Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
In pro baseball, most hitters will tell you they usually don't want to know whether a teammate thinks he's stolen the catcher's sign for the next pitch. Not only is there a risk that the filched signal is wrong, but the input adds complexity to an already daunting task. Hitters may make an educated guess on what pitch might come, but their main job is to attempt a disciplined reaction, spoiling or avoiding great pitches, and pouncing on mistakes.
Professional investors typically adopt the same stance. They don't try to predict tomorrow's headlines or the short-term market reaction, but instead try to sell their clients and boards of directors on the idea that, over a long season, their discipline will nudge their averages at least a bit above the league benchmark.
This year, however, many of these players could be forgiven for looking for those stolen market clues, with so few of them seeing the ball well and so much inscrutable day-to-day action penalizing caution and then boldness, whipsawing most everyone. The S&P 500 finished last week virtually flat for 2011 (down 1%, to be exact), yet along the way provided ample opportunity to get it wrong, rising in a gentle climb by 9% at its springtime peak, then dropping nearly 20% in a few months, followed by one of the best monthly rallies in market history.
ONLY 23% OF STOCK-FUND MANAGERS were ahead of the S&P this year through Nov. 30, according to Bank of America Merrill Lynch. This period ended with Wednesday's 4% surge, on the latest coordinated effort by central banks to flush cheap dollars into the banking system while Europe argues over more consequential measures.
That day nicely distilled the 2011 market: dominated by global monetary conditions and "policy responses," all producing a market move that virtually no one caught. Had some helpful spy noted at the crack of dawn Wednesday that half a dozen central banks would be expanding dollar-swap lines to increase liquidity in the system, how would the average fund manager have exploited this?
The S&P that morning opened immediately higher by about 4%, by which time almost no trading business had been done, and then the index just sat there all day, as the trading computers argued among themselves over fractions of an index point until the close.
This will, and should, give comfort to those owning such "quality proxies" as the Vanguard Dividend Appreciation exchange-traded fund (ticker: VIG), which has nicely stayed ahead of the indexes this year.
But has this market not taught us the old baseball rule, that no team is as good as it appears during a winning streak, and none as bad as it looks while on a skid?
THE "RISK ON/RISK OFF" DYNAMIC in markets has been predominant the past few years, with macro cues and policy whisperings dictating a herd-like rush either toward or away from riskier assets. Ned Davis Research this year devised an index to gauge this effect as a market-handicapping tool.
Yet there wasn't any easy way to play this concept until last week, with the advent of the ETRACS Fisher-Gartman Risk On (ONN) and ETRACS Fisher-Gartman Risk Off (OFF) exchange-traded notes. They aren't based on the Ned Davis index, but they address the same issue that it does.
So add "risk appetite" to the list, joining "volatility," of things transformed into wannabe asset classes that were formerly mere inputs or statistical byproducts of investing. There are more than 30 exchange-traded funds tracking volatility in one way or another.
It's tempting to view this trend as a mark of an imminent peak in the whole risk on/off day-trading mode. Yet these things are effective, so long as one's purpose is the tactical trading of market nervousness as a short-term hedge, or if you believe you can price and predict such movements better than the guy who's been trading "gamma" and "skew" for a decade. (If you have to ask, this rules you out.)
Yet such instruments are beside the point for too many nonprofessional investors who surrender their one real advantage over the pros: The luxury of having a longer-term investment horizon, with no need to manage toward monthly relative performance.
The opposite of the latest run of volatility-surfing products could be the more quietly launched MSCI USA Minimum Volatility Index exchange-traded fund (USMV), made up of large-cap stocks screened for extremely low volatility attributes. This should offer market exposure plus a buffer, without too much forgone upside even in strong markets.
CORPORATE BUYBACKS ARE RUNNING at the highest level since late 2007. Many companies effectively are taking themselves private.
