Category: Quantitative Methods

The Major Article List is Live!

The Major Article List is Live!

Posted on by David Merkel

Though it is something that will grow, the major article list section of this blog is now up-to-date. It is a complete index of my long-term writings at RealMoney (primarily).

The one thing that would make it better would be to index my long term Columnist Conversation posts. It is my favorite part of RealMoney, and that is why I have concentrated there, even though I don?t get paid for cc posts. (sad that) What would be interesting would be to scour my cc posts for long term value, though I have over 1500 cc posts. I?m not doing that anytime soon. 80% of my cc posts are ephemeral, and I?m not sure it is worth the effort to get the other 20%.

35 Out Of 35 Up

35 Out Of 35 Up

Posted on by David Merkel

I can’t remember the last time that all of my stocks were up. 28 of them were up by more than 1%. If anyone would like to track the performance of my broad market portfolio, I have it listed at Stockpickr.com. Two notes though, at present I am running with 8% cash, and Allstate and the Japan Smaller Capitalization fund are roughly 1.5x the size of the largely equal-weighted portfolio. Today, the portfolio continued to beat the S&P 500, returning roughly 1.9%. Leading the charge were Fresh Del Monte (what a move over the last month), Barclays plc, Royal Bank of Scotland, SABESP (wish it had gone down more, would have bought a bunch), and Deerfield Triarc. Deerfield Triarc pointed out that as a mortgage REIT, they had minimal exposure to subprime mortgages. No surprise to me, but in this environment, everyone is suspect. Nice yield of around 10%.


As for my project of the week, I have all of my tickers contending to be in my portfolio, and I will share them with you here:

ABY ACI ADM AGU AIMC AL AMGN AMK APPB AVT AXL AYI BBV BEZ BG BGG BLX BP BPOP BRL BRNC BTU CAJ CAKE CALM CAR CAT CHK CMI CMP CNQ COO DB DF DGX DSW DT DUK EAC EAT ECA EMN ENI EPD ESV EVEP FCL FINL FL FSTR GGC GI GIL GMK GMR GPI GRC GSF HAL HES HSOA HTCH HTZ ICO IDCC INSP IOM JRCC KBR KOMG KONG KPN LABL LAD LCUT LINE LMC LNG LNX LRW LSCO MCHX MEE MEG MOT MU MUR MWE NAT NBR NCOC NEM NFX NGPC NOV NTE NXG NXY NZT OCR OPMR PCA PD PDS PHG PMTC POT PSO R RAD RDC RIG RIO RSG RSH RTP SCM SKX SNSA SON SPC STX STZ SUG SVU SWFT TAP THE TJX TK TKR TMA TMO TNP TOT TSCO TSN TSO TUES UNT URI VLI WDC WERN WIRE WPI WTI YRCW YZC

The next two tasks are calculating the industry ranks from two different models, and setting up the spreadsheet so that I can compare companies against one another. That’s for tomorrow and Thursday.

Full Disclosure: Long ALL FDP BCS RBSPF SBS DFR JOF

What I Have Learned Over the Past 42 Hours

What I Have Learned Over the Past 42 Hours

Posted on by David Merkel

I was a little ahead of the market yesterday, say 10-15 basis points ahead of the S&P. Leading the charge were Fresh Del Monte (my current largest loser), and Grupo Casa Saba (what a great undiscovered stock). Fresh Del Monte was upgraded from underperform to neutral after their less bad earnings. Grupo Casa Saba reported excellent earnings. They run drugstores in Mexico, an excellent industry for a country with a growing middle class. For my balanced mandates, I kicked out the QQQQs that I bought yesterday. The rally wasn’t as big as the reduction in short term risk implied by the VIX.
At RealMoney.com, I had a post late in the day called, “What I Have Learned Over the Past 36 Hours.” It attempted to put forth a dozen things that have been revealed since the recent crisis hit. Here’s an explanation:

  1. China sneezes; the world catches cold. If we needed any proof that America no longer solely dominates the global scene we saw it on Tuesday.

  2. Systemic risk may or may not be a problem now, but a lot of people acted like it was a problem. Thus the rallies in the currencies used to finance the carry trades. The Yen and the Swiss Francs are good hedges here. I am more dubious about long Treasuries, though not long TIPS. (It was neat to see the rallies in the yen and swiss francs. Thne long bond fell more today than the carry trade currencies did.)

  3. The current equity market infrastructure is marginal to handle the volume of the last two days. Given the nature of modern finance, major errors are not acceptable. I got off a couple of good trades as a result of the accident, but those trades were accidental as well.
  4. The lack of human intermediaries with balance sheets leaves markets more volatile than before. It genuinely helps to have someone who can stop the market at certain volatile points, and then restart with an auction so that a fair level can be determined after news gets disseminated. Also, liquidity providers show their value in a crisis.

  5. Algorithmic trading and quantitative money management is making stock price changes more correlated with one another than they used to be. Markets behave differently in normal times, and under stress. The methods that make money when the market is calm exacerbate volatility when market stress appears

  6. Panic rarely pays.
  7. Patience usually pays.
  8. Diversification pays.
  9. In a crisis, strong balance sheets and free cash flow are golden. During times of stress, these four bits of wisdom pay off. They protect an investor from his own worst temptations.
  10. People want the Fed to loosen more than the FOMC itself does. The FOMC doesn’t care about weak GDP if labor employment is robust. The FOMC certainly doesnot care about te stok market unless i affects the banking system, which is unlikely.
  11. The oscillator is not oversold, yet. Sad, but true. We have a decent number of days in the rear-view mirror that aren’t so bad. The intermediate-term panic level is not high.
  12. What do you know? Cyclicals are cyclical. I’m just glad I didn’t get kicked worse yesterday. That’s the danger in playing cyclical names. I take my risk therethough, rather than in growth that might not materialize.

All this said, I feel well positioned for the next few trading sessions. I am working on my quarterly portfolio reshaping, which will take out a few companies, and replace them with cheaper companies in industries with more potential. Once I complete that analysis, you will hear about it on RealMoney and here.
Long SAB FDP

Yesterday, My Troubles Were Not Far Away

Yesterday, My Troubles Were Not Far Away

Posted on by David Merkel

I don’t think my troubles are here to stay, either. I was down a little more than 3.3%, better than the S&P 500, but not by much. So what whacked me? Generally, cyclical companies: Cemex, Conoco, Barclays, Sappi, Jones Apparel, Sanamento [SBS], Lafarge, Magna International, Lyondell, Deerfield Triarc, Patterson-UTI Energy, Japan Smaller Capitalization Fund, and Lithia Automotive.
For the most part, these are companies with strong balance sheets where they will do well in the intermediate term, in my opinion.

As for my balanced mandates, I don’t have solid numbers yet, but I suspect I was down a little more than 1%. Not bad, but I hate to lose, period. I take some comfort, but not much, that I am still up a little less than 2% so far this year on the broad market portfolio. Let’s see if we can do better in the next trading session.
long CX, COP, BCS, SPP, JNY, SBS, LR, MGA, LYO, DFR, PTEN, JOF, LAD

In Large, Red, Friendly Letters, It Reads “Don’t Panic!”

In Large, Red, Friendly Letters, It Reads “Don’t Panic!”

Posted on by David Merkel

With the long bond, Japanese Yen, Swiss Franc, and option implied volatility rising today, there is a panicky feel to the markets. Though this could be the start of a “big, bad event,” the odds are that it will not be so bad. One signal of panic that I see is that the VIX is up 21% today, against an S&P 500 down 1.5%. Under ordinary circumstances, that ratio is 10, rather than the 14 we are seeing today. if that ratio gets over 20, it is a sign that too many people are buying index puts to protect their portfolios. If it gets under 5, too few are doing so.

And, as with most investing, stick to your normal way of doing business. Don’t overreact to the markets. We haven’t had significant volatility in a while, and frankly, we need some to keep people from speculating overly. Don’t react to today; ask yourself what things will likely be like three years from now, and use that as your guide to investing. The manic Mr. Market may serve up some bargains. If so, my rebalancing discipline will edge me more into the markets, bit-by-bit in a measured way. This takes the emotion out of it, which leads to better overall performance.

Late Update
Sold my TLT positions slightly after 3PM today and bought some QQQQs with the proceeds. I think that the short run selling is overdone, with the TRIN over 14, and my ratio mentioned above, which I call DeltaVIX over 17, I felt it was better to add a modest amount of equity exposure to my balanced mandates. We added some Hartford as well at the hedge fund. None of my broad market portfolio hit a rebalance point, so I didn’t do anything there, despite 32 out of my 35 stocks being down over 1%, and only one up. In aggregate, it looks like my braod market portfolio will be down 3% or so, and my balanced mandates down a little more than a percent.I’ll have more on this later this evening. I plan on reviewing all of my indicators tonight, and see what they suggest.

PS — a friend pinged me and suggested that today’s move in the VIX did not come from put buying, but from options selling. He cited the increased correlation of stocks to one another. I’ll have to think about this some more.


long FXY FXF QQQQ HIG (and apologies to the late Douglas Adams) and now after the update flat TLT

Theme: Overlay by Kaira.