Saturday, September 29, 2007

The people have spoken - well 15 of you anyway ...

In relation to the recent poll on the site (now removed), the people have spoken (well, the 15 who responded, anyway). Compared to the S&P500 close on September 17 2007 at 1,476 (closed on Friday September 28 2007 at 1,525), most readers felt that it would reach lower depths at some point within the period ending six months out (March 17 2008):

  • 27% said it would have touched a point at least 25% lower;

  • 27% said it would have touched between 12% to 19% lower;

  • 33% said the dip would be relatively minor, between 0-12%

  • 13% said that it wasn't going any lower - that 1476 would be the low water mark over that time frame. So far anyways, those who chose this option have been correct, as the market gapped up the next day on the back of the FED rate reduction and waved good-bye to 1,476.

Interesting, but obviously not scientific in any way, given the self-polling aspect, and tiny sample size.

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Monday, September 17, 2007

Where is the S&P500 headed? Poll here.

Got any idea where equities are headed over the next six months?

If you got an opinion as to what the low point in the market is going to be over the next while, why not take the poll on the right hand side of the blog? (Please be a bit patient, as the poll takes a little bit to load ... a 10-20 seconds for high-speed connection)

I'll report out on the results in a few weeks. Thanks to everyone who participates.

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Tuesday, September 11, 2007

Fundamental vs Cap-Weighted Indexing Debate

I have written many times about moving along with better investing, thinking about long-term themes that will improve your investing results.

One of those themes, for passive investors, is to use low-cost products, like ETFs or index mutual funds. For the average investor, this will produce better than average results. Another theme is to use those same type of products that mirror some type of fundamental, as opposed to capitalization-weighted index.

John Bogle's (creator of the Vanguard mutual fund behemoth) back-testing research several decades ago that showed that most investors would be better off in funds that simply mirrored the then best market indices available, but at the lowest cost. However, times move on, research advances and other indices are created and tracked.

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The ones that are outperforming the conventional capitalization-weighted indices (like the S&P500, the Dow Jones Industrials, etc.) are ones that track fundamentally-weighted indices. Products, such as low-cost ETFs, are then modelled on those indices. Some of the indices or products are the RAFI indices, and the Wisdom Tree series of products.

RAFI indices consider the economic footprint of the companies it tracks (rather than it's stock market value) and in back-testing, those indices generally outperform the more popular by a significant margin. They've also generally outperformed since various products modelled on them have been produced over the past several years. The Wisdom Tree series of products generally looks at the dividends paid as a fundamental weighting, and models products based on that. Notwithstanding its weakening relation to companies that outperform the average capitalization weighted index, it is still a decent predictor of outperformance.

Anyone wanting to understand this further can go to a debate among three leading proponents of the various styles - Rob Arnett for RAFI indices, Jeremy Siegel for Wisdom Tree, and Gus Sauter, Chief Investment Officer for Vanguard - here.

An interesting and enlightening debate, and well worth the read. I have also written about fundamental indexing here, and here.


The Confused Capitalist

Saturday, September 08, 2007

Emerging Markets hold the line in equity decline

Has the egg finally cracked?

I postulated, last year, that emerging markets were a better value proposition that widely acknowledged, with their strong economic fundamentals, and solid government financing, in sharp contrast to most western nations, and particularly the US.

The WS Journal chart below (via Barry Ritholtz's Big Picture), shows that, globally, the emerging markets were the only major stock group to end the week in an up position.

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Perhaps this is the start of the trend I've envisioned, wherein emerging markets, and the developed nations, re-balance to more appropriate valuation ratios, based on the conditions actually in existence today.

Or perhaps this is just a short term blip ...

Dividend Yield versus Payout Yield - Part II

Weighing payout behaviours ...

In an posting made last month, I commented on the rising importance of payout yield versus dividend yield ... I just ran across an article in CFO magazine that perhaps explains part of the reason why dividend yield is declining as a predictor of future outperformance.

To quote ...

In 1980, for example, the value of stock buybacks exercised by S&P 500 companies equaled just 10 percent of the value of the dividends issued, according to Scott Weisbenner, a finance professor at the University of Illinois who studied the issue while serving as an economist at the Federal Reserve Board from 1999 to 2000. By the late 1990s, however, companies were spending more on repurchases than on dividends.

And the boom continues: in the second quarter of this year, buybacks outpaced the same period a year ago by 43 percent, while dividends accounted for just 32 percent of cash paid out to shareholders, down from 51 percent as recently as the second quarter of 2001. Weisbenner also found that between 1994 and 1998, the use of stock-options programs by S&P 500 companies grew by more than 40 percent.

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The rest of the article - which is primarily about the morality of company insiders selling into share buyback plans - can be accessed here.


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