- The money market funds macro-group (+$169.1 billion) was the only macro-group attracting net flows in October, while stock and mixed-equity funds handed back $86.3 billion and bond funds
witnessed $44.4 billion of net redemptions.
- Large-cap funds (-$16.2 billion) continued to be the outcasts of the U.S. Diversified Equity (USDE) funds group, while small-cap funds (-$3.5 billion) managed to avoid the large losses witnessed by the other capitalization groups.
- In October the Mixed-Equity Funds macro-group (-$19.4
billion) suffered only its third monthly redemptions since July 2002. The mixed-asset target horizon funds group (+$0.9
billion) could not make up for the unprecedented net redemptions witnessed by the mixed-asset target allocation funds group (-$18.4 billion).
- In October the World Equity Funds macro-classification
(-$24.1 billion) suffered its worst monthly drawdown in over ten years, surpassing the previous month's record decline of
$20.8 billion.
Thursday, November 20, 2008
What is the "right level" for equities?
What can the academics say besides - we don't know what the price should be. The MARKET decides that.
Short Answer: S&P around 600 won't be surprising and around 700 is fair value.
I thought about our most sacred academic cow of equity market ratios and wondered what it would tell me. The D/P ratio. Here D means the Dividend Yield and P is naturally the price. So this ratio measures the "yield" if you will of investing in equities. Obviously if prices increases the yield falls and vice versa.
Where is this D/P ratio these days? Has it come back to the historical average of around 4% or is it still low? If we want to come up with a target for the S&P I think we could do worse than saying this is the level of S&P that gets us a D/P ratio of 4%. That number has a pretty long history.... Roughly speaking it seems the level on stocks should be from 700 to 800 ( for a ratio of 4.5% to 4%). Naturally, in a scenario like the current one, the pendulum swings too far to the other side to give it a reason to rally! so say D/P swings to 5% - 6% not unnatural after such a risk inducing event. then we see the levels of around 580.
So my fellow student Manuel's idea of going in at 600 is not bad.
My highly complex quantitative rule of what price to offer for assets in distressed times: After many regressions and highly complicated maths, I have come up with my wonderfully quantitative rule of what price to offer when there is SERIOUS trouble around. The rule is 1/3rd. Just offer 1/3rd of what the value was. You will offer more for finance firms :) but overall for the S&P you would be doing fine.... Remember you are making a bid and letting the market COME to you. No rush to spend your valuable money in times like this.... I think you should use the strategy on cars, houses as well... If you are in a developing country then it the rule is 1/4th :)
D/P chart
http://www.newyorkfed.org/research/directors_charts/ipage20.pdf
Interesting how commentators that I read are remarking on how the yield on equities has exceded the yields on the 10 year bonds after many years. However, no one is thinking of what the historically HIGH D/P ratios are... We are thinking of average D/P and then will act surprised when it is broken. No one cried wolf when the D/P ratio was 2.5 earlier...
My idea: It would be better to invest in India/China than the U.S. once this crisis is over
I thought about investments a little bit and it occurred to me that when the market starts recovering in the next 3-6 months or so ( if it does!) then I should invest in India or China. The exchange rate is quite favorable ( drop of 25-30% vs. the dollar from 39 to 51, and if the market recovers India's stock market that has gone down about 62% to 63% of what it was- from 21000 to 8000! these emerging markets have HIGHER betas and will recover more quickly. I believe their economic story anyway...Maybe I can figure out their D/P ratios...
If I could buy BRIC notes in the next 6 months I would. No need to rush in. Decide the price you want to OWN the thing at and leave a bid and let the market come to you.
My own trading:
I sold out of my S&P puts way too early- made a profit still but could have made more.... This is what happens when you don't have a crystal ball AND not enough contracts to average :).
Short Answer: S&P around 600 won't be surprising and around 700 is fair value.
I thought about our most sacred academic cow of equity market ratios and wondered what it would tell me. The D/P ratio. Here D means the Dividend Yield and P is naturally the price. So this ratio measures the "yield" if you will of investing in equities. Obviously if prices increases the yield falls and vice versa.
Where is this D/P ratio these days? Has it come back to the historical average of around 4% or is it still low? If we want to come up with a target for the S&P I think we could do worse than saying this is the level of S&P that gets us a D/P ratio of 4%. That number has a pretty long history.... Roughly speaking it seems the level on stocks should be from 700 to 800 ( for a ratio of 4.5% to 4%). Naturally, in a scenario like the current one, the pendulum swings too far to the other side to give it a reason to rally! so say D/P swings to 5% - 6% not unnatural after such a risk inducing event. then we see the levels of around 580.
So my fellow student Manuel's idea of going in at 600 is not bad.