Nearly complete data for the third quarter show that buybacks involving companies in the S&P 500 totaled $132 billion, up from $80 billion in 2010's third quarter, $109 billion in this year's second quarter and the highest level since the $142 billion in 2007's fourth quarter, according to Howard Silverblatt, Standard & Poor's senior index analyst.
Small companies also are getting into the act with a record 39% of those in the Russell 2000 repurchasing stock in the third quarter, reports JPMorgan Chase small-cap strategist Bhupinder Singh. The figure for the S&P 500 is around 70%. Small companies are buying back stock at an annual rate of 3.6% of their combined market value, while S&P 500 companies are repurchasing stock at a 5% rate. The S&P's "total yield"—dividends plus buybacks—exceeds 7%.
In the 12 months through September, Hewlett-Packard was the only S&P 500 company that ranked in the top 10 in both the amount spent on stock repurchases and the value of those shares as a percentage of its recent stock-market value.
The accompanying table shows S&P 500 members that bought back the most stock in the past four quarters and those that repurchased the largest percentage of their outstanding shares.
ExxonMobil (XOM) tops the list with $22 billion as it continues a steady program that has retired $80 billion of stock in the past 10 years and shrunk its share count to under five billion from seven billion. Some investors want Exxon to pay a bigger dividend, comparable to those of its Big Oil peers, and buy back less stock—the dividend yield is 2.3%—but management isn't budging.
International Business Machines' large and regular buyback program is a hallmark of CEO Sam Palmisano, and is a key reason for the strength of its shares (IBM) and Warren Buffett's interest in the company; Berkshire Hathaway (BRKA) now has a more than a $10 billion stake in Big Blue.
Amgen (AMGN) is executing a one-shot $5 billion repurchase this month via a tender offer financed by a similarly sized debt issue that should vault it into the top 10 for the year, at around $8 billion.
Conspicuously absent from the list is Apple (AAPL), which hasn't bought back stock despite carrying more than $80 billion in cash. Analysts say Apple may implement a program next year. Steve Jobs, who died in October, wasn't keen on buybacks.
It's important to focus on the sustainability of buybacks and whether managements are overpaying. Exxon, IBM, Microsoft (MSFT), Intel (INTC) and Coca-Cola (KO) likely can continue their buybacks at around current rates. Yet Hewlett-Packard's program is being scaled back after $21 billion in repurchases over its past two fiscal years at an average of $42 a share—the stock is now $28. With its net debt up sharply and profits under pressure–a combination that prompted a rating downgrade by S&P last week—the company (HPQ) now plans a "disciplined" approach to capital management.
JPMorgan Chase (JPM) and Goldman Sachs (GS) were too aggressive this year with buybacks. JPMorgan effectively exhausted its 2011 program by buying $8 billion of stock through the third quarter, at an average price of $38. Now, it can't take advantage of its currently low share price, around $31. It will have to wait until the first quarter for Fed approval for a new program. As for Goldman, it bought back $5.1 billion at an average price of $135 in the year's first nine months, way above its current price of $95.
Among the top percentage spenders, Gap (GPS), Kohl's (KSS) and DirecTV (DTV) stand out, with large and steady repurchases. Best of all, the programs look sustainable, even if not at current levels. And sustainability is critical for investors who factor in this criterion when selecting stocks.
E-mail: michael.santoli@barrons.com, andrew.bary@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
The beleaguered BlackBerry maker could draw a bid but its fundamentals continue to falter.
Stronger pricing and longer rentals bode well for the industry.
The maker of signal-processing chips will benefit from order stabilization.
Credit Suisse's top sector picks are KLA-Tencor and Teradyne.
The restaurant chain will get a boost from international licenses.
In the aftermath of the launch of generic Lipitor, rivals Watson Pharmaceuticals and Pfizer could generate healthy returns for investors.
With Disney boosting its annual dividend by 50%, the "risk-reward is as attractive as at any point in the past twenty years."
The company has relatively less U.S. Enterprise backlog than rivals.
The money-transfer firm's stock could hit $22 within 12 months.
Credit Suisse says the sector expects orders and shipment strength.
Read Full Article »