Saturday, February 28, 2009

Economics at Play - Why "dubah-ya" wanted us to Spend

You often hear on the news that because of the economy:

- People are taking less vacations
- Buying less cars
- Buying less technology

Intuitively, this makes sense to all of us, but in looking at the economy as a whole, we can see that there are larger implications. I think that this is very important to discuss, especially when it comes to stimulus plans in the US and the multiplier effect. There are many different ideas at play and it is important to acknowledge their respective effects on the economy.

Marginal Propensity to Consume (MPC) - This is a measure of overall spending habits. It is usually phrased as such: "If I was to give you an extra dollar, how much of it would you spend?". MPC is a measure of individual spending, but also, more importantly money flow. This eventually leads to the powerful idea of a GDP multiplier (why George W. Bush asked us to all go out and spend). When you spend a dollar, the GDP will go up by an amount greater than the dollar. Why? Because if you spend that dollar, the person who receives it will save a portion of it (marginal propensity to save, MPS = 100% - MPC) and spend the rest (MPC). This amount that is spent recursively goes through the same process over and over again. The result is a converging geometric series whose aggregate solution is the multiplier (the multiplier is calculated by 1/MPS, so if we all spend half of the $1 we get, the GDP eventually goes up $2). Hint: The US has a generally higher MPC than Japan (who has a higher MPS). But it also lends itself to volatility (when times are good, a high MPC allows the GDP to grow really quickly, but when times are bad, all the extra GDP growth from strong money flow drys up just as fast).

Income Demand Elasticity - Income Demand Elasticity is essentially a fancy way of saying, if I gave you more money, would you buy more of a particular item. It is a good way of anticipating consumer behaviour for different classes of goods. For instance, if you suddenly made 10x more money, you'd probably not buy any more orange juice than you already do, but you might be tempted to buy that sports car. Conversely, if you got laid off and had to live off of savings for a while (a situation many people are now finding themselves), you might not give up OJ as quickly as the new car. This lends itself to the idea of "defensive" class stocks such as Walmart and McDonalds. These types of companies don't suffer as much (and often thrive) in hard times because peoples spending in these areas don't change.

Whether on an aggregate (GDP) or microeconomic (one particular company) scale, government spending would manifest as a right shift in the demand curve (more demand) which implies (cateris paribus) that both quantity supplied and prices would go up (demand pull).

Based on this, you can see why Democrats and more Keynesian style economists would like to stimulate the economy through spending. However, Republicans and conservatives would usually prefer tax cuts as a method of rewarding working business models and getting government out of the way (another interesting analysis for a future post).

Despite all this analysis, however, it seems like a bit of a moot point in our current environment. The stimulus package won't single handedly solve the problem (as almost everyone has acknowledged that more help will be needed) and it seems that the most important issue that needs to be address is that something needs to be done expediently and there will certainly be a need to reassess the next steps in the near future.

Friday, February 27, 2009

Why Bernoulli based models are rubbish - and why they might work

I've recently read from a brochure from a highly respected Canadian big bank about Behavioural Finance, particularly, the Gambler's Fallacy - The idea that future random events depend on past random events. It proposes the idea that if a stock rises five consecutive days in a row, that if you assumed it's less likely to rise on the sixth day, then you are a victim of a gambler's fallacy. Although I can see their rational, I strongly disagree.

If the analogy was taken into a casino, where future random events *are* independent of past events, then I would agree. However, I think that this model oversimplifies the stock market. And the principles on which this type of modeling is built, Bernoulli trials, should not hold under the Efficient Market Hypothesis.

The reason I'm so confident in making this statement is that I would like to believe that there are *some* rational value based traders out there who, when the stock price varies too far from its intrinsic value, will buy or sell accordingly. In this way, those traders who are doing their homework are essentially profiting off of those who are trading as if each day's outcome is random (or even if you model your risk management as if these outcomes are random). Prices *should* gravitate towards some number, and therefore each day's rise or fall *is* dependent on the day before it. A prime example is the price escalation we recently saw. Bernoulli trials would have simply labeled them as "unlikely" but I'd like to think that a value based trader would see a bubble forming.

Having said that, with all the emotional and fear based trading going on, this lack of faith causes high volatility in prices and using a Bernoulli type model might have some value as a risk management tool based on certain similarities. However, trying to get actionable value from it would be like attempting to profit from chaos which is risky and difficult (like creating a Garbage In Gold Out model).

However, those of you that can profit from this volatility will actually be providing a service to the economy in the form of marginal price stabilization. Anyone who is able to profiteer from the mood swings by reducing the spreads will bring us closer to something resembling that should happen under EMH.

But real stability won't happen until there is enough stable capital in the market that doesn't exhibit flight at the first hint of trouble. And that won't happen until there is broad based confidence in the fundamentals of the economy.

Thursday, February 26, 2009

Edelman Trust Barometer

I attended a talk yesterday at Rotman's Fleck Atrium by Richard Edelman. He gave an interesting perspective of our current crisis from a PR perspective and how it relates to the changing relationship between stock holders and stake holders, business and government.

Among his points, he highlighted that there is a broad based 3 to 1 ratio of trust in government versus business and that as a result business should partner with government and NGO's (who had much more credibility) to shape policy within the private sector. One intellegent question asked by an audience member was if the organizations with good credibility are put at risk when they partner with businesses. The good response was that as in any "marriage" there is some risk, and that it was incumbant on both parties to know what they were getting into.

Another hot topic was the idea of CEO compensation. With CEO salaries in the multiples of several hundred times some of the lower paid employees, the conflict between sky rocking compensation packages versus the ability to attract the talent and performance they were supposed to was also brought up as an issue of credibility. A good example is what was recently done by the CEO of Canadian banks who, unlike their US counter parts, have demonstrated more stable decline (not as sudden or sharp) but proactively cut their bonuses.

This started to raise a whole host of issues such as social responsibility, dispersion of authority and the need for continuous conversation (I would personally phrase this as closed loop versus open loop communication - the idea that you can't just drop a message and run, but that you have to stick around for feedback and critiquing).

One of the good take away messages that Canada has a strong potential to pick up some leadership in the national landscape as our banks were rated #1 in terms of trust due to our moderate social democracy and well governed mixed economy.

Asset Allocation - A Potential Key to Success

Let's assume that there are three asset classes: Equity, Fixed Income (Bonds), and Cash.

