As part of a growing trend among hedge funds and Wall Street firms, Cold War-style satellite surveillance is being used to gather market-moving information.
The surveillance pictures are often provided by private- sector companies like DigitalGlobe in Colorado and GeoEye in Virginia, which build and launch satellites and take pictures for US government intelligence agency clients and private-sector satellite analysis firms.
That means there are two links in the chain before the satellite data gets to Wall Street—a satellite firm takes the pictures and sells them to an analysis firm, which scrutinizes the images and sells the aggregated data to hedge funds and Wall Street analysts.
As an example of how Wall Street getting in on this techhology, the UBS Investment Research issued its earnings preview for Wal-Mart's second quarter, which publicly revealed that UBS had been using used satellite services of private-sector satellite companies to gather the comings and goings of the parking lots at Wal-Mart stores. “UBS proprietary satellite parking lot fill rate analysis points to an interesting cadence intra-quarter and potential upside to our view,” the report read.
UBS analyst Neil Currie had been looking at satellite data on Wal-Mart during each month of 2010, and he’d concluded that there was enough correlation between what he was seeing in the satellite pictures of Wal-Mart’s parking lots to the big-box chain’s quarterly earnings, that he was ready to incorporate that data into UBS’ report on Wal-Mart, which releases its earnings on Tuesday.
Currie purchased his analysis from a small two-year old Chicago-based firm called Remote Sensing Metrics LLC , which had scoured satellite images of more than 100 Wal-Mart stores chosen as a representative sample.
By counting the cars in Wal-Mart’s parking lots month in and month out, Remote Sensing Metrics analysts were able to get a fix on the company’s customer flow. From there, they worked up a mathematical regression to come up with a prediction of the company’s quarterly revenue each month.
And what the satellite analysts found surprised the UBS team, which was already well versed in the ins and outs of Wal-Mart’s business.
In the second quarter, the satellite analysts had spotted a surge in traffic to Wal-Mart stores during the month of June, which was 4 percent ahead of the same month a year ago. That, they speculated, was driven by an aggressive Wal-Mart price rollback marketing campaign that brought a lot more customers into the stores that month.
Because they could see that traffic showing up in the parking lots, the satellite analysts came up with a much different projection for the company’s quarterly earnings in the second quarter than the UBS team did using traditional methods.
UBS predicts that Wal-Mart’s second quarter sales will be up from the first quarter, but down a percent against the same period a year ago. But the satellite analysts figure that the number will come in 0.7 percent higher—not lower—based on the traffic surge they saw in the parking lots.
Takes Out the Guess Work
With a satellite picture, “you don't have to guess based on what a manager is saying from a store or the opinion of a research analyst,” said Tom Diamond, co-founder of Remote Sensing Metrics. “It's a real piece of data you can look at.”
In its report, UBS laid out both predictions side by side. And depending on how the second quarter turns out for Wal-Mart, the firm expects to begin adding satellite analysis into its Wal-Mart reports on a regular basis.
Diamond said his satellite analysis of the retail sector is pointing out some key trends that might not be apparent without the orbital imaging.
For example, Diamond said he’s been cross-referencing the parking lot information with unemployment database and comparing results between areas of high unemployment and areas of low joblessness.
In the past four or five months, he said, Wal-Mart’s growth has come in areas of higher than average unemployment.
But at competitor Target , Diamond added that the growth had been coming in areas with lower than average unemployment. But this summer, something shifted, and Diamond said that he sees both Target and Wal-Mart growing together, regardless of unemployment levels.
“I think that’s one indicator that the maybe the economy is starting to settle out,” Diamond said. “Some of this complexity of unemployment payments is maybe working itself out.”
Diamond’s analysts are doing the same surveillance on several of the biggest names in the economy, including Home Depot , Lowes and McDonald’s .
And he said what he’s seeing makes him moderately bullish on the retail sector—and the whole US economy.
“We just are seeing positive growth overall,” he said. “It's not skyrocketing, but based on what we're seeing, which is just ahead of company announcements, it looks like there is some stability here. We're not seeing it fluctuate up and down like it was a couple months ago.”
For more details on these satellite images, the companies that provide them and the businesses that use them, watch Eamon Javers reports, "Spying for Profits," all day Tuesday, August 17 on CNBC from DigitalGlobe headquarters in Colorado.