Morning News: March 26, 2014
Posted by Eddy Elfenbein on March 26th, 2014 at 6:50 am

Ukraine Starts Talks With Slovakia for Importing Gas From EU

Lifting U.S. Crude Export Ban Would Help Counter Russia- Oil CEO

British Government to Sell a Big Stake in Lloyds Banking

U.S. Unemployment Seen Below 6% by Year’s End

New York Fed: Large Banks Have Significant Funding Advantage

Bitcoin Currency Use Impeded by IRS Property Treatment

Facebook in $2 Billion Deal for Virtual Reality Company

How Tesla’s Fight With Car Dealers Could Help Decide the Next President

Walgreen Co. to Close 76 Unprofitable Stores

Why Employers Will Stop Offering Health Insurance

Murdoch Makes Big Succession Planning Step With Jobs For Sons

A Likely Heir Is Leaving JPMorgan Chase

Warren Buffett Wants to Make It Easier For You to Win His Billion Collars

Credit Writedowns: More Thoughts About Potential for QE from the ECB

Jeff Carter: What Will Wearables Look Like? Will We Even Wear Them?

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The Shift to Value Continues
Posted by Eddy Elfenbein on March 25th, 2014 at 12:19 pm

Over the last month, the stock market has strongly shifted away from growth stocks and towards value stocks. You can see that most prominently in the drop in Biotech stocks.

Here’s a look at the Vanguard Value ETF ($VTV) divided by the Vanguard Growth ETF ($VUG):

Breaking Down the Yield Curve
Posted by Eddy Elfenbein on March 25th, 2014 at 8:34 am

The Treasury yield curve is one of the more important animals in finance. It tells us how much each Treasury bill, note or bond yields across the maturity spectrum.

For the most part, a steep yield curve is bullish for the economy and stock market. A flat or inverted yield curve has often preceded rough times. The yield curve is one of the few forward indicators that has a good track record of predicting what will come.

The yield curve also gives us a glimpse into the future. For example, if we look at the yields on the one- and two-year Treasury, we can work out the math to see what the market believes a one-year Treasury will yield one year from today.

Warning, math ahead. The one-year currently yields 0.14% and the two-year goes for 0.47%. So if you were to get a yield of 0.14% for the next year, you would need to yield 0.80% for the following year to make a two-year yield of 0.47%. Think of it as the market’s opinion for what the market will say in the future.

Here’s the interesting part—every yield curve has in it an implied direction for short-term interest rates. The exact same information in any yield curve can be expressed in the expected direction of short-term rates. For example, we can take the two-year Treasury and compare it with the two-and-a-quarter-year Treasury, and see where the market thinks three-month bills will be two years from now. The steeper the curve, the more rapidly rates are expected to rise.

Check out the chart I made below. The red dots are the current Treasuries at yesterday’s close. I added the blue line in an attempt to smooth out the trend of the red dots. The black line is the implied three-month T-bill based off the blue line.

I have to add that the black line looks a little screwy after about five years out. Don’t worry about that part of the graph. The problem is that any small deviation in those long-dated bonds can have a big impact on the implied short-term rate.

The interesting part is what’s expected over the next five years. The bond market’s view is largely inline with the Fed’s most recent guidance. In fact, the bond market is a bit more hawkish than the Fed. The bond market sees rates rising next year and hitting 1% before the year is out. After that, rates are expected to rise continually until the middle of 2017 when they’ll be near 3%.

Janet Yellen’s comments last week caused that rise in the black line, from 0% to 3%, to move to the left by two months.

(My pal, David Merkel, has made these types of graphs before, I believe, with a smoothing function.)

Morning News: March 25, 2014
Posted by Eddy Elfenbein on March 25th, 2014 at 7:35 am

Putin Threatened With More Sanctions as Russia Out of G-8

Punishing Putin Fuels Energy-Export Drive in Congress

German Business Confidence Slips on Ukraine Tension

UK Inflation Hits New 4-year Low in February, House Prices Up Sharply

EasyJet Leads the Way as Positive Company News Pushes FTSE 1% Higher

With Start-Ups, Greeks Make Recovery Their Own Business

Harbin Bank Said Planning to Price $1.1 Billion IPO Near Low End

Treasury 5-to-30-Year Yield Curve Least Since 2009 on Rates View

Payday-Lending Rules Near as U.S. Agency Sees Debt Traps

Disney Buys YouTube Network Maker Studios for $500 Million

Internet Company Mega Plans New Zealand Listing

Morgan Stanley Investors Await Fed’s Buyback Blessing

Jury Says 5 Madoff Employees Knowingly Aided Swindle of Clients’ Billions

Joshua Brown: Moooooooooo! The Ag Trade is Back!

Cullen Roche: Economists Already Understood the Money Multiplier (not)

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This One Weird Chart Explains the Entire Market
Posted by Eddy Elfenbein on March 24th, 2014 at 2:27 pm

Here’s a quick one but it explains a lot. This is the Value ETF ($VTV) along with the Growth ETF ($VUG). They had been behaving similarly until late last week. Since then, a wide gulf has opened as Value has strongly beaten Growth.

Investing By Day of the Month
Posted by Eddy Elfenbein on March 24th, 2014 at 1:59 pm

Is there a monthly pattern to the stock market?

