Sunday, December 28, 2008

Earnings Week of 12/29 (Why Bother? 2 - Electric Boogaloo Ed.)

I hope everyone had a great Christmas with family and friends.

So unsurprisingly, another week with no earnings. Well, not zero exactly but awfully close - CALM (Cal-Maine Foods) on Monday. That's it. Only one company made it through my filter.

Enjoy the college football bowl season and New Year's Eve. I'll try to do some sort of substantive post in the next few days since there probably won't be a whole lot going on in the market to warrant the attention.

Monday, December 22, 2008

SPX and P/E

In an earlier post, I had looked at some of the earnings forecast revisions that S&P had made in the past months. This time, I'm going to confine my discussion to historic PE levels and implications for the market in the future, considering the current earnings expectations.

For this, I downloaded Robert Shiller's monthly S&P data set (see sources at bottom) that goes back to the dark ages of the market. But since I just couldn't see how the S&P's valuation in the 19th century was relevant, I decided to restrict the set to 1950 until the present time. There are some caveats with the set that he explains and you should read but that I will omit here. Shiller's data set uses the "as reported" earnings as opposed to "operating" earnings. The former includes all the write-downs, write-offs, one-time expenses, etc. whereas the latter omits all of these things and is typically the number that you will read has been forecasted by analysts. Here is the chart of P/E & SPX. SPX on this chart is on a log scale to allow the movements in the 50s to be seen.

The last 3 months in the data set are estimated using the actual SPX levels but with the most recent S&P Q4/2008 EPS estimates. The average P/E from 1950 to present is 16.59 with a standard deviation of 6.76. The majority of the points (~73%) fall withing +/- 1 standard deviation. The only points that are above +2 standard deviations (PE>= 30.06) are unsurprisingly on the high end of the distribution. Approximately 4.2% of the months fall into this range and perhaps also unsurprisingly, essentially all of these points originate in the 2001/2002 bust period.

The next step was attempting to derive something useful out of this historic information. If you have had the displeasure of viewing any financial TV since the market began crashing in earnest, you've likely heard that this is a "great time to buy stocks because they are undervalued historically," or something of that nature. What seemed like the best thing to do with this data set was to bin the monthly PE values against 1 year SPX % returns and compare the data sets to see if there are any statistical differences.

In the chart, you'll see some circles that overlap and some that don't. The degree of overlap indicates how distinct these sets are. Similarly, the positive values in the comparison's table (just below the mean chart) show which groups are (and are not) connected. The deviations within each group are rather large, however the bins (>+2 std. devs, +1 to +2 std. devs, -1 to +1 std. devs and <-1 std. devs) are - at least on the extremes - relatively distinct. The +1 to +2 std. dev and -1 to +1 std. dev groups are not distinct and the very small circle is the representation of the former category. The summary for average 1 year SPX percent returns: <-1 = 13.91% -1 to +1= 8.42% +1 to +2 = 6.41% >+2 = -2.14%
Entire data set: 8.66%

So... where is the PE of SPX currently? Well, if you believe the S&P EPS estimates for Q4, the trailing 12 month PE should be a bit over 18. Not exactly in the "cheap" range to say the least but not as wildly overvalued as it had been in the 2nd and parts of the 3rd quarter. Most optimistically, I'd say SPX is averagely valued and an average return could be expected rather than a sharp rebound.

One other topic that I've not heard addressed in a very satisfying way: multiple contraction and multiple expectations if appetite for securities disappears or diminishes in the retail arena. After all, a lot of people would have been served quite well by simply putting their 401k contributions into US treasuries for the last 10 years. (Yes, I'm aware this is simplistic and overlooks dividends. Maybe I'll look at that in the future.)

Sources: (download ie_data.xls)
S&P 500 EPS estimates (see link on right)

IV Implosion

I just assume that very few people would read my little blog randomly. After all, I'm not well-known, don't advertise and am not an extremely frequent poster of commentary. However, I'm sure it would help the random reader to have some point of reference for a few of the phrases I use from time to time during my one weekly feature, the earnings look-ahead.

