Seeking Alpha as a Predictor of Stock Movements and Earnings Surprises [View article]
Hailaing, it's fascinating to see this research. Thank you, to you and professors De, Hu, and Hwang.
Unlike many stock picking services, our goal at Seeking Alpha hasn't been to push stock picks at our users, but to present our readers with a variety of opinions about stocks, ETFs and the overall market, and let them make up their own minds. Sometimes, even a lousy stock picker can write something amazingly valuable that helps you to reach a better conclusion. Or a single comment on an article (we have over 40,000 comments per month) can change your perspective for the better.
Because of that, we've never tried to measure the accuracy of articles on SA (which you have done using sentiment analysis). So your work comes as a pleasant surprise.
The Seeking Alpha team will be excited to see this. But even more so, this is a huge affirmation for our contributors.
Just One Stock: Heavy Upside From a Leveraged Play on Rising Silver Prices [View article]
Lance, you misunderstood the framework. Just One Stock, as the intro says, means "what's your top pick?". Nobody sane thinks you should hold only one stock in your portfolio.
Two advantages of paying a higher ongoing dividend vs. a one-time buyback:
1. Management might be wrong that the stock is undervalued. Maybe MSFT's low stock price and multiple compression accurately predict lower future profitability. (That's what the market is telling you, right?) In which case, buying back stock in an attempt to raise future EPS may be an inefficient allocation of capital which would reward short term shareholders at the expense of long term shareholders. In contrast, raising the dividend payout ratio as the author suggests in this article would reward longer term holders. Leave it to the market to decide whether the increased dividend yield justifies a higher stock price.
2. Buying back stock rewards option holders who have no interest in being long term owners of the stock, whereas raising the dividend rewards owners and penalizes option holders. As such, stock buybacks have historically facilitated excessive options grants. Managements often claim that options align employees' interests with shareholders', but that's often not true. By paying a dividend, MSFT management and employees with options would want to exercise their options and hold the stock so they earn the dividends. But only, of course, if they believed in the company and its stock...
Think Your Dividend Yield Is High? A Warning for Income Investors [View article]
David, you wrote: "If, on the other hand, your investment objective is to maximize income at some point in the future--say the day you retire--then higher stock yields (and lower prices) are good news. You can lock in high yields on cost that will benefit you for as long as you own the stocks."
But isn't that exactly Jason's point? If you believe Jason is right that stock prices will be significantly lower a year or two from now, then why wouldn't you sell your stocks now and buy back the same dollar value when prices are lower? You'd sacrifice 3-8% in income while you waited, but you'd then be buying stocks at much higher yields, and you'd be set for the next 30 years.
But you then write: "That's a key concept: If you are investing for maximum total income at some future date, you will not often sell the instrument--the stock--that grants you the rights to receive that income. Why would you? So price variations don't matter very much, and therefore risk to price doesn't bother you very much."
However, the price variations do matter, because if they are really large, then you'd want to get out of the market now and get back in when prices are lower and dividend yields are higher.
As I said in my earlier comment, I don't buy the Elliot Wave analysis, and I have no idea whether, in reality, stocks will fall as much as Jason is predicting.
But he does make a point worth considering. Many people think that stock prices can't fall much because that would imply dividend yields of 7-15%. But he's saying that they *can* fall that much, and it's not unthinkable for yields to go back to long run historical norms.
Again, I'm not sure I agree with him, but it's not "punditry" or "fuzzy thinking".
Don't Let Talk of a Bubble Scare You Out of Bonds [View article]
Abegaz, you're confusing currencies with bonds. They're two separate things. Cullen is right: if you hold a ten year Treasury bond to maturity, you won't lose your principle (at least in nominal terms; in inflation-adjusted terms is another matter altogether).
If you're concerned about the dollar, you can hedge your currency exposure in other ways.
That's exactly why we carry summaries of Jim Cramer's recommendations on Seeking Alpha.
On Mar 13 10:57 AM Speedspirit wrote:
> I believe to become an intelligent investor or speculator one must > know what ideas are influencing the crowd. It doesnt mean that one > has to agree with anything being said on CNBC or Fox but if the masses > are being influenced in one direction then a well informed member > of say seeking alpha will trade in a diffrent direction.Thats how > it works, no.
Think Your Dividend Yield Is High? A Warning for Income Investors [View article]
I'm not sure about the Elliot Wave theory, but the point about the risk of potential declines in stocks is similar to the one Roger Nusbaum made here, also worth reading: Yield vs. Yield: Why Bonds and Dividend Stocks Are Not Interchangeable seekingalpha.com/artic...
There are also tax issues: MSFT had the cash outside the U.S. to pay the dividend without the bond issue, but it didn't want to repatriate it for tax reasons.
Wall Street Breakfast: Must-Know News [View article]
IBM's in-line EPS + revenue miss is a big deal, because this is a company which is expert at smoothing EPS to meet consensus, but revenue is less easy to control. In other words, this is a significant miss.
Given the size of IBM, this probably indicates that the tech sector is less strong than the recent results from INTC and ORCL suggested. Given the weakness in the stocks of other tech leaders (eg. GOOG), it makes me more cautious about tech overall.
Why Germany's Economic Fortress Could Come Toppling Down [View article]
Note also Germany's looming demographic crisis. There's a chart showing Germany's demographic composition in the middle of this article by Alicia Damley that's a must-see: seekingalpha.com/artic...
I only saw your comment now, and didn't realize that we'd had any problems with the comments system. We did make a recent change a few days ago: we finally managed to show large numbers of comments beneath the article without crashing Internet Explorer. Perhaps the problem with your comment was related to that change.
If you see any problems in future, please send me a direct message and let me know.
The good news is that all comments now display beneath the article, without having to click to a new page to see comments.
David, one problem with yield on cost (as you've defined it) is that you're using nominal money, and therefore comparing apples and oranges - yield in today's prices versus cost at earlier prices. That's why, as you say, yield on cost and current yield diverge over time. To measure yield on cost in real terms (as opposed to nominal terms), you should adjust the purchase price of the stock for inflation, then you can see the true performance.
To give an analogy: Imagine an aristocratic family purchased an estate in 1700 for $400, a massive sum at the time. Generations later, the heirs rent out the estate for $40,000 per year, and want to assess the profitability of purchasing estates for future generations.
The yield on (nominal) cost -- 1000x the original price! -- would tell them little about the success of the investment, because $400 was a princely sum at the time, but is a tiny sum for a real estate purchase today.
But in inflation adjusted terms, that $400 might now be equivalent to $4 million (I'm making up the numbers; please excuse my ignorance about inflation data). In which case, the yield on real cost is 10% ($40,000 / $4,000,000).
Your use of nominal yield on nominal cost highlights the advantage of real assets (companies, real estate etc) which generate income over nominal bonds (ie. not inflation-adjusted bonds). With bonds, you get the principle back in *nominal* terms, and it isn't adjusted for inflation. In contrast, stocks are shares in a company, which is a real asset and should grow in line with inflation (because companies raise prices in line with inflation). So in prolonged periods of high inflation, you'd rather own dividend stocks than nominal bonds.
But by using nominal money and not adjusting for the holding period, it doesn't help you assess your true investment performance, because the time period and inflation rate is a critical factor. Your yield on cost on a stock bought in 1969 will be phenomenal compared to that of a stock bought in 1990. But if you adjust for inflation, you might find the numbers are very different.
On Byron Wien's Ten Surprises for 2010 [View article]
Edward, as usual this is an excellent article.
An anecdote about Byron Wein that you might enjoy:
In 1999, there was a meeting inside Morgan Stanley between the research analysts covering technology (I covered communications equipment) and Byron Wein, who was then Morgan Stanley's strategist.
We tech analysts were universally bullish on our stocks. Almost every company was seeing demand outpace their ability to supply. Pricing was rising. And every quarter was "beat and raise", with the stocks jumping after results and guidance were issued.
Byron pointed out that valuations were nuts. In particular, I recall him saying that the revenue growth rate required to justify Cisco's stock price implied that Cisco alone would account for a large percentage of US GDP 5-10 years out. And that was ridiculous.
The reaction of the analysts was bemused - we knew our sectors better than he did, and hey, there was real momemtum behind the stocks.
Cisco was one of the most touted stocks for the decade in 2000. But during the ensuing 10 years, Cisco massively underperformed the S&P 500.
It's that kind of courageous and intellectually powerful call that has given me enduring admiration for Byron.
V. thought provoking article, Jeff. (And thank you for your kind comments about the work we've put in to grow the site.)
We've recently been discussing the embedded value in contributors' articles, and how we could share that information in a more thorough way.
The first issue is: What is the value of SA contributors' sentiment? There are two possibilities: (1) Like other sentiment indicators such as Barron's money managers' poll, it's a contrarian indicator (if most writers are bearish, there's still money sitting on the side lines).
(2) Our contributor base represents a small minority of money managers with greater ability to predict correctly -- in which case the sentiment is an accurate (not inverse) indicator.
Jeanne Klempner, one of our editors, makes a good point: once we've extracted the sentiment data, just test it for correlation against the market, and we'll find out whether it's valuable and in what direction.
The second issue is assessing the sentiment of an article. Some articles are explicitly bullish or bearish, but many articles aren't: they discuss individual stocks or some aspect of a company or the market, without coming to a "bullish" or "bearish" conclusion. We need to be careful about assigning sentiment to contributors inaccurately.
I'd be interested to hear more thoughts on this issue.
Seeking Alpha as a Predictor of Stock Movements and Earnings Surprises [View article]
Unlike many stock picking services, our goal at Seeking Alpha hasn't been to push stock picks at our users, but to present our readers with a variety of opinions about stocks, ETFs and the overall market, and let them make up their own minds. Sometimes, even a lousy stock picker can write something amazingly valuable that helps you to reach a better conclusion. Or a single comment on an article (we have over 40,000 comments per month) can change your perspective for the better.
Because of that, we've never tried to measure the accuracy of articles on SA (which you have done using sentiment analysis). So your work comes as a pleasant surprise.
The Seeking Alpha team will be excited to see this. But even more so, this is a huge affirmation for our contributors.
Just One Stock: Heavy Upside From a Leveraged Play on Rising Silver Prices [View article]
Microsoft, Don't Buy Back Shares - Here's Something Else [View article]
1. Management might be wrong that the stock is undervalued. Maybe MSFT's low stock price and multiple compression accurately predict lower future profitability. (That's what the market is telling you, right?) In which case, buying back stock in an attempt to raise future EPS may be an inefficient allocation of capital which would reward short term shareholders at the expense of long term shareholders. In contrast, raising the dividend payout ratio as the author suggests in this article would reward longer term holders. Leave it to the market to decide whether the increased dividend yield justifies a higher stock price.
2. Buying back stock rewards option holders who have no interest in being long term owners of the stock, whereas raising the dividend rewards owners and penalizes option holders. As such, stock buybacks have historically facilitated excessive options grants. Managements often claim that options align employees' interests with shareholders', but that's often not true. By paying a dividend, MSFT management and employees with options would want to exercise their options and hold the stock so they earn the dividends. But only, of course, if they believed in the company and its stock...
Think Your Dividend Yield Is High? A Warning for Income Investors [View article]
But isn't that exactly Jason's point? If you believe Jason is right that stock prices will be significantly lower a year or two from now, then why wouldn't you sell your stocks now and buy back the same dollar value when prices are lower? You'd sacrifice 3-8% in income while you waited, but you'd then be buying stocks at much higher yields, and you'd be set for the next 30 years.
But you then write: "That's a key concept: If you are investing for maximum total income at some future date, you will not often sell the instrument--the stock--that grants you the rights to receive that income. Why would you? So price variations don't matter very much, and therefore risk to price doesn't bother you very much."
However, the price variations do matter, because if they are really large, then you'd want to get out of the market now and get back in when prices are lower and dividend yields are higher.
As I said in my earlier comment, I don't buy the Elliot Wave analysis, and I have no idea whether, in reality, stocks will fall as much as Jason is predicting.
But he does make a point worth considering. Many people think that stock prices can't fall much because that would imply dividend yields of 7-15%. But he's saying that they *can* fall that much, and it's not unthinkable for yields to go back to long run historical norms.
Again, I'm not sure I agree with him, but it's not "punditry" or "fuzzy thinking".
Don't Let Talk of a Bubble Scare You Out of Bonds [View article]
If you're concerned about the dollar, you can hedge your currency exposure in other ways.
Don't Watch CNBC [View article]
On Mar 13 10:57 AM Speedspirit wrote:
> I believe to become an intelligent investor or speculator one must
> know what ideas are influencing the crowd. It doesnt mean that one
> has to agree with anything being said on CNBC or Fox but if the masses
> are being influenced in one direction then a well informed member
> of say seeking alpha will trade in a diffrent direction.Thats how
> it works, no.
These Five Economic Barometer Stocks Are Pointing to a Higher Market [View article]
Alcoa: seekingalpha.com/artic...
Pepsico: seekingalpha.com/artic...
CSX: seekingalpha.com/artic...
Intel: seekingalpha.com/artic...
JP Morgan Chase: seekingalpha.com/artic...
