Nomura Securities International, Inc. U.S. Quantitative Research. 26 May 2009 Nomura Securities International, Inc. How macro is priced in equity factors:

Nomura Securities International, Inc.U.S. Quantitative Research

.

26 May 2009

Nomura Securities International, Inc.

How macro is priced in equity factors: a tour of the crisis and its aftermath

Joseph Mezrich

Nomura Securities International, Inc.

Please read the analyst certifications and important disclosures on pp. 23-24. gl

2 Joseph Mezrich, 212.667.9316, [email protected]

U.S. Quantitative Research

Note: Each factor return is normalized for the period through 5/30/08. Based on quintile spreads in S&P500. Transaction costs not included.Source: Nomura Securities International Inc., I/B/E/S

Market turbulence and accidental factor bets

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

29-J

un-0

7

13-J

ul-0

7

27-J

ul-0

7

10-A

ug-0

7

24-A

ug-0

7

7-S

ep-0

7

21-S

ep-0

7

5-O

ct-0

7

19-O

ct-0

7

2-N

ov-0

7

16-N

ov-0

7

30-N

ov-0

7

14-D

ec-0

7

28-D

ec-0

7

11-J

an-0

8

25-J

an-0

8

8-F

eb-0

8

22-F

eb-0

8

7-M

ar-0

8

21-M

ar-0

8

4-A

pr-0

8

18-A

pr-0

8

2-M

ay-0

8

16-M

ay-0

8

30-M

ay-0

8

Z S

core

Default risk

Up to down revision

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Ma

r-9

3

Ma

r-9

4

Ma

r-9

5

Ma

r-9

6

Ma

r-9

7

Ma

r-9

8

Ma

r-9

9

Ma

r-0

0

Ma

r-0

1

Ma

r-0

2

Ma

r-0

3

Ma

r-0

4

Ma

r-0

5

Ma

r-0

6

Ma

r-0

7

Ma

r-0

8

Z S

co

re

Default risk return ( low risk - high risk )

Revision return ( high - low )



S&P500 implied volatility –

equity risk jumped, then exploded, then reverted

Note: Shows implied volatilities of 1-month and 1-year S&P500 index options. Last data as of 5/1/2009.

Source: Nomura Securities International Inc. and Optionmetrics.

0%

10%

20%

30%

40%

50%

60%

70%

80%

No

v-9

5

Jul-9

6

Ma

r-9

7

No

v-9

7

Jul-9

8

Ma

r-9

9

No

v-9

9

Jul-0

0

Ma

r-0

1

No

v-0

1

Jul-0

2

Ma

r-0

3

No

v-0

3

Jul-0

4

Ma

r-0

5

No

v-0

5

Jul-0

6

Ma

r-0

7

No

v-0

7

Jul-0

8

Ma

r-0

9

One M onth vol One Year vol

9/11LTCM 2002, Accounting Scandals

Asian Crisis

Iraq War Begins - vol slide begins

Credit Crisis

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-0

7

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-0

8

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

One M onth vol (VIX)

One Year vol

LTCM peak 1-yr vol



The stock market shifted focus

from equity volatility to credit risk

Notes: The charts show the path of credit risk (CDS), equity volatility (VIX for US, Nikkei 225 implied volatility for Japan), and the equity market for US (S&P500, top panel) and Japan (Nikkei 225, bottom panel). Data are from 1 May 2008 through 30 April 2009.

Source: Nomura Securities International Inc., Bloomberg and Markit.

Japan

-2

-1

0

1

2

3

4

Ma

y-0

8

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

8

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Z S

core

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Z S

core

Lehman bankruptcy

Nikkei 225 implied volatility (left axis)

CDS index (left axis)

Nikkei 225 (right axis)

US

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

Z S

core

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Z S

core

Lehman bankruptcy

VIX (left axis) CDS index (left axis)

S&P500 (right axis)



Panic pricing in put options was prominent

- is finally gone

Note: Blue line in the top panel shows 1-year skew of S&P 500 put option implied volatility; brown line shows the 1-month skew. Returns do not include transaction costs. Last data as of 5/8/2009.

Source: Nomura Securities International Inc. and Optionmetrics.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

1-year put kew 1-month put skew



Options distortions faded with the March Rally

Note: Top panel shows intraday prices of S&P500 index and VIX. Last data as of 5/8/2009. Green line in the bottom panel shows the spread between 1-year put skew and 1-month put skew of S&P500 option-implied volatility shown on page 5. Returns do not include transaction costs. Last data as of 5/8/2009.

