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Last Week’s Best Performer- Acadia Healthcare Company

Summary One of 20 ranked (#11th) as best-odds for wealth-building from coming-price forecasts implied by market-maker [MM] hedging on 6/17/2015. Its target upside price of 78.38 was reached (within ½%) on 6/22/2015’s close at $77.99 after a day’s high of $78.50. ACHC’s +7.7% gain in only 5 calendar days produced a huge annual rate, but was only one of 27 hypothetical positions closed on that strong market-performance day. Their average gain of +9¼% in average holding periods of 33 days from prior lists of top20 MM forecasts resulted in gains at an average annual rate of +166%. Let’s look at what specific circumstances created this bonanza. How to build wealth by active investing Passive investing doesn’t do it nearly as well. SPY is now up in price YTD 2015 at an annual rate of 4.5%. Market-Maker [MM]-guided active investing this year, has identified 1281 such closed-out positions as ACHC, 20 a day. They earned at a +31.4% rate. That’s some 2700 basis points of “alpha” better than SPY. Our “leverage” is not financial. Those results are all from straight “long” positions in stocks or ETFs, no options, futures, or margin. We have the “leverage” of perspective. The perspective of market professionals who know, minute by minute, what their big-money “institutional” portfolio manager clients are trying to buy, and to sell, in the kind of volume that can’t be done with ordinary trades. Not only which securities, but at what prices. And on which side of each block trade their firm is being called on to put the firm’s capital at risk to bring the transaction to balance. We get that perspective by knowing what is meant by the way the MMs protect themselves when they hedge their capital exposures. Their actions tell just how far the market pros think prices are likely to get pushed, both up and down. That perspective is an important leverage, but it is magnified by the way we use perspective on the other key investing resource that is required: TIME. Here is what makes active investing active. We not only buy, we sell. We sell according to plan. The plan is set at the time we buy. An explicit price target is set then, with a time limit to our patience for it to be accomplished. We are investing time alongside of our capital. If the sell target price is not reached by when the time limit arrives, the position is sold, gain or loss on the capital is taken, and both capital and time are ready, positioned for immediate reinvestment. Active investing keeps its capital working all the time, it does not try to time the overall market, nor does it make uncompetitive investments in the market, ones which would accept single-digit rates of return in fear of seeing a loss or having to accept one in order to keep capital and time working diligently. Perspective and time-discipline can keep the odds of having winning holdings positions in favor of active investors. Three wins for every loss is quite doable, and the ratio even reaches seven out of every eight. Here are the specifics of how it worked for ACHC Figure 1 pictures how the market-making community has been viewing the price prospects for Acadia Healthcare Company, Inc.(NASDAQ: ACHC ) over the past six months. Figure 1 (used with permission) The vertical lines of Figure 1 are a visual history of forward-looking expectations of coming prices for the subject stock. They are NOT a backward-in-time look at actual daily price ranges, but the heavy dot in each range is the ending market quote of the day the forecast was made. What is important in the picture is the balance of upside prospects in comparison to downside concerns. That ratio is expressed in the Range Index [RI], whose number tells what percentage of the whole range lies below the then current price. A low RI means a large upside. Today’s Range Index is used to evaluate how well prior forecasts of similar RIs for this stock have previously worked out. The size of that historic sample is given near the right-hand end of the data line below the picture. The current RI’s size in relation to all available RIs of the past 5 years is indicated in the small blue thumbnail distribution at the bottom of Figure 1. The first items in the data line are current information: The current high and low of the forecast range, and the percent change from the market quote to the top of the range, as a sell target. The Range Index is of the current forecast. Other items of data are all derived from the history of prior forecasts. They stem from applying a T ime- E fficient R isk M anagement D iscipline to hypothetical holdings initiated by the MM forecasts. That discipline requires a next-day closing price cost position be held no longer than 63 market days (3 months) unless first encountered by a market close equal to or above the sell target. The net payoffs are the cumulative average simple percent gains of all such forecast positions, including losses. Days held are average market rather than calendar days held in the sample positions. Drawdown exposure indicates the typical worst-case price experience during those holding periods. Win odds tells what percentage proportion of the sample recovered from the drawdowns to produce a gain. The cred(ibility) ratio compares the sell target prospect with the historic net payoff experiences. Figure 2 provides a longer-time perspective by drawing a once-a week look from the Figure 1 source forecasts, back over two years. Figure 2 The success of a favorable outlook comparison for ACHC on June 17 was not any rare magic of the moment. It just happened that enough reinforcing circumstances came together on that day to make the forecast and its historical precedents look better than hundreds of other investment candidate competitors. Those dimensions are highlighted in the row of data items below the principal picture of Figure 1. The balance of upside to downside price change prospects in the forecast sets the stage of similar prior forecasts. They were followed by subsequent favorable market price changes that turned out on that day to be competitive in