[3/22/06] (Marty Zweig writes in the ZF annual report),
"Although much has been written about the relationship between the two-year note and the 10-year, we think it is more important to compare the 3-month yield to the 10-year yield. Right now they are about even. Historically, over the past 52 years when short rates have been 95% or more of the long rate (more would represent an inverted curve), the S&P has gone down approximately 11% on an annualized basis. When the short rate has been 95% or less than the long rate (less would be a relatively normal yield curve), the market has gone up almost 12%. This time the curve has inverted because the short rate has gone up while the long rate has been fairly flat. That seems a more neutral yield curve. However, if bond yields rise toward 5%, we’d start to get concerned."
[2/25/06] Mauldin presents a Fed paper which correlates the the yield curve spread and the probability of recession. With the current spread, the probability of a recession is 20%. However the spread figures to invert more negatively in the coming month.
"It is all but a foregone conclusion that the Fed will raise rates at its March meeting. If the ten year stays where it is, we will see a negative 27 basis point spread in the middle of March, which within 90 days would suggest a mid-30% chance of recession.
If the Fed raises again in May to 5%, without the ten year moving up, we would see a 40% chance of recession as the 90 day average would soon be a negative 50 basis points."
[2/28/06] Liz Ann Sonders writes much the same thing.
Saturday, February 25, 2006
Wednesday, February 15, 2006
the fourth year
Bull markets often follow a predictable pattern. In the first year of a rally, bulls tend to charge out of the gate: the Standard & Poor's 500-stock index has posted rip-snorting price gains of 38 percent, on average, in the initial year of bull markets since 1942, according to a recent study by S.& P.
This is typically followed by a more subdued second year, with the S.& P. 500 up around 12 percent, on average. And in the third year, the rally starts to sputter, with average gains of just 3 percent.
This is close to the way the last three years have unfolded - with the S.& P. up more than 26 percent in 2003, 9 percent in 2004 and 3 percent last year.
So how do stocks perform once bulls like this one enter their fourth year? The short answer is that they tend "to catch a second wind," said Sam Stovall, S.& P.'s chief investment strategist. Over the last 63 years, the S.& P. 500 has soared 14 percent, on average, in the fourth year of a bull market.
This is typically followed by a more subdued second year, with the S.& P. 500 up around 12 percent, on average. And in the third year, the rally starts to sputter, with average gains of just 3 percent.
This is close to the way the last three years have unfolded - with the S.& P. up more than 26 percent in 2003, 9 percent in 2004 and 3 percent last year.
So how do stocks perform once bulls like this one enter their fourth year? The short answer is that they tend "to catch a second wind," said Sam Stovall, S.& P.'s chief investment strategist. Over the last 63 years, the S.& P. 500 has soared 14 percent, on average, in the fourth year of a bull market.
Friday, February 10, 2006
Why are bank stock P/Es so low?
[Vitaliy Katsenelson writes] In my piece on Lloyds TSB (NYSE: LYG), I wrote that banks usually trade at lower price-to-earnings ratios to the market, because they are considered riskier investments as a result of their high use of debt. That line caught the eye of Foolish financial editor Joey Khattab, who asked writers Stephen Simpson and Nate Parmelee whether they agreed with my logic. Both disagreed. They argued that larger banks generally have lower P/Es because they are perceived to have a slower or more limited growth potential.
At first, I thought there might be a conspiracy of Fools at work against me! So I asked several investment professionals for their opinion. And to my amazement, they all agreed with the Fools.
At first, I thought there might be a conspiracy of Fools at work against me! So I asked several investment professionals for their opinion. And to my amazement, they all agreed with the Fools.
Thursday, February 09, 2006
Nonsensical Nine
[John Dorfman writes] Each year I compile a warning list of nine stocks that I think display striking danger signs. I call them the Nonsensical Nine. This year the warning list includes such well-known stocks as Celgene Corp., Continental Airlines Inc. and Dun & Bradstreet Corp.
Since I started the list in 2001, members of the Nonsensical Nine have averaged a one-year return of negative 7 percent. The S&P 500 over the same five years has averaged a return of positive 3.4 percent. Three of the five Nonsensical Nine lists have produced a negative one-year return, and four of the lists trailed the S&P 500.
