Nice new paper out, “Unbundling Hedge Fund Beta” which finds that hedge funds are good at timing the market. This is not surprising to me, as the Hedge Fund Masters tracking portfolios (and initial data out of AlphaClone) tend to follow the market on the downside, then have much higher upside returns. AllAboutAlpha summary here.


I don’t know anyone saying, “man, I can’t wait to be long stocks this weekend!”. However, almost ALL of the indicators are screaming buy, at least for a short term bounce.


The Tiger Cubs are in a lot of pain.


Hour long Buffett interview.


Stocks trading at or below cash at least give you a nice floor to the downside. Cheap Stocks tracks an index of profitable companies trading below NAV.

Lots of stocks trading below cash – here are a few from Barrons (and the rest from my screener):


If I had a buy and hold portfolio, I would be buying closed-end-funds hand over fist. Nice paper on historical closed-end fund discounts: “The Bubble of 1929: Evidence from Closed-End Funds“.

Chart courtesy the folks at TFS:

100% Cash and Out of Sample Returns

People email me every day asking how the timing model has held up during this market dump (short answer: great). The model is currently 100% in cash/bonds (more on that below).

When I do a blog re-design I will include a tab with historical results and updates if enough people are interested (and I also plan on doing an update to the paper at the end of the year). All returns are gross of management and transaction fees.

Here are out-of-sample results (meaning after I published the paper), from 2006-9/2008. (They would look better if you included October, of course.) I think we are setting up for a monster Nov/Dec rally, but what do I know?

The model is doing what it was designed to do, namely, protecting capital as markets decline and achieving equity like returns with bond-like volatility. (Chart fixed thanks to reader Sea – had to rescale the Y-axis the S&P was down so much!)


I was going to title this post 10 things to do when you are sitting on 100% cash, but I didn’t think that was a good idea because 1) when you are beaming about how smart you are the market has a way of humbling you, and 2) there are a lot of people losing a lot of money, and that is nothing to gloat at. (PS – If the S&P closed here, it would be the third worst year ever since 1926...)
A reader emailed in asking how many times it occurred when the model was 100% cash (out of five positions). It turns out that has only happened 4 times since 1972-2008:
While this is a tiny statistical sample, I thought it would be interested to see what the resulting returns were for the buy and hold portfolio over the following 12 months. The theory of course goes back to the old “buy when there is blood on the streets”. The 12-month performance for the four dates was :

6/30/1974, 11.34%

4/30/1980, 18.39%

9/30/1981, 14.11%

10/31/1981, 16.04%

That works out to an average of 14.97%, or about 3.5% higher than average. Thus, it’s usually a good time to be investing. What about when only one position is on (20% invested)?

9/30/1973, -19.43%

4/30/1974, 2.94%

5/31/1974, 8.54%

7/31/1974, 16.04%

8/31/1974, 8.68%

9/30/1974, 20.43%

10/31/1974, 17.07%

11/30/1981, 14.47%

3/31/1982, 32.98%

7/31/1984, 25.95%

8/31/1984, 19.00%

11/30/1987, 19.23%

12/31/1987, 18.46%

5/31/1990, 14.24%

12/30/1994, 22.74%

1/31/1995, 24.91%

9/30/1998, 11.35%

10/30/1998, 9.58%

Similar results at 14.84%, with about 3.4% abnormal returns.

With September being one of the worst months on record for stocks, the strategy of waiting a month then investing for 2 months could be a great time November 1st. For equities back to 1900, when stocks have declined by over -9%, the resulting “wait a month then invest for two months” offers good returns on average, but the range is large. The worst two month return would have been around -24%, and the best around 91%…That lines up nicely with the traditional year end rally.

Value Investing Congress NYC, Summary With Picks

While some of the most famous hedge funds are getting hammered (here and here and here), there are still some top investors presenting at the Value Investing Congress. If these managers liked their picks last week, they probably like them even more after the down day today.

If you link tracking the top hedge funds, keep an eye out for the AlphaClone beta launch in a couple weeks!

