Archive for the ‘Indices’ Category

The Negative Correlation of BATS

April 10, 2009

Since the FTSE-100’s closing low of March 5th 2009 British American Tobacco has been negatively correlated to the index.

The beta of BAT over this time has been -0.2617 [1]. Undoubtedly a short-term phenom but rather startling nevertheless.


What can we take from this snippet of info? Perhaps more evidence of “sector rotation” and a rebuke to the idea that “money on the side” is re-entering the market.

Other big cap “defensives” are showing little correlation to the index. Imperial Tobacco is also showing a negative correlation but far slighter than BATS (a beta of -0.074) while Glaxo is showing a very slight positive correlation of +0.069.


[1] For some reason Google’s dataset is missing 27th March for both the FTSE 100 and All-Share, I’ve simply taken that day out of the calculation for all the above.


The blogosphere and Jeremy Siegel

March 1, 2009

Jeremy Siegel’s Wall Street Journal article brought about much rancor and ridicule in the Blogosphere, along with a counter-attack. While Siegel’s math may be dodgy there is a more pertinent point: why should equity holders of an index such as the S&P 500 worry about vast losses from such small constituents? There doesn’t seem to be any reason for index holders to worry about such losses, any capital re-building by banks is unlikely to be a major drag on the S&P now.

So the mental abstraction of saying the S&P 500 is 94% in real companies and 6% in zombie banks and crushed autos which give ‘option value’ seems valid. There is some cherry picking going on here however. Defenders of Siegel have largely ignored the bullish outliers, i.e. the energy companies, who have not yet seen the drop in oil price vanquish their low historic P/Es.

To show how screwed up using a composite P/E is right now – here is a comparison between P/E and Robert Shiller’s P/E10:

The recent inversion between P/E and 10-year P/E is unprecedented!

Decoupling the Myth

January 22, 2008

Monday 21st January 2008 saw big falls in stock prices but rather like February 2007 there is no clear consensus view as to why.

Ambac was the big story, the fear of $2.4 trillion being uninsured and/or unhedged with the monolines saw heavy falls in banking. Yet, the greatest movement was from the miners. The two biggest fallers in the FTSE-100 were the two largest miners, Rio Tinto and BHP Billiton. There was some company specific news: BHP lining up 7 (seven!) banks to tie-up a deal with Rio but other miners also fell sharply. Even Xstrata fell despite concrete talk of Brazilian’s Vale looking to make a bid.

Miners fell so much thanks to the macro sentiment. Japan saw the largest fall from an established market due to fears of an all-out US recession. Of the emerging markets India got the greatest hammering. The idea of “decoupling”, that resource stocks and far-eastern companies would do okay in a US downturn with the Chinese and Indian markets continuing healthy expansion, seems to be on life-support.

While many in the media, especially the left-leaning media (aka BBC/Guardian) have positively lapped up the decoupling hypothesis it has little basis in reality.

Paul Kedrosky makes the point that you could (and I would) argue:

“when it comes to the importance of the U.S. to global GDP, darn little has changed”

The strenghening influence of BRIC countries is, perhaps, a very long-term trend. Yet that hypothetical trend is of no use when the US is still well within its long-term norm of % of world GDP.

Guess at 2008

January 2, 2008

Amused at the annual: “how will the FTSE-100 end the year” guessing game. It makes good newspaper copy but is of little use to anyone else. The FTSE-100 is not a good benchmark with its over-reliance on banking and resources.

Amongst the dozen or so analysts in the FT Money section last weekend they collectively made some good points: If it wasn’t for the miners then 2007 would have been awful, banking only needs to recover slightly to have the index humming, the value of sterling will have an affect on how the index does this year and the FTSE-100 is a global not local index.

This bloggers’ guess? year end 2008 = 7,049. Don’t bet on it.

FTSE Small Cap Collapse

December 21, 2007

The FTSE Small Cap Index[1] has nose-dived since September. A magnification of the falls on the FTSE 250, true. Yet this bares little resemblance to the Russell 2000 (the de-facto benchmark small cap index in the US). The Small Cap and Russell had tracked each others movements quite closely in recent years:

Russell 2000 vs FTSE Small Cap (5yr)

Key: RLT = Russell 2000, SMXX = FTSE Small Cap excluding Investment Trusts.

The divergence over the past three months is rather alarming:

Russell 2000 vs FTSE Small Cap (1yr)

Year-on-year the drop in the Russell 2000 is ~4% compared to >20% for the Small Cap! There are numerous possible reasons. I’ll posit a couple of those I favour.

1. Darling’s politically motivated attack on private equity via the 18% CGT rate could be partly to blame. Many long-term holders in smaller companies may well be locking in profits at the 10% rate. Crash Gordon’s pension raids have deflated the FTSE for the past decade so its no surprise Darling has carried on with the wealth-destroying traditions.

2. A realisation that Britain and sterling are screwed. While the US commentators are expecting a sharp “v” shaped recovery by late 2008 there seems to be no such relief for the UK. The UK is far more reliant on the property bubble, financial services and on the public sector gravy train. Anyone holding property or financial stocks already knows about the markets repricing. The public sector has gotten far too big and far too wasteful, a point reflected by Prof. Peter Spencer when commenting upon the latest government spending figures:

“What is really shocking about these figures is that they reveal that the Exchequer was running a large current deficit before the credit crisis hit home, when the economy was doing very well and it should have been showing a large current surplus”

This isn’t the place to have a rant about New Labour, but with the economy, or at least the perceptions of the economy, turning it is too late now. We’ve reached the top of the big dipper and the sudden dread of the fall to follow is beginning to dawn.

Evan Davis, while looking at the utterly meaningless trade deficit, opines:

The UK looks [as if] it has had more in common with the US than we thought.

Dear Evan, if only that were true!

[1] The FTSE Small Cap excluding Investment Trusts (ITs) is used in the charts as a more meaningful measure.