Numeraxial LLC

Investment Analysis Report

2000-2017

Leila Shohet Economy & Psychology Queens College

Wencong Li Financial Mathematics Columbia University
Xiao Tong UC-Berkeley & Rutgers Business School
Peter Pach Senior Economics Ph.D.
Jean G. Ndoutoum Principal

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 SUMMARY
CONTENT

➢ Content
➢ Introduction
➢ The Market
➢ Market Performance
➢ Return/Standard Deviation Scatterplot
➢ Performance vs. Benchmark Return and Sharpe Ratio
➢ Performance over the years
➢ Large-Cap Drivers
➢ Macro Impact on the S&P 500
➢ Market Risk Analysis
➢ Conclusion

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 INTRODUCTION

➢ In this report analysis Numeraxial investment analysis team

performed three levels of analysis suited for three types of
investors, the regular, intermediate, and the sophisticated. The
study encompasses the effect of macroeconomic indicators,
financial ratios on a portfolio. We looked at several standard
portfolios including the S&P 500, Dow Jones.
➢ The models study the sensitivities of the portfolio return with
respect to the economics and financial indicators, aiming a
providing the portfolio manager the factors that best explain the
movement of the portfolio for a greater control.
➢ We combined both top down and bottom up analysis to identify
the main factors affecting the portfolio.
➢ We used twenty economic indicators and ten financial ratios.
➢ The data was observed in times series as weekly, monthly, and
quarterly from January 2000 to June 2017. We broke the analysis
in business cycles, yielding deep insight on how much sensitivity
the principal factors move the market and the high significance for
predicting portfolio returns including the probability of economics
turning points such as the end of the current slow growth.

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 THE MARKET
OVERVIEW
Throughout the years 2000 to June 2017, the macroeconomic and political environment has been the
principal driver of returns. The 2000 tech bubble combined with the 9-11 attack triggered the 2000-
2002 recession. The housing boom fed by low interest rates, drove the recovery, only to set up the
housing crisis and financial melt-down.
The low rate and easy monetary policy implemented by the Fed jumpstarted economy and continue
to sustain moderate rates of growth. In the current the cycle, three factors –- personal consumption,
durable goods and nonfarm payroll – are primary drivers, contributing 12%, 10% and 8% to market
returns, out of the 19 economic factors which impact market outcomes.

PERFORMANCE
The best market performers best performance from 2000 to 2017 have been Monster Beverage 17.1x
and Netflix 10.0x. The worst performers have been AIG, losing 94% and ETrade, losing 87%. Across
major sectors, the financial and information technology sectors have outperformed the market, while
the energy and utility sectors have underperformed during the same period.

SENTIMENT

All 30 Dow components show significant (inverse) correlation with VIX, which is at historic lows. This
reflects an extended period of calm. What will cause the next storm, and how will markets respond?
Business confidence is favorable, with one in three Dow components showing significantly correlation
to BCI. Sentiment indicators have significant relationships with stock returns, which can help explain
current market moves, and set the conditions for future changes.

RISK
Washington DC, market makers and catastrophes are three principal sources huge market downturns
historical data shows, in the past 17-year Numeraxial analysis shows one outlier which happened the
day after the Congress failed to pass the TARP, with broad indexes down more than 7%. Natural and
terrorist events have had moderate negative, but transient direct impacts on the market. Market
response to Fed actions has been sustained but subdued.
Three sectors showing elevated risk are: IT, energy and telecommunication with value at risk
measures 21%, 18% and 18% respectively.

ALPHA
Value investors have been challenged by the current market environment. Looking at the average
number of undervalued companies in the S&P 500 alone showed that from month to month since
2010 48% of the market has under-performed the S&P500. Alpha may be derived from those
companies which have under-performed in this growth cycle, along with the fundamental analysis of
growth prospects by sectors. Relative strength by sector will be key to capturing alpha in the next
downturn.

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S&P 500 Best Performing Companies 2000- Q2 2017

Netflix is the only company that has consistently been among the best market performers of
both periods 2000 to 2017 and 2010-2017 period. Overall IT, Pharmaceutical and
communications industry showed very strong performances.
Among the worst performing companies are Akamai Technology with total return of -82.64%
from 2000 to 2017.
Citi group -79.22% two company which was at the center of the last two recessions.

