FT Alphaville had despaired of any indicator stepping up to the mark set by the usual “throwing darts blind©” technique.
But, courtesy of the Saïd Business School (via the FT’s Duncan Robinson), we may have found one.
It’s the Alex indicator. A subtle yet devastating approach to market prediction wrought to celebrate the Daily Telegraph cartoon’s 25th birthday.
From Saïd Business School:
Alex is the quintessential investment banker. In the words of his creators, he is overpaid, lazy, cynical, callous, materialistic, networked, ruthless, charming, entertaining and humorous. Alex is a stereotype, no doubt about it, but he is not simply the caricature banker who is currently getting such a bashing in the popular press. This caricature has the City’s blessing. Alex is a reflection not so much of how others see the City, but of how the City sees itself.
Since we argue that Alex reflects what the City thinks about itself, we first need to know whether Alex is a reliable weather vane, i.e., that his preoccupations are those of the City more widely. Is Alex in touch with the mood on the markets, for instance? Yes, he is. Take hedge funds, which become important between 2002 and 2006. Alex does not mention hedge funds until 2002, but then talks about them a lot, his interest peaking in 2007 together with that of the wider market.
The creators of Alex collect ideas for the cartoon by talking to a variety of market participants. As such, they are collecting data on sentiment, and we might therefore expect Alex’s preoccupations – as measured by mentions of certain words – to relate to market performance.
The authors tested the theory and the results were startling(!):
Three of the factors tested were statistically significant at the 10 per cent level:
- Alex or Clive being fired resulted in a 23.4 per cent rise in the market
- The mention of the internet was very negative, with a coefficient of -211.8 (because internet is not a very common word).
- When Alex was being lunched (or was lunching others) more relative to the previous year,the market tended to fall in the subsequent year.
But most impressively:
Our model uses data from Alex to predict the following year’s FTSE performance. Thejustification for using words such as ‘lunch’, ‘dress down’, ‘internet’, ‘bonus’ and ‘redundancy’ is that they reflect sentiment in Alex and the wider City. Lots of lunches, dressing down and mentions of the internet are signs that the good times are rolling, whereas worries about bonuses or redundancy – and particularly Alex or Clive being fired – suggest that the market is bottoming.
The results suggest that, contrary to City claims to be ahead of the market, the City is in factbehind the curve. They fire people and reduce bonuses just as the market is bottoming. The fitisn’t bad, although our model fails to predict the 2008 crash or the nasty recession of 1990. Butit has been a good indicator in other years – it did a very good job in 2011 predicting a slight fall and in 2009 and 2010.
And for any readers looking for investment tips, our model suggests that the FTSE will rise by 10.1% in 2012…
On a more personal level the authors found
1. Bankers cheat on their wives. Alex’s wife matters only in the first five years or so,and is replaced by a string of mistresses as he works his way up the corporatehierarchy: first there is Wendy (Alex’s secretary), then Amanda (his colleague), followedby Jane (his boss) and, most recently, Carolyn (his client).
2. Bankers change jobs frequently but change careers only rarely. But since thecrisis, career changes have become more commonplace. In 2009, Simon left the Cityto become a schoolteacher while Justin became an MP. What is in store for Alex andfriends in the future?
3. Bankers are increasingly frightened of the media. Alex hardly used to mention the press, despite the fact that his brother is a reporter, but since the crisis, fear of negative stories is a constant theme that impinges on some of Alex’s favourite excesses. Conspicuous consumption is definitely out.
4. Bankers love gadgets. Alex has always bragged about being the first to have thelatest hi-tech gadget, even when that meant buckling under the weight of a brick-like‘portable’ phone. But mentions of Blackberry, smartphones and the like explode from 2004.
5. Bankers play hard when times are good. Mentions of wine, lunch, maitre’d and lapdancingall peak when the market is riding high.
And lastly:
Alex is, by and large, utterly unconcerned about the wider economy. He panics a lot about unemployment and the threat of redundancy when the market falls, but that bears no relation to increases in the unemployment rate in the wider UK economy . Not surprising perhaps, but telling.
Related links:
Alex Archive – The Telegraph