Thursday, November 29, 2007
Wednesday, November 28, 2007
Tuesday, November 27, 2007
The mortgage fiasco hit Freddie Mac (FRE) investors today. The company announced it would pay a fourth quarter dividend of 25 cents per share versus 50 cents per share in the same quarter last year. This 50% cut jeopardizes FRE's listing on Standard & Poor's list of company's' that have increased annual dividends for at least 10 straight years. In addition to the dividend cut, the company announced plans to sell $6 billion of preferred stock in anticipation of more loan losses.
Saturday, November 24, 2007
The BCG research demonstrated that:
- dividends have a far more positive impact on a company's valuation multiple than share repurchases do.
- the report also noted that share repurchases actually erodes a company's valuation multiple as detail in the table below.
Avoiding the Cash Trap
The Boston Consulting Group
By: Eric Olsen, Frank Plaschke, Daniel Stelter
Thursday, November 22, 2007
Wednesday, November 21, 2007
Introduced by Nobel Prize winner Harry Markowitz in the 1950s, modern portfolio theory proposes that investors may minimize market risk for an expected level of return by constructing a diversified portfolio. Modern portfolio theory emphasizes portfolio diversification over the selection of individual securities. A simplified version of modern portfolio theory is "Don't put your eggs in one basket". Modern portfolio theory established the concept of the "efficient frontier." An efficient portfolio, according to modern portfolio theory, is one that has the lowest risk for a given level of expected return. An underlying concept of modern portfolio theory is that greater risk is associated with higher expected returns. To construct a portfolio consistent with modern portfolio theory, investors must evaluate the correlation between asset classes as well as the risk/return characteristics of each asset.
Now onto the discussion on MPT. Recently, SmartMoney featured an article, Modern Portfolio Theory Looks Very Outdated. The article features an interview with Niels Clemen Jensen, a former senior executive at Lehman Brothers (LEH), Goldman Sachs (GS) and Oppenheimer (OPY) who now runs Absolute Return Partners, a $400 million London fund of funds. SmartMoney notes, "Jensen is a pro well versed in the nuts and bolts of modern portfolio theory and risk management. I am here to testify that, in this case, knowledge is not bliss, more like a long leap into the unfathomable."
Following are excerpts from his October 2007 newsletter:
- Here is the problem. Central to all the academic work referred to above is the assumption that returns are normally distributed. If they are not, you might as well bin everything to do with modern portfolio theory. Risk management tools such as volatility, covariance and value-at-risk, all so critical to how we deal with risk, become meaningless if the return pattern does not match the famous bell curve.
- For returns to follow a normal distribution, you must have a set of independently distributed returns with no extremes. You find these mostly in static systems.
- Now, what investors really should worry about is what we call extreme risk – 3-6 SD events which can potentially wipe out years of profits. This is often referred to as fat tail risk. It is to be found to the extreme left of the below chart (encircled in red). However, according to the text book, they do not occur very often. Take a closer look at the following table:
- Statistically, assuming you are not an ‘über human’ vastly outliving the average person on this planet, you should experience only a couple of 2 SD events in a lifetime. The problem is that recent years have been littered with 6, 7 and 8 SD events. A 7 SD event equals 1 every 3 billion years or approximately the lifetime of our planet. Since the 1998 Russian debt crisis, financial markets around the world have experienced at least 10 extreme shocks none of which were supposed to occur more than once every few billion years.
As one considers building an investment portfolio, they must stick to an investment discipline. Warren Buffett's sage advice, "the most important quality for an investor is temperament, not intellect and "what you need is the temperament to control the urges that get other people into trouble in investing."
More often than not, this means not following the crowd.
Wagging the Fat Tail (pdf)
The Absolute Return Letter
Absolute Return Partners LLP
By: Niels Clemen Jensen
Modern Portfolio Theory Looks Very Outdated
By: Igor Greenwald
November 20, 2007
Monday, November 19, 2007
Last week, Nike (NKE) announced it will increase its quarterly dividend 24.3% to 23 cents per share. This compares to 18.5 cents per share in the same quarter last year. The estimated payout is 28% based on May 2008 estimated earnings of $3.30. The five year historical payout ratio is approximately 19%.
Standard & Poor's has added a site containing data on home prices in select markets in the U.S. The quarterly information is a summary from the S&P/Case Shiller Home Price Survey.
The purpose is to measure the average change in single-family home prices in a particular geographic market. The monthly indices cover 20 major metropolitan areas, which are also aggregated to form two composites – one an aggregation of 10 of the major metropolitan areas; the other including all 20.
Friday, November 16, 2007
- Since 1900, the stock market has tended to outperform during the first six to seven months of the average pre-election year. For the remainder of the year, pre-election performance has tended to be choppy and flat.
- Going forward, the pre-election year has tended to end the year with a small rally beginning around the time of the Thanksgiving holiday.