Source: Nomura Securities International Inc. and Bloomberg.

30

32

34

36

38

40

42

44

46

48

3/27

/200

9

3/30

/200

9

3/31

/200

9

4/2/

200

9

4/3/

200

9

4/7/

200

9

4/8/

200

9

4/13

/200

9

4/14

/200

9

4/15

/200

9

4/17

/200

9

4/20

/200

9

4/22

/200

9

4/23

/200

9

4/27

/200

9

4/28

/200

9

4/29

/200

9

5/1/

200

9

5/4/

200

9

5/6/

200

9

5/7/

200

9

760

780

800

820

840

860

880

900

920

940

960

VIX intraday SPX intraday

Put Term Structure (1-year put skew minus 1-month put skew)

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

<<

Pan

ic -

----

----

----

---

Rel

axed

>>



B/P-default probability correlation and major risk measures

Note: The B/P-default probability correlation is based on the B/P score and the logarithm of default probability in S&P500 universe with 0 default probability stocks excluded. B/P spread is based on differences of the median B/P between top and bottom quintile baskets based on default probability. Synthetic CDX is CDX since the end of 2004, but extended before that by using the linear relationship with bond spreads, where the coefficients are estimated by the time series regression from 31 Dec 2004 to 4 Feb 2008. Last data as of 2/27/09.Source: Nomura Securities International, Inc., Markit Group Ltd., Optionmetrics, Federal Reserve, Moody’s, Merrill Lynch/Bloomberg, S&P, Compustat, Worldscope, IDC, Ex-Share.

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

z-s

co

re

B/P Default Correlation Synthetic CDX

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

z-s

co

re

B/P Default Correlation SPX 1Y Volatility



Valuation and default probability –

How fear and relief affect value stocks

0.0

0.5

1.0

1.5

2.0

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

B/P

Corporate scandals

Subprime crisis

Ch

eap

Exp

ensi

ve

High default probability stocks

Low default probability stocks

Note: Green line in the exhibit shows the average B/P for the 100 stocks in the S&P500 (US) and Nomura 400 (Japan) with the highest default probability, blue line shows the average B/P for the 100 stocks with the lowest default probability. Returns do not include transaction costs. Last data as of 4/30/2009.

Source: Nomura Securities International Inc., Compustat, I/B/E/S, Russell, and IDC.

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

B/P

Financial crisis

Subprime crisis

Ch

eap

Exp

ensi

ve

high default risk stocks

low default risk stocks

Lehman bankruptcyYamaichi bankruptcy

US

Japan



The tails of value and price momentum

Predicted E/P

-20

-15

-10

-5

0

5

10

15

20

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 E <= 0

Ex

ce

ss

re

turn

(%

)

Mar 02 - Feb 03

Mar 03 - Apr 03

High E/P > 0 Low E/P > 0

B/P

-15

-10

-5

0

5

10

15

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Ex

ce

ss

re

turn

(%

)

Mar 02 - Feb 03

Mar 03 - Apr 03

High B/P Low B/P

Momentum

-20

-15

-10

-5

0

5

10

15

20

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Ex

ce

ss

re

turn

(%

)

Mar 02 - Feb 03

Mar 03 - Apr 03

Winner Loser

Predicted E/P

-50

-40

-30

-20

-10

0

10

20

30

40

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 E <= 0

Ex

ce

ss

re

turn

(%

)

Jun 07 - Feb 09

Mar 09 - Apr 09

High E/P > 0 Low E/P > 0

B/P

-60

-40

-20

0

20

40

60

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Ex

ce

ss

re

turn

(%

)

Jun 07 - Feb 09Mar 09 - Apr 09

High B/P Low B/P

Momentum

-60

-40

-20

0

20

40

60

80

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Ex

ce

ss

re

turn

(%

)

Jun 07 - Feb 09Mar 09 - Apr 09

Winner Loser

2003……………………………...….2009

Note: Universe is Russell 1000. Excess returns are calculated for each decile based on B/P, one-year price momentum and predicted E/P. In the calculation for predicted E/P, stocks with negative predicted earnings are separated out as another group. Last data as of 4/30/2009. Returns do not include transaction costs.




Revenge of the cheap losers

Note: “Cheap loser” portfolio consists of highest B/P and lowest price momentum deciles in the Russell 1000, rebalanced monthly. Transaction costs are not included. Last data as of 4/30/2009.


Long worst momentum & highest B/P

-100

-80

-60

-40

-20

0

20

40

60

80

100

No

v-7

3

No

v-7

4

No

v-7

5

No

v-7

6

No

v-7

7

No

v-7

8

No

v-7

9

No

v-8

0

No

v-8

1

No

v-8

2

No

v-8

3

No

v-8

4

No

v-8

5

No

v-8

6

No

v-8

7

No

v-8

8

No

v-8

9

No

v-9

0

No

v-9

1

No

v-9

2

No

v-9

3

No

v-9

4

No

v-9

5

No

v-9

6

No

v-9

7

No

v-9

8

No

v-9

9

No

v-0

0

No

v-0

1

No

v-0

2

No

v-0

3

No

v-0

4

No

v-0

5

No

v-0

6

No

v-0

7

No

v-0

8

No

v-0

9

12

-mo

nth

ro

llin

g p

erc

en

t re

turn



S&P500 price, earnings, and recessions since 1900

RecessionRecession

startRecession

endRecession

periodBottom in stock

marketLead before

recession endBottom in earnings

Lag after recession end

( months ) ( months ) ( months )X Y Y - X Z Z - X

A Sep-1902 Aug-1904 23 Mar-1904 -5 Nov-1904 3

B May-1907 Jun-1908 13 Nov-1907 -7 Dec-1908 6

C Jan-1910 Dec-1910 11 Jul-1910 -5 Dec-1911 12

D Jan-1913 Dec-1914 23 Dec-1914 0 Dec-1914 0

E Aug-1918 Mar-1919 7 Jan-1919 -2 - -

F Jan-1920 Jul-1921 18 Aug-1921 1 Dec-1921 5

G May-1923 Jul-1924 14 Oct-1923 -9 Nov-1924 4

H Oct-1926 Nov-1927 13 - - Dec-1927 1

I Aug-1929 Mar-1933 43 Jun-1932 -9 Dec-1932 -3

J May-1937 Jun-1938 13 Apr-1938 -2 Sep-1938 3

K Feb-1945 Oct-1945 8 - - Jun-1946 8

L Nov-1948 Oct-1949 11 Jun-1949 -4 Dec-1949 2

M Jul-1953 May-1954 10 Sep-1953 -8 - -

N Aug-1957 Apr-1958 8 Dec-1957 -4 Sep-1958 5

O Apr-1960 Feb-1961 10 Oct-1960 -4 Jun-1961 4

P Dec-1969 Nov-1970 11 Jun-1970 -5 Dec-1970 1

Q Nov-1973 Mar-1975 16 Dec-1974 -3 Sep-1975 6

R Jan-1980 Jul-1980 6 Apr-1980 -3 Mar-1981 8

S Jul-1981 Nov-1982 16 Jul-1982 -4 Mar-1983 4

T Jul-1990 Mar-1991 8 Oct-1990 -5 Dec-1991 9

U Mar-2001 Nov-2001 8 Sep-2001 -2 Dec-2001 1

Current Recession Jan-2008 ? ? ? ? ? ?

4 month lead 4 month lag5 month lead 3 month lag

Simple Average Lead/LagWeighted Average Lead/Lag

Notes: Aggregated earnings and prices for S&P500 are based on data from Robert Shiller’s website (http:/www.econ.yale.edu/~shiller/data/). Analysis period is from January 1900 through March 2009.

Source: Nomura Securities International Inc., Shiller, S&P, NBER.

0

1

2

3

4

5

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12

Lead / lag ( months )

Nu

mb

er o

f re

cess

ion

s

Market bottom

Earnings bottom

After recession endBefore recession end

Recession end



Estimate dispersion and the economy

US

0

2

4

6

8

10

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Dis

pers

ion

of a

nal

yst e

stim

ates

(%)

Recession

Japan

0

5

10

15

20

25

30

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Dis

pers

ion

of a

nal

yst e

stim

ates

(%) Recession

Europe

0

5

10

15

20

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Dis

pers

ion

of a

nal

yst e

stim

ates

(%)

Asia

0

2

4

6

8

10

12

14

16

18

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Dis

pers

ion

of a

nal

yst e

stim

ates

(%) Earnings down

trend period

Earnings downtrend period

Value

Market

Growth

Value

Market

Growth

Value

Market

Growth

Value

Market

Growth

Notes: The median dispersion of analyst estimate is plotted for value, growth stocks and the universe (smoothed FY1 estimate dispersion using 12-month moving average). The top half of the universe based on B/P is labeled value, the bottom labeled growth. Period of analysis is from May 1988 through February 2009. US = S&P500; Europe = MSCI Europe, Japan = NOMURA 400, Asia ex Japan = MSCI Asia Pacific ex Japan.

