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

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:
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:



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…



CAPE Updates

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



Damodaran on Valuations

Longish piece from Damodaran

and nice graphic of buybacks and dividends…


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


What Premium Looks Like

Some have expressed confusion as to the format of premium, so below is a demonstration.  I’m going to do CAPE updates tomorrow then do a 10 part QTAA series for the 2013 paper update next week.  Email in any questions or thoughts…

First, a summary:

Idea Farm – 2-3 private emails per week, curated by me, public and private newsletters.  Short summary and then a download of the newsletter.  Examples here.  Cost $195 annual$19/month.
Mebane Faber Research – Free/Premium blog.  Premium posts are behind a paywall, and likely to include research that isn’t published mostly focused on quant research systems and actionable ideas.  Data series updates like CAPE, etc.  Includes premium RSS feed.  $395/year.  There isn’t a free trial since there was essentially a six year free trial with > 1,200 articles.

Premium posts show a “Lock” at the top of the post as well as a “KEEP READING” at the end of the post.  Non-subscribers will be redirected to a login page.  Subscribers will never see the lock once they have logged in.  Below is an example from a recent post on CAPE and drawdowns.



Upcoming Travel and Idea Events

Below are a few interesting events in the next few months, I starred the ones that I will be attending for sure (including SF next week and NYC the following) if anyone wants to meetup.  Although hoping to attend all if possible!

*Wine Retreat, Sonoma, CA, April 5th

Grant’s, NYC,  April 9th

Real Return Investing with Rob Arnott, Santa Barbara, CA.  April 15th

*Value Investing Congress, Las Vegas, NV, May 6 & 7 (I’ll be there)

Ira Sohn, NYC, May 8th

SQA Shiller Speech, NYC, May 31st


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