Monthly Archives: April 2013

Why Have Luxury Stocks Perfomed So Well The Last Few Years?

Luxury stocks have shown some very stunning results over the last few years. Making new all-time highs the past few months. Which is, of course, very surprising because we are supposedly in a modern day depression with high unemployment and high defecits. You would expect luxury brands to perform very poorly. But the opposite seems true.

I’m going to first show you some charts of luxury stocks and then give you a possible explanation for this.

Compagnie Finaciere Richemont SA. Key brands: Cartier, Montblanc, Chloe, IWC, Piaget, Vacheron Constantin, Baume & Mercier and Lancel.

Compagnie Financiere Richemont SA stock price

LVMH Moët Hennessy Louis Vuitton. Key brands: Louis Vuitton, Marc Jacobs, Guerlain, Givenchy, Moet & Chandon and Hennessy.

LVMH stock price

Burberry Group PLC. Key brand: Burberry.

Burberry Stock Price

Why have luxury stocks performed so well? I tend to think we should look at the buyers of luxury stuff. The top 10% of wage earners and people with a high net worth.

This is an interesting article about income and wealth distribution in America of which I will use a few tables here.

The table below shows the distribution of income and wealth in the US between the different percentiles of the population.

income and wealth distribution

This table shows how the income is divided:

Income distribution in the United States

From the article: “In terms of types of financial wealth, the top one percent of households have 35% of all privately held stock, 64.4% of financial securities, and 62.4% of business equity. The top ten percent have 81% to 94% of stocks, bonds, trust funds, and business equity, and almost 80% of non-home real estate.” This is shown in this table:

Stocks owned by top percent

So we can conclude that the richest 10% of the country own almost all stocks (81%), while the middle and lower class are more dependable on their principal home (60%) for their net worth. While of course a large portion of American society has no or even a negative net worth.

If we now look at how stocks, houses and wages have performed since the 2009 bottom we can see why luxury stocks are doing so well.

The S&P 500, makeing a new all-time high as I write this. Don’t forget dividends:

S&p 500 chart 5 year

House prices in the US (Case-Shiller index):

House prices us Calculated Risk

Wages in the US. Percent change from previous year. You can easily spot that on average wages have grown very slow in the last few years. Barely keeping up with inflation.

Wages US percent change from year ago

The rich 10% of America have profited the most the last few years because stock prices went up while housing and wages remained low. This in turn has resulted in higher stock prices for luxury brands.

Capitalization Weighted vs. Equally Weighted Portfolio’s

I came across an interesting article in the Journal of Asset Management today where a comparison is made between a capitalization weighted (CW) portfolio and an equally weighted (EW) portfolio. In a CW index stocks are weighted for their market capitalization and in an EW index every stock is equally weighted. Most mutual funds use the CW approach for their investment portfolios.

“Figure 1 displays the performance of the DJEURO and the equivalent EW portfolio over the observation period. The cumulative return of the EW portfolio was 38.42 per cent compared with -4.70 per cent of the DJEURO, with a difference equal to 43.12 per cent”

Equally weighted and capitalized weighted dj euro stoxx

“Figure 2 shows the performance of the DJEURO50 index and its EW version. In this case, the cumulative returns of the EW portfolio and of the DJEURO50 index were 11.60 per cent and -16.63 per cent, respectively, showing a difference equal to 28.23 per cent.”

equally weighted and capitalization weighted dj euro stoxx 50

The reason the EW portfolio does better than the CW portfolio is because of the automatically rebalancing every quarter. The EW portfolio follows a contrarian view in that it sells overvalued stocks each quarter to rebalance the portfolio. The EW portfolio is also more diversified because it has a larger share of mid- and small cap stocks in its portfolio unlike a CW portfolio which exists for a large part out of large cap stocks.

Berkshire Hathaway’s Performance Is Stunning

Between 1964 and 2012 Warren Buffett has generated a return of 586,817%. That is an annual growth rate of 19.7%.

Below is a chart of the performance of Warren Buffet’s investment vehicle Berkshire Hathaway in the last 20 years.

return berkshire hathaway warren buffet till now

It’s pretty interesting to see how fast Buffet recoverd from the “Dot-com bust“. He wasn’t loaded up on a lot of internet companies. After the crash he even said “I told ya so” to analysts and other investors who had criticized him for not “investing” in some of the dotcom stocks.

It took him almost 4 years to recover from the 2008-09 crash. But he still has beaten the S&P since then. Truly one of the best investors ever.

