What was Mr. Buffett’s sell strategy? It was to buy when everyone else was focusing on selling! That is probably the most important lesson to be gleaned from his annual report. As he put it: “Pessimism is the friend of the long term investor, euphoria the enemy.”
So, Mr. Buffett didn’t sell anything in the face of such a relentless bear? Actually, he confessed to trimming his positions in Procter & Gamble and Johnson & Johnson in 2008’s fourth quarter. But, this, according to him, was so he could buy securities in General Electric and Goldman Sachs.
This type of move really underscores his investment philosophy. Not only was he investing in the most volatile part of 2008, October and November, he was rebalancing his portfolio away from what was generally perceived to be the only safe areas of the market, health care and consumer nondurables, into financials and industrial cyclicals.
The bottom line is Mr. Buffett espouses a contrarian investment philosophy. Not only is he buying, not selling, when markets are declining, but he’s buying in some of the most beaten down areas, financials and industrials, while lightening up in those sectors in which others are seeking a safe haven.As Mr. Buffett put it: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Wednesday, March 11, 2009
Japan’s Stimulus is a Lesson
HAMADA, Japan — The Hamada Marine Bridge soars majestically over this small fishing harbor, so much larger than the squid boats anchored below that it seems out of place.
And it is not just the bridge. Two decades of generous public works spending have showered this city of 61,000 mostly graying residents with a highway, a two-lane bypass, a university, a prison, a children’s art museum, the Sun Village Hamada sports center, a bright red welcome center, a ski resort and an aquarium featuring three ring-blowing Beluga whales.
Nor is this remote port in western Japan unusual. Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.
Now, as the Obama administration embarks on a similar path, proposing to spend more than $820 billion to stimulate the sagging American economy, many economists are taking a fresh look at Japan’s troubled experience. While Japan is not exactly comparable to the United States — especially as a late developer with a history of heavy state investment in infrastructure — economists say it can still offer important lessons about the pitfalls, and chances for success, of a stimulus package in an advanced economy.
In a nutshell, Japan’s experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists and one very important American official: Treasury Secretary Timothy F. Geithner, who was a young financial attaché in Japan during the collapse and subsequent doldrums. One lesson Mr. Geithner has said he took away from that experience is that spending must come in quick, massive doses, and be continued until recovery takes firm root.
Moreover, it matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending.
“It is not enough just to hire workers to dig holes and then fill them in again,” said Toshihiro Ihori, an economics professor at the University of Tokyo. “One lesson from Japan is that public works get the best results when they create something useful for the future.”
And it is not just the bridge. Two decades of generous public works spending have showered this city of 61,000 mostly graying residents with a highway, a two-lane bypass, a university, a prison, a children’s art museum, the Sun Village Hamada sports center, a bright red welcome center, a ski resort and an aquarium featuring three ring-blowing Beluga whales.
Nor is this remote port in western Japan unusual. Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.
Now, as the Obama administration embarks on a similar path, proposing to spend more than $820 billion to stimulate the sagging American economy, many economists are taking a fresh look at Japan’s troubled experience. While Japan is not exactly comparable to the United States — especially as a late developer with a history of heavy state investment in infrastructure — economists say it can still offer important lessons about the pitfalls, and chances for success, of a stimulus package in an advanced economy.
In a nutshell, Japan’s experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists and one very important American official: Treasury Secretary Timothy F. Geithner, who was a young financial attaché in Japan during the collapse and subsequent doldrums. One lesson Mr. Geithner has said he took away from that experience is that spending must come in quick, massive doses, and be continued until recovery takes firm root.
Moreover, it matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending.
“It is not enough just to hire workers to dig holes and then fill them in again,” said Toshihiro Ihori, an economics professor at the University of Tokyo. “One lesson from Japan is that public works get the best results when they create something useful for the future.”
Billionaires are down too
Like the rest of us, the richest people in the world have endured a financial disaster over the past year. Today there are 793 people on Forbes list of the world's billionaires, a 30% decline from a year ago.
Of the 1,125 billionaires who made last year's ranking, 373 fell off the list -- 355 saw declining fortunes, and 18 died. There are 38 newcomers plus three moguls who returned to the list after regaining their 10-figure fortunes. It is the first time since 2003 that the world has had a net loss in the number of billionaires.
Microsoft's Bill Gates lost $18 billion but regained his title as the world's richest person. Warren Buffett, last year's No. 1, saw his fortune decline $25 billion as shares of Berkshire Hathaway (BRK.A, news, msgs) fell 40% in 12 months, but he still managed to slip just one spot, to No. 2. Mexican telecom titan Carlos Slim Helú, No. 2 a year ago, also lost $25 billion and dropped to No. 3.
Of the 1,125 billionaires who made last year's ranking, 373 fell off the list -- 355 saw declining fortunes, and 18 died. There are 38 newcomers plus three moguls who returned to the list after regaining their 10-figure fortunes. It is the first time since 2003 that the world has had a net loss in the number of billionaires.
Microsoft's Bill Gates lost $18 billion but regained his title as the world's richest person. Warren Buffett, last year's No. 1, saw his fortune decline $25 billion as shares of Berkshire Hathaway (BRK.A, news, msgs) fell 40% in 12 months, but he still managed to slip just one spot, to No. 2. Mexican telecom titan Carlos Slim Helú, No. 2 a year ago, also lost $25 billion and dropped to No. 3.
Tuesday, March 10, 2009
Roubini is depressing
For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.
With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
Japan at 26 year low
Stocks in Asia were lower as financial fears continued to pressure sentiment. Hong Kong's Hang Seng Index led the decline, falling 4.8%, and Japan's Nikkei 225 broke through its October low to finish at the lowest level in 26 years. Adding pessimism to trading in Japan, the country reported the widest-ever current account deficit as the first deficit since 1996 came courtesy of a sharp contraction in exports due to the struggling global economy and a stronger yen.
[3/9, Schwab Center for Financial Research - Market Analysis Group]
[3/9, Schwab Center for Financial Research - Market Analysis Group]
Sunday, March 08, 2009
"Safe" Dividend Aristocrats
Dividend Aristocrats are S&P 500 issues that have either paid increasing annual cash dividends for the past ten years or increased cash dividends for 20 of the last 25 years.
S&P also identifies those that have increased their dividends for 25 straight years. And have earnings at least twice their dividend rate.
The following are those that qualify in all categories.
3M
Abbott Laboratories
Aflac
Archer-Daniel Midland
Bard (C.R.) Inc
Becton Dickinson
Chubb Corp
Dover Corp
Emerson Electric
Exxon Mobil
Family Dollar
Grainger (W.W.) Inc
Johnson & Johnson
Lowe's Companies
McGraw-Hill
Pepsico
Procter & Gamble
Questar
Sherwin-Williams
Sigma-Aldrich
State Street Corp
Target
VF Corp
Walgreen
Wal-Mart
[via chucks_angels]
S&P also identifies those that have increased their dividends for 25 straight years. And have earnings at least twice their dividend rate.
The following are those that qualify in all categories.
3M
Abbott Laboratories
Aflac
Archer-Daniel Midland
Bard (C.R.) Inc
Becton Dickinson
Chubb Corp
Dover Corp
Emerson Electric
Exxon Mobil
Family Dollar
Grainger (W.W.) Inc
Johnson & Johnson
Lowe's Companies
McGraw-Hill
Pepsico
Procter & Gamble
Questar
Sherwin-Williams
Sigma-Aldrich
State Street Corp
Target
VF Corp
Walgreen
Wal-Mart
[via chucks_angels]
Four Bears (update)
As of this writing, the current bear market has surpassed the 1973-1974 (oil crisis) bear market and the tech crash of 2000-2002 in magnitude. Those lost 48% and 49% peak to trough respectively. The current bear has lost 56% so far.
It has now matched almost exactly the 1929-1932 crash 17 months into the bear. But the 1929-1932 crash went on to last a total of 34 months and lost a total of 89%.
[chart via chucks_angels]
It has now matched almost exactly the 1929-1932 crash 17 months into the bear. But the 1929-1932 crash went on to last a total of 34 months and lost a total of 89%.
[chart via chucks_angels]
Barron's calls the bottom
One of these days, one of these guys will correctly call the bottom. It's Andrew Bary's turn in the Barron's cover story.
* * *
The brutal bear market of the past year has affected all industry groups and nearly every stock. All 30 members of the Dow Jones industrials are in the red for the past 12 months and just one stock, IBM (IBM), is in the black for 2009. Within the S&P 500, just eight stocks are higher in the past year, led by Family Dollar Stores (FDO), which has gained 56%. The worst performer in the S&P 500: AIG (AIG), which is off 99%, to just 35 cents.
Sure, stocks could slide much further -- but they probably won't. By most measures, they are downright cheap.
AFTER THE STUNNING DECLINE OF THE PAST FIVE months that has left the Dow Jones Industrial Average and Standard & Poor's 500 Index more than 50% below their 2007 highs, a lot of investors are worried stocks could fall much further.
In a worst-case scenario, based on current earnings estimates and the most pessimistic reading of market history, the Dow could fall a further 25%, to 5000, and the S&P could drop to about 500. The Dow industrials closed at 6,627 Friday, and the S&P 500 ended at 683, both down 24% so far this year and both at 12-year lows.
The lousy economy is the main factor, but stocks haven't been helped by Obama administration proposals that would hurt a range of companies, including drug makers, managed-care firms and student-loan providers. Investors also haven't liked the president's plan to raise taxes on the wealthy. It doesn't help that the Street is calling this an "Obama bear market" and that some investors are looking to "Obama-proof" their portfolios, avoiding sectors targeted by the president.
However you feel about President Obama, he got at least one thing right last week: He said stocks are cheap for long-term investors. Our research shows that to be true, whether you look at stocks relative to book value, U.S. economic output, gold or a normal level of corporate earnings.
These factors, plus the huge amounts of cash now sitting on the sidelines, suggest that, barring a global economic and financial meltdown, the Dow should bottom well above 5,000 and the S&P Index well above 500.
It is tough to predict this year's corporate profits because of the deepening global downturn and potential likelihood of little or no earnings in the U.S. financial sector. Citigroup financial economist Steve Wieting sees $51 in operating profits for the companies in the S&P 500 this year before big write-downs, down from $66 in 2008. Based on his estimate, which is in line with the current Wall Street consensus, the S&P 500 is valued at more than 13 times projected 2009 profits.
THAT PRICE/EARNINGS MULTIPLE is in line with the lowest levels hit during most bear markets over the past 80 years. Key exceptions were 1974, 1982 and 1987, when the S&P 500 was valued at about 10 times forward earnings, according to Goldman Sachs. If stocks do get to a P/E of 10, the S&P 500 could drop as low as 500, a decline of more than 25% from current levels, and the Dow Jones Industrial Average could drop toward 5000.
This scenario seems extreme, however, because prior market lows occurred during periods of higher inflation and interest rates, decreasing the relative appeal of stocks. Treasury yields, for instance, were in the double digits in 1982, against 2% or 3% now.
* * *
The brutal bear market of the past year has affected all industry groups and nearly every stock. All 30 members of the Dow Jones industrials are in the red for the past 12 months and just one stock, IBM (IBM), is in the black for 2009. Within the S&P 500, just eight stocks are higher in the past year, led by Family Dollar Stores (FDO), which has gained 56%. The worst performer in the S&P 500: AIG (AIG), which is off 99%, to just 35 cents.
Sure, stocks could slide much further -- but they probably won't. By most measures, they are downright cheap.
AFTER THE STUNNING DECLINE OF THE PAST FIVE months that has left the Dow Jones Industrial Average and Standard & Poor's 500 Index more than 50% below their 2007 highs, a lot of investors are worried stocks could fall much further.
In a worst-case scenario, based on current earnings estimates and the most pessimistic reading of market history, the Dow could fall a further 25%, to 5000, and the S&P could drop to about 500. The Dow industrials closed at 6,627 Friday, and the S&P 500 ended at 683, both down 24% so far this year and both at 12-year lows.
The lousy economy is the main factor, but stocks haven't been helped by Obama administration proposals that would hurt a range of companies, including drug makers, managed-care firms and student-loan providers. Investors also haven't liked the president's plan to raise taxes on the wealthy. It doesn't help that the Street is calling this an "Obama bear market" and that some investors are looking to "Obama-proof" their portfolios, avoiding sectors targeted by the president.
However you feel about President Obama, he got at least one thing right last week: He said stocks are cheap for long-term investors. Our research shows that to be true, whether you look at stocks relative to book value, U.S. economic output, gold or a normal level of corporate earnings.
These factors, plus the huge amounts of cash now sitting on the sidelines, suggest that, barring a global economic and financial meltdown, the Dow should bottom well above 5,000 and the S&P Index well above 500.
It is tough to predict this year's corporate profits because of the deepening global downturn and potential likelihood of little or no earnings in the U.S. financial sector. Citigroup financial economist Steve Wieting sees $51 in operating profits for the companies in the S&P 500 this year before big write-downs, down from $66 in 2008. Based on his estimate, which is in line with the current Wall Street consensus, the S&P 500 is valued at more than 13 times projected 2009 profits.
THAT PRICE/EARNINGS MULTIPLE is in line with the lowest levels hit during most bear markets over the past 80 years. Key exceptions were 1974, 1982 and 1987, when the S&P 500 was valued at about 10 times forward earnings, according to Goldman Sachs. If stocks do get to a P/E of 10, the S&P 500 could drop as low as 500, a decline of more than 25% from current levels, and the Dow Jones Industrial Average could drop toward 5000.
This scenario seems extreme, however, because prior market lows occurred during periods of higher inflation and interest rates, decreasing the relative appeal of stocks. Treasury yields, for instance, were in the double digits in 1982, against 2% or 3% now.
Saturday, March 07, 2009
undervalued, cheap, (and going down?)
I'm looking through some old mail in my deleted folder and came across this Morningstar article dated 10/8/08 titled The Market's Most Undervalued Stocks (These five high-quality companies are truly cheap).
