An Urban's Rural View

Spring training is under way again, which means baseball fans are arguing about statistics. Actually, we're always arguing about statistics. The latest hot dispute pits traditional measures, like a pitcher's earned run average (ERA), against the new "Sabermetrics," like "defense-independent earned run average" (dERA).

The traditional measures are easy to understand and calculate. For a pitcher's ERA, just divide earned runs allowed by innings pitched and multiply by nine. Alas, simplicity sacrifices precision. Example: Indifferent fielding and bad luck "drop in" balls can inflate the number of runs a pitcher gives up. Traditional stats like ERA don't even try to capture such subtleties.

Sabermetrics do, but the math can be mind-numbing. The calculation for dERA, which attempts to adjust ERA for defense and luck, requires ten steps, several with multiple sub-steps (http://tiny.cc/…).

So which is better? It depends on your definition of "better." That's why the debate rages on.

Baseball is far from the only field of human endeavor abloom in arguments over statistics. The stock market is another. One statistic equities investors look at is the price/earnings ratio of the S & P 500 stocks.

Of course, there's more than one way to calculate P/E.

For the denominator, you can use the previous 12 months' earnings. Or, as Yale University's Robert Shiller famously suggests, you can substitute the last 10 years of earnings adjusted for inflation. Still another way is to use an estimate of the coming 12 months.

Relying on the trailing 12 months, today's stock market is overvalued (that is, its P/E is higher than the historical average P/E) by about 25%. Relying on the Shiller P/E, it's overvalued by close to 70%. The estimated-earnings measure has the market slightly undervalued.

Security analysts who study companies double as new-metrics machines. Example: To rank order fast-food chains, Goldman Sachs counts how many followers each has on social-media sites like Instagram and Vine and compares that to its total sales. (http://tiny.cc/…). By this metric, the Number One chain is -- drum roll -- Shake Shack.

Never heard of it? New York-based burger flipper Shake Shack started as a food cart 15 years ago. Even today it operates only 70 restaurants worldwide, versus 36,000 for McDonald's. But as its outsized presence on social media suggests, the younger generation loves it. Investors gobbled up its initial public offering a few weeks ago, lifting the stock's opening price several dollars above expectations.

Applying what it called "very, very rough calculations" to that first-day price, the website MarketWatch figured the market had valued Shake Shack at the equivalent of $150 for every hamburger sold (http://tiny.cc/…).

Anyone who uses futures or options to sell corn or cattle can attest that agriculture is not to be outdone when it comes to statistical debates. Which numbers do the best job of predicting the direction of commodity prices? Argumentation abounds.

Broadly speaking, the quarrel is between those who look at charts and those who look at supply-and-demand fundamentals. Both categories encompass a multitude of specific measures, and the disputes about them are so fierce they can make the baseball and equities stats wars seem like pillow talk.

DTN Senior Analyst Darin Newsom leads the charge for an eclectic blend of fundamentals and technicals known as the DTN Six Factors (http://tiny.cc/…). As Darin is fond of noting, including again in his recent column "Phoenix Early Rising," (http://tiny.cc/…), Six Factor analysis holds you'll find the best price omens in the markets themselves, not in government estimates of supply and demand.

Example: If you had to bank on just one statistic to justify your bullishness or bearishness, Six Factors analysis would pick futures-spreads trends over ending stocks.

Decide for yourself which ag-market statistics to follow. DTN publishes them all. Its market recommendations are based on the Six Factors, but its analysts comment on a wide variety of other numbers. Darin and the DTN analyst team -- Todd Hultman, Mary Kennedy, John Harrington, Rick Kment, Cliff Jamieson -- are as trenchant and insightful on planted-acreage reports as on the net-long and short positions of big investors.

They can also be entertaining writers. Here's John describing a wild day in the cattle markets: "If today's crazy action could somehow be standardized, the CME wouldn't have to worry about closing the cattle pits. It could just move the entire floor to Disneyland and charge for rides."

And here's Darin on why the wheat market looks bullish despite large ending stocks. "It comes down to the familiar issue of quantity versus quality. Think of it this way -- world wheat supplies are like all you can eat convenience store sushi. There's plenty to go around, but nobody wants it. Except for the bait shop next door."

Nobody has yet devised a metric for measuring and ranking metaphors and similes, but I'd argue this delicious juxtaposition of wheat and sushi deserves the simile-of-the-year award.

Urban Lehner

urbanize@gmail.com

(CZ)

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