Tag Archive | modern portfolio theory

Blackstone’s James Says Debt, Equity Markets Overvalued

“We’re between the bottom of the seventh and the top of the eighth,” Marks said in a Bloomberg Television interview last week. “It’s time for the seventh-inning stretch. You have to have plenty of defense on the field today.”

SmartStops Comment:  Defense is the best Offense!

View complete article at: http://www.bloomberg.com/news/2014-09-09/blackstone-s-james-says-debt-equity-markets-overvalued.html?cmpid=yhoo

Nowhere to Run: The Correlation Bubble

SmartStops Comment:: Indeed, Beta and correlation approaches are not enough to manage risk in today’s markets. However we have somewhere for you to run – to intelligent self-adjusting risk methodologies that the SmartStops optimization engine offers.

Originally published at Seeking Alpha: http://seekingalpha.com/article/815851-nowhere-to-run-the-correlation-bubble

Fundamental analysis of “buy and hold” companies is a quaint, Warren Buffetish notion that probably works in the long term. But as Keynes said, in the long term we’re all dead. The big risk in today’s über-correlated markets is systemic shock. One can practice due diligence on a company and buy at a reasonable valuation, but if global markets collapse the next day and don’t recover for years, one has paid a lot in opportunity cost. In other words, tail risk is not reflected in fundamental analysis.

Fundamental analysis is valuable so long as the basic fabric of capital markets remains intact. In an insane world (where U.S. Treasuries and German Bunds are considered “risk-free”, of infinite rehypothecation, where MF Global’s John Corzine walks off with $200M segregated assets, of the London Whale, LIBOR, Goldman’s muppets, regulatory capture of SEC and Fed, U.S. / China animosity and the dollar’s loss of world reserve status) it’s unlikely that business-as-usual will continue without a disruptive bout of creative destruction.

Precisely when and how it will occur is anyone’s guess, but, unfortunately, old school techniques like cross-asset class and regional diversification have lost their glimmer. Just as socioeconomic disparity is partitioning the globe into lords and serfs, so too has the market been divided into polarized castes of highly correlated risk-on assets and (scarce few) risk-off havens.

Position Sizing: Key to Maximizing Returns

In a time when market volatility and equity preservation is of utmost importance, determining the correct number of shares to buy, or “position sizing”, is key to maximizing returns and minimizing risk.

The common investor generally doesn’t spend much time thinking about how many shares to buy or how significant of a position to take.  Instead, most investors use a common methodology of trading the same number of shares each time, which usually translates to a specific dollar amount.  Other, more sophisticated investors, opt to allocate a certain percentage of their portfolio value to a specific position. Following this train of thought, a new position in a portfolio of $100,000 would transcribe either a $10,000, or 10%, investment or a usual position of 50 shares.

Although these methods may work for some, using the volatility of a specific portfolio is likely to be the most effective decision tool.  Measuring a portfolio’s overall volatility enables an investor to decide on what percentage of that portfolio he is willing to risk losing on the new position.  This methodology is better explained through the following example. Read More…

Rethinking Modern Portfolio Theory

Are we all doing it wrong — or is the theory in need of updating and repair?

I think MPT died 30 years ago,” says Jeffrey Saut, chief investment strategist at Raymond James. “If the theory were correct, Warren Buffett, Peter Lynch and Paul Tudor Jones wouldn’t have their track records.” He says that although 60% of Lynch’s trades resulted in losses, he could manage downside risk precisely because he wasn’t tied to a strategic asset allocation. “Asset allocation-and just about any other model-works in a bull market,” Saut scoffs. “But the driver of returns in a bear or range-bound market is stock selection and risk management.”

By Joan Warner
February 1, 2010

So far, no other single method has knocked the Modern Portfolio Theory off its perch as a coherent way of structuring portfolios and pricing assets. But more and more practitioners believe the theory doesn’t deal adequately with today’s world.

Poor Harry Markowitz. Every time investors get whipped in the financial markets, they take it out on his Modern Portfolio Theory (MPT).

Never mind that the groundbreaking concept has governed investment discipline for more than 40 years and that Markowitz won a Nobel Prize for it in 1990. Its central tenet-that diversification mitigates portfolio risk-seemed to collapse in 2008 when the bear market left no asset class unmauled. Only Treasuries provided a haven, and according to MPT, Treasuries don’t even count. They’re just the risk-free baseline at the bottom of the return axis. If you had furious clients asking what the hell happened to your age-appropriate asset allocation strategy, you weren’t alone.

Investors don’t kick Markowitz only when they’re down. MPT also came under gleeful attack during the technology boom of the late 1990s, when “risk” was a dirty word. What sense does it make to diversify out of an asset class that’s returning 30%? Plenty, of course-but try telling clients to keep a little money in cash during a raging bull market.

Why does MPT look so good on paper, yet fail so spectacularly every few years?

Read More…

Know when to Hold ‘em, Know when to Fold ‘em

SmartStops comment:   Its why this service was brought to fruition.  Follow SmartStops and you can be protected before you lose it all. 

Unprecedented Monthly Volume Sell-Off Suggests Now’s the Time to Take Shelter – published at Minyanville by Kevin A. Tuttle

Do not concern yourself if the market goes up today, tomorrow, or a month from now. The risk of entering is not worth the reward.

Over the weekend I had the pleasure of speaking with a very prominent European money manager – overseeing hundreds of billions – about the “across-the-pond” financial crisis unwind and looming hazard of a potential domino-effect coming to fruition. Without rehashing the entire conversation, the consensus is not “if,” it’s “when” will the developing pressure finally blow. He actually went so far as to say it could truly begin unraveling within the next few weeks considering the catalysts currently in play.

The intent of providing the conversation synopsis is not for sake of fear, but understanding the potential ramifications. About three years ago, in one of my firm’s quarterly reports, we opined on a unique situation in regard to the GDP measurements of Global Nations. It stated the unprecedented growth statistics from the 56 nations tracked. “History is currently being made in the sense that all the globally tracked economic growth nations (56), every one… 100%…, are showing expansion.” This lead to my next comment… “If the economic cycle pendulum swings in both directions what would happen if the inverse occurred?” Are 2011/2012 the years we are about to find out? Maybe that’s somewhat extreme, but yet… is it possible?

We at my firm do not pretend to be intelligent enough to figure out all the nuances, catalysts, causes and reasons why the markets could fall apart; we’ll leave it to the team of economists and officials to attempt to sort that out. What we do instead is try to determine when the storm is coming and how to take shelter, which brings me to my point: Now is the time. Take shelter! Do not concern yourself if the market goes up today, tomorrow or a month from now. Clarity is key! Would you sail your boat into rocky waters with a potential hurricane looming because of your love of sailing? Is the risk worth the reward? For some, maybe; but for most, probably not.

S&P 500 Index

Since the “2011 Channel of Indecision” broke on August 4, the seas have picked up dramatically and have begun swallowing ships. The markets have never seen this type of monthly volume sell-off – 47% above average (unprecedented), as seen in the monthly chart above. As Kenny Rogers put it so eloquently… “Know when to hold em’ and know when to fold em’, know when to walk away, know when to run!”

PIMCO’s El-Erian Warns U.S. Rating at Risk, Even With Debt Ceiling Deal

SmartStops comment:  Investing in today’s 21st century markets demands dynamic, intelligent risk management.  Economic impacts to governmental policies and published economic numbers are fluid.  No longer is it sufficient to just allocate amongst your holdings based on beta. 

originally published  by AdvisorOne, by Melanie Waddell

July 25, 2011

As negotiations on a debt-ceiling deal broke down again over the weekend and leaders of both parties now plan to unveil their own debt ceiling plans, Mohamed El-Erian, co-CEO of PIMCO—the world’s largest bond fund manager—is warning that even with a debit limit deal in hand, the United States’ AAA rating is still at risk

El-Erian (left) said in a blog posting for The Huffington Post that while he believed the nation’s leadership would “stumble into a short-term compromise over the next few days—one that raises the debt ceiling and avoids a debt default” more importantly such a plan “leaves the AAA rating extremely vulnerable and does little to lift the damaging clouds hanging over the U.S. economy.”

A debt deal, he said, “will come down to the wire,” however, “the resolution will likely be temporary, and the damage will be real and long-lasting—both of which render an already worrisome situation even more difficult going forward. Indeed, by illustrating so vividly to the whole world what is ailing America, the weekend’s political theatrics should make us all worry even more about the world’s largest economy.”

El-Erian went on to say that America’s “already-fragile economic psyche and its global standing have taken a material hit. Forget about ‘animal spirits’ for now.” Instead, he wrote, “worry even more about an economy that is already having tremendous difficulty sustaining an acceptable growth momentum, and that already suffers from an unemployment crisis that is increasingly protracted in nature. Analysts will now scramble to again revise down their projections for growth, and up those for unemployment.”

Second, he warned. “The debt and deficit issues that are at the root of the debt ceiling drama are, unfortunately, a small part of a much larger set of structural impediments to employment, investment and wealth creation.” The housing sector is still languishing, he continued, “credit intermediation is uneven, infrastructure investment is lagging, job skill mismatches are increasing, and income and wealth inequalities are worsening.”

Read More…

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