Funny Jon Stewart!
http://www.ritholtz.com/blog/2009/12/jon-stewart-on-glenn-becks-gold-interest/
Archive for December, 2009
Gold & Glen Beck
Monday, December 14th, 2009Gold & Glen Beck
Monday, December 14th, 2009Funny Jon Stewart!
http://www.ritholtz.com/blog/2009/12/jon-stewart-on-glenn-becks-gold-interest/
Commercial real estate
Thursday, December 10th, 2009Just wanted to write a quick note today on the commercial real estate downturn and how it is playing out with banks. Though real estate is not an asset class covered by our Covert Analytics software platform, many investors either willingly or not have exposure to this illiquid asset. Savvy investors can make plenty of money in this market, and timing the cycle is very important. My mantra has always been: “there are plenty of opportunities to make money in liquid capital markets, why move into the illiquid spectrum?” I stand by this view. For most money managers, you invest according to an investment thesis and if the market moves against you, take a stop loss. If not ride the bull market till you have reached your target price. Illiquid assets do not afford investors the same “in and out” luxury. That being said, when some “core” funds managed by some of the largest and most established asset managers are down 60-70% of their peak – even after this surging recovery in the economy and markets – it is worth digging into the details.
Is the commercial real estate space an interesting opportunity given the huge losses suffered this year of 30-40% on a cash basis, and after assuming the leverage of most core real estate funds 50-70%? I have discussed the situation with some major money managers in this space in the past few months, and surprisingly they expressed concern that there would be further volatility in the upcoming months! (that is a polite way of saying ”we think our fund will go down”). I didnt see how this is possible, but regardless I figured this would be a good sector to keep an eye on and potentially make a substantial allocation to in the next 3-6 months – anywhere from 5 to 10% of a portfolio.
Aside from the negative performance, the huge writedowns have caused some wacky situations. I have heard of funds with a pre-crisis allocation limit of 2% to the hotel sector, finding that after all was said and done, hotels now constituted almost 15% of the portfolio. Another interesting situation was mezzanine loans made to property developers that defaulted on their loans, and now a core real estate fund which is income oriented is forced to foreclose on the developer and take possession of undeveloped land! Most real estate funds are categorized by their approach: Core (primary concern: income, typical max leverage: 40%), Core Plus (primary concern: income and secondary concern: capital appreciation, typical max leverage 50-60%) and Opportunistic (primary concern: capital appreciation, typical max leverage: 70-80%).
This week has brought some interesting anecdotal evidence of how this is playing out:
- Credit Suisse is foreclosing on the Gaanesevort South. An ownership stake to secure a $90 million mezzanine loan will be auctioned off in the coming months.
Link: http://www.miamiherald.com/business/breaking-news/story/1373036.html
- The Sagamore Hotel is months and $30 million behind on its mortgage. They are looking for a “bailout” and partnership with Playboy.
Link: http://www.miamiherald.com/business/story/1372614.html
What our software does
Tuesday, December 8th, 2009
Taking a peek at the cover the FT today I almost had a panic attack ** again ** thinking about continued clashes in Iran, and what effect this would have on the market, continued Middle East tensions, etc. Then I realized that press rewind or fast forward a few months, and the same headline will likely be there. I calmed down instantly when I realized that insofar as positioning a portfolio goes, a very high percentage (I would say over 90%) of what is discussed over and over again on a daily basis is what I call “noise”. Very little should be included into your approach to portfolio construction. It is very difficult to do this, as humans we get caught up in the whirlwind of media speculation, financial market commentators, existing portfolio positions, hesitation over future purchases, that it is difficult to discern what is noise or what is signalling a new trend. Coming from an engineering background this reminded me of the signal-to-noise ratio and how engineers attempt to maximize this ratio to “get a good signal”. How should a portfolio manager eliminate noise?
Noise is everywhere! Is the Fed doing too much? Not enough? Is Chimerica doomed to destroy America’s economic and financial market dominance? Is the US$ set to crash, or is this fully priced in by markets and therefore should I position for a dollar rally? Are we entering a multi year bull market after 10 lost years of Equity returns? If I had a $100,000,000 portfolio sitting in Cash, how would I allocate it today!?!
This is where Covert Analytics comes in. By having a systematic approach such as our tactical asset allocation model builder, you are encouraged to take in all the noise you want, our system filters out what isnt relevant and spits out what is. Our quantitative approach is a “noise filter” for your portfolios. Rest easy, and take in all the noise you want. Our system takes the data, uses your methodology to analyze what the data is saying, and recommends an asset allocation.
Interesting article on the current business cycle
Monday, December 7th, 2009If you have never heard of them, you should look into the Economic Cycle Research Institute, which his headed by Lakshman Achtuthan. I read his book a few months ago “Beating the Business Cycle” where he basically gives the history of his firm (see businesscycle.com), and their approach to forecasting business cycles across the globe. Their bread and butter is their “Leading Indicator” – what they call WLI for Weekly Leading Index – which is a proxy for the business cycle and thus is a good market timing tool for Equity markets. Also they construct “future inflation gauge” measures to predict whether inflationary pressures are building or declining, thus a good market timing tool for the bond markets.
They were quoted in NPR today discussing how employment in the US is at risk given where we are in the business cycle and what is required to return to “pre-recession” lows. Mr. Achuthan came up with a surprisingly depressing statistic: to return unemployment to its pre-recession low of 4.4 percent, the economy needs to expand without interruption until 2020! Lets hope that the double dip does not return.
Link: http://www.npr.org/templates/story/story.php?storyId=121087285
Quick note about reverse repo's
Friday, December 4th, 2009The Federal Reserve is now entering new uncharted territory. How do you drain so much liquidity without choking the economy is a key question most policy makers are grappling with. Policy blunders are what caused the devastating and continued economic declines in the 90s and 2000s Japan and 1930s US examples. And these policy blunders related to acting as if the economy were on a firm footing while in reality they were highly dependent on continued government support to offset the private sector contraction. Global central banks have a very difficult task ahead of them and it is unlikely that it will be a nice calm return to “normal times”.
Sitting on 1,200,000,000,000 US$ that was created via the Fed’s “support” of the financial system must be intimidating. These excess banking reserves as they are called have caused much speculation regarding possible inflation and the destruction of the US dollar due to money printing by the Fed. The reason CPI is negative on a year on year basis and inflation is not a problem is that banks have been buying more US Treasuries than loaning the money out it seems, which is prudent given their recent over loaning but it basically offsets the target of allowing the economy to pick up steam through credit creation. Long story short, the Fed is concerned about how to remove liquidity if need be.
Reverse repos are a new tool being tested to do just that. The reverse repurchase agreement work like this: Fed sells US Treasuries to banks, with an agreement to buy them back later at a slightly higher price. Problem is: this has never been done before by the Fed and just yesterday they did a test run with about $200 million which. This is not an indication of a change in monetary policy whatsoever,but it is an indication of the Fed being proactive in responding to threats down the road.
Quick note about reverse repo’s
Friday, December 4th, 2009The Federal Reserve is now entering new uncharted territory. How do you drain so much liquidity without choking the economy is a key question most policy makers are grappling with. Policy blunders are what caused the devastating and continued economic declines in the 90s and 2000s Japan and 1930s US examples. And these policy blunders related to acting as if the economy were on a firm footing while in reality they were highly dependent on continued government support to offset the private sector contraction. Global central banks have a very difficult task ahead of them and it is unlikely that it will be a nice calm return to “normal times”.
Sitting on 1,200,000,000,000 US$ that was created via the Fed’s “support” of the financial system must be intimidating. These excess banking reserves as they are called have caused much speculation regarding possible inflation and the destruction of the US dollar due to money printing by the Fed. The reason CPI is negative on a year on year basis and inflation is not a problem is that banks have been buying more US Treasuries than loaning the money out it seems, which is prudent given their recent over loaning but it basically offsets the target of allowing the economy to pick up steam through credit creation. Long story short, the Fed is concerned about how to remove liquidity if need be.
Reverse repos are a new tool being tested to do just that. The reverse repurchase agreement work like this: Fed sells US Treasuries to banks, with an agreement to buy them back later at a slightly higher price. Problem is: this has never been done before by the Fed and just yesterday they did a test run with about $200 million which. This is not an indication of a change in monetary policy whatsoever,but it is an indication of the Fed being proactive in responding to threats down the road.
The best defense is offense
Thursday, December 3rd, 2009We all know how difficult the investment climate has been for the past decade. What’s worse: the outlook going forward is increasingly tricky, and human nature causes us to extrapolate recent trends out into the future and expect for a similar outcome. After disastrous portfolio performance resulting from the 2000-02 TMT bear market or the 2008-09 Great Recession it seems investors would be happy to achieve steady returns north of 5%, an unimaginably boring bogey in the prior two decades.
In addition to being boring, this target return would be seen as “un-ambitious” before, but now seems difficult to achieve, especially in a world of near-zero interest rates and in a world with enormous financial and economic uncertainties. Evaluating global stock markets is tricky if we are on the verge of a “double dip” in the developed economies. There is talk of too-hot speculative activity in the BRICs. Investing in government bonds feels like skating on thine ice due to an ever increasing supply from the money printing central banks. Gold is breaking new all time highs. Like Mr. Pellegrini (formerly of Paulson & Co) said recently: “It is a time of risk management rather than real decisive positioning”.
