Comments on GTAA model

Well, the market took a huge dump today. If you are following my model you are 80% in cash/bonds, and by the end of the day tomorrow (unless commodities rip back up), you will be 100% in cash and bonds.

I asked readers who utilize the model for their comments the other week in my “Yawn” post, and I have heard from everyone from little retail accounts to billion dollar hedge funds that have implemented the strategy. (And yes, I am still waiting on any thank-you bottles of nice tequila…)

Here are some below (and if you haven’t left a comment, do so now):

“I’m following a 10-asset class, 130% GTAA model using leveraged funds based on Meb’s white paper. I use a 4-week cycle instead of a monthly cycle. I’m currently 100% in bonds and cash. Took profits on DJP on 8/11/08 and on GSP on 9/08. Portfolio is +2.3% YTD and +4.1% YoY with a maximum drawdown of 4.7% measured on a weekly basis from peak to trough. Compared to a 60% IWB / 40% AGG benchmark, GTAA rocks!”

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“My “Strategy 3″ is a variation of your white paper idea – you can view weekly allocations here: http://www.regimenia.com/

My TAA model has been 100% cash the past 2 weeks. In actuality I’ve been net short.”

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“I’m in cash (and speakers). I talk about my strategies at kirznerfervor.blogspot.com (which you’ve seen). Most of this year, though, I was day trading energy and financial companies, but with more leverage than I felt comfortable with given the volatility. So I made a better trade, Senior Economist at an insurance company too conservative to blow up.”

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“My TAA Portfolio,
VTI (Total Stock Market)
VWO (Emerging Markets)
IEF (7-10 Year Treasury)
RWX (Intl Real Estate)
DBC (Commodity)

Right now, Long 20% IEF

I love this strategy.”

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“Long time reader, first time poster….

Count me in as a huge fan of the system.”

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“I had followed the 5 asset-class strategy for a while but in EUR (instead of USD). Actually, I lost money and stopped the experiment this summer.

I continue to monitor the strategy as it seems sound to me.

The reason for my losses was the cost of trading Euro ETFs (bid-ask spread mainly).

My experience tells that you should invest in ETF from the USA, in USD then hedge your currency (if you want to).”

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“Here is the strategic asset allocation for a 130% GTAA model, which is one of three models I publish:

Symbol Percent
ULPIX – 5.0%
UAPIX – 5.0%
UNPIX – 5.0%
UUPIX – 5.0%
URE – 10.0%
DJP – 10.0%
GSP – 10.0%
SHV – 12.5%
SHY – 12.5%
IEF – 12.5%
TIP – 12.5%

I use a 4-week period and a 40-week SMA for the timing signal. The last period ended on 9/05/08, when the model generated a sell signal for GSP. The model had previously generated a sell for signal for DJP on 8/08. The portfolio is currently 50% long bonds, 50% cash.”

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Thanks for the update, and yes my reading of the signals is a sell on commodities tomorrow. I wonder if we’ll see $60 oil? That’ll be a big plus for financial markets. I see a big potential for a cyclical bull move in a long, secular term bear for equities building.

Then as the last move, we go from the bull high in equities to a climax low for the secular move in several years while oil goes from $60-$200. That’ll be quite a ride.

Thanks for your work. It has made and saved me a lot. “

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“Make hay while the sun is shining, brother! It’s doing exactly what it’s supposed to do; muting volatility and delivering long-term (i.e. multi-year) returns that will slightly exceed that of stocks.

What will be interesting, will be when the GTAA is trailing the SPY over a 12-month period by a substantial margin. It’s happened in test and will happen again.

Like most mechanical systems, GTAA adds believers when it outperforms and will probably lose them when it underperforms. That’s not a fault with the system – far from it! I’m a fan! It’s more a fault with investor psychology.

… and a reason why mechanical systems will always work and never get their “edges” arbitraged away …”

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“I am an investment advisor who started using the TAA method back in April. I wanted to express a “BIG THANK YOU” from me and the clients I rep. This method is simple enough for my clients to understand, but sophisticated enough for me to appear valuable in its implementation and monitoring. For those who are looking for an incredible opportunity. Get securities licensed, show this method and obtain 100 $1,000,000 clients, charge 1% for the advice you offer, gross $1,000,000, make your clinets lots of money, get paid well for doing it. M you are the best.”

LinkFest

I love Estrada’s work. Here is a link to a recent paper in the Journal of Investing.

