Archive for the ‘Market Sentiment’ Category

The Nielson Company provides valuable market research (demographic breakdowns of an audience, socio-economic factors) for any consumer driven company. Here’s an excerpt from their report on YTD 2009 Advertisment Spending:

U.S. ad spending fell 15.4% in the first half of 2009, according to data released today by The Nielsen Company. A total of $56.9 billion was spent on advertising in the first six months of the year, more than $10.3 billion less than the same time period in 2008.

The automotive industry was the top spender ($3.68 billion), despite a 31% cut over last year. Local auto dealerships – also a perennial top-10 spending category – cut its ad budget 26% through June this year.

ad-spend_4 Via Infectious Greed

A 31% drop in spending by the autos shouldn’t be surprising, but that’s brutal.

Finally, here are the type of Ads we can look forward to watching this football season:


One has to wonder if businesses are moving away from TV advertising altogether, and relying on the “clicks” of Google to bolster business.

Here’s the full report.


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The Efficient Market Hypothesis is a topic getting ripped apart these days…I thought I’d share the archive of readings I’ve saved over the past year to add to the fun.

and of course,

  • The Black Swan: The Impact of the Highly Improbable (Nassim Nicholas Taleb)

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David Rosenberg, the former chief economist at Merrill Lynch (who recently jumped ship) had a follow up interview on CNBC about his bearish observations of the past month. Here are some points from Zero Hedge‘s thorough summary:

On the technicals, Rosie sees a possible break through all the way to 1,200: “That is an observation, not a forecast, by the way. Back when we hit that level last fall, it was a glass-half-empty feeling of being down 20% from the highs; this time around it is a cause for celebrating an 80% move off the lows!”

In the fund flow camp, he points out that after the sideways action for the past three weeks, the break out was precipitated by only the second net 2009 inflow in mutual funds of $12 billion. “The initial source of buying power in March was the dramatic short-covering and pension fund rebalancing.” Now, it is the retail investor keeping the rally alive, as he is transfixed by the cheerleading puppets on CNBC. The vicious cycle would pressure the predominantly bearish fund managers (60% seeing the move off the lows as a bear market rally, and 5% buying into the V-shaped recovery concept) to chase performance, implying high “odds of a further melt-up.”

Indeed, the market technicals make this chart of the S&P 500 look unstoppable:

S&P 500 6-2

The upswings since March have been on high volume (with the declines on relatively lower volume), and the index recently broke through the 200-day moving average, which has been a source of resistance since December 2007.

The market’s valuation on the other hand, is very overbought:

In a nutshell, David doesn’t see the S&P $75 earnings, based on a bond implied 12.5x multiple, as achievable until 2013 at the earliest. And he concludes “Look at this way — we are going to be hard-pressed to see operating EPS much better than $43 this year. A ‘normal’ first-year earnings bounce is 20%, and again this is being generous, but that would leave us with $52 EPS for 2010. We give that prospect very little chance of occurring, and we have some difficulty with the stock market going ahead and pricing in an earnings profile that is likely four or more years away from occurring.

Rationalizing the move upward is almost impossible, since this rally is founded on sentiment derived from the fear of being left behind…By institutional investors! From Minyanville:

Portfolio managers are evaluated based on their performance relative to their benchmark. Most institutional managers are still overweight cash and underweight equities…Perhaps even more importantly, virtually everybody that has cash right now is underperforming on a year-to-date basis. Remember that the S&P 500 started the year at 903…Most of these managers aren’t bullish on the market, but at this point, it doesn’t matter what they think. Getting long equities is a matter of job preservation.

That’s very well put…if they cashed out near the bottom, they have no choice but to chase the rally up. He goes on to point out that institutional fund managers (mutual funds, hedge funds, or general financial advisors) handle a great deal of money, and therefore cannot simply buy or sell all at once – it takes much longer to establish/unwind positions, making their operation less liquid. In essence, the shift in allocation from bonds to equities is moving the market due to the magnitude of the cash flow.