the top20 ranking of over 2500 equity issues, both stocks and ETFs. On other days luck would have it that several additional stocks were included in the daily top20 lists, and then on June 22nd would reach their sell target objectives. Figure 3 puts the same qualifying dimensions as ACHC in Figure 1 together for the days their forecasts were prescient. Then Figure 4 lists them with their closeout results. Figure 3 (click to enlarge) Figure 4 (click to enlarge) Columns (1) to (5) in Figure 4 are the same as in Figure 3. Columns (6) to (11) show the end of day [e.o.d.] cost prices of the day after the forecast, e.o.d.prices on June 22nd, the resulting gains, calendar days the positions were held from the forecast date, and the annual rates of gain achieved. Several things are to be noted. A number of the positions are repeat forecast days for the same stock. This does not make them any less valid, since investors are posed with the recurring task of finding a “best choice” for the employment of liberated or liquidated capital “today” and these issues persisted in being valid competitors for that honor for a number of days. Note that they are not always sequential days. Further, the TERMD portfolio management discipline uses next-day prices as entry costs for each position. Here for Healthsouth Corporation (NYSE: HLS ) the price rose about +10% from $43.29 to $47.41 on the day. It was still included in the scorecard, although a rational investor judgment call might have eliminated it from the choices. As a result, its target-price closeout on the 22nd resulted in a diminished 0.4% gain and a +14% AROR. Also you may note that some of the closeout prices are slightly less than their targets. This is to recognize that investors often become concerned that positions getting close to their targets sometimes back away, losing a gain opportunity and the related time investment. So our sell rule is to take any gain that gets within ½% of the target price. But all exit prices are as e.o.d., so some are above the sell targets, like the 5/21/2015 Aetna (NYSE: AET ) position at $128 instead of $125+. Conclusion These 27 ranked position offerings are an illustration of how active investing takes advantage of the sometimes erratic movements of market prices. It is in the nature of equity markets that investors sometimes get overly depressed and overly enthusiastic. By being prepared for opportunities when they are presented, the active investor often can pick up transient gains that subsequently disappear. This set of stocks is not abnormal in the size of its price moves. They averaged +9.3% gains, and the 2015 YTD average target closeout gains are running +10%. What is unusual in this set is that their time investment has been brief, only 33 calendar days on average, producing an AROR for the set of +165%. Part of the explanation lies in these 27 positions all being successful in reaching their targets. The 2015 YTD target-reaching average (952 of them) took only 46 days to make +10% gains, for an AROR of 113%. The overall YTD average in 2015 is 57 days, including positions closed out by the time limit discipline, making the AROR a more reasonable +31%. But that is well ahead of a passive buy & hold rate of gain in SPY of +4.5%. The man said “It ain’t braggin’ if ya can do it.” We are doing it, have done it before, and have been goaded into this display by passive investment advocate SA contributors whose statements infer that active investors invariably lose money. That’s just not so. We are not in an investment beauty contest with those whose capital resources are extensive enough to allow them to live comfortably off the kinds of placid returns that passive investing typically provide. They are to be congratulated. Our aim is to let investors who are facing financial objective time deadlines that cannot be met by “conventional conservative investing practices” know that there are alternatives that are far more productive and far more risk-limited than they have been led to believe. Alternatives numerous and consistent through time which we intend to continue to record and display. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Vectren’s (VVC) CEO Carl Chapman on Q4 2014 Results – Earnings Call Transcript

Vectren Corp (NYSE: VVC ) Q4 2014 Earnings Conference Call February 17 2015, 02:00 PM ET Executives Robert Goocher – Vice President of Investor Relations and Treasurer Carl Chapman – Chairman, Chief Executive Officer and President Susan Hardwick – Chief Financial Officer and Senior Vice President Ron Christian – Executive Vice President and Chief Legal and External Affairs Officer Analysts Matt Tucker – KeyBanc Capital Markets Paul Patterson – Glenrock Associates Sarah Akers – Wells Fargo Operator Good afternoon and thank you all for joining us on today’s call. This call is being Webcast and shortly following its conclusion a replay will be available on our website at Vectren.com. Yesterday we released our 2014 results and this morning we filed our Form 10-K with the SEC. Under the investor’s link on our website, you can find copies of the Earnings Release, today’s slide presentation and the 10-K. As further described on Slide two, I would like to remind you that many of the statements we make on this call are forward-looking statements. Actual results may differ materially from those discussed in this presentation. Carl Chapman, Vectren’s Chairman, President and CEO, will provide opening remarks on 2014 results, and review our 2015 earnings guidance. He will then turn it over to Susan Hardwick, Senior Vice President and CFO, who will walk through our expectations for 2015. Also, joining us on today’s call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer. Following our prepared remarks, we will be glad to answer any questions you might have. With that, I’ll turn it over to Carl. Carl Chapman Thanks, Robert. And I’d also like to welcome everyone to today’s call. And thank you for your interest in Vectren. Let me start by taking a moment to recognize Robert’s recent announcement of his intention to retire this summer after 40 years in the utility industry. Robert has been an important part of Vectren’s leadership team in his 13 years as treasurer and the last four and a half years as our VP of Investor Relations. All of us at Vectren very much appreciate Robert’s contributions to the company and his role in elevating the treasury and investor relation functions during his time with us. Now lets’ turn to slide four and five as we begin our review of 2014 results, I’d like to remind everyone we’ve excluded Coal Mining results in 2014 and ProLiance results in 2013, the year of disposition for each entity. We believe excluding results or the year of disposition provides the most useful comparison of the results of ongoing operations. You will find a reconciliation of GAAP to non-GAAP measures in the appendix. 