Friday, September 28, 2012

Passages from PT Barnum's The Art of Money Getting

I recently read "The Art of Money Getting," which was written by PT Barnum in 1880.  Although 132 years old, many of its passages still ring true today.  Below were some highlights worth re-posting.  Overall the quotes paint a picture of a man who would argue that there is no such thing as overnight success.

  • "The safest plan, and the one most sure of success for the young man starting in life, is to select the vocation which is most congenial to his tastes."
  • "No man has a right to expect to succeed in life unless he understands his business, an nobody can understand his business thoroughly unless he learns it by personal application and experience.  A man may be a manufacturer: he has got to learn the many details of his business personally; he will learn something every day and he will find he will make mistakes nearly every day.  And these very mistakes are helps to him in the way of experiences if he but heeds them."
  • "Engage in one kind of business only and stick to it faithfully until you succeed, or until your experience shows that you should abandon it.  A constant hammering on one nail will generally drive it home at last, so that it can be clinched...Many a fortune has slipped through a man's fingers because he was engaged in too many occupations at a  time."
  • "So the young man starting in business; let him understand the value of money by earning it...Men who get money with too great facility cannot usually succeed.  You must get the first dollars by hard knocks, and at some sacrifice, in order to appreciate the value of those dollars."
  • "The reader of a newspaper does not see the first mention of an ordinary advertisement; the second insertion he sees, but does not read; the third insertion he reads; the fourth insertion, he looks at the price; the fifth insertion, he speaks of it to his wife; the sixth insertion, he is ready to purchase, and the seventh insertion, he purchases."
  • "He must of course have a really good [product], and one which will please his customers; anything spurious will not succeed permanently because the public is wiser than many imagine."

PE Multiple Expansion of Largest S&P 500 Companies

The S&P 500 is up 15% year to date, but earnings are forecast to grow 3-5% this year, which mathematically means that we've experienced some multiple expansion during 2012.  Below is a chart highlighting the multiple expansion for the 10 largest S&P 500 companies so far this year.  Of the 10 largest companies in the S&P 500 (to start the year) only one, XOM, has seen multiple contraction on a TTM basis.

The average P/E multiple of these 10 companies has expanded from 14 to 16 during 2012.

PE Multiple Largest Companies

What Would September Look Like Without Draghi and Bernanke?

As September is coming to a close, the S&P 500 looks set to post another monthly gain.  However, most of that gain came completely on two trading days: September 6th and 13th when Mario Draghi and Ben Bernanke each announced infinite monetary action.  Without those two days the S&P 500 would be 52 points lower and the chart would look like it does below.

Of course, it's not really possible to strip away two trading days or the effect of what that news did to prices.  However, the hypothetical chart below does highlight that there have been more down days than up days in September.

Thursday, September 27, 2012

Jobless Claims, the VIX and High Yield Spreads

Initial jobless claims were reported today and fell back towards their lowest levels for this cycle at 359k.  The chart looks similar to two other important financial charts: the VIX and High Yield credit spreads.  All three charts show a similar spike in the recession and have gradually declined since (with some bumps along the way).  Now all three are settling at low levels, but slightly higher than their lowest points reached in 2006/2007.  If the S&P 500 is going to extend its rally from here, it would seem dependent on each of these indicators breaking through to lower levels.  Can we get there?

VIX Initial Jobless Claims High Yield Spreads

Long Term Durable Goods Orders Chart

Durable goods orders posted a terrible print this morning for August.  The Series showed a 13% m/m decline.  Much of this came from the transports component, which is notoriously volatile.  Still, the magnitude of the drop is certainly noteworthy.

The 13% decline is the 3rd largest drop in the history of the series which goes back to 1992.  There hasn't ever been this large of a decline outside of a recession.

Before we declare the end of this expansion though, it is most likely that this is an anomaly rather than an indication of the state of the economy.  To some extent this datapoint was already reflected in the sub-50 ISM reading that was reported at the beginning of September.  For a more salient indicator, all eyes should be on how ISM measures this coming monday.

Durable Goods Orders Long Term

Wednesday, September 26, 2012

Best 3rd Quarters in S&P 500 History

There are only two trading days left until another quarter goes in the books.  Here's how 3Q12 is shaping up so far compared to other years.

