Advance Gross Domestic Product , the broadest measure of economic output, fell at an annualized rate of 6.1% in 1Q, much worse than the Bloomberg forecast of a 4.7% decline, and only slightly better than the 6.3% decline in 4Q. The measure is the first reading on economic activity in 1Q, and is likely to be revised in future readings. Personal consumption rose 2.2%, much better than the 0.9% expected rise, after declining 4.3% in 4Q. Personal consumption spending was led by a 9.4% jump in durable goods purchases. GDP was negatively impacted by a drop in exports and business investment spending, which fell 30% and 37.9%, respectively. Real final sales, which exclude the 2.8% impact from a decline in inventories, fell 3.4%.
Pricing pressures gained steam, with the GDP Price Index rising 2.9%, compared to a gain of 0.5% in 4Q and the forecast of 1.8%. The core PCE Index, which excludes food and energy, rose 1.5%, just above the estimate of 1.3%, and the rate sits between the Fed's implied target of 1-2%. Treasuries remain higher after showing little reaction to the data.
Despite the worse-than-expected decline, the market is taking solace in the report, due to the 2.2% rise in spending by consumers, who represent nearly 70% of GDP. Negative impacts of falling inventory (down 2.8%) and government spending (down 4.0%) are expected to be reversed in the future, as the fiscal stimulus kicks in and low stocks of inventories combined with increasing demand imply the need to rebuild inventory in the future. There is some question as to whether the resumption in consumer spending is sustainable in light of high consumer debt levels, and whether the 1Q spending was a temporary blip that resulted from having a few extra dollars in consumer wallets. As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Market and Sector Analysis, Brad Sorensen, CFA, discuss in their latest Schwab Market Perspective: Do Tough Earnings = Higher Market?, when the crisis took another leg down following the Lehman Brothers bankruptcy last September, consumers went into hibernation and corporations began destocking inventory to align with falling sales. However, the steep fall in spending and manufacturing was so dramatic that it simply could not be sustained and some pent-up demand built up. In 2009, consumers have benefitted from mortgage refinancing, a decrease in gasoline prices versus a year ago, and tax refunds now up 17% from 2008. However, the economy is still contracting and it is probable that the path to recovery will not come in a straight line. Read more on their market perspective at www.schwab.com/marketinsight.
[via Schwab]
[4/28/09] The Consumer Confidence Index rose from an upwardly revised 26.9 in March to 39.2 in April, well above the estimate of 29.9. Along with the improved overall reading, consumer confidence about the present situation and expectations for the next six months improved. The report suggests the recent signs of life in the economy and the preceding rally in equities may be beginning to repair some of the damage in confidence that stemmed from the sharp deterioration in the employment picture and destruction of consumer net worth via the collapse in housing and the severe drop in equity prices in the past two years. However, Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Market and Sector Analysis, Brad Sorensen, CFA, caution in their latest Schwab Market Perspective: Do Tough Earnings = Higher Market?, the excess supply of homes available for sale will continue to pressure prices, and we expect prices to fall another 10%-15% before finding stability. However, sales typically turn before prices, and once home sales begin to rise, that could boost confidence and get others off the sidelines.
Thursday, April 30, 2009
Monday, April 27, 2009
4-1/2 sounds better than 25
HISTORICAL stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn.
But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.
How can this be? Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market.
By MARK HULBERT
Published: April 25, 2009
But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.
How can this be? Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market.
By MARK HULBERT
Published: April 25, 2009
Saturday, April 25, 2009
Alice Schroeder on Warren Buffett
Q How has your experience with Buffett changed or shaped your way of thinking, both financially and personally?
A Big topic. Yes, it has. This would be a separate interview if we had the time. I’ll just say that he prods people that he is friends with to lift their aspirations and expecations of themselves. He did that for me. At the same time, when you’re around him, you see how hard he works and you realize that you should not be out there trying to invest by yourself. You should buy an index fund.
All of these books that say you can get rich by investing like Warren Buffett, it’s a bunch of baloney. You can’t do it. He’s not only brilliant, but he works like a demon from morning until night and he’s been doing that for 70 years. So, when you see him and you’re around him, you realize the futility of trying to replicate his achievement. It can’t be done. But, at the same time, he lifts your aspirations in many other areas, including being extremely good at whatever it is you are good at. He made me far more focused in my career. He convinced me I could write. I didn’t know I could write.
[via brknews]
A Big topic. Yes, it has. This would be a separate interview if we had the time. I’ll just say that he prods people that he is friends with to lift their aspirations and expecations of themselves. He did that for me. At the same time, when you’re around him, you see how hard he works and you realize that you should not be out there trying to invest by yourself. You should buy an index fund.
All of these books that say you can get rich by investing like Warren Buffett, it’s a bunch of baloney. You can’t do it. He’s not only brilliant, but he works like a demon from morning until night and he’s been doing that for 70 years. So, when you see him and you’re around him, you realize the futility of trying to replicate his achievement. It can’t be done. But, at the same time, he lifts your aspirations in many other areas, including being extremely good at whatever it is you are good at. He made me far more focused in my career. He convinced me I could write. I didn’t know I could write.
[via brknews]
Thursday, April 23, 2009
Jim Rogers and the two Cs
The legendary investor is sticking for now with the two Cs: China and commodities.
WELL, BANK EXECUTIVES and investors can breathe a sigh of relief: Jim Rogers has covered the short positions on financial stocks he put in place ahead of last year's massive meltdown.
But just because this influential investor isn't betting that big banks will fall much further doesn't mean he's confident they will stage a lasting rally either. He feels similarly about U.S. stocks in general.
"I am skeptical about the rally, and the world economy for the next year or two or three," he says. "But if stocks go down, I can make money with commodities."
Rogers, now 66, gained fame as George Soros' hedge-fund partner in the 1970s and 1980s. After retiring from professional money manager in his late 30s, the Alabama native tooled around Europe, Asia, Africa, and Latin America visiting emerging markets, one by one. His resulting book, Investment Biker, helped to popularize emerging market investing at the outset of a bull market for the sector.
He also helped to popularize commodity investing, which for decades was the province of niche investors. In the 1990s, he developed commodity indexes based on futures contracts that in recent years have been turned into exchange-traded funds available to all investors. His 2004 book, Hot Commodities, came ahead of a surge prices for energy, metals, and agriculture.
Since its inception in July 1998, the Rogers International Commodities Index has gained 158%, while the S&P 500 has fallen 23%. And that gain for the commodities index comes despite the fact that it's lost more than half of its value since last July. At these levels, Rogers has been a buyer.
These days, Rogers, now 66, is sticking close to home in Singapore with his wife, Paige Parker, and two small daughters. He's about to release his latest book, A Gift to My Children: A Father's Lessons for Life and Investing (Random House), in which he encourages other people's children to travel widely and learn Mandarin so they can reap the rewards of China's economic boom.
Recently, Rogers talked to Barrons.com by phone from his Singapore home.
Q: When you last did a lengthy interview with Barron's magazine a year ago (see "Light Years Ahead of the Crowd," April 14, 2008) you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?
A: No. I've sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then. I'm not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It's been the strongest market in the world in the past six months and I don't like jumping into something that has been that run up. Still, I'm not thinking of selling these stocks either. I think if it goes down I'll buy more. I think you will find that it's the single strongest market in the world since last fall.
Q: In your latest book, you talk of China as the great investment opportunity of the 21st century, just as the U.S. was in the 20th century. What percentage of a typical American investor's portfolio should be in China?
A: If they can't even find China on a map, I don't think they should have anything in China. They should know something about China before they invest there. If they have the same convictions that I do then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.
Q: Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?
A: Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States. The idea of investing is to make money, not to have some sort of political agenda.
Q: That being said, you currently think Chinese stocks are bid-up now, so you're not buying at these levels. So what have you been buying lately?
A: I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won't let me buy individual commodities. I recently bought the all four Rogers indexes – the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.) That's how I invest in commodities and that's what I bought last week. I have been buying these shares since last fall and up to last week.
Q: Though you got out of emerging markets last year before they fell hard, you seemed be caught by surprise by the fall-off in commodity prices last year. Is that right?
A: Yes, I was surprised. I did not expect commodities to go down that much and in retrospect it was a period of forced liquidation for many (professional) investors. You know AIG went bankrupt, which was huge in commodities. Lehman Brothers was big in commodities.
But at least I was shorting the investment banks at the time and other financials such as Citigroup and Fannie Mae. So I was hedged by being long commodities and short the other things such as financials and as you know most of them were down from 80% to 100%, so I more than made up on my shorts than I lost on my longs. So thank God for (the stock decline in) Citigroup and thank God (for the decline) in Fannie Mae.
Q: Now despite the recent stock-market rally that started in March, many U.S. stocks are trading well off their 2007 highs. How come you see no value to this market?
A: I am not buying U.S. companies mainly because I think we may have seen a bottom but I don't think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.
Q: Can you summarize the reasons for your bullishness about commodities?
A: It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years. And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it's going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.
That does not mean that if suddenly the U.S. goes bankrupt that everything won't collapse in price. But I would rather be in commodities because it's the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.
Q: What do you think of bonds?
A: I am anticipating shorting bonds -- the U.S. long bond. It's about the only real bubble around that I can see right now -- other than the U.S. dollar. I am not shorting bonds at this moment because I've shorted plenty of bubbles in my day, and I have learned that you better wait because they go up higher than any rational person can anticipate. But my plan is to short the long bond in the U.S. sometime in the foreseeable future.
Q: I've read that you think the penchant of the last two presidential administrations for bailing out failing U.S. companies is a big mistake and will contribute to prolonging this recession. You argue that it's best to let these companies all go bankrupt. How bad can the economy get?
A: Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn't last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.
It's laughable on its face, but politicians think they've got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.
***
[10/13/09 more..]
The 21st century belongs to China
According to Rogers, the 19th century was the era of the British Empire and the 20th century was the U.S.’ heyday. But the 21st century is China’s (though the rest of Asia is definitely going to get a boost too).
Jim Rogers is not a Ben Bernanke fan
Yep, it’s a fact. No “Team Bernanke” shirts for Jim Rogers (who said to scattered applause during the Q&A session that if he was in charge of the U.S. economy he would “abolish the Fed and resign.”).
Rogers is appalled by the government’s actions—Bernanke’s in particular. The U.S. government’s strategy calls for the debasement of the dollar, he says, calling it a “horrible policy.” While he concedes it can work in the short term, it NEVER works in the mid- or long term.
“He’s going to run those printing presses until we run out of trees, because that’s the only thing he knows,” Rogers said of Bernanke.
Add that on top of the country’s rapidly growing astronomical debt, and Rogers believes you’ve got a recipe for disaster.
Commodities, commodities, commodities
OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.
U.S. government bonds are the next big bubble
Well, would you lend money to us? Rogers says short-term bonds are probably OK, but he advises getting out of anything with a longer maturity. He calls it “inconceivable” that anyone would lend money to the U.S. for 30 years at the going rate, and notes that the U.S. was a creditor nation as recently as 1987.
“Now the U.S. is the largest debtor nation in the history of the world,” he said.
WELL, BANK EXECUTIVES and investors can breathe a sigh of relief: Jim Rogers has covered the short positions on financial stocks he put in place ahead of last year's massive meltdown.
But just because this influential investor isn't betting that big banks will fall much further doesn't mean he's confident they will stage a lasting rally either. He feels similarly about U.S. stocks in general.
"I am skeptical about the rally, and the world economy for the next year or two or three," he says. "But if stocks go down, I can make money with commodities."
Rogers, now 66, gained fame as George Soros' hedge-fund partner in the 1970s and 1980s. After retiring from professional money manager in his late 30s, the Alabama native tooled around Europe, Asia, Africa, and Latin America visiting emerging markets, one by one. His resulting book, Investment Biker, helped to popularize emerging market investing at the outset of a bull market for the sector.
He also helped to popularize commodity investing, which for decades was the province of niche investors. In the 1990s, he developed commodity indexes based on futures contracts that in recent years have been turned into exchange-traded funds available to all investors. His 2004 book, Hot Commodities, came ahead of a surge prices for energy, metals, and agriculture.
