From today’s WSJ: Advisers Ditch ‘Buy and Hold’ For New Tactics http://online.wsj.com/article/SB124096109870565775.html. Here’s one quote (of many) of what advisors are doing for their clients:
Today, Mr. Seymour keeps about 90% of his clients’ money in such low-risk investments as short-term bonds, cash and gold. With some of the small amount that’s left over, he uses leveraged exchange-traded funds to place magnified bets both on and against the Standard & Poor’s 500-stock index.
It continues…
Buffeted by steep declines in stocks, many bonds, commodities and real estate, many advisers are questioning their faith in long-standing investment principles, such as controlling risk by building diverse portfolios. Some are adding increasingly exotic investments, including products that offer downside protection, to client portfolios. Others are trading more actively — and say they plan to continue to do so until they see evidence of a new bull market.
For starters, Mr. Seymour should read our post Levered ETF’s Are Not Your Friend from 4/27. The Mr. Seymour should think about how he defines risk for his clients. Lack of volatility? OK, cash and short term bonds fit that description (although gold does not). Permanent loss of capital? Considering the fact that both short term bonds and cash offer no return, his clients are accepting almost gauranteed small losses on a daily basis, while gold is a relative return play. Mr. Seymour might be able to play the gold market well, but I highly doubt that.
Interestingly, Mark Hulbert wrote about an indicator he’s been following for 20 years. It measures the sentiment towards buy-and-hold by advisors. As you can imagine, it is lowest near market bottoms: http://www.marketwatch.com/news/story/status-market-timing-popularity-indicator/story.aspx?guid=%7B9514E9B5%2D9949%2D4D0C%2DAFA5%2DAD8A7B40679B%7D&dist=msr_10. So maybe we should thank Mr. Seymour for coming out and telling his clients and the rest of us how this time it’s different and that there has been a fundamental shift in investing.
By the way, I am not saying that buy-and-hold-forever is the way to go. I am just critical of the way that most advisors determine what strategy they will use and when. The process for choosing a stock or a strategy is more important to me than which particular stock or strategy you choose. I believe in buying cheap assets and continually finding the cheapest assets out there. I too, provide some indication in a chaos-theory, post-modern way.
In a recent paper, Professors Stambaugh and Pastor argue that stocks exhibit higher volatility over long horizons. “Evidence of lower long-horizon variance is cited in support of higher equity allocations for long-run investors (e.g, Siegel, 2008) as well as the increasingly popular “life-cycle” mutual funds that allocate less to equity as investors grow older (e.g., Gordon and Stockton, 2006, Greer, 2004, and Viceira, 2008).” The implications touch pension investors or any investors determining allocation based on time horizon (i.e. the vast majority).
For me, one of the most interesting aspect of this paper is that time does not necessarily increase predictability. Assuming that equities are not more volatile over the long term, as the paper suggests, but instead are equally volatile. That would support Mandlebrot’s fractal modeling. Even if volatility is higher, that is, we see the same pattern, but with a certain multiple, using fractals, we should still be able to run simulations and “build” hypothetical returns. Despite our recent foray into genetic algorithms, I find myself continually going back to the work of Mandlebrot…talk about confirmatory bias. Here’s the abstract:
Conventional wisdom views stocks as less volatile over long horizons than over short horizons due to mean reversion induced by return predictability. In contrast, we find stocks are substantially more volatile over long horizons from an investor’s perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return. We decompose return variance into five components, which include mean reversion and various uncertainties faced by the investor. Although mean reversion makes a strong negative contribution to long-horizon variance, it is more than offset by the other components. Using a predictive system, we estimate annualized 30-year variance to be nearly 1.5 times the 1-year variance. (Pastor, Lubos and Stambaugh, Robert F.,Are Stocks Really Less Volatile in the Long Run?(February 17, 2009). Available at SSRN: http://ssrn.com/abstract=1136847)
Also, check out this interview with Stambaugh and Jeremy Siegel at Wharton. http://knowledge.wharton.upenn.edu/article.cfm?articleid=2229
April 30 (Bloomberg) — China Mobile Ltd. agreed to buy 12 percent of Far EasTone Telecommunications Co., the first investment by a Chinese state-owned company in Taiwan since a civil war ended six decades ago.
The NT$17.8 billion ($529 million) purchase, announced by China Mobile yesterday, underscores how warming political relations between China and Taiwan are leading to closer economic ties. The Chinese government said this week it would end a ban on investments in the island on May 1 following an agreement to open cross-border operations for financial-services companies, expand direct flights and cooperate in fighting crime.
