Month: June 2014

Don’t worry, it’s just “special” boots on the ground…

 

 

Source: Cagle

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Submitted by Lance Roberts of STA Wealth Management,

 

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Goldman Sachs' Jose Ursua assesses puzzling seasonal patterns of volatility by month, day, and type of data period

There are a few “market anomalies” affecting the seasonality of stock returns that have captured some investor attention, like the day-of-the-week effect or the January effect, for example. They are called anomalies because – according to financial theory – the market should arbitrage away the regularity of such patterns. But in reality, it does not. We ask whether similar patterns exist with respect to market volatility. And the answer is yes: they exist and are equally puzzling.

Monthly patterns: Fall is the season of vol

We start by looking at average volatility (of S&P 500 daily returns) over the course of the year, split by month. If the arbitraging away argument were right, we would not expect to see major differences across months. Yet we find the opposite – volatility tends to be steady in the spring and summer, considerably higher in the fall, and relatively lower in the winter. Indeed, the averages for those periods since 1928 are as follows: March through August (14.8%), September through November (17.5%), and December through February (13.9%). For the whole year, average volatility stands at 15.2%, so in effect there are substantial intra-year “Vol Seasons,” which do not change much depending on which historical period we take.

The famous adage, “Sell in May and go away; don't come back till St Leger Day,” is based precisely on the notion that investors would go away for the summer, volumes would come down, and volatility would rise to uncomfortable levels. The St. Leger Stakes (an English horseracing classic) usually takes place in mid-September, so the pattern would be somewhat off when it comes to volatility – at least with respect to US markets. Our results show that a more proper recipe for volatility traders would be to “Buy in Independence Day and go away; don’t come back till Halloween” – or something like that.

Daily patterns: Not so smooth coming back from the weekend

We then look at average annualized volatility by day of the week. We find that volatility is highest at the beginning of the week, and then declines towards Friday. For the three historical periods, Monday through Friday volatility goes from: 19.4% to 17.4% (since 1928), 18.0% to 13.9% (since 1946), and 21.3% to 16.3% (since 1980) One could argue that some historical events that occurred at the beginning of the weak are to blame for these patterns – like Tuesday 9/11 2001, Black Monday of October 1987, and Black Tuesday of October 1929. But excluding them does not materially alter the patterns.

We also find that volatility is highest at the turn of the month, with two intra-month spikes: one around the 11th and another one around the 22nd-23rd. The bottom line appears to be that markets get relatively more nervous at the turn of the week and at the turn of the month. At least partially, these patterns could reflect some Monday blues on the one hand and portfolio-rebalancing sprees on the other.

Data patterns: Bad news makes markets nervous

Finally, we look at how volatility behaves around data surprises. We find that volatility is substantially higher around data misses (when our MAP indicator – which is higher, equal, or lower than zero when prints exceed, match, or undershoot consensus, respectively – is negative). Moreover, that spike happens almost exclusively in the midst of what we have called “Active” data periods of the month (running from Philly Fed to Non-farm Payrolls, the most intense period in terms of data releases). In contrast, “Lull” periods (when there are fewer data releases) show more boring patterns, regardless of the sign of MAP.

Keep “Vol Seasons” in mind, but trust fundamentals

For an infinitely-lived investor, exploiting market anomalies can be profitable. But for regular investors with shorter horizons, the strategy is somewhat riskier – since patterns tend to materialize, but do not always. In the end, “Vol Seasons” are something to keep in mind, but fundamental analysis should stay in the driver’s seat.

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Submitted by Martin Armstrong of Armstrong Economics,

The greatest problem we have is misinformation. People simply do not comprehend why and how the economic policies of the post-war era are imploding. This whole agenda of socialism has sold a Utopian idea that the State is there for the people yet it is run by lawyers following their own self-interest. The pensions created for those in government drive the cost of government up exponentially with time. The political forces blame the rich and this merely creates a class warfare with no resolution for the future. Even confiscating all the wealth of the so-called rich will not sustain the system. Consequently, we just have to crash and burn and start all over again.

The Guardian reported that some 50,000 people marched in London to protest against austerity. They cried: “Who is really responsible for the mess this country is in? Is it the Polish fruit pickers or the Nigerian nurses? Or is it the bankers who plunged it into economic disaster – or the tax avoiders? It is selective anger.”