Generally, these three classes are generalized as follows:

Equity - Highest volatility, highest potential for growth and gains (let's say 8%)
Fixed Income - Moderate volatility, moderate gains (let's say 4%)
Cash - No volatility, Low to no gains, incredibly liquid (let's say 0%)

Let's also assume that you are relatively young and looking for growth (let's say 20's to 40's) and that you have 100k to invest. Your allocation might look something like this (numbers will vary based on your individual risk tolerance profile):

E - 50% - 50k
FI - 30% - 30k
C - 20% - 20k

Now let's say that things go according to plan and your portfolio next year becomes:
E - 50k * 108% = 54k (51.3%)
FI - 30k * 104% = 31.2k (29.7%)
C - 20k = (19%)

Your portfolio is now worth $105.2k. If you were to re-balance your portfolio, you'd move some of the value received from equities into fixed income class (.3% worth or ~$315.60) and cash (1% worth or about ~$1.052k). I think this is the most "true" definition of "profit taking" that we often hear about on stocks news shows, where a calculated reallocation of capital takes place from one class to another more liquid class (cash).

Having said that, how does this protect us from huge crashes (as I suggested they might in a previous post)? Well an indicator that a bubble is about to burst is when equity prices start going too high. However, if you notice, as equity prices start to get too high, you start to liquidate your position out of them (to a position which is more comfortable for your tolerance). You begin to take your gains out and put them in more stable instruments.

How about when prices fall? Say the equity component drops as well. If you follow the strategy, you will take money from your FI or C and bolster your E (in an attempt to profit from low prices). You can clearly see that the old adage "Buy low sell high" is built right into the strategy.

Although hardly a perfect strategy, we can improve it's effectiveness by looking at a few issues which arise:

Frequency of re-balancing - There are transaction costs involved with re-balancing portfolios (it might not be simple nor cheap to just sell equity class investments and buy fixed income instruments). Therefore, you might not be able to re-balance the portfolio every time there is a tiny bit of movement. However, re-balancing should take place at regularly defined time intervals (say a year), OR if a certain threshold is met (your equities gaining 20% in a day might be a good reason to reallocate funds).

Seeding your investments - Another way to "re-balance" is for people who regularly contribute to their investment portfolio through regular contributions (RRSP or just general savings). If your portfolio is misaligned, you can divert the funds you were planning on investing into the appropriate category. For example if you had the ratio mentioned above as a plan, but your portfolio was currently overweight in the FI class, you could put your savings directly into E to balance it out.

Redeeming your investments - If you are close to retirement and taking money out, you can take money out of a class which is overweight. Let's say that in retirement you want to move from the ratio mentioned above (50/30/20) into a ratio of 30/50/20, you might start by cashing out your equities first.

Granularization - When you have the opportunity to add (or remove) funds to (or from) a particular class, such as equity, you can use the same recursive thought process for which individual equities you want to buy more of. For instance, you can purchase more of a stock which is currently at a lower price relative to it's counter parts rather than try to buy a spread of stocks (if transactions would prevent that). Or you could buy more of a particular ETF.

Especially for people who want to be more active in their retirement planning, but aren't experts in investing, I'd rank this as a good strategy to use even right up to investors who would categorize themselves as moderate to highly experienced. Even investment firms will practice this in a more sophisticated way but having a variety of funds available to capitalize on different opportunities in the market (and can be classed by weigh in terms of how much capital exposure is allocated to them.)

Lessons and Strategies from Our Current Crisis

Risk Managers have always been seen as people trying to halt deals. Not necessarily the most popular people in the office, they seem to be the "boys that cry wolf" only this time the wolf was there and the economy crashed. Skeptics (aka the cowboys) will decry the predictions, often saying something similar to: "If you say the end is coming enough, you'll eventually be right".

So how can we balance the knowledge that a potential bubble is building with the understanding that it will eventually burst? Although you can closely monitor the "warning signs", it is tragically difficult to predict the bursting of bubbles (such as Warren Buffet's correct, but poorly timed shorting of tech stocks just before the tech bubble burst).

As portfolio managers and equity analysts will attest, it is becomes difficult (near impossible) to know when the burst will come. From their perspective, they need to always find places where their capital will provide good returns.

As a result, I think it is incredibly important to diligently use asset allocation (*AND* re-balancing) as a strategic method of pre-determining your level of volatility tolerance (conversely known as your aggressive greed level).

Wednesday, February 25, 2009

The Dual and Compounding Effect of EPS

I've repeatedly mentioned EPS and PE as a model for creating a price for stocks. However, I've also cautioned against using it recently as there are some problems with it in this economy. To further understand how a model like this can fail (or rather, underestimate the effect of EPS on price), I thought it might be prudent to delve further into how EPS movement affects stock price.

Although the formula for price with regards to EPS and PE is quite simple (Stock Price = Earnings Per Share x Relevant Price to Earnings Ratio), it is in determining the appropriate ratio which is particularly difficult.

For instance, I had a previous target of RIM between $57.75 to $64.80 (which has gotten blown away with the recent plummet in stock price). RIM's quarterly EPS guidance was dropped to about the low 80's cents per share mark versus the high of 95ish. This affects RIM's stock price doubly because: EPS now shrinks rather than grows and the PE ratio also shrinks to match the corresponding lack of EPS growth. Especially for a growing company like RIM, investors get spooked when they think that the company won't exhibit the behaviour of a growing company and begin to behave more like a company reaching maturity in its industry - the reaction to their news that they have more subscribers but lower margins could be read as an indicator of that - further compounding the price drop in the "panic" category of selling (technically outside the scope of this post).

So with downwardly revised EPS guidance, the new annual EPS calculation as well as the relevant PE ratio used for PE analysis drops. Since the company doesn't look like it's growing any more, people struggle to find an appropriate PE ratio to assign to the stock. As I mentioned before, a mature company has a PE usually between about 8 to 12. A growing company will usually have ratios between 15 to 20.

[Aside: And I don't think RIM should be trading as if it's some sort of "speculative" tech stock. It's long past those days, yet the volatility just shows that there is some volume in there that is "emotional" (which I believe was confirmed by it's recent recovery and uptick - but again I digress).]

But just as with the PE or PEG ratio, if you aren't (or don't seem to be) experiencing growth, your potential outlook (beyond your current reported numbers) dims also, and your price takes that second hit.

However, having said that, any sign of strength will cause a compounded recovery in price by the same mechanics and this is a leading cause in the volatility of stock prices, especially those with volatile EPS.

