Temporary Hiatus

In case you hadn't noticed lately, the most substantive posts on things like SPX EPS, oil, unemployment and the like have been conspicuously absent. Real life obligations and requirements have a knack of hoovering up time.

So, I'll try to resume the regular NYMEX updates and such next week maybe. And the earnings post should (hopefully) resume next Sunday. Apologies to anyone who missed it, though inferring from the lack of notes in my inbox that couldn't have been too many of you!

Earnings Week of 4/27

Here's the week's earnings spreadsheet:



Spreadsheet Link

Another week with tons of earnings. Too many for commentary, plus I'm under-the-weather today so the spreadsheet will stand on its own again. One note: I boosted the threshold minimum on prior month option activity to 5000 to filter out some of the low-liquidity earnings reports. These types often aren't worth playing anyway since it's hard to trade out of them.

Earnings Week of 4/20

Here's the week's earnings spreadsheet:



Spreadsheet Link

Notice: Google docs is not allowing me to upload the spreadsheet for some reason. Apparently, they caught the Yahoo bug. I'll try again in an hour or so to upload it. Keep your fingers crossed!

Update: Google docs is functioning again. Not sure what exactly the problem was. However, it's now late and I don't have time for a full-on analysis. I'll try to do one tomorrow. Suffice to say that there are a TON of companies big and small this week. One note on the filtering... there were so many on the 23rd that they were overflowing the number of lines that I had created the IV approximation and other queries for. So, I limited the parameters further to a prior month option volume of 5000 and a minimum share price of 7.50. The results are on the tab 0423-B. The other tabs use the standard 2500 volume and > $5 share price. My apologies for the lack of commentary.

Buckle up for the week and be careful!

Earnings Week of 4/13

Here's the week's earnings spreadsheet:



Spreadsheet Link

Monday Update: Welcome Evil Speculator visitors. Someone over there linked to this entry and all of a sudden site traffic is up. Anyhow, to read a bit of background about the spreadsheet and what it is and isn't as well as a bit of history, go here: Earnings Spreadsheet Explanation. This is a weekly thing, posted some time on Sunday (And lately, the only thing that gets posted regularly.) You can click on the dated tabs in the window above to see the different days. Here's the rest of the original post:

Quick look at last week: AA gapped up, faded and then gapped up again the next session. I'd call this a negative because unless you had considerable confidence to fade that initial spike, you'd have taken a loss. However, the vertical spreads on BBBY were a great play as it gapped up about 18% and continued upward. Keep an eye out for these "survival of the fittest" plays like BBY/CC and BBBY/LNT. FDO also did quite well and JOSB did get above that resistance and then bolted. So all in all, not a bad week in retrospect.

Unfortunately, I am tardy getting this update out as I had those dreaded "real life" committments to attend to this easter weekend. This is also going to curtail my standard commentary. Fortunately, there were no releases that made it through the filter for Monday so that's kind of helpful. I'd say that I'd like to post a mid-week update but my posting frequency as of late has been dismal so I'll not make an unlikely promise. Instead here's a brief overview of what's to come...

1st - This is an op-ex week.

2nd - The "Golden Boys" of finance - JPM and GS announce earnings. (Disclosure: long JPM shares, covered calls). I've often noted the ridiculousness of financial earnings likening them to kabuki theatre. WFC's out-of-the-park announcement last week should help people realize that when you get to borrow money from someone at nearly zero rates, then lend them the same money at 4.5% and charge them a fee to make the loan, that to recover, all you need is time. Consider also that GS is considering an equity offering to pay off TARP. Having long ago passed into bizarre-o world, the potential dilution from Warren B's warants and another offering in the works means that GS will likely go to the Moon.

3rd - Faux-financial GE is Friday. GE recently lost its AAA rating from Moody's (BRK lost it a few days later, leaving on 4 companies left with AAA).

Check over the spreadsheet, there are a number of big names on there. Tuesday has INTC, JNJ and GS. Wednesday has ABT, and a key semiconductor equipment supplier ASML. (Yes, finally a mention of a player in that sector.) Thursday has several biotech names (AMLN, BIIB, VRTX) along with GOOG, JPM, NOK. I'll throw ISRG a mention as well since it has often been volatile. Friday rounds out the week with GE and MAT.

That's it for this week. Surprisingly, short interest is higher than I would have expected though that could just be an artifact of Yahoo delays in data reporting. Who knows - at least their sites worked this week.

Earnings Week of 4/6

Here's the week's earnings spreadsheet:



Spreadsheet Link

First, a functional note. Or rather, a disfunctional one. Yahoo is having trouble with another aspect of their finance data. This time the screener won't return data so the the ownership information is stale. Keep this in mind and check your broker for the actual short percentages.

Last week I did a little summary of the week prior and since my other thought on filling this space is of the "misty philosophical rambling essay" variety, I think I'll just stick to a wrap-up. The web is full of blogs with those kinds of entries. So... how did I do last week? First, the OK:

APOL - I thought it would be volatile, but not volatile enough. It ended up dropping like a stone but didn't breach the break-even price in my table. It has since found support on the DMA(200).

MON - My gut feeling was for a return to 80. It closed the week at 81.41 and saw 80 on Thursday and Friday. This still has a nice chart with support from the DMA(30&50) around 79.40 and it might be good to watch with MOS coming out this week.

KMX/MDRX - neither would have been profitable strangles.

The not so good: RIMM - oy... it was profitable and my underestimation of its strength was obvious.

So on to this week's earnings releases:

Monday - BLUD. Biotechs tend to move more on news than earnings. And I don't really know anything about their products.

Tuesday - Earnings season is upon us with AA's release. Also on this day are BBBY and MOS. AA has been beaten badly though it is still well off its March lows - 60% up in fact. I'd guess that a short-weighted strategy would be the highest odds. BBBY has lost one of its major competitors as Linens & Things went BK. I believe this will have a similar impact as BBY and CC. BBBY's chart is looking good and it shot over the 200 DMA on strong volume over Thursday and Friday. Historically, BBBY has not moved much at earnings so a strangle might not be wise here. But I'd be tempted to go with a vertical call spread. Finally, MOS: as noted MON was last week and reaction was lukewarm. MOS has a somewhat more bullish chart and it has certainly made large moves in the past. But 53 on the upside seems out of reach to me so I think I'll avoid this one.

Wednesday - FDO is the only one that really interests me. I've had some success with the Dollar Store and this one before. And as before, if FDO can't make money in this economy it never will. In this case, watching to see the action before the release will be important since it's riding an upward sloping support. If that fails - it wouldn't surprise me to see FDO fill the gap back to early March over the next month.

Thursday - DJI component CVX releases. It is about 7% of the DJI now that some of the more embarrassing components have regained some respect. This one won't move a lot but it is a huge company and worth listening to what they have to say. JOSB is very close to a break-out point around 32. If it gets past this, it could bolt. Otherwise, I'd put downside support at 26, which is well above the lower break-even price.

Auto Sales and Vehicles per Driver

Over at Calculated Risk there have been several posts on the auto sales numbers as that data has been released. CR's take (link to the latest post: HERE) has been that the fleet turnover ratio, currently at a record 26.8 years is unsustainable and believes that the correction in this value will take the form of an uptick in auto sales rather than a decrease in the fleet size. The comments have been in disagreement with this outlook far more than is typical for a post over there. The comments section has typically evolved into a "I've got a 1982 Honda that I've driven around the world 18 times and expect it to make another 2 trips," sort of thing. Not exactly hard evidence. There was one comment in the last string about 2 car families becoming 1 car families. This is far more interesting.

I decided to try to dig up the data on licensed drivers and the registered vehicles to see if there has been a change in the ratio or anything that would remotely resemble a historical "norm.

Here are the charts: the first one containing the data on licensed drivers, passenger cars and trucks along with one line combining those last two. Motorcycles are omitted because in the more recent sources they are not found broken out separately as in the earlier reports. (See the source links at bottom.) Also note that until 1990, the year axis is ticked off in increments of 5 years and then in 1 year increments.