My highly complex quantitative rule of what price to offer for assets in distressed times: After many regressions and highly complicated maths, I have come up with my wonderfully quantitative rule of what price to offer when there is SERIOUS trouble around. The rule is 1/3rd. Just offer 1/3rd of what the value was. You will offer more for finance firms :) but overall for the S&P you would be doing fine.... Remember you are making a bid and letting the market COME to you. No rush to spend your valuable money in times like this.... I think you should use the strategy on cars, houses as well... If you are in a developing country then it the rule is 1/4th :)
D/P chart
http://www.newyorkfed.org/research/directors_charts/ipage20.pdf
Interesting how commentators that I read are remarking on how the yield on equities has exceded the yields on the 10 year bonds after many years. However, no one is thinking of what the historically HIGH D/P ratios are... We are thinking of average D/P and then will act surprised when it is broken. No one cried wolf when the D/P ratio was 2.5 earlier...
My idea: It would be better to invest in India/China than the U.S. once this crisis is over
I thought about investments a little bit and it occurred to me that when the market starts recovering in the next 3-6 months or so ( if it does!) then I should invest in India or China. The exchange rate is quite favorable ( drop of 25-30% vs. the dollar from 39 to 51, and if the market recovers India's stock market that has gone down about 62% to 63% of what it was- from 21000 to 8000! these emerging markets have HIGHER betas and will recover more quickly. I believe their economic story anyway...Maybe I can figure out their D/P ratios...
If I could buy BRIC notes in the next 6 months I would. No need to rush in. Decide the price you want to OWN the thing at and leave a bid and let the market come to you.
My own trading:
I sold out of my S&P puts way too early- made a profit still but could have made more.... This is what happens when you don't have a crystal ball AND not enough contracts to average :).
Sunday, November 16, 2008
Are we on track to becoming Japan? Please post some comments
Low nominal rates of interest
Want to "rescue" firms that have all become too big or too important to fail
Likely to have an interventionist government
Stock market over the last 10 years is flat/lost money in NOMINAL terms (In real terms i.e. when you take the time value of money or the interest rate into account, it has lost a lot of money)
These are some of the concerns I have. I need to think about this more deeply and figure out what the right things to look at are. I do think we have better corporate governance than Japan does,are quite risk taking as a country and our culture are quite different. However, the possibility of a long and gradual road to recovery cannot be ruled out.
If any of the visitors or readers has any comments/views/suggestions on whether we are in danger of becoming Japan and what are the key metrics to examine, please post some comments.
thanks
Want to "rescue" firms that have all become too big or too important to fail
Likely to have an interventionist government
Stock market over the last 10 years is flat/lost money in NOMINAL terms (In real terms i.e. when you take the time value of money or the interest rate into account, it has lost a lot of money)
These are some of the concerns I have. I need to think about this more deeply and figure out what the right things to look at are. I do think we have better corporate governance than Japan does,are quite risk taking as a country and our culture are quite different. However, the possibility of a long and gradual road to recovery cannot be ruled out.
If any of the visitors or readers has any comments/views/suggestions on whether we are in danger of becoming Japan and what are the key metrics to examine, please post some comments.
thanks
Thursday, November 13, 2008
Soros makes sense
Below are some of Mr. Soros's views and I have to say I find myself in considerable agreement with almost all of the points he makes.
My explanation for why there will be recession:
Time to delever: The basic idea behind this is that it took 3-5 years for various financial institutions in the LOW volatility cycle to lever up (as volatility decreases, financial institutions lever up to make higher returns since lower volatility typically means lower spreads on illiquid and hard to value assets which is how most people make money. Also the "risk" seems lower so institutions can gamble more)So it will take time to UNlever.
Consumers delever too when they are losing jobs AND can;t get credit card lines Just as banks levered up, consumers levered up to with the savings rate dipping to 1% or so from 7%. Thus there will be considerable "systematic" and systemic pain. Systematic pain/risk means ALL people suffer together. Hence we will have a recession.
I continue to hold my short position that I put on when the S&P reached a 1000 and Mr. Obama got elected.
Mr. Soros's comments text from yahoo
Reuters
Soros says deep recession inevitable, depression possible
Thursday November 13, 11:01 am ET
WASHINGTON (Reuters) - George Soros, chairman of Soros Fund Management, testified at a House Oversight and Government Reform Committee hearing on Thursday. Highlights:
* Said "a deep recession is now inevitable and the possibility of a depression cannot be ruled out."
* Said hedge funds were an integral part of the financial market bubble which now has burst.
* Said hedge funds will be "decimated" by the current financial crisis and forced to shrink their portfolios by 50-75 percent.
* Said Fed, Treasury Department and the SEC must accept responsibility to prevent market bubbles from growing too big in future.
Said impossible to prevent market bubbles from forming, but they can be kept within "tolerable bounds."
* Said financial engineering should be regulated and new products approved by regulators, and that such regulation should be a high priority of the new Obama administration.
* Said a recent IMF credit facility not large enough to stabilize markets.
