Can lipstick predict the markets?

published 24 November 2017

Investors are drowning in data. Practically every day we are confronted with some economic indicator or index. Global markets tend to pay particularly close attention to major gauges such as employment data, and business and consumer confidence surveys. But while these can be helpful, they are never foolproof, so analysts are always on the lookout for new ways to monitor activity. These alternative indicators range from scientific and accurate to quirky and frivolous.

Starting at the sensible end of the spectrum, one alternative indicator that has established itself in recent years is Deloitte's biannual London Office Crane Survey. It monitors office building projects by taking into account evidence of construction such as cranes and scaffolding, providing an insight into the state of the commercial property market in central London and the health of the city's overall economy. The China Satellite Manufacturing Index from SpaceKnow assesses satellite pictures of industrial regions across China to measure activity in the sector.

Many analysts highlight the Baltic Dry Index, which tracks freight rates for shipping dry commodities. An uptick in the index heralds a healthier global economy. There are several versions of the Skyscraper Index, which holds that the top of a cycle is marked by an attempt to construct the tallest skyscraper in the world, a reflection of the hubris and ambition prevalent in a boom. The construction of the Petronas Towers in Kuala Lumpur, for instance, coincided with the start of the late 1990s Asian crisis. Ominously, Saudi Arabia is building the Jeddah Tower, which will be 1km tall when complete.

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Meanwhile, the Toronto-listed BuzzSocial Media Insights Index is designed to exploit momentum in the market by seeing whichinvestments are trending on social media. Two older gauges are the hemline and lipstick indicators. Hemlines are high in boom times, signalling rising confidence, while consumers cut back and buy little treats, such as lipstick, if they fear a downturn.

But are any of these helpful? The main drawback is that they are coincident indicators, telling us what's happening now, rather than usefully hinting at the near future, as some economic indicators notably consumer confidence and Purchasing Managers' Indices (PMIs) tend to do. The Baltic Dry index is the closest to a leading indicator, but its link to the global economy has broken down in recent years owing to a glut of ships, which depressed freight rates. It's worth keeping an eye on a couple of alternative indicators to see if they complement the official data and your own assessment of the situation. But they should never be more than a small part of your investment decision-making.

I wish I knew what a stock split was, but I'm too embarrassed to ask

A stock split takes place when a company decides to increase the number of its shares in issue by replacing one share with two or more of them. The overall value of a shareholder's holding doesn't change just the number of shares they hold. For example, say a company's share price is £10, and a given shareholder owns 100 shares (£1,000 worth). If the company undertakes a two-for-one stock split, the shareholder would end up holding two shares, each priced at £5, for every one share previously owned. The shareholder would now own 200 shares, but they'd still be worth £1,000 in total.

The idea behind stock splits is to increase liquidity in the shares by lowering the price per share, which should make it easier for people to buy (and sell) individual shares. Stock splits typically only occur when a company is doing well and its shares are in demand, so it is often viewed as a bullish sign.

One company that famously spent a lot of time resisting splitting its stock is Berkshire Hathaway, Warren Buffett's investment vehicle. A single "A-share" in Berkshire now costs around $248,000. Buffett's rationale is that he wants to keep the share illiquid, discouraging short-term investors. However, in 1996, Buffett established a secondary "B-class" of shares to offset the threat of Berkshire "copycat" unit trusts being launched. These originally cost one-30th of the price of the A-shares, and had a fraction of the voting rights of a Class A shareholder. A 50-to-one stock split in 2010 means a B-share now costs around $183. If a company wants to reduce the quantity of shares in issue, it might undertake a reverse stock split. In this case, two £5 shares would be replaced with one £10 share. Any odd lots would be exchanged for cash, so someone with a single £5 share would simply get that amount in cash.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.