Stocktake

Compiled by PROINSIAS O'MAHONY

Stock split could land Apple in Dow

APPLE SHARES rose last week after an analyst said it was “considering” a stock split.

Currently, Apple is the only dividend-paying company worth more than $215 billion that is not included in the Dow Jones index. But with shares trading above $600, Apple would make up more than a quarter of the index, which is weighted by share price rather than market capitalisation

A 3:1 stock split, bringing the shares down to $200, would alter that. As Bespoke Investment Group notes, that ratio would be “just enough to make its weight reasonable but still the largest in the index”, reflecting its status as the largest company in the world.

Three years ago there were similar rumours regarding Apple joining the Dow. Had it happened, the index would now be well above 15,000 – an all-time high.

Reports of equities’ demise exaggerated

BILL GROSS, manager of the world’s biggest bond fund, last week spooked many by saying the “cult of equity is dying”.

Stocks have enjoyed real annual returns of 6.6 per cent since 1912, but that’s a “historical freak”, said Gross. If stocks continue to appreciate by almost 7 per cent while GDP grows at 3 per cent, then the stockholders will eventually have “nearly all of the money in the world!”

However, Henry Blodget, the controversial one-time analyst who now runs the Business Insider website, reckons Gross has miscalculated. Stocks have appreciated in real terms by roughly 2 per cent annually, not 7 per cent, said Blodget; about 4 per cent of the 6.6 per cent annual return has come from dividends. Blodget agrees that US stocks will return less in future years, but for reasons that have “nothing to do with the flawed idea that stocks can’t return more than GDP”.

Wall Street down in the dumps

CONTRARIANS CHEERED Gross’s administering of the last rites to the cult of equities, which they compared to BusinessWeek’s infamous “Death of equities” cover in 1979.

Another contrarian indicator – strategists’ recommended equity allocations – is also providing comfort. Bank of America strategist Savita Subramanian noted last week that her indicator measuring Wall Street bullishness has fallen to 43.9.

“That’s the lowest level in the history of our data going back to 1985,” she said, suggesting strategists are “more bearish on equities than they were at any point in the last 27 years”.

Cape of good forecasting

THIS COLUMN noted last month that the Iseq is one of the cheapest markets in the world, based on its cyclically adjusted price-earnings ratio (Cape).

Cape averages earnings over a 10-year period. Two recent studies confirm its forecasting ability. An Italian paper finds that Cape is a “powerful” long-term indicator for the US and also for Belgium, France, Germany, Japan, the Netherlands, Norway, Sweden and Switzerland.

A June paper by investment manager Joachim Klement studied Cape forecasting ability for 35 countries. A “reliable” indicator, its expected returns for developed markets are “generally very high”, with odds of negative returns over the next five to 10 years mostly being “low to nil”. European countries, in particular, “promise very high real returns” that should be “significantly higher than historic averages”. The papers can be found at

iti.ms/MCA71dand iti.ms/NPyNfY.

Caught in the web

ONE thinks of insider traders as cunning and careful types. Think again. The US Securities and Exchange Commission has charged an executive from pharmaceutical firm Bristol-Myers for allegedly making $300,000 via illegal insider trading. The SEC said he did web searches for “illegal insider trading options trace” and “can stock option be traced to purchaser” as well as reading an article titled Ways to avoid insider trading. All this was allegedly done on his work PC.