The Importance of Extreme Events
Posted by Eddy Elfenbein on September 26th, 2012 at 11:05 pm

Over the 116 years of its existence, the Dow Jones Industrial Average has risen by 4% or more in a single day 138 times, which works out to about once every ten months.

Now if we take the combined gain of these 138 days, it comes to more than six times the entire gain of the Dow over its entire 116 years.

In other words, most of the stock market’s gain has come on just 0.5% of the trading days. The other 99.5% of the time, the market is a net loser (this is just capital gain, not dividends).

Now let me stop for a second. While these stats are accurate, they’re slightly misleading. The problem happens with extreme events — at the far tails of the distribution. For example, the 138 days aren’t evenly spread out. Seventy of those days, a slim majority, came during the 1930s. There were only two 4% or more days between Pearl Harbor and JFK’s assassination.

The lesson is that finance tends to move in two speeds. The vast majority is slow and boring. Then, very suddenly, things get very, very dramatic.

Dividend Guy’s Stock Screen
Posted by Eddy Elfenbein on September 26th, 2012 at 4:03 pm

I’m not usually a fan of stock screens. I think they’re fine when looking for good prospects but I caution investors not to blindly follow them.

I do like the five criteria list at The Dividend Guy.

1. Yield above 3%. I would say “above market,” but 3% is a good rule of thumb.

2. Five-year dividend growth rate over 1%. Basically, a rising dividend even if it’s small.

3. ROE over 10%. Yep, that’s always good. That means a company is probably healthy.

4. Five-year income growth over 1%. This one I’m not so sure about. The problem, of couse, is that the last five years have been very atypical. Many well-run companies have seen their profits plunge.

5. Dividend payout under 75%. Meaning less than three-fourths of their profits should be paid out. That’s good because it would eliminate companies that don’t have confident plans for future growth.

The longer I invest, the more impressed I am with dividends. There are several reasons why. They’re easy to follow. Unlike accounting earnings, you know exactly what you’re getting. Dividends also tend to be “sticky,” meaning most companies have an implicit promise to maintain their dividend at the same level, or possibly increase it.

The Presidential Election Cycle
Posted by Eddy Elfenbein on September 26th, 2012 at 9:58 am

I don’t put too much faith in seasonal trading patterns but I do find them interesting from an historical perspective.

A few years ago, I took the entire Dow from its inception and worked out what the average four-year presidential election cycle looks like.

The second half of the election year has been one of the best times for the market. The Dow has gained an average of 14.5% during those six months. The good mood lasts until September of the year following the election. After that, the market enters a lousy patch that doesn’t end until the mid-term election.

The S&P 500’s First 1% Drop in Two Months
Posted by Eddy Elfenbein on September 26th, 2012 at 9:27 am

For the first time in two months, the S&P 500 lost more than 1% yesterday. The market didn’t start out so poor yesterday but traders got nervous after Charles Plosser, the head of the Philadelphia Fed, said that QE3 won’t work. Specifically, Plosser said that by pinning so much on the policy, the Fed is risking its credibility. My initial reaction is that I’m afraid that happened a long time ago.

The market slowly moved down towards yesterday’s closing bell. Financial stocks were particularly hard hit. Members of our Buy List like AFLAC ($AFL), JPMorgan Chase ($JPM) and Nicholas Financial ($NICK) were surprising losers.

The market is still nervous about events in Europe. The austerity policies have led to more riots in Greece. There are also protests in Spain and bond yields there are back over 6%. The government there is prepared to ask for a bailout. In China, the Shanghai Composite has fallen to a 3.5-year low.

The key metric that’s on everyone’s mind is the bond market in Europe. The authorities there have made it clear that they intend to defend the euro. That would lead me to believe that yield spreads would tighten. That had been happening but now the yields are moving in the other direction.

Morning News: September 26, 2012
Posted by Eddy Elfenbein on September 26th, 2012 at 6:28 am

Rajoy Bets Italian Woes May Ease Spain Rescue Terms

Greece Hit By 24-Hour General Strike Ahead of New Budget Cuts

Germany Clears Last Hurdle To ESM Bailout Fund Ratification

RBS Instant Messages Show Libor Rates Skewed for Traders

Toyota Joins Nissan in Saying Deeper China Output Cuts Loom

AngloGold Mines Halted in South Africa as Strikes Spread

Housing Market Displays New Vigor as Prices Rise

Consumer Confidence in U.S. Rises to a Seven-Month High

Tesla Cuts Revenue Outlook, Unveils Plan to Sell More Shares

U.S. Regulators Order Discover to Pay $214 Million to End Probe

EU Rejects US Claim To Have Weaned Boeing Off Subsidies

ICAP Sees First-Half Revenue Down 14% on ‘Subdued’ Markets

Barnes & Noble Tablets Aim for Niche Below iPad

Jeff Carter: Meaningful Tidbits of Information-Job Creation and Bain Capital

Cullen Roche: When the Egos of Capitalists Ruin a Good Thing…

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DirecTV Hits 52-Week High
Posted by Eddy Elfenbein on September 25th, 2012 at 1:29 pm

From Bloomberg:

DirecTV (DTV), the largest U.S. satellite-television provider, rose to a record high after Hudson Square Research upgraded the stock to buy from hold.

