COMPOSITE MACRO ETF WEEKLY IMPLIED COST-OF-CAPITAL ESTIMATES VS. CUMULATIVE RETURNS (12/26/15)

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WHAT IS THE "IMPLIED COST OF CAPITAL (ICC)" MODEL?

“In accounting and finance the implied cost of equity capital (ICC)—defined as the internal rate of return that equates the current stock price to discounted expected future dividends—is an increasingly popular class of proxies for the expected rate of equity returns. ”

— CHARLES C. Y. WANG; an assistant professor of business administration in the Accounting and Management Unit at Harvard Business School

The basic concept of the ICC model is that it is a forward looking estimate of the implied earnings growth rate of stock given the current stock price. It is calculated using a combination of equity book value and earnings forecasts.

To see a more involved explanation of the previous model I used see here.  

In the past I used a Multi-Stage Residual Income Model. However, this time around I've decided to use a simpler Single-Stage Residual Income Model for these estimates. I chose this because I believe the additional complexity is not warranted given my purpose which I will elaborate on further.

The Single-Stage Residual Income Model as defined by the CFA Institute is the following:

source: CFA Institute

'V' is the stock price at time 0, 'B' is the book value of equity at time 0, 'ROE' is return on equity, 'g' is an assumed long term growth rate and 'r' is the cost of equity/capital. The ICC model essentially solves for 'r' given the other inputs. 

WHY USE THE IMPLIED COST OF CAPITAL MODEL?

There is ongoing debate regarding the ICC model's application and accuracy as a proxy for expected returns as quoted by Charles C. Y. Wang. As an investor/trader I'm less interested in the academic debate and more intrigued by the intuition behind the model and its practical application as a relative value tool. 

I use the ICC model as a relative value measure to identify analyst/institutional expectations and sentiment between different market sectors at a point in time. 

For this purpose I believe it provides great insight. 

COMPOSITE ETF COMPONENTS FOR ICC ESTIMATES

Z-SCORE ICC ESTIMATES AND CUMULATIVE RETURNS COMPARISON CHART

The below plot gives visual representation of the ICC estimates. I z-scored both year-to-date cumulative returns and the ICC estimates so we can view them on the same scale. Examining this chart allows investors to quickly determine which market sectors are outperforming (underperforming) their respective Implied Cost of Capital Estimates. 

The extreme cases show where there are disconnects between the analyst community's forward earnings expectations and actual market performance. The plot is sorted left to right by ascending ICC estimates.

LAST 252 TRADING DAYS 

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 126 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 63 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 21 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 10 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

CATEGORY AVERAGE ICC ESTIMATES

Long term growth rate (g) is assumed to be 2.5% reflective of our low growth high debt economic environment. 

ALL ETF ICC ESTIMATES BY CATEGORY

COMPOSITE MACRO ETF WEEKLY ANALYTICS (12/26/2015)

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LAYOUT (Organized by Time Period): 

  1. Composite ETF Cumulative Returns Momentum Bar plot

  2. Composite ETF Cumulative Returns Line plot

  3. Composite ETF Risk-Adjusted Returns Scatter plot (Std vs Mean)

  4. Composite ETF Risk-Adjusted Return Correlations Heatmap (Clusterplot)

  5. Composite ETF Cumulative Return Tables

  6. Notable Trends and Observations

COMPOSITE ETF COMPONENTS:

LAST 252 TRADING DAYS

LAST 126 TRADING DAYS

LAST 63 TRADING DAYS

LAST 21 TRADING DAYS

Click here for help understanding this chart 

LAST 10 TRADING DAYS

Cumulative Return Tables:

Notable Observations and Trends:

  • Healthcare has been the strongest composite group this year (+9.96% L/252) and has recently shown positive momentum over the L/10 days gaining +5.74%. 
  • As noted last week the T-Bond Yield composite continues to gain momentum (top 3 positive returns L/63, L/21 and L/10 Days), indicating an increasing appetite for risk. 
  • 2 of the worst 3 performers L/10 days, Precious Metals and Oil + Gas, had positive cumulative returns. This is a potential indicator of a relief rally within those composites but more specifically within the Oil + Gas composites. Shorts are likely locking in gains and investors are harvesting losses given the continued double digit declines in Oil + Gas in all time frames greater than 10 days.
  • AsiaPac Equity surging +5.29% could be a trend to lookout for. In my weekly Implied Cost of Capital composite ETF valuation analysis, has consistently estimated AsiaPac Equity as the composite with the highest future implied returns baked into the price.

COMPOSITE MACRO ETF WEEKLY IMPLIED COST-OF-CAPITAL ESTIMATES VS. CUMULATIVE RETURNS (12/19/15)

/

WHAT IS THE "IMPLIED COST OF CAPITAL (ICC)" MODEL?

“In accounting and finance the implied cost of equity capital (ICC)—defined as the internal rate of return that equates the current stock price to discounted expected future dividends—is an increasingly popular class of proxies for the expected rate of equity returns. ”

— CHARLES C. Y. WANG; an assistant professor of business administration in the Accounting and Management Unit at Harvard Business School

The basic concept of the ICC model is that it is a forward looking estimate of the implied earnings growth rate of stock given the current stock price. It is calculated using a combination of equity book value and earnings forecasts.

To see a more involved explanation of the previous model I used see here.  

In the past I used a Multi-Stage Residual Income Model. However, this time around I've decided to use a simpler Single-Stage Residual Income Model for these estimates. I chose this because I believe the additional complexity is not warranted given my purpose which I will elaborate on further.

The Single-Stage Residual Income Model as defined by the CFA Institute is the following:

source: CFA Institute

'V' is the stock price at time 0, 'B' is the book value of equity at time 0, 'ROE' is return on equity, 'g' is an assumed long term growth rate and 'r' is the cost of equity/capital. The ICC model essentially solves for 'r' given the other inputs. 

WHY USE THE IMPLIED COST OF CAPITAL MODEL?

There is ongoing debate regarding the ICC model's application and accuracy as a proxy for expected returns as quoted by Charles C. Y. Wang. As an investor/trader I'm less interested in the academic debate and more intrigued by the intuition behind the model and its practical application as a relative value tool. 

I use the ICC model as a relative value measure to identify analyst/institutional expectations and sentiment between different market sectors at a point in time. 

For this purpose I believe it provides great insight. 

COMPOSITE ETF COMPONENTS FOR ICC ESTIMATES

Z-SCORE ICC ESTIMATES AND CUMULATIVE RETURNS COMPARISON CHART

The below plot gives visual representation of the ICC estimates. I z-scored both year-to-date cumulative returns and the ICC estimates so we can view them on the same scale. Examining this chart allows investors to quickly determine which market sectors are outperforming (underperforming) their respective Implied Cost of Capital Estimates. 

The extreme cases show where there are disconnects between the analyst community's forward earnings expectations and actual market performance. The plot is sorted left to right by ascending ICC estimates.

LAST 252 TRADING DAYS 

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 126 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 63 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 21 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 10 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

CATEGORY AVERAGE ICC ESTIMATES

Long term growth rate (g) is assumed to be 2.5% reflective of our low growth high debt economic environment. 

ALL ETF ICC ESTIMATES BY CATEGORY

COMPOSITE MACRO ETF WEEKLY ANALYTICS (12/19/2015)

/

LAYOUT (Organized by Time Period): 

  1. Composite ETF Cumulative Returns Momentum Bar plot

  2. Composite ETF Cumulative Returns Line plot

  3. Composite ETF Risk-Adjusted Returns Scatter plot (Std vs Mean)

  4. Composite ETF Risk-Adjusted Return Correlations Heatmap (Clusterplot)

  5. Composite ETF Cumulative Return Tables

  6. Notable Trends and Observations

COMPOSITE ETF COMPONENTS:

LAST 252 TRADING DAYS

LAST 126 TRADING DAYS

LAST 63 TRADING DAYS

LAST 21 TRADING DAYS

LAST 10 TRADING DAYS

Cumulative Return Tables:

Notable Observations and Trends:

  • The Healthcare composite has shown the most durable positive, relative performance of the groups. It has been a top 3 performer over the last 252, 21, 10 trading day periods.
  • Over the last 63 trading days Treasury bond yields have been the number 1 performer. If Treasury yields continue to outperform, it's likely that any selloff in equities will reverse course.
  • Energy and Oil + Gas continue to underperform across time periods with no end in sight. 
  • Precious Metals Miners are also hurting over the last 252, 126 and 63 day time frames. I wonder if, at some point a bullish case could be made given that their largest input (Oil and Gas) continue to decline in price.
  • It's interesting that over the last 21 trading day period there were no composite groups with positive cumulative returns.

COMPOSITE MACRO ETF WEEKLY IMPLIED COST-OF-CAPITAL ESTIMATES VS. CUMULATIVE RETURNS (12/13/15)

/

WHAT IS THE "IMPLIED COST OF CAPITAL (ICC)" MODEL?

“In accounting and finance the implied cost of equity capital (ICC)—defined as the internal rate of return that equates the current stock price to discounted expected future dividends—is an increasingly popular class of proxies for the expected rate of equity returns. ”

— CHARLES C. Y. WANG; an assistant professor of business administration in the Accounting and Management Unit at Harvard Business School

The basic concept of the ICC model is that it is a forward looking estimate of the implied earnings growth rate of stock given the current stock price. It is calculated using a combination of equity book value and earnings forecasts.

To see a more involved explanation of the previous model I used see here.  

In the past I used a Multi-Stage Residual Income Model. However, this time around I've decided to use a simpler Single-Stage Residual Income Model for these estimates. I chose this because I believe the additional complexity is not warranted given my purpose which I will elaborate on further.

The Single-Stage Residual Income Model as defined by the CFA Institute is the following:

source: CFA Institute

'V' is the stock price at time 0, 'B' is the book value of equity at time 0, 'ROE' is return on equity, 'g' is an assumed long term growth rate and 'r' is the cost of equity/capital. The ICC model essentially solves for 'r' given the other inputs. 

WHY USE THE IMPLIED COST OF CAPITAL MODEL?

There is ongoing debate regarding the ICC model's application and accuracy as a proxy for expected returns as quoted by Charles C. Y. Wang. As an investor/trader I'm less interested in the academic debate and more intrigued by the intuition behind the model and its practical application as a relative value tool. 

I use the ICC model as a relative value measure to identify analyst/institutional expectations and sentiment between different market sectors at a point in time. 

For this purpose I believe it provides great insight. 

COMPOSITE ETF COMPONENTS FOR ICC ESTIMATES

Z-SCORE ICC ESTIMATES AND CUMULATIVE RETURNS COMPARISON CHART

The below plot gives visual representation of the ICC estimates. I z-scored both year-to-date cumulative returns and the ICC estimates so we can view them on the same scale. Examining this chart allows investors to quickly determine which market sectors are outperforming (underperforming) their respective Implied Cost of Capital Estimates. 

The extreme cases show where there are disconnects between the analyst community's forward earnings expectations and actual market performance. The plot is sorted left to right by ascending ICC estimates.

YEAR-TO-DATE LAST 247 TRADING DAYS 

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 126 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 63 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 21 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

LAST 10 TRADING DAYS

Data Sources: YCharts.com, Yahoo Finance

Data Sources: YCharts.com, Yahoo Finance

CATEGORY AVERAGE ICC ESTIMATES

Long term growth rate (g) is assumed to be 2.5% reflective of our low growth high debt economic environment. 

ALL ETF ICC ESTIMATES BY CATEGORY