Archive for June, 2011
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Morning News: June 14, 2011
Eddy Elfenbein, June 14th, 2011 at 7:57 amEuro Finance Chiefs Race to Avert Greek Default
Noyer Says Any Greek Default Would Mean Financing Whole Economy
China Raises Banks’ Reserve Ratios After Inflation Stays High in May
Spain Sells $7.8 Billion of Treasury Bills, Almost Meeting Maximum Target
I.M.F. Names Lagarde and Carstens as Contenders for Top Post
Bank of Japan Creates New Credit Line for Growth Sectors; Rates on Hold
Web IPO Boom Splits VC Haves From Have-Nots
Avis Budget to Buy Avis Europe for $1 Billion
Honda Expects Profit to Plunge
Nokia, Apple Reach Patent Deal, Settle Lawsuits
Wendy’s/Arby’s to Sell Arby’s to Roark, Undoing Peltz Tie-Up
David Einhorn’s Huge Short Is On An Unbelievable Winning Streak
Abnormal Returns: Desert Island Blogger Quiz – Book Recommendations
Howard Lindzon: Is The Bull Market Dead…or Just a Breather
Paul Kedrosky: Bank of England Discovers Google Data
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The 200-DMA Is Within Sight
Eddy Elfenbein, June 13th, 2011 at 12:59 pmHere’s a look at the S&P 500 and its rapidly approaching 200-day moving average. The index hasn’t closed below the 200-DMA since September 10th.
If today’s numbers hold up, the S&P 500 will be slightly over 1% above its 200-DMA.
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Do Dividends Make Up 90% of Total Stock Returns?
Eddy Elfenbein, June 13th, 2011 at 9:40 amWhen I was heading up to Maine recently, I stopped at a diner in New Jersey and was eating a chili dog when I got an email from blog-sensei Barry Ritholtz. Barry wanted my take on a factoid mentioned in Forbes. Specifically, the magazine wrote:
Here’s a jaw-dropper: Over the past 100 years, dividends were responsible for 90% of U.S. stock returns, says money manager BlackRock.
Barry was skeptical and I could see why. The conventional view is that half of returns have come from dividends. Nowadays, there are a lot of companies that don’t even pay a dividend. Even dividend payers retain a large portion of their earnings. So how could dividends be responsible for nearly all of stock returns?
I saw in the email chain that Barry had contacted the folks at Forbes and they provided him three items of documentation; a research piece from BlackRock, a research item from GMO and a section of Daniel Peris’ book “The Strategic Dividend Investor.” Forbes said they decided to use BlackRock for attribution.
I looked at all three sources and each one repeated the same claim—that dividends account for 90% of U.S. stock returns. The BlackRock and GMO items merely repeated the fact, but Peris was the only one who explained where the 90% number came from.
This is either one of the most remarkable discoveries in the history of finance, or something is wrong. Well…I’ve looked into it and I can safely report that something is off—dividends haven’t accounted for 90% of stock returns.
The hitch is that the claim is that 90% of returns are derived from dividends, not specifically dividends themselves. This is a bit of logical sleight-of-hand. The problem is that this sleight-of-hand doesn’t reveal any important truths. Instead, it makes a point which is ultimately irrelevant.
I’ll show you what I mean, or rather, what they mean.
Let’s take a stock that at the beginning of the year pays a 5% dividend. During the year, the dividend is increased by 10%. Let’s say that the stock also rises by 10% during the year. Well, Paris et al claim that the 10% stock rise is derived by the dividend payment since the shares are merely keeping up with the dividend. Ergo, the return derived from dividends is the 5% dividend plus the 10% stock increase. In other words, all of the stock’s returns (15% out of 15%) are derived from dividends.
Simple, right?
Er…not exactly. The problem is that if you’re claiming that any stock increase that’s commensurate with a dividend increase is “derived from dividends,” you’re ironically not saying anything about what dividends really do. I’m not saying that the point is wrong. It’s worse. It’s taken so far from a logical foundation that it’s meaningless.
