Sunday, April 13, 2014

Working Thoughts on Long-Term Equity Returns

A few semi-random thoughts prompted by the abundance of "statistics" regarding the "stock market." I use " " because sometimes the term is very ill-defined. 

You've all seen them:
- Since 18XX/19XX, the "stock market" has returned X%/Y% per year
- Since 18XX/19XX, the LTM/NTM P/E of the "stock market" is X%/Y% per year
- Since 18XX/19XX , the "stock market" cap to GDP is XX%/YY%
- Since 18XX/19XX, the "stock market" "profit margins" are XX%/YY%

These stats are of limited use because the "stock market" of 18XX is not the stock market of 19XX which itself is not the stock market of 20XX. The stats of the 1991-93 Chicago Bulls stats are irrelevant to the Chicago Bulls today, and some of that is applicable to the "stock market". 

Some of the obvious differences are:
- Stock market composition: just as an example, railroads were a much bigger percentage a hundred years ago than they are now. 

- National GDP has a drastically different profile and is less relevant due to business globalization (and GDP calculations themselves change over time)

However, the biggest difference is that...

- Stocks, as financial assets, are MUCH closer to cash therefore their returns will be MUCH closer to cash longer term

Let me elaborate on how stock are closer to cash vs. 20-50-100 years ago:
- Liquidity when measured in share volumes: easier to transform any one stock in cash within a second for many market participants 
- Liquidity when measure in how the stock can be transformed to cash: sale, sale of covered calls, short-sale of index against a portfolio, etc.
- Liquidity when measured in transaction costs, both commissions (zero in some cases) and slippage 
- Lower diversification cost: one can get a Vanguard index fund at 0.10% annual cost
- The low cost to diversify has led to more diversification (index products), and these are the most liquid names
- Lower information risk: easier to see if a company is a fraud (incl. whether it actually exists), easier to see who the other holders are, easier to see reliable, periodic, audited financial statements, etc. 
- In some cases, partial or full sales data for companies is available in near-real time (i.e. scanner data for CPG from Nielsen)
- In other cases, company returns are pre-set (i.e. regulated utilities that are allowed to mark-up your power bill as they see fit to get the commission-allowed ROE) 
- In other cases, revenues are reasonably foreseeable (i.e. "pre-sold" or hedged production in oil and gas) 
- In general, if you think about it, there are a lot fewer "dark corners" and "black boxes" now. Most of the outright fraud is confined to the OTC markets or in regulatory capture (which benefits shareholders for the most part)

That is not to say that we won't have 1987 or 2002 or 2008 ever again: stock are still influenced by panics, excessively high or low expectations, supply and demand, margin debt/forced selling, taxation of gains and dividends, etc. as they always have been. Maybe HFT and algos are a bigger risk. But one probably should not expect the 10- or 20- or 30- year returns from a century ago when a lot more risks and costs had to be priced in. 

Friday, March 14, 2014

Charting US Retail: Not Mean-reverting

I've been harping for some time on Twitter that traditional US retail is no longer a mean-reverting industry. I've selected 36 charts of well-known and not-so-well-known retailers that are at XX% off their pre-crisis or post-crisis high to illustrate my point. Some a pure retailers, some are both wholesalers and retailers (ie CROX).

Surely some retailers are doing better but also there is a good number that have liquidated in the last few years (ie Borders, Circuit City, Mervyn's, Loehmann's, Syms, Filene's, etc.) as well as unsuccessful offshoots (ie Structure, Ruehl)

My thinking is that the lack of mean-reversion is driven in part by online shopping (not only direct substitutes but also reducing physical shopping trips), in part by demographics and in part by stagnant real discretionary incomes for the bottom YY% of the population.

Also beware of any thesis heavily based on the putative "value" of a company's retail real estate or overly optimistic vacancy and rent increase projections.

Update 3/24/14: this is what traffic has looked like. The rest of the charts are from the original post.







































Wednesday, January 29, 2014

Five-year Market Review: Thinning Participation, More Questions Than Answers

This chart-heavy post is coming out of a conversation I had with Credit Bubble Stocks on Twitter on Saturday: while a number of OECD equity indexes have been making all-time or post-2009 highs as of earlier this month, there are plenty of country, regional, industry and asset-group indexes that are well below their post-09 highs.

Is participation in the recovery getting thinner?
Did "global risk on" die by mid-2011?
Is it all a matter of capital flows and FX?
What is Mr. Market telling us here?
There's probably more than one answer, but here are some charts that caught me eye. I am using only US/USD ETFs so obviously local market highs will be different.

Post-crisis peak:
Late 2009: Italy EWI, Spain EWP
Late 2010: China FXI, India EPI, Brazil/Chile/Peru/Colombia EWZ ECH EPU GXG, entire Frontier Markets FRN
April 2011: entire Emerging Markets EEM, commodity index DBC (heavy in oil %), Canada EWC, Australia EWA, South Africa EZA, S&P Metals and Mining XME, Silver SLV, Coal KOL (has its own issues), Steel SLX
Sept 2011: gold GLD, gold majors GDX
Sept 2012: bond market index (AGG), emerging market debt EMD
May 2013: all the income plays (real estate IYR, utilities XLU, mortgage REITs REM, preferred stock PFF, IG and HY corporate LQD JNK, MLPs AMJ)
Dec 2013: US retail XRT?

Will more geographies or sectors continue to "peel off" the rally?

Here are the five-year charts.

  Peaked around October 2009: Italy EWI and Spain EWP.










Peaked around October 2010: Frontier (not Emerging) Markets FRN, China FXI, India EPI, Brazil EWZ, Chile ECH, Peru EPU, Colombia GXG










Peaked around April 2011: Emerging Markets overall EEM, Commodities overall DBC, Canada EWC, Australia EWA, Russia RSX, South Africa EZA, Metals and Mining XME, Steel SLX, Silver SLV, Coal KOL

Peaked around Sept 2011: Gold GLD, Gold Majors GDX
Peaked around Sept 2012: the aggregate bond index AGG, emerging markets debt EMD
Peaked around May 2013: Real estate IYR, Mortgage REITs REM, Utilities XLU, IG Bonds LQD, HY Bonds JNK, Preferred Stock PFF, Master Limited Partnerships AMJ
Finally, peaking (quite possibly), in December 2013, Retail XRT: