Monday, July 21, 2014

Risky Business Monitor: July 21, 2014

Ralph Waldo Emerson’s cogent observation that “[a] foolish consistency is the hobgoblin of little minds” notwithstanding, I note that if I have said it once, then I have said it a zillion times: I hate redundancy. Nonetheless, I acknowledge my most recent J.J.’s Risky Business blog post bears more than a passing resemblance to my most recent J.J. McGrath’s Instablog post at Seeking Alpha, as reflected by the following recapitulated ruminations:

The Select Sector SPDRs carving the S&P 500 into nine slices may be unique in the exchange-traded fund universe: They serve not only as investing and trading vehicles but also as equity-market indicators, lagging, coincident and leading. Accordingly, I keep an eye (or two) on them at all times.

A few results of this many-faceted observation process can be found in a recent series of articles published at Seeking Alpha. In each of the nine pieces, I focus on a single sector SPDR: its behavior in the first half of this year relative to its parent’s proxy, the SPDR S&P 500 ETF (SPY), and all its siblings; its average monthly performances during the first full 15 years of its existence; and market-moving issues likely to have an effect on it in the foreseeable future (e.g., changes in policy at the U.S. Federal Reserve).

If you employ the sector SPDRs as market indicators, then you might want to read all of these articles. If you use a given sector SPDR as either an investing or a trading vehicle, then you might want to read the piece related to it. In any case, all nine of them are accessible via the hyperlinks appearing below:










Related Reading



Monday, July 14, 2014

Risky Business Monitor: July 14, 2014


One way I have attempted to cut my risk in the financial markets during the past 11 years is by developing the Risky Business Daily Market Seismometer (and its forerunners). Each and every day, I assess the condition of the equity market by bringing up-to-date an assortment of spreadsheets based on multiple stock-market metrics.

This assessment is based partially on examination of these metrics as they apply to the Select Sector SPDR exchange-traded funds that break the S&P 500 into nine chunks. These sector SPDRs are the subjects of most articles appearing in the Risky Business Monitor this week, as follows:








Related Reading



Monday, July 7, 2014

Risky Business Monitor: July 7, 2014

Long ago and far away, I was the editor of a weekly newspaper, where I claimed for half a dozen years to be The Most Published Writer in America. (Neither The Best nor The Brightest, but The Most Published.) The claim may or may not have been valid, but it certainly appeared so to me.

Anyway, I do not publish as much now as I did then, but there are enough articles bouncing around cyberspace these days that it seems a good idea to create a clearinghouse for hot links to my contemporary economic and market stories here at J.J.’s Risky Business. Thus, I am happy to introduce the Risky Business Monitor.

Here’s the lowdown on what’s up this week:










Friday, June 13, 2014

Time-Out For Time Amid Spinoff’s Twists And Turns


Equity-market participants with an interest in Time Inc. (TIME) in the wake of its recent spinoff by Time Warner Inc. (TWX) would be wise to take a time-out to review the company’s financial data in depth. On the one hand, Time Inc. ranks as the No. 1 magazine publisher in the U.S. by print-advertising revenue and readership with titles such as People, Time and Sports Illustrated. On the other hand, its revenue dipped -8.78 percent from 2011 to 2013, while its operating income dropped -40.14 percent on the same basis.

The only constant at the megamagazine-publishing concern co-founded by the innovative Briton Hadden and Henry R. Luce more than 90 years ago, change was on the march at Time Inc. again this week as the company’s equity traded under its new ticker symbol for the first time since being divested by Time Warner.

Time Warner effected the spinoff by distributing all outstanding shares of Time Inc. common stock to the erstwhile parent company’s shareholders at a ratio of one share of Time Inc. common stock for every eight shares of Time Warner common stock held on May 23, as noted in a U.S. Securities and Exchange Commission Form 8-K filed by the former parent firm on Monday. These shares numbered 108,935,794, as pointed out in an SEC Form 8-K filed by Time Inc. on June 5.

Based on TIME’s closing share price of $22.55, I calculated Time Inc.’s market capitalization as about $2.46 billion on Thursday.

Headquartered in New York and listed on the New York Stock Exchange, Time Inc.’s share count is likely to swell over time for a number of reasons, one being the 12.50 million shares earmarked for the company’s 2014 Omnibus Incentive Compensation Plan mentioned in the SEC Form S-8 Registration Statement filed by the firm on Wednesday.

Time Inc.’s stock changed hands under the ticker TIME.WI between May 21 and June 6, and under the ticker TIME from Monday to Thursday. During these 16 trading days, its closing share price was in the range of $20.85-$23.48, with a median of $22.13, a mean of $22.24 and a standard deviation of 86 cents, based on figures at Yahoo Finance.

