Monday, October 14, 2013

Are Index Investors Unknowingly Increasing Interest Rate Risk?

Here in an interestingly look at the Barclay's US Aggregate Bond Index from Lord Abbett  The below Chart shows how the duration of the Index has changed over the last ten years.

As you can see, up until late 2010 the duration of the Aggregate Bond Index tended to hover around 4.5 years. That has increased to approximately 5.5 years today. I think it is important that "passive" index investors be aware that they are currently making an "active" decision to increase their interest rate risk.

Friday, August 9, 2013

Emerging Markets Price-to-Book Ratio & Forward Returns

Here is an interesting look from J.P Morgan regarding the Price-to-Book ratio on Emerging Markets.

They then look at how those various Price-to-Book ratios relate to forward 1-year returns....In short, it looks good.

Although I don't like that the 1-year forward returns only use 1999 to today. Why not use the same data as the first graph back to 1993? Also, I don't tend to think any valuation metric is a reliable short-term (1 year) timing indicator. However, Rob Arnott has also been pointing out that longer-term forward returns (10 years) are also looking pretty tempting using a Shiller PE ratio. All I know is, anything looks good 'relative' to the US right now.

Monday, July 29, 2013

Foolish Fed Forecaster Rankings

The Wall Street Journal recently published a piece Ranking Fed Forecasters (you can read their methodology following that link). Let's see if you notice anything "convenient" about the sample period.

Does this "analysis" smell of sampling period bias to anyone else? June 2009 - Dec 2012? Who really cares about someones accuracy during exactly HALF a market cycle? If you were analyzing investment managers using this same type of sampling period bias you would be many times more likely to find managers that would under-perform going forward not outperform. I think the "analysis" here runs the same risk.

Unfortunately, this is being used by the WSJ to support the case for Janet Yellen. And gullible audiences everywhere are likely taking it hook, line and sinker.

What would it look like if they went back further? I'm not sure, but I do know that Janet Yellen was just as foolish as most everyone else currently at the Fed as demonstrated in this article from Feb 21, 2007 

"Janet Yellen, president of the Federal Reserve Bank of San Francisco, is sleeping better than she was a year ago, thanks to signs of stabilization in the housing market."
 "Last year, when it looked like the housing downturn could turn into a bust that risked tipping the broader economy into recession, Yellen said she found it more difficult to sleep."
 "But Yellen said she has noted recent signs of stabilization in the housing market and slim evidence that housing's slowdown has spilled into other parts of the economy."
Yes, in 2006 she had some worries about housing but apparently those went away after housing prices fell a whopping 1.5% before "stabilizing" in early 2007.

And how about the next year? What did she think then? This is from Reuters Feb 8, 2008
"San Francisco Federal Reserve Bank President Janet Yellen said on Thursday that the United States faces several quarters of "anemic" economic growth but will probably not fall into an outright recession."
Yes, that is in February 2008......2 months after the recession already started. And according to the WSJ that is the best forecaster of all Fed members. We have so much to look forward to........

Saturday, July 20, 2013

Valuations of Emerging Markets vs US Stocks

As the US Stock market continues to sing it's own tone, I thought this look at valuations of US Stocks vs Emerging Market stocks was interesting. This is from a conference call presentation from Rob Arnott at PIMCO (all slides here)

Really hard to be tempted by US stocks at these levels, especially with both emerging & even developed international as alternatives considering valuations. Below is another chart from the slides, showing the shorter & longer term returns from various Shiller PEs. Clearly it's a longer-term gauge historically.

Sunday, March 17, 2013

Is This Bull Market Fundamentally Driven? (A Look at PE Expansion)

This post over at The Big Picture Blog which had a listing of Bull markets of 20% or more without a 20% correction got me thinking about Bull Market fundamentals. Some people talk about this bull market being driven by the Fed and not fundamentals (me included). I can easily point at a Shiller PE of 23 to highlight overvaluation but I wanted to look at it another way, so I focused on PE expansion.

