There is an ever-present fear of being on the wrong side of the market. This, of course, assumes one has taken a position.
The fear comes from having been wrong many times in the past (and knowing that getting on the right side of the market trend is the most critical thing you can do to increase your chances of success), and hopefully leads to a healthy respect for the market and a risk management framework that minimizes the size of ones potential mistakes.
I'm caught in the middle right now, and have a wager either side. I have a healthy cash position should the market experience a retracement (which I am looking for), but maintain a reasonable equity exposure should the market chose to continue moving higher. With a significant lead over my benchmark, I am afforded the luxury of this strategy and position.
Having had good exposure to the beta trade off the bottom, bottoms-up issues are increasingly influencing my investment perspective and portfolio management positioning. As holdings run and hit my target levels, I am happy to let them go. And as prospective targets fall and look more attractive, I am happy to add them to the portfolio.
Tuesday, June 30, 2009
Friday, June 26, 2009
Michael Jackson Died
I, like everyone else who came of age in the 80s, have the beats from his music, the sound of his voice, and the images of his videos ingrained on my mind.
I was sad, but perhaps not surprised to hear of his passing. And it saddens me to think of his life. It has to be hard to be a famous person. Whether a rock star, movie star, or a President. Most famous people have a time in the sun, then recede to the shadows. But some continue to occupy a place in the public mind. Michael Jackson was one. This is a day you remember, much like when Elvis died (I was only 10 at the time, but remember it distinctly).
And let's not forget another icon from a period. Farrah Fawcett died on the same day. Charlie's Angels and the Six Million Dollar Man, almost defined my youthful tv viewing (can't forget Dr. Who either...and many others as I come to think on it).
I was sad, but perhaps not surprised to hear of his passing. And it saddens me to think of his life. It has to be hard to be a famous person. Whether a rock star, movie star, or a President. Most famous people have a time in the sun, then recede to the shadows. But some continue to occupy a place in the public mind. Michael Jackson was one. This is a day you remember, much like when Elvis died (I was only 10 at the time, but remember it distinctly).
And let's not forget another icon from a period. Farrah Fawcett died on the same day. Charlie's Angels and the Six Million Dollar Man, almost defined my youthful tv viewing (can't forget Dr. Who either...and many others as I come to think on it).
Wednesday, June 24, 2009
It's Just That Easy?
The bullish case is predicated to some extent upon the unprecedented amount of stimulus being injected into the system (what I call an artificial impost). I am presuming that the case also extrapolates to a point in time where the stimulus puts us on a self-sustaining track where the govt can hand the economy back to the private sector (but I haven't heard that espoused too much).
I've struggled with the seemingly cavalier way in which some analysts and strategists take it as granted that the borrowing of money is an unmitigated positive. My sense is that they see it this way because the immediate cause is positive and the long term effects somewhere in the future. Similarly, they see it this way because they have been conditioned to this cause/effect throughout their careers. When a problem arose in the past, we simply doused it in money (whether fiscal or monetary, or preferably both), and voila the problem was solved.
If it were only that easy. Something seems wrong about this to me. But I'm not smart enough to fully articulate why. I guess the best response I can make is if it were so simple to goose growth by simply spending and borrowing money, then why don't we do this all the time. If there are no costs/consequences to such an action, why not do it always and at every time. The answer, of course, is that there are limits to such activities.
However, as John Mauldin said last week, saying "this time is different" is a very precarious position to take, and will generally be wrong (except when it is right...wasn't last year a "this time is different" case and didn't all the lemmings fall off the cliff together).
Increasing deficits when the balance sheet is already stretched and the income statement looks terrible (just ask the states and local governments) does not seem like a free lunch to me. The economic optimists seem to be only focusing on the positives (stimulating demand), while failing to factor in the effects (greater debt burden, greater pressure on currency/inflation, a short term fillip, rising taxes).
