Posts Tagged ‘Strategy’

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A Brief History and Analysis of Equity Market Correlations vs BoomBustBlog Analysis

Tuesday, September 7th, 2010 by Reggie Middleton

We performed an analysis of the correlation of the stock prices of the companies that we have covered over the last two years to the broader stock market. Based on the price movements in the selected stocks and S&P 500 over the last decade, we mapped the pattern seen in the degree of correlation that is exhibited when there are changes in the overall market direction owing to change in the “perceived” macro-situation.

For the purpose of our analysis, we divided the total period under consideration (December 31, 2000 till August 31, 2010) in to four sub-periods reflecting four different market sentiments:

  • Pre-crisis- Dec 31, 2000 -Dec 31, 2007 – Long-term
  • Financial crisis- Jan 01, 2008 to March 09, 2009
  • Rally – March 10, 2009 to April 30, 2010
  • Correction – May 01, 2010 to Present

Based on the daily prices of the stocks and S&P 500 in the aforesaid periods, we calculated the following metrics to analyze the degree of correlation as well the relative price movements:

  • Correlation coefficient
  • Beta
  • Annualized volatility
  • Ratio between stock volatility and S&P 500 volatility
  • Annualized return
  • Z-score – calculated by dividing annualized return by annualized volatility
  • Ratio between stock z-score and S&P 500 z-score

Based on the matrix obtained, we have the following key observations:

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Near Record High Correlations: Is this the End of the Fundamental Value Investor?

Tuesday, September 7th, 2010 by Reggie Middleton

As stimulus induced economic indicators drove financial markets higher through the end of 2009 and into the middle of 2010, many financial advisors and researchers believed the Great Recession was taking its final breath and believed they bore witness to a forceful yet successful example of a proper response to a endemic crisis by policymakers around the globe. Fast forward to the present and you find that the Eurozone solvency crisis, the US economic slowdown and the Chinese real estate/lending bubble forces general economic consensus to move from that of recovery and prosperity to a gloomier picture of a return to output contraction or more realistically, realization that we never really left the period of economic contraction sans hefty government stimulus.  Although it was a while ride, much of what BoomBustBlog has alleged has come to pass in terms of the condition of global banks, global economic output, and the prospects of the companies and countries that we cover. Most sell-side economists have lowered their GDP growth outlooks to near 1% for the next quarter, and more attention is being focused on central bank officials and the idea of new stimulus measures – all pretty much in line with our prognostications throughout 2008 and 2009.  The problems has been that regardless of monetary policy, new stimulus and the growing need for them markets have moved with incredible correlation and very low dispersion among stocks over the past few quarters making it very difficult to monetize the fact that we have been right all along. These recent events beg the question, “Is this the end of the Stock Picker?” and if so, then “What does this portend for the future of the investment markets when casino style gambling has returned better results than adhering to fundamentals, math and basic common sense?” “Has the Fed destroyed the fundamental investor?” Let’s peruse the topic as illustrated in the mainstream financial media:

Stocks Move with the Market: CNBC

  • 78% of the S&P 500 simply moves with the market and ignores underlying fundamentals
  • CNBC attributes this to the rise of algorithmic trading and death of traditional stock picking, however, correlations have been higher in eras that lacked heavy algorithmic trading

Correlation Soars on S&P 500: WSJ

  • Individual stock correlations to the S&P have reached their highest point since the crash of 1987
  • Movements have forced fund managers from examining long term fundamentals and into quick moves into cash, treasuries, and investment grade corporate debt

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The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream Media

