Since market-cap weighted indexes weight companies according to market capitalization, and respectively the stock price, they often reflect the investors’ enthusiasm over certain sectors. To remove market exuberance from the indexing process, FTSE, together with its partner Research Affiliates, has developed FTSE RAFI Index Series, a range of indices that are based on fundamental metrics of company size including sales, earnings, book value, cash flow, and dividends.
Q: What are the key features of the fundamental indexation™ methodology of the FTSE RAFI Index Series?
A: The concept of fundamental indexation ™ was introduced by Rob Arnott and his team at Research Affiliates, who were looking to create an alternative to market-cap weighted indexes. The idea is that a market-cap weighted index, where stock price is a key variable, reflects a good part of the investor psychology that determines the price, while fundamentally weighted indexes exclude market emotions.
Instead of using market-cap weighting, Rob Arnott used sales, earnings, cash flow, and book value to measure company size. His experiment showed what would happen if each of those weightings replaced market capitalization...[...]
November 8, 2007 - Excerpt from CIBC World Markets strategist Jeffrey Rubin's latest report:
...Soaring resource prices and plunging prices for technology are not only profoundly affecting Canada’s terms
of trade, but have also dramatically re-sculpted the TSX, increasing the market’s leverage to emerging markets
which are still growing handily, while reducing the vulnerability to the currency and a far-from-healthy-looking
US economy.
Thanks to the dramatically increased importance of both oil and base metals, the resource share of
the market has tripled since the start of the decade, rising in importance from just 15% of market cap to nearly
45% today. That gain, reflecting the broad shift of trade from resources to computers, has come largely at the
expense of info tech, whose cap share even with the past year’s above-benchmark performance is still far below
its past high water mark (Chart 4).
That compositional change in market cap couldn’t come
at a more propitious time as the US economy has gone
on recession watch while the global economy has seldom
been stronger. Outside of the US economy, growth is
soaring. Recent estimates from the IMF now point to near-
5% growth in real global GDP next year.
The contribution of emerging markets to commodity
demand has been even greater than their contribution
to global economic growth since their economies are so
much more resource-intensive than the largely servicebased
OECD economies. Emerging markets have become
the dominant drivers of global commodity demand,
accounting for as much as 80% of growth in world
oil consumption in the last five years.
And there seems
little sign that the housing market weakness in the US
economy is having any impact on emerging economies,
as evidenced by the recent 11.5% growth rate of China’s
third-quarter GDP. Buoyant asset prices in those markets suggest that investors are betting—in all likelihood
correctly—that those markets will not be impacted too greatly by a modest economic downshift stateside...[...]
1. Let’s start with the good news, ECRI still doesn’t see a recession on the horizon. They’re pretty accurate, so I give them room, and mute my own views.
2. That doesn’t mean there aren’t significant pockets of weakness. Mortgage equity withdrawal is a spent factor, so to speak, and it ripples through current consumption and housing price weakness. The less equity available, the less to pad consumption, and the less buying power for homes. Credit card default rates are worsening, which can’t be good for buying power either. On the low end of the income spectrum, many Hispanic workers are finding it hard, and that affects Wal-Mart, among other retailers on the low end. That said, I have read that the Hispanic immigrants are much less likely to default on their mortgage loans than non-immigrants with similar credit characteristics.
3. CLSA predicts a record gold run, and so far, gold is cooperating. That said, it will take a lot more to get gold to $3400/ounce. We would need a real dollar collapse, and not this slow grinding selloff. That said, the grinding selloffs tend to persist; more on that later in this post.
4. Of course, we could look at the price of wheat, or even just the price of stuff. If it deals with food or energy, two items that are core to almost everyone’s budget, prices are rising. John Wasik repeats a number of my arguments for why core CPI does not represent the diminution of the average person’s buying power. I’m honestly surprised that no one has made a campaign issue out of honesty in inflation statistics so far. It helped Reagan versus Carter in 1980. [...]
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Thomas Hobson ran a thriving carrier and horse rental business in Cambridge, England around the turn of the 17th century. He rented horses mainly to Cambridge University students and was known for not giving his customers a choice as to their mount – it was simply “this or none”, i.e. Hobson’s choice.
Fast-forward to November 2007 and one cannot help wondering if the US economy has taken on the guise of a modern-day Hobson, really offering no choice at all. And on the receiving end is Fed chairman Ben Bernanke facing an increasingly recessionary economy. A worsening housing situation and the likelihood that significantly more credit losses lay ahead leave him with what Richard Russell (Dow Theory Letters) describes as a “brutal problem”.
Before digging a bit deeper into the alternatives available to Bernanke and the monetary authorities, let’s focus on the graphs of the Philadelphia Housing Index and Bank Index for a snapshot of the market’s assessment of these two intransigent sectors.
Nov. 9, 2007 -BHP Billiton, undiscouraged by Rio Tinto’s rejection of an initial takeover bid, has upped the ante as it is now prepared to offer more that $140 billion for the mining company. If accepted, the deal would be the largest of this year (see article from The Money Times). In order to determine if any significant relationships exist between BHP and Rio Tinto that could facilitate negotiations, we created an IntellectSpace Knowledge Map that visually maps the ties through the Executives and Board of Directors at either company. The results suggest that BHP may need more than connections to satisfy Rio Tinto.
(Note: the information contained and presented in Knowledge Maps is public information from the Securities and Exchange Commission of the United States of America).
posted on: September 20, 2007 | about stocks: OIL / USO / DBO
Oil's low close of $50.48 on January 18th, 2007 seems decades away as prices are up 62% since then.
With T. Boone Pickens forecasting $100 oil (thankfully not this year), we looked back at historical price moves for the commodity since 1986.
Bull and bear markets are defined as 20% moves. Notably, the average gain for oil in a bull market is 62.89% (we are up 62.32% right now); the average length of a bull market is 226 days (we are at 245 days right now). See Chart (Complete Story)
