returns: capital changes vs. total return

Happy New Year!!

Like a stock that’s gone ex-dividend, my mind has gone ex-thoughts on the final day of the year.  My family might contend that this is not as unusual as I want to make it out to be.  Whatever the case, I can always hope that, like dividends, my absent thoughts will show up in my account as credits in a day or two.

Anyway, this is the best I can come up with on a sleepy New Year’s Eve.

Through last Friday, the S&P 500 was up 14.07% for 2012, year to date, on a total return basis.  The index was up 12.52% on a capital changes basis.

The difference?

Total return includes dividend payments as part of the return.  Capital changes doesn’t.

In figuring out your performance against the index, the total return figure is the one to use.  Looking at standard reference sources, like your broker’s website or the financial news, however, the figure that gets the most prominence is the capital changes one.

There are two historical reasons for this:

–from the mid-1980s until very recently, US Baby Boomers, who have been a major force in the domestic stock market, have been pretty much exclusively interested in capital gains, not in dividend income. So they paid the highest prices for growth companies.   Firms risked being typecast as dowdy and unimaginative if they paid large dividends, so they didn’t.  The result is that the dividend yield on the S&P has been small, and easily ignored.  No longer, though.

–keeping track on a daily basis of inflows and outflows of funds, account by account, is necessary for an accurate total return performance calculation.  This was beyond the computer capabilities of the custodian banks I knew for a considerable portion of my professional career.  Easier to ignore than to spend the time and money to upgrade staff and computer systems–especially when the calculation didn’t make that much difference.

2012 (and beyond): a different story

Dividends are again a significant component of the total return on US stocks.

2012 has seen a significant number of companies declare large special dividends, making the difference between their stocks’ capital changes and total returns especially large.  Take WYNN, which I own, as an example:

Through last Friday, WYNN is just about unchanged, year to date, meaning a capital changes return of 0.  The company has paid out dividends of $10, an $8 special dividend + four quarterly $.50 dividends.  On a total return basis, then, the stock is up a bit over 9%.  Yes, still an underperformer–but not by the margin that just looking at the figures Yahoo or Google offer would suggest.

I’m not sure that 2013 will be a year to write home about as far as capital change in the S&P 500 is concerned (more about this when I post my strategy for 2013).  Despite the absence of a spate of special payouts, I think dividends will be at least as important to next year’s total returns as they have been in 2012.

See you next year!


tax selling in 2012; the result on the “January effect” in 2013

yearend tax selling

Yearend tax selling typically has a significant influence on the US stock market during the fourth quarter.  There are three categories of investors involved:

1.  mutual funds and ETFs  About 25 years ago, the IRS allowed mutual funds in the US to change their tax years from a calendar basis to a fiscal year ending in October.  This was to help accounting firms spread their auditing workload and thereby avoid errors.  Every mutual fund complex I know of jumped at the chance.

The result has been that since the late 1980s, tax selling by mutual funds has depressed stock prices during late September and early October rather than in December, as mutual funds sell to reorient their portfolios and to manage the size of their yearly distributions of realized profits.

a non-factor this year

Because mutual funds and ETFs can’t make distributions until they use up the huge tax losses generated by redemptions during the 2008-09 market swoon, yearend selling by funds has been a non-factor in the US stock market over the past several years.

2.  taxable institutional investors, like insurance companies.  A generation or more ago, these were the Wall Street behemoths.  Their tax years end in December.  No one really thinks too much about them anymore, because their effect on markets is usually dwarfed by the actions of mutual funds/ETFs.

This December, however, it looks to me as if they’ve been shifting their portfolios away from bonds and into stocks–and in large enough size to help offset the negative effect of individual investor selling of stocks.

These institutional investors, as well as the mutual funds/ETFs are out of the market this week.  Post-Christmas trading reflects the activity of individuals only.

3.  individuals

a.  the January effect.  This is the bounceback during the first two or three weeks of the new year of stocks that have been depressed by large-scale tax selling in December.  Historically, the January effect has been most pronounced in small-cap stocks trading at under $10 a share–the typical stomping grounds of inexperienced amateur speculators.

Because it’s concentrated in small speculative stocks, neither the selling in December nor the subsequent rise in January have much effect on the major averages.

b.  special for 2012: reaction to impending tax law changes

Although we still don’t know what the new tax rates will be on capital gains, they’re certain to be higher than they are now–probably a lot higher.  This consideration has turned yearend tax selling by individuals on its head.

