Category: Uncategorized
Strong Upward Momentum in Metals with Down Moves in Bonds and Dollar – Good Potential for the Start of the Year
There were some trend surprises in markets near the end of the year; the upward price movement in both precious and base metals and the weather shock in the natural gas market and to a lesser extent oil product markets. The question for the beginning of the year is whether these trends will only be short-term in nature. Strong price spikes, especially weather related, are often reversed.
60/40 Global Blend Tells a Similar Story to US – 2017 Was Exceptional – A Normal Year May be Closer to 1/2 of the Return
The 60/40 stock/bond combination generated an exceptional year for many investors. Although a 60/40 combination is a simplified version for the portfolio that many investors hold, it is a good representation of the general asset class mix without any accounting for alpha and manager selection. For international investors, we ran a similar 60/40 combination of the MSCI World and Citi WBIG index of world sovereign bonds.
A Dollar-Funding Problem? – Cross-Currency Basis Swaps Signal Temporary Dollar Shortage
Global macro traders look for outliers. The good ones have a disciplined approach to review and process lots of cross-market relationships looking for the few that may be out of place. These are the relationships that need capital and for those that can provide the funds, there is a reward.
Do You Really Want to Live With a 60/40 Allocation in 2018? – Follow the Numbers and You Will Likely Underperform
Numbers and statistics are a funny thing. They usually don’t lie and are not fake. You can misinterpret them, but numbers tell a story and it is the job of the investor to either accept the story or come up with an alternative.
This Investing is Easy! Everything Positive for 2017, But Unfortunately We are Starting a New Year
Many pension and endowments are going to post double-digit returns for 2017. Most have exceeded their actuarial expect return assumptions of 7%. Family offices and general investors have also posted good returns for the year.
Forget About Overvalued Equities – Forecast Survey Expects 6% – Optimism Still Exists
Perhaps the market analysts making 2018 forecasts for the S&P500 did not get the memo on valuation. The equity markets are overvalued by most any measure, yet the median forecast is still expecting a 6% total return in the year-end Bloomberg survey.
Add Mental Models for the New Year – Broadening Your Thinking Process Will Improve your Productivity
Most New Year’s resolutions focus on the physical, “I will exercise more, eat less.” A better resolution should focus on mental muscles like, “I will add some mental models to my thinking.” This may help better manage time and effort and allows you to undertaken tasks more efficiently.
Mean Reversion Is Not the Same as Contrary Thinking. A Big Confusion for Many Managers
Disagreeing with the consensus or trend is not always contrary thinking or mean-reversion thinking. It is sometimes being different for the sake of being different.
Is a Bond Bust More Likely Than an Equity Sell-Off? Look For Alternatives
The major drumbeat of asset class overvaluation has focused on equities, but perhaps a scarier place to invest is holding long duration bonds. Both asset classes may be overvalued, but a close look at the economic fundamentals may suggest that greater concern should be with bonds.
Back to Basics for Trend-Following – It is All About What It Does to the Portfolio
It does matter what an investment strategy will do on a stand-alone basis; however, it really matters what an investment will do when added to an already diversified portfolio. For any strategy allocation decision, it is all about the marginal contribution to portfolio return and risk. Most investors know this intuitively, but they often do not focus on the marginal portfolio contribution in practice.
Buy the Losers and Sell the Winners? Reverse your Thinking and Be Careful About Avoiding or Exiting Losers
The general view is that an investor should pick good managers who have had a track record of success, but a more nuance look at data suggests that buying when good managers underperform can be valuable. Whether past performance provides some indication on future success has been one of the key issues facing any investor. We now have an interesting perspective from Brad Cornell, Jason Hsu, and David Nanigian in their Journal of Portfolio Management paper, “Does Past Performance Matter in Investment Management Success”.
Buy in a Drawdown? Focus on Future and not the Past Performance
Managed futures, as a hedge fund strategy, have moved off of its max drawdown since June, its worst drawdown in the last five years, as measured by the SocGen CTA index. For some investors this type of drawdown means an exit from the strategy; however, some of the broader data on manager selection suggest a different approach. The idea of being careful about making investment decision based on a drawdown is consistent with the mean reversion performance analysis of winners and losers.
Not Buying the Fed Package – The Fed, Yield Curve, and Bonds
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.