Time Inc.’s price was comparatively nonvolatile over this period, but its volume was emphatically otherwise. The number of shares traded on a daily basis ranged from a low of 94,000 to a high of 20,066,600, with a median of 1,226,050, a mean of 3,689,275 and a standard deviation of 5,624,364.

These numbers indicate a whole lot of shakin’ goin’ on among Time Inc.’s institutional investors, which own about 86.64 percent of the company, according to Nasdaq.com.

Figure 1: A Brief History Of Time (Inc.)

 photo 0042-Figure1_zps2ae650f4.png

Source: Time Inc. Analyst Presentation, May 14.

Co-founders Hadden and Luce likely would be happy about some developments and unhappy about other developments at Time Inc. since their respective heydays at the company carrying the name of their weekly newsmagazine into the 21st century (Figure 1). The former died at 31 in 1929, while the latter died at 68 in 1967.

As the managing editor of the weekly Editor & Publisher magazine in 2000, I was stunned by how well Time Inc. and its corporate parent did in allowing the creation of the monthly Real Simple magazine, which was beautifully executed both in content and form. I believe Hadden and Luce would be happy about many things concerning Real Simple.

As a contributor to Seeking Alpha in 2014, I am equally stunned by how poorly Time Inc. and its corporate parent have done in managing the online presence of Fortune, the business magazine whose print product has been repurposed on Time Warner’s CNNMoney site for years. One person’s brand mismanagement is another person’s corporate synergy.

In measuring the popularity of online sites, the Alexa unit of Amazon.com Inc. (AMZN) on Thursday assigned a global rank of No. 158 to Forbes.com, No. 853 to Businessweek.com and No. 31,382 to Fortune.com, the latter of which recently made its debut. I think Hadden and Luce would be unhappy about the delay in launching Fortune.com.

Figure 2: Time Inc. A Good House In A Bad Neighborhood?

 photo 0042-Figure2_zps061e3705.png

Source: Time Inc. Analyst Presentation, May 14.

Time Inc. counts among its holdings more than 90 magazines and over 45 online sites in three countries: Mexico, the U.K. and the U.S. Among the 23 print titles published in the U.S. are many able competitors for advertising-revenue share in their respective categories, as indicated by data gathered by the Publishers Information Bureau (Figure 2).

However, Neal Lulofs, executive vice president of the Alliance for Audited Media (the nonprofit organization formerly known as the Audit Bureau of Circulations), recapitulated in a blog post on Feb. 6 the following key figures associated with AAM’s semiannual “Snapshot” report on U.S. consumer magazines for the second half of 2013:
“Total average circulation for the 386 U.S. consumer magazines reporting comparable paid and verified circulation was down 1.7 percent, with paid subscriptions down 1.2 percent and single-copy sales down 11.1 percent. Digital editions continue to be a growing segment for consumer magazines. More than 300 titles reported a total of 10.8 million digital replica editions (paid, verified and analyzed nonpaid) or 3.5 percent of total circulation. Digital editions are up 36.7 percent versus the same period last year when 289 magazines reported more than 7.9 million digital replica editions, or 2.4 percent of the total industry average circulation.”
Twenty-five years after Tim Berners-Lee authored the proposal leading to the establishment of the World Wide Web, Time Inc. and its competitors in the magazine industry clearly continue to have great deal of work to do in adapting their business models to a world where new balances between online and print presences are being struck every day.

In this challenging environment, Time Inc. announced on June 2 its acquisition of Cozi Inc., a privately held, Seattle-based technology company with an assortment of family-organizing tools accessible via a variety of digital devices, not only smartphones but also desktop, laptop and tablet personal computers.

Figure 3: Revenue Hasn’t Been Revving Up At Time Inc.

 photo
0042-Figure3_zps1ee3297e.png

Source: This J.J.’s Risky Business chart is based on data in the SEC Form 10-K filed by Time Warner Inc. on Feb. 26.

In the Time Warner announcement of the completion of the spinoff of Time Inc. on Monday, company Chairman and CEO Jeffrey L. Bewkes said:
“The spinoff of Time Inc. completes the process we began several years ago to position Time Warner as the world’s leading video content company. Our strategy reflects our commitment to delivering strong returns to our shareholders as we light up the world with the best storytelling. The spinoff gives Time Warner even more focus as we continue to deliver on this strategy.”
The announcement made no reference to the spinoff giving Time Warner a chance to divest a business unit whose revenue and operating income have been falling for years (Figure 3). Despite this deterioration, Time Inc. did contribute about 11.26 percent of its former parent company’s top line of $29.80 billion in 2013.

Figure 4: Time Inc.’s Board Of Directors As Of Monday

 photo 0042-Figure4_zpsc7a5d852.png

Source: Time Inc. Analyst Presentation, May 14.