Fundamentally driven bull markets should rely more on cyclically adjusted earnings growth and less on investors willingness to pay ever increasing multiples on those earnings. To look into this I decided to focus only on bull markets of 100% or more. I looked at the Starting and Ending Shiller PE using Robert Shiller's online data and updated it with daily pricing data for the important dates (as he only has monthly prices). Then I divided the Bull Market gains by the amount of PE expansion to see how much gains investors were receiving per unit of PE expansion. The results are below, sorted by most fundamentally driven to least fundamentally driven. The results are quite interesting.

Take a look at the 1974-1980 Bull Market compared to today....The magnitude of the advance is similar between the two but the 1974-1980 advance only relied on a PE expansion of 2.2 vs 11.1 today. You will also notice that those that relied least on PE expansion tended to experience smaller subsequent bear markets. The top 5 averaged a bear market loss of 30.4% vs the bottom 4 which averaged a 48.5% loss. If history is any guide people should expect that the next bear market will be deeper then average because this bull market is lacking a fundamental underpinning.

UPDATED: 3/19/2013 - Corrected chart to reflect the proper starting PE of 8.8 for the bull market starting 6/13/1949. However, this did not change the overall ranking of any of the bull markets.

Friday, March 15, 2013

Rally Continues to Reduce GMO's Asset Class Return Forecasts

Investment Management firm GMO is well know for it's Asset Class forecasts it puts out. The continued strong rally in the market has officially moved their 7-year forecast for Large-Cap stocks (S&P 500) into negative territory, joining their negative forecast for Small-Cap stocks, US Bonds, Intl Bonds (hedged), and Inflation Linked Bonds.

You can see below the history of their forecasts. Through time it has shown to be a good general guide.

With so little looking attractive how are they investing their Benchmark Free Allocation Strategy I discussed here?
While this is from 12/31/12 not much has changed except a slight increase to their Equity Risk Premium Strategy (which is a put selling strategy) they are using as a substitute for some equity exposure.

Sunday, February 17, 2013

Performance of Morningstar's New Analyst Ratings For Mutual Funds in 2012

Last year I wrote about Morningstar's new analyst ratings for mutual funds (here as well). These are different from their Star Ratings in the fact that these are meant to be "forward looking". From Morningstar (bold added by me)
"The Analyst Rating is based on the analyst's conviction in the fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. If a fund receives a positive rating of Gold, Silver, or Bronze, it means Morningstar analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years."
Now it should be clear that these ratings are longer-term in nature so take the following breakdown with a grain of salt but I said I would follow-up on these so I am.

First lets start with a review of what the distribution of Morningstar's Analyst Ratings looked like at the start of 2012
While the distribution of ratings has gotten a little better it remains a mystery why Morningstar has an allergic reaction to assigning negative ratings. As of the start of 2013 they have now rated 1069 funds but only 52 (or less then 5%) have negative ratings. Although the neutral ratings have increased to 28%, Bronze to 25%, Silver is down to 24% and Gold down to about 18%.

Without further ado, below is how the rated funds performed in 2012. These only include funds rated at the start of 2012.
Not much really stands out after the first year. While their was a slight positive result for Gold and Silver rated funds, Neutral rated funds did even better. As for Bronze and Negative rated funds, outperformance was pretty much a coin flip.

Below is the Average Rank for each, as you can see Neutral rated funds performed the best and Negatively rated funds performed the worst.

Take this for what it's worth, which at this point is not much because full market cycles are indeed a better measuring stick. For instance, in 1999 and 2006/2007 a lot of bad managers did good thinking the unsustainable was in fact sustainable while a lot of good managers did bad as they realized irrationality when they saw it. However, this is at least a starting point for looking at the performance of these Analyst Ratings.

Monday, November 5, 2012

The Election Results According to Real Money Oddsmakers

Finally the election will come to a close tomorrow with all votes submitted. While we are constantly told who is favored by this poll or that poll you often have to question the sampling methods. That's why I tend to favor the real money oddsmakers because MONEY TALKS!

So what are the oddsmakers saying? While odds may vary slightly place to place, the message seems to be the same......Obama is a MAJOR favorite. Over at Sportsbook.ag you'll see the moneyline odds for an Obama victory is -300 or an implied probability of 75%.

You can see a snapshot of their swing state odds below.  (for those not familiar with moneyline odds you can convert them here). Oddsmakers are only giving Romney Florida and North Carolina.

So what will the final Electoral Map look like according to the oddsmakers?

Looks like a landslide for Obama. Don't agree? Maybe you should put your money where your mouth is and profit (or not)! Personally, I would not throw my money away on Ronmey and actually put money on Obama at -200. He got my bet but neither of them got my vote!

Tuesday, October 30, 2012

Survey Highlights Investors Misguided Beliefs About Republicans

Barclays Research recently released a survey which was highlighted over at Zero Hedge. Apparently, investors in the survey seem to think that an Obama victory will more likely result in a stocks selling off, while a Romney win would result in an increasing stock market (as seen in the chart below from zero hedge).
The most interesting part of the above graph is how FEW see a sell-off under Romney. There seems to be this odd belief, despite the facts, that Republican policies are better for markets. However, history would say otherwise as the chart below shows from CMC Markets going back to 1900.
The stock markets have returned an average annual return of 15.31% with Democrats vs 5.43% with Republicans. Now some may correctly point out that Republican policies have changed over this long time-frame. However, the trend holds over the last 50 years as well as this chart from Janus Funds highlights (link is to their white paper: Market Performance and the Party in Power).
Furthermore, the Barclays survey also highlights how investors think the BOND markets would initially react to a Romney win.....yep they think bonds would sell-off.
Granted the question only refers to the "knee-jerk" reaction, but again, why would the market react this way when history has shown that the BOND markets are what actually has done better during Republican presidencies?  This is also illustrated by the Janus Funds paper as seen below. 
Clearly it is bonds NOT stocks that have done better under Republicans. I think Jeremy Grantham may have addressed investors misguided belief best in a recent interview with Charlie Rose.
"These capitalists who are desperate to elect Republicans should study their history books."         ---Jeremy Grantham
Now, having said all this, I do not actually think it actually matters whether the president is Republican or Democrat. The powers of secular market cycles, valuations and events outside of any presidents control is what truly drives the market. For instance, the S&P 500 was up 26% in 2009, a gain which is attributed to Obama despite the fact that he just took over office. The reality is the market would have bounced off it's lows in 2009 even if McCain was president.....Besides, Democrats and Republicans?? They both push the same agenda in reality......

Wednesday, August 1, 2012

Morningstar Continues Rollout of Analyst Mutual Fund Ratings, Only 7% Negative.

Morningstar has been rolling out it's new "forward looking" analyst ratings for mutual funds since last November as I have touched on before. The number of funds rated has gone from 349 funds to 924 as of the end of the 2nd quarter (You can see the full list as of 6/30/12 here). While it has been good to see the distribution of ratings even out somewhat, Morningstar still appears to have an allergic reaction to rating funds "negative" as can be seen below.

As a reminder about the meaning of the ratings, per Morningstar....
"The Analyst Rating is based on the analyst's conviction in the fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. If a fund receives a positive rating of Gold, Silver, or Bronze, it means Morningstar analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years."
After reading that you might assume that anything rated gold, silver or bronze is a fund Morningstar analysts think will provide risk-adjusted outperformance compared to a relevant benchmark over a full market cycle of atleast 5 years. Apparently not......as can be seen by the majority of ratings given to 29 index funds. Obviously you could not expect an index fund to outperform it's relevant benchmark....after all, index funds are designed to REPLICATE their relevant benchmark. So they should generally perform in line with the benchmark, minus fees. The best an index fund can hope to do is meet Morningstar's definition of neutral "Fund that isn’t likely to deliver standout returns, but also isn’t likely to significantly underperform".

