• The Long View for Stocks
    Posted by on January 22nd, 2015 at 1:21 pm

    Ibbotson Associates is known for their collection of long-term financial returns data. Their latest yearbook isn’t out yet, but I was able to bring the data up to date by using numbers from Standard and Poor’s.

    Here’s what the chart looks like of long-term stock returns from December 31, 1925 to December 31, 2014.

    image1454

    The blue line is stocks and dividends but is not adjusted for inflation. Starting with $1, it turns into $5,300 by the end of 2014. That’s an annualized total return of 10.12%.

    The red line is the blue line adjusted for inflation. Stocks have averaged a total real return of 6.98% annualized over the last 89 years. That’s roughly stocks doubling in real value every decade.

    Of course, there’s a lot of variation in that. Over the last 15 years, real stock returns have averaged less than 2% per year.

    Jeremy Siegel often talks about how stocks have returned 7% in real terms over the long haul. I’ve even heard this referred to as the Siegel Constant.

    Personally, I don’t think investors should expect 7% real returns going forward. The problem with this past data is that it’s based on the American Century. I’m still a long-term bull but we can’t replicate the success of 20th Century America.

    Now let’s have more fun with the data. I took the red line and divided it by a 7% trend line, meaning a line that just rises by 7% per year, every year. So when we divide the two, it means that whenever the line is rising, stocks are outperforming their long-term average. When it’s falling, they’re trailing it. (Even a mildly declining line is still making money for you.) I then made it a logarithm chart so it would be easier to read. Here’s what I got:

    image1455

    A few thoughts: First, notice how cyclical the chart is. Stocks don’t return 7% per year consistently. Rather there are long periods of outperformance followed by long stretches of underperformance.

    Second, the 1949 to 1956 bull market was one of the greatest in history. No one talks about that one. I think it’s because it never crashed.

    Third, the 1929, mid-1960s and 2000 peaks are all roughly similar. The mid-1960s peak was a rolling one. Things didn’t really fall apart until the 1973-74 crash.

    Similarly, the 1932, 1982 and 2009 troughs aren’t too far apart.

    Fourth, 1929 to 1932 sucked. Seriously.

    Fifth, as strong as the last six years have been for stocks, we’re merely back to our long-term average. Actually, we’re still a bit short of it. Stocks would have to gain about 20% in 2015 for us to be back at the mid-point.

    Finally, if you use a little imagination, this chart somewhat resembles the long-term chart of P/E Ratios. This makes sense since earnings have tended to increase at a fairly steady pace over the long haul. Not quite like a 7% trend line, but not too far off, either.

  • Morning News: January 22, 2015
    Posted by on January 22nd, 2015 at 7:14 am

    Davos 2015: Banks Call For Free Rein to Fight Cyber Crime

    Draghi Is Pushing Boundaries of Euro Region with QE Program

    The Drivers And Implications Of The Bank Of Canada’s Oil-Driven Rate Cut

    Fed Officials Reassess U.S. Outlook Amid Global Weakness

    Speculators Looking for Havens from Slowing Growth are Piling Into Silver

    Talk of Wealth Gap Prods the G.O.P. to Refocus

    ‘Fast Money’ Recap: eBay Could Be Undervalued but Not After PayPal Spinoff

    American Express To Slash 4,000 Jobs On Heels Of Strong Quarter

    Kinder Morgan: A Splendid Quarter To Kick Off A New Era

    Uber Raises Another $1.6 Billion With Convertible Debt Sale

    Netflix Soars Most Since April 2013 on Profit Talk, Rollout

    Hyundai Motor’s Biggest-Ever Dividend Greeted With Outlook Concern

    EBay’s Breakup Plans May Open Door for e-Commerce M&A

    Joshua Brown: The Riskalyze Report: Advisors Spread the Wealth

    Jeff Carter: What To Do About Dead Equity On The Cap Table

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  • eBay Earned of 90 Cents per Share
    Posted by on January 21st, 2015 at 4:54 pm

    After the closing bell, eBay ($EBAY) reported Q4 earnings of 90 cents per share. That was one penny better than expectations. Three months ago, eBay said that Q4 earnings would range between 88 and 91 cents per share. For all of 2014, eBay earned $2.95 per share. That compares with $2.71 per share in 2013.

