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Wind Shear Avoidance: Why There Is Value in Momentum
by Vineer Bhansali of PIMCO,
Explicit tail hedges that look expensive in a normal world may indeed turn out to be cheap if the unimodal morphs into the bimodal.
When faced with bimodal outcomes, momentum as a risk factor becomes potent, and cost-efficient exposure to momentum becomes critical to proper portfolio construction.
In this world of low, pegged interest rates, an investor who is going to take risk needs other means to make the portfolio more inured to unforeseen shocks and market storms. Investors should look at effective alternative beta strategies, such as momentum, that can be implemented efficiently.
Why a 60/40 Portfolio isn?t Diversified
by Alex Shahidi,
Maintaining a balanced portfolio is critical, especially when predictions of growth and inflation vary as widely as they do today. Investors are always better off spreading risk than aggressively betting on one economic outcome, and that's especially true when the range of possible economic outcomes is so wide.
Rethinking Safe Withdrawal Rates: The Meaning of Failure
by Wade Pfau,
Merely knowing the probability that an investor's wealth will be depleted at some point is not enough to build a retirement strategy. That is the traditional measure of failure in safe withdrawal studies, and it's time to move beyond it.
The Unemployment Rate: A Coincident Recession Indicator
For what is considered to be a lagging indicator of the economy, the unemployment rate provides surprisingly good signals for the beginnings and ends of recessions. We have developed a model that uses unemployment figures to produce these signals and to determine the probability of when a recession may start.
Investor Question: Gold or Gold Miners?
by Russ Koesterich of iShares Blog,
The Fed may be the best friend gold investors ever had. The most important factor for gold is actually not inflation or the dollar, but rather the level of real interest rates. In fact, the relationship between gold and real rates is so critical that since 1990, the level of real rates explains roughly 60% of the annual performance of gold. Gold generally does best in an environment in which real rates are low to negative as this means no opportunity cost to holding gold. Since 2003 when gold began its long-term outperformance we have been in just such an environment.
Paul Kasriel's Parting Thoughts on the Economy
by Robert Huebscher,
Paul Kasriel, the chief economist at Northern Trust, will retire at the end of this month. In this interview, he explains why he is optimistic about the prospects for the US economy and why supposed headwinds - from the price of oil to the housing market - pose much less of a threat than most people believe.
Gassed Up but No Place to Go
When a great investor points to a vastly underpriced asset, a natural first reaction is to devise the best strategy for buying it. Sometimes, however, the impediments to that strategy prove too great, something anyone will soon discover who listens to Jeremy Grantham's assertion that 'everyone who has a brain should be thinking of how to make money' long-term on natural gas.
Reigniting Your Passion for the Business
by Dan Richards,
Successful advisors consistently tell me they've lost enthusiasm and passion for their work compared to 10 or 15 years ago. Advisors have two choices when this happens - either accept it as a sad reality or put in place strategies to rekindle the fire that burned earlier in their career.
Revisiting the Liquidity Cycle with the Minsky Model
by Thomas Fahey of Loomis, Sayles & Co.,
Once an extreme event occurs, standard models offer limited insight as to how the ensuing crisis could play out and how it should be managed, which is why policy responses can seem disjointed. The latest policy responses to the European crisis have been no exception. To understand and respond to a crisis like the one in Europe, perhaps we need to consider some new models that include the human factor. Economic historian Charles Kindleberger can offer some insight
Trade Rains on the Jobs Parade
by Peter Schiff of Euro Pacific Capital,
Back in the late 1980s, when annual trade and budget deficits were but a small fraction of today's levels, the markets were rightly concerned about America's ability to sustain its twin deficits. This anxiety helped lead to the stock market crash of 1987. More recently, large and persistent trade deficits were a significant factor in building the imbalances that caused the U.S. economy to implode in 2008. But in recent years, most Americans have lost their concern with gaping trade deficits. I believe it will soon come back with a vengeance.
Stress Tests No Sweat
by Peter Schiff of Euro Pacific Capital,
The Federal Reserve ran another "stress test" on major financial institutions and has determined that 15 of the 19 tested are safe, even in the most extreme circumstances: an unemployment rate of 13%, a 50% decline in stock prices, and a further 21% decline in housing prices. The problem is that the most important factor that will determine these banks' long-term viability was purposefully overlooked - interest rates.
Why U.S. Investors Should Look Beyond Dividend Yield
Many investors are fed up with yields on fixed income securities and are in search of higher yield. As a result, U.S. stocks with high yields have become very popular with individual and professional investorsbut we believe that investors are looking at the wrong kind of yield. Though dividend yield works very well internationally, investors in U.S. stocks should instead focus on shareholder yield, a factor we have long advocated that has provided considerably stronger returns for U.S. stocks for more than 80 years.
How Do Spending Needs Evolve During Retirement?
by Wade Pfau,
Most people's spending patterns change over the course of retirement - expenses look very different at 90 than they do at 65. Yet most research on retirement withdrawal rates relies on constant inflation-adjusted withdrawals to develop a client's forward-looking budget. Such an unrealistic, one-size-fits-all approach can be disastrous if a client inadvertently retires with insufficient savings. Is there a better way?
Concentrated Equity Triple Play Higher Returns, Lower Risk, Lower Correlations
Concentrating a portfolio on a few choice assets dramatically increases an investor's chance of superior performance. Nonetheless, most advisors and investors shun portfolio concentration as unacceptably risky. To a great extent, this is driven by the myth that adequate diversification is impossible unless one holds many stocks - a myth I will debunk.
The Ambergris Factor!
by Jeffrey Saut of Raymond James,
I had a meeting with two PMs from Switzerland that had 10 questions they wanted answered. 1. Would you buy cyclical stocks or defensive stocks? I would buy cyclicals because I dont believe we are going to see another recession in the U.S. for the near future. 2. 2011 was a risk on/risk off year, so is it a top down or bottom up strategy for 2012? Last year you only had to get two things right. You had to raise cash in March/April and put it back to work during the bottoming sequence of August October. One always needs to employ a bottom up strategy combined with a top down view.
The Gutenberg Economy
by Michael Lewitt,
As commentators near and far speculate on what 2012 will bring to the global economy and markets, there is little question that one factor will be decisive: the central banks' printing presses. Both the Federal Reserve and the European Central Bank (ECB) will keep printing dollars and euros around the clock until their presses run out of ink.
Oil and Gasoline Prices Rise Again: How High and How Long?
by Team of American Century Investments,
One year ago, we wrote on the recent up-tick in crude oil and gasoline prices which was caused by turmoil and revolution in the Middle East. A year later, were experiencing a similar rise in crude and gasoline prices. Last week, the average national cost for a gallon of unleaded regular gasoline was approximately $3.75 per gallon. One contributing factor has been the increase in tensions between Western countries (and Israel) with Iran over its continuing work to produce nuclear fuel which could be used in atomic weapons.
More Mixed
by Scott Brown of Raymond James,
The economic data reports have become more mixed. Growth is rarely even across time and industries, but the stock market often has a hard time with conflicting evidence. For Mr. Market, the economy has to be either booming or falling apart completely. Mild winter weather has clearly been a factor in the last few months, but unusual weather often merely shifts growth from one quarter to another. Last year, the economic gears were starting to catch, but gasoline rose from around $3 per gallon at the beginning of the year to $4 per gallon in early May. Are we in for a repeat?
U.S. Covered Bonds: Reassessing Credit Risk and Relative Valuations
We believe nominal spread analysis is insufficient, since investors must now consider recovery and default risk under various economic conditions.
Our factor-based approach provides a means to quantify default probabilities across a range of outcomes instead of analyst-defined ad hoc assumptions.
We also investigate historical CDS spreads as a means to quantify default risk relative to national home price appreciation.
The potential for an emerging U.S. issuer market, combined with ongoing foreign issuance, leads us to believe the U.S. covered bond market has viability.
2012: A year in US bonds
There are two new factors that came to the forefront in late 2011 and which are set to influence investments throughout 2012. Indeed, it appears the collective bond market had a series of epiphanies in Q3 that should frame investment activity for some time to come, and these factors are by no means isolated to the US. The first factor is the broad recognition that debt expansion will not be the large driver of economic growth as it has been for the past several decades. The second factor is that political policy pronouncements will often trump economic and credit fundamentals.
Jim O?Shaughnessy: What Now Works on Wall Street
by Katie Southwick,
Understanding the science of investing has been the lifelong passion of Jim O'Shaughnessy, whose 1996 book, What Works on Wall Street, was among the first to explain the benefits of quantitative, empirical methods. Now, with the hindsight of the two bear markets since, he has refined his approach - rejecting some of his original ideas in favor of improved ways to forecast market performance. His new and improved approach finds that a dividend-oriented global strategy is best in today's environment.
Evaluating Popular Recession Indicators
by Georg Vrba, P.E.,
Recessions are notoriously difficult to forecast. That, of course, hasn't stopped many high-profile analysts from predicting recessions in 2010 and 2011 - incorrectly, at least thus far. Given the wealth of often contradictory economic data that exists today on which to base such forecasts, this should come as little surprise. What's more surprising, however, is that they have based their predictions on models that were ill conceived and insufficiently tested.
Inflation Held in Check by Fear
by John Browne of Euro Pacific Capital,
Out of control money supply creates inflation. In light of the trillions of synthetic dollars that have been injected into the economy by the Fed over the past five years, most observers had expected prices to spiral upward. But in making these determinations, many of us forgot to factor in the supply side of the supply/demand equation. Inflation remains low now because of game changing events that have reduced the demand for money. So beware of the recovery. Any wakening of animal spirits in the U.S. will likely stir the threat of inflation, which may very well short-circuit the recovery.
?The Greatest Anomaly in Finance'
by Geoff Considine,
If I told you that there is an easy-to-exploit market anomaly that has enabled investors to consistently and substantially outperform the market with less risk for more than four decades, your first instinct might be to roll your eyes. After all, the unending quest to improve returns while lowering risk has yielded countless methods with initial promise that subsequently collapse under further scrutiny.
Why Target-Date Funds Fail
by Robert Huebscher,
New research explains why target-date funds have failed to meet investors' objectives. While most of the criticism has been directed to overly aggressive glide paths, that is merely a symptom of the underlying problem - the misalignment of incentives between investors and fund companies.
Lacy Hunt on the Roadblock to Recovery
by Robert Huebscher,
'The fundamental key to prosperity is not governmental financial transactions, or even private sector financial transactions,' according to Lacy Hunt, the widely respected economist at Hoisington Investment Management, with whom we spoke last week. 'The key to prosperity is the hard work and creativity of our individuals in businesses.'
Weekly Market Commentary
In recent discussions with clients, I have answered questions about good new versus bad news and short-term versus long-term probabilities. As my readers are aware, I have become increasingly bearish in my asset allocations, a factor which derives from a combination of very short-term information along with macro, secular data. In short, my analysis quantifies policies, valuations, and fundamentals which have dragged down the prospects for global earnings acceleration (in the near-term). Notice that I refer to these statistics as decelerators, not necessarily absolute impediments.
Preferred Securities Investment Commentary - December 2011
by Team of Cohen & Steers,
In terms of preferreds broad performance potential, we note that bond yields are at or near historic lows, and that the Federal Reserve is likely to hold interest rates steady until 2013. In such an environment, the income offered by preferreds (78% or more) will be hard to come by, likely resulting in good investor demand in the year ahead. At the same time, the high income these securities produce is also likely to continue to factor meaningfully into their total return and dampen returns volatility.
Must Bond Investors Fear Rising Interest Rates?
by Andy Martin,
Thirty-one years ago, in 1981, the one-year Treasury reached its all time high of 14%. Today it hovers around 0.10%. Never before have interest rates fallen so far. Many economists and investment advisors, seeing nowhere to go but up, expect interest rates to climb from these historic lows. But that would not be the catastrophe that many bond investors fear.
The Misreading of Reinhart and Rogoff
by Robert Huebscher,
If the cry for deficit reduction rests on an intellectual framework, it would be the work of Reinhart and Rogoff, whose book, This Time is Different, has been hailed for its historical study of financial crises. A key finding - that growth slows once the ratio of debt-to-GDP exceeds 90% - has been widely cited by those calling for decreased government spending. But those calling for deficit reduction have largely ignored a number of caveats that Reinhart and Rogoff gave with respect to their 90% threshold, and as a result many warn that the US faces a Greek-like sovereign-debt crisis.
Motivating Older Clients
by Dan Richards,
Two advisors recently reminded me of the subtle differences it takes to successfully work with older clients. Both provide the highest quality of advice and have regular client events to stay in front of their best clients. Two years ago, however, they were frustrated by the difficulty of getting older clients to attend those events - until each came up with a solution.
New Measures of Risk (and why markets are now very fragile)
by Adam Jared Apt,
Understanding risk is essential to successful investment management, yet most common measures, like beta, capture only risk within markets - disregarding systemic risk of the markets themselves. Fortunately, new research is now shining light on "fragility" or systemic risk - how fast and how severely an unanticipated event will propagate through the markets.
US Recession - An Opposing View
A large number of reputable analysts and companies are forecasting a new U.S recession on the immediate horizon. Attracting the most attention is ECRI, which made a public recession call on September 30th and several television reaffirmations since. But an examination of a broader range of other composite economic indicators shows that sole reliance on ECRI's forecast would be misplaced.
The Riches of Three Generations
by Robert J. Horrocks of Matthews Asia,
We have had the Great Leader and the Dear Leader. Now North Korea falls to the Great Successor. There is a Chinese proverb that says a family cannot stay wealthy for 3 generations. The wealth is made by the first, enjoyed by the second and squandered by the third. Will the same be true of power in North Korea following the death of Kim Jong Il? For the short term, the worries over leadership transition are likely to dominatethere is the potential for the new leader to want to demonstrate power, authority and dominance.The market reaction has already started to factor in this scenario.
Dennis Gartman Explains His Call on Gold
by Robert Huebscher,
Dennis Gartman has been publishing his daily commentary, The Gartman Letter, since 1987. He's been in the news lately because of a call he made last week on the price of gold. In this interview, he discusses the reasons behind that forecast.
Can this be Serious?
by Robert Huebscher,
Of the hundreds of investment books that we are asked to review, a recent one stood out for its utter audacity: '401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day,' by Richard Schmitt. The premise of this book is as preposterous as its title. But it raised two important questions, meriting this review.
GLWBs: Retiree Protection or Money Illusion?
by Wade Pfau,
One of the most popular variable annuity riders is the guaranteed lifetime withdrawal benefit (GLWB), which offers downside protection through lifetime income, upside potential with step-ups based on market performance, and minimal surrender penalties. But, examining historical data, I have found that those riders carry a cost that will not be readily apparent to retirees: their cash flows rapidly decrease on an inflation-adjusted basis.
Weekly Market Commentary
We yearn for improvement, yet do not wish to lower our standards of evaluation. Year-over-year uptrends are indeed showing some progress, but dont factor in the bigger issues of jobs loss, savings depletion, home and portfolio devaluation and most importantly the loss of innocence/confidence that our institutions know how to do it better and can help us to sustain enthusiasm for something better ahead.
The Quality Conundrum
We are witnessing the end of a remarkable and confounding era for stocks, best described by the 'quality conundrum' investors faced for much of the last two years. During that time the combined outperformance of low-quality stocks alongside the underperformance of high-quality stocks was unprecedented in the last 30 years. Now, we are embarking on an era where high-quality stocks will likely significantly outperform low-quality stocks, resolving this conundrum.
The Unspoken Truth about Hedge Funds
by Michael Edesess,
The popularity of the endowment model among advisors has been driven by the belief that hedge funds have produced positive risk-adjusted returns. But the basis for that notion has been statistics gleaned from hedge fund databases, and new research shows returns from those databases are even more upwardly biased than previously thought; the supposed alpha never really existed.
Are Corporate Balance Sheets Really the Strongest in History?
by John P. Hussman of Hussman Funds,
At an aggregate level, corporate balance sheets look reasonable, but are certainly not "stronger than they have ever been in history." Cash levels are elevated, but this is at best a second-order factor (with excess cash representing only a few percent of total assets), while debt remains near record levels relative to total assets and net worth.
With Rising Wages, Will China Remain a Manufacturing Hub?
In 2010, countries such as Hong Kong, Japan, South Korea and Germany depended on China for data processing, apparel, and iron and steel exports. Chinas largest import partners in 2010 were Japan, South Korea, the U.S., Germany and Australia. For those companies not already doing business in China, theres one dominant factor that shows they should start: the vast domestic market. Companies may be able to find a cheaper workforce in Bangladesh, India or Sri Lanka, but being located in China allows convenient access to what is rapidly becoming the worlds largest consumer market.
Michael Aronstein on Today's Key Macro Trends
by Robert Huebscher,
Michael Aronstein is the president and chief executive officer of Marketfield Asset Management. Since its inception in 2008, his fund has returned 31% while the S&P has been down 15%. I spoke with him about the key macroeconomic and strategic issues facing investors today.
A Better Way to do Financial Planning
by Robert Huebscher,
Simplicity is dangerous when it comes to financial planning. Easy-to-use tools that project your retirement savings based on minimal inputs such as your income and savings rate amount to a ?bait-and-switch,? according to Larry Kotlikoff, a Boston University professor of economics. To properly prepare for retirement, one should focus on maintaining a constant standard of living throughout their life ? what economists call consumption smoothing.
Libya, Ghaddafi and the Arab Spring
While the US and Europe have remained fixated on the simmering sovereign debt crisis in Euroland, the Arab world has been experiencing waves of demonstrations, protests and civil wars that have seen the fall of three major regimes thus far in 2011, with several others struggling to find equilibrium. The underlying forces behind the Arab Spring are complex and vary from country to country. But a key factor is demographics, as a glance at the population pyramids below suggests.
Market See-Saw Brings Us Back to April 2010 Double-Digit Third Quarter Losses Erase Previous Gains
by Ron Surz,
Stock markets around the world plummeted in the third quarter, with the US market losing 16% and foreign markets faring somewhat worse with 17% losses. This quarter's loss reverses the gains of the first quarter and brings year-to-date returns below water, with domestic markets losing 11% and foreign markets losing 13%.
Results 6,251–6,300
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