BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Equities

Old news can be good for canny investors

Posted on August 31, 2012

Can you see the wood for the trees? If so, you have a rare ability not shared by many investors, and you can make money from it.

    Prices of stocks, bonds and commodities bounce around in response to new information. But there is hard evidence that so many investors do not pay full attention that significant and predictable profits can be made from the release of old news.

    Modern disclosure rules require companies to be transparent, which in practice means unloading a lot of data. That makes it hard, and expensive, to dig up your own market-moving information. But it also makes it hard to make sense of the information already out there.

    The human brain has difficulty putting together data to see a bigger picture. That creates opportunities, as is shown by fascinating research into a situation where stale and new information can easily be separated.

    The Leading Economic Indicators (LEI), published monthly by the US Conference Board, offer a perfect test. LEIs have over time been great leading indicators of economic growth and of stock markets (as the chart below shows).

    They are compiled from 10 separate streams of data, such as average weekly hours worked, manufacturers’ new orders and the money supply. These are condensed into one index number, set so that its 2004 level was 100.

    Longview: Leading the Market

    Crucially, the formulas for doing this are public on the Conference Board’s website and do not require great computational capacity. All 10 LEI data points are published at least 24 hours before the official LEI is published.

    So if people pay attention, the LEI itself should be a complete non-event. It is a predictable compilation of news that is already known.

    Yet LEIs move markets. When a team of academics looked at the S&P 500’s movements in the days before and after an LEI announcement*, they found that the market gained ahead of positive LEIs (when alert investors already knew what the LEI would be), but then gained even more after the announcement. Those latter gains would then be reversed the next day. The exact reverse happened when the LEI was negative.

    A strategy of buying or selling the S&P just after the last LEI constituent data came out (according to whether the data were positive or negative), and then reversing that trade just before the correction, would have made an average of 0.65 per cent each month, enough to make almost 8 per cent for the year. That is serious money – better than an average year for the entire stock market.

    Plainly there is money to be made by exploiting the mistakes people make when they fail to pay attention.

    A growing literature has found other examples. Investors will not respond enough to genuinely new news when it comes out on a Friday, or when it comes out on a day when many companies are publishing results, for example.

    This failing might refer to the difficulty we all have in assimilating more than one piece of information at once. Information is readily available. These numbers make clear that many investors have too much of it for their own good.

    Perhaps regulators should stop forcing the publication of ever more data. Rather, aggregating data as it comes in, making sense of it, and understanding the big picture, could on its own be enough to beat the market. And that is far harder than it sounds.

    The next month could be a classic. After a deeper summer torpor than usual, September brings critical announcements by the European Central Bank on how it will support the eurozone’s bond markets; a decision from the Federal Reserve on whether it will resort to more bond purchases; a “troika” report on whether Greece can keep up with its debt repayments; an election in the Netherlands; and maybe even a plea for a second bailout from Spain. After all that, November brings a divisive and close US election.

    These events could easily combine to force the market either upwards or downwards. To make money, it will be necessary to sort out exactly what is new, and to join the dots to see the bigger picture that is taking shape.

    How to do that? First, maybe we should heed the message of the LEIs. The news may be stale, but many have not noticed that the US economy is in decent, strengthening shape. US stocks are a tad ahead of themselves, but not by much.

    The US may not be strong enough to withstand a true disaster in Europe, and it may not be weak enough to force the Fed into the bond purchases that many want, but this is an important truth to hold on to.

    Beyond that, it is no surprise that information aggregator services – modern advances on LEIs – are popular. And maybe a financial newspaper can be a good investment.

    *Investor Inattention and the Market Impact of Summary Statistics by Thomas Gilbert, Shimon Kogan, Lars Lochstoer and Ataman Ozyildirim. Available at