Below are their picks:


Whitney Tilson (presentation here)
T2 Partners
Fairfax Financial (FFH)
EchoStar (SATS)
Berkshire Hathaway (BRK)

John Burbank
Passport Capital

LONGS (Foreign and Farmers)
EFG Hermes
Mosaic (MOS)
Potash (POT)

US Overleveraged (GE)

Bill Ackman (presentation here)
Pershing Square
Wachovia (WB)

Lance Helfert & Atticus Lowe
West Coast Asset Management
Contango Oil and Gas (MCF)
ATP Oil and Gas (ATPG)

Thomas Russo
Pernod Ricard

Alexander Roepers
Atlantic Investment Management
Roepers looks for companies with free cash flow yields of around 10%, P/E Ratios of around 9-12, and EV/EBIT of around 8-9. He runs concentrated portfolios, and likes:

TNT (Dutch)
Dai Nippon
Goodrich (GR)
Joy Global (JOYG)

Carl Icahn
No picks, but a good hour of ranting and raving. Highly enjoyable.


Boykin Curry
Eagle Capital

Boykin started off talking about time arbitrage – namely, that most analysts and portfolio managers have a short time horizon and focus only on the next 12 months, even though the majority of a firm’s DCF valuation lies in the future. He considers this a sustainable competitive advantage for his firm.

Long Idea
American Express (AXP)

Long dated call options
Newfield (NFX)
Microsoft (MSFT)
Comcast (CMCSA)

Kian Ghazi
Hawkshaw Capital

Kian looks for high quality, one-of-a-kind franchises that are financially strong with positive free cash flows trading at less that intrinsic value.

Universal Technical Institute (UTI)

Leon Cooperman
Omega Advisors

Described the environment as chilly, with household debt burden reaching a record high. Described the recent climate as the most difficult financial environment he has ever been through. Housing has began to see the end of its decline, stock valuations are reasonable, corporate America is liquid, and the S&P ROE is at high levels. Cash yield on the S&P (dividends and buybacks) is at record records vs. 10-Year T-note yields.

The average bear market decline is around -26%, lasts about a year, and PE ratios decline about 30%. We are near all of those values.

He likes:

Atlas America (ATLS) currently $25, target $57-$77

Parent of:
Atlas Energy Resources (ATN)
Atlas Pipeline (APL)
Atlas Holdings (AHD)
These three are taxed at partnerships, not corporations.

Aaron Edelheit
Sabre Value Management

Has been running Sabre for 10 years with returns near 20%. Uses only 10-15 holdings with no leverage. Sabre’s approach is to invest in small cap value that have insider buying, are spin-offs, or are restructuring. His pick is:

Photochannel (PNWIF), $1.9

Trading at 7x earnings with an excellent recurring revenue model. They manage the front and backend of a retailers website. They get a fixed fee for every picture printed through its system, and clients include Costco, CVS, Sams Club, Kodak China, Tesco, and Wal-Mart Canada. 21,000 transactions a day average in q2, now at 40,000 a day. Retailers represent half of all prints, but only 11.5% of retail prints are uploaded online.

When asked why it is down so much he said that it has no coverage by any large sell side firms, the Small Cap Canadian Index is down over 60%, and some institutions have been forced to sell.

Next pick:

Hemisphere (Toronto: HEM), $2.4

Company develops GPS guidance and auto-steering for the farm. Revenue growing by 50% in 2008 and 25% in 2009. Grain bull markets last on average 10-14 years, and we are only 2 years into the current rally. Trades at 8 times 2009 estimate outside of cash, and 1.2 times sales. Acquisition of competitor values HEM at over $6 per share. Insiders are buying, and company announced a buyback.

Next pick:

Limoneira (LMNR), $165

Largest producer of avocados in the US, and 7,000 acres of prime CA real estate. 500 acres just got entitled for development 10 minutes from the ocean (appraised in 2004 for $1billion). One of only two major projects in Ventura County to be built in the next 10 years. Also owns substantial water rights. Estimates that water alone could be worth near $500million alone without land. Estimates target of $500-$1000.

