Value Stocks and Short-Term Rates
Posted by Eddy Elfenbein on August 28th, 2014 at 9:57 am

Here’s a small addendum to yesterday’s post on how the stock market behaves. This chart shows the Vanguard Value Index divided by the Vanguard Index 500 fund. That’s the black line and it follows the right scale. The numerical value of the black line is irrelevant, but what’s important is that whenever the black line is moving up, it means that value stocks are outperforming the overall market. When it’s declining, value stocks are lagging.

The red line is the yield on the 90-day Treasury (left scale). Note how the two lines have a decently strong correlation. As I tried to stress in yesterday’s post, these cross-market relationships are far from overwhelming, but something is clearly going on. The correlation is especially strong in the near-term. Rising rates are good for value. Falling rates are not.

I think it’s interesting to note that ever since the Fed brought interest rates to the floor, there doesn’t seem to have been any great trend toward growth or value. I could be wrong, but to my eyes it mostly looks like noise.

I would think that over the very long term, value stocks would outperform the stock market, but there’s no reason to expect short-term rates to rise indefinitely. At least, I hope not.

Q2 GDP Revised to +4.2%
Posted by Eddy Elfenbein on August 28th, 2014 at 9:35 am

Some good economic news this morning. Wall Street was surprised when the initial report for Q2 GDP came in at 4%. Today it was revised higher to 4.2%. A lot of economists had been expecting a downward revision.

Domestic demand increased at a brisk 3.1 percent rate, instead of the previously reported 2.8 percent pace. It was the fastest pace since the second quarter of 2010 and suggested the recovery was becoming more durable after output slumped in the first quarter because of an unusually cold winter.

Third-quarter growth estimates range as high as a 3.6 percent rate.

Economists polled by Reuters had expected the second-quarter GDP growth pace would be revised down to 3.9 percent. The economy contracted at a 2.1 percent pace in the first quarter.

Gross domestic income, which measures the income side of the growth ledger, surged at a 4.7 percent rate, consistent with strong job gains during the quarter. That was the fastest increase since the first quarter of 2012.

Morning News: August 28, 2014
Posted by Eddy Elfenbein on August 28th, 2014 at 4:43 am

Russian Hackers Said to Loot Gigabytes of Big Bank Data

Philippine Q2 GDP Growth Fastest in Five Quarters, Rate Hike Likely

SEC Shelves Plan for Private Asset-Backed Bond Disclosure

Lending Club Could Be One of Silicon Valley’s Biggest Tech IPOs of 2014

Vivendi receives GVT bids from Telecom Italia, Telefonica

Kia Struggles as Sibling Hyundai Speeds Ahead

Kia Motors To Build $1 Billion Car Assembly Plant In Mexico

Market Basket Revolt Ends as Arthur T. Demoulas Wins Bid

Are Uber’s Aggressive Recruitment Tactics Legal?

Qantas Result Challenges Alan Joyce Leadership

Weaker Corporate Tax Receipts Worsen U.S. Budget Picture

Snapchat Founders Likely Billionaires With New, Reported Investment

Drones Could Rule the Skies Over Disney

Cullen Roche: Malkiel’s Mendacity

Roger Nusbaum: Is This Bull Market Real?

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Ross Stores Reaches Nine-Month High
Posted by Eddy Elfenbein on August 27th, 2014 at 11:58 am

Ross Stores ($ROST) is finally getting some love from investors. ROST has been as high as $75.53 this morning. The shares were at $62 just six weeks ago.

Morning News: August 26, 2014
Posted by Eddy Elfenbein on August 26th, 2014 at 4:31 am

Europe Bank Cleanup Driving $1.72 Trillion of Asset Sales

Nene Sees 1.8% South African Growth With Budget Under Strain

Napa Mops Up Wine and Tallies Its Losses After Quake

Deep Tax Cuts Opens Northern Front for U.S. Companies

Surging U.S. Stocks Echo Dot-Com Rally With Cheaper P/E

Slowing Home Sales Show U.S. Market Lacks Momentum

Time Warner Prepares To Offer Buyouts At Turner Cable Division

Roche to Acquire InterMune for $8.3 Billion

Accor H1 Profit Rises, Summer Business Trends Stable

What’s Twitch? Gamers Know, and Amazon Is Spending $1 Billion on It

Shareholders Sour on GrubHub Filing

Ann Taylor (ANN) Shares Soar on Activist Investor Pressure

HP $48 Million Lawyer-Pay Plan to Sue Autonomy Shot Down

Howard Lindzon: Kill All The Data Scientists! …and The Timeline is Everything.

Joshua Brown: The Challenge

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NY Post: AT&T Reaches Deal with Feds on DTV Merger
Posted by Eddy Elfenbein on August 25th, 2014 at 5:04 pm

Here’s some potentially good news about the AT&T/DirecTV merger. The New York Post is reporting that AT&T has reached a deal with the feds on the conditions by which they can buy DirecTV.

