Opening Bell 27.07.2015

Your world at 9am

world.2015-07-27

Equities

Major
DAX(DEU) -1.43%
CAC(FRA) -0.58%
UKX(GBR) -1.13%
NKY(JPN) -0.73%
SPX(USA) -1.07%
MINTs
JCI(IDN) -0.33%
INMEX(MEX) -1.23%
NGSEINDX(NGA) -0.40%
XU030(TUR) +0.40%
BRICS
IBOV(BRA) -1.13%
SHCOMP(CHN) -1.74%
NIFTY(IND) -0.79%
INDEXCF(RUS) -1.27%
TOP40(ZAF) -1.70%

Commodities

Energy
Ethanol -2.04%
Heating Oil -0.02%
Natural Gas -0.94%
RBOB Gasoline -0.18%
Brent Crude Oil -0.16%
WTI Crude Oil -0.33%
Metals
Gold 100oz +0.94%
Palladium +0.92%
Platinum +0.77%
Copper +0.00%
Silver 5000oz +0.92%

Currencies

USDEUR:-0.19% USDJPY:-0.26%

MINTs
USDIDR(IDN) +0.00%
USDMXN(MEX) -0.11%
USDNGN(NGA) +0.00%
USDTRY(TUR) +0.10%
BRICS
USDBRL(BRA) +2.11%
USDCNY(CHN) +0.00%
USDINR(IND) +0.43%
USDRUB(RUS) -0.19%
USDZAR(ZAF) -0.55%
Agricultural
Cotton +0.00%
Wheat -1.07%
Cattle -0.09%
Cocoa +0.00%
Corn -2.80%
Feeder Cattle +0.07%
Lean Hogs -1.18%
Lumber -2.13%
Soybean Meal -0.85%
Soybeans -0.78%
Sugar #11 -2.35%
White Sugar +0.00%
Coffee (Arabica) +0.16%
Orange Juice +0.24%
Coffee (Robusta) +0.00%

Credit Indices

Index Change
Markit CDX EM -0.71%
Markit CDX NA HY -0.40%
Markit CDX NA IG +3.04%
Markit iTraxx Asia ex-Japan IG +1.63%
Markit iTraxx Australia +2.19%
Markit iTraxx Europe +1.09%
Markit iTraxx Europe Crossover +11.77%
Markit iTraxx Japan +2.12%
Markit iTraxx SovX Western Europe +0.07%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) +0.49%
Looks like we are setup for another down week…

Must reads

This is not good for rate cuts: 33% surge in onion prices in the past week and prices of vegetables are already higher by about 15-20 per cent as compared to the last year. (TOI, ET, #inflation)

Indian outsourcing firms seem increasingly willing to forego profit for market-share. Good luck with that! (LiveMint)

Get rich so that you can get out? India has seen the second-biggest outflow of high net worth individuals in last 14 years, second only to China, with as many as 61,000 millionaires shifting base to abroad due to reasons like tax, security and child education. (FE)

Retail sales growth in developing countries that are net exporters of commodities slipped to 2.6% in May from 2.7% in April. (FT)

Four tailwinds driving European profit growth past the U.S. (Bloomberg) Here’s how Indian investors can invest in Europe.

Genetic research has become cheaper and democratized. Pick your creature, pick your gene, and you can bet someone somewhere is giving it a go. (Wired)

Good luck!

Profiting from PE Ratio Obsession

Background

We are not big fans of using the Price-to-Earnings ratio. We saw how funds that use the market PE to time the market are no better than a buy-and-hold strategy (sometimes B&H performs better,) and we followed that up with how every single “ratio” has a caveat. And PE is the dumbest of them all.

However, if a large group of market participants pay attention to single flawed metric, then there should be a profitable arbitrage strategy that exploits that anomaly?

Exploiting PE obsession

Researchers in the US figured out a way to do just that.

Active investors with limited attention and capital constraints use fundamental metrics to screen and sort potential investments. Price-earnings (P/E) ratios are extremely popular, and are typically calculated using four trailing quarters of net income. Changes in the rankings of published P/E ratios may influence investor attention and subsequent excess returns. From 1974-2013, decile long-short portfolios formed on characteristics of P/E rankings which are rebalanced monthly earn value-weighted monthly excess returns of 101 basis points with annual Sharpe ratios of 0.79. Decile long-short portfolios which are rebalanced daily earn value-weighted daily excess returns of 16.99 basis points with annual Sharpe ratios of 2.91. Excess returns are robust to size, value, profitability, investment, price momentum, earnings momentum, short-term reversals, and relative volume. Changes to a stock’s P/E ranking predicts excess returns even when the stock’s P/E ratio itself does not change. The return premium cannot be explained by fundamental risk, clustering of attention at round number P/E ratios, or autocorrelation in the regressors.

We haven’t tested this for the Indian market yet. But this is just too cool not to share!

