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.

What Is An ACL Worth?

3 ETFs Morningstar would like to see. They are not really correct on the momentum front, as Powershares has the Value Line Timeliness (PIV) and Technical Leaders (PDP) ETFs.

Direxion had some volatility ETFs in the works, but it looks like they may not make it to market.

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Time killer of the day – Chronotron.

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Like I needed another excuse to spend more money. . .

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Mating behavior is written in your face.

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Nice extension of my paper where the authors take a look at the methodology with daily data…

Tactical Asset Allocation Using Daily Data

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What’s the value of an ACL?

“How did losing Tom Brady affect the Vegas odds on winning the Super Bowl? “There never has been an injury that’s had such a dramatic effect on the odds,” said Bodog’s Sportsbook manager, Richard Gardner. Bodog, one of the major price setters, dropped the price on the Patriots from 5-2, the shortest on the board, to 20-1, which ranked 12th.”

The Coyboys are heavy favorites, and the 0-1 Chargers (soon to be 0-2 after they play Denver this weekend) are second. Check out the futures on Tradesports (HT: Sea):

The New President Will Have His Work Cut Out For Him

The following chart is courtesy of Tom McClellan. He writes a daily report as well as a twice monthly newsletter, and they come highly recommended! You can find more info on his website www.msoscillator.com (as well as his older guest post here).

The chart below shows inflation (as measured by the CPI-U) as a leading indicator for unemployment. The CPI time series is shifted forward two years on the chart.

The simple take away is that with inflationary pressures rising, unemployment rates are likely to be going up for the next few years. . .

Is this the bottom in stocks?

…or are you catching a falling knife? Unless you have a plan (and the tactical model I published certainly looks like a good one right now), then subjective guessing about where the markets are going is a recipe for disaster.

Do you have your Bad Idea jeans on? A little humor from the SNL vaults for these volatile markets. . .

Is it Time to Buy the Gold Miners?

Please read my original post here for background information.

The ratio of the Barrons Gold Mining Index to cash gold is getting into buy territory where future excess returns are nicely positive (around 1.2 currently).

LinkFest

I feel like I have been on the Moon for the past 10 days – that’s what happens when you lose your laptop charger when on a long trip.

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It is better to buy stocks when credit spreads are rising rather than falling (at least for a one month hold). It also looks like spreads are predictable.

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I always wondered why a search engine didn’t pay the users to search, and now one does – Scour.

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As always, a great review over on CXO of an academic paper. In his September 2008 paper entitled “Black Swans in Emerging Markets”, Javier Estrada investigates the influence of the best and worst days on long-term equity returns in emerging markets. I would bet that the vast majority of the up and down days occur when below the 10-month moving average. And I bet the volatility is much higher in line with my asset class studies here.

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Gottex is launching an endowment style fund. And here is more on Harvard’s ’08 results.

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If you bet on the election, don’t use real money.

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% distance stock markets are from their peak. That means it is going to take a gain of around 150% to get back to even in China, or, roughly five years compounding at 10% per year. Ouch.

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A Tiger Cub shuts down. Also, more fund closures here.

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I worked in a gene therapy lab in college and remember spilling our prized virus all over the lab (and the resulting two hour clean-up). I am still waiting to see if I get any super powers from the experience. Judson on the Virus.

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The TechCrunch 50 Program.

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Five Great Investment Papers.

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Ok, it’s official. I’m buying a Maserati. Today.

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If ever there was a reason to go out and party Tuesday night, this is it…

Time to Short Credit Spreads?

As the Bespoke boys point out, spreads of corporates vs. treasuries are getting to historical levels. Below is a chart that takes the data back a little further. All data is from the St. Louis Fred database.

Index Huggers

Is your fund manager just an index hugger in disguise? (Cartoon from www.nicholsoncartoons.com.au )

Investing in most mutual funds is a waste of time as they rarely offer any benefit over low cost index funds. Sure there are some exceptions of managers willing to hold unconventional portfolios like CGM (CGMFX), Fairholme (FAIRX), and Hussman (HSGFX) – but most simply track an index with more fees.

To give an example, I looked at the 9114 funds Morningstar ranks as “all-diversified stock funds”. Of these funds, the average performance is around -12% YTD, and only about 50 have positive performance YTD. The top five are:

HRVIX Heartland Value Plus 11.17
PARSX Parnassus Small-Cap 9.96
FVALX Forester Value 9.29
AARFX Akros Absolute Return 7.81
HFTFX Hennessy Focus 30 7.29

Of the 158 long short funds, only 14 are positive, with the top five being:

HSKSX Highbridge Statistical Mkt Neutral Sel 7.99
DDMIX DWS Disciplined Market Neutral Instl 6.20
HSGFX Hussman Strategic Growth 5.01
MGAAX Managers AMG FQ Global Alt. 3.98
PALIX Palantir Fund 3.66

In a related note, if you had been following the simple TAA timing model from my paper, you would be up around 2% (gross of fees) through the end of July. Even a simple buy and hold would have flat performance YTD through July. . .

Follow-Up Post To Largest Company By Market Cap

About a year and a half ago I wrote and article investigating the performance of the largest public stock by market capitalization each year.

The original study was featured in the book “Mosaic: Perspectives on Investing” by Pabrai.

Pabrai did a backtest and reported a near 500 bps underperformance for the top mkt cap company vs the S&P 500. I extended the study a few years and found the results to be consistent, with the underperformance in CAGR of almost 7% from 1986-2006. This intuitively makes sense as the forces of capitalism work to compete with the top company (in addition to the difficulty in growing earnings at a massive scale).

How did this strategy perform in 2007?

Awful. Exxon’s stock (XOM) was up about 24% vs. 5.5% for the S&P 500. XOM would have been the largest company again in 2008, and both XOM and the S&P are down about equally in 2008.

Bespoke takes a look at the top companies in the world by market cap and 2008 stock performance.

PS One of the topics Pabrai covers in a subsequent book is cloning the best investment processes of great investors such as Buffett, Graham, and Munger. He argues that there is no need to reinvent the wheel – and simply apply the same selection model these investors have for decades. I go a step further and argue that an investor can perform equally well by simply following the holdings of these investors.

I have no idea how Pabrai’s funds are performing, but if he is just running a long only book, then it sure looks like he is in trouble (from SEC filings). I don’t see him on the implode-o-meter list…

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