Source: Nomura Securities International Inc., I/B/E/S, Worldscope, ExShare, S&P, MSCI, NBER and ESRI.



Zero crossing in the slope of estimate dispersion signals recession’s end

Notes: Top: median dispersion of analyst estimate is plotted for S&P500 universe (smoothed FY1 estimate dispersion using 12-month centered moving average). Aggregated earnings for S&P500 are based on data from Robert Shiller’s website (http:/www.econ.yale.edu/~shiller/data/). For more recent periods, I/B/E/S actual earnings for the S&P500 were adapted and linked to Shiller’s time series of earnings. Bottom: Monthly percentage change of median estimate dispersion (smoothed FY1 estimate dispersion using 12-month centered moving average) is plotted as a blue line and the six-month moving average is plotted as a pink line for S&P500 universe. Future trend of the monthly change is estimated based on the current downtrend, and is displayed in a white shade. Analysis period is from July 1988 through April 2009. Source: Nomura Securities International Inc., S&P, I/B/E/S, NBER.

Analyst estimate dispersion, earnings, and the economy in US

1.0

1.5

2.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Ear

nin

gs

(lo

g)

0

1

2

3

4

5

6

7

Med

ian estim

ate disp

ersion

(%)

Recession

Estimate dispersion (right axis)

Aggregated earnings (log, left axis)

Oct 2009

The slope of estimate dispersion and the economy in US

-4

-2

0

2

4

6

8

10

12

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Mo

nth

ly c

han

ge

of

esti

mat

e d

isp

ersi

on

(%

)

Recession

Monthly change of estimate dispersion

6 month moving average

Oct 2009Feb 2003



Momentum echoed estimate revisions in US and Europe

Note: US = Russell 1000; Europe = MSCI Europe, Japan = NOMURA 400, Asia ex Japan = MSCI Asia Pacific ex Japan (Australia, Hong Kong, New Zealand and Singapore). Shows cumulative return of a factor portfolio that is long 1-year past winning stocks and short 1-year past losing stocks, and the cumulative return of a factor portfolio that is long the highest earnings revision stocks while short the lowest earning revision stocks. US is based on decile baskets, while other regions are based on quintile baskets. Long and short baskets are rebalanced monthly with equal weighting. Transaction costs not included. Last data as of 1/9/2009.

Source: Nomura Securities International Inc., Compustat, I/B/E/S, Russell, IDC, Worldscope, ExShare and MSCI.

-30

-20

-10

0

10

20

30

40

50

60

11/3

0/20

07

12/3

0/20

07

1/30

/200

8

2/29

/200

8

3/30

/200

8

4/30

/200

8

5/30

/200

8

6/30

/200

8

7/30

/200

8

8/30

/200

8

9/30

/200

8

10/3

0/20

08

11/3

0/20

08

12/3

0/20

08

Cu

mu

lati

ve

da

ily f

ac

tor

retu

rns

(%

)

-20

-15

-10

-5

0

5

10

15

20

25

US momentum (LHS)

US revision (RHS)

-15

-10

-5

0

5

10

15

20

25

30

11/3

0/20

07

12/3

0/20

07

1/30

/200

8

2/29

/200

8

3/30

/200

8

4/30

/200

8

5/30

/200

8

6/30

/200

8

7/30

/200

8

8/30

/200

8

9/30

/200

8

10/3

0/20

08

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Japan revision (RHS)

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Asia revision (RHS)



Price momentum echoed default risk in Japan and Asia

Note: US = Russell 1000; Europe = MSCI Europe, Japan = NOMURA 400, Asia ex Japan = MSCI Asia Pacific ex Japan (Australia, Hong Kong, New Zealand and Singapore). Shows cumulative return of a factor portfolio that is long 1-year past winning stocks and short 1-year past losing stocks, and the cumulative return of a factor portfolio that is long the lowest default risk stocks while short the highest default risk stocks. US is based on decile baskets, while other regions are based on quintile baskets. Long and short baskets are rebalanced monthly with equal weighting. Last data as of 1/9/2009.


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) Asia momentum

Asia default



Value fails when risk aversion rises and vice versa: Estimate dispersion vs. B/P

Note: US = Russell 1000; Europe = MSCI Europe, Japan = NOMURA 400, Asia ex Japan = MSCI Asia Pacific ex Japan (Australia, Hong Kong, New Zealand and Singapore). Shows cumulative return of a factor portfolio that is long the lowest estimate dispersion stocks and short the highest estimate dispersion, and the cumulative return of a factor portfolio that is long the highest book-to-price (B/P) stocks while short the lowest B/P stocks. US is based on decile baskets, while other regions are based on quintile baskets. Long and short baskets are rebalanced monthly with equal weighting. Last data as of 4/7/2009 for Japan, 4/6/2009 for US, and 4/3/2009 for Europe and Asia. Factor returns do not include transaction costs.


