The bizarre data continues

In May, retail sales regained about 80% of the losses from March and April. That’s in one month! In contrast, even a year after the trough in retail sales in March 2009, retail sales had recovered only about half the losses.

I understand that these are strange times, but I fail to understand how forecasts can be so far off:

Retail sales jumped by a record 17.7% in May over April, coming in at more than double the consensus estimate for a rise of 8.4%.

I don’t doubt that market forecasters are competent individuals. So I assume that these data points are intrinsically difficult to predict. But does anyone know why? Don’t we have real time daily data on credit card sales? And don’t most people use credit cards these days? So how can the forecast for May be 9.3% off course? We live in the computer age, but seem no more able to predict retail sales announcements than back in the 1920s. Why?

(With the earlier May labor report, it was partly definitional problems. That doesn’t seem to apply here.)

Off topic:

Buffett endured his worst performance vs. the S&P 500 index (SPX)in a decade last year, and 2020 is on track to be nearly as bad, the FT noted. CFRA Research analyst Cathy Siefert said Berkshire’s “chronic underperformance” needs to be answered for, especially considering some of Buffett’s decision-making in recent years, including the writing down of his stake in Kraft Heinz (KHC) by $3 billion and the “unmitigated disaster” that was his Occidental Petroleum (OXY)deal.

Wait, isn’t Warren Buffett the strongest argument for market inefficiency?


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34 Responses to “The bizarre data continues”

  1. Gravatar of Christian List Christian List
    16. June 2020 at 11:25

    About the OT ofc:

    I doubt that Buffett has ever beaten the S&P 500 index long-term. I think he even admitted this himself. His fans have a skewed picture of him, Buffett cannot beat the market. Maybe he was able to do this once, for a short period of time, in the 70s, when his company was rather small, but even there I have my doubts. A few months ago he also said that it is better to invest in the right ETF than in his company, which makes sense.

  2. Gravatar of sd0000 sd0000
    16. June 2020 at 12:48

    I’d say the strongest (maybe only?) argument for market inefficiency is the performance of Jim Simon’s RenTech. I haven’t heard anyone come up with an even halfway decent explanation for that.

  3. Gravatar of Garrett Garrett
    16. June 2020 at 13:12

    Regarding Renaissance, how much of their performance is explained by their use of basket options?

    https://www.accountingtoday.com/articles/rentechs-billion-dollar-tax-cloud-darkens-after-irs-ruling

    Can their amazing performance be explained by a market making strategy but with much less taxes?

  4. Gravatar of Ray Lopez Ray Lopez
    16. June 2020 at 13:45

    Both W. Buffett and J. Simon beat the market about 51%+ of the time since they use legal inside information then leverage (aka “Buffett call”). Ssumner: “Wait, isn’t Warren Buffett the strongest argument for market inefficiency?” – it depends on which of the three versions of the Efficient Market Hypothesis you use.

    @Christian List – OT – I am glad to see you don’t believe the Wuhan virus (SARS-CoV-2) is natural, as I don’t either. Find the ‘intermediate host’ (animal) in the wild, as they have found immediately for every other virus, dozens of them (though for Ebola and HIV/AIDs viruses it took over 10 years, for hantavirus it took three years, but they found it) and I’ll change my mind. In the meantime, the strong Bayesian ‘coincidences’ point to a Wuhan WIV release. As Dr. B. Cole would agree. Everybody but our clueless host. I liked this (Time mag):”The salmon link is most likely a “red herring,” Cowling added drily.”

  5. Gravatar of Alan Goldhammer Alan Goldhammer
    16. June 2020 at 14:24

    Buffett has to mark down Kraft/Heinz because of GAAP accounting rules as he has noted in his letter to shareholders. Regarding performance of Berkshire vs the S&P, it is also available in the letter to shareholders (disclosure: I have been one for 20 years)and they have outperformed the index in 7 of the last 10 years. The performance since inception of the company is: Berkshire 20.3% compounded gain; S&P 10%

    @Christian List is totally wrong in his post. All the Berkshire letters to shareholders are publicly available.

  6. Gravatar of Rajat Rajat
    16. June 2020 at 14:45

    Chalk one up for Lars C!

  7. Gravatar of Christian List Christian List
    16. June 2020 at 14:53

    Alan,

    Buffett says this all the time for years: “Buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time.”

    And don’t compare S&P 500 and Berkshire directly, this is foolish. Berkshire doesn’t make any payouts. You have to compare an S&P 500 ETF without payouts to Berkshire.

    I’m not saying at all that Buffett is terrible. His company is great and I really love that guy. But of course he loses against a good S&P 500 ETF. It’s no big deal, it happens to every fund manager, and he basically is a fund manager.

    But hey, do with your money what you want. =)

    @Ray Lopez
    The latest news on the subject that I found was an expert from Australia who claimed that the virus is surprisingly well adapted to humans. Actually, one would expect it to bind to human receptors worse than to previous animal hosts, but his claim was that it bounds best to the human receptor, better than to any other animal species he studied and better than to the alleged animal hosts.

  8. Gravatar of Benjamin Cole Benjamin Cole
    16. June 2020 at 15:31

    Dr. Ray Lopez: I am open to the idea that the Wuhan virus was manufactured in a lab, and I am open to the idea that it is a natural virus that was collected, stored in Wuhan and then leaked out, or was inadvertently released by an infected lab worker.

    For that matter, a disgruntled lab employee, or sociopath, might have intentionally released the virus in Wuhan.

    The scientific community appears split on whether the Wuhan virus was fabricated or not. Like everything else, this issue has become politicized.

    The reaction of the CCP and other Chinese authorities strongly suggests there was a leak from one of the Wuhan labs.

    Back on topic, I agree with Scott Sumner that the US government, and private-sector forecasters, appear unable to collect retail data. This is puzzling. Decades ago I read that 7-Eleven knows every time a pack of gum is sold.

  9. Gravatar of Christian List Christian List
    16. June 2020 at 15:38

    Don’t we have real time daily data on credit card sales?

    It doesn’t seem that way. I did a little research. Only monthly, and usually with a six day lag at least. So May data could have been available on June 6, and that was a Saturday, so June 8. We live in the digital uber-age.

  10. Gravatar of Benjamin Cole Benjamin Cole
    16. June 2020 at 15:41

    By the way, what is the Occam’s razor explanation for why two nations that are in loggerheads with China, the UK and the US, are also the two nations experiencing the worst Covid-19 outbreaks?

  11. Gravatar of Alan Goldhammer Alan Goldhammer
    16. June 2020 at 16:30

    @Christian List – what Buffett says for average investors is far different from what he and his investment team do for Berkshire. As I already noted his Letter to Shareholders includes a yearly performance record vs the S&P 500.

    You are of course it is my money and I’m pretty pleased with my performance over the years. I’m not in the top performance category as our friend Ray Lopez but then few are.

  12. Gravatar of Matthias Görgens Matthias Görgens
    16. June 2020 at 16:42

    Benjamin, by what metric is the UK experiencing the (second 9 worst outbreaks? It is not by any of the common ones like case count or deaths.

    Btw, and why would Taiwan (and Hong Kong) have so few cases?

    If this was a biowapeapon targeted at US or UK, it did not work well at all.

  13. Gravatar of Christan List Christan List
    16. June 2020 at 16:46

    Ben,

    Occam’s razor explanation would be that there might be a common underlying ideology by the government that has led to both the wrong reaction to Covid-19 and the reaction to CCP China.

    The even better Occam’s razor explanation would be that the underlying reason is you, that you are seeing things which aren’t there.

    The general rational explanation would be that the sample size is too small, that correlation is not causation, and that the two incidents very likely have not much to do with each other at all. You might as well say that both countries start with the letter U.

