Graham and Buffett

March 3, 2014


It’s around this time of the year when investors start looking for Warren Buffett’s annual letter to the stockholders of Berkshire Hathaway.  As usual there is much to sink your dentures into; we found Buffett’s open dependence on Benjamin Graham’s 1949 book, The Intelligent Investor, noteworthy.  Buffett describes Graham’s ideas as logical, elegant, and easy to understand.  The revised edition of chapters 8 and 20 are the keys to Buffett. In a strange twist, Geico and Burlington Northern or their predecessors were two companies that Graham himself purchased that Mr. Buffett later purchased for Berkshire Hathaway.

Both men place little emphasis on market timing or macro-economic analysis, focusing instead on knowing their companies inside and out.  Buffett is actually pleased by the “capricious” nature of investors, causing them to listen to pundits, and worse yet, acting on their comments.  He is more than happy to buy when all sounds gloomy. Conversely, he remembers Barton Biggs’ famous quote: “A bull market is like sex.  It feels best just before it ends.” Tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values.  A climate of fear is your friend when investing; a euphoric world is your enemy….words of wisdom from Benjamin Graham and Warren Buffet. 

“When one door of happiness closes another opens; but often we look so long at the closed door that we do not see the one which has been opened for us.”
-Helen Keller

Slower Growth

February 24, 2014


Last week U. S. equities edged lower ending a two week winning streak.  The DJIA dropped 0.3% for the week and the S&P 500 was down 0.1% for the week.  This week look for several more reports on the housing markets.  Last week existing home sales fell 5% and housing starts were down 16%. 

This Tuesday the Case-Shiller S&P index should show home prices rose 12% last year.  On Wednesday new home sales for January should show a third monthly decline and on Friday pending home sales could also be down for the eighth consecutive month.  Most analysts are blaming poor housing numbers on the weather but a decline in pending home sales would be troubling as they are considered to be a leading indicator and could portend a slowing in the economy. 

Keep an eye on the economic numbers as the weather gets warmer to see if the economy is still improving.

“When everything seems to be  going against you….remember that the airplane takes off against the wind not with it.”
-Henry Ford

Stormy Weather…..

February 18, 2014


Equity markets were decently higher last week on the heels of mixed economic news. Bond prices moved slightly lower as yields pushed higher. 

For the week, the Dow Jones Industrial Average finished at 16,154.39 to close the week higher by 2.28%. The broader-based S&P 500 closed at 1,838.63 for a gain of 2.32% for the week. The Nasdaq Composite closed the week at 4,244.03 for an advance of 2.86%. International markets also moved higher as the Dow Jones Global (ex US) Index gained 2.05% for the week. Despite last week’s snap-back, market averages remain negative for the year-to-date period with the Dow Jones Industrial Average down 2.5%. The 10-year Treasury sold-off slightly to close the week at a yield of 2.75% … up a bit from last week’s 2.71% yield. 

Most economic news released last week was fairly disappointing, including misses in industrial production, initial jobless claims, retail sales and consumer confidence. Of course, the stormy weather over the past month has taken most of the blame for the swath of weak economic news. Fortunately, investors looked-through the weather-impacted data and pushed markets higher … perhaps taking their cue from Dallas Fed President Richard Fisher who opined that the Fed would continue their tapering of its asset purchase program despite the recent weak economic news. International news provided a breath of fresh air as China’s trade data surprised to the upside. Eurozone GDP was also better-than-expected. 

Fourth quarter earnings season is almost over as 77% of S&P 500 companies have reported. Here’s the breakdown of earnings: 68% reported positive surprises, 21% reported negative surprises and 11% reported in-line numbers. 

Spring is just over a month away … hang-on!

“Don’t knock the weather; nine-tenths of the people couldn’t start a conversation if it didn’t change once in a while.”
-Kim Hubbard


The Correction Takes a Breather

February 11, 2014


Last week’s markets were whipsawed by economic uncertainty, which was eventually offset by longer-term optimism. Monday’s higher opening was quickly reversed by a very disappointing ISM Manufacturing Index update.  The result was a closing 2.3% swoon by the S&P 500. However, the rest of the week moved erratically higher, and the weekly tally was a 50 to 80 basis-point advance by the major indices [the Russell 2000 did fall by 1.3%, which is a subject for subsequent market note].

An important factor for equity traders is currently the value of the yen. The yen-based carry trade is most rewarding when the yen falls versus the dollar and stocks simultaneously advance. That is exactly what happened in the second half of last week: the dollar advanced in yen terms and the equity markets were able to move higher. [but is it causation, or just correlation?]

Note that the overall dollar index {the DXY} was slightly negative, that gold advanced, and the stronger 10-year treasury’s yield is back down to 2.68%. The new Fed chair will be testifying Tuesday [recall that new Fed appointees are inevitably tested by markets].These markets continue to be treacherous for traders.

“If you don’t know who your are, the stock market is an expensive place to find out”
– Adam Smith [aka George JW Goodman]


Shrinkage and Other Interesting Topics

February 3, 2014

A recent story about companies buying their shares back caught our eye. As shares are repurchased earnings per share go up in corresponding fashion. The largest repurchaser was Direct TV (12.6%) followed by, surprisingly, General Motors (11.6%), Pfizer (11.4%), Halliburton (8.9%), and O’Reilly Automotive (8.7%). As an indicator these buy backs and consistently increasing dividends are two excellent things to watch. 

Managers have been cautious in the New Year and some of the concerns cited have been fear of a Chinese slowdown, followed by an emerging market economic response, and continued sluggishness in Europe. Meanwhile, the numbers here at home have been very good with GDP up over 3% and consumer confidence quite good. 

We would point out that markets are volatile (more right now), but volatility will lead to opportunity.  Having cash reserves and other short-term investments at the ready will pay off handsomely.