ABSTRACT

Do investors obtain their long-term returns smoothly and steadily over time, or is their long-term performance largely determined by the return of just a few outliers? How likely are investors to successfully predict the best days to be in and out of the market? The evidence from 15 international equity markets and more than 160,000 daily returns indicates that a few outliers have a massive impact on long-term performance. On average across all 15 markets, missing the best 10 days resulted in portfolios 50.8% less valuable than a passive investment; and avoiding the worst 10 days resulted in portfolios 150.4% more valuable than a passive investment. Given that 10 days represent less than 0.1% of the days considered in the average market, the odds against successful market timing are staggering.

Great data, but wrong conclusion – he needs to take his data and analysis one step further!! Long time readers of World Beta will know that the vast majority of big up AND down days come when the market is declining, mainly because it is more volatile. Posts here, here, and here. About 70% of the big up and down days are in declining markets. So, it should be no surprise to readers that markets have been volatile lately.

Thus, the simple reason my quant system works – it avoids the volatile up and down days. (And this is not to mention the sequence of up and down days, which is also important.)

I’ve been trying to get Estrada to extend his work to when the markets are above and below the 10-month moving average, stay tuned!

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An inspiring story of one of the top chefs in the country who is battling tongue cancer. I’ve always wanted to go to Alinea.

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A few funds that practice extreme diversification. Although, I must say that the buy and hold portfolio in my paper is more unconventional than most of these. Funds listed:

Permanent Portfolio PRPFX
Evergreen Asset Allocation EAAFX
PIMCO All Asset PASAX

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Is Thiel buying here?

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I love maple syrup, but man it is getting expensive.

LinkFest

I was going to do a linkfest, but the KirkReport and Abnormal Returns do such a better job that you should just go there today (everyday).

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Are you on the buyside? Check out the new site SumZero.

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An open letter to the US Congress from Hussman.

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Ron Paul on the financial crisis.

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I wish Themeforest had themes for Blogger. . .I need a redesign.

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I wrote an article on 9/9 about it being a good time to buy the gold miners. The GDX is up about 35% since then (and no I don’t take any credit for the timing of that call – a friend recommended I do an update to a previous article).

The K-Ratio is still in deep buy territory.

There also seems to be another simple trade to me – if gold breaks the $1000 mark, which is a huge psychological barrier, then don’t you think it will sail to $1200 pretty quick? I do. Maybe a good strategy would be to sell some $1000 calls, and then buy a ton of $1200, $1300 calls? (Either on the futures or on GLD).

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Jordan, Morocco, and Tunisia are doing relatively OK.

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The truth about thread count.

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Michael Lewis on looking on the bright side.

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Trailer for SYNECDOCHE, NEW YORK – the first film directed by Charlie Kaufman, who wrote Being John Malkovich, Adaptation, and Eternal Sunshine of the Spotless Mind.

Harvard and Yale Endowments 2008 Performance

was…

Harvard: 8.6%
Yale: 4.5%

Pretty impressive considering stocks were down more than -10% over the same time period. Below is a table of the five main asset classes over the past year and their total returns. The buy and hold allocation is the same allocation mentioned in my paper, namely a 20% allocation to the same five asset classes. GTAA is the timing model from the same paper. (Both are gross returns so lop off about 50 bps for management fees.)

Harvard: 8.6%
Yale: 4.5%

B&H: 9.79%
(no rebalance), 6.44% monthly rebalance
GTAA: 13.92% (no rebalance), 11.15% (monthly rebalance)

US Stocks: -13.12%
Foreign Stocks: -10.15%
Bonds: 12.76%
Commodities: 75.99%
REITs: -16.55%

A simple, diversified allocation across low fee and tax efficient ETFs would have performed very nicely.

One could replicate these asset classes with the following ETFs:

SPY
VEU
BND
VNQ
DBC

LinkFest

I am marking the bottom in stocks here. My mom just called asking if she should sell some of her stocks – and she has nailed every bottom for as far back as I can remember.

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A Dark Mood Among Hedge Funds - sounds like the perfect time to start one…

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SEC may require hedge funds to disclose short positions (and more here and here).

You know I love that proposal. . .

Market Folly also dives into Moore Capital holdings.

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A commitment pill?

Yawn….

That is likely your reaction to this market turmoil if you have been following my global tactical model.

