Mar

21

 A rather shocking study which shows that investors in mutual funds receive a much worse return than the actual return shown by the mutual fund through putting most of their investment in before the mutual fund goes down and least of their investments when mutual funds before the mutual fund goes up. The actual underperformance seems to be of the order of 3 percentage points of return a year, i.e, 6% versus 9%, with sector funds and specialty funds and growth funds showing much greater underperfomance. This must be a pretty good indicator of when to go against a particular sector.

Steve Ellison writes:

I read Mr. Swedroe's book Rational Investing in Irrational Times. This is very interesting data, but it undermines his main message, that the market is efficient and even professional managers can't beat it, so you should diversify and keep costs low by buying index funds. If mutual funds favored by the public underperform by a wide margin, something else must be overperforming. One might be able to beat the market by simply avoiding the hot funds and their favored stocks, like Bacon's technique of betting on all the other horses besides the overpriced favorite.

Mick St. Amour writes:

A great contrarian indicator. The retail investor is often guilty of chasing returns and as you can see this is a performance killer.

Larry Williams writes:

Aha, mutual funds are for the masses, while the elite managers of money: Cohen, PTJ, Dalio– are the winners for their clients. 

But hold on a moment here. Lots of professional managers have beat the market for many, many years. It can be done, and it is being done. But not all can do it. Just like not all teams will be in the final four, and while luck is part of the game, in the end skill carries the day. 

Sep

22

It is a Fed that realizes this has been a balance sheet recession and collateral values must be reflated in kind. Action in gold, dollar, and equities seems to indicate this–just my humble opinion.

May

26

The Europeans ponied up $1 trillion of funny money to essentially guarantee the debts of Greece and the other members of the EU family nobody really likes to talk about at family gatherings. Ostensibly, the bailout war-chest was as much to protect major European money-centre banks as Greek and Portuguese civil service pensioners. Stock markets are acting like these countries have already defaulted. If that were actually happening, banks presumably would be doing the same thing they did in the great Credit Crisis of 2008 – not lending to each other for fear of stinky balance sheets on the other side. When this happened in 2008, LIBOR spreads spiked almost 150 basis points. Today LIBOR ranges from .25% to 1%, depending on maturities, (1 mo to 12 months) at all-time lows. It seems that banks continue to be quite happy lending to each other, and therefore there should still be plenty of liquidity in the system. Sure there is in itty-bitty up-tick in May-– not entirely unreasonable since the VIX just doubled - but no indication that it's anything other than business as usual behind the scenes.

Yes, governments are printing money and debt levels are ultimately unsustainable, but just like consumers can keep rolling over and transferring their credit card debts virtually indefinitely, so too can governments that matter, and major banks essentially underwritten by these governments, keep staving off default for a very long time. Look at how long way-over-leveraged Japan has been able to muddle along for over two decades after it blew up in 1989. I don't see banks panicking in this situation, and with all the liquidity and promise of liquidity, that's just more fuel for the fire. Someone is going to wake up soon and realize we may be going down, but we're not going down any time soon, and all those companies reporting big earnings increases are likely to snap back in a hurry. If we are to have a double-dip recession and a bear market, it would be for other reasons, which will be more slowly developing. Shorts beware.

Mick St. Amour writes:

George,

I wish more folks agreed with you as I do. From a technical perspective one thing that I'm not hearing in the media is that Dow Transports don't seem to be confirming retest of Feb Lows by the Dow. If I'm correct on this as well Thursday's action seemed like a washout to me, I can't remember seeing 75:1 downside to upside volume days in some time. I'd love to find research that shows turning points in the market when one looks at the vix collapsing (like it did on Friday) with volume that is at least 10:1 positive to negative. I suspect that would show good turning points.

Craig Mee writes:

It appears that since the bull market run up of the tech wreck, it has been all boom and bust, and until we have renewed respect in the banking sector, and politicians pulling there belts in, and making some tough calls, and with that and a credible plan moving forward…then this charade looks set to continue. Not until we see some consolidation of prices at lower levels over an extended period of time, in essence saying that yes , we have learnt our lessons, and we are ready to come out of the naughty corner…will it seem that the market can move forward without any risk of the volatile behavior of late no matter what numbers companies are posting. 

Alex Forshaw comments:

I'm confused.

LIBOR is at 3-month highs across most maturities. The treasury/libor spread is at 10-month highs.

The series is extremely autocorrelated, which means that a reversal of trend should be taken extremely seriously, as the series doesn't change trend easily.

If anything LIBOR is flashing a big warning sign as $1T of QE has caused nary a blink in the spread's rise over the last month.

May

24

learned your lesson yet? From a technical perspective one thing that I'm not hearing in the media is that Dow Transports don't seem to be confirming retest of Feb Lows by the Dow. If I'm correct on this as well Thursday's action seemed like a washout to me, I can't remember seeing 75:1 downside to upside volume days in some time. I'd love to find research that shows turning points in the market when one looks at the vix collapsing (like it did on Friday) with volume that is at least 10:1 positive to negative. I suspect that would show good turning points.

Craig Mee adds:

It appears that since the bull market run up of the tech wreck, it has been all boom and bust, and until we have renewed respect in the banking sector, and politicians pulling there belts in, and making some tough calls, and with that and a credible plan moving forward…then this charade looks set to continue. Not until we see some consolidation of prices at lower levels over an extended period of time, in essence saying that yes , we have learnt our lessons, and we are ready to come out of the naughty corner…will it seem that the market can move forward without any risk of the volatile behavior of late no matter what numbers companies are posting?

May

20

Beware of the parade of technical analysts soon to make their rounds on
television.  When this happens a panic low is usually near.

Sushi Kedia asks:

Do you say this because either Fundamental analysts are always in panic/euphoria extreme psychologies or the quantitatively evolved price students (they too are technicians, which the Chairman has acknowledged several years ago and he has indeed suggested that this passe thought process of beating Technical Analysts be avoided) are never experiencing panic or euphoria?

George Parkanyi adds:

And beware the contrarians who call panic lows based on what goes on on television…

Apr

11

 It is common sense that the stock market anticipates what will happen in the economy after some time. The invisible hand of the market driven by millions of investors who make decisions according to different quantity and quality of information eventually represent the best way to encapsulate and synthesize the current status and prospects of the world's economy. But is this always true? Or for some reasons markets are resilient to change and slow in timely reading the information available?

If this is the case, what are these reasons and when does this happen? Can markets be manipulated by strong hands or there are simply forces that render decision making viscous and create a breakout friction before markets actually change the course they are following? Like a ship takes some time before reacting after the wheel is turned.

These questions are relevant today as they were before the beginning of the crisis two years ago. As loan underwritings standards deteriorated, the securitized mortgage market developed a bubble in housing prices that continued for quite some time until it finally popped. Even if we now read on several reports that it was clear to many what was about to happen, until the very last moment almost everybody continued to play the same sheet of music. Investors, regulators, government. The markets went on with huge inertia along the tracked lines of unrealistic risk assessments, walking on quants' clouds and careless of gravity. The longer they continue the more violent is the reaction eventually.

It seems to me that currently markets are in a similar situation. After the impressive injection of liquidity in the system (like an adrenalin shot to the heart) aimed to restore confidence and normal functioning of shaken markets, prices of assets have reflated for over a year now. In order to do this, sovereign debt in Europe and the US is increasing to levels that everybody knows are unsustainable. Still, for political reasons nobody wants to take the bitter medicine that would be needed. The show goes on with cheap money poured into assets that go up with a regularity and pace that is almost unprecedented. Regardless of unemployment, housing prices that in some states are going down again, the contracting credit to consumers, some states and cities are very close to bankrupcy, banks continue to be seized by the FDIC, industrial production levels are still 10% lower now than at the pre-recession peak, durable goods orders are almost 20% lower now than they were before the recession began. Finally, equities are up 75% from the lows, but earnings are still almost 40% below their pre-recession levels.

Is this manipulation? When and how is this going to finish? Or actually this time markets are reading correctly what is going on and are simply anticipating a global recovery and the consequent future increase in corporate profits?

Laurel Kenner writes:

The wonder is that the market didn't go up much more, given the trillions of stimulus. Since '07, the market has made short-termers of all of us– at least, of everyone fortunate enough to still possess enough liquidity to trade. We're all dancing in the dark until the tune ends. Meanwhile, the music has changed in the bond market.

Russ Sears writes:

It is my contention that the markets are good at forecasting what is predictable. However, much is not forecastable, like the weather.

I will be presenting a paper Tuesday that Dr. Dorn and I have authored in Chicago Tuesday.

In it we content that faulty risks evaluations can cause neurotic outcomes, in individuals, companies, sectors and even whole economies.

The markets can become, and apparently did become, a mechanism to trade short term gains while coming at the expense of increasing long term risks from over-allocation of resources. The risks of over allocation is often a chaotic system, meaning it is impossible to predict specifically when and how hard it will crash. Statistically, this could be thought of as trying to predict when the correlations will become a self reinforcing mechanism approaching 1 . Or is more practical examples when would over- building of housing in California, Arizona, Nevada etc. lead to deflationary spiral and foreclosures and inability to refinance all across the country and world. Another example would be the over allocation of delta hedging and portfolio insurance in Oct 87.

I am hesitant to make predictions, especially after Bear Stearn then Lehman and AIG and a government run mortgage market in Fannie and Fredie. But I am not as pessimistic as many that this is only a short term bounce. This stems from my belief that while the mortgage markets securities economic value are difficult to predict… the markets are giving at least giving them a more realistic view of their worth given this uncertainty. If this discount for uncertainty is as healthy a discount as I believe; there is still considerable liquidity and value that can return to the markets once these values are realized and known. The markets, at least in my modeling, seems to still give a considerable chance to the deflationary spiral returning.

Mick St. Amour writes:

Paolo, thank you for sharing your thoughts. I like your comments on inertia because that is at work. I see this all the time with retail investors and as of right now that dynamic is at work in that those folks still haven t taken a bullish slant and have been slow to change their minds. most investors are slow to embrace a change in thought when conditions change and they tend to ignore what market prices tell them. They tend to get locked into some ideology and usually only change their belief until after bulk of gains are made. Best trades are made when you can find inertia still at work and market prices begin to shift in different direction opposed to prevailing view. I have found those to be the best low risk trades.

Mar

18

I look at my trades over the past couple of weeks and feel like I'm the master of the universe. It's not long after I feel that way I'm soon humbled. I suspect many feel that way after 10+ up days in a row. Complacency in your trading will breed mediocrity. The temptation is to follow the trend. Sometimes we can fall victim to inertia. Be wary of it.

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