The shares climbed 3.2 percent to $54.39 at 12:09 p.m. in New York. DirecTV, already up 23 percent this year, rose as much as 4.7 percent to $55.17 earlier in the session, reaching the highest level since the stock began trading in 1985.

Drunken Profits
Posted by Eddy Elfenbein on September 25th, 2012 at 11:15 am

Josh Brown highlights this amusing tale from the London Telegraph:

It’s probably not uncommon for City traders to wonder how they burnt so much cash during a drunken night on the town.

But Steve Perkins was left with a bigger black hole in his memory than most when his employer rang one morning to ask what he’d done with $520m of the oil trading firm’s money.

It was 7.45am on June 30 last year when the senior, longstanding broker for PVM Oil Futures was contacted by an admin clerk querying why he’d bought 7m barrels of crude in the middle of the night.

The 34-year old broker at first claimed he had spent the night trading alongside a client. But the story began to fall apart when he refused to put the customer in touch with his desk for official approval of the trades.

By 10am it emerged that Mr Perkins had single-handedly moved the global price of oil to an eight-month high during a “drunken blackout”. Prices leapt by more than $1.50 a barrel in under half an hour at around 2am – the kind of sharp swing caused by events of geo-political significance. Ten times the usual volume of futures contracts changed hands in just one hour.

Oopsie.

Scattered Thoughts
Posted by Eddy Elfenbein on September 25th, 2012 at 10:55 am

The stock market is up again this morning but only by a modest amount. The market was helped by a strong Case-Shiller report and news that consumer confidence rose to a seven-month high.

I want to pass on a few scattered unrelated thoughts about some stocks.

FactSet Research Systems ($FDS) is down today even though they beat earnings and guided inline. I like this company a lot and it used to be a Buy List member. Unfortunately, I think the price is way too high. I wish it would come down a lot.

I often tell investors to ignore what happens to stocks after you sell them. Of course, I ignore this advice all the time only to my detriment. Of last year’s sells, I see that Gilead ($GILD) is up over 65% this year, Deluxe ($DLX) is up by 38% and Abbott Labs ($ABT) is up by 25%. Deep sigh.

I’ve been watching Global Payments ($GPN) lately. The stock was crushed earlier this year due to an embarrassing security breach. You’ll notice that many good bargains often have dents and scratches in them, but the question is how damaging are they. GPN still looks like a strong business. They report earnings tomorrow. The stock should probably be about $10 higher but I understand the market’s reticence. I’m not saying it’s a clear buy but it’s one to watch.

Seneca Foods ($SENEA) is one of those odd stocks I love. No one follows them but they continue to prosper. The stock is at a new 52-week high.

Cummins ($CMI) seems to be a very attractive stock. I’m surprised the stock is so low. The same could be said for Crane ($CR).

Morning News: September 25, 2012
Posted by Eddy Elfenbein on September 25th, 2012 at 6:30 am

Merkel Says Markets Worried About Euro States Repaying Debt

The Trade-Off That Created Germany’s Job Miracle

Draghi Rally Lets Skeptics Dump Spain for Bunds

Spain Presses ECB to Quantify Bond Purchases as Bill Yields Rise

IMF No ‘Yes-Man’ For Euro Zone, Lagarde Says

I.M.F.’s Call for More Cuts Irks Greece

South Africa Warms To Shale Gas

Riot at Foxconn Factory Underscores Rift in China

Williams Says Fed to Pursue QE3 Until Job Market Rebounds

After U.S. Inquiries, Discover Agrees to Refund Some Credit Protection Fees

‘Free’ Checking Costs More

Jump in Home Deliveries Boosts Lennar’s Profit

Verizon to Pay More Than $510 Million to TiVo, ActiveVideo

Joshua Brown: Drunk-Trading

Roger Nusbaum: Something No One Needs

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Google Hits All-Time High
Posted by Eddy Elfenbein on September 24th, 2012 at 12:28 pm

After five years, shares of Google have finally made an all-time intra-day high. On November 7, 2007, the stock got to $747.24.