Amazon ($AMZN) Sales Growth Projections for Next Two Years Appear Overly Optimistic

Investors have been reallocating capital out of Amazon ($AMZN) shares fairly heavily since the company reported a lackluster fourth quarter earnings report. After peaking over $400 in January the stock has dropped about 75 points to the low 300's. In fact, I actually think the stock is beginning to look compelling for long term investors, if you believe Amazon will continue to successfully enter new markets, as the shares now fetch only about 1.5 times 2014 revenue (after deducting net cash). While profit margins remain low (cash flow of $5.5 billion in 2013 equated to only 7.4% of sales), those that claim Amazon makes no money don't seem to dig into the company's financial statements very deeply.

All of that said, after looking at Amazon's sales trends over the last 15 years, I believe that Wall Street is currently overly optimistic about sales growth at Amazon for the next two years. If you believe that investors will be focused on sales growth, in lieu of material profit margin gains in the intermediate term, it would imply that Amazon bulls can take their time building long-term investments in the stock over coming quarters.

So why do I think Amazon will be hard-pressed to achieve the current consensus estimates for sales in 2014 (up 21% to $89.9 billion) and 2015 (up another 20% to $107.6 billion). First, let's look at Amazon's annual sales since 1998:

Simply looking at this data may cause you to feel pretty upbeat about Amazon's business. Over the past 15 years sales have grown an astounding 41% per year, rising from under $1 billion in 1998 to nearly $75 billion in 2013. Is it really a stretch to asssume that two more years of 20%+ growth could be in the cards?

The problem Amazon is going to begin to face is the fact that once you reach a certain size, it becomes nearly impossible to continue to grow at 40%, 30%, or even 20% per year. Finding an additional $15.4 billion of revenue in a single year (the incremental figure analysts estimate Amazon will book in 2014) is no easy feat. In fact, Amazon's total revenue in 2007 was just $14.8 billion, so "2014 Amazon" must equal "2013 Amazon" plus "2007 Amazon." With annual revenue approaching the $100 billion level, the company's growth rate is likely to begin to slow soon.

Is there any way to know when exactly growth will decline significantly? Not really, but one of the numbers I like to focus on is incremental revenue growth, in dollars, from one year to the next. As a company gets larger and larger, the amount of incremental sales growth needed simply to maintain its growth rate rises fairly sharply. In fact, if we chart out Amazon's incremental annual sales growth since 1999, we can see patterns emerge:

For instance, between 1999 and 2006 Amazon was able to grow sales by between $1-2 billion a year (roughly). That figure rose to $4-5 billion from 2007-2009, and accelerated to $10 billion in 2010 after the recession ended. Interestingly, over the last three years Amazon has hit a wall. In both 2012 and 2013, incremental sales growth at Amazon failed to eclipse 2011 levels. I believe this could be the beginning of a period where we see Amazon's sales growth slow materially.

Perhaps problematic, the current Wall Street consensus forecast calls for Amazon's incremental revenue growth in dollars to reaccelerate to more than $15 billion this year, and again to nearly $18 billion in 2015 (look at the orange bars in the above chart). While there is no assurance that this figure cannot continue to climb, there will be a time when Amazon simply cannot continue to find that much new revenue each and every year (without making large acquisitions anyway, not something they have typically done). Given that a disappointment in merchandise sales growth has been a key driver of Amazon's recent stock market weakness, I believe it is entirely possible that both 2014 and 2015 sales forecasts are too high. Maintaining annual sales growth of 20% for much longer seems unlikely, perhaps even starting this year.

As I mentioned at the outset of this article, however, I don't necessarily think this would spell the end of Amazon's stock market stardom, at least not long term. If Jeff Bezos is willing to show investors that he is willing to demonstrate that profit margins can be susteained at levels above those currently being attained, investors would likely be very pleased and any short term stock decline would quickly be reversed. After all, annual sales approaching $100 billion offer Amazon the ability to generate some very impressive free cash flow, which would make the stock's current market value of $150 billion seem not so unreasonable.

