• What if the Stock Market Were a Bond?
    Posted by on January 23rd, 2018 at 10:03 am

    Here’s an update to one of my more off-the-wall ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.

    Crazy? Let me explain.

    I took all of the historical market performance of the Wilshire 5000 (including dividends) and invented a hypothetical long-term bond that matched the market’s daily gains step-for-step.

    I assumed that it’s a bond of infinite maturity and pays a fixed coupon.

    There’s one hitch, though. I had to choose a starting yield-to-maturity for the beginning of the data series in December 1970. So this isn’t a completely kosher experiment because the starting point is based on my guess.

    If I chose a number that’s too high, the historical performance wouldn’t be able to keep up and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM was too low, the yield would gradually get pushed down to microscopic levels.

    Fortunately, the data made my job easy. After four decades, the window I had to work with is pretty narrow. Starting with 10% is too high and 8% is too low. After playing with the numbers, I finally settled on 8.93%.

    Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past 47 years. It’s the same old stock market but it’s expressed in the form of a bond. Through yesterday, the “bond’s” yield stood at 4.65%.

    Here’s what the actual stock market looks like, expressed in the form of a bond. For comparison, I added Moody’s AAA Bond Index (in red). That series starts in 1983.

    It’s been more than ten years since the red line was higher than the blue. This is why I often say that the math still favors stocks. When you hear people say that the stock market is expensive, you have to wonder “compared to what?” Lower bond yields are tough competition for stocks and that ought to raise valuations.

  • Morning News: January 23, 2018
    Posted by on January 23rd, 2018 at 7:04 am

    Singapore Soars Up Innovation Rankings, U.S. Falls Out of Top 10

    South Korea to Ban Cryptocurrency Traders From Using Anonymous Bank Accounts

    Murdoch’s Fox Takeover of Sky Is Dealt a Blow by U.K. Regulators

    U.S. Tariffs, Aimed at China and South Korea, to Hit Targets Worldwide

    Montana Governor Signs Order to Force Net Neutrality

    Netflix, Inc. Shrugs Off Price Increases to Grab 8.3 Million New Subscribers

    Elon Musk’s Pay at Tesla Will Now Have Nothing to Do With Making Cars

    Rupert Murdoch Wants Facebook to Pay for the News

    Immunotherapy M&A In Focus as Celgene Buys Juno; Good, Bad of Activism

    Amazon’s Pointless Obsession With Cashiers

    Millennials Brought About the Downfall of One of America’s Most Iconic Beer Brands

    Bacardi Moves To Buy Patrón Tequila, Valuing It At $5.1 Billion

    Cullen Roche: Why Does Momentum Investing Work?

    Ben Carlson: 180 Years of Stock Market Drawdowns

    Roger Nusbaum: Isn’t ROC Supposed To Be A Bad Thing?

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  • Highest Gap Above 200-DMA Since 2013
    Posted by on January 22nd, 2018 at 2:34 pm

    Not only has the market’s rally been impressively upward, but it’s been impressively calm. As a result, the S&P 500 has been above its 200-Day Moving Average almost nonstop for nearly two years.

    As I’ve written before, the 200-DMA isn’t bad for tracking the market. It’s a good example of a dumb rule that works for very smart reasons. The reason is because the S&P 500 tends to be very trend-sensitive. The hard part, quite naturally, is spotting the turning points.

    Here’s me from a few years ago:

    Since the beginning of 1933 to yesterday, the S&P 500 has traded above its 200-DMA 67.8% of the time. It’s traded below the 200-DMA the other 32.2% of the time. When the S&P 500 is above its 200-DMA, it’s risen by an annualized rate of 11.29%. But when it’s below the 200-DMA, it’s fallen at an annualized rate of -1.06%.

    Here’s a look at the S&P 500 and its distance from the 200-DMA. On Friday, we got to more than 12% above the 200-DMA. That’s the biggest gap in nearly five years.

