Tuesday, March 27, 2007
Wednesday, March 21, 2007
Sunday, March 18, 2007
- He genuinely believes the subprime real estates woes will spill over into the prime real estate market, at some level.
- Although there is no evidence, yet, the poor real estate market will slow the overall economy, perhaps, into negative territory.
- He believes the primary problem the Federal Reserve should be addressing is economic growth and not inflation.
- If the Fed waits for core CPI to fall to the comfort level before starting to cut rates, they risk letting recession take hold.
- A time to "break the rules" is at hand. The Fed must have the boldness to start cutting rates when the economy appears to be growing at its optimal level and core CPI is above the comfort level.
- He is doing this because he does not believe there is a consensus for this action either in the market or at the Fed.
- Finally, heaven forbid, that the Fed should hike rates to fight inflation in the face of the coming economic slow down.
Mr. Bernanke and his fellow members of the Federal Reserve are meeting this week. We'll listen carefully to their official statement. If it is primarily aimed at fighting inflation, I have the strong feeling that Mr. Greenspan will stay on the offensive. If they emphasize that economic growth prospects appear to be dimming, I think Mr. Greenspan will stand down.
Tuesday, March 13, 2007
Monday, March 12, 2007
Friday, March 09, 2007
This is Part 1 of series of three blogs in which we will describe who John Burr Williams was, why he believed dividends trumped earnings in determining the intrinsic value of a company, and finally, why his theories matter so much today.
In 1937 near the end of the worst bear market in US history, Williams, a thirty-five year old Harvard doctoral student in economics, made the following statement in his thesis: “The investment value of a stock is the present worth of all future dividends to be paid upon it . . . discounted at the pure [riskless] interest rate demanded by the investor.”
Mr. Williams’ dissertation, entitled “The Theory of Investment Value,” did not immediately earn him his doctorate. That would not be forthcoming until 1940. Prior to his final oral exam, he sold the rights to his thesis to Harvard University Press, who published his dissertation as a book, but only with Mr. Williams subsidizing a portion of the costs.
It would seem that only foolish greed could compel a doctoral student to sell his thesis before he had been granted the degree. Williams, however, who was already a successful Wall Street investor when he went back to Harvard, explained that he had returned to college to learn what had caused the 1930s stock market crash (and the subsequent economic depression) from the best minds possible. Since he had come for the knowledge and not the degree and since his work was complete, he wanted to share his findings with the public as quickly as possible.
What he did not say at the time, but would later admit, was that because of some of the views he had expressed in his thesis, he had become persona non-grata with key Harvard professors and was unlikely to have been awarded the degree anyway.
Blaming the Bureaucrats
His troubles with the dons of the school of economics were many but were centered in two areas: (1) Williams claimed that the correct method of determining the intrinsic value of a company was by calculating the present value of its future dividend payments, not earnings as was the universal belief at the time, and (2) he voiced great skepticism of the theories of John Maynard Keynes and the state-sponsored programs of President Franklin Roosevelt. Williams devotes an entire chapter in the book entitled "Taxes and Socialism" to debunking the notion that the redistribution of wealth could lead a country to prosperity.
Finally, in 1940, with the book drawing praise from important financial commentators, and his success as an investor gaining accolades, John Burr Williams went before the Harvard dons to seek his doctorate.
As expected, he was soundly criticized for publishing the thesis before he had obtained his doctorate, and his professors were upset that he did not embrace Keynes’s teachings. Oddly enough, however, they did not dispute his dividend-centric theory of investment value but questioned if a thesis studying the valuation of stocks was of enough significance to justify a doctorate in economics from Harvard. After a heated debate he was granted his doctorate.
The truth is often born of travail, matures under constant testing, and once acknowledged, is subject to twisting. That has certainly been the case with John Burr Williams’ theory. What had angered his Harvard professors, at first, caused Wall Street brokers to scoff. The majority of the wizards of Wall Street believed then, as they still do today, that earnings are the driver of stock prices and that dividends are only a by-product. Furthermore, intrinsic value has never commanded a big following on Wall Street, where trading and short-term speculation have long been the accepted modus operandis.