The S&P 500 is currently up 5.3% for the quarter, which would be the 16th best 3Q in the 55 years since the S&P 500 was created.

Tuesday, September 25, 2012

Intrade Daily Dollar Volume

While some in the blogosphere continue to try to push the idea that google trends could be a good election indicator, Intrade has become a popular supplement to traditional polling to help handicap each candidate's odds of winning.  Recently, Obama's odds have surged above 70%.

Many in financial markets are comfortable with Intrade as a prediction market presumably because of the pervasive belief that markets are efficient at predicting future events.  Most technicians will argue that you can't trust prices without volume though, and in the volume department Intrade is still a developing marketplace.

Below is an evolution of the daily dollar volume that trades in Intrade's most popular contract, the Obama presidency contract.  Volume has risen sharply as the election has gotten closer, but still only averages $1.2m per day in September, which is roughly equivalent to an illiquid microcap stock.

Obama Intrade Volume

Google Trends Election Check-in

A few weeks ago I posted a hypothesis that Google trends may be a good election indicator, because it is a measure of a candidate's mindshare.  If that's true, this election may be somewhat closer than many expect, because the most recent trend reading shows Romney with slightly more search volume than Obama.  The last two elections didn't have this close of a race in late September.

They also didn't show news references tick sharply lower.  Is that an indication that there is weak general interest in this election?

Google Trends Obama Romney

Amazon vs. Target

I've written a few times about what I think about Amazon's market potential, but the growth that is priced into the stock never ceases to amaze me.  Below is a comparison of some fundamental metrics for Amazon vs. Target.  Amazon does 75% of Target's revenue and only 58% of Target's gross profit, but it has a market cap that is 2.7x larger than Target's.  Amazon has to grow a lot to grow into that valuation.

TGT Revenue TTM Chart

TGT Market Cap Chart

Housing vs. Equities

Case Shiller was reported this morning up 1.2% y/y for July.  The datapoint serves as confirmation that housing prices are recovering.

Below is a chart of Case Shiller vs. the S&P 500 since 2000.  It shows that even though housing prices may be starting to turn, they still have quite a ways to climb.  Also it highlights that even despite the housing bubble burst, housing prices have still risen since the turn of the century and have thus outperformed equities.

Housing Outperforms Equities

Monday, September 24, 2012

S&P 500 1% Declines

It's been almost two months since the S&P 500 had a daily decline of 1% or more.  That nearly matches the streak put together at the beginning of 2012 when we went all of January and February without a daily decline that large.  In fact, it wasn't until March 7 that the market closed down by 1% in a single trading day.

Around that time I posted a chart of the frequency of 1% declines for the S&P 500.  On average, the S&P drops by this much or more 26 times per year, and in 2011 it happened 48 times.  Below is an updated chart of the number of 1% declines in 2012 compared to 2011.

This year started slowly for volatility but picked up by mid July.  Since then though volatility has collapsed and we have had half as many large declines in 2012 as we had at this point in 2011.  The last time we had a year this mild was in 2006.

Days with large declines on S&P 500

Friday, September 21, 2012

Publicly Traded Federal Debt Continues to Rise

US Federal debt is broken down into two different categories: publicly traded and non-publicly traded.  The non publicly traded debt is typically intergovernmental debt--more specifically it is debt that is owed to Social Security.  Those who are less concerned about Uncle Sam's debt situation tend to write off the intergovernmental debt and exclude it from Debt to GDP calculations.  This is why you may have seen widely variant accounts of what the US Debt to GDP ratio is.

It's getting problematic to hide this debt though because the last few years of deficits have been mostly financed by floating new tradable debt.  The chart below shows publicly traded debt as a percent of total Federal debt.  Prior to 2008 the ratio was about 50/50.  Today Federal debt is nearly 70% publicly traded.  This is concerning because it's obviously more difficult to control publicly traded debt.

The other issue is that as the Fed extends its maturities more and more, the maturity profile of the truly publicly floated debt becomes shorter and shorter.  Short term funding is what causes banks to be susceptible to bank runs and was the primary point of failure for Bear and Lehman.