  • Morning News: January 22, 2018
    Posted by on January 22nd, 2018 at 7:02 am

    Recent ‘Odd’ Market Moves May Be a Warning Sign for Stocks

    There Is Nothing Virtual About Bitcoin’s Energy Appetite

    Inside Amazon Go, a Store of the Future

    Icahn, Deason Push for Xerox to Explore Sale

    Sanofi to Buy Biogen Hemophilia Spinoff for $11.6 Billion

    GE Engine Venture May Oust Rolls From Emirates A380 Contract

    UBS Smashed by $3 Billion Tax Law Hit, Plans Big Wealth Management Push

    Biggest U.S. East Coast Oil Refinery Files for Bankruptcy

    Richemont, In Online Push, Looks to Take Over Yoox Net-a-Porter

    Wal-Mart Shops Brazil Unit Stake to Advent, Other Funds

    AIG to Buy Reinsurer Validus Holdings for $5.56 Billion in Cash

    Diamond Miner Can’t Stop Finding Huge Stones

    Joshua Brown: A Momentum Signal That Occurs Just 1% of the Time

    Cullen Roche: 2 Annoying Myths About Low Rates

    Michael Batnick: These Are the Goods

    Be sure to follow me on Twitter.

  • Morgan Housel on What Other Industries Teach Us About Investing
    Posted by on January 20th, 2018 at 4:24 pm

  • CWS Market Review – January 19, 2018
    Posted by on January 19th, 2018 at 7:08 am

    “Patterns are the fool’s gold of financial markets” – Benoit Mandelbrot

    Earnings season has arrived. This is Judgment Day for Wall Street. You can have a great business plan, happy customers, and the best swag in the Valley, but if your numbers ain’t good, Lord help you.

    Remember that earnings season is all about expectations, so it’s not so important to do well. Instead, you have to do better than everybody else was expecting you’d do. This, of course, means that people are expecting you to do better than what everybody thinks everybody else (but them) is expecting. Earnings season is basically a giant game of Twister. That’s worth $30 trillion.

    I’m happy to say that our first earnings report this season was a good one. Signature Bank easily beat expectations, and the shares rose nicely on Thursday. Since its September low, Signature is up more than 31% for us. I’ll go over the earnings report in a bit. I’ll also preview upcoming earnings reports from Alliance Data Systems and Sherwin-Williams. Plus I’ll discuss an ugly hit-piece on AFLAC. But first, let’s look at the 20-cent earnings beat from Signature Bank.

    Signature Bank Rises to Seven-Month High

    On Thursday morning, Signature Bank (SBNY) reported adjusted Q4 earnings of $2.43 per share which was well above Wall Street’s estimate of $2.23 per share. I call the earnings “adjusted” because the bank took a charge last quarter due to their lousy business in medallion loans.

    Let’s dig into some numbers. Last year’s SBNY’s total assets rose by 10.4% to reach $43.12 billion, and deposits rose by 5% to $1.58 billion. That’s quite good. For the year, Signature made $8.91 per share.

    “2017 was a year during which our highly successful, single-point-of-contact business model further distinguished Signature Bank in an exceedingly competitive marketplace. We continued to attract quality business relationships as evidenced by the growth in both our core deposits and loans. Notwithstanding our challenges in the taxi-medallion business, we were able to achieve a double-digit return on equity,” explained Joseph J. DePaolo, President and Chief Executive Officer.

    “Now with tax legislation becoming law and the positive effect we believe it will have on future earnings and capital, we look forward to the $50 billion SIFI threshold potentially moving higher, to at least $100 billion. This will allow the Bank to slow down the pace of expense growth. Realistically, Signature Bank, with its uncomplicated and straightforward balance sheet, should not be subject to the same standards as a truly complex, systemically important trillion-dollar financial institution. We welcome 2018 as we plan to strengthen our foundation by making major investments in our loan operation and origination systems, payments-architecture platform and new foreign-exchange system. We also will look to expand our geographic presence in areas where we have significant client synergies, such as the West Coast, after we successfully tested the waters in 2017 with the appointment of a team and the opening of our new accommodation office in San Francisco,” he concluded.

    For Q4, Signature’s “net-interest margin on a tax-equivalent basis” bumped up to 3.07% from 3.05% in Q3. Except for the medallion mess (which is being addressed), SBNY is doing quite well. For Q4, their provision for loan losses was $41.7 million. That’s up 88% from last year. Thank you, medallions.

