Big Mac Investing - How to Consider the Fast Food Market

Rummaging through some Economist archives recently, a reminder arose of the Big Mac Index – a novel way to explain currency trading. The world of fast food has been an intriguing one since the start of the recession, with consumers trading in sit down meals for dollar menus at quick service restaurants (QSRs) such as McDonalds (NYSE:MCD), Burger King (NYSE:BKC), and Taco Bell (NYSE:YUM). The Big Mac Index is an interesting look into how valuable a double patty is across countries, but sales of these Big Macs and other QSRs sandwiches have been an interesting case. Sales have not grown in every quarter at these QSRs, but certainly have not declined as far as other segments.

Yum! Brands, owners of the Taco Bell franchise, released a raise in their earnings forecast earlier this week. Do not look to this as a clear indication that consumers are ready to fall back into stuffing their faces, however. In a non-robust analysis below, you will find how to use search to analyze which of the firms in the QSR space are outperforming each other in a given geography (the United States in this case).

Searches for the nearest fast food restaurant location have exploded over the course of the recession. Locations are important to factor into your search analysis as they are a clear indicator of interest (while a simple brand search may be the direct product of advertising response).

Sales at these QSRs have not grown as strongly as the charts indicate, though, mainly driven by the QSRs' focus on lower priced meals. Taking a look at these searches in the US, though, indicates that McDonalds is far and away the winner of the fast food battle.

The Yum! increased earnings story becomes more apparent in search when taking a look into their other key brand, Pizza Hut: consumers are ready to get back into seats and sit down with their families.

The interest in locations has exploded over the course of the past year and a half due in large part to cost concerns of transportation. When holding the location constant as we have here, however, we are able to get a proxy of the US consumer’s intent to visit these dining establishments.

Moral of the story: Yum! Brands has seen a strong interest lift as consumers want to find their nearest Pizza Hut; McDonalds has seen a strong interest increase as well, but not all fast food restaurants are going to come out clear winners. Burger King is at the bottom of this competition, with a concavity inflection in their searches taking place in the 2^nd half of this year.

Stacking Up the EDMC IPO with Apollo Group

The story of the recession has been consistently: financials, manufacturing, and automotive are the key laggards; healthcare and education have been the bright spots. Firms such as Apollo Group (NASDAQ:APOL), owners of the University of Phoenix, and DeVry, Inc (NYSE:DV) have been leading the charge as the largest players in the for-profit education sector. While the S&P 500 is down 28% since the start of 2008, Apollo Group and DeVry are up 6% and 10% respectively. It is curious as to what this will mean for the IPO of Education Management Corporation (to be NASDAQ:EDMC) on October 1^st.

Why have Apollo and DeVry been so resilient? Common knowledge would say that as unemployment rises, workers want to return to school to increase their skill set. Traditional non-profit universities filled this void in previous recessions; but for-profit schools (with looser acceptance standards) allow for an easy entry.

Search backs this story strongly. Searches for “university of phoenix” and “devry university” back the trend that their parent companies have benefited in stock price. Consumers are turning to these programs. This creates for an interesting story with EDMC whose top brands are Art Institute and Argosy University.

Taking a look at searches for Argosy, it appears to follow the trend (accelerating through Q3 even). This could bode well for the $18-$22 asking price.

The outlook is not as promising for the Art Institute, however. Searches for the school which builds graphic designers, among other categories, has been in a decline. EDMC reports that revenues grew 19.4% for the year ending June 30, 2009. The specific schools have not been identified, however. APOL has not released their numbers for the same time period, but through their first 3 quarters of reporting in their fiscal year, they have already met 92.2% of last year's revenue. Staying in line for Q3 revenue would put APOL at a 26% growth rate y/y.

It is important to keep a pulse in the long run on where these schools lay relative to each other regardless of the direction that EDMC takes on their IPO on 10/1. When taking your picks in the education space, keep consumer interest in mind. The most telling comparison may lie in the breakout between Apollo’s University of Phoenix and EDMC’s top 2 stars.

Whether you think education is a bubble or not, the searches do not lie. Apollo’s University of Phoenix does appear to be top of mind for consumers.

