by Chris Georgopoulos, SmartStops contributor
Reading financial articles can be, let’s say boring at times. This article we are going to try to spice it up, let’s play a game of role playing. Famed speculator, Jesse Livermore once was quoted…
“If I were walking down a railroad track and saw an express train coming at me at 60 miles an hours. I would be a damned fool not to get off the track and let the train go by. After it had passed, I could always get back on the track, if I desired.” –Reminiscences of a Stock Operator, Edwin Lefevre.
For this game let’s rename the train, Best Buy stock (BBY: NYSE), the ““I” in walking down the track” we can call the shareholders of Best Buy and the speed of the train, the issues. The game is scored by the costs of each decision. Whoever has the best return wins!
It is the end of summer 2005, Best Buy is approaching $80/share and the future couldn’t be brighter. The tech bubble burst is ancient history, the housing market is hot, interest rates are low and every house in America is an ATM for consumer spending. You are on the railroad track…there isn’t a train in sight!
It is now the beginning of fall 2008; Best Buy has fallen to the mid $40s in defiance of the market making new highs and there are rumors of problems in Mortgage backed securities. (Note: Sidestepping risk is now made possible with the release of SmartStops.net which if had been available would have had you out in the $70 range in 2005). Your friend has made a fortune flipping speculative properties in south Florida and Las Vegas, but you see he is worried. He still has five houses on the market with almost no personal income… (You know how this story ends) You can hear a train coming and it sounds like it’s really moving!
Only a few months later, Best Buy is trading under $18/share! The rumors are true; the housing market has crushed the stock market. It seems nobody thought housing prices would ever go down and the economy is on the verge of total failure. You can now see the train, its moving fast and finally you start to consider if you should actually get off the tracks.
(SmartStops.net issued two Long-Term exit signals in 2008 the first January 4, 2008 at $46.80 and on September 16, 2008 at $40.68. That’s a $22 per share savings by sidestepping risk.)
It is two years later; Best Buy is trading back in the mid $40s. Read More…
originally posted at Minyanville.
by Chris Georgopoulous, SmartStops contributor
Autozone (AZO: NYSE), a retailer of automotive replacement parts and accessories has seen an unprecedented appreciation in value over the past few years while most equities have been punished from an economic recession. While the success of Autozone’s stock, management and business model are unquestionable there is still one question that needs to be answered; “Will it continue? “
Most businesses experienced negative effects from this past economic recession, Autozone triumphed. The marketplace for new cars dried up quickly when personal income and spending dropped. With less money in the pockets of consumers, the more they had to rely on their aging autos. Aging autos need to be constantly fixed, and where did consumers go to replace those batteries, headlights and fuses? That’s right, “Get in the zone….Autozone”!
This macroeconomic factor is the foundation of the growing demand, but it wouldn’t have propelled the stock alone. A competent management focused on using this ever growing cash flow to aggressively repurchase shares, open new stores and concentrated on maximizing same store sales figures. The stars aligned for Autozone and they took advantage of it.
Simple Moving Averages to highlight; 20=$292.10, 50=$271.55, 200=$178.82
The same success can be seen in the technical and fundamental analysis of their stock. From its lows in early December 2008 the stock has increased from the mid $80s to over $300. The Stock has not once broken its 50 day SMA, which was tested for the first time in 2 years during the most recent market correction. Once tested the stock quickly rebounded in defiance of the overall market and broke to new highs.
Fundamentally the market may even be discounting the stock’s value. Yahoo Finance lists the next five years growth rates at around 15%, Read More…
With the market largely treading water over the last 10 years and investors experiencing several gut wrenching corrections over this period, it is no wonder that investment psyche has evolved from one of buy and hold to buy and protect.
Unlike a roller coaster, in investing the fun comes with the ride up, not with the nail biting ride down. Yet in the past 18 months alone buy and hold investors experienced a 30% decline in Google, a 46% decline in Ford, a 50% decline in Cisco and a 67% decline in Bank of America. Not a lot of fun here. Especially when you consider it takes a 43% gain to make up the ground on a 30% pullback. As a result of this experience, investors find themselves asking, why ride out these storms if I don’t have to? How can I do a better job at identifying and sidestepping risk?
Traditionally, investors have turned to the VIX as a tool to help forecast market sentiment and risk levels. Unfortunately, the VIX often spikes in unison with significant market pullbacks providing little forewarning. The financial industry has responded with a slew of new and creative solutions that aim to help investors gain visibility and better listen for the footsteps of the next pullback. Following we take a quick look at three novel solutions, one which combines fundamental analysis with crowd sourcing, one which analyzes market sentiment, and a third that leverages technical analysis to identify periods of above normal risk. Read More…
By Bill Gross – Originally published at Investment News: The following is the commentary of Bill Gross, managing director and co-CIO at Pimco, for the month of September. For a complete archive of his commentaries, click here.
