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business newsWant a Clue on Stocks? Follow a Simple Box
By
Ryan Krueger
Jan 24, 2011 11:30 am
You have to pay a lot more for a box now than a year ago: Rock-Tenn just offered a premium to acquire the shares of Smurfit-Stone to get its hands on even more boxes.
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No matter how many new toys toddlers get for Christmas or a birthday, it has been my experience that they will prefer to make up a game inside their shipping boxes within a couple hours of opening them. Little Casey Krueger celebrated each over the past four weeks. Her soon-to-arrive littler sister already had us all living out of boxes for the past eight weeks while we added a new room to our old house.
I feel the same way as Casey when I compare shiny new Wall Street toys and expensive opinions to a simple box. You would need it to be a large box if you wanted to fit all of the dire economic forecasts from last year inside. Despite countless calls for deflationary spirals and no growth, perhaps the simplest but most profound update dispelling those myths is that you have to pay a lot more for that box now than you did a year ago. Rock-Tenn (RKT) just offered a premium to acquire the shares of Smurfit-Stone (SSCC) to get its hands on even more boxes.
In this letter we at my firm are going to try and get our words out of the way of simple pictures showing several measurements that we take throughout the year in our research lab which was built to help us understand what is happening while others predict what should be happening.
Recall how bad the holiday season was supposed to be, and how poor investor sentiment was last year. The consumer was finally dead….again…according to economists. Plenty of reasons were given for what should have happened. What was happening was a lot of boxes being opened. The peak order day for the 2010 holiday season at Amazon (AMZN) counted 13.7 million items sold which was up 44% from the peak of 2009.
In related news I noticed the invoices from the architect of my daughter’s room were not deflating on schedule with an economic slowdown I kept reading about. So, I looked and dug up the data like I am prone to do (yes, the architect really liked the meetings better with only my wife). I wondered how far off the bottom their industry might have bounced. It turns out that the work already on the drawing boards for architects just surpassed the previous peak two years ago. Contrary to popular opinions, there is a lot of stuff being designed to be built for boxes of stuff to be put inside. How is that for some high-level analysis?
Boxes were filled in traditional stores also, not just online. To prepare for holiday sales more than 150,000 retail jobs were added which was up 300% from the year before. Many economists still explained that what should have happened next was a lot of idle time for those workers to re-fold shirts. After all, surveys confirmed just how awful consumers felt. Below are the results from a nationwide monthly interview with adults questioned on the state of economy, personal finances, and buying climate.
Then we found out what is happening instead. Total US retail sales reached a record in December, having made up all losses during the worst recession since the 1930s in less than three years and already surpassing the November 2007 previous peak. Imagine what the number will be when consumers actually feel comfortable shopping again!
Trains, Planes, and Automobiles
Warren Buffett, when asked to identify the single most important economic statistic he would like to know if he was stranded on a deserted island and could only get one, explained he would choose freight-car loadings.
We retrieve data from the American Association of Railroads every month to see what stuff is moving inside those bars above. There are 19 different categories of commodities they track. In 2010, all 19 were up.
If you like that growth in the US, you will love the faster growth everywhere else. Airlines carrying stuff can be measured globally and compared to show that consensus forecasts for slow to no growth were dramatically underestimating what was actually happening.
Or more simply put by my partner, “If things are supposed to be so bad out there, where are all these trucks on the freeway going?” Below is the benchmark US truck shipment index.
And Yet…Stocks Remain Historically Uncrowded
S&P 500 total earnings will set a new high in early 2011 yet stock prices are nowhere near their 2007 peak. There are two possible reasons for that disconnect. Have fixed income yields from bonds become a better choice for new capital? Nope. The 10-year Treasury yield has fallen by more than 20% since then. Or, has the willingness to take on risk dropped even lower and the valuation investors are willing to place on stocks eroded despite better business underneath them? Yep. More investors are even shooting against stocks than a year ago. The overall short interest (hoping stocks fall in price) as a percentage of outstanding New York Stock Exchange shares actually grew 5% in 2010.
Confusion reigns supreme, which we love here at Krueger & Catalano. Consider this startling fact for some well-heeled Wall Streeters who may want to hang on to those shoes a little longer than years past. Collectively, the stocks that top analysts liked the most last year significantly underperformed during the rally. The stocks they rated the lowest not only did better, but outperformed the S&P 500 by more than 11% on average. As a result, analysts are not just losing confidence in stocks but in themselves also. Of the 159,000 total ratings according to my trusty Bloomberg database, analysts are making the fewest number of buy or sell recommendations in history. More than 67% of stocks are rated neutral.