Since its inception in July 1998, the Rogers International Commodities Index has gained 158%, while the S&P 500 has fallen 23%. And that gain for the commodities index comes despite the fact that it's lost more than half of its value since last July. At these levels, Rogers has been a buyer.
These days, Rogers, now 66, is sticking close to home in Singapore with his wife, Paige Parker, and two small daughters. He's about to release his latest book, A Gift to My Children: A Father's Lessons for Life and Investing (Random House), in which he encourages other people's children to travel widely and learn Mandarin so they can reap the rewards of China's economic boom.
Recently, Rogers talked to Barrons.com by phone from his Singapore home.
Q: When you last did a lengthy interview with Barron's magazine a year ago (see "Light Years Ahead of the Crowd," April 14, 2008) you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?
A: No. I've sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then. I'm not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It's been the strongest market in the world in the past six months and I don't like jumping into something that has been that run up. Still, I'm not thinking of selling these stocks either. I think if it goes down I'll buy more. I think you will find that it's the single strongest market in the world since last fall.
Q: In your latest book, you talk of China as the great investment opportunity of the 21st century, just as the U.S. was in the 20th century. What percentage of a typical American investor's portfolio should be in China?
A: If they can't even find China on a map, I don't think they should have anything in China. They should know something about China before they invest there. If they have the same convictions that I do then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.
Q: Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?
A: Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States. The idea of investing is to make money, not to have some sort of political agenda.
Q: That being said, you currently think Chinese stocks are bid-up now, so you're not buying at these levels. So what have you been buying lately?
A: I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won't let me buy individual commodities. I recently bought the all four Rogers indexes – the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.) That's how I invest in commodities and that's what I bought last week. I have been buying these shares since last fall and up to last week.
Q: Though you got out of emerging markets last year before they fell hard, you seemed be caught by surprise by the fall-off in commodity prices last year. Is that right?
A: Yes, I was surprised. I did not expect commodities to go down that much and in retrospect it was a period of forced liquidation for many (professional) investors. You know AIG went bankrupt, which was huge in commodities. Lehman Brothers was big in commodities.
But at least I was shorting the investment banks at the time and other financials such as Citigroup and Fannie Mae. So I was hedged by being long commodities and short the other things such as financials and as you know most of them were down from 80% to 100%, so I more than made up on my shorts than I lost on my longs. So thank God for (the stock decline in) Citigroup and thank God (for the decline) in Fannie Mae.
Q: Now despite the recent stock-market rally that started in March, many U.S. stocks are trading well off their 2007 highs. How come you see no value to this market?
A: I am not buying U.S. companies mainly because I think we may have seen a bottom but I don't think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.
Q: Can you summarize the reasons for your bullishness about commodities?
A: It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years. And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it's going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.
That does not mean that if suddenly the U.S. goes bankrupt that everything won't collapse in price. But I would rather be in commodities because it's the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.
Q: What do you think of bonds?
A: I am anticipating shorting bonds -- the U.S. long bond. It's about the only real bubble around that I can see right now -- other than the U.S. dollar. I am not shorting bonds at this moment because I've shorted plenty of bubbles in my day, and I have learned that you better wait because they go up higher than any rational person can anticipate. But my plan is to short the long bond in the U.S. sometime in the foreseeable future.
Q: I've read that you think the penchant of the last two presidential administrations for bailing out failing U.S. companies is a big mistake and will contribute to prolonging this recession. You argue that it's best to let these companies all go bankrupt. How bad can the economy get?
A: Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn't last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.
It's laughable on its face, but politicians think they've got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.
***
[10/13/09 more..]
The 21st century belongs to China
According to Rogers, the 19th century was the era of the British Empire and the 20th century was the U.S.’ heyday. But the 21st century is China’s (though the rest of Asia is definitely going to get a boost too).
Jim Rogers is not a Ben Bernanke fan
Yep, it’s a fact. No “Team Bernanke” shirts for Jim Rogers (who said to scattered applause during the Q&A session that if he was in charge of the U.S. economy he would “abolish the Fed and resign.”).
Rogers is appalled by the government’s actions—Bernanke’s in particular. The U.S. government’s strategy calls for the debasement of the dollar, he says, calling it a “horrible policy.” While he concedes it can work in the short term, it NEVER works in the mid- or long term.
“He’s going to run those printing presses until we run out of trees, because that’s the only thing he knows,” Rogers said of Bernanke.
Add that on top of the country’s rapidly growing astronomical debt, and Rogers believes you’ve got a recipe for disaster.
Commodities, commodities, commodities
OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.
U.S. government bonds are the next big bubble
Well, would you lend money to us? Rogers says short-term bonds are probably OK, but he advises getting out of anything with a longer maturity. He calls it “inconceivable” that anyone would lend money to the U.S. for 30 years at the going rate, and notes that the U.S. was a creditor nation as recently as 1987.
“Now the U.S. is the largest debtor nation in the history of the world,” he said.
Margin of Safety by Seth Klarman
by Saj Karsan
In the next few weeks, we'll be doing a chapter-by-chapter run-down of Seth Klarman's sought after book, Margin Of Safety. We've discussed Klarman on my website before, as he has consistently demonstrated an ability to generate market beating returns over a long period of time. You can find Klarman's limited edition book selling on ebay for hundreds of dollars.
Chapter 1
Klarman starts out by distinguishing investing from speculating. He uses a Mark Twain quote to illustrate the two times in life when one shouldn't speculate: "when you can't afford it, and when you can!". Speculators buy in the hopes or assumptions that others will want to buy the same asset (be it a painting, a baseball card, or a stock) later, while investors buy the cash flow the investment returns to its owner. (As such, a painting can never be an investment by this definition!)
Chapter 2
What's good for Wall Street is not necessarily good for investors, according to Klarman. Because of how Wall Street does business, it has a very short-term focus. For example, Wall Street makes money up-front on commissions (not from long-term performance), therefore the Street will always push for churn and will always push "hot" investments.
Chapter 3
In this chapter, Klarman discusses how the investment world has changed over the last several decades, and how understanding these changes allows investors to earn superior returns. From 1950 to 1990, the institutional share of the market rose from 8% to 45%, and institutions comprise 75% of market trading volume. But the institutions are hampered by a short-term mindset, and Klarman attempts to explain why.
Chapter 4
In this chapter, Klarman examines the junk bond market in depth to illustrate how Wall Street can create investment fads, only to leave investors much poorer when the tide goes out.
Chapter 5
In the previous four chapters, Klarman focused on describing how investors go wrong. Chapter 5 is an introduction to the second part of the book, where Klarman describes the philosophy of value investing.
Chapter 6
This chapter is dedicated to describing the philosophy of value investing and why it works. The terms used to describe value investing don't require any accounting or finance background, making this an easy read for beginners looking to learn about value investing.
Chapter 7
Klarman introduces what he calls the three central elements to a value investing philosophy:
1) A "bottom-up" strategy
2) Absolute (as opposed to relative) performance
3) A risk averse approach
Chapter 8
Business value cannot be precisely determined, Klarman asserts. Not only do a number of assumptions go into a business valuation, but relevant macro and micro economic factors are constantly changing, making a precise valuation impossible.
Klarman discusses what he believes to be the only three ways to value a business. The first method involves finding the net present value by discounting future cash flows. The second method is Private Market Value. Finally, Klarman discusses liquidation value as a method of valuation.
Chapter 9
Sometimes, there are so many value investments available that the only constraint on the investor is a lack of funds. Most times, however, Klarman finds it difficult to find value investment opportunities. Investors can spend a lot of time reading through financial reports, research reports, and other financial news and end up finding nothing but fairly valued opportunities. Therefore, it is important that the investor look in the right places.
A few of the places Klarman suggests finding investment opportunities include the new-low lists and the largest percentage-decliners lists which are published by major news sources. Klarman also finds that companies whose dividends have been cut or eliminated can also be unduly punished by the market, leaving investment opportunities. Of course, just because a stock shows up on one of these lists does not make it a buy; one still has to go through the valuation process described in previous chapters in order to determine whether it trades at a discount to its fair value.
Chapter 10
This chapter contains of a plethora of value investing examples. Klarman details a number of securities where investors who paid attention to fundamentals (e.g. strong businesses masked by unprofitable divisions, or companies trading at discounts to cash etc.) reaped enormous profits.
Chapter 11
This chapter examines opportunities at the time of writing that value investors had in the banking sector. In the mid-1980s to early 1990s, many banks were selling for less than book value. During the recession of the early 90s, many thrifts had to be bailed out by the government due to some of the high-risk loans they had offered and due to the general downturn in the US real-estate market...remind you of today?
* * *
Value-Stock-Plus page
***
[12/1/09] Currently, Seth Klarman is very popular in the value investment community. He is particularly popular on Gurufocus.com, where people are literally watching every move he makes.
One of the biggest mysteries about Klarman is what is he is actually holding in his portfolio. You can see his stock and convertible bond holdings and their value filed under the 13-F. In Baupost's 13-F for Q3, total securities listed are $1.36 billion dollars. Klarman stated that he had 30% of his portfolio in cash which is not listed on the 13-F.
Now, here is the shocking part. I called up Baupost and they informed me that they had slightly under $20 billion assets under management. Let us assume that they are managing about $18 billion because that is slightly under the amount they named. That means $6 billion is in cash and $1.36 billion is in stocks and convertible bonds. That leaves more than 50% of their assets or about $10.6 billion not listed in their 13-F.
This $1.36 billion is not an insignificant number, however it is clear that most of his return are coming not from the $6 billion in cash or even the $1.36 billion in stocks and convertibles. Most of his return is coming from his bond holdings. In fact, we would not even know that he had $6 billion had the notes not leaked out from the Baupost meeting. Without these details, all one would know is that Baupost had $1.3 billion in convertibles and stocks and about $17 billion unaccounted for.
One important thing to remember is when you see that Klarman has posted 20% returns annually, you might think you can achieve the same returns by coping him. However, this is not necessarily the case since most of his gains are coming from his bonds (which are not reported). This does not mean that Klarman is not an amazing stock investor or that his stock investments should be ignored. In fact, he has achieved some spectacular results from his stock portfolio, including a recent 75% return in one day from his holding in Facet Biotech Corporation. The significance of the above information is one must realize before trying to mimic Klarman is that you are only seeing a small fraction of the full picture. I doubt we will ever know what Klarman’s full holdings truly are.
***
[9/12/10] Seth Klarman interviewed by Jason Zweig
[12/1/11] Seth Klarman interviewed by Charlie Rose (video)
[4/19/12] Notes to Margin of Safety
[4/28/13] The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning with the rst edition of Security Analysis. That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful. The foibles of human nature that result in the mass pursuit of instant wealth and effortless gain seem certain to be with us forever. So long as people succumb to this aspect of their natures, value investing will remain, as it has been for 75 years, a sound and low risk approach to successful long term investing.
—Seth Klarman, The Baupost Group [from the Art of Value Investing]
In the next few weeks, we'll be doing a chapter-by-chapter run-down of Seth Klarman's sought after book, Margin Of Safety. We've discussed Klarman on my website before, as he has consistently demonstrated an ability to generate market beating returns over a long period of time. You can find Klarman's limited edition book selling on ebay for hundreds of dollars.
Chapter 1
Klarman starts out by distinguishing investing from speculating. He uses a Mark Twain quote to illustrate the two times in life when one shouldn't speculate: "when you can't afford it, and when you can!". Speculators buy in the hopes or assumptions that others will want to buy the same asset (be it a painting, a baseball card, or a stock) later, while investors buy the cash flow the investment returns to its owner. (As such, a painting can never be an investment by this definition!)
Chapter 2
What's good for Wall Street is not necessarily good for investors, according to Klarman. Because of how Wall Street does business, it has a very short-term focus. For example, Wall Street makes money up-front on commissions (not from long-term performance), therefore the Street will always push for churn and will always push "hot" investments.
Chapter 3
In this chapter, Klarman discusses how the investment world has changed over the last several decades, and how understanding these changes allows investors to earn superior returns. From 1950 to 1990, the institutional share of the market rose from 8% to 45%, and institutions comprise 75% of market trading volume. But the institutions are hampered by a short-term mindset, and Klarman attempts to explain why.