Next pick:

Digimarc (DMRC/D)

21st strongest patent portfolio in the IT field in the world. $13million in revenue in 2007, $20million in 2008, and $43 million in cash on the books.

David Nierenberg
D3 Family Funds

D3 is a long-term investor focusing on microcap GARP stocks where they look to get consturctively engaged.  With average market caps of $400 million, they cap their size at $1.2 billion.  They impose a 5-year lockup on investors, and target 10-12 positions.   They focus on industries and companies that are seen as “dead money”, but also focus on companies with strong balance sheets and cash flows that are leaders in their niche.   Often their companies have experienced scandals, accounting issues, or simply simmangement.

His three picks are:

Move Inc, (MOVE) $1.73, target of $10
Electro Scientific Industries (ESIO) $12.46, target of $57-$76
Brooks Automation (BRKS)  $7.42, target of $43-$58

Mohnish Pabrai
Pabrai Funds

Pabrai reviewed one of the strategies from Joel Greenblatt’s “You Too Can be a Stock Market Genius” that focuses on buying stocks that have been spun-off.  Greenblatt found that they experienced outsized returns, expecially in the second year after the spin-off.  Pabrai highlighed one such Portugese company, Sonae Capital (SONC.LS), spun out from Sonae SGPS (SON.LS).

He completed a sum of the parts analysis of all of Sonae’s properties, and while the stock only trades at 0.69 Euros, his target is 3.82 – 6.20 Euros. The flagship Troia property bought from the Portugese government in bankruptcy comprises a majority of the estimated value. 

How to Miss the Housing Crash

A reader emailed in asking me if the timing model would work for housing. I actually wrote an article on a beta allocation to housing and/or hedging your home value about a year ago. There are a couple housing ETFs coming to market (UMM – MacroShares Major Metro Housing Up & DMM – MacroShares Major Metro Housing Down.) Currently there are futures trading on housing (although they have really low volume last I checked).

The conclusions were:

1) Including housing in your strategic asset allocation probably makes sense (possibly as a portion of the real estate allocation).
2) The timing model works for housing as well.

When I wrote the article (June 2007 data), both of the composite indexes were on sell signals. 13 of the 20 cities tracked were on a sell signal already. Had you exited the composite when the model flashed sell (October 2006), you would have avoided the 20%+ decline in home values. Below are the dates (using July 2008 data) for when the timing model would have sold some individual markets:

Los Angeles: 1/2007
San Diego: 10/2006
San Francisco: 10/2006
Denver: Currently long
D.C.: 9/2006
Miami: 4/2007
Tampa: 11/2006
Chicago: 2/2007
Boston: 11/2007
Charlotte: Currently long
Las Vegas: 12/2006
NYC: 10/2006
Cleveland: 11/2006
Portland: 12/2007

Here is the equity curve for the timing system on the housing composite back to 1987. This does not include interest on cash balances, which would up the return a bit. Similar to the timing model on virtually every asset class, it is long roughly 70% of the time.

Value Investing Congress NYC

I’ll be traveling for the next week – drop me a line if you would like to meet up.
Also, if you’re going to be at the Value Investing Congress in NYC let me know!

San Francisco October 2-5

NYC October 5-8

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!”


“My “Strategy 3″ is a variation of your white paper idea – you can view weekly allocations here:

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


“I’m in cash (and speakers). I talk about my strategies at (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.”


“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.”


“Long time reader, first time poster….

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


“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).”


“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.”


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. “


“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 …”


“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.”


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


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!


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.

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


Is Thiel buying here?


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


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).


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


An open letter to the US Congress from Hussman.


Ron Paul on the financial crisis.


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


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).


Jordan, Morocco, and Tunisia are doing relatively OK.


The truth about thread count.


Michael Lewis on looking on the bright side.


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


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:



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.


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


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.


A commitment pill?

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