Our latest research was released today at 10h30 GMT! It covers the following:
- A featured pair from the steel and construction sectors
- Signal price slippage – your experience
- Performance update
- Research review: commodities & cointegration
- Status of research pairs
What does a ‘featured pair’ look like? An example excerpt from issue #9 (note, not today’s release) is below:
The full version digs into both halves of the pair, provides a fundamental accounting profile and the backtest out of the ArbMaker cointegration software tool-set. If a signal is subsequently generated for this pair an alert is sent via email and mobile phone alert with complete entry details.
Trials available here.
Research review: Percent accruals (2010)
A subscriber to our premium research newsletter and owner of our software commented that he was surprised by the depth of fundamental analysis we applied to our selections.
This is particularly the case where the anticipated trade horizon demands it. That is, it is frequently a good idea to identify the stronger half of your pair and trade with it rather than against it – especially for longer trade durations. Over time pricing is more likely to reflect fundamentals than not.
This approach is in keeping with the notion of “filters” we have written about several times in our research to clients: the stat tells one story; technical indicators another; sentiment yet another; and the accounting one more (and so on). The sweet-spot where these filters overlap represents a validation of one’s primary methodology.
To underline this point have a read of this older but still valid paper that is accounting-focussed. The core, entirely reasonable notion is that cash trumps accruals – and the large data set presented demonstrates the payoff. The authors are positing that a single indicator allows traders to select both a long and a short and expect a significant reward (in the aggregate) over the following accounting exercise.
These types of indicators are useful secondary triggers that help validate a trade’s thesis. But limitations remain and it would be a misguided trader who sought to apply it (i) in isolation; and (ii) for very short-term trades.
*This is an abridged version of an excerpt from our research service. Try it free.
This week US stock markets hit records. Will the run continue?
Long/short approaches should not care either way – it is generally directional investors and traders who rejoice (and hope). In an ideal world one would have exposure to both strategies. But there are always important provisos to consider for long only strategies.
There is sometimes comfort taken from “momentum” arguments when buying high. Others view purchases made at all-time highs under the assumption that, over the “long term”, the passage of time will forgive paying too much today.
Maybe so, but there is no guarantee of that. A long term investment is sometimes only a euphemism for a short term investment gone bad. Worse, events may subsequently prove the purchase did not fully appreciate the context in which it was made.
We point you to an article here showing how such an attitude unravelled for one set of professional private equity investors caught in a “we must not miss out on this” mindset. It’s about a 10 minute read.
Any investment can tank. Often that may be due to factors beyond one’s control. But succumbing to the temptation of a roaring market without taking everything – most of all price – into account is avoidable!
Better still, hedge.
Some interesting and informative data for long/short traders from a 13 February “Earnings Season Update” report compiled by BoA Merrill Lynch.
With 85% of companies reported:
- 61% have beaten on EPS
- 48% have beaten on sales
- 36% have done both
Those EPS beats are better than post-2000 average of 53% but the sales results are worse than their historical 56% level.
Perhaps most interesting were these 2 graphs:
Health Care and Tech have had most positive surprises with the opposite being the case for Staples, Telecom and Utilities.
Something to bear in mind when considering sentiment.
None the less, we like it very much as a news source and general sounding-off platform. If you care to follow us just go here or click the graphic below.
Assuming IKEA win the Mexico Wall contract – and the pricing is undeniably attractive – the natural coupled position is provided by another IKEA product: the flat pack refugee shelter featured in the non-satire Guardian.
The main issue is getting the exposure to unquoted Ikea.
In the absence of that get non-satirical research on hedged trade ideas right here.
“The key elements of the Dodd-Frank Act in the cross hairs of President Trump (and his intentions towards these) are:
- The stress tests: relax them
- The Volker Rule: redefine (at least) the rule and permit banks to make speculative investments with deposit insured funds
- The Fiduciary Rule: enters into force this April and would stop the sale of high fee & commission products in the name of greater choice
Clearly, if you are in the banking and investment business such changes would mean more profit. At what cost is another matter.”
That excerpt comes from tomorrow’s edition of our research newsletter along with a specific trade idea close to execution. A trial accessing the research can be obtained here.
A broader concern in the discussion of Dodd-Frank is would such changes be, on balance, a good turn of policy? It is easy to see how they might not.
- For example, relaxing the stress tests is a step towards greater bank sector consolidation and thus increased too-big-to-fail risk. By what process might this occur? Well, should the threshold defining “systematically important financial institutions” (SIFIs) be raised it will promote M&A activity that creates larger entities that flirt with, but do not meet, SIFI status. Such new entities raise consolidation risk incrementally.
- Reinterpreting or abolishing the Volker Rule risks going all the way back to the mixing of commercial and investment bank activities that the Glass-Seagall Act abolished after the Great Depression. Glass-Seagall was specifically intended to create a firewall between customer deposits and bank speculation with those funds. Its systematic erosion in the name of “competitiveness” was a material factor in the 2007 to 2009 crisis.
- It is difficult to accept as serious an argument that suggests an incentivised salesmen sets out the case between a high commission product and a lower commission product evenhandedly. The contrary assumption has been seen before, very recently, in the subprime mortgage market. The Fiduciary Rule is due to take effect this April. A still birth would be a cause for concern.
There are usually ways existing regulatory legislation can be finessed for the greater good. With these three elements doing so requires great care.
In 2007 Harvard economist Robert Jensen published what was essentially a study of real-world arbitrage with a look at the impact of technology (mobile telephones) on fish market prices in Kerala, India.
The work has since become very well-known mainly for the hope that embracing new, affordable “better information” tools held out for the developing world.
Unfortunately it turns out the world – and markets – are more complicated than Mr. Jensen’s work implied. Subsequent research, notably this paper by Steyn and Das, set out several factors that act as obstacles to the efficient price arbitrage of Jensen’s analysis: regulation, trust in other market participants, fatigue and specific port idiosyncrasies (among others). Steyn went on to provide further detailed refutations in this 2016 paper.
Here is the point – and we say this a lot to our research subscribers: context matters in the search for relative value and long/short trade opportunities (and development policy too).
A great article appeared in the Financial Times earlier today. In the tradition of “lies, damned lies and statistics” it puts the recent Dow Jones Industrial Average record of 20,000 in perspective.
Here is how that record looks using regular ‘level’ prices:
So what’s the big deal about the Crash of 1929, anyway?
Well, here is the same chart using a logarithmic scale:
On a related side note, our software range allows analysis to be made both ways: via level prices or natural logs. This 20k DJIA example is as good an explanation as we’ve seen as to why having the choice is a good idea!
“It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive”
Times change and when JM Keynes wrote that in The General Theory of Employment, Interest and Money he did not anticipate the rise of bookmakers like William Hill, Ladbrokes, BetFair/Paddy Power and so forth.
Combined with the power of the internet and idiot-proof betting and trading algos (which is not a comment on the effectiveness of those same algos) the share prices of these companies came to bear an uncanny resemblance to that of the London Stock Exchange (LSE).
Here, for example, is a plot of the William Hill (in red) vs LSE share price between April 2009 and July 2013:
Very positive correlation (and strong cointegration too). It brings to mind the the more famous casino quote from chapter 12 of The General Theory:
“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”
What, then, to make of the same graphic (with LSE now in red) since August 2013?
Now they show negative correlation (but still strong cointegration).
It is perhaps a sector comment and nothing more. But given that the DNA of the modern bookmaker is now part-bourse (they take financial wagers in addition to bets on just about anything else) it gives pause for thought on the possible future direction of the broader market.
After all, central bank actions have not bestowed identical benefits on the clients of bookmakers and on those of stock markets.