Chapter 4
In this chapter, Klarman examines the junk bond market in depth to illustrate how Wall Street can create investment fads, only to leave investors much poorer when the tide goes out.
Chapter 5
In the previous four chapters, Klarman focused on describing how investors go wrong. Chapter 5 is an introduction to the second part of the book, where Klarman describes the philosophy of value investing.
Chapter 6
This chapter is dedicated to describing the philosophy of value investing and why it works. The terms used to describe value investing don't require any accounting or finance background, making this an easy read for beginners looking to learn about value investing.
Chapter 7
Klarman introduces what he calls the three central elements to a value investing philosophy:
1) A "bottom-up" strategy
2) Absolute (as opposed to relative) performance
3) A risk averse approach
Chapter 8
Business value cannot be precisely determined, Klarman asserts. Not only do a number of assumptions go into a business valuation, but relevant macro and micro economic factors are constantly changing, making a precise valuation impossible.
Klarman discusses what he believes to be the only three ways to value a business. The first method involves finding the net present value by discounting future cash flows. The second method is Private Market Value. Finally, Klarman discusses liquidation value as a method of valuation.
Chapter 9
Sometimes, there are so many value investments available that the only constraint on the investor is a lack of funds. Most times, however, Klarman finds it difficult to find value investment opportunities. Investors can spend a lot of time reading through financial reports, research reports, and other financial news and end up finding nothing but fairly valued opportunities. Therefore, it is important that the investor look in the right places.
A few of the places Klarman suggests finding investment opportunities include the new-low lists and the largest percentage-decliners lists which are published by major news sources. Klarman also finds that companies whose dividends have been cut or eliminated can also be unduly punished by the market, leaving investment opportunities. Of course, just because a stock shows up on one of these lists does not make it a buy; one still has to go through the valuation process described in previous chapters in order to determine whether it trades at a discount to its fair value.
Chapter 10
This chapter contains of a plethora of value investing examples. Klarman details a number of securities where investors who paid attention to fundamentals (e.g. strong businesses masked by unprofitable divisions, or companies trading at discounts to cash etc.) reaped enormous profits.
Chapter 11
This chapter examines opportunities at the time of writing that value investors had in the banking sector. In the mid-1980s to early 1990s, many banks were selling for less than book value. During the recession of the early 90s, many thrifts had to be bailed out by the government due to some of the high-risk loans they had offered and due to the general downturn in the US real-estate market...remind you of today?
* * *
Value-Stock-Plus page
***
[12/1/09] Currently, Seth Klarman is very popular in the value investment community. He is particularly popular on Gurufocus.com, where people are literally watching every move he makes.
One of the biggest mysteries about Klarman is what is he is actually holding in his portfolio. You can see his stock and convertible bond holdings and their value filed under the 13-F. In Baupost's 13-F for Q3, total securities listed are $1.36 billion dollars. Klarman stated that he had 30% of his portfolio in cash which is not listed on the 13-F.
Now, here is the shocking part. I called up Baupost and they informed me that they had slightly under $20 billion assets under management. Let us assume that they are managing about $18 billion because that is slightly under the amount they named. That means $6 billion is in cash and $1.36 billion is in stocks and convertible bonds. That leaves more than 50% of their assets or about $10.6 billion not listed in their 13-F.
This $1.36 billion is not an insignificant number, however it is clear that most of his return are coming not from the $6 billion in cash or even the $1.36 billion in stocks and convertibles. Most of his return is coming from his bond holdings. In fact, we would not even know that he had $6 billion had the notes not leaked out from the Baupost meeting. Without these details, all one would know is that Baupost had $1.3 billion in convertibles and stocks and about $17 billion unaccounted for.
One important thing to remember is when you see that Klarman has posted 20% returns annually, you might think you can achieve the same returns by coping him. However, this is not necessarily the case since most of his gains are coming from his bonds (which are not reported). This does not mean that Klarman is not an amazing stock investor or that his stock investments should be ignored. In fact, he has achieved some spectacular results from his stock portfolio, including a recent 75% return in one day from his holding in Facet Biotech Corporation. The significance of the above information is one must realize before trying to mimic Klarman is that you are only seeing a small fraction of the full picture. I doubt we will ever know what Klarman’s full holdings truly are.
***
[9/12/10] Seth Klarman interviewed by Jason Zweig
[12/1/11] Seth Klarman interviewed by Charlie Rose (video)
[4/19/12] Notes to Margin of Safety
[4/28/13] The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning with the rst edition of Security Analysis. That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful. The foibles of human nature that result in the mass pursuit of instant wealth and effortless gain seem certain to be with us forever. So long as people succumb to this aspect of their natures, value investing will remain, as it has been for 75 years, a sound and low risk approach to successful long term investing.
—Seth Klarman, The Baupost Group [from the Art of Value Investing]
Friday, April 17, 2009
How cheap are U.S. stocks?
Using trailing average five year earnings through 2008 to calculate the S&P 500 earnings coupon, U.S. equities are the cheapest they have been since the Depression when compared to the 10-year Treasury yield. Because this calculation encompasses the financials’ losses reported in 2007 and 2008, one could argue that the attractive 7.7% earnings yield is artificially low.
Academicians Eugene Fama and Kenneth French recently published a study that found that value stocks have declined two years in a row only five times: during the Great Depression in 1929-32; at the beginning of WWII in 1939-41; during the Arab oil embargo of 1973-74; when the Internet bubble popped in 2001-02; and now as the housing bubble deflates. Following the four prior periods, stocks snapped back by an average of 60% in the next 12 months.
-- Longleaf Partners, 2008 Annual Report
Academicians Eugene Fama and Kenneth French recently published a study that found that value stocks have declined two years in a row only five times: during the Great Depression in 1929-32; at the beginning of WWII in 1939-41; during the Arab oil embargo of 1973-74; when the Internet bubble popped in 2001-02; and now as the housing bubble deflates. Following the four prior periods, stocks snapped back by an average of 60% in the next 12 months.
-- Longleaf Partners, 2008 Annual Report
Tuesday, April 14, 2009
stock pros who survived the depression
IRVING KAHN SITS AT HIS CLUTTERED DESK, PEERING AT his computer screen through thick, dark glasses. The Dow inched up 38 points today, a small move in light of its 332-point drop earlier in the week. But Kahn has made a career of betting on beaten-down stocks, and he’s hard at work poring over annual reports and studying balance sheets looking for companies that have lots of cash, not much debt and good long-term growth prospects. General Electric has a solid business and looks pretty good at these prices, he muses. General Motors? Not so much.
Like a lot of us, Kahn has seen good times and bad, bull markets and bear markets, recessions and recoveries. But he’s also seen something most of us haven’t: the Great Depression. Kahn, who still shows up at work every day and puts in a good six hours, worked as a stock analyst and brokerage clerk on Wall Street in the 1930s. He’s 103 years old.
Like a lot of us, Kahn has seen good times and bad, bull markets and bear markets, recessions and recoveries. But he’s also seen something most of us haven’t: the Great Depression. Kahn, who still shows up at work every day and puts in a good six hours, worked as a stock analyst and brokerage clerk on Wall Street in the 1930s. He’s 103 years old.
Monday, April 13, 2009
Charles Allmon still in cash
Mark Hulbert's column in Barron's
WOULD BEN GRAHAM'S famous value-stock investment strategy have protected you in the bear market that began 18 months ago?
The surprising answer, I have found, is "yes." And that's remarkable, since virtually all of the most popular stock-picking strategies, including those that ostensibly fit into the category of "value investing," lost nearly as much as the overall averages during the recent bear market -- if not more.
Ironically, however, few investors actually benefitted from the protection that Graham's strategy could have afforded. His approach fell out of favor several decades ago, when the bull market of the 1980s and 1990s further and further divorced stock prices from fundamental value.
One of the ancillary benefits of the recent bear market, therefore, may be to reacquaint investors with the advantages of paying attention to value.
That would represent a fitting 75th anniversary present to the value school of investing. Back in 1934, Graham (along with David Dodd) wrote what has become the definitive textbook on value investing -- Security Analysis, now in its sixth edition. In fact, this book not only ushered in value investing, it provided the blueprint for fundamental analysis of stocks.
Perhaps not surprisingly, given that Graham developed his approach to investing during the Great Depression, his definition of value was very strict. Instead of defining value in relative terms, as do most value managers today, Graham defined it in absolute terms. That in turn meant that there would be times when few, if any, securities were considered to represent genuine value.
It took exceptional discipline to adhere to Graham's approach in a bull market that was causing stock prices to soar into the stratosphere, and few value managers possessed it. As their clients left them in droves, many value managers chose instead to define value in relative terms: So long as a stock's price-to-earnings or price-to-book ratios were lower than that of most other stocks, a stock satisfied this modern, more liberal definition of value.
That approach may have afforded value managers the possibility of participating in the bull market. But it left them vulnerable as never before to the downside.
Consider two hypothetical portfolios, one of growth stocks and the other of value stocks, constructed by Eugene Fama and Kenneth French, finance professors at the University of Chicago and Dartmouth College.
The value portfolio contained the approximately 30% of stocks with the lowest price-to-book ratios, while the growth portfolio contained the 30% of stocks with the highest such ratios. At the bear-market low earlier this year, the value portfolio was 57% below its peak in the fall of 2007, while the growth portfolio was "just" 42% below.
If value is not defined in relative terms, then how can it be defined? Graham employed a number of criteria, but his primary one was to compare a company's stock price to its net current assets per share. (Net current assets are total current assets minus total current liabilities, long-term debt and the redemption value of preferred stock.) Graham believed that a stock should be bought only if it was trading for less than two-thirds of its per share net current assets.
At the depths of the Great Depression, hundreds of stocks on the New York Stock Exchange satisfied this demanding criterion. That number fell in subsequent decades, however. By the late 1980s and 1990s, there were many occasions in which not one common stock on the NYSE was able to satisfy it. An adviser who stayed true to Graham's criteria, therefore, would have had no choice but to build up an increasingly large cash position in his portfolio.
To those who think that this would have hopelessly handicapped long-term performance, consider the model portfolio contained by Growth Stock Outlook, a newsletter edited for the last 44 years by Charles Allmon. Though Allmon has not purely adhered to Graham's definition of value, he has come closer over the years than any of the other newsletter editors that the Hulbert Financial Digest (HFD) monitors.
Allmon in fact claims almost apostolic succession from Graham, according to Peter Brimelow, in his book on the investment newsletter industry titled The Wall Street Gurus (Random House, 1986). Brimelow quotes Allmon as saying: "'Graham called me on the phone, as I recall in 1969, maybe 1970. He said, 'I've got a copy of your Growth Stock Outlook, and I've been very intrigued by what you're doing here. How are you spotting these values?' I said, 'Mr., Graham, I'm taking a lot of your own criteria and trying to crank in my own for value relative to growth potential.' And he said, 'Well, it's a very intriguing idea. I think if I were young again, that might be the course I would take. It sort of speeds things up a bit'."
True to Graham's legacy, Allmon began building up a large cash position in 1986. With no more than one or two exceptions since then, his model portfolio has been more than 80% cash. Thanks in no small part to the recent bear market, Allmon's newsletter is now in first place for risk-adjusted performance among all HFD-monitored newsletters since 1980, when the HFD began monitoring the newsletter.
What would Graham be advocating now? You might think that he would be increasing his equity exposure, since the number of stocks selling for less than two-thirds of per-share net current assets is starting to grow. But Allmon, at least, remains firmly in the bearish camp, continuing to recommend that subscribers have more than 80% of their equity portfolios in cash.
He wrote recently that "our country appears to be on the brink of the biggest financial firestorm in our 220-year history." Expressing little confidence that the government will get us out of this mess, he adds that "the trick now is to avoid being scalded in a sea of nonsense."
Of the three stocks that Allmon's newsletter portfolio currently owns, the biggest holding is Newmont Mining Corporation (ticker: NEM); he is forecasting "5% to 15% U.S. inflation," which will in turn lead gold bullion to trade over $1,800 an ounce.
The two other stocks that his model portfolio owns are Altria Group (MO) and Philip Morris International (PM).
We can only wonder whether Graham would have approved.
