Mr. Sensitive

August 19, 2011

FSX Friday Update

Filed under: Uncategorized — lbej @ 16:53

With yet another chaotic week in the books, I want to take a moment to review the concept of Beta, something to which I have often referred when discussing the relationship between the volatility and direction of returns for FSX components vs. the return of the market.  Return, in this case, is rate of return, on a percentage basis, of and on investment.  The Beta coefficient is a measure that relates the return of an asset to a benchmark using the covariance of those returns.  I had to be able to calculate Beta for the CFA exams and so I know the formula, but you, blissfully, don’t care.  Of more interest to you may be how I use the concept in my discussions of the FSX.  What you need to know is less how it is derived than how it is used and interpreted.  You can calculate a Beta for anything against any benchmark as long as you have historical data.  Beta can be positive, negative, or zero.  An asset with a Beta of 0 is statistically independent of the market; the performance of the market has nothing to do with the performance of the asset, good or bad, at least from a statistical standpoint.  A positive Beta means that the asset and the market tend to move in the same direction whereas a negative Beta means they move in opposite directions.  The magnitude of the Beta indicates the strength of the relative movement; a Beta of 1 (or -1) means the movement of the asset’s price tends to match that of the market, whereas a Beta of less than one means the movement will be larger and a Beta of more than one suggests that it will be smaller.  Perhaps an illustration is in order.

Suppose we have three stocks with three very different Beta coefficients: ABC, with a Beta of 0.3; XYZ, with a Beta of 2.5, and BOB, with a Beta of -0.7.  Now, suppose you expect the market to go higher by, say, five percent over your investment horizon, and you don’t know anything about these three stocks other than their respective Beta statistics (this last point is critical).  You would select stock XYZ, because it should move in the direction of the market (unlike BOB), but to an extent greater than the market itself (unlike ABC).  What if you think the market is going to decline by five percent?  In that event, you would select BOB, because it is expected to move in the opposite direction.  So why would you ever pick ABC over either of the other two?  You would pick ABC if you didn’t have a strong view on the market’s direction and you didn’t want to take much market risk.  That’s the thing about Beta—it only measures the component of a stock’s return related to the market.  The stock-specific fundamentals, and in particular changes thereto, are not theoretically reflected in its Beta.  That risk is idiosyncratic risk, not market (Beta) risk, and it is no coincidence that the return for which money managers are supposed to be compensated is called alpha, that is, return they generate beyond that expected to accrue to their portfolios based on the amount of Beta risk they take.  Unless it is a coincidence.

Why am I mentioning this now?  I have talked about certain stocks in the Family Stock Index as being high-Beta relative to the index overall.  Now, however, I find myself considering the Beta of the FSX itself relative to the stock market as a whole.  I haven’t done the math and I’m not planning to, as I think I’d experience CFA PTSD if I tried.  So let’s think about it anecdotally.  When the market is up, we are usually down marginally.  When the market is up big, we are up small.  When the market is down, we are down big.  And when the market is down big, we are like Jack Boniface in the last issue of Shadowman.

Based on that information, I would say that our Beta is approximately negative doo-doo.  I’m confident that a regression analysis would bear that out.

The broader market had another rough week, with the Dow suffering another 400-point drop on Thursday amid the fierce struggle between Europe and the U.S. to see whose fiscal implosion will leave the biggest economic crater.  The beariest of the bears like to evoke the 1920s and 30s, during which time period trade and currency wars between the world’s great powers led to economic depression, depression led to political extremism, and extremism led to the Second World War and tens of millions dead.   To which I say: oh, stop it.  I hate to say this, because sometimes it doesn’t feel like it, but we’re just not that stupid anymore.  We have an inherent sense of our social and economic interdependence that didn’t exist before WWII, and we have governments in the West that, if not always responsible, are at least accountable.  What’s happening now is not what happened then.  Which is not to say that what’s happening now isn’t very bad—it’s just not Hitler bad.

The Family Stock Index had the sort of week its doo-doo Beta would suggest, down 6.7% to close at 991.50.  We fell below the 1000 level, a breach we had narrowly avoided last week, and while that isn’t technically significant, it still sucks.  The major event of the week was the breakup of Team Charlotte, now apparently inevitable.  Whether the split will be permanent remains to be seen.  It may be like the 1984 breakup of the old AT&T, after which the Baby Bells spent the next 20 years merging with each other until the largest of the offspring finally gobbled up Ma Bell herself.  If that sort of scenario unfolds, I’d say the venerable Team Charlotte name would live on, but Nicole B. would play the role of SBC Communications.  I feel a post comparing my family members to the Baby Bells coming on.

In honor of the sundering of Team Charlotte, I will preempt my regular advancers/decliners section for a Team Charlotte rundown, including not only this week’s change but year-to-date performance.  The market’s reaction to the breakup is almost uniformly negative.  Almost.

Team Charlotte Advancers/Decliners

  • Charlotte (ICE) and Zero (FRZ) fell 8.6% and 9.2% this week, respectively.  For the year, Charlotte has lost a modest 11.7%, but Zero has been socked to the tune of 32%.  I know Charlotte is taking the loss of one of her best friends especially hard, and will probably miss Justin and Nicole as well.  Plus Mercury is in retrograde, or so I hear, which plays havoc with absolutely nothing whatsoever.
  • Justin (WOLF) closed down 12.5% on the week, but prior to this week’s bruising he had been positive for 2011 and was among the better performers in the FSX, with a return of +4.2% YTD.  Charlotte may be the titular team leader, but Justin is the one who brought them to Chicago and it’s his graduation that has triggered the impending exodus.  His YTD outperformance means that the market is pleased with his initiative, at least so far.  This week’s action suggests the beginnings of real trepidation, though.  Time to get famous, Justy.

  • Icarus (FLOW), down 11.2% for the week and an FSX-worst 44% for the year, is trading like he would rather go with Charlotte than with Justin.  But Justin shouldn’t feel slighted; it looks like Zondro (ZQK -16.4%) wants to go with her, too.
  • And finally, we have Nicole (NI), who leads the entire FSX this week with a 3.1% increase, and who has steadily built a 14.9% gain for the whole of 2011.  I always knew those other losers were holding her back.

Other than that, the carnage is too comprehensive to single out anyone in particular: 12 of us fell more than 8 percent this week, and eight of those 12 suffered double-digit losses.  But perhaps there is someone who demands attention after all.

  • Lulu (LULU) -20.9%.  Picture it: I am sitting on the couch in the family room—the smaller one facing the television—and I’m holding Brinky and trying to get him to finish a bottle, only he won’t finish, because the stupid fat cat is reeowring at an impossible volume on the stairs just outside the room.  Probably I’m not opening the front door for it fast enough, or else I put its food in the blue bowl and it prefers the white bowl, or else some unknown, trivial cat-master failure has led it to become temporarily but intensely displeased with me.  Owwooorrr, it says, approximately every 20 seconds.  Incidentally, the time it takes Brinky to refocus and return to drinking his formula following a thunderous mmrrooowoor is approximately 19 seconds.  Finally, I have had enough.  But then something strange and wonderful happens: rather than my customary haste and fury, I am possessed by an unexpected and elucidating calm.  I do not sling Brinky over my shoulder and stomp out of the room to shout at the cat.  Instead, I set him down carefully on his Batman blanket in front of the television, and I slowly scan the room.  My gaze settles on a Pirates of the Caribbean pillow I bought at the Dollar Store for reasons that have not yet revealed themselves to me.  The cat continues its sonic assault, unperturbed.  I snatch up the pillow and I walk purposefully from the room.  I do not sneak, because the cat has an uncanny sneak-detecting ability.  I step out into the hall and swing the pillow forward in a single, unreadable motion.  And then I have released the pillow, and it is plowing the stupid, fat cat into the flat of a step.  This is a thing of beauty, and I am seeing it in slow-motion.  The cat snarls at me—I didn’t know it could snarl—and it scampers up the stairs and disappears.  What have I accomplished?  The cat has learned nothing; already knows it that which it needs.  But no matter; the Fat One will hide upstairs for at least half an hour now, and I have experienced the first moment of unambiguous joy in my day.
Name Ticker 8/19/2011 Change
Brinkley BCO $22.14 -2.01
Charlotte ICE $105.05 -9.83
Dustin DST $43.67 -2.71
Icarus FLOW $2.29 -0.29
Jenny LEN $12.72 -1.37
Justin WOLF $2.38 -0.34
Katie CATY $11.54 +0.12
Lee1 LEE $0.71 unch
Lee2 MSTR $105.92 -16.70
Lisa LSI $6.29 -0.70
Lucas LEI $1.86 -0.34
Lulu LULU $46.00 -12.15
Marcus MCS $8.03 -0.27
Mario T.E. PBY $8.58 -0.32
Mario T.Y. SUP $14.45 -1.82
Marisa MOLX $19.36 -1.58
Nicole B. NI $20.24 +0.61
Nicole L. COL $45.25 -1.32
Reagan REGN $54.37 +0.19
Ruby RBY $3.86 -0.01
Wilson WILC $5.70 -0.12
Winston HWD $12.98 -0.96
Zero FRZ $1.87 -0.19
Zondro ZQK $3.52 -0.69
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3 Comments »

  1. Justin explained that my increase was due to the fact while all my other roomies are “hurdling into the unknown” I am “returning to familiar arms” (meaning going to stay with my mom.)
    But Justin failed to mention that we’re actually facing the unknown together, and that makes it easier. Which is why I also credit my positive attitude for my stock increase.

    Comment by nicole — August 21, 2011 @ 17:08 | Reply

    • Justin is the only dude I know who would say those things out loud to another person.

      Comment by lbej — August 21, 2011 @ 17:22 | Reply

  2. Yeah, I think Nicole has it best out of all of us right now. She’s no longer working for the man, and Justin has a plan, even if it seems uncertain, for the both of them. Zero and I still don’t know what we’ll be doing at the end of September, and I think I’m the most clueless and lacking guidance of us all. Plus I cry all the time. I seriously thought about collecting my tears in tiny vials, dying them different colors, and trying to sell them. This is where I’m at these days.

    Comment by Sis — August 22, 2011 @ 17:41 | Reply


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