How Internet Data Fuels the Health Care Debate

There has not been a day in the past weeks that has passed without a mention on CNBC or Bloomberg about the current health care proposals underway by the Obama administration. The bottom line issue: health insurance has become too expensive for Americans.

It has become a hot button issue, one dividing strong political lines. Amidst the turmoil, top health insurance providers such as UnitedHealthcare Group (NYSE:UNH) and WellPoint, Inc (NYSE:WLP) have seemed to remain resilient throughout. Why the resilience?

Most analysts would argue that the extremely high uncertainty around the health care debate is keeping these tickers stagnant. The uncertainty is rooted in that deep dividing line and will hopefully lead to a deeper understanding into why health insurance has become unaffordable for the 10% of Americans who cannot afford coverage.

The most eye-popping statistic comes when comparing medical costs to CPI:

Indexed to 1982 Value
Year	CPI	Cost of Hospital Services
1999	166.6	109.3
2000	172.2	115.9
2001	177.1	123.6
2002	179.9	134.7
2003	184	144.7
2004	188.9	153.4
2005	195.3	161.6
2006	201.6	172.1
2007	207.3	183.6
2008	215.3	197.2
Total % Change	29.1%	80.4%

Source: Centers for Medicare and Medicaid Services, Office of the Actuary

This has posited a nearly impossible situation for the health insurance providers, dubbed as “profiteers.” While hospital costs are not the full picture of what goes into health coverage, it is difficult to imagine a scenario where the cost of premiums could not have increased at a 6%+ rate each of the past ten years.

Search data shows us the resilience of consumers despite these trying times, however.

Comparing 3 main themes in the health insurance search arena, affordability reigns supreme among consumers, not the low cost options. This demand has been constant from the time that Google started reporting on searches in 2004. What jumps out from this chart is the staggering rise of the action-oriented keyword “apply” in the health insurance space.

Consumers have had a constant demand for affordable health insurance, but over the past few years, they have been taking matters into their own hands to find the right ways to apply for health insurance. Affordability, the issue at hand for the Obama administration, will certainly be at the forefront of this debate. This search data, paired with the resilience of health insurer stock prices, indicates that the debate may not be a “helpless consumer.” Consumers are taking matters into their own hands to play off of the competitive nature of internet shopping to find their most affordable option.

The debate will likely continue in the coming months, with all sides bringing valid arguments to the table. Healthy argument tends to yield healthy compromise and that compromise will hopefully come with a look into addressing the following scenario:

1. Rising operational expenses to health insurance providers causes compressed margins as expenses rise at a rate 2-3x the cost of inflation (CPI).
2. UnitedHealth and WellPoint, among others, have a profitability obligation to shareholders which requires them to maintain their premiums at a trade-off between their rising opex and volume of customers.
3. Consumers have increasingly turned to the internet to do comparison shopping, which naturally drives the price down to the market equilibrium of what providers can afford at an acceptable rate.

These market factors in play lead the current cost of health care to be at the market equilibrium price, based on revenue vs. cost. The only way to naturally drive the price (cost) of health care to consumers is to look into the reasons for the rising opex. Hospital costs rising over 80% in the past 10 years while other goods and services have raised a mere 29%; this begs the question:

Rather than focus on mandating a lower cost of health insurance, shouldn’t we attack the reasons why health insurance has become so expensive?

The public debate has not yet shifted to this arena, but it appears that the equity market may already be taking this into account. Stocks like UnitedHealthcare and WellPoint will be the reflection of where we move toward in health care reform. At this point, they appear to indicate that we will either stay status quo or move in the private direction.

Google Finance Launches Economic Indicator Prediction Tool

Earlier today, Google (NASDAQ:GOOG) released a new tool on their Google Finance platform called Google Domestic Trends. The idea behind the platform is to use a bucket of queries to serve as a proxy for various economic indicators such as unemployment, air travel, credit & lending, etc.

It's reassuring to see that Google is moving toward this direction in moving toward sharing their data beyond its value to advertisers and the CDC to include your average, everyday investor.

It was also very interesting to see a (relatively) main stream take on the concept of using search data for investment recommendations in today's Tech Crunch. There is still a long way to go with using internet data strategies for retail investors; we are still just at the beginning of a new era.