Let’s take the same example I just used, but instead let’s say our stock pays a 0.001% dividend at the beginning of the year. The dividend is again increased by 10% during the year, and the shares also rise by 10%. Once again, according to their logic, we can say that all of the stock’s gain is derived from dividends. Of course, any investor would clearly understand that dividends played almost no role in their gains for that year.
(Using this same logic, I suppose we could extend this example even further by saying that a stock that pays no dividend has all of its return derived from its dividend. I’m not being sarcastic—that exactly what this logic implies.)
The fact is that we should expect stocks to gain as much as dividends. Using this “derived” context is a too-cute way of claiming everything for dividends. All the 90% number tells us is that dividend growth has lagged share price growth over the past several decades. That’s all it means and nothing else.
Well…so what? That’s a well-understood fact. Dividend payout ratios aren’t what they used to be.
If the phenomenon had gone the other way and payout ratios had steadily climbed over the years, this logic would say that over 100% of stock returns have been derived from dividends.
Barry was correct. This factoid is of little use to investors.
Let me also add that from what I’ve seen of Paris’ book, it looks to be a sound book on investing. I’m merely objecting to the logic used in this one instance.
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Morning News: June 13, 2011
Eddy Elfenbein, June 13th, 2011 at 7:30 amECB Stance on Greece Means Higher Debt Costs for Italy, Spain: Euro Credit
ECB and Germany May Be Forced to Compromise
Japan’s Machinery Orders Drop 3.3% in Sign Companies Are Paring Spending
China Yuan Down Late On Higher Central Parity Rate
Shekel Drops to Week-Low as Fischer Bids for IMF Job; Bonds Fall
Oil Declines for a Second Day on Concern Over Economic Growth, Share Slump
Roubini Sees “Meaningful Probability” of China Hard Landing
Saab in Deal With Chinese Firms
More Firms Join Hostile Bid for Toronto Exchange
HSBC Aims To Double Trade Finance Revenue; Emerging Markets Key Growth Driver
Two Specialty Insurers to Merge in $3.2 Billion Deal
Hanwha wins $720 Million Biosimilar License Deal With Merck
Gary Al expander: June Is A Bust So Far, But The Press Isn’t Telling You The Whole Story
Jeff Miller: Weighing the Week Ahead: Has Stock Selling Gone Too Far?
Phil Pearlman: Quick Video with Options Maven Steven Place on the Strange VIX Behavior
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No Comment
Eddy Elfenbein, June 12th, 2011 at 9:14 pmFrom an interview with Matt Taibbi:
Did you ever study economics?
No. In fact, up until two or three years ago I couldn’t even balance my own cheque book. This is the sort of job where you have to educate yourself quickly about things you don’t know anything about, and more importantly you have to be able to, very quickly, pretend that you know what you’re talking about when you don’t (laughs).
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StockTwits in the News
Eddy Elfenbein, June 11th, 2011 at 11:43 amThe StockTwits network continues to grow and receive attention. This weekend’s Barron’s talks about Twitter’s impact on investing:
You can also unearth savvy financial types at StockTwits, another social network that’s essentially a cousin of Twitter. It invites you to ready-made communities based on the markets that interest you, your investment style and your typical holding period. Many of the people you find at StockTwits will also be on Twitter.
“We curate and moderate and we filter,” says StockTwits’ Executive Editor Phil Pearlman (@ppearlman). Obvious spammers get blocked, post-haste. And on StockTwits, unlike Twitter, the roughly 125,000 subscribers can’t delete messages, so you can keep tabs on traders’ past trades.
Barron’s also includes a list of good follows on Twitter. Howard Lindzon, our fearless leader at StockTwits, appeared on CNBC on yesterday.