The performance is calculated as of June 30, 2017

The 10 Best performant companies 2000-2017 The 10 Best performant companies 2010-
2017
MNST Monster Beverages 17177.08% LVLT Level 3 Communication. 3641.18%
NFLX NETFLEX, Inc. 10082.47% NFLX Netflix, Inc. 1749.60%
CXO Concho Resources Inc 7820.46% REGN Regeneron Pharma., Inc. 1500.66%
FB Facebook, Inc. 7582.76% ULTA Ulta Beauty Inc. 1384.71%
TSCO Tractor Supply Company 6766.15% INCY Incyte Corporation 1364.21%
CRM Salesforbce.com, Inc. 5712.84% AVGO Broadcom Ltd 1224.51%
AYI Acuity Brands, Inc. 5354.89% URI United Rentals, Inc. 1161.19%
KMX CarMax, Inc. 5073.33% ALK Alaska Air Group, Inc. 1012.68%
ISRG Intuitive Surgical, Inc. 4797.41% STZ Constellation Brands, 931.87%
Inc.
CELG Celgene Corporation 4182.97% CHTR Charter Com., Inc. 825.36%

The 5 Worst performant companies 2000-2017 The 5 Worst performant companies 2010-
2017
AIG American Int’l Group Inc. -94.07% RIG Transocean LTD -85.26%
ETFC E*TRADE Financial Corp. -87.03% CHK Uni-Asia Holding Ltd. -74.88%
EQIX Equinix Inc. -82.77% FCX Freeport-McMoRan Inc. -67.32%
AKAM Akamai Technology, Inc. -82.64% SPLS Staples, Inc. -64.42%
C Citigroup Inc -79.22% MOS Mosaic Co -51.61%

Conventional wisdom tells us that when analyzing stocks to look both at fundamental and
technical analysis as the principal sources of drivers of stock return. The study of the 10 best
performing stocks over the past two decades show us more than just the economic indicators
and companies ratios though important.
To achieve exponential type return we found a significant correlation between the company
projected culture image and strong customer based with a culture of adaptive to industry
trend, innovation and timely execution.

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 Large-Cap Drivers
Summary
The problem that the portfolio manager is facing is how to identify the best predictable factors for their portfolio to
achieve their investment goals and objectives.

Large-Cap: The Dow Jones

Forecasted the returns of all the 30 stocks in the Dow Jones for the next 5 quarters
For economic indicators we forecasted the quarterly return in term of interest, M2, and real disposable income
For fundamental indicators we forecasted P/E ratio, P/B ratio, and net margin

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The analysis of the Dow Jones large cap shows that on one hand there are four principal financial ratios contributor in
driving the stock returns: EPS basic, P/B, P/E and Net margin. On the other hand the economic indicators are: interest
rate, money supply and real disposable income, this analysis agrees with BARRA observation.

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 IMPACT OF INDICATORS ON THE
S&P 500
The analysis shows that 44.14% of stocks returns in the S&P 500 are driven by personal consumption
expenditure
This means that a change in the of either direction in personal consumption will result in a change of close
to half of stock returns in the market. To account for the contribution of alpha drivers, further analysis of
the composition of personal consumption expenditure is required. On average PCE has an annualized
growth rate of 3%, while the median stock return of S&P 500 company has been 5.75 %