Paper: Rankings of published price-earnings ratios and investor attention

Weekly Recap: Roller Coaster Investing

world.2015-07-17.2015-07-24

Equities

Major
DAX(DEU) -2.79%
CAC(FRA) -1.31%
UKX(GBR) -2.88%
NKY(JPN) -0.52%
SPX(USA) -2.03%
MINTs
JCI(IDN) -0.27%
INMEX(MEX) -2.26%
NGSEINDX(NGA) +0.14%
XU030(TUR) -4.70%
BRICS
IBOV(BRA) -6.06%
SHCOMP(CHN) +2.87%
NIFTY(IND) -1.03%
INDEXCF(RUS) -3.30%
TOP40(ZAF) -2.54%

Commodities

Energy
Ethanol -4.06%
RBOB Gasoline -4.46%
Brent Crude Oil -4.02%
Heating Oil -1.74%
WTI Crude Oil -5.35%
Natural Gas -2.77%
Metals
Gold 100oz -3.05%
Palladium +1.49%
Platinum -1.18%
Silver 5000oz -1.35%
Copper -4.80%

Currencies

USDEUR:-1.16% USDJPY:-0.19%

MINTs
USDIDR(IDN) +0.70%
USDMXN(MEX) +2.26%
USDNGN(NGA) -0.03%
USDTRY(TUR) +3.28%
BRICS
USDBRL(BRA) +4.95%
USDCNY(CHN) +0.00%
USDINR(IND) +0.90%
USDRUB(RUS) +2.83%
USDZAR(ZAF) +2.53%
Agricultural
Coffee (Arabica) -4.47%
Coffee (Robusta) -0.56%
Corn -6.67%
Cotton +0.03%
Wheat -7.62%
White Sugar -3.08%
Orange Juice +2.83%
Feeder Cattle -2.46%
Cattle -2.62%
Cocoa -3.88%
Lean Hogs +2.41%
Lumber -4.10%
Soybean Meal -1.83%
Soybeans -2.34%
Sugar #11 -5.94%

Credit Indices

Index Change
Markit CDX EM -0.39%
Markit CDX NA HY -0.72%
Markit CDX NA IG +3.51%
Markit iTraxx Asia ex-Japan IG -0.56%
Markit iTraxx Australia -2.39%
Markit iTraxx Europe -0.14%
Markit iTraxx Europe Crossover +7.87%
Markit iTraxx Japan -1.57%
Markit iTraxx SovX Western Europe +1.59%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) +0.01%
An uneasy week that saw most indices weak. The entire commodity complex came crashing down. Gold, copper, silver, oil, grains… pretty much every commodity was down.

Nifty Heatmap

CNX NIFTY.2015-07-17.2015-07-24

Index Returns

For a deeper dive into indices, check out our weekly Index Update.
index.performance.2015-07-17.2015-07-24

Sector Performance

sector performance.2015-07-17.2015-07-24

Market Cap Decile Performance

Decile Mkt. Cap. Adv/Decl
1 (micro) -1.58% 73/62
2 +0.74% 69/66
3 +8.28% 69/66
4 -0.03% 71/63
5 +1.95% 70/66
6 +0.73% 65/70
7 +0.40% 72/63
8 +1.34% 70/65
9 -0.35% 63/72
10 (mega) +0.01% 70/65
Looks like there was an outlier that bumped up a microcap stock…

Top Winners and Losers

INFY +8.56%
ABIRLANUVO +8.56%
IBULHSGFIN +8.86%
LUPIN -15.25%
SUNPHARMA -11.76%
CONCOR -11.74%
Sunpharma’s warning, Lupin’s disappointment and Infy’s optimism…

ETF Performance

INFRABEES +1.50%
JUNIORBEES -0.66%
NIFTYBEES -1.12%
CPSEETF -2.56%
PSUBNKBEES -2.76%
BANKBEES -2.94%
GOLDBEES -3.13%
Gold got shellacked…

Yield Curve

yield Curve.2015-07-17.2015-07-24

Bond Indices

Sub Index Change in YTM Total Return(%)
0 5 +0.02 +0.12%
5 10 -0.04 +0.35%
10 15 -0.01 +0.22%
15 20 -0.02 +0.34%
20 30 -0.02 +0.36%
The long end of the curve was in the green after a long time…

Investment Theme Performance

A mixed bag. Momentum ended flat as Kitex got whacked…

Equity Mutual Funds

Bond Mutual Funds

Thought for the weekend

Big money is in buying and holding great businesses acquired at reasonable valuations. Owning such businesses will produce gut-wrenching roller coaster rides which the investor has to have the willingness to take. They can’t avoid those rides by jumping out and trying to get back in, and attempts to do so are likely to be unsuccessful. So, the best strategy is to stay put and bear it.

Source: Sanjay Bakshi

Beware of Single Factor Investing

Factors are short-cuts

Analyzing financial statements is a cumbersome process for most retail investors. Many don’t have the time, patience or expertise to dig through balance-sheets, income and cashflow statements. Most don’t find joy in reflecting on the many footnotes that accompany such statements. Here lies the attraction of single-factor investing.