The second chart shows the ratios of passenger cars to licensed drivers and passenger cars + trucks to licensed drivers over the same period. Early on in these data sets, there is a shift in the categorization of trucks and so these early points are omitted. I don't think it matters in the final analysis anyway.

One interesting thing is the decline in passenger cars and the rise in the cars + trucks ratio. I am assuming this represents the change in vehicle mix as the SUV came to be such a dominant class. However, I did not dig very deep into the specifics of the classifications in this case. The most important thing to note is that the ratio of vehicles to drivers is greater than 1 and the 2007 ratio stood at 1.19 vehicles per driver in the US. In 2001 (the last data I can find), the percentage of households with 3 or more vehicles in the US was 23.6%.

If there really is a new sense of frugality that creeps into the American household budget it does not take a great leap to imagine that the ratio of vehicles to drivers might actually fall back closer to 1. This could get even worse if the low interest credit that the automakers have been providing courtesy of the government disappears since it seems very likely that consumer credit is going to be significantly reduced in the coming year. (And justifiably so.) At any rate, simply because the fleet turnover rate has reached a hitherto unknown height does not necessarily imply that auto sales will push up. I think the data and change in patterns argues for a much closer examination of the possibility that the vehicle fleet is reduced.

Sources: FHWA Highway Stats 2006, FHWA Highway Stats 2007, National Trans. Stats Table 01_011, BTS Transportation Stats Annual Report.

Earnings Week of 3/30

Here's the week's earnings spreadsheet:



Spreadsheet Link

This is a relatively light week with only a couple of names worth paying attention to so I'm going to stick a little recap of last week's action in here. Kind of a "Keepin' Score Lite" post for those that have been reading long enough to remember those posts.

Last week, I got a few things correct and few things sort of off.
First the correct stuff:
- Pointed out IV was too high for FMCN to make a profit. Result: peak price about 1.20 below B/E price.
- WSM did get above the 10 mark and spiked up ever so briefly to 12.36 before falling back.
- RHT looked interesting and it closed the week at 16.99 above the strangle B/E of 16.30 and at one point had reached 17.80.
- GME, if you had a long-weighted position you would have done fine as it peaked out at 28.45 just above the B/E price of 28.05 for a neutral position.
- I thought TXI was priced perfectly on the downside but had some wiggle room for profitability on the upside. It benefitted from a strong run and closed the week at 25.10 - well above the B/E price of 20.07.

Things I didn't do so well on:
- I thought TIF had peaked out, but it pushed upward and broke past the DMA(50).
- I didn't think WAG had very good odds to be profitable and it would have been.
- Similarly, I felt CCL wasn't worth the time but it came within a penny of the B/E price in the sheet.
- Not really sure how I managed to overlook BBY last week but that was a stupid, stupid move on my part. I would have treated that like GME given my ongoing thesis that the liquidation of CC has been like BBY buying outs its biggest competitor at zero cost. Hindsight is 20/20 but that's pretty disappointing for me.

So has the rally played out? I mentioned to someone in the middle of this past week that 666 * 1.25 = 832.5 so that was my target for the local maxima. The peak of SPX this week was 832.98. Obviously, it's a bit premature to declare the top here it does fit with the KISS idea of theories - Keep It Simple, Stupid. We'll see, but suffice to say longs are hedged and I am looking for more downside in the coming week, even if it is just a pullback to the DMA(50) around 790.

Anyway, as mentioned earlier the number of earnings releases this week is small. But here they are anyway. One important note: Yahoo! is providing yet another reason why their share price deserves to be where it is today. Again, the data reporting on the options has been dicey and in several instances the puts are intermixed with the calls. I have tried to manually correct, but I think in a few cases I have missed some so be aware.

Monday - SNP. I've mentioned many times on here that I don't like/trust ADR/ADS because of their even worse overseas regulation. The exception would be a company like STO because of its location in Norway. Who doesn't trust Norwegians? At any rate, I am not going to make a comment either way here because I've seen screwy patterns and volume many times in the past.

Tuesday - I think APOL will be volatile, just not volatile enough. Same thing for GIGM. ACH is another Chinese ADR. LEN... a 40% move seems a bit much to ask of any stock in this environment.

Wednesday - nothing. Probably because no bank wants to have their earnings on April Fool's Day. It's just too easy to make jokes. I'm sure LOLFed is sad.

Thursday - Two big companies MON and RIMM. I'll take MON first. Current pricing has an average absolute move of 11.25 which is well within the performance of the last two quarters considering the moves of +19.22% and +18.38% respectively. However, it just moved up from the 80 level and just like the rest of the market has moved basically 25% in 2 weeks time. It's difficult to imagine how much room is left on the upside especially with the DMA(200) looming at 93.20. MON has not been above DMA(200) since October. My two cent gut feeling is a return to 80. Now for RIMM, which is up about 22% give or take in the same period of time. The way that the spreadsheet calculates its break-evens is on a gap in strikes but even buying both at 45 still is no guarantee of success. The downside B/E ends up at 37.90 which is virtually the trough before the latest run and to move up requires a big bounce above the DMA(50). It's certainly not impossible - RIMM has made moves like this in the past - but it seems more unlikely this time around with the indices appearing to hit a local maxima. Of the other two on this day, KMX has shot up about 40% and MDRX about 25%. It seems unlikely that either of these two will be profitable strangles.

Friday - nothing made it through the screen.

Market Sector Valuation Breakdown

I really should apologize for my utter lack of posts in the last few weeks. As noted before, it’s been a combination of unsuitable-for-posting work, lack of inspiration and real-life requirements that have reduced my output to a trickle. Plus, what’s the point of posting work that relies on a data set that might literally be worthless overnight? (See: PPIC announcement, SPX reaction to as Exhibit A.) Anyhow, now that the SPX rally seems to have hit some local maxima, I figured I’d have a go at looking at valuations from a sector perspective. I thought this would be interesting on its own merits, but also because tons of bulls out there continue to state that financials aside, stocks are cheap, cheap, cheap. My belief is that they are not but unexamined assumptions have a way of biting you and giving you rabies. (Look no further than the current real-estate malaise infecting the system for proof of that assertion.)

So, here’s the background: I downloaded data on PE(ttm) and PE(fyf) for 5,214 stocks on the evening of 3/23. Included in the set was the Sector, Industry, and sub-Industry information. Not included were OTC stocks.

The first thing that I noticed was the sheer number of companies with an unreported PE, or perhaps more correctly an undefined PE. Unsurprisingly, the percentage of companies reporting an undefined PE varied considerably by sector. Here’s a snapshot:

Surprisingly, the financial sector did not have the highest percentage of unprofitable companies – that honor went to health care, though largely due to the substantial number of biotech start-ups that have never turned a profit. Anyone that has dabbled in that industry knows how many of those companies fail. On the other end of the spectrum, consumer staples and utilities were the two lowest which makes sense considering their positions in the standard “defensive” portfolio. Please note, this says absolutely NOTHING about the volume of loss within each sector. Case in point, as is clearly stated in the SP500EPSEST sheet by H. Silverblatt: AIG alone accounts for -$7.10 of the -$23.04 reported EPS loss. (Yes, AIG is apparently still in the index!) One bonus: here is a table of the PE Breakdown by Industry, which provides a bit more detail than this sector overview.

Anyhow, one can further refine this by removing the pharmaceutical and biotech industries from the overall total which reduces the overall percentage of undefined PEs to 37.8% making the relative value of the financial group that much worse. The reason for explaining this is that I have never read someone discussing average PE that talked about how they treated the “undefined” result. In the discussions below, the average of any group is defined as the average of the numeric response PE. To illustrate if there were 3 companies with PEs of 5,10 and undefined then the average of the group would be 7.5. Including the breakdown of unprofitable companies really helps add needed detail to the analysis.

