Two widely watched indicators just hit five-year extreme levels – and that’s a positive for the economy.
Consumer sentiment hit a five-year
high in the preliminary October reading, as measured by the University of
Michigan-Thomson Reuters sentiment gauge. This gauge “covers how consumers view
their personal finances as well as business and buying conditions,” according
to MarketWatch. Higher levels of sentiment could translate into higher consumer
spending and help propel the economy.
And, the second indicator, housing foreclosure filings, hit
a five-year low in September,
according to RealtyTrac. Foreclosure filings include default notices, scheduled
auctions, and bank repossessions. In September, there were 180,427 foreclosure
filings. By contrast, that number was above 350,000 in mid-2009, so, yes, foreclosure
filings have improved significantly over the past few years.
And, for good measure, let’s throw in a third indicator – weekly
jobless claims – which fell to their lowest level in more than four years for
the week ending October 6, according to Bloomberg. Lower claims “may mean
employers are seeing enough demand to maintain current staff, a necessary first
step to bigger gains in hiring,” according to Bloomberg.
While these three indicators look good, “Earnings pessimism
among U.S. chief executive officers is climbing to levels last seen when the
Standard & Poor’s 500 Index was mired in bear markets,” according to
Bloomberg. In fact, analysts are now forecasting a 0.9 percent decline in corporate earnings for the
just completed third quarter, according to Bloomberg.
Good news, bad news, what’s an investor supposed to take
from this? Well, like the movie by the same title, it’s complicated. The
economy continues to recover and rebalance from the Great Recession and this
leads to some indicators looking good, others looking bad, and some looking just
plain normal.
DO YOU WANT TO KNOW THE
SECRET to Warren Buffett’s remarkable
investment success?
First, some background. Buffett partially owns a company
called Berkshire Hathaway and he uses this as his vehicle for making
investments in other companies. So, when people say Buffett is a great
investor, they’re looking at the performance of Berkshire Hathaway stock which,
in turn, tends to reflect the performance of the companies Berkshire owns.
Further, a recent academic paper by Andrea Frazzini, David
Kabiller, and Lasse H. Pedersen, titled Buffett’s
Alpha, said, “Buffett’s performance is outstanding as the best among all
stocks and mutual funds that have existed for at least 30 years.”
Now, here’s the secret to Buffett’s spectacular returns according
to the paper’s authors:
We find that the secret to Buffett’s
success is his preference for cheap, safe, high-quality stocks combined with
his consistent use of leverage to magnify returns while surviving the
inevitable large absolute and relative drawdowns this entails.
Let’s look at each of those components:
1)
Cheap:
defined as value stocks with low price-to-book ratios
2)
Safe:
defined as stocks with low beta and low volatility
3)
High-quality:
defined as stocks of companies that are profitable, stable, growing, and have
high dividend payout ratios
4)
Leverage:
perhaps shockingly, the authors discovered that Berkshire magnified its returns
by leveraging its capital by 60 percent financed partly using insurance float
with a low financing rate
Source: Buffett’s
Alpha paper
This is not a buy or sell recommendation on Berkshire
Hathaway stock, rather, it shows Buffett latched on to a good strategy early in
his career, used leverage to magnify his returns, and stuck to the strategy
even when it suffered large declines.
Now that we know “how” Buffett achieved his outstanding return
(including the surprising leverage), does this in any way diminish his results?
No. In fact, it’s probably just the opposite. Buffett figured this strategy out
more than 30 years ago and researchers are just now catching up with him!
Weekly Focus – Think About It…
“Research is to see
what everybody else has seen, and to think what nobody else has thought.”
--Albert Szent-Gyorgyi, Hungarian
biochemist
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