Instead of selling losers in December and winners in January (recognizing gains in the following tax year), and instead of small cap relative weakness/large cap strength in December, we are seeing the reverse.

stock market implications

1.  If I’m right about December behavior, the January effect for 2013 should be a selloff in small-cap speculative losers, counteracted by a rise in blue chip large cap stocks that have been the target of December tax selling.  AAPL will be the litmus test for this, I think.

2.  The return of taxable institutions to the market in the new year, and the absence of tax selling pressure from individuals, should both be stabilizing influences on stocks in January.  Bonds may be a different story.  But stocks could do surprisingly well, absent further negative developments in Washington.

demise of the e-reader: implications

e-reader sales

A Christmas Eve Financial Times article indicates that while e-reader sales in 2012 will still be robust, the category may be on the brink of a rapid decline in popularity.  Its source is IHS iSuppli.   I’ve found the data in a graph from (note the convoluted chain of attribution–PSI cites emarketer, which in turn cites CNET citing IHS).

The reason for the falloff?   …the rise of light, powerful cheap multi-function tablets, which can serve as e-readers as well as do a lot of other stuff, for within a reasonable distance of the price of a dedicated e-reader alone.  This development wouldn’t be surprising, since the multi-function smartphone has replaced the dedicated music player for many users.

(The above is what I see as the consensus view. It’s not a unanimous one, though.   The Market Intelligence and Consulting Institute, which presumably has special insight into the Taiwanese companies that actually make the e-readers, predicts a bounceback in sales for 2013.  So we should at least keep in mind that the consensus may not be correct.)

Implications, if the FT is right?

In a world where the decision on what merchant to buy an e-book from hinges on what dedicated e-reader you own, the firm with the largest number of e-readers in circulation (Amazon) should be the dominant factor.  Other, non-compatible e-reader makers, like Barnes and Noble, should have small relative market shares.  Other would-be booksellers are footnotes, at best.

The game changes substantially, I think, if the key decision becomes what app the potential buyer has on his tablet.  That’s because any customer can download a new book app with a couple of taps.  Unlike the case with music, where users may want to construct playlists, it probably doesn’t matter much whether one’s entire library is on one app or several.  So the key factor in the purchase decision probably comes down to price.

It’s possible that AMZN can develop a tablet that’s the full equivalent of a Samsung or Google offering.  The performance of the Kindle Fire suggests that’s not likely.  But, if it can, perhaps AMZN can preserve its “ecosystem” with avid readers for a while longer.  And in doing so it would be able to bar the download of other booksellers’ apps onto its machines.

Personally, I doubt Barnes and Noble will be able to create a viable tablet.  Yes, it does have its alliance with MSFT.  But that only seems to me to guarantee that BKS can have the Zune of tablets.

AAPL is in an unusual position.  Its strategy has been to generate superior profits by selling up-market devices at premium prices.  Does it want to compete in the (eventual) $100 tablet market?  My off-the-cuff guess is that it doesn’t.  By default, this makes AAPL less of a player in the e-book market.

On the one hand, this would make the big publishers’ alliance with AAPL of a few years ago look extremely short-sighted.  On the other, it creates the opportunity for them to have a common app that bypasses both BKS and AMZN.

the stocks?

Any restructuring book distribution by cutting out dedicated e-readers is obviously not a reason for the companies that control the e-reader market to celebrate.  The biggest single loser, I think, is potentially BKS, since AMZN has 3x the market share in e-books that BKS has.  It isn’t that AMZN escapes the change unscathed.  But it already has lower prices than BKS; its large relative size gives it another big advantage in the price-drive. environment I think will develop.  Also, it’s not clear that AAPL will abandon the up-market strategy that snatched it out of the jaws of bankruptcy to become a serious competitor in the mass tablet market.

All in all, I score the situation as a net plus for AMZN.

The wildcard is potential new competitors who might be able do offer superior app performance.

weak Christmas spending?

Over my 30+ years in the stock market, the general rule about the year-end holidays has been that the longer the time between Thanksgiving and Christmas, the more spending Americans will do.  That should have meant a banner season for retail this year, because Thanksgiving fell on the earliest possible day in 2012.

First reports on credit card usage, however, indicate the opposite–that overall retail spending barely exceeded the 2011 level, despite predictions of a 3%+ increase.  Explanations include:  Hurricane Sandy (some offices around Wall Street still don’t have phone service, the transit system isn’t yet fully up and running), the fiscal cliff, the Newtown shootings.  Who knows the real reason?   …I tend to think that this may be the opening act of a long-lasting readjustment of consumer spending, in response to what will hopefully be a Washington that begins to live within its means.