2014 consolidated earnings were $2.28 per share in line with guidance and up 7.5% compared to $2.12 per share in 2013. This continues our consistent earnings growth trend that began back in 2010 and continues to be supported by our strong utility results. The Utility Group achieved earnings of $1.08 per share and increased to 4.7% over 2013 earnings of $1.72 per share, drivers of the improved utility results were higher returns from Ohio infrastructure replacement programs and increased margins from residential and commercial customer growth. The weather impact on utility results for the year was minimal as higher electric margins related to increased usage were offset by additional weather related maintenance cost in our GAAP system in the first quarter of 2014. For the year, our Utility Group once again earned near our allowed return. Also, I’m very proud that Vectren’s Electric Utility was the recipient of the 2014 ReliabilityOne Award for top ranked Midsize Utility presented by PA Consulting Group which recognizes Electric Utilities for outage prevention and reduction performance. A lot of effort by our electric employees over the last several years has gone into making our electric systems safe and reliable and when outages do occur they have demonstrated their ability to respond quickly and efficiently to restore service. Congratulations and heartfelt thanks to all of our utility employees for their efforts to meet our customers’ needs every day. Moving on to the Nonutility segment. 2014 earnings were $39.1 million compared to 2013 earnings of $33.0 million. Infrastructure Services continues to experience strong demand for its construction services even though harsh winter weather negatively affected early season construction operations well into the second quarter. This put crews in catch up mode the rest of the year including in the fourth quarter when we also were hampered by weather as the year ended. Because of this weather, overall results for the year for infrastructure services fell short of initial expectations although demand remained strong throughout the year. On April 1st Energy Systems Group acquired the federal sector energy, energy services unit of Chevron Energy Solutions, greatly enhancing our ability to compete for federal energy efficiency projects. We continue to believe 2015 will be a turnaround year for energy services including a return to profitability. And finally on the Nonutility side, Vectren completed the exit of commodity based businesses with the sale of our coal mining segment in August. We are confident that our efforts to narrow our Nonutility business focus over the last few years will continue to lead to consistent and higher quality earnings growth for Vectren shareholders. In conjunction with our simpler, higher quality business mix, back in November we were pleased to provide increased long term growth targets which I’ll discuss more in a few minutes. We are particularly proud of our annualized dividend increase of $0.08 per share or 5.6% in December. This was the largest dividend increase for Vectren or its predecessor since the early 1990s and extended our streak to 55 consecutive years of increasing the dividends paid. Moving onto slide six, I’d like to cover some of the regulatory highlights that will be important to our utility operations and earnings growth for the foreseeable future. Over the last several years, we have worked collaboratively with regulators, legislators and the other utilities in Indiana and Ohio to establish the regulatory framework for the long term cost recovery of our gas infrastructural placement programs that will enhance the reliability and safety of our gas systems. In early 2014, we received approval from the Ohio Commission to recover such costs and in August we received an order from the Indiana Commission under Senate Bills 560 and 251 approving our plans and related recovery. In addition to these orders supporting our gas investment in January 2015 we received an order from the Indiana Commission approving Vectren’s request to upgrade existing emissions control equipment on our coal fired electric generation and approving Vectren’s requested framework for long term cost recovery of the planned investments. This includes equipment required to meet EPA regulations for mercury and air toxic standards or MATS. We expect the total investment to be between $80 million and $90 million. Also in early 2015, Vectren reached an agreement in principle with the Indiana consumers’ advocate to extend gas decoupling until 2020. The final settlement will be filed with the Indiana Commission by March 1st with an order expected well before the December 31 exploration date. As you can see at the bottom of slide six, great strides have been made in creating a regulatory structure that balances the needs of our customers with those of our shareholders. In addition to the various infrastructure recovery mechanisms I discussed, Vectren has also worked collaboratively with our regulators to obtain a number of other regulatory mechanisms to protect margins and recover costs that position Vectren well to earn our allowed return. We believe this outcome is a best-in-class result amongst our peers in the industry. Turning to slide seven as reported yesterday, we are affirming our 2015 consolidated EPS guidance provided in November of $2.40 to $2.55 per share. For several years now, Vectren