Morning News: September 4, 2015
Posted by Eddy Elfenbein on September 4th, 2015 at 7:06 am

What Draghi Said on QE, Market Volatility, Greece

Putin Pitches for Foreign Investment in Russia’s Far East

The Fed’s Election-Defining Decision

The Jobs Report and the August Curse: Jobs Day Guide

Why the U.S. Gets the Most Out of Cheap Oil

Hedge Funds Faced a Test in August, and Faltered

Chinese Company to Buy Avolon in $7.6 Billion Deal

VW’s Unassuming CFO Emerges From Boardroom Wars as Chairman

General Mills to Sell Green Giant, Le Sueur for $765 Million

Man Asks Kickstarter for $20,000, Gets Over $9 Million

Japanese Banks Among Bidders for GE’s Local Finance Unit

How a Boeing Sales Flop Became the World’s Hottest Secondhand Jetliner

Philip Falcone, Former Head of Vast Fund, Tries a 3rd Act

Cullen Roche: Three Things I Think I Think – Crashing Up & Down Edition

Roger Nusbaum: Defensive Expectations

Be sure to follow me on Twitter.

A Little Context for NFP
Posted by Eddy Elfenbein on September 3rd, 2015 at 3:29 pm

The big August jobs report comes out tomorrow. This is a good example of where it pays to take a step back and look at the big picture.

The trend in non-farm payrolls has been perfectly clear for five years. Non-finance people would be amused to learn how much that red line is debated.

Morning News: September 3, 2015
Posted by Eddy Elfenbein on September 3rd, 2015 at 7:16 am

ECB to Cut Inflation Forecast But Keep Powder Dry

Xi Says China No Threat, Announces Military Cuts at Parade

Gross Says Fed Move May Be ‘Too Little Too Late’ Amid Turmoil

U.S. Treasury’s Lew Says China Will Be Held Accountable on Currency

U.S. Private Payrolls Rise Steadily; Productivity Revised Up

U.S. Productivity Increased at Fastest Pace Since 2013

U.S. Bank Earnings Up 7.3% in Second Quarter, FDIC Says

Those Inflation Targets Keep Getting Harder to Hit

Novartis to Begin Selling Copy of Amgen’s Neupogen in U.S.

Security Startup Tanium Said to Reach $3.5 Billion Valuation

With U.S. Factory and Boston Transit Deal, Inroad for Chinese Rail Firm

Spielberg’s DreamWorks Studio Expected to End Distribution Pact With Disney

Japan Display CEO Hints at Strong Apple Orders Ahead of New iPhone Launch

Jeff Carter: Are Market Black Swans Like Startup Unicorns?

Joshua Brown: When 499 of the S&P 500 Fall in a Day

Be sure to follow me on Twitter.

Morning News: September 2, 2015
Posted by Eddy Elfenbein on September 2nd, 2015 at 7:14 am

U.S. Auto Sales Pace Accelerates

Australian Dollar Hits Six-Year Low on China

Putin’s Got a New Problem With China

Solar Win in Coal’s Back Yard Shows Cheap Way to Beat Blackouts

Welcome to Quantitative Tightening as $12 Trillion Reserves Fall

Boston Fed Chief Says Interest-Rate Hike Will Be Gradual

Citi Sells Hungary Consumer Banking Business to Erste Group

McDonald’s Planning to Start Selling All-Day Breakfast on Oct. 6

Lego First-Half Sales Growth Beats Rivals as Asia Drives Sales

Volkswagen Extends CEO Martin Winterkorn’s Contract

Klarna Powers Mobile Payments For Overstock.com in U.S. Push

Amgen to Help Develop Novartis’s Pipeline of Alzheimer’s Drugs

Dollar Tree Swings to a Loss After Deal for Family Dollar

Howard Lindzon: The ‘Gig’ Bear Market of 2015… and the Bull Market in Volatility of Volatility

Cullen Roche: The 1998 Playbook

Be sure to follow me on Twitter.

August was Good for Ford
Posted by Eddy Elfenbein on September 1st, 2015 at 2:59 pm

Ford‘s (F) sales in the U.S. rose 5.4% last month. The stock is down today but not as much as everything else.

Ford said its sales were driven by demand for new cars, sport-utility vehicles and trucks. Ford SUV sales were the strongest in 12 years in August, while the F-series truck brand logged its best sales month of the year with a 4.7% increase. In all, Ford sold 234,237 vehicles in August, well above the 225,834 that automotive information website Edmunds.com had forecast.

Bad Markets Cause Volatility, Not Vice Versa
Posted by Eddy Elfenbein on September 1st, 2015 at 12:22 pm

Today, I wanted to talk about the stock market’s volatility which has received a lot of attention recently. Many investors misunderstand the character of volatility. The key fact to understand is that volatility is not a factor separate and apart from the market’s recent direction. Markets do not go down due to volatility. Rather, bad markets are the primary cause of volatility.

As I’ve explained before, movements in the stock market are generally not symmetrical. Bull markets tend to be long and slow while bear markets are short and quick. Even in secular bear markets, most of the pain is confined within a short period of time.

The single-best days of the market almost always come after the single-worst days. These spikes aren’t really bullish moves so much as they’re counter rallies in rough markets. In fact, when the market is at a new high, the daily movements are far more subdued than they are normally.