Finally, the long-term fundamentals illustrate a more precarious conviction, since the broader economy doesn’t point to the “green shoots” sprouting too quickly:

The much more ominous questions of unemployment and consumer savings are still on the table, and painting a much bleaker economic bleaker picture. In Rosie’s words: “The really big story is that the fiscal stimulus is assisting in the household balance sheet repair process, but is not really doing much to spur consumer spending — highlighted by the rise in the personal savings rate to a 15-year high of 5.7% from 4.5% in March and zero a year ago — never before has the savings rate risen so far over a 12-month span. Note that the post-WWII high in the savings rate is 14.6% and that is where I believe we are heading. Despite the conventional wisdom, this is highly deflationary.” As for unemployment: “Nothing is as important to the inflation backdrop as the labor market — wages/salaries/benefits are seven times more powerful in determining the corporate pricing structure.” And the labor market, at least until the latest batch of however adjusted data, is not showing any relief whatsoever.

A tug of war between market barometers indeed…

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I just looked through my archives and discovered that I engage in some sort of market prognostication about every three months…The most recent one from January is a good place to pick up for this edition (if at all curious, here’s September and August).

US Treasury debt is an unreasonably low yielding investment, meaning this is where everyone is hiding from risk – which is a misconception, since the principal investment on a 10-year note is only protected by a 2.10% interest rate, meaning any indication of a sell off could drastically hurt a US debt holder. Should treasuries sell off, certain sectors within equities would be a logical home for this capital – the question is always when.

Well to answer this issue 3 months late, when could be now.

But first, some background on the FED’s role in buying treasuries.

The FED has been overreaching the bounds of their traditional policy tools i.e. setting interest rates through buying short-term government debt (1-3 month T-bills), and has entered the business of buying 5, 10, and even 30 year bonds in an effort to drive down the Mortgage Backed Securities pegged to government debt of longer maturities, which should lower the prices of adjustable rate mortgages and allow people to refinance a fixed mortgage.

Due to this agenda, the Federal Reserve has been a huge buyer at all of the recent treasury auctions (the same ones which finance our $1.5 trillion deficit), and have successfully suppressed bond yields…until today:

From Bloomberg:

Benchmark indexes turned negative at about 2 p.m. after an auction of $34 billion in five-year Treasury notes drew a larger-than-forecast yield of 1.849 percent, spurring concern that government attempts to lower interest rates won’t work.

Treasuries declined for a fifth day following the auction and the failure of a U.K. government debt sale. The last time the U.K. was unable to attract enough investors was in 2002.

This situation is paradoxical; on one hand, as I wrote in January, the disinterest in treasuries could be a indication that investors are beginning to trust equities again – a notion which is supported by the 1,200 point rally in the past 10 days.


On the other, we could have a situation where the free markets counter the aims of the FED by selling off treasuries – when buyers cease to exist, yields will go up, and so will rates on mortgages indirectly pegged to treasuries.

With that, here’s the rest of what I’ve been thinking:

Reasons to be Positive:

  • I think the Dow has temporarily bottomed at 6,500 – for different reasons than Doug Kass – because we will need to see if the effects of the recent government action actually work. More specifically, in order to drop below 6,500 we would need a scenario discernibly worse than a nationalization of our financial system, since that was what a DJIA of 6,500 was pricing in. Besides that, all of the logistics which traders look for are coming into favor: there’s heavier volume to the upside on up days, oil has rebounded (which suggests an antipication of increasing global demand), investor confidence is rising, and home prices/sales are looking more optimistic.

Reasons to be Negative:

  • Citi, BofA, and JP Morgan have all indicated that they were profitable for the first 2 months of 2009, but this was accomplished in a system with free money. What will happen to profitability when Bernanke inevitably raises rates?
  • Do I need to worry about the omnipotence of vacant stores, or is commercial real estate implicitly apart of the same set of issues we’ve been dealing with for the past 2 years?

I never thought I’d run out of negative things to say…I may add in some other points if nothing else interesting happens in the meantime.

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From The Big Picture:



Meanwhile the S&P 500 declined 30% from 1,200 to 850 in the same time frame – I realize this isn’t a metric of correlation (especially in lieu of the massive liquidations over this same time) but it’s peculiar that there are fewer short sales.

Here’s what I think is really going on…

From Bloomberg:

VIX Jumps

The benchmark index for U.S. stock options jumped to the highest since Jan. 23 as investors paid more to use options as insurance against stock-market declines. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 8.8 percent to 47.49. The index averaged 32.65 last year.

Could it be that people are using options instead of formal short sales? When volatility is this high, it is easier and safer (to a degree) to buy a put option to hedge against losses…or set up a synthetic short sale if your risk appetite is higher. Another benefit of buying put options, is we are not victim to the schema of “stocks can only go down to zero, but can go up to infinity,” since we only lose the price paid for the option (should it expire or fall deeply out of the money).

