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Waffles and Investing
The Hampton Inns hotel chain recently added personal waffle makers to its breakfast buffets in 1,800 hotels, and this provides Rocky with a new research project. See story here: http://news.travel.aol.com/2010/06/17/hampton-inn-officially-adds-waffles/
Behavior Finance is already a ”hot” topic, and the spread of do-it-yourself waffle bars enables Rocky to introduce the world to “Culinary Finance” — an interdisciplinary endeavor that studies the duality of dough in one’s wallet and dough in one’s oven. Rocky made this connection while staying at a hotel chain whose room deodorizers emit a fragrance not-found in the natural world.
[For submission to the Journal of Finance]
ABSTRACT- This paper studies the relationship between self-made waffle success and self-made financial success based on three random visits to a Hamptons Inn Hotel Chain Complimentary Breakfast Buffet during July, 2010. We demonstrate that waffle results predict investment results with statistical significance. Previous research demonstrated that a “Watched Pot Never Boils” (M. Mother (1920), however, this is the first paper to extend those results to a “watched waffle iron.”
We identify several classes of waffle failure: (1) Early exit resulting in an undercooked waffle; (2) Late exit — resulting in a burned waffle; (3) Systemic Waffle Iron failure/stickiness. We demonstrate that these three conditions also arise in investing (early exit/late exit/no exit); and may be a metaphor for Goldilocks and the Three Bears.
The paper observes that the most successful waffle users (1) read the directions before pouring batter; (2) stay at the machine’s side for all of the 2 minute and 30 second cooking period; (3) are not distracted by impatient spouses. Men wearing short pants had the highest success rate. Women carrying Fendi purses and wearing tight white pants had the lowest success rate.
[Disclosures: The results are preliminary and have not been independently verified. Because the waffle iron "beeps" annoyingly after the cooking is finished, Rocky excluded deaf people from the study. There is no relation between Warren Buffet and Breakfast Buffet.]
Balloons and bonds
Rocky observes that when he pinches a balloon on one end, it expands on the other end. This simple revelation has implications for his friends who continue to buy corporate bonds at ever lower yields, while ignoring the effects that it has on the stock prices of the same companies.
Bill Miller writes in his latest commentary, “US large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was 1 year old then, but did not have then sufficient sentience or capital to invest.”
See: http://www.leggmason.com/individualinvestors/documents/economic_perspectives/D9368-Bill_Miller_Commentary.pdf
Rocky doesn’t remember 1951, so he ran some tests on Dow Jones Industrial Average stocks and bonds to test Mr. Miller’s hypothesis, and found that the conclusions are impressive — even if one makes the improbable assumption that there is ZERO real earnings growth over the next ten years.
(During the 2008/2009 financial crisis, corporate bonds were getting hammered too, so one could not have done this analysis in 2008. Also, so long as the US population continues to grow, it’s extremely difficult to have zero economic growth, so this is a very conservative assumption.)
Rocky’s choice : (1) Buy an equal-weighted basket of the 10-year debt of “quality” companies or (2) Buy an equal-weighted basket of the stocks of the same companies. Buy and hold for ten years.
Analysis of choice #1 (bonds):
The average return is 3.9%. This is the best case and assumes no defaults, leveraged buyouts, or other credit events.
Analysis of choice #2 (stocks):
The current average dividend yield is 2.9% per year on the stocks.
The current average earnings yield is 6.3%.
So if one owns this stock basket and there is no earnings growth and no dividend growth, and the economy is Japanese-like, with intermittent recessions and growth, the return is 2.9% + 6.3% = 9.2% per year for the next ten years. (Which is remarkably close to the long-term average return for stocks.) Here Rocky assumes no bankruptcies and assumes a terminal p/e which is unchanged. But it also ignores the possibility that the economy could do much much better (or much worse).
Some might quarrel that Rocky is double counting … when he includes the dividends. So he says, “ok, let’s forget about the dividends.” Then, the stock basket’s earnings yield is 6.3% and the bond basket yield is still 3.9%, so it’s a pickup of 240 basis points per year for the risk/reward of owning stocks. Or, put another way, over a 10 year period, 10 x 2.4 = 24% … which means that the earnings yield could decline by more than 20% over the next decade and Rocky would still be better off in the stock market than in the bonds of the same companies.
None of this is making Rocky rush out to buy oodles of stocks tomorrow morning — because it’s certainly possible that stocks AND bonds may decline over the next ten years. However, for an investor in corporate bonds, this is an important result — particularly since in a SEVERE deflation or economic crisis, corporate bonds can get hurt badly. Note that Rocky did not include government bonds in this analysis — only corporate bonds.
Lastly, if stocks keep declining and corporate bonds keep rising, the relative values will become more attractive, however, at some point, corporations will issue new debt and use their cash to repurchase shares … and that’s what will keep the relationship between corporate bonds and stocks in line. Perhaps not at these relative valuations … but at some point.