Does all of this sound familiar? That's because it's essentially a very similar concept to the Capital Asset Pricing Model (CAPM) and the idea of beta, how the stock price moves with the market (but with more amplified effects). For growing companies who exhibit greater volatility, you can expect that their beta will also be quite high. The idea that with incremental risk come incremental rewards.

Tuesday, February 24, 2009

Is "What's good for General Motors is good for the country" still true?

Charles Erwin Wilson was once asked if he could make a decision adverse to the interests of General Motors (when he was serving as Secretary of Defense while he was President of GM). Wilson answered affirmatively but added that he could not conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa".

While that ideology has held up in the past, that is clearly not the case today. And while people will point fingers as to what *exactly* went wrong (bad management, poor product development strategies, expensive union labour etc) the clear point here is that there isn't much right.

In this scenario, the capital markets are doing exactly what they are supposed to: weed out weak companies. When the demand for an industry's products decline (left shift in demand) the supply side must respond appropriately (supply shift left) in order for the industry to remain profitable. "Supply shift left" is a very fancy way of saying cutting capacity. This means closing factories and losing jobs in weaker companies.

Recently, GM has been looking for government assistance in various forms (loans etc). But I think this is incredibly unfair, especially to the car companies which are performing well producing products that people want.

The way that our economic model is supposed to work is that companies that can't survive on their own are supposed to die out. The only "stimulus" I think would be fair is one that isn't targeted to specific companies, but rather tax reduction stimulus for the industry in general (for instance, tax deductions for the R&D of fuel efficient cars - or with the drop in oil prices perhaps some other incentive program). That way, the industry is still bolstered, but not disadvantageously towards failing companies (and all companies including GM would benefit greatly and move towards products that people are more interested in buying - something good product development strategies would have taken care anyways of in a strong company).

If you want to approach this from a government spending side to generally soften the pain, I think the most appropriate avenue would be to spend on retraining for the jobs lost in the factories. It's not that I have an irrational dislike of factory workers or their unions, but if we can retrain them for jobs which society will benefit more from, then I wonder why we are not doing it?

Another spending option is improving municipal mass transit by purchasing more buses. Many of these companies have divisions which build larger class vehicles and would benefit from government spending in this area. Although this might erode your long term demand by creating a cheaper substitute for individual commuting, it is certainly in line with the overall tone of environmental sustainability and the goal of less reliance on foreign oil.

Recent Stock Volatility

Not entirely sure what is with the volume and volatility in the markets the last two days, but stock prices have generally taken another beating. It becomes clear that much more detailed modeling is required in order to understand the overall economy and it's direction (or more importantly, when the direction will start to change).

Having said that, I am currently writing a series of posts relating to the dual effect of EPS decline on stock prices, lessons and strategies for weathering volatility (and possibly dampening the effect of crisis such as the one we are in through asset allocation and re-balancing) and the increasingly important role of economists and risk managers in investment banking firms.

I hope to have them completed by tonight for publication over what remains of this week.

Monday, February 23, 2009

Deal Sourcing

It's interesting to note that many firms have active PE groups that don't just invest in PE funds, but rather also use the funds as a method of deal sourcing and precursor for bigger deals. For example, this strategy can be used to establish a position in a big fund to find out what they are buying.

A good example is the progressive financing of growing companies. For example, smaller mezzanine firms traditionally play a bridge financing role and their acquisitions are prime targets for bigger firms with more capital (like Omers, CPP or OTPP) who can help create more value for the company, taking it to the next level. Large investment banks or funds also acquire companies on their own accounts and are good places for deal sourcing for companies to buy.

These PE groups take a position to find out what a fund is buying and decide if they want to co-invest on the deal and take larger positions. By piggy backing off the funds, they can eventually decide if they want to take bigger chunks of deals.

In the distant future, one strategy you would expect is that they might only allocate a small portion of its money to PE funds and use them to get good insight on potential deals and incrementally increase the number of their own deals and they don't have to pay as much carry to fund the managers and can keep more of it for themselves.

Deal sourcing in this market is very important for firms as M&A activity is fairly low. Any firms which depend on deal sourcing for business will have to network more and resort to more proactive methods in order to have more deals coming in the door as the market cools in order to bolster their bottom line.

Although this area might not be as glamourous as it was only a year ago, it is certainly just as necessary and important for the restructuring or divesture of company assets.

Sunday, February 22, 2009

Sunday Reflection: Study Plans

Sorry for lack of posts recently. I've been busy with training and studying. However, hope to have a slew of new material in the next week.

Also reviewing some research and notes from a friend in order to better develop my own models.

Friday, February 20, 2009

Yes, we CANada

Obama's visit to Canada seems to have been fairly successful. As we Canadians are worried about the state of NAFTA and some of the recent "Buy American" clauses's effect on our commodities prices and general economic, Obama's visit was cheered by Canadians.

Perhaps a more telling sign of our own politics is the ideological symmetry the media is focusing on between Harper with Bush, and Ignatieff and Obama.

Wednesday, February 18, 2009

Oil - Prisoner's Dilemma as a model for OPEC and Cartel Style Oligopolies

This is a quick economics review for people who are concerned about the price of oil and the mechanics at play behind the scenes in the supply and demand curves.

Oil - a fungible commodity like any other - is always under the scrutiny of economists as a major indicator and influence in the world economy. However, unlike some other commodities, it exhibits a greater degree of scarcity and its output is generally controlled by a small group of countries (The Organization of the Petroleum Exporting Countries or OPEC).

Now many investors and hedge funds feel like oil should intrinsically be valued between $40 to $70 USD per barrel (although it is currently trading below $40). This is disastrous for various reasons. First, it shows how weak the economy's demand for oil is. Also, projects like the oil sands in Alberta get halted because it costs more to get a barrel of oil out of the ground than you can profit from selling it.

The problem that OPEC faces can be described by a common game theory model known as the Prisoner's Dilemma or Cheater's Paradox. Let's have a look at how this works:

The way OPEC works is that they will take orders from their customers. Returning to the group, they will set production quotas for each of their members to satisfy the demand (simple supply and demand curves) at a price point of their choosing. If everyone behaves according to the rules they set, the suppliers (OPEC), with perfect information and control on supply, will profit in a similar manner as a monopoly.

However, the system begins to break down when they start to lose control over the inelastic demand and as well as when their individual suppliers misbehave. Let's look at the first scenario.

