Thursday, February 12, 2015

Adjusting in the finance world

There has been much talk recently about homogeneity adjustments. Some in the mainstream madia, and none that made much sense. It's one of the most extraordinary scandals of our time. Maybe even criminal:

"Is history malleable? Can temperature data of the past be molded to fit a purpose? It certainly seems to be the case here, where the temperature for July 1936 reported ... changes with the moment," Watts told

"In the business and trading world, people go to jail for such manipulations of data."

So I thought I'd see what does go on in the trading world. I originally commented on this at Paul Homewood's site. I looked up the chart for BHP's share price on our national exchange, ASX. Scrolling down, I read:

"Adjustments - The charts are adjusted to smooth out the effect of bonus issues, rights issues, special dividends, share splits, consolidations, capital reductions, or to link historical values that represent the company's primary equity security. The chart also assumes that all company issued options and convertible securities are converted into ordinary shares."

In other words, not the historic prices at all. And ASX won't show you a chart of the "raw data". One complaint about GHCN adjustments is that they are constantly changing the past. But see what happens here. As with climate, present adjusted values are held equal to present market price. So what happens when BHP issues such a dividend? Its price drops by about the amount of the dividend. ASX adjusts all past prices down, to "smooth" the drop.

So are they changing the trend? Yes, definitely. Dividends, share splits etc almost always lower the share price. So past adjustments are almost always down. BHP's actual share price did not rise nearly as much as shown (well, OK, declined by more, lately).

You may say, well, a dividend is a known amount (though since BHP dividends are fully franked, the drop may be modified by the tax benefits). So let's look at another case - Bluescope Steel. They say:

"To enhance comparability, and consistent with market practice, actual share prices have been adjusted to reflect the 1 for 6 consolidation of December 2012 and the deemed 'bonus component' of the BlueScope Steel Entitlement Offers of 2009 and 2011. (An adjustment factor of 0.8470 has been applied to share prices prior to 22 November 2011 in respect of the 2011 Entitlement Offer, and a further adjustment factor of 0.8016 has been applied to share prices prior to 7 May 2009 in respect of the 2009 Entitlement Offer)."

That is rather more specific, and the numbers quoted are estimates, with no explained basis.

I haven't heard anyone threatened with jail for this very public malleability of history. Of course, they are done for the same reasons as temperature adjustments. If you want to know how the company (or the market) is faring, then you do not want to know about the predictable response to dividends, share splits etc. It is absolutely right to take them out. As it is with the inhomogeneities in the temperature record.


  1. "Watts told"

    Would fox news be these idiots:
    US TV channel Fox News has made an on-air apology after a terrorism pundit described Birmingham as a no-go area for non-Muslims.

    Steven Emerson, billed as an expert on terrorism-related issues, was described by the prime minister, David Cameron, as “a complete idiot”...Emerson issued a string of apologies to British media outlets over his “terrible, inexcusable error” during a broadcast last weekend and has also donated £500 to the city’s children’s hospital.

    Fox News presenter Julie Banderas told viewers: “Over the course of this last week we have made some regrettable errors on air, regarding the Muslim population in Europe, particularly with regard to England and France.

    “This applies especially to discussions of so-called no-go zones, areas where non-Muslims allegedly aren’t allowed in, and police supposedly won’t go.

  2. Statistical Adjustment of Data, W. Edwards Deming, 1938 first edition, 2nd in 1943.

    Raw data are almost never usable, which has been recognized for a very long time.