Does Lower Fertility = Lower Interest Rates?
Posted by Eddy Elfenbein on May 16th, 2013 at 7:58 am

Economists have been puzzled by the persistence of low interest rates. Several years ago, Ben Bernanke talked about a “global savings glut” as one possible reason. Kenneth Rogoff recently discussed some of the competing theories which includes factors such as emerging economies and increased long-term uncertainty.

I want to advance one heretical idea: Are long-term interest rates being held down by lower fertility rates? Mark Perry highlights the dramatic plunge in global fertility rates. In the last 50 years, women have shifted to having half the number of children they used to.

How does this affect interest rates? For most of human history, your retirement plan was your kids. Having a lot of children and raising them was your savings account. With modernity, people are trading in their metaphorical savings account for real ones.

This is just a speculative question on my part, but I wonder if these two phenomena are related.

Morning News: May 16, 2013
Posted by Eddy Elfenbein on May 16th, 2013 at 6:58 am

Japan Posts Surge in Economic Growth

UK Uncut Loses Legal Challenge Over Goldman Sachs Tax Deal With HMRC

After Bangladesh, Seeking New Sources

E.U. Considers Emissions Fines for Chinese and Indian Airlines

Homebuilder Confidence in U.S. Climbs as Outlook Improves

Big Banks Get Break in Rules to Limit Risks

Soros Joins Gold-Stake Cuts Before Bear Market Drop

Cisco Profit Tops Estimates on Data-Traffic Demand

Sony’s $100 Billion Lost Decade Supports Loeb Breakup

GROUPON: We Can Be A $100 Billion Company

Tesla Motors’ Bid for Cash May Also Energize Critics

Google Rises as Page Updates Music to Maps Services

Glencore Xstrata Chairman Ousted In Surprise Coup

There’s A Massive Tug-O-War Happening In Economics, And With Every Datapoint One Side Is Claiming Victory

Pragmatic Capitalism: Signposts: A Daily (Bakers) Dozen for Investors

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The CBO Sees Improved Budget Numbers
Posted by Eddy Elfenbein on May 15th, 2013 at 2:37 pm

Earlier this year, the CBO forecast a budget deficit for this year of $845 billion. That would be the first deficit below $1 trillion in four years. Yesterday, the CBO revised that estimate down to $642 billion. That will be 4% of GDP. By 2015, they expect the deficit will be just 2.1% of GDP.

This is remarkably good news. The country still faces long-term problems with the deficit, and the CBO report makes that clear. However, the fiscal disaster that plagued us for so long has greatly diminished in the near term.

No, the U.S. is not going the way of Greece.

What Models By Mandlebrot?
Posted by Eddy Elfenbein on May 15th, 2013 at 2:05 pm

The New York Review of Books carries a book review by Jim Holt on the autobiography of the late mathematician Benoit Mandelbrot. I’m generally a fan of Mandlebrot but this passage by Holt stopped me in my tracks.

What is perhaps less well known about Mandelbrot is the subversive work he did in economics. The financial models he created, based on his fractal ideas, implied that stock and currency markets were far riskier than the reigning consensus in business schools and investment banks supposed, and that wild gyrations—like the 777-point plunge in the Dow on September 29, 2008—were inevitable.

Hold on a second. Let’s make one thing perfectly clear—Mandlebrot didn’t develop any financial models. He revived the idea that financial markets don’t follow the normal distributions. Mandlebrot did not invent this idea and it’s been known for over 100 years (see Louis Bachelier).

In simpler terms, a distribution of the stock market’s up and down, doesn’t match the classic bell curve. There are too many instances at either extreme, fat tails if you will. Mandlebrot suggested that instead of following a normal distribution markets were fractal, yet he never developed any models based on that idea.

What’s Going On at Bio-Reference Labs?
Posted by Eddy Elfenbein on May 15th, 2013 at 10:35 am

I have to confess that I have very incomplete knowledge of this story, but there’s something very unusual going on with Bio-Reference Labs ($BRLI). On the surface, it seems like a very well-run lab testing outfit. Earnings have grown impressively for several years.

Last month, however, some short-selling websites came out publicly against BRLI with claims of phony billing practices. The stock dropped from around $26.14 to $24.20 on very heavy volume. The allegations stem from a former employee who claims she was fired after she exposed the wrongful practices. For their part, BRLI strongly deny the allegations and claim she’s a disgruntled former employee.

The shares have rallied back and BRLI is now above $28 per share. But by most conventional measures, the stock ought to be higher. Clearly, the allegations are hanging over the stock and it has an unusually large short position against it. Of course, this can backfire and create a “short squeeze” as those who bet against BRLI are forced to cover which sends the price even higher.

This isn’t the first time BRLI has been hurt by Internet bears. In September 2011, one website said the company often promoted specialty tests that were not cost effective. The next earnings report comes out on June 5th.

I think these situations are fascinating because you really can’t split the difference. One side is telling the truth and another side is not. How exactly does “tail risk” impact the stock? It’s hard to say but let’s say the market believes there’s a 20% chance the allegations are true and the result is a $15 drop in shares price. That would mean if the company is right, the stock gains $3, and if they’re wrong, it drops $15. (Bear in mind, I’m making these numbers up.)

The point is the market has to find a middle ground when there isn’t one. As a result, you get an odd share price. I should add that this is another reason why investors should like dividend-paying stocks. Companies can fudge all sorts of numbers, but if they’re going to send you a dividend check, you can be sure it’s real.

Industrial Production Falls 0.5% in April
Posted by Eddy Elfenbein on May 15th, 2013 at 10:01 am

Since the price of gold started falling, I suspected that deflationary pressures were stronger than most people realized. Today the government reported that wholesale prices dropped by 0.7% in April. That’s the biggest drop in more than three years. March had a drop of 0.6%. A lot of the decrease is due to lower energy prices, but even the “core rate,” which excludes food and energy, rose by just 0.1% in April.