In coming quarters, I will be focused on Amazon's sales trends and if I am correct and the current consensus forecasts are too aggressive, any continued short-term weakness in Amazon shares could present investors with an excellent opportunity to continue building a long-term position in the stock.

Full Disclosure: Long AMZN at the time of writing, but positions may change at any time

The Average Investor Can (And Should) Ignore the 60 Minutes Story About "Rigged" Markets

The piece on 60 Minutes this past Sunday has ignited a discussion about high-frequency electronic trading systems and undoubtedly has spiked sales of the new Michael Lewis book entitled "Flash Boys: A Wall Street Revolt" which digs deep into the topic. Since I have yet to read the book, I am not going to get into many details here, but the big issue is that technology has become so advanced these days that certain people are now able to get insights into what orders are coming in for a particular security, and jump in front of those orders to make a few pennies per share on the backs of smaller investors. It's gotten so bad (read: unfair) that a company called Virtu Financial Inc, which recently filed documents to go public, disclosed that it has only lost money on one day out of the first 1,238 trading days it has been operating.

Since I work with regular retail investors, the most salient question my readers might want to ask is "Does this affect me?" I would say "No, it doesn't." There are definitely counter-arguments to be made, but for the typical investor (who is investing in the stock market and planning on holding a stock for months or years) the existence of high-frequency trading firms should not even be a blip on their radar. The market is not "rigged" against the types of investments they are making. If you want to invest in Company A, you have done your research, and you feel as though paying $20 per share for that stock is an attractive price, then all you have to do is enter a limit order to buy Company A at $20 per share. In that scenario, you know what you are getting, you know what price you are paying, and you feel good about your odds of success. Over time if your investment thesis proves accurate then you will make money, and vice versa. Nothing else really should matter to you.

Now, it is hard to argue that we should embrace or even accept a system where certain groups of people with more money and better technology should be in a position to game the system and earn a profit 1,237 out of every 1,238 days the market is open. Hopefully regulators will do everything they can to close these loopholes in the system. That said, the discussion around whether regular investors should change how they save and invest based on this new book or the 60 Minutes segment are focusing their coverage and attention on the wrong headlines, in my view. Carry on.

Biglari Holdings Buys Maxim Magazine In Distressed Sale

There was a time when Steak 'n Shake and Maxim magazine would have first brought to mind my college days, but oh my how things have changed. Now one of my largest investments, Biglari Holdings ($BH), owns both companies. Activist investor Sardar Biglari recently announced that the holding company he runs has acquired Maxim magazine from Alpha Media Holdings in a distressed sale. The purchase price was not disclosed, but media reports suggest a cost between $10 and $15 million. That is a far cry from the near-$30 million deal with another buyer that fell through late last year. Always a seeker of a bargain, Biglari appears to have picked up a solid brand on the cheap. The magazine, despite millions of readers and tens of millions in advertising revenue, has been losing several million dollars annually in recent years, so there is work to be done for this investment to pay off.

At first glance it may seem quite odd that the owner of Steak 'n Shake, as well as a 20% stake in publicly traded Cracker Barrel (CBRL), would venture into the media business, but Biglari has made it known for years now that he aims to build a diversified holding company and will not shy away from entering any industry that offers the potential for significant profits. While he had hinted that an insurance company was on his shopping list, this deal should not surprise (or worry) close watchers of Biglari Holdings.

While success with Maxim under the Biglari umbrella is hardly assured, when you pay such a low price for an asset with a large readership and a strong brand among its core young man demographic, there are multiple levers you can pull to create value from the transaction. Biglari has shown he prefers strong brands (something both Steak 'n Shake and Cracker Barrel possess) and there is no doubt that the Maxim name could find itself attached to far more than just a magazine cover over the next several years. Licensing opportunities could very well be a core part of Biglari's future plans for Maxim. The recently launched Esquire Network cable television station is a good example of how media brands can be extended in order to broaden their reach and appeal.