Public Federal Debt as Percent of Total

Thursday, September 20, 2012

Financial Sector Employment

Bank of America announced that it would cut 16,000 more jobs today in order to continue to cut costs amid a weak environment for financial services businesses.  The announcement adds to the continued attrition of financial sector jobs: since 2006, the financial sector has lost a total of 600k jobs.

Below is a long term chart of US employment in the financial sector.  As a percentage of total workforce, financial services actually peaked in 1986 at 6.27%.

Financial Services Jobs

Wednesday, September 19, 2012

Seasonality of Birthdays

Normally I save offbeat posts for Fridays but it's my birthday today and I was curious about what sort of seasonality there is for birthdays in the US.  The data was pretty interesting to me.  Not only is there monthly seasonality peaking in September, but there are also spikes and drops surrounding certain holidays.

Comparison of Japan and US Monetary Base

Before the Fed eased last week, I wrote that the ECB's actions could force the Fed to ease in order to maintain the value of the dollar relative to the euro.  Today, the BOJ's decision to purchase another 10T Yen worth of assets confirms that global central banks are in a prisoner's dilemma race to the currency bottom.

Below is a chart of the relative size of the Japanese monetary base compared to the US base.  The Japanese monetary base is about 50x larger than the US base (measured in nominal local currency units), but for most of the last 2 decades it has been more like 100x the size.  The chart implies that as the US monetary base grows compared to the Japanese, the Yen could strengthen further, which is a problem for a Japanese economy that relies on exports.  Unfortunately for Japanese exporters, the Fed has announced an easing program which is likely to be larger than the BOJ's.

BOJ balance sheet vs. Fed

Tuesday, September 18, 2012

Total Systemic Debt Measured in Gold

The underlying justification for perpetual QE is that the Fed is trying to inflate away America's sizable debt load by debasing the value of the currency.  While there still has been no nominal deleveraging since 2008, if one measures our debts in terms of Gold, the US owes much less in "real" terms than it did at the turn of the century thanks to dollar debasement.  Whereas total US debt amounted to 70 Billion oz. of Gold in 2000, today it stands at 22 Billion oz. which is a level last seen in 1988.

Of course, nominal GDP measured in ounces of gold would have fallen by a similar amount, hence the Debt to GDP ratio of the US has been unaffected by inflation.  However, this chart should give some indication as to where we are in fighting debt driven deflation with engineered inflation and deeply negative real interest rates.  The chart below may suggest that the threat of deflation is almost over.

Gold Deleveraging Inflation

Friday, September 14, 2012

50 Month Moving Average Bumping 200 Month Moving Average

Earlier this year I pointed out that the 50 month moving average was approaching the 200 month moving average of the S&P 500.  Fast forward 4 months and the convergence has continued, but the recent rally has served to stave off a crossover for at least the near future.  The death cross, where the 50 day falls below the 200 day is one of the most loathed technical indicators in financial markets.  The monthly crossover (the Mayan-apocalypse cross) has only happened twice, once at the end of the 1970s bear market and once in the midst of the depression.

S&P 50/200 Month Moving Average

Thursday, September 13, 2012

The Fed Can't Extend Twist Because it's Running Out of Short Term Bonds to Sell

Along with announcing more QE today, the Fed reiterated that Operation Twist will continue through the end of the year.  Interestingly, the Fed might not be able to extend twist beyond year end even if it wanted to.  That's because the Fed has almost completely exhausted its portfolio of short term treasuries, and at the current pace it probably wont have many short term Treasuries on its balance sheet at year end.

Below is a chart of the maturity profile of Treasuries on the Fed's balance sheet.  In total, the Fed owns $1.6T worth of Treasuries, and only $490B of that is paper with less than 5 years of maturity.  Only $3B of that has a maturity of less than 1 year.

At the current pace of $45B per month, the Fed will sell 30% of its remaining 1-5 year holdings by year end and be left with about $350B of 3-5 year maturities (assuming the 1-5 year portfolio is roughly equally weighted by maturity and they sell the nearest maturities first).  From there, it would be about 8 months until the Fed has sold all maturities 5 years and in.

The end of operation twist could have a couple of major implications for rates markets in 2013.

1) Twist is empirically the only monetary program so far that has actually flattened the curve while pushing equity prices higher.

2) Since the new QE is only focused on mortgages, the Treasury market could be missing a major buyer in 2013.

