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Fun with quant: MS Business Conditions edition

Summary:
Marketwatch recently reported that Morgan Stanley’s Business Conditions Index had deteriorated to levels last seen during the 2007-08 financial crisis. Wow! Is this an alarming signal, or contrarian?  In reality, it was a lesson for data analysts in quantitative analysis.  Looking for confirmation When I see a surprising result, I look for confirmation. To be sure, CEO confidence has fallen off a cliff.  On the other hand, NFIB small business optimism has been on fire.  What’s the real story here? Is there a severe bifurcation between big business (CEO) and small business (NFIB) confidence? Wouldn’t the Morgan Stanley index be more reflective of the big business rather than the small business outlook? I was able to obtain some of the details behind the Morgan Stanley

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Marketwatch recently reported that Morgan Stanley’s Business Conditions Index had deteriorated to levels last seen during the 2007-08 financial crisis. Wow! Is this an alarming signal, or contrarian?
 

Fun with quant: MS Business Conditions edition

In reality, it was a lesson for data analysts in quantitative analysis.
 

Looking for confirmation

When I see a surprising result, I look for confirmation. To be sure, CEO confidence has fallen off a cliff.
 

Fun with quant: MS Business Conditions edition

On the other hand, NFIB small business optimism has been on fire.
 

Fun with quant: MS Business Conditions edition

What’s the real story here? Is there a severe bifurcation between big business (CEO) and small business (NFIB) confidence? Wouldn’t the Morgan Stanley index be more reflective of the big business rather than the small business outlook?

I was able to obtain some of the details behind the Morgan Stanley Business Conditions Index. A detailed analysis of its components reveals some of the reasons behind the index crash. Capex plans had dropped dramatically from 21 in May to 7 in June, which is consistent with what we see in CEO confidence. On the other hand, the Manufacturing Subindex cratered from 67 to 0 in a single month, while the Services Subindex fell from 35 to 18. The other components, such as the Price and Prices Paid Indices, were relatively stable.
 

Fun with quant: MS Business Conditions edition

67 to 0? Really? Did someone forget to fill in the spreadsheet? That looks like a possible data error that someone should be looking into. In the meantime, investors should view such dubious data with some skepticism without confirmation.

The moral of the story is, “Don’t believe everything you read on the internet.”
 

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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