Disclaimer: Author owns shares in GOOG.

Jobless Claims Prediction Hits the Mark

Earlier this week, following a Google Insights for Search snafu, Markets with Search predicted that jobless claims would come in flat for the week (in line with consensus). The numbers released today validated the claim. Chalk one up to another win for using search to "predict the present."

Looking further into the issue which resulted in the errant prediction earlier, it is to my understanding that Insights for Search data may take up to 2 days to finalize following the end of a periodic week. The initial prediction was made on data that has not been fully normalized. While this is not ideal, it still enables you to be ahead of data that is delayed by 5 days.

Console Wars: How PS3 Price Cut is Impacting Unit Sales

Two weeks ago, Sony (NYSE:SNE (ADR)) announced that they were cutting the price of their Playstation 3 console by $100 to a price of $299. It has been no secret that PS3 has been the laggard of the next generation consoles (Nintendo's Wii and Microsoft's Xbox 360), but investors will want to know whether this price cut will stimulate growth of Sony's effort.

Initial indications in the search space is that the price cut has in fact driven consumers to express interest in purchase of the PS3 console. Looking through call-to-action "buy" keywords, with a filter to remove searches for consumers seeking to buy "points" on these consoles, it appears that searches for interest in purchasing the Playstation console.

It does not appear that Microsoft (NASDAQ:MSFT) has had as much luck with their reaction to cut the price of their most expensive console, announced a week after Sony. Searches for Xbox purchases remained flat through last week.

These are still initial results and there is much left to be seen of where sales will sit once the dust settles, but the first response appears that Sony is winning this battle.

Disclaimer: Author owns shares in MSFT.

Correction: Jobless Claims Likely to Be In-Line with Consensus this week

There appears to have been a glitch in the data analyzed for yesterday's post. Insights for Search was listing an 18% lift in popularity for key searches in yesterday's evaluation; today's data shows a different story (highlighted below).

The reason for the discrepancy is currently under investigation and I apologize for the confusion.

The current data reflects no major changes in the key searches, which indicates a likely flat week for initial claims, in line with consensus expectations.

Initial Jobless Claims Likely to Miss Consensus this Week

This upcoming Thursday, September 3rd, the initial jobless claims report for the week ending 8/28 will be released. Initial claims have been trending downward over the past weeks, which is a positive sign for the economy, as job retention has been looking fairly stable.

The consensus pick for this week's data is a continuing trend downward, with an expectation around a 1.5% drop. Looking at the search data, however, indicates that there was a sharp increase in searches for key unemployment-driven queries.

On July 16th, we posted the correlation between key searches for unemployment and jobless claims. While it is unlikely that this week's jobless claims release will increase by 18% (as searches have week over week), it is highly likely that the concensus pick will miss the mark in the wrong direction.

[PLEASE NOTE THIS POST HAS BEEN UPDATED TO REFLECT NEW, CONTRARY DATA]

Predicted Housing Starts Number Hits the Mark

On July 23rd, Markets with Search posted an estimate of where the housing starts number would move for the month of July. The post predicted that we would see flat movement in the data, which was the case.

August 18th data showed that the SAAR for housing starts went from 0.582M to 0.581M. We look forward to continuing hitting these predictions in the future.

The Predictability of Search Trends

Google today posted a new insight into the predictability of where search trends will move. The study revealed that with a simple time series forecast, slightly over half of the queries on Google are able to be predicted with high accuracy.

These time series analyses allow you to create a deviation away from where a predicted trend will move toward. Positive and negative misses can help you in benchmarking where a current trend is deviating toward. The other (glass half empty) view is to showcase that another half of Google queries are unpredictable. As we saw with the iPhone data, major releases can serve as an indicator of where current performance of sales is trending. This allows us to get a pulse on where the purchases move relatively.

Using search data to influence your investment decisions is a happy medium between those queries that we can predict and those which roll with the tides. The Google Research Blog post shows the full white paper analysis.

Evaluating the Impact of Cash for Clunkers

The recent CARS (aka “Cash for Clunkers”) campaign has driven the media into frenzy into whether the program is going to be a wild success or wild failure. Taking politics aside, we took a look at searches indicating interest for car purchases.

