More on Related Themes
2014-04-17 Ukrainian Crisis: Should Investors Avoid the Russian Stock Market? by Philip Lawton and Noah Beck of Research Affiliates
This is neither to treat the profoundly worrisome crisis in Eastern Europe cavalierly nor to advocate profiting, however indirectly, from the distress of Ukraine, a sovereign nation whose people have suffered horribly over the last three-quarters of a century. It is merely to caution international investors that, from a strictly financial perspective, withdrawing assets from Russia might not be the right move.
2014-04-11 Can You Have Your Cake and Eat It Too? by David Braun, David Holdreith of PIMCO
Many insurers would like to optimize both total return and book yield income, which may be seen as competing and divergent goals. In fact many insurers fall somewhere on the spectrum between these goals or shift their objective based on business and market conditions. While it has long been an accepted practice to track manager performance with regard to total return, tracking book income has been more elusive: PIMCO has an innovative and unique solution to help manager’s track alpha generated by active managers.
2014-04-02 Gain International Exposure with Small-Caps by David Nadel of The Royce Funds
Portfolio Manager and Director of International Research David Nadel discusses our attraction to international small-caps, how our investment approach translates into the international small-cap universe, how we try to avoid value traps, the effect monetary policy has had on our approach and performance, and more.
2014-03-26 Striking a Balance: Risks and Opportunities in Emerging Market Debt? by Francesc Balcells, Anton Dombrovsky of PIMCO
?We believe the risk of a full crisis in emerging markets is greatly diminished as the initial conditions of such economies nowadays are quite different. Although there are vulnerable credits out there, the mark-to-market volatility in the financially strong emerging market economies can present advantages as longer-term fundamentals reassert themselves. By monitoring key triggers and employing a differentiated investment approach, investors may be able to take advantage of attractive valuations in emerging market debt. ?
2014-03-14 Dangerous Assumptions for Retirees by Rob Isbitts of Sungarden Investment Research
One of the main difficulties with MPT, is that by focusing on historical data to calculate asset allocation, it completely ignores extreme risk (2007-2008).
2014-03-13 The New Face of Failure by Liam Molloy, Charlie Mas of Galway Investment Strategy
A strong year in the domestic stock market - like we saw in 2013 - can create overconfidence in investors, which, in turn, leads them to make a number of predictable errors in judgment.
2014-03-11 How Can You Find an Expert Whose Decisions You Can Trust? by Jerry Wagner of Flexible Plan Investments
Recently a family member visited the doctor to determine if she needed her gall bladder removed. Since she’d been having some pain, we assumed the answer would be “yes.” But, of course, we wanted an expert opinion, so we went to a surgeon that has done more than 6,000 removals.
2014-03-04 A Century of Policy Mistakes by Niels Jensen of Absolute Return Partners
A century ago Argentina ranked as one of the wealthiest countries in world. Today it is a shadow of its former self. A long string of policy errors explain the long slide from riches to rags. Europe, like Argentina 100 years ago, is facing enormous challenges - as well as potential pitfalls - and the management of those challenges will define the welfare path for many years to come. Unfortunately, the early signs are not good. Our political leaders, afraid to face public condemnation, have so far chosen to ignore them.
2014-03-03 Casting a Wide Asset Net in a Volatile Sea by Ed Perks of Franklin Templeton
It’s fair to say that investors will likely never be fully comfortable with market volatility. But actively managing the inevitable bumps that accompany equity investments, even in bull markets, can help make the ride a little less harrowing, according to Ed Perks, executive vice president and director of Portfolio Management, Franklin Equity Group®. He explains how understanding the fundamental dynamics behind market selloffs is key to uncovering potential opportunities in the face of a rough market ride.
2014-03-01 Black Swans and Endogenous Uncertainty by John Mauldin of Millennium Wave Advisors
John is in Florida and feeling a bit under the weather, so this week we’re bringing back one of his most popular letters, from December 2007. In the letter he discusses the work of Professor Graciela Chichilnisky of Columbia University, one of whose key insights is that the greater the number of connections within an economic network, the more the system is at risk. Given the current macroeconomic environment, it is important to remind ourselves of how complacent we were back in 2007 and how it all fell apart so quickly, just as John outlined in this rather prescient piece.
2014-02-07 2013 Year-End Investment Commentary by Team of Litman Gregory
We find ourselves with a more sanguine big-picture view, at least over the nearer term, than we have had in some time. U.S. and global economic fundamentals gradually improved over the past year across a number of dimensions, and seem poised for continued improvement or at least stability in 2014. However, as we look ahead, the longer-term risks related to excessive global debt, subpar growth, and unprecedented government policy that we have worried about since the aftermath of the 2008 financial crisis still remain largely unresolved.
2014-02-05 This Just In: The Secular Bear Market May Be About to Resume. by Martin Pring of Pring Turner Capital Group
In our 2012 book, Investing in the Second Lost Decade we laid out the case for the secular bear market in equities lasting at least through the end of the decade. Since then prices of most averages have moved to all-time highs. It’s time to throw in the towel on the secular bear market for stocks...right?
2014-02-04 Short-Term Trends Can Have Long-Term Consequences by Dawn Bennett of Bennett Group Financial Services
There are short-term trends that can have implications for the long-term investor’s investment portfolios. The first trend and outcome for 2014 is Americans are earning less and have less money to spend.
2014-02-04 Challenging the Consensus by Niels Jensen of Absolute Return Partners
Investors are overwhelmingly bearish on bonds going into 2014. In this month’s Absolute Return Letter we challenge that view and look at various reasons why the bond market may surprise most people and deliver a positive return this year.
2014-01-31 The Super Bowl of Investing by Robert Isbitts of Sungarden Investment Research
Here is our list of official National Football League penalties - as applied to investors. Don’t get penalized, think your way through today’s environment, or find a money management specialist who can.
2014-01-27 Rummaging for Yield - The Case of the Insurance Investor by Eugene Dimitriou of PIMCO
Since the height of the global financial crisis in 2008, insurance companies have faced three key challenges: First, insurance companies urgently needed to address new critical risk management issues as banking sector and peripheral sovereign credit risks significantly increased in Europe. Second, the prospects of longer-term low yields forced insurers to identify alternative sources of meaningful yield. And third, insurance companies needed to prepare for pan-European insurance regulation Solvency II.
2014-01-25 Wealth Services at Banks Come Under Central Bank\'s Scanner by Rajat Dhar of Cogent Advisory
RBI, the central bank of India, made critical observations of way in which wealth services were being practised at banks. Also, the clear note was made with respect to the rising cases of misselling at banks. This market commentary covers the draft guidelines issued by RBi and tries to uncover the reason for the same and the way forward for the clients. This has been the first time ever that separate guidelines have come for banks and independent financial advisors or advisory firms in India; and this article covers the wealth services being offered by banks in India.
2014-01-14 The Financial Fire Next Time by Robert Shiller of Project Syndicate
Just as most people are more interested in stories about fires than they are in the chemistry of fire retardants, they are more interested in stories about financial crashes than they are in the measures needed to prevent them. That is not exactly a recipe for a happy ending.
2014-01-10 Risk Management: The Ability to Say No by Heather Rupp of AdvisorShares
Heather Rupp, Director of Research for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD), discusses the advantages of active management when it comes to credit risk.
2014-01-10 The Leverage Buyout Overhang by Heather Rupp of AdvisorShares
While we are not opposed to leveraged buyouts, as they can often produce very supportive private equity partners, what does concern us is when the capital structure is levered up to a potentially unsustainable level due to these buyouts or large dividends to equity sponsors.
2013-12-31 Tech Bubble Circa 1999, or Something Different? by J.P. Scandalios of Franklin Templeton
Technology sector stocks have been investor favorites in 2013, pushing the tech-heavy Nasdaq Composite Index to its highest level since 1999 and drawing comparisons to the "dot com" bubble which burst soon thereafter. Will we see a redux of the tech bust in 2014? John P. Scandalios doesn’t think so. Investor fever for anything "dot com" in the late 1990s was built more on promise than actual results.
2013-12-30 Weighing the Week Ahead: How Should Investors Judge the Prospects for 2014? by Jeff Miller of New Arc Investments
Sometimes the calendar of news and events makes it easy to predict what will grab our attention in the week ahead. In the last few weeks leading up to the Fed tapering announcement, I highlighted the following.
2013-12-27 The Risk Tolerance Paradox....And What You Can Do About It by Ken Mungan, Matt Kaufman of Milliman Financial Risk Management
The risk tolerance level many investors expect to achieve over the long-term rarely equals the same tolerance investors actually experience over shorter periods. This paper provides a brief introduction to this paradox, explores the main reason we think it exists, and introduces a risk management strategy that seeks to solve the problem.
2013-12-26 Creating a Reliable Lifetime Income by Ken Mungan of Milliman Financial Risk Management
With the baby boomer generation rolling into retirement, financial advisors have been faced with increased demand to assist with retirement income planning. As the financial advisory community struggles to address this demand, advisors are realizing that their traditional planning techniques must improve. In this white paper, we analyze the problem of providing a reliable lifetime income. We compare several approaches and demonstrate that risk management is a key element to a successful investor outcome.
2013-11-05 Stormy Weather by David Wismer of Flexible Plan Investments
Young and old alike celebrated Halloween last week, albeit in soggy fashion in much of the nation.
2013-11-01 Risk Management: An Ounce of Prevention by Seth Masters, Daniel Loewy, Martin Atkin of AllianceBernstein
They say an ounce of prevention is worth a pound of cure. But if the sickness is excessive portfolio volatility, “prevention” can entail more than one step.
2013-10-23 What a Yellen Fed Could Mean for Interest Rates by Zach Pandl of Columbia Management
A major question among investors after Janet Yellen’s nomination for Fed Chair is whether she will be too soft on inflation. Part of Yellen’s dovish reputation stems from a debate among the FOMC in July 1996, in which she warned the committee about the risks of pushing inflation too low. With the passage of time, however, the views Yellen expressed at that meeting now come across as very sensible. Indeed, today they would be considered uncontroversial among most economists. In reality Yellen is closer to the Fed consensus on inflation than her reputation in markets would suggest.
2013-10-22 Washington Strikes a No-Surprise Deal - Now What? by Sam Wardwell of Pioneer Investments
Congress called a time-out in the budget/debt fight last week, striking a deal to avoid default and fund the U.S. government through January 15, 2014 and raise the debt limit through February 7, 2014. While the parties agreed to budget talks, they did not commit to reaching an agreement (technically, Paul Ryan and Patty Murray, the House and Senate budget committee chairs will begin a process of fiscal negotiations, due to wrap up by mid-December).
2013-10-15 Equity Markets to Congress: “What, me worry?” by Sam Wardwell of Pioneer Investments
President Obama said he was willing to have discussions, though he said he wouldn’t engage in negotiations. (Comment: I guess it depends of what the meaning of "is" is.) So far, those discussions haven’t produced a deal, but at least they’ve started talking.
2013-10-09 Getting Serious About Investing Responsibly by Luke Spajic, Josh Olazabal of PIMCO
To date, much of ESG-related investing has focused on negative screening, but we believe there is a better approach. This approach rests on three pillars: identifying and analyzing key ESG issues facing a given investment sector, engaging with the issuers of securities, and supporting the development of markets for ESG investments.
2013-10-01 The Eight Principles of Value Investing by Scott Clemons and Michael Kim (Article)
In any environment, but especially one characterized by uncertainty, eight principles of investing are critical. These bedrock beliefs help guide our thinking at the levels of asset allocation, security selection and identification of the third-party managers we engage to help manage our clients’ assets.
2013-09-24 ENERGY MLPs: A Suitable and Sustainable Asset Class by Sponsored Content from ClearBridge Investments (Article)
Key Takeaways: MLPs have provided income with little correlation to other asset classes and little sensitivity to interest rates, commodity prices or economic cycles. The market for MLP stocks has expanded greatly and offers liquidity which appeals to long-term institutional investors. The renaissance in U.S. energy production is driving sustainable growth in the infrastructure that MLPs own and operate
2013-09-23 Happy Anniversary? Perspectives on the Financial Crisis Five Years Later by Nanette Abuhoff Jacobson of Hartford Funds
Since 2008, there’s been slow but steady improvement in the global economypolicy makers’ unconventional tools have helped stabilize ﬁnancial markets and bought time for economies to rebalance. Expectations are too low for developed-market growth and inﬂation, in our view. As such, we think this environment will be positive for developed-equity marketsparticularly in Europe and Japan.
2013-09-04 Money and Savings? by Jeffrey Saut of Raymond James
I spoke to Ben Stein (American actor, writer, lawyer, and commentator on political and economic issues) a few weeks ago, and his parents sound a lot like my grandparents. My grandparents, and their peers, were just starting out in life during the depression. After experiencing those horrible economic times, saving for a rainy day became second nature.
2013-08-20 Letters to the Editor by Various (Article)
A reader responds to Bob Veres’ article, Envisioning the Planning Firm of the Future, which appeared last week. A reader responds to Dan Richards’ article, How to Fix the Flaws in Financial Planning, which appeared on July 30, and a reader responds to Bob Veres’ article, The Price You Pay for Poor Management, which appeared on July 23.
2013-08-15 Correlation and Portfolio Construction by Dean Curnutt of Macro Risk Advisors
We review recent periods of financial market stress, which bring about elevated levels of asset volatility and during which investors are vulnerable to incurring substantial loss of capital. We illustrate that risk is determined both by the volatility of individual investments in a portfolio and the degree to which they are correlated. Often overlooked, correlation is a critical factor. Because assets become more correlated at the same time they become more volatile, we argue that the benefits of diversification often are difficult to achieve when they are most needed.
2013-08-08 Market Melt-Up Catches Defensive Investors by Surprise by Douglas Cote of ING Investment Management
Extraordinary returns in the fourth year of a bull market remind us that long-term defensiveness can’t be rationalized. July saw remarkable returns across global equity and fixed income markets, with the exception of U.S. Treasuries. Investors would be well served to ignore media drama and fear mongering and simply follow the fundamentals. Five years spent worrying about Armageddon is too long, but there’s still time to get back to a normal allocation.
2013-08-08 What is Risk? by Chris Engelman of Cedar Hill Associates
There are no rewards from investing without some measure of risk. Risk management, a process for recognizing, assessing and prioritizing a variety of risks, is an essential part of managing a portfolio successfully. Cedar Hill takes a holistic approach to risk management by identifying each client’s objectives, preferences and constraints, then creating specific asset allocation and implementation strategies to minimize the effects of negative events.
2013-08-02 The Shariah Appeal by Mark Mobius of Franklin Templeton Investments
For some, the only guiding rule they have for investing is to grow their assets. For others, the rules are more complicated. Specifically in the Muslim world, demand has been growing for investments compliant with Islamic law (Sharia or Shariah) which adhere to a set of religious beliefs and principles. Considering the global Muslim population is expected to grow to 2.2 billion by 2030, representing more than a third of the world’s total population1, I expect rising demand for Shariah-compliant investment vehicles to continue.
2013-08-01 Alternatives for Today's and Tomorrow's Market Challenges by Jennifer Bridwell, Sabrina Callin of PIMCO
Investors should consider alternative investment strategies, which could enhance diversification and the potential for alpha, or risk-adjusted returns, because returns from traditional asset classes in coming years may be lower and more volatile than those realized historically.
2013-07-31 The Context of Price by Pamela Rosenau of HighTower Advisors
While the stock market has enjoyed a recent rally, some investors are experiencing some “weakness in the knees” as they continue to ascend the climb. These new all-time highs in the market compound the problem for some investors as they suffer from the recency effect, or the not-too-distant memory of significant market losses.
2013-07-30 Economic & Capital Market Summary by Gregory Hahn of Winthrop Capital Management
We are approaching the five year anniversary of the beginning of the Financial Crisis. By this time in 2008 we had already experienced the complete seizure of the Auction Rate Preferred securities market and the takeover of Bear Stearns by JP Morgan Chase. In August of 2008, we would see the collapse of Lehman Brothers and the government takeover of AIG. We stand here today, shoulders slumped, and heads bowed mourning the lack of real progress in addressing the structural problems that are impeding sustained economic growth and private credit expansion.
2013-07-23 More Summer Storms? by Jerry Wagner of Flexible Plan Investments
don’t know about your part of the country but I think this summer has been the wettest in some time around Detroit. We have had soooo much rain. Our Great Lakes began the year well below their long-term average depth. After months of rain, all of the Great Lakes are now above their levels from last year, and nearby Lake Ontario has gained ten inches in height in just the last month. Ontario is 11″ higher than one year ago and 5″ ABOVE the century average. Yet its previous below average condition had existed for years and had been worsening quite a change!
2013-07-17 The Bernanke Guessing Game by David Wismer of Flexible Plan Investments
There can be little doubt that US equity markets have become more dependent than ever, at least in the short-term, on the every utterance of Fed Chairman Ben Bernanke and his fellow FOMC members.
2013-07-16 Nassim Nicholas Taleb: To Prevail in an Uncertain World, Get Convex by Laurence B. Siegel (Article)
Investment professionals know the value of a convex bond – it gains more from falling rates than it loses from rising ones. According to Nassim Nicholas Taleb, people and institutions can and should position themselves to be convex. Indeed, they should be antifragile – ready to gain from disorder or uncertainty.
2013-07-10 Rising Rate: Challenge and Opportunity by Gibson Smith, Lindsay Bernum of Janus Capital Group
While the prospect of rising interest rates generally strikes fear into the hearts of fixed income investors, it’s important to remember that periods of rising rates are normal and can create opportunities for active bond managers. Since 1970 there have been 21 periods in which interest rates rose significantly. While each has had its own unique characteristics, over the past 20 years equities have rallied during these periods, which has tended to support corporate credit markets.
2013-07-10 Market Perspectives Q2 2013: Fed Fears by Richard Michaud of New Frontier Advisors
Investors have been hypersensitive to the inevitable reversal of the Federal Reserve’s bond purchasing economic stimulus program known as QE3. Signs of sustainable economic recovery have been closely monitored as a harbinger of a likely end of the program.