The world economy has become so weak (and there has even been suggestions that high fuel prices have causes consumers to jump ship to technologies that are less fuel dependent - the law of substitution) that the demand for fuel has plummeted (some say irreparably, others not). This manifests as the demand curve shifting left or at least becoming less steep and more elastic and weakens OPEC's ability to keep prices up at least in the short term. This deflates the price of oil and makes it harder for individual OPEC member countries (such as Venezuela) to maintain enough cash and net exports to support the GDP which is largely dependent on oil export. What is Venezuela to do?

Now Venezuela is incented to "cheat", to produce more oil than in its OPEC stated quota in order to generate revenue to cover the shortfall from the drop in oil prices. This shifts the supply curve to the right and drops the price further compounding the effect. This is exactly the same model as the well documented game theory model the Cheater's Paradox - where OPEC members are the prisoners, producing additional oil is considered cheating and the reward matrix is expressed as marginal increments in GDP.

This process repeats until the supply stabilizes and the price finds a new home, much lower than is expected (which is exactly the case in the current economic environment).

Tuesday, February 17, 2009

First Time Home Buyers

Based on this Sunday's Reflection post Steve asked:

"If I have a very short term investment horizon (1-2 years before buying a house) do you think I would benefit from meeting with a financial adviser?

Or does it make sense for me to just hang onto cash until I'm ready to take on home ownership?"

What a fantastic question. I was writing the answer when I realized that so many of us are in this exact position and there were so many dimensions to his question that I thought it warranted its own post. (Also note: The older you are, the more relevant this becomes).

The short answer is a resounding "Yes!", and here's the process and reasoning as to why (and what you should look for from the adviser):

Step 1 - You want to buy a house
Buying a house is the single largest purchase you will ever make. A mortgage will be the largest expense from your pay cheque and will longest lasting recurring payment.

Whether you're married, engaged, dating or single, you've probably done your homework with regards to what you want, need and can compromise on with regards to your houses location / size / features to come up with a price range.

This price range determines what deposit you need, your monthly mortgage payments and pay back period. Ok. So far pretty basic stuff.

Step 2 - Making your money work harder for you
Steve makes a good observation that he has a short investing horizon which implies high liquidity needs. He expects to be buying his house within a year or two (not sure if that means he is A. passively looking for a house while building his deposit B. waiting for the market to cool a bit more to get a better price or C. Has everything in place and is actively looking for his dream house).

Either way, this is a *textbook* example of what the Home Buyers' Plan (HBP) was designed for. It allows you to take up to $20k from your RRSP to buy a house for the first time. Also remember that RRSPs are funded with your *PRE*-tax income, giving you another reason to consider using this savings vehicle (As is a Tax Free Savings Account - TFSA, another new pre-tax savings vehicle started in 2008). Those of you with company sponsored RRSPs have another dimension of financing to consider (but check your vesting period). With a short time horizon, his adviser could help him use an RRSP that has conservative growth and low risk as part of his saving strategy for home financing (RRSP's don't have to be made up of aggressive growth stocks. Some RRSP qualified mutual funds are made up of less risky instruments like bonds or GICs and can be liquidated with relative ease - although you need to be aware of all performance, front or rear loaded management fees). These are just some of the solution strategies that a good financial adviser should be able to provide you with.

Aside: At most major banks or funds, if you have *any* type of investment: RRSP, RESP, RSP, discount brokerage etc you probably already have an adviser assigned to you. You should go meet them.

This also brings up another important and relevant topic... RRSPs in and of themselves and how they are affected by house purchases.

Step 3 - Retirement.
It may *seem* far away, but you have to think about it now. Ask your parents. One of their biggest regrets (unless they were born incredibly wealthy) is that they felt like they should have started thinking about their retirement sooner. Needless to say, the impact of buying a house has a *huge* effect on your retirement planning. On top of your mortgage, you have to pay for maintenance (you're the owner now), property tax and a host of other expenses.

Do you remember those adverts which compare a 22 year old person straight out of university who starts saving money versus a 30 year old saving money for retirement? The point they were trying to make is this:

For all the good investment advice in the world, the one thing in life you can't buy is time.

Therefore, for that reason alone, I think it's good to see a planner sooner rather than later. Even if you feel like you don't have a lot of money right now, that's all the more reason to start addressing that issue to plan for your future. Make them earn your business and trust while you build your nest egg and plan for your goals.

Another consideration: If you are married, you have a whole host of options available to you regarding income distribution for taxation and retirement saving which can save you a lot of money especially if one spouse is making more than another and is in a different tax bracket.

There is also a crucial point which is highlighted: the need to revisit financial plans. Your outlook as a young person buying a house will change in the next two years. Envision when you have a house (and a mortgage) and how that changes your cash flow. How will this affect how you save and plan for the future? What we're really saying here is that you have TWO obvious time horizons - 1. Saving for your deposit in two years time 2. Saving for your retirement (please never lose sight of this goal). Don't forget to make sure you also have enough cash on hand to enjoy life now.

Steve, I hope this answers your question, but I would love to follow up or address anything else I may have missed.

Sunday, February 15, 2009

Sunday Reflection: Financial Planning 101

In an environment where investing isn't as simple as dumping some money into a tech stock and watching it soar, it becomes even more important to find the right adviser and put together a financial plan to match your goals. Many naive investors will "chase stocks up", buy distressed companies because "they're cheap", or perform some other form of investment hara kiri.

Although the focus of this blog is to understand the mechanics of the market and occasionally look at potentially interesting stocks, picking equities to invest in is the last step of an investment plan not the first.

You should begin by meeting with a financial adviser. The first sign that they have your best interests at heart is if they get to know your current income and goals. Other important topics which should be covered before you even consider buying anything are:
  • Do they know your current financial position? Income? Expenditures? Savings?
  • Do they understand your risk tolerance?
  • Do they know your time horizons?
  • Are they aware of your goals for home ownership, further education, raising children?
  • Are they aware of your retirement time line and income expectations?
Based on this, your adivsor will start to lay out a plan for you including:
  1. Liquidity needs
  2. Risk tolerance
  3. Expected growth plans
  4. Asset allocation
  5. Suitability - Will you be able to sleep at night?
You also have to understand that these advisers are usually in it to sell their own products. Unfortunately, many of them are sales staff first and investment planning professionals second (and you want it the other way around). You also have to be careful of conflicts of interest which they may not disclose openly (although they are supposed to). For instance, if they recommend a stock, how is their commission structured? Identifying how they are paid will make it clear how you can best use their advice. After all, they have to be paid something to compensate them for their assistance.

If you ask the right questions, you will feel more confident about the advice you receive and if you pick the right advisor they won't mind a collaberative approach to the mutual success your partnership will create.

