Dept. of Misleading Stats
Posted by Eddy Elfenbein on April 30th, 2014 at 10:04 am

One of my pet peeves is misleading statistics. It’s one thing when facts are simply wrong, but it’s another when the numbers are accurate but they’re presented in such a way as to tell a different story.

This morning, Brett Arends, one of my favorite columnists at the WSJ tweeted this out:

Over 90% of the returns from US stocks since 1927 are an illusion caused by inflation pic.twitter.com/jOIUfu8mL6

— Brett Arends (@BrettArends) April 30, 2014

Is that right that inflation has eaten up 90% of stock gains? Yes, but no. The chart is accurate, or at least it looks similar to my data. The problem is the 90%. The reason why is that it uses a linear measure against compound growth. I’m throwing out my red flag. When you mix those two measures, the 90% figure is meaningless. All it really tells us is that inflation averaged about 2.8% per year (growth of 2.78% for 84 years equals tenfold).

Put it this way: If you have any data series with positive inflation, after a long enough period, inflation will reach “90%.” The nominal figure will by definition grow faster, and those gains will compound themselves.

If the stock market returned 10% per year in nominal terms and real returns averaged 9.9%, after 2,300 years, by the methodology described, inflation will have taken 90% of the gains. The numbers are correct, but interpretation is misleading.

Here’s another example of misleading stats. Please bear in mind that I’m not saying the numbers are incorrect, just how we read them.

You’ll often hear that from the March 2000 peak to the March 2009 low, the stock market lost 46% (the Wilshire 5000). That’s correct. But if you take a starting point 18 months before the peak, and an ending point one year after the low, then the market made 78%. It’s true that I’m being selective with my data, but what’s so special about measuring from the peak to trough?

What if the Stock Market Were a Bond?
Posted by Eddy Elfenbein on April 30th, 2014 at 9:39 am

Here’s an update to one of my more off-the-wall ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.

Crazy? Let me explain.

I took all of the historical market performance of the Wilshire 5000 (including dividends) and invented a hypothetical long-term bond that matched the market’s daily gains step-for-step.

I assumed that it’s a bond of infinite maturity and pays a fixed coupon.

There’s one hitch, though. I have to choose a starting yield-to-maturity for the beginning of the data series in December 1970. So this isn’t a completely kosher experiment because the starting point is based on my guess.

If I choose a number that’s too high, the historical performance won’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM is too low, the yield would gradually get pushed down to microscopic levels.

Fortunately, the data makes my job easy. After four decades, the window I have to work with is pretty narrow. Starting with 10% is too high, and 8% is too low. After playing with the numbers, I finally settled on 8.93%.

Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past 43 years. Through yesterday, the “bond’s” yield stood at 5.63%.

Here’s what the actual stock market looks like, expressed in the form of a bond:

Q1 GDP Growth = 0.1%
Posted by Eddy Elfenbein on April 30th, 2014 at 9:27 am

The government reported that the economy grew by a measly 0.1% in the first quarter of this year. That’s a terrible number. Obviously, the weather was an issue, but even so, 0.1% is very bad.

This was the worst quarter for the economy since the first quarter of 2011. We barely came in below the growth rate of the fourth quarter of 2012. Over the last seven years, the economy has grown by 8.3% in real terms. In the last 32 quarters, economic growth has topped 3.2% only five times. The U.S. economy grew less over the last 14 years than it did in the seven years prior to that.

