May

23

Victor1) With a good heart I mention, regardless of whether one was long or short, but from the standpoint of the dispassionate observer, the Osbornian man from Mars, or the O'Brianesque or Ferberesque all-seeing eye, it was beautiful the way this holiday week ended. Completely the opposite of the Easter holiday as is natural, and with total fright of a repeat of the French Bank inside trades on Washington's birthday. The memory of the terrible beginning of the year, and predictions of the Palindrome and Sornette, and the weekly old timer, and what happened in the last June to July comes to mind. Who could have the courage over the weekend except those who trade all markets without commissions and make money 95% of all days by marketmaking to the public, and enjoying borrowing costs of less than 2.5%. It's a perfect recap of the year, and a warning that only the strong could possibly withstand giving the public a chance to lose so much more than they have any right to lose. And today's action was so similar to the meaningless Employment number of January 3. With a rise by a gnat's earlash preceded by a run of two grand terribles. Everything is designed to deceive, and prevent the weak among the public from capturing the full differential of 6% earnings return plus 6% growth, compared to 3% on Treasuries. There were so many beautiful touches. The four down opens this week following five up opens last week. the down 50 this week in S&P after up 40 the previous week. the fake decline of the ten year below 115 and then back up to 116, a situation repeated endlessly over the last months, but each time with gusto and real sincerity. And the weak closes on Thursday and Friday followed by down down to surprise, discombobulate and ruin the vacation of all those who like to fade it.

2) The sight of a commercial space on the southeast corner of Fifty-third and First, long ago the Mayfair restaurant, not rented out for five years on the grounds that rents will go up and they should wait, reminds me of the builder who doesn't work overtime to get the rents, and those who buy the two year but not the 10 year, on the idea that rates could go up. But how much do they have to go up over the subsequent eight years to equal the total return of the 10 year, and, similarly, how much do the 10 years have to go up 10 years hence to equal the 30 year? It's terrible to see.

Alan Millhone adds:

The second part got me to thinking about collecting rent after hours. Years back a renter offered me their rent in cash and I did not have a receipt book at hand. Later I told my Father of this and he told me to never go anywhere without a receipt book in the car. People will pay you at odd hours and always be ready to accept payment! Goes with the territory of having rentals. Nowadays I always have a rent receipt book in my home, car, truck, warehouse office, and never miss the opportunity if presented to take rent when presented.

Phil McDonnell extends:

PhilWould you buy a business to earn 6% a year?

The long term growth in stock prices seems to be a fairly consistent 6% per year over the long term. Of course it can be quite variable in the short run. However this is only part of the story. The earnings of a company with a PE of 16 represent about 6% return per year. Part of this is is kept as retained earnings and thus is already a primary constituent of the growth in share prices. But part is distributed as dividends. Historically this has averaged about 3% per year.

As Dimson, Marsh and Staunton and the earlier Fisher Lorie study demonstrated about half of the return to investors came from dividend reinvestment and half from simple price appreciation. On the face of it the math does not seem to work out. 6% from growth and 3% from dividends seems to be only a third from dividends not half. But the real story is that the growing dividend stream and the very significant benefits of dollar cost averaging work out to half of the return.

Dollar cost averaging is simply the idea that if we have a steady income stream from dividends, salary or bonds then we buy more shares at the market lows and fewer at the highs. Thus our overall share cost is below the average price of the market. The Dollar cost averaging effect really is a very effective timing tool that works. The only thing requires is a source of income.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008


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4 Comments so far

  1. David Whitehouse on May 27, 2008 10:04 am

    I am interested in finding how much water daily goes up the trunk of one of our largest redwood trees. In scouting around the Internet I found numerous articles on redwood lore and your address among them. Perhaps you can enlighten me or recommend a technical source. Thanks for any help you can give me.

  2. vic niederhoffer on May 27, 2008 2:36 pm

    The book The Wild Trees I reviewed has a reasonable discussion and bibliography on the subject of water evaporation, lifting and transpiration. v

  3. Rocky on May 28, 2008 12:38 pm

    Taking your 2nd point literally, for an unleveraged investor with a six month holding period, right now the answer is a parallel yield curve shift of only 11 basis points. That is, if the 10-year yield rises from 3.99% to 4.11%, you will make a total return of 2.28% over 6 months. If the 2-year rises from 2.57 to 2.69%, you will likewise have a total return of 2.28%. Conversely, if the rates fall 11 basis points over the next six months, the 10-year will generate a return of 5.73% and the 2-year will generate a return of 2.88%. Lastly, and as a matter of arbitrage, the ten-year treasury is efficiently priced as a forward strip of 5 two-year treasuries. So unless you are bullish or bearish, the correct answer to your question is… is that a rational investor should be largely indifferent.

  4. vic niederhoffer on June 4, 2008 10:19 pm

    I would ask Mr. Rocky whether he agrees with my point that whenever the Commissioners or the Chairman makes a comment about how vigilant they are about tightening and the market goes down, that this is the time that the frictional upkeep is contributed by the public in the fixed income at the maximum expectancy per day. vic

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