You’ll often see the VIX quoted which is the Volatility Index. For newer investors, let me explain what the VIX is. In the formula to calculate options prices, one of the variables is volatility. As a result, we can take the current options price and work backward to find the implied price of volatility. And just like everything else, volatility can be bought and sold.

Warning: Math Ahead

The VIX shows the one-month standard deviation for the S&P 500, but the number is annualized (don’t ask me why). To get that number to a monthly figure, just divide the VIX by 3.464. That’s the square root of 12. Fans of math will remember that the standard deviation rises by N^0.5.

The VIX closed yesterday at 28.43. That means traders see the S&P 500’s one standard deviation over the next month as being 8.2%.

For some context, the stock market has historically gained about 1/30 of 1% each trading day. The daily standard deviation is about 1%. That means that about 97% of each daily move is, on average, complete noise.

After one month, assuming 21 trading days, the market averages a gain of 0.7% with a plus/minus of about 5.5%. After a year, the market averages 8.4% with a standard deviation of 16%. Even after four years, the market’s average gain and standard deviation are equal at about 33%. In other words, it’s perfectly reasonable for the stock market to be in the red even after four years.

Of course, these numbers are merely explanatory. The market doesn’t move according to the bell curve, which furthers my point about volatility.

I took the last 25 years’ worth of data on the S&P 500 and VIX. I then compared the VIX to the S&P 500’s position versus its 52-week high. The relationship is very strong. The further below the 52-week high, the higher the VIX.

Here’s what my chart below means. When the market is at its 52-week high, the average VIX is 15.16. When it’s 0% to 1% below its 52-week high, the VIX averages 14.92. The bigger the fall, the higher the VIX.

I would guess that the relationship is even stronger if you use a time period shorter than 52 weeks. I wouldn’t be surprised if three months is more accurate, or even one month.

Think of it this way (in VERY rough terms): the VIX should be around 14 to 15 in placid times. It will increase by 1 point for every 1% the S&P 500 is below its 52-week high.

ISM Drops to 51.1
Posted by Eddy Elfenbein on September 1st, 2015 at 10:14 am

The ISM Manufacturing Index for July dropped to 51.1. That’s the lowest number since May 2013. But manufacturing is still expanding.

Oil’s Three-Day Bounce
Posted by Eddy Elfenbein on September 1st, 2015 at 8:47 am

The price of oil has bounced back dramatically over the past three days. If you look carefully at this chart, you might be able to make it out:

As I’ve said, the late summer storm isn’t quite over. The futures are looking lower this morning. Stock markets in Europe were hit hard overnight.

Morning News: September 1, 2015
Posted by Eddy Elfenbein on September 1st, 2015 at 7:07 am

China Data Pulls Down Regional Stocks

IMF’s Lagarde Sees Weaker-Than-Expected Global Economic Growth

German Unemployment Drops as Economy Eases Euro-Area Burden

Eurozone Jobless Rate Falls to Its Lowest Since Early 2012

Russia’s Fist Just Clenched Around the Internet a Little Tighter

World’s Top Oil Trader Vitol Sees Price Stuck at $40-$60 to 2016

Don’t Ditch Emerging Markets Just Because They’re Down

Valean Picks Up AstraZeneca Psoriasis Drug After Amgen Exit

Gold Prices Higher as Possible Fed Rate Rise Seen Later

Calpers, Calstrs Want Bank of America to Separate Roles of Chairman, CEO

Brazil’s Economic Crisis Is Destroying the World’s Busiest Helicopter Market

The Bustle in the Frozen Food Aisle

European Firms Team Up to Target Google in Civil Lawsuits

Roger Nusbaum: A White Knuckle Ride To A Small Gain

What Startup CEOs Can Learn From a No-No

Be sure to follow me on Twitter.

There Are No Hacks in the Market
Posted by Eddy Elfenbein on August 31st, 2015 at 1:32 pm

When I was in college, my friends often came up with crazy “can’t miss” business ideas. One week, they were going to sell imported leather goods. Another week, they were going to scalp concert tickets. They always knew somebody who knew somebody who probably knew somebody else.

It didn’t take long for me to realize that these business ideas rarely involved much work on their part. Instead, they were transactions that exploited some apparently unfilled gap in the market. Not surprisingly, these business ideas never worked out. The lesson is that there’s no way to hack the economy.

I thought of that as I read Josh Brown’s recent post “Computers are the New Dumb Money.” This past week was an unhappy one for computerized trading. Josh relayed the story of hearing a quant saying he “could write a program that crushes the market in my sleep.” Yeah, sure. A $20 trillion market can be so easily hacked.

To be sure, there are patterns that emerge which can be exploited for some time. Then it stops and the computers are never told when. As Josh said, “The problem with computers is that they can’t be programmed with humility.”

This is also why I tell investors to steer clear of stock screeners or any over-systemized investing approach. They may work, and they’ll keep on working—until they don’t. It’s a very reassuring thought that very few hedge funds have beaten Smuckers (SJM), the jelly people.

I take back what I said before; there really are ways to hack the economy. For example, hard work. A college student can wake up early on a Saturday and mow someone’s lawn. They can do a good job and get referrals. Pretty soon, the student can make some decent spending money.

In the stock market, there are hacks as well. For example, value investing. Time after time, academic studies have shown that it works, and in markets all around the world. For all the evidence, you’d think more people would pay attention. Instead, they’re buying BABA for a quick buck. It’s about to pop. I heard it from someone who heard it from someone….