Adventurous Investor

Last updated: January 21, 2013 4:29 pm

The Investor Dashboard: January 2013

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Nick Bullman, the Bath-based hedge fund manager who runs a subscription-based service called Check Risk, has helped me put together this “Dashboard” of risk-based measures for key markets.

For explanations of the measures used, see below.

Here is the Investor Dashboard for January:

Investor Risk Dashboard January 2013
Risk factor Price 1-month change (%) Accelerating/ decelerating Risk better/ worse Direction change? Status Risk assessment
 Behavioural risk factors
Periphery Europe Sovereign CDS  

3645

 

124

ACC Better No Moderate Amber
Sovereign UK CDS  

42

 

9.09

 

ACC

Worse Yes Moderate Green
FTSE Volatility (VFTSE)  

10.96

 

-17.77

 

ACC

Worse No Severe Red
FTSE Insider Buying and Selling 1.62 3 DEC Better No Moderate Amber
Gfk Consumer Confidence  

-29

 

31.8

ACC Worse No Severe Red
FTSE Volume Ratio (UKX/Volume)  

7.54

 

-9.90

 

DEC

Better Yes Moderate Amber
 Real risk factors
London Interbank Spread OIS  

0.10

 

-8.90

DEC Better No Moderate Green
US TED Spread  

22.84

 

-12.15

 

ACC

Better No Moderate Green
Gold  

1673.92

 

-1.41

 

DEC

Better No Moderate Amber
Brent Crude Oil  

110.3

 

3.16

 

DEC

Worse Yes Moderate Amber
FTSE Dividend Index Future  

225

 

3.68

 

ACC

Worse No Moderate Red
Baltic Dry Index  

781

 

1.95

 

DEC

Better Yes Extreme Red
 Other factors
Gold/Silver Ratio  

53.62

 

-3.09

 

DEC

Worse Yes Moderate Amber
FTSE 100 20 / 200 day Moving average  

Above

 

6.79

 

ACC

Worse Yes Severe Red
Robert Shiller CAPE for S&P 500  

22.82

 

9.39

 

ACC

Worse No Severe Amber
For explanations see below

Comment from Nick Bullman at www.check-risk.com:

It appears that risk is on the increase once more. This is partly due to valuation issues. The FTSE has moved ahead quite quickly and is discounting a lot of good news, and now stands some 6.79 per cent above the 200 day moving average, the highest reading we have seen since 2008.

This is combined with the lowest reading on FTSE volatility over the same period. Essentially these are highly indicative of investors having a low perception of risk when actual risk has increased. Other risks that investors should be concerned with are the level of global trade, as reflected by the Baltic Dry Shipping Rate and other similar indices, that stands close to all time lows. The Gfk Consumer Confidence Survey replaces the Nationwide Consumer Confidence survey and is close to all time lows.

There are some good signs, however, interbank rates have been driven lower by the BOE and a lot of the free cash generation is finding its way into financial assets like the stock market, which inevitably supports equity prices.

In the short-term, risk has increased and on a month’s view the downside risk is increasing as valuations are stretched, consumer confidence is low and geopolitical event risk remains high. The current dashboard is indicative of a sideways moving market with an increase in underestimation of risk by investors against a relatively stable real risk environment.

Comment from David Stevenson:

Personally I feel a little more confident at the global equity level than I’ve felt for many months, although I wouldn’t go so far as to say I’m a gushing bull. I agree with the consensus view which is that equities are the least worst investment idea and I’ve generally been lowering my cash levels from 25 per cent to around 10 to 15 per cent.

But I’d also say that there aren’t many screaming bargains out there, so I’d still be cautious, especially about over paying for quality and/or income producing equity assets

Notes

Behavioural factors

Periphery Europe Sovereign Credit Default Swaps (CDS)

CDS are insurance contracts insuring the ability of the bond issuer to pay interest and principal on their debt. Portugal Ireland Italy Greece and Spain’s CDS are stressed. This is a good gauge on the biggest risk in Europe.

Sovereign UK CDS

This factor is measured for the same reasons as the above but is a direct reflection of the UK’s indebtedness and debt to GDP ratio. The higher Sovereign CDS go the more likely a default.

FTSE Volatility

Volatility, is viewed as a measure of market nervousness. However, it is generally a lagging indicator. We use volatility as a contra-indicator. The lower it goes the greater the risk of a surprise. The lower it is the more the market is underestimating market risks.

FTSE Insiders

Employees of FTSE companies who are buying or selling their own company’s shares are called insiders. This factor gives a perspective on what owners of the business are doing. It excludes share option sales.

Consumer confidence

Consumer confidence surveys are critical at present as they represent an important part of any recovery in the UK economy.

FTSE Volume Ratio

This is a ratio between the FTSE index price and daily volume. It is important because a rising market on thin volumes is riskier than one with plenty of volume support. The inverse is also true

Real risk factors

London Interbank Spread:

The Libor spread is a measure of the efficiency and liquidity of the banking system. Sharp rises in the spread reflect tension in the interbank market and is an indicator of credit risk

US TED Spread

The TED Spread shows the spread between interbank loans and short term US 3 month Treasury bills. It has two uses, it shows us any “flight to safety” as it happens because rates on short T Bills go down toward 0 or below and it reflects risk between “riskless” US T Bills and banks, which is essential in the current credit crisis. A rising spread often presages a downturn in the stock market as liquidity is drained from the system.

Gold

Is a useful indicator for risk as it reflects investor risk aversion and a measure of expected inflationary pressures.

WTI Oil

West Texas Intermediate oil is a risk factor because the price of crude oil directly impacts world GDP. Prices above $130 per barrel for 2 to 3 months would greatly increase the risk of a double-dip recession

FTSE Dividend Index Future

This futures contract is the sum of all dividends on FTSE Shares. It is important to monitor dividend expectations when real interest rates are negative and beginning to rise.

Baltic Dry Index

The Baltic dry index measures the freight rates of dry bulk carriers shipping iron ore, coal, grain and other commodities. Generally this flow of goods is West to East from South America to China for example and is a strong leading indicator of input demand.

Other factors

Gold Silver Ratio

The gold silver ratio tends to narrow in times of economic hardship, and widen as an economy recovers. The thinking goes that silver has more uses as an industrial metal and reflects that demand; whilst gold is bought as a safe haven instrument.

FTSE Moving Averages

The difference in the price of the index and its moving averages may be useful particularly at extreme values as the likelihood of a reversion to the mean price increases.

Robert Shiller’s Cyclically Adjusted Price to Earnings (CAPE) Ratio:

A widely used measure among value orientated investors that takes the average of the last ten years earnings for the benchmark S&P 500 index in the USA and then compares this adjusted price to this long term measure of earnings capacity.

adventurous@ft.com

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