Stocks Against Bonds
Posted by Eddy Elfenbein on August 8th, 2012 at 2:35 pm

Here’s a chart I like to look at periodically. It’s the stock market divided by the long-term bond market (specifically, the Wilshire 5000 Total Return divided by the ML 15+ Bond Index).

I think it’s interesting that despite a very strong stock rally since March 2009, the bond market has held its own. In fact, if you had switched into bonds before the end of March, you’d be outperforming stocks.

I’d expect stocks to slightly outperform bonds over the long haul. Given the strong rally in bonds and their ultra-low yields, I think stocks are the safer place to be right now.

Bob Dylan Bonds?
Posted by Eddy Elfenbein on August 8th, 2012 at 2:00 pm

When interest rates are near 0%, investors get creative. From the WSJ:

Bob Dylan’s music was the soundtrack for the counterculture of 1960s America.

Now it has become a selling point for an unusual bond offering being marketed to institutional investors and wealthy individuals.

A privately held Nashville, Tenn., company is preparing a $300 million bond backed by the cut it receives as a middleman between music companies and songwriters and the outlets that broadcast their music.

The company, Sesac Inc., has the exclusive rights to the public broadcast or performance of the music of Mr. Dylan, pop singer Neil Diamond, Canadian rock band Rush and jazz singer Cassandra Wilson.

S&P rated the offering triple B minus, one notch above junk, which seems kinda high.

Priceline.com Plunges $113
Posted by Eddy Elfenbein on August 8th, 2012 at 12:10 pm

Shares of Priceline.com ($PCLN) are getting severely crushed today. Imagine the USA-Nigeria basketball game, but in stock form. PCLN has been down as much as $113.70, or 16.73%. After the close yesterday, the company reported earnings of $7.85 per share which was very good; it was 49 cents per share more than Wall Street’s consensus.

The problem, however, was guidance for this quarter. The Street had been expecting Q3 earnings of $12.79 per share on revenue of $1.795 billion. Priceline now says earnings will range between $11.10 and $12.10 per share and sales will be between $1.6 billion and $1.67 billion.

Both Priceline and Orbitz are being hurt by the problems in Europe. So is Priceline a good buy at this price? Let’s bring in our World’s Simplest Stock Valuation Measure:

Growth Rate/2 + 8 = PE Ratio

As a reminder, this is just a simple, ballpark tool and we shouldn’t overly rely on it. Wall Street currently projects a five-year earnings growth rate for Priceline of 23.68%. That translates to a P/E Ratio of 19.84. Wall Street’s earnings forecast for 2013 is $38.95, so that works out to a fair value of $772. It appears that Priceline is currently going for $200 below its fair value.

But we should make some adjustments based on the recent lower guidance. The midpoint of today’s guidance is about 9.3% below Wall Street’s forecast. If we apply that as a constant to next year’s earnings, that brings it down to $35.33.

Now as far as growth is concerned, we have to get a little creative. I don’t believe we need to adjust the long-term growth rate by the full 9.3%. Instead, I think it’s better to ratchet it down by half or 4.65%. Decreasing the rate of growth by 4.65% (note, not the overall number but a reduction in the rate) brings the new five-year growth rate to 17.93%. That’s gives us a fair value of $599.

That’s just an estimate but I think it’s a reasonable one. This means that Priceline may be a bit undervalued but not by much. I don’t think something is a strong buy until it’s at least 30% undervalued.

Morning News: August 8, 2012
Posted by Eddy Elfenbein on August 8th, 2012 at 6:44 am

Bank Of England Slashes Growth Forecasts To ZERO As Double-Dip Recession Deepens

German June Industrial Production Fell on Construction Output

Greece’s Rating Outlook Lowered by S&P as Economy Weakens

ECB’s Rescue Worsens Spain, Italy Maturity Crunch

Indigestion for ‘les Riches’ in a Plan for Higher Taxes

Bernanke Promotes Financial Literacy, Says Next Generation Will Be Better Off

Regulators Irate At NY Action Against Standard Chartered

Accusations Against Bank on Iran Deals Surprised U.S. Regulators, Too

‘Avengers’ Helps Disney Smash 3Q Profit Forecast

ING Profit Falls 22% on Spain Investment Sales, Loan Losses

Molson Coors 2nd-Quarter Net Slumps 53% on Higher Costs

Pfizer Settles U.S. Charges of Bribing Doctors Abroad

Mobile Payments Go Mainstream With Square’s Nationwide Starbucks Deal

Jeff Carter: Where Is My Buggy Whip?

Cullen Roche: The Anniversary of the S&P Downgrade – Have we Learned Anything?

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Gross is Right: The Siegel Constant Is History
Posted by Eddy Elfenbein on August 7th, 2012 at 12:07 pm

Recently, Bill Gross said that the Siegel Constant, the idea that stocks can return 6.6% after dividends and inflation, is no longer useful. I think he’s exactly right on that.

While the data from history has shown that the broader stock market has returned an average of 6.6% a year more than inflation, I think that’s unlikely to continue. The part is most likely not prologue. More importantly, it’s a dangerous assumption for investors to use. At that rate, it means that your investment in the stock market will double, in real terms, every 11 years.

For one, the Siegel Constant is hardly a constant. The data from 1926 through 1999 showed the long-term total return to be over 8%. After more than a decade of sub-par returns, the long-run Siegel Constant is now down to 6.6%.

The other striking fact about the market’s long-term total return is how cyclical it’s been. Here’s the stock market’s long-term total return (in blue) and I’ve added a black trend line that’s grown by 6.6% per year. As you can see, the two lines wind up in the same place, but they’ve hardly tracked each other.

Now here’s the blue line divided by the black line:

What we see isn’t a constant but a cycle. There are long stretches where the market handily outpaces its long-run average (1942 to 1966 and 1982 to 2000), followed by long period of under-performance (1929 to 1942, 1966 to 1982 and 2000 to 2009).

I will defend Siegel against one criticism levied by Gross. Specifically, Gross conflates GDP with stock market return. They’re not the same. Due to dividends, investors should expect the total return of stocks to outpace GDP growth.

S&P Sticks By Downgrade
Posted by Eddy Elfenbein on August 7th, 2012 at 10:34 am

One year ago, S&P downgraded U.S. debt. The company is sticking by its forecast:

“S&P sticks by its decision,” said Chambers, the 56-year-old chairman of S&P’s sovereign-debt rating committee. “Since the downgrade, our projection for the national debt as a percentage of the economy in five years has actually gotten worse.”

The only person’s judgment who matters is the market’s, and the market’s love for U.S. debt hasn’t subsided. Here’s a look at the long-term Treasury debt ETF ($TLT) over the past year.

S&P 500 Breaks 1,400
Posted by Eddy Elfenbein on August 7th, 2012 at 10:29 am

The S&P 500 finally broke 1,400 this morning after coming very close several times during the day on Monday. The Nasdaq has burst through 3,000.

Shares of JPMorgan Chase ($JPM) got as high as $37.67 this morning. That’s a post-Whale high. Bear in mind, the stock was at $46 in April. It’s a good lesson in investing that the whole episode cost JPM about one-third of their market value, which is a nice counter argument to the idea of efficient markets.

Earnings season is almost over for us. The last one is Sysco ($SYY) and that’s due on Monday. After that, we turn to the January-April-July-October cycle stocks and we have two, Medtronic ($MDT) and Jos. A. Banks ($JOSB). But those won’t report until the end of the month.

Today’s rally is being led by cyclicals for a change. Energy and Industrials are both doing well today. Energy is probably being aided by the huge fire in California. Defensive sectors like Healthcare and Utilities are mostly unchanged.

Morning News: August 7, 2012
Posted by Eddy Elfenbein on August 7th, 2012 at 6:41 am

Draghi Channeling Merkel Has Traders Raise Bets Against Euro

Italian Economy Contracts for Fourth Straight Quarter

Monti Warns of Euro Breakup as Tussle Over Spain Aid Hardens

South Africa Fines Telkom $55 Million For “Bullying”

Goldman Sachs’s MIST Topping BRICs as Smaller Markets Outperform

Standard Chartered Falls Most in 24 Years on U.S. Iran Probe

Standard Chartered Faces N.Y. Suspension Over Iran Deals

Fed Official Calls for Bond Buying

SEC To Tighten Rules Following Knight Bailout

Best Buy Founder Richard Schulze Offers To Buy Struggling Retailer

Hospital Chain Inquiry Cited Unnecessary Cardiac Work

Lawsuit Accuses G.M. of Blocking Plan to Rescue Saab

Gold Trove Found at Israel Castle Reveals Crusaders’ Forex Moves

Joshua Brown: Chicken or the Egg: The Actively Managed ETF Problem

Roger Nusbaum: Jeremy (Grantham) Spoke

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Coca-Cola Nears 14-Year High
Posted by Eddy Elfenbein on August 6th, 2012 at 10:25 am

Shares of Coca-Cola ($KO) are due to split 2-for-1 in a few days. This will be Coke’s first stock split in 16 years.

Coke was enormously overpriced in mid-1998 and the stock is closing in on breaking its all-time high close of $87.94 set on July 14, 1998. If today’s market holds up, KO will close at its highest price in 14 years.

Despite KO’s rally, I still think the stock is massively overpriced.

The S&P 500 Nears 1,400
Posted by Eddy Elfenbein on August 6th, 2012 at 10:06 am

The market is up this morning and the S&P 500 is very close to breaking 1,400. This is a continuation of Friday’s big rally. The big market news today is that Best Buy’s founder, Richard Schulze, has offered to buy out Best Buy ($BBY) for $24 to $26 per share. BBY closed Friday at $17.64 per share. The stock is up strongly this morning, but only to $21 or so. I think this means that the market is skeptical that Schulze’s deal will come to pass.

A few weeks ago, I noted that Cognizant Technologies Solutions ($CTSH) “is starting to look pretty good at this price.” The stock is up 11.8% on strong earnings and higher guidance.