    Not to mention that there are other countries that are just as badly off, for example Brazil, Russia and Spain.

    Oh, we have forgotten India, now I believe your theory. India is the nemesis of China. And hasn’t Brazil also recently started a dispute with China? And what about Russia, which after all is also a geostrategic competitor of China. Ben, you solved the mystery!

  14. Gravatar of Christian List Christian List
    16. June 2020 at 16:54

    Alan,

    and as I already noted, and you seem to be really dense about this, is that you can’t simple compare the S&P 500 minus dividends with Berkshire. It’s completely misleading. Berkshire is not paying any dividends.

    I have compared exactly those two graphs, the real ones, many times, especially in the last 10 years, and Berkshire has never won. Not in a single year. Check out the latest Berkshire “recovery”, too. This is ridiculous. How can people be so dense.

  15. Gravatar of Christian List Christian List
    16. June 2020 at 16:57

    Ben,

    sorry I was in the wrong thread.

    One Occam’s razor explanation might be that there might be a common underlying ideology by the governments that has led to the wrong reaction to Covid-19 and to the reaction to CCP China.

    The better Occam’s razor explanation would be that the underlying reason is you, that you are seeing things which aren’t there.

    The general rational explanation would be that the sample size is too small, that correlation is not causation, and that the two incidents very likely have not much to do with each other at all. You might as well say that both countries start with the letter U.

    Not to mention that there are other countries that are just as badly off, for example Brazil, Russia and Spain.

    Oh, we have forgotten India, now I believe your theory. India is the nemesis of China. And hasn’t Brazil also recently started a dispute with China? And what about Russia, which after all is also a geostrategic competitor of China? Ben, you solved the mystery!

  16. Gravatar of milljas milljas
    16. June 2020 at 17:40

    Forecasters are competent, there are more competent people elsewhere? Is this not related to the off topic, which to me seems very on topic.

  17. Gravatar of Christian List Christian List
    16. June 2020 at 17:53

    Alan,

    it might be that the starting point is really important. I compared the usual S&P 500 with Berkshire Hathaway, and also the biggest European S&P 500 ETF from iShares (ISIN IE00B5BMR087) in a third graph.

    Starting point is 2010, or more precise, exactly 10 years back from today. S&P 500 is doing better every year, and strangely enough around 2013 the ETF and its index are also separating. The ETF is doing better than the actual index since 2013. Don’t really know why though, since it says dividends are included in all.

    Starting point is really important though, other starting points and the results are different. Start 2015 or 2017 and there is not much difference between all three. Start 2020 and Berkshire is losing again. I’m sure there are starting points were Bershire is winning, maybe before 2010? I did not invest before 2010.

    I separate most of my cash in ETF and Berkshire, and at least in my depot ETFs are usually doing better. I hope Buffett finds his grip again, but I honestly doubt it. His company might be too big in order to outperform by much.

  18. Gravatar of Benjamin Cole Benjamin Cole
    16. June 2020 at 19:59

    Matthew G and Christian L:

    Okay, Hong Kong and Taiwan have closed their borders, so they have managed to control C19. Taiwan is an island, and Hong Kong nearly so, both are small and well-administered. Also, one might posit Beijing-CCP did not not want to deploy bioweapons so close to home.

    The US is the champion of C19, and no one seems to know why. Trump was early in closing air traffic from China, but state and local governments control lockdowns and business rules, and other public health laws.

    But is the US any better or worse managed than Thailand? I can’t tell, and Thailand is nearly unscathed by C19, despite being a top tourist and business destination for Chinese.

    The UK has 43,000 dead on population of 66 million, actually doing worse than the US on a death/population ratio.

    No doubt, a bioweapon like C19 is difficult to deploy accurately. Brazilians may get hit (collateral damage) by travelers and then due to a warm lifestyle (dancing, hugging, talking, family gatherings etc., tight business and living quarters) you get a epidemic.