* * *
[This is interesting to me as I have that book The Wall Street Gurus and used to own Allmon's fund until it became Liberty All-Star back in ... 1995.]
WOULD BEN GRAHAM'S famous value-stock investment strategy have protected you in the bear market that began 18 months ago?
The surprising answer, I have found, is "yes." And that's remarkable, since virtually all of the most popular stock-picking strategies, including those that ostensibly fit into the category of "value investing," lost nearly as much as the overall averages during the recent bear market -- if not more.
Ironically, however, few investors actually benefitted from the protection that Graham's strategy could have afforded. His approach fell out of favor several decades ago, when the bull market of the 1980s and 1990s further and further divorced stock prices from fundamental value.
One of the ancillary benefits of the recent bear market, therefore, may be to reacquaint investors with the advantages of paying attention to value.
That would represent a fitting 75th anniversary present to the value school of investing. Back in 1934, Graham (along with David Dodd) wrote what has become the definitive textbook on value investing -- Security Analysis, now in its sixth edition. In fact, this book not only ushered in value investing, it provided the blueprint for fundamental analysis of stocks.
Perhaps not surprisingly, given that Graham developed his approach to investing during the Great Depression, his definition of value was very strict. Instead of defining value in relative terms, as do most value managers today, Graham defined it in absolute terms. That in turn meant that there would be times when few, if any, securities were considered to represent genuine value.
It took exceptional discipline to adhere to Graham's approach in a bull market that was causing stock prices to soar into the stratosphere, and few value managers possessed it. As their clients left them in droves, many value managers chose instead to define value in relative terms: So long as a stock's price-to-earnings or price-to-book ratios were lower than that of most other stocks, a stock satisfied this modern, more liberal definition of value.
That approach may have afforded value managers the possibility of participating in the bull market. But it left them vulnerable as never before to the downside.
Consider two hypothetical portfolios, one of growth stocks and the other of value stocks, constructed by Eugene Fama and Kenneth French, finance professors at the University of Chicago and Dartmouth College.
The value portfolio contained the approximately 30% of stocks with the lowest price-to-book ratios, while the growth portfolio contained the 30% of stocks with the highest such ratios. At the bear-market low earlier this year, the value portfolio was 57% below its peak in the fall of 2007, while the growth portfolio was "just" 42% below.
If value is not defined in relative terms, then how can it be defined? Graham employed a number of criteria, but his primary one was to compare a company's stock price to its net current assets per share. (Net current assets are total current assets minus total current liabilities, long-term debt and the redemption value of preferred stock.) Graham believed that a stock should be bought only if it was trading for less than two-thirds of its per share net current assets.
At the depths of the Great Depression, hundreds of stocks on the New York Stock Exchange satisfied this demanding criterion. That number fell in subsequent decades, however. By the late 1980s and 1990s, there were many occasions in which not one common stock on the NYSE was able to satisfy it. An adviser who stayed true to Graham's criteria, therefore, would have had no choice but to build up an increasingly large cash position in his portfolio.
To those who think that this would have hopelessly handicapped long-term performance, consider the model portfolio contained by Growth Stock Outlook, a newsletter edited for the last 44 years by Charles Allmon. Though Allmon has not purely adhered to Graham's definition of value, he has come closer over the years than any of the other newsletter editors that the Hulbert Financial Digest (HFD) monitors.
Allmon in fact claims almost apostolic succession from Graham, according to Peter Brimelow, in his book on the investment newsletter industry titled The Wall Street Gurus (Random House, 1986). Brimelow quotes Allmon as saying: "'Graham called me on the phone, as I recall in 1969, maybe 1970. He said, 'I've got a copy of your Growth Stock Outlook, and I've been very intrigued by what you're doing here. How are you spotting these values?' I said, 'Mr., Graham, I'm taking a lot of your own criteria and trying to crank in my own for value relative to growth potential.' And he said, 'Well, it's a very intriguing idea. I think if I were young again, that might be the course I would take. It sort of speeds things up a bit'."
True to Graham's legacy, Allmon began building up a large cash position in 1986. With no more than one or two exceptions since then, his model portfolio has been more than 80% cash. Thanks in no small part to the recent bear market, Allmon's newsletter is now in first place for risk-adjusted performance among all HFD-monitored newsletters since 1980, when the HFD began monitoring the newsletter.
What would Graham be advocating now? You might think that he would be increasing his equity exposure, since the number of stocks selling for less than two-thirds of per-share net current assets is starting to grow. But Allmon, at least, remains firmly in the bearish camp, continuing to recommend that subscribers have more than 80% of their equity portfolios in cash.
He wrote recently that "our country appears to be on the brink of the biggest financial firestorm in our 220-year history." Expressing little confidence that the government will get us out of this mess, he adds that "the trick now is to avoid being scalded in a sea of nonsense."
Of the three stocks that Allmon's newsletter portfolio currently owns, the biggest holding is Newmont Mining Corporation (ticker: NEM); he is forecasting "5% to 15% U.S. inflation," which will in turn lead gold bullion to trade over $1,800 an ounce.
The two other stocks that his model portfolio owns are Altria Group (MO) and Philip Morris International (PM).
We can only wonder whether Graham would have approved.
* * *
[This is interesting to me as I have that book The Wall Street Gurus and used to own Allmon's fund until it became Liberty All-Star back in ... 1995.]
Sunday, April 12, 2009
David Dreman fired from own fund
NYTimes.com
By FLOYD NORRIS
Published: April 9, 2009
David N. Dreman was a star mutual fund manager. Then he bought bank shares and held on as the financial crisis grew.
Now he has been fired from the flagship fund that bears his name, despite what remains a good long-term record. The fund’s name will be changed, and the fund will take fewer risks. A drab industry will become a little drabber.
In the past, the firings of once-celebrated fund managers have sometimes provided a market signal of its own — that the trend that led to their poor performance was about to end. If that were to happen this time, there could be a revival for so-called value stocks, and particularly for the beaten-down and almost universally disdained financial stocks.
“The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace and the experts you respect,” Mr. Dreman wrote in his best-selling 1998 book, “Contrarian Investment Strategies.”
Mr. Dreman rose to fame in the 1990s, when the fund he began in 1988 amassed an impressive long-term record. But he had been preaching, and practicing, the gospel of investing in unpopular stocks with low price-earnings ratios since the late 1970s. He has been a columnist for Forbes Magazine.
As the fund industry concentrated, the Dreman fund family was bought by Kemper, which was bought by Scudder, which was bought by Deutsche Bank. Last week the fund board installed by Deutsche quietly filed with the Securities and Exchange Commission a disclosure that Mr. Dreman’s firm would no longer manage what is now called the DWS Dreman High Return Equity Fund.
On June 1, Deutsche will take over the management, and assign the job to a team of managers based in its Frankfurt office. The fund will become known as the DWS Strategic Value Fund. Mr. Dreman’s firm will continue to manage three smaller Deutsche funds, but don’t be surprised if those relationships eventually end.
Mr. Dreman, who is 72, did not sound bitter when I spoke to him this week. “The board of directors is obviously entitled to do what they did,” he said. But neither was he repentant. “Low P/E has worked well over time,” he added. “There will be years that we are very out of favor, but we make it up.”
You wouldn’t have known that the fund’s long-term record remained better than the market from reading what Deutsche officials had to say. “We had seen very weak performance for the fund over every major time horizon,” David Wertheim, the bank’s project manager for equities, told Bloomberg News. He declined to speak to me.
Those time frames are one year, three years and five years, the periods that are used by fund raters like Morningstar and Lipper. Just now they are dominated by last year, which was a horrid one for the Dreman fund. Even so, it still has a superior long-term record.
There are few celebrity mutual fund managers any more. Fund groups prefer to promote themselves rather than a manager who could leave to start a hedge fund. In an age when holding on to assets is the way for a fund family to profit, they may well prefer a fund that sticks close to its peers. The new fund managers plan to own more stocks, with less concentration in any one stock, and a broader definition of value investing. They are far less likely to stand out from the crowd.
Mr. Dreman often stood out. I checked the fund’s last 14 annual reports, each of which showed its performance relative to Lipper’s group of equity-income mutual funds. In seven of those years, it was in the top quartile. In four of them, it was in the bottom quartile. Only in three of the years did the fund end up in the middle 50 percent of funds.
The recent bad performance has been costly for Deutsche Bank, as well as the fund investors. Because of a combination of poor performance and investor withdrawals, the fund had $2.4 billion in assets on March 31, down from $8.3 billion in late 2007.
What went wrong? You can get a hint from part of the fund’s most recent annual report, for the year that ended last November. “The cornerstone of our contrarian value investing philosophy is to seek companies that are financially sound but have fallen out of favor with the investing public,” it said.
With too many financial companies, among them Washington Mutual, Citigroup and Fannie Mae, Mr. Dreman and his colleagues did not realize until too late that the companies were not financially sound, no matter what their books seemed to say.
Buying stocks with low P/E ratios can make sense only if the earnings — the “E” — are real. “The E was much worse than anyone thought,” Mr. Dreman told me. “The banks themselves had no idea of how bad the E was.”
He still thinks his strategy will work, and told me he thinks the market may well have hit bottom. As that last annual report put it, “The last few months have provided many opportunities to buy strong companies with good long-term prospects at the lowest prices we have seen in many decades, and we have taken advantage of what we regard as incredible bargains.”
By FLOYD NORRIS
Published: April 9, 2009
David N. Dreman was a star mutual fund manager. Then he bought bank shares and held on as the financial crisis grew.
Now he has been fired from the flagship fund that bears his name, despite what remains a good long-term record. The fund’s name will be changed, and the fund will take fewer risks. A drab industry will become a little drabber.
In the past, the firings of once-celebrated fund managers have sometimes provided a market signal of its own — that the trend that led to their poor performance was about to end. If that were to happen this time, there could be a revival for so-called value stocks, and particularly for the beaten-down and almost universally disdained financial stocks.
“The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace and the experts you respect,” Mr. Dreman wrote in his best-selling 1998 book, “Contrarian Investment Strategies.”
Mr. Dreman rose to fame in the 1990s, when the fund he began in 1988 amassed an impressive long-term record. But he had been preaching, and practicing, the gospel of investing in unpopular stocks with low price-earnings ratios since the late 1970s. He has been a columnist for Forbes Magazine.
As the fund industry concentrated, the Dreman fund family was bought by Kemper, which was bought by Scudder, which was bought by Deutsche Bank. Last week the fund board installed by Deutsche quietly filed with the Securities and Exchange Commission a disclosure that Mr. Dreman’s firm would no longer manage what is now called the DWS Dreman High Return Equity Fund.
On June 1, Deutsche will take over the management, and assign the job to a team of managers based in its Frankfurt office. The fund will become known as the DWS Strategic Value Fund. Mr. Dreman’s firm will continue to manage three smaller Deutsche funds, but don’t be surprised if those relationships eventually end.
Mr. Dreman, who is 72, did not sound bitter when I spoke to him this week. “The board of directors is obviously entitled to do what they did,” he said. But neither was he repentant. “Low P/E has worked well over time,” he added. “There will be years that we are very out of favor, but we make it up.”
You wouldn’t have known that the fund’s long-term record remained better than the market from reading what Deutsche officials had to say. “We had seen very weak performance for the fund over every major time horizon,” David Wertheim, the bank’s project manager for equities, told Bloomberg News. He declined to speak to me.
Those time frames are one year, three years and five years, the periods that are used by fund raters like Morningstar and Lipper. Just now they are dominated by last year, which was a horrid one for the Dreman fund. Even so, it still has a superior long-term record.
There are few celebrity mutual fund managers any more. Fund groups prefer to promote themselves rather than a manager who could leave to start a hedge fund. In an age when holding on to assets is the way for a fund family to profit, they may well prefer a fund that sticks close to its peers. The new fund managers plan to own more stocks, with less concentration in any one stock, and a broader definition of value investing. They are far less likely to stand out from the crowd.
Mr. Dreman often stood out. I checked the fund’s last 14 annual reports, each of which showed its performance relative to Lipper’s group of equity-income mutual funds. In seven of those years, it was in the top quartile. In four of them, it was in the bottom quartile. Only in three of the years did the fund end up in the middle 50 percent of funds.