For the Nonsensical Nine, I look at U.S. stocks with a market value of $1 billion or more, selling for at least three times book value (assets minus liabilities per share). Then I select the three stocks that sell for the highest multiple of earnings, the three that sell for the highest multiple of revenue, and the three that have the highest ratio of debt to equity.
Since I started the list in 2001, members of the Nonsensical Nine have averaged a one-year return of negative 7 percent. The S&P 500 over the same five years has averaged a return of positive 3.4 percent. Three of the five Nonsensical Nine lists have produced a negative one-year return, and four of the lists trailed the S&P 500.
For the Nonsensical Nine, I look at U.S. stocks with a market value of $1 billion or more, selling for at least three times book value (assets minus liabilities per share). Then I select the three stocks that sell for the highest multiple of earnings, the three that sell for the highest multiple of revenue, and the three that have the highest ratio of debt to equity.
Monday, February 06, 2006
The April Effect
A 1987 article in the University of Chicago Press' Journal of Business observed that, for years, returns on the London Stock Exchange in April weren't particularly different from returns in other months. Subsequent to the imposition of a capital-gains tax, however, the British stock return data exhibited "apparent monthly effects" in April.
Saturday, February 04, 2006
Morningstar's Equity Research
[10/27/06] The Morningstar approach to stocks
* * *
[2/4/06] Many people think of Morningstar as a mutual fund research provider. And while that’s certainly true, it’s only part of the story. Our stock analysts cover 1,700 companies in more than 100 industries, including more than 85% of the market capitalization of the Wilshire 5000 Index.
We evaluate stocks for what they truly are--pieces of a business. Instead of prognosticating short-term price movements or momentum, our analysts focus on determining the value of a business, its risks, and whether the stock price accurately reflects both the value and risk.
Simply put, we look for superior businesses that trade at discounts to their fair values. The market, of course, doesn't always agree with us, so sometimes our recommendations are out of step with consensus thinking. But we believe this approach is the most sensible way to create wealth over the long term.
(sounds good to me)
* * *
[2/4/06] Many people think of Morningstar as a mutual fund research provider. And while that’s certainly true, it’s only part of the story. Our stock analysts cover 1,700 companies in more than 100 industries, including more than 85% of the market capitalization of the Wilshire 5000 Index.
We evaluate stocks for what they truly are--pieces of a business. Instead of prognosticating short-term price movements or momentum, our analysts focus on determining the value of a business, its risks, and whether the stock price accurately reflects both the value and risk.
Simply put, we look for superior businesses that trade at discounts to their fair values. The market, of course, doesn't always agree with us, so sometimes our recommendations are out of step with consensus thinking. But we believe this approach is the most sensible way to create wealth over the long term.
(sounds good to me)
Morningstar looks at growth stocks
[4/29/06] Morningstar's five principles on investing in growth stocks
[2/4/06] Morningstar focuses on three factors when looking for growth ideas.
* * *
[11/22/05] Morningstar studied the return earned by investors in a sample of 50 widely known growth stocks over periods starting in 1990, 1995, and 2000, in an attempt to increase their insight into growth stock valuation.
"Of course, there's no chance that we'll abandon our preference for investing with a margin of safety--this remains a core Morningstar principle. In our view, one of the most frequent investment sins is overpaying for growth. It's entirely unnecessary, as an informed investor is well positioned to determine when growth is attractively priced--and when it isn't. Margins of safety remain vital, but when it comes to the best companies, there's often more to consider than most investors realize."
... "while many investors shy away from stocks with high P/E ratios, our research concludes that this isn't always wise. And while P/E ratios for growth stocks must eventually decline, this can take years to happen--by which time the "E" can be several times larger. For example, investors who bought Qualcomm QCOM at a P/E of 78 in 1995 have earned tremendous results. And as we illustrate, those investors could have paid up to a P/E of 577 before they would have underperformed the S&P 500. Similarly, investors could have happily bought Starbucks SBUX at 62 times earnings (maximum P/E 298) or Fastenal FAST at 41 times earnings (maximum P/E 80) and done magnificently. For the right company, growth is most assuredly worth "paying up for."
[2/4/06] Morningstar focuses on three factors when looking for growth ideas.
* * *
[11/22/05] Morningstar studied the return earned by investors in a sample of 50 widely known growth stocks over periods starting in 1990, 1995, and 2000, in an attempt to increase their insight into growth stock valuation.
"Of course, there's no chance that we'll abandon our preference for investing with a margin of safety--this remains a core Morningstar principle. In our view, one of the most frequent investment sins is overpaying for growth. It's entirely unnecessary, as an informed investor is well positioned to determine when growth is attractively priced--and when it isn't. Margins of safety remain vital, but when it comes to the best companies, there's often more to consider than most investors realize."
... "while many investors shy away from stocks with high P/E ratios, our research concludes that this isn't always wise. And while P/E ratios for growth stocks must eventually decline, this can take years to happen--by which time the "E" can be several times larger. For example, investors who bought Qualcomm QCOM at a P/E of 78 in 1995 have earned tremendous results. And as we illustrate, those investors could have paid up to a P/E of 577 before they would have underperformed the S&P 500. Similarly, investors could have happily bought Starbucks SBUX at 62 times earnings (maximum P/E 298) or Fastenal FAST at 41 times earnings (maximum P/E 80) and done magnificently. For the right company, growth is most assuredly worth "paying up for."
The Cliches of Wall Street
A Cliché a Day Keeps
Wall Street Losses Away
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
December 27, 2005; Page C1
Words to the wise: Buy low, sell high, and don't follow the crowd.
The Street of Dreams (Wall Street) is paved with clichés. Analysts love to write that stocks offer "positive price potential" and are in "sustainable advances." Price targets get "revised upward." Stocks rarely seem to sport negative potential or falling targets.
And yet, some of the clichés can be helpful, if only as red flags. The above phrases scream that the advice being offered can be taken with a grain of salt. And some other old saws actually are rooted in market reality.
"The market is all about attitudes and people," says Phil Roth, chief technical market analyst at New York brokerage firm Miller Tabak. Many sayings "started because they contain a grain or more than a grain of truth."
So herewith, dear reader, in honor of the season, is a gift box of beloved Wall Street adages, with explanatory notes appended. Without further ado:
Santa Claus Rally
Oddly enough, stocks often rise right after Christmas. In fact, the entire fourth quarter is, on average, the year's strongest. The Dow industrials have suffered a fourth-quarter decline just once in the past 10 years -- in 1997. The average is up about 3% in the current quarter. The fourth quarter usually is a strong time for corporate profits. Investors are looking ahead to big injections of retirement money into stocks in the new year, and at Christmastime, people tend to look for better days to come. So today might -- might -- be a good day to buy.
Sell in May and Go Away
Sounds like nothing but a catchy phrase, but amazingly, it often is good advice. Over history, the market's biggest gains have come from October through April. From May through September, the market, on average, rises little. But that's not always the case. From October 2004 through April 2005, the Dow Jones Industrial Average rose just 1%. It went up almost 4% from May through September of this year. In most years, though, the winter is better for stocks. Why? See above.
Summer Rally
This is talked about almost as much as the Santa Claus rally, but it is a dubious concept. Sure, stocks tend to rally at least once in most seasons, but historically, summer tends to be a weak period. Stocks tend to bounce up and down over the summer and hit bottom in September or October. September, historically, is the worst month for stocks, the only one that averages a noticable decline. Summer tends to end with a thud.
Beware the Dead-Cat Bounce
Some stocks -- and some entire markets -- are so troubled that they just aren't going to rebound for a while. In such cases, the temporary bounce is a fake, a rally that won't last. The origin of the phrase, in brutal terms: Even a dead cat will bounce a little, if it falls from a high enough perch. A dead-cat bounce can be caused by bearish investors covering their bets. They sold borrowed shares in hopes of replacing them with cheaper ones bought later, called shorting. After their buying starts, the stock climbs, but when they finish, the decline resumes.
Bulls and Bears Make Money. Pigs Get Slaughtered
Another saying that is cruel to animals, but at least it is self-explanatory. If you have a clear investment plan, be it bullish or bearish, you have a chance of success. If you get greedy, pushing a bet too far or staying in a risky investment too long, you may suffer.
