The S&P 500 and Its Earnings
Posted by Eddy Elfenbein on December 30th, 2015 at 9:38 am

Here’s the S&P 500 along with its earnings. The index is in black and it follows the left scale. The earnings are in yellow and follow the right scale.

The two lines are scaled at a ratio of 16 to 1. That means whenever the lines cross, the market’s P/E Ratio is exactly 16.

As you can see, earnings have ticked down for the last four quarters but are expected to rise again for Q4. The forward part of the earnings line is Wall Street’s estimate.

Morning News: December 30, 2015
Posted by Eddy Elfenbein on December 30th, 2015 at 7:02 am

Global Growth Will Be Disappointing in 2016: IMF’s Lagarde

A Chinese Company in India, Stumbling Over A Culture

Puerto Rico Debt Crisis Closes In on Jan. 1 Deadline

Consumer Confidence in U.S. Increases More Than Projected

For the Wealthiest, a Private Tax System That Saves Them Billions

Oil Prices Become a Problem for U.S. Steelmakers

Exporting Crude Oil

A Former ‘Pharma Bro’ Company Files For Bankruptcy

FedEx Cites ‘Unprecedented’ E-Commerce Surge in Christmas Delays

China Telecom Chairman Resigns Amid Corruption Probe

Chicago Subway System Now Has Full 4G Wireless Coverage

Icahn Has High Bid for Pep Boys as Bridgestone Backs Away

Elon Musk `Stepping on Toes’ in Space Race, Russia Official Says

Cullen Roche: The Best Econ and Finance Research of 2015

Jeff Carter: Never Pay For An Introduction

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The 2/10 Spread Drops Below 120
Posted by Eddy Elfenbein on December 29th, 2015 at 2:27 pm

I’ve probably become a bore on this point, but I like to keep a close eye on the spread between the 2- and 10-year Treasury bond yields. This indicator has a pretty good track record over the last few decades. When it goes negative, bad times are not long off.

We’re still a long way from going negative, but the spread dropped below 120 basis points yesterday. That’s among the narrowest spreads in eight years.

The spread briefly hit 119 in February of this next year before bouncing up to 177 by summer.

Should Cognizant Buy Perot Systems?
Posted by Eddy Elfenbein on December 29th, 2015 at 2:17 pm

One analyst thinks so. Here’s the story: Dell bought Perot Systems from Ross Perot for $4 billion. Now Dell is buying EMC so they want to free up some cash by selling off Perot.

David Koning at Robert W. Baird think Cognizant would be an ideal buyer:

Koning estimates Perot revenue at $3.1 billion annually, which is roughly 22.5% of Cognizant’s annual revenue. He estimates Perot’s EBITDA — earnings before interest, taxes, depreciation and amortization — at about $470 million, or roughly 15% of Cognizant’s EBITDA. He expects the combination would create about $50 million worth “of synergies.” Cognizant’s $3 billion of net cash in the bank could swing to $2 billion in debt, depending on how Cognizant financed the acquisition, he says.

Bottom line? Maybe 20 to 25 cents per share of improvement to Cognizant’s annual earnings, Koning says. “Investors sometimes don’t like the strategic fit but end up giving credit for accretion,” he wrote.

Interesting, but I’m not sure if this would be a good idea long-term. Sometimes I wonder if sitting on too much cash is a good thing. I’m reminded of what Peter Lynch called the “Bladder Theory of Corporate Finance.”

Lost in a Gloom of Uninspired Research
Posted by Eddy Elfenbein on December 29th, 2015 at 11:07 am

This time of year is popular for market watchers to make forecasts for the coming year. I try to avoid that game. I like to say that my year-end forecast for the Dow is December 31. Of course, I have the Buy List, but I’m referring to analysts who confidently say that the Dow or the S&P 500 will close next year at some precise level. The most I’ll say is that the math favors or doesn’t favor something. That’s quite a bit different from forecasting the precise close 12 months hence.

