Archive for April, 2013

• Market Return By Size Decile
  Eddy Elfenbein, April 2nd, 2013 at 10:37 am

  Here are more results from the Ibbotson Yearbook. This shows the famous size premium. Researchers have found that over the long term, smaller stocks have done better than larger stocks. I’ll explain more why I think the size premium is overrated.

  This chart shows the performance of the stock market by size decile, meaning each 10% size grouping of stocks. The results are almost perfectly rank ordered: The smallest have done the best and the largest have done the worst.

  

  As impressive as this looks, the results are a bit deceptive. The reason is that the out-performance of small stocks isn’t a constant. Instead, small stocks outperform or underperform for many years at a time. If you catch the cycle right, you can do very well, but if not, you’re in for decades of lagging the market. Conisder that Decile 1 has beaten out Decile 10 over the last 29 years, and Decile 2 has edged out Decile 9 over the last 45 years.

  So while it appears to be true that small stocks do better over the long term, that term is so long that it’s irrelevant for the average investor.

• Kid Dynamite’s “You’re Absolutely Right!”
  Eddy Elfenbein, April 2nd, 2013 at 10:22 am

  On April Fool’s Day, Kid Dynamite announced a new service:

  For the low base price of $49 (payable via Paypal link on my right sidebar), I will agree with anything you say. Just ship me $49 on Paypal, tell me your thesis, and I’ll tell you that you are right! You’ll feel good about yourself and you’ll gain the “confidence” to maintain your position and not get shaken out of a winner.

  There are some stipulations of course: the $49 base price includes basic confirmation bias, but I can spice it up a bit for additional fees:

  for an additional $9 each, you can choose from the following options:

  1) I’ll use the word “banksters”

  2) I’ll blame selloffs on “naked shorts” or “market maker manipulation”

  3) I’ll talk trash about fiat money

  4) I’ll tell you that everyone else is a sheeple, and that YOU are one of the few who has seen the dire reality of the situation

  Read the whole thing. He’s joking, of course, but it’s sad how many investors buy into that nonsense.

• Morning News: April 2, 2013
  Eddy Elfenbein, April 2nd, 2013 at 6:31 am

  Unemployment in Euro Zone Reaches a Record High of 12 Percent

  Cypriots Feel Betrayed by European Union

  Chinese Factories Rise But U.S. Manufacturing Slows

  Abe Says BOJ May Miss Price Target If Global Economy Changes

  Low-Cost Drugs in Poor Nations Get a Lift in Indian Court

  Stockman Sundown Belied by Stocks Showing Morning for Investors

  Nasdaq to Buy Treasurys Platform for Up to $1.23 Billion

  Raw-Material Bull Market Fading as Supply Expands

  Airlines Rejected by Top Court on Price Advertising Rules

  Apple CEO Cook Apologizes for China IPhone Warranties

  A $25 Million Question Over a Bid for Dell

  Glencore Pushes Back Xstrata Deal Due To China Probe

  Wal-Mart Customers Complain Bare Shelves Are Widespread

  Roger Nusbaum: Barron’s Picks Up A Random Roger Theme?

  John Hempton: Cupid PLC’s Strange Balance Sheet

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• The Stock Market Since 1925
  Eddy Elfenbein, April 1st, 2013 at 1:37 pm

  I just got the latest edition of the Ibbotson SBBI Yearbook. This is a well-known resource for investors which covers the long-term data on stocks, bonds, bills and inflation. Over the next few days, I’ll post some of the charts from the updated yearbook.

  I’m always a bit leery of studies of long-term market returns, especially when the study goes into the 19th century. The idea of a stock market that the average consumer can participate in is a relatively recent phenomenon.

  Here’s a chart of the stock market’s return since 1825. The red line is capital gains, the blue is dividends and the black is both together. After 188 years, one dollar turned into more than $4.2 million; annualized, that comes to 8.45%. Of that, 5.02% is from dividends and 3.27% is from capital gains.

  

  Before the bull market of the 1920s, the stock market was almost entirely one of dividends. You’d buy a stock near its par value (usually $100) and wait for the board of directors to declare the dividend each year—and that was the stock market.

  Think of it this way: during the last third of the 19th century, inflation fell by about 2% per year on average. If you were getting a stock that paid 5% per year in dividends and had zero capital appreciation, you were basically matching long-term real returns. That idea is very foreign to modern investors, but that’s how things worked back then. The idea of steadily rising capital gains is not a constant.

  The phrase “this time is different” is often mocked but the bull market of the 1920s really did permanently change the market from one that focused on dividends to one that focused on capital gains.

  Another concern I have is that using this long-term data creates overly optimistic expectations. I doubt that the extraordinary success of the United States over the past 180 years is easily repeatable. Even in the more recent past, I think the era of post-World War II prosperity was a one-off deal.

• Dividends Continue to Rise
  Eddy Elfenbein, April 1st, 2013 at 11:25 am

  The dividend numbers are in for the first quarter and the S&P 500 paid out $7.954 per share (that’s an index-adjusted figure). This was a 12.2% increase over the first quarter of 2012 and it marks the ninth-straight quarter that dividends have grown by double digits.

  Due to tax reasons, there was a surge of dividends in Q4. Dividends rose more than 22.7% over the fourth-quarter of 2011, but I’m glad to see that the dividend trend still continues. For the last four quarters, the S&P 500 has paid out $32.112. At 2%, that comes to 1,605.60.

  Here’s a look at the S&P 500 (in blue, left scale) and its dividend (in black, right scale). The two lines are scaled at a ratio of 50-to-1 so whenever the lines cross, the market’s dividend yield is exactly 2%.

  

  What I find interesting is that this latest bull market seems much more solid than the previous two, especially the tech boom of the late 1990s. Dividends have been rising quite steadily. Except for the worst part of the financial crisis, the S&P 500 has mostly had a dividend yield of about 2% for the last 10 years.

• Weak ISM Leads the Market Lower
  Eddy Elfenbein, April 1st, 2013 at 11:01 am

  The market is down so far this morning (and month and quarter). The March ISM came in at 51.3 which is down from February’s surprisingly strong 54.2.

  Any reading above 50 indicates that the manufacturing sector is expanding. Below 50 means it’s shrinking. Forty-three of the last 44 months have been above 50.0. Although today’s ISM is weaker than expected, today’s report is still well above the danger zone.

  

• Morning News: April 1, 2013
  Eddy Elfenbein, April 1st, 2013 at 6:08 am

  As Banks in Cyprus Falter, Other Tax Havens Step In

  Russia Won’t Help Out Cyprus Depositors, Says Minister

  Lira Bonds Worst Performer as Policy Confuses: Turkey Credit

  Pessimism Declines Among Japan’s Big Manufacturers, Survey Shows

  China Manufacturing Expands at Faster Pace, PMI Gauges Show

  China’s Urbanization Drive Leaves Migrant Workers Out In The Cold

  Michael Dell Said to Consider Blackstone LBO Only With CEO Guarantee

  Drug Maker Novartis Loses India Patent Battle

  E-Commerce Companies Bypass the Middlemen

  What The Rise Of Bitcoin Teaches Us About Money

  Discovery Expands Its Reach Overseas

  Insider Case Against SAC Manager May Be Tough To Prove

  Edward Harrison: Buiter: ‘It Was Clear That Cyprus Was A Laboratory’

  Jeff Miller: Weighing The Week Ahead: Signs Of Another Economic Soft Patch?

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