From an investment point of view, however, noting the possible overall weaker spending trend is less important than breaking down overall spending into areas of strength and weakness.  We won’t have the data needed to do this for several weeks.  But there will doubtless be both makers of innovative products and demographic segments that will be doing considerably better than the nation as a whole.  Technology and middle-/lower middle-class spenders are where I’m going to be looking first.

Wall Street Journal on internet pricing

The Wall Street Journal has an interesting, if somewhat disorganized, front-page article today on how internet retailers vary the prices and the selection of goods they offer to different customers.  The article addresses several different topics, which it doesn’t clearly distinguish:

different pricing in different countries.  Who doesn’t do this?

dynamic pricing, where prices of goods or services change depending on time and the availability of inventory.  Airline tickets  or hotel rooms are the model of this type of price change.  There have also been attempts by bricks-and-mortar stores to vary pricing by time of day, so that a gallon of milk costs 50% more at midnight than at noon–though I’m not aware of a single successful experiment of this type.

customer assessment.  Four aspects:

—-The merchant uses the IP address of the customer as a proxy for zip code and offers different merchandise based on area demographics.

—-The merchant offers different merchandise depending on the device the customer uses to access the site–phone, tablet, PC.

—-The merchant offers different merchandise or pricing based on how the customer arrives on the site–mobile app, social media, search engine.

—-The merchant varies merchandise/pricing depending on the customer’s on-site behavior.

proximity to bricks-and-mortar alternatives.  Here the online merchant varies pricing, based on how far away the customer is either to its own bricks-and-mortar store or to those of its rivals.


The first three of these seem to me to be staples of traditional retailing.  So it’s hardly surprising that once enabling technology became available these tactics would emerge in the online world.

The fourth is the problematic one.

There may be legal or ethical problems with charging higher prices in poor or rural areas where bricks-and-mortar alternatives aren’t readily available.  It seems to me, though, that this pricing behavior trains consumers not to use the sites of these merchants but to automatically go to online-only merchants like Amazon instead.

trading between now and yearend

Practically speaking, 2012 is already in the books for investment professionals around the world.  Many are already on vacation.  Many global stock markets will be closed for most of the handful of business days between now and December 31st–Wall Street being a notable exception.  On days that markets will be open, trading volume will doubtless be very light.

Is there anything useful we can do as individual investors during this deadest of all trading weeks?     …other than celebrating the holidays and resting up for the challenges of 2013, that is.

Yes, there is.

1.  If you haven’t done so already, check the year-to-date tax position in your brokerage account.  You may want to consider either selling losers to minimize taxable gains or winners to lessen realized losses.

I believe very strongly that transactions driven solely by taxes are invariably a bad thing.  But I also think that tax considerations can be a useful way of overcoming one’s psychological aversion to admitting a mistake (every rookie professional’s biggest stumbling block) and thereby be an excuse for exiting a bad investment.  Yes, it would be better to man up and just sell the loser, without rationalization.  But the most important thing is getting the weak stock gone.

2.  the “window dressing” phenomenon.  I guess there really are professional portfolio managers–most of them soon to hit the unemployment line–who buy trendy stocks to “dress up” their portfolios so they’ll be cosmetically more attractive right before meeting with their customers.  And there may be financially illiterate customers who are fooled by this.  But that’s not really what I’m talking about.

There’s also a type of illegal stock manipulation of small-cap stocks on the next-to-last or last trading day of the year that is euphemistically called window dressing.   The stock “magically” rises (or falls, if a short-seller is at work) ten or fifteen percent, often in the last half hour of trading–in a way that helps a manager, or group of managers, achieve a higher performance-based bonus.  Nowadays, this most often happens in smaller markets in the EU or in the Pacific.  But it also happens in the US on occasion.

In my experience, this is always a good chance to sell.  The stock in question invariably crashes back to earth the first day of the new year.

3.  the fiscal cliff.  As I’m writing this, the S&P 500 futures are down about 1.5% on worries that Washington won’t reach an agreement to soften the economic damage from already legislated tax increases and government spending cuts slated to go into effect on January 1st.

It’s possible that politicians are even hoping for a 5%-10% stock market decline to give them the political “cover” they feel they need in order to justify compromise to the ir constituents.

In my view, 1.5% isn’t enough to act on, but a larger decline would doubtless an excellent opportunity to buy a stock you want to own, but think is too expensive–or to add to a position you have strong conviction in but think is too small.