The stock market is down slightly today. The S&P 500 is currently off by 3.20 points or 0.19%. Our Buy List is fairly quiet this morning, though I noticed that Ford Motor ($F) got up to $14.44 which is another new 52-week high. The S&P 500 has gone 177 days without a 5% pullback, which is a new record for this bull market.

The Federal Reserve said that U.S. industrial production fell by 0.5% in April. That’s the biggest drop in eight months. Manufacturing fell by 0.4% which was the third drop in the last four months. Today is the mid-way point of Q2 and the consensus among economists is that real GDP grew by 1.6% for the quarter.

The really exciting market has been the Japanese Nikkei. The index just broke 15,000 yesterday. Six months ago, it was below 8,700. On the downside, the Japanese yen has fallen against the dollar, but the Nikkei is still up impressively in dollar terms. For the first time in more than 20 years, there’s actual excitement about the Japanese economy.

Morning News: May 15, 2013
Posted by Eddy Elfenbein on May 15th, 2013 at 7:30 am

Germany Can’t Stop Euro Zone From Sinking Into Longest Recession

King Says ‘A Recovery Is in Sight’

Documentary Depicts ‘Lost’ François Hollande As He Faces EU Pressure

EU Raids Oil Majors In Probe Over Possible Price Fixing

Oil Shockwaves From U.S. Shale Boom Seen by IEA Ousting OPEC

Import Prices Down 0.5% on Falling Oil Costs

Uninvited Guest Gives Japan’s Business Culture a Jolt

Promises in Bangladesh

CBO Sees Brighter Economy With Budget Deficit To Plunge To $642 Billion This Year

HSBC Plans More Job Cuts in Effort to Save Up to $3 Billion

EU Regulators To Investigate Spanish Aid For Ford

In Role Reversal, Goldman Chief Advises Dimon

Baba Is 35-Year-Old Billionaire With Zombie and Bear Apps

Joshua Brown: The Death of Cold Calling

Phil Pearlman: Best of StockTwits Charts: Banks Taking Leadership Edition

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18 Tuesdays in a Row
Posted by Eddy Elfenbein on May 14th, 2013 at 4:11 pm

It’s official. The Dow has now risen for the last 18 Tuesdays in a row. The S&P 500 has risen for 15 of the 18 last days. The Dow climbed 123.57 points today to close at 15,215.25 while the S&P 500 added 16.57 points to finish at 1,650..34.

Our Buy List is now up 13% year-to-date which still trails the S&P 500 but not by much. Thanks to its dividend increase FactSet ($FDS) had a very good day. The stock rose 1.95% today. Several of our Buy List stocks such as Ford ($F), Wells Fargo ($WFC), Medtronic ($MDT), DirecTV ($DTV), Moog ($MOG-A) and Stryker ($SYK) hit new 52-week highs.

The Golden Age for Financial Stocks
Posted by Eddy Elfenbein on May 14th, 2013 at 1:06 pm

In December 2011, I changed my mind on the financial sector and said that it was finally a good buy. At the time, the Financial Sector ETF (XLF) was at $12.82 per share and today it’s been as high as $19.60. That’s a nice 52% run.

Actually, that call wasn’t completely out of the blue. Three months before, I said that the XLF would be a good speculative buy if it fell below $12. I wasn’t ready to say the sector was a flat out buy. The XLF did fall below $12. In fact, it briefly dropped below $11. As usual, market trends can last longer than you thought possible.

In the CWS Market Review from two months ago, I said that we’re in a Golden Age for investing in financial stocks.

Let’s run down some of the reasons why the financial sector is so appealing. The biggest is that the Federal Reserve is keeping short-term interest rates near 0% and has promised to keep them there for some time. The Fed’s position clears up a lot of uncertainty, and Wall Street likes it that way. Another big reason in favor of financials is that the economy is slowly improving. At a firm like Nicholas Financial, the overall quality of their loan portfolio has improved dramatically.

We also have to look at the mortgage market. For obvious reasons, many financial stocks are closely tied to the mortgage market, and the U.S. housing sector continues to improve. Thanks to Bernanke and his friends at the Fed, the bond-buying policy has pushed down mortgage rates and they’ll probably stay low. This time, the improvement in the housing market is far sounder and more sustainable than it was last decade. Let’s not forget that lending standards have thankfully improved.

Another key point is that valuations for many financial stocks are still quite modest. JPM just broke though $50 per share and it’s going for less than nine times Wall Street’s estimate for next year’s earnings. Based on Thursday’s close, JPM yields 2.4% and I’m expecting the bank to raise its dividend soon. I think the current 25-cent quarterly dividend will go up to 30 cents per share. That would still be less than 22% of their full-year earnings.

Given the current environment, I doubt many investors will be able to beat XLF this year or do it with less volatility. We’re going to look back at this era as a great time to buy financial stocks.

I turned out to be right about JPM’s dividend. Less than a week later, the bank raised its dividend to 30 cents per share.

FactSet Research Boosts Quarterly Dividend
Posted by Eddy Elfenbein on May 14th, 2013 at 10:49 am

FactSet Research Systems ($FDS) announced today that it’s increasing its dividend by 12.9%. The quarterly dividend will rise from 31 cents per share to 35 cents per share.

In the big picture, FactSet’s dividend is pretty small. The new dividend translates to a yield of just 1.45% based on yesterday’s close. But what impresses me is the company’s record of continually increasing its dividend. In 2005, their dividend was just five cents per share. FactSet has increased its earnings every year for the last 16 years, and they’re going to do it again.