If we assume Biglari paid approximately $12 million for Maxim, it is not hard to see how reasonable it is to expect that it could pay off in spades. If the company five years from now earned free cash flow of just $5 million per year, it would be a hugely successful investment that could be sold for many multiples of original purchase price, or Biglari could hold onto it long term and use the cash flow to fund additional acquisitions. As part of a larger company with more financial backing, it is likely that meaningful investments will be made into the Maxim brand, which could make that scenario a reality far easier than would have been possible within a struggling media company.

While some may be scratching their heads as to why Biglari made this deal, I believe it fits the exact mold that Sardar has been describing since he became CEO. As a result, I think the odds of success are likely far greater than casual onlookers may believe, and for that reason I remain as bullish on the company's long-term prospects (and the stock) as I was before the acquisition was announced.

Full Disclosure: Long shares of Biglari Holdings at the time of writing, but positions may change at any time

Is Facebook ($FB) Really Worth 15% More Than Amazon ($AMZN)?

If you needed more proof that there is another bubble forming in Silicon Valley 15 years after the last one ended badly, how about this headline:

"Facebook to acquire WhatsApp for $19 billion"

This announcement makes the Facebook ($FB) deal to buy Instagram for $1 billion in 2012 look like the biggest bargain in U.S. corporate merger and acquisition history. Maybe the Snapchat guys were smart to turn down the $3 billion Mark Zuckerberg offered them. Their asking price is probably $10 billion now and they just may get it now. All of the sudden the debate over whether Twitter ($TWTR) is worth $40 billion with only $1 billion in annual revenue takes a back seat. Now WhatsApp, a company many people have never heard of, is in some eyes worth half that price without a penny of revenue(Correction at 5:05pm PT: The WhatsApp app is free for the first year, then users pay $0.99 per year, so they technically do have revenue, although 8 cents per month is not material in my mind).

Rather than debate whether startups without fully formed business models are worth tens of billions of dollars, the more interesting thing to me is that Facebook's current market value is now $185 billion after you add in the $15 billion of new stock they are giving WhatsApp (along with $4 billion in cash). Amazon ($AMZN), after its recent post-earnings report decline, has an market value of just $160 billion.

I might be completely wrong about this, but if I had to pick one of those stocks at those prices for the next 5 years, I'd take Amazon over Facebook in a heartbeat, even ignoring the fact that I would be getting it at a discount. I just don't think Facebook usage five years from now will be as high as it is today. They seem to share this view, based on their recent buying spree, which has resulted in them targeting competing apps that they intend to operate completely separately from the Facebook platform.

Essentially, it's an "app grab" and they have plenty of money and equity-raising ability to pay huge amounts in order to place bets on which apps will dominate in the future. Given how fast consumers' technology preferences change (if you looked at the top 10 most visited web sites from 10 years ago you would giggle), I think it will be really hard to know which apps will be long-term winners. And paying $19 billion for one seems truly remarkable to me.

Along those lines, for investors looking for a way to play their opinions on how these kinds of things play out longer term, I think you can make some interesting bets using paired trades to reduce your market risk. For instance, getting Amazon for a 15% discount to Facebook looks intriguing to me, and I am putting a little money on that paired trade; short Facebook, long Amazon. It's a market-neutral bet that simply is a play on Amazon narrowing that valuation gap, and quite possibly overtaking Facebook, in the next, say, 3 to 5 years.

Now, I could be completely wrong here (and in technology it's easier to be wrong than in other industries), but right now I just think the sentiment has shifted so much lately (to Facebook and away from Amazon, though not for the same reasons), that I'm willing to put a little money on the line. It wasn't that long ago that Faecbook was written off shortly after its disasterous IPO and after a mediocre holiday quarter (in the eyes of some anyway), Amazon shares have dropped 60 points in short order.

From hero, to goat, to hero again, in less than 2 years...

