Monday, December 29, 2008

Orange County Supply of Homes near 2 year low

This little nugget is reported in the OC Register. You won't hear this news from the mainstream media, but we've been reporting on this for several months. The supply of homes in the epicenter of the housing problem of Orange County in California is declining at a fast rate. Inventory peaked at nearly 18K homes September 2007 and has steadily dropped to below 12K now. Whats really interesting is that houses under $750K have a reasonably low turnover of only 5 months.

The critics would claim that houses are being held off the market due to the drastically lower prices, therefore, reducing inventories. In reality though, the lack of willing sellers at these levels combined with more buyers coming in at these low prices is what creates a bottom and a reversal in the market. The stats don't lie and they definitely show how inventory levels kept growing and peaked in the late summer when supply was too high, but in 2008 inventory peaked in March. Don't be surprised when CA real estate prices become steady in early 2009 leading to a housing recovery nationwide.

  • The latest O.C. home inventory report from Steve Thomas at Altera Real Estate in Aliso Viejo notes that the year ended — well, his last count, as of Thursday — with 11,842 homes listed for sale on the brokers’ MLS files, nearly a two-year low.
  • In 2008, inventory reached its peak by the end of March at 15,617 homes — just a 4.5% increase from where the year’s home supply started.
  • Compare that to 2007 when supply grew 54% from start of year to peak at 17,898 homes by September.
  • Or 2006, when inventory grew 117% from start of year to peak at 16,006 in August.
  • It would take 5.93 months for buyers to gobble up all homes for sale at the current pace vs. 5.34 months two weeks vs. 15.05 months a year ago vs. 7.51 two years ago.
  • Homes listed for under a million bucks have a market time of 5.00 months vs. 27.71 months for homes listed for more than $1 million.

Sunday, December 21, 2008

Dec 2009 Oil Trades at $55

Don't be fooled by the quotes of oil trading in the $30s last week. The current quotes for just about all forward months is above $50. The chart above is for the Dec '09 contract and it's currently trading for above $55 on the NYMEX. The supposed culprit for the current low prices is that the Cushing terminal is flooded with oil, therefore, requiring all excess oil to be dumped on the markets. Long term though the OPEC cuts and expectation that demand will eventually rebound has future months considerably higher.

These higher future prices will undoubtedly help justify some of the long term projects being considered in the oil markets. Too much focus on last months prices missed the reality of the long term prices.

Monday, December 15, 2008

Asset versus Market Value at SHLD

Commentary from Change Alley on the ridiculous market value placed on Sears Holdings stock (SHLD). Basically repeats some of what I've posted here before, but probably more eloquently. My favorite comment plus a great quote from Benjamin Graham:

However, the large short interest in Sears strikes me as attempting to pick up nickels in front of a bulldozer; the real estate value is a massive imbalance that is incredibly clear-cut, paired with an aggressive stock buyback plan.

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment.
– Benjamin Graham, The Intelligent Investor

Thursday, December 4, 2008

Buyout Expert Having Problems Raising Cash

More signs of the times. NY Post has a report on Blackstone head Schwarzman being eager to make buyouts in this economy, but having trouble raising the cash. In normal times, he'd easily raise the money, but funny how during a weak market people are least willing to invest with him. Seems odd because his company is probably best served for profiting from the current environment. As usual people buy at the top and sell at the bottom.

At some point in the near future, you'll see companies like Blackstone go on buying sprees. Low interest rates would usually allow for huge deals to take place, but the frozen credit markets are preventing the normal business process to take place. When that happens, watch out. We'll likely see 12 months of unprecedented buyouts.

Monday, December 1, 2008

NBER declares Recession started December 2007

According to this Reuters report, NBER has declared the recession is already 12 months old and within stricking distance of the longest post Great Depression recession on record. This isn't that surprising to anybody following the market. Though the surprising part is that the recession officially started in December of last year even though we had good, positive GDP growth in the first half of 2008. Alot on Wall Stree feared that the recession didn't start until the summer and would need as much as 18 more months to run its course. Now we likely are looking closer to the end then the beginning.

Whats interesting though is that NBER has a history of calling recessions when they are just about to end. The last recession in 2001 was called exactly the month that they later declared as the end. Does their declaration put and end to the rampant speculation of the recession and force people to finally start thinking about the end? History definitely shows that the call a recession and then it abrutly ends. It sure feels like this one will persist much longer because the economy has gotten weaker of late, but then again once the market bottoms and starts showing signs of improvement it can pull the economy out of its funk. The old saying is that you should start buying stocks half way through a recession which we've likely already passed.

  • The current downturn was particularly tricky to define because gross domestic product remained positive in the first half of 2008. The NBER said its committee looked at payrolls, which peaked in December 2007 and declined in every month since then, as well as real GDP and other data to determine when the recession started.
  • The National Bureau of Economic Research said its business cycle dating committee members met by conference call on Friday and concluded that the economic expansion that started in November 2001 had ended. The previous period of economic expansion, which ended in 2001, lasted 10 years.
  • The current recession, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression, behind only the 16-month slumps of the mid-1970s and early 1980s.

Tuesday, November 25, 2008

Chart of the Day: Capitulation Phase Over?

Actually this is the Chartiest of the Day report. Carter Worth on CNBC gave his reasonings for the market lows being hit on Oct 1oth follow by the lower low on Nov 21st which technically confirmed the Oct low since it only stayed below for 1 day. Carter was pretty accurate on the way down so I have faith in the guy. Interesting view which makes it seem like you should accumulate stocks around the S&P 840 low and look to sell any big gains at close to 990 at least for now. The market has clearly oversold, but he makes some good points on why the market won't rally big for now.

He also said that because we've breached the lows of Oct. 10, in the short term, the market will be directionless. “The capitulation phase of the bear market is over. Now we’re heading into the apathy phase,” he says. “We’re stuck in a range with 990 being the top and 790 being the bottom.”

Interesting comments on BMY. BMY has been one of our favorites in the Net Payout Yield portfolio.

Thursday, November 20, 2008

Stat of the Day: Dividend Yields above Bond Yields

In the last 45 years, the market has never seen the dividend yield of stocks even approach the 10 yr Treasury yield. Though this chart doesn't show it, the last time the dividend yield exceeded the bond yield was 1958. Whats even more incredible is that dividends aren't nearly as popular over the last 10 years. The Net Payout Yield would drastically exceed the bond yield now due to huge buybacks. This is definitely not the time to abandon stocks for low yielding bonds. Its exactly the time to buy some aggresive small caps or Net Payout Yield stocks if you want less risk.

Wednesday, November 19, 2008

More Signs of a Housing Bottom in Orange County

Interesting article in the LA Times about a real estate boom in Santa Anna. 10x the sales volume of last year and houses receiving multiple offers sure sounds like a bottom. When somebody has to make an offer on 3 houses before getting a house, its difficult for the market to fall. Definitely a sign of demand outstripping supply at the current levels though its key to note that its 45% below the peak levels. Still, investors will have more confidence in banks once the housing market has hit bottom. Banks also will be more willing to lend money. Also, its interesting to note how bearish the article is about possible future declines due to job loses and such. Overly bearish if you ask me.

  • All told, 357 homes in Santa Ana were in escrow in October, almost 10 times the volume of a year ago.
  • Debini said the house they bought was actually the third they bid on. All of the foreclosed houses they pursued drew multiple offers, and they were outbid in their two previous attempts, she said.

Tuesday, November 18, 2008

Stat of the Day: Biggest PPI Drop on Record

Today we got yet another record: the largest PPI drop ever. At a drop of 2.8%, Wholesale prices are dropping at a dramatic rate. These reduced costs should help most businesses save money and increase profits leading to additional spending. The previous low was Oct of 2001 yet another period that was the near the lows of a bear market.

