Wednesday, July 08, 2009

Do Not Be Fooled By Headline Numbers

Here's a good posting on Star Business: Investors must analyse data, mere headline numbers may deceive

  • WHAT is the difference between a stock that is down 90% versus a stock that was down 80%, then halved? If you were quick enough, you would have the answer right away.

    Yes, they are both the same! Some readers would have thought that the stock which was down 90% is in a worse situation compared with the stock which was down 80% earlier but later halved in value.

    However, there could be readers who would have thought that the stock which was down 80% and then halved was worse than a stock that is down 90%. In any case, we all now know that the answer is the same and perhaps it is how the question or statement is phrased that matters.

    It is also similar to looking at a glass of water and whether it is half full or half empty depends on one’s confidence level, when in actual fact if the glass was exactly 50% filled, it is either half empty or half full.

    Moving towards the current economic indicators,
    it is also interesting to note how one economic figure can be misconstrued as good by some and bad by others when in reality it may well be saying something else.

    The issue here is that as most fund managers are busy keeping track of economic data out of the US, Europe and Asia practically on a daily basis,
    are we seeing the trees from the forest or mainly just looking at headline numbers?

    Most economic data are measured either on a month-on-month or year-on-year basis. There are two ways to measure the data points; either by absolute difference (for example consumer confidence data), which to me is more reflective of the real situation, or by percentage change, which can sometimes be misconstrued by investors.

    For example, let’s take the durable goods order data out of the US.

    The latest reading for May suggests that total durable goods orders stood at US$163.38bil, which compared with the preceding month was higher by 1.8%.

    Of course, the headline that we see in the media as well as economic research reports is on the month-on-month change, i.e. the rise of 1.8% and we have seen how positive the market takes these data point as signs that the worst economic recession in living memory is indeed over.

    However, if we were to analyse the data deeper, there are several other observations that we can make.
    First, on a year-on-year basis, the durable goods order contracted by 23.5% and in terms of absolute level, the May total orders were still hovering at levels last seen in 2002/2003!

    They say a picture tells a thousand words. Now, let’s look at the above data points in terms of charts.

    The chart on the left is the total durable goods orders in absolute form and the chart on the right is based on the widely accepted, month-on-month change. The two charts clearly show two different pictures of the same time frame!

    While it can still be argued whether the durable goods orders are recovering or otherwise, it is noteworthy to take into account what a particular chart really means.

    Hence, it is imperative for investors to dissect data before coming to a conclusion whether the economic data points released by regulators are in actual fact telling the right story or otherwise.

    This is what we call a numbers game and how these data points are communicated to the market has very different interpretations.

    Perhaps economists and market analysts need to be more detailed in analysing data points as mere headline numbers may not tell the real story.

    Pankaj C Kumar is chief investment officer at Kurnia Insurans (M) Bhd. Readers’ feedback to this article is welcome.

Ah.. the numbers game. :D

Posted back in May Earnings Declined Over 90%

  • Numbers are numbers and sometimes one can have so much unreal fun with numbers.

    Let's see.

    You start at 100. Say you lose 90% of value.

    You only have 10.

    At 10... if you go back to 20. That's an increase of 100%.

    Or if you go back to 30, that's an increase of 200%.

    So how good is this 100% or 200%?

Do think of this when you look at the coming quarterly numbers. Some stocks could see their earnings improve by 20% if look on a quarterly basis but on a yearly basis, the earnings are completely nothing compared to before.