Archive for January, 2014

• Will the Fed Ditch the Evans Rule?
  Eddy Elfenbein, January 8th, 2014 at 9:23 am

  A little over a year ago, the Federal Reserve introduced a new policy: The Fed said it wouldn’t raise short-term interest rates until the unemployment rate reached 6.5%. Ben Bernanke was careful to say that this was a threshold and not a trigger. He’s repeated that many times since.

  The use of this specific economic metric has been referred to as the Evans Rule in honor of Chicago Fed President Charles Evans, who has advocating using such a strategy. One of the odd parts of monetary policy is that it’s much more effective if it’s seen as credible. A central bank can yammer all they want, but if no one believes them, the implementation of policy becomes that much harder. Credibility is the watchword for any modern central banker.

  While the Fed is still seen as an opaque and secretive institution, Ben Bernanke has probably pulled back the curtain more than any other Fed chair. As such, the Bernanke Fed has also been careful in telegraphing their intentions to market participants (see Hilsenrath comma Jon). That’s also why last year’s Taper Tantrum was so bizarre.

  I think the commitment to credibility is why the Evans Rule may not live much longer, or more specifically, the 6.5% threshold. The fact is that the unemployment rate is falling, and falling rather quickly. The rate for November was 7.0%. This morning’s ADP report was encouraging, and now it seems very likely that we could hit 6.5% unemployment by the middle of this year. The report for December comes out this Friday.

  Yet there seems to be no demand for short-term interest rates to rise anytime soon. The one-year Treasury is still around 0.13%. At this point, most FOMC members don’t expect a Fed rate increase until 2015—and a good majority of them don’t expect much of an increase next year.

  Will it hurt the Fed’s vaunted credibility with the market as unemployment drops and the Fed does nothing month after month? You could say that Bernanke’s threshold-not-trigger statement grants them some leeway, but how much? When the Fed adopted the Evans Rule in December 2012, it was a cost-free commitment. The rule told traders what to expect and when, and helped remove a lot of worry from the markets. But now that promise is coming due.

  I rate this as an event with a low probability but one with a large potential impact. At some point this year, the Fed may alter the Evans Rule and lower the threshold to 6%.

  One final note: Here’s a very simplified version of the Taylor Rule, with variables via Paul Krugman (the Fed Funds rate should be 1.8 times the difference between unemployment and inflation, plus 9). Please note that Krugman has said that “using historical estimates of the Taylor rule is not a good way either to predict Fed policy or to recommend Fed policy at this point in our history.” It’s a better estimate to what the Fed has been thinking.

  

• Morning News: January 8, 2013
  Eddy Elfenbein, January 8th, 2014 at 6:46 am

  Euro-Zone Retail Sales in Surprise Surge

  America to Europe: Stronger Banking Union Would Help Boost Growth

  U.K. Banks to Ramp Up Lending After Surge in Demand

  Calls to Drop 1970s-Era U.S. Oil Export Ban Stir Political Fight

  Natural Gas Prices Surge on Cold Snap

  Obama Speaks of Better Days for Economy, With Asterisk

  House Financial Services Chairman to Seek Volcker Rule Change

  JPMorgan to Pay $2.6 Billion Over Madoff Scheme Lapses

  Madoff Trustee Tops $10 Billion Recovery With Bank Deal

  Facebook to Buy Android App Monitoring Tool Maker

  Aereo Receives $34 Million Boost

  Cisco CEO Pegs Internet of Things as $19 Trillion Market

  Chinese Tycoon Admits New York Times Bid Faces Obstacles

  Cullen Roche: The Biggest Myths in Economics

  Edward Harrison: Tightening Into Frothy Markets in the Asset-Based Economy

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• Trade Deficit Falls to Four-Year Low
  Eddy Elfenbein, January 7th, 2014 at 10:32 am

  After three straight down days, the stock market is finally looking up this morning. The S&P 500 is currently up about 11 points or 0.6%. Healthcare stocks are doing particularly well. Buy List stocks like Medtronic ($MDT) and CR Bard ($BCR) are solidly in the black this morning.