2013-07-09 The Five Best New Investment Ideas: New Age Paradigms for the Post-MPT World by Bob Veres (Article)
Over the past four years, I’ve been collecting the most tangible, concrete post-Modern Portfolio Theory insights offered by professional investors.
2013-07-09 ENERGY MLPs: A Suitable and Sustainable Asset Class by Sponsored Content from ClearBridge Investments (Article)
Greater capitalization. More liquidity. The energy MLP market has grown steadily, with good reason: our constant demand for energy. While oil prices go up and down, volume has stayed consistent. Production is increasing. And the infrastructure is needed to support it. Add some risk, and you’ve got an investment which could fit in a diversified portfolio.
2013-07-02 Avoiding the Interest Rate Freight Train with Individual Bonds by Stephen J. Huxley, Jeremy Fletcher and Brent Burns (Article)
For bond funds, rising rates mean that total return has to fight losses on the underlying portfolio. As a fund’s net asset value (NAV) declines, coupon interest may not be enough to overcome the price loss. Making the same fixed-income allocation to high-quality individual bonds instead and holding them to maturity is a superior strategy when rates rise.
2013-07-02 The Practical Application of Behavioral Finance by Mitchell D. Eichen and John M. Longo (Article)
From the Dot-Com bubble onward, traditional investment models have repeatedly disappointed those who relied on them. When compared to mathematically based models, behavioral finance provides a superior foundation. Here is an alternative investment paradigm, grounded in behavioral finance, that is practical and effective over time periods that are relevant for a significant portion of investors.
2013-06-27 Currency Wars: A Case for the U.S. Dollar by Gibson Smith, Chris Diaz of Janus Capital Group
In recent years, the U.S. dollar has tended to lose value when the global economy improves, as investors are more willing to take risks. We believe that pattern has changed and that the U.S. dollar will outperform the Japanese yen, the euro and the British pound over the medium term, even if the global economy continues to improve. In our view, current conditions justify a material deviation in currency exposure compared with certain global fixed income benchmarks, such as the Barclays Global Aggregate Bond Index.
2013-06-26 The Fed\'s Dirty Little Secret: QE Does Not Work by Gary Halbert of Halbert Wealth Management
Today I hope to dispel the myth that the Fed’s massive quantitative easing (QE) policy has driven long-term interest rates lower. I will argue that the opposite is true and demonstrate that the yield on the 10-year Treasury note has actually risen during QE-1, QE-2 and QE-3. This flies in the face of most market commentators.
2013-06-19 Changes in our Asset Allocation by Gregory Hahn of Winthrop Capital Management
We believe that valuations in publicly traded securities are stretched, and, although we have seen a move higher in interest rates and stocks have sold off from their high levels, investors are faced with choices that offer generally lower expected returns based on historic measures of return. Today, with the S&P 500 hitting 1650 and the yield on the 10 year US Treasury Note moving abruptly from 1.70% to 2.15%, there are generally two schools of thought on the minds of investors.
2013-06-18 Retirement Income Designations – Which Should You Choose? by Wade Pfau (Article)
With more than 50 certification programs based on the withdrawal phase of the planning lifecycle, advisors are faced with a paralyzing choice about which designation provides the most valuable curriculum. Here’s some guidance on choosing the right program for advisors.
2013-06-14 The Evolution of Emerging Market Corporate Bonds for U.S. High-Grade Fixed-Income Investors by Todd Kurisu, Thomas Brennan of William Blair
Emerging market (EM) investment-grade corporate bonds are an important and growing segment of the core ﬁxed-income universe. These bonds have evolved to be more like U.S. investment-grade corporate bonds than high-yield or traditional emerging market debt (EMD) securities. This sector has demonstrated favorable risk, return, and diversiﬁcation beneﬁts in the context of a broad market ﬁxed-income portfolio. Today’s ﬁxed-income investors must have a framework for evaluating new opportunities subject to prudent risk management
2013-06-14 Which Way for Bonds? Mapping a Path Forward by Bill Gross of PIMCO
In 1980, the Federal Reserve, led by Paul Volcker, tightened the quantitative noose to tame double-digit inflation, fueling an unprecedented tailwind for bond prices. Thirty years later we find ourselves at the other extreme, as central banks print money in the trillions of dollars to stimulate economic growth, and inflation is abnormally low. While we are not likely to see a repeat of that type of bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds.
2013-06-11 Managing the Odds: Overcoming Exit Strategy Biases with Tail Risk Hedging by Vineer Bhansali of PIMCO
Rather than making an exclusive choice we believe that rebalancing, options purchase and diversification should all be considered on the same footing. Is it better to dynamically de-risk if markets begin to fall to lock in gains, or is it better to purchase explicit tail hedges? Our tendency, as humans, to be time-inconsistent, with behavior changing as the situation changes, makes dynamic rebalancing prone to behavioral biases. At pricing levels of low option premia the purchase of options to prevent time-inconsistent behavior seems like a judicious decision.
2013-05-31 In an Era of Uncertainty and Lower Returns, It\'s Time for Alternatives by Sabrina Callin, John Cavalieri of PIMCO
The initial economic and capital market conditions of the 1980s set the stage for a multi-decade bull market for stocks and bonds. Times have changed, however, and traditional investment portfolios are unlikely to deliver returns as healthy as those enjoyed for much of the last 30 years. It’s time to think alternatively about asset allocation and index construction, sources of alpha and beta, and risk and return objectives to increase the probability of success in what we believe is a new era for investors and financial markets.
2013-05-31 Japan and the Euphoric Volatility Trap by Ashwin Alankar, Michael DePalma, Arnab Nilim of AllianceBernstein
When equity markets are buoyant and optimism abounds, fears of volatility tend to subside. But recent events in Japan remind us that euphoria itself can generate turbulence.
2013-05-30 UK Secular Outlook - Morphing into the Carney Era by Mike Amey of PIMCO
The UK remains in a “stable disequilibrium”, one that needs to either transform into growing economy with narrowing income differentials or risk a more aggressive policy response. Financial repression, protection of real purchasing power, tail risks of accelerated currency weakness and price sensitivity will likely dominate UK markets over the secular horizon. Investors may consider progressively reducing exposure to assets susceptible to tail risks. Higher quality short-dated income-generating, inflation-hedging and non-sterling assets remain attractive.
2013-05-14 New Normal ... Morphing by Mohamed El-Erian of PIMCO
The New Normal has morphed to include consequential elements of a "stable disequilibrium." In the midst of notable multi-speed dynamics, the global economy as a whole is muddling along a road that will give way over the next three to five years to one of two stark alternatives: either sustainable global growth, institutional and political renewal in the West and safe deleveraging; or growth shortfalls that cause financial instability, fuel greater social tensions, accentuate political dysfunctions and complicate debt traps.
2013-05-09 BlackRock Inc: Fundamental Stock Research Analysis by Team of F.A.S.T. Graphs
This article will reveal the business prospects of BlackRock Inc through the lens of FAST Graphs fundamentals analyzer software tool. Therefore, it is offered as the first step before a more comprehensive research effort. Our objective is to provide companies that have excellent historical records and appear reasonably priced based on past, present and future data and expectations.
2013-05-08 Is Your Investing One Dimensional? by Jerry Wagner of Flexible Plan Investments
At the National Association of Active Investment Managers (NAAIM) Uncommon Knowledge Conference in Denver last week, a reporter from Financial Planning magazine asked us, “What is active investing’?” Many confuse the phrase with the simple act of running a mutual fund populated with stock picks within the strict guidelines of a prospectus, as opposed to running an index fund, where the manager simply buys and holds the shares making up a particular stock or bond index.
2013-04-30 Zebras?! by Jeffrey Saut of Raymond James
We saw many “outside zebras” gorging themselves on stocks in late 2007 as the D-J Industrial Average (DJIA) made a new all-time high and then registered a Dow Theory “sell signal” in November 2007. Subsequently, those outside zebras ended up as “lion lunch” when the senior index shed an eye-popping 53% over the ensuing 17 months.
2013-04-30 Beware of the New Systemic Risk by Ashwin Alankar, Michael DePalma of AllianceBernstein
It felt like there was nowhere to hide from the market declines last Monday, April 15, when stocks, bonds and commodities fell in unison across the world, well before the Boston bombings that day. We believe that this failure of diversification was instigated by increasingly powerful multi-asset funds, many of which use leverage, which may have become a new source of systemic risk for investors.
2013-04-24 The 5% Problem: Double Jeopardy for Traditional Bond Investors by Nathan Rowader of Forward Management
Investors have suffered with low yields, but profited from rising bond values during the 30-year bull market for bonds. We believe the bond market is moving into a bearish phase, putting the value of existing bond holdings at risk. A variety of income-producing options are available for those who want to diversify bond portfolios and seek better yields. Historical analysis shows that a diversified portfolio would have outperformed traditional bonds during the last bear bond market and in periods of rising interest rates.
2013-04-19 First Quarter Investment Commentary by Team of Litman Gregory
Looking ahead, significant uncertainty surrounds fiscal and monetary policy in terms of what policies will be adopted and their ultimate economic and financial market impacts. More broadly, still-high global debt levels pose an economic headwind. Against this backdrop, our outlook for stocks has not improved. If anything, given the sharp run-up in stock prices, we are getting closer to reducing our U.S. equity exposure further than we are to increasing it.
2013-04-15 The Counter-Inflation Playbook Part 1 by Jeffrey Jones of Cornice Capital
One of the most important lessons I learned during my days at UCLA came from my freshman philosophy professor. He told us that should you find yourself engaged in a debate, the surest way to defeat your opponent is to attack his base principles. If those base principles aren’t fundamentally sound, any case built on top of it, no matter how convincing, is at risk of crumbling all at once.
2013-04-12 How a Landslide Shifts Copper Supply by Frank Holmes of U.S. Global Investors
The U.S. mining industry was dealt a devastating blow as Kennecott Utah Copper’s Bingham Canyon Mine experienced a pit wall failure causing a massive landslide with rocks and dirt covering the bottom of the mine pit. It’s a miracle no one was hurt due to the vigilance of its owner, Rio Tinto. The landslide is just one example of how quickly and unexpectedly the supply and demand factors facing the red metal can shift, which underscores the need for nimble active management.
2013-04-03 When Does The Great Recession Become the Great Rotation? by Gene Tannuzzo of Columbia Management
Given the strong flows into the bond market over the past few years, many pundits have pondered the beginning of the “Great Rotation” when bond investors begin to move money into the equity market. Investors fear that this shift could cause losses in bond funds as investors flee. Indeed since the start of the Great Recession in 2008, investors have plowed into bond funds as an alternative to equity volatility.
2013-04-02 Bernanke’s Motives Behind Quantitative Easing by Paul Franchi (Article)
We are at a turning point: away from one global monetary standard, to a yet-to-be-determined new form.
2013-03-05 Letters to the Editor by Various (Article)
A reader responds to Bob Veres' article, Comparing Advisors to Jim Cramer: Measuring your Professional Alpha , which appeared on February 5, and a reader responds to Robert Huebscher's article, Five Ways to Improve Your Investing Decision Making, which appeared last week.
2013-03-01 The Walk of Life: Stepping Away From Dire Straits and Toward Active Short-Term Mgmt Strategies by Jerome Schneider, Andrew Spottiswoode of PIMCO
Money market investors may find the benefits of recent regulatory and industry reforms bittersweet at best, as they are still tolerating borderline zero percent yields in a persistent low rate environment. Without creative strategies for liquidity management, many investors are finding themselves in the "dire straits" of actual negative real returns on their cash allocations even with modest current levels of inflation.
2013-02-26 Howard Marks’ Warnings and How to Protect your Portfolio by Geoff Considine (Article)
Howard Marks, founder and chairman of Oaktree Capital Management, wrote in a recent memo that the biggest danger to investors is their willingness to buy risky assets that are likely to provide low returns. Market conditions may not fully reflect current risk; option prices, for example, are very low. Some firms – notably PIMCO – recommend investors buy put options to protect their portfolios. I propose an alternative strategy that will be resilient to the potential shocks of increased volatility and higher interest rates, without incurring the cost of options.
2013-02-19 Expanding the Toolkit for Monitoring Your Equity Managers by Markus Aakko, Andrew Pyne of PIMCO
Investors may want to consider active share when assessing whether and how their active equity managers add value beyond a passive benchmark. The methods for monitoring investment managers are well established. But given the importance of getting portfolio allocation right in a low-growth, low-return world, it's worth examining new ways to assess risk and value added. While tracking error has been held as a key measure for active risk, it may include elements that reflect market conditions rather than managers' actual decisions on risk.
2013-02-15 Hyperinflations, Hysteria, and False Memories by James Montier of GMO
In the past, Ive admitted to macroeconomics being one of my dark, guilty pleasures. To some value investors this seems like heresy, as Marty Whitman1 once wrote, Graham and Dodd view macro factors...as crucial to the analysis of a corporate security. Value investors, however, believe that macro factors are irrelevant. I am clearly a Graham and Doddite on this measure (and most others as well).
2013-02-12 Fixed-Income Insights: When High Yield Loses Some Height by Zane Brown of Lord Abbett
If one sought an indication of how monetary policy and historically low interest rates can influence investor behavior, the high-yield bond market could provide some perspective. In 2012, investors' ongoing demand for income was reflected by the high-yield market's 15.6% return, the $32 billion that flowed into the asset class, andas several headlines pronouncedthe market's record-low yields of less than 6%.
2013-02-05 Currency War or Something Altogether Different? by Niels Jensen, Nick Rees,Tricia Ward of Absolute Return Partners
"Who is afraid of currency wars?" asks Gavyn Davies in the FT. I have known Gavyn for 25 years and have to confess that he is way out of my league intellectually. He is one of the smartest people I have ever met and, thankfully, also one of the humblest. He rarely gets things wrong so, when I occasionally disagree with him, it always makes me slightly uneasy.
2013-01-23 PIMCO's Secular Forum Preview by Mohamed El-Erian of PIMCO
It is almost time again for PIMCO's Secular Forum a critical part of the firm's investment process. This annual event, which takes place each May, brings together our investment professionals from around the world to debate and specify the key themes that we believe will affect the global economy and, consequently, our investment strategies over the next three to five years from asset allocation and relative value positioning to returns expectations and risk management.
2013-01-07 An Unconstrained Approach to Bond Market Investing by Sabrina Callin, Lisa Kim of PIMCO
Investors are increasingly focused on alternatives to traditional investment strategies. Unconstrained bond portfolio construction should be driven by an outcome-oriented goal, with strategies assessed on an individual risk/reward and correlation basis, and each investment in the portfolio evaluated rigorously for the expected risk and return as well as the potential impact of the correlation to other investments in the portfolio.
2013-01-02 Somewhere Over the Rainbow by John Mauldin of Millennium Wave Advisors
We are 13 years into a secular bear market in the United States. The Nasdaq is still down 40% from its high, and the Dow and S&P 500 are essentially flat. European and Japanese equities have generally fared worse. The average secular bear market in the US has been about 11 years, with the shortest to date being four years and the longest 20. Are we at the beginning of a new bull market or another seven years of famine? What sorts of returns should we expect over the coming years from US equities?
2012-12-28 Don\'t Wait for the Robins: Investment Strategy for 2013 by Pamela Rosenau of HighTower Advisors
Warren Buffet once remarked, "If you wait for the robins, spring will be over." "Uncertainty" has been an overarching issue since the financial crisis of 2008 and one of the principal reasons that investors have remained on the sidelines away from the equity markets. As it has been a part of the investment lexicon, "uncertainty" will always exist in some capacity. In 2012, investors began by focusing on European issues, then the U.S. election, and now the fiscal cliff. In fact, when there is little uncertainty and investors appear unafraid, one should be more concerned.
2012-12-26 The Ten Key Benefits of Investment Committees by Bob Veres (Article)
In this first part of a two-part report, I'll identify ten core purposes that investment committees serve in different types of firms, ranking them in order of the number of responses I received. If your investment committee is serving all ten purposes, based on the survey, you're among a select minority - which means that many advisors may find new ways to use this versatile new tool in their RIA practices.
2012-12-20 Hedge Funds: Identifying Alpha and Mitigating Risk by Daniel Eagan of AllianceBernstein
Hedge funds have historically generated higher returns than stocks with less volatility, but they also pose several significant risks that volatility alone doesn't capture, our research suggests. That makes careful due diligence and diversification of managers crucial.
2012-12-11 Loomis Sayles' Matt Eagan on the Macro and Fixed Income Outlook by David Schawel, CFA (Article)
In this interview, Loomis Sayles' Matt Eagan discusses the fixed income universe, Fed policy and issues facing the global macro economy. Eagan is the co-manager, along with Dan Fuss, of the Loomis Sayles Bond Fund and he manages the Loomis Sayles Strategic Alpha Bond Fund.
2012-12-04 In Search of the Holy Grail by Niels Clemen Jensen of Absolute Return Partners
This month's letter focuses on the short to medium term factors that drive our asset allocation and portfolio construction. All research suggests that financial markets are not driven by economic fundamentals in the short to medium term, so why should the investment process be?
2012-11-28 November 2012 Monthly Investment Bulletin by Team of Bedlam Asset Management
Equities have rarely been so attractive yet any investor acting on the perceived wisdom of the last 50 years would scoff and keep selling: the bad news will worsen for economic activity, growth in credit, wages, consumption, employment and in several countries, political stability. Few indices are glaringly cheap as measured by Cyclically Adjusted Price to Earnings multiples (CAPE: chart p.4) with many expensive, especially in many emerging markets.
2012-11-16 November Fundamentals by Chris Brightman of Research Affiliates
For the second half of the 20th century, U.S. gross domestic product growth averaged 3.3% per year. This growth was driven by a combination of rising population and employment rates and increased productivity. But all three of these factors are slowing or declining. What does this mean for future growth?
2012-11-13 How Well Does the Next Generation of Guarantee Riders Protect Your Income? Part 2 - Starting the Inc by Wade Pfau (Article)
Unlike traditional VA/GLWBs, the future payments from stand-alone income riders are tied to 10-year Treasury rates. That's bad news for retirees, who may find their future benefits compromised if interest rates remain at historically low levels - regardless of how the stock market performs.
