Thursday, April 26, 2012

5 Important Charts

The blog will be on brief hiatus until May 1, so until then I thought I'd post 5 of my most important data-points for readers to look at and ponder until then.  The 5 points are the monetary base, 10 year yield, high yield spreads, US population and GDP per capita.  These represent the value of the currency, the risk free rate of return, the price of risk, growth and productivity in 5 charts.  Get those 5 variables right and you're in business.

Wednesday, April 25, 2012

S&P to Gold Ratio

Below is a longer term chart of the ratio of the price of the S&P 500 to the GLD ETF (the data source I'm working from doesn't have the physical gold price).  It shows that despite the S&P rally since October and the pullback in gold, the "currency agnostic" value of the S&P (priced in gold) is still below where it was this time last year.

Tuesday, April 24, 2012

How Much Can Apple Go Up In One Year?

With Apple back up above $600 in aftermarket trading, the stock is now up 48% year to date.  For reference, below is the performance of Apple's stock on an annual basis going back to 1999.  The most the stock ever went up in one year was 202% in 2004, when the iPhone was just a glimmer in Steve Job's eye.

From the beginning of the stock's bull run in 2003 through the end of 2011, the stock returned an annualized 56.8% per year.  If the stock rises by that much in 2012 it would end the year at $635.

Wedge Forming in Gold

I've mentioned before on the blog that there are a few formations that bring out the closet technician in me.  One of them is a wedge, because it must resolve itself one way or the other.  There happens to be a significant wedge that's been forming in gold over the last several months that pits the long term trend against the lower highs that have been made since September.  To cap it off, the formation is culminating just in time for the Fed to speak tomorrow.  Could be an interesting show...

Monday, April 23, 2012

Largest FCPA Settlements

Reposted from (there really is a blog for everything I guess) below is a list of the 10 largest settlements under the foreign corrupt practices act.  The largest settlement was $800m and the average of the 10 largest settlements is $317m.  Based on worries about an FCPA violation, WMT's stock has lost almost $10B worth of market cap today, 12.5x the largest settlement.

1. Siemens (Germany): $800 million in 2008.
2. KBR / Halliburton (USA): $579 million in 2009.
3. BAE (UK): $400 million in 2010.
4. Snamprogetti Netherlands B.V. / ENI S.p.A (Holland/Italy): $365 million in 2010.
5. Technip S.A. (France): $338 million in 2010.
6. JGC Corporation (Japan) $218.8 million in 2011.
7. Daimler AG (Germany): $185 million in 2010.
8. Alcatel-Lucent (France): $137 million in 2010.
9. Panalpina (Switzerland): $81.8 million in 2010.
10. Johnson & Johnson (USA): $70 million in 2011.

Friday, April 20, 2012

Food For Thought

Despite the fact that it was down 2.7% today, CMG is still one of the best performing S&P 500 stocks year to date.  It's up 24% so far this year and 752% since the March '09 lows.  In order to get a sense of the company's valuation, below is a comp table for competing restaurants centered around the number of restaurants that they own or franchise.  Chipotle has 1230 restaurants that it operates with a value of $11m per store.  Even Panera only has a value of $2.9m per store, while lowly Wendy's only has a value of $283 thousand per store.  If In-n-out ever came public I wonder where it would fit on this table.

International Total Debt to GDP Ratios

The chart below is a nice info-graphic of total debt to GDP ratios (consumer/corporate/financial/govt) for different developed countries.  It comes from Gundlach's QE3 presentation which he gave earlier this week.  If you haven't looked at the presentation, it's worth a read.  The full presentation is here.

Thursday, April 19, 2012

Natural Gas Inventories

One last post on natural gas--a chart of where inventories are currently vs. where they would typically be based on a 5 year average.

Also, showing inventories over the last two decades and where they would normally be in the second week of April.