Additional election year market information can be found within this blog at the post: The Market and Elections
Thursday, November 15, 2007
- Consumer Discretionary earnings fell 38.9%.
- Financials earnings plunged 33.1%.
- Excluding homebuilders (CTX, DHI, KBH, LEN and PHM) and General Motors (GM), the Consumer Discretionary (8.8% of the S&P 500 Index), would show a 4.2% gain for the Q3 2007.
- Year-over-year quarterly dividends increased 13.3%.
Q3 Financials Sector Earnings Plunge 33.1%; S&P 500 Earnings Decline 8.48% (pdf)
Standard & Poor's
By: Howard Silverblatt & David R. Guarino
November 15, 2007
Wednesday, November 14, 2007
Today, Johnson Controls (JCI) announced an 11.1% increase in the company's quarterly dividend. The new quarterly dividend will equal 13 cents per share versus 11 cents per share in the same quarter last year. This increase represents the 33rd consecutive year that JCI has increased its annual dividend. The payout ratio is 21% based on estimated 9/30/2008 earnings of $2.53. This is in line with the 5-year payout ratio of 21%.
Leggett & Platt
The company announced it would be increasing its quarterly dividend nearly 39%. The new quarterly dividend equals 25 cents per share versus 18 cents per share in the same quarter last year. The estimated payout ratio equals approximately 70% based on estimated 2008 earnings of $1.42 versus the 5-year average payout of 52%. It should be noted in the company's news release today, LEG indicated they would be selling about 1/5th of their portfolio of companies. The release stated:
"The company is adopting a new strategic objective, implementing role-based portfolio management and more rigorous strategic planning, and narrowing its focus by eliminating over one-fifth of its portfolio. Leggett also intends to enhance returns on its remaining assets, return more cash to shareholders, and pursue disciplined growth."
Sunday, November 11, 2007
Earlier this week I was conveying a retail story to an associate on the fact my wife received a $25 gift card in the mail from J. Crew (JCG) several weeks earlier. About a week later, the J. Crew store in a mall near us called my wife to remind her of the gift card and that the store would be getting a fresh supply of merchandise the following Monday. Now, if retail business was that good, I do not think the store would be calling potential customers. I actually can't recall this ever happening before. As I finished this story my associate told me he received a similar call from a Jos. A Bank (JOSB) store near where he works. The caller from the store advised him of a sale and new merchandise. Not to be out done, J. Jill, owned by Talbots (TLB), also called my wife to tell her of a sale their store had in progress. Other than the fact my wife is likely doing too much shopping in these store, retail can't be all that good if individual stores are calling potential customers in order to generate sales.
Friday, November 09, 2007
Posted by David Templeton, CFA at 10:29 PM
Thursday, November 08, 2007
"output and employment grow, but not quickly enough to prevent the unemployment rate from rising. That would mean real gross domestic product (GDP) growth of roughly 2%, a modest diminution of inflation pressures, and flat corporate profits through the end of 2008."
reduce real GDP growth by roughly 0.6% in the year ending June 2008, compared with a full percentage point drag over the four quarters ended in June 2007.
A "Growth Recession" Likely Fallout of Credit Downturn (pdf)
T. Rowe Price Report
By: Alan Levenson
Tuesday, November 06, 2007
Today Emerson Electric Co. (EMR) announced a 14% increase in the company's quarterly dividend. The new quarterly dividend increases to 30 cents per share versus 26.25 cents per share in the same quarter last year. The projected payout ratio is approximately 40% based on 2008 year end estimated earnings of $2.98. The 5-year payout ratio is approximately 54%.
Monday, November 05, 2007
Justice David Souter was also critical of the challenge and worried aloud about disrupting the municipal bond market. "We have an enormous market, the effect of interrupting which we really as a court cannot tell very much (emphasis added)," Justice Souter said.
Samuel Alito questioned whether states should be allowed to give special tax breaks on bonds that finance private construction, rather than a government project. So-called private activity bonds finance mortgages, student loans, small-scale industrial projects and redevelopments.
Supreme Court Hears Challenge To Muni-Bond Tax Exemption
The Wall Street Journal Online
By: Mark H. Anderson
November 5, 2007
Muni Bond Tax Breaks Get Support From U.S. Justices
By: Greg Stohr
November 5, 2007
Friday, November 02, 2007
Additional information on the index performance for October can be found under Standard & Poor's MarketAttributes section of their website.
Thursday, November 01, 2007
The often volatile contrarian individual investor bullish sentiment reading does not surprise this week. The American Association of Individual Investors reported bullish sentiment jumped to 44.71% versus last week's bullishness reading of 31.25%. In an effort to smooth out this volatility from week to week, the below chart contains the 8-period moving average of the bullish indicator. This indicator also saw an increase to 44.1% versus 43.3% in the prior week.