These were stocks with Morningstar ratings of 5 stars and trading at less than half of their fair value estimate.
The stocks named were USG, UNH, COP, NWS, EXPE.
Let's see how they have done.
Which tells me just because it's good and cheap doesn't mean it won't go down a lot. (Now let's see how they do on the upside -- if we ever get an upside one of these days.)
* * *
Yet Morningstar maintains that (Graham-style) value investing protects the downside. (Does that mean Morningstar doesn't practice value investing?)
These were stocks with Morningstar ratings of 5 stars and trading at less than half of their fair value estimate.
The stocks named were USG, UNH, COP, NWS, EXPE.
Let's see how they have done.
10/8/08 3/6/08 loss%The Vanguard 500 (I chose this instead of the S&P 500 because Yahoo has an adjusted close which accounts for dividends) has gone from 89.96 to 63.96 or a loss of 29%. So four out of the five stocks have underperformed the index.
USG 19.85 4.29 78%
UNH 19.20 17.90 7%
COP 60.77 35.36 42%
NWS 10.06 6.00 40%
EXPE 12.96 6.47 50%
Which tells me just because it's good and cheap doesn't mean it won't go down a lot. (Now let's see how they do on the upside -- if we ever get an upside one of these days.)
* * *
Yet Morningstar maintains that (Graham-style) value investing protects the downside. (Does that mean Morningstar doesn't practice value investing?)
Thursday, March 05, 2009
World's safest banks
International banks dominate the rankings in a new report on the safest financial institutions worldwide, with San Francisco's Wells Fargo & Co. coming in as the safest U.S. bank.
According to Global Finance , the analysis of the “World’s 50 Safest Banks” shows the effects of the subprime mortgage meltdown and credit crisis brought on by large Wall Street players. European banks now dominate the rankings, with only four U.S. banks among the listing.
Wells Fargo (NYSE: WFC) — which recently merged with Wachovia Corp. —was ranked No. 21, followed by US Bancorp (NYSE: USB) at No. 26, The Bank of New York Mellon (NYSE: BK) at No. 35 and JPMorgan Chase & Co. (NYSE: JPM) — which has merged with Washington Mutual Inc. — at No. 47.
Four German banks were ranked in the Top 10, with state-owned development bank KfW Bankengruppe at No. 1.
According to Global Finance , the analysis of the “World’s 50 Safest Banks” shows the effects of the subprime mortgage meltdown and credit crisis brought on by large Wall Street players. European banks now dominate the rankings, with only four U.S. banks among the listing.
Wells Fargo (NYSE: WFC) — which recently merged with Wachovia Corp. —was ranked No. 21, followed by US Bancorp (NYSE: USB) at No. 26, The Bank of New York Mellon (NYSE: BK) at No. 35 and JPMorgan Chase & Co. (NYSE: JPM) — which has merged with Washington Mutual Inc. — at No. 47.
Four German banks were ranked in the Top 10, with state-owned development bank KfW Bankengruppe at No. 1.
Tuesday, March 03, 2009
money on the sidelines
At the end of November 2008, money market fund assets surpassed stock fund assets for the first time in at least 11 years. This situation came about as a result of equity market declines and high levels of risk aversion. There have been two months of data released since then, with January data (released last Thursday) demonstrating that high money market and cash levels remain. Total stock fund assets are now at their lowest point since September of 2003, as continued declines in equities erode the total value of holdings. Money market fund assets continued to grow, making new highs as investors continue to put money in the safest of assets. This comes as treasury yields hang around historically low levels. Another indicator of continued risk aversion is the portion of stock fund assets that are in liquid assets or cash. Liquid assets in mutual funds as a percentage of total assets jumped to new highs in January to 5.8%, the highest since March 2001, suggesting that money managers are hoarding cash while equity markets trade at the lowest levels seen since the late 90's.
[via iluvbabyb]
* * *
[I couldn't find a link to the above (it's supposed to have come from briefing.com), but here's some supporting evidence that money fund assets are high]
Many investors are peculiar in the sense that they have most of their money in equities when markets are near tops but have little exposure when markets are at their lows. With the S&P 500 having declined substantially in 2008, there is currently a huge amount of money waiting on the sidelines. US Money Market Funds assets recently increased to US$3.7 trillion (as at 26 November 2008), which is 35% of the total US market capitalisation.
Historically, the US Money Market Assets to US Equity Market Capitalisation proportion has stood at 15%, intuitively increasing when equity markets suffer sharp losses (See Chart 3). This ratio recently reached a new historical high of 39.2% on 19 November 2008, not only due to the decline in the equity market but also due to new inflows of cash into money market instruments. In comparison, the ratio spiked to 26% at the last market bottom in October 2002.
* * *
[but the flow out of stock funds may be starting to reverse???]
Investors in stock mutual funds added modestly to their portfolios in January, reversing seven straight months of net redemptions, according to data released today by Strategic Insight Mutual Fund Research and Consulting LLC of New York.
Despite sharply falling stock prices last month, stock fund positive flows reached $7 billion, according to estimates from Strategic Insight’s Simfund database. Inflows were experienced in U.S. stock funds ($5 billion) and international equity funds ($2 billion).
Also during January, mutual fund investors purchased $21 billion of taxable bond funds, with all key sectors showing gains, and more than $3 billion of tax-free bond funds.
Money market mutual funds benefited from more than $64 billion of net inflows, as money fund assets rose to another record of almost $4 trillion.
* * *
[4/22/09 from E*Trade] Not surprisingly, the long and painful bear market has pushed a lot of money to the sidelines. At the end of 2008, cash in money markets and bank accounts had reached nearly $9 trillion or 74% of the value of all publicly traded stocks in the U.S.!
That was the highest such ratio since 1990 — and it would only take a portion of that money moving back into the market to have a powerful effect on stock prices.
[via iluvbabyb]
* * *
[I couldn't find a link to the above (it's supposed to have come from briefing.com), but here's some supporting evidence that money fund assets are high]
Many investors are peculiar in the sense that they have most of their money in equities when markets are near tops but have little exposure when markets are at their lows. With the S&P 500 having declined substantially in 2008, there is currently a huge amount of money waiting on the sidelines. US Money Market Funds assets recently increased to US$3.7 trillion (as at 26 November 2008), which is 35% of the total US market capitalisation.
Historically, the US Money Market Assets to US Equity Market Capitalisation proportion has stood at 15%, intuitively increasing when equity markets suffer sharp losses (See Chart 3). This ratio recently reached a new historical high of 39.2% on 19 November 2008, not only due to the decline in the equity market but also due to new inflows of cash into money market instruments. In comparison, the ratio spiked to 26% at the last market bottom in October 2002.
* * *
[but the flow out of stock funds may be starting to reverse???]
Investors in stock mutual funds added modestly to their portfolios in January, reversing seven straight months of net redemptions, according to data released today by Strategic Insight Mutual Fund Research and Consulting LLC of New York.
Despite sharply falling stock prices last month, stock fund positive flows reached $7 billion, according to estimates from Strategic Insight’s Simfund database. Inflows were experienced in U.S. stock funds ($5 billion) and international equity funds ($2 billion).
Also during January, mutual fund investors purchased $21 billion of taxable bond funds, with all key sectors showing gains, and more than $3 billion of tax-free bond funds.
Money market mutual funds benefited from more than $64 billion of net inflows, as money fund assets rose to another record of almost $4 trillion.
* * *
[4/22/09 from E*Trade] Not surprisingly, the long and painful bear market has pushed a lot of money to the sidelines. At the end of 2008, cash in money markets and bank accounts had reached nearly $9 trillion or 74% of the value of all publicly traded stocks in the U.S.!
That was the highest such ratio since 1990 — and it would only take a portion of that money moving back into the market to have a powerful effect on stock prices.
The formula that killed Wall Street
A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
[via aquarian]
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
[via aquarian]
Has the market bottomed?
These three Zacks guys didn't think so last week (2/25) (and they were right).
They were looking for something like a 20% drop from 7500 which would mean like Dow 6000.
They were looking for something like a 20% drop from 7500 which would mean like Dow 6000.
a depression with a small d?
It may not be another Depression, but it might be another depression
By TOM RAUM and DANIEL WAGNER , Associated Press
WASHINGTON - A Depression doesn't have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase "d."
And it may be happening now.
The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn't been one since the epic hardship of the 1930s.
But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way.
"We're probably in a depression now. But it's not going to be acknowledged until years go by. Because you have to see it behind you," said Peter Morici, a business professor at the University of Maryland.
No one disputes that the current economic downturn qualifies as a recession. Recessions have two handy definitions, both in effect now — two straight quarters of economic contraction, or when the National Bureau of Economic Research makes the call.
Declaring a depression is much trickier.
By one definition, it's a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn't qualify yet: 15 months old and 7.6 percent unemployment. But both unemployment and the 6.2 percent contraction for late last year could easily worsen.
Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that's happening now.
Morici says a depression is a recession that "does not self-correct" because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.
Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week.
The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust.
And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression.
... The current downturn has many of the 1930s characteristics, including being primed by big stock market and real estate booms that turned to busts, said Allen Sinai, founder of Boston-area consulting firm Decision Economics.
Policymakers and economists note there are safeguards in place that weren't there in the 1930s: deposit insurance, unemployment insurance and an ability by the government to hurl trillions of dollars at the problem, even if it means printing money.
Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss.
"When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used," he said. "People also use 'downward blip.' Alan Greenspan once called it a 'sideways waffle.'"
...Today's economic indicators don't project a depression. But Banerji is cautious. Economic data in 1929 didn't show that the stock market crash was about to lead to years of economic misery, either.
"It did not look like the kind of plunge that would be a depression until after the recession began," Banerji said. "The Great Depression didn't start out as a depression. It started out as a recession."
The depression that consumed most of the 1870s and followed something called the Panic of 1873 makes a better comparison to what's happening now, said Scott Nelson, a history professor at the College of William and Mary.
Financial markets had become centrally located by the 1870s, notably in London. And nations had not yet enacted the protectionist trade policies that were in place by the 1930s.
The results were not exactly promising. Gangs of orphans roamed city streets as men moved west to pursue cattle industry jobs. Widows struggled to make money by serving unlicensed liquor. Thousands of workers, many Civil War veterans, became transients.
The downturn lasted more than five years, according to the economic research bureau — four times as long as what the United States has endured so far in this downturn.
Today's recession is already longer than all but two of the downturns since World War II. But for now, public officials are being extremely cautious about the D-word. Alfred Kahn, a top economic adviser to President Carter, learned that lesson in 1978 when he warned that rampaging inflation might lead to a recession or even "deep depression."
When presidential aides asked him to use another term, Kahn promised he'd come up with something completely different.
"We're in danger," he said, "of having the worst banana in 45 years."
[via investwise]
By TOM RAUM and DANIEL WAGNER , Associated Press
WASHINGTON - A Depression doesn't have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase "d."
And it may be happening now.
The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn't been one since the epic hardship of the 1930s.
But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way.
"We're probably in a depression now. But it's not going to be acknowledged until years go by. Because you have to see it behind you," said Peter Morici, a business professor at the University of Maryland.
No one disputes that the current economic downturn qualifies as a recession. Recessions have two handy definitions, both in effect now — two straight quarters of economic contraction, or when the National Bureau of Economic Research makes the call.
Declaring a depression is much trickier.
By one definition, it's a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn't qualify yet: 15 months old and 7.6 percent unemployment. But both unemployment and the 6.2 percent contraction for late last year could easily worsen.
Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that's happening now.
Morici says a depression is a recession that "does not self-correct" because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.
Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week.
The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust.
And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression.
... The current downturn has many of the 1930s characteristics, including being primed by big stock market and real estate booms that turned to busts, said Allen Sinai, founder of Boston-area consulting firm Decision Economics.
Policymakers and economists note there are safeguards in place that weren't there in the 1930s: deposit insurance, unemployment insurance and an ability by the government to hurl trillions of dollars at the problem, even if it means printing money.
Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss.
"When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used," he said. "People also use 'downward blip.' Alan Greenspan once called it a 'sideways waffle.'"
...Today's economic indicators don't project a depression. But Banerji is cautious. Economic data in 1929 didn't show that the stock market crash was about to lead to years of economic misery, either.
"It did not look like the kind of plunge that would be a depression until after the recession began," Banerji said. "The Great Depression didn't start out as a depression. It started out as a recession."
The depression that consumed most of the 1870s and followed something called the Panic of 1873 makes a better comparison to what's happening now, said Scott Nelson, a history professor at the College of William and Mary.
Financial markets had become centrally located by the 1870s, notably in London. And nations had not yet enacted the protectionist trade policies that were in place by the 1930s.
The results were not exactly promising. Gangs of orphans roamed city streets as men moved west to pursue cattle industry jobs. Widows struggled to make money by serving unlicensed liquor. Thousands of workers, many Civil War veterans, became transients.
The downturn lasted more than five years, according to the economic research bureau — four times as long as what the United States has endured so far in this downturn.
Today's recession is already longer than all but two of the downturns since World War II. But for now, public officials are being extremely cautious about the D-word. Alfred Kahn, a top economic adviser to President Carter, learned that lesson in 1978 when he warned that rampaging inflation might lead to a recession or even "deep depression."
When presidential aides asked him to use another term, Kahn promised he'd come up with something completely different.
"We're in danger," he said, "of having the worst banana in 45 years."
[via investwise]
Worst GDP Quarters
the stock market is taking it on the chin yet again, with the major averages taking out their November 20, 2008 lows. The Dow is now below the “psychologically important” 7,000 level, which is unleashing many headlines noting that it’s been cut in half since its high.
Since last fall, when there was a lot of hope expressed that the November lows would hold, we’ve reminded investors that market bottoms are processes over time, not moments in time. We still think this process will be less V-bottom like and probably more like what we experienced as the last bear market was ending. Recall the market sold off into the July 2002 lows, then rallied; then sold off again into the ultimate October 2002 lows, then rallied; and then again sold off into the pre-Iraq war lows of March 2003. It was only then that the market found its footing.
