Archive for 2011

  • What Number for the Equity Risk Premium?
    , April 14th, 2011 at 12:11 pm

    I’ve often said that the equity risk premium is probably a lot lower than most people realize. This is the amount that investors pay to own stocks over the risk-free rate of Treasury bills.

    Some academics decided to do a broad survey to see what others think:

    US Market Risk Premium Used in 2011 by Professors, Analysts and Companies: A Survey with 5.731 Answers

    The average Market Risk Premium (MRP) used in 2011 by professors for the USA (5.7%) is higher than the one used by analysts (5.0%) and companies (5.6%). The standard deviation of the MRP used in 2011 by analysts (1.1%) is lower than the ones of companies (2.0%) and professors (1.6%). Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references used to justify the MRP, comments from 58 persons that do not use MRP, and comments of 110 that do use MRP. The comments illustrate the various interpretations of the required MRP and its usefulness.

    Professors, analysts and companies that cite Ibbotson as their reference use MRP for USA between 2% and 14.5%, and the ones that cite Damodaran as their reference use MRP between 2% and 10.8%.

    Wow, the professors think it’s 5.7%! That’s quite high — and it’s down from 6% in 2010.

    My preference is to see what investors demand to own stocks over long-term Treasuries, and I think that’s probably around 1.5% to 2%.

  • The Truth About JPM’s Dividend Plans
    , April 14th, 2011 at 10:26 am

    Sometimes I’m simply baffled by what gets reported in the news. Yesterday, JPMorgan Chase ($JPM) reported good earnings and at one point, the stock got over $47 per share.

    The shares, however, slid during the rest of the day and close at $46.25. The stock is down close to $1 today.

    The media reported that the stock fell after Jamie Dimon said not to expect another dividend increase. Here’s what the FT had to say:

    Shares in the group were initially up 1.4 per cent, but retreated after Jamie Dimon, the chief executive, said the company would see no further dividend increases for several quarters. The shares finished 0.8 per cent lower at $46.25.

    Let’s make something perfectly clear — there was absolutely nothing negative in what Dimon had to say. JPM has historically increased its dividend for Q1, and that’s exactly what they did. They raised the dividend from five cents per share to 25 cents per share.

    Dimon said they need approval for another increase. He didn’t at all say it had to do with a lack of profits. Also, whether they pay the dividend or not has zero baring on the stock’s return to investors.

    The only reason for the stock to be down is if there was some reason to believe that the profits would be down, and Dimon said nothing like that.

    This is from TheStreet:

    “I wouldn’t look for a dividend increase the next couple of quarters,” Dimon said on the earnings call, in response to an analyst question. “We would have permission to do a little bit more on the dividend, but we would have to ask regulators for an increase in this environment.”

    That’s it. That’s all he said. If you knew nothing about JPM but its dividend history, you wouldn’t expect another dividend increase so soon. But you’d probably expect one a year from now. How could anyone read something negative into that? I have no idea but sometimes on Wall Street, the rule is sell first and ask questions later.

  • The Cyclicals Are Trailing Again
    , April 14th, 2011 at 10:11 am

    I often talk about looking at the relative performance of cyclical stocks versus the rest of the market. I think this is an important indicator of what the market is thinking.

    The ratio of the Morgan Stanley Cyclical Index ($CYC) to the S&P 500 reached a top in early January and another in mid-February. The CYC is trailing the market for the seventh day in a row.

    This is very important because these cycles tend to last for years once they get started. If the Dow had kept pace with the CYC since the March 2009 low, it would be close to 25,000 today.

  • Ford Expands Recall of F-150
    , April 14th, 2011 at 9:47 am

    Shares of Ford ($F) are down again today. The company just announced that it’s expanding its recall of F-150 trucks due to problems with the airbag.

    The recall covers trucks from the 2004 through 2006 model years. Ford’s F-Series pickup is the top-selling vehicle in America.

    The company in February agreed to recall more than 150,000 of the trucks. But on Thursday U.S. safety regulators said that Ford will add to the recall because the trucks’ air bags can go off unexpectedly and injure drivers.

  • 2010 Leucadia Shareholder Letter
    , April 14th, 2011 at 9:17 am

    The latest shareholder letter is out. If you own shares of LUK, I recommend giving it a read. Cumming and Steinberg lay out what they’ve been up to in an easy-to-follow way.

