Beta Bear Market, Alpha Bull?

“All night he check, check, check.” Teddy KGB in Rounders

In poker you fold a majority of the hands, and it can be pretty boring for amateurs to play that way. Most end up playing far too many hands for entertainment value. Sometimes it simply makes sense to sit out.

Following the GTAA model I published is pretty boring, and it only makes about one round trip per asset class per year. But hey, boring this year is not bad. Personally, I’ll just follow my model when it gives a signal, whether it is next month or two years from now. If you were following the model as published you would be up on the year, mainly due to the atypical allocation of 20% to commodities. Most of world betas are down around -15% YTD and -20% from their highs. REITs are getting clobbered down around -40% from the highs.

Anyways, here is an updated list of asset classes through 7/15 and listed alternatives. Gold stars go to the market neutral funds, managed futures, and of course the bear funds. Is GRZZX really up 40% YTD? That is pretty amazing work Mr. Leuthold. Heebner continues his outperformance, up over 10% in 2008.

(You still have to click on the chart to zoom in – Blogger has not made resizing images a feature yet.)

Alpha Hall of Fame Interviews

If you don’t subscribe to the magazine, here are the links. All of them are worth reading:

Bruce Kovner

James Simons

Julian Robertson

George Soros

Michael Steinhardt

Kenneth Griffin

Seth Klarman

David Swensen

Steven Cohen

Leon Levy

Jack Nash

Louis Bacon

Alfred Winslow Jones

Paul Tudor Jones

NYC This Week

Posts will be lighter this week as I will be in NYC starting Wednesday. As always, drop me a line if you are around.

Rule #1

Stock markets are risky. According to Bespoke, I count about 8 that are down more than -40%.

How long is that going to take you to get back to even? From a great article at designing better futures (here is the chart).

“Rule #1 in all investment allocation decisions is don’t lose money. Risk management is the name of the game at the asset and portfolio level. If you are a European and invested in US shares you have lost 50% of your money after the currency conversion. You would need a 100% return to break even.

The acceleration point for losses requiring greater gains is around a 13% loss. Think of it as inverting the power of compounding returns. Currently the S&P is 26% below its highs. To get back to the previous high point for domestic investors the S&P 500 needs to gain a little over 35%. The long term +80 year historical average return for equities is around 7-8%, so back to break even then in around 4 years. Based on historical average return would be 2012-2013.”


What if the candidates listened to the economists?


Why even hold an election? Obama futures at Intrade are currently trading around 70…I think a good strategy would be to buy McCain futures right around the time (or right after) the Democratic National Convention.


I wrote about the Congressional Effect back in January of 2007 and January of 2008, and here is an excerpt:

“According to two economists, Mike Ferguson of the University of Cincinnati and Hugh Douglas Witte of the University of Missouri at Columbia (paper link here) , if you had invested $1 in the Dow Jones Industrial Average back in 1897 when the index first started and invested only when Congress was in or out of session until the year 2000, here’s how much money you would have:

Invested When Congress is In Session:

Invested When Congress is Out of Session:

Here is a link to another paper, the Congressional Calendar.

Link to when Congress is in session.

With only 27% of the population approving of the job Congress is doing, my proposal is that we simply eliminate Congress and watch the market go to the moon!

There is now a mutual fund trading on the strategy, although it has a somewhat ridiculous 2% annual fee for a transparent strategy – here is the homepage for the Congressional Effect Fund.

Fund Fact sheet here
Morningstar quote page here.

Weekend Linkfest

Is the stock market decline nearing an end?


I love my iPhone, and will probably trade in my old one via Flipswap for the new one. My favorite apps are:


Seriously, how cool is it that you can hold your phone up to a speaker and it tells you what song it is? It’s magic, I swear.

Don’t Pay Alpha Fees for Beta Performance.


The (in)significance of global subprime losses in the grand scheme of things.


What stock is up the most on the NYSE today at 25%? Hercules! Hercules!


I really don’t get most of these aggregators – here is a new one Streetread….I need less news that is more useful, not more news that is all noise! Sites like Abnormal Returns that thoughtfully filter the information are worth much more to me than the ones that simply combine ALL of the information.


