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.

When Buyouts Boom

Nice day for hedge fund favorite QCOM, up 4%.

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Brevan Howard announces €1bn LSE float for a fixed income/global macro fund.

Once again, not in the US.

In related news, an ETF provider in the US filed to launch the Intellidump Micro Retail Dividend Weighted 4X Leveraged ETF.

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Wait, so Red Rocks Captital is the advisor to the PowerShares Private Equtiy ETF (PSP) and the Foreign Listed Private Equity ETF (PFP). So, why did they start a mutual fund on Listed Private Equity? Do you think they realized the PFP owners are going to get hosed on taxes?

Or is it so they can simply charge more (1% to 1.5% for various share classes) than the 10 basis points or so they get for advising the ETFs? It looks like they are still investing in the foreign listed funds, so I’m not really sure how they’re going to manage the tax problems. . .

FYI, Vista has had a listed PE fund out for awhile. . .

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Soros shorts the UK.

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Whenever I make a stupid mistake, I like to blame it on coding errors.

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Did you know Nick Nolte and Tom Selleck turned down the role of Indiana Jones?

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Just passed my 300th post!

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I was reading this article in Fortune Mag the other day titled, “When Buyouts Boom“. While the article struck me as your typical mildlynotreallythatinteresting article, there was a nice graphic (below). Simply, it’s the spread between buying and borrowing costs. More specifically, it’s the pretax cashflow yields of stocks (S&P500) vs junk bond yields. I will let you draw your own conclusions.

LinkFest

Consumer sentiment is the worst since I was (almost) 3 years old.

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Young and small hedge funds perform better – I like the sounds of that!

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Look at all that pork! From Carpe Diem:

Imagine if Michigan’s struggling Big Three automakers suddenly struck this deal with Congress: The U.S. government would buy the Motor City’s cars for roughly twice the world market price, then resell them at about an 80% loss.

This boondoggle of a deal would spur worldwide protest, and rightfully so. But the five-year, $307 billion farm bill is equally ludicrous. President George W. Bush is expected to veto it within days, but no matter. Congress appears to have the votes lined up to override.

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Do Losses Linger?

Abstract
We examine how professional stock traders, who work on behalf of a Nasdaq market
maker, are influenced by their prior trading performance. Our results show that when
traders incur morning losses, their desire to recoup these morning losses before the close of trading leads them to trade more aggressively in the afternoon. This behavior is consistent with the underlying behavior behind the disposition effect. An analysis of individual trading performance shows that traders who are more influenced by their prior trading losses perform far worse than traders who are less or not influenced by their prior trading losses.

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Hauser’s Law and investing on the first day of the month, and Wednesday.

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Get rid of your recency bias.

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I have always been amused by the people that do detox diets to remove “toxins”. Wait, they don’t work? What a surprise.

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Hillary’s chances not looking so good at about 15:1 underdog.

LinkFest

Microsoft is unveiling their “cash-back for search” offering (which is where you get anywhere from 2% – 30% for buying something that popped up from your search). Why stop there? Why not pay x% of clicks when the user searches and clicks on an ad?

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Larry Kochard has a great Market Wizards style book that interviews endowment managers (Foundation and Endowment Investing) – I highly recommend it. Here is an interview with him at the Motley Fool.

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Keynes the money manager

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Just added Financial Crookery, blog.pmarca.com, and Greg Mankiw to the blogroll.

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SPACs move to the Big Board

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Fundy Indexing Smackdown

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Lots and lots of great info over on Ed Easterling’s site Crestmont Research.

List of good charts on their Executive Summary

50% of the time stocks return < -16% or > +16% !

Perspectives on Hedge Fund Investing

13F Hedge Fund Best Ideas and Consensus Approach

Looks like another great quarter for the hedge fund tracking strategies. My previous observation that the funds exhibit similar downside volatility and much higher upside volatility looks like the right take away from this Q. Historical testing showed a FOF approach outperforms by about 6-12% a year, and out-of-sample results in 2007 (roughly 10% outperformance) and 2008 (roughly 5% YTD) is a good indication that the model is working.

I sat down with Mark Yusko from Morgan Creek the other week, and he commented that the top holding for many of these funds on their 13F is likely not their best idea, but rather was their best idea and has simply appreciated the most. I reserve judgement until I see most of the data from lots of funds, which is why alphaCLONE is going to be such a cool software app (I’m starting to get really excited, the behind the curtains look so far is awesome). Sign up to keep abreast of the launch, targeted for this Summer.

On to the 13fs!

Bespoke takes a look at the hedge fund sector bets here. Taking the top three sectors from each manager below, I find the top sectors are Services 39%, Tech 37%, and Financial at 14%.