US

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Cu

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%) Estimate dispersion (low -high)

B/P

Nov 21Citigroupbailout

J an 8US jobs

Japan

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B/P


J an 8US jobs

Dec 5Chins

Mar 9

Mar 9

Mar 9

Mar 9



Estimate dispersion and value’s success around the globe

Notes: Returns to B/P are based on decile spreads in US and quintile spreads in Japan, Europe and Asia (rebalanced monthly and equally weighed) and the cumulative return is smoothed using 12-month moving average. For Japan and Europe, detrended cumulative return to B/P is plotted. The median dispersion of analyst estimate is shown for Japan, Europe and Asia, while the gap of median dispersion of analyst estimate between value and growth stocks is shown for US (smoothed FY1 estimate dispersion using 12-month moving average). As value and growth universes, S&P500 stocks are divided into two groups, with the top half based on B/P labeled value, and the bottom labeled growth. The data covers from May 1988 through February 2009. US = Russell 1000; Europe = MSCI Europe, Japan = NOMURA 400, Asia ex Japan = MSCI Asia Pacific ex Japan (Australia, Hong Kong, New Zealand and Singapore).

Source: Nomura Securities International Inc., Compustat, I/B/E/S, Russell, IDC, Worldscope, ExShare, S&P, MSCI, NBER and ESRI.

US

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th )

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Cumulative return to B/P (detrended)

Median stimate dispersion

Median estimate dispersion Cumulative return to B/P (detrended)

Asia

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Cumulative return to B/P

Recession

Earnings down trend period

Earnings down trend period

Cumulative return to B/P

Gap of estimate dispersion( value - growth )

Recession



The world of recently synchronized estimate dispersion

Note: The median dispersion of analyst estimate in each universe is normalized by the data from July 2007 to February 2009 (smoothed FY1 estimate dispersion using 12-month moving average). Period of analysis is from May 1988 through February 2009. US = S&P500; Europe = MSCI Europe, Japan = NOMURA 400, Asia ex Japan = MSCI Asia Pacific ex Japan.

Source: Nomura Securities International Inc., I/B/E/S, Russell, S&P and MSCI.

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JapanEurope

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Agree to disagree



Global factor return summary

Factor US Europe JapanAsia ex Japan

US Europe JapanAsia ex Japan



1 Mon. Price Momentum (Low - High) -0.3 -5.2 -13.6 -2.4 5.8 8.6 6.9 15.7 -15.3 -5.9 -10.3 -3.4 -40.0 -21.8 -40.2 6.21 Year Price Momentum -54.0 -25.5 -25.0 -12.1 -12.4 -15.9 -15.9 -6.4 3.2 -0.4 -4.4 -0.1 -55.8 -22.2 -30.5 21.41 Year Dividend Growth -32.2 -8.3 -14.5 -1.7 -13.3 -1.1 -6.8 -1.4 7.1 1.1 -1.4 1.0 -25.7 -8.1 -29.2 -16.05 Year EPS Growth -19.5 0.1 1.3 0.6 -8.7 -0.8 5.1 2.3 5.5 0.5 5.1 -3.0 -15.2 -4.6 -15.3 6.2Predicted LT Growth -9.6 -4.1 4.4 -1.5 1.8 -2.7 3.8 2.4 6.7 -2.6 3.0 -3.6 -27.9 -10.3 11.1 0.6Up to Down Revisions -24.3 -13.0 -0.2 -3.5 -4.1 -8.4 -4.9 -7.5 3.8 -1.1 -7.0 -3.9 -14.2 -18.4 -10.4 -4.8

