Morning News: November 13, 2015
Posted by Eddy Elfenbein on November 13th, 2015 at 6:12 am

Half of Russia’s Richest People Are Planning to Cash Out

French Economic Rebound Suggests Best Year Under Hollande

Hong Kong Posts Modest Third-Quarter Growth, Braces for China Slowdown

Fischer Says Strong Dollar Delayed Rate Rise, but Fed Could Move in December

U.S. Budget Deficit Edges Higher in October

After Budget Deal’s Surprise Cuts, Can Boomers Really Count on Social Security?

Hulu Service Said in Talks to Sell Stake to Time Warner

Kentucky Fried Chicken Real Meals Just Got Easier with DoorDash On-Demand Delivery

Fossil Group to Buy Misfit for $260 Million

Cisco Forecasts Miss Estimates as Currency Erodes Growth

Syngenta Shares Rise on Report of Chinese Takeover Interest

Liberty Media Lets Investors Bet On Radio, Baseball, With Tracking Stocks For Sirius, Atlanta Braves

Volkswagen, Offering Amnesty, Asks Workers to Come Forward on Emissions Cheating

Joshua Brown: Aggressive Financial Salespeople and Test Scores

Roger Nusbaum: Myopia & Market Function

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Morning News: November 12, 2015
Posted by Eddy Elfenbein on November 12th, 2015 at 6:08 am

Draghi Stimulus Hint Underpins Stocks, Knocks Euro

Greece Comes to a Standstill as Unions Turn Against Tsipras

Russia’s Oil Rivalry With Saudis Masks the Bigger Iranian Threat

CICC Keeps It `Conservative’ With 300% China IPO Return Forecast

Apple, Banks in Talks on Mobile Person-to-Person Payment Service

Rolls Royce Plunges in London as Executive Jet Market Sags

Lenovo Posts Narrower-Than-Expected Loss Amid Phone Restructure

Macy’s Fights Downward Spiral With Bet on Off-Price Backstage Stores

Wal-Mart Goes ‘Deep’ on Holiday Inventory in Bid to Boost Sales

Kroger/Roundy’s Tie-Up Is A Win-Win For Both Parties

Airbnb Pledges to Work With Cities and Pay ‘Fair Share’ of Taxes

Merck KGaA Raises Forecast as Quarterly Profit Tops Estimate

The Next Internet? Marijuana Delivered as Easy as Pizza

Cullen Roche: Why No One Should Support the Gold Standard

Jeff Carter: What’s SnapChat Worth?

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Why Active Managers Lose
Posted by Eddy Elfenbein on November 11th, 2015 at 3:41 pm

Interesting article at Bloomberg View. The authors address the puzzling reason why so many active managers lose to the indexes, even before fees.

The reason, they contend, is that stock returns are very unevenly distributed. The big winners are really, really big. So big that they skew the whole sample. So while the total index reflects that, it’s very hard for an active manager to select one of those few big winners.

Here is a simple illustration of our main idea:

Consider an index of five securities. Four (though we don’t know which) will return 10 percent and one will return 50 percent.

Suppose active managers choose portfolios of one or two securities and each investment is weighted equally. There are 15 possible one or two security “portfolios.” Of these, 10 will earn returns of 10 percent, because they will include only the 10 percent securities. Just five of the 15 portfolios will include the 50 percent winner, earning 30 percent if part of a two-security portfolio and 50 percent if it is the sole asset in a one-security portfolio. The mean average return for all possible actively managed portfolios will be 18 percent; the median actively managed portfolio will earn 10 percent. The equally weighted index of all five securities will earn 18 percent.

In other words, the average active-management return will be the same as the index, but two-thirds of the actively managed portfolios will underperform the index because they will omit the 50 percent winner.

It should be noted that there are some stock-pickers who have done quite well.

