Tuesday, May 27, 2008

Soros on oil

Soaring oil prices are increasingly the result of speculation, financier George Soros said in an interview published Monday.

The billionaire investor said the money pouring into the oil market increasingly had the look of a bubble, but that it would not burst until both the United States and Britain were knocked into a recession.

"Speculation ... is increasingly affecting the price," Soros was quoted as saying by The Daily Telegraph. "The price has this parabolic shape that is characteristic of bubbles."

But the cost of oil — which briefly reached new record highs of more than US$135 a barrel in trading Thursday — was unlikely to fall dramatically until the U.S. and Britain economies began contracting, the paper quoted Soros as saying.

Ken Fisher is bullish

I'm getting a lot of hate e-mail these days. This onslaught is not entirely a bad thing. It reassures me that my bet against the crowd is a wise one. I'm bullish and have been steadily since the July 8, 2002 issue. In my Jan. 28 column I reiterated the upbeat outlook and reminded you that the fourth year of a presidency only rarely delivers losses to stockholders. Now, with stocks globally (as measured by the Morgan Stanley All-Country World Index) down 8.6% so far this year, people are telling me I'm an idiot. Someone posted to FORBES Web site, "Hi Ken. It's been an absolute pleasure watching you vie for the 2008 Henry Blodget Award. Keep up the good work!"

Gloat for now, but please note that 2008 isn't over. I still think the year will end in the plus column. And I'm never happier than when I'm alone.

My critics call me a perma-bull. They forget I called the last three full-fledged bear markets right here in FORBES--reasonably well and better than most--and mostly alone (June 15, 1987; Nov. 27, 1989; Feb. 19, 2001). I know I may be wrong now. But I see what's happened since Jan. 1 as just a major correction, very comparable to 1998, with a few things flip-flopped, as described in my Feb. 25 column.

On Mar. 13 Goldman Sachs demoted market strategist Abby Cohen for having been bullish too long. That day marked the bottom of the back half of what I think is a double-bottom whose first bottom was in January. I see Goldman's move as bullish. That once famous market timer Joe Granville materialized out of nowhere saying that we are beginning a bad bear market. I'd bet against Joe any time. Gloomy people are saying that we are in the midst of the worst financial crisis since the 1930s. They said the same thing in 1998. Bullish!

You can't find a time in the 20th century when, less than five months into a real global bear market, people were talking bear market and recession in any visible numbers. But they always talk disaster during corrections. Check out "Russian Financial Crisis" on Wikipedia. The second sentence says 1998 was a "global recession … which started with the Asian financial crisis in July 1997." Wrong. There wasn't a global recession then. There isn't one now.

An old saw says, "You should be fearful when others are greedy and greedy when others are fearful." Clearly folks are fearful now. So you should be greedy. Another saw: "Buy when there is blood on the streets." There's plenty of blood, or at least depression, on Wall Street. So keep buying.

[via investwise 5/13/08]

Saturday, May 24, 2008

Memorial Day

According to Martin Zweig's Winning on Wall Street, the day before Memorial Day (and holidays in general) is supposed to be bullish, "the odds of the market rising on the day before a holiday was about seven out of eight." However if the market is down on that day, then one should short the market for the day after the holiday.

So this means we should expect the market to go down further on Tuesday.

Of course, the mere fact that we know this affects the pattern. The book uses data thru 1985 and was published in 1986. Since then, the tendencies may not as strong.

[6/3/08] The market finished positive on May 27. In other words, wrong again.

Friday, May 23, 2008

How has van den Berg done it?

Although he is not quoted as frequently as master value investor Warren Buffett, value investor Arnold van den Berg's long-term investment returns at Century Management are nearly as impressive.

Since its 1974 inception, the firm has delivered more than 16% annual returns to investors before fees, and nearly 15% annual returns after fees. As Century points out, that means the firm would have doubled your money every 4.8 years.

How has van den Berg done it? Mostly by concentrating on buying stocks that are out of favor with other investors. At a presentation he gave in 2006 (which was transcribed in an excellent issue of Outstanding Investor Digest), he described four psychological states investors experience that he takes advantage of in order to earn those outsized returns.
  • Apathy: The stock price has gone nowhere for a number of years, and people are just tired of it.
  • Disgust: The stock has done nothing; earnings and sales might be down. People might have lost money holding on to it and can't bear to own it any more.
  • Fear and panic: The bad news hits, the company runs into trouble, and the price drops off a cliff. Sell! Sell!
  • Anger: Nothing's gone right while holding it, lost a lot of money, it will never turn around! Just dump this piece of garbage!
Those conditions, especially the last two, lead investors to "buy high, sell low." It's from those same people that Van den Berg buys his stocks. "People, acting as a herd," he said, "do some very foolish things because of emotions that block out reason and intelligence. ... So don't let your emotions dominate."

Tuesday, May 20, 2008

a penny costs more than a penny

WASHINGTON (AP) -- Further evidence that times are tough: It now costs more than a penny to make a penny. And the cost of a nickel is more than 7½ cents.

Surging prices for copper, zinc and nickel have some in Congress trying to bring back the steel-made pennies of World War II and maybe using steel for nickels, as well.

Market Cycle Math

During bull markets, a vibrant, peaceful combination of P/E expansion (a staple of bull markets, a great source of return) and earnings growth brings outsize returns to jubilant investors. Prolonged bull markets start with below- and end with above-average P/Es.

P/Es are some of the most mean-reverting creatures, and range-bound markets act as clean-up guys: they rid us of the mess (i.e., deflate high P/Es) caused by bull markets, taking them down towards and actually below the mean. P/E compression wipes out most if not all earnings growth, resulting in zero (or nearly) price appreciation plus dividends.

