Important News – Freed Again

It has only taken a few weeks but I am very happy to announce that enough people have subscribed to The Idea Farm that I am ready to return the blog to free.  More people subscribed , and at a faster rate,  than I expected. In retrospect I should have just turned on the Idea Farm first before the blog.  But this has all been new to me and a bit of an experiment, as well as a learning experience.  (So too will be self publishing a book in two weeks.)  Instead of the six month period I was expecting it to take to reach a conclusion, it was only two weeks.

I’m going to refund all charges to the blog, which is a bit painful,  but a big huge thanks to the overwhelming support for the people that subscribed.  In general I prefer to have the content free, and never got comfortable placing the content behind a paywall.  I certainly don’t have a problem with charging for content (as I described to one reader, that is the beauty of capitalism – you only have to pay for what you consider to be of value). But, it is expensive to run a research organization and thankfully Idea Farm is helping to pay the freight of all of those costs…

If you want to support our efforts the easiest way is simply through a subscription to The Idea Farm.

All of the same privileges of subscription to the blog will now apply to subscribers on The Idea Farm – first look at publications, CAPE updates,  and free copies of all books.

Next up, GTAA 2012 paper update goes out to the Idea Farm list later this or next week depending on NYC travel schedule!

Thanks for the patience and support everyone!  

 

Sharks Circling

Interesting news tonite that Third Point is launching a Greek Hedge Fund to capitalize on opportunities in the beaten down stock market there.  Other big firms such as Baupost have been building stakes in stocks there, and you know I think they’re cheap!

Longer post from Josh on Third Point and their recent investment letter

Travel: NYC and Philly

I’m on the plane to NYC to sit in on the Barron’s ETF Roundtable, and should have a little free time in both cities.  Bummed the Mets and Phillies are out of town but may catch a Yanks game (somehow never been to any of the three stadiums).

Drop me a line if you want to meetup!

Asset Price Trend

Asset Price Trend Theory

Abstract:      
Traditional portfolio optimization models implicitly or explicitly specify placement of capital as rather irrevocably and fully at risk through investment horizon(s) or continuously. Under this constraint, asset class allocation typically serves as primary mode of diversification, pursuing risk moderation by seeking to reduce portfolio variance. But investors adopting this construct find Risk Management inevitably failing to encompass risk containment, to limit negative variance, leaving drawdown risk unbounded to fully 100% loss. 

Here we turn to the little-discussed yet universally-held and most basic of assumptions in Finance – that asset prices tend to trend – and consider implications of constructs reframed in a consistent and corresponding manner. Most important among these is enabling of pursuit of risk containment which, through stop-loss protocols (i.e., loss-contingent exits), seeks to limit negative variance, to limit drawdown depth. Additionally, with risk containment centered on Exit protocols, pursuit of growth can proceed in relatively un-conflicted form via traditional modes of capital deployment and via now logically-enabled price and return trend-contingent alternatives. 

Within a more broadly-applicable capital allocation framework we illustrate how pursuit of risk moderation, such as through traditional asset allocation regimes, is logically and operationally subordinated to the objectively more pressing and critical matter of risk containment.

Investing In High Dividend Years

A few Idea Farms ago we looked at a WisdomTree research piece by Schwartz that sorted emerging markets into high and low dividend years.  This is of course backwards looking, but instructive nonetheless.   They found that:

 

+ The average performance of the MSCI Emerging Markets Index during years following high dividend yield values was 33.03%, more than 31 full percentage points above the return following low dividend yield years.
 
+ The years following high trailing 12-month dividend yields had performances that averaged over 15 percentage points more than the average performance of all 24 calendar years. The years following low trailing 12-month dividend yields on average performed about 15 percentage points worse than the average performance of all 24 calendar years.
 
+ Four of the five best yearly return periods for the MSCI Emerging Markets Index followed trailing 12-month dividend yields that ranked among the five highest of all 24 calendar year returns. Notably, at the 2008 year-end, the dividend yield on the MSCI Emerging Markets Index was 4.75% (the highest value) and the 12-month forward return of the index was 79.02% (the highest 12-month forward return).
 
+ On the other hand, the lowest observed year-end trailing 12-month dividend yield for the MSCI Emerging Markets Index was observed on December 31, 1999, and it was followed by the second-worst of all 24 yearly returns studied, specifically -30.61%.
 
And figure below:
 
romp
 
 
So I thought for fun we would run the same analysis in the US since 1872.  For some perspective, that is 140 years of investing.  We divide the years up into high and low dividends with the breakpoints being a 4.18% nominal yield and a 1.48% real yield.
 
If you invested in low dividend years your average return would have been 7.5% per annum nominal, 5.1% real.
If you invested in high dividend years your average return would have been 13.2% per annum nominal, 10.7% real.
 
Results are consistent for real yields as well.
 
The dividend yield at the end of 2012 was 2.19% nominal, 0.49% real.
 

Sector Valuations: One Buy, One Bubble?

Below I updated the sector CAPE valuations….there is a pretty wide range – one sector is at 10 and another at a near all time high bubblishious 27…

Here I am below also yapping about some of our tilts….and so far the Aussie pronunciation of my name may perhaps be my favorite so far…

 

And here are the sector CAPEs:

 

sector

Valuations Across All Stock Markets since 1979

The difficulty I have with a lot of indicators is just that, they are difficult.  If I can’t understand what the chart is saying within a few seconds it is usually too confusing and often makes me think you’re trying to smash a square peg in a round hole.

I’m not sure why I didn’t think of this before, but below is simply the average CAPE value across all countries since 1979.  As you can see, it does a great job of setting up secular and cyclical lows in the markets…

 

CAPES

CAPE Updates

Below are updates to the CAPE values from our paper Global Value: Building Trading Models with the 10 Year CAPE.  

 

cape

Damodaran on Valuations

Longish piece from Damodaran

and nice graphic of buybacks and dividends…

divbuybacks2012

Is the S&P 500 at All Time Highs?

If I asked you if US stocks were at all time highs, what would you say?  Yes?  No?

What if they are both right?

Lots of disinformation spilling around out there.  Below are four series.  

S&P 500 Price Return

S&P 500 Total Return (including dividends)

S&P 500 Price Return after inflation

S&P 500 Total Return (including dividends) after inflation

The two in bold are at all time highs, and the S&P total return net of inflation isn’t too far away…

The purple line, of course, is really the only series that matters…those are the returns you can eat…

1990-2013, March returns estimated.

chart 1c2

 

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