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Sunday links: fee reductions as alpha
Quote of the day
Andrew Beer, ?Fee reduction is the purest form of alpha.? (All About Alpha)
Chart of the day
Market breadth is confirming new market highs. (StockCharts Blog)
Markets
Bubble talk dominated the past week. (A Dash of Insight)
Five signs of a bubble: not there yet. (Mark Hulbert)
Stock Market Valuation is a Relative Game
The S&P 500′s valuation on current earnings is more expensive than it was last year and more expensive than it was the year before. Relative to 2012 and 2011, it is not cheap. In addition, it is also expensive relative to the earnings growth rate and to the rate of growth in the US economy overall.
But the S&P 500 is not at a bubble valuation at the current moment.
I know sometimes you wish things would be black or white, Summer Roberts or Marissa Cooper, but that sort of exactitude just isn?t how the world works.
And so the answer as to whether or not the market is cheap comes laden with asterisks and caveats and on-the-other-hands.
Here?s FactSet Research with some nuance on the current valuation puzzle:
The forward 12-month P/E ratio for the S&P 500 now stands at 15.0, based on yesterday?s closing price (1790.62) and forward 12-month EPS estimate ($119.26). This is the highest forward 12-month P/E ratio logged by the S&P 500 in more than four years (September 2009). Given the high values driving the ?P? in the P/E ratio, how does this 15.0 P/E ratio compare to historical averages? Is the index now overvalued? On the one hand, the index is now trading above both the 5-year (13.0) and 10-year (14.0) average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.2), and is not close to the peak P/E ratio of 25 recorded in the late 1990?s and early 2000?s.
Top clicks this week on Abnormal Returns
Thanks for checking in with us this weekend. Here are the items our readers clicked most frequently on Abnormal Returns for the week ended Saturday, November 16th, 2013. The description reads as it does in the relevant linkfest:
Chilling signs of a market top. (The Reformed Broker)
Ray Dalio thinks you shouldn?t bother trying to generate alpha. (The Tell)
Ten laws of stock market bubbles. (Doug Kass)
How to teach yourself to focus. (The Kirk Report)
Are we in a bubble? (Crossing Wall Street)
Josh Brown, ?If the entities in control of trillions of dollars all want asset prices to be higher at the same time, what the hell else should you be positioning for?? (The Reformed Broker)
Guess what stock has added the most points to the S&P 500 this year? (Businessweek)
Everything you need to know about stock market crashes. (The Reformed Broker)
Jim O?Neil is swapping BRICs for MINTs. (Bloomberg)
How to survive a market crash. (Your Wealth Effect)
What else you may have missed on the blog this week:
When actively managed funds make sense. (Abnormal Returns)
Thanks for checking in with Abnormal Returns. You can follow us on StockTwits and Twitter.
The post Top clicks this week on Abnormal Returns appeared first on Abnormal Returns.
Top clicks this week on Abnormal Returns
Thanks for checking in with us this weekend. Here are the items our readers clicked most frequently on Abnormal Returns for the week ended Saturday, November 16th, 2013. The description reads as it does in the relevant linkfest:
Chilling signs of a market top. (The Reformed Broker)
Ray Dalio thinks you shouldn?t bother trying to generate alpha. (The Tell)
Ten laws of stock market bubbles. (Doug Kass)
How to teach yourself to focus. (The Kirk Report)
Are we in a bubble? (Crossing Wall Street)
Josh Brown, ?If the entities in control of trillions of dollars all want asset prices to be higher at the same time, what the hell else should you be positioning for?? (The Reformed Broker)
Guess what stock has added the most points to the S&P 500 this year? (Businessweek)
Everything you need to know about stock market crashes. (The Reformed Broker)
Jim O?Neil is swapping BRICs for MINTs. (Bloomberg)
How to survive a market crash. (Your Wealth Effect)
What else you may have missed on the blog this week:
When actively managed funds make sense. (Abnormal Returns)
Thanks for checking in with Abnormal Returns. You can follow us on StockTwits and Twitter.
The Inevitable Year-End Melt-Up
Is a melt-up for US stocks into the end of the year inevitable? Will benchmark-chasing by the under-invested push us into the 16,000′s on the Dow and the 1900′s on the S&P?
Even the permabears like Hussman ? while still predicting a crash eventually ? concede that a continued run-up is more likely than anything else over the next few weeks.