“This is a landmark deal. China Mobile will lead the way for other Chinese companies that have been waiting to invest in Taiwan but were hesitating,” said C.Y. Huang, vice chairman of Polaris Securities in Taipei. “This will open the floodgates for more Chinese investments into Taiwan.”
China Mobile agreed to pay NT$40 a share, or 14 percent higher than Far EasTone’s closing price yesterday, for the stake in Taiwan’s third-largest phone company. China Mobile will get a seat on the Taipei-based company’s board and become its second- largest shareholder, Far EasTone spokeswoman Alison Kao said. The deal is subject to approval from regulators and shareholders.
http://bloomberg.com/apps/news?pid=20601087&sid=a5WnAvYXwxdA&refer=home
Brazil cuts rates to record low 10.25%
New Zealand cuts key rate to record low 2.5%
and Im not quite sure what the FED did. Sure looks like the USD is falling and UST are backing up. Is that part of the FEDs plan?
For the time being USDEUR is in a holding pattern. To determine the KING of the FX pyramid we are going to be find it in places no one is looking. I continue to focus my attention on those NEEDs which are limited in supply.
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Germany’s economy will shrink by 6 per cent this year, making it one of the worst-performing large economies, the government said on Wednesday after slashing its official growth forecast.
Yet growth would resume next year, ending the worst recession in the Federal Republic’s history, said the government, brushing aside calls for a new fiscal stimulus to prop up consumption at home.
The new forecast, down from an expected 2.25 per cent contraction, underlines the impact the global downturn has had on Germany’s export-reliant economy. Of the world’s largest economies, only Japan is expected to shrink faster.
http://www.ft.com/cms/s/0/38564444-34a7-11de-940a-00144feabdc0.html
Caterpillar Inc.’s top executive said the company’s excavator sales in China had resumed record levels in recent months, a sharp bounceback from a deep slump over the winter months.
Excavator sales in China for the Peoria-Ill.-based heavy equipment maker had been around 600 a month before the start of the financial crisis last September, Chairman and Chief Executive James W. Owens said. Sales then plummeted and many orders were canceled, he said.
“In January, I think we sold five,” Mr. Owens said, in an appearance at the Chicago Council on Global Affairs.
He said the company’s overall Asian sales were up 42% in the third quarter. For the fourth quarter, he said, there was almost a “complete seizure” of sales and heavy cancellations of back orders.
Mr. Owens said excavator sales in China were “back to record levels” in March-April. He declined to say whether the level matched the 600 monthly figure from before the crisis.
The Chinese market had “bounced back faster than anywhere else,” he said.
http://online.wsj.com/article/SB124101603545368769.html
Not a good sign, but the real question is whether this is already priced in and what direction is the next leg?
http://blogs.wsj.com/economics/2009/04/29/more-cities-seeing-at-least-15-unemployment/
As a sidenote, Google recently started charting vast troves of data. Go to google.com and type in “unemployment rate new york” or any state for that matter. The first link will provide you with a chart of unemployment rates across the country: http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&idim=state:ST360000&q=unemployment+rate+new+york. It’s also offering a whole host of other charts (try any reported statistic). Great tool!
I have a hard time assuming that fee based brokers will be able to use “new” techniques to produce alpha in the upcoming marketplace.
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The broad decline across financial markets in the past year has persuaded a small but growing number of financial advisers to abandon the traditional buy-and-hold strategy — which emphasizes long-term investing in a mix of assets — for a new approach geared to sidestep future market plunges and ease volatility.
Jeff Seymour, an adviser based in Cary, N.C., used to counsel clients to buy a diverse menu of stocks, bonds and commodities, and hold on for the long run. But early last year, he says, he recognized that “the macro-economic climate has changed.”
Today, Mr. Seymour keeps about 90% of his clients’ money in such low-risk investments as short-term bonds, cash and gold. With some of the small amount that’s left over, he uses leveraged exchange-traded funds to place magnified bets both on and against the Standard & Poor’s 500-stock index.
http://online.wsj.com/article/SB124096109870565775.html
All truth passes through three stages:
First, it is ridiculed.
Second, it is violently opposed.
Third, it is accepted as being self-evident.
– ARTHUR SCHOPENHAUER (1788-1860)
It’s interesting how many new inquiries and papers we have been seeing on building these types of algorithms. Here’s another one: Hybrid Evolutionary Techniques for FX Arbitrage Prediction by Tristan Fletcher.
