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?

LinkFest

80-100% cash & bonds is a good place to be right now.

I think my grandmother’s expression to today’s market turmoil would be, “Lawd have mercy!”.

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It is really a shame Wealth Manager magazine doesn’t do a better job with their website because James Picerno has an excellent overview of the listed hedge fund space.

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Short Target.

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A short seller thinks we have seen the worst in financials.

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I can’t imagine investor money will be at risk here, but I still would close out any Lehman ETN positions. (Which is too bad because they had probably the best private equity ETN.) The three Opta Lehman ETNs are RAW, EOH, and PPE.

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I live about a mile from work, so this doesn’t really apply to me, but most people in LA spend about 72 hours a year commuting.

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iTunes Genius is genius.

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It always amazes me to hear how often these once-in-a-century events happen.

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I’m pretty sure I will not be picking anyone up via Avego.

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Greenblatt (Gotham fund manager and “Little Book that Beats the Market” author) has an interesting website called Value Investors Club. You have to apply for membership, and Greenblatt awards $5,000 per week to the best idea. While $260,000 may seem like a lot of money, it certainly is less costly that hiring an analyst, and you have the benefit of much greater information flow.

I think someone should start a new site that is open to everyone. Toss up some ads, but let members submit their detailed investment ideas. Give away 50% (or whatever) of the revenue from the ads on the pages from the members writeups. Then, allow other members to vote on the best long and short ideas. Naturally, the best ideas will be viewed the most often. The best analysts will also develop a following. I certainly think this is a better (and easier) idea than Covestor, Vestopia, and PersonalRIA.

Leave a comment if you have a good name for the site. I wanted longorshort.com but the owner won’t sell it to me. . .

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Having a rough go of it in the markets? Top 25 Calvin and Hobbes comics. (Hat Tip: Sea)

Mean Reversion After Bad Months


Maybe the market is trying to tell you something – if you just listened?

I have written about this subject a number of times. For background you can check out some earlier posts:

Time to Put Money to Work
Mean Reversion After Bad Months
When is the Time to Buy Homebuilders?
When to Buy Japan?
Idiocracy and Mean Reversion

In one study I examined asset class performance after a really bad month.

The take-aways from this study were:

– 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.

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.

It looks like a good "trigger" for equity like asset classes is around -9%, and for bonds around -3%.

Below is a summary chart of this strategy for the five asset classes I mentioned in my paper. The returns are simply the excess returns (nets out the average monthly return over the entire time period) to a strategy of buying an asset class a month after a really bad month, with a two month hold.

Note that this does not work for the commodity index, and one could speculate that is due to differing risk premiums and sources of return to that asset class. This system would have triggered for REITs after a horrible June (-11.25%). To illustrate, one would wait a month then buy the index August 1.

I imagine if you broke out the asset classes into further subdivisions (sectors, countries, etc.), the same principles would apply but the triggers would widen due to the increases in volatility.

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