Bad news sells, and making dire forecasts is especially popular. In finance, there’s no shortage of people predicting doom and gloom. The problem is that whatever bad news comes along, they claim they were vindicated while conveniently overlooking the other bad stuff they predicted.

I remember one guru who claimed he predicted the financial crisis. To be fair, he did predict a financial collapse, but he predicted the meltdown of civil society. He said chaos would overtake the earth and people would have to turn to drinking rainwater to survive. I don’t recall that happening but those other forecasts get pushed down the memory.

I recently saw the movie, The Big Short. It’s OK, but not outstanding. I give the moviemakers credit for trying to explain some of the complex finance. As such, the movie is unconventional at times. The film centers on Dr. Michael Burry, an eccentric doctor-turned-hedge fund manager who correctly predicted the housing bubble.

The problem is that lots and lots of other people also predicted the housing bubble. Neil Irwin of the New York Times shows that the Google searches for housing bubble peaked in August 2005, two years before the crisis began. Even if you get the phenomenon right, there’s still the issue of timing.

What Dr. Burry got right was the systemic collapse. Burry recently had a rather gloomy outlook for the U.S. I have to say that I don’t find his views very persuasive. That’s the issue I want to get at. Burry is obviously intelligent, but intelligence isn’t the top trait an investor needs to have. I would rank patience and discipline above brains.

But there’s a certain kind of intelligence that can actively hinder investing performance. When you overanalyze too many variables, it often leads to a certain kind of highly intelligent person down the road forecasting disaster. As Wordsworth put it, “lost in a gloom of uninspired research.”

This leads me to one of the most complex and difficult to understand observations about people, and by extension, markets. This complex idea is that people generally find a way to muddle through, especially at the micro level.

Sounds earth-shattering, I know, but lots of smart people don’t get it. The famous guru will identify some terrible event, but they project its impact well out in the future. Instead, people will work around it.

For example, when a snowstorm hits a city, folks in the neighborhood are largely able to get by. They eventually dig themselves out. People look in on their elderly neighbors. Sure, It may not be pleasant, but within time, things slowly return to normal. But the city business or transit system will be complete chaos. That’s the thing. Big breakdowns usually happen at the higher orders (think Katrina). Large systems can freeze up, but people usually don’t.

Dr. Burry was able to see the threats to the system. His eccentric personality probably aided him in connecting all the dots. It’s usually the outsider with marginal views who’s right when all the experts are wrong. But that’s also why the same person will likely be dead wrong with their next 20 predictions. Making forecasts isn’t a skill like shooting free throws where you simply listen to people with better track records.

The Big Short notes that $5 trillion was destroyed by the financial crisis. That’s true, but at Gary Alexander points out, $30 trillion has been created since then. People muddled through.

Morning News: December 29, 2015
Posted by Eddy Elfenbein on December 29th, 2015 at 7:06 am

Putin’s Bailout Bank Needs a Rescue; It’s an $18 Billion Whopper

Crude Prices Rise on U.S. Export Prospects

Oil-Producing States Battered as Tax-Gushing Wells Are Shut Down

Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge

Marc Faber Takes on Janet Yellen

4 Tactical/Momentum ETFs: A Disappointing 1-Year Anniversary

Icahn Sweetens His Bid for Pep Boys to More Than $1 Billion

Whole Foods to Pay $500,000 for Overcharging NYC Customers

Deutsche Bank to Raise Up to $4 Billion From Huaxia Sale

U.S. Trade Body Declines Nvidia’s Review Petition Against Samsung

Start-Up With Bitcoin in Its DNA Stumbles on Fund-Raising Trail

Universities Race to Nurture Start-Up Founders of the Future

Adidas Not Facing Shareholder Pressure to Sell Reebok

Roger Nusbaum: Santa Claus Checks In

Joshua Brown: The Riskalyze Report: A Year-End Rotation

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Once Again…
Posted by Eddy Elfenbein on December 28th, 2015 at 3:14 pm

Here’s the 2016 Crossing Wall Street Buy List. The list goes live at the opening bell next Monday.

