Barron’s 12/30/13

Bill Carache from Nomura raised price targets on Visa to $264 and MasterCard to $935. Earnings can increase by 15% annually for next 5 years.


Coke (KO) could rise 20%+ over next year. Recipe – turn 3 to 4% yearly volume growth into 5-6% revenue growth and EPS growth in high single digits. Recently fallen short. Big picture per Jonathan Feeney of Janney Capital Markets is 700 million people will join middle class by 2020 leading to a double in soft drink sales and the infrastructure is already in place.


Fayez Sarofim, Houston based money manager since 1958 – buy high quality stocks and hold them forever. Too much trading is a destroyer of wealth. Top 10 holdings are PM, AAPL, XOM, KO, CVX, NSRGY, JNJ, MCD, COP and IBM.


A simple timing model

John Hussman wrote about a simple market timing model in his May 6, 2013 weekly market comment in which he shows how the SP500 performed under a few conditions.

The article can be found at this link:

The timing approach uses a 39-week smoothed moving average. This approximates 10 months or 200 days. Excess return is defined as the market return in excess of T-bills. When the SPX was greater than this average, the excess annual return was 9.6% and when it was less than this average the excess return was 0.3%.

OVOB stands for overvalued, over bullish. That is defined as a Shiller P/E (PE) greater than 18 and advisory sentiment reading that is greater than 47% bulls and less than 27% bears at any point over the most recent 4-week period. Hussman is using numbers based on Investors Intelligence and imputed numbers prior to the 1960s. Under these conditions, when the SPX was greater than the moving average (MA) the excess return was -4.2% (annualized) and when it was less than the MA the excess return was -4.6%.

When the SPX was greater than the MA and the PE less than 18, the return was 15.1% but when the PE was greater than 18 the return fell to 4.3%. Now look at the impact of investor sentiment. Under these latter conditions (SPX>MA and PE>18) when the market is not overly bullish the excess return is 11.7% but when conditions are overly bullish the excess return is -3.3%.

Finally, when the SPX is less than the moving average and the PE is less than 18, the excess return is 1.2% but when the PE is greater than 18, the excess return is -1.9%.

So where is the market now. SPX is above the moving average, and the Schiller PE is greater than 18 (it is 25.4 based on a calculation at GuruFocus). Investors Intelligence is reporting 67.2% bullish. The PE has been above 18 all year and so has the moving average and yet the market has had strong gains. So as we all know nothing works all the time as this year has proven in this particular example.

All of the above returns are summarized below:

Condition Annual Excess Return Sharpe Ratio Frequency
SPX > MA 9.6% 0.78 70.3%
SPX < MA 0.3% 0.01 29.7%
OVOB -4.6% -0.33 19.1%
SPX > MA, OVOB -4.2% -0.32 17.0%
SPX > MA, PE < 18 15.1% 1.18 35.6%
SPX > MA, PE > 18 4.3% 0.36 34.8%
SPX > MA, PE > 18, NO OVOB 11.7% 1.04 18.3%
SPX > MA, PE > 18, OVOB -3.3% -0.26 16.5%
SPX < MA, PE < 18 1.2% 0.06 20.1%
SPX < MA, PE > 18 -1.9% -0.10 9.5%

Barron’s 12/23/13

American Tower (AMT)

Company leases antenna space on cell carriers and is a beneficiary of wireless firms efforts to improve service. Sales should be up 20% and net income up 46% in 2014. Trades at 18x next year’s AFFO. Yield is 1.5%. AMT was subject to a bearish report by Muddy Waters in July.


Ambac (AMBC)

Improving markets should help it pay back insurance claims with about $1.6b remaining. Market value is $1.1b. Price = $21 and could advance 50% or more in a year or so. This is speculative and it insures $2.5b of Puerto Rican debt.


PVH – shares can rise 20% or more next year.


A.M Castle (CAS) – small cap $13.64. Will lose money this year. Has an activist investor. Jeffries see the business improving and a $20 price target.


Closed-end funds are selling at historic discounts. Current discounts provide a margin of safety against rising rates. Muni’s offer some good opportunity.




Bitcoin down about 50%

Bitcoin hit $455 today down from around $1,000 a few weeks ago. See our Gary North quote from November 30.

Link to Marketwatch article:

Market roars higher on taper

The Fed announced the “taper” today and there was a sell off that lasted about 30 seconds, then it was off to the races as the DJ ended up 292 points on strong volume. The taper was doubled with the announcement that the Fed Funds rate wouldn’t begin to rise until the unemployment rate went below 6.50%, which helped get the party started.

The close pushed the SPY to a new closing high. The market would appear poised for new highs now unless it is setting us up for a major head fake.

James Paulsen on the possible taper

Today on CNBC, James Paulsen said “I really think if we have a controlled, methodical, linear taper…then the market will be fine with that,” which echoes our comments of November 7 when we wrote, “we believe a slow, steady taper over a 12-month period would work just fine.” However, Paulsen thinks there is a chance that money velocity might increase later on which could lead to a panic taper.

Link to the CNBC interview with Paulsen:

Barrons 12/16/13 (Ebay and more)

Here are some note from this week’s Barrons:

Following up on the WSJ article recently, Barron’s writes that Ebay could climb 20%. Cantor Fitzgerald called Ebay its top Internet value play for 2014. Sells for 19x this years forecast with a mid-teens earnings growth rate. Has net cash of $6b and should generate $4b in free cash next year. Using 2015 estimates, 14x EPS and 13x FCF.


YPF, an oil Company at Argentina might be significantly undervalued. The stock sells at $29 but has significant shale reserves that haven’t been tapped yet. Downside is the crazy government.


Read Gene Epstein’s commentary on the budget deficit, “The Budget Deal Stabilizes Nothing,” as a reminder of how dangerous our nation’s lack of fiscal discipline is.


Bullish on 2014 – Barron’s spoke to 10 strategists and they have a mean target of 1977. Expecting SP profits to advance by 9% to $118, GDP +2.7%.


Interview with Ned Davis, Lance Stonecypher and Timothy Hayes

They see a correction approaching, in the 20% range, followed by a good buying opportunity. Fed tapering with rates going up to 3.25 to 3.5% on the 10 year, might be enough to set off the correction. See GDP improving. Drop will be similar to 2011 20% drop. So the market might be down short term but will be good long term.