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September 2, 2010 $4 Trillion a Day
Guess what market has daily volume of $4 trillion? Give up? I'll give you a hint: The currency markets. Look at the table on the link. What's interesting is how much the U.S. dollar dominates the currency markets. In fact, if you were to place a non-dollar trade -- say, British pounds to Mexican peso -- it would probably go pounds to dollars and then dollars to pesos. Posted by Eddy at 2:28 PM | Permalink ISM Chart Here's the latest chart on the Institute for Supply Management index:
As I've discussed before, this is one of the best metrics for telling us if we're in a recession or not. Notice how often the recession bars on the chart coincide with low ISMs. A reading above 50 means the economy is expanding, below 50 means we're contracting. Yesterday's reading was 56.3. Until now, I’ve been a doubter on the Double-Dip hypothesis, but now I think I need to take that scenario a lot more seriously. I still don’t think a second recession is probable, but the odds of one have increased markedly. Fortunately, the ISM takes some of the worry off. The jobs outlook, however, does not. Despite all the concerns of a Double Dip, the quarterly GDP growth number has dropped from 5% in Q4 to 3.7% in Q1 to 1.6% in Q2. That’s not good, but it’s (for now) not a recession. I should add that we have been fooled before by a false Double Dip. Let’s take a look at what happened 19 years ago:
GDP growth was negative for three straights quarters (you can't see Q3'90 of -0.006% but it's there).Then the economy grew by 2.7% in the third quarter of 1991, followed by 1.7% in Q4 and 1.6% in Q1 of 1992. That's successively lower growth just like we're seeing now. Yet, it didn't lead us to another recession. In fact, it led to four straight quarters of 4% of more growth. Here's an AP article from December 1991 titled "National economy stalled on brink of double-dip recession." This came right as the time the double-dip threat was passing. I'm not saying that history will repeat itself. I'm merely pointing that a double-dip is certainly possible, we still have a ways to go to get to one. Posted by Eddy at 9:56 AM | Permalink September 1, 2010A Look at the Mid-Term Rally The stock market has historically done very well from its low point during a mid-term election year to the high point during a presidential election year. Check out the numbers:
The Dow's lowest close (so far) this year came on July 2 at 9,686.48. A 57% rally would bring the Dow to over 15,200. Posted by Eddy at 2:10 PM | Permalink ISM 56.3 Whew! The ISM number came in at 56.3 which was well above expectations of 53. I feel like we dodged a bullet here. The market should continue to rally. Posted by Eddy at 9:58 AM | Permalink ISM Due at 10 am Stocks are rocking this morning, but the ISM comes out at 10 am. The Street expects 53. A negative surprise could be very nasty. I'm now hiding under my snuggie. Posted by Eddy at 9:29 AM | Permalink Good Earnings from Joe Bank Jos. A. Bank Clothiers (JOSB) just released a very good Q2 earnings report this morning. The company earned 59 cents a share which was six cents more than Wall Street was expecting. Let’s hope the stock gets a nice bump today. The details look very solid. Sales rose 12.3% and same-store sales rose 9.2%. A year ago, the company earned 45 cents a share. I’m especially glad to see that gross margins improved to 62.8% from 61.5%. Right now, Wall Street pegs JOSB to earn $3 for the entire year, bear in mind that a very large part of that comes in their fourth quarter. I expect Wall Street to up its full-year estimates soon. Three months ago, JOSB beat the Street by 14 cents a share. JOSB has posted higher year-over-year earnings for 35 of the last 36 quarters including the last 17 in a row. Even at $3 a share, the stock is going for about 12 times forward earnings which is a decent value. Update: The stock is up 13% today. I'm now playing that Gary Glitter HEY song in my office. Posted by Eddy at 8:52 AM | Permalink August 31, 2010From 1985: What Will Shopping Be Like in 2010? From 1985, peer into the distant future of 2010. Posted by Eddy at 12:05 AM | Permalink August 30, 2010The WSJ Takes on the P/E Ratio The Wall Street Journal has a rather unusual column today claiming that the Price/Earnings Ratio is not only declining, but the metric’s importance is declining as well. For supporting evidence, they offer up the fact that corporate earnings