I was alerted to this little piece of mind-numbing news by the blog ZeroHedge (www.zerohedge.com), and, not believing it, went to the website for the Federal Reserve Bank of New York www.newyorkfed.org/research/ for confirmation. On the NY Feds page, there is a study by David Lucca and Emanuel Moench titled The Puzzling Pre-FOMC Announcement “Drift.”
The “drift” refers to the phenomenon of positive moves in the S&P 500 in the 24 hours preceding Federal Open Market Committee announcements. The dates covered in the study ranged from 1994 through 2010. From Lucca and Moench:
- Since 1994, there has been a large and statistically significant excess return on equities on days of scheduled FOMC announcement.
- This return is ahead of the announcement so it is not related to the immediate realization of monetary policy actions.
- …the return on the twenty-four-hour period ahead of the FOMC announcement cumulated to about 3.9 percent per year, compared with only about 90 basis points on all other days. In other words, more than 80 percent of the annual equity premium has been earned over the twenty-four hours preceding scheduled FOMC announcements, which occur only eight times per year.
- The chart below visualizes this return decomposition. It shows the S&P 500 index level along with an S&P 500 index that one would have obtained when excluding from the sample returns on all 2 p.m.-to-2 p.m. windows ahead of scheduled FOMC announcements. In a nutshell, the figure shows that in the sample period the bulk of the rise in U.S. stock prices has been earned in the twenty-four hours preceding scheduled U.S. monetary policy announcements.
The implication of the graph, if we can infer causality from an unusually long string of coincidence, is that the S&P 500, without “drift” would be trading at 600 – less than ½ of its 2010 closing value.
The authors conclude with the following:
“Our findings suggest that the pre-FOMC announcement drift may be key to understanding the equity premium puzzle since 1994. However, at this point, the drift remains a puzzle.”
For simple people like me, it’s not all that puzzling.
It’s the liquidity bubble, stupid.
Re-visiting the Robots
Yesterday I tweeted (or twittered, or whatever) an article from the Financial Times titled “Real Investors Eclipsed by Fast Trading.” It was later pointed out to me (by both or our followers!) that the article could only be opened by those who were registered with the Financial Times. So, in order to right that wrong, I thought I’d put a couple of bullet points from the article in the blog:
- Trading by “real” investors (defined as buy and sell orders from mutual funds, hedge funds, pensions and brokerages) is taking up the smallest share of US stock market volumes in over a decade. Source: Morgan Stanley’s Quantitative and Derivative Strategies group.
- “Real money” trades account for only 16% of buying volume and 13% of selling volume
- The takeaway, by the authors of the study, is this: “Matching of ‘real’ buyers and sellers is more challenging in a market where there are fewer of them.”
Let’s just hope the bots don’t begin to gain a sense of self. From what I’ve heard, that would be bad.
I really don’t have anything to say about Apple. It’s just that there is a new law stating that if you’re going to publish, speak, or give hand signals regarding anything about investing, you have to mention Apple. I think this puts me in compliance.
With the European crisis taking up the bulk of the international headlines, the Bank of Japan has quietly decided to add another 5 – 10 trillion Yen to their asset-purchasing program. This is in addition to the 65 trillion Yen already in the program. With this round of quantitative easing, the BOJ re-asserts itself as the central bank with the biggest balance sheet as a percentage of GDP in the world. Congratulations guys!
With the horrible demographics in Japan, growing their way out of the crisis seems unlikely. This is something worth watching.
- Spain’s unemployment rate is now at 24.4%.
- S&P has cut Spain’s credit rating by two notches on Thursday, setting it at BBB+
- Spain’s foreign minister Jose’ Garcia-Margallo says, “Spain is undergoing a crisis of enormous proportions.”
- In France, it appears that socialist Presidential candidate Francois Hollande has a pretty good shot at winning the run-off elections next Sunday. His platform includes dumping the austerity program, increasing government spending and not ratifying the new European fiscal treaty. That should do wonders in reducing France’s debt strain.
- For the second time in two months, Romania’s government has fallen. This morning, in the wake of the continued collapse of their currency (leu), a vote of no confidence meant that Mihai Ungureanu was getting the boot. Austerity takes another victim. As a result, the IMF has decided to not send Romania it’s expected 5 billion Euro aid package until a new government is in place.
- In the Netherlands, the government quit on April 23, only to pull a “Never Mind” later in the week. The reason… the opposition Freedom Party refused to support the proposed austerity and tax hike program. Later, they agreed to it and are now back in business. I guess for a few days, you could say they were “In Dutch.”
- So far in this earnings season, 200 of the S&P 500 companies have reported. 75% have beaten their estimates, 10% have matched, and 15% have missed.
- Across the S&P 500, the average earnings surprise was +12.1% (just for yucks, that number is 7.5% if you take out Apple).
- Year-to-date, the S&P 500 is up over 11%
While the global scene certainly looks glum, the US remains profitable and growing at an ever-so-slight rate (this morning’s GDP came in at 2.2% versus and expected 2.5%). $7 trillion in newly created global money, the Bernanke Put, and Apple seem to be buoying the US stock market.
It makes me wonder if we may just be the prettiest horse in the glue factory.