One of the considerations that often pops up is implied volatility, particularly in reference to historic volatility. At this point, I am assuming some basic familiarity with options and the different parameters (delta, theta, etc.) affecting the price. I wrote this little bit below over a year ago but it still holds true and illustrates the concept of IV implosion quite well. The specific date of the event noted below escapes me at this point but it is nearly irrelevant anyway.
AMLN watchers had been anticipating exenatide LAR results for a long time and consequently had driven IV up to around 80 (maybe higher), in turn inflating the value of both calls and puts. When the data was finally released on Wednesday morning, the stock tumbled about 3%. Obviously, the call options would be affected. But look at this chart:

The puts lost nearly 50% of their value also, even as they went in the money. Of course, there's a lot more math involved but this is the best illustration of just how IV implosion works when it comes to highly anticipated events like data release in biotech and earnings calls.

Unfortunately, I can't remember what day this was so I can't find the share pricing graph to match up with the options pricing. But as stated before, it's largely irrelevant to the illustration.

Sunday, December 21, 2008

Earnings Week of 12/22 (Why Bother? edition)

Suffice to say that this will be a light activity week in the trading and financial world. And the earnings release schedule is certainly reflective of it. It is so light - as you'll soon see - that it's not even worth posting up the link to the spreadsheet. This actually worked out well, since my macro sheet required some maintenance and updating with a new op-ex calendar for 2009 and so on.

Monday: RHT (Red Hat) and WAG (Walgreen's) release. Break-even percentage moves are +11.16/-29.26 and +12.15/-10.85 respectively. Neither have been historically volatile immediately around earnings but have moved considerably between release and op-ex so perhaps watching for a directional signal at that point would be wiser.

Tuesday: Nothing made it through the filter. For the sake of completeness, MU releases but I have no commentary to offer on them.

Rest of week: Nothing at all. Truly, a slow week. Enjoy Christmas!

Keepin' Score (12/15)

BBY - I said: "Positive news could boost them to the 29 area..."
What happened: +0.5 points for highs of 29.04 and 29.66 on 12/17 and 12/18 respectively, despite some rather grim comments. I would add that I really should change my phrasing from "positive news" to "positive reaction" since perception and reaction seems to have little connection to whatever is stated or implied.

NKE -I said: "NKE is intriguing but the options pricing is very reflective of the chart and has a break-even low price of 42.50, which would be just below the recent lows. Another one to probably avoid unless you feel like gambling with naked puts on op-ex week."
What happened: -0.5 points since NKE would have been profitable on a strangle when NKE hit 54.25 on the 18th.

JOYG -I said: "The break-even high at 24.88 leaves little room for error with the 50 DMA just above that at 24.98. Another one with no clear reason to play on op-ex week."
What happened: -0.5 points since JOYG would have been profitable at the high price of 26.50 on the 17th.

RIMM -I said: "This one is attractive to play as a strangle, even with the warning that these contracts will be worthless if the shares do not make the appropriate move."
What happened: RIMM gave good guidance and the 2.46 which would have been kind of a worst case price for the strangle would have paid off 59 cents when the 40 calls sold for 3.05. (They peaked higher than that, later.) +1 point for getting the strangle call correct.

Total: +0.5 points for the week.
Aggregate Total: +1.0 points

As I was writing this week's Keepin' Score recap, it occurred to me that I should have some kind of standard and consistent scoring scheme going forward. Here's what I was thinking:
+0.5 points: getting a high or low level correct even if the release isn't worth playing.
-0.5 points: stating a particular release is not worth playing and then it turns out that it would have been profitable to do so.
+1.0 points: Recommending an ultimately profitable strategy.
-1.0 points: Recommendation is not profitable.

I'll probably tweak them a bit as different situations arise but they should serve as a start.

Tuesday, December 16, 2008


Is there any other commodity that nearly everyone in and out of the market has an opinion on? It’s almost enough that I hesitate to add my small voice into the howl of market opinion. But that’s never really stopped me…

Other websites and news outlets have already reported on vehicle miles traveled. Here are two charts showing vehicle miles traveled (VMT) both on a rolling 12 month basis and with the price of crude since 1986. There is clearly a regular monthly variation and this year is no different in that regard.

This year, the percentage increase from September to October in VMT was 7.27%, as opposed to an average of 5.62% in the 5 years prior, which certainly would indicate that the plunge in gasoline prices has allowed for more driving. The year-over-year percentage change level has not been seen in the data series since the late ‘70s timeframe, which is saying something in this discussion.

But obviously the VMT is not the majority of the story, considering oil continued to accelerate upward for a few years even as the year-over-year mileage driven started to slump. For a second piece of the oil price puzzle, NYMEX has to be checked.

