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Archive for June, 2013

Further to this post Value Badly Lagging Glamour: The Value Premium Is Now A Discount Saj Karsan requested a calculation showing the value premium using EBIT/EV:

This chart shows the average annual value premium calculated using EBIT / EV (decile 10 — decile 1) from the largest 50 percent of non-financial stocks listed in the US for the period 1999 to present.

EBIT Value PremiumThe horizontal red line is the average EBIT/EV value premium for the period at 5.4 percent. 2009 aside, the value premium has been negative since 2007 (although there is a very small premium for the incomplete 2013 year to date). Even so, the magnitude of the return in 2009 means that, in aggregate since 2007, the value premium is still slightly positive.

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Two interesting charts from The Brandes Institute’s annual Value versus Glamour update for 2013. The first exhibit (2) shows the disappearance of the value premium over the last five years, and its inversion over the last two years. The yellow dotted line shows the average returns to the ten decile portfolios of stocks ranked by price-to-book value from 1968 to 2012. It demonstrates that, historically, the higher the price-to-book value, the lower the returns. The differential between the returns to the stocks in decile 10 (the “value” portfolio) and decile 1 (the “glamour” portfolio) is the value premium. That relationship seems to have broken down since 2007 (shown in blue), and inverted since 2010 (shown in red). The value premium is now a value discount!US Value Premium

The second exhibit (3) shows the rolling five-year annualized relative performance of value over glamour. In the last two rolling five-year periods, value stocks in the U.S.–marked in yellow–have delivered their worst relative performance in the 32 years of data from 1980. The Non-U.S. value stocks have continued to outperform.Rolling Five-Year Value versus GlamourAs the second exhibit demonstrates, it’s unusual for value to underperform glamour by so much and for so long. The last period of underperformance occurred in 2000, and it wasn’t as deep or prolonged. One possible explanation is that low p/b value strategies are now so well known and low p/b value stocks are so picked over that value investors have to do something special to outperform. More likely is that this is a brief period of underperformance at the tail end of a bull market and the relative performance of value over subsequent periods will compensate.

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This issue of Barron’s carries a brief article on activist hedge funds and makes mention of activist Jeff Ubben and his firm ValueAct Capital, which is regarded as one of the elite activist funds because it has averaged gains of 144 percent in companies where they filed 13D forms.

Some notable holdings include:

  • ADOBE SYSTEMS INC
  • CBRE GROUP INC
  • MCGRAW HILL
  • MICROS SYSTEMS INC
  • MICROSOFT CORP
  • MOTOROLA SOLUTIONS INC
  • MSCI INC
  • VALEANT PHARMACEUTICALS INTL

You can see a list of their most recent holdings here.

Ubben is speaking at the 9th Annual New York Value Investing Congress taking place September 16 & 17, 2013 at Jazz at Lincoln Center’s Fredrick P. Rose Hall.

Ubben will be accompanied by some of the world’s most accomplished investors, and for good reason: they want to be the first to hear investment ideas from money managers who have a proven track record of generating stellar returns for their clients and themselves.

Readers of Greenbackd can save $1,700 by registering now with discount code N13GB2 before Thursday, June 27th.

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Here’s the updated St Louis Fed’s FRED on Warren Buffett’s favored market measure, total market capitalization-to-GNP:

FRED Graph

The Q1 2013 ratio – the most recent point – is 110 percent.

According to the FRED data, the Q1 2000 TTM/GNP peak ratio was 158 percent, and the Q3 2007 TTM/GNP peak was 114 percent. The average for the full period – Q3 1949 to Q3 2012 – is 69 percent. The last time the market traded at a below-average ratio was Q1 2009.

Here’s the log version:

FRED Graph

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In Is the AAII Sentiment Survey a Contrarian Indicator? Charles Rotblut, CFA asks if the AAII Sentiment Survey results signal future market direction.

Each week from Thursday 12:01 a.m. until Wednesday at 11:59 p.m. the AAII asks its members a simple question:

Do you feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)?

AAII members participate by visiting the Sentiment Survey page (www.aaii.com/sentimentsurvey) on AAII.com and voting.

