Five Years Ago Today….
Posted by Eddy Elfenbein on March 6th, 2014 at 4:25 pm

The S&P 500 closed today at 1,877.03. Five years ago today, the index got down to 666.79. That day, the Wall Street Journal ran this op-ed by Michael Boskin: “Obama’s Radicalism Is Killing the Dow.”

American Household Net Worth = $80.7 Trillion
Posted by Eddy Elfenbein on March 6th, 2014 at 2:49 pm

Wall Street is having another good day. The S&P 500 has been as high as 1,881.94. The mega intra-day low came exactly five years ago today when the S&P 500 bottomed at 666.79.

Wall Street’s attention is focused on tomorrow’s jobs report. I suspect we’ll see more sluggish improvement in the labor market. I strongly doubt the Fed will soon be convinced to abandon its taper plans. This morning’s initial jobless claims report dropped to 323,000 which is a three-month low.

The Fed released a quarterly report called the Flow of Funds report. It’s always interesting to go through. The report shows that the combined net household worth of Americans increased in Q4 to $80.7 trillion. Of that, $19.4 trillion is in real estate which is still $3.2 trillion below the peak from eight years ago.

Update on My Watch List
Posted by Eddy Elfenbein on March 6th, 2014 at 10:05 am

I’m often asked how I go about picking stocks for my Buy List. The answer is really quite simple. I don’t have a magic formula and I hate stock screeners.

Instead, I have a Watch List of about 100 stocks that I try to follow. These are what I would call “really good companies.” They’re in the top tier of Corporate America. It’s taken me years to build up this list and I change it often.

The Watch List serves as the minor leagues for my Buy List. It’s from this list that almost all candidates for the Buy List come, and it’s where they return after they’ve been deleted.

Let me make it clear that I’m not recommending any of these stocks listed below. That’s what the Buy List is for. I just wanted to show you which stocks make the first cut in the process. If a stock is on this list, you can be pretty sure it’s a decent company (though the price may not be).

My secret formula is nothing more than watching really good companies and making a move when the price looks good.

The Growth of Smart Beta ETFs
Posted by Eddy Elfenbein on March 6th, 2014 at 9:42 am

Bloomberg has an interesting but slightly confused article on the growth of “smart beta” ETFs. I think the article makes these funds out to be more sinister than they truly are.

Without question, the advent of ETFs has been very beneficial for individual investors. They offer broad diversification at low cost. Also, investors can pinpoint a particular sector far more easily than before.

The challenge for ETFs is to offer low-cost “strategy” funds. This is what’s also known as “fundamental indexing” or “smart beta.” Rather than portraying these ETFs as holding the miracle key to beating the markets, I think they should be presented much more clinically, as another tool that investors can use. In fact, they shouldn’t be presented as following indexes at all. No index is neutral.

The Bloomberg article seems to be overly focused on the fact that these funds aren’t properly weighted. Well, no strategy fund should reflect the market; that’s the point. I’ve already written on Low Vol ETFs, and I’d like to see many, many more products like this such as low P/E, high yield, low P/B, low EV/EBITDA, zero-debt stocks and so on. Ideally, the strategies should be mechanistic and rather dumb.

One big problem is that the fees on these smart beta ETFs tend to be much higher than traditional ETFs, as much as ten times higher. That needs to change.

Also. Ditch the name “smart beta.”

Warren Buffett’s Latest Shareholder Letter
Posted by Eddy Elfenbein on March 6th, 2014 at 8:47 am

This weekend, Warren Buffett unveiled his latest Berkshire Hathaway Shareholder Letter. Wall Street looks forward to this each year, and it contains a great deal of Buffett’s folksy investing wisdom. I’ve long encouraged new investors, and experienced ones as well, to look over these letters. He keeps it pretty simple and they’re fun to read. You can see the entire collection here.

In this year’s letter, Buffett mentions his “Big Four” investments which are Coke, IBM, Wells Fargo and American Express. We have two of them on our Buy List. That wasn’t on purpose, but we follow similar strategies so some overlap is to be expected. I should note that Buffett has recently increased his positions in both Wells and IBM, plus he has a nice stake in DirecTV which is another Buy List stock.

I wanted to highlight one section of this year’s letter where Buffett discusses some important aspects in analyzing a company. Here he explains why he’s presenting non-GAAP operating figures:

We present the data in this manner because Charlie and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP figures.

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand the disparate nature of intangible assets: Some truly deplete over time while others in no way lose value. With software, for example, amortization charges are very real expenses. Charges against other intangibles such as the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real costs. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint they could not be more different.

In the GAAP-compliant figures we show on page 29, amortization charges of $648 million for the companies included in this section are deducted as expenses. We would call about 20% of these “real,” the rest not. This difference has become significant because of the many acquisitions we have made. It will almost certainly rise further as we acquire more companies.

Eventually, of course, the non-real charges disappear when the assets to which they’re related become fully amortized. But this usually takes 15 years and – alas – it will be my successor whose reported earnings get the benefit of their expiration.

Every dime of depreciation expense we report, however, is a real cost. And that’s true at almost all other companies as well. When Wall Streeters tout EBITDA as a valuation guide, button your wallet.