Concerns about Amazon's low profit margins seem to be moot after the WhatsApp deal...

Full Disclosure: Long Amazon and short Facebook at the time of writing, but positions may change at any time

Book Review: Bill Ackman vs MBIA in "Confidence Game"

The stack of unread books in my office has been getting higher and higher in recent months so I took the long holiday weekend to trim it down a bit. "Confidence Game" by Christine Richard takes readers through hedge fund manager Bill Ackman's multi-year attempt to blow the whistle on one of the largest bond insurance companies in the world, MBIA, which for years went to great lengths to hype its business model and support its ever-rising stock price. In doing so the company continually mislead investors and played a large role in the credit crisis.

While I thoroughly enjoyed the book, it does go into extreme detail about MBIA's business model (insuring debt securities so that they could be given AAA ratings and sold easily to investors) and therefore might not appeal to a wide array of readers. However, if you follow Bill Ackman and his hedge fund (Pershing Square Capital Management) and are at all curious about what makes the guy tick and how much work he does on his investments, I think you will find the story very interesting.

You may know that Ackman current crusade is against Herbalife, the large mult-level marketer of diet supplements. Many other hedge fund managers have mocked Ackman's assertion that HLF is a pyramid scheme, and so far have fared well taking the other side of his short bet against the company. After reading this book, it made me wonder if maybe Ackman has done more work on HLF than many believe. The guy spent as much time digging into MBIA as is humanly possible and was proven right. I'm not saying that means anything about Herbalife (I don't know the company well at all), but I just found Ackman's rigor impressive.

If you would enjoy learning more about one of today's most talked about hedge fund managers, or want to read about a company that has been written about in far less detail than many when it comes to the recent financial crisis (by now I think the Countrywide and AIG stories have been covered enough), I can confidently recommend "Confidence Game."

U.S. Unemployment Rate Drops To Historical Average in January

Since the political party in power will always try to spin economic data postively, while the opposing party tries to convince you the country is still in the doldrums, sometimes it's nice to put metrics like the U.S. unemployment rate in perspective by showing historical data without political interference. Accordingly, below is a chart of the unemployment rate over the last 40 years. As you can see we are back down to "average" today (the 40-year mean is the red line), so things are neither great nor terrible. That's surely not what you'll hear as the mid-term elections get into full swing this year, but that's yet another reason why politics and investment strategies shouldn't be mixed. Investing is far more dependent on reality than politics.

Checking In On A Sears Property Slated For Possible "Box Split"

Sears doesn't have a sales problem, it has a profit problem. Whether you agree or not (my personal view is that a sales problem both contributes to, and serves to exacerbate, an underlying profit problem), that's the conclusion drawn by CEO Eddie Lampert. As a result, he is closing dozens of stores and trying to figure out ways to make others smaller (and therefore perhaps more profitable).

In fact, Sears has a relatively new subsidiary called Seritage Realty Trust that has been given the task of managing (read: restructure and/or redevelop) about 10% of Sears' locations. Seritage has its own web site, with many of its projects listed. Included on that list are locations tagged for a "box split," which means they would like to subdivide the current store and rent out space to another retailer. The thesis is that Sears will make more in rental income from the subleased square footage than it did using it to sell Sears' inventory. In addition, they could see sales per square foot increase in the Sears store that remains open by rationalizing their product selection. Overall, it's an interesting strategy with potential, but since it is early in the process it is also largely unproven.

There are only 9 "box split" store candidates listed on the Seritage web site and it just so happens that one of them (the Alderwood Mall store in Lynnwood, WA) is only about 30 minutes north of my home in Seattle. This past weekend my wife and I drove up there to check out a new mall (we've only lived here for about 6 months) and see what, if anything, of note was happening at the Sears store. Perhaps not surprisingly (given that we are talking about Sears after all), there were some good things, some bad things, and some strange things going on.