Could this, along with the very real inflation implications of printing money in an economy with tightening capacity utilization finally be the straw that breaks the rates market's back?

What Happened the Last Time the Fed Announced QE?

The S&P 500 is up 1.2% currently following the announcement of new QE.  This is not unlike the pattern that we saw in 2010 where the market rallied out of the summer on the expectation that there would be more QE and rose again on the day that QE was announced.  However, over the next 8 trading days immediately following the announcement of QE2 the market fell 4.4% as it consolidated.  It then continued to rally for about 2.5 more months.

Trading Pattern of S&P after QE2 Announced

Forecast of Monetary Base to 2015 Based on Today's Fed Action

Pretty much as expected, the Fed announced that it will be conducting outright QE at the pace of $40B per month without any clear end date.  Based on this pace of purchases, below is a forecast of what the monetary base could look like out to 2015 assuming that the Fed prints at today's pace for as long as it intends to keep rates exceptionally low.

If this pace were maintained until then, the monetary base would increase by about 5x between 2008-2016, which would be a CAGR of 22%.  The current pace of $40B per month represents an annualized growth of about 18% from current levels.  Given gold and oil's correlation with the growth of the monetary base, $2700 gold and $170 brent crude prices might not be out of the question if the Fed maintains QE for that long.

Long Term Historical Correlation of S&P 500 with Interest Rates

In the previous post I highlighted how the correlation of rates and the S&P 500 has turned slightly negative, which is an infrequent occurrence judged over the last 10 years.  The risk on/risk off trade has thrived on the idea that rates and stocks are positively correlated (i.e. when stocks go down bonds rally (rates fall) and when stocks go up bonds sell off).  This is likely a function of the fact that the risk premium (as opposed to inflation expectations) is the primary driver of price fluctuation in the current environment.

For most of the 20th century, risk premium was less important than inflation premium though, which led to an inverse correlation of rates and equities.  Because inflation was a greater component of a company's cost of equity, as inflation expectations fell, interest rates fell (as did the cost of equity) and stocks rallied along with bonds.  If inflation ever becomes a dominant theme again, then one might expect the correlation that has been the heart of the risk on/risk off trade to get turned on its head.  What happens to the algo guys if that happens?

5 Year Correlation S&P 500 and Rates Historical

Correlation of Rates and S&P 500

Operation twist has had the opposite effect on rates that outright QE has had, but equities have rallied during twist just like they did during QE1/2.  This has lead to a divergence between equities and interest rates over the past year.  Previously equities and rates had been relatively correlated: when equities moved higher so did interest rates.  Recently though, the daily correlation has broken down and over the past year has actually turned slightly negative.

Rates S&P 1 year correlation

QE Effect on Interest Rates

Consensus seems to be growing that the Fed is definitely going to announce some sort of new QE today.  From an academic standpoint QE is supposed to lower interest rates in order to spur lending and economic activity, but as a reminder the last two times that there have been unsterilized printing programs rates have actually risen because QE has created the appearance of inflation.  Only operation twist, a sterilized maturity swap program has been effective at flattening the yield curve.  Below is a chart of the 10 year yield with QE dates highlighted.

Interest Rate Chart with QE dates

Tuesday, September 11, 2012

Dow Trying to Post Positive Return for 8th of 9 Months in 2012

Near the midpoint of the month, the Dow is currently up 1.78% for September.  If the index holds up and ends September in the green, it will mean that the average has risen in 8 out of 9 months in 2012 (although the S&P was negative in April, the Dow eked out a slight gain).  What would it mean for the Dow to maintain such a high batting average?

In 112 years of Dow history since 1900, the index rises in 6.8 months per year on average.  In other words, the Dow posts positive returns in a little over half of all months.  Since the Dow has already risen 7 months this year, the Dow would have to post negative returns through the end of the year in order to keep pace with the average.

Looking at history it's not at all unusual for the Dow to rise in 8 or even 9 months of the year, but beyond that the frequency begins to wane.  The Dow has never risen in all 12 months of any year and has only risen in 10 or 11 months 9 times out of 112 years.  The last time the Dow rose in 10 months of the year was 2006.

Number of Months that Dow is Positive Per Year

Will there be more QE?