The pressure on the market currently feels a lot like 2002-2003, when every speckle of hope was dashed and the cycle of negativity continued. Many technical analysts kissed hope good-bye when the Dow broke 7,200 and the S&P 500 broke 740. Fundamental analysis isn’t helping either, of course, as the news is uncertain at best and dire at worst.
But history is full of examples of the stock market finding its footing while the economic news is most bleak. In fact, check out the table below, which ranks the worst 10 single quarters for GDP in history and shows how the stock market performed in the next year.
10 Worst GDP Quarters
Date (of Quarter) S&P 500 One Year Later
Source: Bureau of Economic Analysis, FactSet.
Note that in every case—even though GDP was at its crescendo low for the cycle—the stock market rebounded by double-digit percentages each time, with an average gain of 25%. What we don’t know, of course, is whether the fourth quarter’s -6.2% GDP will be the ultimate low for the economy, but history provides some reminders about the discounting nature of the stock market.
Since last fall, when there was a lot of hope expressed that the November lows would hold, we’ve reminded investors that market bottoms are processes over time, not moments in time. We still think this process will be less V-bottom like and probably more like what we experienced as the last bear market was ending. Recall the market sold off into the July 2002 lows, then rallied; then sold off again into the ultimate October 2002 lows, then rallied; and then again sold off into the pre-Iraq war lows of March 2003. It was only then that the market found its footing.
The pressure on the market currently feels a lot like 2002-2003, when every speckle of hope was dashed and the cycle of negativity continued. Many technical analysts kissed hope good-bye when the Dow broke 7,200 and the S&P 500 broke 740. Fundamental analysis isn’t helping either, of course, as the news is uncertain at best and dire at worst.
But history is full of examples of the stock market finding its footing while the economic news is most bleak. In fact, check out the table below, which ranks the worst 10 single quarters for GDP in history and shows how the stock market performed in the next year.
10 Worst GDP Quarters
Date (of Quarter) S&P 500 One Year Later
3/31/1958 32%Average 25%
6/30/1980 15%
3/31/1982 37%
12/31/1953 45%
3/31/1949 15%
12/31/1960 23%
12/31/1981 15%
3/31/1975 24%
12/31/1970 11%
12/31/1957 38%
Source: Bureau of Economic Analysis, FactSet.
Note that in every case—even though GDP was at its crescendo low for the cycle—the stock market rebounded by double-digit percentages each time, with an average gain of 25%. What we don’t know, of course, is whether the fourth quarter’s -6.2% GDP will be the ultimate low for the economy, but history provides some reminders about the discounting nature of the stock market.
Monday, March 02, 2009
Dow dives below 7000
A relentless sell-off in the stock market Monday blew through barriers that would have been unthinkable just weeks ago, and investors warned there was no reason to believe buyers will return anytime soon.
The Dow Jones industrial average plummeted below 7,000 at the opening bell and kept driving lower all day, finishing at 6,763 -- a loss of nearly 300 points. Each of the 30 stocks in the index lost value for the day.
And the Standard & Poor's 500 stock index, a much broader measure of the market's health, dipped below the psychologically important 700 level before closing just above it. It hadn't traded below 700 since October 1996.
Investors were worried anew about the stability of the financial system after insurer American International Group posted a staggering $62 billion loss for the fourth quarter, the biggest in U.S. corporate history -- and accepted an expanded bailout from the government.
But beyond daily headlines, Wall Street seems to have given up the search for a reason to believe that the worst is over and the time is ripe to buy again.
"As bad as things are, they can still get worse, and get a lot worse," said Bill Strazzullo, chief market strategist for Bell Curve Trading, who said he believes the Dow might fall to 5,000 and the S&P to 500.
The Dow's descent has been breathtaking. It took only 14 trading sessions for the average to fall from above 8,000 to below 7,000. For the year, the Dow has lost 23 percent of its value.
Its last close below 7,000 was May 1, 1997 -- a time when the market was barreling to one record high after another because of the boom in technology stocks, but often suffered big drops as investors worried about inflation and rising interest rates.
This time around, Wall Street analysts seem to believe that a stock market recovery will first require signs of health among financial companies, and on Monday those signs seemed further away than ever.
The Dow Jones industrial average plummeted below 7,000 at the opening bell and kept driving lower all day, finishing at 6,763 -- a loss of nearly 300 points. Each of the 30 stocks in the index lost value for the day.
And the Standard & Poor's 500 stock index, a much broader measure of the market's health, dipped below the psychologically important 700 level before closing just above it. It hadn't traded below 700 since October 1996.
Investors were worried anew about the stability of the financial system after insurer American International Group posted a staggering $62 billion loss for the fourth quarter, the biggest in U.S. corporate history -- and accepted an expanded bailout from the government.
But beyond daily headlines, Wall Street seems to have given up the search for a reason to believe that the worst is over and the time is ripe to buy again.
"As bad as things are, they can still get worse, and get a lot worse," said Bill Strazzullo, chief market strategist for Bell Curve Trading, who said he believes the Dow might fall to 5,000 and the S&P to 500.
The Dow's descent has been breathtaking. It took only 14 trading sessions for the average to fall from above 8,000 to below 7,000. For the year, the Dow has lost 23 percent of its value.
Its last close below 7,000 was May 1, 1997 -- a time when the market was barreling to one record high after another because of the boom in technology stocks, but often suffered big drops as investors worried about inflation and rising interest rates.
This time around, Wall Street analysts seem to believe that a stock market recovery will first require signs of health among financial companies, and on Monday those signs seemed further away than ever.
Saturday, February 28, 2009
Warren Buffett vs. Prem Watsa
Twenty years junior to Warren Buffett, our Investment Guru of Year 2008 Prem Watsa is known as the “Warren Buffett of the North”, for good reasons, as you will see.
Just as Warren Buffett built Berkshire Hathaway (BRK-A), Prem Watsa built his Fairfax Financial Holding Limited (FFH) empire on the foundation of a collection of excellent insurance subsidiaries, except he cut through the deviations that Warren Buffett experienced during his earlier year -- No time for beating the bushes in textile or retail businesses; if Warren Buffett tried and failed, no need for Prem Watsa to reinvent the wheel.
If short term performance is all that matters, Prem Watsa should pride himself for outshining Warren Buffett considerably in 2008. On February 19, FFH reported best earnings in the company’s twenty-three-year history. Fourth quarter 2008 earning was $346.8 million and annual earning was $1,473.8 million for the 2008 year ($19.62 and $79.53 per diluted share, respectively). Company book value per share reached $278.28 and the company has more than $1.5 billion in cash and marketable at the holding company level.
* * *
So what do Warren Buffett and Prem Watsa have in common in when it comes to stock investing?
First of all, both have a highly concentrated portfolio.
According to GuruFocus Data, As of December 31, 2008, Warren Buffett has a stock portfolio of $52 billion, allocated among 41 stocks. For Prem Watsa, it is $5.2 billion among 44 stocks. Compared to some of other Gurus we follow, such as Kenneth Fisher who owns 632 stocks, or even the 500 companies that S&P 500 index includes, Buffett and Watsa are very concentrated.
Looking closely, their portfolios are more concentrated than these number suggested. The following table lists the top 10 holdings of Warren Buffett and Prem Watsa respectively. Each concentrates more than 85% in their top 10 holding.
Among Watsa's holdings are JNJ (2), PFE (3), DELL (5), INTC (6), GE (7).
* * *
There are twelve (12) stocks that are owned by both Gurus, in particular WFC, KFT, JNJ. The others are BNI, GE, USB, WSC, WMT, USG, GCI, SNY, GSK.
Just as Warren Buffett built Berkshire Hathaway (BRK-A), Prem Watsa built his Fairfax Financial Holding Limited (FFH) empire on the foundation of a collection of excellent insurance subsidiaries, except he cut through the deviations that Warren Buffett experienced during his earlier year -- No time for beating the bushes in textile or retail businesses; if Warren Buffett tried and failed, no need for Prem Watsa to reinvent the wheel.
If short term performance is all that matters, Prem Watsa should pride himself for outshining Warren Buffett considerably in 2008. On February 19, FFH reported best earnings in the company’s twenty-three-year history. Fourth quarter 2008 earning was $346.8 million and annual earning was $1,473.8 million for the 2008 year ($19.62 and $79.53 per diluted share, respectively). Company book value per share reached $278.28 and the company has more than $1.5 billion in cash and marketable at the holding company level.
* * *
So what do Warren Buffett and Prem Watsa have in common in when it comes to stock investing?
First of all, both have a highly concentrated portfolio.
According to GuruFocus Data, As of December 31, 2008, Warren Buffett has a stock portfolio of $52 billion, allocated among 41 stocks. For Prem Watsa, it is $5.2 billion among 44 stocks. Compared to some of other Gurus we follow, such as Kenneth Fisher who owns 632 stocks, or even the 500 companies that S&P 500 index includes, Buffett and Watsa are very concentrated.
Looking closely, their portfolios are more concentrated than these number suggested. The following table lists the top 10 holdings of Warren Buffett and Prem Watsa respectively. Each concentrates more than 85% in their top 10 holding.
Among Watsa's holdings are JNJ (2), PFE (3), DELL (5), INTC (6), GE (7).
* * *
There are twelve (12) stocks that are owned by both Gurus, in particular WFC, KFT, JNJ. The others are BNI, GE, USB, WSC, WMT, USG, GCI, SNY, GSK.
Tuesday, February 24, 2009
Shiller's P/E below fair value
Yale professor Robert J. Shiller, the author of "Irrational Exuberance," created one of the most useful and predictive measures of stock-market valuation: the cyclically-adjusted price-earnings ratio (CAPE).
As Professor Shiller explains here, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market's value regardless of where we are in the business cycle.
Professor Shiller's P/E has finally dropped below fair value for the first time in 15 years. The market's cyclically adjusted PE is now under 14X (compared to a long-term average of about 15X).
So is Prof. Shiller going all-in? No. He's waiting until the P/E drops below 10X, which it has done at major market lows in the past.
[via paraguay2es]
As Professor Shiller explains here, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market's value regardless of where we are in the business cycle.
Professor Shiller's P/E has finally dropped below fair value for the first time in 15 years. The market's cyclically adjusted PE is now under 14X (compared to a long-term average of about 15X).
So is Prof. Shiller going all-in? No. He's waiting until the P/E drops below 10X, which it has done at major market lows in the past.
[via paraguay2es]
Japan's wipeout
Japan's painful hangover from its own version of the global financial crisis is a grim lesson for those who hope for a quick recovery from the present one. Japan is the only major industrialized country since the Great Crash of 1929 to go through a crisis of a similar scale. Like the United States and other world economies today, it suffered a market meltdown, a collapse in consumer confidence and a crisis in its banking system.
It has never fully recovered. After being knocked flat on its back by the bursting of a stock-market and real-estate bubble in the early 1990s, it stayed there for the rest of what became known as its lost decade.” It bounced back slightly after the turn of the century, only to head into trouble again as the global economy weakened. In all, the aftereffects of its crisis have lasted nearly two decades.
Japan's crisis seemed to hit like a lightning bolt from a clear blue sky. In the late 1980s, Japan was on top of the world. Its “miracle economy” had grown by an average of 10 per cent in the 1960s, 5 per cent in the 1970s and 4 per cent in the 1980s, putting its Western rivals to shame. Companies such as Honda, Canon and Sony were flooding the globe with Japanese-made cars, cameras and television sets. Japanese companies bought prized overseas assets like New York's Rockefeller Center and California's Pebble Beach golf course. In books such as Ezra Vogel's Japan as Number One, analysts predicted that Japan's tight-knit social fabric, disciplined business culture, hard-work habit and government-directed growth strategy gave it an irreversible edge over the tired economies of the West.
But trouble was brewing. Officials deregulated the financial markets and lowered interest rates, the same combination that would lead to the credit fiasco in the United States. With money easy to borrow, companies invested heavily in property and stocks, sending prices soaring. The Nikkei stock-market index more than tripled from 1985 to 1989. A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.). It was said that the property around the sprawling Imperial Palace was worth more than the whole state of California.
When the bubble finally burst, it was a wipeout. The Nikkei dropped by two-thirds over the next two years. Commercial land values in the big cities fell by 80 per cent between 1991 and 2000. They never returned to their bubble levels. Neither did stocks. Today, the Nikkei stands at one-fifth of its 1989 peak.
[via kemcheca]
It has never fully recovered. After being knocked flat on its back by the bursting of a stock-market and real-estate bubble in the early 1990s, it stayed there for the rest of what became known as its lost decade.” It bounced back slightly after the turn of the century, only to head into trouble again as the global economy weakened. In all, the aftereffects of its crisis have lasted nearly two decades.
Japan's crisis seemed to hit like a lightning bolt from a clear blue sky. In the late 1980s, Japan was on top of the world. Its “miracle economy” had grown by an average of 10 per cent in the 1960s, 5 per cent in the 1970s and 4 per cent in the 1980s, putting its Western rivals to shame. Companies such as Honda, Canon and Sony were flooding the globe with Japanese-made cars, cameras and television sets. Japanese companies bought prized overseas assets like New York's Rockefeller Center and California's Pebble Beach golf course. In books such as Ezra Vogel's Japan as Number One, analysts predicted that Japan's tight-knit social fabric, disciplined business culture, hard-work habit and government-directed growth strategy gave it an irreversible edge over the tired economies of the West.
But trouble was brewing. Officials deregulated the financial markets and lowered interest rates, the same combination that would lead to the credit fiasco in the United States. With money easy to borrow, companies invested heavily in property and stocks, sending prices soaring. The Nikkei stock-market index more than tripled from 1985 to 1989. A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.). It was said that the property around the sprawling Imperial Palace was worth more than the whole state of California.
When the bubble finally burst, it was a wipeout. The Nikkei dropped by two-thirds over the next two years. Commercial land values in the big cities fell by 80 per cent between 1991 and 2000. They never returned to their bubble levels. Neither did stocks. Today, the Nikkei stands at one-fifth of its 1989 peak.
