• What Should Investors Expect?
    Posted by on March 11th, 2014 at 4:10 pm

    In the Wall Street Journal, Brett Arends writes about a subject close to my heart: what can investors expect from the stock market.

    The problem is we can only go on past information. Most long-term studies begin the 1920s, and they show that the stock market has returned about 7% per year, once we include dividends and inflation.

    The problem with that is it covers what Henry Luce called the “American Century,” when our way of life of democratic capitalism spread all over the world. I don’t think that’s repeatable. I’m still optimistic for America, mind you, but I don’t think we’ll see quite the triumph of free minds and free markets that we saw in the 20th century.

    The great bull market from 1942 to 1966 was astonishing. I don’t think many investors realize this. It’s not really discussed because, I suppose, the market never truly crashed again. We have to remember how poorly valued stocks were for many years. The real yield for stocks was often much higher than inflation. Arends writes:

    For example, from the 1920s through the early 1990s stock investors collected an average annual return of 4% just from their dividends. Today the figure is less than 2%. Logically we should expect future total returns to be at least two percentage points lower.

    I disagree that lower dividend yields will translate to lower returns. Even putting aside buybacks (which I don’t like), the payout ratio is far lower than it used to be. Companies used to shell out a large percentage of their profits as dividends. Nowadays, it’s far less.

    Back in the 1950s, U.S. stocks traded at an average of about 11 times the previous year’s earnings, according to analysts. In the 1940s and the early 1980s, valuations fell as low as eight times earnings.

    But after 1982 they became sharply revalued upward. Today the S&P 500 trades at about 18 times earnings. To expect the same again is to engage in Bubble Logic—the belief that things will keep going up simply because they have.

    Again, my view is slightly different. The valuations of the 1940s and 1950s were, indeed, very low. But I believe the valuation revolution of the 1960s is still in place. The problem is that low inflation brought earnings multiples back down again in the 1970s, and that appeared to be mean reversion. I don’t believe it’s reasonable to assume that we’ll revert to single-digit multiples, unless there’s high inflation.

    Strip out these one-off gains and inflation, Rob Arnott recently suggested, and investors ought more realistically to expect about 1.5% a year plus dividends—meaning, in the current environment, an annual return of about 3.5% in real terms. That’s a far cry from 10%.

    I think that’s slightly pessimistic. I would say that investors should expect real returns of 5% from common stocks. That’s 2.5% from capital gains and 2.5% from dividends.

  • Lowest Spreads in Six Years
    Posted by on March 11th, 2014 at 11:54 am

    In a recent CWS Market Review, I discussed the market’s growing appetite for risk. We can see this effect by looking at the narrowing yield spread between risky bonds and secure bonds. Before, I looked at CCC bonds, but here’s the spread between BB bonds and Treasury bonds. Double B bonds are among the lowest-rated investment grade bonds.

    fredgraph03112014

    It recently dipped below 2.6% which it hasn’t done since July 2007.

  • Retail Rebound
    Posted by on March 11th, 2014 at 11:49 am

    Here’s the best way to see the weather’s effect on the stock market. This is the relative strength of the retail sector. After a terrible start to this year, retail is finally showing some strength.

    sc03112014v

  • Four Million Job Openings
    Posted by on March 11th, 2014 at 11:34 am

    The stock market is quiet again today. There’s not really much economic news this week. The JOLTS report, which is Job Openings and Labor Turnover, today said there were four million job openings in the economy. That’s actually the number for January, there’s a little lag in the JOLTS report.

    The S&P 500 has been as high as 1,882.35 this morning, which is a little over one point from Friday’s intra-day high. We have a good shot of reaching another closing high today.

    I was surprised to see Bed Bath & Beyond ($BBBY) behave so well yesterday despite Friday’s profit warning. Perhaps the market is finally looking past the weather-related events. McDonald’s ($MCD) is particularly strong today. The company reported some sluggish sales numbers, but the CFO made some optimistic comments at an investment conference. It’s simply a cheap stock. The eBay/Icahn spat continues. eBay ($EBAY) said they’ve rejected his board nominees. I’m sure we’ll hear more on this.

    Qualcomm ($QCOM) got to a new high today of $77.20. Express Scripts ($ESRX) is also on the new high board today. ESRX is getting very close to $80 per share.

  • Morning News: March 11, 2014
    Posted by on March 11th, 2014 at 5:10 am

    China Suggests Full Interest Rate Liberalisation in Two Years

    China to Pilot Five Private Banks

    Bank of Japan Sticks to Easing Plan as Sales-Tax Bump Looms

    Three Years After Fukushima, Japan Still Struggles to Cope

    Manpower Employment Outlook Survey Points to Confidence Around the World

    Virtu Filing Shines Light on Business of High-Frequency Trading

    Colorado’s First Month of Recreational Pot Tax Yields $2 Million

    Despite Rough Winter, Airlines See Strong Profits

    Regulators, GM Under Fire After Deaths

    Sbarro Files Second Bankruptcy as Mall Traffic Dwindles

    EBay Rejects Icahn’s Board Nominees

    McDonald’s Stock Not on Value Menu Amid Weak Sales

    On the Herbalife Fight, Natural-Gas Plays

    Cullen Roche: “Keynesian” Myths and Misunderstandings

    Jeff Carter: Everyone is a Node on a Network

    Be sure to follow me on Twitter.