Period 2000-2017 2000-2002 2003-2007 2008-2009 2010-2017

Economic Indicator Freq Weight Freq weight Freq Weight Freq Weight Freq Weight
GDP 59 11.73% 34 6.76% 49 9.74% 96 19.09% 2 0.40%
CPI 82 16.30% 222 44.14% 92 18.29% 221 43.94% 53 10.54%
Durable Good 107 21.27% 159 31.61% 80 15.90% 148 29.42% 187 37.18%
ISM 40 7.95% 126 25.05% 70 13.92% 231 45.92% 44 8.75%
Personal Consump 69 13.72% 247 49.11% 136 27.04% 139 27.63% 222 44.14%
PPI 190 37.77% 190 37.77% 96 19.09% 310 61.63% 176 34.99%
Retail 87 17.30% 288 57.26% 143 28.43% 189 37.57% 59 11.73%
Balance of Trade 75 14.91% 145 28.83% 116 23.06% 187 37.18% 115 22.86%
Consumer Sentiment 104 20.68% 138 27.44% 78 15.51% 166 33.00% 72 14.31%
Nonfarm Payroll 74 14.71% 202 40.16% 88 17.50% 170 33.80% 141 28.03%
Consumer Confidence 82 16.30% 222 44.14% 92 18.29% 221 43.94% 53 10.54%
House Permit 119 23.66% 205 40.76% 156 31.01% 179 35.59% 38 7.55%
Indus Pro Index 132 26.24% 225 44.73% 115 22.86% 125 24.85% 95 18.89%
Capacity Uiti 140 27.83% 198 39.36% 139 27.63% 134 26.64% 103 20.48%
New Home Sale 88 17.50% 187 37.18% 114 22.66% 161 32.01% 54 10.74%
Inflation 83 16.50% 134 26.64% 119 23.66% 106 21.07% 67 13.32%
Interest Rate 68 13.52% 162 32.21% 74 14.71% 193 38.37% 119 23.66%
Unemployment 85 16.90% 159 31.61% 107 21.27% 190 37.77% 95 18.89%
Oil 162 32.21% 180 35.79% 126 25.05% 198 39.36% 69 13.72%

The first order difference of the historical data from 2000 to 2017 were used to perform the multilinear
regression using the 20 economic indicators as independent variables and the stock returns as dependent
variable
p-values that are less than 0.05 are statistically significant in the MLR.
The four main factors driving the current long bull market are: personal consumption, producer price index,
non farm payroll and interest rate.
These factors are as well the potential sources of risk to drive the market and economy into beat and
market and recession.

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Market Risk Analysis
Summary
Policies and catastrophes are three principal sources huge market downturns historical data shows, in the
past 17-year the analysis shows one outlier which happened the day after the Congress failed to pass the
TARP, with broad indexes down more than 7%. Natural and terrorist events have had moderate negative,
but transient direct impacts on the market. Market response to Fed actions has been sustained but
subdued. Three sectors showing elevated risk are: IT, energy, and telecommunication with value-at-risk
measures 21%, 18% and 18% respectively.
Economic Indicator Correlation Matrix

S&P 500 Sector Market Risk 2010-2017

Standard Deviation VaR( 99%,1m) VaR(95%,1m)
Consumer
Discretionary 6.14% 16.80% 9.09%
Consumer Staples 4.01% 10.21% 5.92%
Energy 7.61% 18.65% 13.28%
Financials 6.45% 21.88% 10.36%
Health 4.63% 12.12% 7.44%
Industrial 5.75% 16.87% 9.99%
Information Tech 7.20% 21.61% 12.00%
Materials 5.97% 16.53% 10.27%
Real Estate 6.64% 24.93% 7.62%
Telecom 8.61% 18.00% 13.37%
Utilities 4.96% 14.13% 8.64%

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 CONCLUSION
We computed the probability of appearance for each economic indicator as the significant factor correlating
with the return of each stock.
We found during the recession, the CPI, personal income, consumer sentiment and retail have higher
probability to appear than that during the bullish market as the significant factors in the regression results.
This phenomenon gives us some information about the stocks sensitivities to indicators that can represent
the personal consumption and the potential of consuming activities.
On the other hand, during the bullish market, the market is more sensitive to the indicators that represent
the general economic healthy. Based on my calculation, the balance of trade, capacity utilization, durable
goods and inflation have higher probability as the main factors significantly correlated with the return of
stocks than that during the recession.

THE PRINCIPAL MACRO DRIVERS OF THE LONG BULL MARKET

PPI Nonf. Payrol Pers. Cons. Durable Good

34.99% 28.03% 44.14% 37.18%

Numeraxial LLC
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Phone:
718-570 0396
Web:
www.numeraxial.com
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