were strong this past earnings season but the stock market has since fallen. Sorry folks but that’s not a hard knot to entangle: The P/E Ratio looks backward while stock prices look forward. As a result, you can get some poor readings. I’m afraid to tell the WSJ that despite this minor conflict, the P/E Ratio remains very important (though we must be aware of its shortcomings). The WSJ goes on to say that the P/E Ratio has plunged about 36% in the past 12 months which is the biggest drop in seven years. Again, this shouldn’t be much of a surprise because, as I just mentioned, the P/E Ratio looks backward. Corporate earnings have improved very dramatically since the depths of the recession. A higher E with a flat-to-lower P means a lower P/E Ratio. Mystery solved. The WSJ also writes that the forward P/E Ratio has dropped from 14.4 in May to 12.2 currently. This probably means that stock prices are ahead of analysts’ forecast and that those projections may be headed lower soon. Because of the time discrepancy in the P/E Ratio we sometimes get “false readings.” For example, when stocks are cheapest, the earnings line is often still headed lower. As a result, the very first stages of a bull market often shows the P/E Ratio dramatically expanding. The opposite happens when the market begins to look rich, which may be happening right now. Stocks are sluggish while earnings have improved. As a result, you have stocks falling after good earnings combined with a subdued P/E Ratio. Three months ago, analysts expected the companies in the Standard & Poor's 500-stock index to boost profits 18% in 2011. Now, they predict 15%. Mutual-fund, hedge-fund and other money managers put the increase at closer to 9%, according to a recent Citigroup survey, while Mr. Levkovich's estimate is for 7% growth. The WSJ says that the P/E Ratio is plagued by the lack of certainty in future earnings, and on this point I agree. Think of it this way. Imagine we have two stocks that are similar in every way except for one difference. Stock A is projected to earn $1 a share next year, plus or minus 20 cents. Stock B is projected to earn $1 a share next year, plus or minus three cents. Which stock will be worth more? Outside of rare exceptions, we can assume that Stock B will be worth more. Why? Because the market rewards certainty. The WSJ also claims that the P/E Ratio has had earlier bouts of loss of importance -- from the Great Depression to the early post-war period and again during the inflation struggles of the 1970s and early 80s. I agree on the former, but the latter was hardly a refutation of the P/E Ratio. It's simply that the P/E is closely tied to interest rates. As rates head higher, P/E Ratios headed lower so stocks could actively compete with bonds. I can assure you that any obituary for the P/E Ratio is very premature. Posted by Eddy at 2:43 PM | Permalink Genzyme Says No to Sanofi-Aventis The stock market is bucking the trend of 2010 as we’re currently heading lower on a Monday. The market, however, is still well above the lows from Friday morning. Most of the rally from Friday afternoon still holds. The cyclical stocks are leading the market lower today. One of the big stories today is that Genzyme (GENZ) has rejected the $18.5 billion offer from Sanofi-Aventis (SNY) believing the bid is too low. I don’t have a strong opinion about either company but I’m happy to see companies reject buy-out offers right now. As usual, the market had the right idea. GENZ’s had already been trading above SNY’s bid price of $69 a share. Sanofi’s CEO said they made a "compelling" offer and that Genzyme’s management "has a history of overpromising and under-delivering.” Ooooh, snap! On the Buy List, Intel (INTC) is still in a buying mood. This time, they’re picking up the wireless unit of Germany’s Infineon Technologies for $1.4 billion. This is an area where Intel hasn't been particularly strong. "The acquisition of Infineon's wireless business strengthens the second pillar of our computing strategy--Internet connectivity--and enables us to offer a portfolio of products that covers the full range of wireless options from WiFi and 3G to WiMAX and the long-term evolution," a standard for the new faster fourth generation mobile networks," Intel President and Chief Executive Paul Otellini said in a statement. Intel's stock is currently hovering around $18 a share. Posted by Eddy at 12:53 PM | Permalink Buffett Turns 80 Happy Birthday to Warren Buffett. Here's to 80 more!