Since last September, I have been tracking open interest of crude contracts on NYMEX since there is no source of this historical data that I was able to locate. Once a couple of months of data were collected, the pattern in open interest was apparent as seen in this chart:

Peak open interest since last May has fallen off considerably on a year-over-year basis reflecting liquidation of a portion of these contracts rather than the continued rolling of them from month to month. Back in July of 2007, I was fortunate to stumble upon Hussman’s article titled, “The Outlook For Inflation and the Likelihood of $60 Oil.” In it, he stated:
“In my view, the problem will emerge a few months from now, as a) economic demand softens further, b) planned production hikes actually emerge, and c) weakening price momentum encourages speculators to close long positions instead of rolling them forward. At that point, I expect that net speculative positions will plunge by 10-15% of open interest and we'll see a sudden glut on the market for spot delivery. It should not be surprising if this speculative unwinding takes the price of crude below $60 a barrel by early next year.”

This statement was made when oil was still above $130/bbl and so really is impressive in my mind. But the interesting thing is that the open interest didn’t take until the fall to unwind – it actually began in July. The chart here shows the peak open interest levels and the year-to-year percentage change. The February contract peak should be occurring in the next week as the January contract nears assignment. I don't expect that there will be significant additional liquidation.

Additionally, there is the subject of contango vs. backwardation. For almost the entirety of the run up in crude oil pricing, the spread between the front month contract and 6 months out was negative (backwardation) meaning that delivery sooner was worth more than delivery later. However, as the peak in oil price approached this 6 month spread started to flatten out and eventually switched over to contango. Last week, the 1 year spread in contract pricing reached $15/bbl meaning that you could buy oil for delivery in the near month, stick the oil in a tank and sell a contract to deliver that oil in one year’s time for $15/bbl more than you paid – a decent return assuming warehousing costs are not too much. At this point though, it looks like this spread is narrowing a bit which would imply some increase in price or at least a bottom.

Another item worth mentioning, the couple of oil stocks that I track in my oil spreadsheet – XOM & RIG- have been moving up in the last weeks, even as crude has fallen. RIG, a bit more than XOM, has generally traded in anticipation of crude price movement. The caveat here is that RIG has been crushed from its high and still apparently has its capacity contracted for 4 years so some of the rebound could simply be reflective of this fundamental economic health. (Peak oil or not, oil is almost indisputably getting more difficult to lift out of the earth.)

Finally, there is the weakening dollar that has recently breached a resistance level. Where this ends up, I’m not sure considering that there aren’t many other regions that are in considerably better fiscal health than the US. During the run up, it seems evident that using commodities as a store of value against dollar depreciation was a typical trade. However, it also seems likely that many of these players forgot that oil, like all commodities, is subject to supply and demand considerations and if demand side collapses so too will the price.

At any rate, this is all a rather long-winded way of making my case for oil having formed at least a mid-term bottom. I hate to be on the same side as GS on this but there it is.

Dear Baby: Welcome to ZIRP-istan!

Population: You.

Fed Statement

Normally, I dislike throwaway posts, but sometimes you have to break the rules.

Sunday, December 14, 2008

Earnings Week of 12/15

The set up is the same described in last week’s post with the same caveats in place. Perhaps with the added reminder that this is op-ex week and that the wrong side of any strangle will likely be immediately worthless as the IV collapses.

Spreadsheet Link

Monday – No releases made it through the filter. Just as well, since it’s too late to set up for them anyway.

Tuesday – ADBE, BBY, & GS. I’ll say this about GS: anyone who still believes in the reporting of the big financials at this point is a liar or a naïf. Many others have made this point far better than me, but earnings releases for these guys are basically theater of the absurd. That leaves ADBE, which rarely moves more than 5% on earnings and BBY which behaves similarly. BBY had interested me as a short possibility as it was making its climb to the 50 DMA. Gut reaction is to listen closely to what they have to say and watch for a move afterwards. Positive news could boost them to the 29 area, and a very cloudy or negative read on early holiday shopping would cause a failure at the 50 DMA and a fall to the 20 area over several sessions.

