Mark Rzepczynski, Author at IASG

The take-away quote from Yellen this week, “The relationship between the business cycle and the yield curve may have changed.” There was little supporting evidence for her view. It is the hope of the Fed that further rate increases which may further flatten the yield curve will not reverse the current course of the economy.

Equities are overvalued! Bonds are overvalued! In the minds of many investors everything is overvalued given central bank distortions, yet there may be an exception. Look at commodities. The difference between financial and real asset could not be larger. Financial assets have steadily moved higher while commodities have fallen or at best moved sideways relative to risky stocks in the last 5+ years. This relationship has applied to all equity indices around the world to varying degrees.

The current buzzword used with quant investing is “machine learning.” Many quants may like to appear more intelligent by peppering their strategy discussions with comments like, “We use machine learning to create new and enhance our existing models.” Yet many investors don’t fully appreciate that machine learning is a term that refers to a broad […]

“What I think HBS does and does very well is train people to, in situations of ambiguity, to take imperfect information, uncertain outcomes, and tight deadlines and figure out what to do in the most effective, efficient, and powerful way.” – Casey Gerald from The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

The Fed has become more focused on financial market conditions since the Financial Crisis. There is less interest in the classic goal of managing full employment since by many measures we may beyond the natural rate of full employment, and there is admitted confusion on how to control inflation.

“Risk of a rapid repricing in global markets”; this ECB quote was a key talking point in the press release from the ECB Financial Stability Report issued last week. Note that “rapid repricing” is a polite way of saying asset price declines.

Managed futures managers were, on average, positive for the month with returns beating commodities and the fixed income Barclay Aggregate index. Managed futures did not beat the strong equity performance but that should not be a surprise given that equity exposure will only be a small portion of the total risk exposure for managers. Most managers will cap the equity exposure within the program, so even if equities are trending higher, performance will lag a long-only index.

Equity style sectors were strong across the board with only emerging markets posting a negative November return; however, emerging markets have been the best performing sector year to date. The value index showed a strong gain although it still lags the growth index year-to-date. Trend indicators are all positive except for emerging markets and the short-term trend in the small cap index. Price indicators suggest that there is no reason to cut equity exposures.

Trend behavior last month was mixed for many CTA managers. The allocation weights had a significant impact on November performance. We believe there may again be significant dispersion in performance because trend dispersion is high. For example, US stock indices show strong up trend signals while non-US stock indices are showing clear short signals. The opposite is the case for bonds where US bond signals are for short positions while non-US bonds signals point to long positions.