    When looking at banks, there’s a key metric to watch: the “efficiency ratio.” It’s a bank’s overhead as a percent of revenue. The lower this number, the better. Signature defines its efficiency ratio as net interest expense divided by total income. As a general rule, anything below 50% is considered good. For Signature, the efficiency ratio was 33.5% last quarter. That’s really good, and it’s actually up from a year ago when it was 31.25%.

    Traders were pleased by the report as shares of SBNY gained 3.6% on Thursday to reach a seven-month high. Signature has been rebounding nicely from a tough time during much of 2017. The stock is up more than 31% from its September low. This week, I’m raising my Buy Below on Signature to $160 per share.

    Negative Article Knocks down AFLAC

    Last Friday, shares of AFLAC (AFL) got nailed for a 7.4% loss after The Intercept ran a very negative article on them. The Intercept alleged:

    The insurance firm Aflac has exploited workers, manipulated its accounting, and deceived shareholders and customers, according to nine former employees. This article is based on interviews with multiple current and former employees, as well as three previously unreported lawsuits.

    The allegations contained in the lawsuits involve nearly every aspect of Aflac’s business and have already led to a series of investigations by state and federal regulators. But though Aflac’s top management and board of directors have known about the claims for over a year, they have not disclosed anything to shareholders in public filings with the Securities and Exchange Commission beyond generalities about unnamed pending lawsuits that they say they expect will not hurt the company’s bottom line.

    The allegations, if true, are very disappointing. However, nothing I’ve seen so far has me concerned for AFLAC’s future. Of course, I’m hardly an independent observer. I’ve admired the company for years. Also, The Intercept has a political bent to its reporting, so I’m reading this with my eyes open, but most of what I’ve read so far is what I’d call the unseemly byproduct of running a large and profitable enterprise.

    In the movie Raising Arizona, the police ask Nathan Arizona, Sr., if he has any disgruntled employees. He answers, “Hell, they’re all disgruntled. I ain’t running no damn daisy farm.”

    The sales jobs at AFLAC are described as very tough and demanding. That’s not a surprise. Perhaps AFLAC is guilty of making the jobs seem better than they truly are, but that’s a long way from an Enron-type scam. It’s not difficult for them to revamp their recruitment process.

    Any big company will have lawsuits brought against them. If you only read what the lawyers have to say, without any explanation from the company, the picture can look quite ugly. That’s what lawyers do. At one point, The Intercept compared working at AFLAC to being a sharecropper. That’s absurd.

    Most of what’s alleged can be explained by saying that AFLAC plays to win in a tough business. The company has 10,000 full-time employees, and they do more than $20 billion in annual revenue. If you talk to all the former employees of any firm, the most disaffected can surely share some unpleasant stories.

    To their credit, AFLAC quickly responded with a press release. Here’s the key bit:

    Recent media stories regarding AFLAC contain false allegations made by a very small group of independent contractors. AFLAC intends to aggressively fight these allegations beginning with filing for their dismissal. The unfounded articles allege claims including insider trading, fraudulent sales and financial manipulation. The company has investigated these claims and found them to be without merit.

    The Intercept says this is the first of a series. So far, I’m not exactly overwhelmed by the allegations. Fortunately, shares of AFL regained a lot of lost ground this week. At one point on Thursday, AFL was more than 5.5% above its low from the previous Friday. Don’t let this article scare you. AFLAC will report earnings again on January 31.

    Earnings Next Week from Alliance Data and Sherwin-Williams

    You can see our complete Q4 Buy List Earnings Calendar here. We have two more reports coming out next week. Both Alliance Data Systems (ADS) and Sherwin-Williams (SHW) are due to report on Thursday, January 25.

    Three months ago, Sherwin had a very good earnings report, and the paint folks raised guidance. For Q3, SHW made $4.75 per share which was eight cents better than estimates. Their EBITDA from continuing ops rose 9.6% to $1.70 billion. The company estimated that the hurricanes dinged them for about 27 cents per share.

    For Q4, Sherwin sees earnings ranging between $1.97 and $2.27 per share. Adding back 98 cents in acquisition costs, that comes to $2.95 to $3.25 per share. That works out to full-year 2017 earnings of $14.85 to $15.15 per share.