Saturday, February 14, 2009

Hawk-Dove Model for Economic Recovery

It may appear to be a good time to buy anything as prices have hit all time lows, but most investors are cautious and are probably expecting a bit more downside before getting into the market. However, this unique scenario is very similar to a Hawk-Dove model in game theory (or more commonly known as a game of "Chicken").

The longer investors can hold out, the more they will potentially benefit from declining prices. Investors who decide to make an early entrance now will become "Doves" whereas those who can hold out a bit longer will be "Hawks". The scenario where everyone holds out forever the result will be a "crash".

Although much more complicated than the simple 2x2 matrix traditionally associated to this model, the fundamental theories at play are very similar. Also, funds, investors and individual "players" are capable of signaling their intentions to the market (although not-binding) through leading economic indicators and the movement of capital.

Having said that, there is an anticipated equilibrium point at which players can be expected to make an entrance back into the market (although it can't be simply computed as a Nash Equilibrium as there are no simple hard numbers). However, for those who are doing model based trading or risk analysis and are able to pick out the appropriate indicators can use this interesting perspective as a component to build into their analysis for a time horizon of one to two years.

Friday, February 13, 2009

Exchange Traded Funds - A New Frontier of Investing?

There are several schools of though regarding different classes of investment vehicles, but proponents of the Efficient Market Hypothesis (EMH) will tell you that it is usually impossible to beat the market over time. Although your fund manager may provide you with good returns, after adjustment for management fees the funds only marginally outperform indexes (the idea that you get what you pay for not much more or less).

The follow up question is usually: "So why am I investing in mutual funds?" and a surprising answer is "You don't have to". There is a popular trend to now start trading in Exchange Traded Funds (ETFs). Similar to mutual funds, ETFs can be composed of a variety of different investment vehicles which base their price movement on different styles or strategies. For instance, there are ETFs which move with US dollar exchange rates, natural gas prices or even industry sectors.

The fundamental idea of an ETF is to package a simple and relatively cheap way to position yourself in a market without having to pay fees and without having to suffer significant liquidity premiums. It also allows you a relatively simple mechanism to package and diversify your investments and can provide you with diversity or access to different market segments.

Although a fairly "lassiez faire" investment style, it is possible to put together a portfolio that contains a few ETFs that provide the appropriate diversification for your investment time frame and goals. But in an environment where cherry picking seems to be preferred (as broad economic recovery is still past the horizon) it might be prudent to wait a bit longer before buying instruments which are over diversified.

Thursday, February 12, 2009

A look at Venture Capital

Venture Capital is an interesting niche in the Equity market. I would consider this area to probably be one of the the most exciting and involving spaces to be in.

Venture Capital traditionally finds businesses which usually have great ideas and provides bridge financing to take them from a small time operator into the big leagues in preparation for eventually going public through an IPO. In terms of financing life cycles, VC usually gets on board after an angel investor provides the financing which acts as a precursor and testing ground for the next stage.

However, as with any start up or relatively new business, there is the inherent possibility it will fail. As a result, the intensity of VC financing is fairly unique. There is low liquidity (no market to sell weak businesses) and the failure rate is quite high even with good management of earnings and milestones. However, the returns can be dramatic for the few that hit it big. The end result is a time horizon of anywhere from 2 to 7 years or beyond, but also extremely high exit multiples.

Venture Capital is also an area where fund managers have specialized backgrounds in the fields which they invest in and a wealth of experience in the area of expertise in which their companies operate. Often these companies are very small and can use the additional management or industry contacts provided by the fund. In other words, a smart entrepreneur will look for a fund which can contribute more than just capital, but also experience and network connections which can help boost operations and sales.

If you are looking for a good company to get involved in, it's always prudent to keep one eye on this part of the market. Although it is difficult to get your hands on a primary offering, watching the stock make it's eventual entry into the secondary markets can be very profitable.

Wednesday, February 11, 2009

Understanding The Truth Behind EPS

One of the most important questions anyone who is concerned about investing in equities is should be asking is "How much money are you going to make for me?" Although other questions are generally ancillary to this first question, the next logical question is validating the "strength" of these earnings as a measure of where the price of the stock should be.

Earnings per share (EPS) is a good measure of a companies performance because it is a fairly no nonsense indicator of how much the company is making (and by extension, how much of that is yours). But manipulation by management can often obscure problems which may not be obvious by just looking at this number.

The first place an analyst will go is to check the actual EPS versus the guidance. If the actual EPS is below management guidance, the assumption is that either the management isn't doing there job, or there is something wrong with the business (it is analogous to not being able to collect your rent every month). Perceived problems have negative effects on a stock's price. Usually, EPS above guidance comes as a welcome surprise (think Apple's recent quarterly earnings report and the subsequent jump in price).

[Aside: It is also interesting to note that when discussing Apple's stock, analysts will usually focus on iPhone sales and sometimes neglect the impact of other divisions (Macbook or iTunes sales for instance). This is a danger when evaluating any company (especially those with exposure in different segments). This is particularly pervasive in mining where companies will mine for different resources and therefore have different exposures to commodities prices. There's an old Chinese Maxim: "Don't focus on a scorpion's head at the expense of the tail."]

In order to calculate a price for the stock, a quarterly EPS is aggregated with other EPS in the year to form a trailing 12 month EPS. Then an appropriate PE ratio (determined by similar companies in the industry and tweaked for unique characteristics of this company) is used to create a price for the companies stock.

Now that we've looked at how EPS and PE interact to form a stock price, let's look at where extra care needs to be taken.

Although annual reports are audited by third parties (and come with hints as to whether they are qualified or unqualified), quarterly EPS can be greatly influenced by management manipulation of non-recurring expenditures or sales of assets (a good place to look for indications of this are in the MD&A). For example: Selling a factory might increase EPS by +2c which may not seem like a lot, but could be the difference between "falling short" (actual EPS 39c) versus "making the numbers" (expected EPS 41c). Other categories of non-recurring items include exercising deferred tax assets/liabilities, selling/buying marketable securities or acquiring another company at a discount/premium. Under the guise of "proof smoothing" or outright attempts to mislead the public by less scrupulous executives, a prudent analyst will critique EPS numbers to understand what's recurring, what's growth and what is obfuscation.