The TED Spread and Equity Returns
Posted by Eddy Elfenbein on November 11th, 2015 at 11:54 am

I was curious to see if there’s a connection between the TED Spread and equity returns. The answer seems to be no, but there are some notable exceptions. That’s one of the issues in doing research—you spend a lot of time crunching the numbers only to reach a dead end. Still, I thought I’d share my results with you.

The TED Spread got a lot of attention during the financial crisis and it’s faded away since then. The TED Spread is the difference between the short-term Treasury yield and the Eurodollar yield (TED standing for Treasury-Eurodollar).

In short, this measures the level of panic within the financial system. For the most part, the TED Spread bounces between 0.1% and 0.5%. When folks get nervous, it spikes up to 0.7% and can even go as high as 1%. During the financial crisis, it spiked over 2% and got as high as 4.58%. That shows you just how scary those days were.

I went to the Federal Reserve’s database and took all the TED Spread numbers going back to 1986 and compared them with the Wilshire 5000 Total Return Index. I then divided the Ted Spread numbers into 10 buckets of increasing value (0.09% to 0.2%, 0.21% to 0.25%, etc.). I then saw how the market performed on those days, and I annualized those results.

Here’s what I got.

In other words, the Ted Spread was between 0.09% and 0.20% 933 times. Over that period, the market had an annualized return of 10.11%.

There doesn’t appear to be any clear trend until we exceed 1%. The stock market does very poorly over 2.10%, but that doesn’t happen often. Interestingly, the market does quite well between 1% and 2.10%.

My hunch is that that reflects the market chilling out as the TED Spread falls from its elevated position. For example, the TED Spread was still quite high after the 1987 crash. At the market low in March 2009, the TED Spread was still over 1%. This means it may not be the TED Spread itself that’s important to the stock market, but the direction of the TED Spread. Of course, that’s a guess (and for another project).

Whenever I do research like this, I want to find a variable that has a consistent impact on stocks. For example, I found that stocks do well when the 10-year TIPs yield is low. The lower the better, and the higher the worse. Those are the types of relationships I want to find.

Morning News: November 11, 2015
Posted by Eddy Elfenbein on November 11th, 2015 at 7:12 am

China Car Sales Get Jump-Start From Tax Cut

Pound Gains as Unemployment Decline Bolsters Case for Rate Boost

Dollar Lower on Position Adjustments

How Will The Fed Raise Rates?

Shoppers Blew $1 Billion in the First Eight Minutes of the World’s Biggest Online Shopping Spree

Alstom Wins $3 Billion Indian Railways Contract

Fidelity Marks Down Value of Snapchat Stake by 25%

AB InBev Gets SABMiller for $107 Billion as U.S. Deal Agreed

Molson Coors Nears Deal to Buy Out Remainder of MillerCoors Venture

Charges Announced in J.P. Morgan Hacking Case

McDonald’s Won’t Spin Off Real Estate Holdings

Can Retail Robots Make Brick and Mortar Shops Competitive Again?

Attorney General Tells DraftKings and FanDuel to Stop Taking Entries in New York

Joshua Brown: Don’t Sleep on Gen X

Howard Lindzon: Scheme or Racket? …and Eric Schneiderman

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Morning News: November 10, 2015
Posted by Eddy Elfenbein on November 10th, 2015 at 7:08 am

Creditors Withhold 2 Billion Euro Bailout Payment From Greece

Two-Child Policy Will Boost China’s GDP Growth by 0.5%, Government Says

IEA Sees OPEC Market Share Growth in 2020 as Rivals Stagnate

Pimco Suit Sheds Light on Murky Investor Fees

Buffett’s $1 Billion Purchase That Got Buried in Record Quarter

GE, Alstom Land $5.6 Billion Deals to Supply Indian Railway

D.R. Horton Profit Jumps, as do New Home Orders and Closings

ABN Amro IPO Values Bank at Over $16 Billion

Tencent Shows Its Resilience With Strong Profit, Revenue Growth

Ackman’s Biggest Valeant Regret Is Being Unable to Buy More

Match’s Parent Aims to Cash in on Dating Boom

The Rise of Airbnb’s Full-Time Landlords

U.S. Government, Electrolux Argue at Trial Over GE Appliance Deal

Cullen Roche: Economic Bellweather CSX on the State of the Global Economy

Roger Nusbaum: Jobs Up! Rate Hike On?

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The Impact of Bad Weather on Analysts
Posted by Eddy Elfenbein on November 9th, 2015 at 2:32 pm

I wouldn’t read too much into this fun, but I think it’s fun nonetheless:

To investigate the influence of weather on analysts, the team looked at 636,000 market observations by 5,456 brokerage-firm analysts known as sell-side analysts from 1997-2004. Because the researchers knew where the analysts were located, they could check the weather during each of the 636,000 observations.

Based on the calculations, comparing responses of analysts in good weather and bad when earnings announcements were made, analysts experiencing bad weather were 9% to 18% less likely to issue an annual earnings forecast; a recommendation to buy, hold or sell; or a target-price recommendation. Dr. deHaan says the calculations were designed to measure only the effect of weather, and canceled out such influences as characteristics of the firm, analyst or market conditions.

Snap-on Raises Dividend by 15%
Posted by Eddy Elfenbein on November 9th, 2015 at 10:28 am

This morning, Snap-on (SNA) announced a 15.1% dividend increase. The quarterly payout will rise from 53 to 61 cents per share.

Annually, that comes to $2.44 per share. This year, Snap-on should earn about $8.06 per share. Last year, they earned $7.11 per share. That keeps their payout ratio around 30%.

There have been a few times when SNA has skipped raising its dividend so it doesn’t have a long streak like some others. Still, the company has a long trend of raising dividends.

The Small-Cap Premium is Bunk
Posted by Eddy Elfenbein on November 9th, 2015 at 10:10 am

The other day, I wondered if the value premium was a thing of the past. Today, I’ll set my sights on the small-stock premium.

This is the observation that smaller-cap stocks have historically outperformed their larger peers over the long haul. I’m very suspicious on this point. It could be that smaller companies are more nimble and have a greater ability to adapt to a changing marketplace.

The problem, however, is how this is measured. We have to remember how unbalanced the stock market is. There are a small number of giant companies, and thousands of tiny ones.

When divided into size deciles, the smallest 10% of stocks comprise about 3% of the total market. That’s about the size of one mega-cap stock. It would be like looking at the long-term outperformance of one particular S&P 25 stock and claiming a premium for it.

There’s also an issue of how volatile this premium is. Here’s a look at the Russell 2000 divided by the Russell 3000. This shows that over the last 37 years, small-caps have underperformed.

For it to be a premium, I think it needs better performance than that.

There’s also a larger problem methodology. Michael Batnick relates the poor statistical foundation that the long-term returns are based on.

Morning News: November 9, 2015
Posted by Eddy Elfenbein on November 9th, 2015 at 7:15 am

OECD Warns of Global Trade Slowdown, Trims Growth Outlook Again

China’s Trade Drop Means More Stimulus Measures Are Coming

Yergin Joins OPEC in Seeing Oil Market Balanced as Soon as 2016

Dollar Bulls are Vulnerable as Currency’s Strength May Cap Rates

Banking Giants Learn Cost of Preventing Another Lehman Moment

Regulators Urge Broader Health Networks

Dish Tops Profit Expectations Despite Pay-TV Subscriber Losses

Ericsson, Cisco Pool Telecom, Internet Savvy in Wide-Reaching Alliance

Snapchat Triples Video Traffic As It Closes the Gap With Facebook

PrairieSky Agrees to Acquire Canadian Natural Royalty Assets

Boeing Ends Dubai Drought With $8 Billion 737 Deal From Jet

Match Group Sets IPO Terms

Bonus Pay on Wall Street Is Likely to Fall, a Report Says

Joshua Brown: R.I.P. BRIC

Jeff Miller: What Will Higher Interest Rates Mean for Financial Markets?

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