Despite the fact that by their very nature index funds can't be expected to outperform their relevant benchmark, of the 29 index funds Morningstar rated, the ratings breakdown as follows: 14 Gold, 9 Silver, 3 Bronze, 2 Neutral, 1 Negative. It is true that the majority of actively managed mutual funds underperform their benchmarks as can be seen below (you can see more in S&P's Indicies vs Active Report). However, the reality is index funds always underperform their benchmarks! (unless a sampling error works in their favor).
However, what Morningstar should take away from the above info is not that index funds deserve metal ratings, what they should take away is that they need to be much more stingy in giving away Gold, Silver & Bronze....because the majority of mutual funds, ACTIVE & PASSIVE, underperform their benchmarks! If everyone knew that metal ratings only meant they would perform like their benchmark I doubt anyone would care for that information, yet Morningstar thinks that is exactly what they should do.

Sunday, June 17, 2012

Global Cost of Living Comparisons

Mercer LLC released it's 2012 cost of living survey which compares the cost of living in different cities for US expatriates. As they describe below:
"Mercer's Cost of Living rankings are released annually and measure the comparative cost of living for expatriates in 214 major cities. We compare the cost of over 200 items in each location, including housing, transport, food, clothing, household goods and entertainment. We use New York City as the base city for the rankings and the US dollar as the base currency. 
Two main factors determine a city's position in Mercer's Cost of Living rankings: 
1. the relative strength of the relevant currency against the US dollar in the 12 months between ranking (March 2011 to March 2012 in this case); and   
2. price movements over the 12 month-period compared to those in New York City as the base."
The below infographic is not in order but is a sampling of the different cities. The top 50 most expensive cities can be seen here.
(hover over and click enlarge to make bigger. Or click here if does not work)

Friday, June 8, 2012

Motifs: A Lower Cost, Customizable Alternative to ETFs?

An interesting startup launched on June 4th called Motif Investing. The idea behind this new online brokerage is that people can buy baskets of up to 30 stocks (Motifs) centered around specific themes for a single charge of only $9.95 (about what sites like E-Trade charge to buy 1 stock).

However, what makes the concept interesting is the customization of these Motifs. Before buying the "Motif" you can alter the stock weightings or completely delete or add stocks for no additional cost -- as long as these changes are made before buying the Motif. Otherwise they charge $4.95 to sell a stock or add to a stock in a Motif you already own. But if you want to sell the entire basket of stocks in the Motif it's just $9.95.

In essence, these Motifs are like ETFs but customizable to your particular preferences and WITHOUT the ongoing fees charged by ETFs. Don't want Bank of America in the Motif? Take it out. Don't like that Apple is such a large weighting in a Tech related Motif? Reduce it's weighting.

The site currently has 53 different pre-made Motifs with many more coming. While these are fully customizable, they also plan on allowing users to generate their own motives from scratch and, according to Forbes, these will include long-short portfolios (although I question the logistics of that). Also for an additional fee you’ll be able to harvest tax losses in these Motifs and then reinvest 31 days later, avoiding the wash-sale rules.

You can search for Motifs by Idea Type -- such as megatrends (pictured below)

Or Model Based (as well as many other ways)

Here is an example of the "Income Inequality" Motif. A combination of Luxury and Discount retailers.

Or their "Guns, Guards and Gates" Motif

While their pre-made Motifs are interesting. I think the power comes with the customization. The minimum for each Motif is $250 (miniumum account size is 1K or 2K for margin).

This will be interesting to see how this pans out. I think it is a great concept.....only I think this will prove to be a very "interesting" time to launch (they might want to speed up the implimentation of those long-short portfolios lol). This is a very innovative concept and as long as individual investors can control their behavioral biases (theme based investing can be very dangerous) -- I think this can be very good tool for investors.

Monday, May 28, 2012

Everyone Is Ready For Greek Exit From Euro, What's The Hold Up?

I'm so tired of hearing about Greece I seriously considered not even making this post. But it is amazing how European officials continue to delay and deny the inevitable Greek exit from the Euro. Despite the denials of the inevitable, plans continue to be put in place for this eventuality. I discussed this briefly in my post in January "The List of Companies & Governments Preparing for Euro Breakup Grows". This list is only growing....

