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The London Whale
After the market close on May 10th, JP Morgan announced that it had suffered an unexpected $2 billion loss on a trading position in credit default swaps (CDS). The trades seem to have originated from the firm’s London office, with a trader named Bruno Michel Iksil (quickly dubbed “The London Whale”). The news sent the stock down over 9% and was an embarrassment for JP Morgan CEO Jamie Dimon, who had earned a reputation as one of the more astute risk managers on Wall Street during the 2008 financial crisis. JP Morgan has long had one of the larger derivatives businesses among the big banks. In fact, it was the opacity of this derivatives business which ultimately made us uncomfortable holding the stock, leading us to sell it in November 2011.
Monthly Digest – May 2012
May 16th, 2012Monthly Digest – March 2012
March 21st, 2012The stock market has staged a powerful rally in the last five months, crossing various round number thresholds that excite headline writers (and many investors, too). Since its recent closing low at 1,099 on October 4, 2011, the S&P 500 has rallied all the way above 1,400, a nearly 28% rise. The Dow Jones Industrial average crossed 13,000. The NASDAQ crossed 3,000. What does it all mean for long-term investors?
The good news is that the driving force behind the stock market recovery has been better news about the US economy. Job growth has resumed at a good pace and this has led to a stronger, more confident consumer. There have even been some positive signs emanating from the housing market. A stronger real economy is the best support for a rising stock market and a necessary pre-condition to address our nation’s fiscal imbalances. Read the rest of this entry »
Monthly Digest – February 2012
February 13th, 2012Halftime in America
During the recent Super Bowl, Chrysler aired an extended 2-minute commercial starring Clint Eastwood, with the tagline “Halftime in America.” The ad paid homage to generations of resilient Americans, and drew a parallel between the U.S. auto industry’s recent resurgence and that of the broader American economy and society. Cynics saw the commercial as a form of covert electioneering by a company which benefited from a government bailout just two years ago, but recent macroeconomic data do support the case that the U.S. economy is improving.
To start with, January U.S. auto sales were up 11% over the prior year, to the highest annualized level since May 2008 (WSJ, 2/2/12). General Motors, only two years removed from bankruptcy restructuring, is expected to report 2011 net income in excess of $8 billion. The company has added 13,000 jobs since emerging from bankruptcy and now hopes to be earning as much as $10 billion annually by 2013 (WSJ, 2/6/12). Read the rest of this entry »
Quarterly Commentary – Fourth Quarter 2011
January 27th, 2012Investors can be forgiven for wondering whether 2011 was the purest distillation yet of what has become of modern stock markets: all volatility and no return. Whether it was the wild daily 4% swings the stock market saw in August or the steep 19% drop in the S&P 500 from June through September, investors saw big changes in market prices, yet the S&P 500 ended the year practically where it began, with dividends providing a small positive total return.
Large Cap Value Monthly Commentary – December 2011
January 7th, 2012The S&P 500 index was up about 1% in December and finished the year with a return of about 2%, including dividends (total return). The 3 stocks that contributed most to the Large Cap Value model portfolio’s investment returns during the month were Vulcan Materials (VMC), Cintas (CTAS), and Apollo Group (APOL). The top detractors were Dell (DELL), NRG Energy (NRG), and Sprint (S). During the month, our only trade was to increase our investment in Hewlett Packard (HPQ). Not much has changed since we discussed our reasons for this new position back in September so we’ll refer our readers to our news archive.
The reason behind Vulcan’s positive stock performance in December was an unsolicited buy-out offer from its main competitor, Martin Marietta (MLM). The proposal currently on the table is to exchange each share of Vulcan for ½ share of Martin Marietta. Based on MLM’s current share price, VMC’s stock actually trades at a small premium, an indication that the market is anticipating that MLM might raise its offer. We do not expect submitting your shares at this point as the offering price is below our assessment of Vulcan’s value. We will keep you posted. Read the rest of this entry »
Monthly Digest – December 2011
December 16th, 2011One purpose of this monthly digest is to help clients better navigate the torrent of financial news, data and information thrown at them everyday by the internet, CNBC, radio, etc.
Indeed, the great challenge facing investors today is no longer how to find good information. Rather, the challenge is to filter out all the noise and put new information into a meaningful broader context. Not only is there simply too much information to digest, news is also frequently sensationalized and purposefully de-contextualized in order to grab attention. While easier access to investment information is clearly a step forward, we have little doubt it can also contribute to pervasive short-term thinking and exposes investors to behavioral pitfalls.
This month we wanted to highlight an internet site that is a good source of economic news and, just as importantly, puts that information in a helpful longer-term context. We are not economists, and we don’t expect our clients to be, but we thought you might find this site useful in understanding what you hear on the news. The site is called Calculated Risk; take a look at these two posts from this week. Read the rest of this entry »
Large Cap Value Monthly Commentary – November 2011
December 5th, 2011Is the world financial system on the brink of collapse? This question was recently raised by George Soros, the well-known hedge-fund manager and philanthropist. We don’t know, but there are certainly diverging economic signs in Europe and the U.S. While here at home, the recovery seems to be taking hold and employment numbers are slowly improving, in Europe the situation is deteriorating very fast and is reminiscent of our own banking crisis in 2008. Read the rest of this entry »
Monthly Digest – November 2011
November 17th, 2011Bonds Best Stocks Over Last 30 Years
Following a very good year for bond performance in general, October 31st marked a very unusual event for market historians: for the first time since before the Civil War, the trailing 30-year average annual return on long-term government bonds exceeded that of common stocks (as measured by the S&P 500). Government bonds advanced 11.5% annually during this period, versus 10.8% for the S&P 500.
Of course, the main reason for this once-in-150-years event is that yields on these bonds decreased from the mid-teens level in the early 1980s to slightly over 2% today. As yields dropped, bond prices rose and investors enjoyed significant capital appreciation in addition to their regular interest payments. Read the rest of this entry »
Large Cap Value Monthly Commentary – October 2011
November 8th, 2011What a difference a month makes! After declining by more than 7% in September, the S&P 500 index roared back in October by almost 11% and is now up about 1% year-to-date. The index logged its best monthly gain since December 1991, and October was the first month it has gone without two consecutive days of declines since October 2006. The Large Cap Value Model portfolio was up over 10% for the same period. Read the rest of this entry »
Quarterly Commentary – First Quarter 2012
April 20th, 2012Dear Fellow Investors,
Earlier this year, a major bond rating agency warned that California may not be able to repay $4 billion borrowed against the ten-year old class action settlement with tobacco companies that is paying states billions over a 25-year period to compensate for tobacco-related health care costs. The money was not guaranteed, but tied to tobacco sales, and the number of smokers is declining more rapidly than anticipated, resulting in lower payouts from Philip Morris et al.
Read the full commentary.
Tags: baby boomers, Cintas, EOG Resources, Financial repression, NRG Energy
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