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.