“There are three kinds of lies: Lies, damned lies, and statistics.”
– Leonard Courtney


January 27, 2014


Last week equity markets were rattled by economic news out of China which indicated that the Chinese economy may be slowing even further. As a result on Friday U.S. markets had their largest daily decline in 7 months. The DJIA was down 3.5% for the week and the S&P 500 was off 2.6% for the week. 

Emerging market equities were hit even harder with most markets down 6% YTD as a slowdown in China lessens demand for commodities which are the main exports for many emerging countries. 

With question marks about the strength of global recovery we may be about to experience a more extensive correction than any that occurred in 2013.

“Nothing ever becomes real till it is experienced.”
-John Keats

The New Year and the Old Inflation Concern

January 21, 2014


The Market was mixed last week, with the DJIA advancing 0.1% while the S&P fell -0.2%. This continues the Year-to-Date pattern of flat to down markets, [only partially offset by advancing Nasdaq and Russell 2000].

One of the Market’s recurring concerns is Europe [in spite of its 2.0% YTD stock market performance]. The easy money crowd is focusing on the “low” 0.8% Euro inflation rate registered in December. In fact, The International Monetary Fund is now pressuring the European Central Bank to do something about the IMF’s deflation fears:

However, the IMF may be ignoring the difficulty of the ECB [which is not a single country central bank] instituting some form of Quantitative Easing. Moreover, individual countries occasionally need to endure falling prices in order to regain competitiveness. Finally, the Japan example does not really apply in this situation [perhaps more on that in future installments].

The market is off to a tentative start in 2014. Perhaps the 2013 market “borrowed” some performance from 2014, and we will no doubt see corrections this year, but the longer term trend is still higher.

“The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy. The true neighbor will risk his position, his prestige and even his life for the welfare of others.”
-Dr. Martin Luther King


Buckle-up – Let’s Make it a Good Year!

January 13, 2014


Equity markets were marginally higher last week on the heels of mixed economic news. Bonds rallied on a weaker-than-expected non-farm payroll report.

For the week, the Dow Jones Industrial Average finished at 16,437 to close slightly lower by -0.15%. The broader-based S&P 500 closed at 1,842 for a gain of 0.63% for the week. The Nasdaq Composite closed the week at 4,175 for an advance of 1.06%. International markets moved higher as the Dow Jones Global (ex US) Index gained 0.60% for the week. The 10-year Treasury rallied to close the week at a yield of 2.86% … down quite a bit from last week’s 3.00% yield.

 Most economic news released last week was fairly encouraging, including ISM Manufacturing, ADP employment data, and U.S. trade data. However, Friday’s nonfarm payrolls report was a big disappointment … expectations were for a gain of over 200,000 jobs, yet the reported gain was only 74,000. Of course, the bulls immediately declared the report an anomaly due to weather and holiday seasonality. Stocks sold-off a bit on the weak report, but bonds rallied on the hope that the Fed’s easing will be pushed out a few months.

Fourth quarter earnings season begins in earnest this week. Expectations for fourth quarter earnings point to 5% earnings growth and 3% revenue growth. We expect earnings to be more-or-less in-line with consensus.

Buckle-up … it’s a new year. As we state in our year-end newsletter, we expect increased equity market volatility (we’ve gone over 830 days without a 10% or more correction in the markets) as markets finish higher by year-end. Bonds should be less volatile this year as rates move gradually higher over the course of the year. Let’s make it a good year!

Ring out the old, ring in the new,
Ring, happy bells, across the snow:
The year is going, let him go;
Ring out the false, ring in the true.
~Alfred, Lord Tennyson, 1850

The Good News And The Good News

January 6, 2014


Who says we are only the bearers of bad new? Just about all the recent economic data has been encouraging. Factory orders are out today and they are up in November by 1.8%. This number was propelled (no pun) by huge aircraft orders, nevertheless, we’ll take it.  Consumer confidence jumped to 78.2 from 72.0. Their “expectations” number was the stronger of the two measures but the one disappointing area has been consumer spending. One thing to remember when the fourth quarter GDP comes out is that the third quarter was pushed unusually higher by a large buildup in inventories. Also the sixteen day Government shutdown is expected to knock off 0.6% from the GDP number. 

Now to our second favorite topic of the day-income investing.
Rules to remember- 

  • If the yield is extraordinarily high is that it’s probably too risky for you.
  • Be willing to accept lower dividend yields from companies that consistently raise their dividends-example GE and Proctor and Gamble.
  • Be wary of high fund management fees which eat into the yields.  
  • Diversify your sources of yield-use stocks, bonds, emerging markets, preferred stocks and MLPs
  • Don’t be obsessed with current yields to the detriment of overall portfolio structure.

“Ability is what you’re capable of doing.  Motivation determines what you do.  Attitude determines how well you do it.”
– Lou Holtz

Treasuries Hold Near Their Lows

December 23, 2013


After months of speculation in the press the Federal Reserve last week announced a very modest start to a tapering of its bond buying program. The Fed said it would reduce its monthly bond purchases by $10 billion per month from $85 billion to $75 billion. This modest reduction was well received by the stock market and with further positive economic news of 4.1% GDP growth in the 3rd quarter the S&P 500 advanced 2.4% for the week. So far, the S&P 500 is up 27% YTD and if it holds those gains till the end of  the year it will be the largest annual gain since 1997.

Bond price reaction was less enthusiastic with prices for the 10 year U.S. Treasury dropping slightly and the yield rising above 2.9%. Next year look for continued upward pressure on interest rates as economic growth and tapering continue. As for equities, most forecasters are looking for continued but more modest gains in 2014.

“To be a consistent winner means preparing not just one day, one month or even one year – but for a lifetime.”
– Bill Rodgers