A Budding Romance: Finance and AI

Better Analyzing Sectors in a Rising Rate Environment

"I am above the weakness of seeking to establish a sequence of cause and effect"

-Edgar Allan Poe

In today’s post, we’re going to provide 1 month projections for each Sector using the current conditions in rates for the 10 Year Treasury AND price trends for each Sector.

The yield on the 10 Year Treasury finally hit bottom and a two year low in early February of this year. Since that time, with expectations of the Fed’s impending rate hike, it’s been rising steadily. In these environments, so it goes, investors rotate out of sectors like Utilities where the dividends start becoming less appealing, and out of assets like Gold that provide no yield, and into Financials and Insurers that directly profit from higher rates.

For our weekly market calls, we typically provide fundamental or news based context around our statistics. This morning, we’re going to let the percentages do the talking and let investors put them into the proper context.

A Short Term Trade Idea for Monsanto (MON)

"Baseball is 90% mental, the other half is physical"

-Yogi Berra

Monsanto (MON) is down 6% over the past three weeks, while the S&P 500 is only down about 1.5% over the same period. For a stock that trades with high correlation to the market, that’s a distinct move.

For our weekly market calls, we typically provide fundamental or news based context around our statistics. This morning, we’re going to let the percentages do the talking and let investors put them into the proper context.

1 Month Call Options for GM and Toyota Look Cheap

"The best qualification of a prophet is to have a good memory"

-George Savile

Forecasting future returns and volatility is a common practice littered with inherent “bugs”. Many models start with the assumption that markets will be efficient for ease of modelling, and apply normal distributions to forecast future returns and volatility for everything from risk management to asset valuations. We’ve learned time and again that this can be shaky ground to stand on.

Fundamental Valuations Meet Statistical Probabilities (GMCR, CVRR, HSP, UNP, RYN, FSLR, ATO)

"He is one of the most undervalued players in baseball. This guy should cost $3 Million a year. We can get him for $237,000."

-Pete Brand, Moneyball, 2011

EidoSearch does predictive analytics across both public and proprietary data sets, and we have done a deep dive on price trends to provide probabilities to the investment community. We can look at the trajectory of a stock’s price, and by finding similar price trajectories in a peer group historically, we have validated that there are conditions that contain valuable information about future returns that complement fundamental valuation statistics.

AmEx (AXP), Kohl’s (KSS) and Statistical Significance

"The best thing about the future is that it only comes one day at a time."

-Abraham Lincoln

Watching some of the NBA and NHL playoffs over the weekend, or at least getting the recaps on ESPN (kids soccer games), it was hard to ignore the proliferation of statistics being thrown at viewers:

· “When a best of 7 NBA series is tied 2-2, the winner of game 5 goes on to win the series 82% of the time.”
· “Hockey teams that have a goal differential over 20 during any point during the playoffs have won the Stanley Cup 9 out of 16 times.”

These are interesting factoids, and provide a barometer of sorts on the odds facing a team in different situations, but they are sorely lacking when it comes to depth of the conditions in these situations. Do the percentages change if the series started out 2-0 vs. 1-1? Does it matter if the game 5 winners plays the next game at home or on the road? These are additional conditions that can provide valuable information about the forward probabilities that are typically ignored.

Mexico Heating Up

"Rosita: I was thinking later, you could kiss me on the veranda. Dusty Bottoms: Lips would be fine."

-Chevy Chase, The Three Amigos

After a 17% run up in 2012, the Mexican stock market (BMV IPC) has followed that up with a couple of clunkers: a drop of -1.7% in 2013 and -1.4% last year. The Index is up 7% thus far in 2015, but investors have every reason to be skeptical. The BMV IPC was up close to 9% through September of last year when it gave back all those gains and then some so here we are again.

Natural Gas in 6 Months Factoring Seasonality

"The cheapest Natural Gas in the World is in the United States"

-T. Boone Pickens

Natural Gas prices are at 3 year lows and about half of what they were at this time last year. As they say in the party game LIMBO, “how low can you go”?

May and June Futures rebounded a bit last week, in part based on expectations that warmer weather forecasts for early May in many parts of the country might help move us out of the low demand lull of Spring. However, Natural Gas storage supplies are still well above the levels at this time last year and production is starting to pick up again (recent announcement from Baker Hughes as an example).

Amazon Surprises…What’s Next?

"It’s not an experiment if you know it’s going to work."

-Jeff Bezos

Amazon’s (AMZN) shares surged more than 14% on Friday amid analyst excitement about the results from Amazon Web Services, the company’s cloud-computing platform. The stock rose modestly into the release, as investors seemed to anticipate favorable news, and then popped. The question is, after this move, how do people tend to react next? Is it a good time to build a larger position or trim?

Good Entry Point for Wal-Mart (WMT)?

"Every Exit is an Entry somewhere else"

-Tom Stoppard

Wal-Mart’s stock price has taken a beating over the past few months. After hitting an all-time high of $90.47 on January 8th, the stock is now down -14% as of Friday’s close while the market is up a little bit over the same time. Is this typically a good time to buy or a good time to get out?

If Netflix (NFLX) Beats Expectations the Stock will….

"You must always be able to predict what’s next and then have the flexibility to evolve."

-Marc Benioff, Founder of Salesforce.com

Netflix is up 42% over the past three months. Although the stock gave back a bunch of gains in March, it has popped another 9% over the past week after announcing that their members watched over 10 billion hours in the past quarter. The EidoSearch team has accounted for a few of those ourselves.