6/09/2010: It looks like I own BP now – my limit order for 20 shares at $31/share went through today. I put in another order to buy 25 more if the stock reaches $25/share – and a limit order to sell if it hits $40. This stock fits nicely as a high-yielding oil play. Even though I don’t predict much appreciation in oil in the near future, I don’t necessarily think it will collapse in price either. As for the environmental damages, I think BP can cover it and still have substantial remaining value (~$21 billion/year net income for the last 3 years). They are a British company operating internationally, so the US Administration is limited in what they can do (The UK will not want to bankrupt one of it’s biggest companies right now) , and so far they have really been showing a tremendous effort to contain and clean up the spill which will help them survive politically and limit damage to their brand.
As for the trading strategy … it’s been on hold so that I could focus on the CFA-1 exam I took on June 5 (2010), but I’m coming back to it. I’ve been wondering why the ECRI and trailing P/E ratios don’t change their correlation with the S&P much when the S&P is set ahead anywhere from 0 to 36 months (I’ve been trying to see how well they predict and how many months ahead they most reliably predict). My next steps will be to look at the actual charts overlaying each other, showing relative or indexed changes so that I can visually see whats going on, and perhaps to experiment with 3-month averages of the leading indices and/or the S&P 500.
5/27/2010: In order to test for the best timing in using different leading indicators (how far up they generally predict), I tested their correlations with the S&P 500 index at 1 month intervals between 0 and 36 months. The results were somewhat puzzling as the correlation with trailing P/E ratios remained fairly constant at 0.64, and the LEI and ECRI at 0.94 throughout the range. Meanwhile, there were significant differences with the effectiveness of the I just emailed my winter 2010 portfolio management professor, David Solomon, because he is really good at data analysis and may provide useful insights on the issue.
Keep in mind that many say the stock market is a leading indicator, but I don’t believe that’s completely true. Many market players make decisons based on technical analysis, coincidental indicators, recent news stories, or other such information, and the severe disadvantages of going short often prevent useful arbitrage opportunities. There also tends to be too much weight on analyst expectations which are often off the mark. As such, I believe that a focus on the leading indicators which are more concrete & require less judgement can potentially produce outsized returns.
5/25/2009: Bloomberg is an amazing resource. I went to the USC libraries today to see if they could help me get some essential information and was introduced to the bloomberg server. They have one computer – with a weird color-coded keyboard – that has all the stock index data you could want. It took a bit of figuring out; I was only told the room number, so I had to figure out how to set up an ID and everything. Long story short, I got data into my excel spreadsheet for:
P/E ratios from the S&P 500 dating back to 1970, ECRI weekly leading index, LEI TOTL Index, ISM report #’s on new business orders & inventories, University of Michigan consumer confidence, conference board initial jobless claims, US unemployment seasonally adjusted, US weekly hours all employees total private sector (last 2 only back to 2006, 2 before to 1978, all before to 1970)
In addition, I know where to dig up the difficult to find data. This is definately enough to get started on developing my trading strategy.
5/22/2009: I hope to find out soon how to make this an additional archivable post rather than a page, but this is all I can do for now.
Trading Strategy: I downloaded some useful data today on fama french portfolios and historical US treasury bond yields. However, I’m having difficulty finding anything I can use for historical 10-year AAA corporate and AAA municipal bond yields. Similarly, finding historical data on trailing P/E ratios as well as leading indicators is proving difficult… the closest thing I found so far was a 1990 article from the NY Times which named the 11 classic leading economic indicators. Fortunately as a current USC student I have access to the Marshall Libraries with proprietary data. I’ll have to quit for now, but on Tuesday I’ll get to campus early and have the library experts help me dig up some information I can use.
Market thoughts: I don’t really have anything to add for now. There is a lot going on with the US financial regulation, European debt drama, etc, but this page will be more readable in the future if it is less frequent and more concise. I’m thinking of updating this page monthly or even quarterly, but for now it will be the post page because it’s the most important page for me to get hard dates on.
Journal: The purpose of this page is simply to keep me motivated and document progress as I make it. This project will not be easy and it may be interesting later to see the incremental steps taken.