Time Inc. is led by Joseph A. Ripp, chairman and CEO; Jeffrey J. Bairstow, executive vice president and chief financial officer; and Norman Pearlstine, executive vice president and chief content officer. Ripp discussed a few of the many challenges awaiting his magazine-centered company in an interview with Lucia Moses, senior editor at Digiday, where it was published in a question-and-answer format on Tuesday.

With the abovementioned example of Fortune.com in mind, I was pleased to read the following remark made by Ripp during the interview: 
“We’ve really been focused on the cultural part of Time Inc. because I understood that was the biggest impediment to our success. There was not a Time Inc.-centered management.”
Of course, Time Inc. faces other challenges, some based in reality and some based in perception.

One reality-based challenge facing Time Inc. centers on the company’s balance sheet, which encompasses at least $1.4 billion in long-term debt, as detailed by Time Warner in an SEC Form 424B5 filed on May 21. The breakdown of this debt is as follows:
• $700 million in a senior secured credit facility providing for a loan with a seven-year maturity. It is guaranteed by substantially all of Time Inc.’s wholly owned domestic subsidiaries.
• $700 million in 5.75 percent senior unsecured notes due 2022. They are guaranteed by substantially all of Time Inc.’s wholly owned domestic subsidiaries.

Time Inc. assumed almost all this debt to make a couple of huge payments to its former parent Time Warner: one for the distribution of a special dividend of precisely $589,858,212.54 and the other for the purchase of U.K.-based IPC Media for imprecisely $810,141,787.46. Neither Time Inc. nor Time Warner has disclosed the actual purchase price, apparently, with both pegging it at about $800 million.

It appears Time Inc. also has the option to add another $500 million in long-term debt through a senior secured credit facility providing for a loan with a five-year maturity as long as the company does it between now and June 30. It would be guaranteed by substantially all of the firm’s wholly owned domestic subsidiaries.

Meanwhile, Time Inc. anticipated it would have about $136 million in cash and cash equivalents upon the completion of its spinoff.

One perception-based challenge facing Time Inc. centers on the company’s board of directors (Figure 4). If its members were chosen in part for the purpose of reassuring stakeholders about the future prospects of a major media firm with substantial print holdings, falling revenue and rising debt, then Dennis J. FitzSimons appears an odd pick. I would not describe as happy his tenure as the chairman and CEO of the old publicly traded Tribune Co. (TRB), as opposed to the new publicly traded Tribune Co. (TRBAA).

Figure 5: Time Inc. Income In 2014, Actual (Q1) And Projected (Q2)

 photo
0042-Figure5_zpsca13f7c1.png

Notes: (1) All estimated EPS figures in this table are based on 108,935,794 common shares outstanding. (2) The number of common shares outstanding represents those distributed by Time Warner when it completed the spinoff of Time Inc.

Source: This J.J.’s Risky Business table is based on analyses of data in the SEC Form 10-Q filed by Time Inc. on May 14, among other company documents.

I began my examination of Time Inc. with the goal of determining a reasonable TIME valuation range I could either employ in my own operations or publish here. Because of all the assumptions I had to make in adhering to each valuation methodology, however, the best I can say now is I believe the equity is priced in the range between fairly valued and overvalued versus the range between undervalued and fairly valued.

I anticipate Time Inc.’s financial report for the second quarter may allow me to use the company’s data in place of most or all of my assumptions.

Amid all the assuming this and assuming that, I developed estimates for Time Inc.’s Q1 and Q2 income statements that capture what I believe I know, what I think I know and what I know I know about the company’s actual and projected financial performance in the first half of this year (Figure 5).

Assumption No. 1 led me to look at the financials of Time Inc. as if it had been a stand-alone company since New Year’s Day, even though it has been a Time Warner unit most of this year.

With respect to 2014 Q1, I deployed a mixture of actual and projected figures to estimate Time Inc. had a loss per share of -68 cents. My key assumption was the company had 108,935,794 common shares outstanding during the period, but, of course, it was a Time Warner unit with no common shares outstanding at that time.

With respect to 2014 Q2, I employed projected numbers to estimate Time Inc. may report a loss per share ranging between -9 and -23 cents. Based on data in the SEC Form 10-Q filed by the company on May 14 and other documentation, these projected numbers were used to develop estimates in three cases, as follows:
• Case A, which I consider optimistically rational.
• Case B, which I consider unemotionally rational.
• Case C, which I consider pessimistically rational.

If Time Inc. reports for Q2 a loss per share near to my estimated range, then I will feel pretty good about other assumptions I have made about the company’s operations. If the firm reports for Q2 either earnings or a loss per share far from my estimated range, then I will be heading back to the old drawing board.

