What If the Stock Market Were a Bond?
Posted by Eddy Elfenbein on August 24th, 2011 at 2:06 pm

Here’s an update to one of my crazier/demented/possibly brilliant 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 the historical market performance of the Wilshire 5000 (including dividends) and invented a hypothetical long-term bond that matched the index’s 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 have 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 choose a number that’s too high, the historical performance won’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 is too low, the yield would gradually get pushed down to microscopic levels.

Fortunately, the data makes my job easy. After 41 years, the window I have to work with is pretty narrow. Starting with 9.2% is too high, and 8.8% is too low. After playing with the numbers, I finally settled on 9%.

Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past 41 years. Through yesterday, the yield stood at 12.96%.

Remember that Double Dip…Yeah, About That
Posted by Eddy Elfenbein on August 24th, 2011 at 10:57 am

More positive economic news today:

Orders for U.S. durable goods climbed more than forecast in July as a surge in demand for aircraft and autos eclipsed a decrease in business equipment, including computers and machinery.

Bookings for goods meant to last at least three years rose 4 percent, the most in four months, after falling a revised 1.3 percent in June, a Commerce Department report showed today in Washington. The median projection of 81 economists surveyed by Bloomberg News called for a 2 percent gain. Orders excluding the volatile transportation category, unexpectedly advanced 0.7 percent.

Morning News: August 24, 2011
Posted by Eddy Elfenbein on August 24th, 2011 at 5:27 am

European Bank Job ‘Bloodbath’ Surpasses 40,000

Italy’s Eni Lobbies Rebels to Keep Libya Oil Dominance

Moody’s Cuts Japan’s Rating One Notch, Citing Its Giant Debt

Japan Rolls Out New Yen-Stopping Measures

Turkish Lira Weakens First Day in Three After Moody’s Downgrades Japan

German Business Confidence Falls

Markets Will Look for Hints in Bernanke’s Words

New S.&P. Chief Knows Crisis and Change

Australian Brewing Giant Foster’s CEO Open to ‘Sensible’ Takeover Talks

Australian BHP Billiton’s Oil, Gas Earnings Rise 38% on Surging Prices, Output Gain

Heineken Slumps on Flat Forecast

Hertz to Begin Renting Electric Cars in China

Sell Big or Die Fast

10 Most Popular Stocks Among Hedge Funds

Todd Sullivan: Do Rising Auto Sales Discount Double Dip Scenario?

Stone Street: A Rare Mea Culpa: Rating Downgrades and MBS

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Possible Bottom Forming
Posted by Eddy Elfenbein on August 23rd, 2011 at 4:30 pm

Yesterday, I tweeted saying that today would be a good day for a 400-point rally. Well, we got 322 points. I guess I should have done that three weeks ago.

In any event, the S&P 500 has formed some major bottom points recently. I’m not a technician, but I’ll pass this along to give you a sense of what traders are watching.

The S&P 500 has closed at very similar levels on a few days during the past two weeks. On August 8th, it closed at 1,119.46, then two days later it closed at 1,120.76. Last Friday, we closed at 1,123.53 and yesterday at 1,123.82. Not making a new low is the key event.

The story seems to be that the low bar is holding up. The bears have tried a few times to bring us lower but they haven’t been able to do it. This may give the bulls more confidence.

We’ve seen rallies like today before. In fact, it’s only the third-best day of the last eleven. But if we start seeing some real follow-through, which has been sorely lacking, the bulls may finally take back the stage.

Mylan +130,000%
Posted by Eddy Elfenbein on August 23rd, 2011 at 12:12 pm

Since the beginning of 1978, shares of Mylan ($MYL) are up 130,000%. That’s enough to turn an investment of $8,000 into $10.4 million. The stock is now going for about nine times this year’s earnings estimate.

I don’t know how to embed this chart, but you can see for yourself.

Peter Brandt on My Gold Model
Posted by Eddy Elfenbein on August 23rd, 2011 at 10:47 am

Peter Brandt, who knows basically everything there is to know about commodities trading, recently had some very kind words for my gold model:

This past week I read a blog post that nearly knocked my socks off. It was a huge déjà vu moment. It was one of the best postings I have read in years.

Each morning I briefly cruise through the posts made the previous day by the StockTwits blogging community, plus a half dozen other blogs I really like.

For the most part the verb “cruise” is very accurate. I am a very selected consumer of the opinions of others. I have little time for a regurgitation of the news of the day. I mainly look for original research, sophisticated insight into risk management protocols, bold and original thinking and unique market perspectives.

This past week one post led me to a post from October 2010 that knocked my socks off. It was profound. Let me explain.

On Thursday I read a blog post by @EddyElfenbein (Crossing Wall Street), titled Updating the Gold Model. BTW, Crossing Wall Street is one of my favorite blogs. However, this was not the post that captivated me. But, this post led me to a post from October 6, 2010 by Eddy, titled, “A possible model for the price of gold“.

Read the whole thing.

Medtronic Earns 79 Cents Per Share, Reiterates Full-Year Guidance
Posted by Eddy Elfenbein on August 23rd, 2011 at 9:03 am

Medtronic ($MDT) just reported fiscal first-quarter earnings of 79 cents per share which matched Wall Street’s estimate. The best news is that the company reiterated its full-year earnings guidance of $3.43 to $3.50 per share.