Wednesday – See above on GS for MS. CAG, GIS, and PAYX rarely move much. NKE is intriguing but the options pricing is very reflective of the chart and has a break-even low price of 42.50, which would be just below the recent lows. Another one to probably avoid unless you feel like gambling with naked puts on op-ex week. JOYG has in the past been a profitable earnings play, though as I recall that was due to some fortuitous entries. Anyhow, last quarter they dropped 20% dropping below the 30 DMA from which JOYG has peeked above just once since. The break-even high at 24.88 leaves little room for error with the 50 DMA just above that at 24.98. Another one with no clear reason to play on op-ex week.

Thursday – A hodge-podge of releases… FDX already threw out some guidance and was downgraded. The big one here is RIMM. Considering how far they’ve fallen, and the apparent bottom that has been put in, I am cautiously optimistic that the 9.38% move to the upside required for a strangle to break-even could be hit without too much difficulty. Similarly, if RIMM fails at this level there is no support for it until the 30 area and for that level you have to break out the long term chart and check out late 2006. This one is attractive to play as a strangle, even with the warning that these contracts will be worthless if the shares do not make the appropriate move.

Friday – DRI jumped almost 10% on Friday on news or rumor that I apparently missed and can find no news story about. DRI gapped down and then significant buying volume pushed it back up almost immediately before dropping off. It’s hard to know what to make of this, but the Friday bullish engulfing candle sure is impressive and the daily chart is certainly positive. DRI has been only moderately volatile historically and in this market environment, to put so much work into a play seems like a waste of time.

Saturday, December 13, 2008

Keepin' Score (12/08/08)

One thing I've been somewhat remiss about since I started commenting and venturing opinions on how a stock might behave around earnings, is keeping track of how I've actually done. This will hopefully rectify that. If you think I'm being too generous with my scorekeeping, feel free to say so. This refers back to the earnings post for 12/08.

I said: "At the moment, I'm skeptical that this could break through those barriers [20.75 & 21.59] significantly. On the downside, the channel bottom is around 15.50-15.75. Odds would seem to be in favor of some downward movement here."
What happened: +1 point for not closing above 20.75 until Friday but -1 point for expectations of downward movement. Total = 0

I said: "Upside limit here would probably be 129 area (the late Oct high) and the low barrier appears to be around 100 by options expiration."
What happened: +0.5 point for not closing above 129 until Friday.

I said: "the B/E % moves are a bit high considering history. (+27.9%/-19.37%). There is a reasonable chance of being able to leg into a strangle position with much better prices based on the assumption of continued upward price movement in the first part of the week. Calls on Monday, puts later on Wednesday - maybe around the 13 area if you're lucky."
What happened: This is tougher to score. +1 for the leg in strangle/straddle idea even though the week high was only 11.88. -0.5 points for not thinking that the strangle would be profitable based on the break-even numbers from Sunday. LULU closed Thursday at 7.08, over 30% off and far below the break even share price of 8.70. Total: +0.5.

Aggregate Total = +0.5 points.

Thursday, December 11, 2008

Fighting the Last War (or: This Is Not a Replay of 2001)

Who doesn’t want to look at the current economic forecasts and want to do some prognosticating based on the last recession? After all, there's a lot of nostalgia for a recession that was practically over before it was even called out for being what it was. The NBER declared it started in March 2001 and over in November 2001. And lately, I’ve read a few market projection opinion pieces that sure sound like they are trying to run the playbook from the last recession, even if that premise is not explicitly stated. So what’s different?

As usual, I’ll start out with a chart:
This chart needs a little clarification:
- The days are done on market sessions for SPX rather than on calendar days. (True for subsequent charts as well.)
- Day 1 is one calendar year prior to the NBER declared start of the recession. March 2001 for the tech bubble and December 2007 for the current one.
- The data series noted with “TB” are the tech bubble runs.

All things considered, the charts are not that much different if you were just to take a quick glance at it – U3 moving up, Fed slashing rates, SPX plummeting – albeit at much faster rates on those last two items. But when more detail is added to the picture it gets far darker.

Here are some additional specifics on the unemployment rate then and now. (For more, revisit my inaugural blog post.)
At a similar point in the last recession, U3 (SA) was 5.7% vs. the 6.7% currently observed. But worse, the participation rate was 66.6% whereas now it is 65.8%, which likely adds to the general malaise in the employment area.