We propose that the best defense for this environment is offense. Having a plan, a systematic strategy for how to rebalance assets and look for opportunities across the spectrum of financial assets and across the globe strikes us as the real best defense. Focusing on risk management without an approach like ours at Covert Analytics, is a bit like driving with the parking brake on. As former portfolio managers we know what can occur without a systematic strategy, something we like to call “Asset Allocation Paralysis”. We coined this term to describe what happens when a portfolio manager is unconvinced whether a market is overbought or a good opportunity, whether to sell a legacy position or maintain it, whether to increase Equities or not. The uncertainty of making aggressive portfolio bets ends up causing inactivity, and the end result is a portfolio sailing through treacherous waters like a ship without a sail.
Gold, and the trouble with bubbles
Wednesday, December 2nd, 2009An article this morning in the Wall Street Journal this morning discussed an interesting topic: bubble targeting by the Fed. Inflation targeting has long been the modus operandi at global central banks since the high inflationary era in the 70s. The great global moderation of the 1980s – mid 2000s was an exceptional achievement, but the Great Recession displayed the vulnerability of global economy. Mr. Boeckh said it best when he wrote that root cause of this crisis was a deeply flawed international monetary system: US over consumes, ships dollars to China and other exporters, and they buy US Treasuries and loan us the money, thus shipping the dollars right back and allowing us to benefit from low interest rates and ample liquidity.
Now however central banks are doing their post mortem and studying whether instead of inflation maybe they should be targeting employment metrics, or maybe asset prices? Sounds like a horrible idea to me. This is being reactive to a crisis and not properly addressing the issues. My view is that bubbles are never so evident and clear enough to prevent them ahead of time (whether housing, tech, energy, etc). Furthermore, though there are definitely speculative bubbles likely to ensue in select Emerging Market share and property markets, the article this morning mentioned Gold. I hardly think Gold is an adequate candidate for mention in the bubble crowd.
Granted Gold this morning broke through the 1,200 level ( a new cyclical high ). Is Gold reaching a Minsky-ish bubble? I dont think so. Here is the bullish / bearish outlook on Gold as I see it. Tailwinds (bullish): global excess liquidity conditions still in place, positive momentum, and diversified customer base (central banks, retail investors, jewellry demand). Headwinds (bearish): possible Fed intervention (?), and technically overbought. Some quick facts which are consistent with my view that Gold is not in bubble territory: Gold’s inflation adjusted high is over $2,000, central banks continue to buy it (and when they buy, they buy BIG), and there will likely be continued skepticism over fiat currencies.
I did a quick analysis, look at the graph below. This is a “history of bubbles”. It compares the Gold run in the 70s (blue), the Nikkei suge in the 80s (amber), the Nasdaq bubble in the 90s (red), and for fun I put in the surging S&P in the roaring 20s (green). The “Gold Bull Market” is in black. Hardly.
Strategically it makes alot of sense to buy Gold, and tactically it is a hot asset (one of the few that did well in 2008), and it is fully liquid.
Japan – Land of the Sleepy Sun!
Tuesday, December 1st, 2009Did the capitulation finally come? I had been wondering for too long what Japan was thinking. The second biggest economy in the world, has been the global laggard in stock market performance. Forgetting for a moment that Japan is still 75% below its 1989 peak 20 years later, the Bank of Japan seemed to be oblivious to the new environment. A drastic situation that central banks around the world responded to with dramatic actions, was followed by the same old policy tools by the BoJ.
Accordingly, there has been a serious underperformance this year in Japan. In fact many investors have written off Japan as the perpetual global laggard. The global recovery in markets this year was barely noticeable in Japan: whereas the S&P is up 23.1%, Nasdaq up 38.3%, DAX up 20.1% and FTSE up 19.8%, Japan is up 8.0% year to date (after a 2.4% move today).
Take a second to look at Japan’s money supply growth, and it is clear that Japan was “not doing enough” to provide liquidity to its economy. Whereas the other major central banks pushed money supply to grow approximately 20+% over the past three years, Japan’s money supply growth has actually contracted! This chart compares money supply growth between US, EU, UK and Japan.
The BoJ’s fiscal discipline is not being rewarded by investors. In fact, fiscal discipline is not offsetting the surging Yen (which is surging to levels not seen since 1995), which is choking an export driven economy such as Japan.
Today’s development: The Bank of Japan annnounced plans to inject approximately $115 billion to banks to bolster liquidity. This is not outright quantitative easing as in the US and UK, but merely the announcement of new liquidity enhancing measures. The market reacted positively to this development but the question remains if this is merely political manuevering to get the new political party (DPJ) off its back.