It is risk management at its simplest, and depending on your start date, your portfolio would be 80-100% in cash/bonds right now (with 20% in commodities). There is a little (ok, A LOT of) guilty pleasure watching the market dump while being on the sidelines.

I have received emails from all over the world from people who run their own variants of the timing model, and it is gratifying to see that it is protecting investment capital so effectively this year (and out of sample since 2006). If you were following the model as exactly published in the paper, you would have been UP slightly on the year going into September (but I imagine slightly down with commodities coming off this month). You would be beating stocks by about 20% this year.

I have heard from everyone from little retail accounts to billion dollar hedge funds that have implemented the strategy.

I would love to hear if you are running the tactical model, your particular variant, and how you are doing YTD. Leave a comment to this post.

Here is a comment from reader Paulm recently:

“I’m following a 10-asset class, 130% GTAA model using leveraged funds based on Meb’s white paper. I use a 4-week cycle instead of a monthly cycle. I’m currently 100% in bonds and cash. Took profits on DJP on 8/11/08 and on GSP on 9/08. Portfolio is +2.3% YTD and +4.1% YoY with a maximum drawdown of 4.7% measured on a weekly basis from peak to trough. Compared to a 60% IWB / 40% AGG benchmark, GTAA rocks!”

Let me hear from you!

A simple 5 asset class allocation with ETFs could be:



Domestic Stocks

20%

VTI

Foreign Stocks

20

VEU

Bonds

20

BND

Real Estate

20

VNQ

Commodities

20

DBC

A simple 10 asset class allocation with ETFs could be:



Domestic Large Cap

10%

VTI

Domestic Small Cap

10

VB

Foreign Developed Stocks

10

VEU

Foreign Emerging Stocks

10

VWO

Domestic Bonds

10

BND

TIPS

10

TIP

Real Estate

10

VNQ

Foreign Real Estate

10

RWX

Commodities

10

DBC

Commodities

10

GSG

ETFs that generate K-1s

For those looking to avoid the headaches of dealing with K-1’s on your taxes, here is a short list of ETFs that require the filing of one (there are about 120 securities I have found that generate them). In addition to many of the energy related closed-end funds and private equity groups (like KKR, Blackstone, Icahn) here are the ETFs/ETNs:

iShares GSCI (GSG)
Macroshares Oil (DCR, UCR)
Powershares DB (DBC, DBV, DBA, DBB, DBE, DGL, DBO, DBP, DBS, UDN, UUP)
United States (UNG, USO, USL, UGA, UHN)

Dogs in the Dumpster

Not surprising to readers of World Beta, but the Net Payout Yield strategy is beating all the dividend strategies this year (and did so in 2007 as well). Before you leave any comments please read the background posts on net payout yield – it is NOT dividend yield.

Flying Five (Link to original post here.)
Dogs of the Dow (Link to original post here.)
Net Payout Yield (Link to original post here.)

Dogs of the Dow is simply to top ten stocks in the Dow sorted by dividend yield.
Flying Five further sorts those by lowest price.
Net Payout yield is the top ten Dow stocks sorted by net payout yield.

For the past 30 years or so the Dogs strategy has outperformed the DOW by ~ 3% per annum, and the Net Payout Yield strategy another 3% on top of that (ditto for Flying Five). But are the results simply data mining? The NPY strategy certainly sits the best with me of any of them.

All three performed below the DJIA Index in 2007:

DOW: 6.43%
DOGS: 2.22%
Flying Five: 4.18%
NPY: 6.3%

The 2008 names and YTD performance for Dogs, Flying Five, and Payout Yield are below:

DOW: -17.7%

Dogs of the Dow, -20.14%:
C
PFE
GM
MO
VZ
T
DD
JPM
GE
HD

Flying Five, -27.93%:
PFE
GM
HD
C
GE

Payout Yield, -13.57%:
HD
IBM
HON
DIS
PFE
JPM
AA
C
XOM
HPQ

Here is a screen for net payout yield stocks, and the top ten right now are:

HD
AA
PFE
XOM
BA
T
GE
MCD
CAT
GM

Palin and Hillary

Too funny (Hat tip: CC).

Closed-end funds

Wow. There are currently over 100 CEFs that trade at a greater than -15% discount to their NAV. Enterprising investors could be scooping up some funds at nice discounts.

ETFConnect is my favorite resource here.  I seem to remember Herzfeld tracks the % of CEFs trading at a discount?

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