Wednesday, September 1st, 2010 by Reggie Middleton

Back in September of 2007 when I was preparing to launch a hedge fund, I came up with this interesting name for a blog. It was BoomBustBlog. What made it interesting is that I can literally blog ad infinitum on the synthetically crafted booms and busts of the global economy, for the method of shepherding the economy in this day and age is actually predicated on the existence and/or creation of Booms and Busts. Of course, from my common sense perspective, one would think that the job of a central banker would be to ameliorate the effects of, and in time eliminate booms and busts… Apparently, that doesn’t appear to be the flavor du jour. As a matter of fact, it appears as if central bankers are doing the exact opposite. Of course, attempting to cure a bust with a boom, or worse yet attempting to prevent a boom from busting with another boom is a recipe for disaster, and worse yet the probability of success is close to nil, yet central bankers try anyway. This leads to overt and explicit policy errors, which leads to outsized profit opportunities to those who pay attention. Enter “The Great Global Macro Experiment, Revisited“, from which I will excerpt below. Please keep in mind that this article was written in October of 2008, and turned out to be quite prescient, I will annotate in bold parentheticals the portions of particularly prescient relevance. The original macro experiment piece was posted on my blog in September of 2007… For those that are interested, I plan on discussing this topic live on Bloomberg TV today: “Street Smart” with Matt Miller & Carol Massar at 3:30 pm.

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Reggie Middleton on Bloomberg TV, September 1 at 3:30

Tuesday, August 31st, 2010 by Reggie Middleton

Interested parties can check me out on Bloomberg TV tomorrow: “Street Smart” with Matt Miller & Carol Massar at 3:30 pm.

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As Research in Motion Continues Its Inevitable Downward Descent In Both Equity Value and Market Share, Investors Should Tweak Their Assumptions Accordingly

Monday, August 30th, 2010 by Reggie Middleton

Following up on my Research in Motion commentary in , I’d like to comment on potential future paths for the company. From what I see from their public announcements, I remain as unimpressed now as I was just before (After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play) and after (RIM Smart Phone Market Share, RIP?) the OS6/Torch launch. The tricky part is that RIMM is now starting to look rather inexpensive relative to consensus earnings and historically projected growth rates. This is where a little strategic foresight comes into play. I have made available for download (for all paying subscribers) the Mobile Operating System Market Share Model which illustrates, on a very granular level, the market share movements (gains and losses)  of the major mobile OS providers.

Research in Motions recent equity share decline stems not only from market share loss, but from the apparent lack of a clear cut and believable plan to stem that market share loss.

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The Race for 4G Next Generation Broadband Deployment

Thursday, August 12th, 2010 by Reggie Middleton

With the blaring success of Apple’s iPhone and Google’s Android devices, we have seen a marked degradation in the performance of newtwork providers (ex. AT&T) who are straining to keep up with the pace of innovation and broadband data usage. The company that can provide the most high quality bandwidth, profitably at competitive prices will be the telecomm leader of the next generation. As we move from 3G services to 4G,and from mere smartphones to full blown mobile computers, the landscape will create a sharper distinction between the winners and the losers.

Subscribers are welcome to download the document, File Icon The Race for 4G Next Generation Broadband Deployment that illustrates the pitfalls and potential of the race to build out the next generation of high speed cellular networks.

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Does Pessimism Now Sell As Well As Sex, or Are Investors Just So Starved for the Unconflicted Truth?

Tuesday, August 10th, 2010 by Reggie Middleton

Many have labeled me a Permabear, particularly my detractors and those in the media (who are decidedly not detractors but still paint a pessimistic bent on my outlooks, see sidebar below). I am nothing of the such. I am what will be soon be known as a realist, as opposed to being a pessimist or optimist. No, I am no Permabear. My proprietary investment style (see “The Great Global Macro Experiment, Revisited“)

Crain’s New York

“His work is so detailed, so accurate, it’s among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton’s research.

Reggie in Forbes (Going short)

Middleton’s site combines self-promotion with meticulous financial analysis that is often delivered with a whiff of bathroom humor

