Equity Rally or Dollar Sell-Off

The recent (since June) equity rally looks awfully tame / non-existent in Euro terms.



Source: Yahoo

Second Largest Equity Pullback Since the March Bottom

Vix and More details (bold mine):

With today’s (Fridays) continued drop in the SPX (low of 1073.18 with 45 minutes left in the session), the index has now fallen 75 points from peak to trough. This is the second largest pullback in terms of points and percentage retracement since the March 2009 rally began.

Equities Lost Decade

BusinessWeek with the details:

With the '00s about to flip the odometer to the '10s, there has been a raft of commentary about how lousy a decade this has been. Stock investors can vouch for that: The ten years since Y2K are on track to produce the worst total returns for investors since the 1930s. And, after the roaring '80s and '90s, the disappointment of the last decade is all the more galling.

Indeed, it will be hard for investors to wash the taste of trillions of dollars of losses from their mouths.

In both the 1980s and the 1990s, the broad S&P 500-stock index index provided a total return (which includes dividends) of more than 400%, according to Capital IQ, a Standard & Poor's business. The total return for the S&P 500 since New Years 2000 has been negative 10.8%.

In looking at the chart, doesn't it appear the 80's and 90's were just as much outliers (and the reason for the RICH valuation at the beginning of the decade) as the 00's?

Source: ICMARC

The Job Market and Equities

WSJ details the "hopeful" job opening data:

The Labor Department's Job Openings and Labor Turnover Survey found that the number of job openings in the U.S. increased slightly in both August and September, the first two-month rise since early 2007. Hotels, restaurants, education and health care made the largest contributions; even such hard-hit sectors as manufacturing saw a rise.

The number of job openings per unemployed persons has "slid" to 6.11 in September from 6.17 in August. Unfortunately, we already know the numerator in this equation jumps 558,000 jobs in October, so we need an increase of at least ~90,000 job openings to keep that ratio steady (unlikely). More "broadly", the broad unemployment measure points to almost 10.6 unemployed / underemployed persons per job opening (down slightly from 10.67).



The report also details the number of individuals separated from their jobs that were in the form of a "quit" (i.e. power of the people!) vs "layoff" (damn corporations!). Not surprising, when the going gets tough, the layoffs win.



Taking the ratio of quits to layoffs, we get the 'quits to layoff ratio' (anyone have a better name?), which has a very strong correlation (0.69 monthly correlation going back to December 2000) to the S&P 500 index.



Based on history it does appear that the equity market has been a leading indicator of 'quits to layoffs', but does anyone think the "power of the people" outweighs the power of the "damn corporations" right now?

Source: BLS

Bubble or Bull?

Initially posted the Irrational Exuberance Matrix on March 4th (within a week of the market bottom). Time to dust it back off... are we in the early stages of a bull market or just another bubble?



For the record, this is still the favorite thing I've done at EconomPic.

The Ultimate Armageddon Stock

Businessweek reports:

Of the 500 stocks in the S&P 500, (according to data from Capital IQ) fewer than 20 have actually risen in value in the economic downturn of the past 18 months. The leader of these recession-defying stocks is, far and away, Family Dollar Stores (FDO). Since the end of 2007, Family Dollar shares are up 67%.

Today, Family Dollar proved again why the downscale retailer is so attractive to investors. In quarterly results released July 8, earnings per share of 62 cents were 35% higher than last year and 3 cents above Wall Street expectations. Family Dollar eased a few investor worries with this report.

Family Dollar Stock Performance vs. Inverse YoY GDP

Source: Yahoo / BEA

What Goes Down, Must Come Up

Source: Investment Postcards

India Equity Markets Soar

Marketwatch reports:

A surge in Indian share prices following a decisive election victory by the Congress Party-led coalition over the weekend helped turn around other markets in Asia Monday.

Trading in Indian stocks was halted Monday after shares in key benchmarks surged more than 17% -- triggering market circuit breaker rules.

India's surge helped boost sentiment in other regional markets. While Japanese shares closed lower, before the start of Indian trading, exchanges open later, including Hong Kong, Shanghai and Singapore all ended higher.

The Sensex closed 17.3% higher at 14,284.21, while the 50-stock S&P CNX Nifty rallied 17.7% to 4,323.15.

"The election in India is showing a clear mandate there, and probably underlines to a lot of investors there that Asia is going to be the growth area for the next six to nine months, whereas growth in Europe and U.S. could take much longer," said Andrew Sullivan, a sales trader at Main First Securities in Hong Kong.

