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Advisor Perspectives
Insights into the world of high- and ultra-high net worth investing
January 27, 2009- Vol 3, Issue 4
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US banks have written-off nearly $600 billion in bad loans, but that
represents only half the losses to be
incurred over the next two years, according to Nouriel Roubini and his colleague,
Elisa Parisi-Capone. The US banking system is borderline
insolvent, and another $1+
trillion of funds are necessary to restore banks to their pre-crisis
capitalization ratios.
The pendulum has swung to the point of excess gloom, according to
consultant Dan Richards, who
lists 12 reasons to be optimistic despite
the flow of bad news. Richards says it's important to help
clients understand that we are in that part of the market cycle where the
problems seem overwhelming, and any positive signs are ignored.
Historically, exactly these kinds of
environments represent the best times to invest.
MIT Professor Andrew Lo is a
highly-respected authority on risk management and financial modeling.
So, we were surprised to learn that he is now trying to find the mathematical justification for technical analysis.
His results thus far enforce our belief that technical analysis is closer to astrology than to real science.
Jeff Gundlach, Chief
Investment Officer of the TCW Group, provides a broad overview of the
markets, identifying those sectors that are attractively valued for 2009, and
those that are not. Gundlach looks at each sector of the fixed income markets, identifying one or two that are currently undervalued.
Investment risk should be viewed as a
matter of quantifiable probabilities and some amount of risk,
even risk of extreme outcomes, is ever present. In this article written for investors, advisor
Adam Apt says it is useful to identify investment risk with the volatility
of returns and that some common
inferences from this identification are incorrect. But a
little statistical learning can lead to dangerous underestimation of
investment risk.
Mike Ryan, an Illinois-based advisor, says that while measures have been
taken to stabilize the crisis, the
underlying problems are systemic. To produce a real, lasting
solution, the only option is to reform
our entire banking system, and he offers a radical seven-point plan to accomplish
that goal.
Risk management groups on Wall Street are engaging in risk manipulation, risk distortion, and risk
amplification - everything but risk management. Guest
contributor Thomas Tan argues that a recent New York Times article by Joe Nocera understates the problems in commonly used risk
management models.
The web site gurufocus carried a portion of
our recent interview with Fairholme manager Bruce Berkowitz. We
encourage you to visit their site, which is geared to sophisticated value
investors
Lastly, we highlight submissions to Advisor
Market Commentaries.
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"The US banking system is borderline insolvent in the aggregate and it
will take a huge amount of public financial resources and complex and
time-consuming work-out of insolvent institutions to restore its financial
health and allow it to lend again in ways that support sustained economic
growth," according Nouriel Roubini and Elisa Parisi-Capone of the RGE
Monitor.
Read the article
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Twelve
Pieces of Good News in the Gloom
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In this guest
contribution, Dan Richards identifies a dozen pieces of good news about the
economy and the markets - points which can help advisors in their
conversations with clients. Richards' optimism is based on factors
such as a number of respected analysts who believe the market is
attractively priced, pruning out of weaker firms, and stronger leadership
across the globe.
Read the article
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Can
Andrew Lo Legitimize Technical Analysis?
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Andrew Lo and his colleague Jasmina Hasanhodzic are attempting to prove
that profitable trading strategies can be found among the varied tactics
that comprise technical analysis. Their results thus far are not
encouraging, but we examine the related question of why a number of
individuals demonstrate persistent success, which they attribute to the
much-maligned discipline of technical analysis.
Read the article
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Jeff
Gundlach: A Survey of the US Capital Markets
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Jeff Gundlach is extremely bullish on non-agency mortgage-backed
bonds. These are trading below par and stand to benefit from the
growth in refinancing, as government actions reduce mortgage rates.
Gundlach believes the equity markets are not attractively priced, and
investors should wait for a commodity prices to rise, which will be
accompanied by a fall in the dollar, before increasing equity allocations.
Read the article
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How
to Think about Investment Risk
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In this article, Adam Apt offers a thorough discussion of the concept of
risk as it applies to investments. Most advisors will be familiar
with this material, but Apt's article offers an excellent introduction for
clients that want a better education about the nature of risk in the
financial markets.
Read the article
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An Opportunity for Monetary Reform
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Nationalize the Federal Reserve, retire all outstanding Federal debt, and
eliminate the income tax. These are three parts of a radical
seven-part plan proposed by Illinois-based advisor Mike Ryan as a way to
put our financial system on secure footing.
Read the article
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Risk
Management or Risk Manipulation
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The liquidity crisis of the last six months was inevitable. Wall Street got
complacent with computer models, and nature came back to punish them (and
the rest of us) for shrugging off the resistance to modeling of a key
factor: liquidity. Thomas Tan looks at this and other shortcomings in
risk management models and how they contributed to the credit crisis.
Read the article
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Highlights
from Advisor Market Commentaries
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Fortigent's investment research team looks at the trajectory of earnings
across the S&P 500 and elsewhere in the global markets, as well as the
prospects for the fourth quarter GDP, to be announced later this week.
Read the commentary
John Mauldin's commentary looks at the distortions of the price-weighted
Dow Jones index (particularly since bank stocks are now priced at such low
levels); he then comments on Roubini's analysis of bank losses, which is
the subject of our lead article above.
Read the commentary
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