    In October, Alliance Data System reported Q3 earnings of $5.35 per share which easily beat Wall Street’s forecast of $5.04 per share. I was pleased to see ADS reiterate its guidance of $18.10 per share for this year and $21.50 per share for 2018. Since Thanksgiving, the shares have had an impressive run (+15%) and that includes an ugly drop earlier this week. The consensus on Wall Street is for Q4 earnings of $5 per share.

    That’s all for now. Earnings season ramps up next week. There will be several big-name earnings reports. We’re also going to get the existing-home sales report on Wednesday. Then on Friday morning, we’ll see the durable-goods report and the big Q4 GDP report. This has a chance of being the best GDP report in years. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

    Syndication Partners

    I’ve recently teamed up with the folks at Investors Alley to feature some of their content. I think they have really good stuff. Check it out!

    3 High Yield REITs to Grow From Interest Rate Increases

    Share values of real estate investment trust (REIT) companies have been dropping since the Fed announced its last Fed Funds Target Rate increase on December 13. The Fed started raising interest rates in quarter percent increments in December 2015. Each of the four rate increase announcements has been accompanied by a pull back in REIT values. These declines have been short-lived and can be viewed as buying opportunities.

    2017 was an interesting year for the REIT sector. While most of the S&P market sectors had stellar returns for the year, REITs as a group returned just a positive 5.1%. In contrast, the S&P 500 gained 21.8%. With average REIT yields near 4%, the 5% total return gives the impression that REIT values did not do much in 2017.

    The REIT sector last peaked in mid-December just after the last Fed rate increase. Since then REIT values are down by 6.5%. This is the time to pick up some high-quality REITs and watch the share values for signs that prices have bottomed for this cycle. It’s not possible to pick and exact bottom, but the good news is that some very high-quality REITs are now sporting very attractive yields.

    3 Stocks Taking Off From Trump’s Tax Cuts

    The cut in the U.S. corporate tax rate from 35% to 21% is supposed to do everything from juicing the U.S. economy to levels not seen in decades to enriching both shareholders and consumers alike. But the reality is likely to be quite different.

    The first thing it will bring is a muddied fourth quarter earnings season for investors. A one-time tax on accumulated offshore earnings and revaluations of deferred taxes, based on the new rate, means a lot of potential charges and writeoffs for multinational companies. For firms that report only GAAP earnings, the headline impact on earnings could be quite large.

    Investors should look through these one-off charges and focus on what the long-term effects will be on the companies they are invested in.

    While many on Wall Street make proclamations about the benefits of the corporate tax cut for banks, I believe the sector still faces too many headwinds (like continuing low interest rates) for me to be interested in investing into banks. Instead, I’d rather focus on three other sectors – with still relatively low valuations – that should benefit from the changes in the tax law regarding U.S. corporations.

  • Morning News: January 19, 2018
    Posted by on January 19th, 2018 at 7:03 am

    Oil Halts Rally as IEA Warns U.S. Production Surge Looming

    The U.K. and France Are Thumbing Their Noses at the U.S. Over Net Neutrality Repeal

    U.S. Watchdog Outlines Issues With Bitcoin ETFs, Mutual Funds

    Government Closing Near as GOP Bill at Brink: Shutdown Update

    Amazon Chooses 20 Finalists for Second Headquarters

    Apple Leads These Companies With Massive Overseas Cash Repatriation Tax Bills

    SoftBank is Now the Largest Stakeholder in Uber as Deal Closes

    Google Inks a Patent Deal with Tencent as it Explores Ways to Expand in China

    United Airlines To Launch Premium Economy Cabins In 2018

    IBM Slides as ‘Tax Headwind’ Hits 2018 Outlook After Long-Awaited Sales Win

    HSBC to Pay $100 Million to End U.S. Currency-Rigging Probe

    Executive Behind Facebook’s China Charm Campaign Is Out

    Jeff Carter: Basic Economics and Basic Business

    Howard Lindzon: No Turning Back…Fintech Fintech Fintech

    Mark Hines: Are You Still On the Sidelines?

    Be sure to follow me on Twitter.

  • Signature Bank Earns $2.43 per Share
    Posted by on January 18th, 2018 at 1:03 pm

    On Thursday morning, Signature Bank (SBNY) reported adjusted Q4 earnings of $2.43 per share which was well above Wall Street’s estimate of $2.23 per share. I call the earnings “adjusted” because the bank took a charge last quarter of $37 million due to their lousy medallion loan business.

