Top Projections for 2015

“I’ll give you a winter prediction: It’s gonna be cold, it’s gonna be grey, and it’s gonna last you for the rest of your life.” – Phil Conners, Ground Hogs Day, 1993

While we’re not as negative on 2015 as Bill Murray, it is that time of year again when prognosticators make their big market calls for the coming year. Ours includes a big run up for an Emerging Market, a couple of large cap Energy Stocks rebounding and an improvement in prices for a key Commodity.

First, EidoSearch put our hat into the ring for the first time last year with 4 bold predictions and a unique approach. How did we do?

The projections were highlighted in our Weekly Market Call posted on Monday, December 16th, 2013 (still available at our website, as are all weekly market calls under Insights and Latest Market Calls). We tracked the calls through Tuesday, December 16th, of this past week.

#1. FTSE Italia AllShare Index (ITLMS): Projection of 16.05% for the year. Actual: 6.7% gain (correct)

Italy dropped about 10% in Q4 2013 and there were considerable headwinds including no growth and risk of default heading into this year. The recovery began right out of the gates though, and as of June 10th the Index and our call was up a robust 27.7%. It’s been in a decline since, but we kept some decent gains.

#2. Canadian Large Caps – S&P / TSX 60 (TSP60): Projection of 12.49% for six months. Actual: 14.06% (correct)

The first half of this year was smooth sailing for the S&P / TSX 60, with a steady run up through the summer. Since September 3rd however, when the index gave back over 10% of its gains in just 5 weeks, it’s been quite volatile.

#3. Verizon (VZ): Projection of -14.41% relative to the S&P 500 for the year. Actual: -15.92 relative to the S&P 500 (correct)

#4. Cablevision (CVC): Projection of -9.17% relative to the S&P 500 for the year. Actual: 7.7% relative to the S&P 500 (wrong)

We set out to find a group of stocks that would underperform for the year relative to the S&P 500 (using the SPX) and landed on a couple of Cable providers. We nailed it with Verizon. Even on an absolute basis the stock was down -4.8% for the year, pretty good for a one year short call on a large cap. For Cablevision, we were looking pretty good through Mid-October, but CVC outperformed the S&P by about 7.7% over the past two months crushing our hopes for a sweep on all of our 2014 market calls.

Our 75% hit rate for last year’s calls is a bit above our average for all of the weekly market calls we’ve made since the fall of 2013.

What’s unique about our approach? EidoSearch doesn’t make predictions, we make projections based on probabilities. We’ve done tons of research to validate the accuracy of our return probabilities, and the predictive nature of using historical instances (conditional return distributions) to project a range of forward return distributions. In fact, we’ve done over 20 trillion pattern comparisons in our research, looking at 10 years of data, to validate the accuracy of forward return probabilities.

So, with a solid Year #1 under our belts and our unique approach to statistics and probabilities, we are excited to highlight our….

EidoSearch Top Projections for 2015

South of the Border: Mexico full year projection…Muy Bien!

We started with a look at Global Markets to see what countries seem primed for outsized returns in 2015, and Mexico (BMV IPC) has the highest projected return and risk/reward ratio of any global exchange.

The Index was up 21% last year between mid-March and mid-September, but gave up those gains in Q4 and is actually down a bit for 2014 overall even with last week’s rally. The Fed said it will be “patient” on the timing of raising interest rates is good news for Mexico, which typically encourages demand for higher yielding emerging markets where valuations are currently pretty appealing. A rebound in Energy prices next year should also help drive growth in Mexico with their recent efforts to encourage energy exploration in the region.

Using EidoSearch we went back to the late 70’s to find the most similar instances of the BMV IPC’s (FMEX) current one year price trend, to capture the historical one year returns of these similar environments and to project a typical and range of probable return outcomes. Although not quite statistically significant, the data is still compelling.

· We found 24 similar instances dating back to 1983
· In 21 of 24 instances (87.5%), the FMEX is up in the next one year and the average return is 43.4%
· We actually excluded one instance, from 1985-1986, where the index was up over 500% and skews the results to the positive even further
· The worst performer of the 24 is from 1998 to 1999, and is down -21.2%. The best is 1985 to 1986, with a return of 236.9%

Forward returns of the 24 most similar instances of the current one year price trend in Mexico’s (BMV IPC) history

Here are the 5 most similar comps in order from 2002, 1999, 2010, 2004 and 1997, and with the current 1 year price trend in overlaid in blue.

Playing the Energy Rebound: Full year projections for Chesapeake Energy and Range Resources based on Probabilities

Crude Oil is down almost 50% since June 13th. There are not many times in recent history where we’ve seen Crude drop so precipitously. What’s more telling is the trajectory of the recent move, which is what makes capturing “similar environments historically” meaningful for forward return probabilities. Based on our recent analysis (market call posted on our website December 1st), there are not many times where Crude Oil, with a similar trajectory, has continued to trade further down from here: really only one time at the end of 1993.

Expecting a rebound in Crude, we cranked up EidoSearch to find some Energy stocks with the strongest probability of taking advantage and outperforming in 2015. We found a couple of large cap E&P stocks, Range Resources (RRC) and Chesapeake Energy Corp (CHK), that fit the bill.

Both patterns are similar in trajectory, and we found many instances in Energy stocks historically from the Energy Crash and recovery from 2008. With statistical significance, there’s 85% probability that Range Resources will be above $56.94 (just about its current price) in 1 year.

There’s 85% probability Chesapeake Energy will be above its current price in 1 year

Commodities: High Grade Copper prices will be up in 2015, halting 4 year downward trend

After bottoming at $1.25 in December 2008, High Grade Copper prices had ripped all the way up to $4.63 by February of 2011. Since that time, almost 4 years ago, prices have been in a steady decline based on global demand woes and increasing supplies and now sit at $2.91.

Rising supply from mines is likely to keep prices in check, and Goldman Sachs last month cut their outlook for 2015. But, there still appears to be some upside. According to the ICSG, Copper usage increased 12% in 2014, whereas mine production increased just 3%. In an article in Reuters a few weeks back, Oscar Gonzalez Rocha, the President of Southern Copper Corporation, said, “With demand recovering in the U.S. and Europe, and Chinese copper consumption growth maintaining at current levels, we see 2015 copper prices at about $3.15 a pound with quite a lot of upside potential.”

We looked at High Grade’s Copper prices back to 1960, and found 11 similar instances of the current 1 year price trend. Although we’re not projecting huge upside, in the last 55 years we’ve not seen any instances where prices drop more than another -8.6% (2013) in the next year and the average return in the next 1 year of all 11 instances is 5.7%.

5 most similar comps from history

Happy Holidays!