Stocks Go Flat

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Enter your email address and zip code to set up customized email alerts.You have successfully emailed the post. Not much going on in U.S. markets today, as there were no major economic data releases this morning.

However, the 10-year U.S. Treasury yield did hit its highest level in over a year this morning, at 2.22%.

Meanwhile, after a small upward move earlier, stocks have retraced their gains, and the S&P 500 is now flat on the day.

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Low Volatility Investing Strategies Got Crushed In May

Low volatility had a bad month in May, and there has been a slew of commentary on this.  See Abnormal Returns here for a bunch of links.

Deutsche Bank's 'The Quant View' by Rochester Cahan summarized the month's performance by noting  that

'Last month we argued that the Low Volatility/High Dividend Yield trade was looking crowded, and cautioned that this could indicate elevated downside risk. It turns out that call was prescient.' 

"Could" and "change in probability" means nothing, because it's consistent with anything, eg, if the rate rises it's hardly testable because the old and new probability are couched merely as possibilities, and if the probability doesn't change, that's in the forecast too ('could').  Now if they said, don't buy or short strategy X this month, that would have been prescient.  I wonder if such people realize how disingenuous this is, or if they think their nuance is actually highly rigorous analysis.

In any case, last month was very bad for low volatility strategies, leading many researchers to reassess the validity of this approach.  But, to put it in perspective, here's the total return over the past 12 months, using my beta data.

Clearly the past year, higher beta has been the better place to be, while lower beta has not.  As the SP500 rose 26% from May 31 2012 through May 31 2013, this is not surprising: on average, over shorter horizons like years, betas are accurate, so higher beta stocks do better in rising markets, lower beta portfolios underperform. For example, over the past year, given the SP500 rose 26%, low beta stocks rose 70% of that, high beta 170% of that, implying betas of 0.7 and 1.7, which is totally consistent with the simple CAPM for the high beta stocks, and better-than-expected for the low beta portfolio (ie, its beta was 0.6 in that period).  If you bought low vol stocks not understanding this, well, you really need to.

Now, many people seem to infer from this that low vol/beta has been a bad bet over the past year. If you evaluate yourself purely against the indices, this is true: deviations from the benchmark are only good if they are above the benchmark.  Yet, in simple Sharpe ratio or Information ratio, high beta portfolio did poorly, even in this period.  The clear winner is actually a Beta-1.0 portfolio, which has the highest Sharpe and Information ratio.  Like low volatility, I have championed the beta 1.0 portfolio for a while, and I'm sure it will be a big fund someday.

Stats on US portfolios, 5/31/12-5/31/13

Falkenblog

Internationally we see the same thing: low vol did worse in raw returns, but much better in a pure Sharpe.

Falkenblog

See data here.  I think this highlights a profound truth, that as a practical matter investors don't care about Sharpe ratios as much as returns relative to the benchmark.

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STOCKS GO NOWHERE: Here's What You Need To Know

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Enter your email address and zip code to set up customized email alerts.You have successfully emailed the post. Absent any major economic data releases, it was a fairly quiet day in the market.

First, the scoreboard:

And now, the top stories:

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The First Baby Is Here Whose Doctor Got Paid In Bitcoin

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Enter your email address and zip code to set up customized email alerts.You have successfully emailed the post. The world's first Bitcoin baby is here and adorable.

That's thanks to Dr. C. Terence Lee, a California-based fertility specialist and Bitcoin aficionado. Lee offered a couple with whom he had worked with before a 50% discount if they would go along with his dream of fostering a Bitcoin retail economy (of babies). As CNN Money's Stacy Cowley reports:  

The child was born thanks to a frozen embryo transfer cycle paid for with bitcoins. Lee says it's the first time he's aware of that anyone has paid for fertility treatments that way.

Lee presented on his unconventional fertility methods at the Bitcoin 2013 conference.

Apparently Lee is just in it for the love of the Bitcoin game. The digital currency's recent crash doesn't bother him at all.

Lee claims he wouldn't care if his bitcoins lost their value entirely -- he and his staff are having fun figuring out the technology, meeting new people, and enjoying the economic novelty of a whole new kind of currency. He's even managed to convert a few more of his clients.

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Lululemon CEO Christine Day Is Stepping Down

Lululemon CEO Christine Day is stepping down.

Shares are tanking on the news.

Day has been the head of luxury yoga-wear maker Lululemon since 2008. Before that, she worked as an executive at Starbucks.

The board has hired an executive search committee, and Day will stay on as CEO until her replacement is chosen, the company said today.

"Being a part of Lululemon for the past five and a half years has been an incredible journey. I am proud of building a world class team that has produced one of the best growth, brand and profit stories in retail," Day said in a company release.

"Plans have been laid for the next five years and a vision set for the next ten. Now is the right time to bring in a CEO who will drive the next phase of Lululemon's development and growth. I will continue to actively lead the organization while the Board searches for a new CEO, and will work to ensure a smooth transition," Day said.

Day's leadership was called into question after a series of quality control issues with the brand's clothing. 

The worst offense happened in March, after the retailer had to recall 17% of its black luon yoga pants for being too sheer.

That gaffe cost the company millions of dollars and resulted in the resignation of Chief Product Officer Sheree Waterson. 

The retailer figured out the source of the problem and has started re-stocking shelves.

The company didn't say where Day plans to go next. 

Lululemon beat Wall Street's expectations during earnings today. 

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Lululemon Shares Are Tanking After CEO Announces She Will Step Down (LULU)

Yoga clothing retailer Lululemon just reported earnings, and the stock is tanking.

The numbers aren't bad – the company beat expectations on earnings and revenue – but the CEO used the opportunity to announce that she would be stepping down.

Shares are down 9% in after-hours trading.

Below is the full text from the press release.

VANCOUVER, British Columbia--(BUSINESS WIRE)-- lululemon athletica inc. [NASDAQ:LULU; TSX:LLL] today announced financial results for the first quarter ended May 5, 2013. lululemon also announced today that after a five and half year tenure Christine Day will step down as the Company's Chief Executive Officer when a successor is named. The Board has formed a search committee and enacted its CEO succession plan. Ms. Day's decision is being announced at this time so the Board has the benefit of a healthy transition period, and can openly use that time for a thorough search for the next CEO.

"Being a part of lululemon for the past five and a half years has been an incredible journey. I am proud of building a world class team that has produced one of the best growth, brand and profit stories in retail," said Ms. Day. "Plans have been laid for the next five years and a vision set for the next ten. Now is the right time to bring in a CEO who will drive the next phase of lululemon's development and growth. I will continue to actively lead the organization while the Board searches for a new CEO, and will work to ensure a smooth transition."

"Christine has been an exceptional leader for lululemon, successfully embracing the culture while growing the business and returning value to all of our stakeholders including our guests, employees, partners and shareholders," said Chip Wilson, Chairman of the lululemon Board of Directors. "I thank Christine for her leadership, contributions and commitment to lululemon. I am confident that we will find the right person to lead this strong team and continue to build on this excellent foundation."

RESULTS FOR THE FIRST QUARTER ENDED MAY 5, 2013

Commenting on events of the first quarter Ms. Day added: "The past quarter has been one of the most important in our company's history. While we regret that we had quality issues with our black luon we are proud of the organization's ability to get luon delivered back into our stores within 90 days of having pulled it from our line, all the while keeping our guests happy and engaged with the brand."

For the first quarter ended May 5, 2013:

Net revenue for the quarter increased 21% to $345.8 million from $285.7 million in the first quarter of fiscal 2012.Comparable stores sales for the first quarter increased by 7% on a constant dollar basis.Direct to consumer revenue increased 40% to $54.0 million, or 15.6% of total Company revenues, in the first quarter of fiscal 2013, an increase from 13.5% of total Company revenues in the first quarter of fiscal 2012.Gross profit for the quarter increased 9% to $170.7 million, including a provision of $17.5 million for inventories charged to cost of sales related to the pull-back of black luon pants, and as a percentage of net revenue gross profit decreased to 49.4% for the quarter from 55.0% in the first quarter of fiscal 2012.Income from operations for the quarter decreased 10% to $65.9 million, and as a percentage of net revenue was 19.1% compared to 25.6% of net revenue in the first quarter of fiscal 2012.The tax rate for the quarter was 29.8% compared to 36.5% a year ago. The lower effective rate reflects the ongoing impact of revised intercompany pricing agreements.Diluted earnings per share for the quarter were $0.32 on net income of $47.3 million, compared to diluted earnings per share of$0.32 on net income of $46.6 million in the first quarter of fiscal 2012.

The Company ended the first quarter of fiscal 2013 with $588.4 million in cash and cash equivalents compared to $424.3 million at the end of the first quarter of fiscal 2012. Inventory at the end of the first quarter of fiscal 2013 totaled $143.7 million compared to $107.7 million at the end of the first quarter of fiscal 2012. The Company ended the quarter with 218 stores in North America and Australia.

Updated Outlook

For the second quarter of fiscal 2013, we expect net revenue to be in the range of $340 million to $345 million based on a comparable-store sales percentage increase of 5% to 7% on a constant-dollar basis. Diluted earnings per share are expected to be in the range of $0.33 to$0.35 for the quarter. This assumes 146.0 million diluted weighted-average shares outstanding and a 30.0% tax rate.

For the full fiscal 2013, we now expect net revenue to be in the range of $1,645 million to $1,665 million and diluted earnings per share are expected to be in the range of $1.96 to $2.01 for the full year. This assumes 146.2 million diluted weighted-average shares outstanding and a tax rate of 30.0%.

Voluntarily Delist from Toronto Stock Exchange

The Company has provided written notice to the Toronto Stock Exchange ("TSX") regarding the delisting of its common stock. The Company anticipates that its common stock will be delisted from the TSX at the close of trading on June 24, 2013. The Company believes that the minimal trading volume of its shares on the TSX no longer justifies the expenses and administrative efforts associated with maintaining this dual listing. The Company's listing with NASDAQ provides its shareholders with sufficient liquidity, as NASDAQ accounts for nearly all of the Company's current trading volume. Further, administrative and regulatory efficiencies will be achieved by focusing on the single listing. The Company's common stock will continue to be listed and trade on NASDAQ and its Canadian shareholders will be able to continue to trade through their brokers on that market.

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