Also, some companies who are experiencing tremendous growth might be in a position to sacrifice short term earnings for huge profit potential in the future (negative EPS as a precursor to large EPS growth - how long term investing by the company manifests on financial statements by using large amounts of capital to purchase revenue generating assets). However, in this case, it is particularly important to look at the Weighted Average Common Shares outstanding. A negative EPS is a dangerous place to be. And it might appear that a small negative EPS is less risky than a large negative EPS. However, a small negative EPS may simply be a huge loss spread over a large number of shares (further compounding the difficulty of recovery).

What I am proposing is simply this: Looking only at the basic information (trailing EPS, FPE, PEG, yield etc) provided by the popular public stock research tools (Google or Yahoo Finance, Reuters or Bloomberg) is only a mechanically generated *part* of the story. Especially when times are tough, it becomes even more essential to do your homework and use the appropriate performance forecasting metrics.

RIM down a whopping 16+%

Intra-day prices have seem to stabilized at around $59 CND. At this price, it seems that investors are concerned that this latest report of bad news is a signal that the potential earnings over the next year will suffer. While I would agree with that assessment to a degree, I'm afraid that the effect of price gravity in this environment draws prices down with much greater speed then is actually justified (and depress them more than expected).

At the current price, based on the earnings news, is fairly low. According to my previous trading spread $58 to $75, it would be about right to climb back in. However, with the revised earnings, I'd say the new spread should be more like $57.75 to $64.80. Although I still feel as if the stock is worth $70, the market seems to disagree (for now).

RIM Stock Takes a Huge Hit

RIM Stock prices are currently down around 10+% in early morning trading. RIM has stated that their earnings coming out for this quarter will probably be in the low range of guidance.

I'd like to do more homework on this subject before I comment further, but I'm a little skeptical about how dramatic the drop in stock price is. A momentum change after such a positive increase in the last few months wouldn't be unheard of, but I don't think the dramatic decline we are seeing is necessarily warranted. I think with the new numbers, a good price target is closer to $70 versus $75, but certainly not less than $65.

It might be a good time to get back into the stock if it passed you by the first time. Or let the panic drop the price a bit more and put in a low standing buy price.

Tuesday, February 10, 2009

Signal Analysis as a Model for Stock Price Momentum

Technical analysis is a fairly useful modeling technique to determine the momentum in the market and are very similar to how signal processors filter out components in Electrical engineering. The fractal-like characteristics for different time horizons can give mixed signals when it comes to buy or sell decisions. The key is to pick an appropriate time window which is appropriate for the current market and stock.

A signal being analyzed will have different frequency components which are similar to price movements in the stock. For instance, an active day trader would have a similar view as a high-pass filter. They have short time horizons and focus on the volatility in the stocks prices.

In contrast, A moving average technical trader or buy and hold investor by definition has a longer time horizon and their behaviour is similar to that of a low-pass filter. By ignoring the noise in the market and day to day volatility, they can ride the larger and longer swings in a stock price.

Particularly in this environment, using regression analysis to forecast movement can be dangerous. For different investment styles, one might see the start of a short term reverse head and shoulders formation (indicating a buy signal) versus another who might see momentum heading for decline.

The best advice is to incorporate the appropriate leading indicators into your model which can help paint a clearer picture. The problem is that current volatility across different time horizons may give more false positives so it falls on those who design the models to be prudent when reading tea leaves in the market.

RIM's Purchase of Certicom

For those who have been watching M&A activity in the markets lately, they are well aware of deals such as Pfizer and Wyeth. I had mentioned that such deals would probably be typical M&A activities in this type of market, large companies looking to acquire growth and find ways to cut costs (usually in the form of job losses).

However, it is refreshing to see acquisitions for more positive strategic purposes still happening. RIM had initially tried to take over Certicom and was halted in its tracks. Verisign then picked up the ball, only to be later intercepted by RIM's second bid. News on the street is that now Verisign won't be matching RIM's bid.

A few interesting things to note in this transaction. RIM is trading just below their $75 dollar target (which I had set last month and was verified by analysts at RBC). Also, as with any M&A, the acquirer's stock is expected to take a hit reflecting the premium payed on the acquired company (especially in a scenario with multiple bidders and higher premiums). However, because Certicom's size is incredibly small versus that of RIM, the effect on RIM's stock has been minimal. This simply re-affirms that RIM stock is finally back to the levels where it should be (Rate: Hold).

Certicom (CIC) has dropped a bit today as news of Verisign not offering a second bid has prevented the stock from going any higher, however, there is already a premium attached based on the several rounds of bidding (so Certicom stock holders can't be too upset - CIC's been at it's 52 week highs when everyone else is experiencing new 52 week lows).

From a strategic point of view, it makes a lot of sense that companies like RIM and Verisign are interested in Certicom (RIM's positioning as a secure wireless solution used by essential services and Verisign as the leader in consumer confidence payment transactions online). Although, they are already leaders in these areas and this deal doesn't provide any ground breaking advantage for RIM, it's good to see that someone with cash is still out there making purchases.

Quality with Capital Gains

It is an interesting time in the market right now and a great time to learn and observe, but fairly stressful if you need to guarantee returns for your retirement fund.

Capital has long left the equity markets and gone the traditional "flight to quality" route in bear markets (US treasury bonds, considered to be virtually risk free and of highest quality, are trading at yield levels equivalent to investors saying "Just give me back what I put in"). Although it seems like the capital markets are offering 50% off fire sale prices across the board, investors are still cautious before putting their money back in, cherry picking equities which have been dumped by panicking funds, yet still have the potential for upside recovery.

Although the consensus (especially with the recent record January job loss numbers reported last week) is that the economy will get worse before it gets better, savvy investors are looking at different options for investing. One model of interest is mezzanine financing in the form of preferred shares (like those recently issued by North American Banks).

These investment vehicles offer dividends with stable and attractive yields as well as potential upside for capital appreciation (with the inclusion of conversion options). Also, for investors who want "green in the jeans" versus a "paper gain", the dividend is attractive for it's alternative tax implications (Canadian dividend income taxed differently and more favourably in some circumstances than capital gains).

Monday, February 9, 2009

Why PE Ratio Analysis Won't Work

PE ratio analysis (a staple valuation model) has recently been a terrible indicator of a businesses value in the current economic environment. The reason for this is that many of the underlying assumptions for this tool in valuing a company's stock have fallen apart. This includes PE ratio's cousin, PEG (Price Earning Growth), in which case the PE ratio is discounted by the expected growth rate of the company (PEG's usually hover around 1, PEG's over 1 are generally over valued relative to their growth and visa versa).