Here’s a chart of the major sectors and their PE(ttm) binned out. The sub-0.1 bin is an artifact of an Excel quirk and is a stand-in for the “undefined” bin. This is a percentage chart within sector so that the sector-to-sector comparison is a bit easier to see. Again, it is pretty easy to see the lower representation of the utilities and consumer staples in the “undefined” bin and the very large proportion of the healthcare sector for the reasons mentioned above.

So considering the percentage of unprofitable companies in each sector and the average multiple of the remaining issues, it would appear that energy is perhaps the best value right now if one were to buy into a sector ETF for the long term. What makes this also an attractive sector to me is the average yield – at least on a trailing basis – is the 2nd highest of any sector. The first is the financial sector but this will soon change as the dividend cuts in this sector will far outweigh the devastation in the share price. While the popping of the crude bubble will have similar effects, it will likely not be as drastic going forward. (I did not include the dividend breakdown here.)Further, if/when the demand side returns in energy the price in commodities could be shocking since so many projects were cancelled. And finally, it must be mentioned that the Fed is clearly bent on inflation and commensurate dollar devaluation which can only serve to boost most commodity prices. Let’s just hope the inflationary cycle has both legs – price AND wages. If the latter fails to keep up, the demand side will fall slack as I don’t think the credit will be around to offset the lack of earning power. But that’s a long digression that will be far better covered in more professional places.

Again, all of this must be put in the context that valuation is whatever the market feels like it being. There's a funny quote about how, "only god knows the right PE," and it's true - it's totally a function of supply and demand. And I believe I have made the case in past posts (see here & here) that only earnings recovery will signal a true bottom and demand for equities will far outweigh any concerns regarding valuation when that happens. I would conceded that there are sectors where the market is "cheap" relative to historical norms and further, that within each sector there is some skewing that is occuring due to a small-ish number of very high multiple issues. These types could offer some interesting pair trades with long sector ETFs and short on the high multiple componenets. However, these observations do not support just buying a sector or index but rather very selective stock-picking. Something to investigate further...

(If anyone is interested in further industry/sub-industry breakdowns, let me know and I’ll try to post up some additional charts as requested.)

Earnings Week of 3/23

Here's the week's earnings spreadsheet:



Spreadsheet Link

Once again, for the readers that are out there, I apologize for not putting up some better (or any at all, really) posts though I have been keeping up with the NYMEX charting which has been pretty interesting for those that keep up. Last week, I actually had a couple of decent selections: first, GES did jump nicely despite no forward guidance. Second, DRI was a good play and cranked out a big gap and move. It seems that earnings plays are slowly becoming more attractive as the IV premiums have shrunk back a bit from the levels that generally made these strategies rather unattractive for the last couple of months.

It also would appear that for the moment, the bulls lack the conviction of various pundits out there telling everyone that stocks are cheap, cheap, cheap and you should buy, buy, buy! While I could perhaps tolerate some of that talk when SPX was sub-700, now that the index has run up so much, those multiples are again pushing on expensive territory. However, keep in mind that earlier charts on this blog have shown that multiples do NOT have to come down to what is generally considered "value" territory in order for a bottom to be put in. Instead, EPS needs to recover and that is the current unknown. Just beware of the people prattling on about the Fed model for valuation. That you can have outright manipulation of Treasury rates through the QE activity of the Fed constituting a sound basis of comparison seems a bit... odd. But that's just me.

Enough of the blather... here's the earnings rundown for the week:

Monday - FMCN, TIF, & WAG. FMCN's IV is so out of whack it seems virtually impossible to turn a profit from a long strangle unless you plan on holding it until next op-ex and get lucky on the long side. Similarly, TIF has never made a move like the options are priced for. They interest me from the consumer discretionary aspect of things. How much are people cutting back in the most discretionary of purchases - jewelry? Just like the rest of the market, TIF peeked above the 50 day MA and looks to be headed back down. I'd guess 19.50 would be the next stop but ultimately, the 17.50 area could be in reach. WAG might have an outside chance but also seems low odds.

Tuesday - CCL, DB & WSM. DB deserves no comment except to note that they were a HUGE recipient of taxpayer dollars routed through AIG. So huzzah for them I guess. You can believe their statements at your own risk. It's all theatre of the absurd and far too opaque. CCL isn't worth the attention. WSM constitutes another discretionary store in my mind because you can buy all the stuff they sell at TGT, albeit lesser brands. Crazily though, WSM is almost in breakout mode having breached the $10 line and has moved quite a bit in the last two quarters. This could be worth a look, particularly on the long side if the market doesn't completely fall apart around it.

Wednesday - Only RHT deserves any attention because it jumped +16.8% last earnings announcement. It is very close to the top of a channel and has a chart very similar to DRI's bullish one from last week. I'd guess a move above 16.25 could send this one blasting. A bad reaction probably means 14.75 first and then if things get really ugly to 13.25 or so.

Thursday - GME catches my eye. It took a beating last quarter at earnings time. However, I'm looking at it in a way similar to GES. It has never moved enough to the downside to profit on the options pricing on a 1:1 contract basis. However, a long weighted play could be more interesting as the day grows closer. We're still in a situation where there is no telling where SPX will be in 3 days. But, it's sitting just below the 30/50 DMAs and I'd guess that a pop above those could let it run to the mid-28 level. TXI looks priced to perfection on the downside but has some wiggle room on the upside with the next resistance probably around 20.86. Again, this has to be watched since Thursday is far away.

Friday - KBH. Stay for the laffs maybe?

That's it for this week.

Earnings Week of 3/16

Here's the weeks' earnings spreadsheet:



Spreadsheet Link

The lack of posting in the last week was a combination of some personal business in the earlier half, some computer problems caused by the interaction of my fat cat with the cables causing a video card issue, some non-postable work, and finally something of a lack of inspiration. Even today, I switched off my usual Sunday morning TV of Meet the Press and This Week because I couldn't tolerate the moronic questions of David Gregory, the obfuscation of Larry Summers, and the pathetic political maneuverings of Mitch McConnell. Maybe I missed something - but I doubt it. Each week the actors are different, but the lines are all the same.

Anyhow, this could be an interesting week with options expiration on Friday and the rally on Vikram "Bandit" Pandit's utterance that C is profitable if you ignore all the other write-offs and neglect to consider they are basically being given free money with which to play. But that's what happens when the market goes in a virtual straight-line down and gets oversold. It doesn't take much substantive to spark a fierce rally. This might be the topic of a post as the EPS forecast and multiple gets revisited in light of the SPX movement. But onto the main topic, of which there is little to discuss:

Monday: SINA has been a nice speculative bouncer in the past, though not necessarily at earnings time. I don't know much about the other two releases - FRPT & MDVN.

Tuesday: ADBE & GES. It's hard to imagine a consumer discretionary rally a whole lot more but then again... I must admit I find this one tempting to play weighted to the long side. I've got no solid justification for this though. ADBE, eh. Usually not a big mover.

Wednesday: Restaurant player DRI (owner of Red Lobster/Olive Garden), consumer staple GIS, consumer discretionary NKE and tech heavyweight, ORCL. DRI has a bullish looking chart since December and is just under a resistance/breakout point at 30. Otherwise, I guess 24 is the downside target. GIS has been brutalized since hitting a 52-week high a couple quarters back, though it popped up a bit in the last couple of sessions. Only DRI is really interesting to me though as a play. NKE/ORCL are important for what they say.

Thursday: DFS, FDX, ROST, and PLCE. FDX is often quite an important source of data on direction of the economy and so are important to listen to. ROST is like the Dollar Store - they should be thriving in an environment like this. At the moment, share price is just a hair under the SMA(200) and looks like it wants an excuse to go higher. PLCE... are there really enough yuppies to keep buying outfits from this place instead of TGT? It's been occasionally volatile in the past and several of the last quarters have seen moves larger than what the options are pricing in so it might be one to keep an eye on as Thursday approaches.

