Volatility Clustering

“Statistics are like bikinis. They show a lot, but never everything.” – Lou Piniella, Cubs Manager

I am always surprised as to the posts readers find most interesting. This post on Volatility Clustering was one of my favorites, but didn’t elicit a single comment. I think it is fairly timely with the pickup in volatility in the stock markets now that we are below the 10-month moving average.

Notice the only market where the volatility is higher when above the moving average – commodities – which makes sense given that commodities are much more likely to spike up due to supply/demand issues. Take a look at a chart of wheat or corn for an example. Volatility for asset classes, on average, is about 25% higher and returns about 60% lower when under the moving average.

Reminds me of the behavioral reasons listed by Lo in this earlier video.


A new book on the way soon from Robert Schiller – The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It.


KKR is going public by merging with their listed fund in Amsterdam. Hopefully (albeit unlikely) this will bring some needed attention to the listed hedge fund and private equity fund space.


I don’t use the mean reversion technique I mentioned in an earlier post, but it would buy US Stocks, Foreign Stocks, and REITS in August for a two month hold. I’ll track the performance with SPY/IWR, EFA/EEM, and IYR/RWX. Other particularly awful performers that could see a bounce are:

Financials (XLF)
Netherlands (EWN)
Sweden (EWD)
India (INP)
Infastructure (MG)
Private Equity (PSP)
Foreign Private Equity (PFP)

Macro Links

Some macro commentary from Epoch:
The Perfect U.S. Economic Storm: Asset Deflation, Commodity Inflation and the Expiration of the “Greenspan Put”


From Carpe Diem:

The Big Three of Entitlements and

it is now cheaper to buy a house than a car in Detroit.


The Economist has been publishing the Big Mac Index since 1986. Has anyone ever backtested their index for performance (ie long 10 most undervalued currencies, short the 10 most overvalued)?


Huge fan of Marc Faber, and not just because he has a great name:


I recently read Ron Paul’s “The Revolution: A Manifesto” on the plane coming back from NYC and really enjoyed it. I don’t think I have seen a book with 600 reviews and 5 stars before. It was interesting, because as I read it I thought “I bet Jim Rogers would really like this guy”, and it looks like I was right.

Below is a video from Candidates@Google:

Everyone Loves Qualcomm Part II

Hedge fund favorite Qualcomm is up big today (about 18%) to a new 52 week high.  I have written about the stock a few times in “Everyone loves Qualcomm” and “Hedge Fund Masters“.  The next update to the tracking portfolios will be in about a month, but so far the two dummy clone strategies are killing the stock indices since inception (beginning of 2007).  If you recall, they historically outperformed the indices in backtests to 2000 by about 5-12% a year.

Sign up for the ucoming AlphaClone beta here.

There are a ton of hedge funds that own this stock, and it reads like a who’s who of the best hedge funds:

Tiger Global
Lone Pine

Reader Questions

I need a blog redesign – leave a comment with the best designed blogs or news sites.


Ahhh, Web 2.0.  Click here and vote on a name for my company and get paid if yours is the best.

NameThis (by Kluster).


Advisor Perspectives interview with El-Erian. I am still waiting for someone to ask him why his allocation in his book only adds up to 98%.


Correlations can, and do, change.


Attack of the Clones

This is really a great overview of alpha, beta, and alternative beta.  Also reviews hedge fund clones and listed hedge funds, errr I mean “Permanent Capital Vehicles”. 


Below is a reader question:

Meb, I’d like to hear your thoughts on this statement by Paul Tudor Jones:

“Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket. I am sure they were using similar logic about tulips three centuries ago.”

PTJ probably knows a lot more about commodity returns than I do, and some of that knowledge helped build our alma mater a new basketball stadium.

I think there is a very simple answer – there wasn’t much inflation in the US from the founding of the country until the last 50 years or so. Blame it on what you want, but wars and going off the gold standard are two good theories. Interestingly, Hussman believes that an increase in the money supply is not a good indicator of increasing inflation, but unproductive government spending is.

In a somewhat related note, here is a PDF “Core Inflation as a Predictor of Total Inflation“.


Blogging is hard – which is why I am sad to see Mangan go. . .


I had a hard time getting through Bernstein’s new book, “A Splendid Exchange”, although some parts were brilliant. I found this table particular interesting. The reason Bernstein gives for African descendants increasing their numbers so much America and Canada, who made up for a very small part of the slave imports, was that North America for the most part didn’t grow sugar, which was a particularly deadly crop to grow and refine. (The slave trade was also outlawed in the US in 1808.)

Proportions of New-World Slave Imports 1500-1880

US & Canada 4.5%
Mexico and C.America 2.4%
Caribbean Islands 43.0%
Brazil 38.2%
Other S. America 11.8%

Proportion of New-World African Descendants in 1950
US & Canada 31.1%
Mexico and C.America 0.7%
Caribbean Islands 20.0%
Brazil 36.6%
Other S. America 11.6%


Does the Stock Market Fully Value Intangibles?

  • Fortune magazine’s “Best Companies to Work For” earned an annual four-factor alpha of 4% from 1984-2005.
  • Employee satisfaction is associated with higher shareholder returns, rather than reflecting unnecessary expenditure.
  • Even when intangibles are made visible by a publicly available survey, they are not incorporated into stock prices, supporting for managerial myopia theories
  • Socially Responsible Investing screens need not reduce, and may even enhance investment returns

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

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.


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