Source: Yahoo

2008 Corporate Profits vs. Market Cap (Top 10)

Source: CNN Money

Pre-Market Equity Boom

With the latest Private Public Partnership to be announced this morning at 8:45 AM, equity markets like what they hear. The Big Picture details:

Good Monday Morning. Looks like we have green on the screen this morning, with markets recovering from Friday’s sell off in the early going.

Asian markets were up huge: The Nikkei 225 had gains of 3.39%, the Hang Seng Index up 4.78%, and the S&P/ASX 200 Index tacking on 2.44%.

Nothing like the prospect a trillion giveaway to get the animal spirits moving . . .

Inflation Adjusted w/ Dividend S&P 500

The Big Picture posted a chart from Crossing WallStreet showing the inflation adjusted Dow. Mike asks:

Anyone know what it is with dividends?

Not the Dow, but detailed below are returns of the S&P 500 with dividends going back to 1973, both cumulatively and by 10-year rolling average.

Cumulative



10-Year Rolling Period


Not pretty, but 1996 is not as bad as The Big Picture's title “Inflation Adjusted Dow is at 1966 Levels” might imply.

Source: BLS

"Rational Apathy"

The original title was "What the opposite of Irrational Exuberance" (thanks Tahoe):

Floyd Norris reports:

Another stock market milestone was reached last week, when the S.&P. 500 fell under the Dec. 5, 1996, close of 744.38. The Dow, for what it is worth, is still above the 6,437.10 level it sported then.

(As I write this, the S.&P. is at 714 and the Dow at 6,880.)

That night Alan Greenspan uttered his legendary “irrational exuberance” comment. It was actually a question:

”How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Stairway to....

Source: Yahoo

The Former Untouchables

We have some big names struggling...

Berkshire Hathaway per Bloomberg:

Warren Buffett's Berkshire Hathaway Inc. fell the most in at least 23 years, dropping for the eighth straight day since reporting a 77 percent decline in third- quarter profit.

The stock plunged $11,550, or 12 percent, to $84,000 in New York Stock Exchange composite trading and has slipped 41 percent this year, compared with the 45 percent drop in the Standard & Poor's 500 Index. Berkshire, based in Omaha, Nebraska, rose in 17 of the past 20 years.

Goldman Sachs per Bloomberg:

Goldman Sachs Group Inc. closed at its lowest price since the firm first sold shares for $53 apiece to the public in 1999, as the profit outlook darkens for a company that set a record for Wall Street earnings last year.

The stock fell $6.85, or 11 percent, to $55.18 in New York Stock Exchange composite trading, giving the company a market value of $26 billion. The New York-based firm's value reached a high of $105 billion, or $248 per share, on Oct. 31, 2007.

You Call That a Knife? THIS is a Knife!

You call that market volatility? This is market volatility. Below is a chart for Double Inverse Real Estate (Symbol SRS), which is up another 10 points as of this post.

20 point daily swings have been commonplace and a 60 point move occurred just a few weeks back on October 28th. The following news explains it all in a nutshell (WSJ):

One of the nation's largest shopping mall owners, General Growth made the warning in a quarterly filing with the U.S. Securities and Exchange Commission. The company, based in Chicago, faces an additional $3.07 billion in debt coming due next year.

General Growth has struggled for the past year to refinance and pay down a $27 billion debt load, amassed in acquisition sprees in recent years. The company owns more than 200 U.S. malls, including flagships such as Honolulu's Ala Moana Center and Las Vegas's Fashion Show mall.

General Growth has $900 million in debt coming due Nov. 28 on two luxury malls on the Las Vegas strip. It has another $58 million in bonds due on Dec. 1. The company is attempting to meet those obligations by selling those two malls as well as another on the Las Vegas Strip. It also is negotiating with its lenders to gain an extension on its deadline to pay those debts.

Another victim of an era of easy money. Expect commercial real estate properties to be under immense pressure as they get hit from the bottom (vacancies due to unemployment) and the top (deleveraging).

In other words, expect this volatility to continue for a long time to come...

Volkwagen Largest Company by Market Cap????

FT (via Credit Writedowns):

Volkswagen briefly became the world’s largest company by market capitalisation on Tuesday as panic-buying by hedge funds desperate to cover losses caused its value to shoot up by up to €150bn.

Shares in Europe’s largest carmaker soared as high as €1,005 in early trading, having closed at about €210 on Friday. That gave it a market capitalisation of around €296bn ($369bn), higher than that of ExxonMobil, the oil company that closed on Monday with a value of $343bn......