dictates that I switch between extremes of bullishness and bearishness contingent upon the extreme policy errors of central bankers. As a matter of fact, I was as bullish as can be in residential real estate in NYC form 2000 to early 2004. I leveraged up on all the “in the money” distressed real estate I could find in areas of heavy gentrification, literally extracting 4 digit returns. That doesn’t mean I disobeyed the laws of math though. As 2004 progressed, the writing on the wall became larger and more pronounced… Enter 2005 and math said turn bearish, common sense said turn bearish, and not to be one to look arithmetic in the face and argue, I grew bear claws and donned a ruffled brown grizzly coat! After liquidating my real estate, I took a year off and started shorting every industry that was even tangential to real assets. That was 2007. By the first quarter of 2009, I had a cumulative return in my portfolio of about 452% averaging roughly 50% cash (see Updated 2008 performance). I sensed the market was oversold, but the fundamental and macro outlooks was still quite negative, hence I pulled my profits one weekend in March (but let a few underwater positions ride). This weekend, coincidentally, happened to be the beginning of the rally that shouldn’t have been, and I fought the faux bull to my detriment I got hurt in the artificially engineered, central banker and government synthesized rally of 2009, and my cumulative return was almost halved.

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A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple

Monday, August 2nd, 2010 by Reggie Middleton

I try to maintain a culture of constant debate at BoomBustBlog. I insist that my analysts challenge my precepts, concepts and conclusions at every change they get, that is if they can produce a valid challenge. Well, with the Apple fever taking over the world, you can bet your left nipple hairs that there was plenty of challenge to go around this time… Let’s take a sneak peak at some email excerpts.

This tidbit came from a discussion of the history of competition in personal computing devices at the cusp of a paradigm shift…

BoomBustBlog analyst #4:

Hi Reggie,

(In response to your contention in your mail below) Though, I agree that Microsoft windows has the largest application library in the PC World, the key advantage that Windows has is “the first mover advantage” and very limited competition that also came in when Windows was already a very established player.

In case of Android the same thing does not hold, as Android already has established competitors including Apple OS, Blackberry and Symbian.  Moreover, mobile phone software needs more compatibility with third party applications, which does not hold as a very important consideration for the PC market.  Additionally, I do agree that developers will go where the money is, there is no concrete evidence (though I will check the same in detail) that there is more money in developing applications for Android.

A quote by gaming legend John Carmack to CNBC stated, “I have mixed feelings about Android. I’ve got a warm feeling about the open source model, but a lot of the things that make Linux not-so-wonderful seem to be there in Android. On the iPhone, you know everyone on that device [has the same functionality and hardware], while on Android, you’re across the board on a number of different things.”

Carmack added, “the [Android] marketplace is also apparently not well handled. And from what I hear, nobody’s making a lot of money on these [Android titles].”

The extraordinarily handsome Reggie Middleton, in reply:

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After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play

Thursday, July 29th, 2010 by Reggie Middleton

About two weeks ago I warned my readers and subscribers not to count Microsoft out of the smart phone fray (Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet). They succumbed to big company-itis like many other monopolies, but you don’t survive two technology paradigm shifts by being a slouch. Now upon the eve of the third major paradigm shift in as many decades (an unprecedented pace of popularly accepted technological advance of which relatively few grasp the potential and staggering consequences), we finally have Microsoft taking things seriously as Google and Apple continue to eat MSFT’s lunch.

The ability to fully and functionally integrate with Office 2010 (as well as legacy versions), X-Box Live, and Zune Marketplace are levers that Microsoft should have used to take over the smart phone space years ago. They didn’t, they fumbled the ball like a butter-laden fair maiden with extra greasy finger tips. They also, apparently, have learned their lesson. Take a gander at the capabilities illustrated in the videos below…

Windows Phone 7 XBox Live 3D Game Play Demo 00:45

01:34 Windows Phone 7 Office Suite  HUB

01:46 Windows Phone 7 – Emails, Events and Schedule Integration


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All Throughout Last Year and During the Inflation/Deflation Camp Debates, I Warned of the Risks of Stagflation. Did I Have a Point? Let’s Look at the Numbers Behind the Numbers…

Monday, July 26th, 2010 by Reggie Middleton

Let’s make this quick and clean. Enter the first leg of the formula…

Wages Fail to Keep Pace with Inflation: WSJ

  • Median weekly earnings rose 0.8% in the 2nd Quarter this year, against 1.8% CPI growth in the same period
  • Excess supply in the labor market has kept wage inflation low
  • On a year over year basis, wage growth based on occupation has been barely positive, or in some cases wages are showing deflationary pressures

Which leads to a hint of the Stagflationary conclusion…

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