has demonstrated a record of consistent earnings growth. We expect this record to continue as evidenced by our recently increased long term earnings growth target of 5% to 7%. Our dividend growth will be aligned with earnings growth in our 60% payout target. Our anchor for growth is still our premier utility franchise, which has demonstrated the ability to consistently earn allowed returns. Going forward, we expect utility earnings growth of 4% to 6%, growth will be driven by timely recovery of significant gas infrastructure investments coupled with a continued focus on operating cost control from our culture of performance management. And then as I said earlier, we believe our Nonutility portfolio is now positioned to provide a higher quality earnings mix and more consistent earnings growth driven in the near term by infrastructure services. We are very proud of the consistent earnings growth Vectren has been able to achieve for our shareholders. With earnings growth of 8 plus percent over the past several years as a foundation, we are confident we can achieve our growth targets in the years to come. And with that, I’ll turn it over to Susan who will provide the 2015 outlook for out Utility and Nonutility businesses before opening the discussion up for questions. Susan? Susan Hardwick Thanks, Carl. Turning to slide number eight, we’ll begin with our utility outlook with the 2015 EPS guidance midpoint is affirmed that the $1.90 per share up 5.6% from 2014. As you see in the graph at the bottom, Vectren has consistently grown utility earnings in 2011, the year of our last – gas base rate case order. We expect growth over the next several years to be driven by our return on investment in new gas infrastructure. Before I go on too much further, I should note recent headlines concerning the significant drop in oil prices. Our utility results have not yet been impacted but we recognize that some of our customers are sensitive to low oil prices, some unfavorably and some favorably. We will remain in dialogue with our customers and actively monitor this situation. Now back to the 2105 outlook. As I mentioned the key long term utility growth driver relates to investment in our gas infrastructure system where we expect to invest about $1.3 billion of our total $1.9 billion utility CapEx spend over the next five years. As planned these investments will significantly shift our utility earnings contribution from about 45% gas to approximately 65% gas over the next five years, which we believe should improve the evaluation of our utility business as a more gas weighted operation. Moving onto slide number nine in our infrastructure services business. The key takeaways for VISCO are simply these. Number one, our outlook on 2015 is unchanged, and two, the significant majority of VISCOs work is safety and integrity driven infrastructure repair and replacement while the work directly related to gas or oil gas and oil exploration and production activities represents only about 15% of 2015 expected revenues. Again in reference to the currently low oil prices and relatively low natural gas prices we have seen no decrease in backlog and no significant impact to construction operations to date. As shown in the graph on this slide a large majority of VISCOs projected 2015 revenue will come from pipeline integrity or safety related work just as it did in 2014. New E&P share related construction work will mainly focus on projects that must be completed in the near term such as those needed to eliminate gas flaring or connecting already completed wells. We expect that any potential impact of low oil and natural gas prices on demand for new share related pipeline and related construction work will lag eight to twelve months since many projects have already begun or have near term start dates. And because VISCO targets smaller diameter pipe construction projects we don’t expect that an extended period of low oil prices would impact us to the same degree as others in the industry that derive a larger portion of their business from large diameter pipe projects. While we recognize some risk exists in 2016 if oil prices don’t rebound, we believe the nature of the work VISCO predominantly performs gives the business significant installation from oil price related risk. Over the long term, we expect demand for pipeline maintenance and replacement work to remain very strong throughout 2015 and beyond as utilities continue pursue sizeable pipeline replacement programs and as gas and oil transmission pipeline, integrity and replacement work remain a top priority for our customers. Now, on the slide 10, energy services finished 2014 strong with a record $189 million of new contract signed in the year which resulted in a strong year-end backlog. With project construction averaging about 12 months to 18 months, the current backlog sets the great foundation for 2015 earnings. Also the sales funnel is at record levels with federal sector demonstrating exceptionally strong demand and as a result we continue to expect VESCO to return to profitability in 2015. Slide 11 continues our energy services discussion with the federal market update and key long term growth drivers for VESCO. I want to first highlight our emphasis on growing the sustainable infrastructure segment by leveraging our project management expertise in this area. The types of projects and industry targeted in this market segment are very broad. A few examples include things like combined heat & power plants at industrial food processors, CNG fueling stations for municipal transit systems and waste authorities, and the conversion of coal-fired steam systems for natural gas for universities. It is our view that the demand for such projects and others like these will continue to grow as efficiency and environmental solutions are solved by customers with significant infrastructure challenges. As it relates to the federal sector, overall federal market activity and demand is still very high. But as I mentioned the amount of time it takes for customers to close on contracts, remains the key issues. To combat this issue, VESCO is working cooperatively with