2012-11-13 The Downside to Socially Responsible Investing by Robert Huebscher (Article)
Who wouldn't want a cleaner environment or a more just society? We can all agree these are worthy goals. But it's an established fact that pursuing them through one's investing is costly; environmental-, social- and governance-based investing (ESG) does fine on a gross basis, but loses money net of fees. Now, a recently published paper argues that that ESG is basically a waste of time.
2012-11-06 The Absolute Return Letter: The Era of Kakistocracy by Neils Jensen of Absolute Return Partners
We are now five years into a crisis that just doesn't want to go away. Paraphrasing Charles Gave of GaveKal who wrote a supremely succinct paper on this topic only last week, policy makers continue to tamper with interest rates, foreign exchange rates and asset prices in general. They continue to permit deposit-taking banks to operate like casinos. They issue new debt to pay for expenditures when we are already drowning in debt. They just don't seem to get it. Albert Einstein once defined insanity as doing the same experiment over and over again, expecting a different result.
2012-10-22 Eggs Are Not Enough: The Truth About Diversification by Feifei Li of Research Affiliates
We learn in finance theory that diversification simply means not putting all your eggs in one basket. Simple as the idea is, most investors do not hold portfolios that are even close to being truly diversified. Two reasons make this sensible objective difficult to achieve. First, most investors are not disciplined enough to implement diversification. To illustrate my point, pause and check whether you are willing to reduce equities when the trailing 12-month return on stocks is 20+ percentage points higher than bonds?
2012-10-19 House of Mirrors by Jeremy Boynton of Laureate Wealth Management
Did you ever try to navigate the "House of Mirrors" as a kid at your local carnival? You know the one I mean ---- where you walk through a labyrinth of mirrors designed to confuse your orientation while mocking you with various distortions of your body? If you were particularly skilled, you could use the mirror to your own advantage. What a compelling metaphor for the current state of the financial markets.
2012-10-16 The New World of Credit by Michael Lewitt, Editor, The Credit Strategist (Article)
In an era in which economies are driven by the creation of fiat money by central banks, and where the base of hard money is dwarfed by the volume of outstanding debt, every form of capital is tied to credit. In 1919, William Butler Yeats famously wrote that 'the center cannot hold.' A century later, there is no center.
2012-10-09 The Yin and Yang of 2012 Stock Markets Through September by Ron Surz (Article)
Despite investor concerns about the economy, stock markets delivered substantial returns in the year-to-date, with the S&P 500 returning more than 16% and Europe, Australasia, Far East (the EAFE index) delivering more than 10%. This growth has been in the face of investor withdrawals from equity mutual funds. So if mutual fund investors are selling, who is buying?
2012-10-09 A Case Study of a Fiduciary Breakdown by Robert Rafter, Matt Sommer of Janus Capital Group
A recent case offers several lessons for Plan Sponsors and Service Providers. One of the most critical issues in the case was the failure of the company to follow its own Investment Policy Statement. This case illustrates the need for plans to create a proper process for Fiduciary Risk Management - emphasizing the Investment Policy Statement as the foundation for a prudent process.
2012-10-04 Thrown in Over Their Heads: Understanding 401(k) Participant Risk Tolerance vs. Risk Capacity by Stacy Schaus, Ying Gao of PIMCO
Our analysis suggests as investors in target-date strategies near retirement they become more attuned to market swings. We believe 401(k) plans cannot succeed if participants jump out of markets at the bottom and possibly miss a rebound. Plans need to have tolerable downside risk, so participants can ride the market waves. The way to manage target-date assets, in our view, is to focus first on the risk capacity of participants relative to meeting an income goal. We ask, how much of one's final income will need to be replaced in retirement?
2012-10-04 When Career Risk Reigns by Neils Jensen of Absolute Return Partners
In this month's Absolute Return Letter we pick up the baton from last month. How does the current crisis actually affect financial markets? How do you overcome the low returns? What can you do to protect the downside risk in a high correlation environment? We argue that career concerns often lead to irrational decisions by professional money managers and that this provides opportunities for those who can afford to deviate from the norm.
2012-10-02 Lessons from Scandinavia by Kaisa Stucke, Bill OGrady of Confluence Investment Management
During the late 1980s and early 1990s, Scandinavian nations suffered through balance sheet recessions. Commentators have suggested that U.S. policymakers could use the Scandinavian response to their crises as a roadmap for resolving the current U.S. situation. As part of our own analysis, we have studied several earlier events to understand the underlying similarities and differences to develop insights into the current event.
2012-09-28 The Permanent Portfolio Turns Japanese by Adam Butler, Mike Philbrick of Butler|Philbrick|Gordillo & Associates
Our last few articles dealt with the Permanent Portfolio, a widely embraced static asset allocation concept proposed by Harry Browne in 1982. To review, the simple Permanent Portfolio consists of equal weight allocations to cash (T-bills), Treasuries, stocks and gold to ward against the four major financial states of the world.
2012-09-21 The Volatility Risk Premium by Graham Rennison, Niels Pedersen of PIMCO
Amid elevated global macroeconomic uncertainty and market turbulence, investors are searching for ways to diversify portfolios with non-traditional asset classes. Volatility risk premium strategies aim to capture a return premium over time as compensation for the risk of losses during sudden increases in market volatility. We believe investors seeking to diversify their equity risk exposures should consider adding volatility risk premium strategies to their portfolios, albeit with appropriate diversification across major option markets, active risk management and prudent scaling.
2012-09-18 The Trend is Your Friend by Keith C. Goddard, CFA (Article)
John Hussman's recent market commentary, The Trend is Your Fickle Friend, highlighted the limitations of trend-following investment strategies that rely on moving-average crossover rules as a primary filter. But an extensive study conducted by our firm demonstrated that a simple moving-average crossover system outperforms buy-and-hold, while reducing drawdown risk and volatility.
2012-09-18 Your Clients' Toughest Retirement Decision by Wade Pfau (Article)
Want to trigger an impassioned debate? Ask a group of advisors about the choice between systematic withdrawal plans and single-premium immediate annuities. Fee-only advisors are loath to cede control of client assets to an insurance company that might someday default, while annuity advocates fire back that only their strategies provide a lifetime income guarantee.
2012-09-04 Letters to the Editor by Various (Article)
A reader responds to Dan Richard's article, The Wrong Way to Ask for Referrals, which appeared last week, and two readers respond to Bob Veres' article, The Profession's Faulty Assumptions: A Top Ten List, which appeared on August 21.
2012-08-29 A Two-Pronged Case for Holding Gold by Russ Koesterich of iShares Blog
Gold continues to benefit from today's low interest rate monetary climate, and Russ says its diversifying effects mean the metal can be a valuable risk management tool for investors.
2012-08-28 Taking Rational, not Rationalized, Risks by Wylie Tollette of Franklin Templeton Investments
Like beauty, "risk" is often in the eye of the beholder. What might seem "risky" to one person (such as traveling to an exotic destination) might be an exciting adventure for someone else. Wylie Tollette, Senior Vice President and Director of Performance Analysis and Investment Risk at Franklin Templeton Investments, travels around the world, working with portfolio managers to focus on a different kind of risk.
2012-08-28 Permanent Portfolio Shakedown Part 2 by Adam Butler and Mike Philbrick of Butler|Philbrick|Gordillo & Associates
In our Permanent Portfolio Shakedown Part 1 we investigated the history of the approach, tracing it back to Harry Browne in 1982. The company he helped to found, The Permanent Portfolio Family of Funds, has been running their version of the strategy in a mutual fund for almost 30 years, with fairly impressive results. Harry's thoughts about the portfolio are worth repeating in this second installment.
2012-08-16 What Works in Tough Equity Markets? by Sharon Fay of AllianceBernstein
During the market crisis of 20082011, traditional equity style strategies such as value and growth underperformed the markets, often by wide margins. But our research shows that there was a way to diminish the negative impact of market turmoil on portfolio returns. In a recent study, we found that in volatile markets, stocks performed relatively well if they had at least one of the following characteristics.
2012-08-14 An Imperfect Storm by Janus (Article)
Changing regulations have drained liquidity from the corporate bond markets, as growth in bond ETFs is distorting a shrinking market. These converging forces are likely to result in a more volatile environment, but we see opportunity for managers able to understand the fundamental risk and reward.
2012-08-13 Invest with the Best?! by Jeffrey Saut of Raymond James
I have been a "fan" of the astute Claude Rosenberg ever since hearing him speak. Some will remember him as the author of Investing with the Best, which deals with the daunting task of selecting an investment manager. Given the plethora of investment managers, picking a manager is difficult. That's why many individuals' selection process consists of nothing more than looking at a portfolio manager's track record for the past few years. We think such a simplistic approach is a mistake.
2012-08-03 Real Assets Replication: Solving the Capital Call Conundrum by Andrew Hoffmann, Niels Pedersen, Mihir Worah of PIMCO
Risk factors help to identify the fundamental value drivers of real assets and explain differences in the reported returns of public and private equity investments that hold substantially similar assets. By combining the fundamentals of real asset valuations with the statistical tools required to unlock the component risk factors of asset classes, it is possible to replicate the returns of private real asset investments using liquid publicly traded instruments.
2012-07-31 Venerated Voices by Venerated Voices (Article)
We published our quarterly update for the Venerated Voices awards. Rankings were issued in three categories: The Top 25 Venerated Voices by Firm, The Top 25 Venerated Voices by Advisor and The Top 10 Venerated Voices by Commentary.
2012-07-27 Secular Outlook: Implications for Investors by William Benz of PIMCO
For investors, the biggest challenge now is moving from a world of normal distributions, with expected occurrences around the mean, to one of bi-modal distributions where more extreme scenarios prevail. Key institutions, including governments and central banks, were previously stabilizing forces but are now helping to accelerate underlying, destabilizing trends in the global economy and financial markets.
2012-07-24 Litman Gregory Mid-Year Commentary by Team of Litman Gregory
High debt levels in developed countries create headwinds that are likely to hamper global economic growth in the years ahead. Europe's debt woes raise the risk of a damaging financial crisis, and global stock markets reflected these concerns in the second quarter. Why are we discussing this now? It is partly a reflection on having reached a quarter of a century in business and thinking about how we have conducted our business.
2012-07-19 Europe Risk Preparedness by William De Leon of PIMCO
PIMCO's risk management process is dynamic and flexible, allowing us to evolve to understand, quantify and manage risks in broad scope and at the portfolio level. We are particularly focused on preparation for multiple potential scenarios, from a one-country redenomination to a full break-up of the eurozone into 17 separate currencies.
2012-07-13 End Game: What Happens to Residential Mortgage-Backed Securities if There's a Eurozone Exit by Rod Dubitsky of PIMCO
An exit would substantially affect euro-denominated RMBS mortgage collateral. Currency redenomination and devaluation would likely wipe out the entire available credit enhancement for most deals. Losses of redenominated loans could overwhelm credit support, even for well-performing deals.
2012-07-09 The 4 Biggest Investment Performance Myths - and How They Can Torpedo Advisor-Client Trust by Robert Isbitts of Sungarden Investment Research
In 26 years in the investment industry, I have seen investor and advisor behavior from many different angles: as an advisor, portfolio manager, strategist, author and proprietor. Two things have been quite consistent during that quarter-century: 1) That clients and advisors both care deeply about investment performance and 2) that investment performance is rarely evaluated with proper perspective.
2012-07-02 This film is rated "R" by Scotty George of du Pasquier Asset Management
This is not your fathers stock market. Nor really is it yours, the one you envisioned two decades ago. Instead we may have leveraged, in a literal sense, all the financial details to our heirs. The bad news is that we have become marginalized. Our goals and expectations have been sequestered, postponed, for another time.
2012-06-28 Focusing on Capital Preservation: Stable Value and Possible Alternatives by Brett Gorman, Henry Kao, Stacy Schaus of PIMCO
Stable value, which combines an actively managed fixed income portfolio with a contract to help assure principal and income, offers capital preservation potential and historically higher risk-adjusted returns than money market and low duration strategies.
2012-06-19 Retirement Floors and Implications for Evensky's Cash-Reserve Strategy by Wade Pfau (Article)
Does sensible retirement planning call for funding basic needs with less volatile assets and investing more aggressively for aspirational goals? Or, with client goals clearly defined and prioritized, does sensible planning call for a total returns approach? Multiple schools of thought have emerged, but there is not yet any consensus about what constitutes a proper retirement income floor. These lingering unresolved disagreements reinforce the benefits of Harold Evensky’s and Deena Katz’ popular strategy.
2012-06-19 The R Word in Emerging Markets by Mark Mobius of Franklin Templeton
No matter what decision we face in our lives, there is always some type of risk involved. But when you take a few risks, the experience can often be quite rewarding. When it comes to investing, some risks are present no matter what market youre in. Its also true that there are risks that are especially important to consider when it comes to the emerging markets.
2012-06-15 Remembering Hainan Development Bank by Sherwood Zhang of Matthews Asia
With tropical weather and white sand beaches, Hainan Island is often referred to as the Hawaii of China. Popular particularly among Chinese honeymooners, Hainan attracts tourists from around the world. Few, however, recall the islands darker days when it was mired in the failure of Hainan Development Bank (HDB). In June 1998, Chinas then regulator of commercial banks announced the closure of HDB, which was saddled with bad debts.
2012-06-08 Monthly Investment Commentary by Team of Litman Gregory
Global stock markets dropped sharply in May amid renewed macroeconomic fears. Large-cap U.S. stocks fell 6%, while small and mid-cap stocks lost 6.6% and 6.7%, respectively. Domestic stocks are still well in positive territory for the year, with returns ranging from just over 5% for large-caps to 3.4% for small-caps. Foreign markets fell further, as questions over the stability of the eurozone dominated headlines. Both developed and emerging-markets were down 11% for the month and in negative territory year-to-date (down 3.3% and 0.4%, respectively).
2012-06-07 The Absolute Return Letter - First Mover Advantage by Niels C. Jensen of Absolute Investment Advisers
Contrary to conventional wisdom, the eurozone crisis has always been a banking crisis. It only morphed into a sovereign crisis because of political incompetence. Given the rather stubborn approach of the German government to its beleaguered eurozone partners, the crisis is rapidly moving towards some sort of crescendo. It is only a question of time before one of the Southern European countries come to realise that they might be better off outside the eurozone, particularly if they are the first mover.
2012-06-07 Remarks to the 12th Annual International Seminar on Policy Challenges for the Financial Sector by Mohamed A. El-Erian of PIMCO
Let me start with what I will refrain from doing specifically, I will not pre-empt the detailed discussions that you may have on such topical issues as regulatory principles, SIFIs, market infrastructure, stress testing and, of course, the rapidly changing nature of sovereign risk in advanced countries. Instead, I will try to touch on three more general topics that, in addition to your critical detailed analysis, I believe are important in assessing the potential impact of regulatory reform in terms of the past, present and future.
2012-06-06 Liquidity Lessons: The Critical Importance of Budgeting for Overlay Strategies by Markus Aakko, Jared Gross of PIMCO
One approach is to tier liquidity into current and contingent tiers, where some assets are kept in more liquid form and others are kept in higher-yielding investments. Quantifying how much of the immediate category is needed is a relatively straightforward risk-management exercise involving estimating the potential mark-to-market change in value of the overlay. Our view is that locating the liquidity pool internally has a number of potential advantages over an external model.
2012-06-05 Energy and the Wealth of Nations by Richard Vodra, JD, CFP (Article)
It is time for a new and different approach to understanding the economy, according to ecologist Charles Hall and economist Kent Klitgaard, who together are pioneering the discipline of biophysical economics. They advocate a novel methodology that properly accounts for the realities of global energy supplies and consumption.
2012-06-04 Why Smaller Banks Are Attractive by Richard Bernstein of Richard Bernstein Advisors
We continue to prefer smaller, US domestic banks to larger, multinational banks. A backdrop of anemic yet improving US employment and stabilizing housing markets will likely benefit domestic lenders, but the continued deflation of the global credit bubble could continue to hurt the growth prospects for global financial institutions. Although the vast majority of the risks related to the deflation of the US credit bubble seem well-known, investors still appear to be underestimating the risks of credit deflation in Europe and in the Emerging Markets.
2012-05-22 Life-cycle Finance and the Dimensional Managed DC® Pension by Wade Pfau (Article)
Pension plans are like cars, according to Nobel laureate Robert Merton. People want a car they can drive and a pension that will maintain their standard of living in retirement; they do not care about what goes on under the hood. Advisors, however, must care. So when a new pension-like option hits the market, as DFA's recently did, it's important to go beyond simply kicking the tires and carefully examine how it works as a retirement-saving vehicle.
2012-05-22 Finding Alpha with Active Managers by Jay Feeney of Robeco Investment Management
Many investors are convinced that alpha has disappeared from U.S. equity markets and prefer to use passive investment tools such as exchange traded funds (ETFs) to broadly gain exposure to these markets. The problem with this approach is that it gives up any chance of outperformance and forces an investor to settle for benchmark returns minus fees. It also ignores the fact that alpha potential does exist. Although many active managers have not done a good job in capturing alpha, there are many who have outperformed over time, producing very sizeable excess returns.
2012-05-21 Liquidation Syndrome by John P. Hussman of Hussman Funds
Presently, the market remains richly valued on normalized earnings, and is coming off of a speculative peak with an abrupt and persistent initial decline. All of this reflects what might be called a "liquidation syndrome" that is selective for awful drops that began in 1969, 1972, 1987, 2000, 2007, and the more moderate but still steep losses in 1998, 2010, and 2011.
2012-05-21 A Worthy Scapegoat by Charles Lieberman (Article)
The $2 billion trading loss reported by J.P. Morgan Chase has unleashed a torrent of comments suggesting an even greater need to impose Dodd-Frank, that bank trading operations need to be reined in, that banks managers are badly overpaid and suffer from hubris that gets them into trouble, that our largest banks are too big to fail and too big to manage, and that regulators need to do a better job of keeping banks from taking too much risk with depositor money.