Posted by Eddy at 8:15 AM | Permalink August 28, 2010Ave Maria! Maria Bartiromo singing!. Here's Part 1: Part 2: Posted by Eddy at 1:07 PM | Permalink August 27, 2010Market Notes: August 27, 2010 The Buy List had a very good day to close out August which was an ugly month for us. Here are a few notes on some of our stocks: Barron’s notes that First Global has downgraded Gilead Sciences (GILD). Eli Lilly (LLY) won a court battle which extended the blocking of generic versions of Strattera, an attention deficit disorder drug. Nicholas Financial (NICK) got as low as $8.06 today. The company’s book value is $8.59. Here’s Ben Bernanke’s speech today in Jackson Hole. I thought it didn’t say much at all, but the market bond dropped sharply and stocks rose. Posted by Eddy at 3:53 PM | Permalink Altria Raises Dividend Altria (MO) announced today that it's increasing its quarterly dividend by 8.6% to 38 cents per share. Think of it this way: If you had bought the shares 25 years ago, the dividends alone are yielding you 192%. Posted by Eddy at 11:46 AM | Permalink Krugman and Bond 36,000 Ten years, I criticized the Dow 36,000 thesis for its bad math. Now I very cautiously criticize Paul Krugman’s defense of the bond bulls. Professor Krugman had a post earlier this week saying that the low yield on the 10-year T-bond is justified. He backed up this claim by taking the CBO’s 10-year projections for unemployment and core inflation and ran that through Greg Mankiw’s Fed rate rule. The output was a projection for the Fed funds rate for the next 10 years. What’s interesting is that it shows that the Fed ought to keep rates near 0% for a few more years. The problem I have with Krugman is what he did next. He used the 10-year forecast of short-term rates to arrive at his estimate of what the 10-year yield ought to be—2.6%. The problem with this is that the yield on the 10-year bond is not solely the summation of 10 one-year bonds, or 40 three-month bills, or whatever time slice you like to use. There’s also an added “term premium.” This is what makes the yield curve, well...curve. I looked at the historic spread of the 10-year bond over the effective Fed funds rate since 1954 (chart below). The spread has average 92 basis points. Bear in mind that this is a premium that’s over and above what the market has already factored for future rate increases. This is simply the premium you get for holding longer term debt.
Assuming a 10-year bond with a coupon of 2.6%, an increase in yield of 92 basis points translates to a drop in price of close to 8%. That may not sound like a lot but it's a big move in the bond market and it's especially large if you're pricing in an historic bull market for bonds. This ends today's portion of my day when I criticize Nobel Prize winners in their field. Posted by Eddy at 9:55 AM | Permalink The Lost Decade The government revised the GDP growth number for Q2 today and it wasn't good. Instead of growing by 2.4% which the original report said, the economy grew by just 1.6% for the second three months of the year. As bad as that sounds, Wall Street was expecting even worse. The consensus was to expect 1.3%. Thanks to that "good news," it looks like stocks are ready to open higher. The 1.6% growth rate also matches what the U.S. economy has done over the last ten years. There's talk of us having a lost decade; we've already had one! Here's a look at the annualized GDP growth rate over the preceding 10 years:
Since Q2 of 2000, the economy has averaged 1.6% a year which is less than half the growth rate of the preceding 10 years. Posted by Eddy at 9:03 AM | Permalink The Low Point in the Presidential Election Cycle We’re coming up on an important day for investors. One month from now is the market’s historic low point during the Presidential Election Cycle. Historically, September 30 of the mid-term year is the best time to buy stocks. A few years ago, I crunched the entire history of the Dow from 1896 to 2007. Here’s what I found: Historically, the Dow has gained an average of 24.1% from September 30 of the mid-term election year to September 6 of the pre-election year. This means that nearly two-thirds of the Dow’s four-year gain (24.1% of 36.7%) comes in less than one-quarter of the time. That’s a pretty stunning stat. After September 6 of the pre-election year, the Dow has historically pulled back 5.2% to May 29 of the election year. After that, it puts on a nice 23.2% climb to August 3 of the post election year. Then trouble starts. After September 3, the Dow then pulls back 5.6% and we’re back at our starting point, September 30 of the mid-term election year.
Warning: I don't put much faith in this statistical oddities for gaining a trading advantage. I simply think they're interesting in what they reveal about market history. Posted by Eddy at 6:30 AM | Permalink August 26, 2010Goldman Sachs January 2011 Puts Just in case anyone is interested, you can pick up some puts on Goldman Sachs (GS) for January 2011 with a strike price of $2.50. You never know. Posted by Eddy at 2:41 PM | Permalink This Might be a Sell Signal If the CEO of one of your stocks is named Time's Person of the Year, that might be time to sell. Intel's (INTC) Andrew Grove got that distinction in 1997 and the stock's recent plunge brings it to almost exactly where it was back then. Intel is currently going for just 8.7 times next year's earnings. Jeff Bezos got the nod in 1999, and Amazon (AMZN) eventually dropped over 90%. But maybe it's not always a sell signal. Today, Amazon is up 54% since the Time cover. Of course, these are the same people who bought AOL. Posted by Eddy at 2:18 PM | Permalink No Jobs Means No Sales Means No Recovery Here’s a chart I made that I think may be helpful in explaining the current market to new investors.