The market continues to match or set records that were last reached at market lows whether Yield Curves, Valuations, or Costs. These indicators alone never tell us when the bottom has been reached, but they all add up to being much closer to the bottom then the top.

Monday, November 17, 2008

Stat of the Day: Off the Charts Yield Curve

Another indication of the whackiness in this market. The yield curve is now off the charts bullish. This usually has a very positive impact on future bank earnings, but in a market where lending is limited its difficult to determine if the impact will be like normal cycles. Typically banks are encouraged to lend like crazy because the spread is so positive for them, but that isn't happening this time because of the financial crisis. You can bet though at some point in the future, this yield curve will help return the market to growth and inflation. In fact, its likely to cause irrational investments as it always does at the peaks and troughs.

This number is off the charts because of the huge compression in the rates of the T-bill. Its unlike anything the market as seen even in the last 25 years. Anytime this ratio gets above 2 it becomes very bullish for the future economy. The markets tend to forget that in periods of extreme bullishness or negativity that such monetary realities will cause a dramatic shift in the future economies direction.

Hedge Funds Raising Cash

Lots of reports have contributed the huge market declines in Sept and Oct to liquidations and forced selling by hedge funds. Based on this article, it's becoming very clear that alot of hedge funds have over liquidated. Though funds aren't required to report cash positions the numbers add up to a good portion of funds already having sizeable cash positions. In some cases such as BP Capital, funds have already moved to mostly cash.

These drastic moves put alot of cash available for reinvesting in the market once a rebound occurs. Adds more fuel to the argument that an eventual rally could be just as fast as the deline. Below are some samples of firms that have drastically reduced their reporting holdings during Q3 and in most cases the cash position has been identified as 30, 40, 50% and sometimes even more. That money can't remain on the sidelines forever and at least for these funds the selling will be limited going forward.

  • Hedge-fund manager David Tepper entered the third quarter with $3.1 billion of U.S. stocks and exited with $648 million, selling most holdings to reduce risk and raise cash as carnage spread across the financial markets. The firm, which switched some money to bonds, has between 30 percent and 40 percent of assets in cash.
  • Atticus Capital LP, based in New York, disclosed that its holdings declined to $510 million from $8.1 billion. The firm, run by Timothy Barakett, 43, sold out of 39 stocks while adding no new holdings. ConocoPhillips, MasterCard Inc. and Burlington Northern Santa Fe Corp. were the three largest positions he exited, with a combined market value of $2.68 billion as of Sept. 30. David Slager, 36, who manages the Atticus European Fund, told investors that more than 50 percent of his fund was in cash or U.S. Treasuries after he lost 43.5 percent year-to-date.
  • At Tudor Investment Corp., the Greenwich, Connecticut, hedge-fund group founded by Paul Tudor Jones, 13F holdings fell to $453 million from $5.7 billion. Jones said markets face more selling from managers.
  • SAC Capital Advisors LLC of Stamford, Connecticut, said its holdings were $7.7 billion as of Sept. 30, down from $14.4 billion at June 30. Founder Steven Cohen, 52, had about half the firm's assets in cash in mid-October, after his main fund fell 5 percent through September.
  • Louis Bacon's Moore Capital Management LLC said the value of its 13F securities fell 69 percent to $1.4 billion, while at Jana Partners LLC, a firm overseen by Barry Rosenstein that makes activist investments, they fell to $2.1 billion from $5.9 billion. Both firms are based in New York.
  • Jeffrey Vinik, who once ran the Fidelity Magellan Fund, disclosed that his Boston-based Vinik Asset Management LP held $1.8 billion at Sept. 30, down from $11.8 billion at June 30.

Monday, November 10, 2008

China Stimulous Plan - $586B

By now I'm sure just about everybody has heard about the details of the stimulous plan out of China today. A lot of debate has taken place over whether its really new spending or mostly just a rehash of existing plans such as the earthquake rebuild. Regardless, the Chinesse economy is likely to benefit from these additional funds being spent. APWR is our favorite stock based on this news as any increase in demand in China will just further stress the power grid in mainland China requiring the services of APWR. APWR has been crushed due to its speculative appearance and the drop in the China markets, but it has a huge $800M backlog plus another potential $300M deal in the works. Not to mention, APWR is just now producing windmills that will provide for a substantial boost to the bottom line.

Looking for a stock that will indirectly benefit from this stimulous plana and you need look no further. Even the chart is starting to look more bullish.

GM Target Set at $0

Not sure I've seen a analyst come out with a $0 target, especially on a DOW stock. According to this article, Deutsche Bank cut GM to 'sell' with a target price of $0. While Obama has already stated that he is behind some sort of help for the ailing US automakers, the pressue seems high that taxpayers not be impacted. These analysts seem to think GM might get a AIG type of deal where the shareholders are basically diluted out of existense. The issue is that any GM deal needs to get major concessions from labor to make them able to compete with the likes of Honda and Toyota. Otherwise, why not let them go bankrupt and see what happens to their labor deals. Constantly saving overpriced contracts will never solve the problem.

Either way, I'd stay away from the stocks of GM and Ford until this all shakesout.

  • While further government assistance would decrease the likelihood of a GM bankruptcy, we believe any government assistance would likely significantly dilute GM's equity," Barclays' Johnson wrote in a note to clients.
  • "Of the four broad options for government assistance for GM, we believe that political pressure to protect taxpayers may lead to a solution similar to the 1979 Chrysler bailout, which was accompanied by concessions from debt holders, labor, suppliers and management," Johnson said.
  • "GM equity could be interesting longer term, but we advise near-term caution given uncertainty on the structure of any potential government aid," Patel wrote in a note to clients.

Thursday, November 6, 2008

Stat of the Day: Stock Allocation at 58%

From the chart above, Bespoke provides a nice picture of how the market has become so momentum based. Stocks fall and the allocation recommendation for stocks drops as well. Most analysts would advise the opposite if writing a textbook, but when it comes to real world applications it seems that people pull out of stocks at the lows and pile in at the highs. This is another of the historical indications we have regarding buying stocks now.

The average recommendation has dropped from 68% to 58% even though the market is back to the area of the 2003 lows. Just another indication of how the attitude towards stocks has dramatically shifted since 2000.

With gas prices and interest rates falling on a daily basis, its difficult to envision how the market will remain weak much longer. Americans like to spend and the stars are aligning for a great big shopping spree. Valuations and just too cheap to ignore.

Tuesday, November 4, 2008

The Obama Rally?

As we watch the S&P500 surge 4% to over 1,000, it has probably caught alot of people off guard expecting a further selloff with Obama likely to win the election today. The market has enjoyed a nice rally the last couple of weeks following widespread panic selling and hedge fund liquidations over the previous couple of months. We're now likely seeing a rebound as the market is now seeing more certainty with the election finally happening. The market has likely more then discounted a Obama win and is now coming to grips with the facts that the world won't end. In fact, we've lately heard that Obama will likely delay the expected tax increases until maybe 2010 at the earliest.

As usual it appears the market has priced in the worst case scenario and now is waking up the reality that world isn't going to end. After such a huge run, it's likely that the market will use the 1,000 point area as a place to pause before the ultimate rally. We'll likely see 940 or 960 on the downside and possibly as low as 900. When that happens, it will likely be the best buying opportunity we've seen in 30 years. History has generally favored strong rallies in the first year of a Democratic presidents reign especially when the prior year has seen a big selloff in anticipation of his election. Markets always over react and it's likely that 2008 was no exception.

In previoius articles, we've made a strong case for the compelling valuations in the market. Now is the time to act upon them.