After six straight weeks of gains for the market, this ripping rally into New Years and possibly beyond has now become the majority view. What a long way we?ve come, from both a price and a sentiment standpoint.
Here?s the New York Times:
?I think there is a general expectation that the market is going to continue to rally for the rest of the year,? said Brad McMillan, chief investment officer for Commonwealth Financial, based in Waltham, Mass. ?Retail investors are starting to move back in, and I think that?s providing a fair amount of support.?
Toward the end of the year, fund managers who are trailing their benchmarks may help bolster stocks as they chase performance.
?I think it?s going to be a slow grind up,? said Dan Veru, chief investment officer at Palisade Capital Management, adding that the only thing ?that can derail this is some exogenous macroeconomic event that comes out of nowhere.?
The gains have been incredibly easy to come by this year and the volatility has been almost non-existent ? provided you were listening to the right people and not getting chopped up to pieces by make-believe signals and indicators. But I?m not so sure the end of the year can be quite as inevitable as the consensus now expects. It?s almost never that simple?
The Inevitable Year-End Melt-Up
Is a melt-up for US stocks into the end of the year inevitable? Will benchmark-chasing by the under-invested push us into the 16,000′s on the Dow and the 1900′s on the S&P?
Even the permabears like Hussman ? while still predicting a crash eventually ? concede that a continued run-up is more likely than anything else over the next few weeks.
After six straight weeks of gains for the market, this ripping rally into New Years and possibly beyond has now become the majority view. What a long way we?ve come, from both a price and a sentiment standpoint.
Here?s the New York Times:
?I think there is a general expectation that the market is going to continue to rally for the rest of the year,? said Brad McMillan, chief investment officer for Commonwealth Financial, based in Waltham, Mass. ?Retail investors are starting to move back in, and I think that?s providing a fair amount of support.?
Toward the end of the year, fund managers who are trailing their benchmarks may help bolster stocks as they chase performance.
?I think it?s going to be a slow grind up,? said Dan Veru, chief investment officer at Palisade Capital Management, adding that the only thing ?that can derail this is some exogenous macroeconomic event that comes out of nowhere.?
The gains have been incredibly easy to come by this year and the volatility has been almost non-existent ? provided you were listening to the right people and not getting chopped up to pieces by make-believe signals and indicators. But I?m not so sure the end of the year can be quite as inevitable as the consensus now expects. It?s almost never that simple?
Source:
?a form of delusion?
SnapChat is ?worth? more than $3 billion.
Okay, sure, depending on how you define the term worth.
If by worth you mean what some other person is willing to pay for it, then yes, sure. But if by worth you?re referring to the amount of value that might someday be derived from it, well then keep smoking crack. There is a finite window in which the Web 2.0 landgrab will continue, and sellers should be thinking about cashing out sooner than later at this stage in the game, now that all the big ones are public and bloated with massive cash warchests and ?currency? in the form of obscenely high share prices. This will not continue indefinitely, it never does. ?
The SnapChat kids are adorable, they probably envision a world of tomorrow in which disappearing text messages are worth trillions of dollars and change life and civilization as we know it. Or maybe they think they can break Zuckerberg?s balls for a few more months and eventually extract $5 billion from him as Facebook grows increasingly worried about ?losing the younger teens.?.
Who knows?
Fun to watch either way. Facebook can afford to pay a few billion for SnapChat and then quietly write half of it down a year from now. What it cannot afford ? at least in its own mind ? is to let Google get it.
Let the insanity begin.
From the Los Angeles Times:
Snapchat is not even 3 years old. It?s run by a couple of twentysomethings with no prior business experience. And it has never made a cent.
Yet investors are fighting for the opportunity to throw hundreds of millions at the mobile messaging service that is all the rage with teens.
The tiny Venice Beach start-up just turned down a $3-billion all-cash offer from Facebook Inc. And then, according to the Silicon Valley rumor mill, it rejected an offer from Google Inc., this one for $4 billion?
The tech industry may not be in another bubble, said Aswath Damodaran, professor of finance at the Stern School of Business at New York University, referring to the rapid rise and fall of Internet companies in the late 1990s and early 2000s. But these paper valuations are a ?form of delusion,? he said.
What is pushing up the price tags? The ability of these companies to draw a fast-growing following of young users, analysts say.