Current company PE's are generally between 2 and 9, when they are usually around 8 to 16. Based on a previous post, another way of looking at PE is a payback or breakeven period. Assume that you buy a house for $150k and the return is $12k (8% return - Not taking into account discounted cash flows, expenses or taxes). The house will pay for itself after 12.5 years (note the inverse relationship between PE and yield). Also note that this investment scenario would have a PE of 12.5 ($150k / $12k).

Imagine that same house with a PE of 2. Either the same $150k house is now priced at $24k or your earnings have jumped to $75k.

In contrast, that house with a PE of 40 means either the house has jumped in value to $480k or you are now renting the house for $3.75k per year!

The problem becomes obvious. In an economic climate where business are contracting, using any type of PE analysis fails because EPS is declining. The only way a PEG ratio would work is if you can accurately predict the decline in EPS (as well as the corresponding market reaction). Needless to say, with all the conflicting opinions in the market, this is incredibly hard to do (even in a stable growing economy let alone a decline with no definite short term end in sight). Using any trailing EPS is like following lemmings off a cliff and using a Forward PE is risky at best.

Companies with low PE ratios have them for a reason. The trick is understanding if the reason is because the company is on its way out, or if the market has over reacted and unnecessarily punished the stock (Think RIM on Sept 22nd).

When faced with scenarios where PE ratios fail, analysts are often advised to use another method, such as price to book or price to cash. However, the unprecedented decline makes cash a precious and rare commodity and book values can drop just as quickly as earnings under poor management.

In other words, unlike the recent hay-day of financial investing, analysts and advisers are going to have to work harder for smaller returns: seeking to find diamonds in the rough.

GM - Auto Bailout

GM and other car manufacturers have been getting bail outs across the world in various forms to attempt to stimulate the economy as was politically expected. However, as previously stated, although this action is expected, the anticipated result is a more gradual decline in this company rather than a "saving" of the company.

As long as investors keep their money away and as long as people don't want to buy cars, capitalists will continue to punish what they consider "broken business models". The view is that if GM can't stand on it's own, the temporary injection supplied by the government will only work to ease the pain of employees (and the economy at large). Once the metaphorical morphine drip runs out, the decline will continue.

Although much of this bailout takes the form of some kind of investment option, the government has a poor investment track record. But you also have to understand that government "investment" performance is not measured by profit as it is with the rest of us, but rather by social equity and development. Same thing with purchasing toxic debt from banks.

It is based on this that I would continue to rate the stock a sell.

Sunday, February 8, 2009

Sunday Reflection: Real Estate as an Alternative Investment

I've often heard the argument from naive investors (usually ones who have been burned by the market) that purchasing stocks is inherently risky because you are only buying a "piece of paper" (or now adays, even less with electronic brokerages). The argument is that if you buy real estate, you can collect rent to pay against the mortgage and build equity. From a "solutions" perspective, you are essentially providing financing and profiting from your renter. There is also the argument that it will always be worth "something", even if the building burns to the ground you'll still have the land.

Generally speaking, anyone who invests according to cliches had better be prepared for a rough ride. Just like anything which can be bought and sold there is always a timing risk when it comes to investing. A prime example is what is happening in the Calgary housing market (as a result of falling oil prices and companies pulling investment from the area).

I always like returning to numbers to prove a point. Assume you buy a cheap investment property for $150k. Some of the obvious inherent risks are 1. You can't find a renter. 2. The principle value of the property drops below what you payed for it (capital loss). But assume that these aren't the case here. Assume you can rent out the house for $1k a month or $12k a year (net, excluding maintenance, taxes etc). That's an 8% annual return, which seems decent. However, consider too, the following: As an investment vehicle, you have little liquidity (if you sell the house with an agent your fees are approximately 6.5% of the value of the house) and you can't sell "portions" or units of your $150 investment to liquidate portions of equity (without complicated financing agreements which have fairly high price tags).

In this case, what is the difference between buying a house with the intent to rent versus buying $150k worth of preferred shares with a high annual yield?

I have always believed that (as it is with any sales transaction) the buying side is easier to execute than the selling (ceteris paribus regarding market conditions). If you have the financing in place, you can pull the trigger and decide to buy, but you can't pull the trigger to get people to buy from you.

Not that real estate is a bad investment. Suitability is an important factor when choosing investment vehicles. Perhaps buying something you can see and feel makes helps you sleep at night. Or you have long term goals for the property and can weather housing market volatility.

As with any investment, the biggest risk is not throughly understanding what you are buying.

Friday, February 6, 2009

Credit Crisis: A Quick Analysis

In case you find yourself in a party talking about the credit crisis, here are some major points which you can do further research on to understand exactly what happened to the market and what will happen in the foreseeable future.

There were many indicators last year that margins on investment returns were starting to shrink. In the M&A market, LBO's were being done on less profitable companies. PE ratios were off the scale. There were record highs in stock prices. Securities instruments and financial innovation became more complicated (recursive CDOs, debt instruments and waterfall trenches). As the market was flooded with capital, there were less places to find a good return.

After the crash, confidence was shattered in the market. The debt instruments rated AAA which should have been "investment grade" were worthless.

The questions that bankers and investors are asking are:
  • What needs to happen to the debt markets to reinstate confidence?
  • What systematically needs to change in the ratings system?
  • Interest rates are at their lowest rates ever (near 0). Being unable to further drop rates beyond 0, what else will be done to encourage banks to lend and people to borrow?
  • When will the economy recover? And in what windows will each sector recover?

Thursday, February 5, 2009

Triple A Ratings - Do they really matter?

Companies are struggling to keep their AAA ratings, but if recent history is any indicator, does it really matter? It's become clear that there are some major problems in the ratings systems with the fall of Lehman brothers and junk bonds being mechanically assigned a top rating.

Although in the short term, companies will struggle to keep their AAA investment grade rating, in the long term, the ratings system will have to become more transparent and requires a major overhaul in order to not repeat the errors of the past and change is inevitable. The only real question is how and when the reform will manifest and how many revisions are needed before confidence in debt market will resume.

Essentially, saying that you will try to maintain a Triple A rating is saying you are pursuing the approval of an obsolete system only because there is no other alternative. Evaluate management decisions accordingly.

Wednesday, February 4, 2009

Material Adverse Change - The Fall of the BCE Deal

A little while ago, the BCE deal fell apart particularly because of something called the Material Adverse Change (MAC) clause of the M&A contract. What is an MAC? It is a legal provision found in acquisitions contracts and venture financing agreements that enables the acquirer to refuse to complete the acquisition if the target suffers such a change. The Financial Post has a interesting article about the specific clauses in the BCE deal.