[via kemcheca]
a lost generation?
The legacy of common stocks as the cause of so much misery in the 1930s has been made all the more emphatic by historians who have felt compelled to finish the story by reminding readers that it took the once mighty Dow Jones industrial average until 1954 — a lost generation it would seem — to claw its way back to the summit reached in 1929. The image is teeming with innuendo.
The implication is that those who acquiesced to their greedy impulses in the late ’20s, which by all appearances included just about everybody, served penance for a quarter of a century thereafter.
To be sure, most who speculated and lost never purchased another stock for the rest of their lives. Even today, the universal mental image of the era begins with the wealth-destroying stock market crash, followed by the demoralizing and seemingly endless economic depression—and culminating with the manifold uncertainties of World War II.
Fear and remorse sounded the death knell for investment in what everyone had come to believe was the riskiest of all asset classes: common stocks. That perception stubbornly clings to the collective psyche as one of the great investment myths when talk turns to the Depression and its aftermath.
Facts Tell a Dramatically Different Story
Using annual data from the beginning of 1930 until the end of 1954, here are the plain facts, presented dispassionately. For openers, if one includes reinvested dividends, as clearly one should, $1 invested on January 1, 1930, in the S&P 500 was made whole during 1936.
That’s less than seven years to break even, not the much-ballyhooed quarter of a century.
As for the so-called “lost generation” from January 1, 1930, to December 31, 1954, the average annual total return (including dividends) for the more broadly based S&P 500 was 8.1%. Starting three years later in the depths of the Depression, on January 1, 1933, the average annual total return jumped to 14% for the 22 years. Sadly, the greater loss for a generation was opportunity, not money.
-- Frank Martin, Martin Capital Management, 2008 Annual Report [via lethean46]
see also http://stockmarketeers.blogspot.com/2009/04/4-12-sounds-better-than-25.html
The implication is that those who acquiesced to their greedy impulses in the late ’20s, which by all appearances included just about everybody, served penance for a quarter of a century thereafter.
To be sure, most who speculated and lost never purchased another stock for the rest of their lives. Even today, the universal mental image of the era begins with the wealth-destroying stock market crash, followed by the demoralizing and seemingly endless economic depression—and culminating with the manifold uncertainties of World War II.
Fear and remorse sounded the death knell for investment in what everyone had come to believe was the riskiest of all asset classes: common stocks. That perception stubbornly clings to the collective psyche as one of the great investment myths when talk turns to the Depression and its aftermath.
Facts Tell a Dramatically Different Story
Using annual data from the beginning of 1930 until the end of 1954, here are the plain facts, presented dispassionately. For openers, if one includes reinvested dividends, as clearly one should, $1 invested on January 1, 1930, in the S&P 500 was made whole during 1936.
That’s less than seven years to break even, not the much-ballyhooed quarter of a century.
As for the so-called “lost generation” from January 1, 1930, to December 31, 1954, the average annual total return (including dividends) for the more broadly based S&P 500 was 8.1%. Starting three years later in the depths of the Depression, on January 1, 1933, the average annual total return jumped to 14% for the 22 years. Sadly, the greater loss for a generation was opportunity, not money.
-- Frank Martin, Martin Capital Management, 2008 Annual Report [via lethean46]
see also http://stockmarketeers.blogspot.com/2009/04/4-12-sounds-better-than-25.html
Four methodologies for valuing stocks
In the Appendix, Exhibits 2–5,17 you’ll find reasonably understandable explanations of four different methodologies for roughly valuing common stocks in the aggregate—and over many decades.
The first compares the total market value of all U.S.-domiciled companies annually with GDP. It has been featured in a number of earlier annual reports. The second, a model originated by Ben Graham and updated by Bob Shiller, traces the 10-year trailing deflated price-earnings ratio from the early 1920s. The third, Tobin’s q-ratio, compares the market value to the replacement value of corporate assets over the same time frame. Finally, a name out of the past, Edson Gould, attempts to use dividend yield as a measure of valuation. Gould’s work is more relevant to the case made below regarding dividends returning to prominence.
These four different ways of looking at the same thing provided not only similar conclusions as to when major market lows occurred but, with reasonable accuracy, how depressed valuations were on those occasions. Common stocks were most out of favor in the early 1920s, the early ’30s, and the early ’80s, the last episode being the only instance of double-digit inflation and interest rates. If the current malaise continues, and those same low valuations are eventually realized, the S&P 500 could decline farther to somewhere between 400 and 550, the Dow Jones industrial average, 4000 to 5500. From year-end prices the further erosion in total market value could range between 30% and 50%.
Exhibit 2: Market Capitalization-to-GDP
One useful measure of aggregate market value is the market capitalization of all publicly traded stocks as a percentage of gross domestic product (GDP). The November 24, 2008, Barron’s article, from which the graphic at right was taken, reveals that the capitalization of the stock market was 59% of GDP. This is below the long-term average of 79% but well above the lows, which, if achieved, would result in a 550 level on the S&P 500.
Exhibit 3: Shiller’s Graham P/E
When calculating price-to-earnings ratios (P/E), most investors divide the stock’s price by last year’s earnings per share (or estimated current-year earnings per share). Legendary investor Ben Graham, however, suggested that P/E ratios be calculated using the average earnings of the last 7–10 years as the denominator. Such a methodology smooths yearly earnings gyrations and gives the investor a better sense of price paid relative to a business’s earning power over a full business cycle.
As of the end of 2008, the market was trading at a “Graham P/E” of 15.5 times earnings, close to the long-term average of 16.3 times earnings. However, if we swing pendulum-like through the average and reach the lows of about 6.5 times as we did in ’21, ’32, and ’82, the S&P would fall to 350–400. Even a more reasonable downside of 9 times equates to a 500–550 level on the S&P 500.
Exhibit 4: Tobin’s Q-ratio
Tobin’s q-ratio, named for economist James Tobin, is conceptually a measure of the market price of a firm’s assets relative to their replacement value (market value of capital/replacement cost of assets). A q ratio greater than 1 means the market is valuing the firm’s assets for more than it costs to replace them. In other words, you can buy a business for less than you can build that business. The converse is true for q ratios below 1. Among the many versions and approximations of Tobin’s q is the equitymarket q—or the market value of publicly traded equities divided by their book value. The chart above shows that as of December, the market was valuing aggregate net assets at about 75 cents on the dollar, which is approximately the long-term average. However, it’s obviously a very volatile measure. In four previous bear markets (’21, ’32, ’49, and ’82) the q ratio dipped below 0.3, which, if revisited, would equate to a 400–450 level on the S&P 500.
Exhibit 5: Gould’s Senti-meter
Famed technician Edson Gould hypothesized that the market’s dividend yield was a reasonable indicator of investor psychology. His theory was that dividend yields less than 3% signified an optimistic bias in investor sentiment and portended a market decline, while a dividend yield greater than 6% foretold the opposite.
According to Mark Ungewitter, vice president and portfolio manager at Charter Trust Company, if dividend payout ratios remain unchanged, a 6% yield would equate to about 500 on the S&P 500.
[via Lethean]
The first compares the total market value of all U.S.-domiciled companies annually with GDP. It has been featured in a number of earlier annual reports. The second, a model originated by Ben Graham and updated by Bob Shiller, traces the 10-year trailing deflated price-earnings ratio from the early 1920s. The third, Tobin’s q-ratio, compares the market value to the replacement value of corporate assets over the same time frame. Finally, a name out of the past, Edson Gould, attempts to use dividend yield as a measure of valuation. Gould’s work is more relevant to the case made below regarding dividends returning to prominence.
These four different ways of looking at the same thing provided not only similar conclusions as to when major market lows occurred but, with reasonable accuracy, how depressed valuations were on those occasions. Common stocks were most out of favor in the early 1920s, the early ’30s, and the early ’80s, the last episode being the only instance of double-digit inflation and interest rates. If the current malaise continues, and those same low valuations are eventually realized, the S&P 500 could decline farther to somewhere between 400 and 550, the Dow Jones industrial average, 4000 to 5500. From year-end prices the further erosion in total market value could range between 30% and 50%.
Exhibit 2: Market Capitalization-to-GDP
One useful measure of aggregate market value is the market capitalization of all publicly traded stocks as a percentage of gross domestic product (GDP). The November 24, 2008, Barron’s article, from which the graphic at right was taken, reveals that the capitalization of the stock market was 59% of GDP. This is below the long-term average of 79% but well above the lows, which, if achieved, would result in a 550 level on the S&P 500.
Exhibit 3: Shiller’s Graham P/E
When calculating price-to-earnings ratios (P/E), most investors divide the stock’s price by last year’s earnings per share (or estimated current-year earnings per share). Legendary investor Ben Graham, however, suggested that P/E ratios be calculated using the average earnings of the last 7–10 years as the denominator. Such a methodology smooths yearly earnings gyrations and gives the investor a better sense of price paid relative to a business’s earning power over a full business cycle.
As of the end of 2008, the market was trading at a “Graham P/E” of 15.5 times earnings, close to the long-term average of 16.3 times earnings. However, if we swing pendulum-like through the average and reach the lows of about 6.5 times as we did in ’21, ’32, and ’82, the S&P would fall to 350–400. Even a more reasonable downside of 9 times equates to a 500–550 level on the S&P 500.
Exhibit 4: Tobin’s Q-ratio
Tobin’s q-ratio, named for economist James Tobin, is conceptually a measure of the market price of a firm’s assets relative to their replacement value (market value of capital/replacement cost of assets). A q ratio greater than 1 means the market is valuing the firm’s assets for more than it costs to replace them. In other words, you can buy a business for less than you can build that business. The converse is true for q ratios below 1. Among the many versions and approximations of Tobin’s q is the equitymarket q—or the market value of publicly traded equities divided by their book value. The chart above shows that as of December, the market was valuing aggregate net assets at about 75 cents on the dollar, which is approximately the long-term average. However, it’s obviously a very volatile measure. In four previous bear markets (’21, ’32, ’49, and ’82) the q ratio dipped below 0.3, which, if revisited, would equate to a 400–450 level on the S&P 500.
Exhibit 5: Gould’s Senti-meter
Famed technician Edson Gould hypothesized that the market’s dividend yield was a reasonable indicator of investor psychology. His theory was that dividend yields less than 3% signified an optimistic bias in investor sentiment and portended a market decline, while a dividend yield greater than 6% foretold the opposite.
According to Mark Ungewitter, vice president and portfolio manager at Charter Trust Company, if dividend payout ratios remain unchanged, a 6% yield would equate to about 500 on the S&P 500.
[via Lethean]
secular cycles
We can divide the 20th century into 88 twenty-year periods. Though most periods generated positive returns before dividends and transaction costs, half produced compounded returns of less than 4%. Less than 10% generated gains of more than 10%. The table below reflects that higher returns are associated with periods during which the P/E ratio increased, and lower or negative returns resulted from periods when the P/E declined.
There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns. Every period of above-9.6% market returns started with low P/E ratios. EVERY ONE.
Look at the following table from my friend Ed Easterling's web site at www.crestmontresearch.com (which is a wealth of statistical data like this!). You can find many 20-year periods where returns were less than 2-3%.
The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even "normalizing" earnings to an average over multiple years, we are still well above the long-term P/E average.
In terms of valuations, markets cycle up and down over long periods of time. These are called secular cycles. You have bull and bear secular cycles. In a period of a secular bull, the best style of investing is relative value. You are trying to beat the market. These periods start with low valuations, and you can ride the ups and downs with little real worry. Think of 1982 though 1999.
But in secular bear cycles, the best style of investing is absolute returns. Your benchmark is zero. You want positive numbers. It is much harder, and the longer-term returns are probably not going to be as good. But you are growing your capital against the day the secular bull returns. And, as bleak as it looks right now, I can assure you that bull will be back. Some time in the middle of the next decade, maybe a little sooner, we will see the launch of a new secular bull.
[I'm not sure, but I don't believe the above data takes into account dividends. If so, then I'd have to say the study is seriously misleading. -mc]
There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns. Every period of above-9.6% market returns started with low P/E ratios. EVERY ONE.
Look at the following table from my friend Ed Easterling's web site at www.crestmontresearch.com (which is a wealth of statistical data like this!). You can find many 20-year periods where returns were less than 2-3%.
The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even "normalizing" earnings to an average over multiple years, we are still well above the long-term P/E average.
In terms of valuations, markets cycle up and down over long periods of time. These are called secular cycles. You have bull and bear secular cycles. In a period of a secular bull, the best style of investing is relative value. You are trying to beat the market. These periods start with low valuations, and you can ride the ups and downs with little real worry. Think of 1982 though 1999.
But in secular bear cycles, the best style of investing is absolute returns. Your benchmark is zero. You want positive numbers. It is much harder, and the longer-term returns are probably not going to be as good. But you are growing your capital against the day the secular bull returns. And, as bleak as it looks right now, I can assure you that bull will be back. Some time in the middle of the next decade, maybe a little sooner, we will see the launch of a new secular bull.
[I'm not sure, but I don't believe the above data takes into account dividends. If so, then I'd have to say the study is seriously misleading. -mc]
Monday, February 23, 2009
2009 Has No Fire
If the global economy fails to recover in 2009, the housing bubble or credit crunch may not be to blame. It could be a lack of fire. Chinese fortunetellers say fire - one of the five elements mystics believe form the basis of the universe - is essential to financial well-being. And fire is nowhere to be found in the mythology of this coming Year of the Ox, the Chinese Lunar Year that has just began. “Fire is the driving force behind economic growth. Without it, the market lacks momentum,” said Raymond Lo, a Hong Kong Master of Feng Shui, the ancient Chinese practice of trying to achieve health, harmony and prosperity through building design, the placement of objects and auspicious dates and numbers.
Chinese soothsayers see a deepening recession, millions more losing their jobs, and stocks and home prices continuing to fall. That’s more or less in line with what some economists are predicting, but some fortunetellers are throwing in other dire predictions - massive earthquakes, rising U.S.-Russian tensions and trouble for President Barack Obama.