    Now the bad news. For Q1, eBay said they expect earnings to range between 66 and 71 cents per share. Wall Street had been expecting 76 cents per share. They expect full-year 2015 earnings of $3.05 to $3.15 per share.

    The stock is up a bit after hours. Why? The company announced layoffs of 2,400 jobs in order to get ready for the PayPal spinoff. This isn’t really news since the company had already said that layoffs were planned. Today is the day we got the details. But eBay had other news:

    EBay also said it would be exploring strategic options for eBay Enterprise, including a sale or initial public offering.

    “Enterprise is a strong business,” the company said, but “it has become clear that it has limited synergies with either business and a separation will allow both to focus exclusively on their core markets.”

    The company also announced today that it has entered into a standstill agreement with investor Carl Icahn , the company’s largest active shareholder. In addition to certain corporate governance provisions to be adopted by PayPal as an independent company at the time of its spin-off from eBay, the agreement also appointed Icahn Capital executive Jonathan Christodoro to eBay’s current board.

    Mr. Icahn, in a statement on its website, said the corporate governance provisions includes limits on any so-called poison pills and prevents a staggered board at PayPal. The provisions were aimed at giving shareholders a greater ability to weigh in on any offers made for the company.

    “In the end, it should be the shareholders’ decision. This fundamental belief was the underlying philosophy of many of the corporate governance principles for which we advocated at PayPal,” Mr. Icahn said. “We applaud eBay’s board for making this agreement possible.”

    Icahn pushed for this spinoff and he was right. eBay is up 2.66% in after-hours trading.

  • The Super Bowl Indicator
    Posted by on January 21st, 2015 at 2:21 pm

    From Gary Alexander at Navellier Market Mail:

    Will Seattle Save the Stock Market Again This Year?

    Last January, the S&P fell 3.56%, but then Seattle saved the market. On Sunday, February 2, the Seattle Seahawks (the NFC Super Bowl team) thrashed Denver (the AFC team), 43-8. The market immediately turned around. The S&P gained 4.31% in February, erasing all of its January losses, eventually delivering double-digit gains for all of 2014. From Super Bowl Sunday to New Year’s Eve, the S&P gained 15.5%!

    The Super Bowl Indicator basically says that the market will go down in a year in which the AFC team wins, and it will go up if an “old-line NFL” team wins. Being from Seattle, I hope our team wins the first back-to-back Super Bowl victories in a decade (since New England turned the trick in 2004-5 – which were both good market years, by the way). But I know better than to mix football and stock analysis.

    The first problem with the Super Bowl Indicator is the squishy term “old line NFL.” Seattle is in the NFC now, but it was in the AFC for most of its tortured path to football supremacy. Seattle joined the National football conference in 1976, but then it struggled in the AFC from 1977 to 2001 before rejoining the NFC.

    This kind of tortured team history is now common in the NFL. Some other recent Super Bowl winners are currently aligned with the AFC but they are also old-line NFL teams: The Indianapolis Colts (2007 winners) were once the Baltimore Colts, while the Baltimore Ravens (the 2013 champs) were once the Cleveland Browns. The Pittsburgh Steelers (winners in 2006 and 2012) are also from the old-line NFL.

    The statistical secret of this correlation is that the stock market goes up more than it goes down. Since 1967 (Super Bowl 1), the Dow has risen in 35 of 48 years. In the first 48 Super Bowls, an “old-line NFL” team won 34 contests, so there is bound to be a lot of overlap. But the statistical reality is that if a coin comes up heads 30 of 31 times, the chances it will come up heads on the next toss will always be…50%.

  • RIP: Melvin Gordon
    Posted by on January 21st, 2015 at 12:31 pm

    Melvin Gordon has died at the age of 95. He was the CEO of Tootsie Roll ($TR).

