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Fundamental Analysts Belated Downgrades

One of the strange aspects of running a quant shop is watching some of the fundie guys downgrade previously beloved names long after they have been spanked. Let's cherry pick a few charts and work our way through them.

We've noticed this with GM, AIG, and many others recently. Today's silly downgrade is US Steel.

I don't want to pick on any one analyst. Since Goldman Sachs are supposed to be the smartest guys on the street, let's start with them.

continued here

Tuesday, November 18, 2008 | 01:56 PM | Permalink
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Novembers in the Market

Dan Greenhaus is with the Equity Strategy Group of Miller Tabak + Co. He put out this fascinating analysis of what "Novembers" typically hold in store for us after nasty "Octobers"

Dan writes:

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Okay, so we all know October was down a fantastically ugly 16.94%, the steepest decline since 1987 when that October declined 21.76%.  Going back to 1950, there have been 23 years in which October has been down by *any* amount from the prior September for an average decline of 3.15%.  Subsequent to those 23 years, the following November saw an average gain of exactly 1%, while the following two months, at the end of December, saw gains of a much more substantial variety; up 3.54%. But of course the decline in this past October was outsized in comparison to the average October decline, so let’s narrow this down a bit.  Using only instances in which October saw a decline of 3% or more (eight such instances), the average gain at the end of November was 1.67% while the average gain at the end of December was 3.70%.  To a degree, this is not entirely surprising as one would assume that the steeper decline would lead to a steeper rebound.  But in most of those instances, the decline was relatively modest.  As I said, those 23 declines averaged about 3.15%, a far cry from October 2008.  The only analogous decline was the drop in October in 1987 which led to a subsequent 8.53% drop in November 1987.

As I noted, the depth of the decline we just went through in October has only one parallel in the post 1950 time frame, which is 1987.  So the next logical step is to head back to the 20s and 30s to get a handle on what occurred in that time period.  Unfortunately, the Octobers of that time didn’t fare too much better.  October 1929 was down 19.93%, October 1930 was down 8.88%, October 1932 was down 13.86%, October 1933 was down 7.82% and October 1937 was down 10.25%.  In the first three instances I noted, the subsequent November was actually down an additional 13.37%, 3.31% and 5.89% respectively and November 1937 was down another 10.25%.  Only November 1933 saw a gain, moving higher 10.27%.

The point is that while we would be inclined to think that a drop of the magnitude we just witnessed would, at the very least, produce a dead cat bounce, that assertion is not entirely supported by history.

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Permalinks and comments

Wednesday, November 05, 2008 | 10:30 AM | Permalink | Comments (0) | TrackBack (0)
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PBS Video: Taleb & Mandelbrot

Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, speak with Paul Solman about chain reactions and predicting the financial crisis.

click for video

Excerpt:

RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.

Here is the pair's sobering conversation on what may lie ahead.

PAUL SOLMAN, NewsHour Economics Correspondent: One of the world's hottest investment advisers these days, Nassim Nicholas Taleb, author of "The Black Swan," who's been warning of a crash for years, betting on one, and winning big.

He's been ubiquitous in the financial media of late, from cable TV's "Colbert Report" to the BBC's "Newsnight," where he was infuriated by what he called "bogus accounting."

NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.

PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they're both scared.

NASSIM NICHOLAS TALEB: I don't know if we're entering the most difficult period since -- not since the Great Depression, since the American Revolution.

PAUL SOLMAN: The most serious situation we've been in since the American Revolution?

            
   

Source:
Top Theorists Examine Rippling Economic Turbulence   
PBS, October 21, 2008   
http://www.pbs.org/newshour/bb/business/july-dec08/psolman_10-21.html

Wednesday, October 29, 2008 | 12:30 AM | Permalink | Comments (48) | TrackBack (0)
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Smart Money 30 Video

I did a video interview with Smart Money a few months ago -- warning that the credit and financial crisis about to get a lot worse -- and by the time they were ready to post it, the Dow had already plummeted 2000 points (or as its been known around here lately, Tuesday).