The recent bad performance has been costly for Deutsche Bank, as well as the fund investors. Because of a combination of poor performance and investor withdrawals, the fund had $2.4 billion in assets on March 31, down from $8.3 billion in late 2007.
What went wrong? You can get a hint from part of the fund’s most recent annual report, for the year that ended last November. “The cornerstone of our contrarian value investing philosophy is to seek companies that are financially sound but have fallen out of favor with the investing public,” it said.
With too many financial companies, among them Washington Mutual, Citigroup and Fannie Mae, Mr. Dreman and his colleagues did not realize until too late that the companies were not financially sound, no matter what their books seemed to say.
Buying stocks with low P/E ratios can make sense only if the earnings — the “E” — are real. “The E was much worse than anyone thought,” Mr. Dreman told me. “The banks themselves had no idea of how bad the E was.”
He still thinks his strategy will work, and told me he thinks the market may well have hit bottom. As that last annual report put it, “The last few months have provided many opportunities to buy strong companies with good long-term prospects at the lowest prices we have seen in many decades, and we have taken advantage of what we regard as incredible bargains.”
Saturday, April 11, 2009
Kiplinger Magazine archives
Friday, April 10, 2009
passing the test
The New York Times is reporting that regulators say all 19 banks will pass the stress tests, although some still may require more aid. Quoting officials involved in the examinations, they say this is a test a bank simply cannot fail, if the examiners determine that a bank needs "exceptional assistance," the government will provide it. There is said to be a wide range of results among the institutions.
Thursday, April 09, 2009
Cramer vs. Roubini
TORONTO (AP) — CNBC's Jim Cramer has another feud on his hands.
Just weeks after "The Daily Show" host Jon Stewart took Cramer to task for trying to turn finance reporting into a "game," famous bear economist Nouriel Roubini criticized Cramer on Tuesday for predicting bull markets.
"Cramer is a buffoon," said Roubini, a New York University economics professor often called Dr. Doom. "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame."
Cramer recently wrote in a blog that Roubini is "intoxicated" with his own "prescience and vision" and said Roubini should realize that things are better since the stock market bottom in March.
Roubini said in 2006 that the worst recession in four decades was on its way. He has attracted attention for his gloomy — and accurate — predictions of the U.S. financial market meltdown.
Roubini said the latest surge is just another bear market rally following the pattern of other rallies after the government intervened. He expects the market will test the previous low because of worse than expected macroeconomic news, disappointing earnings and because banks will fail after the stress tests come out.
"Once people get the reality check than it's going to get ugly again," Roubini said.
Roubini said Cramer should keep quiet.
"He's not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong," Roubini said in an interview with The Associated Press.
Cramer isn't shutting up. On CNBC, the "Mad Money" host shot back: “We got that guy Nouriel Roubini and he attacked me today, which I regard a great badge of honor."
Just weeks after "The Daily Show" host Jon Stewart took Cramer to task for trying to turn finance reporting into a "game," famous bear economist Nouriel Roubini criticized Cramer on Tuesday for predicting bull markets.
"Cramer is a buffoon," said Roubini, a New York University economics professor often called Dr. Doom. "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame."
Cramer recently wrote in a blog that Roubini is "intoxicated" with his own "prescience and vision" and said Roubini should realize that things are better since the stock market bottom in March.
Roubini said in 2006 that the worst recession in four decades was on its way. He has attracted attention for his gloomy — and accurate — predictions of the U.S. financial market meltdown.
Roubini said the latest surge is just another bear market rally following the pattern of other rallies after the government intervened. He expects the market will test the previous low because of worse than expected macroeconomic news, disappointing earnings and because banks will fail after the stress tests come out.
"Once people get the reality check than it's going to get ugly again," Roubini said.
Roubini said Cramer should keep quiet.
"He's not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong," Roubini said in an interview with The Associated Press.
Cramer isn't shutting up. On CNBC, the "Mad Money" host shot back: “We got that guy Nouriel Roubini and he attacked me today, which I regard a great badge of honor."
best five-week run
Stocks rallied Thursday, ending a holiday-shortened week on a high note after Wells Fargo forecast a nearly $3 billion quarterly profit, adding to hopes that the banking sector is stabilizing.
It was the fifth straight week of gains for the markets. In that time the Dow rose 22%, for its best five-week run since May of 1933, when it gained 31%.
The Dow Jones industrial average (INDU) gained 246 points, or 3.1%. The S&P 500 (SPX) index rose 31 points, or 3.8%. The Nasdaq composite (COMP) gained 62 points, or 3.9%.
With today's rally, the Dow regained all of its losses from Monday and particularly Tuesday, when it fell 186 points. The finish will give the blue-chip index a 67-point gain on the week, or 0.8%. The S&P 500 ended with a 1.7% gain for the week and the Nasdaq a 1.9% gain.
The Dow is down 7.9% for the year, with the S&P 500 off 5.2%. The Nasdaq is up 4.8%, with the Nasdaq-100 up 10.6%.
The market rally that began on March 10 has now pushed the major indexes up 23% or more.
Twenty-eight of the 30 Dow stocks were higher on the day, along with 445 S&P 500 stocks and 91 Nasdaq-100 stocks.
It was the fifth straight week of gains for the markets. In that time the Dow rose 22%, for its best five-week run since May of 1933, when it gained 31%.
The Dow Jones industrial average (INDU) gained 246 points, or 3.1%. The S&P 500 (SPX) index rose 31 points, or 3.8%. The Nasdaq composite (COMP) gained 62 points, or 3.9%.
With today's rally, the Dow regained all of its losses from Monday and particularly Tuesday, when it fell 186 points. The finish will give the blue-chip index a 67-point gain on the week, or 0.8%. The S&P 500 ended with a 1.7% gain for the week and the Nasdaq a 1.9% gain.
The Dow is down 7.9% for the year, with the S&P 500 off 5.2%. The Nasdaq is up 4.8%, with the Nasdaq-100 up 10.6%.
The market rally that began on March 10 has now pushed the major indexes up 23% or more.
Twenty-eight of the 30 Dow stocks were higher on the day, along with 445 S&P 500 stocks and 91 Nasdaq-100 stocks.
Monday, April 06, 2009
Mike Mayo goes biblical
SAN FRANCISCO (MarketWatch) - Bank analyst Mike Mayo went biblical on the sector Monday, predicting loan losses will probably exceed Great Depression-era levels as the industry is punished for succumbing to the seven deadly sins of gluttony, greed, lust, sloth, wrath, envy and pride.
Mayo, a former Deutsche Bank analyst now with Calyon Securities, passed judgment on the banking industry with an underweight rating.
Shares of Bank of America (BAC 8.82), Citigroup (C), J.P. Morgan Chase (JPM), Wells Fargo (WFC), PNC Financial Services (PNC) and Comerica (CMA) will underperform, the analyst foretold.
Mayo commanded investors to sell shares of US Bancorp (USB), SunTrust (STI), Fifth Third (FITB), KeyCorp (KEY) and BB&T (BBT).
"We are initiating on U.S. banks with an Underweight sector rating given the ongoing consequences of increased risk taking by banks in seven different areas," spaketh Mayo in a note to investors.
"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators," quoth Mayo.
"A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression," the analyst foretold. "While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class."
Loan losses to loans will likely increase from 2% to 3.5% by the end of 2010 given ongoing problems in mortgage and an acceleration in cards, consumer credit, construction, commercial real estate and industrial, the analyst warned.
At the peak of the Depression, in 1934, loan losses reached 3.4% of total bank loans, Mayo noted.
[4/6/09, posted 4/23/09]
Mayo, a former Deutsche Bank analyst now with Calyon Securities, passed judgment on the banking industry with an underweight rating.
Shares of Bank of America (BAC 8.82), Citigroup (C), J.P. Morgan Chase (JPM), Wells Fargo (WFC), PNC Financial Services (PNC) and Comerica (CMA) will underperform, the analyst foretold.
Mayo commanded investors to sell shares of US Bancorp (USB), SunTrust (STI), Fifth Third (FITB), KeyCorp (KEY) and BB&T (BBT).
"We are initiating on U.S. banks with an Underweight sector rating given the ongoing consequences of increased risk taking by banks in seven different areas," spaketh Mayo in a note to investors.
"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators," quoth Mayo.
"A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression," the analyst foretold. "While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class."
Loan losses to loans will likely increase from 2% to 3.5% by the end of 2010 given ongoing problems in mortgage and an acceleration in cards, consumer credit, construction, commercial real estate and industrial, the analyst warned.
At the peak of the Depression, in 1934, loan losses reached 3.4% of total bank loans, Mayo noted.
[4/6/09, posted 4/23/09]
Sunday, April 05, 2009
buy and hold the original Dow?
The Dow is a price-weighted index as opposed to a cap-weighted index. Does that make a difference in performance? Specifically, does it affect how the Dow has performed since it was expanded to 30 names in 1928?
The Dow Industrials was expanded to 30 names from 20 on October 1 of 1928. Today, only nine names of the original 30 remain in the Dow. The committee at Dow Jones has replaced the other names as the companies grew out of favor, were merged into other stocks, were considered too small, or the committee felt that other companies better represented the industrial prowess of the US economy.
What if we went back to the original 30 stocks and simply bought them and held them until today? Good, bad or indifferent, what would the results be?
So, the question of the day: would you have been better off investing in the index, or buying the 30 stocks and holding them? Further, would it make any difference if you price-weighted them or equal-weighted them (explanations below)? What about inflation? And how does that compare to the S&P 500?
And before you answer, remember that one stock, Bethlehem Steel, went bankrupt. You would be stuck with Chrysler, which was removed in 1979 for IBM, which itself had been taken out in 1939 for AT&T. There have been 55 changes in the components of the Dow over the last 80 years. Some of the original 30, listed below, we would all recognize. But our kids might not remember Victor Talking Machines or Nash Kelvinator (Nash Auto).
The Dow Industrials was expanded to 30 names from 20 on October 1 of 1928. Today, only nine names of the original 30 remain in the Dow. The committee at Dow Jones has replaced the other names as the companies grew out of favor, were merged into other stocks, were considered too small, or the committee felt that other companies better represented the industrial prowess of the US economy.
What if we went back to the original 30 stocks and simply bought them and held them until today? Good, bad or indifferent, what would the results be?
So, the question of the day: would you have been better off investing in the index, or buying the 30 stocks and holding them? Further, would it make any difference if you price-weighted them or equal-weighted them (explanations below)? What about inflation? And how does that compare to the S&P 500?
And before you answer, remember that one stock, Bethlehem Steel, went bankrupt. You would be stuck with Chrysler, which was removed in 1979 for IBM, which itself had been taken out in 1939 for AT&T. There have been 55 changes in the components of the Dow over the last 80 years. Some of the original 30, listed below, we would all recognize. But our kids might not remember Victor Talking Machines or Nash Kelvinator (Nash Auto).
The market is at a crossroads
There are signs of both a potential market recovery (the beginning of a larger bull rally), and signs that this recent 20%+ run-up was nothing more than a bear market rally.
The good news is that there will be plenty of opportunities going forward, regardless of which of the above scenarios plays out.
The good news is that there will be plenty of opportunities going forward, regardless of which of the above scenarios plays out.
Friday, April 03, 2009
Best four-week gain since 1938
Stocks weathered a very bad unemployment report on Friday and not only finished higher for the day but enjoyed their best four-week gain since 1938. The finish was quite bullish: The Dow Jones industrials ($INDU), which had been down as much as 80 points in the morning, recovered to close up 40 points, or 0.5%, to 8,018, their first close above 8,000 since Feb. 10. The Standard & Poor's 500 Index ($INX) was up 8 points, or 1%, to 843, and the Nasdaq Composite Index ($COMPX) was up 19 points, or 1.2%, to 1,622.
The market finished with its fourth weekly gain in a row. The Dow's total gain since March 6 is about 21%, with the S&P up 23.2% and the Nasdaq up 25.3%.
The Dow's 21% gain in the four weeks since March 6 is its biggest since 1938. If you measure the gain only against four-week periods where each week finished higher, it’s the best since the four weeks that ended on May 12, 1933.
