• Mega-Cap Stocks Dominate Wall Street
    Posted by on December 4th, 2012 at 1:02 pm

    One important point about the stock market that I think many investors don’t fully appreciate is how skewed the market is toward very large stocks. Simply put, Wall Street is comprised of a small amount of gigantic companies, and thousands of much smaller ones. The gap is dramatic.

    Bespoke Investment Group recently pointed out that the 49 largest stocks in the S&P 500 make up half its value. That’s about right in the long-term average. That’s pretty stunning once you think about it. You only need to own one-tenth of the stocks to get half the index. The other 90% make up the other half.

    According to Russell Investments, the Russell 200 represents 64% of the U.S. market while the Russell 1000 represents 92%. Even within the big boys, the largest dominate. The top 50 stocks in the Russell 3000 make up 40% of its value. To closely mimic the market an investor can own a very small number of stocks.

    According to S&P, the current S&P 100 is worth $8.84 trillion and the S&P 500 is worth $12.59 trillion. So the top 20% account for 70% of the value.

    The Wilshire 5000 Total Market Index closed yesterday at 14,781.65. That number is supposed to be an approximation of total U.S. market cap in billions. In other words, the U.S. market is roughly $14.78 trillion. Adding that on to the S&P data, it means that thousands of companies are no more than a rounding error.

    Even on our Buy List, which is pretty well diversified, the large stocks would dominate any cap weighting. Oracle ($ORCL), JPMorgan ($JPM) and Johnson & Johnson ($JNJ) would make up about two-thirds of our Buy List if it were cap-weighted. The other 17 would make up the remaining one-third. Please note that I DO NOT favor cap weighting. At the beginning of the year, I assume that each position on the Buy List is equally weighted.

    One takeaway for investors is that a big secret on Wall Street is how easy it is for someone to be a closet indexer. I can easily construct a small portfolio that closely follows the market without appearing to. A few years ago, I found that a three-stock index fund of DuPont, Disney and United Technologies had an 85.4% correlation with the daily movements of the S&P 500. If we added five more stocks (Walmart, ExxonMobil, American Express, Verizon and IBM), the daily correlation rose to 95%.

  • Morning News: December 4, 2012
    Posted by on December 4th, 2012 at 6:58 am

    EU Debates Bank Supervisor

    Greek Bond Buyback Offer Tops Expectations

    Euro Zone Factory Prices Nearly Flatline In October

    Australia Cuts Main Interest Rate

    Chinese Companies Caught In SEC Crossfire

    World’s Richest Man Faces Clampdown in Latin America

    GOP Makes Counteroffer In Cliff Talks

    U.S. November Auto Sales Rise

    Investors’ Risky Bet on the Ghost of Freddie Past

    Banks Discover Money Management Again as Trading Declines

    Abramovich To Vote 22 Percent Stake In Norilsk

    Oracle Moves 2013 Dividends Up To Beat Possible Tax Hike

    Dish Announces Non-Recurring Dividend of $1 a Share

    Joshua Brown: A Very Bad Bet: How Wall Street Deluded Itself

    Howard Lindzon: Momentum Monday …Stock Picking is NOT a Hobby…The Stocktwits 50…Baidu has a Competitor and Adobe is Interesting?

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  • Oracle Accelerates Dividend
    Posted by on December 3rd, 2012 at 4:33 pm

    Oracle ($ORCL) is the latest company to jump on the dividend bandwagon in order to avoid taxes. The company said that it will pay out its second, third and fourth quarter dividends on December 21st (date of record on December 14th). Each dividend is six cents per share so the total payment will be 18 cents per share.

    To make this clear, Oracle’s fiscal year ends on May 31st, so the company just wrapped up its fiscal second quarter.

    This isn’t a special dividend. The December payment will be in lieu of dividends for the rest of the fiscal year.

    Oracle also announced that it will release its Q2 earnings on December 18th.

  • November ISM Sinks Stocks
    Posted by on December 3rd, 2012 at 3:38 pm

    The stock market started this morning on a small rally, but once the ISM came in below expectations, stocks quickly turned south. For November, the ISM was 49.5. Frankly, that’s not too terrible, but it was below expectations. For October, the ISM was 51.7 and that’s what economists were expecting for last month.