Column1 = stock ticker
Column2 = dividend yield
Column3 = earnings yield. That is, earnings/price for the trailing 12 months.
Column4 = that company’s yield-to-maturity on its 10year corp bullet bond.
Column5 = earnings yield minus bond yield.
[There is a bit of fudging because Intel has no debt, so Rocky arbitrarily gave it a 3.2%. And he extrapolated some companies who had debt maturing in 8 years or 12 years.]
Data source: Bloomberg
| Dividend | Earnings | 10 Yr Corp | Earnings YLD | ||
| Yield | Yield | Yield | minus 10 Yr Bond Yld | ||
| AA UN Equity | 1.1 | -5.6 | 5.7 | -11.3 | |
| AXP UN Equity | 1.7 | 3.7 | 4.5 | -0.9 | |
| BA UN Equity | 2.7 | 3.5 | 3.3 | 0.2 | |
| BAC UN Equity | 0.3 | 2.5 | 5.8 | -3.3 | |
| CAT UN Equity | 2.6 | 3.8 | 3.9 | -0.1 | |
| CSCO UW Equity | 0.0 | 5.6 | 3.6 | 2.0 | |
| CVX UN Equity | 4.0 | 7.4 | 4.5 | 2.9 | |
| DD UN Equity | 4.5 | 6.0 | 3.6 | 2.4 | |
| DIS UN Equity | 1.1 | 6.7 | 3.2 | 3.5 | |
| GE UN Equity | 2.7 | 8.2 | 4.9 | 3.3 | |
| HD UN Equity | 3.4 | 5.9 | 3.2 | 2.7 | |
| HPQ UN Equity | 0.7 | 8.1 | 3.2 | 4.9 | |
| IBM UN Equity | 2.1 | 7.6 | 4.0 | 3.7 | |
| INTC UW Equity | 3.0 | 6.0 | 3.2 | 2.8 | |
| JNJ UN Equity | 3.8 | 7.2 | 3.7 | 3.5 | |
| JPM UN Equity | 0.5 | 6.5 | 5.1 | 1.4 | |
| KFT UN Equity | 4.0 | 7.5 | 4.3 | 3.2 | |
| KO UN Equity | 3.3 | 5.4 | 3.3 | 2.1 | |
| MCD UN Equity | 3.1 | 6.4 | 4.2 | 2.2 | |
| MMM UN Equity | 2.6 | 5.7 | 3.2 | 2.4 | |
| MRK UN Equity | 4.3 | 8.8 | 3.4 | 5.4 | |
| MSFT UW Equity | 2.1 | 7.3 | 3.0 | 4.3 | |
| PFE UN Equity | 5.0 | 11.1 | 3.1 | 8.0 | |
| PG UN Equity | 3.2 | 7.2 | 3.4 | 3.8 | |
| T UN Equity | 6.7 | 7.6 | 4.5 | 3.1 | |
| TRV UN Equity | 2.9 | 12.6 | 4.2 | 8.4 | |
| UTX UN Equity | 2.5 | 6.6 | 3.5 | 3.1 | |
| VZ UN Equity | 7.2 | 7.2 | 4.8 | 2.4 | |
| WMT UN Equity | 2.4 | 6.9 | 3.7 | 3.2 | |
| XOM UN Equity | 3.0 | 5.9 | 4.1 | 1.8 | |
| Equal Wgt Avg | 2.9 | 6.3 | 3.9 | 2.4 | |
[Disclosure: Rocky is not recommending that anyone do anything that involves money or bonds or stocks or shoelaces. But he's watching this relationship and has started to gradually move some of his "high quality" corporate bonds into the stocks of the same companies -- as the relationship becomes ever more attractive. He also notes that if you pinch a balloon TOO hard, it will burst. ]
Watch your step, Mr. Rocky!
After recent summer rain storms, Rocky’s feet were “cold and clammy.” Rocky’s hands are often cold and clammy — especially when his speculations lose money — but this was the first time that the symptom affected his feet.
As a fan of the TV series, House, and mindful that early diagnosis is critical to a successful outcome, Rocky visited the website, “WrongDiagnosis.Com” and diagnosed himself with all of:
While reading the prognosis and mentally preparing for his imminent demise, Trophy Wife leaned over Rocky and said, “I’m glad to see that your shoes match your head.”
Rocky replied, “Huh? What do you mean?”
“They both have holes in them,” said Trophy Wife.
Evidently a ten-penny nailed penetrated completely through the shoe’s sole and left a gaping hole. Instead of a medical mystery, the question became a physics problem: “Where’s the nail?” Only Adlai Stevenson knows the answer…and he ain’t telling…
[Disclosure: Rocky tried to cover the hole with Duct Tape, because every problem can be fixed with Duct Tape (including Apollo 13.) However, the Duct Tape was no match for Rocky's daily walk from his front door to his car door. Please also note that Alpine Syndrome affects tourists who visit low altitude ski resorts and who fast during check-in. Rocky always keeps a box of Tic-Tacs in his pocket, so this diagnosis should be eliminated.]
