Jun 4, 2017

Investing in Facebook, Trading FB

This blog post specifically looks at Facebook investment and trading. Q1 2017 quarterly data is included in the numbers and ratios below.

Before we start marveling at the tremendous growth of FB, one item that stands out is that the effective tax rate has almost halved in the last year from around 40% to 18%. That is quite a big contributing factor to the the Net Income growth.

Revenue Growth

Qtr over year ago Qtr Revenue Growth 49.2%
TTM Revenue over last year Revenue 9.6%

Profitability Trend
Latest Qtr-Qtr EPS Growth 73.3%
TTM NI growth over last year NI 13.0%
TTM Net Profit Margin% 38.0%
TTM Operating CashFlow as %sales 58.4%
TTM Operating Margin% 45.4%

Analyst Estimates
Earnings Est. Y2017 $5.09
No. surprises in prev 4Q            4
Avg. price return to 4 prev earnings results        -1.3%

Market Pricing
Latest P/E ratio 39.1
5 year Average P/E 69
Forward P/E 31.5
Latest P/S ratio 14.89
5 year Average P/S ratio 14.9

Trading Statistics
1 month volatility, annualized 16.8%
36 month volatility, annualized 17.3%
Latest Drawdown% 0%
Days under Water 0

Aug 23, 2013

Assessing Credit risk in the markets

When the whole investing world is feeling unsafe, where will they rush to? Answer: US Treasuries OR may be Gold. But Gold has many other purposes as well, like inflation hedge, Store of value, etc. So let's confine ourselves to the US Treasuries here.

US treasuries are a safe haven at times of distress and when credit crisis prevails in the market. So by measuring the price performance (hence money flow) of the US treasuries against various risky assets, we can get a sense of Risk ON/OFF scenario.

The following chart shows the ratio of S&P 500 over Long term US Treasuries - depicting credit risk in the market.

But when there is interest rate risk in the economy then long term treasuries are susceptible to rising interest rates. To account for the interest rate risk, you need to also look at the ratio of S&P 500 against short term treasuries.

Between the 2 charts, you should be able to get a general assessment of credit risk in the market.

Another way to assess the credit risk in the market is by looking at the ratio of Junk bond yields over investment grade bonds or US treasuries of same duration. (Note that the bond prices are sensitive to duration). High Yield bond ETF (HYG) and Aggregate bond ETF (AGG) has similar weighted Duration and is used in the chart below.

Rising line for risky assets like SPY or HYG (and declining TLT or AGG) indicates Risk ON condition in the market and the opposite is true for Risk OFF condition.

Aug 6, 2013

US Housing market - general health, trend and implications to the overall economy

Consumer spending accounts for 70% of the US economy. Homes and Cars/Auto are the biggest ticket items that consumers spend their money on. Unlike other purchases that may use money earned in the last paycheck, the money spent on Homes and Auto are from loans and mortgages that are borrowed from the future 3 to 30 years. Therefore Housing and Auto spending has immense impact on the economy - in both directions, up and down. This was very evident in the 2003-2004 recovery after the tech bubble burst and then during the meltdown into 2008-2009 recession.

In this post, let's take a peek at how the Housing spending is ensuing.

The first chart below shows the variation of nationwide Housing price with respect to Affordability and new private housing starts. Affordability of 100 implies that the median income family has just enough money to buy a median price home in the country.

The second chart below shows how 3 key housing indicators vary with interest rates. They are:
  1. House prices (Median in green, Average in orange), 
  2. Inventory (as monthly supply of homes in blue) and 
  3. Number of days houses are on the market (as median number of months on sales market for newly completed homes) 
All these housing indicators vary with respect to interest rates (10 year treasury as a representative for 30 year FRM and other ARM loans) in the chart below.

The next chart below shows how

  1. Private residential construction spending (in blue diamond)
  2. S&P Case-Shiller 20 city home price index
  3. Housing Affordability Index

vary with interest rates. I have chosen 30 year conventional mortgage rate to represent the interest rate here.

The chart below shows how the Real disposable personal income and Housing affordability index are varying with respect to year ago change. You might see some early warning signs in the percent-change-from-year-ago charts.

Finally, keep an eye on health of housing by checking how the market is pricing the Home builders ETF, XHB in relation to the S&P 500.

Aug 1, 2013

US Recession Probabilities, Financial Stress Index STLFSI, Yield Curve indicators

There are many economic models to predict recessions and these models are primarily based on Business cycle variables, bond yields and yield spreads.In this post, lets look at a couple that are readily available on FRED website.

I. Smoothed U.S. Recession Probabilities

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables

  • non-farm payroll employment, 
  • the index of industrial production, 
  • real personal income excluding transfer payments, and 
  • real manufacturing and trade sales. 

This model was originally developed in Chauvet, M., "An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf

The same chart zoomed in for the recent 10 years.

II. St. Louis Fed Financial Stress Index (STLFSI)

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. 

Jeff Miller's blog "A dash of Insight" quotes "Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions. The STLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events.  It uses data, mostly from credit markets, to reach an objective risk assessment.  The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses."

The STLFSI measures the degree of financial stress in the markets and is constructed from 18 weekly data series: 

  • seven interest rate series,
  • six yield spreads and 
  • five other indicators. 

Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together. The latest STLFSI press release, with commentary, can be found at http://www.stlouisfed.org/newsroom/financial-stress-index/ 

How to Interpret the Index 
The average value of the index, which begins in late 1993, is designed to be zero. Thus, zero is viewed as representing normal financial market conditions. Values below zero suggest below-average financial market stress, while values above zero suggest above-average financial market stress. 

More information 
For additional information on the STLFSI and its construction, see “Measuring Financial Market Stress” (http://research.stlouisfed.org/publications/es/10/ES1002.pdf) and the related appendix (http://research.stlouisfed.org/publications/net/NETJan2010Appendix.pdf). As of 07/15/2010 the Vanguard Financial Exchange-Traded Fund series has been replaced with the S&P 500 Financials Index. This change was made to facilitate a more timely and automated updating of the FSI. Switching from the Vanguard series to the S&P series produced no meaningful change in the index. 
Copyright Federal Reserve Bank of St. Louis.

Below is the STLFSI indicator for the past 5 years..

III. The Yield Curve as a Leading Indicator - NY Fed


Jul 16, 2013

S&P 500 Valuation using Relative Value Method (using Price/Earnings PE ratio)

We talked about valuing S&P 500 Intrinsic valuation in the previous post, lets value the S&P 500 index using relative value method in this post.

We can use many valuation measures for comparing the value of the security against other securities or against the security's historical values. Though ratios like Price/Book value or Price/Sales or Price/Cash Flow can be used a measure to compare, Price/Earnings (P/E) is by far the most popular valuation measure today.

The Excel spread sheet shows the current P/E ratio for S&P 500 and the valuation for S&P 500 based on historical P/E ratio Averages. The data source for the calculation is from:  http://www.spindices.com/indices/equity/sp-500.

Legendary value investor Benjamin Graham and others have proposed using 10 year average earnings in the denominator of the P/E so that it accounts for the fluctuations in the Business cycle. This ratio is generally denominated as "P/E10". Valuation of S&P 500 based on P/E10 is also shown at the bottom of the table.