Oil to Natural Gas Price Ratio

Continuing on the theme of natural gas, below is a chart comparing the price of a barrel of oil to a Barrel of Oil Equivalent of natural gas.  Energy derived from a barrel of oil is roughly 8.5x more expensive than the same energy derived from natural gas.

Long Term Natural Gas Chart

There aren't a lot of charts that look like natural gas.  Over the last 5 years it's gone from one extreme to the other.  It was caught up in the same energy bubble that oil was in 2008, but thanks to a true technological paradigm shift everything changed.

For a longer term perspective, a multi decade chart is below:

Quantifying The Record Warm Winter 2012

During Q1 there was a lot of discussion of record warm weather across the US.  Such anomalous weather can have a significant effect on seasonally adjusted economic data which is generally seasonally adjusted higher during the winter as cold weather slows the economy.  Looking back with some perspective, the map below shows the actual divergence from normal temperatures across the US over the course of the first quarter.

Even though the west didn't have the above normal temperatures that affected the midwest and east, we did have somewhat less precipitation.  Being from Los Angeles, rain causes much more havoc here than below average temperatures, so the fact that we didn't get much was probably a moderate boost to this region.

Wednesday, April 18, 2012

Los Angeles Housing Market Trends

Below is some housing data pulled from Redfin on trends in the LA metro area.  The divergence between the list prices for houses and selling prices is something to take note of.  List pricing/sqft is up roughly in line with the S&P 500 ytd.  Deals are clearing at lower prices than they were to start the year though.  Perhaps a positive sign is that the number of homes listed has dropped precipitously this year, indicating that supply and demand may be becoming more balanced.  Listings are down 37% y/y. is web 2.0 at it's best (the only website to ever go to for housing data) because of cool features like this one that they've recently added to track market trends for different metro areas.  The above is aggregated data straight from the MLS, so it's much more timely than Case Shiller, which is reported on a two month lag.  It's too bad that in this information age there isn't more economic data that's presented in real time like Redfin does.

Treasuries Outstanding by Maturity

Since the Fed started operation twist in September of last year, it has purchased more than $300B worth of longer term government securities.  In the same time period, the amount of publicly traded US government debt has increased by $700B.  Considering that 10 year yields have also fallen by almost 100bps since operation twist was first anticipated by the markets, one would think that Treasury would take advantage of these lower yields to push out the maturity of its obligations.  Unfortunately, the average maturity has contracted over the last 6 months though.  Treasury Bills as a percentage of total outstanding has increased from 15.4% to 16.2%.

Percentage of Treasury Obligations Outstanding By Maturity

The Federal Government has $1.67T worth of debt that needs to be rolled annually, which creates considerable refinancing risk for the US government.  

The reason that most argue that the US government can never default on its debt is that the Fed has a printing press and therefore an unlimited supply of money to buy Treasury debt.  As it currently stands (partially because of operation twist) the Fed owns 6% of short term maturity bills, but holds 16% of all maturities.  If there were a European-like buyer's strike on US government bonds, the Fed's balance sheet could have to expand by another $1.6T+ to absorb the short term maturities.

Survival Rates By Cancer Type

Warren Buffett was diagnosed with cancer yesterday, but good news for him and Berkshire shareholders: not only was the cancer apparently caught early, but it also is an extremely treatable form of cancer.   Prostate cancer is statistically the most treatable form of cancer, as shown in the table below; it has the highest 5 year survival rate of any type.  By contrast, Steve Jobs had Pancreatic cancer, which is statistically the most aggressive form of cancer.

Tuesday, April 17, 2012

Don't Cry For Me, Argentina

Perennial economic problem child Argentina is back in the news for the proposed nationalization of YPF, the country's largest oil company. A number of Argentine companies, including YPF, have ADRs which trade on US exchanges.  YPF has been halted as of today, but TEO (telecom argentina), which trades with a 10% dividend yield is down over 8% today.  Below is a chart of the Argentine Peso, which has lost almost 30% of its value since Kirchner was elected in late 2007.