My explanation for why there will be recession:
Time to delever: The basic idea behind this is that it took 3-5 years for various financial institutions in the LOW volatility cycle to lever up (as volatility decreases, financial institutions lever up to make higher returns since lower volatility typically means lower spreads on illiquid and hard to value assets which is how most people make money. Also the "risk" seems lower so institutions can gamble more)So it will take time to UNlever.
Consumers delever too when they are losing jobs AND can;t get credit card lines Just as banks levered up, consumers levered up to with the savings rate dipping to 1% or so from 7%. Thus there will be considerable "systematic" and systemic pain. Systematic pain/risk means ALL people suffer together. Hence we will have a recession.
I continue to hold my short position that I put on when the S&P reached a 1000 and Mr. Obama got elected.
Mr. Soros's comments text from yahoo
Reuters
Soros says deep recession inevitable, depression possible
Thursday November 13, 11:01 am ET
WASHINGTON (Reuters) - George Soros, chairman of Soros Fund Management, testified at a House Oversight and Government Reform Committee hearing on Thursday. Highlights:
* Said "a deep recession is now inevitable and the possibility of a depression cannot be ruled out."
* Said hedge funds were an integral part of the financial market bubble which now has burst.
* Said hedge funds will be "decimated" by the current financial crisis and forced to shrink their portfolios by 50-75 percent.
* Said Fed, Treasury Department and the SEC must accept responsibility to prevent market bubbles from growing too big in future.
Said impossible to prevent market bubbles from forming, but they can be kept within "tolerable bounds."
* Said financial engineering should be regulated and new products approved by regulators, and that such regulation should be a high priority of the new Obama administration.
* Said a recent IMF credit facility not large enough to stabilize markets.
Saturday, November 8, 2008
Closed End Funds get hammered - worst since 1987
The credit crisis and thoughts of a global recession hammered closed-end funds (CEF) in October, leading to their worst one-month decline since 1987, with the average equity CEF declining 21.47% and fixed income CEFs handing back 9.66% of their value for the month.
- On the stock side Mixed-Equity Funds (-17.66%) mitigated
losses better than its Domestic Equity Funds (-21.83%) and
World Equity Funds (-23.15%) counterparts.
- For the month only 13 funds were able to post plus-side returns, leaving 666 funds underwater and one at the breakeven mark.
- The Real Estate Funds (-38.07%) classification posted the worst return in the CEF universe.
- In October the median discount for all CEFs narrowed 445 basis points (bps) to 11.61%, still well above the 12-month average of 8.70%.
- On the stock side Mixed-Equity Funds (-17.66%) mitigated
losses better than its Domestic Equity Funds (-21.83%) and
World Equity Funds (-23.15%) counterparts.
- For the month only 13 funds were able to post plus-side returns, leaving 666 funds underwater and one at the breakeven mark.
- The Real Estate Funds (-38.07%) classification posted the worst return in the CEF universe.
- In October the median discount for all CEFs narrowed 445 basis points (bps) to 11.61%, still well above the 12-month average of 8.70%.
Friday, November 7, 2008
Jobless rate at 6.5%
The non-farm payrolls number was bad: 240,000 job losses and the unemployment rate up from 6.1% to 6.5% (from last month). Ford lost about $1.50 per share while the analysts expected about $0.90- $1.0 However, we see a jump up in the stock market this morning that I am inclined to say is a "technical correction." I think everyone and their mom had a short trade on the non-farm payrolls, especially after the ADP report that guesstimates the non-farm payroll numbers. Overall, there is no doubt, we are in for a big recession - worldwide. I will be watching to see if the market closes above 960 levels today.... If not, I will continue to assume it is a technical correction and remain convinced about my short view
Thursday, November 6, 2008
Watch Out for Non Farm Payrolls
The non-farm payrolls number that indicates how many jobs were lost/created is something the Fed looks at quite seriously. Tomorrow at 8.30 am EST, we will know what that number is via Bloomberg or yahoo news. If the number is "bad" i.e. more jobs than expected are lost then naturally the stocks will fall figuring a recession. I have been short of the S&P via the 750 strike Dec 08 contracts and look to sell into the heightened feelings of gloom if any. If the NFP number is "good" then I will happily thank the Gods for sparing this economy and wait for the next time the general population panics. Also, Friday is a bit of a nasty day for these releases since no one wants to go home with naked short positions in a falling market people panic a lot if the number is bad.
Owning Gamma (or abusing terminology short dated volatility) is paying these days. The level of volatility we see right now is high and persistently so- FX volatility has tripled from mid 2007 levels and so has equity vol. I think commodity volatility has also doubled/tripled- look at oil falling from $120/$130 levels to $60/$70 levels.
Good Luck tomorrow
Owning Gamma (or abusing terminology short dated volatility) is paying these days. The level of volatility we see right now is high and persistently so- FX volatility has tripled from mid 2007 levels and so has equity vol. I think commodity volatility has also doubled/tripled- look at oil falling from $120/$130 levels to $60/$70 levels.
Good Luck tomorrow
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