The market finished with its fourth weekly gain in a row. The Dow's total gain since March 6 is about 21%, with the S&P up 23.2% and the Nasdaq up 25.3%.
The Dow's 21% gain in the four weeks since March 6 is its biggest since 1938. If you measure the gain only against four-week periods where each week finished higher, it’s the best since the four weeks that ended on May 12, 1933.
Wednesday, April 01, 2009
stocks vs. bonds
During the past 25 years, the total return for U.S. equities has been lower than for U.S. 10-year government bonds: –47% in real (inflation-adjusted) returns for stocks vs. +71% in real returns for bonds. With the 10-year Treasury yield currently at 2.7%, the bar has been set quite low for stocks to outperform bonds prospectively.
[4/6/09] For the past 40 years too says Bill Gross
[2/18/10] Most people would consider 40 years to be the "long run." So, it is rather disconcerting, or shocking as Rob puts it, to find that not only have stocks not outperformed bonds for the last 40 plus years, but there has actually been a small negative risk premium.
How bad is it? Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the '70s.
[4/6/09] For the past 40 years too says Bill Gross
[2/18/10] Most people would consider 40 years to be the "long run." So, it is rather disconcerting, or shocking as Rob puts it, to find that not only have stocks not outperformed bonds for the last 40 plus years, but there has actually been a small negative risk premium.
How bad is it? Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the '70s.
Monday, March 30, 2009
value stocks in a recession
Contrary to popular belief, value strategies often do poorly during recessions, especially relative to growth strategies.
The reason is simple: When growth is scarce, as it is in a recession, then investors pay a premium for companies that manage to keep growing. One memorable exception was the recession of 2001, when investors dumped growth companies -- mostly overpriced technology stocks -- as if they were toxic.
"It's not unusual for value to suffer in a recession," says Joseph Mezrich, head of quantitative research at Nomura Securities International. "What's unusual this time is the magnitude" of the suffering.
In this recession, the value-stock barrel has been spoiled mainly by a bunch of very bad apples: banks.
Value investors often hunt for companies that have a low ratio of stock price to "book value," which is roughly the value of their assets minus their liabilities. For various reasons, banks typically have very low price-to-book ratios, so they often turn up on the radar screens of value investors.
When the banks started taking heavy losses in late 2007 on mortgage bets gone bad, their share prices fell, which made their price-to-book ratios even lower, making them even more irresistible to value investors.
The trouble was the "book" part of that ratio: Trillions of dollars of the assets on bank balance sheets were tied up in mortgage debt, which was rapidly declining in value. That made book value a target that was moving fast in the wrong direction: down.
And that meant the stocks weren't nearly the bargains they seemed and just kept falling -- a phenomenon some analysts call a "value trap."
The reason is simple: When growth is scarce, as it is in a recession, then investors pay a premium for companies that manage to keep growing. One memorable exception was the recession of 2001, when investors dumped growth companies -- mostly overpriced technology stocks -- as if they were toxic.
"It's not unusual for value to suffer in a recession," says Joseph Mezrich, head of quantitative research at Nomura Securities International. "What's unusual this time is the magnitude" of the suffering.
In this recession, the value-stock barrel has been spoiled mainly by a bunch of very bad apples: banks.
Value investors often hunt for companies that have a low ratio of stock price to "book value," which is roughly the value of their assets minus their liabilities. For various reasons, banks typically have very low price-to-book ratios, so they often turn up on the radar screens of value investors.
When the banks started taking heavy losses in late 2007 on mortgage bets gone bad, their share prices fell, which made their price-to-book ratios even lower, making them even more irresistible to value investors.
The trouble was the "book" part of that ratio: Trillions of dollars of the assets on bank balance sheets were tied up in mortgage debt, which was rapidly declining in value. That made book value a target that was moving fast in the wrong direction: down.
And that meant the stocks weren't nearly the bargains they seemed and just kept falling -- a phenomenon some analysts call a "value trap."
Saturday, March 28, 2009
Dow in 2010
Reread an old OID from July 31, '00 in which Jeremy Grantham summed up his four-year study of 200 years of bubbles in 38 different markets in various countries __stocks, bonds, commodities, real estate. Said every bubble, without exception, gave up 100% of its gains in the bubble period. Now, he was kind of vague on defining how he measured when a bubble started.
The point of interest to me. He tried to figure out where the S&P 500 would be in 2010 with mildly generous assumptions, rather than crazy bubble assumptions (p/e = 32 when he wrote). "We assume a P/E of 17 1/2 (up from the historical average of 14) and a profit margin of 6% (up from the actual historical average of 5.5%). Incidentally we assumed annual sales growth of 4% per year, although we actually believe the figure will be closer to 2%, The long-term trend has been only 1.8%. We're putting in 4% only because our clients can't stand anything less...The return contribution from the yield is 2.2% per year...It gets me to a total return of a negative 1.9%...If I assume 2% sales growth instead, I arrive at an estimated return of neagtive 3.9% per year. That starts to get more like it __closer to reality."
Later, he gives a more negative, but far from crazy, scenario. P/E = 12.6. Profit margin 5.2. Sales growth 1.6. Dow in 2010 = 3,600.
Jeremy also said that for the S&P and Nasdung to trade at fair value the S&P would have to go down -53% and the Nasdaq -70%. Pretty close.
What to buy in '00? Real estate. (Also, timber, inflation-protected bonds, emerging equity and debt.)
Interesting.
"Were we to return to the figures that prevailed in 1982 __perish the thought__ Dow = 1,450."
Grantham never specifically says, but I assume his starting point is the S&P level on 1/1/00 = 1469.25. If so, the S&P is down -35.6%. Or about -4.9% CAGR. Or is that Compound Annual Shrink Rate. Throw in even 2-3% inflation and real returns the last 8 3/4 yrs have been awful. Pretty close reckoning, JG.
[from russ_21401, 10/16/08]
The point of interest to me. He tried to figure out where the S&P 500 would be in 2010 with mildly generous assumptions, rather than crazy bubble assumptions (p/e = 32 when he wrote). "We assume a P/E of 17 1/2 (up from the historical average of 14) and a profit margin of 6% (up from the actual historical average of 5.5%). Incidentally we assumed annual sales growth of 4% per year, although we actually believe the figure will be closer to 2%, The long-term trend has been only 1.8%. We're putting in 4% only because our clients can't stand anything less...The return contribution from the yield is 2.2% per year...It gets me to a total return of a negative 1.9%...If I assume 2% sales growth instead, I arrive at an estimated return of neagtive 3.9% per year. That starts to get more like it __closer to reality."
Later, he gives a more negative, but far from crazy, scenario. P/E = 12.6. Profit margin 5.2. Sales growth 1.6. Dow in 2010 = 3,600.
Jeremy also said that for the S&P and Nasdung to trade at fair value the S&P would have to go down -53% and the Nasdaq -70%. Pretty close.
What to buy in '00? Real estate. (Also, timber, inflation-protected bonds, emerging equity and debt.)
Interesting.
"Were we to return to the figures that prevailed in 1982 __perish the thought__ Dow = 1,450."
Grantham never specifically says, but I assume his starting point is the S&P level on 1/1/00 = 1469.25. If so, the S&P is down -35.6%. Or about -4.9% CAGR. Or is that Compound Annual Shrink Rate. Throw in even 2-3% inflation and real returns the last 8 3/4 yrs have been awful. Pretty close reckoning, JG.
[from russ_21401, 10/16/08]
How will the bear market end?
During bear markets, especially ones as severe as the current downturn, the obvious temptation for investors is to reduce their allocation to stocks and move into the safety of cash. A common refrain from investors is that they will "wait until things get better" to restore their allocation to stocks at a level that is consistent with their longer-term investment strategies. The criteria for improvement often implies the investor will hold out for some positive news about the economy, or possibly wait for the market to start rising again in a more sustained manner.
While this strategy may sound reasonable at a time when stock markets continue to decline and investors take comfort from avoiding losses, the flaws are exposed when the bear market comes to an end. As noted, the market tends to rise six months before the economy stops contracting, so waiting for good economic data to hit the headlines inevitably means missing out on the early stages of the rally. Of course, waiting for the stock market to go up as a signal of the end of the bear market also necessarily means an investor has to sit on the sidelines while a new bull market begins.
This pattern of investor behavior, and its pitfalls, can be demonstrated looking at the end of the 2000-2002 bear market (see MARE article, The Perils of Herding to Cash). Investors moved into a record-high cash position by the end of 2002, during the exact period when the U.S. stock market was bottoming after a three-year downturn (see Exhibit 2.) It took investors roughly until February 2004 -- 15 months after the end of the bear market -- to reduce their cash position back to an average level, during which time many had missed out on the stock market's return of more than 30% during the simultaneous bull market rebound.
While this strategy may sound reasonable at a time when stock markets continue to decline and investors take comfort from avoiding losses, the flaws are exposed when the bear market comes to an end. As noted, the market tends to rise six months before the economy stops contracting, so waiting for good economic data to hit the headlines inevitably means missing out on the early stages of the rally. Of course, waiting for the stock market to go up as a signal of the end of the bear market also necessarily means an investor has to sit on the sidelines while a new bull market begins.
This pattern of investor behavior, and its pitfalls, can be demonstrated looking at the end of the 2000-2002 bear market (see MARE article, The Perils of Herding to Cash). Investors moved into a record-high cash position by the end of 2002, during the exact period when the U.S. stock market was bottoming after a three-year downturn (see Exhibit 2.) It took investors roughly until February 2004 -- 15 months after the end of the bear market -- to reduce their cash position back to an average level, during which time many had missed out on the stock market's return of more than 30% during the simultaneous bull market rebound.
Thursday, March 26, 2009
Kass gives the green light
10 out of 12 factors (including our newest, market internals) on my watch list are in an improving mode. Though many variables are currently accorded relatively low grades and the outlook remains debatable, the delta (rate of change) in almost my entire watch list is improving and flashing a green light for the U.S. stock market.
new home sales rise as prices fall
The new home sales report for January showed that sales rose 4.7% month-over-month (m/m) to 337,000 units on an annualized rate, better than the expectation of a fall of 2.9% m/m to 300,000 units. Year-over-year (y/y), new home sales fell 41%. Inventory of new homes for sale fell to 330,000, comprising 12.2 months worth of sales, much higher than the 5 to 6 months that is considered a stable market. The median price of a new home fell 18% year-over-year, to $200,900, the biggest y/y drop since records began in 1964.
[Schwab Alerts, 3/25/09]
Mauldin retorts
I opened the Wall Street Journal and read that new home sales were up in February. Bloomberg reported that sales were "unexpectedly" up by 4.7%. I was intrigued, so I went to the data. As it turns out, sales were down 41% year over year, but up slightly from January.
But if you look at the data series, there was nothing unexpected about it. For years on end, February sales are up over January. It seems we like to buy homes in the spring and summer and then sales fall off in the fall and winter. It is a very seasonal thing. If you use the seasonally adjusted numbers, you find sales were down 2.9% instead of up 4.7%. But the media reports the positive number. Interestingly, they report the seasonally adjusted numbers for initial claims, which have been a lot better than the actual numbers. Not that they are looking to just report positive news, you understand.
[I suppose Mauldin has a point, but the main point is that the number reported was better than expected. Whether it was up or down is immaterial. Even if sales were actually down adjusted, it was still better than expected. Or is he saying the analysts were stupid for expecting a negative number?]
[4/1/09] Pending home sales for February rose 2.1%, higher than the Bloomberg estimate of flat month-over-month. This series has been volatile on a monthly basis, as represented by January's decline of 7.7%. Pending home sales are considered a leading indicator as they track contract signings. As Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article located at www.schwab.com/marketinsight, Brighter Light at End of Housing Tunnel, sales and traffic of potential homebuyers has picked up, notably in areas where prior declines were most severe. While still at elevated levels, inventories have declined, and prices will likely have to fall another 10-15% before finding stability. However, if the pace of inventory declines continues, the light at the end of the tunnel should get brighter. [Schwab Midday Market View]
[Schwab Alerts, 3/25/09]
Mauldin retorts
I opened the Wall Street Journal and read that new home sales were up in February. Bloomberg reported that sales were "unexpectedly" up by 4.7%. I was intrigued, so I went to the data. As it turns out, sales were down 41% year over year, but up slightly from January.