individual federal agencies, the U.S. Department of Energy and collectively with several trade organizations to identify way to reduce or eliminate the process bottleneck to improve the sales cycle time. All these works to speed up the federal sector sales cycle will be ongoing. In the interim we expect a number of customers who were delayed in 2014 to sign contracts in the first half of 2015. Related to our federal sector acquisition, a failure to meet certain earn out thresholds at December 31, 2014 triggered the reversal of the contingent consideration liability resulting in an after tax gain of about $8.9 million in 2014. Vectren chose to offset these non-recurring earnings by making a contribution of about $9.1 million after tax to Vectren’s charitable foundation, which is now funded for the next four to five years. The bottom-line is that we continue to expect to drive great value from the acquisition and from the federal market as a whole in 2015 and beyond. To wrap things up let’s turn to the best slide in the deck, slide number 12, you can see that our track record for consistent earnings and dividend growth is expected to continue and further improve over the long term. We have executed on our key strategies to get us where we are today and we believe Vectren has a great business mix and solid regulatory foundation in place that will enable us to continue to deliver excellent returns to our shareholders for many years to come. And with that, operator, we are now ready for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] Your first question is from Matt Tucker with KeyBanc Capital Markets. Your line is open. Matt Tucker Hi, good afternoon and congrats on a nice year. Carl Chapman Thanks, Matt. Matt Tucker Just couple of question on the non-utility segments, I guess first, at energy services, could you just talk little bit about, I mean, given the expected steep decline in gross margin that you’re guiding to, how you get to a swing to profitability this year. I assume you’re expecting to hold operating expenses relatively flat or maybe there’s even opportunity to lower them, if you could just add little color there, please? Carl Chapman Sure. The real driver is the increase in revenue and that increase in revenue is driven by larger projects. The larger projects have a lower gross margin typically and of course it also just mix of project, where some of the sustainable infrastructure may have a lower gross margin and some federal will also potentially have lower gross margin. We’ll keep a close watch on the expenses for sure as we always do. But it really will be driven by greater revenue even though the margin percentage will go down. Matt Tucker Got it. Thanks. And it sounds like you been a little bit disappointed with the pace of bookings on the federal side, but can you maybe talk about how the non-federal activity has been shaping up relative to expectations? Carl Chapman Yes. The public sector was really quite strong in 2014 in terms of contract signings, and we still have a very good funnel there as well. So the issue of course in this business is that you have resell projects every year, but you can see that we start with a strong backlog. We indicated how much of that was federal on the slide, but you can see the total backlog is basically double from this time last year. So the public sector we’re shaping up nicely and of course in that backlog is also sustainable infrastructure where we had some success in 2014 also. Matt Tucker Thank you. And then infrastructure services I understand your backlog and kind of what you’re seeing today gave you the confidence to maintain the guidance there which is great. But with respect to kind of eight months to 12 months lag in activity versus energy prices and the potential slowdown maybe next year. Just curious if you’ve already start to see any change in bidding activity or bidding margins on that shale-related work? Carl Chapman Yes. At this point of course we’ve indicated that the E&P related or shale related is relatively smaller percentage. But I would say across all of our business and infrastructure services we really are seeing a lot of bidding activity and more than we might even have expected. So the bidding activity is good. We have no reason to believe that any real change in the margin at this point. You can see that we have in the appendix our midpoint guidance on margin is really the same as we achieved in 2013 and 2014 and we’ve seen nothing to change our perspective on that at this point. Matt Tucker Got it. Thanks. And then just one on the electric side, I believe it was early at least in the first half of 2014, you announced potential loss of a large industrial electric customer, I believe next year. I was just curious if there is any update on that and the expected potential impact of that loss of the customer? Carl Chapman Yes. There is no update to that. I think we disclosed that and we continue to work with them as to exactly what date that will be that they’ll move to cogeneration. But we are working very hard to replace that margin, already we’ve had some success and we continue to work on a number of economic development activities looking to try to replace that. Matt Tucker Great. Thanks a lot. Carl Chapman Thank you. Operator [Operator Instructions] Your next question is from Paul Patterson with Glenrock Associates. Your line is open. Paul Patterson Good afternoon. Carl Chapman Hi, Paul. Paul Patterson Just on slide nine, when we look at that pie chart about the revenue split for E&P, is the margin is similar number? Is the profitability a similar number to that or is it different? Carl Chapman Well, there would be some difference, always going to be as the mix unfolds during the year. This gives you a pretty good sense on the revenue side. There would be some difference in margins, but as you know we have not disclose margin percentages just for competitive reasons between transmission and distribution, and of course for the same reason we’d not be able to share between E&P related and other kinds of business. Paul Patterson Okay. But can you tell it it’s larger or smaller? Carl Chapman