    Of course, I am only musing that the CCP, angered at US and UK posturing regarding the virus and other issues, decided to treat both countries “to some of their own medicine” and intentionally release C19 in the UK and US. The CCP sabotage hypothesis does fit the facts, and it a quick and dirty answer ala Occam’s Razor.

    Of course, in the real world real answers are often convoluted and counter-intuitive, and straight-forward answers can be planted by false-flag operations.

    Bit, hey, has the CCP never sabotaged anything?

  19. Gravatar of Aladin Aladin
    16. June 2020 at 20:38

    80%???

    From where I am sitting, everything is still closed and we are in the middle of June. Granted, I’m in Jersey and we were particularly hard hit, but still.

    There are countervailing factors. Large companies actually gained during the pandemic as smaller companies closed. I’d imagine they former would be somewhat overrepresented in the data.

    But anecdotally,like my savings are much larger than before. So is everyone I know. How can retail, a large portion of expenditures, be up along with savings? Is it all just stimulus money? money printer go brrrrrr? I’d imagine that’s what it is.

    As to why no one has just decided to short everything and wait for the instability of the lockdown and the recognition that there is no “real” growth, it’s all just stimulus, to actually reveal itself in the stock market, well, who knows. I still haven’t sold.

    Although my idea would be that, well, shorting or selling as a strategy only works if you are willing to suffer pains in the short term until everyone knows what you know. But this is temporary, a vaccine may be developed by the end of the year in which case, no coronavirus. If people are “irrational” until then, those who engaged in short selling would end up losing a great deal. In other words, a bubble has formed, but everyone recognizes that the value will eventually be justified when this is all over, so no one expects it to pop. #crackpotTheories. What do I know. I wish I invested in zoom. I was predicting this was going to go wrong too! I just didn’t think to call my broker. Sigh.

  20. Gravatar of Ray Lopez Ray Lopez
    17. June 2020 at 01:15

    Off-topic:
    @Christian List- if you have the Australian expert link handy, post it here or send it to my email ray lopez 88 at gmail, thanks. I keep a running list on this topic. If it’s in German I will have it translated.

    @Ben Cole – we are in violent agreement. I also thought Australia was very brave, very “European” in standing up to China despite them being a big customer.

    @Allan G – Don’t feel bad, I’m in the 1%, true, but it’s because I inherited a lot of money from my uncle and my parents were rich (but lived very lower middle class, you’d never know they are worth more than $10M looking at them). I was in the 10% on my own efforts when I worked, but retired in my forties. I think you are right about Buffett but C. List is talking the recent past, which even Buffett acknowledges is mediocre or Berkshire.

    At everybody following the stock market: a plausible thesis first proposed by Matt Levine of Bloomberg is due to the lockdown, young people are using the Robinhood app to day trade, hence driving up prices. The worse is yet to come? But I’ve closed out my short positions. This stock market drop was possibly the biggest bounce since 1987, showing modern economies are, as Sumner said a few posts back, driven by AD not AS shocks.

  21. Gravatar of Big Al Big Al
    17. June 2020 at 06:56

    On Buffet, if you go to:

    https://www.portfoliovisualizer.com/backtest-portfolio

    and compare BRK.A and VFINX (Vanguard SP500 Index Mutual Fund)

    you can get the cumulative and year by year comparison back to 1985. The last chart on the page has a bar graph with the year by year growth rates. From there it is easy to see that Buffet’s performance relative to the market was rather extraordinary up until the early 2000, somewhat less so through 2010, and pretty ordinary if not poor since then. I am pretty sure the out performance goes back to the beginning of Berkshire in the mid 1960s, by the way, so he was really good as an asset manager for 35 to 40 years.

    We can all speculate about why things seem to have changed in the past decade. Is it the size that he must operate in now? Perhaps, but it was not exactly small in the 1990s either. Is he just getting old and less capable? Did the sort of inefficiencies he was able to exploit for so many years disappear in the last two decades? Who knows?