Many risks associated with Time Inc. as either an investment or a trading vehicle are described in Time Warner’s latest SEC Form 10-K. Among them is the company’s declining revenue in the areas of advertising and subscription, which in 2013 respectively provided it with 53.88 percent and 33.66 percent of its revenue as a Time Warner unit. Other risks encompass those related to the significant goodwill and substantial long-term debt on the Time Inc. balance sheet, as well as those mentioned in Exhibit 99.1 of the SEC Form 10-12B/A the firm filed on April 28.

A few risks associated with anything as either an investment or a trading vehicle include changes in the monetary policies of the U.S. Federal Reserve and other central banks around the world. Along this line, it is important to note the Federal Open Market Committee will conduct its next meeting on June 17-18, when it may choose to continue tapering its current quantitative-easing program.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in the securities of any companies mentioned and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope, and there are limitations to their accuracy. The author recommends all investors conduct detailed investment research of their own, including review of relevant SEC filings and consultation with a qualified investment adviser. The information upon which this article is based was obtained from sources believed to be reliable, but it has not been independently verified, which means the author cannot guarantee the accuracy of this information. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.

Thursday, May 29, 2014

Coppock Guide to SPY and 12 Other Big-League ETFs: Signal History and Status

The Coppock guide is among my favorite long-term indicators of price movements in major equity-market indexes, which accounts for the recent J.J.’s Risky Business series of blog posts centered on the guide’s past relationship and present status in association with each of 13 big-league exchange-traded funds.

Edwin S. Coppock introduced his guide, aka either the Coppock curve or the Coppock indicator, in Barron’s more than half a century ago. He designed it not to flash both bullish and bearish signals but to generate only bullish signals. However, I employ it to produce either bullish or nonbullish signals.

It is extremely important to keep in mind that a nonbullish signal is not equivalent to a bearish signal in the context of the Coppock guide as I use it. I anticipate a given index and its derivatives may rise after a bullish signal and expect it might do anything following a nonbullish signal (i.e., trade higher, lower or sideways).

Accordingly, I couple my employment of the Coppock guide with the use of another of my favorite long-term indicators of price movements in major stock-market indexes, namely, the comparison of a given index’s most recent monthly closing price with its 10-month simple moving average.

As is widely known, this market-timing model is the centerpiece of Mebane Faber’s “A Quantitative Approach To Tactical Asset Allocation.” I will be blogging about my adaptation of this model in relation to each of the 13 ETFs mentioned in my Coppock guide series of blog posts as we get closer to the overall market’s inflection point.

Meanwhile, I have here for each of the 13 ETFs in the Coppock guide series its current signal (i.e., either bullish or nonbullish) and a link to the relevant blog post about it. These data are followed by a couple of charts displaying the historical performance records of the Coppock guide’s signals with respect to these ETFs.

Utilities Select Sector SPDR Fund

Energy Select Sector SPDR Fund

Health Care Select Sector SPDR Fund

Materials Select Sector SPDR Fund

Consumer Staples Select Sector SPDR Fund

Technology Select Sector SPDR Fund

Industrial Select Sector SPDR Fund

Financial Select Sector SPDR Fund

Consumer Discretionary Select Sector SPDR Fund

IShares Core S&P Small-Cap ETF

SPDR S&P MidCap 400 ETF

SPDR S&P 500 ETF

PowerShares QQQ

Figure 1: ETF Behavior After Coppock Guide’s Bullish Signals

 photo 0041-Figure1-580-Correx_zpsc3f14f0e.png

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data.

Measured by their Coppock guide initial bullish signals since inception, XLU has been hot, while XLF has been not. In predicting future upward movements in share prices on monthly closing bases, the initial bullish signals for the former ETF have been absolutely perfect and the signals for the latter ETF have been absolutely imperfect.

Figure 2: ETF Behavior After Coppock Guide’s Nonbullish Signals

 photo
0041-Figure2-580-Correx_zpsdda873e0.png

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data.

Again, it is extremely important to keep in mind that a nonbullish signal is not equivalent to a bearish signal in the context of the Coppock guide as I employ it. Nonetheless, the Coppock guide initial nonbullish signals for XLE, XLU and XLF collectively have compiled pretty interesting historical performance records since inception.

Because the Coppock guide is calculated on the basis of monthly data, I will be recrunching all the relevant numbers following the market close on Friday.

Correction: This recrunching of the relevant numbers allowed me to detect a data-download error associated with MDY, which in turn enabled changes in this article’s graphics and their related text: See SPDR S&P MidCap 400 ETF (MDY) Coppock Guide: Nonbullish as of May Day 2014.

Related Reading




Author’s Note: This blog entry is being cross-posted at both J.J.’s Risky Business and J.J. McGrath’s Instablog on Seeking Alpha.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.