Well, I think we have shared before that the transmission business is a higher margin than distribution, but that’s really all we’ve shared in the past and I think we’d be prepare to share today. Paul Patterson Right. I was actually talking about the E&P element? Carl Chapman Well, E&P is going to be transmission related just because of the – where the business is and the workers that do that work. So we have shared before the transmission margin percentages are higher than distribution and certainly E&P directly related would fall under transmission. Paul Patterson Okay. And then, you guys mentioned in the release and you obviously went over in the call that you were talking to your customers and sort of monitoring what the impact would potentially be in 2016 if prices don’t rebound. So could you just share with us a little bit more about what your customers are sort of indicating or what we might have to think about 2016 if prices don’t rebound? Carl Chapman Well, I think Susan said, she was talk about the utility and we do have customers just depending on obviously which industry they’re in. Some are helped. Some are hurt by low oil prices. But at this point we’re not seeing any significant impact to our earnings from that, and that’s we’ve affirmed guidance today. So there clearly will be some impacts, but we’re not seeing anything that causes us to feel differently about the utility earnings and then we shared also with the lag on the infrastructure side and then I just shared while ago with the bidding activity we see, we’re not seeing any big impact at this point in infrastructure services either. Paul Patterson Right. But when I read the release, I got the impression that you guys said well, the drop in oil prices could have a greater impact to 2016, the long term outlook or trends looks good, but I just wondering, if the prices don’t, could you elaborate little bit more about 2016 if oil prices don’t rebound? Carl Chapman Sure. Yes, and again keep in mind we’ve just said that based on what we’ve seen in the utility for 2015 with pluses and minuses we’re not anticipating any real impacts that change our thoughts in 2015. We have no reason to think anything differently in 2016, obviously time will tell and we’ll know a lot more as we move along for the utility. And then when you move over to infrastructure, keep in mind that we’ve said 15% as E&P directly related, and at this point bidding activity is still strong and we’ll just have to see how prices unfold. Paul Patterson Okay. Maybe just move on the federal market in energy services, if you could elaborate just a little bit further on the comments that you made about working to get the contract delays to be in a more efficiently addressed or to move a little bit further along, Susan talked about, I just wondering if you could elaborate a little bit on what you see actually potentially happening and whether that impacts 2015 or when you see the impact actually showing up? Carl Chapman Well, I think that we obviously will continue to work on that. It’s been the disappointment in the federal side as we’ve shared for few months, but what we try to layout here is we really got a number of activities part of which you’re seeing is that the various federal agencies are not use to handling this much work. As you know President Obama increased the better building initiatives. There is lot of different approaches on renewables and efficiency that some of the agencies are looking at. So we’re really working with specific agencies on how we can assist them in moving approvals through the process. And then we’re also working through the trade agencies or the trade groups associated with energy services to see how the approval processes can be shorten. And it’s really that’s what you get into is just the time frame that it takes to get the actual approvals to the various levels of the federal government. Paul Patterson Right. Thanks. But I just wondering is there any improvement that you guys have in your guidance or is there quantifiable amount or is this is something that you’re working on and you hope that its works out sometime in the future, but you don’t’ – I guess I’m just trying to get a sense as to what you think the impact might be financially when these approval processes are improved? Carl Chapman Yes. Well, obviously for 2015 we have affirmed guidance today, so that it give you a good sense of our expectations for 2015 and I think beyond that we certainly would expect improvements in 2016. We would expect federal projects to move quicker based on our activities, but obviously we’re not giving any 2016 guidance today. But we would believe that we would start to see it’s a show-up in backlog in late 2015 and in 2016, but obviously no real change to any outlook for right now. Operator Your next question is from Sarah Akers with Wells Fargo. Your line is open. Sarah Akers Hey, good afternoon. Carl Chapman Hi, Sarah. Sarah Akers Just one question on 2015 guidance, original guidance included $0.03 corporate drag and I believe most of that related to the charitable donations. So with the pre-funding that you did I believe in Q4 is that drag eliminated for the next four to five years or do we need to consider any offset there? Susan Hardwick Well, as we indicated Sarah, that funding of the foundation that amount does take care of funding for the next four to five years. And as you indicated we’ve had $0.03 that was in our initial guidance. We did reaffirm the consolidated guidance, so no change to that. And I think we’ve identified a number of things over the course of the call today that we’re keeping our eye on relative to oil prices and other things. So, in total we are continuing to maintain that overall guidance expectation for 2015. And as we said, it does impact the out years in terms of the expected funding of the foundation in those out years. Sarah Akers Great. Thanks for the clarifications. Carl Chapman Thank you. Operator And there are no further questions at this time. I’ll turn the call back over to Mr. Goocher for any closing remarks. Robert Goocher Well, we’d like thank you everyone for joining us on our call today. On behalf of our entire team, we appreciate your continued interest in Vectren and look forward to seeing many of you at our Investor Day in New York on March, the 16 where other key members of Vectren’s management team including the presidents of our utility, infrastructure services and energy services would join us and sharing further insights into those businesses and plans. And if you can join in the person the event will be webcast start at 10 AM Eastern. With that, we’ll conclude our call for today. Thanks again for your participation. Operator Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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Dissecting The Holy Grail Of Market Timing