Ford (NYSE:F) numbers released today show an increase in July sales of 2%. Looking at the overall search numbers, this trend appears to be moving in the north-bound direction. Use search to keep a relative pulse on where consumers are moving their money to buy new vehicles such as Honda (NYSE:HMC) and Toyota (NYSE:TM).

The jury remains out on how Cash for Clunkers will impact policy, but its impact on general car sales for July and August are significantly high. While a seasonable positive bump is expected for these months, stay close to how new car sales are trending with indications of interest through search.

Mortgage Refi Index Prediciton within 4.6%

The MBA posted their weekly numbers on Wednesday, with refinance applications coming in at an index level of 1862. This number falls within 4.6% of the Markets with Search prediction of 1950. This gap is slightly larger than would have been anticipated. Looking to this predictive set of keywords in the future, we will be adding a more comprehensive set to provide more accurate predictions.

Tracking Mortgage Applications with Search

Weekly data releases tend to have a little bit less pull in markets than monthly releases, but they can still have a strong impact. One of the strongest weekly indicators that we see released each Wednesday is the Mortgage Bankers Association Mortgage Applications Indexes.

The data released on Wednesdays comes from the prior week ending Friday. While a 5 day lag may not seem like a long time, we can narrow that number by using the power of search data. Taking a look at queries on Google for “mortgage refi” and “mortgage refinance,” it turns out that these indications of interest correspond very highly to action and applications. Comparing these search indexes with the MBA’s Refinance Index, there is an R² of 0.8121.

The last release of the Refi Index came in at 2089.7 for the week ending July 17^th. Data for the week ending July 24^th will be released this Wednesday, July 29^th. Looking at search data, there has been an 8.7% decrease in popularity in searches for this week. This should yield a similar movement in the Refi Index.

Assuming that the Refi Index would follow in a similar relativity to search, this week’s index should come in at ~1950.

Bank of Israel Using Search Data to Get a Pulse on Economic Activity

The Bank of Israel recently posted a brief analysis highlighting how they have looked at Google Insights for Search to predict economic activity. I highly encourage reading through the white paper linked from the press release; it truly shows the power and depth you can get into when analyzing search data.

A very interesting result from this analysis shows some good news for the Israeli economy:

In the last few months the query indices in Israel point to a reduction in the probability of a slowdown; that conclusion is based on the moderation of the decline in private consumption. The indices do, however, indicate a steep increase in unemployment in the second quarter of the year, to more than 8 percent.

It is reassuring to see these kinds of analyses pop up outside of Markets with Search. Thanks for the tip on this press release, Hal.

I will try to repost these articles as I come across them to point to ideas outside of MWS. Have a great weekend and happy trading.

Building with Housing Starts Data

Residential real estate has been at the heart of market movements since the subprime crash dating back to February 2007. Housing inventory has been skyrocketing with foreclosures getting to all time high levels. This has put significant pressure on the home building sector.

Home building has not ceased, but has significantly decreased. New housing starts in June 2009 were at a level 28% of where they were at the same time in 2005. These starts have ramifications outside of just homebuilders like DR Horton (NYSE:DHI), Pulte Homes (NYSE:PHM), and Lennar (NYSE:LEN). Suppliers for new home supplies are impacted as well.

Searches for key indications of interest in the housing sector fall very closely in line with where the true number falls. Going back to 2005, there is an R² of 0.7667 with searches for these key indicators and the true housing starts number.

Markets with Search (tentative) prediction for July 2009 housing starts: flat. The numbers will be out in mid-August.

Updated Apple Earnings: iPhone Sales Prediction within 100k

Apple just released their earnings for fiscal Q3 2009. Consensus picks for iPhone units sold came in between 4.5 and 5.0 million; the Markets with Search prediction came in at 5.3 million.

The final number of quarterly sales: 5.2 million. While the data points were not large to choose from, the lift in search traffic turned out to be an accurate predictor of this data indicator.

Hopefully more of these predictions will reach the same accuracy in the future.

