U.S. Energy Information Administration Petroleum Status Report

Economic Calendar

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What is the EIA Petroleum Status Report?

The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad.  Inventory levels help us forecast the direction of prices for petroleum products.

Boisseauc 1646
Crude oil is an important global commodity. World map, Boisseau circa 1646

Why is the EIA Petroleum Status Report Important?

The prices of petrol products are determined by supply and quantity demanded – just like most other goods and services.

During periods of strong economic growth, we expect demand to be robust. If inventory supply is low, this will eventually lead to an increase in crude oil pricing.  Or, price increases for a wide variety of petroleum products such as gasoline or heating oil.

  • If inventories are high and rising in an environment of strong demand, prices may remain in equilibrium.
  • In a slow economic environment, demand for crude oil may fall.  And, If inventories are rising, this may push down oil prices.

Crude oil, priced in USD, is an important commodity in the global market. Prices fluctuate depending on global supply and demand conditions. Since oil is such an important part of national economies, it contributes to the direction of inflation.  In the U.S., consumer prices have stabilized whenever oil prices have fallen, but have accelerated when oil prices have risen.

The EIA report will become even more relevant if the Shanghai Futures Exchange (SHFE) subsidiary Shanghai International Energy Exchange (INE), initiates a new oil futures contract denominated in Yuan.

ISM Manufacturing Composite Index

Always Check The Economic Calendar

What Is The Institute For Supply Management (ISM) Manufacturing Composite Index?

The manufacturing composite index from the Institute For Supply Management is a diffusion index.  It is calculated from five sub-components of a monthly survey; there are eleven sub-components in total.  The survey respondents are purchasing managers from roughly 300 manufacturing firms nationwide.

The entire survey asks purchasing managers about:

  • general direction of production
  • new orders
  • order backlogs
  • their own firm’s inventories
  • customer inventories
  • employment
  • supplier deliveries
  • exports & imports
  • prices

The five components of the composite index are:

  • new orders
  • production
  • employment
  • supplier deliveries
  • their own firm’s inventories

Note that the five components are equally weighted. The questions are qualitative (not quantitative, so no specific numbers).  Each question is adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.

WHY IS THE ISM MANUFACTURING COMPOSITE INDEX IMPORTANT?

The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is solidified by the fact that it is available very early in the month and is not subject to revision  –this lowers the probability of reporting shenanigans.

Investors need to keep their fingers on changes in the economy because it dictates how their investments will perform. Tracking economic data such as ISM manufacturing lets investors know what the economic backdrop is for various markets.

Remember, the stock market likes to see healthy economic growth because that translates to higher corporate profits.  And, the bond market prefers slow growth and is very sensitive to whether the economy is growing too quickly which gives rise to inflationary pressure.

ISM manufacturing data give a detailed look at how busy the manufacturing sector is and where things are headed. Since the manufacturing sector is a major, major source of cyclical variability in the economy, this report has a big influence on the markets.  And remember, it cannot be revised once the number is released.

A few ISM sub-indices provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on these sub-indices to help determine the direction of their interest rate decisions (in case inflation signals are flashing). Since inflation leads the bond market, the bond market is highly sensitive to the data listed in these sub-indexes.

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ISM Manufacturing Correlations

The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market (existing bonds are valued higher when interest rates are expected to fall).

Also, a healthy manufacturing sector, indicated by rising ISM index levels,  increases the expectation of higher corporate earnings and is bullish for the stock market.

The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall.

ISM Manufacturing, What Do The Numbers Mean?

Readings below 50 indicate a shrinking manufacturing sector but overall GDP growth is expected to remain positive until the ISM index falls below 42.5 (based on statistical data through January 2011). Readings between 42.5 and 50 suggest that manufacturing is in decline while GDP is still growing (very slowly).

As mentioned above, the various sub-components contain useful information about manufacturing activity. The production component is related to:

  • industrial production
  • new orders to durable goods orders
  • employment to factory payrolls
  • prices to producer prices
  • export orders to merchandise trade exports
  • import orders to merchandise imports.

Vendor (supplier) deliveries are another important component of report. The more slowly orders are filled and delivered (inventory turnover), the stronger the economic growth and expectation of higher inflation. When orders are filled quickly, it means that producers don’t have as many orders to fill (or there is a supply glut).

