BusinessWeek sums up some of the latest chatter from and about the Harvard Endowment making the rounds on Monday. Last Friday I wrote about the endowment over at GreenFaucet. In that post I wondered whether HMC might bring more of the fund in house to manage and given their use of ETFs might their demand lead directly to new specialized funds being created.
It might go something like this..."Hello, iShares? Its Jane at HMC, we'd like to you to create a ETF comprised of junior mining companies from around the world and we want to put $300 million into it."
So the way B-week tells it HMC will be bringing more money in house. It would seem to me that proven user of ETFs who could easily commit a couple hundred mill to a fund could get an ETF provider to put something together for them without much hesitancy. Then the fund could be marketed to the public with "This is the ETF Harvard wanted us to create for them." If any of this holds water we might see quite a bit of new innovation come to the industry.
Israel has become the first country to have its central bank raise rates going from 0.50% to 0.75%.
A reader asked me to critique John Hussman's portfolio now that the semi-annual report is out (I did not see the report but I'll assume the reader is correct about it being out). I wrote about Hussman seeming to express frustration about having lagged the rally that started in March. He talked about his discipline preventing him from being more exposed to equities. As opposed to my critiquing the portfolio he seems to be doing it himself; it is easy, without the full benefit of hindsight, to say he has been wrong. From the low the SPX is up about 50% and his fund appears to be up mid single digits.
I've written before about the difference between lagging and missing a big rally. Without hindsight he appears to have missed it. If the SPX goes back down to 700 then I am likely to think he didn't get suckered by the market.
As a matter of philosophy I am not comfortable being so reliant on one outcome as Hussman appears to be. I say that thinking that up 5% in an up 50% world means he really hedged the hell out of his portfolio. I wrote about this a lot and was questioned about it a lot. Zero exposure (or net zero exposure) is a huge bet. I have been convinced that the market needs to go down again and scare the hell out of people. For now that is wrong but I have not changed my mind. The last time I wrote about this someone left a comment saying I was trying to explain why the market was wrong and not going with the trend.
I come at this differently than the way the reader framed it. I try not to let the consequences of being wrong be ruinous which is done by not overly relying on one outcome.
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16 comments:
Van Eck is doing an ETF of junior gold miners.
http://www.sec.gov/Archives/edgar/data/1137360/000093041309002943/c57760_485apos.htm
Setting the bragging rights issue aside, incrementalism has always made more sense to me than being "in" or "out;" e.g., if fundamentals and normalized earnings indicate the market is relatively inexpensive but your model indicates risk is relatively high then add long exposure based on implicit duration of the investment. This and periodic rebalancing is all that is needed to keep a portfolio healthy and growing in real terms even if it doesn't set the forest on fire (hmmmm, bad metaphor for a fire fighter, sorry about that).
As to Hussman, I read him religiously, particularly when he is discussing fundamental analysis and market strategy, but for macroeconimic analysis not so much; i.e, IMO the equilibrium cum accounting identity framework he relies upon is only reasonable in normal cycles (normal in both the statistical and figurative senses of the term) - at extremes such as ZIRP it breaks. JMO
Keeping sds in a bull market may not be ruinous in your opinion, but routine hedging techniques are bound to be costly and wrong. Hedging is only appropriate occasionally. Hedging is betting, not investing. Habitual gamblers and hedgers end up loosing. Do you really want to reduce volatility on the upside?
There is no reason not to be fully invested or near fully invested in a bull market.
RW,
Can you say that again more simply. I read Hussman religiously and think he is a genius from a macroeconomic stand point.
Unfortunately like many of the guru's I like to read I find they are correct about many things but get their timing all messed up.
This conversation exposes the weakness of active (speculation)investing.
Roger, as a suggestion for a future topic, it might be interesting if you could write about behavioral biases in investing. Aside from basic the allocation of equity versus fixed income, confronting one's own nasty behavior seems to be one of the most important factors in successful investing. I strive to be Mr. Spock-like; rational, unemotional, and logical in my investing hopefully with steady progress toward a well-defined goal.
How do you overcome these demons?
@RW
then add long exposure based on implicit duration of the investment.
Implicit duration of the investment? Can you explain?
As to Hussman, I read him religiously, particularly when he is discussing fundamental analysis and market strategy, but for macroeconimic analysis not so much; i.e, IMO the equilibrium cum accounting identity framework he relies upon is only reasonable in normal cycles (normal in both the statistical and figurative senses of the term) - at extremes such as ZIRP it breaks. JMO
Can you elaborate on the bolded part? Or point to relevant reading material?
I made this comment elsewhere, but my sense is we are in a sort of economic “twilight zone” where maybe we need to be careful about what we think we know. It seems to me that the sum total of all government actions, policy, fiscal stimulus is indeed having a positive effect (at least temporarily) on the overall economy and clearly the stock market. Can we have a sustained recovery and multi-year bull market on permanent government life support? I do not know.
I know reading Hussman and Rosenberg the last couple of weeks, they basically consider a sustained economic recovery “off the table”, and they were among the minority of economists and pundits who got the recession and bear market call right . But how much does getting that “call” right mean to whether they are right on their current very skeptical posture? Jeremy Grantham says reduce equities at 1000-1100 on the S&P 500 and that we have 7 “lean years” ahead. That said, the market is clearly discounting a robust profits recovery. Maybe the market sees something the cautious bears are missing?
IMO, if there is one major flaw in Hussman’s approach, I believe it is how he determines “market action” which he has never really articulated in detail. I just know he had “unfavorable market action” during much of the 06-07 ascent when most of the technicians I follow (Yamada, Swenlin, Russell) were all still bullish. On the flipside, this current market rally has been perplexing, and I think some out there may not fully appreciate the role luck has played in them “catching this rally” versus some prescient call based or a robust methodology. Blind pigs and acorns and all that.
All that said, I recall Hussman’s recent skeptical note on the “golden cross” and thinking this is one where in due time he is going to look very wrong, and so far despite the Dennis Kneales of the world being onboard, both the upside break of the 200 DMA, and the 50 DMA/200 DMA cross have been “right” to get long and STAY long.
I read Richard Russell daily who has been writing his newsletter since around 1950. I also follow Louise Yamada closely who despite getting the bottom call and ultimate downside on the market wrong has been mostly right on big picture calls for many, many, many years. Louise has given a few interviews in just the past week or so. There is one common theme that they both reiterate. They have NEVER seen a market like this one with so many contradictory and mixed signals and evidence as to whether this is just a bear market rally (with the implied retesting or break of the lows) or a long-term sustained bull market.
What to do? I think I stay 60-70% invested until normalized valuation metrics like Shiller’s P/E get into that top 10-20% of historical values and/or the bullish moving average signals reverse to the downside. It seems clear to me the trend is up with positive momentum and whether it represents some real economic fundamentals or is just artificially government induced it seems a mistake to get too bearish here?
Not sure if you saw my other message on the previous thread?
Sorry for the length.
Mike C,
It is a bull, but I do not think it will be a multi year bull.
Why would anyone want to give up double digit gains from here whether it lasts 6, 12, or 18 more months?
Anything less than several books and dissection of personal preferences would not do justice to the subject and even then would probably lead to debate so here is an overly simplistic and probably misleading precis that will have to do, sorry:
1. Early influences including Harry Browne (permanent portfolio) convinced me that any economic/investing theory that could not be causally connected to the behavior of humans -- no matter how elegant, successful and/or supported by mathematical models -- was prone to breakage when needed most and could not be trusted to save the individual investor from catastrophe.
2. Equilibrium models grounded in accounting theory balance beautifully, always, and have tremendous mathematical support so it is always possible to gauge current market status but an accounting identity is not a human behavior unless one assumes that human is rational, utility optimizing, fully informed and adheres to models intelligently. If you believe you are such a human, by all means, go for it.
3. I don't think people behave the same during crises as they do normally and I don't think institutions/governments composed of people do either. Models that can keep track of but not otherwise adjust to human behavioral changes -- asymmetric information, herding, hording, ZIRP, quantitative easing, etc -- are not models likely to provide the investor with appropriate decision support. They are certainly better than listening to those loudly asserting their (largely unsupported) opinions that "it's a bull" or "it's a bear" since attending to models does foster analysis but, for all that, following an equilibrium model during times of disequilibrium is not likely to help you interpret alterations in landscape.
4. Regardless, investment implies cash flow which also implies a time frame during which that flow occurs and when the cash must be withdrawn (duration) so, when market valuations are low but time horizon long (> 7-10 years for e.g.) it is appropriate to extend long equity exposure even if shorter term indicators are not favorable. Relative shorter durations imply greater chance of loss and thus require greater weighting of technical and/or quantitative indicators; they may also require greater weighting of more stable assets such as fixed income sources.
Oops, forgot to add a link to an example of what I mean, the debate regarding whether government stimulus has an impact: http://tinyurl.com/mfld3y
From one perspective (generally referred to as the "Freshwater" school of thought) stimulus spending is not only useless it is destructive because everything balances and therefore it must 'crowd out' private economic activity. The other position (the "Saltwater" school) accepts that individuals behave very differently in crisis, and respond differently when more money is made available to the system vs. when money becomes scarce so fiscal stimulus is exactly the right thing to do.
It should be clear from the link I chose which position I consider grounded in real world behavior and generally prefer when the earth shakes (either approach is fine during normal times, in fact the equilibrium approach is probably more precise).
JMO, I am not an economist nor am I claiming a high level of expertise in that discipline, and have no interest in arguing the point; it's all pretty pragmatic from my POV. FWIW
Anyone know or care to guess what valuation metric Jeff Saut is referring to arrive at the market was deeply oversold in March per his latest post? I thought that was one of the big reasons people felt like this wasn't a true bottom, p/e never got to single digits like past bear bottoms regardless if you are looking at normalized, trailing earnings etc.
Consider this: at the March 2009 “lows” the equity markets were at least three, and possibly four, standard deviations below norms. Remember that a three standard deviation event is something that is supposed to occur once every 750 years, while a four standard deviation event happens every 31,750 years.
"...loudly asserting their (largely unsupported) opinions that "it's a bull"..."
The 50+% rise so far doesn't count toward supporting much with you I guess. Being above the 200 dma that is trending up does not count much towards supporting the bull case either. Dow theory predicting a bull market does not count for much either I guess. Have you seen the advance decline line? Did you notice the 90% up days when they occurred?
Exactly what do you expect to happen before we all call it a bull and how much of the rise will be missed?
"I thought that was one of the big reasons people felt like this wasn't a true bottom, p/e never got to single digits like past bear bottoms regardless if you are looking at normalized, trailing earnings etc."
IMO you are correct we have not hit a true bottom, but this could take years and years to play out. We can (and are) have cyclical bull markets in a secular bear market.
The true bottom could be lower or roughly the same as the march bottom with much higher earnings. It doesn't have to be V shaped, It doesn't have to be W shaped, It doesn't have to be WWW shaped as once stated by Mish.
Do not expect this to be easy or quick. I am planning on years and years of more of this crap to come.
OT, but funny: "Hitler Misses the Bull Market."
http://www.youtube.com/watch?v=yqkn1tviGMM
I find the whole concept of "an up 50% world" quite artificial and fueling all sorts of silly, pixel-killing bull vs. bear market debates.
Yes, we're up 50 whatever percent from one day when the financial world was, quite literally, ending. YTD, though, $SPX is up something like 13%. So we're in an up 13% world, right?
Is the market up or down from this date last year? Nobody cares, because it's not the biggest number that the media pundits can latch onto and cause all sorts of untold angst. It's all just fun with numbers.
If the market didn't move another point before December 31st, 2009 would go into the record books as a better than average year, following a pretty lousy year.
Hussman's context was the rally that started in March.
"Exactly what do you expect to happen before we all call it a bull and how much of the rise will be missed?"
I have no idea who this is (or who you think you are) but no one I know has missed a thing in this latest blip: I've been net long myself (while selectively shorting) with posts under my handle to show it but even if that were not the case this is a multi-decade game and missing an up-tic or three doesn't amount to much compared to honing discipline while avoiding major loss.
Everyone makes their own calculations and seeks their own balance: Currently for every up-trending 200 DMA and A/D line there is an ATR or volume indicator that says sponsorship is uncommitted, for every Dow Theory element there is growing abnormality in the business cycle upon which the element depends (e.g., http://tinyurl.com/lnkwmt ) or sustained insider selling in the sector indicating those in the best position to know are distributing rather than accumulating.
That's what makes markets. This rally could certainly find more legs -- enough money is being pumped into the system to prop it up -- but those seeking to attain 10, 20 and 30-year goals have time and if stretching for the next 10% nick carries the risk of a 30% downside then seeking signal confirmation is not a foolish thing to do.
I've made it pretty clear I claim no special expertise and am generally unwilling to give advice although I remain willing to discuss how I think about the problem up to a point.
You appear to be claiming both expertise and competence to advise so use a handle to allow people to track you and discuss your process.
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