Author Archive

• Once Burned, Twice Shy: How Naïve Learning, Counterfactuals and Regret Affect the Repurchase of Stocks Previously Sold
  Eddy Elfenbein, November 17th, 2011 at 8:06 pm

  I like this academic study:

  We establish two previously undocumented patterns in the purchase selections of individual investors. These patterns hinge on investors’ previous experiences with a stock. We demonstrate that investors prefer to (1) repurchase stocks they previously sold for a gain rather than stocks they previously sold for a loss and (2) repurchase stocks that have lost value subsequent to a prior sale rather than those that have gained value. We document these trading patterns by analyzing trading records for 66,465 households at a large discount broker between January 1991 and November 1996, and 665,533 investors at a large retail broker between January 1997 and June 1999. We propose that the first trading pattern results from a simple form of learning whereby investors repeat actions that previously resulted in pleasure while avoiding actions that previously led to pain (i.e., they repurchase their previous winners more readily than their previous losers). We argue that the second trading pattern is tied to counterfactuals. Investors who buy a stock at a higher price than they previously sold it for are painfully aware that they are worse off than if they had simply never sold that stock. Investors who buy a stock at a lower price than they previously sold it experience the pleasure of knowing they are better off than if they had never sold that stock. Investor returns do not benefit from either of the two patterns we document.

  (Via: Alea)

• Morning News: November 17, 2011
  Eddy Elfenbein, November 17th, 2011 at 5:22 am

  Greece Turns to Budget After Confidence Vote Win

  Widening Split in Europe on the Virtue of Austerity

  U.S. Airline Group Looks to Block Air India Funding

  Japan Restricts Fukushima Rice Shipments After Radiation Found

  U.S. Banks Face Contagion Risk From European Debt: Fitch

  Thai Baht Weakens as Fitch Says Europe Crisis a Threat to U.S. Banks

  India Food Inflation Eases

  Oil Climbs to Five-Month High in New York as Supplies Counter Debt Concern

  Gold Top Pick at Morgan Stanley as Europe Debt Spurs Demand

  As New Graduates Return to Nest, Economy Also Feels the Pain

  Why Wall Street’s Layoffs Are More Serious Than You Think

  Reform Adds More Twists to a Convoluted Derivatives World

  With MF Global Money Still Lost, Suspicions Grow

  SABMiller Runs Into Tough Trading in Europe and U.S.

  Branson’s Virgin Money to Acquire Northern Rock From U.K. for $1.2 Billion

  Cullen Roche: 5 Misconceptions About Peak Oil

  Phil Pearlman: The Markets and The Deep Layer of Chronic Diffuse Anxiety

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• Inflation Continues to Chill Out
  Eddy Elfenbein, November 16th, 2011 at 10:31 am

  It’s rather amusing how many people are predicting the imminent return of hyper-inflation. On these matters, I prefer to be a realist. We haven’t had much inflation and it doesn’t appear that we will any time soon.

  The Labor Department reported this morning that inflation actually fell by 0.1% last month. Economists were expecting no change. The core rate, which excludes food and energy, rose by 0.1% and that matched expectations.

  Here’s my preferred way of looking at inflation. This is the monthly core rate which is seasonally adjusted and annualized:

  

  My point is that you can see a clear rising trend of inflation. We’re not so concerned with one or two outliers, but a trend tells us something. That trend, however, peaked in May at 3.5%. Since then, inflation has gradually crept back down. In September, it dropped to 0.66% and last month, it was 1.64%.

  What does this mean for stocks? Lately, the stock market tends to move in alliance with inflation expectations. But expectations of inflation and inflation aren’t the same thing. Historically, the stock market isn’t much concerned with inflation that’s below 5.3%.

• Sysco Raises Dividend
  Eddy Elfenbein, November 16th, 2011 at 9:51 am

  In our last CWS Market Review, I said that I expected Sysco ($SYY) would soon raised its quarterly dividend by a penny per share:

  Here’s the important part: Sysco has raised its quarterly dividend for the last 41 years in a row, and I expect to see #42 very soon. However, the increase will probably be very modest. My guess is that the board will bump up the quarterly dividend from 26 cents to 27 cents per share. That would give the shares a yield of close to 4%. In this environment, that’s not bad. Sysco is a good buy up to $30 per share.

  Sure enough, I got it right. Sysco just announced that it’s raising its dividend by a penny to 27 cents per share. Going by yesterday’s close and the new dividend, the current yield comes to 3.92%.

• Morning News: November 16, 2011
  Eddy Elfenbein, November 16th, 2011 at 5:29 am

  Euro Falls To Fresh 1-Month Low On Debt Woes

  JPMorgan Joins Goldman Keeping Italy Debt Risk in Dark

  European Union Softens Bid to Rein in Ratings Agencies

  Bank of Japan Cuts Economic View as Europe Crisis Becomes Growing Risk

  China Foreign Investment Rises at Faster Pace

  Spain Set to Purge Banks of Property Hangover

  Spared in War, Libya’s Oil Flow Is Surging Back

  Iraqi Cabinet Approves Royal Dutch Shell’s Natural Gas Contract

  Crude Futures Fall; Europe Bond Yields Hurt Sentiment

  Gold Trades Flat, Euro Jitters Help Recoup Losses

  Obama Warns Market Turmoil to Continue Over Europe

  Wal-Mart Profit Below Wall Street Despite Better Sales

  Dell Outlook Cloudy

  Exile on Wall Street Author Mike Mayo on Pundit Review Radio

  Edward Harrison: David McWilliams on Irish (and Italian) Euro Exit

  Joshua Brown: Morningstar Launches New Forward-Looking Fund Ratings

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• Buy List Year to Date
  Eddy Elfenbein, November 15th, 2011 at 10:22 pm

  Our Buy List has beaten the S&P 500 for the last four years in a row and we’re just barely ahead this year as well. It looks like it may come down to the wire. Through today’s trading, the S&P 500 is up 0.01% while our Buy List is up 0.79%. That doesn’t include dividends.

