LinkFest

Just added The Capital Spectator to the Blogroll. Picerno has a great article on the global capital markets portfolio – and so far no ETF shop has gotten it right (they usually exclude commodities and REITs). My estimates for the global market portfolio are (comment if you have links or better numbers):

(I consider the real estate portion to be investable, it would certainly be bigger including non-investable):

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Picking up genes from your environment? Sounds like Bioshock (which is now going to be a movie).

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This sure is a bizarre story: Broadcom co-founder indicted on drug, securities charges.

In 2001, Nicholas smoked so much marijuana during a flight on a private jet between Orange County and Las Vegas that the pilot had to put on an oxygen mask, the indictment states.

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Books recommended by Warren Buffett

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The oil fields of North Dakota

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Seth Klarman now owns 25% of Horizon Lines (HRZ) and Tiger another 8%.

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Cool graphic from Ben Fry on salary vs. performance in MLB. Almost looks like an inverse correlation this year. It looks like historically that higher salaries = more wins, and here is a great scatterplot from 1997-2005. (The graphic is from Matt Sly, creator of the FutureMe website.)

Stock Screening

So far it doesn’t look like there have been any studies that divide factor research into bull/bear or trend periods. If there are any readers that use Factset (especially in SoCal)and would like to collaborate, let me know.

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I posted back in November a simple stock screen and the top picks it returned. Since that time they have returned 8% vs. -2.5% for the S&P. I’m not really a “post stock picks” type of guy (this blog is more about process and theory), but thought it was an interesting follow up. The best performer was Frontline (FRO) up 60%+ and the worst was Holly Corp (HOC) down about -25%.

What is it spitting out now? A pretty diverse group of shipping, electronics, fertilizers, REIT, housewares, engineering equipment, and egg producers.

Annaly Capital Management (NLY)
National Presto Industries (NPK)
Transocean (RIG)
Ampco-Pittsburgh (AP)
Cal-Maine Foods(CALM)
CF Industries Holdings(CF)
Frontline (FRO)
Western Digital (WDC)
Koninklijke Philips Electronics (PGH)
MOSAIC COMPANY (MOS)

LinkFest

Investing in farm stocks all over the world.

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A very cool Magnetic Movie.

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For Ray Kurzweil, the Future is Now. Did you know he runs a hedge fund?

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The dreaded Black Swan formation just showed up on the S&P. I’m not going to even comment on Taleb’s new diet.

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Bill Miller is now underperforming the S&P over a 10-year period.

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I am still waiting for someone to take me out to Urasawa. I promise I’ll pick up the next tab, and according to research we’ll both be better off.

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Credit, Housing, Commodities and the Economy from the Federal Reserve Bank of SF.

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Back in November I mentioned ProElite as a potential short, and Barron’s had an article on the shady company this weekend. It is down about 50% from then (and 75% from the highs), and I imagine on the way to 0.

Periodic Table of Returns

Here is a nice table from Prudential that shows the benefits of a good asset allocation. The second page has a statistic that shows the performance of the same allocation I use in my paper (20% each in US Stocks, Foreign Stocks, Bonds, REITs, and Commodities). 83% of the years since 1973 are above inflation, and 89% of the years are positive. They also have the data in a brochure – “The Case for Multi-Asset Class Investing“.

Weekend Linkfest

You know you’ve made it as a blogger when someone gets to your site by searching “how to blow something up” (currently 5th ranked search query on Google for that phrase). The only weirder search was “Bill Gross’s moustache”.

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Heebner is on fire.

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Who knew something as cool as the Hybrid Tech 220+ MPG Supercar would come from Mooresville, NC?

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Nice post on how consumer confidence influences future S&P returns.

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I hear the new Indy movie is awful, what a shame. How about “The original Indiana Jones: Otto Rahn and the temple of doom“?

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The Miracle Fruit That Tricks the Tongue (another article here). You can buy them here.

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The Robin Hood Charity brings in over $50 million for 2008. (The charity was founded by futures trader Paul Tudor Jones.)

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Thoughts on extinctions. I heart Olivia Judson.

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2008 Investment company factbook. There are now twice as many mutual funds as stocks in the US.

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Dean Kamen (inventor of the Segway) shows off his robotic arm:

Factor Based Stock Screening for Up and Down Markets

Charles Kirkpatrick has been publishing his market newsletter for decades. His simple factor based stock-screener has been beating the pants off the market for a long time. Here is a paper he published in 2001 “Stock Selection – A Test of Relative Stock Values Reported Over 17-1/2 Years“. He has continued to refine and simplify his model which includes relative strength and price/sales as key factors. But hey, what’s wrong with 20%-30% compounded returns? Here is his homepage.