Thursday, October 16, 2008 | 03:00 PM | Permalink | Comments (40) | TrackBack (0)
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S&P 500 Review

In our office, we've been using the Fusion IQ quant system for so long, we know it inside out. We use it as the basis for our institutional trading and published research (up ~10% for the year).

Subscribers have asked us to include our market and stock commentary -- beyond the pure neutral software application. In addition to the tools index rankings, there is also an "S&P 500 Marketometer" -- an intermediate term gauge of the S&P 500’s internal health. We use this as the basis of our own market review. As requested, we include our own application of the quantitative equity ranking system. This means in addition to the equity, index and sector work, we upload our own technical and macro commentary, too.

My partner Kevin Lane is a well regarded technical analyst who built his reputation recommending Enron and Tyco be shorted long before it was fashionable. He is usually the yin to my yang, bullish to my bearishness. Here is his most recent technical commentary about the S&P500:

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S&P 500 Index (SPX) - Daily Chart (1999 to Present)

As seen above the S&P 500 broke through what was once a solid support area (green lines and maroon dotted circle) in the last few days of trading last week and continued falling.  This support break was critical as it sent a message to market participants that this corrective phase is not yet over.  The next support zone for the S&P 500 now comes into play in the 1,015 to 960 zone (blue dotted lines).  At these lower support levels, particularly the 960 level, we would likely see a powerful rally set up as the S&P 500 would hit support while also being deeply oversold and more than likely have absorbed a massive selling purge.  These aforementioned factors along with a likely new 10-year high in the VIX (if this lower support level is hit) would suggest negative sentiment had peaked.

Trend, Breadth and Momentum are all bearish; Liquidity is bearish to neutral. The only element that is remotely bullish is Sentiment.

As we said to clients early last week (prior to these supports being violated) market internals and momentum were all very negative and the path of least resistance would remain down. 

This still remains the case.

Monday, October 06, 2008 | 06:00 AM | Permalink | Comments (12) | TrackBack (0)
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Breakouts/Breakdowns on Fast Money (9/10/08)

Here is yesterday's featured segment, Breakouts & Breakdowns on Fast Money with Dylan Ratigan.

Here is last night's episode:

Breakouts & Breakdowns:  An outlook on PNY and NEM, with the Fast Money traders

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The name Fusion is supposed reflect that we use both technical and fundamental data points.

The metrics we track are Trend (short, medium, and long term), Money Flow (stock and group), Short interest (relative to float), Institutional Ownership, (we crunch it ourselves between official quarterly releases), Earnings Trend (are they still ramping, plateau-ing, reversing or falling), and Forecast Earnings Surprise. 

The last metric is quite fascinating. we take the top analysts on any name in terms of their recent earnings forecast record. When they are an outlier against the rest of the analyst community, we often -- about ~68% of the time -- see an earnigns surprise. I.E., when the top guy is bearish, and the rest of the dead fish are bullish, you tend to see an downside surprise (and vice verse). Think Bove and Whitney versus the geniuses who downgraded Lehman today. When we get towards erarnings season, I'll pull a few names. Its pretty wild stuff.   

Our projected holding period is 3 months, plus or minus -- but we hold longer if working (i.e., we are still short AIG from last year), and always use stop losses when they are not working (i.e., covered the short in RIMM for a 5% hit).

Thursday, September 11, 2008 | 05:00 PM | Permalink | Comments (19) | TrackBack (0)
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Fusion IQ on Fast Money (9/9/08)

I am pleased to announce that my day job (FusionIQ) is now a featured segment on Fast Money with Dylan Ratigan.

The segment is called Breakouts & Breakdowns

Here is last night's episode:

Breakouts & Breakdowns:  An outlook on FDO and JOYG, with the Fast Money traders

Wednesday, September 10, 2008 | 01:10 PM | Permalink | Comments (19) | TrackBack (0)
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Writedowns vs Underwriting Scorecards

Smackdown! WDCI vs LEAG . . .

Well, not quite. Today's interesting MSM pick of the day is a Bloomberg column on none of the latest Wall Street pastime's: Toting up write downs:

WDCI, the Bloomberg function introduced less than five months ago to track the writedowns, has overtaken LEAG, which ranks bond and stock underwriters, in viewers per day.

"WDCI is the new league table, or even better, the negative league table,'' said Hyde, a banking analyst at London-based European Credit Management Ltd., which oversees $27 billion for clients. "If people look at LEAG these days, it's to see who the biggest underwriter of mortgage securities was in the past. You're incriminated if you were.''

The writedowns and credit-market losses at more than 110 of the world's biggest banks and securities firms reached $514 billion last week as the credit crunch continued to wreak havoc.

Since two Bear Stearns Cos. funds invested in mortgage securities imploded in July 2007, seven bank chiefs have lost their jobs, and regulators have seized 12 U.S. banks. New York- based Bear Stearns, then the nation's fifth-largest securities firm, was forced to sell itself when faced with bankruptcy.

The tally on WDCI already surpassed the top of the range that the International Monetary Fund estimated in April banks would lose during the credit crunch. The IMF is scheduled to publish an update of its Global Financial Stability Report later this month.

As the losses build, WDCI readership has climbed. In July, an average of 4,000 users looked at the table daily, up 34 percent from the previous month, according to data compiled by Bloomberg. On some days, more than 10,000 Bloomberg users monitored WDCI. By contrast, LEAG was viewed by an average of 1,800 people daily in July, 17 percent fewer than a year earlier."

Interesting stuff . . .

Source:
Counting Writedowns Replaces Deals Won as Wall Street's Ritual
Yalman Onaran 
Bloomberg September 2 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=azgIxINbnuhU&

Tuesday, September 02, 2008 | 09:00 AM | Permalink | Comments (8) | TrackBack (0)
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Analysts' Profit Forecasts: Worse Than Ever!

 
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"At the start of the year, profits at banks, brokers and insurance companies were projected to rise 22 percent in 2008, according to the average estimate of analysts surveyed by Bloomberg. They're now expected to decline 48 percent."

-Bloomberg's Chart of Day

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How bad are fundie analysts as a group? Well, as the chart up top shows, the earnings forecasts of Wall Street Analysts "missed the mark by the biggest margin in at least 16 years last quarter," according to Bloomberg data.

How often did the Street get it right? Try 6.7% for the companies in the S&P500 Index in Q2. That's the  worst showing since Bloomberg began tracking this data way back in 1992.

While some blame the credit crunch, Oil, and Housing as the problem, a more likely source of error is Reg FD. Analysts have been increasingly wrong since the adoption in October 2000 of Regulation Fair Disclosure. The regulations barred CEOs and CFOs from giving the inside dope to the outside dopes. No more whisper numbers to favored bankerd or their pet analysts.

What does this mean to investors? Well, traditional Wall Street Research seems to be of minimum value to investors. Its no surprise that the fastest growing form of analytics  (yes, I am talking my own book here)  is quantititive -- no C-level execs needed. 

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Previously:
Follow Analysts at Your Own Financial Risk (June 2008)
http://bigpicture.typepad.com/comments/2008/06/follow-analysts.html

Schwab: We Don't Need Your Stinkin' Analysts (April 2008)
http://bigpicture.typepad.com/comments/2008/04/schwab-we-dont.html

Source:
Analysts' Profit Forecasts Missing More Than Ever: Chart of Day
Lynn Thomasson
Bloomberg, Aug. 20 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ar9FYyyXfzdo

Friday, August 22, 2008 | 08:45 AM | Permalink | Comments (36) | TrackBack (0)
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Stocks Breaking Down on Volume

My partner Kevin sends me a reminder this morning that "When the markets break down investors look for alternative ways to make money such as short selling."

Below is a daily list that FusionIQ generates highlighting stocks that have broken down on significant volume, typically a sign of large institutional selling.

We use these as a source of Shorting ideas . . .
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click for jumbo table

Table courtesy of Fusion IQ

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The next release of Fusion (2.0) will be out after Labor Day. 2.0 has many new features and user interface improvements, including a highly customizable home page. 

We may set up another free trial again if there is any interest.

Tuesday, August 19, 2008 | 11:00 AM | Permalink | Comments (18) | TrackBack (0)
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December 2008

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