Morning News: April 30, 2014
Posted by Eddy Elfenbein on April 30th, 2014 at 6:24 am

Euro Edges Lower Ahead of Pre-ECB Inflation Data

Nikke Pares Gains as BOJ Stands Pat, Set to Fall for 4th-Straight Month

France Won’t Block Alstom Bids If Keeps Control of Nuclear Assets

George Osborne Loses Legal Challenge to Robin Hood Tax

Budget Cutbacks Spurring Defense Mergers

BNP Warns U.S. Fine May “Far Exceed” $1.1 Billion Provision

Twitter Beats Estimates, But Shares Slammed on User Growth Worries

3D Systems Reports First Quarter 2014 Financial Results

Shell Profit Beats Analyst Estimates on Higher Gas Earnings

Target’s Move to Chip and PIN Seeks to Assure Consumers

If Apple Did What eBay Has Just Done Then They’d Have A $44 Billion Tax Bill

Wal-Mart Brings One-Stop Shopping to Car Insurance

Coach Gets Marked Down, But It’s Still No Bargain

Jeff Carter: DATA Act Passes Congress-Now What?

Edward Harrison: Steve Hanke on Currency Boards and Paul Brodsky on Bottom-Up Investing

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Four Buy List Earnings Reports
Posted by Eddy Elfenbein on April 29th, 2014 at 7:34 pm

After the closing bell, we had four Buy List earnings reports. Here’s a summary:

AFLAC ($AFL) actually reported results slightly before the closing bell, but it’s the same story we know well. The supplemental insurance company is doing very well businesswise but the yen is eating their profits. For Q1, AFLAC had operating earnings of $1.69 per share. The weak yen knocked off ten cents per share. Excluding currency, operating earnings were up 5.9% from a year ago.

Now for guidance. For Q2, AFLAC sees earnings ranging between $1.54 and $1.68 per share. That’s pretty good. Wall Street had been expecting $1.58. The downside is that AFLAC lowered their full-year guidance. The original range was $6.31 to $6.49 per share. Now it’s $6.06 to $6.40 per share. Those estimates are based on a yen/dollar rate between 100 and 105. The stock got a nice jump in the last few minutes of trading on Tuesday.

Now on to eBay ($EBAY) which gets a lot of attention on the Street. The company reported Q1 adjusted earnings of 70 cents per share which beat the Street by three cents per share. Officially, eBay lost $2.3 billion last quarter going by net earnings but that’s because they took a massive tax charge in order to repatriate foreign earnings.

For Q2, eBay sees earnings of 67 to 69 cents per share which was a tad below the Street’s consensus of 70 cents per share. Importantly, eBay reiterated their full-year guidance of $2.95 to $3.00 per share. Wall Street is at $2.99 per share. These numbers are pretty much what I expected, although the shares were down 4.3% in the after-hours market.

Express Scripts ($ESRX) reported Q1 earnings of 99 cents per share which was two cents below expectations. One troubling note is that they lowered their full-year guidance by six cents per share at each end. The new range is $4.82 to $4.94 per share, but that’s still year-over-year growth of 17% to 20%. The shares were down more than 5% in the after-hours market.

Fiserv ($FISV) may be the big star of this earnings season. For Q1, they made 82 cents per share which easily beat Wall Street’s estimates of 74 cents per share. Earnings were up 22% from a year ago while quarterly revenue was up 7.1% to $1.23 billion which also beat expectations. Fiserv reaffirmed full-year guidance of $3.28 to $3.37 per share which represents growth of 10% to 13%. The stock rallied 1.25% today, and was up another 3.1% in the after-hours market.

Europe Recovers—Slowly
Posted by Eddy Elfenbein on April 29th, 2014 at 11:47 am

It wasn’t that long ago that Europe was falling apart. The economies there are still in rough shape, but their stock markets are doing well. The lesson for investors is that things do turn around, it’s just a matter of time.

Here’s a look at the ETFs for Spain ($EWP), Italy ($EWI) and Germany ($EWG). I also included the S&P 500 for comparison.

Another Lucky Tuesday
Posted by Eddy Elfenbein on April 29th, 2014 at 11:02 am

The stock market is up again today, at least by a little bit. Interestingly, Tuesdays have been the lucky day of the year. So far, the S&P 500 has risen on 13 of the 15 Tuesdays in 2014.

Today is also a big day for earnings. We have four Buy List stocks due to report after the close. This is also the beginning of a two-day Fed meeting, so expect a lot of news this week.

In yesterday’s market, we saw a big split between value and growth stocks. That’s continuing today, but not as wide. The split between Value and Growth, which has been so big last month, slowed down over the past few weeks, but it’s heated up again. This could last for a while.

In economic news, today’s Case-Shiller Index showed that home prices rose 12.9% over the past year through February. Also, consumer confidence fell a bit in April. The Conference Board Index dropped from 83.9 to 82.3. Consumer confidence is still near a six-year high.

A quick word about the bond market. I’ve been surprised at how steady rates have been. The 10-year yield has been locked in a trading range, between 2.6% and 2.8%, for three months. The bond market has been much stronger this year than I expected.

Yesterday, Bank of America ($BAC) dropped sharply today after the company said it was abandoning its dividend increase and share buyback plan. The bank said it discovered flaws in the info it provided to the Fed for its stress test. BAC had planned to raise its dividend from one penny to five cents per share. That’s embarrassing but they did the right thing by coming clean. By many measures, BAC seems cheap, but I won’t even consider it until they start paying a respectable dividend.

One interesting note about BAC. Due to its low share price, it’s a favorite among traders. The stock usually tops the daily list of high volume stocks. BAC trades an average of 109 million shares each day. Wow! That’s more than 4,600 shares every second, and it’s much higher than that towards the opening and closing bells. Yesterday, BAC traded an astounding 344 million shares, including 20 million in the first five minutes.

Morning News: April 29, 2014
Posted by Eddy Elfenbein on April 29th, 2014 at 6:45 am

Why Draghi Believes the FOMC Way Is The Best Way

Spanish Jobless Rate Falls From Year Ago

Yellen’s Dots Dash Effort for Greater Fed Clarity on Rate Rises

Bank of America’s Bad Accounting

Banco Santander Offers to Buy 25% Of Its Brazilian Subsidiary

Deutsche Bank Profit Beats Estimates on Trading Revenue

GE Trumpets 40-year Jet Engine Venture to Bolster Alstom Bid

Texas Enterprise Fund Will Grant $40 Million to Toyota

Samsung Mobile Sales Fall as Chinese Rivals Win Customers

AstraZeneca Chief Puts Cancer Ahead of Megadeals

Nokia Names Networks Head Rajeev Suri as CEO

Warren Buffett Defends High CEO Pay: It’s Not ‘Out Of Whack’

Forest Laboratories to Acquire Furiex for $1.1 Billion

Cullen Roche: Our Unhealthy Obsession With Central Banks

Howard Lindzon: What is The Market Whispering…and Hiding Out in France – The New Safe Haven?

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Morning News: April 28, 2014
Posted by Eddy Elfenbein on April 28th, 2014 at 6:50 am

Strong Euro is a Powerful Deflationary Factor: ECB’s Christian Noyer

Russian Billions Scattered Abroad Show Trail to Putin Circle

France Says Could Block Alstom Deal as President Meets GE’s CEO Jeff Immelt

International Monetary Fund Raises China growth Outlook

Oil Climbs on Worries Over Ukraine Crisis

Fannie-Freddie Fate Hangs on Senate Action This Week: Mortgages

Pfizer Offering $100 Billion for AstraZeneca

Gibson Brands Announces Agreement to Acquire Philips’ Audio and Home Entertainment Business

Sweden’s Meda Rejects Sweetened Bid From Mylan

Panasonic Expects 16% Profit Rise This Full Year

Holcim Reports Lower Sales and Profits on Currency Movements

Charter Reaches Deal With Comcast for Subscribers

Toyota Restructures U.S. Marketing Arm; Voluntary Exits Offered

Joshua Brown: “the most important thing going on in global markets”

Jeff Miller: Weighing the Week Ahead: Time to Sell in May?

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FT: 2,500 Years of Financial Crises
Posted by Eddy Elfenbein on April 25th, 2014 at 9:35 am