First, some good things if you are rooting for Sears to find its footing:

1) The Alderwood Mall is a high-end mall (owned by GGP) located in a suburb of a relatively wealthy city.Sears owns the store outright (it's not leased). The two floors are 82,000 square feet each, excluding a 13,000 square foot Sears Auto Center attached. You might not think the fact that the mall is high-end jives with the core Sears customer (and I would not disagree), but the real value here is in the fact that the real estate is owned and high end mall space is worth top dollar.

2) This store (not surprisingly given it was selected for Seritage's portfolio) appears to be an excellent candidate for a "box split." At ~165,000 square feet it has more floor space than Sears really needs (you should see how many clothes this place is stocking), and it has two exterior entrances but just one mall entrance. This means Sears could split the box in such a way that another retailer could occupy half of the first floor (40,000 square feet) and have a dedicated entrance from the parking lot, while Sears could retain one exterior entrance as well as a mall entrance. Here's a map of the mall:

3) Despite Sears being known for skimping on capital expenditures since Eddie Lampert took over as Chairman, this store was not falling apart like many others. In fact, it appeared to be in very good condition despite being built in 1979. It's good to see that capex reductions are not happening at the "best of the best" locations in the Sears property portfolio.

So that's the good news. But it's not all good, especially considering that this idea is still very much a development concept. There were no signs of any construction or preparation work being done in the store that would lead one to believe any tenant is close to signing a lease at this location and has asked Sears to get the ball rolling.

You can probably guess what kinds of things stood out as being "same ol' Sears." My biggest gripe with the chain has always been that Sears stores are almost always terribly disorganized, making for a miserable shopping experience. It boggles my mind when I go inside one because all I can think to myself is, "has a senior manager ever walked this store, and if they have, how could they not realize that if you simply cleaned up the clutter and organized the inventory in a better way, you would likely see better sales production?" It really doesn't take much money (or any) to focus on organizing stores better, it's just time and effort.

How bad was it? Well, how about some pictures:

I don't know about you, but when my wife is in the market for handbag, she definitely wants to find a new tax preparaer and grab a stuffed bear all at once...

As for Jackson Hewitt, that's not the only place they are advertising; they are also targeting shoppers before they even get to Sears:

That's the floor of the main mall area, a few hundred yards away from Sears...

We also checked out the Lands End section. This is a case where not only does the merchandise they pair with the men's clothing section make absolutely no sense, but I question why Sears even carries the products at all (stuffed bears in the kid's section at least would make sense).

Fake tattoos and mustaches to go with your new dress shirt and pants?

My wife was actually looking for Lands End socks, but couldn't find any on the floor, so we asked one of the dedicated Lands End employees for assistance. Despite the fact that she only works in a small section of the store (Lands End shops in Sears stores average 7,400 square feet, which is less than 10% of the first floor of this particular store), she didn't even know if they had any socks in stock. "It's really hard to keep track of where things are," she said. "They move everything around so much."

So not only is the store disorganized for shoppers, but the Lands End employees can't even keep tabs on their own inventory. Again, management here is a serious problem. Sears gets called out for skimping on store upkeep, but this is simply an organizational and inventory management issue having nothing to do with money. We finally found maybe 10 pairs of women's socks on display after wandering the department for a few minutes. None of them were black (a common sock color!?), the color my wife was looking for, so we left the Lands End department empty-handed.

This brings up another issue, because a big part of Eddie Lampert's "integrated retail" strategy involves carrying less inventory in the actual stores, but installing kiosks that allow you to order online while in the store, in case you need a size they don't have, or one of the various colors that they don't stock in physical stores at all. In one of the rare interviews he agreed to do, Lampert explained his thinking to the Chicago Tribune:

"The integrated retail part of our strategy is really about how you work between online, mobile and store, not just from a customer standpoint, but from a supply-chain standpoint," Lampert said. "If we have a shirt in the store in four colors, we might have that shirt in 10 additional colors online. To have 14 colors in the store may be too risky because what you don't sell, you end up losing money on, (compared with) having a group of it online that serves all the stores so that if people want more variety, they can get more variety."

