Morning News: October 15, 2014
Posted by Eddy Elfenbein on October 15th, 2014 at 6:50 am

German Bond Yields Drop to Records on Economy; Greek Debt Slides

Fall in UK Unemployment: What The Economists Say

Ireland to Close ‘Double Irish’ Tax Loophole

Fed Is Silent on Doomsday Book, a Blueprint for Fighting Crises

Refinance Boomlet Gives U.S. Banks Relief From Plunge

JPMorgan’s Profit Misses; Posts Unexpected $1 Billion Legal Expense

Qualcomm to Buy U.K. Chipmaker CSR in $2.5 Billion Deal

AbbVie to Reconsider Inversion Deal for Shire

Toyota Recalls 1.67 Million Vehicles

Citigroup Consumer Chief Plans to Leave

Intel Gives Rosy Fourth-Quarter Revenue Forecast as PCs Recover

IndiGo Signs Deal for Airbus A-320neo Aircraft

How Jean Tirole’s Work Helps Explain the Internet Economy

Jean Tirole’s Nobel Prize Is Also a Win for Modern Microeconomic Theory

Jeff Carter: Ebola Helping the Market Break

Joshua Brown: How We Think About ETFs

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Wells Fargo Earns $1.02 per Share
Posted by Eddy Elfenbein on October 14th, 2014 at 8:15 am

For Q3, Wells Fargo ($WFC) reports earnings of $1.02 per share which matched expectations.

SAN FRANCISCO (AP) _ Wells Fargo & Co. (WFC) on Tuesday reported third-quarter profit of $5.41 billion.

The San Francisco-based bank said it had earnings of $1.02 per share.

The results met Wall Street expectations. The average estimate of analysts surveyed by Zacks Investment Research was also for earnings of $1.02 per share.

The biggest U.S. mortgage lender posted revenue of $21.21 billion in the period, topping Street forecasts. Analysts expected $20.95 billion, according to Zacks.

Wells Fargo shares have risen 11 percent since the beginning of the year, while the Standard & Poor’s 500 index has climbed slightly more than 1 percent. The stock has increased 21 percent in the last 12 months.

Yes, the 200-DMA Works
Posted by Eddy Elfenbein on October 14th, 2014 at 7:56 am

I’m generally not much of a follower of technical analysis, but I don’t dismiss it either. In particular, I like to look at the 200-day moving average. So it was big news for me when the S&P 500 finally closed below its 200-DMA yesterday. That hadn’t happened in nearly two years. This was the second-longest streak in the last 58 years. We came about three months shy of tying the July 1996 to August 1998 streak.

I’ve looked at the historical data, and the 200-DMA has a decent track record. When the S&P 500 is above the 200-DMA, the market does well. When it’s below the 200-DMA, it does poorly. Not very complicated.

Since the beginning of 1933 to yesterday, the S&P 500 has traded above its 200-DMA 67.8% of the time. It’s traded below the 200-DMA the other 32.2% of the time. When the S&P 500 is above its 200-DMA, it’s risen by an annualized rate of 11.29%. But when it’s below the 200-DMA, it’s fallen at an annualized rate of -1.06%.

(Technical note: For consistency, I excluded Saturday trading which lasted until 1952. For the annualized numbers, I assumed a year of 253 trading days.)

Why is this so? I think this is a good example of a dumb rule that works for complex reasons. The complexity part is that the stock market does show momentum. Changes in the market are not normally distributed. Good times tend to lead to good times. Bad times lead to more bad times. The hard part, of course, is spotting when the trends change. The 200-DMA is about the sweet spot in that it’s long enough to capture the trend, but short enough to pick up on reversals. The more dramatic the reversal, the quicker the 200-DMA will flag it.

The Buy List Suddenly Wakes Up
Posted by Eddy Elfenbein on October 13th, 2014 at 10:01 pm

Our Buy List has been lagging the S&P 500 for much of this year, and it seems as if our seven-year market-beating streak is in jeopardy.

The market’s recent downturn, however, has been good for our Buy List. Or more accurately, we’re down but not as much as the overall market.

Our goal, of course, is to make money, not to suck less than everyone else. Since September 29, the S&P 500 is down 5.21% while our Buy List is down 2.77%. That’s a significant margin considering how broadly diversified our Buy List is. Consider that the correlation of daily changes between our Buy List and the S&P 500 is more than 93%. Being down half as much is not normal. Our “beta” usually runs about 0.95.

What happened is that when people get nervous, they don’t abandon the high-quality names on our Buy List as rapidly as they do for less-stable stocks.

For the year so far, our Buy List is down 1.01% while the S&P 500 is up 1.43%. If the trend of the last two weeks continues, we may close the gap even further.

The S&P 500 Closes Below Its 200-DMA
Posted by Eddy Elfenbein on October 13th, 2014 at 6:07 pm

Today was an unpleasant day for the stock market. The S&P 500 dropped 1.65% to close at 1,874.74. This was the worst three-day slide in three years. This is also the first time in nearly two years that the index has closed below its 200-day moving average. Historically, the stock market has performed much better when it’s above the 200-DMA than it has when it’s below it. This was the S&P 500’s lowest close since May 20. All told, the index is now 6.8% below its BABA high.

Shortly after 2 pm, the market was flat for the day, but then things fell apart, especially in the final trading hour of the day. The price of oil fell to a four-year low. With that, shares of energy stocks felt more pain. The dollar fell and gold rallied. Airline stocks have been getting clobbered which is probably related to Ebola fears. The VIX exploded 16% today to close at 24.64.