    A

  22. Gravatar of Grant Grant
    17. June 2020 at 07:12

    Scott,

    The traders I know who pay for credit card data get it on a weekly basis. I doubt this took them by surprise.

    There was lots of free data suggesting the May jobs report was going to beat expectations. I was shocked to see the market react to it as it did, but then markets are dumber today than I’ve ever seen them.

    There’s no reason to suspect markets are efficient at the moment. Back in Feb they failed to see sars2 coming from miles away, and today they’ve got legions more inexperienced retail traders with freshly-printed money buying literally bankrupt companies.

  23. Gravatar of Todd Ramsey Todd Ramsey
    17. June 2020 at 07:26

    Scott, I’m your biggest fan, but I don’t agree with your selective use of a small sample size to imply that Berkshire has just been lucky to beat the market.

    BRK Compounded Annual Gain – 1965-2019 …………… 20.3%
    S&P 500 w/Dividends included, Compounded Annual Gain…10.0%

    BRK Overall Gain – 1964-2019 ……………….. 2,744,062%
    S&P 500 w/Dividends included, Overall Gain………..19,784%

    BRK beat the S&P 500 twice as many years as lagged S&P 500. Any two year stretch had a 1/9 chance of lagging the market, and that’s what you have chosen, looking backward, to imply the market can’t be beaten. Never reason from a backward look at statistics selected to imply proof of your point.

    Moreover, Buffett himself has pointed out that Berkshire’s performance lately has suffered solely because of size. He can no longer make investments substantial enough to “move the needle” without driving up the prices of stocks he is buying.

  24. Gravatar of ssumner ssumner
    17. June 2020 at 08:35

    Christian, Let’s say it’s June 8th. That still doesn’t explain our inability to forecast retail sales.

    Big Al, You said:

    “We can all speculate about why things seem to have changed in the past decade. Is it the size that he must operate in now? Perhaps, but it was not exactly small in the 1990s either. Is he just getting old and less capable? Did the sort of inefficiencies he was able to exploit for so many years disappear in the last two decades? Who knows?”

    Of course this is exactly what one would expect if his earlier performance were luck, or mostly luck.

    Todd, See my reply to Big Al. Why not assume he was lucky earlier, and his luck ran out?

  25. Gravatar of Postkey Postkey
    17. June 2020 at 09:00

    “No, the coronavirus wasn’t made in a lab. A genetic analysis shows it’s from nature.
    Scientists took conspiracy theories about SARS-CoV-2’s origins seriously, and debunked them “
    https://www.sciencenews.org/article/coronavirus-covid-19-not-human-made-lab-genetic-analysis-nature

  26. Gravatar of Grant Grant
    17. June 2020 at 09:06

    Todd & Scott,

    Early in his career, Buffett managed far less money. It is almost trivial to beak the S&P500 if you’re managing a few million. It must be vastly more difficult with the $175B he has today.

    He was also much younger back then, and there was no information technology. IT, which Buffett has said he doesn’t well understand, has been the primary mechanism for his recent underperformance.

  27. Gravatar of milljas milljas
    17. June 2020 at 09:16

    For those not adept at investing, it will be impossible to prove to them that it wasn’t luck. The big issue is his reputation and methodology is so well known it is emulated by people and computers. He hasn’t really evolved quickly enough. There have been large opportunities and he’s missed them: Facebook, Amazon, Adobe, Salesforce, Danaher, Mastercard and Google. I could go on. They have admitted these mistakes. You could see this in 2009 when he bought BNSF at a huge premium. At that point the gig was up: if he called raise your price. Whether he was ahead of his time or lucky is futile to debate.

  28. Gravatar of Ray Lopez Ray Lopez
    17. June 2020 at 10:27

    Sumner is out of his depth on Buffett. In fact, market mavins muse that Buffet’s chance of beating the SP500 just by luck for as long as he did is vanishingly small.