2012-05-15 James Montier on the Failures of Modern Finance by Robert Huebscher (Article)
The seeds of the next crisis have already been sown, according to James Montier - and they are fundamental flaws buried deep within the current theory and practice of finance. Bad models were the root of the financial crisis, Montier said, and a slew of behavioral biases are reinforcing financial instability.
2012-05-14 Dancing at the Edge of a Cliff by John P. Hussman of Hussman Funds
Our recession concerns remain intact, as do our separate concerns about extreme stock market risk. I've emphasized that our estimate of prospective market return/risk in stocks has slipped into the most negative 0.5% of historical data. Last week that estimate actually deteriorated, but I am reluctant to make comments on such a small sample, as the only more negative estimate in post-Depression history was on September 16, 2000. Even in the conditions that match the worst 2% of our return/risk estimates, the market has lost an average of 20-25% just in the following 6-month period.
2012-05-14 The Flaws of Finance by James Montier of GMO
Bad Models, or, Why We Need a Hippocratic Oath in Finance. The NRA is well-known for its slogan Guns dont kill people; people kill people. I have often heard fans of financial modelling use a similar line of defence. However, one of my favourite comedians has a rebuttal that I find most compelling. He points out that Guns dont kill people; people kill people, but so do monkeys if you give them guns. This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and youve got a potential financial disaster on your hands.
2012-05-10 Benchmarking Tail Risk Management by Vineer Bhansali of PIMCO
While tail risk hedging is a critically important area of modern portfolio management practice, the relative newness of the area means standard frameworks for benchmarking such portfolios have not developed. In fact, weve found that once the framework for proper tail hedge construction is defined based on key guidelines (including exposures, attachment, cost, and basis risk), the task of creating a proper index becomes relatively straightforward. To compensate for insufficient real-time performance measurement, tail hedges need to be evaluated on the basis of scenario analysis.
2012-05-10 Q112 Portfolio Commentary for the Absolute Strategies Fund by Jay Compson of Absolute Investment Advisers
It is no secret the structural problems and crises throughout the global economy stem from excess debt. This letter attempts to explain why we think the global economy is in this situation, why the process for creating the problems continues to this day, why financial markets are not out of the woods. We are extremely optimistic about the future investing climate, but only after we get through the final stage of the credit bubble. In our view, the root of the problem stems from the willingness of a broad swath of investors and money managers to bid up asset prices to extreme levels.
2012-05-08 Dont Fight the Last War Lessons from the Battlefields of Risk Management by Niels C. Jensen of Absolute Return Partners
Investors often behave as if they operate in a world of logic and certainty even when that is not the case. For that reason, history is littered with investors who have failed miserably. In this month's Absolute Return Letter we look at many of the pitfalls facing risk managers and we take a stab at where the next big crisis is going to surface. Our conclusion may surprise a few readers.
2012-05-07 Unbalanced Risk by John P. Hussman of Hussman Funds
Maybe our present concerns won't amount to as much downside as we expect. But if investors were to choose a point to test the hypothesis that this time will be different and risk will be well-rewarded, I hardly think a worse moment could be found.
2012-05-03 Rethinking Best Practices for Bank Investment Portfolios by Sabrina Callin and Justin Ayre of PIMCO
The turmoil in capital markets and changes in the regulatory environment have sparked changes in bank investment portfolios and caused many banks to reevaluate portfolio management practices. Banks without the resources to develop new processes may be forced to limit their investment opportunity set, possibly limiting earnings and diversification potential in the securities portfolio. The investment portfolio may represent an opportunity to improve bank revenues and risk-adjusted performance by expanding into investments with improved return and diversification potential.
2012-05-01 Wind Shear Avoidance: Why There Is Value in Momentum by Vineer Bhansali of PIMCO
Explicit tail hedges that look expensive in a normal world may indeed turn out to be cheap if the unimodal morphs into the bimodal. When faced with bimodal outcomes, momentum as a risk factor becomes potent, and cost-efficient exposure to momentum becomes critical to proper portfolio construction. In this world of low, pegged interest rates, an investor who is going to take risk needs other means to make the portfolio more inured to unforeseen shocks and market storms. Investors should look at effective alternative beta strategies, such as momentum, that can be implemented efficiently.
2012-04-30 Truth or Consequences? by Jeffrey Saut of Raymond James Equity Research
When youre wrong you say youre wrong; at least thats what the pros do. Clearly, I have been somewhat wrong by being conservative, but not by much because the INDU is actually 70 points lower than at the April 2, 2012 intraday high. Given the aforementioned litany of cautionary indicators, my sense remains the S&P 500 (1403.36) will spend some more time below 1425 while the short-term overbought condition is alleviated and the stock markets internal energy is rebuilt. Fridays market action only reinforced that belief with the indices gapping higher and then closing well below those highs.
2012-04-30 Release the Kraken by John P. Hussman of Hussman Funds
The problem for the stock market is that the 13-year journey of underperforming T-bills - with wicked collapses and break-even recoveries - is most probably not over.
2012-04-24 The Number One Priority for Advisors by Dan Richards (Article)
What's the single most critical need for advisors to succeed? There are lots of candidates – investment knowledge, communication skills, the ability to sell, and attracting and motivating a strong team.
2012-04-23 Decoding Duration to Better Understand Your Portfolio by William G. De Leon and Ravi K. Mattu of PIMCO
Duration is often used as a shorthand way to communicate the interest rate risk of a fixed income portfolio. We frequently encounter duration quotations presented as though no subtleties exist. These quotations average duration exposures across maturities and across currencies, implicitly assuming that yields across maturities and currencies are equally volatile and perfectly correlated. We approach the task of understanding interest rate risk with a more complete view of the risk dynamics driving interest rate sensitivity.
2012-04-20 Maybe Diversification Is Not All It's Cracked Up To Be by Chuck Carnevale of F.A.S.T. Graphs
As I began digging into the many faces of diversification, I quickly learned that it is a much more complex concept than at first meets the eye. I feel I learned that there is no one-size-fits-all or even a set of universally applicable rules or principles. To a great extent, diversification turns out to be a very personal issue. How much or how little depends more on your goals and objectives, the knowledge and experience you possess, the time you can allocate to your investment portfolio, and of course, your tolerance for risk. Some of us need a great deal of diversification.
2012-04-20 Monthly Investment Commentary by Team of Litman Gregory
Stocks and other risk assets surged in the first quarter, continuing the strong run that began in the fourth quarter of last year. In each of the past two quarters, domestic stocks gained about 12%, marking one the strongest runs over the October-March span going back to the 1920s. Developed foreign stocks increased nearly 12% in the quarter, emerging-markets stocks gained 14, small-cap U.S. stocks were up 12%, high-yield bonds rose 5%, and emerging-markets local-currency bonds added 8%.
2012-04-19 Current Conditions Cater to Our Rigorous Muni Investment Process by Team of American Century Investments
The last four years have been a remarkable period in municipal bond (muni) market history. The 2008 Financial Crisis and the Great Recession transformed the high-grade U.S. muni market and how people invest in it. What was once a relatively homogenous bond sector in terms of its credit quality and ratings became much more heterogeneous. Under these conditions, we believe experienced professional credit research and portfolio management are now crucial to investment success. This article outlines our muni investment processes.
2012-04-19 New Breed of Managed Futures Funds May Offer Downside Protection...and Upside Opportunity by Team of Emerald Asset Advisors
The search is on for strategies and portfolio managers that can generate return streams uncorrelated to traditional equities and fixed income. Whether it's due to the low return and high volatility equity markets of 2011 or the historically low government bond yields that persist even today, investors are scratching their heads wondering where to turn. A variety of alternative investment styles are available, many of which take an absolute return approach and aim to generate low market correlation, or at least, relatively low correlation to the broad equity markets.
2012-04-17 The Rebalancing Problem by Michael Nairne (Article)
Selling winning asset classes to buy losers runs counter to human nature. But doing so with discipline can increase the potential return of a portfolio while critically maintaining its risk profile. The rebalancing premium is an important and often overlooked addition to returns of properly managed portfolios.
2012-04-17 10 More Years of Low Returns by Lance Roberts of Streettalk Live
Ten more years of low returns in the stock market. If you are one of the millions of baby boomers headed into retirement-start saving more and spending less because the stock market won't bail you out. I will explain why this is the likely future ahead for investors. In this weekends newsletter I wrote that "If you put all of your money into cash today and dont look at the market for another decade you will be better off..."I realize that this statement is equivalent to heresy where Wall Street is concerned but there is one reason behind my apparent madness - the power of reversion.
2012-04-17 The Elusive Equilibrium: How Financial Markets Shape Global Rebalancing by Ramin Toloui of PIMCO
The mental and organizational infrastructure in the asset management industry has been built for a world with a sharp dichotomy between developed countries and emerging markets. Effective portfolio management requires an integrated approach that eschews the traditional dichotomy between developed and emerging markets. Emerging markets account for about 36% of global output and 68% of global GDP growth, but only represent about 4% of the equity portfolios of U.S. investors. We believe the representation in bond portfolios is even lower.
2012-04-12 Evolution, Impact and Limitations of Unusual Central Bank Policy Activism by Mohamed A. El-Erian of PIMCO
I will speak in a central bank and to central bankers about the role of their institutions particularly the Federal Reserve and the European Central Bank in todays highly complex, perplexing and historically unusual policymaking environment. I will go further and try to link actions to motivations. And, when it comes to implications, I will attempt to put forward questions and hypotheses that, I believe, are critical for the future of the U.S. and global economies but for which I, like others, have only partial answers.
2012-03-27 The demise of risk-on / risk-off and the emergence of heteroscedasticity by Jason Doiron of Sentinel Investments
I estimate that I inadvertently watch 12 hours of financial news programming per day. Too much television? perhaps, but for a portfolio manager it has become an occupational necessity. One of the greatest benefits to watching this much television is that I can recite verbatim every commercial that plays on CNBC with no clue which company is sponsoring the ad - pig on a skateboard anyone? The other benefit is that I am provided with a front row seat to a rogues gallery of pundits who describe the complexities of the financial markets through sound bites.
2012-03-14 Systemic Risk, Multiple Equilibria and Market Dynamics What You Need to Know and Why by Mohamed A. El-Erian and A. Michael Spence of PIMCO
In assessing the possibility, duration and impact of systemic risk factors, we need to analyze the interaction of expectations with market (endogenous) and policy (exogenous) circuit breakers. In the current environment, the prevalence of some subjective bimodal expectation distributions (e.g. Europe related) speaks to the multiple equilibrium features of sovereign debt markets. Multiple equilibria give rise to a range of scenarios, each quite different and each with its own distribution of returns, risks, correlations, and market functioning.
2012-03-02 The Protein Bomb by Niels C. Jensen of Absolute Return Partners
Population will grow from 7-8.3 billion people over the next decade. Meanwhile, arable land across the world will shrink and living standards will continue to rise, with the OECD projecting 3 billion new middle class consumers over the next 20 years. Many of these people will change their diets in favor of more animal protein. Livestock is quite inefficient in terms of converting grain to energy, so the pressure on farmers to deliver more will be immense. We conclude that agriculture should be represented in every long-term portfolio, but farm land has already risen a lot in value.
2012-02-28 The Problem with Target-Date Fund Glide Paths by James A. Colon, CFA (Article)
The attack on target-date funds (TDFs) continues to gain steam, and for good reason. Virtually all TDFs offer a mechanical approach to glide-path management, unnecessarily exposing investors to risk - most noticeably when they are on the verge of retirement. A superior approach would keep the long- and short-term volatility of an investor's portfolio within appropriate ranges by actively managing the glide path.
2012-02-23 Muni Outlook Q&A with Portfolio Manager Alan Kruss by Team of American Century Investments
Municipal bonds (munis) are back in the bond market spotlight, but for different reasons than a year ago (when widespread defaults were projected, and muni funds experienced heavy outflows). Muni performance has rebounded strongly since then, which has triggered follow-up questions about the muni market outlook. We posed them to Alan Kruss, Vice President and Municipal Portfolio Manager at American Century Investments.
2012-02-21 Unusual Drawdown Risk by John P. Hussman of Hussman Funds
Presently, the investment opportunity set remains one of the most unfavorable in history - we estimate a 4.4% annual total return for the S&P 500 over the coming decade, corporate bond yields are now at just 3.3%, the 30-year Treasury yield is at 3.2%, the 10-year Treasury yield is at 2.0%, and Treasury bill yields are at 0.1%. We would view a significant change in the investment opportunity set as a very welcome development, but we remain unwilling to accept significant risk for insignificant or negative prospective return simply because of the temporary absence of better opportunities.
2012-02-12 Hot Potato by John P. Hussman of Hussman Funds
A hot potato has been repeatedly passed from speculatively overvalued, overbought, overbullish market conditions driven by massive central bank interventions, to credit strains and emerging economic weakness nearly the instant those interventions are even temporarily suspended. The same speculators who have historically accompanied major and intermediate market peaks have emerged, followed by the emergence of credit strains, economic pressures, and a flight to safe-havens. The market is in an extended game of hot potato which will be resolved by the eventual removal of both conditions.
2012-02-07 Neel Kashkari on PIMCO's Equity Strategy by John Heins (Article)
Bond titan PIMCO has been methodically building its equity-investing expertise. Here the architect of that effort, Neel Kashkari, and his first major hires describe their strategy and how they're uncovering value in today's market.
2012-02-06 Notes on Risk Management - Warts and All by John P. Hussman of Hussman Funds
Presently, there seems to be an unusually wide gap between hindsight and foresight, both in the financial markets and in the economy. In both cases, forward-looking evidence suggests weak outcomes, but recent trends encourage optimism and risk-taking. Rather than sugar-coat these uncertainties and minimize the messy divergences in the data, I think the best approach is to review the evidence, warts and all, including economic risks, market conditions, and the strengths and limitations of our own investment approach.
2012-02-03 The Unlikely Bull Market by Niels C. Jensen of Absolute Return Partners
Europe is going from crisis to crisis at the same time as stock markets climb higher. Meanwhile, investors are left confused. The key to understanding the apparent disconnect between stock market behavior and economic fundamentals is the aggressive policy being pursued by the ECB which has eased credit conditions in the crisis-stricken European banking industry. With more QE from the ECB in the pipeline, we expect equity prices to benefit.
2012-01-27 Adding to Our Pro-Muni Arguments by Team of American Century Investments
Last month, we outlined multiple reasons why investors and investment advisors should consider high-quality muni investments as core fixed income portfolio holdings. In support of owning funds vs. individual securities, we focused primarily on credit-quality issueshow we believe most of the muni market remains fundamentally sound and resilient, but pressured by the economic and fiscal environment. We think this has created a heterogeneous muni market with generally strong credit quality but dotted with potential credit risks and pitfalls in select areas that require professional vigilance.
2012-01-27 Heart of China Bull Beats Strong by Frank Holmes of U.S. Global Investors
With rising incomes and increasing urbanization, we believe China is pursuing the American Dream, and the government has shown great determination to build the necessary infrastructure along with a robust urban labor market. On a purchasing power parity basis, Chinas share of world GDP has risen significantly, from around 3 percent in 1985 to a current world share of nearly 16 percent.
2012-01-10 2011: The Famine That Followed the Feast That Followed the Fiasco by Ron Surz (Article)
Ron Surz provides his award-winning commentary on the US and global markets.
2012-01-03 New Measures of Risk (and why markets are now very fragile) by Adam Jared Apt (Article)
Understanding risk is essential to successful investment management, yet most common measures, like beta, capture only risk within markets - disregarding systemic risk of the markets themselves. Fortunately, new research is now shining light on "fragility" or systemic risk - how fast and how severely an unanticipated event will propagate through the markets.
2012-01-03 The Year of the Dragon by Jeffrey Saut of Raymond James Equity Research
Since the day after Thanksgiving I have stuck with the strategy that the Santa Claus rally had begun. On November 25th the SPX was changing hands around 1158. We are now 100 points higher. Consequently, I would not chase the dragon right here since I anticipate that an upside blow off is due ...
2011-12-29 On the Sharia and Islamic Finance by William Maeck of Seafarer Capital
The practice of banking according to Islamic principles, or the Sharia - the moral code and religious law of Islam - is relatively unknown within developed nations. However, in many parts of the developing world, Islamic banking is a burgeoning industry. It deserves closer scrutiny not only because it is bringing new and otherwise un-banked customers into the fold, but also because it serves as an alternative model for finance and it may manage certain types of risk better than conventional Western models.
2011-12-28 Delayed LDI Implementation: Making it Worth Your While by Rene Martel of PIMCO
With interest rates so low, many defined benefit plan sponsors have delayed implementing or expanding LDI programs, often using intermediate duration bond portfolios instead. Traditional intermediate duration portfolios may not offer the most attractive yields or the best credit match for pension liabilities, and may make the transition to long-term bonds difficult later. We believe plan sponsors in a waiting mode should consider switching to long duration portfolios with a synthetic overlay in an effort to reduce duration exposure.
2011-12-21 Seeking Absolute Return: Finding Opportunity in Overly Hyped Alternatives by Team of Litman Gregory
This commentary references and updates views originally shared in our 2003 whitepaper on hedge-fund strategies. Today, we have similar concerns about a low-return environment for stocks in the years ahead. As we concluded eight years ago, hedge-fund strategies do have the potential to add value to a portfolio. However, finding funds that are skillfully managed and offered at a reasonable cost remains a difficult challenge.
2011-12-19 The Three Rs of Investing by Marc Seidner of PIMCO
The inability to achieve sustainable levels of economic growth raises the risk of recession in many developed world economies. Under financial repression, market interest rates are kept very low for a very long time period with the hope of stimulating investment, but repression also starves savers to the benefit of borrowers. Increasing risk with an uncertain distribution of possible outcomes should lead to caution regarding traditional models and asset allocation practices.
2011-12-13 Asset Allocation and Risk Management in a Bimodal World by Vineer Bhansali of PIMCO
Fat tails and negative skewness in the distribution curve can arise from the mere possibility of multiple equilibriaeven if both individually appear normal. Once markets arrive at a resting place among different equilibria, they tend to become trapped due to a variety of restraining forces. For all these reasons, we believe that the core building blocks of asset allocation and option pricing in the current macroeconomic environment should allow for the possibility of multimodality. This significantly changes the conceptual approach towards portfolio construction and risk management.
2011-12-12 Rethinking Asset Allocation: PIMCOs Strategy for a Changing World by Mohamed A. El-Erian, Vineer Bhansali and Curtis Mewbourne of PIMCO
Alpha generation is a distinct component of the strategy because it is critical to actively seek opportunities in all global markets in this challenging environment. Explicit tail risk hedging is essential to prepare for more frequent significant downturns, both to mitigate their effects and to potentially benefit from them. The strategy is positioned to navigate a world of muted growth in the Western economies, significant market volatility, recurring balance sheet issues and continued income and wealth convergence of the emerging world with the developed world.
2011-12-09 Building Wisdom with Our Boots on the Ground by Frank Holmes of U.S. Global Investors
Analysts at U.S. Global Investors scrutinize research reports and study Bloomberg data to help our investment team gain first-mover advantage. Today, I asked research analyst and Shanghai-native Xian Liang to share how he combines analyses from third-party reports with boots-on-the-ground observations to find the best opportunities Asian markets have to offer.
2011-12-07 After the Flood: Surviving in a Sea of Debt by David Fisher and Olivia Albrecht of PIMCO
Since 2009, developed country governments have run fiscal deficits unprecedented outside of wartime, and their debt levels have reached epic heights. Investors accustomed to considering only the interest rate risk associated with their developed government bond holdings have been shocked to find that credit risk has become dominant in many cases. For investors in government bonds, inflation and currency debasement have the potential to be just as costly as outright default. Investors should consider focusing on GDP, or national income, as a measure of a countrys ability to service its debt.
2011-12-06 Life Finds a Way by Neel Kashkari of PIMCO
Even the most sophisticated risk management models can't protect against scenarios we've never even contemplated. In this New Normal economic environment of slow economic growth, high volatility and enormous macro risks we don't believe ignoring major downside risks is prudent for equity investors. We believe investors are best served by employing a combination of three strategies to actively manage downside risk in equity portfolios to hedge against the risks they can see, and equally importantly, the risks they can't see.
2011-12-05 The Facts They Dont Want You to Know by Niels C. Jensen of Absolute Return Partners
Our industry needs a good old fashioned kick up its backside. Far too much mediocrity is rewarded for nothing other than destroying value.
2011-11-30 Markets Surge As World Engages In Global Bailout by Lance Roberts of Streettalk Live
Today, the remaining survivors of the global financial rout have coordinated an "all in" gamble to save the world from the next impending crisis. This morning's announcement that the Fed, European Central Bank, Bank of Japan, Bank of England, Swiss National Bank and Bank of Canada will lower the rates on currency swaps as well as lower pricing on existing US Dollar swaps provides a massive liquidity canon for the global financial system. While the markets are surging, the important take away here is that the world is in FAR WORSE shape than has previously been discussed.
2011-11-28 The Global High Yield Opportunity by Matt Eagan, Kathleen Gaffney and Elaine Stokes of Loomis Sayles
The shifting characteristics of US, European, Asian and emerging markets high yield assets have contributed to an expanding opportunity set. This has prompted many institutional investors to broaden their high yield investment guidelines, often giving portfolio managers the ﬂexibility to include exposures to these markets within one portfolio. The days of silo investing, in which non-US investors sought exposure to US high yield and emerging market debt through separate mandates, may be giving way to an era of sector allocation driven by investors.
2011-11-16 As Alternative Investments Move into the Mainstream, Advisors and Investors Need to Choose Wisely by Team of Emerald Asset Advisors
We believe that having a piece of an overall portfolio that is committed to liquid alternatives is a critical component to long-term portfolio stability, capital preservation and growth. No one wants a repeat of 2008, or anything close to it. There are an abundance of liquid alternative choices available, some of which have proven themselves through various market cycles and environments. They have gone from Wall Street to Main Street for good reason. Embrace the opportunity, and you and your clients may just sleep a bit better at night during these volatile times.
2011-11-15 Michael Aronstein on Today's Key Macro Trends by Robert Huebscher (Article)
Michael Aronstein is the president and chief executive officer of Marketfield Asset Management. Since its inception in 2008, his fund has returned 31% while the S&P has been down 15%. I spoke with him about the key macroeconomic and strategic issues facing investors today.
2011-11-15 Capital Flows: Asias Quiet Revolution by Gerald Hwang of Matthews Asia
As markets evolve, so do regulations. The reflexive rebuke of capital controls once voiced by Western regulators has given way to a more flexible approach in times of extreme volatility. Asias regulators have observed the efficacy of volatility-dampening measures, and thus far, appear to have avoided the worst excesses. As fears continue over diminishing U.S. dollar power, Asias bonds remain attractive diversifiers for their yields and good credit ratings. However, one should never forget the volatile history of currencies in Asia.
2011-11-09 Is Now the Right Time to Hedge Tail Risk? by Vineer Bhansali, Tina Adatia and Jeroen van Bezooijen of PIMCO
Not all hedges have equally increased in value, giving investors the option to reduce the cost of their hedges by considering both direct and indirect hedges. Tail risk hedging may allow certain investors to maintain an allocation to risk assets where they might otherwise deem the position to be too risky and it can also help stabilize portfolios on a mark-to-market basis. Investors may decide to either start implementing hedges now, phase the tail risk strategy in over a period of time, or put the infrastructure in place now and defer implementation until market conditions change.
2011-11-08 Ignore Egan-Jones at Your Peril by Niels C. Jensen of Absolute Return Partners
The ink on the Greek rescue agreement has barely dried, and the feeling in financial markets is sombre yet again. However, investors have changed their focus away from Greece towards Italy - a change which could prove disastrous for the eurozone given the size of the Italian bond market. In this edition of The Absolute Return Letter we take a closer look at Italy's refinancing needs and suggest corporate bonds as an alternative to government bonds.
2011-11-02 Debarred from Certainty by Christian Thwaites of Sentinel Investments
The innocent pre-2008 are days gone. Expect volatility. Markets distrust most of the news and theres little conviction in any one direction. Vanilla investors are on the sidelines. Day to day trading is mostly position covering and range bound investing. Thats fine with us. The more algos and high frequency trading noise, the easier to spot fundamental anomalies. The challenge is to keep fluid between seemingly different but highly correlated markets.
2011-10-19 All That Glitters Is Not a Cash Equivalent by Jerome M. Schneider of PIMCO
The latest volatility has investors asking questions about the securities they own, in particular probing any exposures to European issuers. Cash investors often over-allocate to money market and bank investment vehicles, while the most attractive risk-adjusted opportunities might fall just outside of this space. We currently see opportunities in short-dated, non-financial BBB-rated corporate bonds, along with dollar-hedged bonds and bills issued by sovereigns with solid balance sheets.
2011-10-11 Market See-Saw Brings Us Back to April 2010 Double-Digit Third Quarter Losses Erase Previous Gains by Ron Surz (Article)
Stock markets around the world plummeted in the third quarter, with the US market losing 16% and foreign markets faring somewhat worse with 17% losses. This quarter's loss reverses the gains of the first quarter and brings year-to-date returns below water, with domestic markets losing 11% and foreign markets losing 13%.
2011-10-07 Point of Maximum Pessimism? by Niels C. Jensen of Absolute Return Partners
The current level of pessimism is quite overwhelming, in particular in Europe where the eurozone crisis has taken its toll on investor confidence. This has led to valuation levels we haven't seen since the dark days of 1981-82, just before we embarked on the 1982-2000 bull market - the biggest of all time. It is our view that investors will be amply rewarded if they begin to buy European equities at current levels, although it is a strategy that shall require both a solid stomach and some patience.
2011-09-22 More Focus on Fixed Income by Team of American Century Investments
G. David MacEwen, discusses how volatile market conditions, a population boom in the 65+ years category, and increasingly conservative investment behavior by those in that category as they approach retirement (including growing demand for more predictable outcomes) are shifting the focus of investment strategies toward fixed income. We strongly believe that the scheduled, mostly predictable payments of interest and principal from bonds are becoming progressively more attractive to a growing pool of investors and their advisors.
2011-09-09 Examining Systemic Risk in the Banking System by Team of Litman Gregory
When we spoke over two years ago, we discussed credit default swaps as speculative derivative instruments, the risks these presented to the financial system, and the need to better mitigate these risks. Can you comment on the progress the industry has made in reducing the systemic risk they pose to the financial system and talk about the risks they continue to pose? Derivatives, as such, were never entirely the problem. But, in some senses, they were symptomatic of a much deeper problemwhich is why we had created a system that was highly leveraged, highly complex, and highly networked.
2011-09-08 The Changing Landscape of Global Investing by Mohamed A. El-Erian of PIMCO
National and global realignments are fundamentally and durably changing the global investment landscape. Investors face the challenge of recalibrating some of the traditional parameters that are key to managing risk and delivering returns. There are also implications for investment management firms which are yet to be sufficiently reflected in the thinking and actions of the industry as a whole.
2011-09-02 If Carlsberg Did Mortgages by Niels C. Jensen of Absolute Return Partners
The old world is drowning in debt. Governments are responding with austerity programmes and near zero interest rates but neither will work. Economic growth will be required to get the escalating debt under control, but policy makers need to dig deep into the tool box for different ideas as to how to create this growth. In this month's Absolute Return Letter we focus on one particular idea which will greatly benefit economic growth at no cost to the tax payer - reform the mortgage finance system across the world, using the model developed by the Danes over the past 200 years.
2011-09-01 Q&A with Litman Gregory Research by Team of Litman Gregory
We regularly use a Q&A format to address questions from readers about our investment views and current strategy. This format permits us to address a range of different topics and allows readers to focus on areas that are of interest to them. This Q&A piece was worked on jointly by members of our research team and tackles questions received during the past several weeks. We have grouped the questions into broad categories for convenience. The main topics include the Fairholme Fund, Investment-Grade Bonds, Floating Rate Loans, Municipal Bonds, International Bonds, China and Commodity Futures.
2011-08-26 The US Financial Sector in an Environment of Turbulence by Team of Loomis Sayles
US financial companies have spent the past three years trying to improve their balance sheets. We saw this trend reflected in company reports of asset quality improvements, increasing capital and strengthening liquidity. Heightened anxiety about the European debt crisis, a potential slowdown in the global economic recovery and the US credit downgrade appears to have overshadowed financial company fundamentals. Fundamental improvements by financial companies have fortified the sector, leaving it substantially stronger than in 2008. Currently, we think financials are well positioned.
2011-08-17 Our Take on the Current Market Tumult by Jon Quigley of Advanced Investment Partners
A headline sums up the markets action: its a sell first, ask questions later market as investors experience flashbacks to the 2007/2008 markets. Investors/markets dont like uncertainty and theyre getting political, economic and sovereign uncertainty in abundance. With the austerity discussions that are dominating US and Europe, there are increasing concerns about a double-dip recession even though positive economic signs are out there earnings, revenues, and a slightly better than expected jobs report.
2011-08-16 The Case for Tail Risk Hedging in Emerging Market Equities by Vineer Bhansali and Masha Gordon of PIMCO
While our secular outlook for emerging markets is solid, we expect long-term success will be earned by those who can manage cyclical risks. There is a tradeoff between the cost of establishing a hedge and the downside protection that it imparts to a portfolio. The best approach to tail hedging is a flexible one; using dynamic rebalancing, diversification and affordable option-like securities. A diversified macro approach to hedging tail risk actually may be more efficient for EM than it is for developed asset classes.
2011-08-09 New Insights on the Role of Alternative Investments in High-Net-Worth Portfolios by Scott Welch, CIMA (Article)
Trends and developments over the past five years allow greater access to alternative strategies and dictate a different conversation with investors about the purpose and trade-offs of such strategies, as well as appropriate ways to incorporate them into well-diversified portfolios.
2011-08-06 The Case for Going Global Is Stronger Than Ever by John Mauldin of Millennium Wave Advisors
If we have learned anything from the current financial mess, its that building wealth is dependent on rational analysis, careful decision making, and risk management. Thats why sticking close to home at a time when our markets are more uncertain than ever is a recipe for disaster and absolutely the wrong thing to do. Not only will you miss out on the worlds fastest-growing markets, but the odds are exceptionally high that you will miss as much as 50% or more in potential returns over the next decade.
2011-08-05 Denominators Matter! What the Price of Gold Tells Us About the Value of Other Assets by JJ Abodeely of Sitka Pacific Capital Management
In an environment where holding either U.S. dollar cash or a broad market portfolio may be detrimental to real wealth preservation, more active asset allocation is required. Portfolio managers who have a broad toolbox of assets to choose from, nimbleness and flexibility, and an eye on the denominators that show us real value, will be in an enviable position to capitalize on the next great bull market in stocks.
2011-08-03 The Trouble with Quants by Chris Brightman of Research Affiliates
Quant managers often over-engineer their products. When these products collapse, they leave investors confused and upset. On this fourth anniversary of the August 2007 Quant Meltdown, we look at what lessons can be learned from the past and how they may apply to some current investment strategies.
2011-08-02 Hitting a Moving Target: Matching Portfolio Risk to Client Expectations by Scott Smith (Article)
Much of the angst faced by investors and advisors over the last several years was caused by mismatched perceptions regarding investors' appetite for portfolio risk. Advisors overestimated the amount of risk investors were comfortable being exposed to within portfolios.
2011-07-29 Postcard from China by Elizabeth Dong of Matthews Asia
Chinas small companies are vibrant forces that are driving the countrys economy. Despite the challenges to investing in newer and unseasoned firms, small companies in China can present attractive long-term opportunities, and are increasingly playing a key role as China evolves as a service-oriented economy. On-the-ground research is a vital step in our investment and risk management process. This involves face-to-face visits with a firms staff to try to discern the health of a companys daily operations and the reliability of its managements claims.
2011-07-26 Investing with a View of Significant Inflation by Bob Kargenian (Article)
Almost all the analysis we read has concluded that, with the Fed seemingly printing money out of nowhere, the inevitable consequence must be significantly higher inflation. We're not convinced, but we have identified which strategies are likely to best protect clients if inflation accelerates.
2011-07-19 Earning 'Extra Credit' Through Short-Term Strategies PIMCO by Jerome M. Schneider of PIMCO
Given renewed concerns over liquidity and credit, investors can potentially do better by considering actively managed short-term strategies that invest beyond traditional U.S. money-market guidelines. The current credit situation in Europe is different from that in both 2008 and 2010 because initial liquidity conditions in the short-term markets are better. In our view, investors should evaluate potential investments within the wider scope of relative value opportunities and not simply for the incremental yield they may offer above risk-free returns.
2011-07-14 Ben Bernanke channels Genworth Financial; Chris Laursen on bank trading under the Volcker rule by Team of Institutional Risk Analyst
This week we republish an important article by Christopher Laursen, NERA Vice President, on bank trading under the Volcker rule. And we ask whether Fed Chairman Ben Bernanke knew he was saying about the conforming loan limit yesterday before the House Financial Services Committee.
2011-07-07 Exit Interview: FDIC Chairman Sheila Bair by Team of Institutional Risk Analyst
This week in The Institutional Risk Analyst, we feature a conversation with FDIC Chairman Sheila Bair as she nears the end of her term. Bair has been in and out of public service for three decades, including working for Congress, the Treasury and lastly the FDIC. She spoke to IRA co-founder Chris Whalen before the July 4th break.
2011-06-21 The World Held Hostage by Credit Default Swaps? Alford on the FOMC: Watch what they say by Team of Institutional Risk Analyst
In this issue of The Institutional Risk Analyst, we feature a comment from Richard Alford on the state of thinking inside the Federal Open Market Committee regarding monetary policy -- at least based on what folks at the Fed say in public. We also comment on the latest financial bailout, in this case the apparent salvation of the European and US banks in the CDS market from taking a hit in the restructuring of Greece.
2011-06-13 Ouch by Jeffrey Saut of Raymond James Equity Research
While equity markets can certainly do anything, if the SPX declines to the lows registered in March of 2009, which is what Walter Zimmerman thinks, and if the current earnings estimates are anywhere near the mark, it would leave the S&P 500 trading at less than 6x earnings with a dividend yield (excluding any dividend increases) approaching 5%. I just dont believe this is in the cards, given my assumption the economy is NOT going to double dip. Amid such market machination I think investors should keep their heads screwed-on straight and begin compiling their buying lists.
2011-06-07 New Challenges for the Endowment Model by Robert Huebscher (Article)
The multi-billion dollar endowments of elite institutions like Harvard, Yale, and Princeton are supposed to never be strapped for cash, but that's not how things played out during the financial crisis, when all those schools and many others were forced to raise liquidity under adverse market conditions. The endowment model, despite those failures, is still basically sound, according to Luis Viceira, but it needs several key improvements before institutions and individuals can rely on it.
2011-06-07 Low Volatility Equity Solutions – Is Now The Time? by K.Sean Clark of Clark Capital Management Group
Correlations converging amid the market declines of 2008 called attention to the limits of relying on diversification between assets for portfolio protection. The desire for non-correlated returns among assets had led to a significant reduction in U.S. equity exposures and accelerated flows into non-U.S. equities and alternative strategies. But the correlations of these uncorrelated assets spiked under the extreme market stress of 2007 and 2008. This shows that for downside protection, buying assets with many different risk profiles is not a substitute for buying volatility to manage risk.
2011-06-01 Next Big Thing: "Rent to Own?" Recreating the Ear of the Markets by Team of Institutional Risk Analyst
We feature a comment by Damien IslamFrenoy and David Cox, of Microsoft Banking and Capital Markets, about the need to restore context to information to better identify and manage risk. But first we make a few observations about the trends in the political economy. The first quarter of 2011 is now the best quarter since 2007 but does this mean that the future is assured? With an ROA<1% and ROE measured in single digits, the results are less than stellar. But the retrenchment of Americans away from housing assets and toward cash savings raises questions about the future of the banking industry.