Yes, young users are the key to crazy valuations. If only said young users had a clue as to their value ? they might actually ask for a couple of dollars at some point rather than contentedly have their content and identities sheared from them like wool from a lamb.
Source:
Social media start-ups? value is enormous ? if you trust investors (LA Times)
Buffet Buys Up Exxon (XOM) Stake, and more
Markets were up slightly on Friday after U.S. factory output increased in October for the third month in a row. The Federal Reserve announced that manufacturing output was up 0.3% in October, following a 0.1% increase in September. Factory output accounts as the largest factor in industrial production. Industrial production, however, fell in October which was largely attributed to the mining sector. There was a decrease of 1.6% in oil and gas drilling after six straight months of gains. The saving grace in output has been the factory sector. They have been stepping up hiring in the past three months. The increasing growth at factories is partially due to a growing demand overseas and the stronger housing market has increased demand for furniture and other wood products. Paul Dales, a senior economist at Capital Economics, said, ?As long as the overseas recovery continues and the domestic fiscal drag fades, output should continue to grow at reasonable rates.?
The United Sates Postal Service announced that they have lost a total of $5 billion over the last year. This will mark as the seventh straight yearly loss for them. The agency said that they have been trying to keep up with the decreasing amount of mail along with $5.6 billion yearly payments for health care costs for future retirees. They also said this should underscore the urgency for Congress to allow them to cease mail delivery on Saturdays and reduce payments for their retirees health benefits. There was, however, a growth in package delivery of 8%, but this is not nearly enough to offset the losses they have accrued. This year?s loss does show quite a substantial improvement over last year?s loss. This time last year the agency reported a loss of $15.9 billion. This year operating revenue came in at $66 billion, while operating expense were reported at $72.1 billion. Joseph Corbett, chief financial officer at the Postal Service, said, ?It?s the first growth in revenue since 2006.?
Berkshire Hathaway, who is owned by the famous Warren Buffett, disclosed that they have purchased a $3.45 billion stake in Exxon Mobil Corp (XOM). This attributes to a total of 40.1 million in shares of the oil company. This stake totals about 0.8% of Exxon. Despite such a seemingly small share of the company, this purchase speaks volumes. Pavel Molchanov, an energy analyst at Raymond James & Associates, said, ?When Warren Buffett gives his seal of approval to any company, that is never a bad thing.? Shares of Exxon were trading higher after the announcement. Fadel Gheit, a senior oil analyst with Oppenheimer & Co, said, ?He likes buying big, established global brand names, and Exxon is a good flight-to-quality stock. The stock has also lagged the market in the last three to five years. That makes it a typical Warren Buffet holding.?
That?s all for the day.
Outlook 2014: Prepare For Another Year Of Subpar Growth
The Great Depression is an era few of us would choose to revisit.
Though the economy isn't especially perky these days, key measures of joblessness, poverty and hunger are nowhere near the levels seen back in the 1930s.
But by one key measure, the economy is actually in worse shape. From 1930 until 1933, the U.S. economy grew less than 3% each year. That was the longest such streak of the 20th century -- and we've already broken it in the 21st century.
We're on pace for a sixth straight year of sub-3% GDP growth, and signs are pointing continued anemic growth in the years ahead (which I'll expand upon in a moment).
Frankly, anything near 3% GDP growth would be welcome. We appear to have approached that level in the third quarter, hitting 2.8%. But almost a full percentage point of that was due to a buildup in inventories, and such gains tend to reverse in the following quarter. Translation: Get ready for 2% GDP growth -- at best -- in the fourth quarter. The recent government shutdown means we may end up closer to 1.5%.
Of course the stock market seems to be simply ignoring the economic travails. As I noted in a recent column, the Wilshire 5000 has risen 68% since the end of 2009 -- yet the economy has grown just 17%.
If you don't want to believe that the Federal Reserve's liquidity-inducing quantitative easing (QE) programs haven't been the main catalyst behind this impressive multi-year stock market rally, then you must believe that today's share prices reflect better economic days ahead. To be sure, if the economy began to grow at a 3% pace for several years, all of the market's recent gains would be justified, and stocks would likely rise much more from here.
So it's a huge question, especially in light of the fact that the Fed's QE programs are reaching the late innings.
How To Get To 3%
There are a few simple markers to assess an economy's growth potential. The first is population growth.
