Ibbotson Yearbook
Posted by Eddy Elfenbein on April 1st, 2006 at 2:42 pm

I just got my copy of the 2006 Ibbotson Yearbook in the mail. Ibbotson is a money management firm in Chicago that’s best known for keeping long-term performance information on the stock market (the company was recently bought by Morningstar).
The yearbook tracks the monthly performance of stocks, bonds, treasuries and inflation since 1925. It’s a fascinating resource. The yearbooks are available at many libraries, but being a data junkie, I like to get my own copy. You can order a copy here.
The data confirms that the stock market is the best place to be. Over the last 80 years, large-cap stocks have gone up an average of 10.36% a year (dividends and capital gains). One dollar invested in 1925 would be worth over $2,600 today. On average, the market doubles every seven years. Nothing beats it.
When you look at the long-term chart, even ugly periods like 1987 appear as minor blips. It’s true that bear markets can be painful, but the long-term data is clear. The market goes up, up and up. The only hitch is that you have to be patient.
Stocks are also big winners against bonds. Long-term corporate bonds have averaged 5.92% a year. Long-term Treasuries have average 5.47% a year, and T-Bills have returned just 3.71% a year.
Ibbotson also looks at small-cap stocks, and that group has done even better than the large-caps. Since 1926, small-caps have averaged 12.64% a year. By small-cap, Ibbotson generally means stocks that are in the smallest 20% of the market’s universe, although they’ve recently altered their criteria.
Ibbotson also breaks out the performance of each size decile, or 10% slice of the market. What’s interesting is that the returns are almost perfectly rank-ordered—the smallest 10% has done the best, and the largest 10% has done the worst.
Since 1926, the smallest decile has returned an average of 13.96% a year. My only caution about micro-cap investing is that although the “outperformance premium” is very real, it’s not very well-behaved. The relative performance is highly cyclical. It’s either feast or famine.
Micro-caps badly trailed the market during the 1990’s, but over the last seven years, micro-caps have been stellar performers. Since 2000, the micro-cap decile is up 211%. This may be the most underreported market event of this decade.
It’s almost like there’s an invisible bull market going on. Interestingly, the peewees started to cream the big boys in 1999 before the market peaked.. Although the S&P 100 (^OEX) is still about 29% off its all-time high, the broader indexes have been hitting new all-time highs lately. Very soon, the Wilshire 5000 Total Return Index (^DWCT) will hit an all-time high.
Another interesting aspect of small-caps is that the outperformance doesn’t comport with the Capital Asset Pricing Model. In English, this means that the small-caps have done even better than their risk behavior suggests.
Something else I noticed from the Ibbotson data is that, in recent decades, long-term Treasuries have been surprisingly competitive against stocks. Mind you, the stock market is still the big winner. But since 1968, long-term Treasuries have averaged 8.69% a year, which is pretty good compared with the 10.52% for large-cap stocks.
Over the long-term, large-caps have averaged 4.63% a year better than long-term T-bonds. Given the current yield of the 10-year Treasury of 4.85%, this implies a market return of about 9.7% (i.e., 1.0463 * 1.0485).
The yearbook also includes a section with data going back to 1815. Personally, I tend to skeptical of those types of studies since the capital markets were so underdeveloped. During the 19th century, most stocks traded at par, meaning $100 a share. Investors were interested in dividends, not capital gains. The idea of continuously rising indexes is fairly new. Back then, stocks traded much like bonds, except that management decided what the dividend (often annual or semi-annual) would be.
Since there was little inflation (before the Fed) and generous dividend payouts, stock prices had little reason to advance much. By Ibbotson’s numbers, the after-inflation return of the market over the last 80 years is only 7.10%.
Sometimes I think we’d be better off the old way. Imagine a world without inflation and you owned a stock that almost always traded around $100, and every six months you got a check for $3.50 a share. Booyah!

Sorry, Folks
Posted by Eddy Elfenbein on March 31st, 2006 at 12:57 pm

It’s just too nice outside to blog about stocks. I promise I’ll have more later.
This is the last day of the first quarter. The S&P 500 is flat, but it looks like this will be the best Q1 since 1999. The Nasdaq is holding above 2,340.
The Buy List is looking good today, especially Respironics (RESP) and Golden West Financial (GDW).
If anyone needs me, I’ll running around outside with my shoes off.

Harley in China
Posted by Eddy Elfenbein on March 30th, 2006 at 12:13 pm

Harley-Davidson (HDI) is set to open its first dealership in Beijing. They really could have used a couple of Harley’s on the Long March.

The move into China is part of Harley’s push to take its bad-boy image global. In the U.S., the $5.3 billion motorcycle manufacturer rules the heavyweight premium-bike segment with a 48.9% share, well ahead of Japanese rivals such as Honda (HMC) and Suzuki. Overseas is a different story. Although Harley’s international deliveries grew 15% in 2005, the U.S. still represents more than 80% of the company’s sales.
And its biggest foreign market isn’t fast-growth Asia, but Europe, where it sold about 30,000 bikes last year. Canada came next, with 11,700, followed by Japan with 11,400, according to company data. Harley groups China into an “all other countries” category of about 11,200 bikes in 2005.

Today’s GDP Report
Posted by Eddy Elfenbein on March 30th, 2006 at 11:01 am

The government revised GDP growth for the fourth quarter today to 1.7% from the original 1.6%. I think this was a minor slowdown for the economy. Next month, we’ll get our first look at the growth rate for the first-quarter. I think it will be over 4%, perhaps 5%. Over the last three years, the economy has grown by 10.8%.