Secondly, when the VIX is at 47, there are rapid swings in short periods, allowing the investor a better chance of executing a profit – If I bought a put on the Dow with a strike price of 8,300 with 20 days until expiration, and the index suddenly jumps to 8,500, there’s no real cause for worry. There is still a very good chance the option falls in the money in 20 days.

In summation, I don’t think people have stopped shorting in an environment like this – they’re just using different tools to do it.

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“Dating back to work on the random walk hypothesis by French economist Louis Bachelier (1870-1946), the efficient market hypothesis asserts that stock market prices are the best available estimates of the real value of shares since the market has taken account of all available information on an individual stock.”

Economy Professor

Now from New York Times Magazine, which had an interesting 10 page spread about Risk valuation last Saturday:

VaR is often measured daily and rarely extends beyond a few weeks, and because it is a very short-term measure, it assumes that tomorrow will be more or less like today. Even what’s called “historical VaR” — a variation of standard VaR that measures potential portfolio risk a year or two out, only uses the previous few years as its benchmark. As the risk consultant Marc Groz puts it, “The years 2005-2006,” which were the culmination of the housing bubble, “aren’t a very good universe for predicting what happened in 2007-2008.”

How are these two phenomena related? The risk models our world of finance has been relying upon for several years are grounded in the Efficient Market Hypothesis; VaR models – or models which price risk – would not function without the corollary of the underlying asset being priced properly. We took comfort in this convenient theory, that everything is priced appropriately, all the time.

The counter to this argument is not another theory, but a series of real life outliers. If markets are efficient, How does George Soros continually compound his fortune by trading according to his boom/bust empiricism (like shorting the British Pound)? Warren Buffet also acknowledges fault with this theory: “I would be a bum on the street with a tin cup if the markets were always efficient.”

Every theory has shortcomings, and the admitted shortcoming of the Efficient Market Hypothesis is one of “black swans”, or in economic terms, exogenous shocks. These are events which cannot be predicted, ones which are often described as lying outside a 99% confidence interval, and ones which continually disprove the efficiency of market pricing – especially during times of panic.

The second glaring shortcoming is one which lies about the applications of the EMH, or one of our perception. One assumption of the hypothesis, like an assumption in micro-economic theory, is that the participants are completely rational (much like human calculators). This assumption has proven to hold under times of tranquility – like the times LTCM succeeded in making money – but during times of deception and opacity, many of us are hopelessly irrational.

To quote Michael Lewis’s most recent book, Panic!, on the pricing of Bear Stearns:

“If the market got the value of Bear Stearns so wrong, how can it possibly believe it knows even the approximate value of any Wall Street firm?” (P. 342)

The pillar of the EMH that comes tumbling down in times like today is “known information”…On the surface, who is to say that Bear’s balance sheet was all that bad? I’d like to believe we could extrapolate everything from the footnotes (never mind having everyone read them), but the population of people who called for the failure of Bear Stearns in 2006 lie far outside the depths of the “normal distribution.” Furthermore, here’s a real life example: how could the Nasdaq be accurately priced at 1,400 in 1997; at 5,000 in 2000; and back at 1,400 in 2002?

All of this is to argue that the notion of efficient markets, which we have taken shelter in for much of our modern financial history, stands paralyzed in times of uncertainty; this would provide insight into why panic ensues at the very signal that we are “in the dark” concerning anything (this could also be a reflection of our poor sentiment; the constant belief that we will be disappointed by Wall Street is becoming a part of our psychology). This would also provide an explanation for our dependence on models as a “crutch”, to grant us what has turned out to be a false sense of security by quantifying risk with numerical values.

The fallout of the sub-prime mortgage crisis has uncovered many of the issues with deriving models after this hypothesis – the only problem is, we haven’t come up with anything better. VaR were used heavily in the late 1990’s by none other than LTCM, but as the NYT article points out:

Firms viewed it as a human failure rather than a failure of risk modeling. The collapse only amplified the feeling on Wall Street that firms needed to be able to understand their risks for the entire firm. Only VaR could do that. (Page 7)

We then reverted back to their use.

I will end with a phrase which has time and again been a sure way to see oneself proven wrong – Maybe this time it’s different.

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Courtesy of FAIL Blog, a pretty funny site.

I decided that this picture is relevant to Economicequities, since the satire happens to be educational.

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