This note was originally published at 8am on July 30, 2013 for Hedgeye subscribers.
“There are lies, damned lies and statistics."
I’ve been spending the last few weeks reading up on advanced statistical analysis of hockey. Based on my initial research, hockey is very much behind the other major sports in the use of statistics to analyze and value players. Much of professional hockey is still ruled by the old boys club who make player acquisitions based on “gut feel”.
To be fair, hockey is a difficult sport to analyze, unlike baseball which has repeatable interactions, such as at bats, that can be counted, hockey is more of a chaotic game. I asked my good friend Theo Epstein from the Chicago Cubs, an early and successful user of Sabermetrics in baseball, about his thoughts related to the analysis of hockey. He directed me towards what he called a plus / minus on steroids – Corsi.
This statistic was developed by former Buffalo Sabres goaltending coach and measures, or counts, the number of shot attempts on the opposition’s net (including blocked and missed shots) for which the player receives a plus and subtracts it versus the number of shots on his own net. The theory is that shots are a proxy for possession and over the long run possession leads to goals and a positive goal differential to wins.
This stat can then be adjusted according to the relative quality of competition via a statistic called Corsi Rel QoC, which attempts to normalize Corsi for the quality of opponent. There are also addendums to this stat that look at where a player typically starts on the ice. For instance, if a player, due to his defensive proficiency is more often started by the coach in face-offs in his own zone, he is likely to have a lower Corsi rating. So, this too needs to be normalized over time and relative to other players.
But enough about hockey statistics and back to the global macro grind . . .
Yesterday the newest member of our Financials Team, Jonathan Casteleyn, launched on asset management coverage in a very thoughtful 90+ page presentation titled, “Fixing Your Income: The Danger of the Bond Market.” Akin to all of Hedgeye’s research, this launch presentation was replete with statistics (and hopefully very few damned lies!) From the macro perspective, Casteleyn raised a number of key points that I wanted to re-emphasize.
First, the U.S. bond market has $38 trillion outstanding across munis, treasuries, mortgages, corporate debt, agency debt, money markets and asset backed. This is up more than 15% over the last five years and has been dually driven by the increase in corporate bonds, up 50% in that period, and treasuries, which are up roughly 100% in five years. The ratio of stocks to bonds is now at 68/32%, which is one of the highest ratios we’ve ever seen. Reversion to the mean anyone?
Second, 10-year treasury duration is literally at an all-time high of 8.9. The implication of this is that a 100 basis point move in the 10-year equates to an 8.9% loss in value. In other words, interest rate risk is literally as high as it has ever been, so any further normalization of rates (remember we remain well below historical levels) has the potential to lead to substantial losses in the bond market. Given this, broker dealers are reducing trading exposure to interest rate products, which has the potential of exacerbating moves in the fixed income market. As we highlight in the Chart of the Day, this is already leading to accelerating bond volatility (or as Taleb would say, more fragility).
Finally, Casteleyn corroborated our macro team’s bullish view of U.S. equities on likelihood of reversion to the mean on asset flows, as alluded to above. He also pointed out that current all in yield of the SP500 is 6% (2.0% dividend yield plus 4.1% earnings yield), which compares favorably to the 2.5% yield-to-maturity on 10-year treasuries. So not only do you get a better yield on equities, but equities typically outperform when the first hike in rates occurs.
That was a Cliff’s Notes version, at best, of the presentation yesterday, but if you have institutional research access please email firstname.lastname@example.org to receive a copy. This idea of continued and sustained outflows from fixed income is in the early innings and may have profound implications for asset returns in the coming quarters and years.
Speaking of interest rate volatility, the FOMC’s 2-day meeting begins today with a rate decision, or lack thereof, scheduled for Wednesday. This is to be followed by the ECB on Thursday. We actually would be lying, or at least have inside information, if we attempted to make a call on what either the ECB or Fed will say, but we can say this with some certainty, the potential for them to create market volatility is a real risk, so keep these events front and center on your risk management monitor this week.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.47-2.66%
I’ll sign off with one of my very favorite statistics quotes from George Bernard Shaw:
“Statistics show that of those that contract the habit of eating, very few survive.”
Stats don’t lie, my friends.
Keep your head up and stick on the ice,
Daryl G. Jones