“I have hedge fund managers literally in tears on the phone,” said one London-based auto analyst. Hedge funds had bet that VW’s share price would fall but after Porsche disclosed it held 74 per cent of the carmaker rather than the previously assumed 35 per cent there was a huge scramble to cover positions.

Breaking News: Recessions Kill Taste Buds

I understand that Input costs = Rising, $6-8 Burrito's = Expensive, Slowing Economy = Risk, 1000+ Calories per Serving = Unimaginable, but have you TASTED a burrito from Chipotle?

Evaluating Shares as Dividend Derivatives

An interesting point was made by a Dominic Connor (hat tip Infectious Greed) regarding what a share in a company actually was:

A share is itself a derivative, composed of several underlyings: capital value changes, dividends, an option that it might be taken over upping the price, and a set of entertaining variable tax consequences, since dividends and capital growth/lose are taxes quite differently from each other and for different classes of investor.

Lets dumb this down and evaluate an equity share solely from the value of it's dividend (click here for some good reasoning as to why dividends may be preferable to earnings for valuation purposes).

Point #1) Dividends are... Uncertain
Unlike traditional fixed-rate corporate bonds, in which an investor receives an agreed upon coupon, for an agreed upon length of time, at which point the principal is returned (bear with me and ignore default risk), an equity investor is not guaranteed a dividend or principal payback of any amount. In fact, we have recently witnessed just how easy it is for a corporation to halt or reduce dividend payouts (why all banks aren't all freezing dividend payments NOW while they are capital raising is beyond me.) Thus, the denominator in the price to dividend model (the dividend) is far from certain. In fact, 121 corporations in the S&P 500 do not currently pay a dividend.

Point #2) The Value of a $1 Worth of Dividends is... Uncertain
Looking at historical dividend payouts of the S&P 500 and the corresponding "derived" price in which investors were willing to pay for the S&P 500, we see shares have become significantly more expensive over the past 15+ years in these regards. From 1962-1992, investors paid no more than 40x the value of the dividends received (the average was a much lower 27x over that time frame for a ~4% dividend yield).

Since 1992, investors have paid as much as 88 times each $1 worth of dividend in exchange for equity ownership. At the end of 2007, investors valued shares of the S&P 500 at more than 50x each $1 of dividend for a yield of less than 2%. The current dividend yield is estimated at just under 3% post-equity collapse (though expected dividends are likely still overstated) and varies widely (i.e. less than 20% of companies in the S&P 500 offer a dividend yield above 5%, which is still about half the average yield of investment grade corporate bonds).

Conclusion
Both the denominator (the dividend) and the price multiple in the price to dividend ratio are at risk. Dividends are at risk due to a slowing global economy and frozen credit markets, which breeds lower earnings and capital hoarding, while the '50x per $1 of dividend' multiple is at risk when an investor can move up the capital structure and receive a 9-10% yield on investment grade debt.

In other words, Paul's satirical comment may not be all that far off...

Sneaky of capital markets regulators to be trying to trick us into going from safe credit default swaps over to tricky derivatives like shares. Those things sound nasty.

Biller Miller Redux

We've already visited 'since inception performance' for legendary investor Bill Miller's Legg Mason Value Trust which shows underpeformance vs. the S&P 500. Now comes further questioning as to whether he should lose the "legendary" tag altogether following the funds large holding in Freddie Mac equity (apparently as much as 30mm more shares than we listed here).

From Joe Nocera at Executive Suite:

Back in 2001, when Bill Miller was viewed as one of the world’s greatest investors, I edited a story about him at Fortune magazine. Mr. Miller, of course, is the manager of the Legg Mason Value Trust mutual fund, whose claim to fame is that he beat the Standard & Poor’s 500-stock index for 15 straight years. (It was 10 straight when Fortune published its story.) In the last few years, however, his fund has stumbled badly. Indeed, there are those in the investment community who whisper that Mr. Miller was never really a truly great investor. Rather, he was akin to the guy who flips a coin and it comes up heads 15 straight times — a product, that is, of randomness rather than skill.

Source: Dealbook

Top Five (Former) Equity Holders of Fannie / Freddie

WSJ (HT Calculated Risk):

Wells Fargo & Co. said ... its perpetual preferred investments in Fannie and Freddie are included in securities available for sale at a cost of $336 million and $144 million, respectively. Those securities now trade at 5% to 10% of their original value.

The F&F confessional is open.

Source: MSN HT Dealbreaker; WSJ