You can find transcripts on quote pages, eg. (AAPL).
Think Your Dividend Yield Is High? A Warning for Income Investors [View article]
Microsoft's Strategy: Borrow Cheap Money, Raise Dividend [View article]
Wall Street Breakfast: Must-Know News [View article]
Given the size of IBM, this probably indicates that the tech sector is less strong than the recent results from INTC and ORCL suggested. Given the weakness in the stocks of other tech leaders (eg. GOOG), it makes me more cautious about tech overall.
Note also that IBM will have a meaningful impact on the Dow today: seekingalpha.com/news/...
Why Germany's Economic Fortress Could Come Toppling Down [View article]
Why I Love Dividends [View article]
I only saw your comment now, and didn't realize that we'd had any problems with the comments system. We did make a recent change a few days ago: we finally managed to show large numbers of comments beneath the article without crashing Internet Explorer. Perhaps the problem with your comment was related to that change.
If you see any problems in future, please send me a direct message and let me know.
The good news is that all comments now display beneath the article, without having to click to a new page to see comments.
- David
How Yield on Cost Works [View article]
To give an analogy: Imagine an aristocratic family purchased an estate in 1700 for $400, a massive sum at the time. Generations later, the heirs rent out the estate for $40,000 per year, and want to assess the profitability of purchasing estates for future generations.
The yield on (nominal) cost -- 1000x the original price! -- would tell them little about the success of the investment, because $400 was a princely sum at the time, but is a tiny sum for a real estate purchase today.
But in inflation adjusted terms, that $400 might now be equivalent to $4 million (I'm making up the numbers; please excuse my ignorance about inflation data). In which case, the yield on real cost is 10% ($40,000 / $4,000,000).
Your use of nominal yield on nominal cost highlights the advantage of real assets (companies, real estate etc) which generate income over nominal bonds (ie. not inflation-adjusted bonds). With bonds, you get the principle back in *nominal* terms, and it isn't adjusted for inflation. In contrast, stocks are shares in a company, which is a real asset and should grow in line with inflation (because companies raise prices in line with inflation). So in prolonged periods of high inflation, you'd rather own dividend stocks than nominal bonds.
But by using nominal money and not adjusting for the holding period, it doesn't help you assess your true investment performance, because the time period and inflation rate is a critical factor. Your yield on cost on a stock bought in 1969 will be phenomenal compared to that of a stock bought in 1990. But if you adjust for inflation, you might find the numbers are very different.
On Byron Wien's Ten Surprises for 2010 [View article]
An anecdote about Byron Wein that you might enjoy:
In 1999, there was a meeting inside Morgan Stanley between the research analysts covering technology (I covered communications equipment) and Byron Wein, who was then Morgan Stanley's strategist.
We tech analysts were universally bullish on our stocks. Almost every company was seeing demand outpace their ability to supply. Pricing was rising. And every quarter was "beat and raise", with the stocks jumping after results and guidance were issued.
Byron pointed out that valuations were nuts. In particular, I recall him saying that the revenue growth rate required to justify Cisco's stock price implied that Cisco alone would account for a large percentage of US GDP 5-10 years out. And that was ridiculous.
The reaction of the analysts was bemused - we knew our sectors better than he did, and hey, there was real momemtum behind the stocks.
Cisco was one of the most touted stocks for the decade in 2000. But during the ensuing 10 years, Cisco massively underperformed the S&P 500.
It's that kind of courageous and intellectually powerful call that has given me enduring admiration for Byron.
Seeking Alpha: Interesting Sentiment Indicator [View article]
We've recently been discussing the embedded value in contributors' articles, and how we could share that information in a more thorough way.
The first issue is: What is the value of SA contributors' sentiment? There are two possibilities:
(1) Like other sentiment indicators such as Barron's money managers' poll, it's a contrarian indicator (if most writers are bearish, there's still money sitting on the side lines).
(2) Our contributor base represents a small minority of money managers with greater ability to predict correctly -- in which case the sentiment is an accurate (not inverse) indicator.
Jeanne Klempner, one of our editors, makes a good point: once we've extracted the sentiment data, just test it for correlation against the market, and we'll find out whether it's valuable and in what direction.
The second issue is assessing the sentiment of an article. Some articles are explicitly bullish or bearish, but many articles aren't: they discuss individual stocks or some aspect of a company or the market, without coming to a "bullish" or "bearish" conclusion. We need to be careful about assigning sentiment to contributors inaccurately.
I'd be interested to hear more thoughts on this issue.