Bullish sentiment has averaged 38.8% over the life of the survey. Neutral sentiment has averaged 30.5% and bearish sentiment has averaged 30.6% over the life of the survey.

In order to determine whether there is a correlation between the AAII Sentiment Survey and the direction of the market, Rotblut looked at instances when bullish sentiment or bearish sentiment was one or more standard deviations away from the average. He then calculated the performance of the S&P 500 for the following 26-week (six-month) and 52-week (12-month) periods. The data for conducting this analysis is available on the Sentiment Survey spreadsheet, which not only lists the survey’s results, but also tracks weekly price data for the S&P 500 index.

Table 2 from the article has the results:

Table 2. Performance of Sentiment Survey as a Contrarian Indicator

Sentiment Level Number of
Observations
Average
S&P 500
Change
(%)
Median
S&P 500
Change
(%)
% of
Periods
Correctly
Contrarian
(%)
6-Month Performance
Bullish > +3 S.D. From Mean
2.0
7.4
7.4
0.0
Bullish > +2 S.D. From Mean
44.0
-0.7
0.3
48.0
Bullish > +1 S.D. From Mean
167.0
0.8
2.9
34.0
Bullish < –1 S.D. From Mean
212.0
6.9
6.2
80.0
Bullish < –2 S.D. From Mean
16.0
14.0
17.7
100.0
Bearish > +3 S.D. From Mean
3.0
25.8
23.0
100.0
Bearish > +2 S.D. From Mean
50.0
2.8
5.3
60.0
Bearish > +1 S.D. From Mean
162.0
4.7
6.0
71.0
Bearish < –1 S.D. From Mean
211.0
3.8
4.5
26.0
Bearish < –2 S.D. From Mean
9.0
-5.5
-1.7
67.0
All
1,319.0
4.0
4.7
12-Month Performance
Bullish > +3 S.D. From Mean
2.0
3.6
3.6
50.0
Bullish > +2 S.D. From Mean
44.0
-2.0
3.6
48.0
Bullish > +1 S.D. From Mean
167.0
2.4
6.3
31.0
Bullish < –1 S.D. From Mean
206.0
12.9
14.3
84.0
Bullish < –2 S.D. From Mean
16.0
20.7
21.7
100.0
Bearish > +3 S.D. From Mean
3.0
35.0
25.6
100.0
Bearish > +2 S.D. From Mean
50.0
3.1
14.3
60.0
Bearish > +1 S.D. From Mean
152.0
7.1
11.8
74.0
Bearish < –1 S.D. From Mean
211.0
7.7
9.9
24.0
Bearish < –2 S.D. From Mean
9.0
-4.3
4.8
44.0
All
1,293.0
8.4
10.2
Based on data from July 24, 1987, to May 2, 2013. Numbers are rounded.

Rotblut observes:

Neither unusual nor extraordinarily high levels of optimism are highly correlated with declining stock prices when the entire survey’s history is considered. The 44 periods with bullish sentiment readings more than two standard deviations above average were followed by a six-month fall in the S&P 500 only 48% of the time. The average six-month decline was 0.7%.

Extraordinarily high levels of pessimism have a mixed record of being correlated with higher stock prices. On a six-month basis, the S&P 500 rose 60% of the time following a bearish sentiment reading more than two standard deviations above the historical mean. The average and median gains were 2.8% and 5.3%, respectively. On a 12-month basis, the S&P 500 rose 60% of the time, with an average gain of 3.1% and a median gain of 14.3%. The average increases in prices are well below the typical increases realized throughout the entire history of the survey, though the median increases are greater than the typical gains.

Read Is the AAII Sentiment Survey a Contrarian Indicator?

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

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Margin debt in the United States — money borrowed against securities in brokerage accounts — has risen to its highest level ever, at $384 billion, surpassing the previous peak of $381 billion set in July 2007 according to New York Times Business Day’s Off The Charts: Sign of Excess?. Margin debt as a proportion of GDP is not quite yet at the peak set in 2007, but it has exceeded 2.25% only twice previously in the last 50 years–2000 and 2007. The bottom panel shows that each of those instances was followed by a large drawdown:

NYT Margin Debt

Read Off The Charts: Sign of Excess?

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h/t SD.

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