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Companies Dying Faster?

Tapering Away

Commodity Beta: Hogs-Wild? Hardly. Energy Fills the Thrill!

Puerto Rico Munis...have they hit bottom?

The Dow: 3 for 3

Companies Dying Faster?

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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MIT’s Technology Review pitches an argument by Richard N Foster, well known consultant, which uses exits from the S&P 500 to show that companies suffer shorter lifespans these days and are dropping off indices faster than they used to.  Foster includes a chart showing a seven year moving average of corporate lifespans including a forecast beyond the year 2025. He blames the increasing pace of technology and the need for rapid innovation for the losses.

Changes to the S&P 500, the Dow and other indices report shifts in the corporate world and rather than causing them. However, there is more going on here than the speed of innovation and technology.  About two-thirds of all exits from the S&P 500 are caused by M&A; and, more often than not, both the acquirer and the target are in the S&P 500.  When a company is acquired, it may drop off the index but its activities, products, revenues and (hopefully) profits remain – and stay in the index if the acquirer is in the index.  Sometimes a company is acquired specifically because it has great technology.  The better measure of lifespan might be to look at the handful of companies that leave the S&P 500 because they have shrunken or filed for bankruptcy.  Any measure of corporate senility must be balanced against the list of companies that have been in the S&P 500 since it became 500 stocks in 1957 or since it began as a 90 stock index in 1926.  There are some long lived entities still going strong.

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Tapering Away

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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Next week the Federal Open Market Committee, meeting for the first time since July, is widely expected to announce the tapering of its quantitative easing program.  Whether the Fed begins to reduce its bond purchases now or later this year, most observers recognize its inevitability.  Indeed, as we’ve noted before, even the anticipation of tapering has caused an increase in interest rates.

Should this disturb equity investors?  We all learn early on that, other things equal, rising interest rates are bad for stock prices.  Difficulties arise when we consider that other things may not be equal.  For example, if a strong economy increases both demand for credit and corporate profits, interest rates and stocks prices might both increase, and the reverse is equally possible.

Indeed, the last 15 years illustrate the point:

Interest rates and Stock Performance

Since 1998, in months when 10 year Treasury rates declined, the average return on the S&P 500 has been -0.38%.  When the 10 year rose, the S&P 500 rose by an average of 1.81%.  This counterintuitive behavior suggests that interest rates were not driving stock prices, but rather that both rates and stock values were both being driven by exogenous factors.

Arguably, the Fed’s future behavior will depend on its assessment of the economy — the stronger the economy looks, the more likely a taper becomes.  But a strong economy should also be good for the stock market.  It’s arguable that the variables that will lead the Fed to increase rates will also support higher equity prices.

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Commodity Beta: Hogs-Wild? Hardly. Energy Fills the Thrill!

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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If you believe the S&P 500, which is market cap weighted, is considered the U.S. stock market beta, then the S&P GSCI, which is world-production weighted (analogous to market cap weighted), is the logical choice for commodity beta.  Typically, using an index, namely the S&P 500, as the benchmark for beta is standard practice in trying to describe the behavior of a single stock compared to the market. For example, a healthcare company, say WellPoint WLP, has a beta of .61, and a technology company, say Facebook FB, has a beta of 1.9 (according to Yahoo Finance).  What this means is that when the stock market index moves, WLP moves less than the market and FB moves more than the market.

In general, the following rules apply:http://en.wikipedia.org/wiki/Beta_(finance)http://en.wikipedia.org/wiki/Beta_(finance)

While we know generally tech stocks have higher beta than healthcare stocks, not many study the beta of commodity sectors and singles.  When examining monthly returns from Aug 2002 – Aug 2013, as one might expect, the beta of the energy sector is greater than 1.0 at 1.25. A less expected observation is that the beta of silver and nickel equal each other at 0.59, yet gold’s beta is only 0.27.  Not only were the betas of nickel and silver the same but surprisingly relatively high (ranked 8 and 9 of 24) for the very low weights in the index, only about 40 basis points each.  Another surprise was that natural gas, despite its low weight in the S&P GSCI of about 2.5%, had a beta greater than 1.0 of 1.1, and also no single commodity outside of energy had a beta greater than 1.0.  

While the S&P GSCI may be the best representation of the commodity futures landscape by its world-production weight, when investors measure beta of a single commodity or sector, they may use the Dow Jones-UBS Commodity Index, also a market leading benchmark. The DJ-UBS CI does use liquidity and production in its weighting scheme; however, it imposes limits on single commodities, groups and sectors since diversification is one of its key principles of construction. Learn more about the differences between the S&P GSCI and DJ-UBS CI.  

Using the DJ-UBS CI as a benchmark, it was no surprise the beta of energy was a bit higher at 1.39 than for the S&P GSCI at 1.25 since energy comprises more of the latter index. What was less expected was despite the relatively equal weights of commodities in the DJ-UBS CI as compared to the S&P GSCI, only 4 of 17 commodities outside of energy had a beta of greater than 1.0. Copper, Silver, Nickel and Corn had respective betas of 1.14, 1.14, 1.10 and 1.01. The other surprise was despite a high weight of almost 10% in the DJ-UBS CI, gold only had a beta of 0.55.

Please see the table below for the betas of commodity sectors and singles.Source: S&P Dow Jones Indices. Data from Aug 2002 to Aug 2013. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance

Source: S&P Dow Jones Indices. Data from Aug 2002 to Aug 2013. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Puerto Rico Munis...have they hit bottom?

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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The S&P Municipal Bond Puerto Rico Index ended September 10, 2013 down 19.14% total return year to date which was up slightly from the previous day.  Its too early to tell if  these bonds have hit bottom.  Puerto Rico municipal bonds have been weighing on the muni market since mid July.

Join S&P Dow Jones Indices for a free forum on the municipal bond on October 17th in NYC.  The event will be live streamed as well.   http://www.spindices.com/sp-events/municipal-bond-event-from-stable-to-challenging

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The Dow: 3 for 3

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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This morning (September 10th) S&P Dow Jones Indices announced three deletions and additions for the Dow Jones Industrial Average.  This post explains why we made these changes. The press release is on www.spdji.com

The Dow is price weighted – each stock’s weight is the ratio of its price to the total of the prices of all 30 stocks.   When the largest stock price is about 185 and the sum of all 30 prices is about 1943, an eight dollar stock has little impact – a weight of about 0.4% (or 40 basis points).  The three stocks being dropped together represent about 3% weight in the index.  At the same time, the high price stocks have a disproportionately large impact on the index. The highest price stock at about 185 has a weight of about 9.5%.   After the changes the highest weight stock is lower at 8% and the lowest rate is more than doubled at 1%.  The improved weighting means that we are not wasting one or two of the thirty names on stocks with minimal weight.

The changes also improve the sector representation. Adding Nike provides more exposure to consumer discretionary stocks and introduces apparel and footwear as well. BankAmerica and JP Morgan Chase are quite similar to one-another; replacing BankAmerica with Goldman Sachs gives some diversity to the financial sector.  Likewise, Visa adds diversity to the tech sector compared to Hewlett Packard.  Hewlett Packard’s businesses are close to those of other tech companies in the Dow while Visa is a leading payment network operator, an activity not as well represented by other Dow stocks.

Changes to the Dow always bring a lot of questions from the media and investors. Three asked today:

The most asked question of the day was probably “why not Google?”  The answer is price weighting – Had we added Google and dropped some high priced stock; Google would have dominated the index with a weight of 25%-30%.  Google may be important, but we shouldn’t pretend it is a quarter to a third of the whole market.

Close behind Google is whether we thought about changing to a different weighting method.  We think about, and discuss, a lot of things with indices. The Averages Committee, which is responsible for the Dow, the Dow Transports and Dow Utilities, will review some recent work on how indices are weighted.  Whether any changes will be made is a question for the future – wait and see.

Do additions or deletions say anything about the companies?  First, additions or deletions to the Dow or other indices are NOT investment recommendations.  Second, the goals in these changes to the Dow were to improve the sector balance and improve the weighting, not to pick stocks.

 

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.