But if you look at the data series, there was nothing unexpected about it. For years on end, February sales are up over January. It seems we like to buy homes in the spring and summer and then sales fall off in the fall and winter. It is a very seasonal thing. If you use the seasonally adjusted numbers, you find sales were down 2.9% instead of up 4.7%. But the media reports the positive number. Interestingly, they report the seasonally adjusted numbers for initial claims, which have been a lot better than the actual numbers. Not that they are looking to just report positive news, you understand.
[I suppose Mauldin has a point, but the main point is that the number reported was better than expected. Whether it was up or down is immaterial. Even if sales were actually down adjusted, it was still better than expected. Or is he saying the analysts were stupid for expecting a negative number?]
[4/1/09] Pending home sales for February rose 2.1%, higher than the Bloomberg estimate of flat month-over-month. This series has been volatile on a monthly basis, as represented by January's decline of 7.7%. Pending home sales are considered a leading indicator as they track contract signings. As Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article located at www.schwab.com/marketinsight, Brighter Light at End of Housing Tunnel, sales and traffic of potential homebuyers has picked up, notably in areas where prior declines were most severe. While still at elevated levels, inventories have declined, and prices will likely have to fall another 10-15% before finding stability. However, if the pace of inventory declines continues, the light at the end of the tunnel should get brighter. [Schwab Midday Market View]
Tuesday, March 24, 2009
what hedge funds do best
Morningstar certainly selected a lively date to launch its initial batch of Morningstar Ratings for hedge funds: January 2008. One year later, hedge funds had suffered their worst 12-month performance in forever, dropping more than 20% in aggregate and spurring a wave of investor redemptions.
In response, hedge funds did what hedge funds do best--they quit. Folded shop, returned what assets remained, expired. They became ex-hedge funds. Either that, or they crawled into a cave to lick their wounds, continuing to exist but ceasing to be seen in daylight by refusing to update their performances in public databases such as Morningstar's. All in all, of the 1,732 single-strategy hedge funds that received a rating from Morningstar during the March 2008 launch, a whopping 615 funds--36%!--disappeared over the ensuing 12 months.
In response, hedge funds did what hedge funds do best--they quit. Folded shop, returned what assets remained, expired. They became ex-hedge funds. Either that, or they crawled into a cave to lick their wounds, continuing to exist but ceasing to be seen in daylight by refusing to update their performances in public databases such as Morningstar's. All in all, of the 1,732 single-strategy hedge funds that received a rating from Morningstar during the March 2008 launch, a whopping 615 funds--36%!--disappeared over the ensuing 12 months.
existing home sales unexpectedly rise
Existing home sales for February rose 5.1% month-over-month (m/m) to 4.72 million units on an annual rate, well above the expectation of a fall of 0.9% to a rate of 4.45 million units, after falling 5.3% in January. Year-over-year sales declined 4.6%. According to the National Association of Realtors (NAR), entry level buyers are bargain shopping, and therefore distressed sales, such as foreclosures, accounted for 40 - 45% of transactions in February. The NAR noted that their analysis shows that distressed homes typically sell for 20% less than the normal market price, which is drawing down the overall median price. The average price for existing homes for sale was $165,400, falling 15.5% from a year ago, the second-biggest drop on record. Inventories rose to 3.8 million existing homes available for sale from 3.6 million in January, and the supply represents 9.7 months of sales, up from 9.6 months in December. The NAR said that sales gains in the West were led by California, where "the median listing price is beginning to rise for the first time in three years." Home shopping activity nationally picked up after the $8,000 first-time buyer tax credit was put in place.
[3/23, Schwab Alerts]
[3/23, Schwab Alerts]
Just As Bad
From the Weitz Funds Quarterly Report, December 31, 2008
On an historical note, at a time when the media makes regular references to the Great Depression and the bear market of the 1930’s, the Leuthold Group offers some interesting statistics. The average annual total return for the S&P 500 for the 10 years ended November 20, 2008 was -2.7%. This matches the worst 10-year performance in stock market history—1929-1939. So, we have just completed a 10-year period during which the stock market was just as bad as the 1929-39 market.
Also, according to Leuthold, roughly 5% of the ten-year periods since 1926, have produced S&P 500 returns of less than 1% per year for the ten years. Each of those flat-to-down markets was followed by a ten-year period of strong returns, ranging from 101% or 7.2% per year (Q4 1938 to Q4 1948) to 325% or 15.6% per year (Q3 1974 to Q3 1984).
On an historical note, at a time when the media makes regular references to the Great Depression and the bear market of the 1930’s, the Leuthold Group offers some interesting statistics. The average annual total return for the S&P 500 for the 10 years ended November 20, 2008 was -2.7%. This matches the worst 10-year performance in stock market history—1929-1939. So, we have just completed a 10-year period during which the stock market was just as bad as the 1929-39 market.
Also, according to Leuthold, roughly 5% of the ten-year periods since 1926, have produced S&P 500 returns of less than 1% per year for the ten years. Each of those flat-to-down markets was followed by a ten-year period of strong returns, ranging from 101% or 7.2% per year (Q4 1938 to Q4 1948) to 325% or 15.6% per year (Q3 1974 to Q3 1984).
Defensible?
I found this blurb interesting while glancing through the GAMCO Growth, 9/30/07 report. (Not to pick on Howard Ward or anything.)
So what happened? The P/E hasn't changed that much, but evidently earnings have been crushed falling far short of the estimates.
As of this writing, the S&P 500 is at about 1500, resulting in a price/earnings (P/E) multiple of 15.8 times the ’07 estimate and 14.9 times the ’08 estimate. These numbers have changed a little for the better in the past 3 months and are close to the long term average P/E. Barring a recession, stock valuations appear quite defensible.
So what happened? The P/E hasn't changed that much, but evidently earnings have been crushed falling far short of the estimates.
Thursday, March 19, 2009
Cramer's worst case
Cramer's worst case scenario using bottoms-up analysis. Dow 5320.
In other words, he can't envision the Dow going below 5320. (So he's actully saying we must be pretty close to the bottom and that's bullish to me.)
In other words, he can't envision the Dow going below 5320. (So he's actully saying we must be pretty close to the bottom and that's bullish to me.)
Wednesday, March 18, 2009
Bernanke sees end of recession
America's recession "probably" will end this year if the government succeeds in bolstering the banking system, Federal Reserve Chairman Ben Bernanke said Sunday in a rare television interview.
In carefully hedged remarks in a taped interview with CBS' "60 Minutes," Bernanke seemed to express a bit more optimism that this could be done.
Still, Bernanke stressed -- as he did to Congress last month -- that the prospects for the recession ending this year and a recovery taking root next year hinge on a difficult task: getting banks to lend more freely again and getting the financial markets to work more normally.
"We've seen some progress in the financial markets, absolutely," Bernanke said. "But until we get that stabilized and working normally, we're not going to see recovery.
"But we do have a plan. We're working on it. And, I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year."
Even if the recession, which began in December 2007, ends this year, the unemployment rate will keep climbing past the current quarter-century high of 8.1 percent, Bernanke said.
A growing number of economists think the jobless rate will hit 10 percent by the end of this year.
Asked about the biggest potential dangers now, Bernanke suggested a lack of "political will" to solve the financial crisis.
He said, though, that the United States has averted the risk of plunging into a depression.
"I think we've gotten past that," he said.
When the financial crisis intensified last fall, Bernanke and President George W. Bush's Treasury Secretary Henry Paulson rushed to Capitol Hill for help. That led to the swift enactment of a $700 billion bailout package in October. Since then, banks have received billions in capital injections in return for government ownership stakes in them.
Looking back, Bernanke said the world came close to a financial meltdown. Asked how close, Bernanke responded: "It was very close."
Bernanke admitted that the Fed could have done a better job of overseeing banks. Critics say lax regulatory oversight contributed to the crisis.
Bernanke said he believes all the big banks the Fed regulates are solvent. Big banks won't fail under his watch, Bernanke said -- though, if necessary, the government should try to "wind it down in a safe way."
[via maverick@investwise]
In carefully hedged remarks in a taped interview with CBS' "60 Minutes," Bernanke seemed to express a bit more optimism that this could be done.
Still, Bernanke stressed -- as he did to Congress last month -- that the prospects for the recession ending this year and a recovery taking root next year hinge on a difficult task: getting banks to lend more freely again and getting the financial markets to work more normally.
"We've seen some progress in the financial markets, absolutely," Bernanke said. "But until we get that stabilized and working normally, we're not going to see recovery.
"But we do have a plan. We're working on it. And, I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year."
Even if the recession, which began in December 2007, ends this year, the unemployment rate will keep climbing past the current quarter-century high of 8.1 percent, Bernanke said.
A growing number of economists think the jobless rate will hit 10 percent by the end of this year.
Asked about the biggest potential dangers now, Bernanke suggested a lack of "political will" to solve the financial crisis.
He said, though, that the United States has averted the risk of plunging into a depression.
"I think we've gotten past that," he said.
When the financial crisis intensified last fall, Bernanke and President George W. Bush's Treasury Secretary Henry Paulson rushed to Capitol Hill for help. That led to the swift enactment of a $700 billion bailout package in October. Since then, banks have received billions in capital injections in return for government ownership stakes in them.
Looking back, Bernanke said the world came close to a financial meltdown. Asked how close, Bernanke responded: "It was very close."
Bernanke admitted that the Fed could have done a better job of overseeing banks. Critics say lax regulatory oversight contributed to the crisis.
Bernanke said he believes all the big banks the Fed regulates are solvent. Big banks won't fail under his watch, Bernanke said -- though, if necessary, the government should try to "wind it down in a safe way."
[via maverick@investwise]
Sunday, March 15, 2009
America ready to bite the dust?
David Roche, formerly an investment strategist at Morgan Stanley and now president of an independent consulting firm in London, authored an interesting piece in the October 2008 Far East Economic Review titled "Another Empire Bites the Dust." Roche's premise is that over the long term all empires and civilizations undergo a pattern of corruption: first the ideology loses sway, next the economic model falters, then the currency loses favor, and finally military power wanes. Roche's explanation is perhaps the most important aspect of the article: "Unsustainable living standards at the empire's core, which are enjoyed but not earned, depend upon flows of wealth from the periphery." In the current market environment, the "empires" are those countries in which, like the U.S., consumers spent briskly, regardless of the consequences, and the "peripheries" were those economies in which consumers saved more than they spent and leverage/personal debt was considered sinful.
-- from the Oakmark Equity and Income first quarter report
-- from the Oakmark Equity and Income first quarter report
Thursday, March 12, 2009
Was 666 the bottom?
Was 666 the bottom? By now, practically everyone knows that the intra-day low we bounced from on Friday was our call for what the trough could possibly look like -- we had danced around this number for months but last reiterated it when the S&P 500 was hovering near 835 back in mid-February.
As we have said in the past, the S&P 500 index any moment in time is the construct of two numbers -- corporate earnings and the multiple that investors are willing to pay for that profit stream. We had been of the view that we could be at 666 by October under the caveat that a classic 12x recession trough multiple would be applied to a 2010 forward operating earnings forecast of $55.50.
But given that we are in March, and we still have to apply that multiple to 2009 earnings of $46, then we are talking about the prospect that we could actually see this market go as low a 550 before we hit bottom. That is not a forecast, but it is more than a remote possibility, in our view.
If we were to apply a blend of 2009 and 2010 earnings, we would be talking about a bottom of around 600. So in answer to the question whether 666 was an intermediate low or something more fundamental, at this stage, unless this recession is over by July, then in our view it simply cannot be that the bear market is over because bear markets end typically 4 months before the recession ends, or when we are two-thirds of the way through, take your pick.
This economic downturn began in December 2007; our internal compass now tells us that we are still barely halfway through, so conceivably, we may not be pulling out of the recession until we are well into 2010.
So with that in mind, it's hard to believe we are at the low unless our timing of the end to the recession is off base. That is always a possibility, but we simply don't see a light at the end of the economic tunnel just yet. We also have to respect the likelihood that the financials, which led the bear market by six months, will be the group that leads us out -- and considering that the S&P financials just hit a fresh 17-year low, we can say with some degree of confidence that the bottom to the overall market is probably at least six months away at this point.
