Relevant and even prescient commentary on news, politics and the economy.

And So Happy Xmas…Now with Canadian Content

A couple of days ago, James Bianco, chez Ritholtz, noted a WSJ article entitled “Dividend Stocks Become the Heroes”:

This year, the 100 stocks in the Standard & Poor’s 500-stock index with the highest dividend yields are up an average of 3.7% before dividend payouts, according to Birinyi Associates. The 100 lowest-yielding stocks are down an average of 10%.

Is this a good idea? I understand the move to dividend-paying stocks—companies that admit they don’t know what to do with their excess cash are almost by definition better-run than those that hoard it without announcing future plans for its use (hi, MSFT!). And some companies have a lot of excess cash right now.

But there is a difference between paying a dividend because it’s the best use of funds for your investors and having a high dividend yield. Don’t believe me? Ask Bank of America shareholders ($2.56 Annual Dividend, just under an 8% yield) ca. 2008:

Or those who bought The Big C for its $2.08-cents-per share Annual Dividend (around 6-7% yield) in late 2007*:

Of course, banks might be the except. But here’s the past five years of Toronto Dominion, which was paying around a 3% p.a. Dividend** around the same time period:

What would have happened to your overall investment if you had gone for the higher-paying firms? It’s not pretty:

I like dividends; they’re an admission from a firm that it doesn’t know better than its owners what to do with some of its cash. But high-yielding dividends are often a sign of bad management giving away “excess” cash in good times.***

The first rule of finance: when something appears too good to be true, it probably is. Caveat emptor and may all your investments for 2012 be good ones.

*The graphic scale and dividend amounts were distorted somewhat by the 10:1 reverse split earlier this year.

**An annual dividend of US$2.28, with the stock trading around US$70-75 per share.

***This is not an unusual story, sadly. The collapse of LTCM, for instance, occurred after the fund gave much of its investment monies back to investors and then count not remain solvent for so long as the market remained irrational. (The contemporary equivalent is MF Global.)

(cross-posted from skippy the bush kangaroo)

Felix Salmon comments on media bias

Felix Salmon comments on media bias at Seeking Alpha:

But let’s not kid ourselves that there’s any particular reason why global stocks are falling. And especially, let’s not try to invent some spurious reason for the fall, be it broad and inchoate (“global economy fears”) or weirdly specific (“Federal Reserve pessimism”).

As a general rule, if you see “fears” or “pessimism” in a market-report headline, that’s code for “the market fell and we don’t know why”, or alternatively “the market is volatile and yet we feel the need to impose some spurious causality onto it”.

This kind of thing matters — because when news organizations run enormous headlines about intraday movements in the stock market, that’s likely to panic the population as a whole. They think that they should care about such things because if it wasn’t important, the media wouldn’t be shouting about it so loudly. And they internalize other fallacious bits of journalistic laziness as well: like the idea that the direction of the stock market is a good proxy for the future health of the economy, or the idea that rising stocks are always a good thing and falling stocks are always a bad thing.

Or, most invidiously, the idea that the most interesting and important time period when looking at the stock market is one day…

I’m not going to try to read any great narrative into this chart. But if you want to explain stocks to the broad population, this is the sort of thing you should be showing them. Rather than useless and irrelevant news about what happened to stock prices this morning.

NIKKEI vs S&P 500

For years I’ve made it no secret that I thought the US was going to follow Japan into a so called lost decade — of course it’s now more than a decade.

With the US stock market now apparently in a free fall I though this chart I’ve been keeping for years would prove of interest. In particular, note how nicely the two stock market major peaks and troughs seem to coincide. Is it more than just an interesting coincidence?

You Want to Invest in This?

So I use Pandora on my Droid, and it’s pretty reasonable. I haven’t done anything complicated, or even created any mixes. And when I pick Bruce Cockburn Radio or Stevie Wonder Radio or Don Henley Radio or any of the other stations that are perfectly safe to play while at work, there will occasionally be tracks by other artists, but they’re fairly similar: Stevie gets followed by Aretha, Cockburn gets followed by an instrumentalist or a McGarrigle sister, Henley gets followed by mellow Genesis or Peter Gabriel (“In Your Eyes”) or Phil Collins solo.*

So I was very surprised when I launched Pandora from my laptop’s browser today, still on the Don Henley station. Here are the first four songs it chose:

  1. Led Balloon, “Stairway to Heaven” (live, no less)
  2. Bon Jovi, “Wanted Dead or Alive”
  3. Lynyrd Skynyrd, “Sweet Home Alabama,” and
  4. Queen, “We Will Rock You”

If I wanted to listen to a set list like that, I would just tune in one of the local mediocre commercial stations. At least their commercials are more interesting.

(Hint to investors: if a company only has one advert that it uses when the app is first used—even after the user clicked through and signed up—they have more of a problem with their business model than Patch.)

From what I can tell, we’re back in the Built-to-Flip model of Internet investing.

The “Don Henley” station is now playing The Rolling Stones’s “Paint It Black.” Love the song, own the Decca collection they’re linking it to. Not what I would expect to hear between Coldplay and Steeler’s Wheel, though.

Paying $36/year to upgrade my account seems much more unlikely than it did even this morning. The next two songs were “Another One Bites the Dust” and this:

which was the second track by that band in an hour—matching the actual number of Henley/Eagles tracks played.

Either their algorithm is really dumb, or they assume all their listeners obsess over Axl’s vocals on “I Will Not Go Quietly.” Not the way to bet in the mass market.

*I have some standards: the latter would be an immediate thumb down, but I know why I’m getting it: after you let the Genesis-recorded Ode to Adultery [“In Too Deep”] play, Collins’s sententious solve-hunger song [“Another Day in Paradise’] or the insufferable “Take Me Home” probably will be suggested sooner rather than later.)

The Historical Relationship Between the Economy and the S&P 500, Part 1

by Mike Kimel

The Historical Relationship Between the Economy and the S&P 500, Part 1

This post is the first in a series on the historical relationship between the economy and the stock market. Data used in this post is the adjusted close of the S&P 500 going back to 1950 and quarterly nominal GDP going back to the same date. Because quarterly GDP figures measure the economy at the midpoint of the quarter, the S&P 500 for February, May, August and November are considered the analogous “quarterly” S&P 500 figures.

The following graph shows how the two series have evolved since 1950.

Figure 1

A simple eyeball test does indicate that historically, the two series have mostly moved together. And in fact, the correlation between the two series has been 93.5%, which is extremely high.

But which series has led and which has followed? For that, we look at the next graph:

Figure 2.

The black line shows the correlation between GDP and the S&P 500 x quarters hence, where x = 0, 1, … 24. In other words, it shows the correlation between GDP and the S&P 500 in the same period, the correlation between GDP and the S&P 500 lagged by a quarter, the correlation between GDP and the S&P 500 lagged two quarters, etc. As the black line shows, historically, GDP seems to have led the S&P 500 by about 16 quarters, or about four years; the correlation between GDP and the S&P 500 16 quarters out is about 94.1%. One possible reason… historically, when the economy grew, it encouraged more investment in corporations, but in many instances, investments take a long time (four years) to show up in ways that boost the market.

The red line looks at the relationship the other way – it looks at the correlation between the two series with the S&P 500 leading GDP. It shows that the correlation between the S&P 500 and the lagged GDP reached a peak of 95.2% when GDP was lagged by 10 quarters, or about two years. One possible explanation… historically, a growing stock market has made people feel wealthier, which in turn caused them to buy more stuff.

The conclusion from this… going back to 1950, GDP has led the S&P 500 and vice versa.

In the next post in this series, I’ll take a look at how this relationship has changed over time.
A few notes…
1. I’m not a financial advisor. I strongly suggest against making investments based on anything written above.
2. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at

QOTD: There are Shareholders and then there are Share Holders

The Epicurean Dealmaker notes that the stock market “game” is irrevocably rigged against the individual investor, and the best thing anyone can do is realise that is so:

I believe [Leo E. Strine Jr, vice chancellor of the Delaware Court of Chancery]’s analysis should conclusively disabuse participants in the current debate over financial regulatory reform of two related notions….The second is the canard that all public shareholders are alike, and they all share the same interests and motivations.

Realizing that the second of these is false, and that Fidelity Investments and SAC Capital do not have the same investment timeframe and objectives as Aunt Millie or even the Ohio Teachers Pension Fund, would have a highly salutary effect on the beliefs and behavior of truly long-term shareholders.

If nothing else, getting Aunt Millie to realize she is the only one in the shark tank without a safety cage should do her a world of good. [emphasis mine]

Read the whole thing, as well as Mr. Strine’s piece in the NYT’s DealBook that inspired it, for a glimpse of the soft, white underbelly of corporate governance and management.

Stock Market Valuation

By Spencer,

At month end the S&P 500 PE on trailing operating earnings was around 24. In my model that is expensive, but not massively so.

Except in the irrational exuberance market of the 1990s, a PE of over 20 has never been sustained and always signaled a major bear market.

Trailing earnings does include the fourth quarter when EPS was minus $0.09 and as the low 2008 earnings roll out of the comparisons the PE could fall while the market rises as it did in 1993. But 1993 appears to be an exception to the rule that the market generally moves in the same direction as its’ PE. The correlation between the change in the market and the change in earnings is essentially zero, and one of the most dangerous times in the market is when EPS growth first turns positive.