Ahead of Earnings: Predicting iPhone Sales

Apple Inc (NASDAQ:AAPL) is set to release earnings for their fiscal Q3 2009 on Tuesday, July 21. A large part of the speculation into the shareholder value of Apple is the success of their iPhone, which launched on June 19^th. In fiscal Q2 2009, Apple sold 3.79 million iPhone units globally.

Predicting the performance of iPhone sales can be tough if looking simply at searches for the term “iPhone.” These searches are subject to the volatility of news, branding, and buzz around the product. An easy filter to take a peek into how sales are performing is to add call to action keywords into search terms. Since the product is global, the analysis below takes a global look at “buy iphone” searches in English, Spanish, Russian, Japanese, and German (Apple’s top iPhone market languages).

While there are not yet enough data points to run a statistically significant regression on searches to sales, eyeballing the data looks quite astounding.

The major global launch of the iPhone 3G in July 2008 appears to have skewed the data for calendar Q2 and Q3 2008, yet all other search movements appear to proportionally fall and predict the according iPhone sales numbers for that quarter. Taking Q2 and Q3 as outliers of the globalization of the iPhone, the most recent search numbers for the past quarter’s lift would indicate that iPhone sales will rise 40% in the earnings release on Tuesday.

Markets with Search prediction for fiscal Q3 2009 Apple iPhone unit sales: 5.3 million.

Predicting the Present

The coming posts to Markets with Search will provide further analysis similar to the jobless trends data. These analyses aim to provide actionable data-oriented plays on the market. Before getting into more, it is important to note some other sources that are out there for your reading. I’ll be posting these kinds of articles intermittently.

The Chief Economist of Google, Hal Varian, has published “Predicting the Present with Google Trends.” This whitepaper embodies the power of the real-time nature of internet data; we can increase transparency into lagged data. In this post, Varian explores how to predict auto sales, home sales, retail sales, and travel behavior using the wisdom of the online crowd.

All of these factors can issue trade ideas. Play around with your ideas on Google Insights or Microsoft xRank.

Enjoy the light weekend read.

Getting Ahead of Initial Jobless Claims

Have you ever wanted to get ahead of data before the official release to the street? Have a play based on the numbers?

The time has finally come. After doing some backtesting, some content has been geared up and ready for release. Today’s trend: using Google to predict where seasonally adjusted job claims will turn… with 88% confidence.

Consumers turn to the search engine juggernaut to indicate interest in topics that have been on their minds, making it the world’s largest focus group. One of the most interested topics of 2009: What do I do if I just lost my job?

Answer: search for filing unemployment. With an R² of 0.8815, searches for “file unemployment” and “filing unemployment” fall right in line with actual seasonally adjusted Initial Jobless claims for a given week.

It is important to note that the indexing algorithm for Insights for Search readjusts with every new peak in popularity, requiring you to index SA Initial Claims accordingly using the methodology (SA Initial Claims_n / Max SA Initial Claims * 100). Given the values from July 16, 2009 the following model will allow you to fairly accurately predict the movement in jobless claims:

Predicted SA Initial Claims = 5006.2 * (Search Index for Unemployment Filing) + 225,046

The Story Behind Markets with Search

Getting macromarket data on a real time basis to influence true market value calculations is the focus of this blog.

The movement of investment markets is centered upon paying what investors believe to be the true market value (TMV) of an underlying asset.  An investor calculates that TMV then looks at the current bid/ask price to identify a chance to profit from a purchase or sale of the asset.  Investing 101 in a nutshell.

There are, of course, millions of factors that can go into calculating that TMV.  Many of those factors are based on data that is released on a lagging basis.  Consumer confidence, unemployment, weekly mortgage applications, and several other data all require us to wait for an aggregation of data before their release to trigger market movements.

What if we didn’t have to wait for this data?

Google started the online predictive market with their release of Flu Trends in late 2008, which uses regional searches for flu symptoms as a real-time indicator of where outbreaks are looming. This is incredibly powerful (and accurate) as CDC data lags two weeks at the very least.

This blog seeks to use powerful tools available to the public such as Google Insights for Search, Twitter Search, Indeed.com Job Trends, and others to apply the flu trends principle to secondary markets.

Thank you for your readership.