Don't Fight the Fed
An old rule on Wall Street is that two things drive stocks: Corporate profit and interest rates. When the Federal Reserve is raising interest rates, as it has been for almost 18 months now, it puts a burden on companies and consumers alike. You should expect the stock market to have trouble -- which it has. This time, at least, stocks haven't fallen, as they have during many previous periods of rate increases.
Don't Fight the Tape
This has mostly to do with crowd psychology. If the market, once tracked by ticker-tape machines, is moving strongly in one direction, up or down, it may not be a great time to bet the other way. No matter how smart you are, or how good your analysis, short-term market momentum can overwhelm your genius. To quote more clichés: Don't fight the trend. Timing is everything. Pick your spots. The trend is your friend.
Stocks Climb a Wall of Worry
This seems like upside-down logic, but it actually makes sense. Stocks tend to rise when investors are anxious. That was the case in October 2002, amid market scandal and an economic slowdown, when the current bull market began. Bull markets begin after people have taken money out of the market, and have it free to invest. As investors resolve their fears, one by one, they put money back in and stocks rise -- climbing a wall of worry. Stocks top out when people become too optimistic. This year, they rose in late October, after worries about profit and interest rates had grown, then ran out of steam as worries eased in December. So this year, Santa is investors' last best hope. The corollary is instructive, too: Buy to the sound of cannons; sell to the sound of trumpets. Translation: Buy when people are too pessimistic, sell when they are too optimistic.
Don't Catch a Falling Knife
This is the opposite of the "wall of worry" maxim above. Sometimes, when things look bad, they are bad, and it is too soon to buy. Think General Motors Corp. Anyone who tried to catch GM stock this year, such as investor Kirk Kerkorian, found it knifing right through their hands. GM repeatedly plunged to new lows. Related: Don't get in front of a freight train (or a Chevy, in this case.)
The Market is Driven by Fear and Greed
Wait a minute. We thought it was driven by profit and interest rates. Oh, well. It is driven by fear and greed, too. When the stock market is doing well, investors set aside fears and build higher and higher expectations for stocks. They become so greedy that they pay inflated prices, thinking stocks never will fall. Expectations become impossible to meet, and that's when a bear market sets in. Remember the bubble? As stocks crumble, greed is replaced by fear, driving stocks still lower. Eventually, fears become excessive and stocks have nowhere to go but up. That's when the old "wall of worry" kicks in. Investors begin to work through their fears, and stocks rise. Then comes the greed again.
Buy the Rumor, Sell the News
Stocks often rise on chatter speculating about pending good news, such as a strong corporate profit announcement. When the news actually breaks, short-term traders sell to take gains. If profit news doesn't exceed Wall Street expectations, the stock may rise before the news but then stagnate or fall afterward. Indexes can do the same. This year, it seems, most of the year-end rally may have occurred early (on the rumor) in November. This cliché also works in reverse. If bad news is anticipated, you sell the rumor and buy the news.
Never Short a Dull Market
This year has definitely been dull, without much sharp movement up or down. Amid rising oil prices, hurricanes and Fed rate increases, you would think it would be a fine time to short the market, betting that indexes would decline. But, as this year showed, that can be a dangerous move unless there is a strong catalyst to push stocks down. Stocks this year have tended to go nowhere, and those who bet on broad market declines have been wrong, although many short sellers betting against individual stocks have had a fine year.
It's Not a Stock Market; It's a Market of Stocks
This is sometimes also expressed as, "This is a stock picker's market." Money managers say such things when the overall market is going nowhere. The way to make money, they say, is to pick stocks that will beat the market. Trouble is, history shows that few people are gifted stock pickers. Trying to beat the market can be a recipe for disaster, as most people stub their toes on that other cliché, buying high and selling low.
Write to E.S. Browning at jim.browning@wsj.com
http://online.wsj.com/public/article/SB113564768089231861-KEnkfFHUTJ_tsqHH_i8L_Yks8Rg_20060102.html?mod=mktw
Wall Street Losses Away
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
December 27, 2005; Page C1
Words to the wise: Buy low, sell high, and don't follow the crowd.
The Street of Dreams (Wall Street) is paved with clichés. Analysts love to write that stocks offer "positive price potential" and are in "sustainable advances." Price targets get "revised upward." Stocks rarely seem to sport negative potential or falling targets.