Bond Yields For All Eurozone Countries Were The Same Before The Lehman Bankruptcy

This is an interesting chart showing that all countries that adopted the Euro in 1999 paid the same interest rate on their bonds after 1999, the year the Euro was introduced. The spread between the different countries returned again after the Lehman Brothers bankruptcy in 2008.

eurozone countries yield long term difference

At the same time many of these countries had a high government debt-to-GDP ratio at that time. A risk that wasn’t priced in the interest rate. I can’t find a graph of these government debt-to-GDP ratio’s in 1999 sadly but this was the result at the end of the second quarter of 2012.

debt to gdp eurozone graphic

The miss pricing of the interest rate on bonds for some European countries by the capital markets is one of the causes of the Euro crisis where we are in today.

On Average Most Companies Beat Earnings And Revenue Estimates

Earnings for Q1 2013 are coming this month. Should you be surprised when a company beats its earnings estimates? No says Bespoke Investment Group. They posted an article a while ago showing that most companies beat the earnings and revenue estimates made by analysts.

Earnings:

average earnings beat quarter estimates

And Revenues:

average revenues estimates beat quarter

As most stocks have a short ‘pop’ after an earnings and revenue beat you could of course use this information to make a little speculative bet by going long a few stocks on the day that they will be reporting earnings.

Although, of course, results from the past provide no guarantee for the future.

The 7 Year Dollar Cycle

A few years ago I came across an interesting article about a seven year dollar cycle. The point of the article is that on average every seven year a ‘top’ or a ‘bottom’ forms in the US dollar index.

US dollar seven 7 year cycle

You can easily see the cycle in this chart of the US dollar index (source):

Us dollar index long term

Since 2008 the US dollar index has been slowely drifting higher from 70.36 to 83.09 today.

us dollar index stockcharts 3 years

Last time everybody thought the dollar was going to collapse people considerd the euro to be of safe haven status. Oh how the tables have turned. Now a lot of people are very negative about the euro. I’m now waiting for books to come out that claim the ‘end of the euro’ or ‘the demise of the eurozone’ just like what happend when the dollar was falling.

Back when the dollar was about to ‘collapse’:
Super model Gisele Bundchen wanted to be paid in Euro’s instead of dollars. Article
Jay-Z flashed euro’s instead of the usual dollars in one of his video clips. Youtube
And a general in James Bond’s movie Quantum Of Solace (2008) proclaimed that: “Dollars are not worth that much anymore these days” while being handed a suitcase of euro’s.

Behavioral economics at it’s finest.

Where Will Interest Rates Go In The Next Few Years?

I love long term charts. I think they are a great refreshment from all the short term thinking that is going on in the financial world on a daily basis. Those long term charts really show you some perspective.

Most of the time that we are shown the US 30 year treasury bond yield’s people will come up with this chart:

30 year us treasury bond yield st louis fed

Judging from this chart rates are exceptionaly low now. Some would say that bonds at these level are a bubble and that they will have to crash soon.

But then there also is this chart.

This is a long term chart, covering 222 years, of the interest rate on US 30 year treasury’s: (Source Ritholtz)

ritholtz long term us treasy bond yields 30 year 222 years

Here is one for the treasury’s for the Dutch State. Again a very long term chart. (Source in Dutch)

lange termijn rente nederlandse staats obligaties bonds 500 jaar

These charts really shows how exceptionally a 30 year bond yield of 6% actually is. Most of the time in the last 100 years bond yields were under 5%.

Will interest rates really shoot up to 6% maybe 7% soon? That’s an event that is highly unlikely in the low-growth, paying-down-debt environment we are in now. People are not spending and borrowing enough. Rates will go up when inflation(-expectations) go up or when there is fear amongst investors that a government will not pay down its debt.

Examples of this can be found in the 70’s when inflation was really high and bond yields went up to keep up with that inflation. Nowadays inflation is very low.

long term inflation dshort cpi

The only countries that pay a high yield on their bonds right now are countries of whom investors are afraid that they may default (partially) on their debt in the future. The higher yield is simply a risk premium.

My take is that interest rates will remain low the coming years. Probably stay between 2% and 4% on the 30 year bond.

I’ll leave you with Japan’s bond yield. Which has been below 2% for more than 15 years. I talked about Japan´s Huge Debt in another post found here. In Japan there has been almost no inflation the last two decades and there hasn’t been any fear that the government can’t pay down its debt. So far.

japan government bond yield long term