That’s a very good point. Last month, I did a post about the strong track record of the “EV/EBITDA,” and was careful to note that there’s room for abuse.

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

ECB Thursday – Stick or Twist?

Europe’s Russia Gas Flows Jump to Month High as Buyers Hoard

China 7.2% Growth Would Meet 2014 Target, Minister Says

Fed Chair Vows to ‘Do All That I Can’ to Boost Weak U.S. Economy

Cutting Off Extended Unemployment Benefits Was A Mistake, And Now The Economy’s Paying For It

Deutsche Telekom Cuts 2015 Cash Flow Forecast on U.S. Spending

ExxonMobil Stock Vulnerable Amid Spending Decline

Staples to Shut as Many as 225 Stores, Cut Costs by $500 Million

Target Exec’s Departure Puts Spotlights on CIOs

With Move to Limit Gun Sales, Facebook Is Caught in Debate

Zero Likes: How the World Came to Hate Silicon Valley

Billionaire Musk Makes Push to Launch Military Satellites

The Winklevii Are Spending Their Bitcoin Fortune on Space Travel

Jeff Carter: Should Your Startup Be a Corporation or LLC?

Bernanke Reveals the Reality of the Fed’s Triple Mandate

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ADP Disappoints
Posted by Eddy Elfenbein on March 5th, 2014 at 2:07 pm

The stock is kind of flattish today which is probably good news considering how strong yesterday was. I’m always a bit skittish whenever we immediately hand back impressive gains. At one point today, the S&P 500 got as high as 1,876.53.

Wall Street is gearing up for Friday’s jobs report. We got a small preview today with the ADP report. ADP is a private payroll firm so their monthly reports don’t always match up with what the government says.

According to ADP, the economy added 139,000 private sector jobs last month. That’s disappointing. Economists were expecting a gain of 158,000. For Friday’s report, the consensus among economists is for a gain of 150,000 jobs. The question we want to know is, how badly has weather impacted hiring? That’s a mystery right now.

There’s not much movement today on our Buy List. I see that Ford ($F) has touched above $15.60 which is its highest price in a month. Also, Bed Bath & Beyond ($BBBY) is creeping up to $69 per share. This stock has had a rough road, but it’s slowly recovering. At one point, BBBY lost $18 per share in just a few weeks. It’s made back about one-third of what it lost. Our buddy Carl Icahn said, “I’ve never seen worse corporate governance than eBay.” Shares of eBay ($EBAY) are still holding above $59.

Morning News: March 5, 2014
Posted by Eddy Elfenbein on March 5th, 2014 at 6:01 am

Economic Expansion in Euro Zone Accelerates

ECB May Repeat Japan Mistake That Triggered Lost Decade

From Funds to Gold, How Will Ukraine Affect My Investments?

China Vows Tough Reforms, Stronger Defense

IDC: China Smartphone Growth To Slow

Qatar Stocks Fall Most in Five Months as GCC States Pull Envoys

Market and Rates Helped Private Equity Chiefs Thrive Last Year

Obama Budget Sets Up Election-year Clash With Republicans

Chicago Cut to Three Levels Above Junk by Moody’s Ahead of Sale

Carrefour Boosts 2014 Capex After 2013 Profit Rises

Forget About Windows 8, Insiders Say Microsoft’s Real Money Maker Is Broken

Darden Expects Weak Q3, Re-Affirms Outlook

Will 1,100 Stores Closures Save RadioShack? Probably Not

Roger Nusbaum: Getting in Front of Changing Retirement Dynamics

John Hempton: Letting Qantas Go Bankrupt Would Be Good For Australia

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S&P 500 Jumps to 1,873
Posted by Eddy Elfenbein on March 4th, 2014 at 5:25 pm

Great day for the market today. The S&P 500 soared 1.53% to close at 1,873.91. That was our best day since December 18.

But the real stars were the small-cap stocks. The Russell 2000 ($RUT) index jumped 2.75% to close at 1,208.65. That’s a huge outperformance for a single day. The VIX plunged back down to 14.10. This was a good day for the optimism trade.

Our Buy List also had a good day. Our portfolio rose 1.62% which edged out the rest of the market. Moog ($MOG-A), which has been a laggard, jumped 5.44%. At one point, it was up as much as 6.79%.

Qualcomm ($QCOM) had a good day with the news of its 20% dividend hike. The company also announced that Steve Mollenkopf will take over as CEO and Paul Jacobs will become the executive chairman.

For the year so far, our Buy List is up 1.73% compared with 1.38% for the S&P 500.

Here’s a remarkable chart. This is the Russell 1000 (in black) compared with the Russell 2000 (gold). The R1000 is the one thousand largest stocks in the R3000 Index, while the R2000 are the smallest two thousand. It’s stunning to see this divergence last for 15 years.

225 Years Ago Today
Posted by Eddy Elfenbein on March 4th, 2014 at 2:34 pm

Today is the 225th anniversary of the U.S. government. Congress first met in New York on March 4, 1789.

Not much happened. They took roll and not enough people had made it there yet. Just nine of 22 senators and 13 of 59 representatives showed up.

George Washington wasn’t inaugurated until April, but March 4th remained Inauguration Day until 1933 when it was changed to January 20th.

Here’s a look at the Congressional Record from 225 years ago today.