When listening to Lo’s speech I was struck by the comment he made on a factor that was predictive in up markets (EPS Growth), but not down markets. Kirkpatrick decided it was not a good search criteria, but he could not explain the difference in behavior related to the different market environments. Lo offered an explanation based upon his AMH model. In bull markets, investors are making decisions using the part of their brains (neocortex) associated with analytical skills and seeking to maximize profits. In down markets, the ‘fight or flight’ part of the brain influences the investment decision making process and fear dominates the markets.

I have done quite a bit of work with factor based stock models, but never divided the periods based on trend.

My Q: Is there any research out there that takes a look at the most predictive factors for up markets (say, above the 200 day moving
average) vs. down markets (below)? Any academic literature? Thoughts? Any quant shops that do this?

He has also recently published the definitive textbook on technical analysis, Technical Analysis: The Complete Resource for Financial Market Technicians.

Books in the Mail

The Intelligent Portfolio: Practical Wisdom on Personal Investing from Financial Engines by Bill Sharpe

Hedge Funds: An Analytic Perspective and The Heretics of Finance: Conversations with the Leading Practitioners of Technical Analysisby Andrew Lo

Here is a FANTASTIC speech by Lo at the MTA meeting in New York. Highly recommended.

Lots of white papers and info on Lo’s AlphaSimplex page. Here is a pdf of his “Adaptive Market Hypothesis“. From the paper:

Specifically, the AMH can be viewed as a new version of the EMH, derived from evolutionary principles. The primary components of the AMH consist of the following
ideas:

(1) Individuals act in their own self-interest.
(2) Individuals make mistakes.
(3) Individuals learn and adapt.
(4) Competition drives adaptation and innovation.
(5) Natural selection shapes market ecology.
(6) Evolution determines market dynamics

Reconciling Efficient Markets with Behavioral Finance: The Adaptive Markets Hypothesis
The Journal of Investment Consulting Vol. 7, No. 2, 21-44 (2005)
Andrew W. Lo

The battle between proponents of the Efficient Markets Hypothesis and champions of behavioral finance has never been more pitched, and little consensus exists as to which side is winning or the implications for investment management and consulting. In this article, I review the case for and against the Efficient Markets Hypothesis and describe a new framework—the Adaptive Markets Hypothesis—in which the traditional models of modern financial economics can coexist alongside behavioral models in an intellectually consistent manner. Based on evolutionary principles, the Adaptive Markets Hypothesis implies that the degree of market efficiency is related to environmental factors characterizing market ecology such as the number of competitors in the market, the magnitude of profit opportunities available, and the adaptability of the market participants. Many of the examples that behavioralists cite as violations of rationality that are inconsistent with market efficiency—loss aversion, overconfidence, overreaction, mental accounting, and other behavioral biases—are, in fact, consistent with an evolutionary model of individuals adapting to a changing environment via simple heuristics. Despite the qualitative nature of this new paradigm, I show that the Adaptive Markets Hypothesis yields a number of surprisingly concrete applications for both investment managers and consultants.

Alternatives Review

Occasionally I take a look at the US listed alternative funds. Below is their performance year to date. With equities down around 4%, many of the alternatives have put in good performances. Standouts include Diamond L/S (DIAMX) and Dreman Value (DHG, still trading at a -13% discount) in the long/short category, and TFS Market Neutral (TFXMX) and Highbridge (HSKSX) in the market neutral category.

Click on the table to enlarge.

Rebounding

Do markets rebound after really bad months?

Back in January I examined some of the worst months on record for 5 main asset classes in a piece titled, “Time to put money to work“. The summary:

What are the key take-aways?

- It does not pay to buy an asset class after a really bad month for the following 1 month.

- 12 Months later the return is not much different than average.

- 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month. That annualizes to about 10% per annum.

A simple strategy would be:

After an asset class has a terrible month (ie MSCI EAFE in January), wait a month then take a 2 month position. i.e. buy March 1 with a two month hold.

How did that perform, buying March 1 with two month hold? Using the iShares EFA, I show a return of 5.9%, not too shabby! The other two poorly performing asset classes were foreign emerging (EEM), which would have done about 5%, and foreign REITs (RWX), which would have done about 4.9%.

Memorial Day Weekend

I bet Warren Buffett is cracking one open this weekend. BUD at all-time highs. (From Stockcharts)

Also got a new book on the way: Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing by Mike Carr.

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