Unemployment is not the entirety of the picture here, however. There is also the consideration of the recovery from the recession in 2001, and this is where it starts to get uglier. Homeowner’s equity stood at 56.98% in Q4/2001 and consumer credit held by commercial banks was just about $235B. Flash forward to today and homeowner’s equity as of Q2/2008 rests at 44.66% and consumer credit has shot up to $363.1B. Additionally, net equity extraction has declined precipitously to $9.5B – probably reflecting the combined reality of less credit available via HELOCs and limted remaining equity in homes. Over the period from Q3/2001 until the Q2/2008, the total net equity extracted has been approximately $3.72T.

And all of this is happening on the backdrop of an economy for which consumer spending drives nearly 70% of GDP.

My 2 Cents worth of 2001 narrative: The broad economy stabilized but many households had one less income, reflected in the participation rate which never recovered. Once the employment situation allowed for enough comfort to do so, these households and others, decided to juice their lifestyles (despite new income levels) via equity withdrawal and spending on credit. (See chart at source 4 below)

Bottom line: be very wary of anyone who sounds like they are trying to replay the last recession. The conditions are vastly different and far more disturbing.


Monday, December 8, 2008

The Chop!

These are truly interesting times. Since October 1st the average intraday range of SPX based on percentage of the opening price has been 5.99%. For the period from 1962 until September 30th, that same value has been 1.44%. Rounding off the October 1 – present period to make a 50 session average of this intraday range finds that there has been no period since 1962 that has seen continued intraday volatility on a level remotely like this.

The last peak was in October 2002 just a bit above 3% and the period around the 1987 crash was 3.50%, though that latter reading is skewed considerably by a 3 day run of 20.47%, 12.96% and 9.5%. Excluding these three sessions and the volatility in the days before and after is essentially unremarkable. Here’s a plot of the 50 day average of SPX intraday range as percent of day open:

Some keen observers will be saying to themselves, “Hey, that looks a whole lot like the plot of the VIX and SPX.” And of course, they would be right for reasons I will get to below. But just so those clever folks can pat themselves on the back for something, here’s the chart of the VIX and SPX. (People that can recognize a VIX chart on sight need all the support they can get, after all.)

The reason that these charts are essentially identical (except for the noise in the VIX plot) lies in how the VIX is calculated. On this particular topic, it really pays to read the CBOE VIX white paper that lays out the calculation method. While the calculation itself is straight-forward, it will likely cause some head-scratching the next time you hear someone telling you that the VIX is predicting this or that for the markets. Here’s the basic overview with a few details left off for brevity:

The VIX is essentially a summation of the call/put average option prices (weighted for strike and time) on the SPX that is limited by two consecutive strike prices with zero bids. (For example: with SPX at 900, there might be no bids at 840 or 850 for puts and so 860 would mark the lowest term limit included in the VIX calculation. The call side works conversely.) The practical consequences of a calculation like this should be immediately obvious. When the SPX covers an intraday range of 6% as in the past couple of months, the number of strikes that will attract bids grows considerably and thus the terms summed in the equation grows. There have been numerous articles written and observations made about mean-reversion in the VIX. While the observation is more or less correct, in theory at least, the VIX has no upper limit.

So that’s all the VIX is – a weighted summation of a varying number terms based on the prices derivatives traders are willing to pay for contracts. This is only predictive if you believe that derivatives participants tend to be overly complacent during good times and too willing to pay too much for a hedge during bad times. But that assertion deserves a closer look so the next chart will show the VIX and SPX closes since the creation of the VIX. (It is worth noting here that the calculation of the VIX has changed in that time – the CBOE white paper details the date and nature of the changes.)

The correlation in the long term is 0.1716 – not really a strong value and more interestingly implying a direct rather than inverse relation. But that’s not being very fair to those people that believe the VIX has more to tell over a shorter term. In that respect they are correct: over any given 5 trading periods, the average VIX/SPX correlation is -0.6560. This is a pretty good result and the negative value is expected considering the typically inverse nature of the relation. However, this does not necessarily mean there is any causative or predictive nature to this relation. For that, offset data of the VIX and SPX closes can be used.

For me, a simple way to check whether or not one series is more predictive or reflective is simply to offset the data sets by varying periods and check the correlations against the original set. The inclusion of a chart for visual reference also helps (though not included here). As noted before, the average 5 period VIX/SPX correlation is -0.6560 and the entire set correlation is 0.1716. The table below shows the correlation rapidly breaks down to essentially none in the average 5-period correlation. The entire set correlation actually rises incrementally. To me, this implies little of predictive value and again shows that the VIX is simply reflecting the range of SPX.

