2013 - November 18
Executive summary:
- The broad US stock market is breathtakingly overvalued.
- The risk of a big sudden drop (15-30%) is higher than it has been in decades.
- Start selling stuff soon, or buying insurance.
Now, those are pretty strong statements. Aren't there thousands of analysts and stock brokers saying it's fairly valued so you should buy stocks now? Well, they would say that, wouldn't they? They're salesmen. With all that noise, how's a guy to know how overvalued the stock market is?
The value of a stock comes from the profits of the underlying business, so in theory we should start there. Unfortunately, profits go up and down by truly amazing amounts depending on whether times are good or bad. Depending on how you smooth out that cycle you can get wildly different results.
So, here's a nice simple way: sales. How much are you paying for each dollar of sales? In short, sales don't fall off in recessions nearly as much as profits do, so the ratio of price to sales is a very much more stable metric of how fairly valued the typical stock is at the moment. A few firms have unusually high price/sales ratios or unusually low ones, as some businesses have unusually high or low margins, but if we look at the typical company---the middle of the pack---those outliers don't matter.
So, a great handy dandy way to value the market is to look at the median price-to-sales ratio of the S&P 500 firms. Basically, we look at the price-to-sales ratio of all 500 companies, sort them, and pick the middle one as being representative. This tells about the typical big firm, not just the few biggest firms the way the S&P 500 index does.
Just before the famous stock market crash of 1987, the median price/sales ratio of non-financial S&P 500 companies was exactly 100%.
After the crash it was about 64%, briefly.
In the 2000 tech bubble the peak value was 151% in June 1999. The market dropped 49% from its peak.
In the 2007 credit bubble the peak value was 185% in June 2007. The market dropped 57% from its peak.
What does this tell us?
Right now the value is 196%, the highest value ever. (at least since 1986, the limit of my data). The typical big US stock is more overvalued than it has been in the last 27 years, more overvalued than during the tech bubble, more than during the 2007 credit bubble, and (I believe but can not prove) the most overvalued it has been in the last 300 years.
Since the current level is an all time high (at least since 1986), it's hard to say what kind of stock market performance we should expect from here. Something not very good.
Since 1986, the most overvalued 5% of the time on this measure led to average returns in the subsequent two years of -32%. The most undervalued 5% of the time led to average two year returns of +36%. Those are the returns of the average S&P 500 firm, counting dividends, adjusted for inflation. Clearly this is a metric which has pretty good predictive power.
Other straws in the wind:
- The market is extremely "overbought". That just means it has gone up an extraordinary amount in a short time. This rarely goes on forever.
- A smaller fraction of investors are pessimistic right now that at any time since February of the big stock market rise just before the October 1987 crash.
When everybody is too optimistic, that's a bad sign. Caution has been abandoned.
- Based on cyclically adjusted profits, the US market is more overvalued now on many metrics than it has been at any time since 1871, with the exception of a few months just before the crash of 1929 and just before the tech crash. On some metrics it's more overvalued than those times.
If you own any stocks that are at all oriented towards growth or speculation, or anything that you have the faintest suspicion is overvalued, I recommend you start selling them. I expect a drop in the market of between 15-30+% some time soon. I expect at least 15% of the drop to happen in a period of two weeks or less. Maybe January, maybe a month
or two either way from that, maybe not at all. You might consider putting 1% of your stock portfolio in index put options. This prediction is pretty speculative...most likely it's wrong. But I'm willing to risk 1% of my money on the possibility that it's right since being prepared for a crash that doesn't happen is much better than being unprepared for one that does. Or just sell some things, and use the cash to buy stuff the next time stocks are on sale.
2013 - August 21
Big Daddy loves to pretend he can predict the direction of the stock market.
That's impossible, of course, but sometimes the odds slightly favour one direction or the other.
You can't win all the time, but you can stack the deck a bit.
One of Big DADDY's methods tries to pick days that might be major market tops.
Sometimes it's right, sometimes it's not, but it's better than random.
The red spots in this graph show all 20 of the "top" signals since 1974.
If you were planning on selling some stock any time soon, it might not be a bad time to do that.
2013 - August 7
Big Daddy still likes IBM.
A couple of weeks ago Goldman Sachs issued a report saying they thought IBM's stock price wasn't going to do well in the next while, but they did still believe IBM's forecast of making a profit of $20 per share in 2015.
Yesterday Credit Suisse issued a report on IBM saying....they thought the price wasn't going to do well in the next while, but they did still believe IBM's $20 forecast for 2015. Maybe they read the report from Goldman.
Let's just forget about the price in the next little while.
Face it, neither of them knows anything about that anyway.
For a bit of history, IBM's earnings went up steadily right through the credit crunch, which is pretty amazing.
If they make $20 a share, a high quality firm like IBM will trade at some point at 14 times those earnings, meaning a share price of $280.
The price is $188.50 right now.
There should be ten dividends by end of 2015 adding up to at least 9.50, meaning your ultimate break-even is $179 a share. Probably more since they usually increase dividends.
If it trades at $280 at the end of 2015, that's $101/share profit.
That's a compound return of 20.5%/year for 2.4 years. Not bad.
To be more pessimistic, what if they don't make the $20 profit till 2016, and the price doesn't hit $280 till then?
Counting the extra year of dividends, that's still a return of 60% or 14.8%/year compounded for 3.4 years.
So, just be patient. Buy now. Wait for the earnings to be $20 a share, then wait for the price to be at least 14 times the current earnings per share, which will probably keep on rising. Time is the friend of the good company.
I don't think they're going anywhere, and the next recession won't kill them.
2013 - June 24
Two bits of news.
If you're feeling pessimistic, don't worry.
Big Daddy's tea leaves suggest the market will probably be higher in 4 weeks' time.
(the S&P index is at about 1556 now)
If you're feeling optimistic, don't get too carried away.
Sometimes a bit of boring income is suitable for some portion of your portfolio.
Big Daddy likes "Wells Fargo Preferred Series L," which trades like a stock.
It costs $1,130 per share right now, and pays a fixed $75 a year in dividends pretty much forever, so that's a yield of 75/1130 = 6.64%/year.
There is no inflation protection though, and no real possibility of an upside, so eventually that return (and the market value of your shares) will buy less stuff.
There is some fine print. For example in a couple of decades it will probably get converted into regular stock, which isn't a bad thing. I think it won't go bust, and won't miss a payment.
2013 - June 7
No doubt some of you have heard of the adage "sell in May and go
away."
It sounds like superstition, but Big Daddy isn't so sure.
A quote from a recent academic study done at a university in New
Zealand: “Observations over 319 years show November through April returns are
4.5% higher than summer returns. The effect is increasing in strength.
Over the last 50 years the difference between the two periods is 6.2%.
It does not disappear after discovery, but continues to exist even though investors may have become aware of it. . . . It is significant in 35 countries . . . stronger in Europe, North America, and Asia than in other areas. . . . The odds of the strategy beating the market are
80% for horizons over 5-years, and 90% for horizons over 10-years, with returns on average of around three times higher than the market.”
Over the last 50 years the difference between the two periods is 6.2%.
It does not disappear after discovery, but continues to exist even though investors may have become aware of it. . . . It is significant in 35 countries . . . stronger in Europe, North America, and Asia than in other areas. . . . The odds of the strategy beating the market are
80% for horizons over 5-years, and 90% for horizons over 10-years, with returns on average of around three times higher than the market.”
I mention this because I have my own particular variant of the rule.
It's based on two observations: that holding on a bit longer into
June won't really hurt things on average, and that it doesn't make sense
to sell while the market is still rising strongly.
Well, it's June, and the market isn't rising strongly, so it's time to
sell.
This is tested using RSP, an exchange traded fund which
tracks the *average* S&P 500 company in the US, weighting all 500
equally.
As of right now it's up 22.5% (counting dividends)
from the buying signal at market close Nov 21 last year.
The idea is to sit on cash till the buy signal in a few months--you can
afford to if you made over 20% in the last few months!
The buy signal will be the first day on or after October 14th that the
market is rising nicely.
For the keenly interested and geeky, here is a description of the
approach http://boards.fool.com/sell-
2013- April 22
Big Daddy likes IBM stock. Big and boring, that's the ticket.
They went out of fashion yesterday and the stock dropped a bunch, from $213 last week to $190 now. Everybody loves a sale!
IBM have claimed, and Big Daddy believes, that they will be making a
profit of $20 a share in 2015. Even if they miss that, it will probably
happen the following year. The shares of such a solid firm are easily
worth 13.5 times current earnings---that's the average multiple for the
average US firm in the average year in the last century. So, the price
would be around 13.5 x $20 = $270 a share in 2-3 years. Today's price
is $190, so that's a total return of 19.2%/year compounded if it's in 2
years, or 12.4%/year compounded if it takes 3 years, or 9.2%/year if it
takes 4 years. All of those are really good numbers these days.
The dividend yield is about 1.8%, so you can add that to all of those figures, and it will probably grow every year.
But say you're a bit more greedy.
If you buy January 2015 strike $170 call options for $29.50 now, that
gives you the right to buy the shares any time you like in the next 1.75
years for $170 a share, just like a rain cheque at the grocer. Just
before those expire, sell them and buy the same thing ($170 call
options) expiring in January 2017. That will cost you an extra $10 or
so.
The result? Your money is planned out for the next 3.6 years, you get
no dividend, and it costs you about $20 more a share to buy the stock
than simply buying it today. So why would you bother? Well, you don't
have to come up with all the money--your skin in the game is just the
cost of the option. When IBM stock trades at $270 those options can be
sold for $100, and your total cost will be $30-40, so your profit will
be 2.5 to 3.33 times your money at risk. If that takes no longer than
four years, that's at least 26%/year compounded return. One disadvantage
is that the value of your holding will jump up and down a lot more than
it would if you simply bought the shares. With either method, just
ignore it--this is a four year project and only the end result matters.
As with most investing, if you think about the next four years instead
of the next four months everything is a whole lot easier and more
predictable.
2013 -March 4
As an investor, Apple isn't Big Daddy's favourite firm.
Frankly
I have little idea what they'll be selling in five years, so I have
little idea of how much money they'll be making selling whatever that
is.
But, hey, there's a price for everything.
Apple shares are trading at $430 right now.
Apple
has a big pile of cash, so for your $430 you are getting ownership of
$146 in cash and $284 worth of the business that actually makes the
money.
Let's assume that the cash is worth, well, face value, and you'll get it back safely.
That
means Apple won't find a way to invest it profitably, but neither will
they blow it uselessly on bad investments, or beer and pizza. Just
break even.
Earnings in the business at the moment are at a rate of around $43 per share per year.
The cash is piling up at a rate of almost a dollar per day per human being alive.
Earning $43 a year on your $284 worth of "business" you bought is an earnings yield of over 15%/year.
Over the long run your returns on any stock will be about the same
as the average earnings yield during the period you owned it.
What can I say? 15% a year is pretty darned good.
What about the future?
Let's
imagine that fully half of Apple's business goes away, but the rest
sticks around. Maybe the competition really knocks the wind out of them
and the Mac goes back to being a niche product for artsy types.
You'd still be making a long run average return of 7.5%/year.
That's
a really good downside, dude. US bonds are paying 1.8%, and that won't
even rise with inflation the way company earnings do.
I
think one could probably buy Apple at today's price and sell it for
$600-700 soon enough that you'll have made a whole lot of money in a
reasonable amount of time without taking any undue risk.
But for me it's a trade, not a marriage.
2013 - January 20
Big Daddy is like a broken record: when in doubt, short the airlines.
We first shorted them May 10 2011, then closed those positions Aug 20 2011 for a 40% profit.
Then we shorted them July 8 2012, and by Aug 13 we made about 23% again.
So,
now that the prices are 42% above where we closed the positions last
time, here we go again: Short equal dollar amounts of Delta, US Airways,
and United Continental.
The tickers are DAL at $13.61, LCC at $14.44, and UAL at $24.79.
To
control risk, I suggest also going a little bit long Allegiant Travel,
ALGT at $73.99, which is one of the rare bright spots in this benighted
industry.
Whether airlines go up or down, it's likely that ALGT will rise more or fall less than the others.
I'd suggest buying $1 worth of ALGT for every $2 total short the rest.
For example, you might short 40 shares of DAL, short 35 shares of LCC, short 20 shares of UAL, and buy 10 shares of ALGT.
For
extra fun, you can also short Tesla (TSLA at $34.52), the electric car
maker. Their company is probably going to go bust eventually, but I
recommend not being greedy. Close the position when the price has
dropped 15%, 20% at most, and take a quick profit.
We can probably do it all over again later.
2013 - January 14
Big Daddy is quite fond of Dollar Tree (DLTR)
It's not screamingly cheap at $38.00 a share, about 14.2 times current earnings, but it's a wonderful business.
Sometimes it's better to buy a great business at a fair price than a fair business at a great price.
If nothing else, it's a lot cheaper than it was at about $57 last June!
The multiple of current earnings isn't as important as the multiple of future earnings, and I'm pretty sure their earnings are going to be a lot higher in a few years.
I imagine you'll have an opportunity to sell your shares for twice today's price in under 5 years, which if true would amount to a rate of at least 14.9%/year compounded.
If the price goes meaningfully lower, buy more.
Sometimes it's better to buy a great business at a fair price than a fair business at a great price.
If nothing else, it's a lot cheaper than it was at about $57 last June!
The multiple of current earnings isn't as important as the multiple of future earnings, and I'm pretty sure their earnings are going to be a lot higher in a few years.
I imagine you'll have an opportunity to sell your shares for twice today's price in under 5 years, which if true would amount to a rate of at least 14.9%/year compounded.
If the price goes meaningfully lower, buy more.
2012 - December 21
Big Daddy's very first ever recommendation here was to buy Walmart stock.
The price is up a lot since then, but it's still not the worst idea in the world.
WMT at $68.53
But today Big Daddy was buying something a little more obscure, shares in Markel Corp (MKL) at about $433 per share.
A really well run insurance and investment company often called a "mini Berkshire Hathaway."
The price has fallen a lot this week because of news they are buying a smaller firm.
But this buyout is (unusually) a really good idea.
The
current price is around the new post-buyout book value of around $424,
and book value has grown at 12.33% a year in the last decade. You
should expect returns maybe even a bit higher, since the share price is
"normally" well above book value.
2012 - December 13
Big Daddy is sometimes like a broken record.
Yet again, it's not a bad time to entrust your money to the fine folks at
Berkshire Hathaway.
This might seem odd, as the price went up yesterday and I am notoriously
cheap.
But consider the reason that the price went up
yesterday: management announced that they will buy back unlimited numbers of shares when the share
price is below 1.2 times book value per share. Since the company
has about $20 billion in spare cash they don't need, this is sufficient to ensure that the
price probably won't go below that level ever again except for the occasional brief
periods during transient market panics. For most of the time, though, it sets a
floor to the price.
So why do I mention this?
Book value per B share at September 30 was $74.48 per share (a bit higher
now).
1.2 times that value is $89.37 per share, the level at which management
is willing to buy shares.
The current share price is $89.32. Note that this is actually lower
than the buyback level.
Thus, you have the opportunity to buy shares that probably won't go down
in price (except, as mentioned above, perhaps for brief periods once in a rare
while).
That's not a prospect you get from buying shares very often!
Plus, the book value is not only rising steadily, but at a good
clip.
It continues to rise at a rate about 6%/year faster than the US stock
market rises.
The shares might (should) go up in price quite a bit even before the
value grows much.
They are actually worth more than 1.5 times book value per share, maybe
as much as 1.7.
The fair value is definitely over $100 per B share now and rising around
80 cents per share per month on trend--and will continue that well or better for decades to
come.
Just promise me you won't sell them at under 1.5 times book value per
share.
Big Daddy keeps half his money invested in this company when it's cheap
like this.
2012 - November 12
Big Daddy suggests picking up some Leucadia National stock at $20.80, ticker LUK.
They're buying another company (Jefferies, an investment bank) and the stock market doesn't seem to think it's a good idea.
If you do buy the shares, you will end up with shares in the merged company and also some shares in a winery. You can sell those, keep them, or maybe ask to trade them in for wine!
Both of the companies in the merger have hugely beat the broad US market in the last 10 and 20 years.
They're buying another company (Jefferies, an investment bank) and the stock market doesn't seem to think it's a good idea.
If you do buy the shares, you will end up with shares in the merged company and also some shares in a winery. You can sell those, keep them, or maybe ask to trade them in for wine!
Both of the companies in the merger have hugely beat the broad US market in the last 10 and 20 years.
2012 - November 9
Big Daddy says today is a wonderful day to buy Berkshire Hathaway stock.
The ticker is BRK.B, trading at $84.58
Why?
Mainly because:
(a) it's trading at about 1.135 times book value per share.
It's
worth over 1.5 times book value per share, and the company has an
unlimited buyback authorization at 1.1x book value per share, so it's
unlikely the stock price will drop very much other than perhaps brief
periods.
It has been this cheap only 12% of the time since the share buyback authorization.
(b)
I estimate the value is rising on trend at about 80 cents per share per
month, and will do at least that much forever. That's 11.4% of today's
price per year.
If the economy is really crummy for another few
years it might be only 70 cents a month, but the company is built to
endure a depression or a world war.
Fair value will be rising on trend at a buck a share per month in maybe 6-7 years.
Big daddy has more than half his chips on this number.
2012 - November 8
Two things today
- My short term call on the market for the end October/start November period didn't work.
Well,
it almost worked. I predicted a gain of about 2.4% with the Russell
2000 index rising to about 835 by market close on November 7.
The good news is that it almost did---it rose to 830.55 Nov 2 and 826.89 Nov 6.
The bad news is that Nov 7 was a bad day and it fell to 804.52, making a small 1.4%
loss for those who held on for the whole period. Oh well, better luck next month!
- My tea leaves are showing bad omens again.
On
August 8 I suggested the coast was clear and that the market looked
like it would rise for a while. That all-clear signal is now over, and
we're back into a risky market.
Since market close on August 9 the average S&P 500 company has risen 1.7%, not much.
2012 - October 26
The Russell 2000 index represents a big collection small US companies.
The index closed at 815.82 last night.
Big Daddy predicts it will be higher the week after next.
Specifically, at market close on Wednesday November 7th.
The target is about 835, an increase of 2.4%, but that's just a central estimate.
It could be anywhere from 785 to 882!
2012 - October 24
For those who like their portfolios fairly simple but
would like to
take advantage of good prices while limiting the risk, one alternative
is to buy an ETF (exchange traded fund) with the ticker HEDJ, called
"WisdomTree Europe Hedged Equity."
This is a collection
of 100 European firms who are all heavy exporters from Europe, so their
sales won't fall off too much if the euro falls or if the European
economies falter further. Plus, the entire portfolio is then hedged
into US dollars. i.e., if the stocks go up +10% measured in Euros but
the Euro falls by -20% against the US dollar, you will make +10%
measured in US dollars.
In this way it is doubly insured against any fall in the currency.
I
had a look at the list of companies in there, and many are ones that I
already own myself. It's a pretty good list, well diversified by
sector, but with not much of a weight in financials, utilities, energy,
or telecommunications which are so dependent on the local market.
Remembering
that all the firms are big exporters, the biggest allocations are in
consumer goods, healthcare, industrials, and technology.
The biggest holdings are things you've heard of:
Anheuser
Busch (beer), Bayer chemicals, Unilever, Daimler (Mercedes), SAP
software, Banco Santander (a big international bank), Sanofi-Aventis
(drugs), BMW, BBVA (the other big solid Spanish bank), Philips.
On
average the holdings of the fund are trading at 5.4 times current cash
flow, about 22% cheaper than US stocks on the same metric despite the
current recession in Europe. European stocks are about 30-35% cheaper
than US stocks based on price/sales or price/book or dividend yield.
Unfortunately
the ETF is not very liquid, but you wouldn't be buying and selling all
the time so this doesn't matter much. This is something to buy now and
forget about for a few years till European stock valuations are again
optimistic.
HEDJ closed at $43.41 yesterday. It has a dividend yield of around 3.13%, though that will vary a bit.
One
last tip: if the euro really crashes, say close to or under $1, then
you could switch from this fund to a non-hedged equivalent European ETF,
locking in the gains from the currency hedge.
2012 - October 18
Big Daddy notices that the Chinese stock market has been doing very badly.
It's
about the same place it was over five years ago, despite the huge
growth in the economy. Though calling the end of such a long bear
market is a dangerous game, I think it's time to buy Chinese stocks.
The easiest way is FXI, a US exchange traded fund that invests in the 25 biggest Chinese companies that trade in Hong Kong.
Current price is $37.44.
You might want to double down by buying some more if the price drops below $32.50 again.
It will take some patience, but I think it will pay off.
2012 - October 3
Big Daddy knows that it's impossible to predict the direction of the stock market, but nevertheless he keeps on trying.
You don't have to be right all the time for good guesses to be valuable.
Lately he has been working on a method of identifying major stock market tops.
This
is a picture of the US stock market since 1974, with the little red
dots being the tops that Big Daddy's method identified based on
information available at the time:
The reason for mentioning it is that this model suggested that August 13 and October 1 might be market tops.
Obviously August 13 wasn't a major market top because the market is already higher now.
Maybe the October 1 signal will be a market top, maybe not---we'll have to wait and see!
2012 - September 25
Intel is now trading at $22.56.
As expected, the
price has dropped some more since my recommendation, so I think it's
time to get the other half of that position that I suggested.
The stock is good, but personally I like those January 2014 $18 call options, now trading at about $5.15.
The price might (or might not) go still lower for a while, but just ignore it. It will bounce.
At
$22.50 they are paying a nice round 4.00% dividend, which is pretty
attractive to a lot of people as soon as the current irrational mood
ends.
It's pretty hard to think of a reason that the stock price won't be over $40 within a couple/few years.
2012 - September 12
Big Daddy likes Intel (INTC) at $23.20.
These
guys are big, boring, and bullet proof, and the stock price has been
falling lately because folks think that chip sales will be a bit lower
next quarter. Who cares about a quarter or a year? It's the next 10 or
20 years that matter. It's like saying a farm is worthless just
because winter is coming.
For those who like to get fancy, try buying January 2014 $18 call options which cost $5.87 right now.
That
gives you the right (but not the obligation) to buy the shares for $18
any time you like in the next 16 months, like a rain cheque at the
grocery store.
Big Daddy has pencilled in a share price target of at least $35.
The
share price might not have soared by January 2014--if not, just sell
these options before expiry and buy the same thing for January 2016.
That will cost you about another $2 a share, maybe less.
So, your total cost per share will be 18 + 5.87 + 2 = a little under $26.
If
the shares are trading at $35 by then you make a profit of around $9 a
share on an investment of $6-8. That's about 24%/year compounded for 3.5
years.
If the share price rises!
There's a good chance that the price might fall a little further in the short term.
Buy half your position now, half then.
2012 - September 6
On July 21, I suggested buying Spanish 10 year bonds at a yield of
7.498%, and perhaps closing them for a quick profit at 6.1%.
They've leapt in price today on news from the ECB (as I expected), so I'd close that position now.
The yield now is 5.735%, which means the price of the bond has risen 18.0%.
Add in almost 1% for the interest accrued in the 47 days and the total return on this is 18.97%.
That's a rate of 140%/year, not bad.
Alas I also suggested for safety hedging the position into US or Canadian dollars.
The Euro gained 4.1% against the US dollar and 0.7% against the Canadian dollar during the last 47 days, so assuming you hedged half-and-half you would have lost 2.4%.
So, the final return on the trade would be 16.6% with no exposure to the Euro currency.
Still better than a kick in the head.
Of course, the Euro crisis is far from over.
If yields spike up above 7% again, we'll do the same trade again!
2012 - August 13
Just an update.
On July 8 I suggested shorting major US airlines again.
The three suggestions:
- short all 3. This trade would be up 22.8% so far while 100% net
short.
- short all 3, but go long 1 part a good airline to contain the
risk. This would be up 16.4% while 66% net short.
- short all 3, but go long 1.5 parts a good airline to contain the risk
even more. This would be up 14.2% while half net short.
I also mentioned that it might not quite be time to enter the
trade -
all three airlines peaked in price the following week.
This trade should be good for a while longer, though I'm a little less
sure about that.
Maybe another two months? We'll see how it goes.
If you're going to keep it on, you might rebalance the position sizes to
their original proportions.
Right now:
UAL at $18.18 for a +24.9% profit held short
LCC at $10.08 for a +27.1% profit held short
DAL at $9.25 for a +16.5% profit held short
ALGT at $67.90 for a -3.0% loss held long (the good one: as
expected, it's holding up better)
If you like shorting, I always like shorting Tesla (TSLA) the maker of
electric cars.
Nice cars, very questionable company.
It's at $31.17 now. Enter a small short here, double the position
size at prices over $33.
Cover the short for a quick profit if you get tghe chance--23 to 26?--and
do it all again.
Unless some even-dumber car company buys them out, which may happen, the price should go under $5 or to zero in the next several
years.
2012 - August 8
Just a little while ago on July 25 I said things were looking bad, like a bear market.
Once again I was totally wrong, stock market prices have gone up 5.5%.
Never mind, as you were. Back to normal--for now.
But still be cautious; I suspect things might start looking bad again soon.
In other news, on May 22 I recommended Seagate (STX) at $25.96.
It's up 28% since then, now trading at $33.30.
The rise in price might be slower from here, but I still like it a lot.
I think it might crack $100 a share within a couple/few years.
If the price dips, don't panic--pick up a few more shares.
2012 - July 25
On June 20th Big Daddy said it looked like the market would be a safe place to be for now.
What, a guy can't change his mind?
What, a guy can't change his mind?
The tea leaves say "sell" again, so Big Daddy is going defensive.
2012 - July 21
Ten year Spanish bonds at a yield of 7.498%: time to buy. Again.
Even though the Euro has fallen a fair bit lately I'd still hedge out the currency exposure.
EUR/USD at 1.2119
EUR/CAD 1.2333
Not for the faint of heart!
But in theory you should make a very solid capital gain when yields return to normal, plus a 7.5%/year return between now and then.
5% should be considered "normal", but if you want to take a quicker profit you could close the position at 6.1%.
Always nice to remember that Spain's debt-to-GDP ratio is way lower than Germany's!
2012 - July 11
Big Daddy doesn't trade by the phases of the moon, but it's certainly true that the stock market doesn't do very well on average in the summer.
Some people just sell their stocks in May, but that isn't always smart.
After all, why sell if the market is still rising?
A better rule of thumb is to start watching the market in May and sell only when things start getting bad. Based on the readings, today is the day.
The bad season has started: assume that the market won't do much till around October.
You could sell your stocks or not depending on whether you believe such things, but at the very least there's no need to rush to buy anything new for a while.
We'll let you know when the coast is clear.
RSP (the average S&P 500 company) is trading at $48.26. We'll check back in a few months.
2012 - July 8
Big Daddy says, "when in doubt short the airlines"
The suggestion was to go short last May and close the positions last August for a tidy 40% profit.
Well, it's that time again--almost.
We can't short the same four crummy major US airlines again since-- surprise!
--one of them has gone bankrupt since then.
But, we could still short the other three:
UAL at $24.24 (United Continental)
LCC at $13.87 (US Airways)
DAL at $11.00 (Delta)
These prices are on average 143% above where we closed the short trade in August.
If you want to take a bit of the risk out of the trade, go short the airlines above and go long one of the few airlines that actually makes money.
One such gem would be Allegiant Travel, ALGT trading at $69.99.
They make money through the cycle, own their planes, and aren't drowning in debt.
Maybe 1 or 1.5 parts long ALGT plus 1 part short each of UAL, LCC and DAL so you would be 50% or 66% net short this industry.
Amazingly, the three weak firms have averaged losing -13.8% of the current share price 2006-2012, while ALGT has made an average profit of 3.2% of the current share price in that period without a single losing year.
The bad news?
It might not quite be time to enter this trade as they are still in one of their all-too-rare periods of making money and rising stock prices because fuel costs have been falling and the next recession hasn't arrived yet.
But it won't last--it never does. You could short them now and be patient, but it might be better to wait for them to be underperforming the market for at least a month or two before starting the position. I'll try to remember to remind you!
2012 - July 2
Happy Birthday Wally! Walmart is 50 years old today.
To celebrate, Big Daddy sold half his position, since the stock has been doing so well lately that the upside is now more modest than it was.
Still a great company for the long haul, but not quite as screamingly cheap now at about $69.75 than it was when Big Daddy first recommended last year at $50.35 on March 15 2011.
But if you like to gamble, here's something for you.
My guess is a 1-in-4 chance of making 10 times your money, with the obvious disadvantage that you could lose it all.
Pure gambling, but gambling with good odds is sometimes rather like sensible investing.
Bank of America (BAC) shares are selling for $8 these days. I think they're worth around $18.
So, the suggestion is:
Buy January 2014 BAC call options at a strike price of $12 for a cost of $67 per 100-share contract.
Each contract gives you the right (but not the obligation) to buy 100 shares at $12 apiece any time you like for the next year and a half, just like a rain cheque at the supermarket.
If the stock price stays below $12 for the whole time you lose everything. Oops!
If the stock rises above $12.67 before then you start making a profit.
If the stock rises above $13.34 you double your money.
If the stock rises above $16.02 you make 5 times your money.
If the stock rises above $18.63 (about what it's actually worth) you make 10 times your money.
2012 - June 25
| Big Daddy thinks that
Europe may be having its troubles, but their biggest international blue
chip firms are not going to go bust. Siemens can be bought on the NYSE for just under $80 right now, ticker SI. They make medical diagnostic machines, gizmos for power grids, and dozens of other things which will sell very well in the years to come. Don't sell under $140. It might take one year, it might take several, but it's a nice return either way. There is a 4.87% dividend to pass the time until then. |
2012 - June 20
On May 16, Big Daddy said his magic tea leaves said things looked like a bear market and to be careful.
The all clear signal has arrived---as you were!
2012 - June 15
| Spanish bond yields are now 6.907%. As a follow on to the tip of June 1st, time to buy more. The price might still gyrate a bit, but there should be an excellent return to be had starting from these levels. If the yield falls quickly the next time markets are calm (5-5.2%?) you can exit with a good fast profit, and if not you will have locked in a very nice rate for a long time. Shorting the euro at the same time wouldn't be a dumb idea, though. EUR/CAD is at 1.292 right now. |
2012 - June 3
The stock market has been falling.
Big Daddy has a market predictor that detects short term market bottoms.
It's not perfect, but it's better than a Magic 8-ball.
It says Friday June 1 might have been a short term market bottom.
If it's right, that would put the S&P low at 1277.25 for a while.
It predicts the market will be higher in a week and in a month.
The last time it triggered was October 4 last year, which was the exact low for 2011.
On
the other hand, sometimes it's wrong! Sometimes it's right but says
"this is the bottom" for a few days in a row as the market falls, as
happened early last August.
So don't bet the rent on this, but I thought it might be nice to know.
If Monday is up, there's a pretty good chance it's right, for a little while anyway.
2012 - June 1
Buy 10 year Spanish government bonds at a yield of 6.628%.
Hedge the euro exposure into Canadian dollars at 1.280.
If the bond yield hits 7%, double the position.
2012 - May 30
| Japan - where capital goes to die! The Japanese stock market has been the end destination of a lot of wasted investment money over the years. Most people think this is because they are still coming off the breathtaking bubble that peaked in 1989, followed by years of simply being ignored. But it's worse than that, actually. The real reason is that Japanese companies are, by and large, very badly run. They earn amazingly low returns on the assets they have, which is the only thing that matters to a shareholder. That being said, there is a price for everything. Even though the earnings are low, the price is perhaps even lower. One surprisingly good way to value a broad market is the cyclically adjusted price to earnings ratio (CAPE), which is the ratio of the current price to the average aggregate earnings in the last decade. This takes out the inevitable cyclical squiggles of earnings. With the Japanese Topix index at 719, the ratio is about 14.4x after inflation and deflation adjustments. That's the cheapest it's been in the history on my history charts - about tied with the lows around 1968. The comparable figure for the US is about 20.8x. In other words, you should expect to get 44% more earnings from your investment dollar in Japan in a "normal" year. Now, it's true that the US should and will trade at a premium because its companies are better run, but usually you're better off with a Chevy at list price than a Porsche at 44% above list. The Topix index is the capitalization weighted index for all of the stocks in the first (senior) section of the Tokyo stock exchange, roughly comparable to the Russell 1000 or S&P 500 in the US. The better known Nikkei 225 index is very concentrated and badly skewed because of the arbitrary weightings, much like the Dow Jones Industrials, so it should generally be ignored. As a bonus, the Topix includes more smaller and more local firms so they aren't as much at the mercy of the usual big swings in the Japanese yen. Big Daddy usually invests in the Topix by buying the exchange traded fund in Japan with ticker 1306:JP, now trading at 735 yen. The dividend yield is about 2.82% based on the payout in the last year. A fairly simple way to do better is to pick a basket of above-average companies. It's not hard to do better than a dart board of all firms, though it takes a bit more work. Right now for example there are 14 Japanese firms with dividend yields over 4%, earnings growth in the last five years over 3% a year, price-to-earnings ratios under 15x, and (critically) returns on equity over 15% on average in the last five years. These are firms that are unlikely to blow up even though they are mostly quite small. Ironically, if the Japanese stock market rises these are the ones that will probably rise the least - usually the junky stuff does best after a major market bottom. But that's a risky way to play the game! Better to stick with solid value. If nothing else you'll get a nice dividend while you pass the time. The average dividend for those 14 firms is 4.97%. (you can find this sort of thing here http://markets.ft.com/ |
To get a feel of the level of the Japanese market, here is a graph of the Topix index in the last 20 years. www.stonewellfunds.com/Topix.
jpg
So, what's the bad news?
Japan is probably going to have a currency collapse at some point in the next 5-10 years when the bond market melts and they have to monetize it with huge inflation. I'm an optimist so I think it will be merely a normal currency crisis rather than hyperinflation and economic collapse.
If you invest there, it's probably a good idea to hedge out the currency risk.
The safest and easiest way to do that is to buy yen denominated index futures.
Other things being equal, a falling yen causes the numerical level of the index to rise.
2012 - May 24
Big Daddy notes that the odds strongly favour US small caps rising in price in the next little while.
The Russell 2000 index is the usual proxy, which can be traded with futures contracts or buying IWM which is an exchange traded fund. Specifically, the prediction is for a rise between market close today (Thursday May 24) until close on Monday June 4. That's a total of 6 trading days since there is a holiday in the US.
My best guess is a rise of about 2%, with 80% chance of a return between -0.8% and +5.4%.
This doesn't change the fact that the general market direction is down - I'm just playing the odds that there will be bounces along the way.
Historically speaking the days around the end of May are on average weirdly good.
2012 - May 22
Seagate Technology (STX), with 40% of the hard disc market, is trading at $25.96.
This seems rather preposterous when you look at how well the company is doing.
They got hit somewhat in the Thai flood last year, but other than that one blip they are on a roll.
Besides, their competition got hit worse!
They'll probably make about $6 per share this year, maybe as much as $8 next year if you believe forecasts.
It's not often you see a company trading at four times earnings and growing to boot.
Oh, and they pay a buck a share dividend to boot for 3.85% yield.
They have $2.5bn share buyback authorization in place, quite a lot for a firm with $11.0bn market cap.
Sure, the price might fall a bit further, but the value seems certain to guarantee a very substantial rebound and more.
2012 - May 21
Big Daddy is quite struck by a couple of stocks today.
Apple's stock price has been falling lately, so a lot of folks probably think that the bubble in their valuation is over and there's nothing to see.
But the odd thing is that they make so darned much money that it's hard to say they were ever overvalued, which makes today's price look pretty reasonable.
Around $550 a share right now. If it gets a bit cheaper again, I particularly recommend it.
Though it's hard to say what earnings will be in future, today's price is only around 11 times the current earning rate, pretty cheap if earnings keep growing even a bit.
BNY Mellon (ticker BK) looks like a great buy to me at great buy to me at $20.36 a share.
This is not entirely a bank---they make a whole lot of their money on boring back-end things like custody, clearing and the like.
That's a good business because it doesn't go up and down with the stock market cycle.
They had a bit of a scandal, some of their clients arguing they were charging too much for foreign exchange conversions, but I suspect it will blow over.
Right now they're trading at around 8.6 times current earnings.
2012 - May 16
Big Daddy's market timing signal says "sell."
If you have some stocks you wouldn't mind selling, this might be a good time to do it.
The Nasdaq Composite closed at 2893.76 last night.
This particular signal is only right half the time, but when it's right it tends to be right by a lot and when it's wrong it tends to be only a little bit wrong.
Think of it as someone giving you 4-to-1 payout in your favour on a coin toss!
2012 - May 15
Big Daddy notes that Leucadia National (ticker LUK) is trading at $21.90 a share.
This is a deeply weird company, run by two quirky guys who will invest in just about anything if it's cheap enough.
It has worked well: book value per share has grown at 18.5% a year since 1978, and has grown at a quite respectable 9.78%/year pretty steadily 1993.
For this kind of outperformance you would normally have to pay a substantial premium to book value, maybe 1.4x or 1.5x, but right now it's only 85% of book value.
So, you should expect a one-time gain of 50-70% when they return to a historically normal valuation level, plus trend of around 10%/year during the years you own it.
Note, don't try to check what they have in earnings - the accounting rules just can't represent what they do, as they have about 200 little divisions. They bought a company a few years back with billions in historical losses which they have been using ever since to remove any need to pay corporate income tax.
The bad news -
I have no idea what the price will do in the short term - it wanders around a lot.
It can be crazily high or crazily low without any particular rationale.
But this is one of those firms you can happily buy now, tuck away in a corner somewhere, and come back in a few years having trounced the broad market with no work.
Just as every loaf needs some yeast, every stock portfolio needs a little bit of growth.
Unlike bakers, investors can get the growth from the boring part of the loaf: the wheat.
From the "very obscure" category, I suggest having a look at Olam International, selling for S$2.30 per share on the Singapore stock exchange, ticker "O32". You can get a quote at ft.com.
Who are these guys?
Unlike bakers, investors can get the growth from the boring part of the loaf: the wheat.
From the "very obscure" category, I suggest having a look at Olam International, selling for S$2.30 per share on the Singapore stock exchange, ticker "O32". You can get a quote at ft.com.
Who are these guys?
They buy stuff like wheat and nuts from farmers, mark it up a tiny bit, and sell it on world markets and make sure it gets to the buyer. They also dabble in farming themselves, and dabble in ingredient processing, but mostly they do the supply chain.
For example, they were the middlemen for 1/8 of the world's cocoa last year.
Earnings have grown at a rate of 31%/year in the last 9 years, but the stock price is 20% cheaper than it was a year ago.
The current price is only 14.67 times the last year's earnings. Dividend yield is 2.2%.
Geeky investors can find more of Big Daddy's comments here.
Cool facts here about the stuff they sell.
| Big Daddy suggested some coal for the fire a while back, buying ARLP on April 9 at $50.42. It's up 24.3% since then to $62.66 so far. Not bad for 18 days' work! It's still paying a dividend of 6.4%, so there is no hurry to throw it out. |
Big Daddy has nerves of steel, so he owns shares in Banco Santander, a big international bank based in Spain.
Spain is in the middle of its own crisis, as is the euro region, but then that's why things have got so cheap. I'm pretty sure they will survive and prosper, and the price has so much bad news built into it that a lot of things can go wrong and you'll still do well.
Santander trades as SAN.MC in Europe, as STD in New York, and will soon be trading as SAN in New York too. Price is 4.65 euros per share right now, or $6.29 in the US.
The dividend is 60 euro cents per year, which is 12.9%.
Even if it gets cut in half, that's still a lot of dividend!
It will be scary to read about the euro crisis if you're a Santander shareholder, but you'll be getting paid well for your fear.
Alliance Resource Partners (ARLP) is a company that mines coal in the US.
The US generates about 42% of its electricity by burning coal.
Big Daddy thinks it's worth a look, there is a panicky selloff going on that doesn't seem to be warranted by the situation.
The price is $50.40, down from $83.80 about three months ago.
It was trading at $67 about a week ago.
They pay a big dividend, just under $4 a year.
Even if there is some big bad news in the future, and even if they cut the dividend at some point, there seems to be a big margin of safety.
2012 - April 1
Big Daddy is thinking of buying some coal for his stocking.
Alliance Resource Partners (ARLP in the US) dropped in price a lot last week on news that the US government doesn't want any new coal-fired power plants built.
But the company still turns mountains of coal into mountains of cash, and will continue to do so for a long time to come.
Trading at $60.10, paying a whopping dividend of 6.6% which seems well covered.The price was $83.80 in January.
The price might go lower or might not, but the company isn't going broke.
Current P/E ratio is about 8x.
2012 - March 27
Big daddy never buys gold, since it never earns anything, but that doesn't mean he doesn't have an opinion about the price.
A good trade for the rest of the year might be to bet that the price of gold will go up measured in Euros.
This is because the euro crisis is far from over, and this is likely to lead to the continuing flood of easy money, which will tend to drive up both real assets and monetary fears.
Both of those will tend to help gold and hurt the euro.
The Euro/USD rate is 1.335 right now.
GLD the fund that tracks gold, is at $161.28.
So, GLD is trading at €120.81 right now.
2012 - March 27
Big Daddy foretells the future:
The S&P 500 index is at 1417, and the US consumer price index is at 227.5.
Big Daddy predicts the next five years the return on US stocks after counting dividends and inflation will probably be around 2.3%/year as a central estimate.
Read all about it here! http://boards.fool.com/
dividends
2012 - March 17
Big Daddy notes that the stock market has been rising very quickly lately, and not so many things are really cheap these days.
Here's one: Becton Dickinson, ticker BDX, trading at $78.08.
They make mostly disposable medical gizmos like syringes and swabs.
They are very safe, and their earnings just keep on doing nice things through thick and thin.
Buy it now, don't sell it before it hits $135 a share (at least 16 times earnings).
That might take 2 years, or it might take 7 years.
Who knows?
Assuming a modest 5%/year growth in their dividends, about half of what I expect:
If it takes 2 years to hit $135, you make 32%/year compounded.
If it takes 3 years to hit $135, you make 21%/year compounded.
If it takes 4 years to hit $135, you make 16%/year compounded.
If it takes 5 years to hit $135, you make 13%/year compounded.
If it takes 6 years to hit $135, you make 11%/year compounded.
If it takes 7 years to hit $135, you make 10%/year compounded.
My guess is under 4 years, but you never know.
2012 - March 5
Berkshire Hathaway stock is undervalued at the moment.
Many stock options are also undervalued at the moment.
So, Big Daddy recommends buying call options on Berkshire Hathaway Class B with the strike price of $50 expiring in January 2014. These cost $31.20 on Friday, and you have to buy a multiple of 100. (One option contract costs $3120 which give you the right to buy 100 shares for $50 apiece).
So, what's a call option? Just like a rain check at the grocery store. It gives you the right (but not the obligation) to buy Berkshire stock any time in the next almost-two-years for $50 a share.
Since the stock itself is currently trading at $78.29 a share, this is a good thing: you could exercise your right and buy for $50, sell for $78.29, and make an immediate profit of $28.29 on the shares the same day. That's why the call option is so expensive: $28.29 for the immediate profit you could make, and a pinch more because you have the luxury of waiting two years before deciding what to do. Roughly speaking, for every $1 the stock rises or falls in price, the options will also change by $1.
Based on what the shares are actually worth (not to be confused with the current market price), I estimate fair value for these options is actually about $52.50 right now and that fair value is rising at about 56 cents a month, up until when they expire in January 2014.
So, two things might happen.
If the stock price of Berkshire stock rises a lot within the next two years, approaching its fair value, sell the options just before they expire for a huge profit, roughly doubling your money.
However, there is no guarantee the market price will be rational within two years. If it isn't, sell the options just prior to expiry and buy the same $50 call options expiring two years later in January 2016. Those should probably have a true fair value of about $70 in January 2014, rising at about 50 cents a month until expiry in January 2016.
If the stock price of Berkshire still isn't at fair value by 2016, well, just exercise the options, buy the stock, and sit on it.
The market is irrational for long periods, but not forever!
2012 - February 27
Berkshire Hathaway's annual report came out on the weekend.
Things are going well--record earnings in every division except construction and housing-related stuff.
Yawn. It's not exciting to watch, but who needs excitement?
I'm reminded of one of my favourite cartoons, wherein the news announcer says, "There was zero trading on the New York Stock Exchange today. Everyone owned exactly what they wanted."
Oh, by the way, the stock is worth AT LEAST 30% more than today's price, continues to grow, and is strong enough to withstand a depression if we should happen to see one.
I just thought you'd like to know.
Yawn. It's not exciting to watch, but who needs excitement?
I'm reminded of one of my favourite cartoons, wherein the news announcer says, "There was zero trading on the New York Stock Exchange today. Everyone owned exactly what they wanted."
Oh, by the way, the stock is worth AT LEAST 30% more than today's price, continues to grow, and is strong enough to withstand a depression if we should happen to see one.
I just thought you'd like to know.
Berkshire B shares closed at $80 on Friday.
2012 - February 20
| Two economists were walking down the street, and come across a $100 bill lying on the side walk. One of them starts to reach for it, but the other stops him, saying "Don't bother." "If it were real, somebody would already have picked it up!" The moral of this story is that deals which are too good to be true are, indeed, sometimes true. In this case, Big Daddy's hot tip is a highly repetitive recommendation to put a lot of money into Berkshire Hathaway. There is a whole lot wrong with the world economy, but this is a firm which (a) will survive and prosper through any turmoil, (b) continue to generate oceans of profits in the next 30 years, and (c) is shockingly undervalued right now. It's hiding in plain sight. Good for your taxable brokerage account, since there are no dividends: all the capital is reinvested to compound for you, so there is no tax bill till you sell many years in the future. But what if the stock price goes down for a while? Just ignore it. The *business* will do fine. Just remember never to sell the stock for less than what it's worth. A pretty good guideline of fair value can be found here http://creativeacademics.com/ |
Choose the "conservative" setting in the upper right corner, then look at the line that says "Intrinsic Value: xxxxxx (A) yyy (B)" This gives a rough idea of fair value for the A shares and B shares. B shares are trading at $79.42 today, and are worth around $116 based on this valuation method.
If you want to be "more conservative", there's a setting for that too.
It suggests fair value of about $96 today.
Since 1990 the stock's price has averaged about 83% of the current "conservative" value estimate: it is undervalued most of the time, but is usually fairly valued at least once in every 4-6 year period like almost any stock, so all it takes is a bit of patience.
Big daddy has over half his capitalist piggy chips in this stock right now.
2012 - February 6 Big Daddy notes that large, value-oriented companies have underperformed the average US stock for three years now.
It's as if the Ladas have been selling like hotcakes but the Porsches just can't be given away at any price! This too shall pass---I predict that large value firms will start to outperform the masses, perhaps (?) some time soon.
IWD is an exchange traded fund that typifies large value-oriented companies, trading at $67.76. RSP is an exchange traded fund that tracks the average large US company, trading at $50.44
So, the theory is that IWD will do better than RSP in the month/quarter/year to come. Here is a graph of the RATIO of the price of IWD to RSP.
The theory is that the long down trend has ended, and may (?) be starting to turn upwards.
The biggest things in the "large value" catagory are things you've heard of: Chevron Oil, GE, AT&T, Procter and Gamble, Pfizer, Johnson&Johnson, Berkshire Hathaway, JP Morgan, Intel.
One quarter of the fund is in the biggest 10 stocks.
As an aside, IWD pays a dividend of about 2.4% these days, average P/E ratio 11.7x
2012 - February 3
The profit is now 12%, made up of 1.61% interest and a the rest in price increases.
That's an annualized rate of return of a nice round 50%/year.
I suggest closing this position for a quick profit---why be greedy?
The euro zone panic is not over, and you can probably buy these back again later on the next round of pessimism which should be soon enough.
If the yield peeks above 7% again, buy 'em again. Maybe even at 6.5%, but definitely over 7%.
2012 - January 26 Feeling lucky?
Buy the S&P 500 index now and sell it next Thursday night.
It closed at 1326.05 last night.
This strategy at the end of January and beginning of Feburary has been pretty reliable in the last 82 years.
Historically this has worked over 70% of the time at the end of January.
When it works, the average return is 1.9% (including dividends.)
When it doesn' t work, the average loss has been -1.2%.
It's kind of like someone giving you 5-to-3 odds in your favour if you can toss a coin ten times and get heads at least four times. The likely pay off is bigger than the likely loss, AND the odds of winning are if your favour too.
So, the overall average is around 1% in 6 trading days, which is around 70%/year rate of return. This is surprisingly easy to do if you have a futures account.
But 1% isn't much. Can you actually make any money with this?
The best times to do this are the last four trading days of each month October through May, through to and including the first two trading days of the following month.
This strategy using the Russell 2000 index futures since 1979 would have given you a return of 13.6% a year, 2.73%/year better than the index with only 21% of the risk once you count the trading costs and the interest while you're sitting on cash.
You'd have made a profit in 97.7% of the rolling years.
The very worst one-year interval from any starting day returned -6.6%, the best +60.2%.
2012 - January 24
When the stock market rises a lot after a reasonably noteworthy bottom, financial stocks usually do better than the average stock for a little while, typically a couple of months, then they do worse for the rest of the bull market.
The rule for banks is to jump in quickly, then go have fun elsewhere.
I note that US financials (tracked by XLF) were up 18.3% from Nov 29 to last night's close, whereas the S&P 500 was up only only 10.3%. This is even more startling when you consider that a huge amount of the S&P 500 is also financials: the financials must have outperformed the non-financials by even more than this.
Thus, it's quite possible that a period of under performance of financial stocks is coming soon to a stock market near you. Financials XLF is at $14.10 right now, broad market SPY is at $131.20. The under performance might not start right away, but be ready for it.
European bank stocks tracked by EUFN are up 24% since November 25th, so they have this rebound effect to contend with plus an ongoing debt crisis. Though they are undervalued, they could go a lot lower again when the next phase of the euro crisis hits, so I would not be a buyer today at $16.73.
A Greek bond default by early March is quite likely, and even though everybody knows it's coming it won't be a good day for the markets.
2012 - January 23
Big Daddy thought you might like to know... of the 37 tips provided so far, 77% of them have been right.
The average return per tip has been 5.28% as of today.
2012 - January 16
Big Daddy is buying Tesco shares. (TSCO.L at 316.8 pence in London, or TSCDY pink sheets in the US).
Mainly known as a big UK grocer, they make 1/3 of their money in other countries.
For every hundred pounds worth of of stock you buy, you get part of a business earning around 10.40 per year.
Of that, they pay you about 4.60 per year in dividends and hold onto about 5.80 more they reinvest for you.
Historically they have earned 10%-17% per year on the money they invest.
Looks like they might have a flat year. Not the end of the world, still a fine company.
In five years they'll probably be making more on your shares, the shares will probably have a higher market price, and you'll get a roughly 5% a year dividend in the mean time.
2012 - January 9
On November 24th 2011 Big Daddy said the market was looking too dangerous.
The S&P was at 1263.85 then.
But, based on bazillions of calculations it now looks like it's safe to go back in the water now.
The S&P is now at 1277. 2012 - January 9
Sure, people call me crazy, but I think that the European banking system is going to survive. If it does, then the banks are really cheap right now.
My pick is Santander (trades as STD in New York) trading at $6.91. That's about four times what they would be earning this year if this year were neither unusually good nor bad. The dividends are a bit irregular, but amount to 10.5%-12.5% of today's price.
If the financial system of Europe melts down, they will have troubles, but otherwise they should eventually be fine and today's price will look like a steal.
My pick is Santander (trades as STD in New York) trading at $6.91. That's about four times what they would be earning this year if this year were neither unusually good nor bad. The dividends are a bit irregular, but amount to 10.5%-12.5% of today's price.
If the financial system of Europe melts down, they will have troubles, but otherwise they should eventually be fine and today's price will look like a steal.
2011 - November 20
Big Daddy thinks the Canadian dollar is a much better store of wealth in the next couple of years than the Euro.
Right now might be a good time to switch some money from Euros to CAD, or to make a bet on the currency exchange rate which is 1.405 right now.
2011 - November 14
On October 28 Big Daddy said the market was going up---for now.
But, it's an uncle's prerogative to change his mind.
Things aren't really looking so good now, so the "buy stocks" message is over.
The S&P is at 1,263.85, a bit lower than back then.
2011 - November 10
For the strong willed, you might want to consider picking up some shares of Jefferies ("JEF"). They're an investment bank in the US, well run.
They're just smaller than the ones you might have heard of like Goldman Sachs.
People got scared recently and the price dropped to $11.18, down from over $27 earlier in the year.
The current price is only 3/4 of book value. In effect they could close the company, sell all the assets at auction, and you'd still make a profit of 29%.
As with all investment banks, there is a tiny chance that they are sitting on a hidden bomb and will blow up during a financial crisis. But there is a huge chance that they are worth hugely more than today's price.
Feeling lucky?
2011 - November 7
If you have a strong stomach, Italian ten year bonds are yielding 6.66% right now, the number of the beast. I think they are a buy, provided you hold them for a few years and don't pay too much attention to the price between now and then. I'd hedge the currency exposure into Canadian dollars using currency futures contracts, but that's just me.
The world will remain dominated by a savings glut, deflationary tendencies, and a search for yield wherever it can be found. When the markets calm down, I expect the yield on these to be more like 3.33% in a few years, probably even lower. (that means the bonds can be sold for an even higher price).
If that takes five years, you can sell the bonds early for a nice profit--it works out to about 10%/year compounded rate.
2011 - November 4
f you buy a log splitt r, b ar ful you on't hit your fing r with th hamm r. It an b angrous.
But, you an probably figur out whi h fing r I hit.
2011 - October 28
It looks like the market is going up for now.
BD's math calculations say to "buy".
The S&P is at 1275.
It's still kind of a general bear market, so you could sit out this signal, but bear markets have nice rallies.
2011 - October 17
In June I suggested it would be fine to sell your stocks and go away for the summer. If you did so, then (a) Friday October 14th was the all-clear signal.
It's OK to get back into the market till next spring, and (b) congratulations, you missed a market drop of -7.58% since the spring.
The suggestion is to buy RSP and hold till the spring sell signal.
2011 - October 13
Just a follow up to my last tip:
The S&P 500 hit 1,220.25 yesterday, having risen continuously since Big Daddy said we had seen the lowest point for a while at 1,074.77. So, the market is up 13.5% in a week.
2011 - October 5
The S&P 500 index had a low of 1074.77 yesterday.
Big Daddy's mathematical models for stock market prediction (only slightly better than a dart board) say that yesterday's low is likely to be the lowest point in the market for at least a little while, even though we seem to be in an ongoing bear market.
2011 - September 27
The S&P 500 hit 1,220.25 yesterday, having risen continuously since Big Daddy said we had seen the lowest point for a while at 1,074.77. So, the market is up 13.5% in a week.
2011 - October 5
The S&P 500 index had a low of 1074.77 yesterday.
Big Daddy's mathematical models for stock market prediction (only slightly better than a dart board) say that yesterday's low is likely to be the lowest point in the market for at least a little while, even though we seem to be in an ongoing bear market.
2011 - September 27
For those who are both patient and willing to invest against the common wisdom, I recommend taking a look at Bank of America, trading as BAC in New York, trading at $6.71 per share right now.
Recently, Berkshire Hathaway bought $5 billion worth of preferred shares of the bank. This is important because:
(a) The bank has $5 billion more cash than they did before. That much less risk.
(b) Nobody hands over $5 billion of you don't think you're going to get it back.
(c) Mr Buffett, who runs Berkshire, is notoriously insightful and risk averse. He definitely thinks they will survive.
Why would I suggest buying a sick US bank which still has a lot of dud mortgages on their books? It's simple: earnings. No matter how many bad loans they have, it's a finite number. The earnings will eventually cover all the losses. After that, it's all gravy.
Management forecasts that the current size of their business should be making enough by 2014 to pay out around $1.10 per share in dividends (16%/year on today's price), plus about $2.80 per share per year in special dividends or stock buybacks which will drive the share price up (another 36%/year return on today's price). That sounds optimistic to me, but even half that would be great!
Will the price go up soon? Beats me.
This might take patience, potentially lots of it.
But for every dollar you plunk down today, you have a decent chance of making an average of over 50 cents a year indefinitely, combining dividends with stock price appreciation.
(b) Nobody hands over $5 billion of you don't think you're going to get it back.
(c) Mr Buffett, who runs Berkshire, is notoriously insightful and risk averse. He definitely thinks they will survive.
Why would I suggest buying a sick US bank which still has a lot of dud mortgages on their books? It's simple: earnings. No matter how many bad loans they have, it's a finite number. The earnings will eventually cover all the losses. After that, it's all gravy.
Management forecasts that the current size of their business should be making enough by 2014 to pay out around $1.10 per share in dividends (16%/year on today's price), plus about $2.80 per share per year in special dividends or stock buybacks which will drive the share price up (another 36%/year return on today's price). That sounds optimistic to me, but even half that would be great!
Will the price go up soon? Beats me.
This might take patience, potentially lots of it.
But for every dollar you plunk down today, you have a decent chance of making an average of over 50 cents a year indefinitely, combining dividends with stock price appreciation.
2011 - September 23
Here's a nice little risky investment for you.
The price of this Canadian stock has been falling like a stone for ages, but at some point that means it's probably cheap.
I wouldn't bet the rent on it, because they aren't making any money right now, but as a speculative holding I think it will triple in the next few years, and I think the dividend will triple too.
The story is simple:
This is one of the most concentrated firms in natural gas production, and natural gas prices are very low right now.
If you think natural gas will stay super cheap forever, stay away.
But if you think natural gas is just too wonderful to stay cheap for several years, this might be a nice lottery ticket betting on the eventual upside.
Perpetual Energy, ticker PMT in Toronto, last price C$2.23
Dividend 18 cents a year = 8.1% a year.
The price of this Canadian stock has been falling like a stone for ages, but at some point that means it's probably cheap.
I wouldn't bet the rent on it, because they aren't making any money right now, but as a speculative holding I think it will triple in the next few years, and I think the dividend will triple too.
The story is simple:
This is one of the most concentrated firms in natural gas production, and natural gas prices are very low right now.
If you think natural gas will stay super cheap forever, stay away.
But if you think natural gas is just too wonderful to stay cheap for several years, this might be a nice lottery ticket betting on the eventual upside.
Perpetual Energy, ticker PMT in Toronto, last price C$2.23
Dividend 18 cents a year = 8.1% a year.
2011 - September 22
If you want to hedge your US stock portfolio against a possible fall in the US dollar, this is perhaps a good day to do it because the US dollar has just spiked up a bit.
For example, you could hedge into Canadian dollars at today's rate of 1.033 Canadian dollars per US dollar, several points lower than it was a few days ago to a better time to buy.
The best way to do this is to buy Canadian dollar futures contracts on the US exchange.
For example, you could hedge into Canadian dollars at today's rate of 1.033 Canadian dollars per US dollar, several points lower than it was a few days ago to a better time to buy.
The best way to do this is to buy Canadian dollar futures contracts on the US exchange.
