A Budding Romance: Finance and AI

Precedence and Projections for Crude in 3 Months

"If I told you I knew a place that had oil, where land could be bought cheaply, what do you think that would be worth?"

-There Will Be Blood, 2007

If I told you that we’ve seen Crude Oil trade in a similar fashion historically, and that the probabilities greatly favored a rebound in the next three months vs. continued deterioration, what do you think that would be worth? (Subscription offer at the end).

Likelihood of Another Big Pull Back for the S&P?

"May the odds be ever in your favor. "

-Hunger Games, 2012

After the S&P 500 dropped 11% over six days back in the middle of August, consensus was building for a continued drop to more reasonable valuations. At a minimum, expectations were being set for minimal gains from equities for the foreseeable future. The Global economy was struggling, commodities were leading the earnings per share slowdown and it seemed all but certain we would see the first rate hike in September. This was the pull back that we had all been anticipating.

Goldman Going Higher?

"China saves too much, produces too much, sells too much to Americans and consumes too little. "

-Henry Paulson

After an uneven reporting of earnings last week for the largest U.S. Banks, we thought it would be interesting to see if any patterns were emerging that contained valuable information and carried the same kind of compelling probabilities as last week and that might be worth analyzing. The most interesting by far is Goldman Sachs (GS).

Probabilities Support a Rebound in Biotech

"Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on."

-Tweet from Hillary Clinton on September 21st

Thanks Hilary! Although, to be fair, she may have just exacerbated the issue. Biotech’s had been on an all-time run since January 2012. The Nasdaq Biotech Sector ETF (IBB) was up over 250% through July 20th of this year, thoroughly outperforming the market which was up a mere 57% through the same period. The sector seemed ripe for a pull-back on valuations.

Yahoo! (YHOO) Rebound Short Lived

"Auburn is a pretty good school. To graduate from there I suppose you really need to work hard. 20 pts and 10 rebounds will get you through also."

-Charles Barkley, NBA Hall of Fame

In mid-November of last year, Yahoo! Inc shares went above $50 for the first time in 14 years (dot com), and were up from just $15 a share when Marissa Mayer took over as CEO in July 2012. Jump on the wagon!

Not so fast. Shares have been in a steady decline since, bottoming last Monday at $27.60. Yahoo! then announced that, screw it, they were spinning of Alibaba regardless of tax consequences and the stock jumped 11% last week. Sustainable?

Gold is Going Down

"We’re going to Hell, so bring your sunblock."

-Ari Gold, Entourage

For those of you excited about Gold’s move up over the past week and the Fed’s continued concerns on global economic growth, we offer a sobering fact: In 13 similar trading environments in the last 40 years, Gold has never been up in the next one month.

Good Entry Point for Exxon Mobil?

"You’ve got to know when to hold ‘em. Know when to fold ‘em. Know when to walk away. Know when to run."

-Kenny Rogers

The past year for shareholders of Exxon Mobil has not been pretty. At the end of July of last year, XOM had risen to an all-time high of $104 a share. Now, a year and change later, the stock is off more than 30% and at a four year low. And, for a stock that is highly correlated to the cost of Crude Oil, the near future does not look any more promising.

85% Probability eBay goes higher this week

"Guess what? The world changes. eBay has defined e-commerce."

-Meg Whitman

Believe it or not, this month marks the 20th anniversary of eBay going live. While they may no longer be the darlings of the eCommerce world, investors are not complaining. The stock is up 479% since March of 2009 (about 75% annualized) and shares have proven to be resilient this year. The stock was up 20% before the recent market correction, and is still up 11% for the year and well ahead of the S&P 500 which is still down for the year. Is this a good time to buy?

85% probability Gas Above Current Price in 1 month

"There are 106 miles to Chicago. We have a full tank of gas, half a pack of cigarettes, it’s dark, and we’re wearing sunglasses."

-The Blues Brothers

Gasoline RBOB has 8 times the upside to downside

Outside of 2008, this is the most severe drop in Gas prices we’ve seen in over 30 years. In June of last year RBOB was at $3.13, and by January of this year prices had dropped 60% to $1.27. After a bit of recovery through June, prices have now settled back to $1.42 and they are approaching 6 year lows once again.

Crude’s Rebound Short Lived

"And they're takin' their sweet time bringin' the oil back, of course, and maybe even took the liberty of hiring an alcoholic skipper who likes to drink martinis and play slalom with the icebergs, and it ain't too long 'til he hits one, spills the oil and kills all the sea life in the North Atlantic"

-Good Will Hunting

Early last week with panic setting into the stock market, we provided statistics in our Monday Market Call showing that there was 85% probability the stock market would drop less than 1.2% last week. We distributed the call with the market already down 4% last Monday morning. Are we just plain stupid?

Nope. We had the confidence of probabilities on our side. Understanding, through statistics, how the market reacts to these similar times historically provided us with an objective view on how the market was likely to respond once again today. The average or typical outcome we communicated last Monday for the SPX was a rebound of .91%. The market ended the week up .80%.