“Just an old-fashioned love song, comin’ down in three-part harmony.” –Three Dog Night
In many ways the global economic crisis is like a marriage gone bad. As the Three Dog Night sang years ago, global economies have functioned harmoniously for many years, but suddenly the love songs have become strident and cacophonous, the policy coordination morphing into a war of the roses as opposed to a giving of them. Instead of three-part harmony we are now experiencing, at a minimum, tri-party disharmony, teetering on the brink of “divorce,” which in economic parlance means a possible “developed economy” recession – a downturn from which reconciliation may be difficult due to a lack of policy options and cooperation. But I get ahead of myself. Let’s first ring the wedding bells, then take you through an explanation of three separate global marriages and how each of the partners have grown apart.
Oh those feisty Europeans! Always fighting like a dating couple and then finally resolving their differences by saying “I do” sometime in the 1950s with the creation of the Common Market and the European Economic Community (EEC). In doing so, France and Germany said “never again,” and even though they didn’t like each other (read “hate”) they decided to make economic lurv in the hopes that they wouldn’t destroy the continent again. It later turned into a formal union, a European Community (EC), where they invited lots of witnesses to the ceremony and created instant family members, if that’s metaphorically possible. Twenty-seven of them, including Italy, Spain and the U.K. were now relatives despite some liking pasta and others preferring horrid cuisines featuring Shepherd’s Pie or fish and chips. The marriage progressed to the point of a smaller monetary union sometime in 1999, but critically, without a common budget. Husband and Wife – Germany and Greece – decided to have a joint bank account, but with separate allowances and no oversight. Greece could issue bonds at nearly the same yield as could its Northern hard-working neighbors, but were free to spend it any way they chose. This was an economic version of an open marriage where one party gets to have all the fun and the other worked nine-to-five and came home too exhausted for whoopee. Well sometime last year, global lenders said enough is enough and soon the whole cheating European Union (EU) was at each other’s throats, hiring lawyers and threatening to break up. Calmer heads prevailed when the ECB decided to make nice and use its checkbook. Last week Angela Merkel and France’s Sarkozy sort of got engaged for at least the second time, nixing expanded funding for their Southern neighbors and placing the burden even more on the ECB. Who knows where it goes now, but let’s put it this way – Germany and France are sleeping in a king-size bed while the rest of its EU family are sleeping in separate bedrooms. As a result Euroland faces economic contraction.
This impending divorce in America is not about sex or sleeping around, but more about romancing the now stone-cold notion that anyone could be a millionaire in the good old U.S. of A. if only they worked hard enough. Our Statue of Liberty proclaimed “give us your tired, your poor…” and sent many of them West to build a little house on the prairie or strike it rich in the goldfields of Sacramento, California or Skagway, Alaska. Many of them did and a century later, the option-laden fields of Silicon Valley provided modern-day examples of rags to riches fairytales come true. But this odd couple marriage of rich (and poor hoping to be rich), now seems on rather shaky ground. Instead of boundless opportunity, the nursery rhyme describing Jack Sprat – who could eat no fat – and his wife – who could eat no lean – appears to be the starker of the two realities. There are the poor and there are the very rich, with the shrinking middle class resembling Mr. Sprat rather than his wife.
During this country’s recent economic “recovery,” real corporate profits increased by four times the amount of working wages in dollar terms, and, as the chart below shows, are 50% higher than at the turn of the century while wages remain relatively unchanged, something that has not occurred since this country’s nuptials were concluded over three centuries ago. Is it any wonder that preliminary battlefield skirmishes in Wisconsin and Ohio between labor and capital promise to spread across every state of this land? (Not Texas!) Is it any wonder that Republican orthodoxies favoring tax cuts for the rich and Democratic orthodoxies promoting entitlements for the poor threaten to hamstring any constructive efforts to reduce unemployment over the foreseeable future? We are witnessing romantic love turning into a spiteful, bitter clash between partners in name only.
The Asian Miracle
Confucius say, “Can there be a love which does not make demands on its object?” While not a marriage, there has definitely been a love affair between Western consumers and their Chinese producer “objects” for several decades now. Read More…
SmartStops commentary: Diversification alone is not going to be enough to manage risk in our 21st century markets. Smartstops offers a superior dynamic intelligent risk management service. Ask yourself, who is watching your back?
originally published at ETFTrends
S&P 500 stocks are moving as a herd and the increased presence of exchange traded funds in financial markets may be partly responsible for the spike in correlations, according to a report Monday.
Stocks in the S&P 500 over the past month have a correlation of 80%, higher than the peak reached during the financial crisis in late 2008, The Wall Street Journal reported.
“One potential reason is the popularity of exchange traded funds. ETFs account for more than 30% of volume in U.S. stock markets, compared with just 2% in 2000,” the newspaper said. “It’s reasonable to expect ETF trading to drive correlation higher because many of the vehicles are tied to stock indexes.”
The three-month stock correlation in the S&P 500 is the highest in at least the past 20 years, while sector correlation is also elevated, according to a recent note from Goldman Sachs analysts.
A higher correlation means prices are moving together, rather than going their separate ways. [Sector ETF Correlations at Two-Year High: Strategist]
Correlations have spiked recently amid the so-called risk-on and risk-off trades. High correlations are not indicative of a healthy or normal market, analysts say. [Rising Correlations]
“Elevated correlation is generally considered a poor environment for long-only fundamental investors,” Goldman Sachs said.
SmartStops comment: Its disappointing to see that Fidelity puts out these kinds of stories, because god forbid, people would actually sidestep periods of great risk in markets. Sure – if you pick the time period from Oct.2008-March 31,2009, you’ll show a bad record vs. buy & hold. But why does the mutual fund industry insist on hiding the other part of that data that has been published – about how missing the worst days of the market can increase your returns by an amazing amount? And it means you don’t even have to be that good at timing when to get back in. Fidelity – have you seen these studies? In Defense of Market Timing
We wish SmartStops could have been ready by Oct. 2007 for the public to use, given that’s when our risk alerts started and you could have been out of the market well before the Oct. 2008 drop. In fact, you could have been bottom fishing all you wanted during 2008 (keeping your losses to a minimum with smartstops) to earn a much better return than the 2% Fidelity says people who held from Oct. 08-March ’09 earned. Yes, buy & hold can show the better performance numbers overall for any given time slice period, but what was the opportunity cost to you? If you could have been out of the market 50% of the time earning money with that investment vs. losing money, why would you think buy&hold was the better way to go? Think about that opportunity cost when you are looking at our performance comparison tool.
Remember that this is standard rhetoric from the mutual fund industry. They want your money just sitting there.
Are VIX ETFs Breaking Out? originally published at ETFTrends
Some traders have been keeping a close eye on the CBOE Volatility Index as a possible “tell” that the rally in risk assets since March 2009 may be due for a breather.
That’s why the VIX’s move above its 200-day moving average Wednesday drew the attention of investors with a technical bent.
The index, which measures the implied volatility of options contracts on the S&P 500, has been relatively subdued during the market’s recent rocky stretch. The benchmark is known as Wall Street’s favorite fear gauge.
However, the VIX was up 18% in the final hour of U.S. trading Wednesday to its highest level since March.
The largest exchange traded product following VIX futures, iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX), rose 8%.
In stock ETFs, a Nasdaq-100 fund was pushed below a key indicator in Wednesday’s sell-off. [Nasdaq ETF Lower]
CBOE Volatility Index
Again, moral is that Buy & Protect is a must in our 21st century markets. Buy & Hold and modern portfolio theory are missing a key layer of risk management to be effective in our stock markets today.
SPY from January 1, 2006 – Dec 31, 2010.
100 year study shows following:
SmartStops recently found this article based on a study which shows some of the fallacy that diversification from modern portfolio theory , MPT, is the only way to manage risk and thus lead to higher returns. Their definition of risk for this study did use the standard deviation from mpt. Our hope is that the industry realizes that even that computational methodology is lacking the sophistication that the smartstops optimization engine was built upon. You can read some of our own studies here.
The takeaway from this article should be to note that it doesn’t take broad asset class diversification to adequately achieve one’s investment goals with a reasonable level of reward versus risk. So all of you lazy Lisas and Larrys out there can sleep easier knowing that your nest egg needn’t be diversified among more than the two carefully selected asset classes discussed above for you to realize your desired long-term return at minimum risk.
published originally at: http://www.stockmarketcookbook.com/index.php
The Myth of Diversification
July 14, 2011 at 3:48 pm
Everyone assumes that broad asset class diversification in an investment portfolio is advantageous. The major benefit is to reduce the risk associated with events that can trigger a decline in any one asset class. By holding a variety of asset classes that are mostly uncorrelated with one another, the investor hopes to avoid those catastrophic occurrences that completely wipes out years of gains such as what happened during the credit crisis of 2008. Further, diversification makes financial planning more reliable and predictable by reducing the variations in portfolio performance from year to year.
Simply put, diversification is a sound investment practice.
But exactly how much risk reduction, in actual numbers, is obtained through application of this philosophy? That was the question I was pondering and was wondering if, indeed, asset class diversification is all that it’s cracked up to be.
Let’s find out.
[Disclaimer: First of all, nothing that follows is an attempt to challenge the precept of broad diversification as an indispensable investment tool, so don't get scared. Consider this analysis to be an exercise in quantitatively determining the relevance of just how much risk can be reduced by adding more asset classes to one's portfolio.]