valueplays

The S&P 500 ($SPY) Intrinsic Value* is a calculation performed solely by myself and is based on Knut Wicksell’s 1898 definition of how he perceived investment rates of return arbitraging over a business cycle to the “Natural Rate” or the average rate of growth of all investments in one’s economy. For the US economy this is the Real GDP + Inflation and I call this the “Prevailing Rate”. The term Prevailing Rate is the long term average return of Real GDP + the best measure of 12mo Inflation which comes from the Dallas Fed as 12mo Trimmed Mean PCE. Today this rate is 4.62% with the inflation measure at 1.6%. *SP500 Intrinsic Value is solely my own construction and not endorsed by Oppenheimer&Co. Over time (since 1978) investors have priced the median average of SP500 earnings at a level consistent with the Indigo Line in the chart below titled SP500 Earnings Trend Index(Intrinsic Value). The relationship remained fairly close with periods of over/under valuation till 1995 when Hedge Funds gained prominence as investment vehicles and we suddenly found that wide variation was beginning to occur. Mainly this variation was towards excess pricing with the Internet Bubble of 2000 and a
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Total N. american rail traffic rebounded from the typical Christmas/New Year slump last week to 686k carloads. This is a very strong number as the rebound is back near the high levels of 2012. Typically rail traffic rebounds in early January but to no where near the high points of the previous year. Here is the chart: Now, some have doubted the strength of rail traffic through the end of the year and here are some of the usual reasons they feel the levels we have seen are NOT due to general economic strength but ancillary reasons: 1- “More oil is being shipped from Bakken via rail” To be sure this is happening. BUT, when you consider the collapse in coal traffic via rail, any increases in oil shipments have not overcome that loss. In fact, in the current week coal shipments were down 24k carload while the category “chemical/petroleum” was up only 7k carloads (that is not all oil but chemicals and oil). For some perspective, CP just signed a deal to ship 50k barrels of oil per day from Bakken. BUT, at ~700 barrels per rail car, that comes to ~71 rail cars a day or 2k /month.
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“Davidson” submits: The National Assoc of Home Builders reported their Housing Market Index this morning at 47, the same as Dec 2012. The trend remains quite strong and while there were hints of a pickup in Residential Construction Employment in the January Establishment Survey report there has not yet been a dramatic change in hiring for this economic sector. I expect that future month’s reports are likely to show some dramatic changes. Stuart Little, CEO of Lennar Corporation (NYSE:LEN), said on his 4Q2012 conference call yesterday: “2012 was a turnaround year that confirmed that we had been — what we had been seeing and communicating for several quarters, and that is that we are in fact in the early stages of the housing recovery. The recovery began in micro markets across the country, and it’s continued to spread to larger pockets. In the second half of this year, recovery had taken hold across the country and has readily been seen in spite of generally negative economic data. While the current, more positive economic data still lags behind what we continue to see in the field, it, along with information from reliable economists, have instilled a new level of consumer confidence
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“Davidson” Submits: Investing is not a simple process, BUT if one recognizes that once economic recovery begins all equity classes tend to rise together then one can make assumptions based on historical market behavior vs. the underlying economic trends. Basically, one can track economic trends and one can develop a sound basis for expecting higher stock prices based on historical market responses, BUT creating precise price and timing targets is virtually impossible. One can see this in the chart below of the S&P 500 (INDEXSP:.INX) vs. iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA) Indices. Especially important is the June 2012 period where the iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA) retested the lows of March 2009, but the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) did not! The news in the US was simply better with many positive commentaries on the beginnings of Real Estate and Banking improvements which were not present in European news. The net result is the SP500 has climbed ~120% from the March 2009 lows while the EAFE has only risen ~78%. The persistent news on the Greek, Spanish, Italian and Portuguese Debt issues kept being recycled keeping European markets in check. Meanwhile prominent money managers like
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I’ve been going through the last 10Q (Q3) for GameStop Corp. (NYSE:GME) and one thing struck me. This isn’t a company that is a fraud per se, I think they are just not being honest with shareholders (or are in denial themselves).  I would lean to “in denial” as I am sure Tower Records, Blockbuster, Borders & Circuit City execs thought until the inevitable end they could turn things around. Look at the YOY sales breakdown below. Fewer new games sold are leading to fewer used games sold and less store traffic. Now, we have been told over and over by the folks at GME the new “Big Release” games like Halo and Call of Duty coupled with the Wii U console release were going to boost sales and stop the declines. But we learned this week that was not the case. The data as well as the explanation from the company below  back the short thesis (though I am sure this is NOT intentional). The only category that is increasing for the company is the “other” category which include their digital segment (downloadable games).   This is also the case industry wide as consumers move to digital.  The real problem for GME is 70% of their profits come directly from selling and then reselling consumers
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I’m always amazed at people ability to take relatively simple things and make then inordinately complicated. For the better part of two years each week people have been riveted by the payroll number and whether it would show an increase or a decrease. While I am not one who cares what the weekly numbers say (they are always materially revised), I do care about the trend, are we in aggregate adding or losing jobs? By following new auto sales and housing starts, we effectively cover most of the US economy. From that we will know what the employment trends will be. Housing and auto sales break in either direction before it shows up in the payroll numbers. Since they are  improving (and by every measure housing is accelerating), we can expect continued positive employment numbers. It really has been that simple…   The Bureau of Labor Statistics reported December 2012 employment this morning with the Establishment Survey up 155,000 and the Household Survey up 28,000. Auto and Light Truck Sales were reported yesterday with the SAAR (seasonally Adjusted Annual Rate) estimated between 15.4 and 15.7mil by various groups. The official number should be available in 10-12 days, I used 15.5mil
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It looks as though Pershing and BAM are making nice/nice. Here is the press release from today…. Press Release: Brookfield Asset Management Inc. (NYSE:BAM) (TSE:BAM.A) (“Brookfield”) has informed General Growth Properties, Inc. (“GGP”) that affiliates of Brookfield acquired the General Growth Properties Inc (NYSE:GGP) warrants held by affiliates of Pershing Square Capital Management, L.P. (“Pershing Square”). The warrants represent the right to acquire 18,432,855 shares of GGP common stock, par value $0.01 per share (“Common Stock”). Brookfield has offered the board of directors the ability to acquire, in the next 30 days, the same warrants for the same purchase price paid by Brookfield ($271,884,611). The details of Brookfield’s purchase of warrants from Pershing Square are set forth in the amendment to Brookfield’s Schedule 13D filed today. In connection with these transactions, Brookfield advised General Growth Properties Inc (NYSE:GGP) that Pershing Square delivered certain undertakings to Brookfield relating to GGP. Pursuant to Pershing Square’s undertaking to Brookfield, Pershing Square agreed that, for a period of four years Pershing Square will refrain from undertaking any of the types of transactions with respect to GGP that are subject to disclosure under paragraphs (a)-(j) of item 4 of Schedule 13D. Pershing Square has further acknowledged the
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The past two weeks have seen positive “surprises” in GDP, initial unemployment claims, housing starts, pending home sales and I have detailed the refusal of rail traffic to do its normal year end collapse. Yet markets are selling off due to the “fiscal cliff” hysteria. It is just that, hysteria. Just like last year the EU was going to destroy the world, the fiscal cliff is more hype than reality. That is fine though as it gives rational people mis-priced equities to buy that will lead to superior gains in 2013. Just like the end of 2012 gave us a $5 Bank of America Corp (NYSE:BAC) and American International Group, Inc. (NYSE:AIG) warrants at $7 (both up ~100% since). The current reaction is giving us some more opportunities. Patient investors with an eye past tomorrow in a perverse way should welcome the cliff and the opportunities is may give us. Whatever happens it will pass and eventually get solved. But the wonderful prices we may get to buy stocks at and hold will be with us for a very long time after the fiscal cliff is long forgotten. To that end, housing will continue to drive the economy in 2013.
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Total North American rail traffic last week continued to buck its normal seasonal end of year swoon trend. It came in at 684k vs 701k the prior week. The 2% drop is well below the 5%-10% drop we have seen in previous years. The only drop was in intermodal and coal. This again conflicts with the data from last year which saw a drop in almost all categories. Here is the chart: Now, many have speculated that the resilience in rail traffic is due to an increase in petroleum shipments. Too be sure, petroleum shipments via rail are up both YOY and over the past few years but they do not offset the loss in coal shipments due to the switch from coal to gas in electric utilities (a 15k fall in coal vs a 10k rise in chem/petrol last week, coal on left axis).  This means the strength is coming from other categories. Here is the chat of coal vs chemical/petroleum.  Note that petroleum and chemicals are grouped together so the rise there is not all petroleum.     Others have speculated that the drought on the Mississippi has caused more grain traffic to be transported by rail than river
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While it may not seem like it, the S&P 500 (S&P Indices:.INX) has risen ~14% from the Dec 31, 2011 close. The high during this period occurred in September 2012 at $1474.51 according to data from Thompson Reuters. The chart below shows S&P 500 (S&P Indices:.INX) formatted for the Monthly High Low and Closing Prices as published by Thompson Reuters. From what I can tell, within the majority of advice provided by the many who have been featured in the media the past 4yrs, there is no one who has correctly predicted the market’s minor or major turns since the lows in late 2008 and early 2009. Look back and saying that “I could of…” or “ I should of…” makes it appear far simpler than it really is. The difficulty in predicting markets is embedded in the wide spread belief that investor and consumer sentiment drives markets which in turn drive the economy. The body of data which has only recently become readily accessible through the St. Louis Federal Reserve FRED site lets one test the many assumptions which are prevalent in investor thinking. Low and behold, when one carefully compares the many economic data series for support of the existing
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The Dallas Fed reported the 12 month Trimmed Mean PCE for November 2012 after the market close at 1.6%-see table. This lowers the “Prevailing Rate” to 4.62% and brings the “Intrinsic Value” of the S&P 500 (S&P Indices:.INX) to $1682 -see chart. The effect of falling inflation results in higher stock pricing all other things being unchanged. Inflation has been falling mainly due to the controlled spending of trillions of dollars injected by Chairman Ben Bernanke. Basically, most are hoarding these dollars as a safe haven against future uncertainty. The inflationary risk is unpredictable as should now be obvious by the many unfulfilled forecasts of higher inflation at this point in the economy. I think that all we can do is to monitor the data on a monthly basis and adjust portfolios as the risks become apparent. The market itself does not have a history of being correct in pricing inflationary expectations. For the past several years inflationary fears have caused many investment funds to buy hard assets as a protective asset. The problem with this concentration in oil, gold, copper, land and etc is that inflation fears have not been realized while returns on these investments have stalled at low levels. History
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