Price-to-Earnings (PE) ratio is one such factor. We recently saw how there was no great advantage in investing in mutual funds that use PE to switch between debt and equity. It is a poor market timing indicator even when practiced by professional fund managers.

The ‘E’ in PE

The ‘earnings’ line-item is an accounting driven artifact that is easily gamed and has very little relationship with the company’s value. Here’s what Michael J. Mauboussin has to say about earnings, see appendix for the full note:

… an increase or decrease in earnings does not provide a clear picture of the corresponding increase or decrease in shareholder value. This is because the earnings figure does not reflect the company’s level of risk, does not take into account the investments needed for anticipated growth, and is subject to a wide variety of accounting conventions. Such accounting conventions do not ordinarily affect cash flow and hence do not affect a company’s value.

Even Shiller’s cyclically-adjusted P/E (or “CAPE”) has little predictive value in the short term. Shiller CAPE shows its strongest correlation to nominal returns over an 8-year time horizon, and is actually most predictive of real returns over an *18* year time horizon. (Kitces)

Some investors also look at Price to Book and Return on Capital Employed. These ratios provide a convenient short-hand but are far from adequate in forecasting future earnings.

Besides what does the ratio of total assets to total liabilities measure anyway? Intangibles can’t be quantified. Are inventories adjusted to current market prices? Is the loan loss reserve adequate?

Bottom line: Assets are often overstated and liabilities understated. (Fool)

What does “capital employed” mean anyway?

  1. No general agreement exists on how capital employed should be calculated, on whether initial or average capital employed should be used or on how profit should be defined.
  2. Often, accounting profit rather than cash flow is used as the basis of evaluation.
  3. It ignores the time value of money.

Take away

Every style of investing – value, momentum or factor – depends on finding historical patterns and extending them into the future.

Every valuation metric comes with a “yes, but…”

No single factor is a predictor of future returns.

Appendix

Opening Bell 24.07.2015

Your world at 9am

world.2015-07-24

Equities

Major
DAX(DEU) -0.07%
CAC(FRA) +0.08%
UKX(GBR) -0.18%
NKY(JPN) -0.68%
SPX(USA) -0.57%
MINTs
JCI(IDN) -1.02%
INMEX(MEX) +0.11%
NGSEINDX(NGA) -0.16%
XU030(TUR) -3.27%
BRICS
IBOV(BRA) -2.18%
SHCOMP(CHN) +0.56%
NIFTY(IND) -0.51%
INDEXCF(RUS) -1.19%
TOP40(ZAF) +0.60%

Commodities

Energy
Ethanol +0.00%
RBOB Gasoline +0.60%
Natural Gas -0.25%
WTI Crude Oil +0.68%
Brent Crude Oil +0.51%
Heating Oil +0.50%
Metals
Copper +0.00%
Palladium -0.52%
Platinum -0.91%
Silver 5000oz -0.57%
Gold 100oz -1.33%

Currencies

USDEUR:+0.13% USDJPY:+0.00%

MINTs
USDIDR(IDN) +0.37%
USDMXN(MEX) +0.14%
USDNGN(NGA) +0.00%
USDTRY(TUR) +0.17%
BRICS
USDBRL(BRA) +1.95%
USDCNY(CHN) +0.00%
USDINR(IND) +0.29%
USDRUB(RUS) -0.04%
USDZAR(ZAF) +0.44%
Agricultural
Cattle +0.00%
Cocoa +0.00%
Wheat +0.05%
White Sugar +0.00%
Coffee (Arabica) -2.60%
Coffee (Robusta) +0.00%
Corn -0.50%
Cotton +0.00%
Lean Hogs +0.00%
Lumber +0.41%
Soybean Meal +0.00%
Soybeans +0.02%
Sugar #11 +1.49%
Feeder Cattle +0.00%
Orange Juice -1.90%

Credit Indices

Index Change
Markit CDX EM -0.28%
Markit CDX NA HY -0.51%
Markit CDX NA IG +1.98%
Markit iTraxx Asia ex-Japan IG +1.57%
Markit iTraxx Australia +1.21%
Markit iTraxx Europe +1.26%
Markit iTraxx Europe Crossover +7.42%
Markit iTraxx Japan +0.53%
Markit iTraxx SovX Western Europe +1.89%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) -0.24%
TGIF!!!

Must reads

Tata Securities thinks RBI will start raising rates next year. (ET, #rates) Probably because of onion prices. (HBL, #inflation)

Is the long-awaited shift of household savings from physical to financial assets is finally happening? (LiveMint, #economy)

Higher returns than the stock and bond markets offer requires greater than average risk. It requires concentrated positions, financial leverage or savvy market timing. Otherwise, it isn’t possible. Lower than average risk means lower returns – but that can be achieved with a much more low-cost set of tools. Can’t have both at the same time. (TRB)

Good luck and have a nice weekend!