Edit: Market finished strong on 11/4, but has started 11/5 off weak as weak economic news comes back to focus. ADP reported a weak jobs number and ISM Services index was sub 45 indicating a very weak Oct. Would expect the market to be weak the reast of the week retesting 940 or 900.

Edit 11/6: wow... the market reacts so fast these days. As of 11am est, the S&P500 is already sub 930 and setting for a potential move to 900. Expected this to take longer then 2-3 days. With worldwide rate cuts, the world economy is bound to start looking better in 6-9 months. Getting more and more difficult to be on the sidelines.

Dirt Cheap Valuations

Now Jeremy Siegel joins us in an article at Yahoo! Finance. This guy is known for being very conservative in his approach to the stock market and constantly warned about overvalued stocks in the late 90s. He is bullish on not only the US market but the Worldwide market. The PE ratios in part of Europe and Asia are remarkedbly low in the 7s. Check out his summary of the world markets PEs.

He makes a compelling case of using normalized earnings to value stocks. Otherwise, throw out the peak and trough or outsized gains and losses to focus on the core earnings level. Do you really want to value a stock based on the current weak economy or based on what it would earn if the economy was growing 2-3%? Just like you shouldn't value a stock based on what it earns when the economy is growing at 5%. That isn't sustainable and neither will be any valuation assigned to that growth.

  • I believe that stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months.
  • Right now the "normal" level of earnings, based on trend analysis of past 15 years of earnings on the S&P 500 Index is $92 a share.
  • If the average 15 price-earnings ratio applied to these $92 per share normalized earnings, the S&P 500 Index would be selling at 1380, which is almost 50% above its current level.
  • The last time the market was at ten times earnings or less was in the late 1970s and early 1980s.

Wednesday, October 29, 2008

Is Sears Holdings (SHLD) the Next VW?

If you missed the VW story from yesterday, Porsche bought basically all the outstanding float in VW forcing panicked trading by the 12% of shares short. Anybody attempting to cover or forced to cover had virtually nobody left to sell in the open market. This forced the stock trading on the DAX up nearly 500% and briefly gave VW the largest market cap in the world over Exxon. Gotta love the free market system that spins out of control.

  • Volkswagen’s stock soared to as high as 1,005 euros a share, about $1,258, on Tuesday before closing at 918 euros. The shares ended last week at 210 euros.
  • The rise appears to have come from a short squeeze of historic proportions, as speculators who had borrowed the stock and sold it scrambled to buy shares. Many had expected the share price to fall after Porsche gained control and stopped buying shares.
All this brings me to the story regarding Sears Holdings (SHLD). Most people commonly know it as the owner of retail gians Sears and KMart or by it's valuable brands like Craftsman or Kenmore. Neither retail operation is very impressive anymore so why would we care about the stock? Many reasons exist because of the valuable brands they control, but more importantly because SHLD is one of the largest commercial real estate owners in the US. As a owner of 250M square feet of valuable mall real estate with limited debt, SHLD has a very valuable asset that isn't being recognized by the market. Check out a good summary at if you want to read more about the value prospects of SHLD as this isn't really the point of this article.

Rather I want to focus on the possibility of a VW type short squeeze. Regardless of what people argue you can't deny that a long list of very successful investors are big holders in SHLD. From Eddie Lampert to Bill Miller to Bill Ackman. Its typically not wise to bet against these guys. If they see value, then it likely exists.

Looking at the list of holders from Auguest 31st below, you can see that more shares were short then the public float not controled by these strong investors. Now its very possible that a Legg Mason or some other fund was forced to sell shares recently to reduce this imbalance, but still its very likely that shorts also piled on to record amounts. All at the same time, SHLD continues to buyback shares further reducing the float. One by one these shares are being taken off the market, yet shorts continue to add. Betting that they can outsmart Lampert and the others. Don't be surprised if you find one day that a Pershing Square Capital comes in and buys 2M, or 5M, or 10M shares to dramatically reduce the float and squeeze the shorts. Combined with the buyback and all of a sudden you get a VW type situation where all the public shares are gone yet a huge short position exists with virtually no willing sellers. Not to mention the naked shorting implications or inability to short if these fund refuse to allow their shares to be borrowed.

Holder Name—Shares—% - as of 8/31/08

ESL Investments, Inc.—65,639,184—51.0%
Fairholme Capital Management LLC—16,110,090—12.5%
Legg Mason Capital Management, Inc.—12,503,168—9.7%
Pershing Square Capital Management—6,746,568—5.2%
ClearBridge Advisors—4,789,523—3.7%
Perry Capital—2,694,95—2.1%
Davis Advisors—2,020,96—1.6%
Dalal Street, Inc.—517,608—0.4%
T2 Partners Management LP—50,625—0.0%
Greenlight Capital, Inc.—11,240—0.0%

Total held by above—111,083,919—86.2%

Total Outstanding—128,800,000

Short Interest—33,656,888—26.1%

Share Not held by Above Holders—17,716,081—13.8%

Now I'm not that familiar with the VW story but the fundamentals of the auto industry are pretty weak so that part of the scenario matches SHLD. Hence the resilence of the shorts to ignore the resounding bullish case. Whether Prosche really sees the same compelling value in VW like these big funds do with SHLD thats beside the point. Many people with lots of money see value and thats all that matters. Betting against them at this point leaves you vulnerable for a epic VW type short squeeze. Will we wake up one day to find out a hedge fund drained the remaining float (don't doubt that they could coordinate this just like the financial bear raids)? Or maybe Lampert just sold a chunk of real estate for a huge premium to its current valuation (which at this point is virtually zero)?

I'm buying because of the valuation presented. One where I could easily conjure up the prospects of SHLD trading north of $400, but this new angle is hard to ignore and if it happens be ready to sell quick.

Long SHLD in both funds and personal.

Tuesday, October 28, 2008

Pickens BP Capital now at 100% Cash

Incredibly T. Boone Pickens BP Capital hedge fund has gone from fully invested in the global growth of energy demands to one that is no longer invested at all. According to this report, his fund has had over 50% redemptions. This just adds to the long list of funds that have now deleveraged and gone to significant cash levels. It also will add fuel to the fire of any rebound.

  • Roughly half the investors in T. Boone Pickens' BP Capital hedge fund have asked to withdraw their money after losses of about 60 percent this year, a source familiar with the situation said on Tuesday.
  • The Texas oil tycoon and his investment fund, which had invested primarily in the energy sector, have lost about $2 billion since peaking in late June, the source said.
  • BP Capital's losses this year come after five years of gains, with annual returns reaching as high as 119.5 percent in 2003 during the commodities boom that began in 2002.

Stat of the Day: Consumer Confidence Lowest on Record

According to the Conference Board, it's consumer confidence index fell to its lowest level since they began tracking it in 1967. This isn't surprising considering the large drops in housing prices and stocks. It's definitely a sign that consumers are gloomy. Does it mean that consumers won't spend? Thats yet to be seen as this report usually doesn't match what consumers actually spend. Some random consumer answers a phone and responds that they are gloomy then they go out to the mall and buy some clothes. Thats basically how the reporting works. Falling gas prices are more likely to impact consumer spending then the stock market or a house. Gas more directly impacts the monthly budget of most consumers, while big ticket items are the ones most likely impacted by housing and stock declines. So expect a weak holiday, but don't bet the house that this report accurately reflects spending.

  • The Conference Board said the consumer confidence index fell to 38, down from a revised 61.4 in September and significantly below analysts' expectations of 52.
  • That's the lowest level for the index since the Conference Board began tracking consumer sentiment in 1967, and the third-steepest drop. A year ago, the index stood at 95.2.