  The Commerce Department reported that the trade deficit for November fell to $34.3 billion. That’s the smallest gap in more than four years. A key driver of the smaller deficit is lower oil prices. The deficit for November was less than Wall Street’s consensus of $39.9 billion. Most of the trade deficit is with China, and that gap fell to $26.9 billion in November. Exports are now 17% above where they were before the recession.

  

  This is the quiet period before earnings season begins. The first big company to report will be Alcoa ($AA) which reports after the bell on Thursday. Bed Bath & Beyond ($BBBY) is also due to report this week, but that’s for the period ending in November.

  Bloomberg notes that according to analyst estimates, “earnings for companies in the S&P 500 will climb 9.7 percent on average this year, almost twice the rate of 2013, while sales will probably increase 3.8 percent.”

• Morning News: January 7, 2014
  Eddy Elfenbein, January 7th, 2014 at 7:01 am

  Eurozone Inflation Dips Further Below Target

  German Unemployment Falls Unexpectedly in December

  Yellen Wins Confirmation as Fed Chief

  Men’s Wearhouse Takes Higher Jos. A. Bank Bid to Investors

  Samsung Pays Out $1 Billion in Bonuses to Mark Chairman Lee Kun-Hee’s 20 Years

  Captive Goodyear Bosses Holed Up at French Site

  JPMorgan Chase Nears a $2 Billion Deal in a Case Tied to Madoff

  Sirius Deserves Richer Offer from Liberty Media

  General Electric Goes Shopping, Thermo Fisher Gets “Attractive Price”

  Intel Says Its Processors Are Now ‘Conflict-Free’

  Twitter Downgraded, Again: ‘Success Is Far From Guaranteed’

  Berkshire Stakes Name on Realty Business Buffett Barely Noticed

  No Barbarians at the Gate; Instead, a Force for Change

  John Hempton: Xero and the Precious Petals of New Zealand Funds Managment

  Jeff Carter: SEC to Kill Crowdfunding If They Can

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• Yellen Is Confirmed
  Eddy Elfenbein, January 6th, 2014 at 7:35 pm

  Janet Yellen was confirmed today as the next Chairman of the Federal Reserve. The vote was 56 to 26. A number of senators didn’t vote because of the weather.

  Ms. Yellen was confirmed 56 to 26, with many senators kept away from the Capitol due to inclement weather. Nearly one dozen Republicans — including Kelly Ayotte of New Hampshire, Saxby Chambliss of Georgia and Tom Coburn of Oklahoma — crossed the aisle in support of Ms. Yellen. Ms. Yellen will be the first Democratic nominee to run the Fed since President Jimmy Carter named Paul Volcker as chairman in 1979.

  Still, it is the thinnest margin of Senate approval for a Fed chairman in the central bank’s history. Mr. Bernanke was confirmed for a second term as chairman with 70 yes votes and 30 no votes in 2010.

• Is Low Vol Closet Value Investing?
  Eddy Elfenbein, January 6th, 2014 at 11:57 am

  One of the popular investing anomalies in recent years is the case of low-volatility stocks. It turns out that stocks that don’t move around a lot have actually performed better than the overall market. This runs counter to a lot of financial theory which holds that investors “pay” for better returns by taking on more risk, which means higher volatility. The theory sounds great and intuitively makes sense. The problem is that real world results haven’t been very cooperative.

  I don’t deny results. The numbers for low vol are impressive. What I don’t get is how low vol is different from simple value investing. The two strategies may be plowing the same field. A value stock is likely to have a higher dividend yield, therefore it’s likely to have less volatility. Is low vol a reflection of value, or vice versa? I really don’t know.

  Low vol strategies have not worked very well over the past several months. The chart below shows how similar low vol and value are.

  

  The blue line is the Utility Sector ETF ($XLU) divided by the S&P 500. The red/black line is a Low Vol ETF ($SPLV) divided by the S&P 500. The base of the two lines are different because the nominal prices are different, but the important point is the nooks and crannies of each line. They seem to match up very well.

  Eric Falkenstein, who is the leading proponent of low vol investing, insists that it’s not the same as value. Perhaps there’s some subtle difference, but for most practical purposes, low vol and value appear to be the same.