It is hard to overstate how surprising that stat is to me. I cannot help but remember one of my favorite table-pounding brokers years ago complaining about any neutral rating, shouting, “We’re not in the storage business, we’re in the moving business” as he proudly pointed to a box of trading confirmations. I learned to trust the box instead.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
I feel the same way as Casey when I compare shiny new Wall Street toys and expensive opinions to a simple box. You would need it to be a large box if you wanted to fit all of the dire economic forecasts from last year inside. Despite countless calls for deflationary spirals and no growth, perhaps the simplest but most profound update dispelling those myths is that you have to pay a lot more for that box now than you did a year ago. Rock-Tenn (RKT) just offered a premium to acquire the shares of Smurfit-Stone (SSCC) to get its hands on even more boxes.
In this letter we at my firm are going to try and get our words out of the way of simple pictures showing several measurements that we take throughout the year in our research lab which was built to help us understand what is happening while others predict what should be happening.
Recall how bad the holiday season was supposed to be, and how poor investor sentiment was last year. The consumer was finally dead….again…according to economists. Plenty of reasons were given for what should have happened. What was happening was a lot of boxes being opened. The peak order day for the 2010 holiday season at Amazon (AMZN) counted 13.7 million items sold which was up 44% from the peak of 2009.
In related news I noticed the invoices from the architect of my daughter’s room were not deflating on schedule with an economic slowdown I kept reading about. So, I looked and dug up the data like I am prone to do (yes, the architect really liked the meetings better with only my wife). I wondered how far off the bottom their industry might have bounced. It turns out that the work already on the drawing boards for architects just surpassed the previous peak two years ago. Contrary to popular opinions, there is a lot of stuff being designed to be built for boxes of stuff to be put inside. How is that for some high-level analysis?
Boxes were filled in traditional stores also, not just online. To prepare for holiday sales more than 150,000 retail jobs were added which was up 300% from the year before. Many economists still explained that what should have happened next was a lot of idle time for those workers to re-fold shirts. After all, surveys confirmed just how awful consumers felt. Below are the results from a nationwide monthly interview with adults questioned on the state of economy, personal finances, and buying climate.
Then we found out what is happening instead. Total US retail sales reached a record in December, having made up all losses during the worst recession since the 1930s in less than three years and already surpassing the November 2007 previous peak. Imagine what the number will be when consumers actually feel comfortable shopping again!
Trains, Planes, and Automobiles
Warren Buffett, when asked to identify the single most important economic statistic he would like to know if he was stranded on a deserted island and could only get one, explained he would choose freight-car loadings.
We retrieve data from the American Association of Railroads every month to see what stuff is moving inside those bars above. There are 19 different categories of commodities they track. In 2010, all 19 were up.
If you like that growth in the US, you will love the faster growth everywhere else. Airlines carrying stuff can be measured globally and compared to show that consensus forecasts for slow to no growth were dramatically underestimating what was actually happening.
Or more simply put by my partner, “If things are supposed to be so bad out there, where are all these trucks on the freeway going?” Below is the benchmark US truck shipment index.
And Yet…Stocks Remain Historically Uncrowded
S&P 500 total earnings will set a new high in early 2011 yet stock prices are nowhere near their 2007 peak. There are two possible reasons for that disconnect. Have fixed income yields from bonds become a better choice for new capital? Nope. The 10-year Treasury yield has fallen by more than 20% since then. Or, has the willingness to take on risk dropped even lower and the valuation investors are willing to place on stocks eroded despite better business underneath them? Yep. More investors are even shooting against stocks than a year ago. The overall short interest (hoping stocks fall in price) as a percentage of outstanding New York Stock Exchange shares actually grew 5% in 2010.
Confusion reigns supreme, which we love here at Krueger & Catalano. Consider this startling fact for some well-heeled Wall Streeters who may want to hang on to those shoes a little longer than years past. Collectively, the stocks that top analysts liked the most last year significantly underperformed during the rally. The stocks they rated the lowest not only did better, but outperformed the S&P 500 by more than 11% on average. As a result, analysts are not just losing confidence in stocks but in themselves also. Of the 159,000 total ratings according to my trusty Bloomberg database, analysts are making the fewest number of buy or sell recommendations in history. More than 67% of stocks are rated neutral.
It is hard to overstate how surprising that stat is to me. I cannot help but remember one of my favorite table-pounding brokers years ago complaining about any neutral rating, shouting, “We’re not in the storage business, we’re in the moving business” as he proudly pointed to a box of trading confirmations. I learned to trust the box instead.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
Position in AMZN.
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