“The Trump Rally!”…
“Wait, the OPEC deal!”…
“The dollar is going higher”…
“Barron’s said the yield curve is flattening?”…
You have heard all of this before. I am sure of that. The truth is, it isn’t about any of that noise.
We here at Stony Brook Securities tune out all of that nonsense and focus on what really matters…
What the market is telling us.
How to Invest in Stocks…the Analyst Way
Starting in Q4 of every trading year, the big banks:
start getting all of their top analysts together to come up with their price projections for many different sectors with the big one being their price target for the S&P 500 for the following year.
Why the S&P 500 rather than the Dow you might ask?
Well because nobody cares about the Dow, it’s a basket of 30 old and boring companies.
And the S&P 500 happens to be a bigger basket of 500.
So these highly paid analysts travel all over the country (they are NOT flying coach my friends), speaking to executives at many of the largest companies in the world, asking them things such as:
What is your 2017 outlook?
How will the dollar effect your earnings per share?
What cost cutting structures will you use in 2017?
What is the nicest, most expensive steakhouse for dinner tonight?
And so on…
On top of this, these institutions do things such as:
- Channel checks (they pay employees to stand outside to JC Penny and the Apple Store to count how many people go in and out)
- Drone flying (they fly drones over manufacturing plants to see how many trucks go in and out of the plants)
- Ship Watching (they take images from satellites of the Atlantic Ocean to track shipments via waterways)
But ultimately after all of these field trips, all-nighters, weekends spent crunching number after number, and cockamamie ideas, they finally come up with their projections for the coming year.
And here is what they come up with:
Citigroup – S&P price target: $2,425 EPS: $129:
Trumped up could trickle down (to EPS)…Tax cuts could be quite stimulative to S&P 500 EPS. If one assumes a 20% statutory tax rate with no deductions versus a current effective tax rate running at near 27%, that might add as much as $12 of 2017 EPS to Citi’s current estimate of $129…A stronger US dollar is plausible if growth and inflation ensue, thereby limiting the earnings benefits. Higher rates from the Fed and possible “crowding out” plus inflation pushing bond yields upward are viewed as offsetting negatives especially if the dollar climbs and eats into earnings. Every 10% move in the greenback might shift EPS by around 2% on an annual basis and therefore must be tracked as well…
Awesome. I’m sure Citigroup spent A LOT of money coming up with whatever that means…
Deutsche Bank – S&P price target: $2,350 EPS: $130:
Republican sweep economic policies will be more about deregulation and tax cuts than protectionism or huge spending. We think so because big actions require legislation, which Congress will shape. This Congress is likely to resist surging deficits, protectionism and executive overreach… The corp tax rate is likely cut in the first 100 days and other proposed major corp tax code changes deferred… A 15% corp tax rate is unlikely, but if cut to 25% from 35% it would align with the OECD avg and likely raise the deficit by only ~0.5% of GDP until growth can offset it. Cutting to 25% cuts repatriation taxes on a permanent basis and will also provide small businesses that want to reinvest their profits for growth a more tax efficient alternative than pass through entities. A 25% corp tax rate, all else equal, would boost S&P EPS by $10 and support a quick S&P rally to 2300 and 2400 by 2017 end.
Sure man…good luck with that.
As we stand today (1/15/2017), the S&P 500 is trading at $2274.64, meaning Citi sees a whopping 6.6% up year and Deutsche sees a puny 3.3% up move. Not like anyone on the street would dare not have a positive price projection for the coming year.
Ultimately, it would likely be fair to say both of these institutions spent a lot of time and money on coming up with these projections.
How to Invest in Stocks…the Stony Brook Way
Ah, this beautiful clip 🙂
However, when I see a bunch of mumbo jumbo like the information and predictions spit out by the largest financial institutions in the world, I have a similar reaction.
Here is how we “predict” the price of the S&P 500 for 2017…
- Get the current price ($2274.64)
- Find the current implied volatility of the S&P 500 ($11.23)
- Figure out how many days are left in the year (350)
- Run this little formula with those numbers:
Price (2274.64) * Implied Volatility (.1123) * (Sqrt of Days (350)/365))
And what do we get?
Based off what the market thinks TODAY, not some rich guy with a suit so tight he cannot sit down, but what the market thinks (aka trillions of dollars), the current range of the S&P 500 for 2017 is +/- $250.14 or +/- 11.23%.
As high as $2524.78…
As low as $2024.50…
There you have it folks…the difference between Wall Street and us.
While both Citigroup and Deutsche both have projections within the expected range, coming up with a number is utterly ridiculous.
We take what the market gives us. They give us a range. And these are where the numbers stand based off where the S&P 500 is today and well as the current expected move.
This is a number that changes all day every day but is 100% accurate for where we stand today.
How likely does the market believe the chances are that the S&P 500 closes out 2017 somewhere between $2524.78 and $2024.50?
And who is more likely to be right? Us or them?
Nobody knows. All it took us less than a minute to give us what the market’s projections are as we stand today…