Agreeing to comply means the Department of Justice will likely clear the AT&T deal in October. The FCC still has not ruled on the merger.

The move will allow AT&T to add DirecTV’s 20 million satellite-TV subscribers to its 5.7 million U-Verse TV service subscribers, which currently spans 22 states.

This merger has caused concern among those who believe the convergence of the few remaining telecom and cable giants will cause a rise in prices.

The deal has raised some eyebrows among consumer activities. We still don’t know what these conditions entail. It may mean the companies will have to spin-off some assets. If the Justice Department approves the merger, then it will mostly like get approval from the FCC. Still, nothing is guaranteed.

DTV closed today at $85.47. The merger deal is for $95. So that’s an 11% premium but I have no idea what the timeframe is.

The S&P 500 Breaks 2,000
Posted by Eddy Elfenbein on August 25th, 2014 at 10:18 am

Moments ago.

The Small-Cap Cycle Could Be Over
Posted by Eddy Elfenbein on August 25th, 2014 at 10:05 am

I want to expand on something I mentioned in Friday’s newsletter. Since March 4, small-cap stocks have been lagging the overall market. This is notable because small-caps had been leading the S&P 500 for over 15 years. It’s been an extremely impressive run.

Let’s look at some numbers. The ratio of the Russell 2000 Index to the S&P 500 reached a low on April 8, 1999. Technical analysts will note that the trough ratio was just a hair below 0.3. Since then, small-caps have shined.

In fact, the impressive behavior of small-caps alters how we ought to look at the great stock bust-up of 2000 to 2009. While it’s certainly true that the S&P 500 reached a peak in March 2000—adjusted for inflation, we still haven’t topped it—but that’s not the whole picture.

The furious rally of the late 1990s was largely driven by tech stocks and large-cap techies in particular. If we exclude a small number of very big stocks, the market’s painful nine years wasn’t quite so painful. When looking at broad market indexes we should always be mindful that a small group can distort the larger picture. Sectors like small-cap value sector have actually done quite well.

That’s why I took notice when the Russell/S&P Ratio reached its last peak on March 4 of this year, almost 15 years to the day after the cycle low. In those 15 years, the Russell 2000 has gained 202% while the S&P 500 is up by just 39%. That’s a five-to-one pounding. But since March 4, the S&P 500 is up 6% while the Russell 2000 is down by 4%. That was enough to bring the ratio down from 0.6450 to 0.5758.

So is the small-cap cycle over? Unfortunately, I can’t say just yet. I thought the cycle had run its course a few times before. Shirley, small-caps couldn’t still lead the market, but they did. Sadly, we may not know if the cycle is truly over for years. It took 30 months for the Russell/S&P Ratio to beat its peak from April 2011. All we can say for certain is that the last six months have witnessed a sharp turn toward big-caps. Historically, once a new cycle starts, it often lasts for many years.

The Dull Stock Portfolio
Posted by Eddy Elfenbein on August 25th, 2014 at 8:37 am

As long-term readers know, I’m a big fan of dull stocks. These are companies that are highly profitable, very well-run and as dull as dirt. I never understand why but these companies are rarely discussed on TV or the Internet as good investments.

Here’s a list of 52 excellent boring companies:

I’m sure you’ve heard of many, but some are barely known. Hubbell is up nearly 50 fold since 1980, yet no analysts currently follow it. Stepan has increased its dividend every year for 46 consecutive years. Seaboard has a little over one million shares outstanding and a $2,900 per share price tag.

You’ll also notice several insurance stocks. I’m often impressed by how many great long-term winners have been insurance stocks.

Please note that I’m not recommending these stocks as buys. I’m saying that they’ve had long histories of being well-run.

Morning News: August 25, 2014
Posted by Eddy Elfenbein on August 25th, 2014 at 6:47 am

European Shares Lifted by Prospect of More ECB Stimulus

German Business Climate Drops for Fourth Month on Risks

Draghi Pushes ECB Closer to QE as Deflation Risks Rise

Central Bankers’ New Gospel: Spur Jobs, Wages and Inflation

Fed’s Yellen Remains Mum on Timing of Rate Change

Burger King in Merger Talks With Canada’s Tim Hortons

Roche to Expand Respiratory Role With InterMune Purchase

Carmaker BYD Sees Shares Rebound After 8% Fall

Arianespace Seeks Answers as Satellites Miss Their Orbits

Family Dollar Said Open to Dollar General With Store Concessions

Sonoco To Buy Weidenhammer Packaging Group

Taiwan’s Wei Family to Buy Cable TV Operator CNS for $2.4 Billion

Roche to Buy U.S. Biotech Firm InterMune For $8.3 Billion

Howard Lindzon: Google…When expensive is Cheap and Cheap is Expensive…and How I Hunt

Epicurean Dealmaker: All Hail and Farewell, the Trophy Kids

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