  29. Gravatar of ssumner ssumner
    17. June 2020 at 10:43

    Postkey, Thanks, but you’ll find that most people find conspiracy theories to be much more fun than boring science.

  30. Gravatar of Alan Goldhammer Alan Goldhammer
    17. June 2020 at 10:46

    We can continue the debate about Berkshire vs the S&P ad nauseum. One important point is that the S&P is not truly representative of the market as a whole. Because it is weighted by market cap, it is naturally skewed in favor of a small number of stocks. The top 10 by market cap which does include BRK-B, repesents 25% of the index by value. The dynamics of the S&P are constantly changing (witness the fall of Exxon which not long ago was in the top 5)

    My bottom line is to have a consistent investing philosophy and don’t deviate from it. I find the Graham/Dodd approach with modification to be a decent way to manage investments. I’ll leave it at that.

  31. Gravatar of tim tim
    17. June 2020 at 11:54

    Buffet doesn’t care about year to year returns, he is only focused on long term investments – and always has been. He could care less if he lost 20% in one year, because he is betting that in 20 years he will be up 200-300% – assuming the market continues to earn 10% a year. In addition to that, he is holding 100B in cash for a reason: the u.s. market is in TERRIBLE condition and is on the verge of total collapse.

  32. Gravatar of Christian List Christian List
    17. June 2020 at 14:42

    @Alan
    Buffett is skewed in favor of a small number of stocks as well. I just read an article that says more than 40% of Buffett’s portfolio are in Apple right now. 11% Bank of America. 9% Coca-Cola. 7% American Express.

    So we are basically buying Apple with some Bank of America, some Coke, and some American Express, minus all the chances he misses because he does not hold the whole index, even though there were times when he parked at least 10% in the Vanguard S&P500 as well.

    Buffett himself says that he is not a fan of diversification, that it is something for people who have no idea about stocks. His value strategy is explicitly based on picking out the few super stocks.

    Anyhow the difference since 2010 is significant, when I calculated correctly the ETF made +280% and Berkshire made +200%. And this is before the crash, not after.

    @Todd Ramsey
    I don’t really believe these calculations. Either they’re wrong, and there are most likely whole books about this topic. Or it’s like Scott says: he got lucky.

    Most likely a combination of both. Buffett himself is always extremely modest about what he actually he achieved. I don’t think he would confirm the numbers that you gave.

    @Ray Lopez
    I’ll give you the OT links in the most recent thread.

  33. Gravatar of Christian List Christian List
    17. June 2020 at 14:57

    @Ray

    I give the links here, I do not want to “ruin” the new thread. Besides, it fits in well here, in the “bizarre data” thread.

    It’s only the Daily Mail, but it’s not as bad as its reputation. They reported correctly about masks very early on. They also reported early on the thromboses. They are often very fast because they don’t like censorship and they simply print what sound potentially interesting. It’s not always accurate ofc.

    Here it is:

    Professor Nikolai Petrovsky said the virus was better at attaching itself to human cells than to any other animal, explaining why it has infected five million people.

    https://www.dailymail.co.uk/news/article-8356751/How-COVID-19s-unique-structure-means-man-made.html

    And this as well:

    US-based pathologist Chris Martenson said a suspicious sequence of nucleotides in the RNA coding of the Sars-Cov-2 coronavirus appear to have been inserted as they do not occur in any of the close or even distantly related viruses.

    https://www.dailymail.co.uk/news/article-8304989/The-plausible-explanation-Coronavirus-DID-leak-Wuhan-lab-Australian-expert-says.html

    Well, like I said, I don’t know how accurate it is.

  34. Gravatar of Todd Ramsey Todd Ramsey
    18. June 2020 at 05:40

    “…or mostly luck.”

    Is another way of saying, “beating the market partly through skillful investment choices, not entirely through luck.”

    Is another way of saying “the strictest version of the EMH doesn’t hold in some cases.”

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