Given that Mario Draghi announced unlimited asset purchases last week, equity markets have been rallying along side the Euro; however, if Draghi ends up exercising his buying power and Bernanke doesn't announce more QE tomorrow, the Euro rally may be short lived.  Since 2009 (as theory would predict) the value of EUR/USD has been closely linked with the relative size of each central bank's balance sheet.  The more that the Fed prints, the more the EUR gains against the dollar.  The more the ECB prints, the more the EUR falls against the dollar.

Euro value ECB Fed Balance SheetRecently following two sizeable LTROs the ECB balance sheet has grown significantly to eclipse the Fed balance sheet (in nominal fiat/local currency terms).  The balance sheet would likely expand even further on new outright purchases.  This implies that there could be further downside for the Euro, unless Bernanke acts to counteract.

The ECB's newfound willingness to expand its balance sheet introduces an interesting game theory aspect to US monetary policy that wasn't as prominent in 2009/10.  If Bernanke wants a weak dollar relative to other global currencies, he may be forced to act further.  Otherwise we could be looking at a much stronger dollar along with the anti-correlated equity prices that come with that.

Of course, who cares if the numerical value of the S&P falls if the dollars that measure its value are worth more?  Depending on his actions, Bernanke might.

Regions Financial Loan Line Utilization

More from the Barclays Financial Services conference...a slide from Regions Financial, a southern regional bank with +$100B in assets which had a lot of trouble with credit quality during the crisis.  The slide below shows loan line utilization improving.  It's a big step forward for this bank just to not have to focus on credit quality, the fact that they are focusing on loan growth shows how far the banking sector has come since '09.

RF Line Utilization

Monday, September 10, 2012

Office Space Vacancy Rate Historical Chart

There are a number of investor conferences going on in New York currently.  One of the largest is the Barclays Financial Services conference where CBRE, the largest commercial real estate broker in the country presented today.  These slides were included in the deck, which I thought were worth posting for current/future reference.

CBRE Commercial Real Estate Vacancy

CBRE Commercial Real Estate Volume

AAPL Stock Performance Near iPhone Announcement Dates

Apple is widely expected to announce a new iPhone on Wednesday.  Leaks of the possible design have been floating around the internet for months, but the final design will be a surprise to many.  For a sense of how the stock could trade, below is a chart of AAPL with the dates of previous iPhone announcements highlighted.  Each announcement date looks like a blip along AAPL's never ending march higher, but it appears that after the announcement date typically the stock consolidates for a bit.

iPhone Announcement APPL

Friday, September 7, 2012

Is Google Trends an Election Indicator?

A personal favorite election indicator is the Halloween mask indicator, which holds that whichever presidential candidate sells more Halloween masks is the one that will eventually win the election.  The indicator has correctly predicted every presidential election since 1980.

The reason it's my favorite indicator is that it's somewhat counter-intuitive (wouldn't you think that you would buy the mask of the candidate that scares you more--the one you aren't voting for?).  It's also a favorite because of what it says about mind share, marketing and elections.  Whichever candidate holds the greater mindshare both at the ballot box and at the costume shop is the one that ends up winning.

Thanks to Google trends, measuring mind share is easier than ever.  The more that people are searching for a candidate, the more that they are thinking about him.  Google trends only goes back to 2004, but in 2004 and 2008, the candidate that was more frequently searched for on Google is the one who ended up winning.

Below are the google search trends for Bush/Kerry, Obama/Mccain and Obama/Romney.  Mccain never eclipsed Obama in searches in 2008, but in 2012, Romney has taken a slight lead out of the Republican convention.  As the election heats up in coming weeks, this could be an indicator to watch.

Google Trends Election Bush Kerry

Google Trends Election Obama Romney

Note the scale is slightly different on each chart.

2006 vs. 2012 Again

I've posted this chart a few times this year already, and figured it might be a good time for an update.  The reasoning behind the comparison is that 2009-2011 traded almost in lockstep with 2003-2005.  So far the pattern in 2012 has been similar to 2006, but the pace of the advance has been a little steeper.  If the comparison holds come year end, the S&P would have to trade sideways or lower between here and then.

S&P 500 2006 vs. 2012

Thursday, September 6, 2012

September 2012 Investor Letter

Below is a letter that is written monthly for the benefit of Avondale Asset Management's clients. It is reproduced here for informational purposes for the readers of this blog.

