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Ten Thousand Words - August 2019

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

Aussie tech stocks are approaching dot.com pricing according to Schroders, while at the same time Argentina's sharemarket this week experienced the second biggest one-day plunge since 1950 (out of 94 stock exchange indices tracked by Bloomberg). Volatility has ramped up in mainstream Aussie and US equities and Evans & Partners have chimed in to remind us that corrections are normal with an average intra-year drop of 13.9% for the S&P/ASX 200. Meanwhile, Goldman Sachs explores the new world where negative interest rates are normal. JP Morgan then looks at what has happened to equities in markets where bond yields fall below 1%.

 …

Ten Thousand Words - July 2019

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

The focus this month is on the impact of low yields on the equity market - the spread between Australian government bond yields and ASX dividend yields has only expanded despite the large cap equity rally, as Evans & Partners shows; leading large cap yield plays up to their highest valuations, as measured by P/E, since the GFC, as illustrated by Equitable Investors; and despite a long history of  lower PE stocks outperforming, the market perception at the moment is that "value" is out of vogue, according to the Bank of America Merrill Lynch survey.

Equitable Investors is exploring these themes further in its June quarterly up…

Ten Thousand Words - June 2019

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

Bond yields are in focus as the RBA cuts rates and speculation that the Federal Reserve will do the same increases. We get a look at the German 10-year bond and how its decline into negative yield mirrors the same event in 2016; a convergence between the US 10-year bond yield and the market's dividend yield; while Deutsche Bank says half the US market is choosing index funds now and Goldman Sachs' number crunchers show Australia's "growth" stocks are the world's most expensive. We like the chart from AKRO investiční společnost showing how banks have improved their capital position since the financial crisis; and fi…

Forget EPS accretion and focus on value!

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We happened upon a copy of Credit Suisse's "To Buy or Not To Buy" - 26 pages on M&A - a couple of years after it was published (Feb 2017) but found it compelling - particularly in relation to EPS accretion.
Three quarters of investor relations professionals surveyed by AT Kearney said stakeholders place a “strong emphasis” EPS accretion or dilution - and that EPS accretion or dilution was deemed to be, by far, the most important metric.Most announced M&A deals today are accretive to the EPS of the buying company.But EPS accretion or dilution actually provides little or no insight because value creation is based on cash flows rather than accounting measures - and the cost of capital rather than the funding source. Credit Suisse took a sample of 95 of the M&A deals, categorised them based on whether the company said it would be immediately accretive or dilutive to EPS, then reviewed the one-day abnormal return for the buyer on the day of the announcement . 
The …

Through the micro cap looking glass

We published "Through the micro cap looking glass" on livewiremarkets.com last week and have received fantastic feedback from a range of industry participants.


If you are going to venture into micro cap stocks, you need to be wide awake to the fact that there are two alternate universes for the one market segment.

There is the conventional world where investors buy and sell interests in businesses that are striving to create value for their shareholders, some with greater success than others. Some of them are supported by institutional investors and reputable brokers, many are not.

But on the other side of the looking glass is an intriguing alternate universe where everything looks familiar yet, on closer, inspection, left is right and up is down...

You can read the full article here.

(and you can learn more about Equitable Investors at www.equitableinvestors.com.au).

Ten Thousand Words - May 2019

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

This weekend Australia votes to decide who will govern the nation and the two weeks following an election are typically buoyant for shares according to CommSec; staying with Australian equities we show micro cap EV/Revenue multiples in the context of revenue growth; over in the US we can see that: (a) the typical intra-year decline is 13.9% on JP Morgan's numbers; and that (b) even "God" would suffer significant draw-downs according to Apha Architect. Finally, we take a brief look courtesy of Racontuer at the chasm in capability between 5G and 4G mobile networks.

What happens to Australian shares when there is a federal electio…

If a company has a low price to book ratio, does this mean its stock is undervalued?

Ten Thousand Words - April 2019

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

In the wake of the Lyft IPO, VC investor Josh Wolfe shows us that 63 companies were valued over $1 billion at IPO in the US, 50% were profitable in the year before IPO; Crescat Capital highlights record flows into a key US equities ETF and Blue Mountain Capital Management shows us why this may be a negative signal - investors expect high returns after realizing high returns (and expect low returns after realizing low returns) but reality runs counter to those expectations; meanwhile Robeco's Jeroen Blokland highlights that investors continue to pour money into negative yield debt (to be clear, that means they are paying the borrower); t…

Ten Thousand Words - March 2019

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

Funeral parlour operator Invocare found Australia's death rate was unusually low in calendar 2018 but actuaries report life expectancy for a 65 year old is in decline in the UK; the rise of the machines as recognisers of imagery; Mohamed A. El-Erian highlights the negative yield boom; a pizza chain outperforms Google; and Equitable Investors' FIT Index series shows the smallest companies struggling to keep up over the past month.


Australian death volumes dip


Source: Invocare


UK data shows life expectancy at 65 is falling


Source: WSJ.com, Institute and Faculty of Actuaries


Artifical Intelligence: neural networks are delivering human-level…

The probability of a stock going up or down

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"What is the probability of a stock's price going up vs going down at any given time?"

The answer depends on how you are looking at this:

(i) if you are looking purely at the very next second with no additional information, there are three ways the stock could go: up, down or flat (no change).

(ii) if you are looking at buying a stock at any given point in time but then holding it for a period of time, historical data starts to indicate that the odds favour up over down.

A while back I ran some stats on my domestic equities market (Australia). I found that 64% of industrial stocks (a broad category that excludes resources plays but includes most other sectors including tech and financials, achieved a positive return in the five years to May 20, 2018. The chart below sets out the distribution of returns.

But that is just one time period in time. Using US data, alpha architect ran a more detailed study that you can read here.

If you look at market returns rather than indiv…

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