  • Morning News: April 14, 2011
    , April 14th, 2011 at 7:32 am

    BRIC Leaders Say Increasing Commodity Prices Pose Threat to Global Growth

    Yuan Advances to 17-Year High on Speculation Tightening Likely

    Greek Debt Pressured by Restructuring Speculation

    U.S. Commodities Day Ahead: Gold Gains on Japan, Libya, Prices

    Obama Sets Deadline for Deficit Deal in Challenge to Republicans

    U.S. Economy: Retail Sales Rise for Ninth Straight Month

    To Sweeten Deal, NYSE Considers a Dividend

    Goldman Sachs Misled Congress After Duping Clients: Sen. Levin

    Vows of Change at Moody’s, but Flaws Remain the Same

    Glencore Starts $11 Billion IPO as Goldman Sachs Says Abandon Commodities

    ProLogis to Make Bid for PEPR Valuing Fund at $1.7 Billion

    Roche Sales Fall 9% on Stronger Franc

    Lower Reserves Drive J.P. Morgan Profit

    Joshua Brown: Peak Fish and Other Insights from Agriculture 2.0

    James Altucher: How I Helped Mark Cuban Make a Billion Dollars and 5 Things I Learned from Him

  • Putting the Budget Into Context
    , April 13th, 2011 at 9:12 pm

    Philip Greenspun puts the the budget deficit into easier-to-grasp context: just divide everything by 100,000,000:

    We have a family that is spending $38,200 per year. The family’s income is $21,700 per year. The family adds $16,500 in credit card debt every year in order to pay its bills. After a long and difficult debate among family members, keeping in mind that it was not going to be possible to borrow $16,500 every year forever, the parents and children agreed that a $380/year premium cable subscription could be terminated. So now the family will have to borrow only $16,120 per year.

  • The Decline In Day-to-Day Correlation
    , April 13th, 2011 at 3:24 pm

    Yesterday, I posted a round-up of some research I had done on Calendar Effects on the stock market.

    I noted that I had been impressed by the correlation in the market’s day-to-day returns. In simple terms, what the market does on one day, it has been very likely to do on the next day.

    This relationship, however, is more complicated than I thought. In the years just before World War II, the day-to-day correlation was absent. In fact, it was slightly negative. After the war, the correlation grew and it reached a high point between the Kennedy Assassination and the market plunge of 1973.

    Here’s a look at the day-to-day correlation for changes in the S&P 500 for rolling periods of 1,000 trading days which is roughly four years (though it’s a little shorter before 1950 due to Saturday trading).

    From mid-1968 to mid-1972, the correlation was an amazing 0.35. After that, things started to change and the correlation gradually sank. By the time of the 1987 crash, the day-to-day correlation was effectively zero.

    Correlation hasn’t merely declined but it’s actually started to appear again, just headed in the other direction. From 2003 through 2010, the correlation has been -0.12.

  • General Electric’s Tax Payment Hoax
    , April 13th, 2011 at 12:21 pm

    Earlier today, some media outlets picked up a hoax story that General Electric ($GE) was going to pay the government its $3.2 billion tax refund.

    The hoax press release, which you can see here, claimed that GE CEO Jeffrey Immelt had informed the Obama administration that his company was returning $3.2 billion to the Treasury and “will furthermore adopt a host of new policies that secure its position as a leader in corporate social responsibility.”

    The release included what seem to be some pretty obvious fake quotes, including this, attributed to Immelt: “All seven of our foreign tax havens are entirely legal. But Americans have made it clear that they deplore laws that enable tax avoidance. While we owe it to our shareholders to use every legal loophole to maximize returns – we also owe something to the American people. We didn’t write the laws that let us legally avoid paying taxes. Congress did. But we benefit from those laws, and now we’d like to share those benefits.”

    The AP nonetheless ran a four-paragraph story that began, “Facing criticism over the amount of taxes it pays, General Electric announced it will repay its entire $3.2 billion tax refund to the US Treasury on April 18.”

    The hoax was put out by some left-wing group. I honestly don’t understand what point they were trying to make. If anything, the idea of a company trying to buy the public’s affection with a tax payment needs to be spoofed as much as any corporate tax policy.

    But let’s look past that and look at the numbers. A $3.2 billion check from GE would work out to about 30 cents per share. Meanwhile, GE’s stock has lost $40 per share (that’s 4,000 cents) over the last 10-and-a-half years.

  • “Credit Losses Were Down 27% Sequentially”
    , April 13th, 2011 at 10:53 am