Dear Investors,

The beginning of September marks an unofficial end to the summer, and for Wall Street that means it’s time to get back to work. The period that begins with going away in May ends with Labor Day, and the news flow, which slows to a crawl in late August, picks back up in September.

Prices set after Labor Day carry a little more weight than they do in July or August because there’s a sense that everyone is back in the office and the judgment of the market represents the opinions of all investors, not just a sampling of those not on vacation. Therefore, what happens in early September can often set the tone for the rest of the year. If the market gets off with a bang, it can lead to more prolonged rallies. However, a less than exuberant embrace of the markets to start September can lead to extreme late month volatility as investors dash for the exits before year end. This year, there are plenty of reasons that I can see the market tipping either way.

On the one hand, there are still plenty of storm clouds. Europe continues to be a source of discomfort, while China is even more troubling. Official statistics and anecdotal evidence are confirming Chinese weakness, and some are starting to whisper that Chinese GDP growth could be as low as 5% going forward. For many US companies, China had been a centerpiece of future growth plans, and so a slowing Chinese economy poses a greater threat to US stock prices than Europe does. On the bright side the Chinese have already cut rates once and monetary policy does tend to be effective with some lag, so worries about China may be slightly premature.

While international markets show weakness, the US continues to be a relatively brighter spot on the world stage. Economic activity remains sluggish, but so far the consumer isn’t slowing further. Retail sales for the back to school season were extremely encouraging, and best of all housing is showing signs of genuine strength. Over the longer term, I remain skeptical of what housing prices will do in a rising interest rate environment, but in the near term, inventories have finally normalized and pricing is beginning to rise. Psychologically, individual investors still seem much more comfortable investing in real estate than in stocks. At these relative prices, I think that’s misguided, but increased that positive sentiment may produce some near term price appreciation. From an economic standpoint, housing has been the missing piece for the US recovery and so if the housing market returns, we may see a stronger economy yet to come. This includes an employment recovery, which would be a huge surprise to the stock market and could provide a boost to new all time highs.

Between here and there, we still have to contend with plenty of politics, including the presidential election and most importantly the fiscal cliff. How congress handles that problem could make or break the next few months. The most likely scenario is that congress will kick the can down the road again, but with the US congress anything is possible.

Our positioning is mostly unchanged from August: highly conservative cash position, with the expectation that our stock picks will carry our portfolios. A pullback would be more than welcome to give us the opportunity to make purchases at lower prices.

Scott Krisiloff, CFA

Opinions voiced in the letter should not be viewed as a recommendation of any specific investment. Past performance is not a guarantee or reliable indicator of future results. Investing is subject to risk including loss of principal. Investors should consider the suitability of any investment strategy within the context of their personal portfolio.

Thoughts on Today's ECB Action

Equity markets are rallying today on news out of Europe that the ECB stands ready to conduct Outright Monetary Transactions (OMT) of sovereign debt.  This is the second major monetary weapon that the ECB has used to try to combat the European situation.  The other, performed earlier this year, were Long term refinancing operations (LTROs).

Below is a comprehensive list of ECB monetary tools for a framework of where OMT fits vs LTRO (note LTROs were extended to 3 year maturity in 2012).  The table is from a monetary policy primer that the ECB put out in 2011.  It can be found: here.

ECB Monetary Policy Tools

Even though the tools are listed separately, in the current framework, there isn't much difference between LTRO and OMT.  In both operations, the ECB is effectively taking unwanted sovereign paper of maturity 1-3 years out of the banking system and onto its balance sheet.  The major difference is that the ECB committed to a range of size for LTROs (the two combined ended up being over 1T Euro).  For the OMT, the ECB is keeping the promise open ended.

The other main difference is that it's unclear to what extent the LTROs were fully sterilized.  Deposits ended up back at the ECB, but the ECB didn't exactly lock up the new liquidity by issuing ECB debt securities.  The "sterilization"mechanism of the LTRO is that eventually after three years the money comes back to the ECB when the repo is settled.  But until then the money supply is effectively raised.  With OMT reports are suggesting that the ECB will sell current securities holdings and thereby not increase its balance sheet.  This would make OMTs much less effective than LTRO as a QE mechanism.  It would also limit the size of OMTs to roughly 270B Euro of securities that are already on the ECB balance sheet.  However, an important undiscussed tool that the ECB has is the issuance of debt securities to absorb liquidity.  If the ECB issued debt to absorb OMT purchases, this could make even sterilized OMT a program of unlimited size.  This option would effectively be a debt swap, sovereign debt for ECB debt across the entire Eurozone.  With central banks every program has the possibility of being of unlimited size, OMT could formalize it.  That's the important point.  