Friday: Nothing but op-ex. Stay safe!

Earnings Week of 3/9

Here's the weeks' earnings spreadsheet:



Spreadsheet Link

This week, I've had some personal projects so while the earnings spreadsheet is posted here, it will remain without comment - at least until later.

U3 & Participation Rate Updates

In a post from last December titled "Fighting the Last War," I looked at the vast differences between the initial conditions of the tech bubble recession and the one that the US entered in December of 2007. At this point, if there was any lingering doubt residing in the populace, it should be shaken.

This post then, is not to re-iterate that point but rather just to provide an update of those charts to see just how much worse things have become. First, there was the rather cluttered chart with SPX, U3, and the Fed target rate. U3 has shot up on both the SA and NSA measures to 7.6/8.5%, respectively. Keep in mind my projection of a 7.9-8.1% U3 (SA) rate from early February, so obviously I think this has room to get worse. What is ominous about this number is that JPM had a loss projections for the WM takeover that used 8.0% in its "severe recession" scenario. Obviously, that is going to be overtaken if not this month than the next. Not coincidentally, the banks have not reported their loss sensitivities based on U3 as of late.

The next chart was the U3 values with the participation rate. This make the picture even more bleak when it is noted that the participation rate is about 1% lower than during the bubble recession, even while U3 is itself 1.5 points higher. This does not bode well for consumer spending since now even more households have a single income.

Finally, but on a similar point, the home ATM is now functionally empty. I'm not putting that chart up but the net equity extraction from homes went to a -$64B for Q3/08. (The last data point available.) Suffice to say, this is very bad for anyone that had relied on consumers tapping their houses for big ticket items. I'm looking at you, HOG!

Bottom line: the picture is growing darker.

Update (3/6/09): U3 (SA) was 8.1% today and the NSA value hit 8.9%.

Earnings Week of 3/2

Here's the weeks' earnings spreadsheet:



Spreadsheet Link

From what I saw of last week (admittedly not as much as I would have liked), it would appear that this the market is entering the "Beginning of the End" phase. It would appear that participants are slowly realizing that stocks aren't cheap, EPS forecasts really should be pessimistic, yields are garbage, and the banks are likely still hosed.

As far as the earnings releases, this week there are far fewer (in fact almost zero) big names like DELL or HPQ that can really shift an entire sector. There are, however, far more of the smaller float/high short interest shares that quite often lend themselves to profitable strangle/straddle strategies. Additonally, there are many companies that are hitting new 52-week lows. I'm going to post the spreadsheet up first, and then do the full run-down later this evening as an update to this post.

(Update)
Monday: CMED, EIX, FCN, OSG and PDLI are all within 5% of their 52-week lows. Several others have short percentages greater than 10%. Unfortunately, the past quarter's performance of most of these has been spotty in terms of magnitude of movement, particularly relative to current IV levels. I will say that it if TWGP doesn't say something pretty great that it could easily be headed for the 52-week low.

Tuesday: High-flying retailer AZO. Interestingly, it hit a 52-week HIGH last week at 148.50. Go figure. I'd guess that 136 would be about the low side if profit taking occurs with an absolute line of 125 in the event of a debacle. Still, the chart of this one is a freakishly bullish in an ugly market. Speculative solar play TSL. It should be mentioned that FSLR was shellacked last week. TSL doesn't have quite the stratospheric PE level that FSLR did and it is also in the single digits.

Wednesday: BJ must have come out with something good last Friday since it spiked hard for a 6% gain. JOYG intrigues me as a potential gamble on the long side, because I don't see the implied low price being hit. PETM has a nice upward channel forming with the 50SMA as the lower bound. The SMA(200) is at 20.88 to provide some resistance and the upper channel line would be around 21.75. SIGM has a nice level set up right at the SMA(200) around 13.75. However, it has a large short interest (which might have been covered and account for the large gap between 12.40 and 13.40). If I were going to lay odds, I'd guess the gap will be closed more solidly. TOL rounds out the bigger names on Wednesday.

Thursday: CIEN has been volatile 3 out of the past 4 quarters but not at the level that the options are pricing. IPI strikes me as a poor-man's POT, but I've heard that potash isn't moving lately and it has little to do with price. Still, the daily chart looks cautiously bullish. URBN has put a small and steady run from it's Dec/Jan lows but it feels to me like they better say something good or else.

Friday: Women's retailer ANN and PBR (not the beer).

One thing that struck me was the considerable variance in the daily charts. There are several that are outright bullish (AZO & PETM for example) and some that have literally no supports left (FCN & OSG as examples). I didn't get to tune in much on Friday and I'm still playing catch up from the weekend. But the fact that SPY never really threatened to overtake Thursday's closing price during Friday's session doesn't exactly engender confidence. Re-iterating my comments above, I think that the horror of what the year holds is finally being realized by investors.

A final note: I find it appalling that Bill Gross is constantly given a platform in the financial media to talk up his book in the guise of "what's best for the US economic system" without anyone calling him out on it. However, his recent statement about equities in the US being dead deserves a little attention. Yes, it's hyperbolic and shrill and it is coming from the kingpin of the bond world. But he is right when he asks why any investor would hold equities with crappy yield and tons of risk when they are the lowest slot on the totem-pole in event of a bankruptcy? About a year back, VZ floated an issue that I believe had a coupon of 8 7/8. Why would you buy the common shares without a guaranteed dividend and a decent chance of further erosion of capital? This is the other side of the coin of my earlier thesis that the equities market is going to emerge from this episode as one in which investors buy shares for dividend yields - big boring companies like KO and JNJ that pay regular dividends and have a solid track record of doing so for many years on end. One play that could be worthwhile is selling puts on these types of stocks in an IRA or some other long-term account - assuming you have the free cash to do so - at a price you'd be comfortable owning. Even if the puts aren't exercised on you, you've generated a little bit of income. And if they do, you have companies that can generate income with some dependability and then you can also sell calls against them each month. Just an idea. Some time this week I'm going to work a bit more on the dividend vs EPS relative changes. So keep an eye out for that.

Functional Note

I have been out of town for the past few days and thus without access to my normal files and set-up. The earnings spreadsheet post will be a bit tardy this Sunday and will probably appear in the evening. The NYMEX charts and Bank Failures have been updated but not much else.

-Mr. Sparkle

In these hard economic times...

Everyone understands: a) the value of the dollar, b) the occasional need to forget about these hard economic times, and c) humorous diversion.

With those key points in mind, I present the following diversion: Bum Wines.

Tangentially, this might be one of the few sectors growing in the coming year.

SPX Dividends and the Lost Decade

OK... so maybe "decade" isn't strictly accurate but it makes for a catchier headline. Unless you were so drunk that you couldn't see straight in the last two days - a prospect I must concede is entirely possible and/or warranted, all things considered - you would have seen that SPX is now at levels not seen since 1997. If you looked a little harder, you could probably have found some cheerleading-type articles saying that yields have never been better, market will recover, stocks are the bomb, etc, etc. Typically, these articles come unadorned with charts and tables and this usually is a sign that there is a bit of elision going on. Or maybe I'm just too skeptical.

My targets here are those that claim that the dividends reaped in past decade would have more than made up for any capital losses and in fact the returns would still have been decent. The first question that requires answering is: Returns compared to what? The gold-standard zero-risk investment is (or at least was) US Treasuries. Since the year 1997 has been mentioned so often, I'm going to use that as my entry point here. For those that want to play along at home, you should download the SP500EPSEST.xls file from the link on the right. I'll also reference some interest rates you can find in the St. Louis Fed database also linked on the right.

Here are the starting conditions: On December 31, 1996 SPX stood at 740.74 and the interest rate on the 10-year treasury pegged in at 6.54%. Let's make some gross simplifications and a few assumptions.

1) Purchase of 1 share of SPX for 740.74

2) Purchase of 740.74 worth of 10-year treasury yielding 6.54%

3) Dividend re-investment in SPX each quarter.

This last point is done because I believe that most people - or at least most buy-and-holders - probably just do the DRIP approach with their mutual funds. So now we have two plans: SPX vs. Treasury.

So at the end of the Q1/1997, the dividends were $3.61 and SPX was 757.12. This means that 0.0048 shares were acquired for a new total of 1.0048. This was then used to acquire dividends in Q2/1997, which were paid at a rate of $3.87/share which translates to $3.89 in dividends to reinvest and acquire another 0.0044 shares with SPX at 885.14 to bring the total owned to 1.0092. And on and on and on up until today, when you would own 1.2233 shares at SPX closing value of 773.14 for a total value of $945.82.

For the years until the treasury matures, it will throw off $50.41 in interest each year until it matures. At that point, to make this comparison easier, the accrued value is re-invested in a 2-year treasury. The interest rate on the 2-year at that point (1/1/07) was 4.8%. The total of $1274.80 would be re-invested at 4.8% simple interest. This produces a total value of $1397.19.

Hmm... so I'm clearly not getting something here. All the risk of the stock market for a lower return? Now, I was not educated in finance and perhaps my math is wrong but I'm pretty sure that the risk-reward equation is supposed to reward risk with a higher return. Excel's INTRATE function produces a rate of 2.31% on the SPX investment when the same formula returns a rate of 7.38% for the Treasury plan. And to add insult to injury, the SPX investment plan doesn't even keep up with CPI inflation. Don't believe me? Click through to BLS CPI Inflation Calculator and find out for yourself. Entering in that $740.74 investment in 1997 dollars produces a value of... $974.47 in 2009 dollars for a real-dollar LOSS. Granted, the real-dollar gain in the Treasury plan isn't glamorous but at least it's a positive number.

Now, the current rates on the 1o-year are an atrocious 2.799%, so the Treasury plan isn't exactly a viable strategy going forward from here. At least barring a wave of deflation that I'm thinking most of us don't even want to ponder. However, I am extremely skeptical of people using the Q4 dividends and the tanked SPX value and producing yields in the 3's. How on earth can you make the assumption that dividends will not fall further? Have balance sheets suddenly gotten stronger in the last two months? Looking at the past work and charts on dividends that I put up, it's pretty clear that it takes quite a bit of EPS degradation to knock dividends down a significant amount. But, look close at some of the charts of reported and operating EPS on this blog and you'll see that the forecasted EPS levels for 2009 look more like 2002 levels for reported EPS and 2005 for operating EPS. A quick look at the dividends from that era show a large difference. I'm not sure this gets bridged but I'm not exactly optimistic that the current yield will be maintained.

One can argue that these are anomalous times and you'll see all sorts of people who want you to invest your money through their service telling you that this is a great time to buy stocks at their brokerage. Just remember, there are real pitfalls to the buy/hold/re-invest strategy and the simple little chart should be plenty to illustrate that.

52-Week New High/New Low

Every once in a while I stumble across somebody trying to bludgeon some bit of random market data into a useful indicator. More often than not, one wonders if the person invested hours torturing the data only to have it confess to... nothing, and then they decided to just make a pretty picture out of it, gloss over the details and call it a day. Because to waste a few hours discovering something doesn't work would be embarrassing or something.

Which isn't really true at all. Discovering something has no utility is a valid result and should be reported. Trying to tart up a chart and make it sing and dance is basically a Type I error. I've always been slightly annoyed that scientists are only concerned with publishing positive results. As though the experiments that were dead-ends were invalid. All information contributes to our total knowledge, and this includes what doesn't work as well as what does. But enough soap-boxing...

At any rate, I present the following two pieces of market trivia: the charts of the 52-week New Highs and New Lows against SPX. I've never found them to be particularly useful as a predictor of anything though I have seen a few attempts to do so in a chart (no numbers/correlation, natch) and quite often the counts appear in some random market commentary that always seems to me to smack of a certain "insiderism" for lack of a better term. Basically, a random piece of trivia that an outsider would have no reason to know.

So here are some Fun Facts about these charts. Since October 2008, there have never been more than 20 new 52-week highs and in fact, since January no day has seen more than 15. In contrast, well look at the new 52-week low chart. The November low area is an abject disaster. Since the New Year, the average number of new 52-week highs has been 6.23 and new lows has been 98.97. Ouch. I've never had much luck getting these charts to tell me much of anything though to be honest, my effort has been cursory at best after my initial attempts. Still, I bring these up because I read a bullish note today that pointed out that the current number of lows is below the November timeframe. To me, that's a lot like saying the patient won't lose much more blood through a cut on the arm because the blood pressure has fallen too precipitously due to a sucking chest wound. But I've never been accused of being a sunny person.

Other details: this is the NASDAQ 52-week high/low and not the NYSE. NYSE has too many preferred shares and other odd issues that tend to make a mess of the numbers and are too annoying to deal with. If anyone has some alternative ideas, I'd be interested to hear them.

Earnings Week of 2/23

Here's the weeks' earnings spreadsheet:



Spreadsheet Link

Well, my comment last Sunday about picking a wrong week to stop drinking turned out to be a nice call. And the comment about nervousness. The remark about "apparent market optimism" was based in part on my SPX indicator, and its consistent upwards trajectory into what is "risky" territory despite what I (and a bajillion others) see as major fundamental deterioration. This trend has continued and continues to puzzle me. My own 2 cent analysis on SPX is that there is going to be a more significant test of the November lows. Yes, SPX got close to it on Friday but not with any great volume or duration. The market is still in a state of floating free from reality and totally subject to the vagaries of the programming schedule of CNBC and misty outlines of bank rescue programs that totally aren't nationalization even though we can't tell you what. Good times. Moving on to the earnings announcements...

Monday: Cons. staple CPB and high-end retailer JWN. CPB is sitting on the lower Bollinger on the daily chart with all the major MAs (except 200) tangled up in the 29.50-30.25 range. The options are pricing in a move below the 52-week low which seems a bit pessimistic for a company like this, even in such an environment. On the flipside, JWN has a high short interest and sells little of any necessity to anyone. It's resting more or less on its last support until 10.25 area and then the November lows. I'll be curious to hear what they have to say about the last quarter and looking ahead.

Tuesday: A whole slew of large and interesting names. Speculative solar play: FSLR. HD announces, go back and read last week's post on earnings with reference to LOW. Nearly-bankrupt department store M. My own 2 cent analysis of M goes like this: a few years ago, M looked around the competitive landscape and decided that they were the weak hand in that space. However, credit was cheap and so they decided to purchase most of their competition. Now fallen are Foley's, Marshall Field's (a reason I detest Macy's), and a handful of others. But, as a result M is now saddled with tons of debt, regions full of customers with no particular affection for the brand, and contracting consumer spending. Contrast this with Best Buy, which now has one less competitor courtesy of CC going bankrupt. And they didn't have to spend a penny to do it! Market share growth at a great price. Moving on: TGT, VNO, and WYNN. If I remember correctly, VNO is the 2nd largest component in DJUSRE, which moves SRS. WYNN... well, it's just been a funny stock to watch in the last few months.

Wednesday: Budget retailer DLTR. Last time out for them, I said this is an environment they should excel in. EPS estimates have not changed for them in the past quarter. Retailer LTD has been hit and I believe is closing stores. Last quarter, CRM moved 20%. TRLG has had occasional quarters of large movement. Finally, GRMN deserves a mention to see how many people bought their gadgets at Christmas.