The ISM manufacturing composite index and its sub-components may show monthly volatility, so check the three-month average of the monthly levels to spot the trend and calculate the probability of an interest rate change.

Purchasing Managers’ Manufacturing Index (PMI)

Economic Calendar

What is the Purchasing Managers’ Manufacturing Index?

Based on monthly surveys of selected companies, the Purchasing Managers’ Manufacturing Index (PMI) is an advance indication of month-to-month activity in the private sector of the economy. It tracks changes in variables such as output, new orders, stock levels, employment and prices across manufacturing industries.

The final index for the current month is released roughly a week after the flash PMI.

Why is the Purchasing Managers’ Manufacturing Index important?

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index in the U.S. & the Markit PMIs in the U.S., and elsewhere, investors will know what the economic backdrop is for various markets.

  • The stock market likes to see healthy economic growth because that translates to higher corporate profits.
  • The government likes higher corporate profits so it can collect more tax revenue to fund political projects and wars.
  • The bond market prefers slow growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
John Seney, 1721
Map of the New World, John Seney circa 1721

The Markit PMI

The Markit PMI manufacturing data give a detailed look at the manufacturing sector. The manufacturing sector is a major source of cyclical variability in the economy and this report has major influence on the markets. Its sub-indexes provide a picture of orders, output, employment and prices.

  • April 2004, Markit begins collecting monthly U.S. PMI data from a panel of manufacturers in the U.S. electronics goods producing sector.
  • May 2007, Markit’s U.S. PMI research was extended out to cover producers of metal goods.
  • October 2009, Markit’s U.S. Manufacturing PMI survey panel was extended further to cover all areas of U.S. manufacturing activity.

Back data for Markit’s U.S. Manufacturing PMI between May 2007 and September 2009 are an aggregation of data collected from producers of electronic goods and metal goods producers, while data from October 2009 are based on data collected from a panel representing the entire U.S. manufacturing economy.

Markit’s total survey panel comprises over 600 U.S. companies.

Markit Economics PMI Release Dates.

Alternative Investments -Measuring Performance

How to measure performance between accounts.

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Dealing in Alternative Investments requires a bit of statistical knowledge (the more the better).  So I picked out one component that would benefit someone who handles their investments personally and, at the same time, benefit someone who pays an advisor because it never hurts to ask the right questions.

The following is not investment advice, but one way to assess the advice you were given…

High Frequency Trading or Unconventional Return Periods

When returns are realized at higher frequencies (many times per year), Sharpe Ratios and the corresponding t-statistics can be calculated in a straightforward way.

Assuming there are N return occurrences per year, and the mean (μ) and standard deviation (σ) of the returns are μ and σ, the annualized Sharpe Ratio can be calculated as (μ×N)/(σ×√N) …or (μ/σ)×√N.

The corresponding t-statistic is (μ/σ)×√(N × number of years).

For monthly returns, the annualized Sharpe Ratio and the corresponding t-statistic are (μ/σ)×√12 and (μ/σ)×√(12 × number of years), respectively.  Here, μ and σ are the monthly mean and standard deviation of returns.

Similarly, assuming μ and σ are the daily mean and standard deviation for returns (you traded every day the market was open…please don’t do that:) and there are 252 trading days in a year, the annualized Sharpe Ratio is (μ/σ)×√252 …the corresponding t-stat is (μ/σ)×√(252 × number of years).

The calculators I use to find these metrics are listed in the right-hand column on “my trading desk.” They both have statistical functions.

The Test Statistic

Test Statistics (t-stat,t-statistic) are tricky creatures.  Essentially when evaluating performance, I require a t-stat of 4 or more (the higher the better) before considering a stake.  In the future, I will explain a simple model I use to allocate cash among accounts and strategies according to their t-stat.

Now, here is a simple formula to estimate a t-statistic for unusual return periods:

Test statistic= (μ/σ)×√(N return occurrences × number of years).

Note that “N return occurrences×Number of years” is just the total number of return occurrences resulting from the investment or strategy (either positive or negative).  So, if you closed out 3 trades (at 1%, -2.3% and 3%), that counts as N=3.

Or, if your investment reconciles every 6 weeks, for the past 1.5 years then N=13, (78 weeks / 6).

Remember, it is important to convert your daily/weekly/monthly returns to an annual (yearly) number.  This makes it very easy to compare performance against conventional, low-return investments pushed by financial salesmen.

And since the volatility adjustment is built-in, it is an apples-to-apples comparison.

 

Japanese PMI Composite

Economic Calendar: The Japanese PMI Composite

 

Japanese Purchasing Managers Index

The Markit Japanese Composite Purchasing Managers Index (Composite PMI) is based on original survey data.  These data are collected from a panel of firms that represent, and are based in, the Japanese manufacturing and service sectors.

The major composite index is composed of two minor indices.  It is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.  These are all based on original survey data collected from a representative panel of over 800 Japanese-based firms that serve Japan’s manufacturing and service sectors. The survey data is collected mid-month.  Survey responses reflect change in the current month compared to the previous month.

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Is The Japanese PMI Composite Important?

Yes!  PMI Data is an important macroeconomic indicator.  Investors need to keep their finger on the pulse of the economy to form expectations of how various types of investments will perform. By tracking economic data such as the PMI numbers, investors will get a better picture of what the economic backdrop is for the various markets.

  • The stock market likes to see healthy economic growth because that translates to higher corporate profits.
  • Governments like to keep markets inflated because a portion of those corporate profits (and inflated assets) are converted into tax revenue.
  • The bond market prefers slow growth and is extremely sensitive to whether the economy is growing too quickly (inflation).

Click this, list of PMI data

Sails Up

↓€/£

Sails are up on this short trade due to global macro and technical confluence.

Global Macro

On the macro side, the COT report shows swap dealers are stretched long the GBP-USD contract and institutional managers are actively taking profit on their euro long positions. Also, the economic calendar lists favorable winds for the big island pound. However, BoE pirate meeting ahead so I will be keeping a weather-eye and trailing stops.

Technicals

The weekly shows good CCI divergence and a pair of tweezer tops on the four-hour chart.  Order triggered on the second pair of tweezer tops.  Lot size is a full bell with a stopper knot set at .9241.

Order triggered at  0.9180

Update:  09/10/2017,  2/3 of trade bulletproofed at 0.9175 & 1/3 of position set to scale-out at 0.9127 –tracking the 4-hour, later trailed to 0.9095.

Update:  09/11/17, closed out 1/3 of position at 0.9095.  Managing remainder of position on the daily chart.

Update:  09/18/17, entire position closed; gain on trade +43% of margin

Antique Maps of the WorldCelestial MapAndres Celariusc 1708
circa 1708

British Retail Sales

How important are British retail sales?

Always check the economic calendar

The British Retail Sales Survey

Retail sales are the total revenue from stores that sell durable and nondurable goods. British retail survey data include all online businesses whose primary function is online retail.  The data also cover internet sales by other British firms, such as supermarkets, department stores and catalog companies.

Headline British retail sales are reported in volume terms but are available in both forms. The data are derived from a monthly survey of 5,000 businesses in Great Britain. The sample represents the whole retail sector and includes the 900 largest retailers and a representative panel of smaller businesses, including internet sales.

Collectively, all of these businesses cover approximately 90 percent of the retail industry –in terms of turnover.

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The survey data covers 90% of Brit retail

Why are British Retail Sales important?

Consumer spending is a major component of the economy and market players continually monitor spending patterns. The monthly retail sales report contains sales data in both pounds sterling (£) and volume. British retail sales data exclude automobile sales.

The pattern in consumer spending is often the foremost influence on stock and bond markets.

  • For equity, strong economic growth translates to healthy corporate profits and higher stock prices.
  • For fixed income (bonds), the focus is whether economic growth is stretched overboard and leading to inflation –building a case for interest rate hikes and decreasing the expected value of existing bonds.

The ideal economy walks a fine line between strong growth and excessive (inflationary) growth.

The British Retail Sales survey not only gives you a sense of the big picture on the big island, but also the trends among different types of retailers. Perhaps ground tackle sales are showing exceptional weakness but navigation electronics sales are soaring (have you seen those prices lately?!). Trends derived from retail sales data can help you spot specific investment opportunities and preempt expectations.

British Office of National Statistics