Mark Haines Moment

I have basically seen Twitter up to this point as a pleasant distraction.  One of the effects however of this real time newsstream is the instant newsflow, and I was immediately saddened to hear about Mark Haines passing away yesterday. Lots of people are offering up their experiences with Mark as a tribute so I thought I would mention mine, albeit brief meeting with Mark.

Mark and Erin were my favorite team at CNBC, and I was estatic when I had the chance to sit down with them at the NYSE a few years ago.  I remember getting warned by the staff that Mark could be just a little bit gruff and ornery, so to be prepared.  They make you sit on this little pulpit waiting for your turn to go on air, and there are a few minutes during commercial where you get to sit down before going on.

Mark introduced (more of a kind of half acknowledgement rather) himself with what I would describe as a skeptical “who is this young kid and WTF does he know about markets?”.  He then proceded to continue a rant he was having, now transferred to me, about how these guys come on air and think they are somehow going to get Erin Burnett’s telephone #.  I responded with a serious “would it be ok if I could get it then?” to which Mark responded with a “I am going to cut your f&king head off and eat it” look of total distain.  I burst our laughing, and after that we kidded around a bit and (hopefully) broke down his guard a little.

The interview was over in a few minutes, but I will say the world has lost a great reporter.  I’m headed back to NYSE to ring the bell for GTAA and am truly sad Mark will not be there and to Mark’s family, he will truly be missed!!

An Econometric Approach to Tactical Asset Allocation


I am finally back home after three weeks on the road (made more interesting by not having a photo ID for the last five flights).  While exhausting to say the least, one of the major benefits of travel is getting to connect with other money managers, writers, and friends to share ideas and swap stories.  I hope to share some of the research ideas that grew out of these meetings in the coming weeks and months.  Now that summertime is fast approaching I’m ready to put my writing hat on and get some of this long overdue research out…

One such lunch meeting was over gyros in Washington D.C. with Eddy Elfenbein from Crossing Wall St.  We got to chatting about asset allocation, and more specifically what economic conditions (factors) drove returns.  And of course, the discussion meandered towards everyone’s favorite precious metal (now that silver has taken a tumble), gold.  Eddy has a great post here titled “A Possible Model for the Price of Gold“.

In it he takes a look at how real interest rates drive gold:

Whenever the dollar’s real short-term interest rate is below 2%, gold rallies. Whenever the real short-term rate is above 2%, the price of gold falls. Gold holds steady at the equilibrium rate of 2%. It’s my contention that this was what the Gibson Paradox was all about since the price of gold was tied to the general price level.

Now here’s the kicker: there’s a lot of volatility in this relationship. According to my backtest, for every one percentage point real rates differ from 2%, gold moves by eight times that amount per year. So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate.

My intern and I have built (still in progress) an Excel sheet that analyzes market returns for asset classes based on any factor.  Below is a look, since 1972 at a few of these factors.  Below is a similar study as Eddy’s but split into quartiles for real rates (90day – CPI) for a whole host of asset classes.  As you can see our numbers are very similar…

(click to enlarge)

 

Below are assets segregated by deciles for each indicator.  While we have a lot more factors built in, we are demonstrating two below – the yield curve and real interest rates.  We take the next month average returns and then annualize them.  For the second table, we take the returns net of inflation (real returns).  We also have the data for sectors back to the 1920s.

I haven’t decided what to do with the findings yet (publish in some form, likely), but I think it is a very useful exercise for taking a broad economic litmus test for “where are we now?”

It looks like, at least according to these two indicators, that small caps and emerging equities, long duration and high yield bonds, and real estate and gold are the best asset classes to own.

 

 

 

Roundup of Managed Futures Funds, or What Worked Part II

I think there is a big need for a newsletter that focuses on public alternative and actively managed funds for the professional (and hobbyist/active individual) investor.  Most people have a difficult time making sense of the hundreds of offerings that are coming out on a daily basis in the ETF and mutual fund space.  Morningstar has the best research offering I have seen so far, although it is limited to the ETF space (ETF Investor:  disclosure – I am a subscriber and our fund GTAA was featured in the last piece.)

The managed futures space is a good example.  It is an area that historically was difficult for most to understand, was/is (ridiculously) expensive, and there have been few public choices available.  I mentioned awhile back that my intern built a killer Excel sheet that could update and report performance for any publicly traded list of funds/stocks.  I wasn’t quite expecting the overwhelming response for the Excel sheet, but instead of emailing out the Excel sheet (which is a rather complicated install and I don’t want to have to offer software support for the file) we have considered just building it as a website.  Stay tuned and we will post updates to the blog when available.

Anyways, here is a look at the various managed futures funds and their performance over the past few periods, as well as performance for some asset classes updated last nite:

(click to enlarge)

 

 

 

 

 

 

 

Hedge Analyst Job Contest

Kind of like the VIC, but instead of a $ prize you get a hedge fund job with base of $125K + bonus.

Capitalist Collective

HT:NG

Ira Sohn Contest

We already had a blog reader win the $10,000 NAAIM prize, so maybe we can have another one win the chance to present your idea in front of hundreds of hedge fund managers and gazillions in assets under management.  (Both semi and finalists get free tix to the event.)

I’ve never been but it has been on my to-do list for years…just be careful what you submit, as your judges will be Ackman, Price, Greenblatt, Einhorn, and Klarman!

Register here.

CQR Issue #2

Ok, so I finally am starting to crank out all of these research pieces I have been meaning to write for months/years, and the newest issue of CQR Monthy (err, should be called CQR Quarterly or CQR whenever…) should be out soon.

In the meantime, a nice read from the folks at Vanguard, The Case for Indexing.

While the % of active funds underperforming indexes was not surprising (consistently over time around 70-80% and something like 95%+ after-tax), the relatively small size of index funds as a % of total assets (13%) at registered investment companies was (I assumed much, much larger).

Enough Toilet Reads for a Year

My friend likes to call online and magazine articles “toilet reading” (well that is the SFW description), and he passed along enough reads for all of 2011.  Just as I was coming up for air from all the books I’ve finished, thank you very little friend (HT: AF)

The Atlantic 100 Great Pieces of Journalism

DC & NYC

DC all this week, NYC all next.  Drop me a line if you’re around for a meetup.  And if you have any suggestions for things to do or places to eat please pass them along this gorgeous spring!

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I have nine papers in various stages of completion.  Looking forward to post-June travels and getting them out…

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If the next 200 pages are as good as the first 50, Empire of Wealth: The Epic History of American Economic Power is a must read.

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Morningstar is enlarging their Alternatives category to include the following areas:

Bear Market, Currency, Long/Short Equity, Market Neutral, Multi-alternative, Managed Futures, Volatility, Trading – Leveraged Commodities, Trading – Inverse Commodities, Trading – Leveraged Debt, Trading – Inverse Debt, Trading – Leveraged Equity, Trading – Inverse Equity, Trading – Miscellaneous

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It looks likes MIT has spun off their Billion Price Project into a company.  Simple, but brilliant idea now paired with State Street:  PriceStats.

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70 pages of VIC notes.

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Thoughts on currencies from the Value Restoration Project:

“In the short term, risk appetite drives currency. In times of risk seeking, capital flows to higher inflation, higher yield currencies. In times of risk aversion, CAPITAL COMES HOME. It does not, according to Persaud go to the “safest” currencies, but it comes home. “

http://www.valuerestorationproject.com/2011/05/currencies-are-not-like-stocks-winners.html

Being Wrong

As I sit in the Charlotte airport en route to Savannah, I am reminded of two things – 1) why doesn’t every airport/hotel (esp the $400 hotel) have free wifi? and 2) what a wonderful book Being Wrong: Adventures in the Margin of Error by Kathryn Schulz is. It is especially interesting in our field, and as old Maynard says, “When the facts change I change my mind, what do you do sir?”

PPT on how we “think” we remember vivid events – flashbulb memories.

Scientists being wrong.  And famously wrong predictions.

TED talk below:

 

 

Gold Ratios and Big Trading Paper Dump

A couple years ago we did a few studies on gold, examining how gold and gold stocks performed:

Gold Miners / Bullion Ratio

“The ratio is around .86 – near the lowest reading ever. Absolute returns for this decile have been strongly positive at 14%, 20%, and 43% for the following 3,6,12 months, and up 90% of the time a year later.”

Since that time (Jan ’09) gold is up 72% and Barron’s GMI 113%.  Where is the K-Ratio now?  Still in the most favorable bucket for gold stocks…

And here is another post on how gold does using a very simple indicator.

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And since I’m speaking at the NAAIM conference tomorrow here is a great list of the paper (and more) that won the Wagner Award:

 

WINNER Buying Power – The Overlooked Success Factor
Thomas Krawinkel
Private Trader

Other Submissions

Optimal Momentum Investing – 2nd Place
Gary S. Antonacci
Portfolio Management Associates
Optimal Rotational Strategies Using Combined Technical and Fundamental Analysis – 3rd Place
Tony Cooper
Double-Digit Numerics
Is there a Distress Risk Anomaly? Corporate Bond Spread as a Proxy for Default Risk
Denzig Anginer and Celim Yidizhan
Ross School of Business, University of Michigan
Why Listed Infrastructure
Michael Underhill
Capital Innovations
Fighting the Next War: Redefining the Inflation Protected Portfolio
Jon Ruff and Vince Childers
Alliance Bernstein
Discriminating Bear Market Rallies from Initial Rallies in New Bull Markets: A Statistical Classifier Approach
David R. Aronson
Hood River Research Inc.
Developing an Active Management System for the U.S. Stock Market and Constructing a Live Testing Environment
David Moenning
Heritage Capital Management
Active Management of the Rydex Series Funds
Mark Pankin
MDP Associates LLC
A Multi Objective Approach for Contingent Claim Portfolio
Pankaj Kumar Jain and Aditya T. Navale
Indian Institute of Finance
Strategy Market Barometer
C. Thomas Howard
Professor, University of Denver and Athena Invest
The Abandonment Metric: Negative Fund Flows as a Predictor of Excess Returns
Neil Stoloff
SweetSpot Investments LLC
Relative Momentum: A New Alternative to Relative Strength
Gary Anderson
Anderson & Loe, Inc.
Protecting Equity Investments: Options, Inverse ETFs, Hedge Funds, and AORDA Portfolios
Gaia Serraino, American Optimal Decisions and Stan Uryasev
University of Florida

 

Buying Power – The Overlooked Success Factor
Thomas Krawinkel
Private Trader

Other Submissions

Optimal Momentum Investing – 2nd Place
Gary S. Antonacci
Portfolio Management Associates
Optimal Rotational Strategies Using Combined Technical and Fundamental Analysis – 3rd Place
Tony Cooper
Double-Digit Numerics
Is there a Distress Risk Anomaly? Corporate Bond Spread as a Proxy for Default Risk
Denzig Anginer and Celim Yidizhan
Ross School of Business, University of Michigan
Why Listed Infrastructure
Michael Underhill
Capital Innovations
Fighting the Next War: Redefining the Inflation Protected Portfolio
Jon Ruff and Vince Childers
Alliance Bernstein
Discriminating Bear Market Rallies from Initial Rallies in New Bull Markets: A Statistical Classifier Approach
David R. Aronson
Hood River Research Inc.
Developing an Active Management System for the U.S. Stock Market and Constructing a Live Testing Environment
David Moenning
Heritage Capital Management
Active Management of the Rydex Series Funds
Mark Pankin
MDP Associates LLC
A Multi Objective Approach for Contingent Claim Portfolio
Pankaj Kumar Jain and Aditya T. Navale
Indian Institute of Finance
Strategy Market Barometer
C. Thomas Howard
Professor, University of Denver and Athena Invest
The Abandonment Metric: Negative Fund Flows as a Predictor of Excess Returns
Neil Stoloff
SweetSpot Investments LLC
Relative Momentum: A New Alternative to Relative Strength
Gary Anderson
Anderson & Loe, Inc.
Protecting Equity Investments: Options, Inverse ETFs, Hedge Funds, and AORDA Portfolios
Gaia Serraino, American Optimal Decisions and Stan Uryasev
University of Florida
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