Thursday: Tech heavyweight DELL. Anecdotally, the Dell catalog/mailers have had some smoking deals lately. On a more data-driven note, computing equipment was one of the sectors that notched a double-digit drop on the last PPI report even as it showed moderate price inflation. DECK, producer of Uggs. KSS interests me not so much as a play but for what they say. Same goes for GPS, particularly in regard to any further store closing plans. They had announced some last time out and any further contraction there is going to really pound the mall-owners. See GGP for exhibit 1 on how that group has been getting pinched. Finally, SWY just to hear their views on basic staple spending and potential shifts in patterns.

Friday: Speculative football SNDA. That's about it.

There are lots of companies out this week with high short interest and digging into the spreadsheet will help find them. Again though, I've reserved specific comments for the same reason as the last few - it is near-impossible to guess where the market will be in 3 hours, never mind 3 days. BAC and C are still looming large despite Ken Lewis' protestations that all is well. Timmy Geithner's stress tests will supposedly get underway, though honestly, I kind of expect this to be an exercise in technical reassurance, with all the detail of a pre-indictment Bernie Madoff audit. The notion that these guys really don't know, after a year of intense stress, if BAC/C/whoever could topple is either laughable or frightening. Hence my inclination to view this as a "show-trial" except instead of the firing squad at the end, the goal is to pump the markets. We shall see...

Crude Indices and DXO/DTO

So in the last installment of this series, Proshares levered ETFs UCO and SCO were checked and analyzed along with a quick 'n' dirty check of their underlying benchmarks correlation with crude oil. Although one commenter felt that DJAIGCL had little correlation to NYMEX spot, I disagree and recommended he pull the source data and run the closing prices correlation for himself. (Also pay close attention to what I say and more importantly, what I don't say.) Anyhow, for purposes here, I'm going to assume you grant me the earlier statement that DBOLIX actually is reasonably correlated to crude prices. And really, it doesn't matter all that much since this analysis is to see how well the levered ETFs track relative to their respective benchmarks.

While DXO open/close data is available going back to 6/23/08, this data is only available for DBOLIX back to 10/27/08 so the charts here are confined to that date up to 2/10/09. During this period DXO's average track error was -0.71% and the average absolute track error was 3.26%. This compares to UCO's values of -0.16% and 3.62%, respectively. There were 28 positive track errors against 44 negative ones during this period, so one could argue there is a bias for underperforming the +2x intraday percentage expectations. Finally, the closing price correlation between DXO and DBOLIX is 0.987 and the correlation of DXO's intraday percent change with tracking error is 0.01.

As for DTO, the same period applies. During this period DTO's average track error was 1.14% and the average absolute track error was 3.8%. This compares to SCO's values of -0.312% and 3.52%, respectively. There were 41 positive track errors against 31 negative errors during this time. The closing price correlation of DTO and DBOLIX was -0.89 and the correlation of DTO intraday percent change with tracking error is 0.017.

On balance, it seems that DXO/DTO have more difficulties in tracking their benchmark and target performance than UCO/SCO. Part of the explanation for this could lie in the fact that DXO/DTO are ETNs sponsored by Deutsche Bank as opposed to ETFs. The ETN suffers from risk exposure both to the underlying commodity and the sponsoring institution and DB has of late been making news for fairly negative reasons. Here's a choice quote from the prospectus: "The PowerShares DB Crude Oil ETNs are riskier than ordinary unsecured debt securities and have no principal protection." On a more technical point, the ETN is exposed to contango - though some attempt is apparently made to minimize impact - and if you check the NYMEX charts with any regularity, you've seen how large the price spreads have become. An aside: USO also suffers from the same contango problems and as long as this condition exists and if oil stays relatively flat in the front month, there will be steady erosion as the contracts are rolled.

Earnings Week of 2/16

Here's the weeks' earnings spreadsheet:


Spreadsheet Link

Four day week! Woo and stuff. Also, it's options expiration as well as termination of the NYMEX March contract on Friday. Throw in a dash of government intervention and the market players in full tantrum mode, and you've got a recipe for a week that could be incrementally more insane than the last few. I won't even begin to predict what this week might hold.

A couple of random comments. First, Brent and WTI have diverged far more than the last time I noted. The gap on the 13th was $7.12/bbl. Secondly, I have a nervous feeling growing but I can't point to anything specific. It's just the accumulation of stories like the ones about China wanting guarantees the US won't go the de facto default via devaluation, strength in gold, Japan going south fast, apparent market optimism, and this unflagging desire by every single person with power to maintain - or a most, incrementally adjust - the current state of affairs. So it has ever been to be sure, but somewhere I wonder if there is still the possibility for a shock to the system, Götterdämmerung, whatever.

Anyhow, on a less soap-boxy note, despite the market having Monday off I figured I would post up the earnings spreadsheets for review. I'm still suffering from the annoying conditional formatting problem on Google docs so if anyone has any suggestions, I would appreciate it. It's unlikely I'll have specific plays for this week (again) - the market is simply too choppy and there is every incentive for companies to intentionally tank their earnings by writing off every last bit that even has a whiff of failure is huge. (As the last week's post should amply reveal.)

Tuesday: Lots of big energy names: natty-gasser CHK, Norwegian STO, refiner HOC, deepwater RIG, and UPL. And don't forget inventories are on Thursday, just to keep you on your toes. I like RIG, and have long liked them. It will be very interesting to hear if any of their contracted work is being cancelled. As for the rest, AMED has a gigantic 50% short interest on a float of 26.5M shares and 33 days to cover. And then outlet-center propietor SKT checks in with a 34.17% short interest on 24M shares though in this case it's only about 9 days to cover. SKT is sitting about 3.50 above the 52-week low. Malls should start getting pinched as more and more retailers fail after lousy holiday numbers, but I'm not sure far that will extend to SKT's business. Bad reaction should send them to 26 or high 25 area. Finally, DJI component WMT also has earnings. They are oddly just 0.25 above their 52-week low of 46.25 which was achieved on Feb 2. A run back to 50 could be seen if their forecast is clear and they say something not-awful. Otherwise, it looks like 43 or so.

Wednesday: Lots of companies so I'll just pick out the big names that will get attention. Chinese internet darling, BIDU. Farm equipment DE. Tech giant HPQ. Oil-services OII. Speculative solar play o' the day: STP. There are several companies with high short interests on this day, but again, a lot can happen in one session so just use the data as a guide.

Thursday: Another heavy day. Several names from across the energy spectrum: APA, BUCY (coal), NBL, PQ, big refiner TSO, WMB, and XTO. Several metal players like EGO, GG, RIO, NEM and RS. Once again, many names have high short interest and low float that could make them interesting if good set-ups can be found.

Friday: JCP might shed some light on the lower-tier department store outlook. And LOW - there was some interesting info at Calculated Risk regarding the spending in home-improvement as compared to investment in single family structures. Go read it.

So that's it for the week. If you had this week staked out on the calendar to quit drinking - you might want to rethink that plan.

Updated S&P EPS - Throwing in the Refrigerator...

... and the oven, and the dishwasher, etc.

Apparently, the media is finally catching up with the S&P EPS estimates that have been out for a few days now and which I wrote about in the Kitchen Sinks & Miracles post. It would seem that this quarter is going to see everything thrown in as - amazingly - S&P has actually revised EPS for Q4/08 downward again. This is at least the 2nd update of EPS this week and this latest one holds some significant changes. And perhaps not coincidentally, there have been new discussions of valuation of SPX so I'm going to do a little updating on that topic as well.

First, let's have a new look at the SPX EPS estimates for both operating (opEPS) and as reported EPS (arEPS). Just this week opEPS for Q4/08 was revised from $6.33 on 2/10 to $5.77 on 2/13. The arEPS values were arguably even worse as it went from -$8.79 to -$10.44. Evidently, the hits just kept on coming. Perhaps more ominously is that this last revision took down Q1/09 arEPS estimate -15% from $9.87 to $8.36. And looking at the chart, this is the first revision of arEPS in some time that shows a significantly lower outlook for all of 2009 and into 2010. On average, the reduction was roughly -22.5%. However, the opEPS reductions was not nearly as severe, which would imply that S&P is expecting more write-downs, charge-offs, reductions in goodwill or whatever continuing for the next several quarters.


