“Risk-On” is the Flavour of October

Monday, October 31st, 2011

It is fascinating how financial markets moved from risk-off in September to risk-on in October. As shown in the chart below, courtesy of Arthur Hill of StockCharts.com, one can measure investors’ sentiment by comparing the line charts of four ETFs. “The S&P 500 ETF (SPY) and US Oil Fund (USO) rise when risk is ‘on’, while the 20+ year Bond ETF (TLT) and US Dollar Fund (UUP) rise when risk is ‘off’. SPY and USO bottomed and surged as TLT and UUP peaked and plunged,” shows Hill.

Source: Arthur Hill, StockCharts.com, October 28, 2011.

Tags: Amp, Arthur Hill, Dollar Fund, ETF, Financial Markets, Flavour, Hill Source, Investors, Line Charts, risk, Sentiment, Spy, Stockcharts, Stocks, Tlt, Uso, Uup
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Inflation in the 21st Century

Thursday, March 24th, 2011

March 18, 2011

by dshort.com

My monthly update Inside the Consumer Price Index identifies the components of the Consumer Price Index, documents their relative weights, and uses line charts to show the cumulative percentage change of each since 2000.

In this post I’m using a bar chart to illustrate the relative change over the same time frame. The table below documents the current weights assigned by the Bureau of Labor Statistics (BLS) to the eight components of CPI. I’ve also included the weights of the two aggregate categories — Food (ex alcoholic beverages) and Energy — that are excluded from CPI to determine the Core CPI. (Note: CPI is sometimes referred to as “Headline CPI” to distinguish it from the Core variety.)

The bar chart below shows the relative change for each component and the two special aggregates. I’ve also added College Tuition & Fees, a subcomponent of Education and Communication, because of its significant impact on households with college expenses. Incidentally, the BLS assigns a mere 1.5% weight to this subcomponent of CPI. But for households planning for college expenses, the impact of inflation is dramatic.

Click for a larger image
The Inflation Controversy

The table and chart above help to explain why inflation is such a controversial topic. If your household mirrors the expense ratios of the CPI weightings, then the monthly CPI reports may seem reasonably accurate. However, households on tight budgets will be highly sensitive to the more volatile components of CPI — food and especially energy expenses. Also, for households with greater exposures to energy costs (especially gasoline), medical expenses, or college bills than the BLS weightings, the CPI data will definitely understate your experience.

Copyright © dshort.com

Tags: Alcoholic Beverages, Bureau Of Labor Statistics, College Bills, College Expenses, Components Of The Consumer Price Index, Consumer Price Index, Core Cpi, Cpi Data, Cpi Reports, Cumulative Percentage Change, energy, Energy Expenses, Expense Ratios, Headline Cpi, Index Documents, Line Charts, Relative Change, Relative Weights, Subcomponent, Tight Budgets, Volatile Components
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Doug Short: Three Market Valuation Indicators

Tuesday, June 8th, 2010

In anticipation of the government’s release on Thursday of the latest Flow of Funds data, which is used to calculate the Q ratio, I’ve been tinkering with improvements to my overlay chart of the three long-term indicators of market valuation.

• The relationship of the S&P Composite to a regression trendline (more)
• The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)
• The Q Ratio — the total price of the market divided by its replacement cost (more)

The chart below differs from my previous version in two ways:

First, to facilitate comparisons, I’ve adjusted the Q Ratio and P/E10 to their arithmetic mean, which I represent as zero. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I’m using as a surrogate for fair value. Based on the monthly averages of daily closes in the S&P 500 for the month of May (1125.06), the index is overvalued by 26%, 33% or 39%, depending on which of the three metrics you choose.

Second, I changed the S&P regression data from a line to an area chart. This change is primarily intended to make the chart a bit easier to read, but it also reinforces the difference between the two line charts — both being simple ratios — and the regression series, which measures the distance from an exponential regression on a log chart (see this regular feature for more explanation).

Click for a larger image

The chart below differs from the one above in that the two valuation ratios (P/E and Q) are adjusted to their geometric mean rather than their arithmetic mean (which is what most people think of as the “average”). The geometric mean weights the central tendency of a series of numbers, thus calling attention to outliers. In my view, the first chart does a satisfactory job of illustrating these three approaches to market valuation, but I’ve included the geometric variant as an interesting alternative view for P/E and Q.

Click for a larger image

I’ll be updating these charts later in the week when the Federal Reserve Board releases the latest Flow of Funds data, which is used to calculate the Q ratio.

(c) Doug Short

Tags: Anticipation, Arithmetic Mean, Central Tendency, Divisor, E10, Exponential Regression, Geometric Mean, Line Charts, Market Valuation, Metrics, Percentages, Previous Version, Satisfactory Job, Surrogate, Term Indicators, Two Ways, Valuation Ratios, Vertical Axis, Weights
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