B/P 46.7 20.3 19.2 1.5 7.6 14.9 14.0 15.6 -13.1 -6.7 3.0 -10.5 23.7 -2.6 43.8 17.5Dividend Yield 21.2 9.8 16.2 2.9 2.5 10.7 12.5 2.7 -5.7 -6.4 3.1 -11.2 23.5 11.8 40.2 14.7E/P 16.4 8.3 13.1 3.7 4.7 15.3 13.0 11.0 -3.4 -4.2 7.6 -6.1 19.9 -1.9 7.6 6.2EBITDA/EV 16.2 8.0 -1.2 1.4 3.1 10.0 -4.4 3.8 -3.9 1.4 4.8 -7.3 15.2 13.3 -12.6 18.4PEG (Low - High) 15.1 2.7 -3.2 3.7 3.4 5.9 2.6 6.8 -1.4 -4.7 -1.2 -4.9 4.4 -7.2 -24.7 -8.4Predicted E/P -5.7 15.2 -11.4 10.6 -8.3 12.3 -7.5 14.2 -8.3 -7.6 -5.6 -3.5 -18.6 -19.1 -53.3 13.4

Quality Accruals (Low - High) 8.3 -0.8 6.1 -1.0 1.7 -3.2 -0.5 -2.2 -0.0 0.4 0.5 -11.2 19.7 9.7 -3.0 -1.6Leverage Debt/Equity (Low - High) -28.2 -9.6 -6.4 -1.4 -2.0 -8.3 -4.6 -3.0 8.8 4.0 7.1 0.5 -3.6 15.6 11.1 11.7

Beta 59.5 19.9 20.3 2.2 12.1 14.0 14.9 10.7 -12.3 -3.4 -1.6 -3.6 29.5 7.2 -7.7 10.9Default Risk (Safe - Risky) -56.1 -26.2 -19.6 -9.7 -12.8 -17.5 -13.8 -15.0 12.8 7.9 -0.6 8.0 -5.0 5.7 -13.4 22.9Estimate Dispersion (Low - High) -32.1 -23.6 -15.0 2.6 -10.5 -5.7 -6.9 7.7 6.9 7.6 -6.0 -7.3 8.3 1.5 -21.3 27.8

Profitability ROE -11.2 -8.7 1.5 2.7 -1.3 0.6 4.7 -4.4 4.3 4.0 5.3 4.1 3.5 8.3 -24.1 -5.7Market Cap (Small - Large) 58.8 11.5 3.2 0.1 12.6 7.8 6.5 7.8 -5.0 -2.5 -0.3 -3.6 48.3 -0.1 37.9 -8.4CapEx/Sales (Low - High) -7.8 -1.2 1.3 4.2 3.0 -1.5 1.3 -1.7 4.5 -1.5 0.1 7.5 22.3 2.8 6.6 13.9Analyst Coverage (Low - High) -3.5 0.4 -6.7 -1.6 -3.2 -0.9 2.0 2.2 -9.7 -2.4 -0.7 -2.3 -7.9 -19.9 25.2 -10.5Share Buybacks -7.6 -9.5 -13.0 -4.9 0.7 -2.3 -3.0 0.2 4.2 2.7 6.0 0.2 14.6 12.1 9.7 19.2