Bottom line, using the VIX as a predictive tool on its own is of dubious merits and could lead to far worse. There are perhaps some possibilities in using some TA on the VIX to produce more reliable signals but the VIX on its own... you'd do as well flipping a coin.

- Data used is current up to December 5th.

Sunday, December 7, 2008

Sector Rotation?

“The market doesn’t build rallies on toilet paper.”

Sure, the more jaded and cynical will make funny comments about the Fed monetizing the ever-expanding deficit in the future. And the very darkest souls might even make references to burning money to stay warm a la Weimar days. But I still think that statement stands on merits – consumer staples is the sector that money gets parked in when it has no better places to go. And when consumer staples, healthcare and utilities are the best performing sectors, the broad market isn’t really going to go anywhere in an economy that is still 70% dependent on consumer spending.

Here’s a chart from Yahoo! showing the various sector SPDR ETF relative performances over the past year-to-date:

SPY has been abysmal and XLP (Cons. Staples) has been the best relative performer followed by XLV (healthcare) and XLU (utilities) – generally not the sectors one would expect to lead a SPY rally.

However, in the last week the better performing sectors have been the year’s most beaten down – XLF (financials) and XLY (cons. discretionary). The collapse of energy has been one of the big reasons that SPY has not advanced further. Energy (XLE) and commodities (XLB) played a massive role in the SPY advance after the tech-bubble collapse – perhaps even more so than the financial sector. This chart link shows that pretty clearly: SPDR 1998-Present.

To go one step further, since August when the week's leading sector was XLF, XLY or XLK (tech) the average return on SPY was 0.33%. While that's not great, SPY has shed -30.3% in the same period. Further, when a defensive sector like XLP, XLV, or XLU has been the week's best performing, SPY has returned an average of -6.87%.

This is all well and good, but it is backwards looking. XLF and XLY have both pulled off of their lows and the 30 DMAs that had marked strong resistance areas in the past couple months has been breached in the case of XLY and being challenged in the case of XLF - both encouraging signs. Particularly so since SPY itself seems to have formed something resembling a bottom and the 30 DMA in that case has almost no room left to fall from a math perspective barring a massive blowout of the 800 level pretty soon.

In the coming week, there are no earnings releases of great note (see previous post) and the macro releases are generally of the variety that are ignored until Friday morning when the retail numbers for Novemeber are released. I am of the opinion that home sales numbers are kind of like GM in the Dow - they've been so bad, so long that they can no longer do any significant damage. The initial claims number coming up has some noise in it and the last few week's have been bad enough that it would seem very possible that an incremental improvement appears. However, even if it doesn't the last unemployment figures were horrific and essentially ignored by the market anyway so there's no reason to think this one won't be as well. Friday makes me nervous though since it will contain the first couple of holiday shopping days.

Earnings Week of 12/08

Time for another installment of the earnings spreadsheet...

Last weeks entry into this series was rather abbreviated because A) I was trying to figure out the html bit for referencing Google Docs in frames, B) it was Thanksgiving weekend and C) pure laziness.

Anyhow, here's a little more explanation: the spreadsheet grew out of an effort to capitalize on options strategies such as strangles/straddles and so on around earnings releases. With so many companies releasing their reports during the height of earnings season, it becomes difficult to cull through all of the information to find companies that might reasonably profitable to play during this release. The various pieces of data - price, share ownership, short interest, close strikes, PE, PEG, etc. - were all considered to be of some importance. The spreadsheet/macro itself actually allows for screening of the stocks for an option activity threshold (based on prior month data from, a minimum share price and the appropriate interest rate to base approximate IV calculations from. Finally, there are some very useful links to charts and sites like and for additional investigation. By eliminating companies with illiquid options and shares with prices below 5, it becomes much easier to find companies that might be worth investigating further.

Caveats: It is very important to keep in mind that this is a snapshot of the data on whatever day I produce it. The spreadsheet does not dynamically update it so whatever day this is posted, this is it. And considering volatility as of late, that could mean a signficant divergence from Sunday when I post these until Wednesday/Thursday which are typically the heaviest days for earnings releases. Finally, the share ownership data (short interest for example) is generally 1-2 weeks old so that should be kept in mind.

Monday: HRB & NSM. HRB has been moderately volatile in the past few quarters and has been in a channel of sorts since early October to the present. The top of this channel looks to be about 20.75 and the 200 DMA is right above that at 21.59. At the moment, I'm skeptical that this could break through those barriers significantly. On the downside, the channel bottom is around 15.50-15.75. Odds would seem to be in favor of some downward movement here. (I don't usually discuss semiconductor companies so NSM will remain unremarked upon.)

Tuesday: AZO, SAI, KR. None of these have been particularly volatile around earnings time in the past quarters. AZO has made a pretty spectacular run from the 87 area on 11/20 to 121.48 on 12/5, closing just above the 200DMA of 120.99. Upside limit here would probably be 129 area (the late Oct high) and the low barrier appears to be around 100 by options expiration. SAI, I know nothing about. As for KR, it seems only interesting from the perspective of seeing if their suppliers have been passing along any falling commodity prices and how this might affect margins.

Wednesday: Nothing made it through filter.

Thursday: CIEN has been volatile in past quarters (with the average absolute move until op-ex being over 25%), but at 6.47 is it really worth bothering? COST is rarely volatile around earnings and any attention paid there should be to see comments on shifting consumer patterns. Then there's LULU. LULU has been a short target of mine for awhile based on it being a specialty store in a period of consumer weakness and an expectation that high multiple stocks would be taken to the woodshed regardless of individual merits. However, the in the last week or so quite a few retailers have jumped on the basis of early reports of sales. (No data on margins, but hey - you can't ask for everything.) Anyhow, LULU has a low share float and high short interest which would normally make this something to investigate but the B/E % moves are a bit high considering history. (+27.9%/-19.37%). There is a reasonable chance of being able to leg into a strangle position with much better prices based on the assumption of continued upward price movement in the first part of the week. Calls on Monday, puts later on Wednesday - maybe around the 13 area if you're lucky. Friday the retail numbers come out so that is worth remembering when playing a specialty retailer like this.

Friday: Nothing.

Wednesday, December 3, 2008

S&P... emphasis on the Poor's

S&P has been busy this last quarter.

I don’t download the SP500EPSEST.xls file every day but probably every couple of weeks, I check it out to see what’s changed. Unfortunately, I haven’t been able to find any source of data that watches the forecast changes from S&P over time. (If anyone knows of one, please let me know.) Every time I’ve opened the file, the revision to Q4 earnings has been negative.

The chart here shows just how drastically the operating EPS estimates have been cut from early September until the present. The quarter ending on 6/30 reflects actual data reported and the 11/12 value for the quarter ending on 9/30 is also real reported earnings.

But it helps to contextualize these revisions. So, the next two charts that illustrate this well. The first shows operating EPS (operating omits write-offs/downs) on a linear scale from 1988 to Q4/2009. The second is the same chart but with a log scale for the EPS side only. The pink line uses the actual operating EPS data. (SPX data was only included up to the end of the actual EPS data series and so stops on 9/30/08.)

Clearly, the revisions downward are reflective of the reality of this most recent quarter’s results. What is most intriguing is the expectation for growth in 2009 that is still built into these forecasts. The linear scale in the first chart shows the steeper slope of these forecasted EPS numbers compared to the entire period of 1988-present. This seems absurd in the face of a mounting recession and the deleveraging occurring. But again, it helps to have context.

Going back to the linear scaled chart, the period marked out from points 1 to 2 (Q2/92-Q2/98) had an average quarter-to-quarter percentage growth of 3.54%. The period marked out between points 3 and 4 (Q3/01-Q3/06) notched average quarter percentage growth of 4.63%. The average forecasted percentage growth rate for Q4/08 to Q4/09 using the most recent S&P forecast is 7.60%!

Making a somewhat optimistic assumption of quarterly EPS growth being an average of the 1-2 and 3-4 periods (4.08%) reduces the forecast considerably.

The forward PE for S&P's forecast at 850 is 10.51. For the reduced forecast it is 11.73. AQR's Cliff Asness has estimated forward PEs have historically been around 11. Considering the optimism of S&P's estimates and how much they've been revised downward, assigning a fair value to SPX at this point would be tricky at best. I'll revisit this in the future with respect to historic yields and PEs a bit more.


Tuesday, December 2, 2008

Room to Maneuver?

That the march by the world's central banks to what seems to be an inevitable zero interest rate policy leaves very little room to maneuver for these institutions has not gone unnoticed or uncommented on. Many others have covered that ground already.