One last item to consider is how bear markets like the one we are in have always ended -- they end when we break below what was universally perceived to have been the fundamental bear market low for the cycle, because that is the time that sentiment gets washed out once and for all.
For example, in the last cycle, the September 21st, 2001 low of 965 was widely viewed back then as having been the fundamental low, and when that low was broken on July 2nd, 2002, the S&P 500 sliced all the way down to 776 by October 9th like a hot knife through butter.
Go back to the early 1980s -- the 112 mark on September 25th, 1981 was supposed to hold. It didn't; it was shattered on February 22nd, 1982 and the ultimate low was turned in on August 12th of that year at 102. We went back five decades and found that in the five major markets over that span, all of them shared this pattern of having a low hold for a period of several months, and when that low was shattered, the S&P 500 on an average and median basis fell a further 20% until the real cycle low was achieved.
So 20% off that 752 closing low back on November 29th would imply 600 on the S&P 500 this time around or roughly another 10% downside from where we are today. Again, that is more of an observation than it is a forecast, and if there is a sprinkle of good news, it is that almost 95% of the bear market is over even if 600 is where we finally bottom out at.
Nicholas J. Shepard
International Equity Sales Trading,
Merrill Lynch, New York
[via investwise]
As we have said in the past, the S&P 500 index any moment in time is the construct of two numbers -- corporate earnings and the multiple that investors are willing to pay for that profit stream. We had been of the view that we could be at 666 by October under the caveat that a classic 12x recession trough multiple would be applied to a 2010 forward operating earnings forecast of $55.50.
But given that we are in March, and we still have to apply that multiple to 2009 earnings of $46, then we are talking about the prospect that we could actually see this market go as low a 550 before we hit bottom. That is not a forecast, but it is more than a remote possibility, in our view.
If we were to apply a blend of 2009 and 2010 earnings, we would be talking about a bottom of around 600. So in answer to the question whether 666 was an intermediate low or something more fundamental, at this stage, unless this recession is over by July, then in our view it simply cannot be that the bear market is over because bear markets end typically 4 months before the recession ends, or when we are two-thirds of the way through, take your pick.
This economic downturn began in December 2007; our internal compass now tells us that we are still barely halfway through, so conceivably, we may not be pulling out of the recession until we are well into 2010.
So with that in mind, it's hard to believe we are at the low unless our timing of the end to the recession is off base. That is always a possibility, but we simply don't see a light at the end of the economic tunnel just yet. We also have to respect the likelihood that the financials, which led the bear market by six months, will be the group that leads us out -- and considering that the S&P financials just hit a fresh 17-year low, we can say with some degree of confidence that the bottom to the overall market is probably at least six months away at this point.
One last item to consider is how bear markets like the one we are in have always ended -- they end when we break below what was universally perceived to have been the fundamental bear market low for the cycle, because that is the time that sentiment gets washed out once and for all.
For example, in the last cycle, the September 21st, 2001 low of 965 was widely viewed back then as having been the fundamental low, and when that low was broken on July 2nd, 2002, the S&P 500 sliced all the way down to 776 by October 9th like a hot knife through butter.
Go back to the early 1980s -- the 112 mark on September 25th, 1981 was supposed to hold. It didn't; it was shattered on February 22nd, 1982 and the ultimate low was turned in on August 12th of that year at 102. We went back five decades and found that in the five major markets over that span, all of them shared this pattern of having a low hold for a period of several months, and when that low was shattered, the S&P 500 on an average and median basis fell a further 20% until the real cycle low was achieved.
So 20% off that 752 closing low back on November 29th would imply 600 on the S&P 500 this time around or roughly another 10% downside from where we are today. Again, that is more of an observation than it is a forecast, and if there is a sprinkle of good news, it is that almost 95% of the bear market is over even if 600 is where we finally bottom out at.
Nicholas J. Shepard
International Equity Sales Trading,
Merrill Lynch, New York
[via investwise]
bear market veterans
The S&P 500 Index has fallen nearly 55% since Oct. 9, 2007--an outcome worse than that of any other bear market since 1929 (when the Dow Jones Industrial Average plummeted more than 80% in less than three years). But there have been some periods with results similarly gnarly to the most recent drop, including the bear market that began in January 1973, which ultimately saw the S&P 500 fall nearly 50%. Granted, there were some other differences back then, including higher inflation and a drawn-out decline. (It's been faster this time around.)
Still, we wondered if funds led by portfolio managers that ran money in the 1970s have been better off in the latest downturn.
Morningstar identified twelve managers with tenures ranging from 32 years to 50 years. All lost money in the period from 10/9/07 to 3/9/07 with returns ranging from -29% to -50%. But all beat the S&P 500 which lost 55%. Looking at 10 year returns, 10 of the 12 beat the S&P 500 which returned an annualized -4%.
Still, we wondered if funds led by portfolio managers that ran money in the 1970s have been better off in the latest downturn.
Morningstar identified twelve managers with tenures ranging from 32 years to 50 years. All lost money in the period from 10/9/07 to 3/9/07 with returns ranging from -29% to -50%. But all beat the S&P 500 which lost 55%. Looking at 10 year returns, 10 of the 12 beat the S&P 500 which returned an annualized -4%.
Today's economic report
Advance retail sales were down 0.1% in February, versus an expected drop of 0.5%, while January's advance was revised from 1.0% to 1.8%. Ex-autos, sales rose 0.7%, well above a projected decline of 0.1%. January was revised from 0.9% to 1.6%. If gasoline, autos, and building materials are removed, sales at retailers increased 0.5%, indicating that consumers have relatively stepped up spending for the second-straight month of the year despite the headwinds of the recession. The increase in spending is likely due to the pronounced weakness in holiday spending, and is likely the outcome of pent-up demand and discounted prices, where consumers shut down spending in 4Q in response to the shock of plunging stock portfolios and rapidly increasing job losses, and are out spending on the margin.
The stabilization of consumer spending is a positive, and if the trend continues it will likely be positive for manufacturers, who have been struggling to cut production fast enough to keep up with shrinking demand. However, we are unlikely to experience sustained rising consumer spending in the face of a deteriorating labor market and unhealthy consumer balance sheets. As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Sector Analysis, Brad Sorensen, CFA, note in their bi-weekly Schwab Market Perspective: Depression/Recession-Does it Matter? consumers are spending less in order to save more to reduce debt, build their retirement accounts back up, and increase their emergency savings to protect themselves in case of future job loss. We need to ratchet down the copious and oftentimes unsustainable debt we ran up during the past few years, which will take discipline and time. Read more on their market perspective at www.schwab.com/marketinsight.
Weekly initial jobless claims rose 9,000 to 654,000, versus last week's figure that was upwardly revised by 6,000, and above the Bloomberg consensus which called for claims to rise to 644,000. The four-week moving average rose 6,750 to 650,000, and continuing claims jumped 193,000 to 5,317,000. Treasuries gave up early gains and are slightly lower.
US Treasury Secretary Timothy Geithner is testifying before the Senate Budget Committee on the Obama administration's 2010 budget proposal. Geithner reiterated that the Obama administration is projecting a $1.75 trillion federal budget deficit for the current fiscal year and that it is determined to cut the deficit by half in four years. The Treasury Secretary said short-term deficits are necessary to combat a recession as well as strains in financial markets. He also noted that the US financial rescue "might cost more" than the $700 billion already approved by congress.
Liz Ann Sonders, and Brad Sorensen note in their bi-weekly Schwab Market Perspective that the Obama administration continues to throw multiple plans at the credit crisis in an attempt to stabilize lending. Unfortunately, the response of the market has been less than enthusiastic as credit spreads have stopped narrowing for the time being-with some even disconcertingly reversing direction. After the $787 billion stimulus package failed to excite investors, and the housing plan left something to be desired, the administration's proposed budget further ignited concerns regarding increased deficits in the future. Additionally, the budget proposal was broad in its scope of extending the reach of government, which added to the uncertainty. This followed previous disappointments coming from the new governmental leaders, helping lead to the market reaction and lack of confidence that we're seeing.
The stabilization of consumer spending is a positive, and if the trend continues it will likely be positive for manufacturers, who have been struggling to cut production fast enough to keep up with shrinking demand. However, we are unlikely to experience sustained rising consumer spending in the face of a deteriorating labor market and unhealthy consumer balance sheets. As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Sector Analysis, Brad Sorensen, CFA, note in their bi-weekly Schwab Market Perspective: Depression/Recession-Does it Matter? consumers are spending less in order to save more to reduce debt, build their retirement accounts back up, and increase their emergency savings to protect themselves in case of future job loss. We need to ratchet down the copious and oftentimes unsustainable debt we ran up during the past few years, which will take discipline and time. Read more on their market perspective at www.schwab.com/marketinsight.
Weekly initial jobless claims rose 9,000 to 654,000, versus last week's figure that was upwardly revised by 6,000, and above the Bloomberg consensus which called for claims to rise to 644,000. The four-week moving average rose 6,750 to 650,000, and continuing claims jumped 193,000 to 5,317,000. Treasuries gave up early gains and are slightly lower.
US Treasury Secretary Timothy Geithner is testifying before the Senate Budget Committee on the Obama administration's 2010 budget proposal. Geithner reiterated that the Obama administration is projecting a $1.75 trillion federal budget deficit for the current fiscal year and that it is determined to cut the deficit by half in four years. The Treasury Secretary said short-term deficits are necessary to combat a recession as well as strains in financial markets. He also noted that the US financial rescue "might cost more" than the $700 billion already approved by congress.
Liz Ann Sonders, and Brad Sorensen note in their bi-weekly Schwab Market Perspective that the Obama administration continues to throw multiple plans at the credit crisis in an attempt to stabilize lending. Unfortunately, the response of the market has been less than enthusiastic as credit spreads have stopped narrowing for the time being-with some even disconcertingly reversing direction. After the $787 billion stimulus package failed to excite investors, and the housing plan left something to be desired, the administration's proposed budget further ignited concerns regarding increased deficits in the future. Additionally, the budget proposal was broad in its scope of extending the reach of government, which added to the uncertainty. This followed previous disappointments coming from the new governmental leaders, helping lead to the market reaction and lack of confidence that we're seeing.
where's the love?
Schwab researchers have examined the performance of analysts’ recommendations over a long period of time. We’ve found that the stocks rated best by analysts (what we’ll call “loved” stocks) have returned only 5.4% per year, averaged over the period from 1994 through 2008. But the worst-rated stocks (“unloved” stocks?) returned 10% per year over the same period.
The Worst Year?
The year 2008 may have been the worst calendar year in the entire history of the US stock market.
An investment in the S&P 500 lost 37% last year on a total return basis. Although 1931 looks worse on paper (a drop of 43%), that was also a year in which the consumer price level declined significantly, and since we have to buy goods and services at the prices being charged, calculations of return should be adjusted for inflation (or deflation, when it occurs).
By that measure, both 1931 and 2008 resulted in 37% losses in wealth, and whether one or the other was slightly worse is debatable, since calculations of inflation are neither precise nor the same for each person (since we all buy different things with our money). Let's just say it's a tie.
[Less Antman via velcher via chucks_angels]
An investment in the S&P 500 lost 37% last year on a total return basis. Although 1931 looks worse on paper (a drop of 43%), that was also a year in which the consumer price level declined significantly, and since we have to buy goods and services at the prices being charged, calculations of return should be adjusted for inflation (or deflation, when it occurs).
By that measure, both 1931 and 2008 resulted in 37% losses in wealth, and whether one or the other was slightly worse is debatable, since calculations of inflation are neither precise nor the same for each person (since we all buy different things with our money). Let's just say it's a tie.
[Less Antman via velcher via chucks_angels]
a contrarian contrarian strategy
A small-cap contrarian approach following the last recession would have paid off handsomely, turning a $10,000 investment into nearly $30,000 in just five years. Not only did the most beaten-down small caps outperform their spared peers, but also, every quintile of small caps outperformed every quintile of large caps over the following five years.
Wednesday, March 11, 2009
Buffett's sell strategy
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.”
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.”
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.