2011-05-31 Bookstaber on the Limits of Capitalism by Sam Parl (Article)
What can we do so that we’re not fighting yesterday’s war? That was the question posed by Richard Bookstaber when he spoke at the sixth annual MIT Sloan Investment Management Conference on April 29. Bookstaber, a Senior Policy advisor to the SEC and to the Financial Security Oversight Council, offered an elucidating perspective on the origins of economic crises and the proper role of regulation.
2011-05-20 Weekly Market Commentary by Scotty George of du Pasquier Asset Management
Last week, I wrote about a phenomenon in global markets “at the top” as being almost like perpetual motion inertia, constant movement, seemingly ending up static. Why does that exist, and what can we do to enhance its portfolio benefit and to reduce its incumbent risk? I believe that today’s risk derives from overvaluations created from “efficiencies” which magnify profitability, but don’t reflect declining top line revenue or demand. Indeed, as stock prices have migrated upwards, relative strength quotients within my proprietary measurements have disconnected, instead moving downwards.
2011-05-17 The Smooth Illusion by Michael Lewitt (Article)
In retrospect, the Federal Reserve's interminable zero-interest policy and its quantitative easing programs are likely to be seen not only as ineffective but damaging to the prospects for sustainable long-term economic growth. A number of asset classes are beginning to exhibit bubble-like behavior, something that would be far less likely to occur were interest rates normalized.
2011-05-09 The Menu by John P. Hussman of Hussman Funds
One of the ways investors can think about prospective return and risk is from the standpoint of the Capital Market Line, which lays out a menu of investment possibilities at various levels of return and risk. In theory, investors like to believe that this menu is always a nice, positively sloped line, where greater risk is associated with greater prospective return. And somehow, regardless of where market valuations are, investors often seem to believe that 10% is 'about right' for the prospective return on stocks. As it happens, valuations exert an enormous effect on the prospective returns
2011-04-26 Are You Watching Your Brokered Deposits? Bob Eisenbeis: What's a Central Bank to Do? by Team of Institutional Risk Analyst
In this issue of The Institutional Risk Analyst, we feature a comment from Bob Eisenbeis, Chief Monetary Economist of Cumberland Advisors. Bob clearly states the obvious in his excellent analysis of the choices facing the Federal Open Market Committee, namely that the Fed continues to steer monetary policy based upon largely domestic factors, this even as the global role of the dollar creates dangers for the US and other nations as they flee the perils of deflation.
2011-04-20 Is Europe at the Tipping Point? Sol Sanders & Bill Alpert on Keynes, Keynesianism -- and Keynesianit by Team of Institutional Risk Analyst
With the world preparing for the collapse of the post-WWII, post-Bretton Woods economic order, we thought it might be useful to look at what Keynes actually said. We depart from our optimism due to the situation in Europe. Forget the threat of a ratings downgrade by S&P, Washington on debt ceilings or our part-time POTUS, the final collapse of the southern states of Europe is accelerating. Most banks in the EU are insolvent and the states supposedly backing them cannot access the global markets. The collapse of the EU bank bailout effort could be the next catalyst for global contagion.
2011-04-19 Rear View Mirrors by Richard Michaud of New Frontier Advisors
It was another positive quarter for U.S. equity investors. The market’s resilience in the face of the Fukushima earthquake, Middle East rebellions, and euro uncertainties was remarkable. The U.S. economy continued to demonstrate significant signs of recovery with new jobs in March and a 1% drop in the unemployment rate since November. While European markets were up 6.5% in dollar terms, Asian indices were down 2%. Bond market was mixed, with treasuries down and diversified indices flat. Oil prices were up over 16% while the dollar fell 6.4% relative to the euro but up 1.3% to the yen.
2011-04-12 Been Down So Long It Looks Like Up To Me by Michael Lewitt (Article)
"The budget crisis is a crisis of leadership," writes Michael Lewitt in the latest issue of the HCM Market letter. "There is no intellectual mystery involved in cutting the budget - entitlement spending must be reduced through the adoption of tighter eligibility standards... The markets will also have to evaluate whether Congress and the Obama administration can make any meaningful progress on budget reform, which will mean tackling the entitlement issue. The failure to rein in federal deficits remains a profound threat to the dollar and interest rates."
2011-04-09 Risk 3.0 Investment Solutions for the New Market Realities by Mitchell Eichen and John Longo of The MDE Group
In spite of the stock market rebound from its March 2009 lows, the 2007-2009 bear market still looms large. Investors have lost faith in the conventional methods of portfolio management. Investor confidence was not merely shaken, but shattered. Risk was either improperly measured, or considered a distant second to return. In this paper, we introduce a new approach to portfolio management that builds upon prior work. The main contribution is that specific kinds of risk are explicitly considered. The portfolio is then optimized, using human judgment, for the current market outlook.
2011-04-05 Two Critical Lessons from Japan An End-of-Quarter Letter to Clients by Dan Richards (Article)
Given recent events in Japan and North Africa, many clients are looking to their advisors for direction on what they should do. This template for an end-of-quarter letter is intended to be a starting point for your letter to clients.
2011-04-04 Confessions of an Investor by Niels C. Jensen of Absolute Return Partners
Woody Brock is advocating a regime change. Throw away the generally accepted approach of two generations of investment ‘experts’ and start again, is Woody’s recommendation. As a practitioner, I certainly recognise the limitations of MPT and I agree that, in the wrong hands, it can be a dangerous tool, but there is also a discipline embedded in MPT which carries a great deal of value. And, in fairness to Woody, he does in fact agree that you can take the best from MPT and mix it with a good dose of ‘common sense’ and actually end up with a pretty robust investment methodology.
2011-03-30 “Agri”-vation by Scotty George of du Pasquier Asset Management
Recent events in the Middle East, combined with weather, have put tremendous pressure upon raw materials prices. The fear is that cyclical pricing pressure might become secular (generational) trends, accelerating inflation in energy prices, foodstuffs, and industrial components, thus undermining a tenuous uptick in consumer spending, global trade, and consumer confidence. While Wall Street rejoices that something, anything, has stimulated trading activity and profit margins, the world watches as surpluses contract and statistics become human convoys of disaster.
2011-03-27 Wanted: Private Investors Seeking First Loss Exposure on RMBS by Christopher Whalen of Institutional Risk Analyst
In a market where volatility is this high, even with the Fed removing trillions of dollars in duration from the markets via QE, just how are private obligors going to price trillions of dollars in first loss RMBS exposure in this imaginary private market that pro-reform elements in Congress have in mind? Fact is, when the Fed ends QE. market dependence upon the GSEs for liquidity support will grow. Like we said, raise the G fees and the conforming loan limit in the name of market forces, Congress needs to find some ways to increase the volume of mortgage loan refinancing and modifications.
2011-03-23 In Search of Value by David A. Rosenberg of Gluskin Sheff
Within the space we do favour large-caps, strong balance sheets, high-quality, low P/E stocks, and commodities, especially energy. But among all the worries, we still see this as an overvalued market and we believe in buying low and selling high. We know that many pundits like to use short-term market measures of valuation using year-ahead or trailing earnings or cash flow, which at times seems a little disingenuous for an asset class that is inherently long-term in duration. Be that as it may, perhaps we can shed some light on why patience may still be virtuous here.
2011-03-22 Consensus: Groundhog Decade for Stocks by Ed Easterling (Article)
Just as Bill Murray woke up to the same thing day after day in the movie 'Groundhog Day,' it's likely that your outlook foretells a groundhog decade for the stock market that will repeat its near-breakeven returns from the past decade.
2011-03-21 Bahrain: Distinguishing Between Objective and Risk by Douglas Clark Johnson of Codexa Capital
Many internationalists would argue that Bahrain is endangering its objective of security and stability by trying to manage risk through armed conflict. An economy that depends on regional, even global, confidence can rebuild itself by quickly addressing civic flaws and heightening commercial strengths.
2011-03-19 How the VAR Model and Japan’s Tragedy Affect Investors by Frank Holmes of U.S. Global Investors
The threat of disaster from the damaged Fukushima nuclear power plant unleashed a ferocious sell-off of Japanese equities, but the damage to other major markets has been limited. Already experiencing a slight pullback prior to the events on March 11, U.S. equities and emerging markets have held up quite well. The MSCI Emerging Markets Index has only pulled back 2 percent since the earthquake and the S&P 500 Index only 3 percent.
2011-03-08 Letters to the Editor and a Final Thought on VAs with GMWBs by Various (Article)
We received a record number of letters in response to Robert Huebscher’s article, Understanding Variable Annuities with GMWBs, and to Peng Chen’s response, The Real Flaws – A response to 'Understanding Variable Annuities with GMWBs,' which were published last week. We also provide a final thought on this subject.
2011-02-23 Right Brains and the Dismal Science by Herbert Abramson and Randall Abramson of Trapeze Asset Management
It has been said that successful investors need to employ not only the left side of their brains which is the analytical or scientific part but also the right side which is the centre for creative thinking. Thats because much of investing has to do with the unpredictable, the down cards, variables about future demand, growth, political policy changes, psychological responses, weather, oil spills, and so forth. Value investors dont want to pay for the down cards, but want to buy so cheaply in the here, that there is little or no risk of losing, and the hereafter can take care of itself.
2011-02-23 Right Brains and the Dismal Science by Herbert Abramson and Randall Abramson of Trapeze Asset Management
It has been said that successful investors need to employ not only the left side of their brains which is the analytical or scientific part but also the right side which is the centre for creative thinking. Thats because much of investing has to do with the unpredictable, the down cards, variables about future demand, growth, political policy changes, psychological responses, weather, oil spills, and so forth. Value investors dont want to pay for the down cards, but want to buy so cheaply in the here, that there is little or no risk of losing, and the hereafter can take care of itself.
2011-02-20 December 2010 Semi-Annual Report by John P. Hussman of Hussman Funds
For the third time in a decade, the Federal Reserve has embarked on a policy that addresses structural economic problems by provoking speculation in asset prices. The first two attempts were ultimately followed by stock market declines greater than 50% each. As we enter 2011, the stock market remains in what we view as an already strenuously overvalued advance, which has driven our estimates for S&P 500 Index total returns to less than 3.2% annually over the coming decade. My expectation is that this attempt to create “illusory prosperity” will end no better than it has in the past.
2011-02-16 The Case for Mid-cap Equities by Eagle portfolio managers of Eagle Asset Management
Mid-cap stocks have been a “sweet spot” in the U.S. equity markets given their risk/return characteristics. These stocks have produced excellent relative performance in both up and down markets, capturing more of the market in up periods and less of the market in down episodes over the same time period than their large-cap or small-cap counterparts.
2011-02-15 Toward an Understanding of Risk by Robert Huebscher (Article)
How should clients think about risk in their portfolios? Advisor Perspectives put that question to a cross-section of prominent advisors and academics. Their answers encompassed diverse opinions and underscored how crucial that question is to the investment process.
2011-02-15 Assessing New Tools to Protect Against Tail-Risk Events by Jerry Miccolis (Article)
Protecting against sudden, severe market drops is as crucial as it is difficult. A plethora of approaches to this problem have been brought to market in last few years, and to evaluate them my firm developed a set of rigorous criteria. These criteria led us to a solution that works for us and for our clients.
2011-02-04 Portfolio Commentary : Fourth Quarter, 2010 by Jay Compson of Absolute Investment Advisors
For our 4Q commentary we have decided to alter our approach and provide direct insight into our managers’ thoughts by providing portions of their commentaries in a series of independent “short stories.” Collectively they represent many of the thoughts that we have utilized for writing our quarterly commentaries, but we feel the current environment offers a unique time to hear things “directly from the horse’s mouth.”
2011-01-25 Should Advisors Care about Short-Term Volatility? by James Colon, John Gambla and Rob Guttschow (Article)
How can advisors construct portfolios that meet their clients' risk preferences across economic environments? You may be surprised to learn that tactical asset allocation has an important role to play.
2011-01-20 James Tobin’s Advice; Look 'Anywhere insight may be found' by Kendall J. Anderson of Anderson Griggs
For 99% of all investors in the United States, risk control can be simplified by separating your funds into buckets of “risk-free” and “risky” assets. Just remember that “risk-free” cannot be substituted with investments that are almost risk free. With FDIC Insurance coverage of $250,000.00 per person, and unlimited amounts available from the U.S. Treasury, the ability for most investors to incorporate risk free investments into their portfolios is easily accomplished.
2011-01-11 Tactical Asset Allocation and Market Timing: What's the Difference? by Nancy Opiela (Article)
Why is it that the industry dismisses significant changes to portfolio allocations as "market timing" transactions but embraces the subtler "tactical shifts" many advisors are making in the current, transitional market? As advisors debate the nuances of that question, the more relevant question may be: How would you respond if a client asked you to explain the difference between market timing and tactical asset allocation?
2011-01-11 The Key to Scaling Your Practice by Bob Oros (Article)
Independent advisors who are ill-equipped to handle a large influx of business from retiring baby boomers will struggle to harness the swelling demand. To capitalize on this new wave of assets, advisors need an edge. Many forward-thinking advisors have already discovered such an advantage in model portfolios.
2011-01-03 Setup and Resolution by John P. Hussman of Hussman Funds
One of the striking features of the market here is the extent to which large-cap, high-quality has underperformed speculative sectors of the market, creating what we view as a multi-year "setup" in favor of high quality issues.
2011-01-02 Hangovers by Isbitts of Emerald Asset Advisors
The overhang of US unemployment, long-term inflation, and risks of temporary overheating in the Commodity and Emerging markets is a wicked one, so the best posture for 2011, and most years for that matter, is to be invested, but with a net to catch you when you fall. However, the longer out one looks, and the wider the breadth of investment themes one is permitted to consider, the more the truly dynamic secular investment opportunities become visible. The ability and willingness to see the "forest" over the ever-present "trees" is the best advice I can give you.
2010-12-22 Understanding Risk Parity by Brian Hurst, Bryan W. Johnson, and Yao Hua Ooi of AQR Capital Management
The outperformance of Risk Parity strategies during the recent credit crisis has confirmed the benefits of a truly diversified portfolio. Traditional diversification focuses on dollar allocation; but because equities have disproportionate risk, a traditional portfolio’s overall risk is often dominated by its equity portion. Risk Parity diversification focuses on risk allocation. We find that by making significant investments in non-equity asset classes, investors can achieve true diversification – and expect more consistent performance across the spectrum of potential economic environments.
2010-12-06 A Most Important Rule by John P. Hussman of Hussman Funds
A decline in bond prices has modestly improved expected returns in bonds, but not yet sufficiently to warrant an extension of our durations. Precious metals have become more overbought, and while we are sympathetic to the long-term thesis for gold, intermediate term risks are now elevated. Finally, we have observed a further deterioration in market conditions for stocks.
2010-12-03 The Dirty Dozen by Niels C. Jensen of Absolute Return Partners
In the following I list a number of risk factors which I believe investors should give serious consideration, but I do not for one second pretend for that list to be exhaustive. Neither should you read anything into the order of which those risk factors are listed. If you want my assessment of how to rank the various factors, you need to take a look at the risk scatter chart at the end of the letter.
2010-11-28 House on Ice by John P. Hussman of Hussman Funds
If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, we would be quickly on the course to a sustained recovery. Unfortunately, however, we have built our house on a ledge of ice.
2010-11-23 Conflicted Agents: Credit Ratings, Risk Management and Dodd-Frank by Christopher Whalen of Institutional Risk Analyst
Implementing Dodd-Frank levels the playing field for all of the producers of ratings. Banks and funds should start to create, aggregate and share two metrics - probability of default and loss given default - for all of the exposures which they touch. In creating these metrics, these institutions must both do their own work and will be able to reference any one of hundreds of external ratings and valuation sources.
2010-11-22 The Science of Risk by Scotty George of du Pasquier Asset Management
We’re in a particularly vulnerable time in world financial markets. Having just completed a significant 2 year market response (upwards) to the global credit crisis, the question of whether or not we can sustain similar economic magnitude has everyone’s attention. Although financial data seems more or less in line with a nascent recovery, investor confidence and activity are still less than robust.
2010-11-12 Analyzing China's Banking Sector Reform by Richard Gao of Matthews Asia
China's banking reform has effectively transformed its state-owned banks into commercial banks running under international practices.
2010-11-09 How Modern Is Your Portfolio Theory? by Direxion Funds (Article)
After 58 Years, is there Another Way to Conquer the Efficient Frontier? In the past, active or "tactical" investment management referred to jumping in and out of stocks and bonds - market timing. With the introduction of sophisticated funds that help the masses harness the power of institutional managers and alternative asset classes and strategies, today, tactical management may help to renovate your portfolios - and help you retain and attract assets.
2010-11-03 Four Rather Sick Patients by Niels C. Jensen of Absolute Return Partners
The world is in an unprecedented situation in which all four major trading currencies (EUR, GBP, JPY and USD) face serious challenges. Not all four major currencies, however, can fall at the same time. Currencies are unique in the sense that they are relative as opposed to absolute trading objects. You don't just buy dollars. You buy dollars against some other currency. The scaremongers may have their day in the sun, but ultimately common sense will prevail and currency traders will have to go back to focus on housing starts again.
2010-11-01 Quantitative Easing Measures Likely to Help Economy by Bob Doll of BlackRock
For the past couple of years, deflationary pressures and deleveraging risks have been front and center in the debate over the future direction of economic growth, and as the pending arrival of additional easing measures shows, these forces are still highly present. The worst of the deleveraging situation is now in the past, however, and the future growth impact of deleveraging will be less than it was over the past two years. The falling dollar higher commodity prices and the addition of more quantitative easing should prime the pump for inflationary pressures to begin increasing.
2010-10-27 Triple Down: Fannie, Freddie, and the Triumph of the Corporate State by Christopher Whalen of Institutional Risk Analyst
What we need from the Federal Reserve is some leadership on the issue of making the White House take responsibility for restructuring the economy. The Fed should be telling the healthy banks to start taking a bit of risk, making some loans instead of buying Treasury bonds and agency mortgage-backed securities. A bit of increased competition in the origination channel so that performing borrowers can get a refinancing closed will unblock the economy and also do wonders for the efficacy of Fed policy.
2010-10-18 Market Rally Contines by Bob Doll of BlackRock
Over the long term, modest levels of growth should be enough to allow corporate earnings to continue to make gains and push markets higher. Because stock markets have advanced so strongly over the past several weeks, however, we may be looking at a classic 'buy the rumor, sell the news' scenario that could cause a near-term setback at some point later this year. In any case, the economic, earnings and valuation backdrop makes for an attractive longer-term case for equities.
2010-10-04 Corporate Earnings Outlook Remains Strong by Bob Doll of BlackRock
In the short term, continued caution is warranted given the high levels of uncertainty, especially considering the rebound in investor sentiment we have seen, coincident with equities rising 10 percent from their lows about a month ago. Still, assuming the United States does avoid a double-dip recession, and that Europe continues to avert a renewed financial crisis, investors with long-term horizons should look past the short-term tactical issues and focus on the fact that equity valuations appear attractive, especially relative to bonds.
2010-10-01 Insolvency Too by Niels C. Jensen, Nick Rees and Patricia Ward of Absolute Return Partners
On 1st January 2013, Solvency II, a new directive governing capital adequacy rules in the European insurance and life insurance industry, will come into effect. Going forward, European insurers will have to be able to pass a 1-in-200 years' event stress test, which has been designed to give the industry enough of a cushion to withstand even the most severe of bear markets without being forced to sell. Risky asset classes such as equities, commodities and other alternative investments will be assigned much higher reserve requirements than less risky asset classes such as bonds.
2010-09-28 The Future of Oil by Robert Huebscher (Article)
No commodity impacts the global economy more than oil. When geopolitical threats loom, two questions often dominate discussion: Will the price of oil rise? And what will be the economic consequences? We review the key drivers of recent, current, and forecast oil prices, including a template for the necessary eventual alignment of supply and demand.
2010-09-27 Not Yet Out of the Woods by John P. Hussman of Hussman Funds
While we know the Economic Cycle Research Institute data has deteriorated further since June, we won't have GDP figures for a while yet. Given the data in hand, it's clear that past growth downturns of the same extent have often gone on to become recessions. The bulk of the growth that we did observe coming off of the June 2009 economic low was driven by a burst of stimulus spending coupled with a variety of programs to pull economic activity forward. These synthetic factors are now trailing off, with little intrinsic economic activity to propel a recovery.
2010-09-27 Weekly Investment Commentary by Bob Doll of BlackRock
The macroeconomic backdrop seems improved compared to one month ago. Economic data has moved from 'bad' to 'less bad' (if not to 'good'), and the rhetoric from Washington, D.C. has recently focused on some pro-business and tax policies. Optimism is growing that with the upcoming midterm elections, investors may be seeing some more equity-friendly policies in the works. BlackRock remains optimistic that the economy will avoid a double-dip recession, and stocks should continue to grind higher.
2010-09-20 Weekly Investment Commentary by Bob Doll of BlackRock
Absent any significant economic disappointments, stocks are likely to continue to make gains in the weeks ahead. Although investors have begun to re-enter the markets, however, most still have lower-than-normal levels of equity exposure in their portfolios and are waiting for clearer signs that the economy has regained strength before rebuilding their stock positions. Nonetheless, equity valuations are attractive and, looking ahead, stocks appear likely to outperform Treasury bonds and cash over a two- to three-year time horizon.
2010-09-14 Latest Bond 'Bubble' Fears are Overblown by Team of American Century Investments
Despite considerable discussion in the financial media about the existence of a bond market bubble, the fixed-income team at American Century Investments finds little evidence to support this claim. Bond bubble proponents base their argument largely on record flows into fixed-income investments, bonds' extended outperformance over stocks, and record low interest rates. However, a confluence of economic headwinds argues for a prolonged period of low interest rates and inflation, while investor demographic and behavioral finance trends also appear to favor further bond inflows.
2010-09-07 Weekly Investment Commentary by Bob Doll of BlackRock
Equity markets have been shaky in recent months, but the tightening of financial conditions that occurred in the spring and summer appears to be reversing somewhat, which should act as an important stabilizing force. At present, stocks are attractively valued and are on the cheap side - the S&P 500 Index is trading at 11.5 times forward consensus earnings, and the dividend yield for stocks is close to the yield of the 10-year Treasury bond. While no dramatic breakout of the current trading range should come any time soon, the path of least resistance for stocks continues to be up.
2010-09-02 Beggar Thy Neighbor by Niels C. Jensen, Nick Rees and Patricia Ward of Absolute Return Partners
Austerity hurts domestic economic growth, and all those countries facing harsh austerity programs over the next several years will thus realize that the only way out of the current predicament is through higher exports and/or lower imports. We cannot all export our way out of our problems, however. Somebody will have to do the imports. Lower economic activity will again lead to lower tax revenues for the public sector; it is a very unfortunate and rather vicious spiral which is also very deflationary.
2010-08-30 Views on Developing Markets by Team of First Eagle Funds
As the developed world stumbles from crisis to crisis, many developing countries seem poised to continue taking a greater share of the world's wealth. This trend, however, is not an automatic signal to invest. China, India and Brazil, the most sought-after developing markets, now demand double-digit multiples, and have higher inflation and monetary growth than developed markets. These factors suggest that the margin of safety is significantly smaller in developing markets than in developed markets.
2010-08-30 Weekly Investment Commentary by Bob Doll of BlackRock
While the recovery has been slow, we have made significant progress. On a real basis, U.S. gross domestic product has regained 70 percent of what was lost during the recession and on a nominal basis, GDP has regained all of it, meaning that the United States is in a nominal expansion. In any case, investors in U.S. stocks can expect continued volatility ahead. The S&P 500 Index has remained in a rough trading range of between 1,020 and 1,120. While a dramatic breakout from this range is unlikely for now, as economic conditions slowly improve, the positive forces should win out.
2010-08-23 Weekly Investment Commentary by Bob Doll of BlackRock
The sharp pullback in bond yields throughout the past couple of weeks suggests that fixed income markets are discounting a return to recession conditions. In contrast, the relative resilience of the stock market suggests that equities are discounting a milder slowdown in the pace of recovery. BlackRock believes that fixed income markets are overly pessimistic, but acknowledges that it will take some time to work all of this out, meaning that stocks are likely to remain in a trading range.
2010-08-18 Risky Business by Robert J. Horrocks of Matthews Asia
Much effort has gone into trying to understand the elements of 'risk' and 'uncertainty' for investors. Matthews' Chief Investment Officer Robert Horrocks tries to bridge the gap between what academic theories define as risk and the experience of practitioners - particularly when it comes to managing Asian equity portfolios. In an environment in which risk is not clearly or reliably defined, he cautions, be humble.
2010-08-18 Zombie Love: Do Fannie and Freddie Provide Any Benefit to the U.S. Economy? by Christopher Whalen of Institutional Risk Analyst
This commentary features a piece from Achim Duebel at Finpol Consult in Berlin criticizing U.S. fiscal intervention in the housing market. Duebel's comment was first written in 2003, when its publication in a housing finance journal was blocked by government-sponsored enterprise lobbyists. The striking thing about it is that almost nothing about the structure of the housing market has changed since it was first written. Christopher Whalen also comments on the current status of the housing sector, and double-dips both real and imagined.
2010-08-17 Economic, Investment and Asset Allocation Overview – July 2010 by Jeff Spitzmiller, Jim Worden and Alan Chauhan of Iron Point Capital Management
A buy-and-hold U.S. stock portfolio alone can't be expected to provide attractive returns over the coming years. Alternative asset classes and certain segments of the stock and bond markets are current areas of focus for Iron Point Capital Management. The firm currently favors high-yield bonds, floating rate securities, alternative investments and emerging market debt and equity, amongst other investments that can provide excess return, risk reduction or the ability to capitalize on long-term trends.
2010-08-16 Investment Commentary by Bob Doll of BlackRock
The outlook for stocks will be highly dependent on the direction of the economy. Despite last week's decline in both equity prices and Treasury yields, financial markets are signaling that the worst of the deflation scare is ending and that renewed recession is unlikely. A strong current of skepticism is likely to persist for some time, and volatility levels will likely remain elevated, but as long as the economy does not retreat back into recession, stocks should be able to continue to make gains.
2010-08-09 Systemic Regulator Risk: Does the Fed of New York Need a Haircut? by Christopher Whalen of Institutional Risk Analyst
Given its second lease on regulatory life, one might expect that the Fed's bank supervision function would be gearing-up to take a fresh, smart, and tough line with respect to financial company oversight. However, the appointment of Sarah Dahlgren as head of supervision by the Federal Reserve Bank of New York indicates this may not be the case. Ms. Dahlgren has been at the center of many of the Federal Reserve's most embarrassing failures in the area of bank supervision, including the fiasco surrounding American International Group.
2010-08-09 Weekly Investment Commentary by Bob Doll of BlackRock
Many risks remain to the current cautiously optimistic outlook, including the failure of the housing market to stage a meaningful recovery, the need for ongoing consumer deleveraging and the move toward fiscal austerity in many markets. As long as the economy does not fall back into recession, however, equity markets should be able to grind higher over time. Economic growth of around 2 percent should be enough to allow corporate earnings to continue to grow, and that backdrop, combined with still-attractive valuations, should make for an equity-friendly environment.
2010-08-03 Letter to the Editor by Various (Article)
In a letter to the editor, a reader responds to Dave Loeper's article, Fake Diversification Exposed: Does Asset Allocation Work?, which appeared on July 13.
2010-08-02 Weekly Investment Commentary by Bob Doll of BlackRock
Market volatility has remained elevated over the past several months as investors remain uncertain about the future direction of global and U.S. economic growth. There is a lack of conviction and confidence on the part of businesses, consumers and investors, but as long as the economy does not slide back into recession, corporations should be able to continue to grow their earnings. A combination of positive (if slow) economic growth, solid corporate earnings and attractive equity market valuations should be enough to restore some positive momentum in equity markets over time.
2010-07-30 Core|Satellite Investing with First Eagle Funds by Team of First Eagle Funds
Many practitioners of core/satellite investing use the core of their clients’ portfolios to generate market-like returns with market-level risk exposure, or beta, and use satellite investments to produce excess returns, or alpha. Within this framework, passive investment vehicles — index funds and ETFs — have become standard core investments. First Eagle questions this approach, and believes an actively managed global portfolio should be the core.
2010-07-27 Robert Shiller: A Cautious Outlook for Stocks by Dan Richards (Article)
Dan Richards recently spoke with Robert Shiller, the Yale economist who foresaw the financial crisis and created the Case-Shiller housing index. Shiller discusses the potential for a double-dip recession, valuations in the US equity market, and the outlook for a housing recovery. This is the transcript of the interview.
2010-07-26 Weekly Investment Commentary by Bob Doll of BlackRock
A sustained, albeit subpar, economic recovery is in the cards. Neither critical equity sectors nor credit spreads are signaling that the recovery has been derailed, which suggests that the cyclical recovery in corporate profits is not over. Still, the US economy continues to face significant headwinds, giving us reason to believe that the move higher in equity and other risk asset prices will likely be a long, hard grind characterized by continued volatility.
2010-07-12 A Man Lived by the Side of the Road ... by Jeffrey Saut of Raymond James Equity Research
Currently, the question du jour is whether the economy is going to slip back into recession; aka ...the dreaded double-dip. While there is always the chance of a double-dip, they are pretty rare. Interestingly, all three double-dips since 1880 were characterized by a mild first recession followed by a more severe secondary recession. Plainly, what we experienced in the 2007 – 2009 recession was anything but mild. Accordingly, the odds of another recession are low. There is always the risk, however, that we will 'talk' ourselves into a recession.
2010-07-08 Update: 10 Predictions for 2010 by Bob Doll of BlackRock
Over the long term, policymakers still have a difficult job to do as they work to unwind the massive amount of stimulus that had been injected into the system without causing either inflation issues or renewed deflation threats. Over the short term, the broad macro environment will continue to be buffeted by financial and economic uncertainty that will keep volatility levels elevated. That said, the odds for a double-dip recession are low. As long as a renewed economic contraction is avoided, equity prices should grind higher over time.
2010-06-22 Market Changes Affect the Role Fixed Income May Play in Client Portfolios by Janus (Article)
Investment consistency, sector allocation and credit analysis are three of the critical ingredients of successful fixed income management. Janus shares their views on these important topics and how to use this information in your discussions with clients. We thank them for their sponsorship.
2010-06-22 Odds of a Double-Dip Recession Remain Low by Bob Doll of BlackRock
Equity markets should be able to make additional gains over the course of this year. This outlook is not so much a forecast of significantly improving economic news as it is an expectation that many of the risks facing investors will fade over the coming months. The direction of financial regulatory reform in the United States should become clearer and the slowdown in Chinese growth should result in a soft landing. The uncertainty surrounding European sovereign debt, however, remains the chief wild card.
2010-06-14 Twelve Weeks Later, The Recovery Remains On Track by Bob Doll of BlackRock
Equities have already priced in the likelihood of somewhat slower economic growth in the coming months. Volatility measures will remain high because markets still remain subject to many risks, not the least of which is the high degree of uncertainty surrounding the European debt crisis. In any case, the bulk of the current correction should be behind us, while the positive macro backdrop and improving valuations will provide a floor for equity prices. Investors will need to remain patient, since it will still take some time before base-building can allow markets to regain ground.
2010-06-10 Bull Market Should Continue, But Patience is Warranted by Bob Doll of BlackRock
Markets remain caught in a tug of war between reasonably strong economic fundamentals and escalating threats of external shocks. As long as the world economy does not sink back into an unlikely recession, however, equity markets should be able to weather the current period of uncertainty. The economic recovery should continue, although the pace should be relatively slow and interrupted along the way by periods of disappointing data. Investors will need to see a recovery in European debt markets and evidence that contagion can be contained before confidence can be restored.
2010-06-08 Dan Fuss: What Keeps Bond Managers Up at Night by Dan Richards (Article)
Highly respected fixed-income manager Dan Fuss of Loomis Sayles recently spoke with Dan Richards about what keeps bond managers up at night. Fuss identifies the critical issues bond investors face. We provide a video and a transcript of the interview.
2010-06-08 Ten Ways to Improve Manager Selection by Nancy Opiela (Article)
Today's emphases on fiduciary responsibility, risk management and increased transparency require better due diligence when selecting managers. Especially in today's turbulent markets, advisors who spend more time and resources to do due diligence well can find themselves at a distinct competitive advantage. While these ten tips won't necessarily help you identify the next active management superstar, they can bolster your manager selection and due diligence program.
2010-06-07 The European Disease by Niels C. Jensen of Absolute Return Partners
It should be blatantly clear that Greece is by no means the only country at risk of falling into the much dreaded debt trap. The United Kingdom, the United States, New Zealand, Spain, France, Portugal and Australia are all in dangerous territory and Ireland is in very deep trouble on this account. This cross-European contagion risk threatens the very existence of our banking system, and it is this risk that French and German leaders are thinking about when they say that Greece will not be allowed to go down.
2010-06-07 Rajiv Sethi on High Frequency Equity Trading by Christopher Whalen of Institutional Risk Analyst
This commentary features a piece by Barnard economics professor Rajiv Sethi on high-frequency trading and its implications for the use of equity-market data, both for profit and risk management. Sethi notes that trading must be based on fundamental information rather than pure market data for prices to remain stable. Banning specific classes of algorithms is unlikely to provide a lasting solution to the problem, however, unless the advantage is shifted decisively and persistently in favor of strategies that feed information to the market instead of extracting it from technical data.
2010-06-03 Fundamental Strength Should Beat Out Heightened Uncertainty by Bob Doll of BlackRock
In previous business cycles, when credit market pressures surfaced at a time when the yield curve was steep, the economy experienced brief slowdowns, but not recessions. If that is also the case today, then what we are looking at should be a temporary slowdown in growth, but not a double-dip recession. Nervous investors and slowly receding uncertainty levels will keep market volatility high over the coming month. However, should the labor market recovery continue, the backdrop of strengthening corporate profits and a recovering economy should push equity prices higher.
2010-05-24 Comment: Clifford Rossi on the Need for the Office of Financial Research by Christopher Whalen of Institutional Risk Analyst
This commentary features a contribution by Clifford Rossi, managing director of the Center for Financial Policy at the Robert H. Smith School of Business, University of Maryland. Rossi writes in support of a proposal by Senator Chris Dodd to establish the Office of Financial Research, which would aggregate enterprise-wide views of risk at large financial firms. Critics say the OFR would represent an unwarranted breach of privacy. The new division was included in the Senate financial reform bill, but is in danger of being dropped during the final reconciliation process.
2010-05-24 Correction Should Be Nearing Completion by Bob Doll of BlackRock
The worst of the downturn should be behind us, but it will likely take some additional time before markets can repair themselves. Looking ahead, one positive factor is that market valuations have become more attractive in recent weeks, as prices have dropped while earnings have increased. Over time, additional clarity around the situation in Europe and financial market reform in the US should provide a measure of stability; and a sense that the economic recovery remains on track should help spark a turnaround in the recent aversion to higher-risk assets.
2010-05-18 Sovereign Debt Crisis Drives Volatility Higher by Bob Doll of BlackRock
Investors have grown increasingly concerned about the potential for contagion from Europe, fearing credit issues could affect other markets. While European Union rescue plans do not address the underlying fundamental issues facing Greece and other countries, however, immediate liquidity risks should be contained in the short term. On a relative basis, U.S. markets have benefited from the uncertainty, as investors have continued to view the United States as a higher-quality haven for their assets. This makes U.S. stocks more attractive than those of other developed markets.
2010-05-18 Learning from the S&P 500 Monthly Moving Averages by Doug Short of Doug Short
Doug Short analyzes monthly closes of the S&P 500 since 1950 to back-test several monthly moving average strategies versus buy and hold. The results suggest that in secular bull and bear markets, passive management is a successful strategy on the way up, but is a losing proposition on the way down. The reverse is true for active management with simple moving averages. It's unlikely to outperform buy and hold on the way up, but outperformance on the way down is a virtual guarantee. Unfortunately it's impossible to pin-point those secular tops and bottoms and change strategy on a dime.