    The ISM usually doesn’t hit the danger area until 44 or 45. Since 1948, the ISM has fallen between 40.0 and 49.9 a total of 43 times; only three were during recessions.

    Ford ($F) opened up strongly today on good sales news. November sales were up 6%. Sales of their F-series trucks were up 18%. That’s the highest since 2005. Shares of Ford were as high as $11.70 before the market got weak. That was a seven-month high.

  • Scott Sumner on Asset Prices
    Posted by on December 3rd, 2012 at 12:46 pm

    If you’re not familiar with Scott Sumner, then I suggest you give this video a quick listen. He’s an economics professor at Bentley, and he’s gained a following as one of the creators of the market monetarists school, said to be the first school of economic thought created on the Internet. Sumner’s description of the Great Recession is rather heterodox but it seems to be gaining respectability.

  • Morning News: December 3, 2012
    Posted by on December 3rd, 2012 at 6:22 am

    Greece Offers to Buy Back Debt

    EU Moves Ahead With Transaction Tax in Rejecting U.K. Changes

    France Sexy No More for Entrepreneurs Escaping Hollande

    Berlusconi Mulls Comeback as Italian Bonds Rally

    Shanghai’s Disturbing Stock Slump

    Dollar Falls to Six-Week Low Versus Euro on China Data

    Obama Keeps the SEC in Pocket of Wall Street

    UBS Near $450 Million Settlement With U.S., UK Over Libor

    A Feisty Start-Up Is Met With Regulatory Snarl

    EADS Confirms Shareholder Structure Talks

    London Black-Cab Crisis Opens Road to Mercedes Minivans

    Delta, Seeking London Access, Ponders a Stake in Virgin Atlantic

    A Spate of Rebranding for Spanish-Language TV

    Cullen Roche: Understanding Inside Money and Outside Money

    Jeff Carter: Why Vulture Capitalist Warren Buffett is in Favor Of High Tax Rates

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  • Stephen Fry on American vs British Comedy
    Posted by on November 30th, 2012 at 3:18 pm

  • The Great Moderation Lives. Maybe.
    Posted by on November 30th, 2012 at 3:09 pm

    One of the puzzles of modern economics is the Great Moderation. This is the fact that economic volatility declined dramatically after the recovery from the 1981-82 recession. In other words, the booms became less boomier and the busts were a lot less bustier.

    This led to a lot of theorizing. Hey, maybe the Fed had finally figured the economy out. Well, all these ideas got tossed out the window once the economy went kablooey in 2008.

    But here’s a fact you don’t hear much about — the Great Moderation may still be with us. The fact is that since the recovery began three years ago, the variability in quarterly GDP has been very low. In fact, it’s lower than at any point between 1982 and 2007.

    There’s no better way to explain this than by using a graph.

  • CWS Market Review – November 30, 2012
    Posted by on November 30th, 2012 at 8:43 am

    Time is your friend, impulse is your enemy. – Jack Bogle

    After a short downturn following the election, the bulls have once again taken control. This is exactly what I expected would happen, and I continue to believe we’re in the midst of a nice year-end rally.

    On Thursday, the S&P 500 touched a three-week high, and the NASDAQ Composite broke 3,000. The bulls were helped this week by a spate of positive economic news. For example, we learned that consumer confidence is now at a four-and-a-half-year high, and pending home sales are at a five-year high. And, as hard as it may be to believe, there was even good news out of Greece.

    This is more evidence that the Double Dip crowd once again got way ahead of themselves. For the time being, there’s no immediate threat of a recession. Since November 15th, the S&P 500 has rallied 4.6%. The index is now only 0.5% away from breaking its 50-day moving average, and we’re only 3.5% away from our highest close since 2007.

    Of course, you probably wouldn’t know this by watching much of the financial media. The gloom-and-doomers have gotten far more attention than they deserve. Consider that 14 months ago, Intrade believed there was a 65% chance that the U.S. would enter a recession in 2012. Today that figure stands at 1%.

