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All posts for the month October, 2016

One of the most highly valued and frequently used measures by our clients within the OTAS suite is the Insider Transactions analysis. Delivered through multiple OTAS applications, users can assess the potential impact on a share by a single well timed trade, placed by a company director or major shareholder.

Live Insider Transactions via the Alerts feed
The introduction of live Insider trade notifications in our Alerts app allows users to view transactions for an order-pad, portfolio or watchlist as they happen in real-time, meaning they need never miss a potentially significant price sensitive trade. Proof of this was evidenced in the trading session immediately after the BREXIT vote when we noted an unprecedented number of senior management in UK Top 100 companies buying their own stock. 

The Insider alerts feed can be custom filtered to identify just significant discretionary transactions or include all trade types, such as exercise of employee stock options and share awards. Our star rating attached to each insider immediately reveals the prescience of the transactor.

        Live Alerts App.                                                  Alert Customisation Filter
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Insider Transactions in the Core Summary
Once a new Insider transaction is received from our provider, it will display in the Alerts panel(as above) and will be available in the Core Summary detail table the following minute.  The Insiders Stamp will populate with new Buy/Sell flags shortly after and will be visible for the next month.

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Insider transactions get registered on the accompanying chart and can be filtered to show Priority discretionary transactions or All trade types just like the live Alerts panel. We keep a history of every trade going back as far as 2006, these can be viewed by clicking the ‘Max’ zoom button. To single out an individuals previous trading history over the selected time-frame….simply click on their name and the chart will filter accordingly.

The plight of insurance companies in an era of low interest rates has led some to predict the total collapse of the industry. The sector is a bellwether for the stock market, because so much of its profit comes from investment returns. The chart of the PE of European insurers relative to the broader market shows that extreme valuation for the sector is a precursor of major market corrections.

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European Insurance Valuation Relative to the Market

On this logic things are fine, because at two thirds of the average PE, insurance stocks have only just crossed into the normal valuation range following a period in the investment doghouse. This would tie in with our recent message that the prevailing investment trends are uncertainty over the direction of interest rates and gradually rising implied volatility back to normal levels. Relative implied volatility for the insurance sector peaks at index lows.

Implied Volatility of Insurance Stocks Relative to the Market

Implied Volatility of Insurance Stocks Relative to the Market

The woes of the insurance industry are easy to identify, which is why the sector is so popular among investment bloggers, who use it to point to the coming Armageddon in Europe, without having to offer too much analysis. Insurers depend on yield, all the more so as their customers age, so if central banks reduce bond yields to zero or below, insurance companies die.

You do not have to talk to those in the industry for too long to hear them bemoaning the new capital that is driving down returns for everyone. For the insurers, this is dumb capital that lacks the long-term perspective of their industry, but which thanks to light or no regulation has a lower cost of capital than incumbents. This is two different arguments; one about time horizons and another about the shadow financial sector.

Insurance is an industry whose last great innovation was the statistical analysis that brought about mortality tables. This allowed probability as a proxy for predictability and gave rise to a legion of highly specialised mathematicians with skills finely tuned to the needs of the industry. The maths can now be done faster and more effectively by computers, and so any cost advantage that new capital has from efficient operations is a permanent one. Whether you are regulated or not, you no longer need all those actuaries, just as investment banks no longer need so many analysts and lawyers don’t require all those proof reading juniors. Regulation actually serves to slow the loss of white collar jobs, because however onerous it may seem, all regulation favours incumbency.

The longer timeframe argument is more intriguing. Factor analysis shows that the inverse correlation between equity values and bond yields has weakened over several decades, most likely due to lower inflation, which had globalisation as its primary cause. The relationship has actually inverted since 2008, so that bonds and equities rise and fall in sync. Initial observations since 2013 suggest that the traditional correlation is reasserting itself.

This is due to the end of quantitative easing in the US and the political reaction to globalisation across the western world. Rising protectionism and constraints on immigration are the most evident backlash. These measures are designed to push up local wages and hence will be inflationary, and could herald the reversal of a long period of ascendancy of capital over labour.

It should be stressed that the jury is out on this. Most of our blogs reference the standoff between those who believe in the continuation of easy money and those thinking its time has passed, because this is the largest investment argument to be resolved. It is also one that OTAS indicators are ideally placed to track, including our fear gauge and low volatility performance monitor.

If the worm has turned however, and the ineffectiveness of monetary policy at the zero bound combines with political pressure to trigger policies that lead to higher interest rates, then the insurance sector will be back in business. Returns on insurance equities should discount this long before it happens. Those cautious mathematicians who have survived in the sector will have won the argument about the long-term, because underwriting in the industry should be priced using a higher cost-of-capital.

