Monthly Archives: September 2015

robo investing (i): old school

September 9, 2015 By in robo investing Tags: , , , 2 Comments

robo investing

“Robo investing” is a term that has recently come into common use to describe a form of online automated investing.

The investor inputs his goals, investment horizon, risk preferences and other pertinent data; software selects and implements an investment plan.  Fees for this service range from zero to 0.50% of the assets under management per year.  Services are either independent websites or free add-ons from discount brokers.  In addition to being low-fee, robo investing services are also available to investors with extremely small amounts of money to invest.

not a new idea

Although robo investing as a freestanding online service is a recent development, the idea itself is not new.  It’s an essential tool that’s been used by traditional (“full-service”) brokers for a long time.

Several differences, though.  For traditional brokers:

–I’ve always viewed computer analysis as part of the traditional broker compliance effort.  Over the years, fearful of litigation and aware of the high costs of training, traditional brokers have reshaped their salesforces from being purveyors of independent (and sometimes half-baked or worse) stock and bond trading ideas to marketers of investment products/plans prepackaged at central headquarters.  Automating the development and implementation of a standard investment plan helps ensure that the broker does his fact-finding and only recommends suitable products to clients.

–the products recommended are typically taken from a limited range of high-cost “load” funds, at least some of them manufactured by the brokerage firm itself.  Sometimes, only products whose makers pay the broker a fee will pop up on the automated recommended list.

–management fees can range as high a 2% of the assets under management yearly.

 

As I see it, the main differences between old school robo investing and its new counterpart are:

–no human interface,

–a different range of products, and

–considerably lower cost.

 

More tomorrow.

 

 

 

 

 

watch current trading carefully

September 8, 2015 By in Constructing a Portfolio, Current Market Thoughts Tags: , , , , Leave a comment

I’m writing this from the airport, so I’ll be brief.

I think the S&P 500 is at a very interesting juncture right now.

Market commentators have been have been explaining the recent decline as the product of computers run amok, either controlled by algorithmic traders or by practitioners of “risk parity” or similar mechanical hedge fund strategies (more on this tomorrow).  Yesterday’s Financial Times offers a different explanation.  A large brokerage firm has analyzed mutual fund betas (essentially indicating whether they’re positioning themselves for an up market or a down one).  It finds that funds in the US have shifted their positioning dramatically over the past few weeks from an aggressive posture to a defensive one.

This is interesting in iteslf, if true.  But if so, we might interpret the decline of the past weeks not as the precursor of yearend mutual fund selling but the actual selling itself–only occurring much, much earlier than usual.

Why would this be important?   …because September-October mutual fund selling is most often followed by a sharp November upward bounce.  I’m not sure we’ll be so lucky, but it’s worth watching for.

 

In addition, we should be on guard for any shifting in the pattern of winners and losers in the parmet.  Typically, some pattern change occurs at the end of a significant decline.  The shift would likely both imply that the selling has run its course and give a preview of future market leadership areas.

correction or bear market: where are we now?

September 4, 2015 By in correction vs. bear market, stock market, yearly distributions Tags: , , , , , , , Leave a comment

correction vs. bear market

The financial media, in a deceptively over-precise way, has come to define a correction as a 10% fall in price of a given index during an ongoing bull market.  The same source defines a bear market as a fall of 20% or more.  There is some sense to making the distinction in this way, at least in that it’s unlikely that a market can fall by 20% and still be said to be retaining its fundamentally upward direction.  Other than that, I don’t find the 10%/20% distinction useful.

two worries:  price and earnings

To my mind, the key difference between the two–correction and bear market–is whether the favorable environment of expanding economies and resulting rising earnings per share which supports a bull market remains intact.

In a correction, stock prices have run ahead of the fundamentals and become too pricey.  We can no longer envision, say, achieving a 10% return from holding stocks for the coming 12 months.  Therefore, stocks have to fall to a level where buyers will anticipate a suitable return and reenter the market.  Buyers are concerned about price, not about earnings.

A bear market has very little to do with the 20% number.  What creates a bear market, simply put, is anticipation of recession, and the decline in corporate earnings that goes along with it.  Buyers don’t reenter the market after an initial fall, because they no longer believe that earnings will be rising.  They either continually withdraw funds from the  market or simply hold on to what they have and wait.  They look for some sign that the economic downturn the stock market has been forecasting has emerged—and reached its low point.  Historically, the turning point has been when the monetary authority begins to adopt a more accommodative stance.  Occasionally, it’s the legislature that acts.  Sometimes, it’s less action than investor perception that the assets of publicly traded companies are at bargain basement prices regardless of the near-term economic situation.

timeline

A correction runs its course in a matter of weeks;  a garden-variety bear market lasts nine to twelve months.

Where are we now?

For the mining industry–metals and oil–the picture has deteriorated dramatically over the past year.  This isn’t because the overall macro environment has weakened.  It’s because of overcapacity that the industry, in its typical shoot-yourself-in-the-foot fashion, has itself created.  This unfavorable situation will take a turn for the better only when substantial capacity is taken off the market.  Last time this happened for metals, in the early 1980s, the downturn lasted a decade.

Mining, and mining-dependent economies, apart, I don’t see any signs of actual GDP decline.  Yes, China may be growing at 5% instead of 7%.  Maybe it’s even 2%.  But it’s still growing.

So my vote is for correction.

One caveat:  as I’ve mentioned before, early September is the time when mutual funds in the US begin to sell to adjust the level of the yearend profit distribution they are required by law to make to shareholders.  Some of this selling may have been preempted by August’s market decline.  But until we see what the mutual fund situation is this year, I don’t think there’ll be much market desire to push prices higher.

Olivier Blanchard on economics

September 3, 2015 By in Academic Theories, securities markets Tags: , , , , , , Leave a comment

Olivier Blanchard, the chief economist of the IMF during the financial crisis, is now leaving that organization for the Peterson Institute.  Monday’s Wall Street Journal contains excerpts from his reflections on the state of the world–and of macroeconomics as a discipline–that are contained in full in the most recent IMF Survey (the WSJ has all the high spots, I think).

What caught my eye was Mr. Blanchard’s admission that macroeconomics was caught flat-footed by the recent global financial crisis.

How so?

My paraphrase of his explanation, with which he might not want to agree, is that:

–the discipline believed that a small, highly abstract set of theoretical relationships among the main moving parts of national economies and their external links, a set fleshed out in the wake of the 1930s depression, was enough to ensure they had complete understanding of the 21st century world.  That has turned out to be completely wrong.  In particular, the idea that economic policy makers need not bother to learn the details of the functioning of the banking system or about the inner workings of the small number of global mega-banks proved to be a costly error.

Yes, it took a humongous crisis to shake macroeconomists’ core beliefs and to begin to lessen their contempt for microeconomics.

What strikes me the most is that there is, as far as I can detect, no similar crisis of conscience on the part of academic finance.  The theoretical underpinnings of this discipline lie in quasi-religious beliefs of the 18th century and are far more suspect.  Its theoretical framework has no failed to predict or explain any of the financial crises that have occurred since its creation in the 1960s-70s.  In fact, the speculative frenzy and subsequent financial meltdown of the early 1970s, one of the greatest counterexamples to academic financial theory postulates, was occurring outside the windows of the ivory tower as academics were nailing down its main planks.

 

It takes a lot of intellectual fortitude for a researcher spending a lifetime dealing with abstractions to admit that knowledge of the “plumbing” behind the walls of his theoretical house actually matters.  A renaissance of macro thinking appears to be in the offing, as a result, of this realization in economics.  One can only hope that the same light one day shines on academic finance.  I’m not willing to bet, however, that this will happen any time soon.