James Surowiecki on the Newspaper Biz
Posted by Eddy Elfenbein on March 30th, 2006 at 10:52 am

From the current New Yorker:

But McClatchy’s gamble depends on a simple, if often overlooked, fact: newspapers remain a surprisingly robust business and generate tremendous amounts of cash every year. Most of them have profit margins that dwarf those of the average company; McClatchy’s operating margin last year was twenty-eight per cent, while ExxonMobil’s was around sixteen per cent, and the typical supermarket’s is around four per cent. The reach of newspapers remains huge. Daily circulation is around fifty-five million (not including online readers), giving the industry more customers than any other traditional media outlet. And those customers have the kind of demographics that advertisers like; even as circulation has dropped, revenue from print ads has stayed healthy, to the tune of more than forty-seven billion dollars last year. Newspapers are classic cash cows: solidly profitable businesses in a stagnant industry.
So why are newspapers everyone’s least favorite enterprise? One reason is that Wall Street tends to love growth stocks, and to underplay the value of steady cash generation. And no one likes to be in a business that’s losing customers.

Heigh-Ho Silver
Posted by Eddy Elfenbein on March 29th, 2006 at 12:32 pm

The poor man’s gold is over $11 for the first time in 23 years. The metal cracked $50 when the Hunt brothers tried to corner the market. The silver market famously crashed on Silver Thursday (26 years and two days ago), and the Hunts were wiped out. (They later become the inspiration for Mortimer and Randolph Duke in the movie Trading Places.) Barclays has been fighting to launch a silver ETF, much like the gold one (GLD).

UnitedHealth Not Interested in Humana
Posted by Eddy Elfenbein on March 29th, 2006 at 11:49 am

Long-time readers will note that I take a somewhat skeptical view of acquisition strategies (GAG!!). That’s why I was glad to see UnitedHealth (UNH) firmly squash any rumors that it’s about to buy Humana (HUM).
Over the past few days, Humana’s stock has risen while UNH’s has fallen back. Today, UNH released an 8-K report which clearly said that it ain’t interested:

From time to time in late March 2006 and the first half of April 2006, William W. McGuire, M.D., Chairman and Chief Executive Officer of UnitedHealth Group Incorporated (the “Company”), Stephen J. Hemsley, President and Chief Operating Officer of the Company, and other senior members of the Company’s management team will be meeting with investors and analysts.
Those discussions will focus on the Company’s strategy, tactics and future outlook, and will include a reaffirmation of the Company’s publicly disclosed 2006 financial expectations, including strong revenue growth, outstanding cash generation and a very positive earnings performance. The discussions will reflect the Company’s particular focus in 2006 on organic growth, new internal initiatives and the full integration of recent business combinations. Given this agenda, the discussions will underscore that it is unlikely that the Company will pursue merger activity with any large, multi-site health benefits providers in 2006.

UnitedHealth’s stock is up about 4% today.

The Fed Raises Rates
Posted by Eddy Elfenbein on March 28th, 2006 at 2:15 pm

For the 15th straight meeting, the Federal Reserve has raised interest rates by 0.25%. The Fed funds rate is now 4.75%.
Here’s the statement:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent.
The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.
The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.
In a related action, the Board of Governors approved a 25-basis-point increase in the discount rate to 5-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco.

What does “some” mean? For now, the market thinks it means at least one more rate hike. The second paragraph is new, but the third is the exact same language as last time.

Hansen Natural
Posted by Eddy Elfenbein on March 28th, 2006 at 11:41 am

Hansen Natural (HANS), the Monster Energy drink stock, is now just getting silly. The stock was up 333% last year, and it’s already up 55% this year. Three years ago, you could have picked up shares of HANS for less than $2. Today, it’s at $123. Wow!
Lennar (LEN) reported good earnings this morning even though the housing market is showing some signs of weakness. The company earned $1.58 a share, three cents more than estimates.
I was happy to see someone upgrade Fair Isaac (FIC) this morning. The stock is around $39 a share.
The big news today is the Fed meeting in Washington. This is the first meeting with Bernanke in charge. The bank will almost certainly raise rates another 25 basis points to 4.75%. This will mark the 15h straight rate hike, and it will finally push the Fed funds rate to the same level as long-term interest rates. I just noticed that the 10-year bond is at 4.751%, so that makes for a perfectly flat yield curve.
The Conference Board reported that consumer confidence jumped to a four-year high. That probably explains Tiffany‘s (TIF) strong earnings report. The company reported earnings of 97 cents a share, 13 cents more than expectations.

Apple Turns 30
Posted by Eddy Elfenbein on March 27th, 2006 at 1:14 pm

This has been a busy week for Apple Computer (AAPL), which turns 30 years old on Saturday. Not only have they gotten in a fight with France, but now they’re fighting with the Beatles. The Fab Four’s business is also called Apple, and this is the third time Apple and Apple have clashed.
The Beatles first took Apple to court in 1978 when the computer company agreed to stay away from the music business. In 1989, the Fab Four nailed Apple when the company released a music-making program. The computer company had to shell over $26 million. Now the Beatles are taking aim at Apple’s iTunes Music store.
The French National Assembly has also jumped into the act:

Last week, France’s National Assembly passed an authors’-rights bill that would, among other things, require music-download stores such as Apple’s iTunes to open their proprietary “digital rights management” copy-control software to users and competitors
The idea behind that provision of this bill, which must still be approved by France’s Senate, is to ensure that a music download can be played on any device, not just one allowed by the seller of that file.

Kevin Hassett sums up the issue:

Imagine if someone built a resort so beautiful that vacationers swarmed to it, and the French passed a law requiring the resort owners to let French citizens stay at the resort for free. This ruling is essentially the same thing. The French are trying to rob an American company.

Interestingly, it was 40 years ago today that John Lennon said that the Beatles were bigger than Jesus. But are they bigger than Steve Jobs?