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.

Earnings Week of 02/02

Here's the weeks' earnings spreadsheet:


Spreadsheet Link

Once again, a heavy week of releases. And again, I'm going to beg off of commentary and only note the big names. There is no point in speculating on what might happen in two day's time (or even two hours' time, the way things are going) so this will just have to stand as a reference.

Monday: Some middling names like HUM and AFL. One company that I like to hear about is SYY since they are a very large supplier to the restaurant industry.

Tuesday: Oil guys BP and MRO. DJI component DIS. UPS will be worth listening to as a signal of the broad economy. Several biotech companies are out but earnings period is rarely when the big moves happen for these guys. Conglomerate TYC reports along with YUM, purveyor of Taco Bell among others.

Wednesday: New DJI component KFT. V could be interesting considering AXP's slides from a week ago and what they saw. Keep in mind that V and AXP have different models though. V doesn't lend its own money out (nor does MA for that matter) and so they rely significantly on fees from their branded cards. Keep that in mind when listening to their numbers. CSCO could shed some light on tech spending forecasts (or lack thereof).

Thursday: MA (see above). Oil services DO. Recently pounded insurer HIG. I'll mention MCO because they really should be getting slammed more in the media as part of the bond ratings story that isn't getting quite as much attention as it probably should. K could tell us a bit about consumer staple spending patterns. (Shifting to store brands?)

Friday: TM... getting hammered with all the rest of the automakers. They are putting up year-over-year numbers that are depression quality. WY is near a 52-week low (deservedly so I'd say) and might be worth listening to for their forecast.

That's it on this topic. I'll make a request if anyone has a good way to get Google Docs to maintain formatting rules, I would appreciate a comment. The time it takes for me to change the format rules isn't worth it for me.