Sentiment Update

I’m not sure why the Investors Intelligence (which polls advisors) is so much more bullish than AAII (individuals), maybe perhaps since individuals still haven’t bought into the market rally?  Curious to hear thoughts here:


aaii1 2

Dogs and Cows of the Dow: Dividends and Buybacks

I thought this would be a fun way to visualize the Dow stocks, and how they distribute their cash through dividends and buybacks.  Most friendly on the left to least friendly on the right. Note that some companies, like Cisco and J&J, seemingly have a good yield but are net issuers of stock…(Note this says nothing about valuation.)….

First list would be Dogs of the Dow (Dividend Yield)

Second list is (Cash) Cows of the Dow (Dividends & Buybacks, aka Net Payout Yield)




The Most Important Yield Chart in the World

Patrick O’Shaughnessy has a great piece this month where they touch on a topic that is incredibly important now.  We mentioned this back in August where the premium that dividend yield stocks are trading at relative to the market is near the highest ever.  Historically when you invest in high yield you are getting a value tilt, but now, as money has rushed into all things high yield, you are actually getting the opposite – not something you want!

Valuations are also cheaper abroad.  


1.  In the US avoid high dividend yield in favor of shareholder yield.  


2.  Look abroad. (this chart from the summer).Screen-Shot-2013-08-19-at-10.40.31-PM

CAPE Country Returns YTD, the Ball Don’t Lie!

I’ve been publishing CAPE updates for countries quarterly on The Idea Farm, and below I highlight a blurb from our upcoming year end outlook.  This chart shows the returns to country ETFs and the 10 cheapest and 10 most expensive markets.  Notice why I was so unpopular in Bogota in January when I said they have one of the most expensive markets in the world!  Also notice the big outlier in the expensive country bucket (the US). Due to all of the expensive countries declining and the US appreciating, we are now the most expensive in the world.

Also note the explosive returns in the cheap countries.  (Portugal only recently had an ETF launch).

As Rasheed Wallace would say, the ball don’t lie!

Screen Shot 2013-12-05 at 10.35.36 AM




All-In with Momentum

This post is similar to the recent post we did on F-Squared.  We sent out a research piece recently to The Idea Farm list from Pictet, a multi-billion $ asset manager out of Europe.  I am slightly embarrassed to admit I had never heard of them until recently when a reader emailed me some of their work.  They have one momentum strategy they describe as:

“One of our most original and historically successful approaches is our “momentum” strategy that allocates invested capital systematically between four asset classes. For those not familiar with this approach, it selects from US 10-year Treasury bonds, US equities, emerging-market equities and gold, and allocates 100% of the capital to the asset class that has shown the best performance in the recent past.”

That’s awesome!  You know I like it, although without a trend overlay and only selecting one asset can lead to some pretty wild swings.  Just how wild?  Below are the backtested results to 1973, 17% a year isn’t bad!

(4 asset classes updated monthly, ranked on 12 month total return.)  Granted if you used more asset classes and invested in the top 1/3 of assets your risk adjusted returns improve a bit…



Building a Simple Sector Rotation on Momentum and Trend

Long time readers know that I am a big fan of simple rules based portfolios, heck that’s behind most of everything I do, from the buy and hold and 13F portfolios of The Ivy Portfolio to the trend portfolios of a QTAA, to shareholder yield approaches to income.  Frankly most all of the 2&20 world can be deconstructed for next to nothing.  For example, the book Following the Trend: Diversified Managed Futures Trading was actually really good – and I feel like it is pretty rare to say that these days.  It basically lays out how to replicate the vast majority of the managed futures industry with a simple system(s). (Covel’s book is great too.) It reminds me a bit of that Bridgewater piece on replicating basic hedge fund strategies with rules based investing  : Hedge Fund Returns Dominated by Beta – May 3, 2012

I was going to lay out a simple model, one very similar to the one we published back in 2010: Relative Strength Strategies for Investing.  This paper was a domestic expansion of work we published way back in 2007 in our Quant Approach to TAA.  

 I thought I would demonstrate the utility of another relative strength approach from F-Squared,  a $15b shop that a lot of RIAs use to outsource their tactical allocations.  (Note: this post is updated at F Squared’s request to only use their 2008 forward index data. )  

You can find their construction rules here:

    • When fully invested, the model index all nine of the U.S. equity sectors:  At the point of rebalancing in a fully-activated mode, the strategy is equally weighted in each sector at 11.1%.
    • The critical process, executed on a weekly cycle in the AlphaSector Premium Index, is the model’s review of each of the nine sectors to be either included or excluded from the portfolio based on likelihood of forward-looking positive return.
    • The decisions are generated through a sophisticated analytical engine that evaluates “true” sector trends while adjusting for market noise and for changing levels of volatility in the market.
    • The key model inputs (driving the decision-making process of the algorithm) are data on total return movements, volatility, and rate of change in volatility for the subject equity sector.
    • The model output is a binary decision.  If a sector receives a positive signal for investing, it is included in the index portfolio.  If a sector receives a neutral or negative signal, it is removed.  All sectors represented are equal weighted, with a maximum allocation capped at 25% of the Index at the time of rebalancing.
    • If there are three or fewer sectors represented at a given time, the remainder of the portfolio (reflecting the 25% maximum cap per sector) is invested in the Short-Term Treasury ETF, representing cash.  The Index can be 100% invested in the cash equivalent if all sectors receive a neutral or negative signal for investing.
    • The presence of a cash equivalent position in the index portfolio during bear markets is a clear illustration of the F-Squared’s philosophy of “client-centric not benchmark-centric.”  Conventional U.S. Equity investment strategies would continue to track to the S&P 500 during a bear market, seeking to achieve only relative outperformance.  Investors are subject to potentially severe drawdowns, even while their traditional manager is perceived as “beating peers.” In contrast, the AlphaSector model breaks the correlation to the S&P by deploying the cash equivalent.  Delivering downside risk controls is our approach to meeting client needs.

My guess was that a simple system, similar to many we have published in our white papers, would capture what F2 is trying to do.  Below we examine 9 sectors,  equal weighted if above 10sma.  If less than 4 sectors then 25% in cash if 3, 50% cash if 2, 75% cash if 1.  We used the French Fama data that goes all the way back to the 1920s…The first chart is the test back to 2001 , the second chart is FF all the way back to the 1920s.

Note that the system does a good job of  capturing what F2 does through their public index.  Also note the strategy does a good job of reducing risk through vol and drawdown back to the 1920s.  Note those looking for outperformance should consider a more concentrated portfolio that only owns the top 2-4 sectors, and we will follow this piece up in a week with another killer momentum system published by another multi-B shop out of Europe…stay tuned!




Where Have all the Mergers Gone?

One argument against a top in equities is the lack of M&A.  Below are a few charts from IMAA:



figure_announced mergers & acquisitions (worldwide) (1)


figure_announced mergers & acquisitions (united states of america)




Link to press release here.



The New House of Money

Steve Drobny, author of the great books Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets and The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money just put out a new one: The New House of Money.  Check it out, it’s free.

1st interview: Kyle Bass 

The US is the Most Expensive Stock Market in the World

Out of 44 developed and emerging markets in the world, the US stock market is the most expensive on a 10 Year PE ratio basis with a value of 25 (CAPE).  If you include frontier markets, the US is the most expensive out of 55 markets with the one exception of Sri Lanka.

Now, the US isn’t in a bubble, nor does this mean it must crash or even go down.  What it does mean, is that the rest of the world is much cheaper and US returns should be muted for the next 5-10 years.  AND it means the biggest weighting in all of the global market cap portfolios (50%) is the most expensive market.   Be forewarned!


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