Hedge Fund Consensus - Top holdings owned by 15 value hedge funds, ranked by # of funds with the same position. Mastercard was the standout performer, and America Movil (AMX) was the only laggard. Everyone still loves Qualcomm.

AAPL (3)
AMX (4)
AXP (3)
COV (3)
EMC (3)
GOOG (3)
MSFT (3)
QCOM (5)
WMT (3)

The list of double repeats is at the end of the post.

Hedge Fund Best Ideas – Top two holdings from each of 10 value hedge funds listed below. Mastercard (MA) and Southwestern Energy (SWN) were the standout performers, and America Movil (AMX)was the worst.

AAPL
AMT
AMX
AXP
CA
CDNS
CSX
GOOG
HPQ
KO
MHP
MSFT
NWS
ORCL
QCOM
RIMM
ROST
TGT
WFC
WLP

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Baupost Group

Klarman doubled down on his top three holdings News Corp (NWS), Wellpoint (WLP), and Exterran (EXH). He sold out of his SLM position. New positions include Theravance (THRX), Sapphire Industrials (FYR). and Borders (BGP).

Top sectors in the portfolio include:

Financials 30%
Services 21%
Energy 22%

Top 10 holdings are:

NWS
WLP
EXH
LINE
UFS
THRX
APL
ELOS
HRZ
FYR

Blue Ridge Capital

Griffin runs a pretty diversified portfolio, and he was added to his top name American Express (AXP). New positions include Google (GOOG), Apple (AAPL), and Wyeth (WYE).

Top sectors in the portfolio include:

Services 30%
Financials 22%
Technology 25%

Top 10 holdings are:

AXP
GOOG
CVA
AAPL
SCHW
MIL
DISCA
TV
WMT
MLM

Warren Buffett

Top 10 holdings are:

KO
WFC
PG
AXP
BNI
KFT
JNJ
WSC
USB
BUD

Eminence Capital

New position in Cypress Semi (CY), sold out of Comcast (CMCSK).

Top sectors in the portfolio include:

Services 28%
Technology 40%
Conglomerates 10%

Top 10 holdings are:

ROST
AXP
ORCL
PHG
FISV
SAI
MSFT
ZBRA
DGX
CSCO

Greenlight Capital

50% of Einhorn’s portfolio is in his top three holdings, and he was adding to all three – Target, Microsoft, and Ameriprise, and selling some Helix. New positions include Patriot Coal (PCX), Echostar (SATA), and Energy Partners (EPL).

Top sectors in the portfolio include:

Services 27%
Financial 17%
Technology 17%

Top 10 holdings are:

TGT
MSFT
AMP
HLX
MDC
URS
COV
HMA
BAGL
MIM

Lone Pine Capital

New positions in XTO Energy (XTO) and Monsanto (MON), sold out of Coach (COH).

Top sectors in the portfolio include:

Services 16%
Technology 43%
Energy 16%

Top 10 holdings are:

GOOG
QCOM
AMX
AAPL
XTO
SD
FAST
SWN
INFY
V

Maverick Capital

Ainslie was adding to his largest holding Research in Motion (RIMM), and added new positions in Starbucks (SBUX) and Wyeth (WYE).

Top sectors in the portfolio include:

Technology 30%
Services 25%
Healthcare 15%

Top 10 holdings are:

RIMM
AAPL
QCOM
AMD
MRVL
BK
TXT
AZO
GME
AVP

Okumus Capital

Okumus’s top holding is a new position – Cadence design System (CDNS). He added to McGraw Hill (MHP) and initiated a position in CA. He sold out of Bed Bath and Beyond (BBBY).

Top sectors in the portfolio include:

Technology 52%
Services 46%%

Top 10 holdings are:

CDNS
MHP
LTD
ODP
ARB
PZZA
MHP
SHOO
CA
QSFT

Private Capital

Top sectors in the portfolio include:

Services 32%
Technology 35%
Financials 22%

Top 10 holdings are:

CA
HPQ
MGM
SYMC
RCL
INTS
RJF
EK
JWA
S

Tiger Global

New positions in Apollo (AINV) and Cree (CREE). Sold out of

Top sectors in the portfolio include:

Services 33%
Technology 28%
Financial 14%

Top 10 holdings are:

CSX
AMT
AMX
MA
GOOG
MELI
BIDU
TDG
SBAC
PCLN

List of double repeats:

BRK
CA
CSCO
CTV
DFS
ETN
INFY
MA
MDC
MHP
ODP
ORCL
PCLN
SAI
SBAC
TGT
TMO
TT
TXT
UTX
WLP

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