Peter Thiel and Clarium are killing it – up 60% YTD. While they use futures, here are the top 10 stock holdings:



I love the Ibbotson Yearbook, but I wish they would add commodities.


I thought I lost some weight when I lived in Boulder that Summer. Map of obesity rates by States – Mississippi is the worst and Colorado is the best.


Lots and lots of free Excel Spreadsheets.


Arnott’s Diversified Portfolio

From an article over on IndexUniverse titled “Liquid Alternatives: More Than Hedge Funds” by Rob Arnott and John West.

Below is how an investor could replicate their portfolio with ETFs.

The Diversified Asset Portfolio is an equally weighted portfolio (10% each) of:

International stocks – VEU, EFA
U.S. stocks – VTI, SPY

Emerging market bonds – PCY, EMB
High-yield bonds – HYG, LQD
Long-term U.S. government bonds – TLT, BLV
Unhedged non-U.S. bonds – BWX
U.S. investment-grade bonds – AGG, BND

Commodities – DJP, DBC

Buying a Dollar for $0.90

Long term readers know I am a big fan of buying closed-end funds at discounts and selling them at parity. Closed-end funds are one of the least efficient areas of the market, and many can and do trade at very large discounts to their NAV. is a good resource here.

It was with great interest when a reader brought it to my attention that there is an ETN that invests in closed-end funds trading at a discount.

Fact Sheet for the underlying index here.

Ticker Symbol is GCE.

The average discount of the top 5 holdings is around -10%.

Cohen and Steers also has a closed-end FOF but it trades as a closed-end fund and can also trade at a discount (in effect getting a double dip). It got as low as about a -8% discount but is back to parity. Quant Investor had a nice article here.


With the Dogs of the Dow on their way to their worst year ever, I wonder if it is a good time to put some money into the closed end fund that track the Dogs strategy (DSF) as it is trading at a -4% discount?

While we’re on the topic of dividends, why do you think Siegel uses them in his Wisdom Tree funds? From his very good book “Stocks for the Long Run”:

“But from a tax standpoint, share repurchases are superior to dividends.”

Results of the 2nd Book Cover Design Contest

35 entries of varying quality. . .Worth1000 book cover design contest.

What Will the 21st Century Look Like?

The markets are closed and I am outta here for some fish tacos, some beach, some surf, and some bbqing. If you need some weekend reading, here goes…

This post below reminds me of Question #2 from Fisher’s book:

“What can you fathom that others find unfathomable?”

Really interesting piece on market history from GFD Guide to Total Returns. From the doc:

“These facts allow us to make several general statements about investing in financial assets during the 1800s:

1. Most people invested in bonds, not stocks
2. Virtually all of an equity investor’s returns came in the form of dividends, not capital gains
3. There was little difference in the returns to stocks and bonds
4. Since the government did not issue treasury bills and deposits were not federally insured, there was no “risk free” investment available to investors
5. Bond and dividend yields declined over the course of the century as the risk to investors and inflation declined.
6. Although prices rose and fell in any given year, from 1815 to 1914, there was no overall inflation in the US and in most countries on the Gold Standard.

What is interesting about these points, which would have been taken as given before 1914, is that during the 20th Century none of these assumptions proved to be true. By the end of the 20th Century, most investors were investing in stocks, not bonds, depended on capital gains, not dividends, received a large premium on stocks over bonds, had risk-free investment alternatives, saw interest rates rise during most of the 20th Century, and suffered from the worst inflation in human history.

This makes us wonder how reliable the assumptions that investor make today will be for the next 100 years. Will everything that we assume to be true about investing today prove to be false by the end of the 21st Century, and why was it that the rules for investors changed so radically over the course of the 20th Century?”

Without poaching too much from the site, a few more great quotes from Ten Lessons for the Twenty-first Century Investor by Dr. Bryan Taylor:

In the 1970s, when Asian markets were emerging, they also displayed these volatile tendencies. The Hang Seng index rose 880% between 1971 and February of 1973, only to collapse 91% by the end of 1974. Poland, Russia and other stock markets went through similar bubbles and crashes when they emerged from Communist rule in the 1990s. Market timing is everything in these markets.

You know I agree with him on the market timing comment.

If you could imagine how the 21st Century will be different, what would you speculate? Leave a comment. . .

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