Monday, October 27, 2008

Stat of the Day: S&P500 Earnings Yield hits 10.76%

Doesn't take long for the yield to soar from the report I posted last week. We'll keep hammering home this theme that the market continues to be the cheapest valuation that we've seen in a very long time. Not much to follow up on this theme as this measure continues to be at the exact inverse of the 2000 bubble. Hmm....

ICICI Bank (IBN) reports decent quarter

How good is this Indian bank that they reported stronger results YOY even though they had nearly $300M more in loan provisions. The ability to lower expenses so drastically even though they grew deposits and loans speaks to the efficiency of this bank.

-- Profit after tax of US $216M; 39% increase over first quarter

-- 42% year-on-year increase in core operating profit (excludes the huge swings in treasury income)

-- 12% year-on-year reduction in costs due to cost rationalization measures

-- Capital adequacy of 14.01%

-- CASA ratio increased to 30% from 25% a year ago

IBN continues to launch both domestic and international growth where they can utilize non-resident Indians as customers and a low cost structure in India to run these international operations at lower costs.

  • At October 22, 2008, the Bank had 1,400 branches and 4,530 ATMs. (State Bank of India has 10,000 branches)
  • Current and savings account deposits increased 16% to Rs. 66,914 crore (US$ 14.2 billion) at September 30, 2008 from Rs. 57,827 crore (US$ 12.3 billion) at September 30, 2007.
  • Being the preferred bank for non-resident Indians: The Banks remittance volumes increased by 38.2% in Q2-2009 to about Rs. 11,946 crore (US$ 2.5 billion) compared to Q2-2008.
Not sure what isn't to like about the future of this Indian bank. India is still in the early stages of a infrastructure build out plan and banks will be big beneficiary of such a move. Any doubts this progressive bank in India will be substantially larger 10 years from now? Don't think so, but then why is the stock down to $12 from a high of $74? Based on the stock price, I sure thought this would be a horror report instead of one filled with lots of growth.

Wednesday, October 22, 2008

Stat of the Day: S&P 500 Earnings Yield at 9.88%

Considering that the 10 year note is at only 3.76%, this is a considerably wide and unheard of spread between the note and the S&P500 earnings yield. This is the widest spread in the last 30 years and maybe in history if I could find a report going back that far.

What this data shows is that anybody invested in a S&P500 stock would earn 10% on his investment while only earning 3.76% on a safe government note. Meaning that if credit was available, the market would see a high amount of leveraged buyouts. Borrow using cheap credit and make money on the spread. Basically a continuation of the private equity buyouts that began in 2002 when the market first got really cheap. has a nice little article that summarizes the bullishness now being seen in the private equity realm due to these very, very attractive valuations. When Henry Kravis and Steve Schwartzman become bullish on valuations, you should expect a big flurry of deals to be announced. Its only a matter of the credit markets freeing up.

Low valuations will continue to be a big theme. Lots of talking heads on CNBC continue to discuss the potential for another 20% drop in the markets. For that to happen, the markets would reach valuations never seen before. Thats a gamble worth taking.

Tuesday, October 21, 2008

E*Trade (ETFC) posts another big loss

Well at least thats the headline that you'll read. The real interesting note is that the CEO claimed that loss provisions have peaked in Q3. Stay tuned on ETFC as they still have a solid online brokerage that is very profitable. They also have access to the new government Capital infusion and TARP programs so the combination should provide any liquidity if needed. These options pretty much takes any bankruptcy fears off the table. Without BK fears, ETFC has a bright future once the current mortgage loans are run off. Anybody doing a quick valuation of Ameritrade (AMTD) will quickly gather that a E*Trade without the shackles of non-performing loans would be very valuable.

Stay tuned as this stock should get interesting!

Millicom (MICC) posts decent earnings considering

Thats the good news. Unfortunately Millicom International Cellular's (MICC) stock dropped 33% today. It's difficult to follow what the market saw that was so scary about the report. A 27% increase in revenues followed by a 25% increase in EBITDA seems rather impressive in this economy. Especially considering the low valuation level of 2.7x EBITDA that MICC now trades at. Does valuation not matter any more?

Highlights of the Q3 report:
  • 53% increase in subscribers for Q3 08 versus Q3 07, bringing total subscribers to 30.6 million
  • 27% increase in revenues for Q3 08 to $869 million (Q3 07: $686 million)
  • 25% increase in EBITDA for Q3 08 to $369 million (Q3 07: $296 million)
  • 17% increase in net profit for Q3 08 of $161 million (Q3 07: $138 million)
  • Basic earnings per common share for Q3 08 of $1.49 (Q3 07: $1.36)
Millicom International Cellular S.A. is a global telecommunications group with mobile telephony operations in 16 countries in Asia, Central America, South America, and Africa. It also operates cable and broadband businesses in five countries in Central America. The Groups mobile operations have a combined population under license of approximately 291 million people.

Though the list of countries includes unstable locations like DRC, Cambodia, and Laos to name a few the diversification in these 16 high growth, low mobile penetration countries reduces the risk that any one country might alter its mobile operations whether from political instability or economic problems. To me, this provides the ultimate emerging market growth vehicle. MICC is basically a mobile emerging markets mutual fund all by itself.

Unfortunately the market doesn't get my concept on the value of MICC. Sure the conference call mentioned several issues including currency translations impacting revenue. Other issues with local country energy and food inflation impacting customers ability to spend on mobile calls. Still though, MICC increased subscribers by 53% to over 30M. Sure the ARPU per user was down, but that only owes to the economic crisis the world now faces and short term inflation impacts in places like Africa that will surely disappear now that the input costs have substantially declined.

Liquidity issues might have sparked the selloff. The CEO mentioned putting off the early redemption of a $460M note that only seems prudent in a market where it's difficult to borrow cash. Why not preserve your $1B cash position (net debt is only $800M) until the markets reopen? Whats amazing is that the balance sheet is remarkable for a wireless company. Most domestic plays are loaded with debt. Makes you wonder if that market doesn't have it wrong about the riskiness of emerging markets. If this spooked the market, then MICC will rebound sooner rather then later.

Some subscriber growth numbers to ponder:
  • DRC (Africa) - 141%
  • Tanzania (Africa) - 110%
  • Laos (Asia) - 101%
  • Senegal (Africa) - 84%
  • Ghana (Africa) - 82%
  • Honduras (C America) - 71%
  • Sri Lanka (Asia) - 58%
  • Paraguay (S America) - 42%
  • Guatemala (C America) - 39%
From these numbers, you can see that MICC still has high growth from plenty of locations in all 4 regions. Africa added nearly 1M subscribers alone which provides a rare investment option in that continent.

Listen to the conference call and you'll hear plenty of questions about country specific issues such as competition, currency, taxes, and inflation. All in all though, MICC continues to perform in a difficult market. At a current market cap of only $3.8B and a Enterprise Value of roughly $4.6B, its difficult to follow why the analysts focus on such micro issues instead of focusing on the macro valuation picture. On all accounts, MICC is very cheap and the subscriber growth rates show that the product is in hot demand. Customers may use the service sparingly during the crisis but it seems almost assured that mobile service is a way of life in these countries now. As much, MICC should have high growth for decades to come. Buy when others are fearful.

Monday, October 20, 2008

Stat of the Day II: Unprecedented Low Valuations

Valuations continue to be at unprecedented low levels as this Valueline Appreciation Potential chart shows levels only matched twice in the last 40 years. This is a theme that we''ll continue to harp on over the coming weeks. As this chart shows, valuations match only the 1974 and 1982 levels. On these 2 occasions over the next 12 months, stock market returns were very positive with an average gain of 28%.
This is yet another confirmation of the cheap valuations as other methods show an even more bullish scenario for this time period. Low interest rates and high cash hordes as documented in other posts seperate this time period from even those prior low periods.

Stat of the Day: Southern California home sales up 65% from last year

Now this did occur before the Oct melt down in the financial markets, but it's a very encouraging that the price drops have finally led to more buyers. According to this LA Times story the median price is down 33% from the peak last year. Sales were also up from August and the hardest hit county of Riverside saw the biggest sales increase of 106%. Doesn't appear that there is a lack of qualified buyers when the price hits an attractive level. Thats an estimated $6B worth of new mortgages and roughly $9B as the original value that just left the books of weak mortgage holders and ended up in the hands of strong, financially solid holders.

  • The median Southern California home sales price was $308,500 in September, the lowest since May 2003 and down 33% from the September 2007 peak of $462,000
  • The number of homes sold in Los Angeles, Orange, San Bernardino, Riverside, Ventura and San Diego counties shot up 65% compared with September 2007.
  • A total of 20,497 homes closed escrow in the Southern California in September, up 5.8% from 19,366 in August.
  • Sales were up most in Riverside County, which posted a 106% gain from the same month a year ago. Riverside and San Bernardino counties also recorded the steepest year-to-year price declines in the region, with the median sales price down 37% compared with a year ago.

Wednesday, October 15, 2008

Stat of the Day II: Market Swings 2nd Highest in History

The guys of Bespoke came up with this interesting chart. The last 2 weeks have have had some of the most volatile intraday percentage swings on the DOW. In fact, only the wild drops in 1987 surpass the swings we saw on 10/9, 10/10 & 10/13. Todays move is close to making the list but might come up short. We're definitely in volatile times these days that favors traders over investors. The market looks like it wants to retest the lows or at least the close from Friday. My guess would be that alot of money is sitting around waiting for that confirmation. Should be an interesting next couple of trading sessions.

Stat of the Day: Gasoline demand down 9% YOY

Gasoline demand continues to plummett year over year according to Mastercard report. It seems that part of the destruction in demand could just be temporary as people spent the last couple of weeks sitting around watching the credit crsis and markets explode. Demand did pick up from the previous week. All in all, the national averages still haven't come down far enough to spark demand. As they approach $3 I'd expect a fair amount of pick up though still lower then last years levels. It'll be interesting to see how fuel efficiency plays into demand over the next couple of year. Would like to see a report that shows miles driven versus gas consumed.

Some highlights:
  • Average national demand for gasoline dropped 9.7 percent compared with the same period last year, MasterCard said in its weekly SpendingPulse report.
  • "This is the first time that we've had two consecutive weeks of pumping, in terms of year-over-year comparison, that were below 6 percent," McNamara said.
  • American motorists pumped an average of 8.762 million barrels per day in the week that ended Oct. 10, up 1.6 percent from the previous week, the report said.
  • the national average price for gasoline dipped 10 cents to $3.61 per gallon

Tuesday, October 14, 2008

Hedged Growth Positive for Oct

Though just slightly positive at $2,300 on a $1M virtual portfolio this is a really significant accomplishment considering the nearly 15% loss in the S&P500 for the month to date. The portfolio has a long mandate with the 1/3 position in Net Payout Yield stocks so this portion of the portfolio has been negative. Boeing, Disney, and Home Depot though are the only stocks that have worst performances then the market. Fortunately though the portfolio has been very heavy in cash due to the environment providing a mostly neutral stance for the Growth and Short portions. The Short position of the SRS ultrashort real estate position has returned 40% to offset some of the losses. The biggest benefit is that the portfolio leaned in with more Growth on Friday afternoon with purchases of Apple and NYSE Euronext. These positions have averaged 20% gains since those purchases. Also the Morgan Stanley and Regions Financial bets have combined for breakeven performances after being down substantially coming into this week. Its helped that MS is up more then 100% this week.

Prior to the close I purchased a 2.4% position in ROM (ultra tech ETF). With the tech sector down substantially today, decided it was a good time to add more exposure. After the bell, Intel reported a so/so quarter which apparently was better then the greatly reduced expectations. INTC is up about 4.5% tomorrow so the addition of ROM might have been pretty timely.

The portfolio is now mostly long with the additions to the Growth portion the last few trading days. All of the short position is still in cash except for the SRS position. For now, I'm still positive on a long term bull market starting, but its still too early to tell whether we've got the reversal needed. Earnings will be bleak and expectations for Q4 need to drop. We're seeing with the INTC report that maybe those expectations for Q4 are closer to reality then we expected. As we get out of the landmines that will be inherent in this earnings period, the market might be able to catch a rally. Then the rally could lead to better economic results in Q4 which would solidify the rally. Its all a vicious cycle and hopefully its now started for the bulls though this portfolio seems capable of handling either market.

Edit 10:30am: Looks like the ROM trade hasn't worked out so well with the market selling off again yet the portfolio is outperforming by 3.5% so far today. Added UWM (ultra Russell 2000) on the pullback to 26.15. With an 8% drop, this is ideal time to add more Growth positions to ensure the portfolio is ready for a rebound. Added to Growth portfolio as well.

Poll of the Day: Was Yesterday's Rally for Real?

The guys at Bespoke have this interesting poll today - Was the Rally for Real? As of this posting, over 51% of the voters think the rally won't last. While basically a 50/50 result, I still find it interesting that so many investors remain that bearish. After a historical 900+ point rally on the DOW, the market still can't find many bulls. Good sign that the rally might finally have legs. The experts say that it usually takes a 3 day rally to solidify a reversal from a bearish trend. We'll be watching to see if that happens and looking to add to the growth stocks in the Growth and Hedged Growth portfolios.

Sunday, October 12, 2008

Net Payout Yield Slightly Outperforms

Its difficult to get too excited by a portfolio down 17.3% last week. On a relative basis, it was over 0.8% better then the S&P500s 18.1% loss. Great, but nothing to write home about. This portfolio is definitely designed to outperform on a relative basis and hence doesn't have any shorts to benefit it on the downside. Considering its goal, it was a successful week since its goal is to just beat the market on a relative basis whether rain or shine. When the market is pouring losses, it'll likely do the same.

The portfolio has outperformed the market MTD and over the brutal last month. Not bad considering the portfolio has some growth stocks which will definitely lead to out performance in a bull market.

This portfolio continues to perform for those willing to accept market risk and not wanting to time the market. The best part is that this is the type of portfolio that should allow you to sleep at night. Net Payout Yield stocks gain market share and buyback large quantities of stock during downturns. This leaves them stronger then the competition when the recession ends and with less shares outstanding to boost earnings per share. Not to mention that dividend yields are higher as well. Holding onto these stocks will ensure you benefit from the coming market rally. Whenever that actually happens could be painful to wait on though.

Growth Outperforms by 3% MTD

For a portfolio that is very aggressively invested, I'm proud to report that it has outperformed the S&P500 during the worst week ever by 2.3%.The S&P500 was down 18.1% vs 15.9% for the Growth fund. The portfolio is also ahead MTD and over the last 3 months. This may be the first time in my investing career that I've done better then the markets during a 3 month period that the market is down 27%. This was achieved because of my bet that oil had peaked in July mainly due to slacking demand when gas hit $4. Hence I invested in DUG (Ultrashort Oil & Gas). This position has paid off nicely to the tune of a 150% and over $90K in gains in 3 short months. On Friday's open, DUG soared up to the upper 70s so I chose to cash in 2/3s of the position. After watching it soar further to 85, I cut the remaining position at 80 as it seemed like the typical blowoff top that is followed by steep declines. With this substantial sell, I bought an 8% position in APPL in the lows 90s on Friday still leaving me with a huge position in cash. Depending on the market, the remaining $114K cash will go to work this week likely on the long side on any weakness that holds the lows. We'll likely not see any huge follow through rallies the next few weeks since so much damage has been done to the markets that most funds will likely still face redemptions. Probably scale into longs over the weeks to follow unless we see a huge rally at which point I'd likely buy an ultrashort ETF like DUG or SRS.

Hedged Growth Outperforms by 17% in 1st 10 days

What a time to start this new portfolio. In its first 10 days of existence, the market is down 22.8% (thats a Bear market all by its self - wow!) while the Hedged Growth portfolio was only down 5.6%. Thats a whopping 17% outperformance. Considering the bearish tone of the market the portfolio stayed mostly neutral besides the 1/3 invested in the Net Payout Yield stocks. The Ultrashort Com'l Real Estate position (SRS) is up 41% so that helped as well. That was offset by the position in Morgan Stanley (MS) that hasn't paid off down 60%. Also helping was the 5% position buys in APPL and NYX close to the lows of the day on 10/10. Both ended the day with over 5% gains. Having $435K or 45% of the original value in cash or SHV (short term treasuries) helped keep the portfolio loss to a minimum though a much larger short position would've kept the portfolio closer to breakeven.

Next weeks outlook favors a market bounce after any initial drops on Mon or Tues due to fund redemptions. The world Governments have come to the rescue in full force so it's getting to the point that further downside is limited. Therefore, the portfolio is tilted towards a up market with the APPL, NYX, and WFC purchases on Friday. With any strong bounce, I'll likely look to add further shorts to keep the hedge going. On any weakness that holds the prior lows, I'll look to add more growth stocks. That portion of the portfolio is still roughly $200K low and I'm pretty bullish once we get out of this weak period.

Hold on because next week could be bumpy but we're already off to a strong start. I'm still intrigued to see how the portfolio does on an up day. Amazingly that hasn't happened since I started it on 10/1. Historical times to be investing for sure.

Friday, October 10, 2008

Trade: Buy Apple, Sell DUG

On the huge selloff this am I made the following trades. Bought Apple (APPL) for the Growth and Hedged Growth Portfolios in the low 90s. Sold 2/3s of the DUG (Ultrashort Oil and Gas ETF) in the upper 70s.

  • APPL has a $20B cash position and no debt. Currently trade at 10x cash flow with substantially higher growth even considering the slowdown. With the cash position, APPL should be able to gain market share in this downturn.
  • The growth portfolio has made a 150%+ gain on the DUG investment. With todays huge selloff, it just seemed the right time to cash in. Market wants to turn and we don't want to lose the gains.

Edit: Added NYX to Hedged Growth b/c it has a strong balance sheet and no credit risk. Sold the remaining DUG shares at 80. Added WFC & CAT to the Net Payout Yield portion of the Hedged Growth fund. Both are strong companies really beated up and that portfolio was still in signifiacnt levels of cash.

Thursday, October 9, 2008

Stat of the Day: 6 Day Losing Streak

While not all that rare, the six consecutive loses on all 3 exchanges hasn't happened since January 1991. As I post this, the markets are headed yet again towards another loss. While 7 days is somewhat rare, the longest losing streaks are 12 days on the DOW and S&P500 and an astounding 16 days on the NASDAQ. CNBC has a good summary of the 6, 7, and 8 day streaks for each market.

Edit: Make that 7 straight down days. Haven't ran the numbers, but it looks like record losses for that period.

Tuesday, October 7, 2008

Hedge Funds Shorting S&P 500 Futures like Mad?

According to acclaimed Bear Doug Kass, the tail might be wagging the dog. Ironically, he has become bullish because he sees excessive shorting of the S&P 500 futures. In his theory, this is being done to hedge against potential losses on long positions that aren't as liquid. Has the world gone mad? Perma bull Jim Cramer has been suggesting that investors sell, sell, sell and perma bear Kass has actually become bullish.

Beginning last Monday, I began to see a number of big hedge funds in the S&P 500 futures pit, boldly selling futures to hedge their core long holdings. As the market dropped precipitously on both Friday afternoon and Monday afternoon, they got ever more aggressive -- according to my sources, more aggressive today than at almost any point in a decade or more.

This strategy is a classic tactic one sees at panic/capitulation lows as hedge-hoggers sell short what they can sell easily -- the S&P futures market is deep and liquid -- while they retain what they can't sell easily (i.e., large blocks of individual equities).

That's what I see happening recently in the S&P futures pit, and even if I am only half correct, those hedge-hoggers could be on a sinking ship without a life preserver as the stock market might have bottomed under the weight and intensity of their aggressive short selling of S&P futures.

Monday, October 6, 2008

Stat of the Day: Commodity Costs Down for the Year

According to the guys at Bespoke, the average daily costs for commodities such as gas is now down $0.62 for the year. So the average consumer is now spending less then they were when the year started. Its also down a remarkable $5.39 per day from the peak in July when consumers were spending $4.77 per day more on commodities. That amounts to a lot of extra cash for consumers and should be bullish to financials and retailers as the market normalizes.

Friday, October 3, 2008

Why is everybody selling when Buffett is loading up?

It intrigues me when the greatest investor of our times has been on a buying spree and yet the markets have just had the worst week in 7 years per CNBC. Guess the heard mentality in the financial markets continues to live strong. After all we're just now coming off commodity and real estate bubbles. Why not have an overdone stock market sell off?

Below our the highlights of the recent Buffett purchases:

  • 9/19: MidAmerican Energy and Constellation Energy (CEG) reached a definitive merger agreement in which MidAmerican will purchase all of the outstanding shares of Constellation Energy for a cash consideration of approximately $4.7 billion, or $26.50 per share. Berkshire Hathaway (BRKA/BRKB) owns 87.4% of MidAmerican.
  • 9/23: Berkshire Hathaway is paying $5 billion for Goldman Sachs (GS) preferred shares that pay a 10% dividend. Berkshire also gets the right to pay $5 billion more in Goldman common shares at $115 each.
  • 9/29: MidAmerican Energy today announced it has agreed to purchase 225 million shares, representing approximately a 10 percent interest, in BYD Company Limited ( The investment is valued at 1.8 billion HK dollars, or approximately $230 million U.S. dollars.
  • 10/1: Berkshire Hathaway agreed to buy $3 billion of preferred General Electric (GE) stock. This stock pays a generous dividend of 10%. On top of that, Berkshire gets the option to buy $3 billion of GE common stock at $22.25 per share, well under the current trading price of around $25 a share.
  • 10/3: Wells Fargo (WFC) said early Friday that it would pay 0.1991 of a share of common stock in exchange for each common share of Wachovia Bank (WB) in a deal worth $15B. Berkshire Hathaway is the largest shareholder of WFC.
Thats a whopping potential for over $30B in deals with up to $16B in cash.

News by Bloomberg of the worst month ever for hedge funds in September might be a big reason for such a negative market this last week. As those redemptions come in the market might have faced a lot of forced selling this week. After all, we know the rescue plan passed on Friday should've been net positive to the market. Todays action after the passage in the House smelled of desperate hedge funds attempting to sell at the best valuation they could get prior to redemption payments.

Buffett may have been early in the market, but I'll be surprised to see him down much on any of his investments. Of course, his cash deals with GE and GS were clearly better deals then any small investor could get, but it's hard to see why anybody would be a net seller when Buffett has gone on a widespread buying spree. Heck, Buffett has even come out on more then one occasion and stated that the rescue bill approved on Friday would likely be profitable to the government. Yet, most taxpayers are overwhelmingly negative on the bill.

As he is famous in saying:
Be fearful when everybody is greedy and greedy when everybody is fearful.
Everybody is fearful right now.