Obama, born in the Year of the Ox, is taking office in a particularly bad year for his Chinese astrological sign. The Ox sign is in direct conflict this year with a traditional Chinese divinity called the “God of Year,” considered a bad omen. Obama also is the 44th president, a number the Chinese deem extremely unlucky, because “4″ is pronounced the same as “death” in Chinese.
“The new U.S. president is not having good luck this year. His honeymoon will only be short-lived,” said fortuneteller Alion Yeo, predicting Obama may even face impeachment in his first year in office. “The Year of the Ox looks slightly better and less dire than last year, but it will still be bumpy.” Yeo also predicted that the U.S. mortgage crisis would worsen and the stock market would plunge to new lows.
But Malaysian numerologist Weng Shi Ming suggested Obama’s birth year would offset his bad luck. Weng said the symmetry of 1961 is “the perfect mix of ying and yang,” rendering Obama “immune to the effects of 44.”
The Ox, 1 of 12 animals in the Chinese zodiac, symbolizes calm, hard work, resolve and tenacity. According to legend, the Ox allowed the cunning Rat to ride on its head in a race to determine the animals’ order. Shortly before the Ox crossed the finish line, the Rat leaped off to claim victory. The Year of the Rat was marked in 2008.
Joey Yap, a Feng Shui expert in Malaysia, saw no economic recovery before 2010. “It will be a daunting year. We haven’t really reached the peak of the problems yet,” Yap said. “We haven’t tasted the main dish, and will most likely experience it during the second half of the year.”
But Feng Shui master Lo saw a glimmer of hope. The combination of two elements changes every lunar year, and this time it’s two earths, the element that represents harmony and peace. Not since 1949, when the world order was settling down after World War II, has an Ox Year seen 2 earth signs. “It is a year for healing … from the turbulent time the world has experienced,” Lo said.
Source: Yahoo
Chinese soothsayers see a deepening recession, millions more losing their jobs, and stocks and home prices continuing to fall. That’s more or less in line with what some economists are predicting, but some fortunetellers are throwing in other dire predictions - massive earthquakes, rising U.S.-Russian tensions and trouble for President Barack Obama.
Obama, born in the Year of the Ox, is taking office in a particularly bad year for his Chinese astrological sign. The Ox sign is in direct conflict this year with a traditional Chinese divinity called the “God of Year,” considered a bad omen. Obama also is the 44th president, a number the Chinese deem extremely unlucky, because “4″ is pronounced the same as “death” in Chinese.
“The new U.S. president is not having good luck this year. His honeymoon will only be short-lived,” said fortuneteller Alion Yeo, predicting Obama may even face impeachment in his first year in office. “The Year of the Ox looks slightly better and less dire than last year, but it will still be bumpy.” Yeo also predicted that the U.S. mortgage crisis would worsen and the stock market would plunge to new lows.
But Malaysian numerologist Weng Shi Ming suggested Obama’s birth year would offset his bad luck. Weng said the symmetry of 1961 is “the perfect mix of ying and yang,” rendering Obama “immune to the effects of 44.”
The Ox, 1 of 12 animals in the Chinese zodiac, symbolizes calm, hard work, resolve and tenacity. According to legend, the Ox allowed the cunning Rat to ride on its head in a race to determine the animals’ order. Shortly before the Ox crossed the finish line, the Rat leaped off to claim victory. The Year of the Rat was marked in 2008.
Joey Yap, a Feng Shui expert in Malaysia, saw no economic recovery before 2010. “It will be a daunting year. We haven’t really reached the peak of the problems yet,” Yap said. “We haven’t tasted the main dish, and will most likely experience it during the second half of the year.”
But Feng Shui master Lo saw a glimmer of hope. The combination of two elements changes every lunar year, and this time it’s two earths, the element that represents harmony and peace. Not since 1949, when the world order was settling down after World War II, has an Ox Year seen 2 earth signs. “It is a year for healing … from the turbulent time the world has experienced,” Lo said.
Source: Yahoo
Friday, February 20, 2009
gold hits $1000
NEW YORK/LONDON (Reuters) - Gold rose above $1,000 an ounce on Friday for the first time since March last year as nervous investors piled into the yellow metal to preserve wealth amid a tumbling stock market.
Long-term inflation worries fanned by the massive U.S. economic stimulus package signed by President Barack Obama this week has driven investors into gold, which is perceived as the most likely asset to hold its value against economic head winds.
"I think there's a little bit of panic out there. Equities are setting new lows and gold is the place to run to. I don't think there's much more than that," said Robert MacIntosh, chief economist at Eaton Vance in Boston.
Bullion continued to appreciate against other asset classes and commodities on Friday amid renewed fears that the U.S. government could be forced to nationalize banks amid a worsening financial crisis.
A ratio of gold against the S&P 500 index rose to its highest level since September 1990, and gold/oil ratio was at its loftiest since December 1998, according to Reuters data.
Long-term inflation worries fanned by the massive U.S. economic stimulus package signed by President Barack Obama this week has driven investors into gold, which is perceived as the most likely asset to hold its value against economic head winds.
"I think there's a little bit of panic out there. Equities are setting new lows and gold is the place to run to. I don't think there's much more than that," said Robert MacIntosh, chief economist at Eaton Vance in Boston.
Bullion continued to appreciate against other asset classes and commodities on Friday amid renewed fears that the U.S. government could be forced to nationalize banks amid a worsening financial crisis.
A ratio of gold against the S&P 500 index rose to its highest level since September 1990, and gold/oil ratio was at its loftiest since December 1998, according to Reuters data.
Saturday, February 14, 2009
Distortions of the Dow
Off and on over the years [John Mauldin has] written about the distortions that the Dow Jones Industrials creates by using a price-based index rather than a market cap index. As an example, if Microsoft with a market cap of $153 billion went to a price of zero, all the Dow would lose would be 136 points, or less than 2%. If IBM with a market cap of $120 billion went to zero, the Dow would lose over 700 points! But it gets worse. David Kotok forwarded this note to me from our mutual friend Jim Bianco (www.biancoresearch.com), which Jim graciously allowed me to reproduce for your edification (prices quoted below are from a few days ago):
"Comment - The Dow Jones Industrial Average (DJIA) is a price-weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company's market capitalization.
"Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night's close (January 20), The DJIA had the following stocks less than $10 ...
Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35
"If all four of these stocks went to zero on today's open, the DJIA would lose only 157.3 points.
"The financials in the DJIA are ...
Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09
"If every financial stock in the DJIA went to zero on today's open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).
"If you want to add GE into the financial sector, a debatable proposition, then: GE (GE) = $12.93
"If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.
"The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks, and the financials are so beaten up that they cannot push the index much lower.
"So what is driving the index? The highest-priced stocks:
IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56
"For instance, if all the sub-$10 stocks listed above, all the financials listed above, and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.
"If IBM opens at zero, it loses 652.95 points [IBM has risen since then – JM]. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE, and Alcoa combined.
"The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos."
You could add Microsoft to the list Jim created and not be over where IBM is today in terms of the DJIA index.
Let's look at it another way. A 10% positive move for IBM would move the Dow up by over 60 points. A 10% move by Citigroup would increase the Dow by less than 3 points. Having stocks with low prices clearly prevents the Dow from declining as much as other market-cap-weighted indexes like the S&P 500.
"Comment - The Dow Jones Industrial Average (DJIA) is a price-weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company's market capitalization.
"Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night's close (January 20), The DJIA had the following stocks less than $10 ...
Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35
"If all four of these stocks went to zero on today's open, the DJIA would lose only 157.3 points.
"The financials in the DJIA are ...
Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09
"If every financial stock in the DJIA went to zero on today's open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).
"If you want to add GE into the financial sector, a debatable proposition, then: GE (GE) = $12.93
"If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.
"The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks, and the financials are so beaten up that they cannot push the index much lower.
"So what is driving the index? The highest-priced stocks:
IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56
"For instance, if all the sub-$10 stocks listed above, all the financials listed above, and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.
"If IBM opens at zero, it loses 652.95 points [IBM has risen since then – JM]. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE, and Alcoa combined.
"The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos."
You could add Microsoft to the list Jim created and not be over where IBM is today in terms of the DJIA index.
Let's look at it another way. A 10% positive move for IBM would move the Dow up by over 60 points. A 10% move by Citigroup would increase the Dow by less than 3 points. Having stocks with low prices clearly prevents the Dow from declining as much as other market-cap-weighted indexes like the S&P 500.
Wednesday, February 04, 2009
Time to buy U.S. stocks?
Is it time to buy U.S. stocks?
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.
Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.
But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."
Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."
[via iluvbabyb]
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.
Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.
But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."
Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."
[via iluvbabyb]
affordable housing?
One of the upsides of a crashing-and-burning housing market, as Edward Glaeser noted back in October, is that buying a home becomes more affordable.
And indeed, according to an index released by the National Association of Realtors, housing affordability was at an all-time high in December.
The Housing Affordability Index composite level for December was 158.8. A composite H.A.I. value of 158.8 means that a family earning the median income has 158.8 percent of the income needed to qualify for a mortgage on a median-priced home. The index had fallen during most of the housing bubble, when it became more and more expensive to buy a home. But December’s composite level was the highest the index has reached since the association began collecting this data in 1971.
[via libertarians_2000]
And indeed, according to an index released by the National Association of Realtors, housing affordability was at an all-time high in December.
The Housing Affordability Index composite level for December was 158.8. A composite H.A.I. value of 158.8 means that a family earning the median income has 158.8 percent of the income needed to qualify for a mortgage on a median-priced home. The index had fallen during most of the housing bubble, when it became more and more expensive to buy a home. But December’s composite level was the highest the index has reached since the association began collecting this data in 1971.
[via libertarians_2000]
Monday, February 02, 2009
two plus two
A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules]
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules]
Gideon Gono deals with inflation
Gideon Gono, widely regarded as the world’s most disastrous central banker, knocked another 12 zeros off the Zimbabwean dollar yesterday in an attempt to bring the national currency back from the realms of the fantastical.
In a stroke, the governor of Zimbabwe’s Reserve Bank slashed the street value of the Zimbabwean dollar from $250 trillion to one US dollar to 250, because the computers, calculators and people could no longer cope with all the zeros.
To counter an inflation rate that economists now estimate to be 5,000,000,000,000,000,000,000 (five sextillion) per cent, Mr Gono has now struck 25 zeros from the plunging national currency since August 2006. One American dollar would now buy Z$2,500,000,000,000,000,000,000, 000,000 (2.5 octillion) had he not done so.
Mr Gono’s announcement came just weeks after the introduction of a Z$100 trillion note, the latest and biggest of 35 denominations that he has brought in since January last year but only enough yesterday to buy half a loaf. “The zeros are too many for our machines to handle,” said Obert Sibanda, the chairman of the Zimbabwe National Chamber of Commerce.
Mr Gono is now ordering Zimbabwe’s red-hot printing presses to produce seven entirely new bank notes ranging from Z$1 to Z$500.
Economists poured scorn on Mr Gono’s announcement, pointing out that four months after he knocked ten noughts off last year they had all returned.
In a stroke, the governor of Zimbabwe’s Reserve Bank slashed the street value of the Zimbabwean dollar from $250 trillion to one US dollar to 250, because the computers, calculators and people could no longer cope with all the zeros.
To counter an inflation rate that economists now estimate to be 5,000,000,000,000,000,000,000 (five sextillion) per cent, Mr Gono has now struck 25 zeros from the plunging national currency since August 2006. One American dollar would now buy Z$2,500,000,000,000,000,000,000, 000,000 (2.5 octillion) had he not done so.
Mr Gono’s announcement came just weeks after the introduction of a Z$100 trillion note, the latest and biggest of 35 denominations that he has brought in since January last year but only enough yesterday to buy half a loaf. “The zeros are too many for our machines to handle,” said Obert Sibanda, the chairman of the Zimbabwe National Chamber of Commerce.
Mr Gono is now ordering Zimbabwe’s red-hot printing presses to produce seven entirely new bank notes ranging from Z$1 to Z$500.
Economists poured scorn on Mr Gono’s announcement, pointing out that four months after he knocked ten noughts off last year they had all returned.
The paradox of thrift
Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.
Economists call it the "paradox of thrift." What's good for individuals -- spending less, saving more -- is bad for the economy when everyone does it.
On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.
"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."
[via chucks_angels]
Economists call it the "paradox of thrift." What's good for individuals -- spending less, saving more -- is bad for the economy when everyone does it.
On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.
"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."
[via chucks_angels]
George Soros and reflexivity
Soros’s experiences in 1944 laid the groundwork for the conceptual framework he would spend the rest of his life elaborating and which, he believes, has found its validation in the events of 2008. His core idea is “reflexivity”, which he defines as a “two-way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them, but on their perception or interpretation of the situation. Their decisions make an impact on the situation and changes in the situation are liable to change their perceptions.”
It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.
The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.
It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.
The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.
Sunday, February 01, 2009
grading the gurus
I reading a blurb by Martin Weiss and wondered just how good this guy is. Obviously this guy is smart, but they all are. So how does he compare?
I came across this website from the CXO Advisory Group called Guru Stock Market Forecasting Grades.
"Can experts, whether self-proclaimed or endorsed by others (publications), provide reliable stock market timing guidance? Do some experts clearly show better intuition about overall market direction than others?"
Here's what they said about Weiss based on 530 trades from November 2007 through November 2008 (that's a lot of trades). 47% of the trades were winning trades with an average return of -6.2% per trade. But the average return per calendar day invested was a positive 0.16%. They summarized Weiss' performance as unimpressive, but it beat the S&P 500's average return per calendar day of -0.11%. So I wouldn't say making money instead of losing money is unimpressive.
Other quick takes on the gurus.
Richard Band is a well below average market timer and apparently achieves results more by holding for the long term than by successfully timing entry and exit points.
Warren Buffett is an investor with superior stock-picking skill that allows him to identify undervalued securities and thus obtain risk-adjusted positive abnormal returns.