A couple of weeks ago, I read The Great Crash of 1929 by John Galbraith. It's as light a read as possible considering the topic. There were a lot of details that warranted close attention but one thing that struck me as interesting was Hoover's decision to cut tax rates on both individuals and corporations. This was ineffectual due to the fact that the cuts (at least for individuals) were basically insignificant. Galbraith cites a man earning $5000 received a tax cut from $16.88 to $5.63. While these cuts were well-received, they did little to actually help the problems.

This got me thinking about the latest tax rates and how much room there is to maneuver for the Federal government in terms of economic stimulus via tax cuts as opposed to outright cash returns.

The chart here shows a few things from 1975 to 2008. The bars indicate median household income in nominal dollars, the upper limit of the tax bracket for a married couple filing jointly of the median income, and the lower limit of the maximum tax bracket. The lines indicate the marginal tax rates (MTR) for this median household and for the maximum tax bracket.

Two major things stick out. First, the significant drop in the highest MTR from 70% in 1975 to 35% in 2008. Second, the MTR for the median household income has not changed since 1987. There is also the fact that the lower limit of this maximum tax bracket has increased considerably from $250k/year in 1993 to $357k/year in 2008.

Considering the very large annual deficit already run by the Federal government, it seems difficult to imagine further tax cuts on what are already low rates by relative standards. Even if tax cuts were made it seems unlikely that they will be significant enough to kick start spending or borrowing again anyway.


Monday, December 1, 2008

Earnings Week of 12/01

A project of mine that has been ongoing for the last year has been the automated collection of data for earnings releases. The spreadsheets below are the product of a macro that queries several different data sources, performs some basic calculations and references. The embedded chart below is more or less useless due to the constraints of the blog format. The actual link:

will be much more helpful. I got lazy with Thanksgiving weekend and thus did not run the macro for Monday so it's blank but the other tabs have data. None of my usual commentary, however.

U3, U6, & the Participation Rate

I've been having a running conversation with a friend of mine regarding how dire the employment situation really is. She believes that BOL statistics do not reflect the reality that so many people's unemployment benefits have expired or they have simply stopped looking for work.

Just so you don’t think I’m being a cheerleader or a naïf when it comes to government statistics or the broad economy, I decided to do a little hunting and digging. Several years ago, I used to post and debate things on Slate in the Moneybox forum and there were a few of the posters that were engaged in an ongoing and occasional effort to tease out what exactly the statistics meant. One of the things that was brought up several times was the “participation rate” which is exactly what it sounds like – what percentage of the available labor force is engaged in work.

Anyhow, I dug back into the BOL website and found the participation rate series and then compared it to both U-3 and U-6 measures. U-3 is the most reported measure of unemployment but, as you note, it doesn’t quite capture all unemployment. U-6 is a much broader measure and counts discouraged workers, marginal employment, etc.

So here’s a chart:
The participation rate and U-3 series go back all the way to 1950, whereas the U-6 line is a recent development - I believe when the BOL started changing the calculations a bit. The participation rate obviously reflects some basic shifts in work patterns such as more women entering the workforce. This rate peaked out in early 2000 at 67.3% and has since fallen back to around 66%.

I disagree with the statement that BOL statistics do not in any way capture people whose unemployment benefits have run out. I believe that the participation rate does capture this even if they are missed by the counts of initial and continuing claims or the U-3 measure.

The peak labor participation rate was 67.3% in April 2000 and the U-6 (not seasonally adjusted) measure was 6.6%. During the December 2006 trough in U-6 measure was 7.8% but the participation rate was 66.4%. This is a difference of -0.9% from the April 2000 peak and the U-6 measure difference is 1.2%. I don’t believe this is a coincidence, particularly considering the noise in the data.

Bottom line, I agree that U-3 most likely understates the true unemployment situation but I disagree that workers that are no longer collecting unemployment benefits are not counted. The numbers are simply not reported by a lazy and stupid press corps who are either not trained or constitutionally incapable of digging into statistics and attempting to draw a conclusion.

Tangents and Digressions:
I didn’t include it here but I’m very curious if that increase in participation rate in the late 80s and 90s overlaps with any real wage stagnation. An increase in the labor pool would logically depress or at least slow wage growth. Of course, that makes our current situation even more dreadful since the labor pool via participation rate has already shrunk and wages have, if anything, shrunk on a real dollar basis.

I don’t think it’s entirely coincidental that consumer revolving credit leaps during the lowest periods of participation rate: