Why Quant Analysis Says October Is a Buy

Monday, 5th October, 2015
Melbourne, Australia
By Callum Newman

  • Rise of the drones
  • Market update
  • Should we be fearful of a crash in October?
  • Kmart: hacked and exposed
  • Fred Harrison: the corruption of economics and power

There’s one question when it comes to the prodigious and relentless development in robotics and tech.

Will they destroy your job or create you a new one?

I’m not sure, but I do know this for certain: thousands of drones are coming to the sky near you.

This is a trend you have to be watching…

The Australian Financial Review reported on the weekend that Australian startup Propeller Aerobotics just raised $1 million from private investors. They’ve built a digital platform where mining and construction companies can view 3D maps that drones create as they fly.

As the paper says, drones are a fast and efficient way for farmers to check hundreds of hectares of property. Or telecommunication companies to inspect their towers.

Propeller says the problem for industry was not the drone technology but accessing and sharing the data. Hence the reason Propeller built their digital platform.

Propeller says independent drone operators can use the platform for a fee and their clients can then access the information.

That’s the pitch anyway.

It’s very early days yet for Propeller. But the benchmarks are already being set overseas anyway.

The Economist reported back in July on the development of a drone called Riser. Riser’s job is to inspect aircraft that have suffered a lightning hit or bird strike for damage.

At the moment, engineers stand on elevated platforms and physically inspect the entire plane to get the job done. It can take about ten hours.

Not only does the airline have the expense of the job, the plane is out of action as well.

Riser cuts the time of that process down to 20 minutes.

According to the Economist,

Using this information, a Riser drone can navigate its way around an aeroplane’s surface, keeping a distance of about a metre away from it at all times, and recording as it flies a high-resolution video of what it sees.

The video automatically tags any damage, permitting a human engineer to find it easily and thus decide whether to repair the plane or put it back into service.

Here’s the rub: all this could save airlines a fortune. How long before these drones spread to more and more industries?

Riser can be used for other safety-critical systems as well. Think nuclear reactors and other places you’d rather not go near. This relentless innovation is another example of why over at Cycles, Trends and Forecasts we’re expecting huge wealth to be created over the next ten years.

If you want to know how to take advantage of that, click here.

Market update

Good news! The market is in the green today. At the time of writing the All Ords are up 87 points to trade at 5,177. It’s following on from the positive rise in US stocks on Friday. The Dow Jones rose 1.23%.

That’s not a bad start to the week. But what about the rest of the month? October doesn’t have a great reputation on that front.

Not so fast…

Jason McIntosh over at Quant Trader did some sleuthing on this. Just how bad is October for share investors?

He asked the question…

Should we be fearful of a crash each October?

Over to Jason…

 ‘Humans have a tendency for selective thinking. We notice events that support our beliefs, and we filter out those that challenge them. Psychologists call this confirmation bias.

Yes, October has seen some big falls. The media reminds us of this each year. This builds upon the notion that October is a risky month. But is it more so than any other month?

Well, there is only one way to find out — let’s have a look at the data. I’m going to start with a table. It shows the average monthly performance for the S&P 500 since 1950.


Source: Moneychimp.com

October isn’t so bad. The average return of 0.7% makes it the seventh most profitable month. In fact, October has been up 62% of the time — that puts it in fifth place.

Now let me break it down a bit further. There is more to an average than a single number. The composition of this figure can be revealing.

October’s worst results were in 1987 and 2008 — the market fell 21.8% and 16.8% respectively. These are far from the typical result. They are outliers — statistical long shots.

We also need to consider the upside. This is an important part of the story.

October’s best returns are 16.3%, 11.1%, and 10.8%. The only other month to have three double-digit gains is January. Most months have no double-digit gains at all.

The other point to make is the size of the returns. October’s 16.3% rise in 1974 is the biggest of any month. The closest figure is 13.2% in January 1987.

An explanation for this strength is that October follows the seasonal weak months. Take the gains of 16.3% and 10.8% for instance. Both followed sharp September sell-offs.

You could call October the rebound month. The next few weeks could be interesting.

It’s funny how we only hear about October’s crashes.

Rarely does anyone mention the rallies. And that’s confirmation bias in action — focus on one side, and filter the other.

The message is clear. It makes no sense to sidestep October.’

Kmart: hacked and exposed 

Our tech expert Sam Volkering calls cybersecurity the biggest trend of the 21st century.

At stake is our privacy and personal information.

Every week we seem to get an example of why he says that.

Fairfax Media reported over the weekend that Kmart was forced to email customers informing them of an ‘external privacy breach’.

According to Business Day,

The email says the data stolen was limited to “name, email address, delivery and billing address, telephone number and product purchase details”. No credit card data was stolen in the breach, according to the email.

What’s not clear is how many people were affected. But the message seems to be coming clearer and clearer.

These networks are vulnerable. Companies have no choice but to invest in top notch security or they will lose customers.

Take store cards for example. They are incredibly beneficial for retailers. They can track your purchases. They can send you deals and specials. The closer they can narrow you down — age, gender, martial status, search history etc. — the better they can market products tailored to you.

The most infamous example in the US is Target. They sent catalogues full of baby and pregnancy products to a teenage girl.  The father complained only to discover Target knew his daughter was pregnant before he did.

For the retailers, losing access to this information would come at huge cost. But people will become reluctant to volunteer or cautious about they’re buying behavior if they think it’s going to fall into the wrong hands.

Capital spending in this area is going to be huge. The question is who wins the market share by providing the defensive security.

That’s why Sam calls them his ‘Defender’ stocks.

This is a strong trend that will run for years. You can see how Sam is positioning Revolutionary Tech Investors to take advantage of it here.

Fred Harrison: the corruption of economics and power

In 1983 Fred Harrison wrote a book that predicted that Britain and the Western economies would be in recession in 1992.

They were.

In the preface of a book released in 1997 he forecast Britain and the Western economies to collapse after 2007 and bring on the depression of 2010.

They did.

Fred Harrison and his life’s work is arguably the most important material you can ever read.

His work led my colleague Phillip J Anderson to research over 200 years of US history to discover the real estate cycle at the heart of the American economy.

Fred’s expertise is land economics.

Fred’s the latest guest on The Daily Reckoning Podcast. Tune in and you’ll learn the driving force behind the business cycle…and Fred’s forecasts for the global property markets, including the date for the next major global recession.

You can check out The Daily Reckoning Podcast on iTunes here or Stitcher for Android users here.

Cheers,

Callum +

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End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 31 stocks, including oOh!Media Ltd [ASX:OML], Prophecy International Holdings Ltd [ASX:PRO], Qantas Ltd [ASX:QAN], and Washington H Soul Pattinson & Co Ltd [ASX:SOL].

52-week lows: 17 stocks, including Australian Rural Capital Ltd [ASX:ARC], Shriro Holdings Ltd [ASX:SHM], and Zimplats Holdings Ltd [ASX:ZIM].