Stat of the Day: Stocks undervalued by nearly 60%

The IBES valuation model continues to show stocks are very undervalued. The ratio is at record low levels. The current S&P500 yield is at 8.84% while the 10 year treasury note yield is at 3.66%. The fear is so great that people continue to favor low yielding notes for much higher yielding stocks.
Very interesting to note that the market is at the exact inverse of the 2000 peak. At that peak in 2000 the market was 60% overvalued. Since then though, the market has consistently been undervalued partly because people preferred to invest in real estate over the last 5 years and the stock market crash in 2000 scared people away from the market. Once stability returns to the markets, stocks should be in for a long run. This valuation model should return to the even mark at some point in the future.

Buffett continues to buy up distressed stocks

Today we get news that Buffett's bank - Wells Fargo (WFC)- has bought Wachovia (WB) swooping in and taking them away from Citigroup (C). Buffett is betting big on the rescue plan to be voted on in the House today. Recently he has bought stakes in GS, GE, and CEG. If Buffett is loading up, should you be sitting on the sidelines?

Great interview with Buffett talking about the rescue plan and his recent investments. Buffett continues to be the ultimate buy low, sell high investor. He continues to be positive that the rescue plan will be profitable.

Wednesday, October 1, 2008

Launch of Hedged Growth Portfolio

As of 10/1, I'm officially adding the Hedged Growth portolio as an option for clients. This portfolio will be the a combination of my existing Growth and Net Payout Yield portfolios plus a combination of shorts. Ideally the portfolio will include a combination of 1/3 of each component. So 1/3 of the stable New Payout Yield stocks, 1/3 of the Growth stocks, and 1/3 Shorts. This will ideally provide a less volatile portfolio that provides more consitent returns regardless of the markets. The Net Payout Yield stocks will provide steady, market beating returns while the Growth and Short sections will provide a market neutral approach with the best of both options. While the Net Payout stocks will be fully invested, the Growth and Shorts will be tweaked depending on the markets with neither to exceed the 33% threshold.

Starting today I've set up fund SFCHG at Marketocracy to start a model portfolio. The expenses on this fund at 2% will be higher then I'd charge clients, but this will provide the opportunity for potential clients to view the results of the portfolio. In addition, since shorting individual stocks isn't allowed on marketocracy I'd be forced to use short ETFs. Not ideal, but still a good example of the portfolio.

Intially purchased BA, UPS, HD, and BMY as Net Payout Yield stocks and RF for growth and SRS to short commercial real estate. RF has a tight stop if the rescue plan is not approved.

Stat of the Day: DOW has rare 4 straight quarters of losses

Its been since the 70s that the DOW has had 4 staright quarters of losses. Here are some other stats from CNBC showing how bad the world markets have been since the highs of last year. The Russell 2000 has been the best performing index with only a 22% loss. China with it's 62% loss has made our losses seem rather small. Guess it's all about your perspective in this market.

With todays start, the market is headed towards a 5th straight quarter of negative returns. If 4 negative quarters haven't happend in 40 years, makes me wonder how long its been since we've seen 5 negatives.

Tuesday, September 30, 2008

Mark to Market Accounting Clarification from the SEC

Reuters reports No need for Fire Sale Pricing which very possibly would've saved Wachovia Bank (WB). The substantial marks taken by JPM on the WM loans all but doomed WB. Now the SEC claims that a distressed sell wouldn't be classied as a market between willing parties and wouldn't count as a 'market'.

  • U.S. securities regulators provided initial guidance on fair value accounting and reminded financial services firms that they don't need to use fire sale prices when evaluating their hard to price assets, according to a document first obtained by Reuters on Tuesday.
  • U.S. accounting rule makers assume that fair value inputs are based on an orderly transaction between willing market participants. The SEC release indicated that the agency does not believe distressed, or forced liquidation sales are orderly transactions.
  • The SEC's guidance says that sometimes the level 3 inputs may be more appropriate than the so-called level 2 or observable inputs.

This is a good sign for stocks like MS and RF that could be ravaged by mark to market fears. Long term both stocks seem strong if they can get through this period. Both posted strong profits last Q and should be able to continue as long as they don't have to take distressed marks and this SEC clarification should help ease the accountants push to take overly conservative marks.

Disclosure: Long both MS and RF in personal account.

Stat of the Day: Money Market Assets at Record Levels

As of last week according to, money market assets alone would amount to 27% of the value of the S&P500. This almost doubles the last housing crisis in the early '90s of 14%. It's also considerablely higher then the 22% reached after 9/11. In fact, after yesterdays historic drop we're likely over 30% now. All of these assets will have to leave the bomb shelter at some point.

Monday, September 29, 2008

Poll of the Day: Was the House correct to not pass the bailout bill?

It's interesting that as the day closes this poll is actually very close to 50/50. We've been led to believe over the last few days that 100:1 of constituents for these House members involved in this vote are against the bill. Ironically this poll tells a different story. also had a poll that earlier today actually showed more people in favor of passing the bill. With CNBC having more of hardcore investor following, I find the poll more compelling and reflective of the general population. Goes to show that people for a bill aren't as likely to complain. Or just maybe a lot of people changed their mind today after seeing the market reaction. With the markets being the ultimate real time polling mechanisms, just maybe we'll see a re-drafted bill approved. After all, these polls suggest the House members voting for the bill won't be in such bad shape come voting time after all.

Edit: The poll ended up at 46% for the bill. Maybe the public is still agains the bill, but the % for it is alot higher then we've been led to believe.

Stat of the Day II: Bonds fall more then equities

In what was a miserable day in the stock market, bonds fell even farther. While the S&P 500 fell 8.8% the index of investment grade corporate bonds (LQD) fell an astonishing 9.4%. Now who holds a lot of bonds...hmm. Let me guess that a lot of retirees might be a little disturbed to see their bond holdings decimated. Weren't we told this wouldn't impact Main Street. My guess is that a lot of people begin to change their tunes on this rescue plan. It clearly impacts everybody. See the chart at Bespoke, Bespoke - Corporate Bonds.

Lots of more once in a century stats if I had the time to post.

Stat of the Day: VXO hits 45 again

Not hardly a week removed from hitting 45 on 9/18/08 and the market is back to this extreme level. Usually hitting the 40 level has historically been a huge buy signal for at least the next 4-6 months. Below are the times that 40 has been hit and only 2 times did it exceed 45 in the prior 20+ years until this month. Guess time will tell if this one leads to a huge rally.

Date High
10/19/1987 152.48
8/24/1990 40.01
10/27/1997 40.04
8/27/1998 41.46
4/14/2000 41.53
3/22/2001 41.99
9/17/2001 47.7
7/11/2002 41.64
9/18/2008 45.81

Friday, September 26, 2008

The Money Making Bailout

It seems very ironic to me that while most of the media and politicians keep harping about the size and scope of the 'Bailout' proposal, alot of well respected investment pros continue to harp on how this deal would potentially be profitable to taxpayers. So while certain politicians want to protect the taxpayer, they are actually just pandering to the uninformed or at least thats what their doing according to these people.

Andy Kessler wrote the follow in the WSJ Mother of all Trades

My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Warren Buffett on CNBC Explains GS Investment

If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

Bill Gross in the Washington Post How Main Steet Will Profit

Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.

The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic

So why would taxpayers turn down this trade?

Thursday, September 25, 2008

Net Payout Yield Focus: Boeing (BA)

Another day, another drubbing for Boeing (BA). BA is now down 47% from its 52 week high due to plane delays, machinist strike, and a weak overall market. All of this is good news for somebody wanting a high yielding stock. BA has been buying back stock at a rampant pace of late. Over the last 12 months, BA has bought back nearly $4B of stock with a current market cap of just over $42B. This gives BA a buyback yield of nearly 9%. Add on the 2.7% dividend and you get a net payout yield of nearly 12%. This yield is incredible considering the market position and financial strength that BA claims.