Is the market that dumb that we can pull the wool over its eyes by simply creating money? I don't think so. So there is something else to the markets strong rise. Me thinks it was the simple overshoot of the market in Feb/March in the face of great fear and uncertainty. But with the armageddon factor diminished, we now have to work out what is a reasonable valuation given the fundamental outlook...and that is where it gets interesting.
I've struggled with the seemingly cavalier way in which some analysts and strategists take it as granted that the borrowing of money is an unmitigated positive. My sense is that they see it this way because the immediate cause is positive and the long term effects somewhere in the future. Similarly, they see it this way because they have been conditioned to this cause/effect throughout their careers. When a problem arose in the past, we simply doused it in money (whether fiscal or monetary, or preferably both), and voila the problem was solved.
If it were only that easy. Something seems wrong about this to me. But I'm not smart enough to fully articulate why. I guess the best response I can make is if it were so simple to goose growth by simply spending and borrowing money, then why don't we do this all the time. If there are no costs/consequences to such an action, why not do it always and at every time. The answer, of course, is that there are limits to such activities.
However, as John Mauldin said last week, saying "this time is different" is a very precarious position to take, and will generally be wrong (except when it is right...wasn't last year a "this time is different" case and didn't all the lemmings fall off the cliff together).
Increasing deficits when the balance sheet is already stretched and the income statement looks terrible (just ask the states and local governments) does not seem like a free lunch to me. The economic optimists seem to be only focusing on the positives (stimulating demand), while failing to factor in the effects (greater debt burden, greater pressure on currency/inflation, a short term fillip, rising taxes).
Is the market that dumb that we can pull the wool over its eyes by simply creating money? I don't think so. So there is something else to the markets strong rise. Me thinks it was the simple overshoot of the market in Feb/March in the face of great fear and uncertainty. But with the armageddon factor diminished, we now have to work out what is a reasonable valuation given the fundamental outlook...and that is where it gets interesting.
Tuesday, June 23, 2009
Thinking the Unthinkable
What if all the monetary and fiscal stimulus fails?
What do we do then?
Talk about staring into the abyss.
What do we do then?
Talk about staring into the abyss.
Hitting The Pause Button
My sense of things is that companies hit the pause button at the end of the first quarter, and are taking a wait and see attitude with respect to the economy (the market looks as though it is doing something similar).
If we lose confidence, there is a good chance we will see a second wave of lay-offs with concomitant, negative flow-on effects to the economy.
Are lay-offs the tail wagging the dog (the economy), or the dog wagging the tail?
If we lose confidence, there is a good chance we will see a second wave of lay-offs with concomitant, negative flow-on effects to the economy.
Are lay-offs the tail wagging the dog (the economy), or the dog wagging the tail?
Saturday, June 20, 2009
What A "New Normal" Might Look Like
I'm a 'new normal' kind of guy and I was just musing what a 'new normal' might look like. Here is what it might look like from an investment perspective in a generalized example:
T-5 T-4 T-3 T-2 T-1 Reset T+1 T+2 T+3 T+4 T+5
Revs ($m) 80 85 90 95 100 70 80 83.5 87 91 95
Profit Margin (%) 20% 20% 20% 20% 20% 5% 10% 10% 10% 10% 10%
P/S multiple (x) 2.5 2.5 2.5 2.5 2.5 1.5 1.8 1.8 1.8 1.8 1.8
Firm Value ($m)* 200 212.5 225 237.5 250 105 144 150.3 156.6 163.8 171
Return 6.25% 5.88% 5.56% 5.26% -58.00% 37.14% 4.38% 4.19% 4.60% 4.40%
*Firm value = Revs x P/S multiple
The table above assumes a 'new normal' world, ie. lower growth rates, lower multiples (higher risk premium), and lower margins - much of the 'new normal' hypothesis depends upon growth rates failing to return to normal (due to consumer deleveraging and increased taxes). Here are a couple of takeaways: (1) We experienced a 58% asset reset last year, reflecting an 80%+ decline in reported profits (I consider that the first wave of deflation), (2) We get a bounce gain of around 37% after the reset (already had it), (3) Firm value will take a long time to recover (hard to get back wealth losses if we're going into a 'new normal'), (4) To reduce the damage of the asset reset, you absolutely needed to stay in the market to capture the bounce.
I was astounded by the implications of the 'new normal' world wrt the loss of wealth (or firm value), but the biggest takeaway from this example is the fact that when you reset asset prices by 58%, long term expected returns are pretty good.
I could have used PE instead of PS for valuation purposes (I prefer PS, especially in a period like the present), and it would have conveyed the same sense.
P.S. Sorry the table looks bad. You'll have to bear with me on that one.
T-5 T-4 T-3 T-2 T-1 Reset T+1 T+2 T+3 T+4 T+5
Revs ($m) 80 85 90 95 100 70 80 83.5 87 91 95
Profit Margin (%) 20% 20% 20% 20% 20% 5% 10% 10% 10% 10% 10%
P/S multiple (x) 2.5 2.5 2.5 2.5 2.5 1.5 1.8 1.8 1.8 1.8 1.8
Firm Value ($m)* 200 212.5 225 237.5 250 105 144 150.3 156.6 163.8 171
Return 6.25% 5.88% 5.56% 5.26% -58.00% 37.14% 4.38% 4.19% 4.60% 4.40%
*Firm value = Revs x P/S multiple
The table above assumes a 'new normal' world, ie. lower growth rates, lower multiples (higher risk premium), and lower margins - much of the 'new normal' hypothesis depends upon growth rates failing to return to normal (due to consumer deleveraging and increased taxes). Here are a couple of takeaways: (1) We experienced a 58% asset reset last year, reflecting an 80%+ decline in reported profits (I consider that the first wave of deflation), (2) We get a bounce gain of around 37% after the reset (already had it), (3) Firm value will take a long time to recover (hard to get back wealth losses if we're going into a 'new normal'), (4) To reduce the damage of the asset reset, you absolutely needed to stay in the market to capture the bounce.
I was astounded by the implications of the 'new normal' world wrt the loss of wealth (or firm value), but the biggest takeaway from this example is the fact that when you reset asset prices by 58%, long term expected returns are pretty good.
I could have used PE instead of PS for valuation purposes (I prefer PS, especially in a period like the present), and it would have conveyed the same sense.
P.S. Sorry the table looks bad. You'll have to bear with me on that one.
Friday, June 19, 2009
A Leap of Faith
I don't think I could have articulated it any better than ISI strategist Francois Traha:
"The market pullback of the past week or so has rattled the conviction of many investors. This is not surprising to us since the recovery in stocks is really about hope rather than concrete evidence of an economic recovery. Thus far, so-called "green-shoots" have been concentrated in indicators that tend to be anticipatory of economic growth (i.e. leading indicators). It always takes a leap of faith to buy into a rally at an economic low since it begins about six months or so before coincident indicators of growth recover. We believe the evidence is overwhelming at this stage, but the "bullish" call on stocks will not become the mainstream until investors see actual growth, which will probably occur later this year."
I don't necessarily agree with his conclusion, but I think he captures the essence of a view.
"The market pullback of the past week or so has rattled the conviction of many investors. This is not surprising to us since the recovery in stocks is really about hope rather than concrete evidence of an economic recovery. Thus far, so-called "green-shoots" have been concentrated in indicators that tend to be anticipatory of economic growth (i.e. leading indicators). It always takes a leap of faith to buy into a rally at an economic low since it begins about six months or so before coincident indicators of growth recover. We believe the evidence is overwhelming at this stage, but the "bullish" call on stocks will not become the mainstream until investors see actual growth, which will probably occur later this year."
I don't necessarily agree with his conclusion, but I think he captures the essence of a view.
Thursday, June 18, 2009
Where Is The Corruption In The System?
Perhaps the most perverse manifestation of the corruption in the system shows through in the area of executive compensation.
Whether it is absolute levels of remuneration/inurement or relative levels (vis-a-vis avg. compensation within a business), executive pay is out of whack with any sense of reasonableness. This is, of course, a broad brush to be painting with, and there are obviously many exceptions, but on the whole executive compensation is bananas.
Who's fault is it? Is it the government for not regulating such activities? Is it society/culture for tolerating such inequity? Is it greed and entitlement among the executive class? Is it the consultants who facilitate the game? Is it a principal-agent relationship gone AWOL? Is it boards stacked with management cronies? Is it institutional shareholders who have abdicated their stewardship responsibilities? Is it regular mom and pop shareholders who are too apathetic and complacent (or powerless)?
I dunno. I think everybody and everything contributes to the problem. But boy, does this description not also look and sound like the problems that led us into the financial crisis.
The failure of monetary authorities, perverse incentive structures imbedded in the system, facilitation by ratings agencies and regulators, greed of the investment banks and bankers, "all care and no responsibility" among mortgage brokers and securitizers, failure of moral courage among borrowers.
All of which begs the question, where is the outrage? or better yet, where is the shame?
Whether it is absolute levels of remuneration/inurement or relative levels (vis-a-vis avg. compensation within a business), executive pay is out of whack with any sense of reasonableness. This is, of course, a broad brush to be painting with, and there are obviously many exceptions, but on the whole executive compensation is bananas.
Who's fault is it? Is it the government for not regulating such activities? Is it society/culture for tolerating such inequity? Is it greed and entitlement among the executive class? Is it the consultants who facilitate the game? Is it a principal-agent relationship gone AWOL? Is it boards stacked with management cronies? Is it institutional shareholders who have abdicated their stewardship responsibilities? Is it regular mom and pop shareholders who are too apathetic and complacent (or powerless)?
I dunno. I think everybody and everything contributes to the problem. But boy, does this description not also look and sound like the problems that led us into the financial crisis.
The failure of monetary authorities, perverse incentive structures imbedded in the system, facilitation by ratings agencies and regulators, greed of the investment banks and bankers, "all care and no responsibility" among mortgage brokers and securitizers, failure of moral courage among borrowers.
All of which begs the question, where is the outrage? or better yet, where is the shame?
Wednesday, June 17, 2009
Confessions of a Conservative*
Ok. I admit. I have a conservative bias.
Oh, it hurts to admit as such, but it is true.
My conservative bias is, of course, the tendency to hang onto my view for too long, and only slowly adjust it over time. In the trade, it is a sibling to anchoring, overconfidence, and regret, and a cousin to ignorance and arrogance. Those banes of any good investor. None of which makes me happy of course!
Anchoring refers to our tendency to grab onto the irrelevant when faced with uncertainty. Overconfidence relates to the illusion of knowledge (a situation where we think we know more than everyone else) which translates into an illusion of control. Regret is what happens after you have bought or sold an investment (kind of like buyer's or seller's remorse).
*Was inspired to plagiarize these thoughts from James Montier's piece "The folly of forecasting: Ignore all economists, stategists, & analysts"
Oh, it hurts to admit as such, but it is true.
My conservative bias is, of course, the tendency to hang onto my view for too long, and only slowly adjust it over time. In the trade, it is a sibling to anchoring, overconfidence, and regret, and a cousin to ignorance and arrogance. Those banes of any good investor. None of which makes me happy of course!
Anchoring refers to our tendency to grab onto the irrelevant when faced with uncertainty. Overconfidence relates to the illusion of knowledge (a situation where we think we know more than everyone else) which translates into an illusion of control. Regret is what happens after you have bought or sold an investment (kind of like buyer's or seller's remorse).
*Was inspired to plagiarize these thoughts from James Montier's piece "The folly of forecasting: Ignore all economists, stategists, & analysts"
Friday, June 12, 2009
The Doldrums
Market is listless and directionless.
Not sure how long the doldrums will last.
Reasonable cases can be made that we will breakout to the upside, breakout to the downside, or stay in the doldrums.
I'm wary of the market tanking a week or so before quarter end, and dashing a lot of peoples hopes for a good quarter.
Not sure how long the doldrums will last.
Reasonable cases can be made that we will breakout to the upside, breakout to the downside, or stay in the doldrums.
I'm wary of the market tanking a week or so before quarter end, and dashing a lot of peoples hopes for a good quarter.
A Problem, an Issue, or a Conundrum
Actually it is probably more an issue and/or a problem, rather than a conundrum.
I am referring to the fact that financial markets like gold and oil are relatively small compared to traditional markets like equities and bonds.
The changing face of market players (the rise of hedge funds, SWFs, and ETFs), along with changing perspectives on asset allocation and investment strategy, has led to the prospect of significant demand/supply imbalances.
In other words, the flow of funds can unhinge a market from its fundamentals, aka bubble.
I am referring to the fact that financial markets like gold and oil are relatively small compared to traditional markets like equities and bonds.
The changing face of market players (the rise of hedge funds, SWFs, and ETFs), along with changing perspectives on asset allocation and investment strategy, has led to the prospect of significant demand/supply imbalances.
In other words, the flow of funds can unhinge a market from its fundamentals, aka bubble.
Thursday, June 11, 2009
Speed wobbles
Just re-visiting the good ol' eyeball of the SPX over the last 5 or 6 years.
Could have used any benchmark to make the point, but SPX is The Benchmark, so why not.
Market returns were smooth and stable with a nice positive skew over most of the period (ah...for the good old days). We then hit a pothole in Feb 07 (first shot across the bow - China and the first subprimes), recovered and got going again at a faster pace, hit the Bear Stearns hedge fund closure in July and the Cramer rant heard around the world (second shot across the bow), over-corrected into October, and then lost control in 2008 (too many shots to innumerate).
We finally crashed and burned in October, and have been in purgatory ever since, but there is nothing like a few indulgences to give us hope.
Could have used any benchmark to make the point, but SPX is The Benchmark, so why not.
Market returns were smooth and stable with a nice positive skew over most of the period (ah...for the good old days). We then hit a pothole in Feb 07 (first shot across the bow - China and the first subprimes), recovered and got going again at a faster pace, hit the Bear Stearns hedge fund closure in July and the Cramer rant heard around the world (second shot across the bow), over-corrected into October, and then lost control in 2008 (too many shots to innumerate).
We finally crashed and burned in October, and have been in purgatory ever since, but there is nothing like a few indulgences to give us hope.
Title inflation
Just an observation.
Has it ever hit you that everyone is a Vice President, a Managing Director, or some other hoity toity title.
Once upon a time, those titles actually meant something.
It reminds me of grade inflation.
Has it ever hit you that everyone is a Vice President, a Managing Director, or some other hoity toity title.
Once upon a time, those titles actually meant something.
It reminds me of grade inflation.
Wednesday, June 10, 2009
Overshoot
Just eye-balling the SPX over the last five years or so.
Looks to me as though we overshot on the upside by about 12% in 2007 (SPX hit 1575, but fair value was probably around 1400)...even assuming the massive build-up of leverage in the system was "normal (remember, no one worried about it then).
We then had a significant overreaction with overshoot on the downside with a low around 666, but it should probably have been about 800 (16% overshoot).
Assuming 1400 should have been the top, then we are presently down about 33% from the high, and the move up to 940 being a 17% bounce from 800.
I don't know what all this means, but I mention it to try and gauge a little perspective under more normal conditions.
Looks to me as though we overshot on the upside by about 12% in 2007 (SPX hit 1575, but fair value was probably around 1400)...even assuming the massive build-up of leverage in the system was "normal (remember, no one worried about it then).
We then had a significant overreaction with overshoot on the downside with a low around 666, but it should probably have been about 800 (16% overshoot).
Assuming 1400 should have been the top, then we are presently down about 33% from the high, and the move up to 940 being a 17% bounce from 800.
I don't know what all this means, but I mention it to try and gauge a little perspective under more normal conditions.
Friday, June 5, 2009
Did We Simply Imagine This?
The thought has occurred to me, and I imagine there are a number of others also wrestling with it.
Is all that we have just experienced over the past 20 months simply an existential crisis of confidence that led to a liquidity crisis, which begat a financial market implosion, which led to panicked firings and a related economic cliff dive?
In other words did we simply imagine this and all will return to normal?
Even if we did just imagine it, it is hard to believe that we will simply return to normal. The reason is because we now have to deal with the consequences of the reaction to the crisis, ie. decline in wealth, lost jobs, heightened insecurity, massive govt interventions in markets and economy.
Is all that we have just experienced over the past 20 months simply an existential crisis of confidence that led to a liquidity crisis, which begat a financial market implosion, which led to panicked firings and a related economic cliff dive?
In other words did we simply imagine this and all will return to normal?
Even if we did just imagine it, it is hard to believe that we will simply return to normal. The reason is because we now have to deal with the consequences of the reaction to the crisis, ie. decline in wealth, lost jobs, heightened insecurity, massive govt interventions in markets and economy.
Thursday, June 4, 2009
What Is The Market Telling Us?
Interpreting the market is pretty easy. You just look at the recent price action and extract the rationale behind those moves.
Last year it was telling you doom, gloom and utter destruction.
This year (at least since early March) it is telling you cyclical recovery (discretionary, IT, emerging markets), inflation (materials, energy, gold), funding concerns (weak dollar, rising rates), and skepticism (short covering and sidelined cash).
The trick, as always, is not getting blindsided by a reversal. And that is problematic because the market has already staged an historic rally, and it is unclear whether the cyclical recovery/inflation thesis will turn out true. Of course, by the time the data comes out, the market will be somewhere else (I'm just not sure where).
P.S. By rallying more than 40% straight up from the lows (with perhaps more to come), the market is telling you that it made a mistake last year (or maybe more precisely at the beginning of this year).
Last year it was telling you doom, gloom and utter destruction.
This year (at least since early March) it is telling you cyclical recovery (discretionary, IT, emerging markets), inflation (materials, energy, gold), funding concerns (weak dollar, rising rates), and skepticism (short covering and sidelined cash).
The trick, as always, is not getting blindsided by a reversal. And that is problematic because the market has already staged an historic rally, and it is unclear whether the cyclical recovery/inflation thesis will turn out true. Of course, by the time the data comes out, the market will be somewhere else (I'm just not sure where).
P.S. By rallying more than 40% straight up from the lows (with perhaps more to come), the market is telling you that it made a mistake last year (or maybe more precisely at the beginning of this year).
Squaring the Circle
It's hard to buy this market right now. We're up 40%+ from the lows, we haven't seen a decent retracement, and the outlook is muted (at best).
Conversely, it's hard to get too bearish. Downside looks like 10%-15% max, the bears are trapped and getting squeezed into the market (flow of funds), momentum and sentiment is positive, green shoots dominate mindspace, and there is plenty of govt "news" likely over the next 6 months.
The tough thing for me is reconciling a less than upbeat economic outlook with positive long term return expectations.
Getting the big trend right is the most critical thing. And it seems like the long term trend will be for a recovery in equities. I hate that because it doesn't necessarily square with my fundamental outlook (a likely cyclical lift no doubt, but significant secular headwinds). It translates into buying equities on hope. That has been the right strategy many times in the past, and is likely to be the right strategy in the future (not because I believe in the fundamental case for such, but because history has shown it is a fool who underestimates economic resilience).
The one thing that could really upset the "hope applecart" is if the market mirrors the Japanese experience (because we are snookered and have few options). And that is what keeps me up at night. The lessons from that experience are to be nimble, be prepared to buy and sell more often, don't get wedded to any stock(s), and be disciplined in trading a range - hardly a description of a long term investment strategy (or maybe it is).
Conversely, it's hard to get too bearish. Downside looks like 10%-15% max, the bears are trapped and getting squeezed into the market (flow of funds), momentum and sentiment is positive, green shoots dominate mindspace, and there is plenty of govt "news" likely over the next 6 months.
The tough thing for me is reconciling a less than upbeat economic outlook with positive long term return expectations.
Getting the big trend right is the most critical thing. And it seems like the long term trend will be for a recovery in equities. I hate that because it doesn't necessarily square with my fundamental outlook (a likely cyclical lift no doubt, but significant secular headwinds). It translates into buying equities on hope. That has been the right strategy many times in the past, and is likely to be the right strategy in the future (not because I believe in the fundamental case for such, but because history has shown it is a fool who underestimates economic resilience).
The one thing that could really upset the "hope applecart" is if the market mirrors the Japanese experience (because we are snookered and have few options). And that is what keeps me up at night. The lessons from that experience are to be nimble, be prepared to buy and sell more often, don't get wedded to any stock(s), and be disciplined in trading a range - hardly a description of a long term investment strategy (or maybe it is).
Wednesday, June 3, 2009
Markets Acting Badly
The market is such a baby.
Right now, especially, it seems to be acting like a spoilt little brat.
Everytime Bernanke, or someone or something, highlights that things ain't so good, it throws a hissy fit.
As if only tax payer dollars, or central bank printing, or jawboning will solve its problems. Like a petulant little brat it requires much hand holding and spoon feeding in order for it to feel good.
P.S. While we're at it, did everyone get the same "trade of the day" email? Seems like everyone is rushing in and out of the same trade at the moment. I guess they all got sold the same model...now where have I seen that before!
Right now, especially, it seems to be acting like a spoilt little brat.
Everytime Bernanke, or someone or something, highlights that things ain't so good, it throws a hissy fit.
As if only tax payer dollars, or central bank printing, or jawboning will solve its problems. Like a petulant little brat it requires much hand holding and spoon feeding in order for it to feel good.
P.S. While we're at it, did everyone get the same "trade of the day" email? Seems like everyone is rushing in and out of the same trade at the moment. I guess they all got sold the same model...now where have I seen that before!
Cliches for the time
After a big move up, it always baffles me that people want to join the ride.
The main premise behind this action is the idea that the market is now signaling that it is safe to get back in, and the adage the trend is your friend. This is momentum investing at its best.
But if you flip it on its head, you end up with the disastrous situation we had last year. Investors selling the market late and eventually quitting at the bottom.
What is interesting to me is not only that momentum investing fits a certain psychological disposition, just as contrarian investing fits a certain psychological profile, but that you can make good money on both sides of the divide.
My guess is that really good investors manage to mix the two perspectives within a fairly flexible investment framework.
The main premise behind this action is the idea that the market is now signaling that it is safe to get back in, and the adage the trend is your friend. This is momentum investing at its best.
But if you flip it on its head, you end up with the disastrous situation we had last year. Investors selling the market late and eventually quitting at the bottom.
What is interesting to me is not only that momentum investing fits a certain psychological disposition, just as contrarian investing fits a certain psychological profile, but that you can make good money on both sides of the divide.
My guess is that really good investors manage to mix the two perspectives within a fairly flexible investment framework.
Monday, June 1, 2009
Mean Reversion Man
Mean reversion man says sell that which is overvalued, and buy that which is undervalued.
Thanks mean reversion man, you're a great help!
What is overvalued and what is undervalued? I dunno. But to garner a little perspective on that issue, I analogized that just as the global economy had significant structural imbalances, so to the domestic economy has probably got a few sectoral imbalances. We heard from Jim Chanos last week that he thought tertiary education, healthcare, defense and financial services had grown at growth rates greater than what was sustainable and so they were probably candidates for some sort of mean reversion (predicated upon govt intervention of some sort).
That got me curious. Does that thesis play out in the national accounts? The answer is yes, no and dunno.
I took a mosy on over to the US Bureau of Economic Analysis and dialed up the numbers for GDP by Industry from 1987-2007. I compared the current proportion of the economy for each industry with its long term average and sort to identify anomalies by seeing which sectors were outside of their one and two standard deviation ranges.
Interestingly, Mining was running 2 std dev above its long term average, with much of that change coming in the last year of the data. Perhaps not surprisingly, Petroleum & Coal is also running 2 std dev higher than long term average, as are Information & Data Processing and Management of Companies & Enterprises. I can see a little mean reversion going on in some of those sectors.
On the flip side, Agriculture, Forestry, Fishing & Hunting is running 2 std dev below its long term avg. contribution to the economy, along with Electrical Equipment, Appliances & Components and Retail Trade.*
And yes, education, healthcare, and financial services were all running one standard deviation greater than their long term average contribution to the economy. Defense was lumped into the govt spending category which wasn't, as of the date of the data, much different from its historic average.
* That one surprised me. I'm not sure of the definition of Retail Trade but I'll have to look it up.
Thanks mean reversion man, you're a great help!
What is overvalued and what is undervalued? I dunno. But to garner a little perspective on that issue, I analogized that just as the global economy had significant structural imbalances, so to the domestic economy has probably got a few sectoral imbalances. We heard from Jim Chanos last week that he thought tertiary education, healthcare, defense and financial services had grown at growth rates greater than what was sustainable and so they were probably candidates for some sort of mean reversion (predicated upon govt intervention of some sort).
That got me curious. Does that thesis play out in the national accounts? The answer is yes, no and dunno.
I took a mosy on over to the US Bureau of Economic Analysis and dialed up the numbers for GDP by Industry from 1987-2007. I compared the current proportion of the economy for each industry with its long term average and sort to identify anomalies by seeing which sectors were outside of their one and two standard deviation ranges.
Interestingly, Mining was running 2 std dev above its long term average, with much of that change coming in the last year of the data. Perhaps not surprisingly, Petroleum & Coal is also running 2 std dev higher than long term average, as are Information & Data Processing and Management of Companies & Enterprises. I can see a little mean reversion going on in some of those sectors.
On the flip side, Agriculture, Forestry, Fishing & Hunting is running 2 std dev below its long term avg. contribution to the economy, along with Electrical Equipment, Appliances & Components and Retail Trade.*
And yes, education, healthcare, and financial services were all running one standard deviation greater than their long term average contribution to the economy. Defense was lumped into the govt spending category which wasn't, as of the date of the data, much different from its historic average.
* That one surprised me. I'm not sure of the definition of Retail Trade but I'll have to look it up.
Why Are We Rallying This Thing?
It's the way of the market.
As Al Funt would say, "when you least expect it, expect it."
The market is rallying on hope and history. Hope that we will see a turnaround by the end of this year, and history associated with the idea that stock markets typically bottom about 6 months before the economy bottoms.
If the recovery is real, then the rally will be supported, if the recovery is premature, then there will be insufficient economic substance to support the market.
As Al Funt would say, "when you least expect it, expect it."
The market is rallying on hope and history. Hope that we will see a turnaround by the end of this year, and history associated with the idea that stock markets typically bottom about 6 months before the economy bottoms.
If the recovery is real, then the rally will be supported, if the recovery is premature, then there will be insufficient economic substance to support the market.
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