Summary Peak-to-trough drawdown periods represent approximately 27% of calendar days since 1950. Avoiding peak-to-trough drawdowns would have increased your returns by a factor of 2.12. Being short the market during drawdowns would have increased this to 3.23. Using up-capture and down-capture ratios are the best way to evaluate the effectiveness of market timing strategies. To successfully time the market, it’s best to have a quantitative system based on macroeconomic and fundamental variables, that is tested over many cycles and different interest rate regimes. Even good market timing strategies will underperform during bull markets and the amount of underperformance can be viewed as an insurance premium. By the numbers We first plot the peaks and troughs for the S&P 500. To be included as a peak or trough, the S&P 500 had to be equal to either its one-year high or one-year low to qualify. The S&P 500 had sixteen significant drawdown periods in the sixty four years from 1950 through 2014. This equates to a significant drawdown, on average, every four years. (click to enlarge) The 10-year constant treasury yield is shown in the background, scaled on the right hand side of the graph. Eleven drawdowns occurred in a rising interest rate environment and five in a declining rate environment. There were more frequent drawdowns in a rising rate environment, but the size of the drawdowns was more severe in the declining rate environment. The following table shows the returns for the sixteen peak-to-trough drawdown periods and trough-to-peak periods. The average drawdown was -26.3% and lasted 382 calendar days. The average trough-to-peak up return was 91.16% and lasted 1039 days. Peak-to-trough drawdown periods represent 27% of the calendar days. Note that these returns are based on daily closing prices and do not include dividends. The compound annual return excluding dividends for the 64 years was 7.76%. The next table shows a slightly different way of looking at the data that provides more granular detail, based on trading days, and provides an easy way to understand where the returns come from. It also avoids the distortion that comes from comparing equity curves that are dependent on start and end dates. The sum of the daily returns (yellow circle) for the 64 years is 482.16%, which equates to an average annual return of 7.53% – very similar to the compound return of 7.76% in the table above. The 482.16% was obtained by capturing 1020.25% in the trough-to-peak up-cycle and by giving up 538.09% in the peak-to-trough downturns. The second part of the table shows the detail for each of the 16 drawdown periods. Some highlights from this table: Drawdowns occur less frequently but are more extreme. The average daily return during drawdowns (-.13%) is 50% more extreme than the average daily return in an up-cycle (0.08%). “Stairs up, elevator down” is a familiar phrase. Avoiding the peak-to-trough drawdowns would have resulted in an average annual return of 15.94%, which is 2.12 times greater than the buy and hold average of 7.53%. Further, capturing the drawdowns by being short the market, could have increased returns by an additional 8.41% per year to 24.34%, 3.23 times greater than the buy-and-hold average. The volatility during drawdowns is not surprisingly higher at 1.26% versus 0.84%. Being short and being wrong, is not as bad as being long and being wrong – see matrix below. The goal of market timing is simple, even obvious: capture as much of the upside as possible and avoid as much of the downside as possible. If hedging on the downside, avoid more downside than you give up on the upside. It should also compensate for additional trading fees and taxes – if you are going to engage in market timing strategies, it’s best to utilize a tax deferred account. Measuring effectiveness Using up-capture and down-capture ratios enable us to evaluate other strategies against the buy-and-hold benchmark. From Investopedia: “The up/down-market capture ratio is used to evaluate how well or poorly an investment manager performed relative to an index during periods when that index has risen/dropped.” The traditional methodology for calculating up-capture and down-capture is to analyze it by month, year or rolling 3-year periods; we prefer to segment by peak-to-trough and trough-to-peak since it better captures all of the directional movement. We can also introduce another measure called the Total Capture Ratio, being the net returns relative to the sum of the maximum long and short returns achievable if we had perfect foresight. For example in our table above, our maximum possible capture would have been 1557.87% (1020.25% trough-to-peak, and 538.09% peak-to-trough). The actual buy-and-hold total was 482.16%, which represents 30.94% of the maximum possible capture. We can use this measure to compare to other strategies. Note: It is important to differentiate between market timing skills and stock picking skills, since they are distinctly separate. It is possible to have an up-capture ratio greater than 100% by picking stocks that outperform the index, but if we are only investing in the index per se, then the maximum possible up-capture ratio is 100%. In this article, we are dealing only with market timing and not stock picking, so 100% is the up-capture limit. Examining a 200-day moving average market timing strategy This strategy is common in the finance literature and goes long the S&P 