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.