• December Non-Manufacturing ISM = 53
  Eddy Elfenbein, January 6th, 2014 at 11:37 am

  The stock market is down again today. This could be the first time since 2005 that the S&P 500 has started the year with three straight losses. Am I worried? Not at all.

  Medtronic ($MDT) is leading our Buy List today. The shares are currently up over 1.2%. Their CEO is due to speak at a healthcare conference today.

  Some downgrades today are hurting a few Buy List stocks.

  eBay ($EBAY), for example, is getting hit this morning for a 3% loss. The shares were downgraded at Morgan Stanley from Overweight to Equal Weight. The earnings report will come out in two weeks.

  AFLAC ($AFL) is also down today. Credit Suisse downgraded AFL from Neutral from Outperform. But they raised their price target from $66 to $67 per share.

  A number of analysts on Wall Street have been raising their forecasts for Q4 GDP growth. We won’t get the report until the end of the month. While I don’t place a great deal of faith in forecasts from the analyst community, it does reflect a growing sense of optimism from investors.

  The ISM reported that its non-manufacturing index fell to 53 in December. The consensus on Wall Street was for 54.7.

  

• Morning News: January 6, 2014
  Eddy Elfenbein, January 6th, 2014 at 7:16 am

  Euro Zone – Reasons to Be Wary in 2014

  China to Allow Up to Five Privately Funded Banks in Trial Reform

  Spain’s Telefonica Denies Readying Joint Bid for TIM Brasil

  Swiss National Bank Takes Hefty Gold Hit

  Gold Climbs to Near 3-week High as Equities Dip; China Demand Robust

  Bond Tab for Biggest Economies Seen at $7.43 Trillion in ’14

  Service Sector Growth Slowed in December, PMI Survey Says

  Selling Social Media Clicks Becomes Big Business

  Pot Prices Double as Colorado Retailers Roll Out Green Carpet

  JPMorgan Nears $2 billion settlement in a case tied to Madoff

  Ford Revs Up in China, Roars Past Toyota and Honda

  $1 Billion as Milestone and Omen

  Men’s Wearhouse Launches Hostile Bid for Jos. A. Bank

  Joshua Brown: The Only Thing We Have To Fear…

  Jeff Miller: Weighing the Week Aheard: Will “Good News” Be Good For Markets?

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• Dividends Rose 12% in 2013
  Eddy Elfenbein, January 3rd, 2014 at 11:39 am

  The fourth-quarter was another strong quarter for dividends. The S&P 500 paid out $9.52 per share in dividends (that’s an index-adjusted number). That’s an increase of 6.58% over last year’s fourth quarter. But remember that Q4 2012 saw a 22.77% surge in dividend payments to take advantage of the change in tax laws.

  Dividends have now risen for 15 quarters in a row. We don’t have the final earnings numbers in yet, but dividends most likely paid out just under one third of corporate profits.

  For the full year, dividends rose by 11.99%. While that’s below the 29.60% rally for the S&P 500, it’s not absurdly behind it either. In fact, dividends have actually outpaced the S&P 500 over the last three years. From the end of 2010 to the end of 2013, the S&P 500 rose 46.97% while dividends paid rose 53.95%.

  Here’s a look at the S&P 500 (blue line, left scale) along with trailing four-quarter dividends (red line, right scale). The two lines are scaled at a ratio of 50-to-1. In other words, whenever the lines cross, the market’s dividend yield is exactly 2%. We also get a glimpse of how much everyone panicked in 2008 and 2009.

  

• Ford’s December Sales Miss Expectations
  Eddy Elfenbein, January 3rd, 2014 at 11:07 am

  Ford Motor (F) wrapped up an excellent year for vehicle sales in 2013. Their sales for December, however, came in below expectations.

  For the year, Ford sales rose by 11% to hit a six-year high. The company sold 2.5 million vehicles last year. The big winner was their F-Series pickups which rose 18%. Overall, their sales for December rose 2% to 218,058. December tends to be a big month for sales of luxury cars.

  Ford is currently down one penny per share to $15.43.