S&P 500 vs 10 Year Treasury Yield

The Dow is up 200 points today, yet bond yields are barely budging.  This continues the divergence that has been occurring in the bond market since operation twist in September.  Below is a chart of the S&P and the 10 year yield over the last five years.  Although the two were reasonably correlated since 07, bond yields have remained flat as stocks have rallied since last fall.

Monday, April 16, 2012

Global Auto Sales

From Lear's annual report, a list of global auto sales by country for 2011:

Major Foreign Holders of US Treasuries

Treasury released TIC data for February today, which includes the most recent report on foreign holdings of US Treasuries.  Below is the full table since July of last year.  It shows that China is still the largest holder of treasuries, but have sold $136 Billion, or 10%, of their holdings since July of last year. In total, foreigners own $5.1T worth of Federal debt, or 47% of all publicly traded debt.  The Fed owns another $1.6T worth, meaning that the Fed and foreigners combined hold 65% of all publicly traded government debt.

Sunday, April 15, 2012

Worst Performers Since March 2009 Low

The inspiration for this post comes from looking at a chart of Best Buy and realizing that the stock is now below where it was on March 9, 2002.  Below is a list of other S&P 500 stocks that are lower than they were when the S&P 500 hit a bear market low.

Friday, April 13, 2012

Deposit Growth Y/Y

Even though it slowed somewhat q/q JPM and WFC each reported huge deposit growth y/y in Q1.  Systemic deposit growth is shown below:

For a broader picture, here's M2 growth, quite significant considering that GDP is growing sub 3%:

Roche Letter to ILMN Shareholders

There's an article about this in the Journal today, but this is too absurd of a situation not to re-post here.

Roche, which is attempting to make a hostile purchase of DNA sequencing firm Illumina, wrote an open letter to ILMN shareholders urging them to accept Roche's bid.  In trying to convince them to do so, Roche talks about how overvalued ILMN is and how there's no clarity on future growth.  The acquirer is bashing the company that it wants to spend billions of dollars to acquire.  Some of the highlights are posted below:
Illumina has continually made a number of qualitative statements regarding the potentially large market for its products in emerging markets and industrial end-markets. However, the company has yet to produce any quantifiable evidence or projections to reassure shareholders when or how this growth will be realized. In fact, since Roche’s offer, the only relevant industry news highlighted the increasing competitive landscape following product-related announcements from Oxford Nanopore and Life Technologies. In addition, Wall Street research analysts who understand the future potential of the sequencing market, Illumina’s role in the industry, as well as its future growth prospects had already factored this potential into their price targets prior to Roche’s offer – and these price targets had a median value of $34 per share
In a recent letter to shareholders, Illumina pointed out that it has been called “the Apple of the genomics business.” However, there is one glaring difference between Illumina and Apple – Illumina’s MiSeq and HiSeq ARE NOT the iPhone and the iPad. Apple’s revolutionary products were huge and instantaneous commercial successes, appealing to a seemingly endless consumer base around the world. Illumina’s products on the other hand, although “revered by genomics researchers around the world,” serve a much smaller and highly regulated market. And unlike at Apple stores, crowd control of eager buyers has not been a problem for Illumina and not even Illumina has projected any surge in revenues from its products in any specific foreseeable time period. As a standalone company, Illumina’s future is far from certain.
If I were a shareholder of Roche I think I'd be a little concerned about why my company wants to acquire this company that it seems to have such a low opinion of.

Thursday, April 12, 2012

Dow Jones Volatility Over Last 100 Years

There are a lot of reasons to believe that volatility has gotten more severe in modern markets.  This week alone the S&P 500 lost 40 points Monday and Tuesday and then gained 30 points between Wednesday and today (assuming we close around here).  Many will blame algorithmic trading and increased information flow for this volatility, but really the most likely culprit is human emotion, which hasn't actually changed much for the last 100 years.