It's possible the strike goes on longer than expected and causes huge financial disruptions to BA, or maybe the global growth story will continue to erode and plane order will be canceled and pushed out. Regardless, BA has the financial strength to outlast the issues and will continue to buyback stock at these lower levels and issue a nice dividend. The longer the stock remains this low, the more stock they buy back and the higher future earnings will be increased.

When extreme fear exists and long term prospects remain intact, that's the time to buy. My portfolio added BA yesterday and sold Dupont (DD). With DD only yielding 6% now, BA offers twice the yield, making it much more attractive.

Net Payout Yield Focus - Microsoft (MSFT)

Yesterday, Microsoft (MSFT) announced a significant share purchase program and an increase to the quarterly dividend. MSFT was up 1% yesterday during a horrible market providing a relative gain against the market of 480 basis points. Very impressive, considering that MSFT didn't annonce better results or a revolutionary product. It was all because MSFT has the financial liquidity to make shareholder friendly moves. This is one of the reasons a net payout yield portfolio can be very attractive.

Lets analyze what MSFT announced:
  • Declared a quarterly dividend of $0.13 per share, reflecting a two cent or 18 percent increase over the previous quarter's dividend.
  • Approved a new share repurchase program authorizing up to an additional $40 billion in share repurchases with an expiration of September 30, 2013.
  • Authorized debt financings from time to time of up to $6 billion. Pursuant to the authorization, the company has established a $2 billion commercial paper program.

The increase in the dividend now provides a 2% yield which gets MSFT to a level that starts making them attractive to dividend investors. This is an improvement

The $40B buyback over 5 years sounds significant but it really just continues what they've done in the past. This averages $8B a year and over the last 12 months they've bought back $9B. So again, the key to this portion of the net payout theory is too watch how much they spend on a quarterly basis.

Issuing debt to buy back stock is not appealing to me. Now I've not seen any studies on the impact of the stock prices, but it's definitely more appealing when the buyback comes directly out of earnings. The debt causes them to lose the liquidity that is so appealing. MSFT, on the other hand, has plenty of cash so I'm not sure why they would need debt unless they plan to be like Home Depot (HD) and do a huge buyback all at once.

All in all, this announcement isn't earth shattering, but it does solidify why MSFT is the primary tech holding in my Net Payout portfolio. MSFT currently yields 6% which is low for the portfolio, but high for a tech stock.

Disclosure: None

The Advantage of Net Payout Yields

The Dogs of the Dow Theory has long interested me in its simplistic nature of eliminating the emotion of the stock market and systematically investing in the out of favor or contrarian stock. What least interested me was that an investor was suppose to buy the 10 highest yielding stocks amongst the 30 stocks in the Dow Jones Industrial average on presumably January 1st and hold them for a year.

While this compelled to my ‘lazy’ nature and was tax beneficial, it seemed overly simplistic and too focused on larger stocks that underperform smaller stocks in the long run. Why not adjust on a monthly if not daily basis? Or buy smaller stocks? If Pfizer (PFE) increases 50% by June and the yield consequently shrinks below the top 10 yields why continue holding till January and potentially give back that gain.

Another compelling concept was to extend the selection beyond the Dow and into the S&P 500 where more growth exists and the selection widens. For this method to work, the underlying stocks have to be fundamentally sound so you don’t want to go too far down the food chain, but it seems logical that the S&P 500 stocks would satisfy that goal while providing for more gains.

Another issue I’ve always had is that a lot of companies now spend a considerable amount of money on stock buybacks instead of dividends. If company X spends 6% on a buyback and 2% on dividends shouldn’t its yield be 8% and considered a higher yield then a company with a 4% dividend only. Afterall, buybacks are more tax friendly and that could be a big benefit if Obama becomes President and raises the taxes on dividends.

A study last year in the ‘Journal of Finance’ On the Importance of Measuring Payout Yield revealed what my thoughts had been all along. Companies with higher Net Payout Yields (net buybacks + dividends) outperform those companies with just Dividends. The company is investing money in shareholders either way so an investor should be focused on the combination. It also showed that the Dogs of the Dow Theory is now dead having underperformed of late.

As with any theory, it must adapt to the changing times. The regulatory and taxing environment over the last couple of decades has made it easier to do buybacks and more beneficial as well. The study showed that Net Payout stocks outperformed the market by nearly 6%, 19.1% to 13.4%, over the last 35 years. It also handily outperformed the highest dividend only stocks.
Unfortunately the study only focused on the Dow stocks nor did it address market timing. Market timing seems more beneficial due to the buyback inclusion. Companies that pay dividends tend to always pay a consistent dividend so the amount paid doesn’t care about the stock price. It does impact the yield though (another slight case for market timing).

With a buyback, the company can dramatically adjust how much it pays each quarter. For example, Home Depot (HD) bought back over $10B of stock during its Q3 last year. That’s over 20% of the outstanding stock, but it’s hardly bought any stock since. As an investor, you’d want to keep an eye on the price HD paid in this case. With a 3.3% dividend, HD now has a whopping 24.5% net payout over the last 12 months. Would you rather own that stock or a 4% dividend payer? That answer seems simple, but you’ll have to keep an eye on the buyback amount and date which makes this theory more complicated yet potentially more rewarding.

Going down into S&P 500 stocks allows for a dramatically larger universe of stocks beyond the limited 30 Dow stocks. Unfortunately I haven’t seen any studies of how performance is impacted. To me it allows you to pick the better yield out of the original Dow stocks plus companies like UPS (UPS) as an example. UPS has a $65B market cap making it a larger company then even some of the Dow stocks. So I think moving into the S&P500 makes the theory less restrictive, but still financially sound as investments. For now though I’ve tried to limit stocks to at least market caps of $20B to remain conservative.

My own results of the last year back up why holding the stocks for one year and then recalculating isn’t exactly ideal. I’ve had several stocks that spiked and consequently the yields fell, but I held onto the stock thinking it was best to hold to avoid churn and expenses. In the end, those stocks fell back to the market and in some cases gave up most of the gains. While not scientific, it does suggest my theory of at least monthly adjustments is more prudent to maximize returns.

Some of my recommendations as of today that have high net payout yields of 7-9% are Caterpillar (CAT), Disney (DIS), UPS (UPS), and Verizon (VZ). It’s amazing that these large companies have such high yields and probably is a sign of the overall value in the market. Other companies with large yields due to large buybacks over the last 12 months include Home Depot (HD) at 26%, Texas Instruments (TXN) at 15%, and WellPoint (WLP) at 25%. These are extremely high yields for such large stocks. The management teams of these companies think their stocks are extremely undervalued to spend that large amount of money on stock. Investing close to the amounts they paid is probably a key in large buyback cases and why buying and holding for 12 months isn’t necessarily recommended.

With so many people approaching retirement, this investing method could be ideal for that group. Especially for an IRA or some tax advantaged account where more trading then the once a year plan isn’t impacted by high taxes. The focus on dividends also would provide income for retirees and plans could be shifted more toward the dividend payers for higher income. Also, the conservative, non-emotional approach is ideal for somebody needing less risk, but still wanting exposure to the stock market.

As with any method of investing, regulatory and tax changes could impact the results in the future just as it has with the Dogs of the Dow Theory. An investor always should test any theory on a regular basis to make sure it continues to work.

So good examples of attractive net payout yields as of the close on 9/10:

Stocks Dividend % Buyback % Net Payout Yield

Caterpillar 2.7 6.9 9.6

Disney 1.1 7.1 8.2

UPS 2.7 4.8 7.5

Verizon 5.3 2.3 7.6

Disclosure: long position in VZ