This may sound like a good idea at first blush, but most people who prefer to shop online aren't coming to your store to then order at a kiosk or their smartphone. More likely, they are in your store because they want to try on or see the actual item prior to buying. If you don't have black socks in stock, and there 100 other stores in the mall, I think that customer is more likely going to go buy from a competitor. Contrary to what Lampert seems to think, ordering online from an actual store is not always convenient for the shopper. If they wanted to order from your web site, they never would have driven to the mall. And if they wanted to buy a physical product from a store, they are likely going to find better selection elsewhere in that very same mall.

In addition, I am baffled as to why Lampert believes those extra 10 colors sitting in a warehouse awaiting an online order are any more profitable than those same colors sitting in the store awaiting an in-person buyer. Sure you could argue that warehouse space is cheaper than store space, but aren't the odds higher that someone will see the product and make an unplanned purchase if the item is in a store and not sitting in a warehouse somewhere? Not to mention the fact that Sears shoppers tend to be older, so they are less likely to be avid technology users and more likely to prefer seeing and touching the product before buying it. I think Lampert's integrated retail strategy might work better for some businesses than others, and I don't think Sears is a good fit relatively speaking. Perhaps that is a contributing factor as to why sales trends are so poor right now.

Before heading out of Sears, I also checked out the hard lines department, the biggest segment for Sears. I was impressed with the hardware and tools section (one of the largest Craftsman selections I've seen) and then I ventured upstairs to check out appliances and electronics.

Appliance department is well organized and there were a couple salespeople ready to assist, but what's that in the background?

I called this their "electronics jail" but it really reminded me more of a professional hockey or indoor soccer game. I guess they are having issues with theft...

This just felt strange. Not a very inviting shopping experience. There was one employee manning the jail, and I doubt it would deter you from browsing if you were looking to make an immediate purchase, but it just seemed so unneccesary, and the first of its kind I have seen. I'd be curious to see if shoppers are less likely to browse an enclosed area like this, assuming they weren't looking for something specific, just because it would feel like the employees were more concerned with making sure you didn't steal something, as opposed to enticing you to buy something. My wife and I had a good laugh (and we didn't go inside, though we did have to raise our voice to ask the saleswoman through the glass where the nearest restroom was located).

All in all, it was an interesting trip. Nothing really has changed about my view of Sears though. They still don't seem to know what they are doing when it comes to creating a positive shopping experience, relative to their competition, and although they aren't skimping on upkeep at this valuable piece of real estate, they don't seem to really be focused on maximizing the profits from the store either. The potential redevelopment opportunity from a real estate perspective is definitely there, but progress is slow. At a mall of this caliber (it's a combined indoor-outdoor complex that very much represents the typical high-end GGP mall), you would think Sears could really turn their 165,000 square feet into something unique and profitable. Time will tell.

Full Disclosure: In order to attend the 2014 Sears Holdings annual shareholder meeting (Mr. Lampert rarely speaks publicly outside of this event and this year I decided to go) I am long a small "odd lot" (i.e. less than 100 shares) of SHLD stock. However, this is merely to permit me to attend the meeting and not for investment purposes. In addition, I am long Sears bonds as an investment. Positions may change at any time.

If Your Mortgage Rate Is Meaningfully Above 4.3%, Consider Refinancing Now

Lots of hedge funds are having a very difficult start to 2014. Many were short long-term bonds as a hedge against a correction in U.S. stocks. Despite profit-taking in equities this month, bond prices are surging and yields are falling. The benchmark 10-year treasury bond has seen its yield drop from 3.03% on January 1st to 2.65% today. Mortgage rates have followed suit, dropping to 4.31% (30-year fixed) according to bankrate.com. A 15-year mortgage now costs about 3.35%, nearly a full point lower.