Brazen bad-guys burglarize bananas!
Rocky suffered insomnia last night. While drinking a warm glass of cold milk, he caught up on the latest trends in criminal behavior: banana theft. He will mercifully spare his readers the many bad puns which come to mind…
From the Daily Journal of Cumberland County, NJ:
VINELAND — A commercial trailer containing $15,000 worth of Del Monte bananas was stolen from the Vineland Produce Auction. The owner, Daniel Hernandez, told police he parked the loaded refrigerator truck on the North Main Road produce auction lot around midnight Saturday and locked it up, just as he always does. His shipment of 900 cases of bananas was due to leave the block Sunday afternoon.
When Hernandez returned at 11:30 a.m. to check on the temperature of the truck’s cargo, the vehicle was gone, police said in a report released Wednesday. Police followed muddy tire marks from where the trailer was parked that went along North Main Road to Vine Road and turned east before disappearing, police said.
The trailer was a white 1994 Great Dane carrier unit with “Atlantic” on the rear doors and “Carrier” on the front. The total theft, including the value of the truck, is estimated at $25,000.
Police have no suspects.
[Disclosure: Rocky thinks the Police should have no difficulty finding suspects. Mae West knew the signs of banana theft: " Is that a banana in your pocket, or are you just happy to see me?" He also notes that the bananas were stolen from a "refrigerator truck." This is suspicious, as the Chiquita Banana Song specifically warns against keeping bananas in the refrigerator: .]
Big G’s Deli (Hold the pickles)
Rocky made a “wrong turn” over the weekend, and found himself in the parking lot of Big G’s Deli in Winslow, Maine. http://big-g-s-deli.com/index.shtml
Several facts about Big G’s deserve attention:
1) Their sandwiches are approximately 144 square inches in size, and the bread is approximately 4″ thick. Big G certainly earns its name, as Rocky, Trophy Wife and Rocky’s Daughter all shared a single sandwich – and were unable to finish it.
2) Rocky’s daughter is a pickle afici0nado. She found the pickles provided with the sandwich lacking, but ordered extra pickles as a side course. Big G’s charged $.10/pickle (plus tax) for extra slices. She recommended the extra pickles wholeheartedly. (They were kosher dills, not the half-sours provided gratis.)
3) While waiting to order, one walks by a rack of pre-packaged, homemade, “moon pies,” “sticky buns,” and chocolate chip cookies. Each and every item weighed more than two pounds. BIG G’s indeed!
4) The menu displays the customary warning that “some products may contain peanuts and were prepared on equipment that processed peanuts.” However, there was NO disclosure that a Toyota Prius parked in the Big G parking lot was actually a Peanut Butter & Jelly sandwich in disguise. Peanut Allergy Sufferers Beware!
Dell me no lies
The Gillette Business Model is simple and successful. Give away razors for free. Sell the blades at a huge profit.
Dell Computer Corp seems to be trying a twist on the Gillette model: Sell defective computers at cost. Make profits on overpriced service contracts.
Rocky recently purchased a new Dell E6510 Laptop. The machine’s specs looked excellent, and Dell priced it well below the equivalent Apple and HP computers. On Day 46 (one day after the expiration of the return period) the laptop fan died.
Rocky to Dell: “I need to get a service call on my new E6510. The fan died.”
Dell: “You didn’t purchase an on-site warranty. You need to ship it to the Dell Service Depot for repair.”
Rocky: “I need this computer for work, and cannot tolerate a two week turnaround time. Can I upgrade my warranty to on-site repair?”
Dell: “Sure. A warranty upgrade will cost you $829.55 plus $61.18 tax = $890.73″
Rocky: “But I can buy a spare machine for that, and just keep it in the closet!”
“Dell: “Thank you for choosing Dell.”
Fortunately, Dell didn’t tell Rocky that the hardware problem was caused by Rocky performing too many difficult math calculations. That’s what Dell told the University of Texas Math Department, and resulted in a large class action lawsuit. See: http://www.nytimes.com/2010/06/29/technology/29dell.html
[Disclosure: The good news is that Dell's customer service representative spoke perfect English. The bad news is that Dell is on the same downward trajectory that has plagued every PC manufacturer since the early 1980's. Rocky has no position in Dell stock.]
The check’s in the mail
It’s that time of the month when Rocky pays his bills. He can only imagine receiving an invoice for $272,203,375.09 !!
That’s the bill which BP just mailed Anadarko — for Anadarko’s share of the oil spill cleanup.
Anadarko disputes the nine cents.
See the invoice here: http://www.talkingpointsmemo.com/documents/2010/06/bps-invoice-to-anadarko-for-response-costs-may-2010.php?page=1
[Disclosure: Rocky has still not purchased or sold any BP stock. He's been tempted. But he slapped his wrist.]
