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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Moog Earned 75 Cents per Share
Posted by Eddy Elfenbein on November 6th, 2015 at 1:29 pm

This morning, Moog (MOG-A) became our final Buy List stock to report earnings for this season. The company reported fiscal Q4 earnings 75 cents per share. However, 13 cents went to “incremental restructuring and impairment costs.” The company also said that they were hit by four cents due to a higher-than-expected tax bill. Wall Street had been expecting 92 cents per share, and the company gave us a forecast of 91 cents per share.

The market doesn’t seem too upset with the earnings miss. The shares are currently up about 1%.

The good news is that they’re standing by their forecast for next year of $4 per share.

Fiscal ’15 was a challenging year for our company across multiple fronts,” said John Scannell, Chairman and CEO. “In the face of these challenges, we delivered solid earnings and record cash flow. We are projecting a stronger fiscal ’16 with earnings per share of $4.00, up 19% on sales growth of about 2%.”

This was a tough year for Moog. Earnings-per-share fell from $3.52 to $3.35. Sales fell 4.6% to $2.53 billion.

Classic Quadrant II Day
Posted by Eddy Elfenbein on November 6th, 2015 at 1:11 pm

Earlier this year, I laid out my “Elfenbein Theory to Explain the Entire Stock Market.” It basically describes how interest rates influence the stock market.

Here’s the key matrix:

I would say that today is a classic Quadrant II day. Bank stocks are doing well, but defensive stocks are in the rear. Short-terms are up not down, but my theory is based on their relative impact.

Again, I’ll stress to not take this as a perfect map of what the market does, but it’s a good way of seeing general market relationships.

Q3 2015 Earnings Calendar
Posted by Eddy Elfenbein on November 6th, 2015 at 11:42 am

Seventeen of our 21 Buy List stocks report Q3 earnings in the current reporting season. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results.

What if the Value Premium is Gone?
Posted by Eddy Elfenbein on November 6th, 2015 at 11:17 am

When I was on CNBC last week, I noted the long underperformance of value stocks. The value guys haven’t led the market in a few years. This is unusual because a large body of academic work has shown that value stocks have historically outperformed the market.

Professor Noah Smith wonders if the value premium no longer exists.

As financial markets improved, we may have seen the entrance of more investors who are willing to do the hard work of digging up obscure and boring companies, and who are willing to go against the herd. If the value premium really was a systematic underpricing rather than a true risk premium, then the gradual development of financial markets would be expected to shrink this premium over time.

There are signs that this is happening. Although value stocks did well in the early 2000s, they have dramatically underperformed since the crisis, even though the market has boomed. Of course, that might simply be a particularly long period of underperformance — we might expect to see value bounce back soon enough. But in fact, the decline has been going on for quite a bit longer than that — the value premium has been falling since the mid-1990s. Coincidentally, that is exactly when the Internet and computerized trading systems made it possible to invest in stocks much more cheaply, and to gather information much more easily.

That would mean that markets are getting more efficient — at least, in this one particular way. But it would also mean that market efficiency takes a very long time to establish itself. If big, systematic mispricings such as the value premium can survive for decades before they are finally traded away, it means that other flaws in the market might be equally long-lived. For example, the momentum factor — another mainstay of standard finance theory — might also be a market flaw that will eventually be shown the exits.

If the market is that inefficient, it also means that stock prices are, in some deep sense, “wrong” — that they are not the best available estimate of a company’s value. That would suggest we should be relying on markets less than we do for things like executive compensation. So watch to see if the value premium comes back. If it doesn’t, it means it might never have been about risk in the first place.

It’s an interesting thought. The only thing I would add is that value investing suggests that the market is both right and wrong. It’s inefficient in that values emerge and efficient in that it recognizes the error.

Make that two things. I’m curious how much financial stocks have weighed down value indexes. The sector hasn’t been too strong since, oh, about 2006.

Here’s a look at financial stocks divided by the S&P 500 (in blue) and value stocks divided by the S&P 500 (in black). (I apologize if it looks confusing.)

The point being that the performance of financials seems to be related to the performance of value. Note that that relationship has parted ways in the last two years. Nevertheless, the fallout from the financial crisis may be impacting the long-term performance of value stock indexes.

The Market’s Response
Posted by Eddy Elfenbein on November 6th, 2015 at 9:56 am

This is an interesting day as Wall Street digests the impact of today’s strong jobs reports.

The overall market is down a little bit, but there’s a lot going on under the covers. For example, bank stocks are doing very well today. On our Buy List, Signature Bank (SBNY) and Wells Fargo (WFC) are having very good days.

Utility stocks and some defensive areas like Staples and Healthcare aren’t doing so well. Qualcomm (QCOM) is recovering a bit after yesterday’s debacle.

The bond market is moving lower. The 10-year Treasury is up to 2.32%. On October 14, it had closed at 1.98%. Gold is down for the eighth day in a row. Dan Rosenblum informs me that gold is down 15 times in the last 17 sessions.

Check out the reaction in the six-month Treasury.