Market expectations of an improvement in like for like sales boosted by a positive currency tailwind following the plunge in sterling post Brexit has pushed Burberry shares 18% higher in the last month.
The shares have benefited from a slew of recent positive broker recommendations and as we head into the Sales Release next week we look to OTAS for any indicators which may provide some colour on the risk landscape from here…

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OTAS Core Observations:-

  • Strong sector relative performance in the last week(+8%) aided by a recent positive technical signals.
  • Despite recent positive broker sentiment the change in analyst expectations has been muted with just +1.74% average revisions to 12m forward numbers in the last month.
  • This contrasts significantly from market expectations, where the shares have been pushed +18% over the same period as evidenced by the Divergence stamp. Investors may see this as a possible travel & arrive scenario.
  • The positive price action has left the shares looking expensive in valuation terms relative to industry peers.
  • Burberrys’ sector relative implied volatility is 27% higher compared to normal, evidence the options market is predicting a higher degree of share price risk(+/-17%) for the shares over the next 3 months. Investment managers employing a low vol portfolio strategy should note this abnormality.
    Interestingly, similarly observed high volatility levels have coincided with distinct price behaviour recently.brby1
  • The Put Ratio of traded options is back at year lows indicating little in the way of downside protection currently being sought. This could be a sign of market confidence or misguided complacency by equity investors.
  • Short Interest is within the normal expected range but has increased by around 50% in the last month.
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Particularly powerful around financial reporting, OTAS’s award winning analytics provides you with multi-asset intelligence and risk outliers in one ‘go-to’ place, allowing you to make more informed investment decisions and provide a better understanding of factors which could impact on share prices.

For your free trial contact OTASsales@otastech.com

“It’s the devil’s way now, There is no way out

You can scream and you can shout

It is too late now, Because you have not been

Payin’ attention”

Radiohead 2+2=5

This week our Blog pulls together the themes and indicators from OTAS that we have been talking about for a while. We have been looking for clues that investors are losing faith in central bank omnipotence, which will expose those who do not adjust their portfolios from following the axiom of the past few years to a significant drawdown. There is a fierce debate among those who believe that judgement is coming and those who expect more of the same.

We tackled this issue in early September in what was probably my favourite blog, because the charts used to illustrate the points were the default charts that can be pulled up from OTAS with virtually no effort. For example, this chart of the average cost of credit for US large caps illustrates how credit risk has flat-lined this year, indicating a collective ambiguity about the direction of interest rates. Perhaps this is why the fiercest online investor arguments are about rates; because no one can be sure of where they are heading.

US Large Cap Average Cost of Credit

US Large Cap Average Cost of Credit

From here we developed the theory of Wall Street’s alternative fear gauge, where we used the relative volatility of banks and utilities to assess how relaxed investors were feeling about stock prices. In less than three weeks since then, the riskiness of banks, where low levels indicate an absence of fear, has fallen below that of utilities. This can hold true for several months, but it is not normal.

Relative Volatility of US Banks vs Utilities

Relative Volatility of US Banks vs Utilities

An obvious reason for the low relative riskiness of banks is that the odds of a US rate rise have increased, resulting in the dollar index breaking out of its recent trading range to the upside this week. Higher rates would raise banks’ margins, while hurting heavily borrowed utilities and diminishing the relative appeal of their dividend yields. This is a simple, but erstwhile effective investment conclusion.

Utility stocks are a stalwart of the low volatility portfolios that have been underperforming of late. This has led some to argue that the size of the unwind of the consensus trade in favour of low volatility and high yield will be the cause of the coming equity market fall. Last week we addressed the trigger point for index corrections in terms of the relative valuation of lower risk stocks. The sell-off in these names has pushed the riskiness of utility shares to extreme levels, which historically have not held for very long.

Relative Volatility of US Utilities

Relative Volatility of US Utilities

The mean reversion mechanism for this indicator is either that utilities lead and the rest follow in a coordinated meltdown in share prices, or the active few who trade relative volatility exit the stage, leaving the majority who passively expect the Fed to keep bailing them out to buy the dips.

The Radiohead song 2+2=5 references George Orwell’s 1984 and specifically Doublethink, whereby the state can compel citizens to believe something that is not true. For many investors it is axiomatic that stock prices will continue to rise, supported by easy monetary policy, because there is nowhere else for anyone to invest. The exchange rate related crushing that gold has taken this week reinforces this belief.

Radiohead subtitled their song The Lukewarm. This is a reference to those on the edge of Dante’s Inferno, who cannot figure out why they are there, because they didn’t do anything. For Dante, and the politically charged members of Radiohead, inactivity is precisely the crime for which these people are condemned. When you have an environmental activist in the family as I do, which makes Christmas colourful, you come to understand the charge sheet against the silent majority.

So who is more right; those who expect a major correction or those who believe that debt, deflation and an ageing population will result in years more pump priming by central banks. The reality is that both may be correct. A sell off in markets may be triggered by a rise in US interest rates, which could happen at the low point for our alternative fear gauge, which is now just a few points away. The resulting tumble could then trigger recognition of a policy error, leading central banks to resume the path of easy money.

In the first Blog referenced above we warned that CDS and implied volatility were sending conflicting signals. So far it is a correction in volatility that has addressed this discrepancy. US large cap CDS and implied volatility are two of the easiest charts to find and follow in OTAS. As Radiohead knew, there is no excuse for not payin’ attention.