This list now officially includes De La Rue. Here is the description of De La Rue via their website.
"the world’s largest integrated commercial security printer and papermaker, De La Rue is a trusted partner of governments, central banks, issuing authorities and commercial organisations around the world.
The Group is involved in the design and production of over 150 national currencies and a wide range of security documents including passports, driving licences, authentication labels and tax stamps. In addition, the Group manufactures sophisticated, high speed, cash sorting equipment."
  As reported May 18th by Reuters:
"De La Rue (DLAR.L) has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source told Reuters on Friday."
The Wall Street Journal also touched on it "From a Greek Drama to a Greek Drachma?"  (May 18th)
"...it emerged Friday that De La Rue, the U.K.-based banknote printer, has discreetly started to prepare for the revival of the drachma (or an alternative currency).
An industry participant, who confirmed a report in Friday’s Times of London, stresses that the development is driven by De La Rue itself for its own commercial reasons, as opposed to it being the result of a direct request from the Bank of Greece or any other government agency.
[The Bank of Greece has repeatedly declined to respond to questions as to whether it is preparing a contingency on banknotes and Friday again declined to respond.]"
Also, as reported today by Reuters "Insight: European firms plan for Greek unrest and euro exit" some specific companies making preparations also include

  • Drugmakers GlaxoSmithKline and Roche
  • Europe's No 2 electrical retailer Dixons
  • Diageo the world's biggest spirits group
  • BMW
  • Mobile phone giant Vodafone
Per Reuters:
"British electrical retailer Dixons (DXNS.L: Quote) has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot."
 "As the financial crisis in Greece worsens, companies are getting ready for everything from social unrest to a complete meltdown of the financial system.
Those preparations include sweeping cash out of Greece every night, cutting debts, weeding out badly paying customers and readying for a switch to a new Greek drachma if the country is forced to abandon the euro"
"The London-based Association of Corporate Treasurers says businesses should take precautions such as demanding cash on delivery and writing sales contracts in another currency such as pounds or dollars."
Add to this list Lloyd's of London. As reported by the The Guardian:
"The Lloyd's of London insurance market has reduced its exposure "as much as possible" to the crisis-hit euro zone in preparation for a collapse of the bloc's single currency, its chief executive told the Sunday Telegraph newspaper."
""I don't think that if Greece exited the euro it would lead to the collapse of the euro zone but what we need to do is prepare for that eventuality," he said."
"On Wednesday, Reuters reported that each euro zone country was preparing a contingency plan for the eventuality of Greece leaving the single currency."
And add HSBC as The Independent reports:
"HSBC has set out contingency plans for all its 15 Greek branches to cope with a return of the drachma.  
Iain Mackay, HSBC finance director, said it had made "preparations at multiple levels" to cope with the currency's re-emergence from an 11-year hibernation should Greece leave the euro. The bank has already reduced its exposure to Greece but has also trained staff at its branch network to be ready should the worst happen. This includes work to manage IT systems, branch funding, how to deal with customers and how to update ATM systems to dispense drachmas."
So why is everyone making all these plans when the president of the Eurogroup, Jean-Claude Juncker, said that talk of a Greek exit was "nonsense, propaganda" and that their "working assumption is that Greece will stay as a member of the euro area."? Oh, I don't know......Maybe because this is the same Jean-Claude Juncker who said that "When it becomes serious, you have to lie" as can also be seen in the video below. Very bad audio but you can clearly hear it at the 20sec mark.
Everyone has had plenty of time to prepare for a Greek exit from the Euro. It is time to implement the 13 Steps For A Greek Exit From The Euro. The more denials, the more can kicking, the more money wasted delaying the inevitable.

Friday, May 11, 2012

Why Is Barron's More Bullish Online Than in Print? (Picks & Pans Breakdown)

Barron's keeps track of its stock "picks and pans" going back to 2007. Barron's defines and tracks those picks as follows:
"This feature tracks the performance of stocks Barron's has written about -- both favorably and critically. For stocks featured in Barron's print magazine, prices are measured from the Friday before publication date to their current price. For stocks featured on Barrons.com, prices are measured from the trading day of publication date to their current price. This list includes U.S. stocks only, including ADRs, but not foreign stocks."
On some occasions I have found these picks also include ETFs. However, what I found interesting when browsing this list is the ratio of bullish picks to bearish picks. Both the magazine and online feature much more bullish picks than bearish picks, and I guess that makes sense...people in general like to hear about opportunities rather than risks (and their average reader probably doesn't short to a great degree). But the most interesting thing was how much more bullish Barron's was online than in print.

As you can see in the chart below, in Barron's magazine they wrote about 4 stocks favorably for every 1 stock they wrote about critically. However, online that ratio jumped up to 7.5 to 1.
Since 2007, Barron's documented 718 stocks which they wrote about in their magazine either "favorably" or "critically" (they categorize them as bullish or bearish). Only 144 were "bearish". Meanwhile,they documented a total of 782 stocks online.....but only 92 of those were "bearish". You can see below how this disparity has grown over the last 3 years (only in 2009 was the magazine more bullish than online). Of the 42 online picks since 2011...only 2 were "bearish" and there have been none this year.


Barron's is often bullish with it's stock picks -- especially online. However, it's track record would indicate that it is only their bearish picks -- and ONLY those featured in their magazine which tend to more consistently pan out. That is completely the opposite of their bearish picks online -- those stocks you would usually be better of buying (note that in 2011 they only made 2 bearish picks online and while they were correct on Japan they got killed on Monster "MNST")
Interestingly, this same general pattern holds shorter-term. Barron's also measures the performance of the picks from the time of the pick until the end of the year in which they made the pick. For instance, if it was picked today it would measure it's performance until 12/31/12. So some picks are being measured up to a year and some possibly as short as a few days.
So both short and long-term the story appears to be that Barron's bullish picks are a coin toss (or worse), while their critical thoughts on stocks in the magazine might be worth heeding, whereas their critical thoughts expressed online might well be a contrarian indicator! So I guess the question is why the huge difference in their bearish picks online vs the magazine?

Wednesday, April 25, 2012

My 3 Favorite Mutual Fund Managers for Navigating the Market Going Forward

The mutual fund world has no shortage of managers. But when it comes to finding managers which have a rock solid understanding of market history, a real grasp of the true drivers of long-term investment returns, a strategy for capturing those returns over time, an eye for avoiding market fallacies that lead the herd and most importantly -- know what it means to be stewards of Other People's Money. Well, that list is much shorter.

Most of the investment landscape is filled with products in a race of relative performance. It is rarely about making decisions to maximize long-term returns. Too often it is only about making decisions to outperform some index -- without making any decisions that might lead to temporarily underperforming that index, even when it is the best long-term decision. Therefore, it is a world of closet indexers and many of those who don't closet index still wouldn't dare be anything other than 100% invested.

While there are some very good managers who only manage funds with less flexible investment mandates, my purpose here is to highlight my 3 favorite mutual fund managers with the flexibility for navigating the markets . This isn't about past performance -- these are the managers I would feel most comfortable allowing to manage my money over the next full market cycle for the reasons described at the start of this post. Is it subjective? Of Course! This is MY list (and in no particular order).

Rob Arnott (Pimco All Asset and Pimco All Asset All Authority)

At Pimco essentially everything is managed "in-house". That is except for these 2 funds sub-advised by Rob Arnott of Research affiliates. These are tactical asset allocation strategies and the only limitation for Rob is that he must use Pimco Funds and abide by these very loose guidelines.
Rob Arnott is a great "big picture" guy and truly understands valuation. He is also well known for his fundamental indexes.

John Hussman (Hussman Strategic Growth)


This is not Hussman's only fund but it is his flagship fund and where he has the majority of his own investable assets. Hussman invests the portfolio like a traditional equity fund and then "hedges" using index options and futures based on his outlook for the market in general -- which has resulted in a highly hedged stance most of the time.

Someone might look at his performance year-to-date (-6.8%) while the market is up 11.1% or point to his performance over most of the rally since 2009 and think I'm crazy. Hussman is catching a lot of flak recently and you can see his response in one of his commentaries from February "Notes on Risk Management - Warts and All". But as I said before -- this isn't a backward looking list of my favorite mutual fund managers.  

There aren't many that understand the drivers of long-term returns more than Hussman and I think his ability to stay true to his strategy will prove out in the long run (the next full market cycle). Even if you don't invest in his fund, his weekly commentaries are always worth the read.

Ben Inker (GMO Benchmark-Free Allocation and Wells Fargo Advantage Absolute Return)

This is less a story just about Ben Inker himself and more about all the people at GMO including Jeremy Grantham and a more recent addition of James Montier. It is a good meeting of the minds there at GMO and their Asset Allocation Team.

The GMO Benchmark-Free Allocation Fund is actually not open but they started a distribution agreement with Wells Fargo in March. Therefore the strategy can be accessed in mutual fund format through the Wells Fargo Advantage Absolute Return Fund. I personally like the GMO name for the fund better -- but I am assuming for marketing reasons Wells Fargo chose the "Absolute Return" name. I am personally not a fan of most "Absolute Return funds" I see in the market, as most are nothing more than a giant ball of derivatives (but that's another story). 

Wells Fargo already had a fund (Wells Fargo Advantage Asset Allocation) sub-advised by GMO but the investment mandate did not give GMO very much flexibility in the allocation. You can see the difference this flexibility made below.

Jeremy Grantham talks about the advantages of flexible investment mandates, as well as the "career risk" it introduces in GMO's most recent quarterly letter (definitely worth the read).

There you have it!

It is important to remember this is not my 3 favorite managers for the next month, or the next year. These are my favorite mutual fund managers for the next full market cycle. Some will perform better than others during different parts of the cycle. For instance, if the market were to begin falling tomorrow, based on current positioning, I would expect John Hussman's Strategic Growth to perform best, then Rob Arnott's All Asset Strategy (either one), then Ben Inker's Benchmark-Free strategy. And obviously opposite if it continued up.

Friday, April 20, 2012

20 Largest Private Companies in the U.S.

Here is a look at the 20 largest private companies in the U.S.

Interesting how many of them (8 of the 20) are in some way highly involved in food -- Cargill, MARS, Publix, C&S Wholesale Grocers, US Foods, H-E-B, Meijer and Reyes Holdings (and although not grouped as such below, you could arguably add Love's Travel Stops, Pilot Travel Centers and Aramark to that group -- bringing it to 11 of the 20). Think any of these will go pubic?

Click image to enlarge

by hightable. Browse more infographics.

Friday, April 13, 2012

Sheila Bair's Humorous & Sadly Ironic Rant

Usually this is something I would just post on Facebook or retweet on Twitter but this from Sheila Bair (formerly from the FDIC) I just had to post for those that may only follow my blog. Funny and sadly ironic -- definitely check out the whole thing here "Fix income inequality with $10 million loans for everyone!" .

Here is a piece from the Washington Post....
"For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.
So why not let everyone participate?
Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)"
and some more.....
"Some may worry about inflation and long-term stability under my proposal. I say they lack faith in our country. So what if it cost 50 billion marks to mail a letter when the German central bank tried printing money to pay idle workers in 1923? 
That couldn’t happen here. This is America. Why should hedge funds and big financial institutions get all the goodies?  
Anyway, check out the whole thing .

Sorry, only the Fed and their friends at the banks get free money. Can't let that money get out to the general public -- That's inflationary! Gotta bailout only a select group of people so not too much of that money gets out into the general economy....that way inflation stays where they want it.....in asset prices.....

Wednesday, April 4, 2012

The Lovely World of S&P Analyst Price Targets

If you want a good chuckle you can always turn to a S&P stock report. Take for example their recent research report on Netflix. Right there at the top of the report they blessed the stock with a "Buy" rating and slapped a 12-month price target of $135 on it. Who can complain with a 17% gain? Looks like it's time to buy!

Oh wait, what is this on page 3?

Gotta love it! So on the one hand their analyst is saying 'Buy" because with a price target of $135 it is 17% undervalued. Then your later being told that, by the way, our "proprietary quantitative model" says you should lose about 42% listening to that Analyst.

This isn't some one-off thing, in fact, it is amazingly common. How about Boeing? Looks like another buy! Price Target $86. Not a bad 16% gain.
Oh wait......

Sorry, S&P actually says you should lose 27%.

So how about something your not being told to buy? Chipotle...
Don't worry, your not the only person wondering why something has a "Hold" rating when it's price target is 11% lower. However, to the analysts credit the "hold" rating was put on when it was trading at $378 (but don't give too much credit -- why is he recommending to hold something he thinks should go down in price?)

Worse yet, not only does the analyst think it's overvalued but so does S&P's "fair value calculation". By 30% in fact. Yet still no "Sell" rating?
I think you get my point......These "Price Target's" are pure humor. And as you may have guessed, the corresponding star ratings provide nothing useful in performance -- and actually have detracted as you can see in the below performance of their "All Stars" basket of stocks vs the regular S&P 500.


You gotta love these "useful" price targets!

Friday, March 16, 2012

It's Official! "It Is Ridiculous To Be Bearish"!

It's official everybody! "it is ridiculous to be bearish". If you didn't know, now you know! At least that's what Thomas Lee, chief equity strategist at JPMorgan says according to USA Today:
"Stocks are levitating like a balloon" adds Thomas Lee, chief equity strategist at JPMorgan. With stocks undervalued, underowned and cash-rich U.S. companies strong, "it is ridiculous to be bearish," says Lee, adding that the S&P could even take out its record high of 1565.15, set in October 2007."
Now that the S&P 500 (at 1403) is approaching Thomas Lee's original target (1430) for 2012, the "non-ridiculous" equity strategist needs to raise his target, it "could even take out it's record high of 1565". After all, how is JP Morgan gonna sell everyone stocks if their equity strategist doesn't say stocks are going higher?
Thomas had essentially the exact same forecast last year. And, yes, on the very day (April 29th) that markets peaked last year (at 1363) he came out with an increase to his forecast to 1475. At which point the market preceded to fall 19% and finish the year where it started. But seriously everyone, "It is ridiculous to be bearish". 

I mean, you have to be crazy! This guy knows cheap when he sees it. Just look at what he was saying in June 2008 when the S&P 500 was (interestingly enough) at 1360. According to bloomberg:
"The biggest rise in the unemployment rate since 1986 is an ``aberration'' and investors who sold equities today are ``completely misreading'' the outlook for economic growth, according to JPMorgan Chase & Co."
The Dow Jones Industrial Average fell as much as 412 points today after the Labor Department said the jobless rate increased by half a percentage point to 5.5 percent, the highest since October 2004, as an influx of students into the workforce drove the biggest jump in teenage unemployment since at least 1948.
``The surge in unemployment is probably an aberration,'' Thomas J. Lee, the New York-based chief U.S. equity strategist at JPMorgan, said in an interview. ``It's not because there were fewer jobs, it's because there were more people looking for jobs. Stocks are completely misreading the situation.''  
Ya, the surge in unemployment to 5.5% was an aberration. Mish Shedlock over at his blog even called him out at the time in his post "aberration in clear thinking by JP Morgan". So what was Thomas Lee's projection given this "aberration"?
"The strategist said the Dow industrials posted a 30 percent average gain in the 12 months following a jump in the unemployment rate by half a point or more since 1950. A rise in joblessness of that magnitude has occurred 16 times during that period, he said."
"Lee expects the Standard & Poor's 500 Index to climb to 1,450 by the end of this year, according to a Bloomberg News survey on June 2."
The market eventually bottomed 54% below his target. But on the bright side, his target is now less than 50 points away........almost 4 years later.

The reality is it's "ridiculous" to not realize that valuations are NOT cheap EXPENSIVE based on measures that actually have a correlation to longer-term returns. As illustrated in this chart from Doug Short.
I think this is a better representation of expected longer-term returns (chart represents "real" inflation adjusted returns)
Or possibly this, as shown by John Hussman in "Warning: A New Who's Who of Awful Times to Invest"
Can markets go higher? Of course, they always can. But bull markets don't start at a PE10 ratio of 22 (but many losses have resulted from these levels). And the only thing that would be "ridiculous" would be taking this guy seriously. Clearly, his target will always be "higher".