That’s good to see because the stock has fallen and the company doesn’t see any major changes in their business outlook for the coming year. Taking the mid-point of that guidance, Medtronic is going for just nine times earnings.

Analysts surveyed by FactSet expected, on average, earnings of 79 cents per share on revenue of $3.98 billion. Analysts typically exclude one-time items from their estimates.

Medtronic has struggled to maintain earnings growth amid sluggish sales of its two leading products: heart defibrillators and spinal implants. Sales for implantable cardioverter defibrillators, or ICDs, fell 8 percent on a constant currency basis to $697 million, as procedure volumes fell in the United States. ICDs treat rapid heartbeats.

Sales from the company’s spinal business fell to $825 million from $829 million, even though international sales in that segment grew 7 percent. That business took a big publicity blow earlier this year when a medical journal alleged that Medtronic downplayed the risks of its InFuse spinal repair protein and failed to disclose millions of dollars in payments to the authors who wrote the initial studies of the product.

Medtronic’s total costs and expenses also climbed 11 percent to $3.03 billion.

The company said international sales accounted for 46 percent of its revenue, and emerging markets sales grew 30 percent as reported or 25 percent on a constant currency basis to $408 million.

Medtronic reaffirmed the fiscal 2012 forecast it made in May. The company expects earnings of $3.43 to $3.50 per share on revenue growth of 1 to 3 percent, or to $16.1 billion to $16.41 billion.

Analysts expect, on average, $3.46 per share on revenue of $16.57 billion.

Here’s a look at Medtronic’s quarterly results for the past several years:

Check out Medtronic’s EPS trend. This is what I like to see: a clean strong upward line. The red is based on the company’s forecast. As you can see, MDT is still very profitable, but the earnings will be flat for a time.

Morning News: August 23, 2011
Posted by Eddy Elfenbein on August 23rd, 2011 at 4:56 am

China Details Yuan Use Offshore

Hong Kong’s ‘Scary’ 7.9% Inflation May Fuel Wages Even as Recession Looms

Europe Failure With Bank Crisis Haunts Markets

The Scramble for Access to Libya’s Oil Wealth Begins

Gold Even Reigns On Stock Market

Treasurys Rally May Hit Wall At Jackson Hole If Fed Disappoints

Standard & Poor’s President to Step Down

Douglas Peterson to Become President of S&P

Audi Defies Market Slump, Boosts A8 Production

Boeing’s 787 Inventory Glut Casts $16.2 Billion Cloud Over FAA Approval

UBS to Slash 3,500 Jobs

McGraw-Hill Shareholders Seek to Split Company

Motley Fool: Confessions of an ADD Investor

Paul Kedrosky: Buy Stocks Until 2011, Then ….

Phil Pearlman: 20 Year SP500 Fibonacci Analysis

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Bashing Stock Buybacks
Posted by Eddy Elfenbein on August 22nd, 2011 at 4:39 pm

I agree 100% with my pal Josh Brown on share buybacks.

Valuing the Market By Dividend Yield
Posted by Eddy Elfenbein on August 22nd, 2011 at 2:02 pm

When we try to value a stock or the entire market, we never want to look at just one method. Instead, we want to look at as many as we can because every method has some flaw.

Trying to value the S&P 500 by going by the dividend yield has been a surprisingly reliable indicator for the past few years and this is despite the historic movement of market interest rates. I especially like this method because dividends tend to be very stable (note the clear trends of the yellow line on the graph).

The graph below shows the S&P 500 in blue and it follows the left scale. The dividend is in yellow and it follows the right scale. The two axes are scaled at a ratio of 50-to-1 which means that the S&P 500’s dividend yield is exactly 2% whenever the lines cross.

I asked Larry Silverblatt, the brilliant analyst at S&P, what his projection for full-year dividends are and he said $26.33, so that’s the red line. That’s probably a very shrewd call because the trend of the red line seems perfectly consistent with where we’ve been.

Now here’s the chart that caught my attention — the dividend yield of the S&P 500 (in other words, the yellow line divided by the blue).

Except for the depths of the financial crisis, note how narrow the range is that the yield stayed in. Of course, you might say that that’s one hell of an exception. But still, once the worst of the financial crisis passed, the market’s dividend came right back to that 1.6% to 1.9% range.

The S&P 500’s dividend yield is currently 2.2%. Since 2003, the S&P 500’s dividend ranged between 1.6% and 1.9% more than 62% of the time. That’s pretty darn narrow. If Silverblatt’s forecast is correct and we use the 1.6% to 1.9% range, that implies a year-end target for the S&P 500 of 1,385 to 1,645.

The dividend yield chart is a good expression of “tail risk,” meaning what can happen when everything goes kablooey. Most of the time, things are by definition, normal. If we’re still in normal times, stocks are very cheap.

But to give you an example of how far things can go wrong, if the S&P 500’s dividend yield decides to match the peak yield from two-and-a-half years ago, punching in Silverblatt’s dividend estimate gives us a year-end S&P 500 of 646.