  • Josh on the Easy Money Myth
    Posted by on March 10th, 2014 at 9:31 pm

    Josh Brown destroys the myth that this has been an easy market:

    It’s been one of the hardest environments in market history. Never before have investors’ wounds been so raw. Never before have there been so many voices polluting the popular consciousness with half-baked conspiracy theories and calls for collapse. Never have there been such a dizzying array of investment vehicle options to confuse and confound. Never have the perceived risks been quite as ferocious.

    In the last five years, investors have dealt with a non-functioning congress, a downgrade of the US Treasury, mass unemployment, exploding deficits, record debt, a possible dissolution of Europe and a slow-motion crash in China and the emerging markets – and that’s before we even get into any specifics. And not only have the threats been unprecedented, the amplification of them – thanks to the desperation of the mainstream media for attention coupled with the advent of a whole new chattering class on social media – has been like an orchestra of clanging pots and pans, car alarms and doberman barks, shrieks and howls, thunder and lightning. Every step of the way some motherf*cker’s been screaming about something about to crash, the calamity waiting around the corner, the next shoe to drop.

    Read the whole thing.

  • Cognizant Technology Split 2-for-1
    Posted by on March 10th, 2014 at 10:21 am

    This morning, shares of Cognizant Technology Solutions ($CTSH) split 2-for-1. The new buy is $56 per share.

    For track record purposes, I assume our Buy List is a $1 million portfolio that’s equally weighted among our 20 stocks at the start of the year.

    As such, the CTSH position was 495.1476 shares bought at $100.98. The split changes that to 990.2952 shares bought at $50.49 per share.

    I always want to go out of my way to make sure our Buy List is as transparent as possible.

  • Morning News: March 10, 2014
    Posted by on March 10th, 2014 at 7:05 am

    Carney Faces Leadership Test as Currency Scandal Snares BOE

    China’s CSI 300 Index Plunges to Five-Year Low on Export Slump

    Crude Oil Sheds Gains After Weak Chinese Data

    China passenger vehicle market rose 18% in February

    EC to Delay Russian South Stream Gas Pipeline Talks

    Spot Gold Extends Losses and Seen Vulnerable if Ukraine Situation Improves

    Tencent-JD.com Partnership Goes Straight For Alibaba’s Throat

    Chiquita Brands International, Inc. And Fyffes Plc To Combine To Create Leading Global Produce Company

    Japan Display Prices IPO at Bottom of Range

    United Rentals to Acquire National Pump

    Comcast Challenging Disney’s Hold on Tourism Trade

    Alleged Bitcoin Millionaire Nakamoto Gets $28,000 Donations

    Hackers Allege Mt. Gox CEO Still Controls ‘Stolen’ Bitcoin

    Joshua Brown: US Healthcare Spending by the Numbers (spoiler alert: it’s not working)

    Jeff Miller: Weighing The Week Ahead: What Is The Risk And Reward For Stocks?

    Be sure to follow me on Twitter.

  • Bed Bath & Beyond Warns for Q4
    Posted by on March 7th, 2014 at 5:14 pm

    Bad news from Bed Bath & Beyond ($BBBY).

    After the closing bell, the company said it sees fiscal Q4 EPS coming in between $1.57 and $1.61. That’s below their previous forecast of $1.60 to $1.67. In January, they had lowered their original EPS forecast which was for $1.70 to $1.77.

    BBBY’s Q4 ended on March 1, and the earnings report comes out on April 9. They estimate that bad weather knocked six to seven cents per share off the bottom line.

    The impact of the disruptive weather included 464 times a store was closed for a full day and 1,923 times that a store was closed for a partial day. For the fiscal quarter, the estimated resulting impact due to the disruptive weather on comparable store sales was in the range of 2.0% to 2.5%. The estimated impact on net earnings per diluted share for the quarter was approximately $.06 to $.07.

    The Company’s comparable store sales for the fiscal fourth quarter increased by approximately 1.7% as compared with its previous model of an increase of approximately 2.0% to 4.0%. Although it is early in the process of its financial close, the Company now estimates net earnings per diluted share of approximately $1.57 to $1.61 for the quarter as compared with its previous model of $1.60 to $1.67.

    Steven H. Temares, Chief Executive Officer and Member of the Board of Directors of Bed Bath & Beyond Inc. stated, “Despite the weather related challenges, we are pleased with our quarter. Absent the disruptive weather, we believe we would have been comfortably within our sales and net earnings per share ranges of our model. Our store associates continue to perform admirably and we thank each of them for their extraordinary effort. We continue to make excellent progress on our omnichannel initiatives and stay on course for the execution of our long term strategic plan.”

  • The Last Five Star: GA Omar Bradley
    Posted by on March 7th, 2014 at 12:27 pm

    Here’s a remarkable video. From 1981, this is 87 year-old General of the Army Omar Bradley speaking only a few weeks before he died. He was the last American five-star general. According to regulations, five stars are always on active duty.

    Bradley was loved by his men. Even at 87 you can sense his decency and humility. (By the way, I looked up the proper abbreviation for a General of the Army. It’s GA.)