The chart below is a chart of the volatility of the Dow going back for 100 years.  The volatility is measured as the percentage change intra-quarter from the low point of the quarter to the high point of the quarter.  There are periods of high volatility but overall, the average volatility has been fairly constant over this period.

The argument could be made that there is a slight structural increase in volatility from about 10% per quarter in the 50s and 60s to about 14% per quarter in the 90s-00s.  However, this doesn't explain the fact that the depression period registered the highest period of volatility despite a lack of algorithms and internet.

MSFT Performance Since Antitrust

Even though the charges are a little less severe, the thought of the Justice Department bringing anti-competitive charges against the county's largest technology company brings 1998 to mind, when the Clinton DOJ sued MSFT for antitrust.  Below is a long term chart of MSFT.  The blue dot is May of 1998 when the charges were first filed against the company.

For MSFT the charges were a major turning point.  There are those who will argue that Gates was never the same after the lawsuit because he lost his sense of what was an aggressive business practice and what was crossing the line.  Thanks in part to bubble valuations, the stock has only risen 42% in 14 years, or about 2.5% per year.  There are major differences between the MSFT charges and the AAPL charges of course.  The MSFT charges were related to the company's flagship product--ebooks mean a lot less to Apple than Windows/Internet Explorer did to MSFT.

Wednesday, April 11, 2012

Year over Year Change in S&P 500

It's been a great year for the S&P thus far, but thanks to the last few days and the steep pullback that started around this time last year, the index is only up 3% y/y.

Amazon vs. Walmart

Here is the same set of charts as the previous post for Amazon vs. Walmart.  Amazon does 10% of WMT's sales at a lower gross margin, but its market cap is roughly 42% of WMT's.

AMZN Revenues TTM Chart

AMZN Gross Profit Margin Chart

AMZN Market Cap Chart

Amazon vs. Best Buy Revenue

With Best Buy's CEO stepping down yesterday there's a lot of talk about how Amazon is killing all retailers.  Below is a chart comparing AMZN's revenues vs. BBY's.  Also there is are chart comparing each company's gross margin and market cap.  Electronics and other merchandise was roughly 60% of AMZNs sales in 2011, so it really only sells about half as much electronics merchandise as Best Buy does.  It's market cap is 11x larger though.

AMZN Revenues TTM Chart

AMZN Gross Profit Margin Chart

Tuesday, April 10, 2012

Growth Stock Roundup

Much to this value investor's dismay, this is starting to smell like the type of market that "growth" (i.e. momentum/unreasonably valued) stocks could outperform.  Below is a group of the top stocks from Avondale's proprietary growth screen and their performance since the beginning of the month.  The S&P is down 3.5% now month to date.  This group is only down 1.79%.

Some names that don't pop up in the screen that come to mind are: AAPL, CMG, UA, NKE and MCD.  All of these have done better than the S&P since April 1.

Monday, April 9, 2012

Small Cap vs. Large Cap Performance

The Russell 2000 is down 1.4% today, about 50bps more than the S&P 500.  The small cap index still has not broken above its high point set last year and is trailing the S&P 500 year to date as well.  Y/Y the Russell is down 4% while the S&P is up 4%.

Friday, April 6, 2012

April Investor Letter

Below is a letter that is written monthly for the benefit of Avondale Asset Management's clients.  It is reproduced here for informational purposes for the readers of this blog.
Dear Investors,
It’s said that markets are ruled by fear and greed, but for the last several years, there has been much more of one than the other.  Since the S&P 500 peaked in 2007, there have been glimpses of the latter, but the market has mostly been dominated by the former.  For the first time in a long time greed appears to be creeping back into the picture though.  The S&P is up more than 12% for the year, and investors are starting to think about how much money they can make investing in stocks rather than how much they can lose.

This transition is a natural progression in an economic cycle and suggests that despite grim prognostications Americans may not have to adjust to a “new normal” after all.  The bottom of a recession is always marked by extreme despair, and from that point investors must slowly climb a proverbial wall of worry until sentiment flips from pessimism to optimism.  In 2008 it appeared that the US economy could be entering an extended depression.  Since then the economy has healed precisely as cyclical theory predicts it should.  The average economic expansion since World War II lasts 60 months and March was the 33rd month of this one, so we are roughly in the middle of a typical cycle—the perfect time for greed to overtake fear.
We began the year worried about a European collapse and Chinese slowdown, but as the quarter ended, these worries no longer held much sway over US markets.  Even when a negative headline would cross the tape, the markets largely ignored it.  Focus was on a resurgent United States, an economy described as “robust” several times in the most recent ISM survey.  The quarter was so good that there was only one day that the S&P 500 lost 1% or more.  Last year there were 48 such days, and on average since 1957 a 1% decline happens 26 times per year (6 times per quarter).

While I’m not surprised that sentiment improved last quarter, I am extremely surprised by how fast it happened.  Even with an optimistic view, my expectation to start the year was that the S&P 500 might reach 1450 by year-end.  This would represent a 16% gain, which I thought would make stocks slightly overvalued, consistent with this part of the cycle.  At 1420, the S&P 500 is already within 30 points of that level though, which means that either my price target was wrong or the market isn’t going to rise much more between now and the end of the year.  I don’t have any problem if my forecast was wrong (in fact I expect it to be) but while the data has confirmed my initial optimism, it hasn’t exactly exceeded it.  So far I haven’t seen anything that suggests my target needs to be revised higher, which is why I continue to expect a pullback.

I’m constantly on the lookout for reasons why my target might need to be revised though.  April will be an important month to assess the need for revision, as companies will start to report earnings for the first quarter.  If it appears that earnings are on pace to grow faster than expected then it’s possible that the first quarter was just the start of something much bigger for the market.  Conversely, if 1450 is the right target then the market will have to effectively move sideways between now and the end of the year.  With 9 months left in 2012, that’s a long time to go without some sort of hiccup.  As summer approaches seasonality will begin to be a headwind for the market just as expectations may be reaching a near term high.
Scott Krisiloff, CFA
Opinions voiced in the letter should not be viewed as a recommendation of any specific investment.  Past performance is not a guarantee or reliable indicator of future results.  Investing is subject to risk including loss of principal.  Investors should consider the suitability of any investment strategy within the context of their personal portfolio.  For more information on Avondale Asset Management, readers may be directed here.

Thursday, April 5, 2012

Inflation Since 1930

Paired with the previous post about Dow Jones returns since 1930, here is a list of consumer goods prices by decade.  The data was found at

Annualized rate of change for each of these items since 1930-2008 (from the data):

*Home price through 2008 incorporates the bubble.

Sadly, wages have lagged every category in this data except for gas (using a 2009 price).  If you use 2012 prices, with gas at $3.92, wage increases have likely lagged all 5 categories.

Dow Jones Return Since 1930

In the near term, it's clear how buying at a market high or low can affect returns.  If you had bought the S&P 500 in October of 2007 you'd be down 10%, but if you bought in March of 2009 you'd be up over 100%.  People tend to think that over long periods of time the difference will even out.  Below is a chart of the Dow going back 100 years showing the difference between buying at the peak in 1929 and the trough in 1932.  Over the course of 80 years the difference is about 300bps annualized.  This is the difference of multiplying your money 33x and 321x.

AAPL Share Price Passes GOOG

Though this fact is functionally irrelevant, Apple passed Google today to become the 3rd highest priced stock per share in the Russell 1000.  Sitting above AAPL now are only NVR and PCLN.  Of course AAPL still has a ways to go before it catches BRK/A.

Wednesday, April 4, 2012

Comparing 2006 to 2012 revisited

The economic cycle theorist in me feels compelled to draw a parallel between 2006 and 2012 mostly because since 2009 the S&P 500 has tracked the path of the last cycle extremely well.  Below is an updated chart comparing 2012 thus far to 2006.  We've already risen as much as we did in all of that year, so (stating the obvious) either there will be a pullback or the historical relationship will break down.

ISM Commentary

The ISM manufacturing index was released Monday and the non-manufacturing index was released today.  While each index was above 50, both are still below the peaks reached in 2011 and the non manufacturing index was actually lower than it was last month.  Still, outside of the numbers, the commentary from respondents to each survey is much better than I can recall at any point this cycle, even when the ISM number was higher.  Below are the comments that get paired with the release.  These may be a good precursor to what the tone of earnings calls will be in a couple weeks.

Comments From Manufacturing Survey:

  • "Business is robust, driven by a healthy demand for exports and relatively stable raw materials [pricing]." (Chemical Products)
  • "Our customers are reporting a potential 10 percent to13 percent increase in purchases for 2012. Actual orders continue to be slow to appear, but expectations continue to be high." (Machinery)
  • "Business conditions [are] very strong and so is outlook." (Fabricated Metal Products)
  • "We have been experiencing 6 percent annual growth and expect that to continue in the near term." (Food, Beverage & Tobacco Products)
  • "Business continues to be brisk — if not robust — [this] month and looking forward." (Miscellaneous Manufacturing)
  • "Business remains essentially stable, with some concerns regarding continued slowdown in China." (Computer & Electronic Products)
  • "Business remains strong." (Primary Metals)
  • "Business improved year over year for the first quarter." (Plastics & Rubber Products)
  • "Generally increasing sales/demand [is] driving higher capacity utilization." (Transportation Equipment)
  • "Sales appear to be picking up over last year at this time, but still have a ways to go." (Wood Products)
Comments From Non Manufacturing Survey:

  • "2012 continues ahead of forecasted pace through March." (Wholesale Trade)
  • "February was a great month for auto sales — much better than expected. Forecasted sales volumes for the year are being revised upward." (Retail Trade)
  • "Positive year-over-year growth is finally being seen as customers' discretionary spend is up, and overall traffic is increasing as well. Increased investments in marketing promotions and advertising during the past few months have helped improve customer loyalty, evidenced by longer stays and increased frequency of visits." (Arts, Entertainment & Recreation)
  • "Companies are seeking professional services to continue efficiencies while positioning for growth, when the top line comes back." (Professional, Scientific & Technical Services)
  • "We are starting to see the private sector building again; the money is starting to flow into construction." (Construction)
  • "Increasing demand for healthcare services while engaging in a more intense effort to reduce costs universally. [We are doing this] prior to implementation of healthcare reform, which is expected to dramatically reduce revenue by approximately 25 percent." (Health Care & Social Assistance)

Tuesday, April 3, 2012

S&P Earnings Multiple

To echo the previous post...

A primary argument for stocks being cheap is that consensus for S&P 500 earnings this year is $103, which implies that the index is trading at 13.7x forward earnings.  Because the index is market cap weighted though, the index estimates skew the P/E of the index toward that of the larger companies and can sometimes give an inconsistent picture of the average stock in the index.  In order to adjust for that effect, below are the S&P 500 multiples of the average constituent based on 2011, 2012 and 2013 estimates.

P/E Multiple of S&P 500 Index vs. Individual Constituents

Stocks Relative to 2013 Earnings

Since the first quarter of 2012 is now over and the S&P 500 is up more than 12% for the year, there's a good chance that there will start to be chatter about the valuation of the S&P relative to 2013 earnings.  To aid in this analysis below are the 30 most expensive and 30 cheapest stocks relative to 2013 earnings estimates:

Most Expensive S&P 500 Stocks Based on 2013 Estimates

Least Expensive S&P 500 Stocks Based on 2013 Estimates