Other

Momentum

Growth

Value

Risk

February 1 YearApril March

Factor US Europe JapanAsia ex Japan




1 Mon. Price Momentum (Low - High) 9 14 18 18 4 7 5 1 22 19 22 10 21 21 21 12

1 Year Price Momentum 21 21 22 22 20 21 22 20 11 10 18 7 22 22 20 3

1 Year Dividend Growth 20 15 19 17 22 13 18 15 3 7 16 4 19 16 19 22

5 Year EPS Growth 16 10 10 11 18 11 7 12 6 8 5 9 17 14 15 14

Predicted LT Growth 14 13 6 15 10 16 9 11 5 15 9 12 20 17 6 15

Up to Down Revisions 17 19 11 19 16 20 17 21 10 11 21 15 16 18 12 17

B/P 3 1 2 9 3 2 2 2 21 21 8 20 3 13 1 6

Dividend Yield 4 5 3 5 9 5 4 10 17 20 7 21 4 4 2 7

E/P 5 6 4 3 5 1 3 4 14 17 1 17 6 12 8 13

EBITDA/EV 6 7 12 10 7 6 15 9 15 6 6 19 8 2 13 5

PEG (Low - High) 7 8 13 4 6 9 10 8 13 18 15 16 11 15 18 20

Predicted E/P 11 3 16 1 17 4 20 3 18 22 19 11 18 19 22 9

Quality Accruals (Low - High) 8 11 5 13 11 17 13 17 12 9 10 22 7 5 10 16

Leverage Debt/Equity (Low - High) 18 18 14 14 14 19 16 18 2 3 2 5 13 1 5 10

Beta 1 2 1 8 2 3 1 5 20 16 17 14 2 7 11 11

Default Risk (Safe - Risky) 22 22 21 21 21 22 21 22 1 1 13 1 14 8 14 2

Estimate Dispersion (Low - High) 19 20 20 7 19 18 19 7 4 2 20 18 10 10 16 1

Profitability ROE 15 16 8 6 13 10 8 19 8 4 4 3 12 6 17 18

Market Cap (Small - Large) 2 4 7 12 1 8 6 6 16 14 12 13 1 11 3 19

CapEx/Sales (Low - High) 13 12 9 2 8 14 12 16 7 12 11 2 5 9 9 8

Analyst Coverage (Low - High) 10 9 15 16 15 12 11 13 19 13 14 8 15 20 4 21

Share Buybacks 12 17 17 20 12 15 14 14 9 5 3 6 9 3 7 4

Risk

Other

1 YearApril March February

Momentum

Growth

Value

Notes: US = Russell 1000; Europe = MSCI Europe, Japan = NOMURA 400, Asia ex Japan = MSCI Asia Pacific ex Japan (Australia, Hong Kong, New Zealand and Singapore). Stocks are ranked according to a particular factor. Factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest decile (quintile) and short the decile (quintile) with the lowest scores (rebalanced monthly). See Appendix F of US Quant Monthly for factor definitions. Last data as of 4/30/2009.




Three-year rolling return to B/P + price momentum

Note: Universe is Russell 1000. Stocks are sorted according to a particular factor and ranked into deciles. Factor returns are the subsequent performance of a basket of stocks that is concurrently long the highest decile and short the lowest decile. The process is equally weighted, rebalanced monthly, and excludes transaction costs. See Appendix G of US Quant Monthly for factor definitions. Last data as of 4/30/2009.


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serious problem



Multi-factor long/short investment in top/bottom quartile based on trailing 5 years

Note: Universe is Russell 1000. Stocks are sorted according to a particular factor and ranked into deciles. Factor returns are the subsequent performance of a basket of stocks that is concurrently long the highest decile and short the lowest decile. Trailing 5-year factor returns are used to rank the best and worst factors for subsequent one month holding period. The process is equally weighted, rebalanced monthly, and excludes transaction costs. See Appendix G of US Quant Monthly for factor definitions. Last data as of 4/30/2009.


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A. US factor returns (Russell 1000) — recent returns