As in the prior post, here's a look at the EPS estimates over time. As already noted, the arEPS negative value is unprecendented. What is very interesting to me, from a trading perspective is the comparison between the tech implosion and current forecasts. The projections for Q4/09 opEPS show a recovery only to the levels of Q3/05. The case of arEPS Q4/09 has a projected value that puts it somewhere in between Q2 and Q3/02. Interestingly, the current level of SPX roughly corresponds to the SPX level between Q2 & Q3/02. I'm not quite sure what to make of this. (I won't even touch the effects of inflation/deflation here - that's far too expansive a topic for my little blog.) At today's SPX close, the PE based on opEPS - assuming no further revisions to the current quarter's EPS report - is 14.93 Using arEPS - which again, is what S&P itself will actually use for the PE of the index - the PE is 29.86!

When I wrote the last post on SPX earnings, I only briefly touched on the historical PE and just made some references. Then I looked back at my post archive and realized that some of the data I was pointing to was actually in some work I had done prior to starting this blog. I'm going to correct that here and update it a little bit.

At the right is a chart showing the trailing-twelve-month PE value using both arEPS and opEPS for calculation since 1988. Also included are the reported EPS values. (I thought it better to clutter the chart than the entry itself.) First, the average PE(arEPS) = 19.25 and the PE(opEPS) = 22.81. S&P only has data for opEPS going back to 1988, hence the limitation. In an earlier post on SPX and P/E, I looked at Shiller's historic data of arEPS and noted the average P/E from 1950 to Dec. 2008 was 16.59 with a standard deviation of 6.76. Considering the above mentioned PE values, neither metric is in "value" territory. However, look closely at the chart - specifically in the 2002-2003 period - when the market finally bottomed the PE(arEPS) was a still-elevated 27.14 and the PE(opEPS) was 18.51. Both of these are above the average. So what changed to put in the bottom? My guess is a recovery in arEPS. Yes, there was still another quarter before the true bottom in arEPS but by then, opEPS had shown some steady (if small) improvement.

My point in discussing this is that when various bears talk about how the market is overvalued and then they project SPX will be at such-and-such a level based on some multiple, they are suffering from similar biases as bulls. There is no "correct" multiple. Sure, you can hazard a guess based on history but look again at the chart right in the middle of the tech bust - the PE(opEPS) reached the mid-40s! That to me, signals that market players refused to come to terms with the reality of a burst bubble and corporate earnings although eventually they threw in the towel - sort of - and the market reached a bottom. So what you find right now is a debate of sorts. On one side you have bulls performing a sleight of hand claiming the market is cheap because PE(opEPS) is below the average PE(arEPS). And on the other you have bears claiming that the market will have to go down because it should have a PE of 15 and earnings going forward are awful. Granted, I have more sympathy for the bears, but to slap a 15 PE on SPX because that's what you consider a "fair value" is absurd in the face of popular delusion. The evidence that the bottom can form even when stocks are overvalued relative to historical averages is right there. Could multiple contraction occur? Certainly, and if popular trust is crushed by more revelations of criminal and rigged behaviour on the part of market makers, it could happen. (This was a major factor in Japan in their post-bubble era.) This would require a change in American popular sentiment that I suspect is no longer possible.

My (currently under-developed) opinion: In the next few years, the market will return to a situation in which investing is done based much more on dividends than on capital gains.

Always remember: "The market can stay irrational longer than you can remain solvent."

Crude Indices and UCO/SCO

Another installment in the occasional series of posts about leveraged ETFs and oil. As mentioned earlier, I have discovered the bulk of my readers visit here looking for information on oil and their various ETFs, both levered and not. In an earlier long post on the ultras, I tackled the issue of volatility and compounding and their potential effects on performance of ETFs such as DXO, DTO and their ilk.

There is another related issue here and that is the tracking effectiveness of these ETFs with their benchmarks. And taking a step backwards from that issue, how do the various benchmarks perform in tracking NYMEX crude? There are two families of ultra ETFs for oil - ProShares (UCO/SCO) and PowerShares (DXO/DTO) - with the former using Dow Jones AIG Crude Oil Sub-Index (DJAIGCL) as its benchmark and the latter utilizing the rather verbose Deutsche Bank Liquid Commodity Index - Optimum Yield Oil Excess Return (DBLCI-OY_CL or DBOLIX).

I used EIA's data on Cushing WTI spot pricing (see link to the right) and checked the correlation of DJAIGCL and DBLCI-OY_CL closing prices with this. Unsurprisingly, the correlations are tight with DJAIGCL having a bit better correlation over the period 1/2/07 - 2/10/09. DJAIGCL had a 0.99597 and DBLCI a 0.985602. In the chart to the right, I also tossed in USO since it is probably the most widely tracked oil ETF and for most people, a proxy for crude pricing. You will also likely notice the NYMEX front and NYMEX 2-month average. This latter value was thrown in because it provides some contrast in periods of significant contango (such as now) and on days with huge squeezes (typically assignment days.) One thing of note is that the value of DBOLIX charted is the DBOLIX divided by 10 so as to make the scaling a little better.

So, at this point I think it is reasonably established that these two benchmarks are excellent trackers of Cushing WTI spot pricing.

The next question is how well do ultra ETFs and ETNs perform with respect to their stated goal of achieving +2x/-2x daily percentage moves of their benchmark index. I started with UCO and SCO in this analysis. (My apologies to all the fans of DXO/DTO - next post.) Part of the reason for this, is that open/close data is available for DJAIGCL going back much longer than what I could find for DBLCI-OY_CL. The flipside is that UCO and SCO have been in existence a far shorter time than their Power Shares counterparts. It's probably easiest to start off with a chart. The average absolute value track error for UCO since its inception is 3.61%. For example, if DJAIGCL moved 2% intraday, UCO should be expected to move +4% intraday. If UCO instead moved +7%, my terminology is that this is a +3% tracking error. For better or worse, this doesn't appear to be a systematic problem and the average tracking error is -0.16%. A few other statistics seem worth a passing mention: the correlation of UCO with DJAIGCL is 0.979 and the correlation of the intraday percentage change of UCO with tracking error is a negligible -0.11.

Moving on to SCO, here's the same chart on the same scale. Basically, similar behavior and a similar average track error of -0.312% and average absolute track error of 3.52%. And the other correlations of SCO with DJAIGCL and intraday percentage change on track error are: -0.798 and -0.02, respectively.

The lack of any correlation of the tracking error with the direction and magnitude of the intraday percentage change of the index implies there is little that can be done to anticipate them, even within a session. While these two funds do offer leverage, more often than not they fail at their stated goals of 2x or -2x the intraday percentage move of the target benchmark, DJAIGCL.

I’ll likely give DTO and DXO similar treatment in the next week or so.

Earnings Week of 02/09

Here's the weeks' earnings spreadsheet:


Spreadsheet Link

Once again this week I think I am going to reserve comment on any specific plays. The volatility and bullishness predicated on massive government intervention/bailout of the financials has shown that this market is not trading on any fundamentals but the hope of fundamental improvement as relayed to the market by the howler monkeys on CNBC. That being said, there are fewer of the really big names left to announce. And the lower float, higher short interest and more historically volatile companies are scheduled so it could be an interesting week in that regard. It's just that trying to predict a position on Sunday when SPX could be +5% by Tuesday is absurd.

Monday: BCS and take-over subject ROH. Others that might be interesting to watch are ENER, SOHU, VMC and WHR. This is based mostly on their days to cover and in a few cases, recollection of earnings plays in the past that worked out for me.

Tuesday: AMAT should be noted as the largest player in the semiconductor cap equipment space. UBS also comes out. CERN has a large short interest at roughly 11 days to cover. YGE is always a speculative football.