2011 - September 21
We're definitely in a bear market right now, it seems.
Comport yourself accordingly.
The market could turn around and start rising any time, of course, but for now the safest assumption is that you shouldn't commit any fresh money to the stock market until there are firm signs of optimism and rising prices.
The S&P is at 1202.
2011 - September 12
Europe in general, and Spain in particular, are not having a good time.
Old-style telephone companies aren't having much fun either, as folks hit by the crisis cancel their land lines and use mobiles only.
So, the worst thing in the world has to be the Spanish telephone company, right?
Maybe not.
Those are the worries, but it's actually a company with some very good things going for it, such as their interests in Brazil and Europe outside of Spain. They probably won't go bankrupt, and they still make a whole lot of money.
Telefonica (TEF in the US) is trading for $17.29 right now and with dividends of $1.98 in the last year, that's a dividend yield of 11.45%. If you assume that their most recent half-year dividend is the new level, the yield is 12.4%.
It's true that dividends over around 8.5% a year are usually a bad sign. The market is often wrong, but sometimes they get things right, and really high dividends are indeed a bad omen.
Those are the worries, but it's actually a company with some very good things going for it, such as their interests in Brazil and Europe outside of Spain. They probably won't go bankrupt, and they still make a whole lot of money.
Telefonica (TEF in the US) is trading for $17.29 right now and with dividends of $1.98 in the last year, that's a dividend yield of 11.45%. If you assume that their most recent half-year dividend is the new level, the yield is 12.4%.
It's true that dividends over around 8.5% a year are usually a bad sign. The market is often wrong, but sometimes they get things right, and really high dividends are indeed a bad omen.
Really high dividend yields never last - either the stock price rises, or the dividend gets cut the way that the market expects.
I imagine a cut is probably inevitable here. Heck, if I were sure the dividend would stay at its current level indefinitely I'd sell everything else and just clip dividend coupons from now on.
But, a small position probably wouldn't kill you.
Be greedy when others are fearful - if you have cash to spare!
2011 - September 5
Buy Bank of America (BAC in New York) stock at $7.25 and hold it for about 3 years.
2011 - August 20
In May I suggested shorting US airlines.
I'm taking the profits on those trades, a nice round 40% profit in 3 months.
United Airlines down -31.9% from $25.35 to $17.26
USair down -44.8% from $9.32 to $5.14
American down -45.5% from $6.33 to $3.45
Delta down -33.2% from $10.81 to $7.22
I think the market will bounce back to higher prices, then I'll do it all over again.
Big airlines never make money on average.
2011 - August 10
Buy Wells Fargo Bank (WFC in the US) at $22.90.
Warren Buffett's favourite stock, at a great price.
Hold it for several years, or forever.
They should be paying close to $2 per share per year in dividends in around five years which would be almost 9%/year as a fraction of today's price.
What if the price goes down some more for a while? Just ignore it.
What if the price goes up a bit quickly from here? Just ignore it.
Don't take a small profit, wait for the big win.
2011 - August 2
Buy Loews Corporation stock, ticker L in the US, trading at $38.23.
Hugely undervalued, bags of cash on hand, able to withstand a depression if need be.
2011 - July 28
For the more adventurous investor, I suggest considering USG at 11.28.
This is the biggest and most efficient maker of drywall (Sheetrock brand) in the US.
Drywall is used in house construction among other things, and nobody is building houses so they are losing money. But - eventually that will end, house construction will pick up a bit, and they will make money again.
In a "normal" year they should make $3.50 per share, which makes
today's stock price of $11.28 look pretty good.
today's stock price of $11.28 look pretty good.
I can't see any really good reason it shouldn't be trading at $30 in a few years. (They're unlikely to go broke, as 1/3 of the company is owned by Berkshire Hathaway, Warren Buffett's company, the deepest pockets in the business).
2011 - July 10
Consider buying BNY Mellon at $25.80. ("BK" in New York)
The price should be 2-3 times higher in 3-6 years.
Not really a bank, they make 80% of their money doing back-end share custody and clearing and money management services.
Solid company, rising dividend, share buybacks, trading at about 10.5 times current rate of earnings.
2011 - July 5
In general, big "value" companies are the safest. Lots of earnings, dividends, good balance sheets, and big enough to have the resources recover from the inevitable occasional unpleasant surprise.
So, normally such companies are more expensive than the iffy ones - you have to pay extra for the good quality merchandise.
But not right now---check out this graph of the performance of big value stocks compared to the average S&P 500 stock.
The good stuff has been getting cheaper and cheaper, but that won't last forever.
Moral of the story: it's a good time to upgrade your portfolio.
Start unloading the overpriced high fliers, and trade up to the good stuff.
2011 - June 20
You may have noticed that RIM shares (the makers of the Blackberry) have crashed recently, from over $70 in February to $27.
You'd think that, with over $5 a share in profits they would then be a great deal. But, don't buy them---the future is uncertain.
You'd think that, with over $5 a share in profits they would then be a great deal. But, don't buy them---the future is uncertain.
I prefer my stocks to be boring. Try Coke instead at $65, and sleep well for the next decade or two, as long as you don't drink too much.
You won't get rich, but you won't get poor either.
2011 - June 7
I have some models for predicting the direction of the stock market, and effective today they say, "sell."
Sell everything except Berkshire Hathaway that is!
2011 - May 18
HP looks good, trading at $36.14 (ticker HPQ).
They say they'll be making over $5 a share net profit this year, so do the math: that's a 15% return per year on your piece of the company.
Bullet proof balance sheet, a nice bonus.
Value Line forecasts a share price of $85 to $105 in 3-5 years.
The middle of that range, $95 in 4 years, is 27%/year compound return, not counting the dividends.
That sounds a bit optimistic even to me, but it's definitely cheap.
2011 - May 10
"When in doubt, short the airlines."
I suggest selling short small amounts of the following stocks, and holding the positions for a long time. From now until the next bear market, you'll own something that goes up when the rest goes down.
UAL at $25.35 (United Airlines)
LCC at $9.32 (US Airways)
AMR at $6.33 (American)
DAL at $10.81 (Delta)
2011 - May 7
This is a Big Daddy tip you'll see a lot.
Berkshire Hathaway (BRK-B) sure is cheap right now at $80.21 a share.
Buy it now, don't even think of selling it till it hits $99.
The safety of this investment is such that they can survive a depression quite happily, so it can be any percentage of your stocks you like.
2011 - April 28
The US stock market is more than 50% overvalued on average.
We're seeing new highs regularly, and huge amounts of complacency.
For a few months more I'm bullish, but bad times will be coming later on.
The best time to buy a boat is before the waters start rising; in the next few months, think about what you can do to make your portfolio more secure.
2011 - April 21
Big Daddy says, "Sell in May and go away."
This is one of those things that makes no sense, but has worked as a rule of thumb since 1694. According to one particularly good variant of the system which tries to pick the exact best date to sell, that date was yesterday, so feel free to sell some stock.
For geeky details, read streetsmartreport.com/sts.html Personally I'd wait at least another day, since yesterday was a rip-roaring day on the markets and there might be another bit of money to be made. InvestoGeeks can check the MACD on the Nasdaq 100.2011 - April 11
Berkshire Hathaway stock is at $81.57 per B share.
That's 16% cheaper than it usually has been over the last two decades, measured as a fraction of what it's really worth.
2011 - April 4
We're in a bull market in stocks, but another bear market will be coming.
When that happens, it might be a good time to sell your stocks.
How will you know when it's time to sell? Go to this link from time to time, and sell when the blue line goes below the red line:
http://stockcharts.com/h-sc/ui?s=$NAHL&p=D&yr=0&mn=8&dy=0&id=p63520388322
It's not always right, but it sure beats astrology.
2011 - March 30
When the next bear market comes, you want to be owning the best stuff.
Intel sure seems cheap at $20.20---they're making around $2.20/share profit.
Once upon a time it was a high-flying speculative tech investment, but after a few decades of profit growth it's now a value investment.
It will be selling for over $40-45 a share in just a few years.
2011 - March 28
Coke pays a dividend of 3.0%. (KO, $65.22)
Warren Buffett recently pointed out that the dividend has increased every year for ages (since 1963 I believe), and expects the dividend to double in ten years.
A guy could do worse, especially since the stock markets aren't going to be much higher in ten years.
2011 - March 22
Personally, I don't think the Euro is worth $1.423 US.
Short it. The euro crisis will start again soon enough.
2011 - March 18
Berkshire Hathaway is very cheap at $83.73 today.
I wouldn't sell below around $101, since it's worth more than that already.
As an added bonus, this is a company will NOT blow up,
and the value is going up around 10%/year.
2011 - March 15