To better understand how MAC affects deals, Jack Welch gives a great description of what affects M&A deals, MAC and how deals are put together.

An interesting question to ask is now that the BCE acquisition by OTPP is dead, would you consider buying BCE? The stock is now trading in the mid 20's although it hit highs in the 40's during the take over deal. Is it still a good buy?

Tuesday, February 3, 2009

The Housing Market - What it means to first time buyers

The housing market has been on a cooling decline and there is now even a renovation subsidy for contracts signed between Jan 2009 and Jan 2010 to try to reduce the slowdown of businesses servicing this sector.

However, you have to look carefully at which sectors of the housing markets are dropping, when, where and WHY. Geography is important. Location, location location. However, the types of houses and the old fashioned supply and demand across different residence classes will greatly affect prices.

This puts first time buyers into a bit of a conundrum. Yes the market is slowing so if they can hold off, they can expect to have loans at lower rates (if they qualify... Banks are not interested in people with less than stellar credit profiles) and housing prices are dropping. However, it's not that simple.

Consider this: A 65+ year old baby boomer retiree who no longer needs a large house and wants to start liquidating the equity will sell their large house into a price depressed (buyers) market. However, with the sell option, they will probably buy (or rent) a smaller apartment or dwelling.

However, a 27 year old couple looking to purchase their first dwelling isn't looking to buy the same house that the retiree is selling. In fact, if anything, they are looking into something in a similar class in terms of bedrooms and square footage and will end up competing in the same demand curve.

Generally speaking, for a Yuppie looking to buy a house, the window of opportunity seems to be reaching it's prime shortly and will slowly start to close within two years time. Things might be different for a couple looking to start a family and might want to upgrade or buy into a larger house.

OTPP, Petro-Canada and "Activitst" Shareholders

Activist Shareholder:
"A person who owns one share of stock, comes to shareholder meetings and wastes time by asking company executives silly questions."

Certainly a cynical definition of an activist shareholder, this is probably the definition we are most familiar as a matter of experience.

However, occasionally, activitst shareholders can actually have the weight and expertise required to ask the right questions from a capitalist perspective. OTPP holds a large portion of Petro-Canada and is using its position to influence pressure on the management to improve performance. This case, it is particularly interesting because this is a clear example of when Private Equity will drive change in management behaviour. What is unique in this case is that OTPP, being one of the three largest PE firms in Canada, will be doing these actions in a relatively public forum as the nature of PE doesn't usually allow for outsiders to look in.

What action will be taken to correct the issues that Petro-Canada is suffering from is yet to be determined, but what is clear is that this will be an interesting case to watch over the next quarter.

Monday, February 2, 2009

The Ground Hog Day Effect

In the same vein as the Super Bowl effect, is there a Ground Hog Day effect on the Stock Market? Is the ground hog seeing his shadow forecast grim news on the horizon? Or just change?

Occasionally, we have to have some fun with the market (especially markets like this one).

Corporate Jets and the Drop in Bombardier

When GM Executives went to Washington to ask for a bailout, they faced a slew of criticism based on their use of a corporate jet. This story is hardly unique for most corporations who are all facing hard times.

It seems that Bombardier is now suffering from a decline in orders. Corporations who have put down payments for jets are expected to walk away from their deposits rather than sink more money into non-revenue generating assets, especially those associated with luxury.

Companies are doing anything they can to improve the EPS and cashflow, even if they are only one time items to reduce and smooth out the decline. Cutting jobs is causing a lot of pain and reducing "luxury" items (whether or not it dramatically affects the bottom line) is necessary to at least send a message to stake holders that management is mindful of the current environment.

Analysts have suggested that it should trade around 7x Forward PE or $3.60 or below (which it is already at).

However, analogous to the decline of jobs, managers are expecting an over extension of job cuts (and order losses) which will be pent up during the recession so the boom (although delayed) will eventually percolate into Bombardier as a lagging indicator of the market.

End result, buy Bombardier late into the economy's recovery (excluding the effects of their train and other business arms) in a years time or later.

Private Equity Funds - Winners and Losers in Today's Market

Now is an interesting time to look at Private Equity Funds and understanding their positions. Private Equity funds who haven't had their capital demolished or who are involved in projects with long term horizons and exit strategies will be in a position to benefit from the current environment.

Although many hedge funds who simply employed leverage to provide higher returns are probably wiped out, funds who either have a lot of cash or were recently created will essentially benefit from what essentially amounts to a 50% off sale in the market for companies who are valued at all time lows.

Unlike pure trading, PE firms will put their managers into the company and make changes to the companies strategy and actively participate in remaking the company into something more profitable.

Although major PE firms like OTPP, Omers and CPP are often in the news with stories such as the (now failed) BCE take over bid, the PE firms to look for are the smaller ones who take major positions in companies in the hopes of restructuring them to produce healthy exit multiples.

Watch List: Canadian Banks

Canadian bank stocks haven't seen as much abuse in the market as their US counter parts, and it might be time to start thinking about buy prices (within a months time).
  • Royal Bank hit a 5 year low last week.
  • BMO broke through their 30 day moving average last week (Buy Signal).
  • TD looks to still be in decline.
I currently hold a position in BNS and will limit that as my exposure to Canadian Banks.

Sunday, February 1, 2009

Sunday Reflection: Shorter Windows in Technical Trading

An interesting point to note is that because of the huge drop in the stock market in Sept, moving averages using periods that extend beyond that time frame are skewed. However, even many short term technical indicators still point to "Sell" (although not as dramatically). Therefore, it is important to understand the behaviour of trading in the market. It's clear that there are very few buy signals and those that exist must be fairly carefully scrutinized.

In technical trading, your trading spread will get smaller for shorter time windows accounting for smaller movements in the momentum of the stock price. Otherwise you'll have to use more leverage by putting more money into play / at risk.

Interesting moving average time frames are 3 month, 1 month and even weekly or intra-day.

Technical trading is a great way of filtering out noise by watching the movement of capital and after reviewing the patterns of last weeks stocks, it looks like stocks are still dropping across the board, but a few good picks can still be found for the discerning investor.

Steelers vs. Cardinals - Who's better for the Stock Market?

http://www.snopes.com/business/bank/superbowl.asp

Data mining at it's finest. Snopes looks into some of the myths about how the market is affected by various external factors, particularly the results of the Super Bowl.