Wednesday: Restaurants BWLD, CMG, & PFCB. Bank CS. Homebuilder TOL. Some of the restaurants fall into the low float, high short interest category and could be interesting to watch.

Thursday: Hotelier MAR - there have been a lot of stories floating around for those paying attention about the low occupancy rates in hotels. Their projection should shed some light on the forecast for business travel, itself a proxy for business health. Restaurant PNRA, DJI component KO, oil TOT...

Friday the 13th: Teen store ANF. PEP comes out. I do hope they get trounced for no other reason than to keep them from producing the worst Super Bowl commercials in the broadcast. Another in the hotel group - WYN.

That's it for this week on this topic. I might get back to individual plays next week as there are even fewer to look at.

U-3: NSA vs. SA

The unemployment report from BLS came out today and it was ugly, even with the headline reporting of the seasonally adjusted numbers. What stuck out at me when I looked into the A-12 table was the difference between the non-seasonally adjusted (NSA) and seasonally adjusted (SA) values. They were respectively 8.5% and 7.6%. Consider the following stories from the last part of 2008:

- "November retail hiring was 53 percent lower than a year ago, when retailers added nearly 458,000 holiday workers, compared with 217,200 hires last month, according to an analysis by Challenger, Gray & Christmas Inc. (Source: Boston Globe - Dec. 5, 2008)

- "Department stores hired 88,000 fewer people this November compared with 2007, and clothing and accessories stores cut 65,000 jobs, according to the Labor Department. (Source: Forbes - Dec. 11, 2008)

There are tons more of these stories if you're inclined to look. If you read a local Picayune, Gazette, or News you'll likely recall similar headlines. So with that backdrop, how valid is the U-3 SA number? As ever on this blog, to the charts!

The first chart looks at the monthly trend in the difference between the NSA and SA numbers. You would expect there to be a pattern because of the whole idea behind the NSA value. However, there is some variation inside in the monthly differences which would be expected. The question is whether or not this is a systematic pattern or just noise. The next chart can shed some light on that question.

This chart requires a little bit of explanation. It uses the difference values for all the January numbers from 1989-2009 and plots them against the U-3 NSA value. The line fits reasonably well with an R2 = 0.805. This certainly seems to imply some correlation with the background unemployment level - a higher U-3 number tends to have a higher difference between the NSA and SA values. I think the stories noted above explain the reason behind this phenomenon.

The SA model would assume that post-holiday season there would be more seasonal workers in the job market just as there should have been more seasonal workers employed in Q4. However, this year that doesn't seem to have been the case. This year, holiday hiring was muted at best and thus the substantial differences between the two measurements. Bottom line: the most recent period does not fit the pattern that the SA modeling assumes.

What to look for in February? Predicting a bump in the U-3 SA number would seem like a no-brainer at this point. The question to me is how much of the difference between the SA and NSA values will be bridged. I would not be surprised to see the NSA number actually hold steady and the SA value to creep up one or two tenths to maybe 7.7 - 7.8%. (see update below)

One other note: the participation rate slid further to 65.4% (SA) and 65.5% (NSA). These are 20 year lows. I've omitted discussion of that for brevity's sake but these are also important to watch as signs of a very anemic labor market. I've touched on that before in my original post to this blog.

Update: I have been thinking more about this and want to revise my expectations of SA unemployment. Here's why: First, the normal SA model appears to expect a fall in February NSA employment figures and compensates upward a bit as a result. I don't believe that this year, there will be a fall in February NSA unemployement and the NSA number is already very elevated. Second, the ongoing mass-layoff stories would point to a higher value. So my revised estimate is 7.9-8.1% for SA unemployment in the next report.

S&P - Kitchen Sinks & Miracles

S&P finally got around to updating their spreadsheet that shows their forecasts for EPS. Disturbingly, (at least for me), the forecast column for operating EPS had for about two weeks been replaced with the statement, "This series is under review should be posted soon." Not exactly reassuring in the current environment, particularly when it appeared beneath these bullet points:

• Operating set for the 6th quarter of negative growth, a new record (5 in Q4,'00-Q4, and Q4, 90-Q4,'91)
• As Reported also set for 6th, but did so during Q1,'51-Q2,'52
• Q4 Financial decline is worse than it appears: Q4,'08 is estimated at $-4.89 and Q4,'07 was $-4.05
• Operating EPS coming in 8% lower than top-down estimate, Staples coming in slightly better than expected, continued large Financial loss

S&P also makes this statement: Expect charges to continue for Q4, as companies clean house for a better 2009. When this line is combined with the numbers in the chart, it can be inferred that S&P is expecting this to be the Kitchen Sink quarter. Just because I'm a somewhat petty person, the charts of operating and as reported EPS that follow include S&P's prior forecasts. Obviously, 6/30 (Q2) and 9/30 (Q3) are concrete at this point and Q4 is 65% reported.

Readers of this blog probably have looked through the historic data and would probably discover that as reported EPS has never been negative. The write-downs expected for this quarter are that severe. Looking at the recovery in Q1/2009, S&P clearly believes that the Q4/2008 is going to be the nadir of EPS.

Considering the track record and the less-than-transparent process of marking assets, it remains to be seen whether this will be true. The operating EPS estimates for Q4/08 went from $24.62 on 9/3/08 to $8.19 on 2/3/09. If the as reported and operating EPS forecasts are compared looking out past this quarter however, there is clearly expectation for some write-downs to continue since the difference between these two values averages well over $5 through 2009. It appears that S&P thinks that these charges will be mostly confined to the financial sector. (I'll probably tackle this a bit more in a follow-up post in the next couple of days.)

Also interesting is the miraculous recovery that S&P anticipates in their opEPS forecast. Considering that operating earnings are supposed to ignore charge-offs and other incidentals, the leap from $8.19 to $14.64 would be an unprecedented percentage gain in opEPS for a single quarter. (As reported EPS has managed larger percentage gains, presumably because of the calculation.) However, the S&P Q4/09 estimate has EPS running below my guesstimate of growth from an earlier post on the topic. In that post, I estimated an EPS growth rate of 4% and extrapolated from Q3 information. Clearly the estimate for Q4/08 was horrendously inaccurate but the difference between this guess based on history and current S&P estimates for Q4/09 is $1 or a bit over 5% off. See the chart on the left, which also helps provide some context.

So how does this affect the valuation assessment of SPX? What version of EPS do you want to utilize? Bulls will seize on the PE based on opEPS which at today's close on a ttm basis is 14.68, assuming that the EPS value from S&P turns out to be accurate. However, on an as reported EPS basis, the PE is 28.74. This latter value is actually what S&P will report for PE on its own website. For historical reference, I would refer back to my earlier post on PE values. For the lazy, historic average as reported PE has been a bit over 16.5. So it's still not "cheap", unless you're a blinkered bull that wants to muddle the discussion by ignoring the differing EPS values used to assess PE. If you are one of those... I doubt you would be reading this, honestly. On a forward PE basis, things are equally divergent with the opEPS estimates coming up with 12.17 and arEPS calculating to 20.02. I've stated in an earlier post that Cliff Asness has estimated forward PE values based on operating earnings to historically have averaged around 11. Again, not cheap. When the historical average for PE(ttm,arEPS) is matched with anticipated arEPS for 2009, a level of 691 is calculated for the end of 2009. If you are feeling more bullish (or less morbid), the average PE (ttm) based on opEPS from 1988 to the present has been about 19 (charitably including the dot-com bubble period) and thus produces a SPX level of 1330.76 for the year's end. I'll pause here for laughter.

Bottom line, any significant rally of SPX from here will further shift valuation out of line with forecast and historical norms. (Excepting the "norms" of the aforementioned insane bulls.) That being said, in my opinion, this market has become more or less untethered to objective reality and now is like a balloon subjected to the gusts of panic and euphoria brought on by reactions to the latest macro data point, Bad Bank, or pundit dribble.