Monthly Archives: June 2011

The Economic Bifurcation May Be Converging

The high for the S&P in the first half of 2010 was about 1220 toward the end of April. Comparatively, in the first hallf of this year, the S&P hasn’t printed below 1249, yet Gallup’s Economic Confidence index is near its low for the year—and lower than it was at any point in H1 2010. The consumer is weak; corporations are relatively healthy. However, they are not mutually exclusive events. At some point, that gap will have to be closed. It will not be over the course of one summer, but over the next quarter or so, you should expect individual economic situation to factor in to equity market returns. Continue reading

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The Pricing of Risk: Yield Implications

Stop viewing Treasury yields from the perspective of opportunity. For a moment, consider what they imply about the pricing of risk. The concept, “I’m taking on more risk, therefore I need to earn more return” is often misapplied. Perhaps it should be restated as such, “If you take on more risk, in order to justify that additional risk, your return needs be higher to the less risky investment just to be equivalent.” Continue reading

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Developing Your Portfolio Framework: Priorities

I’ve been laying out the content generation strategy for this blog. Why? Because the Internet is a vast wasteland of disorganized information and analysis. What you don’t need is more of that. This blog is not about providing stock picks. This blog is not about company analysis. And only occasionally, will I discuss thematic investing. It is my opinion that this is not fruitful for you. However, I can be of value elsewhere on your journey. I am going to provide you with something original.

What we need to develop—together—is a framework. This framework needs to build upon the new rules. The rules are different today because the players are different. High frequency trading, algorithmic formulas, and the ubiquity of information has sensationalized limitless possibilities within the investment arena. In this arena we are out of our league; the game favors our opponent. But we will discuss this more in depth at a later time. Continue reading

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Of Course We Won’t Have QE3

The Fed has done its job; and monetary policy has run its course. However, the economy is still soft and requires additional support–that is, more fiscal stimulus. The budget proposal in which every dollar the debt ceiling is raised, there will be as much or more cut from future spending, seems rather appropriate. It allows for the continued near-term support the economy needs, yet addresses the long-term structural issues. This is the only measure that will be helpful to today’s economy. But depending on the resolution of this issue, the Federal Reserve, in an act of desperation, may attempt to replace the lack of fiscal response. This may include an extended-extended Fed Funds Rate or some other plan that has not yet been laid out. It is very unlikely additional monetary measures will be effective. The economy requires an extremely long time to heal and tough choices need to be made at inopportune times. Continue reading

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Twading: The Twitter Revolution

In a previous post, I had mentioned algorithmic trading based on Twitter commentary.  While I don’t think this is the easiest route to quantitative glory, it represents the convergence of finance and technology.  Bloomberg Insights has the following visual: For … Continue reading

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Investors Prefer Commissions? Really?

The investors that prefer not to pay an ongoing fee do not perceive the value. And unfortunately, the last 10 years of flat performance for domestic equity markets has reinforced this perception. As we transition to a tactical investment management era, commissions will be harder and harder to justify. Commissions create a barrier that needs to be overcome in order to break even. While asset-based fees also create a barrier, the barrier is much smaller and the tradeoff is flexibility. Furthermore, I believe most services that are purchased upfront (e.g. commissions or hourly) disincentivize a continued healthy relationship. An asset-based fee requires, theoretically, continued satisfaction; whereas, a commission requires the opposite. Continue reading

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The Risk of the Unknown: A New Perspective on Equities

The objective of these viewpoints is to question commonly accepted pillars of financial advice. So I took notice when Consuelo Mack interviewed Lubos Pastor, Professor of Finance at the University of Chicago. Pastor recently completed research stating that stocks become more risky over longer investment horizons. His research takes the investor point of view (i.e. forward looking and accounting for uncertainty) rather than a historical (i.e. backward looking) point of view. Furthermore, he suggests that the 7% annualized real return stocks experienced during the last century–based on Jeremy Siegel’s analysis–is uncommonly high with several lucky events bolstering that figure. Pastor’s final pearl of wisdom suggests that human capital should play a significant role in portfolio construction. Continue reading

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