FactorApr Mar Feb YTD 1 Year Apr Mar Feb YTD 1 Year

1 Beta 59.5 12.1 -12.3 57.4 29.5 1 3 54 2 7

2 Market Cap (Small - Large) 58.8 12.6 -5.0 63.9 48.3 2 2 42 1 1

3 B/P 46.7 7.6 -13.1 32.5 23.7 3 7 55 7 10

4 Sales/Price 46.4 9.2 -6.0 46.9 39.7 4 4 44 3 3

5 Op Inc/Price (Before Dep) 43.9 5.2 -12.1 32.8 34.7 5 11 52 6 5

6 Op Inc/Price (After Dep) 35.8 1.2 -12.1 18.5 23.3 6 28 53 11 12

7 EPS Variability 29.1 8.8 -0.8 41.0 -3.8 7 5 31 4 38

8 B/P (WO Goodwill) 26.3 5.9 -10.8 13.1 8.6 8 9 51 17 23

9 PEGY (Low - High) 22.4 1.7 -6.7 17.9 15.3 9 27 46 12 19

10 Dividend Yield 21.2 2.5 -5.7 7.2 23.5 10 20 43 20 11

11 ROIC X B/P 21.0 3.0 -7.7 8.2 6.3 11 18 48 19 25

12 Div. and Buyback Yield 17.6 2.0 -4.0 13.8 41.2 12 22 40 15 2

13 Op Inc. Variability 17.4 1.1 4.1 25.5 -2.3 13 29 19 8 35

14 E/P 16.4 4.7 -3.4 18.8 19.9 14 12 37 10 15

15 EBITDA/EV 16.2 3.1 -3.9 13.8 15.2 15 16 39 16 20

16 PEG (Low - High) 15.1 3.4 -1.4 22.0 4.4 16 15 32 9 28

17 R&D/EV 11.1 13.2 3.9 39.2 34.6 17 1 20 5 6

18 Accruals (Low - High) 8.3 1.7 0.0 7.2 19.7 18 26 30 21 16

19 Dividend Payout Ratio 7.6 -4.9 -6.3 -14.9 3.4 19 42 45 41 30

20 Inventory Turnover 6.9 -3.7 -3.4 -6.9 -22.0 20 38 38 34 49

21 Decreasing Div. Payout 6.4 7.8 -2.2 15.0 4.7 21 6 35 14 27

22 Low Sales Growth 3.8 2.9 -1.7 -3.7 15.1 22 19 33 28 21

23 Decreasing CapEx/Sales 3.4 7.1 3.6 12.0 28.3 23 8 22 18 8

24 EBIT/EV 2.2 -0.8 -4.3 -8.5 1.8 24 32 41 35 31

25 1 Mon. Price Momentum (Low - High) -0.3 5.8 -15.3 -4.6 -40.0 25 10 56 30 54

26 Low Sales Variability -2.1 2.0 -3.2 -10.8 15.7 26 23 36 38 18

27 Cash Flow after Tax and WC/EV -2.3 3.8 2.7 3.0 22.8 27 13 26 24 13

28 Change in Number of Estimates -3.3 -4.8 0.4 -2.3 -14.3 28 41 29 27 45

29 Analyst Coverage (Low - High) -3.5 -3.2 -9.7 -24.5 -7.9 29 37 50 51 41

30 Predicted E/P -5.7 -8.3 -8.3 -20.2 -18.6 30 49 49 46 47

31 Share Buybacks -7.6 0.7 4.2 -1.6 14.6 31 30 17 25 22

32 Improving Gross Margin -7.7 -7.1 7.8 6.1 5.9 32 47 5 22 26

33 CapEx/Assets (Low - High) -7.7 2.3 4.4 -4.8 26.8 33 21 14 32 9

34 CapEx/Sales (Low - High) -7.8 3.0 4.5 -4.4 22.3 34 17 13 29 14

35 Improving Debt/Equity -8.1 1.9 3.3 -1.8 -4.9 35 24 23 26 39

36 Predicted LT Growth -9.6 1.8 6.7 4.8 -27.9 36 25 8 23 51

37 Asset Turnover -10.1 -4.0 12.9 17.5 36.7 37 39 1 13 4

38 ROE -11.2 -1.3 4.3 -4.7 3.5 38 34 16 31 29

39 Sales/Employee -12.8 -5.3 -7.5 -26.8 -37.2 39 43 47 52 53

40 Gross Margin -13.4 -1.9 6.4 -4.8 -1.4 40 35 9 33 34

41 Improving ROIC -14.6 -5.9 -2.1 -20.1 -29.7 41 44 34 45 52

42 Operating Leverage -15.4 0.1 4.2 -14.8 -10.6 42 31 18 40 42

43 ROA -16.0 -6.2 6.3 -17.9 -3.6 43 45 10 44 37

44 Predicted 1 Year EPS Growth -16.3 3.7 0.9 -12.9 -42.3 44 14 28 39 55

45 EBIT/WCPPE -16.5 -1.3 2.9 -16.1 16.7 45 33 25 43 17

46 ROIC -18.5 -7.4 4.9 -22.4 -13.8 46 48 12 49 43

47 5 Year EPS Growth -19.5 -8.7 5.5 -9.2 -15.2 47 51 11 36 46

48 Stable Growth -19.8 -6.4 4.4 -10.4 1.5 48 46 15 37 32

49 5 Year Dividend Growth -21.5 -8.5 9.2 -15.0 0.6 49 50 3 42 33

50 Up to Down Revisions -24.3 -4.1 3.8 -23.7 -14.2 50 40 21 50 44

51 Debt/Equity (Low - High) -28.2 -2.0 8.8 -21.2 -3.6 51 36 4 47 36

52 1 Year EPS Growth -28.9 -12.3 1.7 -29.5 -19.8 52 53 27 53 48

53 Estimate Dispersion -32.1 -10.5 6.9 -21.7 8.3 53 52 7 48 24

54 1 Year Dividend Growth -32.2 -13.3 7.1 -30.0 -25.7 54 56 6 54 50

55 1 Year Price Momentum -54.0 -12.4 3.2 -59.4 -55.8 55 54 24 56 56

56 Default Risk (Safe - Risky) -56.1 -12.8 12.8 -48.7 -5.0 56 55 2 55 40

RanksReturns

Notes: The Russell 1000 stocks are ranked according to a particular factor. Factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest decile and short the decile with the lowest scores (rebalanced monthly). Yellow highlight indicates top 10 ranked strategies; blue highlight indicates bottom 10 strategies in the given column (time period). Factor returns do not include transaction costs. Data as of 4/30/2009. See Appendix G of US Quant Monthly for factor definitions.




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Documents

Nomura Securities International, Inc. U.S. Quantitative Research. 26 May 2009 Nomura Securities International, Inc. How macro is priced in equity factors: