Beta on my Mind

The minutes of Federal Open Market Committee (FOMC) meetings are so carefully crafted that one has to read between the lines to make head or tail of them. So I find the minutes boring and tend to base my judgment on the unanimity of the vote. Any dissension at all indicates that the decision taken on rates is not settled.

The market reacts negatively to the minutes of the September 20 meeting. Investors are still concerned the fed may raise rates. The indices close down marginally for the first time this week.

Wall Street also yawns at OPEC’s threat to cut production, which sends crude prices even lower. OPEC’s production, excluding Iraq’s, is already below its quota. So unless actual production, rather than the quota, is to be cut the threat is useless and the oil price will likely lose more steam in the absence of other supportive fundamentals.

Meanwhile, I’ve got Beta on my mind. Beta measures the volatility of a stock relative to the market, typically the S&P index. The market has a neutral Beta of 1. So if the market declines a stock with a Beta higher than 1 is likely to decline much more than the market does; a stock with a Beta smaller than 1 less likely so. The opposite is also true; when the market gains, high Beta stocks tend to do better than the market.

EBAY’s very high Beta of 3.45 and the seasonal Q4 run-up in software stocks make me think the folio needs a software stock with good long-term prospects and a Beta higher than MSFT’s 0.48 but lower than EBAY’s. I think Adobe Systems (ADBE) fits this profile. Over the next few days I will do more research on ADBE (Beta 1.88) with a view to adding it to the folio.