Archive for 2011

• What Do You Like?
  Eddy Elfenbein, December 28th, 2011 at 10:00 pm

  In keeping with the refined, civilized and high-brow content of this website, I certainly hope you don’t find anything humorous in this clip.

  I’m absolutely ashamed at you.

• The Give and Take of Volatility
  Eddy Elfenbein, December 28th, 2011 at 1:34 pm

  Here’s a look at all the daily changes of the S&P 500 over the last five years:

  

  I’ve said before that volatility is used incorrectly as a scare word by many in the financial media. Volatility is rarely good or bad, especially if you’re focused on the long-term as we are. In fact, I prefer a little volatility since it helps us spot bargain stocks.

  What the chart shows us — and what to keep in mind — is that volatility comes and goes. I’m not trying to sound flippant or dismissive; the numbers back it up.

  We had very little volatility before the financial crisis; then we had historic volatility. Since then, volatility has flared up twice, once in the summer of 2010 and again last summer. That latest flare-up is still going, but I suspect it’s rapidly fading.

  There wasn’t a single move, up or down, greater than 2.3% between September 2, 2010 and August 1, 2011. Since August 2nd, there have been 25 such moves. Like the others, this too shall pass.

  I think the best way to look at volatility is as a struggle in the market for competing theses. The sharper the conflict, the greater the volatility. Once the market settles on a theme, then stability quietly returns.

• The S&P and Sector P/E Ratios
  Eddy Elfenbein, December 28th, 2011 at 1:01 pm

  Here’s a look at the S&P 500 plus the ten sectors along with their earnings estimates for next year and Price/Earnings Ratios.

  Financials are still cheap but how much can we trust that earnings forecast?

  Sector	Earnings Est	12/27 Close	P/E Ratio
  Discretionary	22.66	310.71	13.71
  Staples	23.09	336.82	14.59
  Energy	51.21	525.49	10.26
  Financials	18.21	176.34	9.68
  Health Care	35.27	404.12	11.46
  Industrials	23.82	294.65	12.37
  Technology	35.34	412.30	11.67
  Materials	18.84	214.29	11.37
  Telecom	7.68	129.33	16.84
  Utilities	12.49	183.83	14.72
  S&P 500	106.81	1,265.43	11.85

• The Euro Flash Crash
  Eddy Elfenbein, December 28th, 2011 at 10:29 am

  Yikes. Check out what happened earlier today. The euro plunged to a 15-month low against the dollar.

  

• Things Are Better Than You Think
  Eddy Elfenbein, December 28th, 2011 at 10:25 am

  In The Daily Beast, Zachary Karabell writes on a theme that we’ve been discussing recently — namely, that things are better than you might think. Given all the mayhem of the past 12 months, the U.S. economy has so far dodged all the predictions of its demise.

  Make no mistake, the economy is far from strong. But compared to the rhetoric, we’re not that bad.

  In the last months of 2011, every major indicator of economic health in the United States showed marked improvement: manufacturing, sentiment, holiday sales, e-commerce, inflation, and employment. Even government is shrinking, a fact that Republican candidates strenuously avoid and which Democrats uncomfortably skirt because it means large-scale government-employee layoffs; there are nearly 400,000 fewer government workers now than there were at the end of 2010. Yet there are more people employed overall. Wages have not increased for years but nor is income decreasing the way it was. In almost every way, the U.S. economy is stable, which is a far cry from robust and an equally far cry from dismal.

  I always find it interesting that people get angry when you tell them there’s good news. Check out some of the loony comments below the column.

• The New Buy List
  Eddy Elfenbein, December 28th, 2011 at 8:52 am

  To reiterate, here’s the Buy List for next year. This list will go into effect on Tuesday, January 3rd which is the first day of trading next year.

  For tracking purposes, I assume the Buy List is a $1 million portfolio equally dividend into 20 positions of $50,000 each based on the closing price of December 30, 2011.

  AFLAC ($AFL)

  Bed, Bath & Beyond ($BBBY)

  CR Bard ($BCR)

  CA Technologies ($CA)

  DirecTV ($DTV)

  Fiserv ($FISV)

  Ford ($F)

  Harris ($HRS)

  Hudson City Bancorp ($HCBK)

  Johnson & Johnson ($JNJ)

  Jos. A. Bank Clothiers ($JOSB)

  JPMorgan Chase ($JPM)

  Moog ($MOG-A)

  Medtronic ($MDT)

  Nicholas Financial ($NICK)

  Oracle ($ORCL)

  Reynolds American ($RAI)

  Stryker ($SYK)

  Sysco ($SYY)

  Wright Express ($WXS)

• J&J Breaks $66
  Eddy Elfenbein, December 28th, 2011 at 8:48 am

  The big European news story today was a major bond auction held in Italy and it went much better than feared, though people were fearing the worst. The Italian government sold nine billion euros’ worth of six-month debt. The rate was 3.25% which is a huge drop from last month’s auction at 6.5%.

  The S&P 500 has been up for the last five trading days, and the futures are currently pointing towards a sixth rally. The market turned on October 3rd so the S&P 500 is looking to close out its best fourth quarter since 1999.

  Although Abbott Labs ($ABT) will soon depart our Buy List, the stock just did a Jerome Simpson to a new 52-week high. Johnson & Johnson ($JNJ) which is an amazingly stable stock, is starting to drift higher. Yesterday, the shares closed above $66 for the first time in more than five months.

• Morning News: December 28, 2011
  Eddy Elfenbein, December 28th, 2011 at 7:27 am

  Italy’s Borrowing Costs Drop Sharply at Auction

  NYSE, Deutsche Boerse Merger Date Extended

  Afghanistan Signs Major Oil Deal with China’s CNPC

  ECB Says Banks Increased Overnight Deposits

  U.S. Declines to Say China Is Manipulator in Yuan ‘Quarrel’

  Calgary Oil Turns Canada Into Energy Superpower

  Wendy’s Adds Foie Gras Burger in Japan Return

  Bernanke Drive for Openness May Include More Briefings

  No Relief in Report on Housing

  MetLife to Sell Bank Unit to GE Capital

  A Great Divide Over Oil Riches

  Times Co. Agrees to Sell Regional Newspaper Group

  The High Cost of Failing Artificial Hips

  ‘Mismanaged’ Sears Loses Customers to Macy’s

  Joshua Brown: Your Tax Dollars at Work: Case-Shiller Edition

  Randall Wray: Unemployment Insurance for the 21st Century: The Job Guarantee as an Alternative to Enforced Idleness

  Be sure to follow me on Twitter.

• Walmart: The Mother of All Trading Ranges
  Eddy Elfenbein, December 27th, 2011 at 3:28 pm

  On Friday, Walmart ($WMT) closed at $59.99 and the stock doesn’t look like it will close above $60 today. That’s not too surprising. The stock of the giant retailer has been stuck in a trading range for nearly 12 years.

  Think about this: Not once in over 3,000 trading days has WMT closed above $64 or below $42. The last time it did was on January 19, 2000 when it closed at $64.06.

  
  Here’s a look at WMT’s closing prices by range:

  Lower	Upper	Count
  $42	$44	64
  $44	$46	181
  $46	$48	335
  $48	$50	481
  $50	$52	362
  $52	$54	581
  $54	$56	451
  $56	$58	270
  $58	$60	204
  $60	$62	49
  $62	$64	25

  More than 78% of the time, the stock been between $48 and $59.99.

  Walmart has, of course, paid a dividend over the last 12 years. Since January 2000, the dividend has added 18.1% towards its total return.

• Looking at Factor Investing
  Eddy Elfenbein, December 27th, 2011 at 1:02 pm

  The Wall Street Journal has an interesting article on the growth of “factor investing.” I think this is a fascinating area and I’ve been interested in it since before it even had a name.

  I never cared much for the traditional Capital Asset Pricing Model. Instead, I’ve been interested in areas where this model fails—and there are many. Value stocks, for example, have a long-proven ability to outperform the broader market. Low volatility is another area. The response from academics has been to assert that the model indeed still works, but we need to adjust things for these “factors” like value and low vol.

  I’m afraid they’re stretching things out too far and would be best served by ditching their model. Personally, I don’t care about all about preserving models but I like the idea of keying in on factors that have shown their ability to beat the market. The question is, can we isolate these factors and invest in them reliably?

  What the article fails to mention is that the important thing isn’t the factor itself. Instead, it’s the characteristic. Let me explain.

  Factor investors try to isolate the particular zig and zag shape of, say, most value stocks. What they want to find is anything that correlates to that line. That’s the factor, but that’s not what’s truly important. Instead, it’s the value characteristic that’s important. Even value stocks that don’t correlate with the value factor have shown themselves to be superior performers.

  Last month, Eric Falkenstein wrote:

  Daniel and Titman documented that it was the characteristic, rather than the factor, that generated the value and size effects. They did an ingenious study in that they took all the small stocks, and then separated them into those stocks that were correlated with the statistical size factor Fama and French constructed, and those that weren’t. That is, of all the small stocks, some were merely small, and weren’t correlated with the size factor of Fama-French, and the same is true for some high book-to-market stocks.

  Remember, in risk it is only the covariance of a stock to some factor that counts. Daniel and Titman found that the pure characteristic of being small, or having a high book-to-market ratio, was sufficient to generate the return anomaly, independent of their loading on the factor proxy. In the APT or SDF, the covariance in the return with something is what makes it risky. In practice, it is the mere characteristic that generates the return lift.

  (…)

  The standard equity groupings of size, value/growth, and now volatility, are best done directly, and not via an exposure to factor-mimicking portfolios.

  This is pretty damaging to the standard model because it claims that you can only beat the market by paying for it with more risk. That risk can only be found by correlating with the factor. But it’s not the factor that’s beating the market, it’s the characteristic.

  This is a reason why, despite my interest in factor investing, I think investors are wise to steer clear of these products. There’s no magic formula out there besides “focus on good stocks and wait.”