10 February 2012 – The Aleph Blog

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Posted on 10 February 2012 by David Merkel

US Economy

Two bright spots in the US Economy: Manufacturing http://t.co/ypyMuQ6D Oil & Gas http://t.co/kMqYETNa Is housing next? $$ #cyclicals Feb 09, 2012
@The_Analyst That’s one reason why I typically don’t comment on nonfarm payrolls; calculation of the number is complex; hard to analyze. $$ Feb 08, 2012
Farmers Plan Biggest Crops Since 1984, Led by Corn http://t.co/fpS3Ftys Farmers put Vegas to shame when it comes to risk. #rolldembones $$ Feb 08, 2012
Total Says SunPower Can Withstand China Solar Panel Competition http://t.co/oWPxaYrZ FD: long $TOT ; Watch other solar companies fold $$ Feb 07, 2012
American exposure http://t.co/bI6FR9hp What r the odds that continued European crisis will throw sand in2 the gears of America’s recovery? Feb 07, 2012
I think CR is right if we limit it to the housing that the GSEs lend on; I don’t think it is true of the… http://t.co/9bjWKPPQ Feb 07, 2012

Eurozone

A few thoughts about the Euro snafu? http://t.co/IVQ525GO The cost of Greece leaving the Euro would be very high? but so is the status quo. Feb 10, 2012
Inside the Head of Mario Draghi http://t.co/2LkA1ZUL Favors large banks and an expanded role for central institutions in the Eurozone $$ Feb 10, 2012
On Banknotes http://t.co/LghRIk35 Of safe boxes & paper money, particularly 1000 CHF-notes. Quick, hide $$ 4 a store of value against chaos! Feb 10, 2012
Graphic detail: European banks five-year subordinated CDS http://t.co/HQI1njNf HT @Alea_ The LTRO has decreased EZ-bank CDS & raised stocks. Feb 10, 2012
Euro Finance Chiefs to Defer on Greece http://t.co/okFLAYbb They await the deeds, rather than hearing the words $$ Feb 09, 2012
Sarkozy Most Unpopular as Election Nears Confronting Unprecedented Rebound http://t.co/PAn88rE0 Broader EZ effects: policy disagreements Feb 09, 2012
Homeowners Who Would Be Moguls Make Comeback in UK http://t.co/cdCxHeyo Back a lot sooner than I expected or hoped. Spec leverage rises $$ Feb 09, 2012
UK Failure, Contagion, and Musings on Switzerland http://t.co/wIFZlcO9 Euro Banking crisis -> Swiss crisis -> like Iceland ^ Banks/GDP $$ Feb 09, 2012
European repo has been contained! http://t.co/rzFKRou2 The ink on the LTRO is still wet, what happens when it the refi date comes? $$ Feb 09, 2012
Europe Crisis Cuts at French Welfare State http://t.co/5bCYU6QI Pretty gloomy article. No wonder Sarkozy is doing badly in the polls. $$ Feb 09, 2012
Merkel Approval at Highest Level Since ?09 http://t.co/xHazv1AZ Coalition wouldn?t have a governing majority if elections were held now $$ Feb 08, 2012
Irish Urge Children to Leave as Export Gain Masks Lost Jobs http://t.co/StOYG2xi Perhaps we should call this the Irish export jobs famine. Feb 07, 2012
Denmark?s Credit Crunch Worsening as Retrenching Banks Spur Vicious Circle http://t.co/fU8kf1c0 What did Soros say? http://t.co/ShMY4LWN Feb 07, 2012