Abstract:
This paper discusses the need for a missing value technique to fill in gaps in time series representing foreign exchange (FX) prices and assist in the observation of potential arbitrage opportunities. It highlights the requirement for prediction methods to establish the persistence of these opportunities (latency). Naieve missing value and prediction techniques are investigated and then compared with Kalman Filtration, Ensemble Kalman Filtration, Regression and Neural Network techniques. A technique not known to be applied in this domain before, namely NeuroEvolution using Augmented Topologies (NEAT), is then examined in order to asses its ability in filling in missing values and the prediction of arbitrage opportunities in comparison to these other more established techniques. Hybrid functions, incorporating the most successful of the techniques, are constructed in order to ascertain whether combinations of techniques are more successful than their constituents. Data from for various data providers for three markets is used taken over periods representing different levels of market activity (liquidity).
Citation info: Fletcher, Tristan,Hybrid Evolutionary Techniques for FX Arbitrage Prediction(August 31, 2007). Available at SSRN: http://ssrn.com/abstract=1323607
http://zerohedge.blogspot.com/2009/04/do-quant-factors-persist-anymore.html
This is an interesting post looking at the persistence of various factors. Not much new info there, but I thought it posed some good generalities.
TROMSOE, Norway (Reuters) – An area of an Antarctic ice shelf almost the size of New York City has broken into icebergs this month after the collapse of an ice bridge widely blamed on global warming, a scientist said Tuesday.
“The northern ice front of the Wilkins Ice Shelf has become unstable and the first icebergs have been released,” Angelika Humbert, glaciologist at the University of Muenster in Germany, said of European Space Agency satellite images of the shelf.
Humbert told Reuters about 700 sq km (270.3 sq mile) of ice — bigger than Singapore or Bahrain and almost the size of New York City — has broken off the Wilkins this month and shattered into a mass of icebergs.
She said 370 sq kms of ice had cracked up in recent days from the Shelf, the latest of about 10 shelves on the Antarctic Peninsula to retreat in a trend linked by the U.N. Climate Panel to global warming.
http://www.reuters.com/article/scienceNews/idUSTRE53R27V20090428
A rare Central Asia summit of the five founding members of the International Fund for Saving the Aral Sea revealed some common ground on that issue — but nevertheless ended in bitter disagreement.
Meeting in the southeastern Kazakh city of Almaty for a one-day summit, the presidents of all five Central Asian states failed to overcome differences over water use.
Kyrgyz President Kurmanbek Bakiev exposed the real bone of contention among the states during his address — energy shortages, the construction of new hydropower stations, and concerns by downstream states as to how their water supplies will be affected.
“The strategic issue that requires resolution is the coordination of our timetables of water release for irrigation and energy needs and compensatory fuel supplies [to Kyrgyzstan], and this is what should be the subject of international cooperation among parties interested in using water-saving technologies,” Bakiev said.
The comments by Bakiev, whose “upstream” country is looking at hydropower as an answer to its energy needs, triggered an angry reaction from a “downstream” counterpart, Uzbek President Islam Karimov.
http://www.rferl.org/content/Central_Asian_Leaders_Fail_To_Overcome_Differences_At_Water_Summit/1617787.html
HONG KONG (MarketWatch) — China Railway Group said Tuesday net income for 2008 nearly halved from a year earlier because of a 4.1 billion yuan ($601 million) foreign-exchange loss after it placed a large portion of the proceeds from its Hong Kong initial public offering into Australian dollars.
The profit slump came in spite of a nearly 27% rise in revenue, as the company benefited from increased government outlays on infrastructure and other public-works projects, according to a statement filed with the Stock Exchange of Hong Kong late Tuesday.
http://www.marketwatch.com/news/story/China-Railway-hit-600-million/story.aspx?guid={09E876BB-3333-465D-AC12-798859D6AFA7}
The volume of commercial mortgages at risk of default has quintupled since the beginning of 2008 as a deteriorating economy has made it increasingly difficult for shops and businesses to keep up with their payments.
Special servicers, companies that collect payments from borrowers in distress on behalf of mortgage bond investors, reported $23.7bn of mortgages under their care at the end of the first quarter, according to Fitch Ratings.
http://www.ft.com/cms/s/0/d5c7a272-3434-11de-9eea-00144feabdc0.html
Strategy/Allocation | Yaron Sadan | 
April 30, 2009 10:33 am | 
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