Harm in headlines and sound-bites is when a real story is hidden and people make poor decisions. For example, recent coverage of a slight upturn in Personal Savings Rate confused the real story of consumer health and potential effects on year-end shopping. Sound-bite: “Personal Savings Rate at a multi-year high.” True or false? The Rate is at a high since January 2013, for 22 months. So, true… Is that the whole story? No. You can take 3 steps to discover the rest of the story. Step 1: Check history Personal Savings Rate is at lows since World War II other…
Author: Brian Barnier
“Earnings engineering” is a problem mentioned each earnings season. What earnings are real versus just “engineered?” To avoid errors in evaluating earnings, watch three ratios: Net debt to capital, Buy-back and Earnings Pureness. While rebalancing her portfolio, Carol noticed changes in financial ratios of similar companies that didn’t make sense given actual performance. “Earnings engineering” she realized, “but how do I spot it more easily?” “Earnings engineering” to investors like Carol means rather opaque actions companies take to make ratios appear better without actual improvement. This is in contrast to real business model improvements trumpeted in investor day presentations…
Individual investors have a problem when tracking and rebalancing their portfolios. Value ratios move with more than price. There seems to be mystery pattern. What is it? It’s the saw tooth effect. Individual investors investigating these moves quickly discover it is not: Shares going ex-dividend Earnings “surprises.” It’s no surprise that about 70% of S&P 500 members routinely beat earnings per share (EPS) estimates. Traders care about daily “surprises.” Investors with retirement or college funds care about actual trends. A clue to the mystery is that it is more apparent in value ratios that include analyst estimates. The image…
Measures like P/E ratios are relics of days long past. Today, we have more robust data and can more easily detect distortions. To outperform benchmarks, investors can use more meaningful measures. When broadsheet newspapers were the source of market data, Price/Earnings per share (P/E) ratios were a one-column summary of value. The number showed how many periods of earnings per share (EPS) were needed to cover the purchase price. Like the ink on the old broadsheets, P/Es were dirty summaries because: Investors don’t receive earnings; they get distributions and price appreciation Assumes EPS from all companies grow at the…
People holding dividend-rich portfolios got a nasty shock when prices turned town. With prices back up, the question is whether there is a better way to pick higher-dividend stocks. Yes, three measures help filter for stability. In the hunt for yield, many savers switched from bonds to higher-dividend stocks. In a Fed-fueled equity market, there was little downside fear, and the usual trade-off between growth and stability was often forgotten. Now in monetary policy transition, more people are seeking dividends with price stability. Is there a better way to pick than screen by dividend yield? Yes, with the usual…
Despite the world awash in cash seeking return, just five companies hold 25% of the total cash of S&P 500 members. Thirty-three percent of the cash is concentrated in eight companies. This picture highlights dramatic differences. Cash can be counted different ways. This version shows the amounts reported as Cash & Marketable Securities to the U.S. Securities and Exchange Commission, quickly extracted through Zacks Research System. Financial companies are excluded. Included are financial arms of companies such as General Electric and Ford. By this count, the top five are General Electric, Microsoft, Alphabet, Cisco and Amgen. As General Electric has…
Vanishing equity risk premiums are frequently debated. But why are they shrinking? Have investors stopped caring about risk? Data illustrate the vanishing act isn’t magic; it is monetary policy and measurement. The model matters. The equity risk premium (ERP) is the amount (premium) investors earn for taking the risk of buying equities instead of a “risk-free” asset, often defined as a U.S. Treasury bond. ERPs dropped in 2012 leaving analysts speculating, “Why?” Commentators often opine the market simply “absorbed” this loss and investors are willing to accept less return (premium) for the risk taken. Is there more to the…
The Fed is in a bad spot. Conventional wisdom says rates are low. But it’s only some rates. Yield spreads for medium-quality, investment grade corporate bonds are at historical highs. Raising the Federal Funds rate might add strain. Yet, to the extent the recent spikes reflect “liftoff lightheadedness” and mix of Fed’s Treasury holdings; the Fed might have a safety valve – “cap and lift.” Federal Reserve Chair Janet Yellen offered a “cautionary note” when she remarked, “…significant uncertainty attaches to Phillips curve predictions, and the validity of forecasts from this model must be continuously evaluated in response to…