    In this week’s CWS Market Review, we’ll take a closer look at why the Fiscal Cliff is nothing but hype. The media is largely inventing new worries for us. We’ll also discuss the terrible, rotten earnings report from JoS. A Bank Clothiers ($JOSB). Here’s a sneak preview: I’m not pleased with JOSB. More on that later.

    Despite some unpleasantness, our Buy List continues to thrive. Our strategy of discipline and patience is working out very well. AFLAC ($AFL), for example, is at an 18-month high. Only a few months ago, it was below $40 (see chart below). Plus, stocks like Ford ($F) and Oracle ($ORCL) have been particularly strong lately. Ford finished the day on Thursday at its highest close in seven months. But first, I want to tell you why you should ignore the ridiculous hype surrounding the Fiscal Cliff.

    Don’t Fall for the Fiscal Cliff Hype

    Wall Street’s fortunes seem to be beholden to the Fiscal Cliff (a registered trademark of CNBC). Late in the day on Tuesday, some rather casual remarks by Senator Harry Reid were enough to knock a few points off the S&P 500. The same thing happened again on Thursday, but this time, the remarks came from House Speaker John Boehner. Then, as word of progress leaked out, well…the market started to gain traction.

    Let me be clear: The threat from the Fiscal Cliff is greatly, hugely and fantastically exaggerated. It’s almost reached comical levels. The behavior at CNBC in particular has been reprehensible. The network is simultaneously over-hyping the threat while presenting themselves as the saviors. Folks, there’s nothing to worry about.

    Of course, if we really were to go over the cliff, that would be bad news—and that’s precisely why it won’t happen. In the meantime, both sides need to prove to their respective bases that they’re not backing down. It’s for show, like you see in a nature program about silver-backed gorillas fighting for dominance.

    But let’s get some facts. For one, the threat is easily avoidable. The White House and Congress have too much to lose by not reaching a deal. In fact, a recent article at Politico suggests that, despite the rhetoric we hear in public, the framework of a deal is starting to take shape. Neither side will get everything it wants, but they’ll both get enough to walk away with some pride. Also, remember that this deal is being made with the lame-duck Congress. That means there are a few folks who won’t even be members of Congress in a few weeks. In fact, a deal may even be reached some time in the new year. In a few months, no one will be talking about this.

    The market has resigned itself to the fact that taxes will go up. That’s no surprise. In response, dozens of companies like Costco ($COST) and Las Vegas Sands ($LVS) have announced special dividends. Other companies like Walmart ($WMT) have moved up their dividend dates in order to avoid the taxman. An analyst at Deutsche Bank suggested that Bed, Bath & Beyond ($BBBY), one of our Buy List stocks, could pay a special dividend. I’m a doubter, but I will note that the home-furnishings company is sitting on $4 per share in cash.

    One good way of putting the Fiscal Cliff threat into perspective is by looking at how well defense and aerospace stocks are doing. Needless to say, any sequester would be very bad news for these companies. The Defense Sector ETF ($ITA) badly lagged the market for most of this year. Its relative performance reached a low point in late September, but then, except for a brief period in mid-November, the ITA has been leading the market ever since. This tells me that that no one has the motive for a prolonged fight. Furthermore, the Volatility Index ($VIX) has remained subdued, and the stock market has largely avoided wild daily swings in the past few weeks. There’s only been one daily swing of more than 2% in the last two months, and that was the big sell-off on the day after the election. This has been a calm market.

    The Math Still Favors Stocks

    Due to market leadership from the Industrials and Consumer Discretionary sectors, I suspected that the sell-off would be short-lived. That’s not the script that sell-offs usually follow. Since June 5th, the Consumer Discretionary ETF ($XLY) is up by 12.2%. In simpler terms, the homebuilders and shoppers are waking up from their slumber. Even some crummy tech names have been doing well. Thanks to a jump in shares of Facebook ($FB), Mark Zuckerberg has made a cool $4 billion in the last three weeks.

    The good news about pending home sales, combined with a positive report on home prices, suggests that the housing recovery (such as it is) is propping up consumers. Mind you, there are still weak spots out there. Tiffany ($TIF), for example, just lowered guidance. But these are special cases rather than general rules.