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C.R. Bard Raises Dividend
Eddy Elfenbein, June 10th, 2011 at 9:38 amAnother great stock has raised its dividend. This time it’s C.R. Bard ($BCR). Here’s a description from Hoovers:
C. R. Bard is no upstart in the world of medical devices. The company has been in the business for more than a century and introduced the Foley urological catheter (still one of its top sellers) in 1934. Its products fall into four general therapeutic categories: vascular, urology, oncology, and surgical specialties. Among other things, the company makes stents, catheters, and guidewires used in angioplasties and other vascular procedures; urology catheters and products used to treat urinary incontinence; and catheters for delivering chemotherapy treatments. Its line of specialty surgical tools, made by subsidiary Davol, includes devices used in laparoscopic and orthopedic procedures and for hernia repair.
Bard is raising the quarterly dividend from 18 cents to 19 cents per share. The annualized yield is still puny — just 0.69%. But if you had bought the shares 25 years ago, you’d currently be yielding over 12.4%.
The shares aren’t chaep. Bard currently goes for 17 times this year’s earnings estimate.
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CWS Market Review – June 10, 2011
Eddy Elfenbein, June 10th, 2011 at 7:35 amOn Thursday, the stock market finally stopped its six-day slide. We have to go back more than two years to find the last six-day losing streak. The S&P 500 gained 0.71% on Thursday to close at 1,289. The big gainers on the day were stocks in the Energy, Materials and Financial sectors—exactly the areas that have been getting punished the most recently.
As I’ve been warning investors, the market is rotating out of these economically sensitive stocks and seeking shelter in lower-risk areas. For example, Reynolds American ($RAI), our highest-yielding stock on the Buy List has our second-best capital gain for the year. Another example is that the yield on the two-year Treasury recently dipped below 0.4%. That’s about one-fifth the yield of the S&P 500. Even longer-date maturities are benefiting. The 10-year note got down to 2.92% which is the lowest yield since December 3rd.
So is this a turnaround for the stock market? Perhaps. The week isn’t over yet but we have a good shot of making it six-straight losing weeks. To be fair, that number is a bit misleading since some of the weekly losses have been very slight.
Let’s add some important context here. The S&P 500 is still higher than where it was 12 weeks ago. While the 2.28% plunge on June 1st was unpleasant, there’s no reason to expect the entire market to roll over from that. In fact, there have been 19 days worse than that since the bull market began 27 months ago, and the bull charged over every single one.
When we look at longer drops—the S&P 500 shed 6.16% from April 29th to June 8th—we see that there have been four corrections larger than that in the last two years. That includes an ugly 15.99% drop last year. Once again, the bull overcame all of them. Bloomberg reported that the S&P 500 is at its “cheapest valuation since August.”
In last week’s issue, I noted that the S&P 500 had been in a very tight trading range. Thanks to the recent slide, we broke the lower bound but not by much. Right now, I’m keeping a close eye on the S&P 500’s 200-day moving average which is currently at 1,252. I’m not much for technical analysis, but I’m curious to see if we make a run at the 200-DMA. The S&P 500 hasn’t gone below its 200-DMA in nine months.
The important fact all investors need to understand is that earnings are strong but growth is slowing down largely because the comparisons are getting tougher. It’s not hard to put up 20% or 30% growth numbers when the S&P 500 earns $49.51 as it did in 2008. But nowadays, the comparison bar is set much higher.
With 99% of the earnings in for the first quarter, the S&P 500 has earned $22.58 which is a hefty 16.51% jump over Q1 2010. There are only three weeks left in Q2 but when all the numbers are in, the S&P 500 has a very good chance of posting record quarterly earnings. You wouldn’t know that from looking at the news recently. The old earnings record was set in the Q2 of 2007, yet the S&P 500 is 14.5% lower than it was four years ago. It’s no surprise that we recently learned that bearish sentiment has soared among individual investors.
Wall Street has been rattled by a series of poor economic reports. Last Friday’s jobs report was especially disheartening. Even though the recession officially ended two years ago, the jobless rate is still at 9.1%. What’s especially troubling is that the number of people who have been employed for an extended period remains stubbornly high.