Recent export trends are less about exchange rates than energy prices and ongoing structural changes. For policy makers this puts the emphasis on fiscal and regulatory, rather than monetary policy. For investors, this increases the value of investing in more situationally-aware and nimble companies. The slide since November 2013 in the Goods and Services Trade Balance (blue line below) is the troubling headline. Good news is the upturn in 2Q2015, but the underlying trend may still be there. Our analysis of exchange rates and “liftoff lightheadedness,” left inquiring minds wanting to know more about export specifics. So what’s happening?…
As markets grapple with Fed inaction, the year-long exchange rate spike – “liftoff lightheadedness” has become the gorilla in the room. Exchange rates that are supposed to be an effect of monetary policy shackled monetary policy. The Fed can cure this lightheadedness with slow and predictable interest rate increases designed to bring clarity to today’s uncertainty and put a roof on expectations. Deferring an interest rate increase, the Federal Open Market Committee (FOMC) emphasized “net exports,” “abroad,” and “international.” The Fed did warn markets. “International” first appeared in their assessment phrasing 9 months ago. A June International Monetary Fund…
Yesterday, European Central Bank (ECB) President Mario Draghi presented his remarks at the European Parliament Committee on Economic and Monetary Affairs. In part, he said “Should some of the downwards risks weaken the inflation outlook over the medium term more fundamentally than we project at present, we would not hesitate to act. The asset purchase programme has sufficient in-built flexibility. We will adjust its size, composition and duration as appropriate, if more monetary policy impulse should become necessary.” Unlike the U.S. Federal Reserve, the ECB has a so-called “single mandate” for price stability – “The ECB aims at inflation rates…
The Fed’s flight path depends on knowing the “natural interest rate” for stable economic growth. The problem is that past actions make finding that natural rate like groping in a dark room. Better lit data illustrate less cash is needed for production and more cash is available – thus, the natural rate is lower. The “Federal Funds” rate is a path for the Fed to achieve its objectives of “maximum employment, stable prices, and moderate long-term interest rates.” This rate is often described like the accelerator pedal on a car, if the economic engine is going more slowly than…
As headlines fuel fear about potential weakness in back to school clothing sales, a back to school education makes clear that prices are at 13 year highs and purchases per person are at all time highs. Clothing and footwear, like most all products since the early 1990s, have been falling in price. This has not been a dreadful “deflation” because quantity purchased increased as price fell – classic demand curve. We see this clearly in the price-quantity time track of consumer expenditures. What is different from other products (see https://feddashboard.com/no-fear-of-deflation-if-cause-is-pipe-factors) is the 2009-2011 twist. So what happened? Our story…
Why do stock markets grow? Of many reasons offered, just one driver dominates in each of 5 post-WWII growth eras. These distinct eras with different drivers raise the need to rethink conventional wisdom on business cycle similarity, bull market rebound comparisons and popular investment methods. *** If you arrived here from the Yahoo! Finance video, you may wish to read the replies to the data and method questions. *** Since 2009, the Federal Open Market Committee (FOMC) has been the defining force in markets (see https://feddashboard.com/how-to-dx-fx-fundamentals). Where else might we look to find forces with an outsized impact? After filtering…
DATA ANIMATION Fear of deflation is growing. But we need to ask, “Why?” Fear is usually explained by pointing to a price index like this one. It’s the AVERAGE of price changes for ALL consumer goods and services. But averages hide answers. This animated data visualization highlights several of our analyses on price levels and deflation fears. For more on prices and PIPE Factors, please explore the Money & Prices and Exponential Technology categories. https://feddashboard.com/category/money-prices https://feddashboard.com/category/expotech Story of the Red Dots and globalization https://feddashboard.com/world-to-u-s-do-you-get-globalization-yet For more on exponential technology: Singularity University http://www.singularityu.org Ray Kurzweil: The Coming Singularity http://www.singularity.com/
Strain between financial markets and corporate output is over 12% higher than at the peak of the credit bubble. With strain this severe, it’s vital to know why – starting with monetary policy and business sales. Baron’s Bargain Busts Imagine you were a business baron in 1951 and paid a royal sum to buy stock equal to 1% of U.S. corporate output (GDP). Would that same sum give you 1% of corporate GDP today? No. You would have 70% less, only 0.3% of corporate output. Why so much less? Because equity prices grew so much faster than corporate output…