And yet, some of the clichés can be helpful, if only as red flags. The above phrases scream that the advice being offered can be taken with a grain of salt. And some other old saws actually are rooted in market reality.
"The market is all about attitudes and people," says Phil Roth, chief technical market analyst at New York brokerage firm Miller Tabak. Many sayings "started because they contain a grain or more than a grain of truth."
So herewith, dear reader, in honor of the season, is a gift box of beloved Wall Street adages, with explanatory notes appended. Without further ado:
Santa Claus Rally
Oddly enough, stocks often rise right after Christmas. In fact, the entire fourth quarter is, on average, the year's strongest. The Dow industrials have suffered a fourth-quarter decline just once in the past 10 years -- in 1997. The average is up about 3% in the current quarter. The fourth quarter usually is a strong time for corporate profits. Investors are looking ahead to big injections of retirement money into stocks in the new year, and at Christmastime, people tend to look for better days to come. So today might -- might -- be a good day to buy.
Sell in May and Go Away
Sounds like nothing but a catchy phrase, but amazingly, it often is good advice. Over history, the market's biggest gains have come from October through April. From May through September, the market, on average, rises little. But that's not always the case. From October 2004 through April 2005, the Dow Jones Industrial Average rose just 1%. It went up almost 4% from May through September of this year. In most years, though, the winter is better for stocks. Why? See above.
Summer Rally
This is talked about almost as much as the Santa Claus rally, but it is a dubious concept. Sure, stocks tend to rally at least once in most seasons, but historically, summer tends to be a weak period. Stocks tend to bounce up and down over the summer and hit bottom in September or October. September, historically, is the worst month for stocks, the only one that averages a noticable decline. Summer tends to end with a thud.
Beware the Dead-Cat Bounce
Some stocks -- and some entire markets -- are so troubled that they just aren't going to rebound for a while. In such cases, the temporary bounce is a fake, a rally that won't last. The origin of the phrase, in brutal terms: Even a dead cat will bounce a little, if it falls from a high enough perch. A dead-cat bounce can be caused by bearish investors covering their bets. They sold borrowed shares in hopes of replacing them with cheaper ones bought later, called shorting. After their buying starts, the stock climbs, but when they finish, the decline resumes.
Bulls and Bears Make Money. Pigs Get Slaughtered
Another saying that is cruel to animals, but at least it is self-explanatory. If you have a clear investment plan, be it bullish or bearish, you have a chance of success. If you get greedy, pushing a bet too far or staying in a risky investment too long, you may suffer.
Don't Fight the Fed
An old rule on Wall Street is that two things drive stocks: Corporate profit and interest rates. When the Federal Reserve is raising interest rates, as it has been for almost 18 months now, it puts a burden on companies and consumers alike. You should expect the stock market to have trouble -- which it has. This time, at least, stocks haven't fallen, as they have during many previous periods of rate increases.
Don't Fight the Tape
This has mostly to do with crowd psychology. If the market, once tracked by ticker-tape machines, is moving strongly in one direction, up or down, it may not be a great time to bet the other way. No matter how smart you are, or how good your analysis, short-term market momentum can overwhelm your genius. To quote more clichés: Don't fight the trend. Timing is everything. Pick your spots. The trend is your friend.
Stocks Climb a Wall of Worry
This seems like upside-down logic, but it actually makes sense. Stocks tend to rise when investors are anxious. That was the case in October 2002, amid market scandal and an economic slowdown, when the current bull market began. Bull markets begin after people have taken money out of the market, and have it free to invest. As investors resolve their fears, one by one, they put money back in and stocks rise -- climbing a wall of worry. Stocks top out when people become too optimistic. This year, they rose in late October, after worries about profit and interest rates had grown, then ran out of steam as worries eased in December. So this year, Santa is investors' last best hope. The corollary is instructive, too: Buy to the sound of cannons; sell to the sound of trumpets. Translation: Buy when people are too pessimistic, sell when they are too optimistic.
Don't Catch a Falling Knife
This is the opposite of the "wall of worry" maxim above. Sometimes, when things look bad, they are bad, and it is too soon to buy. Think General Motors Corp. Anyone who tried to catch GM stock this year, such as investor Kirk Kerkorian, found it knifing right through their hands. GM repeatedly plunged to new lows. Related: Don't get in front of a freight train (or a Chevy, in this case.)