2010-05-11 God Is Dead: The Implications of the Goldman Sachs Case by Michael Lewitt (Article)
Michael Lewitt provides us with the most recent issue of the HCM Market Letter, where his discusses the implications of the Goldman Sachs case. Lewitt says Goldman faces a terrible dilemma, and should heed the lessons of the downfall of Drexel Burnham two decades ago. Lewitt also comments on the private equity industry, public pension funds, and bank capital requirements and the ratings agencies.
2010-05-11 Positives Should Outweigh Negatives by Bob Doll of BlackRock
Given the sharpness of recent trading swings, many investors will continue to approach the markets with caution. Markets remain under pressure as a result of the sovereign debt issues in Europe, policy tightening in China and elsewhere, and uncertainty surrounding pending regulations for the financial services sector. The positive forces of improving economic growth, however, including an absence of inflation, low interest rates and stronger corporate earnings, should continue to move markets higher.
2010-05-05 The Commodities Con by Niels C. Jensen of Absolute Return Partners
Investor allocation to commodities has grown dramatically in recent years - to the point where commodities have become a mainstream asset class. Commodity prices have thus at least partly been driven not by fundamental demand but by demand from financial investors eager to diversify their equity risk and attracted to the seemingly high probability of generating uncorrelated returns. What these investors do not seem to understand, however, is that now that traders themselves determine market prices, the promised land of uncorrelated returns is little more than wishful thinking.
2010-05-03 Stocks Sink on Fear of Credit Contagion by Bob Doll of BlackRock
Before last week, the rapid ascent in equity prices had been a cause for concern, and as last week's downturn shows, markets remain vulnerable to corrective forces. To date, the problems of the sovereign debt crisis, global policy tightening and regulatory restrictions have been outweighed by the broader improvements in the global economy and rising corporate profits. Given the low returns offered by cash and the still-reasonable valuations for stocks, this trend should continue.
2010-04-26 Stocks Jump on Earnings News by Bob Doll of BlackRock
Following the stock market lows of March 2009, the bull market that commenced was, at first, driven by government action and increased liquidity. Since that time, stocks have been advancing based on the reality of fundamental improvements in global economic growth and corporate earnings. The key risk to stocks remains the possibility that the economic recovery will become derailed. While deleveraging threats remain and the banking system is still operating in a credit-impaired environment, BlackRock does not expect to see a double-dip recession.
2010-04-20 Months-Long Equity Rally Pauses by Bob Doll of BlackRock
Stocks have rallied in an almost uninterrupted fashion over the past couple of months, but the tenor of Friday's news adds an element of uncertainty. This backdrop, combined with various signs of excess in the markets, suggests that a period of profit-taking may be coming, perhaps sooner rather than later. In any case, however, the recovering economy, low inflation, strong corporate earnings and reasonable valuation levels should be enough to cause any sort of correction to be short-lived.
2010-04-20 Lessons from Yale’s Endowment Model and the Financial Crisis by Geoff Considine, Ph.D. (Article)
The Yale endowment's performance during the financial crisis was worse than what would be mathematically expected, but not significantly enough to question the endowment model's tenets. Moreover, Yale's performance and philosophy suggest two very important lessons for advisors and investors- to diversify beyond equities and fixed income, and that some illiquid asset classes can be an important source of alpha.
2010-04-14 The Tao Jones by Tom Brakke of The Research Puzzle
Looking to step back from the market and get some inspiration, on Monday Tom Brakke reread 1983's The Tao Jones Averages by Bennett Goodspeed. As the book notes, our challenge as investors is to recognize the messages that we are being given by others, the belief systems that we rest our actions upon, and not just the type of environment that we are in now but how it is changing. Our methods and our minds are resistant to change. If nothing else, reading a book like this forces you to consider the possibility that you aren't seeing the complete picture.
2010-04-13 Stocks Reach 18-Month Highs by Bob Doll of BlackRock Investment Management
Continued evidence of improvements in the economy and expectations for strong first-quarter earnings helped push stocks up nearly 8 percent for the year, to their highest levels in 18 months. BlackRock expects stocks to continue to grind higher over the course of the year, and for corporate earnings to become the main driver of equity prices. Over the longer term, the most significant investment issue will likely be the cyclical tailwinds of accommodative fiscal and monetary policy and the secular headwinds of massive budget deficits, high levels of debt and continued deleveraging.
2010-04-07 When the Facts Change by Niels C. Jensen of Absolute Return Partners
An echo bubble is upon us. Echo bubbles are the children of primary asset bubbles, and emerge when monetary authorities respond to the bursting of a primary asset bubble by slashing policy rates. Extraordinarily low interest rates are currently encouraging another bout of excessive risk taking. If policymakers raised rates now, however, they would almost certainly kill the fledgling recovery. The pressure is therefore on monetary authorities to keep rates low and feed the new bubble. Investors should steer toward assets that benefit from high volatility.
2010-04-06 Ben Bernanke: The REPO Man and Castles Made of Sand by Christopher Whalen of Institutional Risk Analyst
Without the implicit backing of the U.S. Treasury and Federal Reserve System, the remaining large dealers of over-the-counter assets and derivatives could not function in the post-crisis marketplace. This reality is most visible in the tripartite market for repurchase agreements or REPOs, the basic tools Wall Street uses to finance its working capital book. Now that it's April and the Fed's quantitative easing purchase program is ending, it seems fair to ask: What trick is Fed Chairman Ben Bernanke going to perform next to maintain the stability of market prices?
2010-04-05 Labor Market Turnaround by Bob Doll of BlackRock
The March payrolls report likely signaled the start of a long-awaited rebound in the employment picture, which should benefit the broader economy. As fiscal and monetary stimulus begins to fade over the coming months, the economy is going to require some self-sustaining mechanisms to kick in, and growing employment levels would certainly be beneficial. Over the course of the next year, we expect the economy to successfully shift from a recovery to an expansion. Investors should continue overweighting equities and credit-related fixed income assets and underweighting cash and Treasury bonds.
2010-03-23 Employment Gains Likely by Bob Doll of BlackRock
The jobs-shedding phase appears to have ended, but new jobs are still not being created. Unemployment claims have declined in March, however, and so this scenario may soon reverse. Temporary employment has increased, and many firms have discussed plans for permanent hiring. Factoring in census hiring, payrolls may increase by more than 200,000 this month. Once jobs growth commences in earnest, corporate earnings should also increase and investor uncertainty should diminish, and this should drive the next cyclical bull market in equities.
2010-03-15 Market Rebound Continues by Bob Doll of BlackRock
Equity markets notched positive returns again last week, as the Dow Jones Industrial Average climbed 0.6% to 10,625, the S&P 500 Index advanced 1.0% to 1,150 and the Nasdaq Composite rose 1.8% to 2,368. Economic growth should continue to improve, which should provide a boost to investor confidence. Additionally, merger and acquisition activity has picked up strongly in recent weeks, as have corporate share buybacks, trends that help promote an equity-friendly environment. On balance, equity markets should endure ongoing periods of volatility, but the cyclical bull market has further to run.
2010-03-09 Equities Notch Weekly Gains by Bob Doll of BlackRock
Last week was strong for risk assets, and equities in particular, as the broad U.S. averages entered positive territory for the first time since early January. All sectors were positive, with materials up the most at 6 percent. A profits-led recovery seems to be unfolding, which will lead to increases in capital expenditures, and eventually, employment. After six negative weeks, flows in equities have been positive for three weeks running. Accommodative liquidity conditions and a healing economy support a pro-growth investment stance.
2010-03-09 Letters to the Editor by Various (Article)
In our letters to the Editor, readers respond to a number of recent articles, including the charity challenges posed by Roger Schreiner and Dave Loeper, the active v. passive debate, Morningstar ratings, and our article on the PIMCO Total Return fund.
2010-03-04 The Retirement Lottery by Niels C. Jensen of Absolute Return Partners
Aggressive advertising feeds us the fallacy that as long as we invest for the long term, equities will always provide us with solid returns. This may be true if your investment horizon is 30 or 40 years, but most people do not start saving for retirement until they are in their 40s. Hundreds of millions of baby boomers are now chasing whatever returns they can to ensure that they can retire in relative comfort. Jensen also examines the relationship between net private savings, foreign capital inflows and government debt.
2010-03-02 Recovery Continues, But Jobs Data Critical by Bob Doll of BlackRock Investment Management
The economic recovery remains intact, but data remains mixed and outlooks are still uncertain. Employment trends remain the most critical economic data, because the labor market is the mechanism that sustains and reinforces growth. At present, corporate earnings and balance sheets are supportive of companies increasing their payrolls. Trading remains uneven, but higher-risk assets still hold long-term upside potential.
2010-03-02 It’s No Shell Game by Roger Schreiner (Article)
Last week, Wealthcare Capital Management's David Loeper accused Roger Schreiner, of Schreiner Capital Management, of "playing a shell game" and "stacking the deck," in regard to Schreiner's $100,000 challenge to passive managers. Schreiner responds, and says that passive advocates miss the point that relying only on diversification is insufficient to protect against downside risk.
2010-02-16 Boom and Bust by Michael Lewitt (Article)
The US and global economies are "trapped in a cycle of boom and bust as a result of fiscal and monetary policies from which there is no easy escape," says Michael Lewitt of Harch Capital Management. Lewitt believes the S&P will rally to 1,200-1,250, but says the long-term prognosis is "somewhere between grave and terminal." We are privileged to provide this excerpt from Lewitt's monthly newsletter and encourage our readers to subscribe to it directly.
2010-02-16 Robert Shiller on Trills, Housing and Market Valuations by Dan Richards (Article)
Robert Shiller, a professor of economics at Yale University and co-creator of the Case-Shiller Housing Index, discusses several topics in this interview with Dan Richards, including his plan for governments to finance their debts by issuing "trills," a security representing a fractional claim on the country's GDP.
2010-02-03 Obama's Recent Regulatory and Fiscal Proposals by Nouriel Roubini of RGE Monitor
Roubini supports the Obama administration’s regulatory policies (e.g, the Volcker Rule) and says the proposed budget will lead to a “sluggish and jobless” recovery. “Obama simply lacks the political support to implement aggressive fiscal reforms,” he says, adding that Obama’s political capital is likely to deteriorate after the 2010 elections.
2010-02-02 Stuck in One Dimension by Tom Brakke, CFA (Article)
Tom Brakke writes about the lessons in the demise of Tiger Woods for those seeking "star" investment managers. Relying on funds run by a single individual can be perilous.
2010-01-26 Using Alternative Investments to Build a Stronger Portfolio by Robert M. Hussey (Article)
Traditional asset classes may no longer provide sufficient portfolio diversification, but there's a new wave of mutual funds that offer alternatives strategies previously available only to large institutions. Robert Hussey of Natixis Global Associates describes how alternative strategies can be used in a mutual fund package. We thank them for their sponsorship.
2010-01-19 Letters to the Editor by Various (Article)
Readers responded to a range of topics in our letters to the Editor: our Paul Krugman interview, our article last week on the causes of the financial crisis, our article on the true cost of insuring the uninsured, and our article on costless collars using options.
2010-01-08 2009 Is History ... Here\'s What We Learned by Isbitts of Emerald Asset Advisors
2010-01-05 Risk Management through Costless Collars by Geoff Considine (Article)
Nassim Taleb and Zvi Bodie are among those who advocate a wealth management strategy that includes options. Despite their evangelism, though, options are rarely a part of retirement portfolios. The costless collar, a straightforward options strategy, gives investors the upside of an asset class (such as equities) while absolutely limiting the downside risk.
2009-12-29 Diversification is Not Enough by Roger J. Schreiner (Article)
The mainstream financial services industry, the media and academia - virtually everyone - has overestimated the value of diversification in risk management. The recent crisis has shown that investors need more than simple diversification to protect them from both the known and the unknown risk that they will eventually encounter. In this guest contribution, Roger Schreiner, says that when it comes to risk management, diversification simply is not enough.
2009-12-08 The 529 Dilemma by Mary Ann Lambert (Article)
The recent market decline coupled with, tax, custodial, management fees and estate planning issues make the decision to use a 529 plan less than straightforward. In this guest contribution, advisor Mary Ann Lambert briefly reviews the history of college savings plans and shows how the current landscape favors 529s for some clients but not for others.
2009-12-01 Think Like a Marine by David Raileanu (Article)
Retired Marine Patrick Gould has just published a book, Prudent Decision Making in an Imprudent World, and his theories prove useful for understanding decision-making in all arenas, not just those that involve life-and-death decisions. He applies many of his theories of risk, reward, preparation, security, and asset management to the financial world, working from modern portfolio theory and ultimately offering a practical decision method.
2009-11-17 Bruce Greenwald on Positioning First Eagle’s Funds by Robert Huebscher (Article)
Bruce Greenwald is a professor of finance at Columbia, the Director of Research at First Eagle Funds, and a leading expert on value investing. Last week we published part one of our interview, where he discussed the structural problems in the economy and his forecast for higher unemployment. This week he discusses the positioning of First Eagle's investments, and why Warren Buffett's purchase of Burlington Northern was a mistake.
2009-09-08 Why Credit Matters: Fixed Income Investing in a Changed Landscape by Janus (Article)
The recent dislocation in the fixed income market is likely to transform how investors and asset managers approach fixed income investing for years to come. The corporate credit sector may now be the single most important sector in generating risk-adjusted outperformance. In Janus' recent brief, Why Credit Matters, they discuss the structural market changes that have occurred and the importance of fundamental, bottom-up credit analysis and robust investment risk management in navigating this changed landscape. We thank them for their sponsorship.
2009-07-28 Moving Average: Holy Grail or Fairy Tale - Part 3 by Theodore Wang (Article)
Buy-and-hold remains deeply entrenched in the financial planning community, despite many of the flaws Ted Wong's previous articles have illustrated. Although many financial advisors suffer dearly from their buy-and-hold practices, they are reluctant to change their approach. Who dares to challenge investment sages like Bogle, Siegel, and Malkiel who emphatically support this long-standing investment principle? Academic research studies overwhelmingly endorse buy-and-hold. How can they all be wrong?
2009-07-14 Beyond Grantham: Politics and Investment Strategy by Jerry Minton (Article)
Jeremy Grantham, the chairman of GMO, believes strongly in what he describes as market "inefficiencies" within the "Presidential Cycle." He is referring to the fact that stock market returns are not distributed randomly across the four-year presidential election cycle, but rather are strongly skewed to favor the pre-election year. Grantham believes - and guest contributor Jerry Minton agrees - the evidence is incontrovertible: the behavior of the political class over the election cycle effects the distribution of stock market returns.
2009-07-14 Some Signs of Life and Hope for a New Recovery by John P. Calamos and Nick P. Calamos (Article)
Calamos Investments' co-CIOs John P. Calamos, Sr. and Nick P. Calamos discuss the current market climate, implications of Fed and government actions, and investment opportunities in the shorter- and longer-term. Global governmental policies have restored a degree of confidence in the financial markets and many key financial metrics are back to pre-Lehman levels. Many investment opportunities will be available in the future. We thank them for their sponsorship.
2009-06-30 Moving Average: Holy Grail or Fairy Tale - Part 2 by Theodore Wong (Article)
Many renowned financial experts declare that passive investing in a diversified index like the S&P500 is the only sensible way to manage money. In a follow-up to his article two weeks ago, Moving Average: Holy Grail or Fairy Tale - Part 1, Ted Wong says that he respects their opinions but is unable to verify their claims. By examining the evidence, he shows that the Moving Average Crossover (MAC) system offers a superior risk-return profile to a buy-and-hold strategy.
2009-06-23 Letters to the Editor – Moving Average: Holy Grail or Fairy Tale? by Various (Article)
Ted Wong's article last week, Moving Average: Holy Grail or Fairy Tale?, drew a large number of questions and comments from readers.
2009-06-16 9 Keys to Portfolio Risk Management by Isbitts of Emerald Asset Advisors
2009-06-16 High-Yield Bonds A Potential Opportunity for the Risk Tolerant by Northern Trust Investments (Article)
High-yield bonds have recently offered investors historically high spreads relative to Treasury and investment-grade corporate bonds, presenting attractive current income potential in today's low-rate environment. The current recessionary environment also poses a heightened risk of default, underscoring the importance of security selection and intensive analysis of underlying fundamentals. We thank Northern Trust Investments for this contribution and their sponsorship.
2009-06-16 Moving Average: Holy Grail or Fairy Tale - Part 1 by Theodore Wang (Article)
Buying and holding a diversified portfolio works well during good times, but falls short when supposedly uncorrelated asset classes drop in unison in bear markets. Are there alternative investment strategies that work for all seasons? Ted Wong evaluates strategies using moving averages to determine their effectiveness.
2009-05-26 What the “Missing Out” Argument Misses by Theodore Wang (Article)
Market timing is discredited by passive investment advisors as a voodoo ritual. Buy-and-hold proponents argue most compellingly by citing the "missing out" scenario - they show a dramatic drop in return, to Treasury Bill levels, if investors are out of the markets for only a few good days. In this guest contribution, Ted Wong debunks the missing out argument, using 137 years of market data.
2009-05-19 David Swensen's Ascent by Mebane Faber (Article)
Mebane Faber provides an excerpt from his new book, The Ivy Portfolio, on the ascent of David Swensen and the development of the tools employed to manage Yale's endowment. Faber shows the data Swensen used to determine Yale's aggressive allocation to alternative asset classes.
2009-05-19 Waiting for the Fifth Wave by Robert Huebscher (Article)
In response to skepticism we've expressed in the past about technical analysis, one of our readers invited us to attend the Market Technicians Association symposium in New York last week. Our skepticism remains, but it was an enjoyable event and we report on the forecasts of Elliot Wave theorist Robert Prechter.
0000-00-00 Woody Brock on Why to Own Stocks Now - Video by Robert Huebscher (Article)
Dr. Horace 'Woody' Brock is the founder Strategic Economic Decisions and the author of American Gridlock. In a recent talk, he explained why investors should own stocks – particularly those with stable dividends – and why bonds are very risky in today's environment. This is the video; a transcript of this talk is also available.