Blaming Wall Street
But, a closer reading of the book turned Wall Street’s ridicule to scorn. The ways of Wall Street were being blamed, at least partly, for the stock market crash. Williams' thesis stated the following:
“The wide changes in stock prices during the last eight years, when prices fell by 80% to 90% from their 1929 peaks only to recover much of their decline later, are a serious indictment of past practices in Investment Analysis [Wall Street]. Had there been any general agreement among analysts themselves concerning the proper criteria of value, such enormous fluctuations should not have occurred, because the long-run prospects for dividends have not, in fact, changed as much as prices have. Prices have been based too much on current earning power, too little on long-run dividend-paying power. Is not one cause of the past volatility of stocks a lack of a sound Theory of Investment Value? Since this volatility of stocks helps in turn to make the business cycle itself more severe, may not advances in Investment Analysis prove a real help in reducing the damage done by the cycle?”
Gradually, particularly among seasoned investment analysts and some academicians, Williams’ valuation theories gained credence. Arnold Bernhard, the founder of “The Value-Line Investment Survey,” perhaps the most famous of all independent, investment research firms, quoted Williams in his 1959 book, The Evaluation of Common Stocks, and echoed his concerns, “Williams postulates that the value of a stock is the sum of all its future dividends discounted by the present interest rates. . . . Because there is no generally accepted standard of value, the market prices of stocks fluctuate far more widely than their true values. The wide fluctuations have in the past imposed a heavy burden on the general economy and undermined the faith of many people in the free market economy. The need, therefore, exists for rational and disciplined standards of value that cannot lead to the wildness of 1929 or 1949 or the present."
Next Time: Investing versus Speculating
Tuesday, March 06, 2007
Monday, March 05, 2007
When emotions begin to run high in the stock market and fears seem to spring from the four corners of the earth, it can seem as though common stocks are nothing more than a flickering image on a computer screen. They have no substance, no value-added, no raison d'etre.
The fact that a company has been in business for a hundred years and has weathered every form of natural and man-made disaster, that it has not only survived but has produced a regular and growing profit, paid taxes and passed some of the remaining profit along as a dividend to it shareholders mean very little when traders are fearful and terra incognita surrounds them.
Sell before______happens and its too late. Everything is Enron, nothing is safe, nothing has any substance.
We have been through these kinds of markets and emotions hundreds of times and nothing ever changes. Good stocks, valuable stocks are thrown out as though they were worth nothing more than the stock certificates they were once printed on.
A person sees enough of these kinds of market swoons and you come to the conclusion that they are a natural part of investing. It is a time when the speculators and day traders sell at bargain prices to the long-term investors, who will then sell back to the speculators and day traders two to three years hence -- at much higher prices.
The chart below shows a glimpse of this:
Click to enlarge.
The chart is of the Exchange Traded Fund for the S&P Dividend Aristocrats (symbol SDY). The Aristocrats are a remarkably unique collection of companies that have raised their dividends for at least 25 consecutive years. They also tend to have higher quality ratings than the average company.
The top of the graph shows the price of the SDY. On the bottom is a relative strength chart comparing the movement of the SDY to the S&P 500.
Notice that even though the SDY was rising (top graph) along with the market from June of '06 through January '07, that on a relative performance basis it was trending lower (bottom graph).
In June, when it was clear the Fed had stopped its rate hikes, money moved away from these high quality, dividend payers and went to higher octane stocks. In mid-January '07 these trends reversed, and in the recent market sell off, even though SDY has fallen in price, on a relative basis it has actually risen.
At first this may seem like a hollow victory. The truth is SDY went down; so what if it went down less than the average stock? It means a lot if you take into account that the high-quality companies contained in SDY are now selling on a valuation basis just about where there average stock is.
The market will continue to be choppy for a while longer, but it is clear to us that there are plenty of buyers of high quality dividend-paying stocks. It may not show on an absolute basis, yet, but when the current selling pressure abates, we believe rising dividend stocks will be the new leadership. We believe they are undervalued and better suited to the heightened sense of risk that is in full bloom in the world wide stock markets.
We are not recommending SDF. We are using it as an example because it is a kind of extreme example of what we believe is the best predictor of value -- rising dividends.