    Probably the best news for investors this week was largely ignored. Charles Evans of the Federal Reserve said that the Fed needs to extend its bond-buying programs until the economy can consistently add 200,000 jobs per month. Until now, the Fed has been reticent in giving a specific economic target as to when they need to take their foot off the gas. I don’t know if Evans will get his way, but we now know there are some voices inside the Fed willing to pursue these policies.

    The bottom line is that there’s no possible solution to the Fiscal Cliff that alters the value spread between stocks and bonds. With the Fed gobbling Treasuries like Santa eating cookies, yields are low and will likely remain so. In fact, the austerity that would result from a Fiscal Cliff deal would add even more pressure.

    Let’s look at some numbers. Analysts now expect 2012 earnings for the S&P 500 of $99.76, and $113.40 for 2013. In June 2011, analysts expected the S&P 500 to earn $111.82 for 2012. So that’s a big change in outlook, yet the market rallied. The reason we rallied is that the market had dramatically overreacted to fears from Europe. Over the last 14 months, earnings estimates for Q4 have come down, on average, about 1% per month. Yet even these lowered numbers represent an acceleration of earnings growth. Prudent investors are in excellent shape right now. The indexes are up, and dividends are having a banner year. I think the S&P 500 can hit 1,500 by March.

    JoS. A Bank Clothiers Bombs

    One aspect of being a good investor is being upfront about our mistakes. After all, that’s how we learn. One big mistake we made this year was having JoS. A Bank Clothiers ($JOSB) on our Buy List. For the second time this year, Joey B badly missed earnings. I understand it happening once, but two times tells me there are some serious problems.

    On Wednesday, JOSB reported fiscal Q3 earnings of 47 cents per share, which was nine cents below estimates. Sales actually did pretty well, both total and comparable-store. But profits tanked. This tells us that JOSB is probably overstocked, and they’re dumping inventory at any price—hence all the buy-one-suit-get-78-free commercials.

    What’s even worse is that JOSB warned that comparable-store sales were down in November, and the company is “cautious” about Q4. That’s not good. Let’s just say that JOSB probably won’t be on next year’s Buy List.

    Oracle Is a Buy Up to $35

    We have earnings reports due soon from Oracle ($ORCL) and Bed Bath & Beyond ($BBBY). In our last issue, I highlighted Oracle as a good buy, and the shares rose to a two-month high. Oracle looks ready to break out with a new 52-week high. The company is due to release its next earnings report in about two weeks. I’m expecting another strong report. Oracle remains a strong buy any time it’s below $35 per share.

    One quick word about Stryker ($SYK). I expect SYK will soon raise its quarterly dividend. The company currently pays out 21.25 cents per quarter. I think they’ll bump it to around 23 cents per share in the next week or so. This is a solid company. They’ve raised their dividend every year since 1995. Stryker is a good buy up to $57.

    That’s all for now. On Monday, we’ll get the ISM report for November. All eyes on Wall Street will be focused on Friday’s big employment report. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: November 30, 2012
    Posted by on November 30th, 2012 at 7:20 am

    Eurozone Crisis Live: German Parliament Approves Greek Deal

    Hollande Mittal Push Risks Hurting Economy by Spooking Investors

    Japan Leads Asia Rally In November; China Slumps

    Japan Approves $10.7 Billion Stimulus Package

    India Growth Matching 3-Year Low Adds Policy-Revamp Pressure

    Youth Unemployment In Bulgaria Passes 30 Per Cent Mark As Jobless Rate In Euro Zone Hits New Record

    Third-Quarter U.S. Growth Is Not As Hot As It Looks

    Republicans Reject Obama Budget as He Sells It to Public

    Complaints Aside, Most Face Lower Tax Burden Than in 1980

    Lessons From The Other Facebook Effect

    Yacktman Bets BlackBerry Can Survive Market-Share Plunge

    Duke CEO Rogers to Resign Next Year in Deal With North Carolina

    Two Ex-Brokers Charged with Trading Scheme Tied to IBM

    Epicurean Dealmaker: The Rules

    Credit Writedows: Portugal and Ireland: Us Too, Please

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