To find out, I took the entire history of the Dow — all 32,000 data points — and broke down how the Dow has performed by each day of the month. Here are my results:

The best days are clustered around the beginning and end of each month. Here’s what the table above looks like in graph form:

Here’s what the performance looks like.

Note that this isn’t literally what the Dow’s average month looks like because the market isn’t open every single day. This is merely a representation of what the cumulative gain looks like based on each day’s average gain or loss.

We can see that the turn of the month is quite good, but the middle of the month sags.

The Biotech Plunge
Posted by Eddy Elfenbein on March 24th, 2014 at 1:43 pm

Biotech stocks had a massive rally at the start of this year. In fact, biotechs had been outpacing the market for a long time — that is, until last Friday.

The Biotech ETF ($IBB) broke sharply on Friday and the selling continues today.

This could be the start in a bear market for “high beta” names. There’s even talk of the new Fab Five — Netflix ($NFLX), Facebook ($FB), Tesla ($TSLA), Priceline ($PCLN) and Google ($GOOG) — all of whom are getting nailed today.

How to Invest $50,000 Right Now
Posted by Eddy Elfenbein on March 24th, 2014 at 12:02 pm

I’m often asked how someone can build a portfolio from my Buy List. I’ve purposely built the Buy List so it’s both easy-to-follow and scalable, meaning it works for portfolios large and small.

No, you don’t need to buy all 20 stocks to have a well-rounded portfolio, but it’s great if you can. At minimum, eight stocks are enough for some basic diversification.

I wanted to give you an example of how to build a solid portfolio based on my Buy List. Please keep in mind that the following is just an example; it’s not investment advice. I want people to get the principles behind how I built this rather than the exact specifics of the portfolio.

For building this portfolio, I followed three rules.

First is that these are all good stocks. If you’re following my Buy List, then you don’t need to worry- they’re all good. I do the hard work for you on that front.

Second is that this portfolio is well-diversified (though it could use some energy stocks). It’s got finance, tech, industrial, food, healthcare. This is a key that so many investors miss—and no, diversity doesn’t mean owning both Apple and Google. You’ll also see that the positions are roughly equally weighted.

Third is that I made it simple. Keep it simple, stupid. Too many investors make their investing strategy needlessly complicated.

If you use a discount broker, you can spend around $100 in commissions (probably less), which works out to 20 basis points. You probably won’t need to worry about rebalancing for another 18 months.

Finally, please note that this is merely for the equity portion of your portfolio. You want to have some fixed income as well depending on your risk profile.

Morning News: March 24, 2014
Posted by Eddy Elfenbein on March 24th, 2014 at 6:48 am

Leaders Gather on Ukraine as West Warn on Russian Troops

China’s Yuan Rebounds From 13-Month Low, Outlook Bumpy

Japan’s Plutonium Plans Stoke China Tensions on A-Bomb Risk

BOJ Tankan to Show Business Mood Up But Outlook Dims

`Concrete Gold’ Is The Best Phrase We’ve Heard All Day

Q&A: Minnesota Fed Chief Kocherlakota

Nokia Expects Closure of Microsoft Deal to Be Delayed Until April

Candy Crush: Will Wall Street Buy the Addictive Game?

Standard Life in Talks to Buy Ignis

Apple in Talks with Comcast for Streaming-TV Service

G.M. Uses Social Media to Manage Customers and Its Reputation

How High-Speed Traders Are Like Fish

Herbalife to Nominate Three Additional Icahn Designees to Board

John Hempton: Herbalife Internal Consumption: A Comment

Credit Writedowns: Economic Consequences of Income Inequality

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Ugly Day for Our Buy List
Posted by Eddy Elfenbein on March 22nd, 2014 at 7:33 pm

Although Friday was a quiet day for the stock market, I’m afraid that it was an unusually poor day for the relative performance of our Buy List (please note the words “relative performance.”)

While the S&P 500 lost 0.29% on Friday, our Buy List dropped 0.96%. That’s an underperformance of 0.67%. That’s our worst daily underperformance in nearly a year. While lagging days are to be expected, I roughly estimate that a day like Friday should come along every six months.

Let me throw out another “relative.” This was our worst daily relative performance relative to what we’re trying to do. Guys in the options or futures markets would laugh at the idea of trialing the market by two-thirds of a percent as being unusually bad.

Since our portfolio is a broad-based and mostly made of mid- and large-cap stocks, we’re bound to track the market pretty closely each day, and we do. In this market, we stay within 20 basis points of the S&P 500 most days. Our outperformance only shows up in the longer term.

Since we don’t take on any weird macro bets, I honestly don’t know what caused Friday’s debacle. Perhaps there was no cause, it just…happened. Sixteen of our 20 stocks trailed the market, and nine stocks were down more than 1%. Seemingly unrelated stocks such as CA Technologies ($CA) and DirecTV ($DTV) got hit pretty hard. The only common link I can find is that they’re on our Buy List.

As you might guess, I’m not at all worried. Our strategy is conservative, and if Friday was bad by that standard, then we’re doing something right. I always want to be up front about what’s happening with our stocks, so I need to be frank with the bad news as well.

Let’s shake this off and get ready for next week.