If you have a mortgage with a rate significantly higher (say, 5% or above), I would recommend crunching some numbers to see if refinancing would make sense. I don't expect rates will stay below 4.5% for very long so this pay be one of the last chances to lock in a great rate. Also, people tend to ignore the 15-year mortgage option (the payment is typically about 50% higher than a 30-year mortgage, despite a lower interest rate), but it could very well be an attractive option for some people, especially if your current payment does not make up a large portion of your discretionary income.

For instance, let's say you currently have 20 years and $200,000 remaining on a 30-year mortgage at 5% (monthly payment of ~$1,075). If you could handle a payment of ~$1,425 you could refinance into a 15-year mortgage at 3.5% and have your house paid off 5 years early. The increased cost might not be workable for many, but for those looking to cut monthly expenses or retire as soon as possible, a refinance might aid in the process.

Here's What Not To Say If Carl Icahn Is Breathing Down Your Neck

Ben Reitzes, Analyst, Barclays: "And I guess there’s been a lot of things in the media about your potential to buy back more stock, and shares are around $500 tonight. I was wondering if you thought this was a good level, and whether it was time to accelerate the buyback from current levels. You obviously generated a ton of cash in the quarter, and what are your latest thoughts there?"

Tim Cook, CEO, Apple: "We’ve been buying back stock. As you know, last year we increased the program overall, our cash return, doubling it to $100 billion. And $60 billion of that is buyback, and we’ve been progressing on that. Luca can give you the precise numbers of it. So we’re a big believer in buying back the stock, and that doesn’t change today, whether the stock goes up or down [emphasis added]."

Apple now has $159 billion of cash. That is $177 per share, versus a share price of $510 per share, so more than 1/3 of the value is in the bank, not within its corporate offices, inventory, retail stores, or supply chain. The core operations are trading at around 9 times earnings, nearly a 50% discount to the S&P 500. We know Carl Icahn is begging for an accelerated buyback and is completely justified in asking for one. I'd bet he is buying more stock today. And yet, despite knowing all of this, Tim Cook casually states on the conference call that his willingness to do stock buybacks does not change at all depending on where the stock is trading. I can't wait to read Carl's next letter to the board. And you thought the first one was unapologetically critical.

Full Disclosure: Long shares of Apple, but positions may change at any time.

Why the January Barometer Drives Me Crazy

You can find the "January Barometer" mentioned in dozens of media articles and it has been referenced a ton on CNBC so far this year, as it is every January. Here's a recap from the Financial Post in case you have been lucky enough not to hear about it:

"Stock performance in January can say a lot about where the markets are headed for the rest of the year. At least, that's the premise behind the January Barometer, a theory that the performance of the S&P 500 during the first month will set the tone for the rest of the year... The Stock Trader's Almanac points out that since 1950, the Barometer has been right 76% of the time."

Sounds harmless enough; If January is up, then the market will finish up for the year three times out of four. Good odds, right? So why does this so-called barometer drive me crazy every time I hear it? Because you need context to really determine if this indicator has any value.

Forget January entirely for a second. Would it not be helpful to know how often the market goes up in a given year regardless of any particular month? I certainly think so. In fact, since 1957 (the year the S&P 500 index was created -- don't ask me how they claim to have data from 1950-1956) there have been 56 calendar years and the S&P 500 index has risen 44 times and fallen 12 times. Why is that important? Because 44 divided by 56 equals 78%. The market goes up 78% of the time no matter what!

But if January is up then the market goes up 76% of the time. So what? Actually, that tells me that January has essentially no influence at all. In fact, we could go a step further and say that if January is up, the odds the market will rise for the full year actually go down slightly compared with the historical average. So really, January is irrelevant. It tells us nothing on its own.

It's sort of like saying if you play blackjack in Vegas in January then the house edge is only 1%. That might sound like great odds, until you do some digging and realize that the house edge in blackjack, assuming you follow perfect basic strategy, is actually less than 1% regardless of when you play.