Jim Cramer's accuracy in forecasting overall stock market behavior is a little below average. More interesting to me was that Cramer bothered to respond to the evaluation.
The Fast Money experts as a group probably do not offer fast money with their stock picks, and their stock-picking ability as a group is unimpressive.
Ken Fisher is well above average in guiding his readers with respect to stock market timing.
Simple statistics indicate that the Hulbert Stock Newsletter Sentiment Index has little or no predictive power for stock returns over the short and intermediate terms.
The accuracy rate of John Hussman's stock market characterizations is a little above average.
Jim Jubak's record of forecasting the overall U.S. stock market is well below average.
Stephen Leeb's U.S. stock market forecasting record is tentatively above average.
John Mauldin's accuracy in forecasting stock market behavior is below average.
"The [S&P] Outlook" is a about average in forecasting market behavior, and its explicit timing recommendations are sometimes good and sometimes bad.
Robert Prechter has not been successful in applying the Elliott wave principle to time the U.S. stock market in recent years.
Richard Russell is well below average in predicting stock market behavior.
Dan Sullivan's stock market forecasting record is well above average.
Ben Zacks' focus on earnings analysis makes him only an average market forecaster.
[started looking 1/25]
I came across this website from the CXO Advisory Group called Guru Stock Market Forecasting Grades.
"Can experts, whether self-proclaimed or endorsed by others (publications), provide reliable stock market timing guidance? Do some experts clearly show better intuition about overall market direction than others?"
Here's what they said about Weiss based on 530 trades from November 2007 through November 2008 (that's a lot of trades). 47% of the trades were winning trades with an average return of -6.2% per trade. But the average return per calendar day invested was a positive 0.16%. They summarized Weiss' performance as unimpressive, but it beat the S&P 500's average return per calendar day of -0.11%. So I wouldn't say making money instead of losing money is unimpressive.
Other quick takes on the gurus.
Richard Band is a well below average market timer and apparently achieves results more by holding for the long term than by successfully timing entry and exit points.
Warren Buffett is an investor with superior stock-picking skill that allows him to identify undervalued securities and thus obtain risk-adjusted positive abnormal returns.
Jim Cramer's accuracy in forecasting overall stock market behavior is a little below average. More interesting to me was that Cramer bothered to respond to the evaluation.
The Fast Money experts as a group probably do not offer fast money with their stock picks, and their stock-picking ability as a group is unimpressive.
Ken Fisher is well above average in guiding his readers with respect to stock market timing.
Simple statistics indicate that the Hulbert Stock Newsletter Sentiment Index has little or no predictive power for stock returns over the short and intermediate terms.
The accuracy rate of John Hussman's stock market characterizations is a little above average.
Jim Jubak's record of forecasting the overall U.S. stock market is well below average.
Stephen Leeb's U.S. stock market forecasting record is tentatively above average.
John Mauldin's accuracy in forecasting stock market behavior is below average.
"The [S&P] Outlook" is a about average in forecasting market behavior, and its explicit timing recommendations are sometimes good and sometimes bad.
Robert Prechter has not been successful in applying the Elliott wave principle to time the U.S. stock market in recent years.
Richard Russell is well below average in predicting stock market behavior.
Dan Sullivan's stock market forecasting record is well above average.
Ben Zacks' focus on earnings analysis makes him only an average market forecaster.
[started looking 1/25]
Wednesday, January 28, 2009
Morningstar's 2008 Performance
Our performance through the midst of the historic events that shaped the past year was mixed. While our 5-star calls [marginally] outperformed the S&P 500, losses greater than 30% are still painful on an absolute basis.
What stands out in 2008 is the huge divergence between the performance of wide-moat stocks and no-moat stocks. Investors rewarded quality companies. Wide-moat stocks returned -22% in 2008 compared with -34% for narrow-moat stocks and -42% for no-moat stocks.
It's also helpful to look at the performance of our star "buckets," which are constructed similarly to our strategies shown on the previous page. For example, the 5-Star bucket can be thought of as a Buy at 5, Sell at 4, 3, 2, or 1 strategy. In 2008, stocks we rated at 5 stars significantly outperformed stocks we rated 1 star as well as the S&P 500, and the three intermediate buckets also lined up as we would hope. This holds true for our trailing five-year performance as well.
While our strategies and buckets may show outperformance, they are not what we would consider investable strategies (given the number of stocks involved). We run a number of actively managed portfolios, such as the Tortoise and Hare that appear in Morningstar StockInvestor, and the Dividend Builder and Dividend Harvest that appear in Morningstar DividendInvestor. These portfolios are real-world examples of our research in practice. In addition, our Wide Moat Focus Index $MWMFT tracks the 20 cheapest wide-moat stocks in our coverage universe. Each of these portfolios has outperformed over the past year, and they are all beating the S&P 500 over their available trailing two-, three-, four-, and five-year time periods as well.
What stands out in 2008 is the huge divergence between the performance of wide-moat stocks and no-moat stocks. Investors rewarded quality companies. Wide-moat stocks returned -22% in 2008 compared with -34% for narrow-moat stocks and -42% for no-moat stocks.
It's also helpful to look at the performance of our star "buckets," which are constructed similarly to our strategies shown on the previous page. For example, the 5-Star bucket can be thought of as a Buy at 5, Sell at 4, 3, 2, or 1 strategy. In 2008, stocks we rated at 5 stars significantly outperformed stocks we rated 1 star as well as the S&P 500, and the three intermediate buckets also lined up as we would hope. This holds true for our trailing five-year performance as well.
While our strategies and buckets may show outperformance, they are not what we would consider investable strategies (given the number of stocks involved). We run a number of actively managed portfolios, such as the Tortoise and Hare that appear in Morningstar StockInvestor, and the Dividend Builder and Dividend Harvest that appear in Morningstar DividendInvestor. These portfolios are real-world examples of our research in practice. In addition, our Wide Moat Focus Index $MWMFT tracks the 20 cheapest wide-moat stocks in our coverage universe. Each of these portfolios has outperformed over the past year, and they are all beating the S&P 500 over their available trailing two-, three-, four-, and five-year time periods as well.
Friday, January 23, 2009
The Trader's Finger
John Coates, a research fellow in neuroscience at Cambridge University, recruited 49 male traders from a London trading floor for his study. These were futures traders who trade at a frenetic pace -- their holding period is typically measured in minutes (and sometimes even seconds!).
Coates found that traders with a lower ratio of index-finger to ring-finger length were both successful financially and more likely to last in the business, after controlling for a number of other factors, including experience and level of risk-taking.
The explanation? In men, a longer ring finger indicates a higher exposure to masculinizing hormones in the womb. That, in turn, produces a host of characteristics that are beneficial in this type of trading: increased confidence, higher risk preference, faster reaction times, etc.
Coates found that traders with a lower ratio of index-finger to ring-finger length were both successful financially and more likely to last in the business, after controlling for a number of other factors, including experience and level of risk-taking.
The explanation? In men, a longer ring finger indicates a higher exposure to masculinizing hormones in the womb. That, in turn, produces a host of characteristics that are beneficial in this type of trading: increased confidence, higher risk preference, faster reaction times, etc.
Wednesday, January 21, 2009
On the road?
"Owners of capital will stimulate working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and State will have to take the road which will eventually lead to communism"
- Karl Marx, Das Kapital 1867
[via investwise]
[2/27 via Payam Ahdout] Actually that quote is a hoax.
- Karl Marx, Das Kapital 1867
[via investwise]
[2/27 via Payam Ahdout] Actually that quote is a hoax.
Friday, January 16, 2009
2007's winners
returned an average of 242% (compared to 4% for the S&P 500). In 2008, these same ten stocks returned -61% (compared to -38% for the S&500).
Wednesday, January 14, 2009
a protracted recession?
The American Consumer has been the engine of the last expansion. We have bought houses, cars, flat screens, beach condos, etc. and financed the purchases either by extracting the equity from our increasing home prices (home equity lines) or incurring additional debt through credit cards and other forms of consumer finance. In the average American's mind, as long as the bottom line of the balance sheet continued to increase (i.e., assets greater than liabilities) then all was well. But in 2008 something happened that had not happened to these Baby Boomers before: the value of all assets (stocks, houses, rental properties, etc.) declined. As a result the debt party began to unwind as the value of the assets declined while the debt (liabilities) remained, thereby shrinking the balance sheet. Americans are feeling poorer … much poorer.
If one considers that the average 401(k) is now a 201(k) and the average house (according to Case/Shiller) declined 26% from its peak value in 2006, then it's easy to understand why the Baby Boomer is feeling gut punched. The financial shock of watching the asset side of their balance sheets crumble while the debt side remained the same or actually grew has now forced the American consumer into a dilemma: How do I retire and live the same lifestyle that my parents enjoyed? Answer: I have to save money and reduce debt.
The consequence to the economy is, in my opinion, going to be a protracted, painful recession. Why? Because this recession is driven by asset devaluation, and that is different than a cyclical downturn. There is a need for institutions and households alike to reduce debt and restore equity to the balance sheet. For the consumer/individual this will only happen with an increase in his/her saving rate to reduce debt and fund future retirement. For example, if the average consumer goes from a 1.7% savings rate to a 5% savings rate, then that equates to $400 billion a year in either debt reduction or retirement funding. From the contra angle, that means there will be $400 billion less of American consumption. I label this the "Paradox of Thrift," in that we can't restore our balance sheets without additional savings, and our stock markets cannot recover without consumer spending and corporate profitability.
-- by Cliff Draughn
If one considers that the average 401(k) is now a 201(k) and the average house (according to Case/Shiller) declined 26% from its peak value in 2006, then it's easy to understand why the Baby Boomer is feeling gut punched. The financial shock of watching the asset side of their balance sheets crumble while the debt side remained the same or actually grew has now forced the American consumer into a dilemma: How do I retire and live the same lifestyle that my parents enjoyed? Answer: I have to save money and reduce debt.
The consequence to the economy is, in my opinion, going to be a protracted, painful recession. Why? Because this recession is driven by asset devaluation, and that is different than a cyclical downturn. There is a need for institutions and households alike to reduce debt and restore equity to the balance sheet. For the consumer/individual this will only happen with an increase in his/her saving rate to reduce debt and fund future retirement. For example, if the average consumer goes from a 1.7% savings rate to a 5% savings rate, then that equates to $400 billion a year in either debt reduction or retirement funding. From the contra angle, that means there will be $400 billion less of American consumption. I label this the "Paradox of Thrift," in that we can't restore our balance sheets without additional savings, and our stock markets cannot recover without consumer spending and corporate profitability.
-- by Cliff Draughn
Sunday, January 11, 2009
As the calendar turns
A rare event occurred as the calendar turned from 2008 to 2009: A single trading day when at least 75% of New York Stock Exchange (NYSE) stocks rise is uncommon (there have been only 65 such occurrences in the last 10 years), yet this happened on three consecutive trading days from December 30 through January 2 (79%, 83% and 82% of stocks, respectively).
According to Bespoke Investment Group (B.I.G.), the market has performed a feat like that only twice before—both times in 1938. In each case, the Dow Jones Industrial Average was positive during the following day, week and month.
Last year was the single worst for the S&P 500 since the Great Depression—1931 to be exact. Nothing escaped the carnage, with global equity, credit and commodity markets imploding, and only U.S. Treasuries saving the day.
I asked a number of my Wall Street friends the following question during the holiday break: There were 253 trading days in 2008. How many days was the market (S&P 500) up versus down? With no exception, the answers were heavily skewed to down days making up the majority. Nope. Remarkably, the market rose on 126 days, and the market fell on 126 days (with one flat day).
So then what drove the overall massive market decline? The skewing of the down days. The average up day increased 1.6%, but the average down day decreased 1.9%. In addition, there were 42 days (nearly 17%) when the market rose or fell by more than 3%: 19 days that were up and 23 days that were down.
Clearly, volatility was off the charts, particularly following the Lehman Brothers bankruptcy in September, with 18 single-day moves of at least 5%. There had only been 17 such moves in the prior 53 years! In October, stocks enjoyed two of the six biggest one-day percentage gains in history—but gave back all of the gains, and then some. Four of the 20 biggest daily percentage declines in history occurred during the last four months of 2008.
Reviewing the 10 worst calendar year total returns for the S&P 500, take comfort in knowing that the average subsequent five-year annualized total return was 10.8%, with all five-year periods in positive territory—even those that began with 1931's 43% drop and 1974's 27% fall.
NDR did an interesting study of "waterfall" declines, similar to what we experienced last fall. In waterfall declines, the Dow loses more than 20% in a short period, and near the end, the 10-day average of NYSE total volume rises to two times its average seen just a few months earlier. In the majority of cases, the end of the waterfall decline wasn't the end of the bear market.
However, in the composite average, the lows were tested but not broken, followed by a basing phase of up to three months before a breakout to a new bull market.
Three post-waterfall phases were designated, and it appears to us that we're currently in the second phase—bear-market bottom to recession end.
Given current cash hoarding, there's now $8.85 trillion held in cash, bank deposits and money market funds. That's equal to 74% of the market value of all U.S. companies—the highest ratio since 1990, according to Fed data compiled by Leuthold Group and Bloomberg. According to SentimenTrader.com, assets in money market funds alone are now enough to buy 42% of the entire S&P 500 index.
The latest asset allocation survey from the American Association of Individual Investors showed another push into safe investments. Individual investor allocations to the stock market dipped to 42%, the lowest since 1991. And these folks' investments in cash instruments moved up to 42%—the highest in the history of the data (November 1987).
Never before have these investors allocated as much or more to cash as they have to stocks. The only other times when the two allocations came close were in January 1991 (42% to stocks, 38% to cash) and October 2002 (43% to stocks, 39% to cash). Both turned out to be good times to be taking a long-term contrary stance against these investors.
According to Bespoke Investment Group (B.I.G.), the market has performed a feat like that only twice before—both times in 1938. In each case, the Dow Jones Industrial Average was positive during the following day, week and month.
Last year was the single worst for the S&P 500 since the Great Depression—1931 to be exact. Nothing escaped the carnage, with global equity, credit and commodity markets imploding, and only U.S. Treasuries saving the day.
I asked a number of my Wall Street friends the following question during the holiday break: There were 253 trading days in 2008. How many days was the market (S&P 500) up versus down? With no exception, the answers were heavily skewed to down days making up the majority. Nope. Remarkably, the market rose on 126 days, and the market fell on 126 days (with one flat day).
So then what drove the overall massive market decline? The skewing of the down days. The average up day increased 1.6%, but the average down day decreased 1.9%. In addition, there were 42 days (nearly 17%) when the market rose or fell by more than 3%: 19 days that were up and 23 days that were down.
Clearly, volatility was off the charts, particularly following the Lehman Brothers bankruptcy in September, with 18 single-day moves of at least 5%. There had only been 17 such moves in the prior 53 years! In October, stocks enjoyed two of the six biggest one-day percentage gains in history—but gave back all of the gains, and then some. Four of the 20 biggest daily percentage declines in history occurred during the last four months of 2008.
Reviewing the 10 worst calendar year total returns for the S&P 500, take comfort in knowing that the average subsequent five-year annualized total return was 10.8%, with all five-year periods in positive territory—even those that began with 1931's 43% drop and 1974's 27% fall.
NDR did an interesting study of "waterfall" declines, similar to what we experienced last fall. In waterfall declines, the Dow loses more than 20% in a short period, and near the end, the 10-day average of NYSE total volume rises to two times its average seen just a few months earlier. In the majority of cases, the end of the waterfall decline wasn't the end of the bear market.
However, in the composite average, the lows were tested but not broken, followed by a basing phase of up to three months before a breakout to a new bull market.
Three post-waterfall phases were designated, and it appears to us that we're currently in the second phase—bear-market bottom to recession end.
Given current cash hoarding, there's now $8.85 trillion held in cash, bank deposits and money market funds. That's equal to 74% of the market value of all U.S. companies—the highest ratio since 1990, according to Fed data compiled by Leuthold Group and Bloomberg. According to SentimenTrader.com, assets in money market funds alone are now enough to buy 42% of the entire S&P 500 index.
The latest asset allocation survey from the American Association of Individual Investors showed another push into safe investments. Individual investor allocations to the stock market dipped to 42%, the lowest since 1991. And these folks' investments in cash instruments moved up to 42%—the highest in the history of the data (November 1987).
Never before have these investors allocated as much or more to cash as they have to stocks. The only other times when the two allocations came close were in January 1991 (42% to stocks, 38% to cash) and October 2002 (43% to stocks, 39% to cash). Both turned out to be good times to be taking a long-term contrary stance against these investors.
2009 Predictions
An article published on Bloomberg.com contains a table summarizing the predictions of Wall Street strategists for the performance of the S&P 500 in 2009. They’re a pretty optimistic bunch, predicting an average increase of 17% this year (with a range between negative 3.2% and positive 44%!).
Even if they’re right, the S&P 500 would end 2009 at 1,056, 28 percent below where the benchmark index for American equities started in 2008 and 35 percent lower than where the analysts said it would be now, based on the consensus of 11 strategists surveyed by Bloomberg News. Some of the biggest investors are growing more optimistic as the S&P 500 advanced 24 percent since reaching an 11-year low on Nov. 20.
* * *
Mauldin chimes in:
Ten out of ten analysts in the recent Barron's forecast saw stock prices rising 10-20% this year. For reasons I outlined last week, I think we could see a tradable rally in the next few months, but at the very least test the lows this summer, if not set new lows. Earnings are going to be far worse than any analyst's projections I have seen. And earnings drive stock prices.
Further, this recession is going to be the longest in anyone's memory. It is going to seem like it is never going to end (it will, I promise), and more and more investors are just going to give up on stocks. The buy and hold for the long run mantra is wearing thin. In inflation-adjusted terms, the stock market is about where it was in 1973! If you reinvested dividends, that gets you to 1991 (again, inflation-adjusted). It takes a lot of buying to make a bull market. It only takes an absence of buying to make a bear market.
Could we get a rally after the summer or fall lows? Sure. And it could be a good one. A lot depends on how fast the stimulus kicks in and whether it really has an effect.
* * *
Liz Ann Sonders says the conditions are right for a rebound, though it may (or may not) be too early.
Even if they’re right, the S&P 500 would end 2009 at 1,056, 28 percent below where the benchmark index for American equities started in 2008 and 35 percent lower than where the analysts said it would be now, based on the consensus of 11 strategists surveyed by Bloomberg News. Some of the biggest investors are growing more optimistic as the S&P 500 advanced 24 percent since reaching an 11-year low on Nov. 20.
* * *
Mauldin chimes in:
Ten out of ten analysts in the recent Barron's forecast saw stock prices rising 10-20% this year. For reasons I outlined last week, I think we could see a tradable rally in the next few months, but at the very least test the lows this summer, if not set new lows. Earnings are going to be far worse than any analyst's projections I have seen. And earnings drive stock prices.
Further, this recession is going to be the longest in anyone's memory. It is going to seem like it is never going to end (it will, I promise), and more and more investors are just going to give up on stocks. The buy and hold for the long run mantra is wearing thin. In inflation-adjusted terms, the stock market is about where it was in 1973! If you reinvested dividends, that gets you to 1991 (again, inflation-adjusted). It takes a lot of buying to make a bull market. It only takes an absence of buying to make a bear market.
Could we get a rally after the summer or fall lows? Sure. And it could be a good one. A lot depends on how fast the stimulus kicks in and whether it really has an effect.
* * *
Liz Ann Sonders says the conditions are right for a rebound, though it may (or may not) be too early.
Wednesday, January 07, 2009
you just missed the bull market
While no one is calling it that, we are technically in a new cyclical bull market and have been since December 8th. Since the 11/20 lows, the S&P 500 is up 24%, which meets the standard bull market definition of a 20% rally that was preceded by at least a 20% decline. But the unwillingness for the majority to call it a bull market is what bulls should be thankful for, since the market typically climbs a wall of worry where investors are full of doubt throughout the rally.
Regardless of what you call it, some of the performance numbers since the 11/20 lows are downright crazy. Even though the S&P 500 is up 24% since 11/20, the average stock in the index is up 41.25%. This means the smaller cap names in the index are up much more than their larger cap brethren. And the stocks that were down the most during the 10/9/07-11/20/08 bear are up much more than the ones that were down the least. As shown below, the average performance since 11/20 of the 50 stocks that were down the most during the bear market is 112%!
[via paraguay2es]
Regardless of what you call it, some of the performance numbers since the 11/20 lows are downright crazy. Even though the S&P 500 is up 24% since 11/20, the average stock in the index is up 41.25%. This means the smaller cap names in the index are up much more than their larger cap brethren. And the stocks that were down the most during the 10/9/07-11/20/08 bear are up much more than the ones that were down the least. As shown below, the average performance since 11/20 of the 50 stocks that were down the most during the bear market is 112%!
[via paraguay2es]
Tuesday, January 06, 2009
German billionaire commits suicide
German billionaire Adolf Merckle has committed suicide, in despair over the huge losses suffered by his business empire during the financial crisis, his family said on Tuesday.
The media-shy billionaire, whose family controls some of Germany's best-known companies, was hit by a train on Monday evening, local officials said.
"The desperate situation of his companies caused by the financial crisis, the uncertainties of the last few weeks and his powerlessness to act, have broken the passionate family entrepreneur and he took his own life," a family statement said.
State prosecutors from the southern city of Ulm said Merckle, 74, left work on Monday and died after being hit by a train near the town of Blaubeuren. He left behind a suicide note to his family, they added.
Merckle, a father of four, inherited the basis of his fortune from his Bohemian grandfather, but went on to build up the chemical wholesale company into Germany's largest drugs wholesaler.
The passionate skiier and mountain climber assembled a business conglomerate with about 100,000 employees and 30 billion euros ($40.45 billion) in annual sales.
His family controls a number of German companies including cement maker HeidelbergCement and generic drug company Ratiopharm.
But the empire was rocked last year by wrong-way bets made on shares in Volkswagen after a surprise stakeholding announcement from Porsche sent the VW share price rocketing as short sellers scrambled to cover their positions.
Banking sources had told Reuters the family lost hundreds of millions of euros on investments, with about 400 million euros lost on Volkswagen shares alone.
Since then the family has been in talks for weeks with banks to renegotiate loans. Banking sources said on Tuesday his death was not expected to affect loan agreements with the family.
[via paraguay2es @ chucks_angels]
The media-shy billionaire, whose family controls some of Germany's best-known companies, was hit by a train on Monday evening, local officials said.
"The desperate situation of his companies caused by the financial crisis, the uncertainties of the last few weeks and his powerlessness to act, have broken the passionate family entrepreneur and he took his own life," a family statement said.
State prosecutors from the southern city of Ulm said Merckle, 74, left work on Monday and died after being hit by a train near the town of Blaubeuren. He left behind a suicide note to his family, they added.
Merckle, a father of four, inherited the basis of his fortune from his Bohemian grandfather, but went on to build up the chemical wholesale company into Germany's largest drugs wholesaler.
The passionate skiier and mountain climber assembled a business conglomerate with about 100,000 employees and 30 billion euros ($40.45 billion) in annual sales.
His family controls a number of German companies including cement maker HeidelbergCement and generic drug company Ratiopharm.
But the empire was rocked last year by wrong-way bets made on shares in Volkswagen after a surprise stakeholding announcement from Porsche sent the VW share price rocketing as short sellers scrambled to cover their positions.
Banking sources had told Reuters the family lost hundreds of millions of euros on investments, with about 400 million euros lost on Volkswagen shares alone.
Since then the family has been in talks for weeks with banks to renegotiate loans. Banking sources said on Tuesday his death was not expected to affect loan agreements with the family.
[via paraguay2es @ chucks_angels]
Monday, January 05, 2009
how cheap are stocks?
Unless you are in your late 80s and were an adult as World War II ended, stocks are cheaper, adjusted for tax rates and interest rates, than they've been at any time in your adult life. That's a simply stunning statement looking forward. You're walking forward. Stop myopically looking at your feet and focus on the horizon. Just buy great franchises at cheap prices now and be patient.
Friday, January 02, 2009
yes, we are in a recession
[12/1/08]
The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy.
The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures.
Many people erroneously believe that a recession is defined by two consecutive quarters of economic activity declining. That has yet to take place during this recession.
The current recession is one of the longest downturns since the Great Depression of the 1930's.
The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10 previous post-Depression downturns lasted as long as a full year, according to the NBER.
several economists said the real concern is that there is no end in sight for the downturn.
Some suggested that the best case scenario for the economy is that it would reach bottom in the second quarter of 2009. And even if that happens, that would still make this recession the longest since the Great Depression.
The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy.
The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures.
Many people erroneously believe that a recession is defined by two consecutive quarters of economic activity declining. That has yet to take place during this recession.
The current recession is one of the longest downturns since the Great Depression of the 1930's.
The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10 previous post-Depression downturns lasted as long as a full year, according to the NBER.
several economists said the real concern is that there is no end in sight for the downturn.
Some suggested that the best case scenario for the economy is that it would reach bottom in the second quarter of 2009. And even if that happens, that would still make this recession the longest since the Great Depression.
Thursday, January 01, 2009
Recessions and stock market performance
[1/1/09] To better understand how recessions typically work, note these four important trends:
1. On average, the S&P 500 has started to lose ground approximately seven months before recessions began.
2. Recessions have lasted an average of 10 months.
3. On average, the stock market has started to recover six months into the recession or four months before it ended.
4. It took approximately 13 months for the stock market to traverse from its peak to its trough.
These averages might not apply to the current recession, but we believe there's a strong chance that some trends could repeat. For example, the stock market could anticipate the beginning and end of the recession before the economic data reflects it.
[6/3/08] Ned Davis Research (NDR), an investment research firm, recently analyzed market performance before, during, and after the 10 recessions since 1945. These have had a median duration of about 10 months. The stock market has generally been a good indicator of these economic slumps.
In past recessions, the broad market began declining several months beforehand, as investors anticipated weaker corporate profits, and continued to drop over the five to six months after the start of the recession, the NDR study shows. From pre-recession bull market peak to recession low, the S&P 500 Index of large-cap stocks fell an average of 23.6%, NDR calculates.
But just as the stock market has anticipated economic downturns, it also has looked ahead to the economic recovery and an earnings rebound. The market historically began rising about midway through these past recessions. On average, the S&P 500 gained 24% six months after reaching a recession low and skyrocketed an average of 32% a year after the recession low.
However, it has taken an average of 20 months for the index to recover to its pre-recession peak after hitting its recession low. (It took the index more than five years, though, to recover from the severe 1973–74 and 2000–2002 bear markets, both of which were accompanied by recessions.)
NDR observes that each of the 10 postwar recessions was accompanied by a bear market, as defined by the firm. In each of these cases, the stock market’s low during the recession was also the bottom of the bear market. (Unlike recessions, there is no official definition of a bear market. The firm notes that 10 of the past 18 bear markets were accompanied by a recession.)
Small-cap stocks tend to underperform those of larger companies leading into and during the early stage of a recession. However, NDR says, just as the S&P 500 Index starts its recovery about six months into a recession on average, small-cap stocks tend to significantly begin outperforming large-cap stocks at about the same time and typically continue leading for at least a year after the recession has ended. For the 12-month period following the end of the last nine recessions, small-cap stocks on average provided a 24% gain compared with 17.6% for the S&P 500.
In terms of market sectors during recessions, NDR found that health care and consumer staples (such as food, household products, and beverage firms) were the bestperforming sectors on average six and 12 months after the start of the last five recessions, dating back to 1973. In fact, health care led in each of these five recessions.