The Market is Driven by Fear and Greed
Wait a minute. We thought it was driven by profit and interest rates. Oh, well. It is driven by fear and greed, too. When the stock market is doing well, investors set aside fears and build higher and higher expectations for stocks. They become so greedy that they pay inflated prices, thinking stocks never will fall. Expectations become impossible to meet, and that's when a bear market sets in. Remember the bubble? As stocks crumble, greed is replaced by fear, driving stocks still lower. Eventually, fears become excessive and stocks have nowhere to go but up. That's when the old "wall of worry" kicks in. Investors begin to work through their fears, and stocks rise. Then comes the greed again.
Buy the Rumor, Sell the News
Stocks often rise on chatter speculating about pending good news, such as a strong corporate profit announcement. When the news actually breaks, short-term traders sell to take gains. If profit news doesn't exceed Wall Street expectations, the stock may rise before the news but then stagnate or fall afterward. Indexes can do the same. This year, it seems, most of the year-end rally may have occurred early (on the rumor) in November. This cliché also works in reverse. If bad news is anticipated, you sell the rumor and buy the news.
Never Short a Dull Market
This year has definitely been dull, without much sharp movement up or down. Amid rising oil prices, hurricanes and Fed rate increases, you would think it would be a fine time to short the market, betting that indexes would decline. But, as this year showed, that can be a dangerous move unless there is a strong catalyst to push stocks down. Stocks this year have tended to go nowhere, and those who bet on broad market declines have been wrong, although many short sellers betting against individual stocks have had a fine year.
It's Not a Stock Market; It's a Market of Stocks
This is sometimes also expressed as, "This is a stock picker's market." Money managers say such things when the overall market is going nowhere. The way to make money, they say, is to pick stocks that will beat the market. Trouble is, history shows that few people are gifted stock pickers. Trying to beat the market can be a recipe for disaster, as most people stub their toes on that other cliché, buying high and selling low.
Write to E.S. Browning at jim.browning@wsj.com
http://online.wsj.com/public/article/SB113564768089231861-KEnkfFHUTJ_tsqHH_i8L_Yks8Rg_20060102.html?mod=mktw
The Three Ways to profit on a stock
Haywood Kelly writes, "My future return on the stock can come in three ways. The company can grow. The price multiple between my purchase date and the sale date can rise. Or I can collect dividends and earn the return that way.
The way this is usually expressed is:
Return = Earnings Growth + Change in P/E + Dividend Yield.
Expressed crudely and admittedly too simplistically, a growth investor will focus on the first component, a value investor on the second, and an income investor on the third."
The charts in the article remind me of the charts in Peter Lynch's book, One Up On Wall Street.
And speaking of Lynch, here's a nice post I found while browsing Shai's blog. See also the Lynch link in the entry below.
The way this is usually expressed is:
Return = Earnings Growth + Change in P/E + Dividend Yield.
Expressed crudely and admittedly too simplistically, a growth investor will focus on the first component, a value investor on the second, and an income investor on the third."
The charts in the article remind me of the charts in Peter Lynch's book, One Up On Wall Street.
And speaking of Lynch, here's a nice post I found while browsing Shai's blog. See also the Lynch link in the entry below.
Friday, February 03, 2006
The Warren Buffett Cartoon
MOVE OVER, SPONGEBOB--BILLIONAIRE FINANCIER WARREN Buffett could be the next big TV animated star.
DIC Entertainment, the mid-size kids' TV program producer and syndicator, is working on a direct-to-video animated kids' series called "The Secret Millionaire's Club," in which Warren Buffett, chairman of Berkshire Hathaway, offers up lessons on money and financing to children.
"It's about financial literacy," said Andy Heyward, chairman and CEO of the Burbank, Calif.-based DIC Entertainment.
-- from tairbear00 via chucks_angels
DIC Entertainment, the mid-size kids' TV program producer and syndicator, is working on a direct-to-video animated kids' series called "The Secret Millionaire's Club," in which Warren Buffett, chairman of Berkshire Hathaway, offers up lessons on money and financing to children.
"It's about financial literacy," said Andy Heyward, chairman and CEO of the Burbank, Calif.-based DIC Entertainment.
-- from tairbear00 via chucks_angels