The exploitation by the bankers has been really a disaster. They have been their own worst enemy and in the end, they have become the symbol that inspires class warfare if not revolution. They are not the representatives of those who produce jobs. They are merely those who wanted to trade with other people’s money for free. When they win, it is their’s, but any losses are passed to the taxpayers. Bankers should be bankers – not hedge fund managers who keep 100% of the profits using other people’s savings.

The repeal of Glass Steagall was the final straw that broke the back of the world economy. That was the single worst act that could have ever been done and we are now paying the price in spades. The collapse from 2007 has wiped out even the liquidity of the markets. The second worst act was the creation of the euro when the real goal was the federalization of Europe from the outset. That undermined the entire European banking system and has led to a serious undermining of the entire global economy.

The solutions from politics will always be the same – grab more power. We are in a downward spiral of liberty and how far we go down this path to the future will be determined by the people and if they at least wise up and see this is not class warfare, it is the people against government. This is why I say career politicians are dangerous for they can be bought way too easily as Clinton was to open the flood gates for the bankers.

This is not going to end pretty. The question is when does society wake up? Just how high will this price be that we have to pay? They will blame the rich and the idiots will cheer – get them. What will happen when there is no more wealth to hunt? We end up with a communist state by default – no wealth, just career politicians who blame everyone but themselves.

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The last time we looked at real, GAAP, not “pro-forma” non-GAAP EPS, in November of last year, when the S&P 500 was just over 1800, we found that on an LTM GAAP basis, the market was trading at a whopping 19x P/E LTM – a number which all but the most dyed-in-the-wool permabulls such as Janet Yellen, would call significantly overvalued (and which even JPM reported was higher than 89% of all P/E prints in the history of the market).

 

What happened next was remarkable: following a uniform change to pension accounting, which helped “revise” US GDP by $500 billion higher, said revision also flowed through to reported corporate earnings, not just non-GAAP EPS but also GAAP, and EPS for the S&P500 were revised retroactively higher virtually uniformly by about $1.5 per quarter. This revision is shown on the chart below.

This is notable because it means that LTM GAAP EPS for the S&P500 were pushed higher from roughly $100 to $106 as of March 31.

In other words, had it not been for the pension accounting fudge which helped raise LTM S&P 500 GAAP EPS from $100 to $106, the P/E of the S&P would be nearly 20x as of Q1. Nonetheless, even on a “revised” GAAP basis, taking full benefit of pension accounting revisions (revisions which are only possible due to the S&P500 being at record highs, something which reflexively is only possible because valuation gimmicks such as this one!) the S&P is still trading at a nosebleed 18.5x LTM P/E.

So how does GAAP EPS compare to that perpetually fudged, Non-GAAP EPS – used excuslively by overzealous management teams and sell-side analysts to “justify” quite ridiculous valuations “when one excludes one-time charges, restructuring items, and so on.” Like fore exammple Alcoa‘s perpetually recurring, “non-recurring” charges or JPM’s now constant “one-time” legal addbacks. The delta between the two is shown in the chart below:

On an LTM basis this means that the choice of GAAP or Non-GAAP for the S&P 500 is equivalent to 2 turns of LTM P/E: 16.5 vs 18.5.

 

Backing up one chart, observent readers will notice something peculiar: in Q1 GAAP earnings tumbled while Non-GAAP earnings maintained an exuberant upward trajectory. Sure enough, anyone curious how real, GAAP EPS performed in the just completed quarter, should look at the chart below. It shows that GAAP EPS (helped by a record amount of corporate buybacks) in the first quarter of 2014 actually dropped 2.2% from Q1 2013 even as Non-GAAP suggested a nearly 5% increase!

How does one explain the dramatic surge in Non-GAAP EPS compared to GAAP? Simple: supposed “one-time” Write-offs. This is what Deutsche Bank has to say about the topic:

Common items excluded from non-GAAP EPS are goodwill impairments, restructuring charges, merger costs, gain/loss on assets sales etc., which tend to be cyclical. Hence the difference between GAAP and non-GAAP EPS is largest during recessions and ~10% ex. recessions.