-- T. Rowe Price Report, Spring 2008
1. On average, the S&P 500 has started to lose ground approximately seven months before recessions began.
2. Recessions have lasted an average of 10 months.
3. On average, the stock market has started to recover six months into the recession or four months before it ended.
4. It took approximately 13 months for the stock market to traverse from its peak to its trough.
These averages might not apply to the current recession, but we believe there's a strong chance that some trends could repeat. For example, the stock market could anticipate the beginning and end of the recession before the economic data reflects it.
[6/3/08] Ned Davis Research (NDR), an investment research firm, recently analyzed market performance before, during, and after the 10 recessions since 1945. These have had a median duration of about 10 months. The stock market has generally been a good indicator of these economic slumps.
In past recessions, the broad market began declining several months beforehand, as investors anticipated weaker corporate profits, and continued to drop over the five to six months after the start of the recession, the NDR study shows. From pre-recession bull market peak to recession low, the S&P 500 Index of large-cap stocks fell an average of 23.6%, NDR calculates.
But just as the stock market has anticipated economic downturns, it also has looked ahead to the economic recovery and an earnings rebound. The market historically began rising about midway through these past recessions. On average, the S&P 500 gained 24% six months after reaching a recession low and skyrocketed an average of 32% a year after the recession low.
However, it has taken an average of 20 months for the index to recover to its pre-recession peak after hitting its recession low. (It took the index more than five years, though, to recover from the severe 1973–74 and 2000–2002 bear markets, both of which were accompanied by recessions.)
NDR observes that each of the 10 postwar recessions was accompanied by a bear market, as defined by the firm. In each of these cases, the stock market’s low during the recession was also the bottom of the bear market. (Unlike recessions, there is no official definition of a bear market. The firm notes that 10 of the past 18 bear markets were accompanied by a recession.)
Small-cap stocks tend to underperform those of larger companies leading into and during the early stage of a recession. However, NDR says, just as the S&P 500 Index starts its recovery about six months into a recession on average, small-cap stocks tend to significantly begin outperforming large-cap stocks at about the same time and typically continue leading for at least a year after the recession has ended. For the 12-month period following the end of the last nine recessions, small-cap stocks on average provided a 24% gain compared with 17.6% for the S&P 500.
In terms of market sectors during recessions, NDR found that health care and consumer staples (such as food, household products, and beverage firms) were the bestperforming sectors on average six and 12 months after the start of the last five recessions, dating back to 1973. In fact, health care led in each of these five recessions.
-- T. Rowe Price Report, Spring 2008
Wednesday, December 31, 2008
Worst Year Since 1931
Few investors will mourn the passing of 2008. For good reason.
The Dow Jones Industrial Average fell 33.8%, it's worst drubbing since 1931 and its third-worst year ever. The Dow's loss has been exceeded only by a 53% loss in 1931 and a 38% loss in 1907. It was slightly worse than its loss in 1930.
The Standard & Poor's 500 Index fell 38.6%, its worst performance since 1937 and third-worst loss.
The Nasdaq Composite Index, established in 1971, lost 40.5%, its worst year ever -- even worse than after the dot-com bust.
Next year may not be anything like 2008 and could even see a rebound. But there are enough minefields facing both the economy and investors that deep caution will be the watchword.
The housing industry still hasn't bottomed, and the year-old recession is likely to be the worst since the 1970s. Meanwhile the fates of General Motors (GM, news, msgs), Ford Motor (F, news, msgs) and Chrysler are problematic.
Yet a new administration takes over in three weeks, with promises of a big stimulus package to jump-start the economy. An administration's first year is often good for stocks.
The Dow Jones Industrial Average fell 33.8%, it's worst drubbing since 1931 and its third-worst year ever. The Dow's loss has been exceeded only by a 53% loss in 1931 and a 38% loss in 1907. It was slightly worse than its loss in 1930.
The Standard & Poor's 500 Index fell 38.6%, its worst performance since 1937 and third-worst loss.
The Nasdaq Composite Index, established in 1971, lost 40.5%, its worst year ever -- even worse than after the dot-com bust.
Next year may not be anything like 2008 and could even see a rebound. But there are enough minefields facing both the economy and investors that deep caution will be the watchword.
The housing industry still hasn't bottomed, and the year-old recession is likely to be the worst since the 1970s. Meanwhile the fates of General Motors (GM, news, msgs), Ford Motor (F, news, msgs) and Chrysler are problematic.
Yet a new administration takes over in three weeks, with promises of a big stimulus package to jump-start the economy. An administration's first year is often good for stocks.
Thursday, December 25, 2008
investing books
Vitaliy Katsenelson, author of Active Value Investing, writes:
We find ourselves glued to the computer screens or CNBC waiting to find out what the Dow’s next tick is going to be. Unfortunately, we are left with only a headache and wasted time. OK, what’s next? Here is my advice –- read. Read books that will bring you sanity, the ones that will snap you back into the shell of investor and out of the sorry shell of nervous observer of the daily stock market melodrama. The following books are excellent choices and will come with plenty of sanity and sage advice.
We find ourselves glued to the computer screens or CNBC waiting to find out what the Dow’s next tick is going to be. Unfortunately, we are left with only a headache and wasted time. OK, what’s next? Here is my advice –- read. Read books that will bring you sanity, the ones that will snap you back into the shell of investor and out of the sorry shell of nervous observer of the daily stock market melodrama. The following books are excellent choices and will come with plenty of sanity and sage advice.
Sunday, December 21, 2008
Dividend All-Stars
I'm looking at dividendinvestors.com (from an article in the paper).
One neat feature is that they tell you how many consecutive years the company has increased their dividends. For example, JNJ had increased their dividend for 45 years in a row. MMM for 49 years. PG for 54 years.
Maybe I'll actually sign up to see more.
* * *
According to this article there are high dividend achievers and high dividend aristocrats. The Achievers are those who have increased dividends 10 or more years. The aristocrats have increased 25 or more years. There are 312 achievers, but only 59 aristocrats.
Well, looking now, there are only 52 (five financial companies have cut their dividend). Among them are XOM, GE, LOW, PFE, TGT, WAG.
One neat feature is that they tell you how many consecutive years the company has increased their dividends. For example, JNJ had increased their dividend for 45 years in a row. MMM for 49 years. PG for 54 years.
Maybe I'll actually sign up to see more.
* * *
According to this article there are high dividend achievers and high dividend aristocrats. The Achievers are those who have increased dividends 10 or more years. The aristocrats have increased 25 or more years. There are 312 achievers, but only 59 aristocrats.
Well, looking now, there are only 52 (five financial companies have cut their dividend). Among them are XOM, GE, LOW, PFE, TGT, WAG.
Tuesday, December 16, 2008
time to buy?
The 2007-08 bear market has been the worst since the Great Depression, more savage than that of 1973-74, which most of us remember only dimly, if at all, and 2000-02, which we remember all too well.
What's more, the combination of two deep bears in less than a decade has poisoned many people against common stocks. The Standard & Poor's 500 Index ($INX) has gone down an average of 0.9% a year over the past 10 years, from November 1998 through November 2008.
Since this bear market began 14 months ago, virtually every asset class, from foreign and domestic stocks to commodities to real estate, has been driven down at least 50%. Even among bonds, only U.S. Treasurys have held up well. The benefits of diversification, in short, have proved to be illusory.
"Today, in my view, the stock market is presenting you with one of the great buying opportunities of your lifetime -- perhaps the greatest," says Steve Leuthold, the manager of the Leuthold Core Investment (LCORX) fund, which ranks in the top 2% of similar funds over the past 10 years. "Buy 'em when they hate 'em."
Having pointed out the negative returns of stocks over the past 10 years, Leuthold tracked the history of stock performance in every 10-year period in which the market averaged an annual gain of 1% or less. Then he looked at the succeeding 10 years. The worst performance in those periods was a gain of 101% between 1938 and 1948. The best was a surge of 325% between 1974 and 1984. The average was 183%.
What's more, the combination of two deep bears in less than a decade has poisoned many people against common stocks. The Standard & Poor's 500 Index ($INX) has gone down an average of 0.9% a year over the past 10 years, from November 1998 through November 2008.
Since this bear market began 14 months ago, virtually every asset class, from foreign and domestic stocks to commodities to real estate, has been driven down at least 50%. Even among bonds, only U.S. Treasurys have held up well. The benefits of diversification, in short, have proved to be illusory.
"Today, in my view, the stock market is presenting you with one of the great buying opportunities of your lifetime -- perhaps the greatest," says Steve Leuthold, the manager of the Leuthold Core Investment (LCORX) fund, which ranks in the top 2% of similar funds over the past 10 years. "Buy 'em when they hate 'em."
Having pointed out the negative returns of stocks over the past 10 years, Leuthold tracked the history of stock performance in every 10-year period in which the market averaged an annual gain of 1% or less. Then he looked at the succeeding 10 years. The worst performance in those periods was a gain of 101% between 1938 and 1948. The best was a surge of 325% between 1974 and 1984. The average was 183%.
Monday, December 15, 2008
Saturday, December 13, 2008
rebounds follow drops (usually)
Through the end of November, we experienced a very rare event, with the S&P 500 down 30% during three straight months of declines. Looking at the history of the market since its inception, there were only five prior cases where returns were this weak—four during the Great Depression. As you can see in "Market physics: rebounds have typically followed sharp drops" below, the market was higher during subsequent periods the vast majority of the time.
Bernard Madoff
NEW YORK (AP) — They had known him for years as a golf partner, a family friend. Some were neighbors or fellow members of country clubs on Long Island and in Florida.
Many had begun investing with 70-year-old Bernard L. Madoff decades ago, often after being referred by a friend or relative who had known the Wall Street veteran even longer.
There had been some warnings: Financial consultants had been suspicious for years about his astounding run of success.
They couldn't figure out how he managed to produce steady returns, month after month, even when everyone else was losing money — and leave almost no footprint while moving billions of dollars in and out of the markets.
"People would come to me with their statements and I couldn't make heads or tails of them," said Charles Gradante, co-founder of the Hennessee Group and advisor to hedge fund investors.
"He only had five down months since 1996," Gradante said. "There's no strategy in the world that can generate that kind of performance. But when people would come to him and say, 'How did I make money this month?' he didn't like it. He would get upset with people who probed too much."
Those investors were scrambling Friday to learn whether they had been wiped out by what prosecutors described as a multibillion-dollar Ponzi scheme. The assets of Madoff's investment company were frozen Friday in a deal with federal regulators and a receiver was appointed to manage the firm's financial affairs.
According to the criminal complaint, Madoff estimates he lost as much as $50 billion over many years. If true, it could be one of the largest fraud schemes in Wall Street history.
* * *
[12/24/08] PARIS - A French investment fund manager badly hit by the multi-billion-dollar Madoff scandal committed suicide in his New York office on Tuesday, a French newspaper reported.
Thierry de la Villehuchet, 65, was the co-founder of Access International, a company that raised funds on the European markets to plough into Bernard Madoff's fraud-hit investment scheme.
Villehuchet "could not cope with the pressure following the outbreak of the scandal. He took his own life, this morning, in his office in New York," the website of la Tribune business daily quoted his relatives as saying.
"This is a farewell from someone who had done nothing wrong," they said.
"For the past week, he had tried day and night to find a way to recoup his investors' money and had begun legal action in the United States against US authorities," his relatives said.
***
[10/13/09 via libertarians_2000] Madoff wins one
Many had begun investing with 70-year-old Bernard L. Madoff decades ago, often after being referred by a friend or relative who had known the Wall Street veteran even longer.
There had been some warnings: Financial consultants had been suspicious for years about his astounding run of success.
They couldn't figure out how he managed to produce steady returns, month after month, even when everyone else was losing money — and leave almost no footprint while moving billions of dollars in and out of the markets.
"People would come to me with their statements and I couldn't make heads or tails of them," said Charles Gradante, co-founder of the Hennessee Group and advisor to hedge fund investors.
"He only had five down months since 1996," Gradante said. "There's no strategy in the world that can generate that kind of performance. But when people would come to him and say, 'How did I make money this month?' he didn't like it. He would get upset with people who probed too much."
Those investors were scrambling Friday to learn whether they had been wiped out by what prosecutors described as a multibillion-dollar Ponzi scheme. The assets of Madoff's investment company were frozen Friday in a deal with federal regulators and a receiver was appointed to manage the firm's financial affairs.
According to the criminal complaint, Madoff estimates he lost as much as $50 billion over many years. If true, it could be one of the largest fraud schemes in Wall Street history.
* * *
[12/24/08] PARIS - A French investment fund manager badly hit by the multi-billion-dollar Madoff scandal committed suicide in his New York office on Tuesday, a French newspaper reported.
Thierry de la Villehuchet, 65, was the co-founder of Access International, a company that raised funds on the European markets to plough into Bernard Madoff's fraud-hit investment scheme.
Villehuchet "could not cope with the pressure following the outbreak of the scandal. He took his own life, this morning, in his office in New York," the website of la Tribune business daily quoted his relatives as saying.
"This is a farewell from someone who had done nothing wrong," they said.
"For the past week, he had tried day and night to find a way to recoup his investors' money and had begun legal action in the United States against US authorities," his relatives said.
***
[10/13/09 via libertarians_2000] Madoff wins one
Wednesday, December 10, 2008
negative interest on t-bills
Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.
Thursday, December 04, 2008
buying in a meltdown
In our 30 plus years of investing, we have rarely seen opportunities the likes of which we are seeing today. In times such as this, we are comforted by the fact that we have survived and prospered through many other crises over the years. Not to be flip, but we are reminded of the time back in 1962 when Russian missiles were on their way to Cuba to confront the U.S. blockade. Joe Reilly, a former partner of Tweedy, Browne, was in our trading room feverishly buying stocks in one of the biggest market meltdowns in stock market history. When asked by Howard Browne how he could be so confident in the face of such impending doom, Joe remarked, “Either this is going to turn out OK and the markets will turn around, or the world is going to come to an end. In either event, I’ll be fine as long as God doesn’t require cash.”
[Tweedy Browne Investment Adviser's Letter via iluvbabyb]
[Tweedy Browne Investment Adviser's Letter via iluvbabyb]