks with favorable valuation characteristics do better than the rest of the market. For example, stock in the lowest decile (or 10%) of price/earnings ratio have historically beaten the market. The same is true for stocks with higher dividend yields or low price/book ratios. Also, small-caps do better than large-caps (although I’m not particularly impressed by the small-cap premium). These phenomena are very well-known and have been documented countless times.
    But simply put—high momentum creams them all.
    At the data library, French has ten portfolios listed by momentum (see “10 Portfolios Formed on Momentum”). He gets his data from the Center for Research in Security Prices at the University of Chicago. I looked at the long-term returns of stocks with the greatest momentum.
    From the beginning of 1927 through August of 2007, the overall market has returned an average of 10.10% a year. The highest momentum stocks returned an average of 17.76% a year.
    What’s more, that’s just the value-weighted portfolio. By looking at the equal-weighted portfolio, which gives more say to smaller-cap stocks, the results are even more impressive. The equal-weighted high-momentum portfolio returned an average of 21.94% a year. Here’s the chart:
    image559.png
    Wow.
    Also, while the momentum portfolios are more volatile, they don’t strike me as being usually high. The monthly standard deviation for the value-weighted momentum stocks is about 20% greater than the rest of the market. The equal-weighted stocks are 37% more volatile.
    The problem I have with many small-cap or value-related models is that the results are highly cyclical. It’s true that small-caps do well after several decades, but it’s not unusual to see underperformance for five years of more. That happened to small-caps in the 1990s and I think value is entering a down phase right now. With momentum, the results are much more consistent. Heck, just look at the red and blue lines.
    There’s also the question of what we mean by stocks with high momentum. I called Dr. French just to make sure I had it right and he was very helpful in explaining it to me. By momentum stocks, he ranks every stock by how it did over an 11-month period, then skips a month and then tracks them for one month. At the end of the month, the whole thing is repeated.
    Confusing?
    He’s an example. On January 1, we take the top 10% of stocks by their performance for the previous January 1 through November 30. The stocks are held for exactly one month and the process is repeated again on February 1.
    This system in completely mechanistic and all emotions are banished. I’ve known lots of people who are momentum investors but they rarely have the discipline to act by strict rules.
    Another interesting aspect of a momentum strategy is the turnover probably isn’t that high. Since it encompasses the best returns for 11 months, many stocks will remain each month. Dr. French said that he thinks the turnover is 91%. That’s high, but not as high as many mutual funds.
    There are lots of historically interesting strategies but many are very impractical. For example, the stock market has been net down on Monday, Tuesday and Thursday combined. But it’s highly impractical to sell all your stocks and buy them a few times each week. But I don’t think that’s the case with a momentum strategy. Also, I’m sure you could even use ETFs to mimic the high-momentum portfolios.
    There’s also the question of why. Why do stocks with high momentum continue to outperform for a bit more? Is there something inefficient in their…frothiness? Can a person really play the height of their frothiness all the time by constantly shifting?
    According to the Efficient Market Hypothesis, this outperformance would rationally be exploited away. I’m not a believer in efficient Market Theory (ironically, it was developed by Eugene Fama) but I do think stocks show a bias towards efficiency. Perhaps there’s something in a surging stock that causes the pre-requisites for an efficient market to break down (flow of information??).
    Dr. French was careful to say that he’s not the discoverer of momentum premium. That award goes to Jegadeesh and Titman who in 1993 found that the best-performing stocks of the last six months outperform the worst over the six to twelve month. I’m very impressed. I’m planning to look into more of the academic literature.

  • 2008 Buy List
    Posted by on December 5th, 2007 at 12:39 pm

    I’ll unveil the Buy List for 2008 on Monday, December 17. I’ll start tracking the new stocks on January 1 and use the December 31 close as my buy price. I do this so no one can claim that I have any impact on the shares.
    There are also two more earnings reports before the end of the year. FactSet Research Systems (FDS) reports on December 13 and Jos. A Bank Clothiers (JOSB) reports on December 18.

  • Gold and Iran
    Posted by on December 5th, 2007 at 10:41 am

    I’m curious how much the National Intelligence Estimate’s report that Iran suspended its nuclear program four years ago will affect the price of gold. While gold is impacted by inflationary concerns, it’s also influenced by geo-political concerns as well.
    I suspect that problems with Iran have helped boost gold, but I wonder how large the impact has been. When gold is priced in euros, its rise hasn’t been as dramatic, but it’s certainly higher.
    I’m also curious if the surge in support for Ron Paul is a sign of a top for gold. When gold peaked 28 years ago, the Libertarians had their best presidential showing ever. That year, Ed Clark won close to a million votes, including 11.66% in Alaska. The Libertarians even won two statehouse seats in Alaska that year. Double-digit inflation and gold at $850 seem to be very good for the party.
    Since 1980, however, the Libertarian presidential candidates have been lucky to get half what Clark did. Now Ron Paul is running in a perfect environment for Libertarians—gold is up, the dollar is way down. The crucial primary will be in New Hampshire, a state almost tailored-made for them (“Live Free or Die”).
    If Paul breaks 10% in New Hampshire, then I think gold will soon plunge. And no, I’m not serious.

  • Headline of the Day
    Posted by on December 4th, 2007 at 3:44 pm

    Countrywide CEO backs Fannie expansion

  • Reader Q&A
    Posted by on December 4th, 2007 at 1:53 pm

    I always like getting e-mails from readers. I get a lot so I try to respond to as many as I can. Please feel free to e-mail me if you have any questions or comments. If I do post you e-mail, I will not include your name.
    Here’s a recent e-mail I got. I’m posting it because it’s a good question and slso because my responses kept getting bounced.

    I am a frequent reader of your blog and have enjoyed many of the entries. Your investment style appears sound and a handful of your tips and articles have been quite conducive to my financial situation. Thank you. I have a question for you. I would like to find a fairly simple means of playing a rally in the US dollar. It may be versus a basket or a particular currency, for example, the euro. This may not be your cup of tea and so a simple ‘I do not know’ will suffice. If you have an opinion please email me at this address.
    Thanks for the kind words!
    You’re in luck! There is a simple way to play the U.S. dollar. PowerShares has an exchange trade fund that tracks the dollar. It’s the PowerShares DB US Dollar Index Bullish (UUP).
    Here’s the description from Yahoo Finance:
    The investment seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Long US Dollar Futures Index. The index is comprised solely of long futures contracts. The futures contract is designed to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The fund is nondiversified.

  • Next Week’s Fed Meeting
    Posted by on December 4th, 2007 at 12:30 pm

    The Federal Reserve meets again next Tuesday and Wall Street expects another rate cut. According to the latest from the futures market, Wall Street thinks there’s about a 60% chance for a 0.25% rate cut and a 30% chance for a 0.50% rate cute.
    I think the Fed erred last time by only cutting by 0.25%, and I would prefer to see the Fed cut by 0.50% this time. Unlike a lot of folks, I don’t think it’s absolutely critical for the Fed to get it exactly right all the time. Twenty-five basis points isn’t that big a deal in an economy this large. Still, the market needs some relief.
    The odds of a recession have clearly increased over the past few weeks. Three months ago, Wall Street was expecting fourth-quarter earnings growth of 8.8%. Today that number is down to just 1.1%. Also, economically cyclical stocks have underperformed the market since July. I think that will continue.
    It’s hard to overstate the importance of interest rates on stock prices. A few weeks ago, I looked at all the data going back to 1962. If you took all the days when the three-month T-bill rate fell, the S&P 500 rose over 2,000%. On days when rates rose—a nearly identical time frame—the S&P lost nearly 60%.