There are some causes for optimism. Looking at the details of the jobs report, we see that there were 29,000 fewer government jobs in May. That means the private economy created 83,000 new jobs. Furthermore, the lousy weather and disruptions in Japan weighed heavily on the jobs market. Thursday’s trade report showed that imports from Japan plunged 25.5% last month. That certainly won’t last. Fed Chairman Ben Bernanke said on Tuesday, “I expect hiring to pick up from last month’s pace as growth strengthens in the second half of the year.” That’s nice to hear, but I want to see proof before I know it’s real.
Despite this outbreak of bad economic news, Wall Street is sticking to its optimistic earnings forecast for this year and next. For 2011, analysts see the S&P 500 earning $98.03, and for 2012 they expect earnings of $111.82. That’s a forward P/E Ratio of 11.53 which is very low. (I should add that I’m a little leery of forecasts that go out so far. I’m mentioning this to show you how fearful Wall Street is.) The good news for us is that our strategy of buying and holding top-qualities continues to do well. For the year, our Buy List has gained more 5% which is more than double the S&P 500.
With each issue of CWS Market Review, I like to point out stocks on our Buy List that look especially attractive at the moment. The recent sell-off has given us several solid values. Ford ($F), for example, recently dropped below $14 per share which is a very good price. The company spoke to analysts this week and outlined ambitious plans for the next few years. Several of my old favorites like AFLAC ($AFL), Nicholas Financial ($NICK) and Moog ($MOG-A) are also excellent buys.
This is a fairly quiet time for the stock market. In fact, there won’t be much important news until the second-quarter earnings season begins in another month. We have two Buy List stocks that are due to report earnings soon since their quarters end with the close of May. Bed Bath & Beyond ($BBBY) will report earnings after the close on June 22nd, and Oracle ($ORCL) will report the next day.
In April, BBBY said it expects fiscal Q1 earnings of 58 to 61 cents per share. My take is that that’s on the low side. I’m expecting a modest earnings surprise—around 63 cents per share, give or take. I hope to see Q2 guidance of 80 to 85 cents per share. For now, I’m keeping my buy price at $55 per share. BBBY is a very well-run company.
I like Oracle a lot especially now that the shares are down over the last two months. The company reported very strong earnings three months ago; revenues rose 37% and earnings topped expectations (which I predicted). In March, Oracle said to expect earnings for the May quarter to range between 69 and 73 cents per share (that compares with 60 cents for the same quarter one year ago). That’s actually surprisingly aggressive so I can’t say I’m expecting a big earnings beat. Still, the company is very sound and I also like their clean balance sheet. Oracle is a strong buy up to $34 per share.
That’s all for now. Be sure to keep visiting this blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
– Eddy
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Morning News: June 10, 2011
Eddy Elfenbein, June 10th, 2011 at 7:22 amGermany Digs In on Greek Debt Extensions
Mexico’s Carstens: Expect India to Contribute More in IMF
African Leaders Eye Cape-to-Cairo Trade Bloc
China Net Crude Imports Fall as Higher Prices Cut Purchases
Korea Bond Yield Rises Most in Three Months on BOK Rate Increase
USDA Cuts Outlook for Corn Harvest
Second Half 2011 U.S. Growth Rebound Intact
Household Worth in U.S. Rises $943 Billion as Stocks Outstrip Home Values
Companies Spend on Equipment, Not Workers
Toyota Sees 35% Profit Slump After Quake
Muddy Waters Research Is a Thorn to Some Chinese Companies
Brian Shannon: Stock Market Review & New Ideas 6/9/11
Joshua Brown: Why Sina did a Sino
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Bid On A Power Lunch With Warren Buffett
Eddy Elfenbein, June 9th, 2011 at 11:46 pmLunch for eight. Hurry up, time is running out (7:30 pm PT Friday). The current bid is $2,345,678.
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