Bear markets are range-bound markets' cousins; they share half of their DNA: high starting valuations. However, where in cowardly lion markets economic growth helps to soften the blow caused by P/E compression, during secular bear markets the economy is not there to help. Economic blues (runaway inflation, severe deflation, subpar or negative economic or earnings growth) add oil to the fire (started by high valuations) and bring devastating returns to investors.

A true secular bear market has not really taken place in the US, but one has occurred across the pond in Japan. The market decline caused by the Great Depression, though referred to as the greatest decline in US stocks in the 20th century, only lasted three years and thus doesn't really fit the traditional "secular" requirement of lasting more than five years. Japan's Nikkei 225 suffered through a true secular bear market: stock prices declined over 80 percent from their 1989-1991 highs until they bottomed in 2003 (the market seems to be coming back now). For more than a decade the country struggled with deflation caused by its banking system coming to a near halt on the heels of a collapsing real estate market and the bad loans that came with it. Of course, all this took place on the heels of a huge bull market, and thus very high valuations.

Sell in May?

Numerous studies show that since World War II, as much as 99% of stock market returns have been generated between November 1 and May 1. Good friend and fishing buddy David Kotok of Cumberland Advisors sums it up nicely:

"According to the Ned Davis (NDR) database, starting in 1950, $10,000 invested in the S&P 500 Index every May 1st and then liquidated every October 31st would only be worth $10,026 today. That's right: had you stayed out of the stock market from November through April and only been in the market from May through October, you would have had no change during the last 57 years. 21 of those years would have been negative; 36 were positive. Thi s happened during the same period that stock prices were rising about 75% of the time and markets made extended upward moves.

"Consider the results of the reverse strategy. Buy the S&P 500 Index on November 1st and sell all your stocks on May 1st. The outcome is dramatically different. Your original $10,000 would now be worth $372,890 as of April 30th closing prices in 2008. Out of the 58 periods you would have had positive results in 45 of them and negative results in only 13 years."

*** 4/30/12

I'm perfectly willing to believe that there is a seasonal component to stocks' price appreciation that is inconsistent with efficient markets, but these data aren't enough to judge the efficacy of a seasonal switching strategy. In that regard, NDR's methodology suffers from several shortcomings: For one, it assumes that when the money isn't invested in stocks, it earns no return whatsoever instead of being invested in Treasury bills. Furthermore, their data do not account for dividends, a critical component of stock returns. Finally, there is no benchmark data corresponding to a straightforward "buy and hold" strategy.

In order to address these issues, I performed my own calculations, using data series from Ibbotson Associates (a unit of Morningstar) that begin in 1926.

There are two key observations here:

The "sell in May" strategy soundly beat the converse strategy, with a margin of outperformance that exceeds 3 percentage points on an annualized basis.

However, "Sell in May" underperformed buy-and-hold; in fact, the outperformance of buy-and-hold is understated because the returns in the table assume no transaction costs and no tax impact.

Thursday, May 15, 2008

The Value Imperative

Dr. John Price (creator of ValueSoft and the Conscious Investor) has written a series of articles for gurufocus called the Value Imperative.

Here are the links to the articles:

Part 1: Setting The Scene
Part 2: Replacement Theory and Tobin's q theory
Part 3: Charting and Technical Analysis
Part 4: The Investment Methods of Benjamin Graham
Part 5: Intrinsic Value and Discount Cash Flow Methods
Part 6: Intrinsic Value and Dividend Discount Methods

What the Sydney Harbour Bridge Taught Me

He also has a number of informative articles at Sherlock Investing.

Buffett and Gates on FBN

Liz Klaman of Fox Business News interviews Warren Buffett and Bill Gates:

Buffett discusses the future of Berkshire Hathaway

Bill Gates discusses the failed Microsoft-Yahoo deal

Buffett and Gates discuss the energy industry and alternative energy

Buffett and Gates discuss the American economy

Buffett and Gates discuss their contrasting deal making methods

Wednesday, May 14, 2008

Emerging Markets are still going strong

Although industrialized economies in the U.S., Europe, and Japan are all likely to see slow growth in the next couple of years, emerging markets are still going strong.
Country   GDP Growth --  2008 GDP      2009 GDP
Past 12 Months Growth Est. Growth Est.
United States 2.5% 1.1% 1.7%
Germany 1.8% 1.7% 1.6%
Japan 2.0% 1.3% 1.5%
China 10.6% 9.6% 9.0%
India 8.4% 7.8% 7.2%
Brazil 6.2% 4.6% 4.0%
Russia 8.0% 7.1% 6.2%
By one simple measure -- the P/E ratio -- emerging-market countries have quite reasonable stock market valuations. And in some cases, they look downright cheap.
Country  Trailing P/E  Estimated
Forward P/E
United States 19.2 14.8
Germany 12.4 11.9
Japan 16.6 15.6
China 19.5 16.2
India 22.0 20.9
Brazil 16.2 13.2
Russia 10.4 11.6

Thursday, May 01, 2008

Earnings Estimates

A recent eye-opening study by Patrick Cusatis and J. Randall Woolridge of Pennsylvania State University looked at 20 years' worth of published earnings estimates made by Wall Street industry analysts. What they found was startling.

Cusatis and Woolridge found that Wall Street analysts -- supposedly among the smartest, most well-informed prognosticators -- consistently overestimated the future earnings growth rates of the companies they cover. By a lot. I mean by a whole lot.

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also