AFLAC (AFL)

Alliance Data Systems (ADS)

Bed Bath & Beyond (BBBY)

Biogen (BIIB)

Cerner (CERN)

Cognizant Technology Solutions (CTSH)

CR Bard (BCR)

Express Scripts (ESRX)

Fiserv (FISV)

Ford (F)

HEICO (HEI)

Hormel Foods (HRL)

Microsoft (MSFT)

Ross Stores (ROST)

Signature Bank (SBNY)

Snap-on (SNA)

Stericycle (SRCL)

Stryker (SYK)

Wabtec (WAB)

Wells Fargo (WFC)

Overpaying for Low Probability
Posted by Eddy Elfenbein on December 28th, 2015 at 9:40 am

In Big Short, people betting on low probability events are geniuses. In reality, people do this all the time, generally overpaying.

— Eric Falkenstein (@egfalken) December 27, 2015

I posted this tweet from Eric Falkenstein because it’s one of the fundamental truths about investing. Markets are generally not very good judges of low-probability events.

One of the best examples of this comes from horse racing. Historically, the worst bet to make is to bet on the long shot. Why is that the case? I think it’s because a certain amount of people want to bet on the long shot precisely because it is the long shot.

Think of the guy who says, “Dude, that horse is 70-to-1! I’m betting $10 on it. How crazy would it be if he won?”

Not to get overly philosophical, but the price impacts the price. I’m sure you’ve heard stories of an art gallery owner who can’t move a painting. Then he triples the price and it sells the next day.

In stocks, this effect often happens with companies that are supposed to be the “next Apple” or “next Google.” Sure, it might work out, but the odds are against it. Some people just want to own for the big payoff, and that itself makes it overpriced.

I suspect that the historic outperformance of value stocks isn’t due to something within value stocks but rather it’s due to the underperformance of richly-valued growth stocks.

Morning News: December 28, 2015
Posted by Eddy Elfenbein on December 28th, 2015 at 7:13 am

Japan Firms Cold on Abe’s Calls For Wage Hikes in 2016

Japan November Industrial Production Falls 1%

India Offers Atypical Video Challenges

Ruble Drops to 2015 Low on Year-End Budget Flows as Oil Tumbles

Prospects For The Oil Market – What Is Market Structure Telling Us As We Head Into 2016?

Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure

Yellen Price-Quirk Focus Shows Confidence in Inflation Comeback

Are Democrats Crippling Obamacare?

Which Puerto Rico Bond Defaults Next? 42% Yields Provide a Clue

F.A.A. Drone Laws Start to Clash With Stricter Local Rules

Colorado Banking Case Tests Federal Drug Rules

China Telecom Falls After Chairman Becomes Target of Probe

Volkswagen’s Audi Tempers Spending Plans for 2016

Cullen Roche: The Importance of First Principle Thinking

Jeff Miller: 2015 in Review: Hi-Yo, Silver!

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Merry Everything
Posted by Eddy Elfenbein on December 25th, 2015 at 8:49 am

I want to take this opportunity to wish everyone a Merry Christmas and a happy, healthy and profitable new year.

This has been a great year for Crossing Wall Street. Our Buy List is up again this year, and it looks like we’ll beat the market. Traffic to the blog continues to be strong, and the newsletter, CWS Market Review, has a record number of subscribers.

I want to thank Marcia Hippen for editing my posts and repairing my numerous typos. I also want to acknowledge some of my fellow financial bloggers Barry Ritholtz, Josh Brown, Morgan Housel, Howard Lindzon, Tadas Viskanta and many, many others for their continued support.

I’d also like to thank the people who follow and interact with me each day on Twitter. In particular, I want to call out George Acs, Zachary Shrier and Joseph Weisenthal. I now have over 22,000 Twitter followers.

Most of all, I want to thank all of my readers for your continued support.

Let’s hope 2016 brings us more success!