Bloomberg notes that futures prices indicate that there’s now a 46% chance the Fed will raise rates by their September 2015 meeting. That’s down from 55% on October 10. The price of oil fell today to $88.89 per barrel. That’s the lowest since November 2010. At least the bond market wasn’t harmed as it was closed today for Columbus Day.

Here’s a minute-by-minute chart of today’s market:

Here’s a look at airline stocks compared with the S&P 500:

Let’s Make Our Own Hypothetical Stock Market
Posted by Eddy Elfenbein on October 13th, 2014 at 12:23 pm

One of the points I stress to investors is just how much noise there is in everyday trading. Simply put, the stock market moves around a heckuva lot compared with what value is actually being created.

I ran the numbers going back to 1957 and found that the S&P 500’s average daily gain works out to 0.0255%. Roughly speaking, that means for every $39 you have in the stock market, you make an average of one penny in capital gains each trading day. Snoozeville, right?

Yet the average daily swing is about 40 cents. This means that you’re seeing 40 times the volatility of the value that’s actually being created, each day. That’s more than 97% noise.

We can use some basic math and a random number function to create our own hypothetical stock market. I’ve attached a spreadsheet which contains our phony market.

I’ve used the calendar for the 2013 trading year as our template. It contains 252 trading days. I’ve set our index to 100 at the start of the year. Each day, the index gains an average of 0.0255%. The random number generator gives us a standard deviation of 1%.

(This is not quite accurate due to the nature of fat tails. I ask the more numerate among us to leave that issue aside for now, since it doesn’t detract from my point. In fact, it supports it.)

Once you’ve downloaded the spreadsheet (and assuming I’ve done this correctly), you can simply point your cursor to an empty cell and keep hitting “delete,” and the chart I’ve made should refresh. Here’s the point: You can just see how many wildly different stock markets we can make solely on the basis of random numbers.

There’s no trend or QE or anything going on. It’s just random, but it’s based on the market’s same stats of the last 56 years.

Entire Darden Board Voted Out
Posted by Eddy Elfenbein on October 13th, 2014 at 12:22 pm

Starboard Value won a big victory for investors. Their slate of candidates completely swept out the current board of Darden Restaurants ($DRI).

The election of Starboard’s 12-director slate, announced Friday at Darden’s annual meeting, was a feather in the cap for the New York hedge fund, Darden’s second-largest investor with an 8.8 percent stake.

It was a stinging defeat for Darden, which this year alienated investors by brushing off their vote requesting a special meeting to debate the company’s then-proposed sale of its struggling Red Lobster chain.

The “extraordinary” and “totally self-inflicted” loss for Darden comes as no surprise given Darden’s “tone deafness” to investor wishes regarding the Red Lobster sale, said Charles Elson, director of the Weinberg Center for Corporate Governance in Delaware.

“It was kind of a done deal, wasn’t it?” agreed Karl Sooder, a Darden investor and University of Central Florida marketing professor, who attended Darden’s annual meeting in Orlando.

The board sweep, which is based on a preliminary vote count, is notable because of Darden’s size, experts said. Darden is the largest U.S. operator of full-service restaurants with $8.55 billion in 2013 sales.

I don’t have a dog in this fight, but I’m glad to see boards get fired. This should happen much more often.

The S&P 500 Breaks Its 200-DMA
Posted by Eddy Elfenbein on October 13th, 2014 at 10:19 am

For the first time in nearly two years, the S&P 500 broke below its 200-day moving average this morning. The index also dipped below 1,900. On Friday, we closed just above the 200-DMA.

The Strong Dollar Trade
Posted by Eddy Elfenbein on October 13th, 2014 at 8:21 am

Recently, I’ve talked a lot about the Strong Dollar Trade. I wanted to show you exactly what I meant by using a series of charts.

First off, here’s the soaring dollar index:

The strong dollar has caused commodities to tumble:

And that includes gold:

Lower commodity prices have hurt energy stocks:

Yet Consumer Staples haven’t budged:

Long-term Treasury yields have fallen:

The shift in the market has caused greater volatility:

Notice the gradual increase in the spread between the daily high and low.

Small-cap stocks have felt most of the pain:

Morning News: October 13, 2014
Posted by Eddy Elfenbein on October 13th, 2014 at 6:53 am

Draghi Asset Plan Seen Falling Short as QE Bets Rise

Dollar Drops as Fed Officials Warn on Slowing Growth; Yen Gains

I.M.F. Warns of Global Financial Risk From Fiscal Policies

Finland Loses One of Euro Zone’s Last Top Credit Ratings

China Posts Strong Trade Figures, But Data Deserve Close Scrutiny

Growth Slows in China Passenger Vehicle Sales

Fed Vice Chairman Confident Regarding Next Move

Crude Oil May Not Fall Below $80 Per Barrel; Are OMCs a Blind Buy?

Russia Spending $6 Billion Not Enough to Stop Ruble Rout on Oil

Norway’s Statoil Sells Stake in Caspian Sea Oil Field for $2.25 Billion

Synergy Health Agrees To $1.9 Billion US Takeover

Marissa Mayer Faces Investor Revolt at Critical Time For Yahoo

Fiat Chrysler Crowns Merger With Wall Street Debut

Epicurean Dealmaker: The Privy Counselor

Jeff Miller: Weighing the Week Ahead: Can Corporate Earnings Reports Reverse the Stock Market Decline?

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