Low Nominal, Normal Real

I forgot to add these longer series on yields back to 1900 to our post the other day on real and nominal yields, so here you go.  




The End of the Middleman

“I look at where the music industry is now and it’s not helping me so I’ve learned to exist without it!”

Replace every “music industry” phrase with “(high fee) financial industry” and you begin to understand.  Phenomenal post by @jaltucher

As you all know I’m self publishing my next book in a week or two and have written a longish case study post that I’ll update as the experience progresses.


AAII Updates

I publish these every once in awhile.  Not much interesting here…






Silliness In Cyprus

There is a lot of silliness going on across the Atlantic with Cyprus and their bank deposit seizure plan.  (For those that haven’t heard here is a brief summary:

“In exchange for €10 billion ($13 billion) in rescue money, creditors would impose a one-time tax of 6.75 percent on all bank deposits under €100,000 ($131,000) and 9.9 percent over that amount….Anastasiades said savers would be compensated with bank shares. Moreover, all those depositors who opt to keep their money in Cypriot banks for at least two years would receive government bonds with a value equal to their losses. The bonds will be backed up by future revenue generated from the country’s newfound offshore gas deposits.”

And while I think it is absolutely moronic, I also think it is worth putting in context.  One thing that people miss is that there are a lot of threats to wealth.  One is taxes, one is outright confiscation, and one is inflation.  In the US we are in a scenario many refer to as “financial repression”.  This scenario of low/zero interest rates and inflation (2-3%) is terrible for savers as their deposits slowly bleed and lose 2-3% a year to inflation.  

So while everyone is gnashing their teeth and freaking out about Cyprus, realize that here in the US, even though your deposits are safe – nonetheless they are getting confiscated, just by a different means…

Shareholder Yield (aka Total Yield)

Nice to see the journalism outlets starting to recognize the silliness of focusing on dividends in isolation.  

Below from this weekend Barron’s:


Screen Shot 2013-03-17 at 8.51.16 PM

I Have Never Met a Rich Technician

I like Jim Rogers but this quote has always made me chuckle.  I could list dozens of rich technicians, but one of the best sadly recently passed, and I smiled when I saw this headline cross the wires today from Curbed:


Better Indexing

I was going to do this post as an issue of The Idea Farm, but there is already a two week backlog of good pieces so I figured I’d just post it here.  Passive and active are meaningless terms to me since I’m a quant and everything is active in my mind.  You have rules for buying, selling, and rebalancing.  It is always ironic to me that likely the largest and most famous index, the S&P 500, is really an active fund in drag.  It has momentum rules (mkt cap weighted), fundamental rules (4Q of E, liquidity requirements), and a subjective overlay (committee input).  Does that sound passive to you?!

However, most of the early indexes were built to be representative of the marketplace.  So while indexing was revolutionary, it was not necessarily the best approach for managing money.  Over the past 30 years we have seen an amazing amount of research that has shown simple ways to construct mechanical portfolios, ie indexes, that outperform these market cap indexes.  Simple indexes that take into account value, momentum and trend, and carry have been applied within and across asset classes to form more robust portfolios.  Second generation indexes have improved upon the first generation (commodities are a great example here).  (For a recent piece of ours that details why market cap indexing is flawed, check out Global Value in the Journal of Indexing.)

Below the good folks at O’Shaughnessy put together a piece titled  ”Combining the Best of Passive and Active Investing” that is well worth your time.



We Live in a Real World

Below are two charts that I find highly useful.  The first looks at yields on various indexes (the red dot is where we are now and purple/green represent one standard deviation bands).  This chart poses the problem many investors complain about daily – where to find yield?  (Note: S&P500 is TTM PE yield.)

One would conclude, that with the exception of mortgage REITs and US stocks, everything else is highly unnattractive.  Bonds and REITs seem to be at their worst yields EVER.




However, if one looks at yields after inflation, so called real yields, the picture changes.  Most asset classes are in normal valuation ranges, and while bonds are still trading at low yields, stocks are even more attractive, and mortgage REITS too.  

The world doesn’t look so bad. (HT: DJ.)


Total Returns for ETFs

I know this is very basic but I have had a shocking amount of conversations lately with people (retail and pro) that seem to forget ETFs pay out income and dividends.  This matters more and more the larger the yield, but below is one of the older dividend ETFs, and the difference in returns is 23% vs. 67%!  While it may look like the price is flat for the blue line, you have to include the dividends!


What To Do About REITs?

REITs have been the best performing major asset class since the market bottom in 2009, up over 200%.  What are the current drivers of REITs saying now across trend, yield curve, and valuation?  I’ll write up a longer piece in the upcoming weeks on my thoughts but below is a very short clip from CNBC yesterday…



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