This chart shows the trailing four-quarter sales and earnings for the S&P 500. This needs a little explanation. The black line is the sales for the S&P 500 and it follows the right axis. The blue line represents the operating earnings and the red is the as-reported earnings. Both of those lines follow the left axis. Notice that sales are much less volatile than profits. I’ve scaled the two axes at a ratio of 12-to-1, which means whenever the red or blue line crosses the black line, the profit margin is exactly 8.33%. Unfortunately, the data only goes up to the first quarter of this year, but nonetheless, I still think it gets the point across. Let me explain the difference between the red and blue lines. The as-reported figure refers to simply the bottom line that companies report each quarter. The blue line is the earnings number that’s adjusted for special items. Personally, I prefer to look at operating earnings because the market has historically been more closely correlated to it. Some analysts only look at as-reported earnings and I respect that choice. You can use either but just be aware of the pitfalls of either choice. The problem with as-reported earnings is that they can fall off a cliff as they did during the fourth quarter of 2008. AIG, for example, reported an earnings loss of over $280 a share. When all those financial stocks reported monster losses it gave the impression that the entire market was worthless. The red line plunged to nearly nothing. The market, obviously, didn’t put a standard multiple on $7 of trailing earnings. Instead, the market’s behavior followed the blue line. I’ll skip the accounting debates. My view is that if market thinks the blue line is important, then I think it’s important. The problem with the operating earnings, however, is that it can reflect poor “earnings quality,” meaning companies get creative with their accounting. A good warning sign of poor earnings quality is when there’s a big gap between the red and blue lines. This was a bigger issue a few years ago, but I’m not so concerned about it today. Either way, let's not get bogged down on the issue of operating versus as-reported. The important point I want to get across to new investors is that the market has responded to a dramatic upsurge in operating earnings since March 2009. That’s great news. The problem is that companies haven't grown their profits by generating new business. Instead, they've grown their profits by increasing profits margins. And they've done that by cutting costs, principally labor costs. They've fired and laid off their way to prosperity! Basic economics tells us that profits can only go so far without sales growth and that's been dismal, and it's partly due to all those lay offs. That black line needs to get moving. The Q2 data point isn’t up yet but it will show pretty much the same thing, sluggish sales growth. I scaled the two lines at 12-to-1 because once the blue line passes the black line (meaning, the overall profit margin exceeds 8.33%), that’s usually when the economy starts hitting the breaking point. When you can’t increase sales quickly, you need to grow earnings by raising prices. But when you increase margins, you slow sales growth. Hence, the economy moves in a cycle. Notice how the blue line tends to lead the black line by a year or two. In other words, profits generate sales. But this time around, it just doesn't seem to be working. Posted by Eddy at 11:42 AM | Permalink August 25, 2010The Larger the Fund, the Fewer the Stocks One of the important lessons of investing is that individual investors often have an advantage over professionals. They don't have to meet quarterly goals. They don't have to justify their actions to committees. Another is that as mutual funds get larger, it's harder for them to make nimble investments. Consider these words from Jack Bogle: Jack Bogle shows how the investable universe of stocks declines sharply as a function of fund size. Assuming that a fund can hold no more than 5 percent of the outstanding shares of any company, Bogle estimates that a fund with $1 billion of assets can choose from over 1,900 stocks while a fund with $20 billion has a universe of about 250 stocks. So it happens that success can sow the seeds of its own failure. True dat. This comes from an interesting report from Michael Mauboussin at Legg Mason (via Abnormal Returns). Of course, large mutual funds can invest in smaller stocks but those stocks play a much smaller role in the fund's overall performance. It doesn't take much to build a portfolio that's nearly blind to moves of the overall market. What really hurts individual investors is time horizon. While stocks have done better in the long run, that long run can indeed be a very, very long time. |
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