    People are often surprised that Tootsie Roll is its own stock. They assume it’s owned by major corporation like Cadbury or Hershey. Nope, Tootsie is all by itself and Melvin Gordon was its CEO for 53 years.

    The stock was actually a strong performer for many years. It rallied from 20 cents per share in 1980 to $30 by 1998. Since then, it hasn’t done much. It’s mostly rallied up and down between $20 and $30 per share. Tootsie has also issued 3% stock dividends every year for the last 17 years (I believe that’s correct).

    Still, I have a special place in my heart for small, oddball companies that do their own thing. I’ll miss you, Melvin.

  • Morning News: January 21, 2015
    Posted by on January 21st, 2015 at 7:08 am

    Central Banks Dominate FX Price Action

    Is Draghi About to Massively Misfire?

    May You Live In Interesting Times – Central Banks On The Loose In 2015

    U.K. Zero Inflation Threat Quashes BOE Rate Dissent: Economy

    Netflix Shares Surge on Subscriber Growth

    The Secret to Amazon’s Success is Streaming TV

    Xiaomi Threatens Samsung’s Market Position in Chinese Low-End Smartphone Market

    Samsung Drops Qualcomm Chip From Next Galaxy Smartphone

    UnitedHealth Earnings Rise 6%, Top Wall Street Expectations

    Wal-Mart Launches Cash Pickup Option for Tax Refunds

    Morgan Stanley’s Results Miss Estimates

    Johnson & Johnson Facing Headwinds From A Stronger Dollar

    BHPB Pumping Iron – But Also Oil

    Joshua Brown: There’s More to Life Than The S&P 500

    Roger Nusbaum: Weekly Market Review – Week Ending 1/16/2015

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  • September Fed Funds Futures
    Posted by on January 20th, 2015 at 5:55 pm

    Just to show you how much things have changed, here’s a chart of the September 2015 Fed funds futures contract (click on the chart for a larger version)

    cbotcis01202015

    Not that long ago, the market thought the Fed would have interest rates at 0.5% (99.50 on the chart) by this September. Now they think the Fed will be at 0.25% by September.

  • Ritholtz on Forecasting
    Posted by on January 20th, 2015 at 12:22 pm

    Great column by Barry Ritholtz and the absurdity of forecasting:

    Economists, market strategists and analysts alike suffer from an affinity for making big, frequently bold — and most often, wrong — pronouncements about what is to come. This has a pernicious impact on investors who allow this guesswork to infiltrate their thinking, never for the better.

    I have been beating this drum for more than a decade. What say we finally put a fork in Prediction, Inc.?

    There is a forecasting-industrial complex, and it is a blight on all that is good and true. The symbiotic relationship between the media and Wall Street drives a relentless parade of money-losing tomfoolery: Television and radio have 24 hours a day they must fill, and they do so mostly with empty-headed nonsense. Print has column inches to put out. Online media may be the worst of all, with an infinite maw that needs to be constantly filled with new and often meaningless content.

    Just because the beast must be fed does not mean you must be dragon fodder.

  • High Beta Pain
    Posted by on January 20th, 2015 at 11:06 am

    Stocks with higher betas have been lagging badly this year. They’re doing a little better today, but it’s been a rough ride since September. Here’s the High Beta ETF ($SPHB) divided by the S&P 500.

    sc01202015a

  • Denmark Goes More Negative
    Posted by on January 20th, 2015 at 10:49 am

    The dramatic move by the Swiss National Bank shook up currency traders. Now it’s Denmark’s turn. After all, they face the same pressures from the ECB. The Nationalbank, Denmark’s Fed, cut rates on CDs to -0.2% from -0.05%.

    Both the Swiss and Danish authorities, trying to keep their currencies — and exports — globally competitive, acted pre-emptively before a meeting of the European Central Bank on Thursday in Frankfurt. At that meeting, the bank’s policy makers are widely expected to announce a program of large-scale bond buying, an action that could further push down the value of the euro, which has been weakening for months.

    A weakening euro has the effect of making other European currencies, like the Swiss franc and Danish krone, relatively stronger — which effectively raises the prices of products priced in francs or kroner on the global market.