500 when it is above its 200-day moving average, and to 100% cash when the S&P 500 is below its 200-day moving average. We use a two-day lag from signal to implementation. The results below show that overall the strategy is almost the same as the buy-and-hold strategy; 488.54% versus 482.16% for the sum of the daily returns. The strategy avoids a lot of the drawdowns (-169.60 versus -538.09% on the buy-and-hold) but also misses a lot of the up-capture (658.13% versus 1020.25% for the buy-and-hold). Factoring in transaction costs and taxes, it would likely be worse than the buy and hold. The volatility for this strategy is lower than the buy-and-hold (0.65% versus 0.97%) mostly due to avoiding the peak-to-trough drawdown periods, which are more volatile. The second part of the table showing the detail for each of the sixteen drawdown periods highlight this fact. Perhaps you are thinking it might be better with a different moving average period. Here are the results for a 100, 150 and 300-day moving average as well. The 200-day average still comes out on top, even though there really is no rationale to explain it. What if we go short, instead of going to cash, when the S&P 500 is below its 200-day average? The returns are very slightly better, but with higher volatility, so after adjusting for risk they are worse. Notice how we are positive in the drawdowns, but we now only capture 296.02% of the up-cycle returns. Comparing strategies in this format, it is easy to evaluate where the returns are coming from, how much are we giving up on the upside and how much are we avoiding on the downside, and what is the overall volatility? This was an example using a 200-day moving average strategy, but there are many varied strategies as described next. Types of Market Timing Strategies For a good overview of the different ways to time the market, see this article by famed professor Aswath Damodoran from NYU. He summarizes the different market timing approaches into the following five categories: Non-financial indicators, which can range the spectrum from the absurd to the reasonable. Technical indicators, such as price charts and trading volume. Mean reversion indicators, where stocks and bonds are viewed as mispriced if they trade outside what is viewed as a normal range. Macro-economic variables, such as the level of interest rates or the state of the economy. Fundamentals such as earnings, cash flows and growth. With few exceptions, only the last two can be considered for any type of market timing strategy that is based on cause and effect relationships. Since the first three have no cause and effect explanation they cannot be expected to perform over the long term; you may find periods when they seem to work, but you are hoping to get lucky. Here are our minimum criteria that a market timing strategy should meet, before being implemented: It must be based primarily on macroeconomic and fundamentals, with reasonable explanations for why there is cause and effect. It must be tested over many economic cycles and interest rate regimes, not just the most recent ten years. It must be 100% rules based, no emotional or discretionary overrides. Since it is based on historical returns or a back test, the incremental expected outperformance should cover the trading commissions, the potential taxes, as well as a strategy risk buffer. Our proprietary research has uncovered some meaningful results in back tests spanning forty five years, based on understanding the nature of the business cycle and how variables such as valuations, risk, interest rates and growth expectations, impact returns at different stages of the business cycle. The results implemented on the SPY ETF since 2001, including dividends , are shown here . As expected, the model has underperformed the buy-and-hold during the bull market of the past five years by about 2.5% per year, but since 2001, which includes two recessions, it has outperformed by significantly more. This is the nature of market timing strategies; expect to forgo some of the upside in bull markets but make it up, plus more, during downturns. The value of a market timing strategy is thus also a function of the frequency of significant drawdown periods. For example, as reported on CNBC , Brian Belski, chief investment strategist at BMO Capital Markets thinks we are 6 years into a 20-year secular bull market. If he is correct, then market timing strategies will likely underperform for the next 14 years. If historical averages are any indication, and a drawdown occurs on average every four years, then we are likely to see four more drawdowns in the next fourteen years, given that we have not had one since 2011. Or, consider that while interest rates may remain low for an extended period of time (by the end of the next 14 years it seems more likely they will be higher than today, given that they cannot go much lower) and that a rising rate environment may be conducive to greater than the average number of drawdown periods. Insurance You can think about it another way; think of the 2% you will likely give up every year in a bull market, as an insurance premium to protect the value of your portfolio. At current implied volatility levels, it would cost you about 7% per year to purchase at-the-money put protection on the S&P 500, so while a slightly different concept, a 2% premium seems reasonable, especially if it helps you avoid a 30% drawdown. Final thoughts If you don’t have the inclination or time to study how the market behaves, or have an advisor who does, then it’s best to stick with a simple diversified index strategy, but this is essentially a risk optimization strategy, so you should expect middle of the road results, with periodic drawdowns averaging around 30%. This may meet your needs, provided you don’t need to withdraw money during a drawdown, because that is difficult to recover from. It’s best to decide in advance whether you are going to try and exploit market timing. If so, then have a scripted, back tested plan and set it in place, but do not attempt to time the market on the fly, without a plan. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.