  We started off the year strongly. By early May, our Buy List was leading the S&P 500 by more than 5.8%. But our lead collapsed during July and at one point in mid-September, we trailed the index by more than 1%.

  We’ve held a slight lead for most of the past few months but any sudden move from one of our stocks can change things very quickly.

  

• Reynolds American Announces $2.5 Billion Share Buyback
  Eddy Elfenbein, November 15th, 2011 at 11:43 am

  I sometimes think these announcements are done specifically to annoy me. Reynolds American ($RAI) just announced a $2.5 billion share repurchase plan. To be more specific, the plan is “up to” $2.5 billion so that includes other numbers…such as $0. Also, this isn’t all at once. The program will last for two-and-half years.

  Basically, this news is released so the company can claim that it’s releasing good news.

  I really like RAI a lot and I especially like the dividend. A little over a year ago, RAI raised its quarterly dividend from 45 cents per share to 49 cents per share. Then in February, they raised it again — this time to 53 cents per share.

  A $2.5 billion share buyback program works out to $4.30 per share which is 11% of the current stock price. I think RAI shareholders would much rather have that in cash than the hope that it will boost the share price that much.

  The company is also making an accounting change that will alter their reported earnings.

  Reynolds American generally analyzes its pension and post-retirement plan performance annually as of the end of the year. Under the change, any actuarial gains or losses outside a 10 percent range will be recognized during the fourth quarter as a mark-to-market adjustment included in pension and post-retirement expenses.

  The accounting change will be applied retrospectively to prior periods.

  As a result of the change, Reynolds American expects adjusted full-year earnings of $2.77 to $2.82 per share. Using the company’s previous accounting methodology, Reynolds American had expected $2.63 to $2.68 a share. Analysts surveyed by FactSet had expected $2.64 per share, on average.

• The Federal Reserve Probably Paid More to the U.S. Treasury than the Bottom Two-Thirds of Taxpayers Combined
  Eddy Elfenbein, November 15th, 2011 at 10:11 am

  Here’s a follow-up to an arresting stat I uncovered earlier this year. Bear with me, I need to explain this fully.

  In 2010, the Federal Reserve made a profit of $81.7 billion. Only a very small portion of that is distributed to the Fed’s shareholders which are the member banks. The rest goes to the U.S. Treasury and last year that totaled $79.3 billion.

  Technically, this payment isn’t a tax but a rebate. To quote David Merkel, “The Fed doesn’t pay taxes; they remit excess seigniorage revenue to the Treasury, which they gather through punishment of savers.”

  It’s just about impossible for a central bank to lose money so if you’re ever offered the chance to become one, my advice is to do it.

  How does the Fed’s contribution compare to what Americans paid in taxes?

  That’s hard to say exactly. The Tax Foundation has the most recent numbers available which are from 2009 so we’re not comparing the same data. Please note that I’m aware of this.

  Using some very rough interpolation, we can see how much the lower two-thirds of taxpayers paid. According to the 2009 numbers, the bottom 50% of taxpayers paid a total of $19.5 billion in income taxes. The third quartile (between 50% and 25%) paid $90.4 billion in taxes. Two-thirds of that is roughly $60 billion. In fact, it’s almost certainly less due to the progressive nature of the tax code.

  One we add that to the lower half, we have a very good estimate of what the bottom two-thirds paid to Uncle Sam.

  As I said, this isn’t an exact comparison but we can assume it’s a very good estimate of what taxpayers said in 2010. Those figures probably won’t be available for another 12 months.

• Morning News: November 15, 2011
  Eddy Elfenbein, November 15th, 2011 at 5:19 am

  Monti Faces Political Resistance on Italy Cabinet

  German, French GDP Grew in Q3 on Spending

  Lending a Hand to Banks, but Not to Nations

  Bank of America Sale Highlights End of Era for Foreign, China Banks

  Tighter Oversight of China Bank Risk Needed: IMF

  Thai Floods May Shift Japan Investment to Indonesia, Vietnam

  Crude Oil Settles -85c At $98.14 On Europe Worries

  Buffett’s Stake in Century-Old IBM Bolsters Berkshire’s Economic Defenses

  Earnings Swooned 44% at Lowe’s in Latest Quarter

  Google’s Android Tops 50% of Smartphone Sales

  MF Global and the Problems With Murky Accounting

  Barclays Capital Rises, ‘Big-Boy Checkbook’ in Hand

  UBS Names Ermotti Permanent CEO

  Anadarko Raises Colorado Oil Tally

  Roger Nusbaum: Not Much In The Way Of Innovative Thinking

  Paul Kedrosky: Just Spell My Ticker Right

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• Good Interview With Buffett
  Eddy Elfenbein, November 14th, 2011 at 10:07 pm