It is thus not surprising that the “write-off” difference between GAAP and Non-GAAP surged in Q1 2014 to 2.9: the highest since Q4 2012 when EPS once again slumped and the Fed was brought in to launch QEternity. In fact, excluding the two quarters prior to the launch of the latest round of QE, the number of “addbacks, write-offs and restructuring charges” has never been greater since the Lehman failure.

The bottom line is that the LTM P/E for the S&P 500 is therefore one of three numbers:

• 16.5x on a non-GAAP basis.
• 18.5x on a revised GAAP basis, or
• 19.5x on a pre-revision GAAP basis, when corporations do not take the “benefit” of a pension boost to EPS which is solely the result of record high stock prices courtesy of a Fed and HFT-manipulated market.

Readers can make their own choice which number to use based on their own particular bias.

As for corporate revenues and CapEx… fughetaboutit.

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Following the rather stunning shenanigans of Q1 GDP with regard healthcare spending (as we detailed here), we thought, four years after its passage in 2010, it worth analyzing Obamacare's economic impact? Beforehand, economists generally believed that the broader coverage would raise the demand for healthcare goods and services, although there was some disagreement about related effects on healthcare inflation. In reality, as UBS notes, there was too much optimism about a positive immediate economic impact and a negative price inflation effect.

 

Via UBS' Maury Harris,

Statisticians at the Bureau of Economic Analysis (BEA) initially were far too optimistic about what expanded healthcare coverage would immediately mean for U.S. economic activity. When calculating their first estimate of Q1(14) real GDP growth at the end of April, the BEA assumed a 9.1% annualized rate of increase in healthcare services consumption—one-ninth of overall real GDP. However, with more complete information, the BEA now reports a 1.4% decline in such spending. That was enough to trim 1.2 percentage points from earlier estimated annual real GDP growth. According to the BEA,

"The revision to health care services reflected the incorporation of newly available Census Bureau quarterly services survey (QSS) data for the first quarter. The QSS data reflect the revenues for-profit and nonprofit hospitals, physician offices, nursing homes, and other health care providers and the expenses of nonprofit hospitals and other nonprofit health care providers. Prior to receiving the Census QSS data, BEA used information on Medicaid benefits and on ACA insurance exchange enrollments to prepare the previously published estimates of health services."

Does American public see any effects from ACA?

Considering government statisticians' struggles in trying to measure what the ACA is doing to the economy, it is useful to ask if the American public thinks it is making much difference in their lives. A Gallup poll conducted on May 21-25 asked the following question: "As you may know, a few of the provisions of the healthcare law have already gone into effect. So far, has the new law helped you and your family, not had an effect, or has it hurt you and your family?" 14% felt it was helpful, a larger 24% responded that it was not helpful, and 59% cited no effect.

A subsequent Bloomberg National Poll on June 6-9 asked a somewhat similar question: "Since the healthcare law went into effect on January 1st of this year, have you experienced a big change, a little change, or no real change in your health care?" A big change was reported by 24% of respondents, little change was reported by 15% of the respondents, and no real change was cited by 60% of the respondents.

While the ACA implementation has not yet made much difference for most Americans, has it influenced their sense of longer-term security—one key to longer-term saving trends? From a behavioral perspective, more secure households should save less and less secure households should save more. The May 21-25 Gallup poll asked this question: "In the long run, how do you think the healthcare law will affect your family's healthcare situation? Will it make things better, not make much difference, or will it make things worse?" 36% responded "worse" versus 22% responding "better".

So far at least, the ACA does not appear to be a longer-term net confidence booster.

Earlier sharp slowdown in healthcare inflation was unsustainable

In addition to consumption and confidence impacts, the ACA potentially influences healthcare costs. The slowdown until recently in the y/y change in the core personal consumption expenditures (PCE) chain price index inflation was partly attributable to slower healthcare inflation. Economists debated whether the ACA should receive any of the credit, with doubters citing earlier instances where healthcare inflation slowed only to subsequently pick up.

Over the three months through May, healthcare goods and services prices accounted for around 43% of the 40 basis point re-acceleration of core PCE price inflation.

With the y/y change in the hourly employment cost index (ECI) for hospital workers up 1.7% in Q1(14), it is hard to see labor-intensive healthcare services prices rising by much less for any sustained period.

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In summary – Yes, Obamacare is bad for the US economy

But apart from massive over-optimism, and negative impacts on confidence and consumption; we are sure the voting public will get behind the man who instigated all of this…

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