Quantitative Investing/Methods

@kyles09 Where do you get figures for implied correlation? Pretty certain the figure I cited was for realized. Feb 10, 2012
Jeremy Grantham’s investing strategies for 2012 http://t.co/eOgHqgth Favors: Quality & Value stocks, developed mkts. Dis: Bonds & Emerg mkts Feb 10, 2012
Defensive Stocks Lose First Time Since 1999 as Equities Resume Bull Market http://t.co/LlGPWxFs Odd, but telling of how surprised most are Feb 09, 2012
@tomkeene Simple ARMA models are used by those that have no structural model, & r highly subject to abuse, torturing data to make it confess Feb 09, 2012
The Inner Broker Resurfaces http://t.co/raWp25LN Correlations r down. Stock-picking returns. But why have correlations fallen? Ideas? $$ Feb 09, 2012
@DavidSchawel @PlanMaestro When I ran option hedging auctions among inv banks, we got the best execution when we limited the # & went AON $$ Feb 09, 2012
Technical indicators point to need for caution http://t.co/3KxlReTy I’ve been selling little by little into the rally. $$ Feb 09, 2012
Contra: PRESENTING: The Great Market Disconnect Seen All Around The Globe http://t.co/qGlUl0qq No reason y they should b connected $$ Feb 08, 2012
A Market Timing Rule that Works http://t.co/ntVw7hiz Volatility timing reduces portfolio volatility by 1/3 w/o sacrificing total return $$ Feb 08, 2012
Contra: Is the 4% Rule Still Viable? http://t.co/Qz85NqIt I expected better from Smartmoney; a 4%/yr distribution is liberal if anything Feb 08, 2012
Stocks are cheap! http://t.co/AOezqb95 Expensive! http://t.co/e9kVzPgh Comes down to your view on where profit margins are going $$ Feb 08, 2012
Dividends Are All The Rage ? The Clamour For Equity Yield http://t.co/pC1nlWVJ Low growing dividends w/strong BalSht is the preferred combo Feb 08, 2012
Hedge Fund profits flow mostly to Industry Insiders http://t.co/I73p7vUK W/2 & 20%, it takes a lot of gross returns 2 give big net 2 clients Feb 07, 2012
Contra: Junk Bonds Still Offer Margin for Error http://t.co/NW6q32fa When Tsy rates r low, normal junk spreads s/b higher & reflect risk Feb 07, 2012
Buy growth and inflation hedge vehicles http://t.co/0q0QoqlD Model moves from neutral to Inflation. Commodity prices jumpy of late $$ #boing Feb 07, 2012

Fed Policy / Banking

Fed’s ‘Operation Twist’ Tangles Treasury Trade http://t.co/nxCMTCqa Fed has acquired 20-30Y Tsys = 91% of new issuance post-Twist. $$ Feb 10, 2012
Banks Not Off Hook With $25B Mortgage Agreement http://t.co/Q6ObUnyA Only takes care of securitization, & not origination/underwriting $$ Feb 10, 2012
Why Dodd-Frank has already failed http://t.co/CZm7qnoP Regulators didn’t use their tools in the last boom, so better tools won’t help. $$ Feb 09, 2012
Bernanke Talks His Book http://t.co/romgydli Inflation implied by TIPS has been rising over the last four months, w/Ben Bernanke silent $$ Feb 09, 2012
Investors too complacent with the Fed?s pledge? http://t.co/G7c1yKDV Volatility on a number of swaptions r multiple standard devs cheap $$ Feb 08, 2012
Global liquidity fail ? the role of skewed incentives http://t.co/Ehgu0Ajm Liquidity is more tenuous when leverage is layered $$ #dominos Feb 08, 2012
Bernanke Economy Shows Critics Wrong on Fed http://t.co/18CYlDZc Too early. Sterilized base money takes 5-7 years 2 produce inflation $$ Feb 08, 2012
The Fed’s next hike will come at the end of 2014 http://t.co/UNW0mo0g Too definite. The economy is always more volatile than expected $$ Feb 08, 2012
The Fed Votes No Confidence http://t.co/qps0mbbD Charles Schwab argues that overly loose Fed policy unnerves economic decisionmakers $$ Feb 07, 2012
Banks Pay Homeowners to Avoid Foreclosures http://t.co/t8xQpEq7 ‘Bout time. Now we can clear the decks on the low end of housing $$ Feb 07, 2012

Politics / Governement

Judge Suggests US Misled Court on Immigration Policy http://t.co/jaRY1V2f What happens when #SCOTUS is deceived & issues opinion off it? Feb 10, 2012
I’ve interacted with Bruce Bueno De Mesquita over his book. It’s a good book, but a lot… http://t.co/CXmUh349 Feb 10, 2012
USPS Loses $3.3B, Warns of Cash Drain http://t.co/d8DKwMzC The loss is for the last quarter; somthing is going to have to give here. $$ Feb 09, 2012
Contra: Live, From the Nation?s Capital, the Supreme Court http://t.co/3Ob69SHI Big mistake if #SCOTUS televises; cheapens deliberations. Feb 09, 2012
World Food Prices Rose Most in 11 Months http://t.co/jJ5EHmAG #Agflation continues; we can print $$, credit, but can’t print food. Feb 09, 2012
Misreading Catholic Barometer Is a Political Risk http://t.co/42JGnZWo Amer Catholics favor contraception, but dislike dissing bishops Feb 09, 2012
@ToddSullivan “Voting no were Reps. John Campbell (R-Calif.) and Rob Woodall (R-Ga.)” $$ http://t.co/LoU2rUQz Wonder what they own? Feb 09, 2012
“Can you imagine if you had to exchange your currency every time you crossed the state line?” The Confederation come? http://t.co/4C1crjn4 Feb 09, 2012
LA?s Six-Figure Carpenters Show Clout of Utility Union http://t.co/GuHB4OOc Nice work if you can get it; pity the poor taxpayers though $$ Feb 08, 2012
Buffett Wants to Pay Higher Taxes?on Less Than 1% of His Income http://t.co/HB5rzRin Buffett asks for tax raises where he does not earn Feb 08, 2012
Is falling U.S. unemployment a statistical mirage? http://t.co/JTuqoKXF More on the falling labor participation rate & discouraged workers Feb 08, 2012
Not a Fan of Santorum, but anything that deadlocks the Republican Convention is a good thing. Here is for someone totally new. Feb 08, 2012
The optimal endgame for the Republicans is that the convention deadlocks, & they choose someone else. The four remaining r fatally flawed $$ Feb 08, 2012
6 Catholics he may not want 2 offend: #SCOTUS RT @BloombergView: @RameshPonnuru on Obama’s smackdown of Catholics $$ http://t.co/eJkuQRRN Feb 07, 2012
For Sale: AIG’s Subprime Bonds http://t.co/zs89CIJy Color me wrong on this one; never thought the loan would get paid back at par $$ Feb 07, 2012
Are Credit Ratings Massively Overrated? http://t.co/YtOLGnj2 Acid test: will regulators outsource the credit risk function to a formula? $$ Feb 07, 2012
Answer: Unlikely, because then they have no one to blame when something goes wrong. $$ Feb 07, 2012

Asset Management

Vanguard’s Forex-Hedged Foreign Bond ETFs http://t.co/194ZRxI2 Frustrating to see them finally do a foreign bond fund & then they hedge. Ugh Feb 09, 2012
Buffett: Bonds Among Most Dangerous Assets http://t.co/x5sJUaak Loss of purchasing power, default, w/no upside. $$ Feb 09, 2012
The Difference Between Owners and CEOs http://t.co/0Vtg8bmZ Companies w/dominant shareholders are typically more price-sensitive on buybacks Feb 09, 2012
everything is connected http://t.co/XADlN5wL Very difficult to improve overall processes inside investment firms w/o looking @ everything $$ Feb 09, 2012
The twilight of the Bond King http://t.co/2SthSbdU Long article, but way 2 early 2 write off Bill Gross. Pimco primer: http://t.co/SUXjeKhz Feb 09, 2012
RT @Frank_McG: @AlephBlog reminds me when nortel mkt cap eclipsed sum of same for all cad banks, back in 2000 – the new math….for a w … Feb 08, 2012
Merely to claim that $AAPL is an outlier begs the question of data reasonableness. Anyone know what had the largest negative surprise? Feb 08, 2012
Apple Results Distorting S&P 500 Earnings, Golub Says http://t.co/i9qJ2rpT If you’re going to remove the best, then remove the worst too Feb 08, 2012
sudden shifts in capital flows ? a risk for EM investors http://t.co/oVHjYiJb Increases in reserves can lead to asset bubbles. $$ Feb 08, 2012
BlackRock?s Fink Says Be 100% in Equities http://t.co/KmXXIFXY That’s quite a call; leaven it with short hi-qual debt and long Tsys $$ Feb 08, 2012
Gold not a reliable inflation hedge http://t.co/XofX5KBX A lot depends on how long the hedge horizon is; noisy in short-run certainly $$ Feb 08, 2012
The End of Wall Street As They Knew It http://t.co/takMaT4e Continued delevering means opportunities in finance r limited & so is future pay Feb 07, 2012
Just wanted to highlight a blog that has been having a discussion w/ @epicureandealmaker : Synthetic Assets http://t.co/iCMb0VXQ Good stuff Feb 07, 2012
Gorman Embracing Vegemite in New Wall Street?s 15% Bogey at Morgan Stanley http://t.co/drNTToLN $MS looking more promising currently $$ Feb 07, 2012
@BarbarianCap $FNF is one bizarre company, almost like a merchant bank. Now that mortgages aren’t a gravy train, they go elsewhere $$ Feb 07, 2012
Why Dividend Stocks Aren’t the New Bonds http://t.co/FiK2kPnV Just because a stock pays a div doesn’t mean it ceases 2b a stock #caploss Feb 07, 2012

Money Market Funds (Resulted in this article)

@MarcHochstein worth to be published daily? Didn’t think so, and I am generally one that favors FMV acctg. FM NAV is a useful internally. Feb 09, 2012
@MarcHochstein I say that b/c a published floating NAV would cause more instability. Would bankers like the fair market value of bank net + Feb 09, 2012
@MarcHochstein Reinforces my view that academic economists r more frequently wrong than those working in business. We deal w/real world. $$ Feb 09, 2012
Money market mutual funds provide more transparency than banks http://t.co/SIXd9Yq2 frequent disclosure down 2 the individual security level Feb 09, 2012
Will SEC Rules Make Treasurers Flee Money-Market Funds? http://t.co/yrgSqFta If I were a treasurer, I would probably buy CP directly. $$ Feb 09, 2012
Simplifies my logic & pushes it forward RT @MarcHochstein: @AlephBlog you’re the Blog of the Day, hope I did it justice http://t.co/Uu18unUF Feb 08, 2012
@MarcHochstein You did it justice. Thanks, many thanks. Feb 08, 2012
@MarcHochstein Had some interesting arguments with the folks at ICI.org . They seem to be playing for all marbles, and will lose. Feb 08, 2012
@MarcHochstein I’m an actuary by training, and have developed stable value funds w/more complex protections, this one is simple, FWIW Feb 08, 2012
@MarcHochstein I’ve actually talked w/some in the MMF industry; they prefer that nothing be done; I don’t think that’s realistic politically Feb 08, 2012
@MarcHochstein So if the loss at the MMF had the NAV down to .9925, renormalizing to 1.0025 means ~1% of shares would disappear. Feb 08, 2012
@MarcHochstein But it has to be lower than 1.005, or you’d have to set the NAV @ 1.01, which MMF don’t want. 1.0025 is the average. Feb 08, 2012
@MarcHochstein 1.0025 is artificial; it just has to be great than 1 so that a run increases the NAV, and biases yields higher in the future Feb 08, 2012
@MarcHochstein Yes, the number of shares is reduced, and the NAV re-normalized @ 1.0025, so that if there is a run, the MMF strengthens Feb 08, 2012
Ready for the next great ETF? Because of the undue persecution of money market funds,there is a lack of demand for A2/P2 commercial paper $$ Feb 08, 2012

Blogging

Blogosphere, We Get It? http://t.co/EDBeJoJi Checked my blog. Only said “we get it” twice in 5 yrs & always followed by the word “wrong.” $$ Feb 08, 2012
And the point is, I get it wrong. Frequently. In economics & investing, the game isn’t simply 2 avoid errors, but 2 minimize their damage $$ Feb 08, 2012
Kauffman Blogger Survey: Economic Sexiness Coming http://t.co/2SLEfv2B A mixed group of forecasters sees better times ahead $$ Feb 07, 2012

Miscellaneous

How to Be a Better Boss? Spend Time on the Front Lines http://t.co/0w90dQJG Mgrs can learn a lot by spending time in the trenches $$ Feb 10, 2012
Best Disclaimer Language Ever http://t.co/orYSFN2k “The future is unknowable. We have good intentions but all of our projections and…” $$ Feb 09, 2012
MF Global Trustee Sheds New Light on Chaos at Firm http://t.co/bTRwHARE Key Q: how much $$ transferred in final 5 days can b clawed back? Feb 07, 2012

On Multiple Asset Allocation Methods

Posted on 10 February 201210 February 2012 by David Merkel

From a reader who is a dear friend of mine:

There are obvious many disparate approaches to asset allocation.? Similar to the disparate approaches of any style of investing, each asset allocation approach has its own particular pitfalls.? Some of these you can plan for and perhaps hedge against or at least mitigate the potential negative impact from those pitfalls, while some booby traps spring up out of nowhere.? Risk Parity issues revolve around leverage, negative skew, and potential negative returns from certain levered asset classes.? Long-term strategic asset allocation may suffer from the quality of initial assumptions and typically relies on stable volatility profiles and correlations between asset classes.? And so on.? Every professional investor ? let?s take an endowment for instance ? diversified its portfolio among several asset classes and styles of management.? But what is interesting to me is that I?m not sure I?ve ever seen an institutional (or even HNW) investor diversify its portfolio among multiple asset allocation approaches.? Theoretically, splitting up a portfolio between 3-5 different AA approaches (strategic, risk-based, tactical with an opportunistic value lens, tactical with a momentum/trend-riding lens, etc.) mitigates the pitfalls of each one.? What are your thoughts here? ?I have a few of my own, but I don?t want to muddy your own intellectual waters ahead of time.? 🙂

My personal approach to asset allocation is similar to Warren Buffett, or Value Line.? I invest mostly in stocks, and keep a bunch of safe assets for liquidity.? As the market rises, I add to my safe assets.? As the market falls, I buy stocks.? In October of 2002, things were so bad that I depleted my safe assets, an everything was in stocks.

In general, I think most complex asset allocation strategies are overly complex.? In general, there are safe and risky assets.? Asset allocation should first focus on the division between the two.? Typically the safe assets are high quality bonds and cash equivalents.? Sometimes there are more opportunities, sometimes fewer.? Safe asset levels should reflect that.

The second focus of asset allocation should be liquidity needs.? Even if there are a lot of promising opportunities to deploy cash, if the liability that funds the assets needs cash, have cash ready for it.? If you invest in limited partnerships or private companies where the assets are locked up for a period of time, have a sense of what your maximum level of illiquidity is (what will you with certainty never need to tap?), and ladder the investments so that like a laddered bond portfolio, you always have some illiquid investments maturing each year, providing fresh cash for deployment where current opportunities are most promising.? These top two ideas are very basic, but even experts neglect them at times.

The third focus of asset allocation is choice of risk assets, which is how I view your question.? There my view of asset allocation is like that of GMO.? Forecast future returns off of free cash flow yields; invest accordingly.

Don’t pay much attention to volatility, but aim for what is most likely, and bend a little in the direction of what can go wrong.? Most of the time, over longer periods of time, what is most likely happens on average; that’s why it is most likely.

Maybe “Too many cooks spoil the broth.”? I have enough trouble trying to work with momentum versus mean reversion.? I would lean toward having one AA strategy that fits with my broader asset management practices.? But on the other hand…

Suppose we did have five asset allocation models, and what their results were encouraging various investors to do.? If we thought that one of the models had been too hot of late, and was attracting too much money, and distorting ordinary market relationships, maybe that could give us a signal to make sure our asset allocation de-emphasized the results of that method.? Timing of course would be difficult, it always is, but seeing the results of the five methods could provide a fuller view of choices faced by our competitors.

I’m not sure that using the average of a number of asset allocation models will provide the best result, but I think that understanding what other players in the market are doing could lead to better decisions.

I’m open to your thoughts, and the thoughts of other readers here.? Anyone have a better idea?

Day: February 10, 2012

Sorted Recent Tweets

On Multiple Asset Allocation Methods

Stocks versus Gold and Bonds