Central banks have unlimited authority to print money if they choose to do so.  The reason that the US isn't in a European-style situation is the unwavering belief that Ben Bernanke stands ready to do everything possible including buying US government debt with printed money to ensure that the US would never default.  Up until now the markets seemed to not believe that the ECB would act similarly, even though the ECB has repeatedly intimated that it would.  Perhaps today the market is finally getting Draghi's message.  

Ultimately it comes down to whether or not the market believes that Draghi is willing and able to buy sovereign debt in unlimited quantities.  If the market does, then we could have a "long lasting" solution to the European problem--at least as "long lasting" as the US or Japanese debt solution is.  Of course you cant solve an insolvency problem with liquidity and so in the case of all three regions, monetary policy can only be so effective.  If debt and deficits aren't reduced in real terms then policy has only shoved the burden onto the monetary system with inflation as the result.

Wednesday, September 5, 2012

Facebook Mostly Uncorrelated to S&P 500

The S&P 500 is down slightly with a couple hours left in the trading session.  However, one stock that is bucking the trend is Facebook, which is up almost 6% on news that Mark Zuckerberg wont be selling any of his shares for at least a year.

While the divergence is mostly just a quirk of the news-flow, it seems that this isn't the first time in Facebook's short history as a publicly traded stock that the daily change of FB is in the opposite direction of the general market.  In fact, because FB has mostly gone straight down since its debut, the stock has shown almost no correlation with the S&P 500.  Since it began trading, the correlation coefficient is 0.02 and since the start of the 3rd quarter, it is -0.15.  In the context of modern portfolio theory, FB is a great hedge!

Nonfarm Payrolls Relationship to Jobless Claims

On Friday, we'll get the monthly employment report, which is expected to show an increase of 130k non-farm payrolls.  Even though the broad employment report comes out once per month, each Thursday we get a glimpse of what the employment situation looks like from initial jobless claims.  Initial claims reports can often move the market, but how good is the initial claims data at predicting payrolls?

Below is a regression of the 4-week trailing average of initial claims against the monthly payrolls data.  The r-squared of the simple linear regression is .54--not a perfect correlation, but relatively meaningful.

Recently, the 4-week average of initial claims has risen somewhat, back to 370k.  From the regression 370k initial claims would imply somewhere around a 55k increase in non-farm payrolls.  This would be well short of estimates.

Tuesday, September 4, 2012

ISM as Recession Indicator

ISM was reported at sub 50 for the 3rd month in a row.  Does that mean that a recession is imminent?

Below is a chart of ISM stripped down to only include times that the indicator has been below 50 for at least 3 months in a row.  There have been roughly 17 periods in which ISM has had a 3 month sub-50 streak.  Of those 17 times, 6 have been outside of a recession: 1951, 1967, 1985, 1995, 1998 and 2003.

Sell in May and Go Nowhere...

With summer 2012 in the books, below is a chart of the S&P 500 since May 1.  Despite a reasonably large pullback to start May, at the end of summer we find the average right where we left it.  From open to close the S&P 500 was up 0.62% over the time period.

Dow Monthly Best and Worst Returns

Aaaaaand we're back.

Now that we're past labor day, the summer of 2012 is (unofficially) over.  Kids are headed back to school and everyone else back to work.  For the market, the transition to fall has historically made for a bumpy September.  Below is a chart of Dow Jones returns since 1900 showing the maximum and minimum monthly returns for each month as well as the average return.

Not only is September one of three months that shows negative returns on average, it also has the distinction of being the month with the greatest negative skew, meaning that the worst month in the history of the Dow was in September.  Of course, there is nothing mystical about these numbers, and just because September has historically been a tough month doesn't mean it has to be in 2012.  Nonetheless, with the S&P near YTD highs, perhaps it's wise to proceed with caution.