    Let’s dig into some numbers. Last year SBNY’s total assets rose by 10.4% to reach $43.12 billion, and deposits rose by 5% to $1.58 billion. That’s quite good. For the year, Signature made $8.91 per share.

    “2017 was a year during which our highly successful, single point of contact business model further distinguished Signature Bank in an exceedingly competitive marketplace. We continued to attract quality business relationships as evidenced by the growth in both our core deposits and loans. Notwithstanding our challenges in the taxi medallion business, we were able to achieve a double-digit return on equity,” explained Joseph J. DePaolo, President and Chief Executive Officer.

    “Now with tax legislation becoming law and the positive effect we believe it will have on future earnings and capital, we look forward to the $50 billion SIFI threshold potentially moving higher, to at least $100 billion. This will allow the Bank to slow down the pace of expense growth. Realistically, Signature Bank, with its uncomplicated and straight-forward balance sheet, should not be subject to the same standards as a truly complex, systemically important trillion-dollar financial institution. We welcome 2018 as we plan to strengthen our foundation by making major investments in our loan operation and origination systems, payments architecture platform and new foreign exchange system. We also will look to expand our geographic presence in areas where we have significant client synergies, such as the West Coast, after we successfully tested the waters in 2017 with the appointment of a team and the opening of our new accommodation office in San Francisco,” he concluded.

    For Q4, Signature’s “net interest margin on a tax-equivalent basis” bumped up to 3.07% from 3.05% in Q3. The bottom line is that, except for the medallion mess (which is being addressed), SBNY is doing quite well. Their provision for loan losses for Q4 was $41.7 million. That’s up 88% from last year. Thank you, medallions.

    When looking at banks, there’s a key metric to watch which is called the “efficiency ratio.” It’s their overhead as a percent of revenue. (Signature defines their efficiency ratio as net interest expense divided by total income.) The efficiency ratio tells us how well run the bank is. The lower the number the better. As a general rule, anything below 50% is considered good. For Signature, their efficiency ratio last quarter was 33.5%. That’s very good, and it’s actually up from a year ago when it was 31.25%.

    Traders were pleased by the report as shares of SBNY climbed Thursday morning to a seven-month high. Signature has been rebounding from a tough time during much of 2017. The stock is up more than 30% from its September low.

  • Morning News: January 18, 2018
    Posted by on January 18th, 2018 at 7:07 am

    Shorts on Top as January Cboe Bitcoin Futures Settle

    Cryptocurrency Prices Steady With Ripple Bouncing Back 30% After ‘Severe’ Sell-Off

    Oil Briefly Weakens, But $80 Brent Is Plausible

    China’s Economic Growth Last Year Was Even Better Than Expected

    Weaker Dollar Won’t Derail Global Growth

    Dumped Cars, EV Dreams: What We Learned at the Detroit Auto Show

    How Emirates Airline Just Singlehandedly Saved the Airbus A380

    Apple, Capitalizing on New Tax Law, Plans to Bring Billions in Cash Back to US

    Bank of America Earnings Hurt by Tax-Related Charge

    Nestle’s Is Launching New KitKats and They’re Made From Natural Ruby Chocolate

    Qualcomm Challenges Broadcom Where It Counts Most – Networking

    Intel Has a Big Problem. It Needs to Act Like It.

    Ben Carlson: Even With Low Returns, Bonds Still Have Their Use

    Roger Nusbaum: Chip Off The Old Block…Chain

    Joshua Brown: How a Criminal Defense Attorney Thinks About Crypto Currency

    Be sure to follow me on Twitter.

  • AFLAC Waddles Back
    Posted by on January 17th, 2018 at 1:50 pm

    Here are three charts I wanted to pass along. The first shows that AFLAC is taking back some of its losses from Friday.

    Here’s an interesting chart. This show the divergence between oil (red) and the relative strength of energy stocks (black). These two had been following each other closely until about a year ago. Since then, oil has rebounded but energy stocks are still weak.

    Lastly, here’s the S&P 500’s dividend yield (in red) along with the one-year Treasury yield (blue).

    Related: