Good Things Come in Small Packages

Thursday, December 17th, 2009

One of the most important findings of modern finance is that small companies, on average, have higher returns than large companies. This size premium is evident from the following graph which illustrates the growth of $1.00 U.S. invested in small company stocks (in red) compared to large company stocks (in green) from January 1926 to November 2009.

The investment in small company stocks grew to $11,253 - more than four times the $2,537 of the large company stocks.

The size premium is not restricted to the United States. A number of researchers have confirmed its presence in most other countries around the world. In a study spanning seventeen countries, Hawawini and Keim found that small company stocks outperformed large company stocks in every country except Korea.

The size premium is unique in a number of respects. First, the relationship between return and size applies across the complete spectrum of firm sizes. Returns become progressively higher as one moves from large to medium to small to micro companies (see Table I at the end of the Commentary). Risk also grows commensurately since the smallest stocks are more than twice as volatile as the largest stocks.

Second, the size premium is a highly streaky phenomenon. The following graph, which depicts the cumulative size premium (i.e. small company returns – large company returns) since 1926, shows that outperformance by small company stocks was concentrated in the mid-1930’s, the early to mid-1940’s, the late 1960’s, the mid-1970’s to early 1980’s, the early 1990’s and the earlier part of this decade.

As can be seen, the periods of outperformance by small company stocks have frequently been punctuated by lengthy spans of underperformance. Accessing the size premium therefore requires patience.

One of the more remarkable elements of this firm size effect is that it seasonal. Virtually the entire size premium occurs in January, an outsized month for small company returns. This excess performance is evidenced in the following bar graph which depicts the average monthly return of U.S. small company stocks from 1926-2008.

Source: Tacita Capital, based on Ibbotson Associates SBBI Small Company Stocks

40% of the average annual return of small company stocks has occurred in January. Two theories have been advanced for this “January effect”. The first attributes the effect to tax-loss selling where losers that were disposed of in the prior year are re-acquired bidding up prices in January. The second attributes the effect year-end “window-dressing” by fund managers who rid their portfolios of losing stocks before year-end thereby depressing prices which bounce back in January.

One of the enduring myths about small company stocks is that they represent a spectrum of the market where, on average, active managers add value by outperforming small company indexes. The evidence refutes this belief. In a comprehensive study

of U.S. mutual funds from 1965-1998, Davis found no evidence of positive, abnormal returns in actively managed small stock funds. More recently, Standard & Poor’s found that small stock funds as a group underperformed their benchmarks in both of the past five-year market cycles including the bear markets (see Table II at the end of the Commentary).

Small company stocks offer patient investors an opportunity to enhance performance. Their “streakiness”, however, means that a strategic, long-term commitment is essential to realizing on this opportunity. Also, given the volatility of this asset class, portfolio allocations must be consistent with the risk profile of the individual investor. This isn’t a free lunch – extra helpings bring extra risk.

December 17, 2009

www.tacitacapital.com

Source: Ibbotson SBBI 2009 Classic Yearbook

Source: SPIVA Scorecard: Active Management Myths;

http://www2.standardandpoors.com/spf/pdf/index/SPIVA_2009_UPDATE.pdf

Tacita Capital Inc. (”Tacita”) is a private, independent family office and investment counselling firm that specializes in providing integrated wealth advisory and portfolio management services to families of affluence. We understand the challenges of affluence and apply the leading research and best practices of top financial academics and industry practitioners in assisting our clients reach their goals.

Tacita research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it and is not intended to replace individually tailored investment advice. The asset classes/securities/instruments/strategies discussed may not be suitable for all investors and certain investors may not be eligible to purchase or participate in some or all of them. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Tacita recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor.

Tacita research is prepared for informational purposes. Neither the information nor any opinion expressed constitutes a solicitation by Tacita for the purchase or sale of any securities or financial products. This research is not intended to provide tax, legal, or accounting advice and readers are advised to seek out qualified professionals that provide advice on these issues for their individual circumstances.

Tacita research is based on public information. Tacita makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to inform any parties when opinions, estimates or information in Tacita research changes.

All investments involve risk including loss of principal. The value of and income from investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Management fees and expenses are associated with investing.

Tags: 1940, Company Stocks, Countries Around The World, Cumulative Size, Decade, Good Things Come In Small Packages, Graph, Investment Stocks, Keim, Korea, Micro Companies, Outperformance, Patience, Periods, Phenomenon, Presence, Remarkable Elements, Respects, Spans, Spectrum, Volatile Stocks
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Jeremy Seigel: Stocks for the Long Run (Still Alive)

Friday, October 9th, 2009

Jeremy Siegel, Wharton School Professor, has recently published an op-ed in FT.com, arguing in favour of his  “Stocks for the Long Run” thesis, which has been challenged in recent times as a result of the ‘lost decade’ in equity markets.

Here is an excerpt:

A look at history shows that the recent experience is not uncommon and excellent returns are available to those who survive rough patches. Since 1871, the three worst 10-year returns for stocks have ended in the years 1920, 1974 and 1978.

These were followed, respectively, by real, after-inflation stock returns of more than 8 per cent, 13 per cent, and 9 per cent over the next 10 years.

In fact for the 13 10-year periods of negative returns stocks have suffered since 1871, the next 10 years gave investors real returns that averaged more than 10 per cent per year. This return has far exceeded the average 6.66 per cent real return in all 10-year periods, and is twice the return offered by long-term government bonds.

Strong future returns also followed poor returns if one extends the analysis to the worst-performing of all 127 10-year stretches since 1871. Without exception, for each 10-year return that fell in the bottom quartile, the following 10-year period yielded positive real returns and the median return exceeded the long-run average.

Stocks also swamp the returns on fixed-income assets over the long run. Even with the recent bear market factored in, stocks have always done better than Treasury bonds over every 30-year period since 1871. And over 20-year periods, stocks bested Treasuries in all but about 5 per cent of the cases.

Read the whole article here.

Tags: 10 Years, Bear Market, Bottom Quartile, Excerpt, Favour, Fixed Income, Future Returns, Government Bonds, inflation, Jeremy Seigel, Jeremy Siegel, Periods, Rough Patches, School Professor, Stock Returns, Stocks, Stretches, Treasuries, Treasury Bonds, Wharton School
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Stocks vs. Bonds: What’s Next?

Friday, October 9th, 2009

A very interesting chart from Leuthold Group points out that this would be the third time since the 1920s that we have emerged from a period in which bonds have outperformed stocks.

In the periods following this re-emergence from bond superiority, stocks enjoyed massive outperformance. The first of the three periods outlined in the chart, was the 1930s bust, the second was 1949 thru 1955.

Jeremy Siegel, too, offers the following argument in favour of “stocks for the long run,” from his recent op-ed in FT.com (worth reading):

A look at history shows that the recent experience is not uncommon and excellent returns are available to those who survive rough patches. Since 1871, the three worst 10-year returns for stocks have ended in the years 1920, 1974 and 1978.

These were followed, respectively, by real, after-inflation stock returns of more than 8 per cent, 13 per cent, and 9 per cent over the next 10 years.

In fact for the 13 10-year periods of negative returns stocks have suffered since 1871, the next 10 years gave investors real returns that averaged more than 10 per cent per year. This return has far exceeded the average 6.66 per cent real return in all 10-year periods, and is twice the return offered by long-term government bonds.

Strong future returns also followed poor returns if one extends the analysis to the worst-performing of all 127 10-year stretches since 1871. Without exception, for each 10-year return that fell in the bottom quartile, the following 10-year period yielded positive real returns and the median return exceeded the long-run average.

Both Leuthold and Siegel make a notable case for the future of stocks, though Leuthold focuses on 5 year periods and Siegel on 10 year periods.

Earlier this year, we featured Robert Arnott’s thesis on Bonds for the Very Long Run (Bonds: Reversion Cuts Both Ways); Arnott focuses on the past 40 years:

For four decades, from time to time, we hear this question: Why bother with bonds at all? Bond skeptics generally point out that stocks have beaten bonds by 5 percentage points a year for many decades, and that stock returns mean-revert, so that the true long-term investor enjoys that higher return with little additional risks in 20-year and longer annualized returns.

Recent events provide a powerful reminder that the risk premium is unreliable and that mean reversion cuts both ways; indeed, those 5 percent excess returns, earned in the auspicious circumstances of rising price-to-earnings ratios and rising bond yields, are a fast-fading memory, to which too many investors cling, in the face of starkly contradictory evidence. Most observers, whether bond skeptics or advocates, would be shocked to learn that the 40-year excess return for stocks, relative to holding and rolling ordinary 20-year Treasury bonds, is not even zero.

Bill Gross, PIMCO’s Bond King, Chief Card Counter and Handicapper, has been exchanging high-grade corporate bonds for longer-dated government bonds, out of concern for deflation.

Is it possible they are all right? Bonds are forecasting deflation and stocks are forecasting reflation. The track record of the bond market, however, as a forecasting tool has proven to be more accurate historically. Pragmatic Capitalist says:

Bond investors (who tend to have a longer time horizon) are forecasting a long battle with deflation.  Equity investors (who tend not to think much farther than one quarter into the future), on the other hand, are putting their money on the line in the hopes that the reflation trade is alive and well.

Unfortunately for equity investors, they have a poor record of forecasting the future when compared to bond investors.   There have been 4 famous cases of such bond and stock divergences in the last 20 years.  The most famous is the summer of 1987.  We all know what occurred then.  The other three cases were fall ‘94, summer ‘98 and winter 2000.   All three preceded declines in the market.  Of all 4 instances, three of them preceded 15% declines in the S&P 500.

The strongest case for equities today seems to rest on the sheer amount of cash sitting on the sidelines; $10-trillion in the US and $1-trillion in Canada. Its a weak argument - investors do not invest simply because they have the cash, and these days investors aren’t exactly inspired.

James Bianco, of Bianco Research, however, (via WSJ), is skeptical of this simplistic theme:

“If you look at the mutual-fund flows there is a record amount going into bond funds. Forty-two billion dollars went into bond funds in August, which is an all-time monthly record. In fact, the all-time monthly record, I believe, for stock funds was $55 billion back in February of 2000. So it’s pretty close to the stock-fund record. But when you break it down, what you’ll find is that short-term muni funds, and short-term corporate funds, those are the funds that are getting huge, huge inflows.

The short-term corporate funds are up 12% this year. And as we talk right now, the S&P 500 is up around 16% this year and the Dow is up about 11% this year. That’s including dividends. So my conclusion was, “Yes, there’s a lot of money that’s built up in the cash on the sidelines. Yes, it is going to come out of that zero interest rate funds. And its going into short-term bond funds, which by the way are performing pretty much in line with the stock market. So don’t hold your breath. You’re going to be waiting a long time before you see that money ever matriculate into the stock market.””

And,

“Now a couple things about that. The first one is I hate when they say, “There’s $3.5 trillion on the sidelines and that’s a whole lot of money.” It implies that all of that money should be put in investments like the stock market. That’s not true. The vast, vast majority is in transactional balances.

It’s money that is going to be needed in a very short period of time, like, within a year. It’s going to be spent on something. They’re almost like checking accounts, if you want to think of it that way. It’s like somebody saying, “You’ve got $10,000 dollars in your checking account, why don’t you $10,000 worth of stocks?” And the answer is, “Well because I’ve got to pay my credit card bill and my rent.”

The strongest case for the bond market is coming out of PIMCO’s thesis, which calls for a ‘New Normal,” a future of De-Leveraging, De-Globalization, and Re-Regulation. The three elements combine as a recipe that ultimately results in stable and stronger dollar outcome as debt repayment repatriates cash from abroad as well as domestically into the credit and bond markets. A strong dollar on this basis results in falling prices, thus the case for deflation.

Bottom line: This may be time to use the equity market’s strength to rebalance out of equities in favour of government bond and money market allocations.

Tags: 10 Years, 1920s, 1930s, Bottom Quartile, Bust, Canada, Emergence, Favour, Future Returns, Government Bonds, inflation, Jeremy Siegel, Periods, Robert Arnott, Rough Patches, Skeptics, Stock Returns, Stocks, Stocks Bonds, Stretches, Superiority, Thesis, Third Time
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What Follows Record-Setting Dow Quarters?

Thursday, October 8th, 2009

This is a guest post by Barry Ritholtz, editor of The Big Picture Blog and author of the newly released book, Bailout Nation

With futures deep in the red, let’s take a look at how markets do after big quarters. The quarter ending September 30 saw the Dow putting in its best quarter since 1998, up a solid ~15%.

With everyone waiting for a pullback, and yesterday (Thursday] and today [Friday] viewed as the probable start, perhaps its time to review some history. What has happened historically after markets have put in record setting quarters - 15%+?

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For the most part, momentum has trumped mean reversion historically. Jim Bianco crunched the numbers, and he found that “stocks returned an average of 1.33% over the month following one of these record quarters, 3.46% over the following quarter, and 9.95% over the following year”.

It is worth noting that these average returns following quarters of 15%+ performance are nothing out of the ordinary. The average monthly return over all periods in the DJIA since 1900 is 0.58%, the average quarterly return is 1.66%, and the average yearly return is 6.90%. If anything, the average returns following huge quarterly gains actually outpace the average returns during all periods.

Perhaps another way to look at it is that these record setting rallies, especially following big selloffs, are themselves a form of mean reversion.

Here’s the table of the past 15% quarters:

Source: Barry Ritholtz, The Big Picture, October 2, 2009.

Tags: Advertisement, Amp, Avw, Bailout, Barry Ritholtz The Big Picture, Blog, Cb, Ck, D1, DJIA, Dow, Futures, Img Src, Jim Bianco, Mean Reversion, Momentum, Openx, Periods, Pullback, Quarterly Return, Quarters, Rallies, Random Number, Selloffs, Stocks
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Are Cover Stories Effective Contrarian Indicators?

Monday, July 20th, 2009

A Financial Analysts’ Journal academic study conducted by three University of Richmond professors concludes that periods marked by overly negative financial cover stories are followed by an end to poor performance and those marked by overly positive cover stories are an indication of the end of superior performance.

This is a great piece that gets to the heart of the classic “death of equities” and other contrarian indicator front page stories. The study covered 20 years worth of cover stories from BusinessWeek, Fortune, and Forbes Magazines.

The classic BusinessWeek, “Death of Equities” Cover

Cover art courtesy of The Economist, May 29th 2008 issue

Last year, The Economist ran this cover about Crude Oil’s record prices.

Abstract (CFA Institute Publications):

Headlines from featured stories in Business Week, Fortune, and Forbes were collected for a 20-year period to determine whether positive stories are associated with superior future performance and negative stories are associated with inferior future performance for the featured company. “Superior” and “inferior” were determined in comparison with an index or another company in the same industry and of the same size. Statistical testing implied that positive stories generally indicate the end of superior performance and negative news generally indicates the end of poor performance.

Click here to download a PDF of the article. (You’ll find the link to it in the right-hand column of the page)

(h/t: SimoleonSense.com)

Tags: Academic Study, Business Week, Businessweek, Contrarian Indicator, Crude Oil, Economist, Featured Company, Financial Analysts Journal, Forbes Magazines, Fortune, Front Page, Hand Column, Institute Publications, Negative News, oil, Periods, Poor Performance, Professors, Richmond, Stories From Businessweek, University Of Richmond
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Corporate Spreads Still Have a Way To Go

Tuesday, June 23rd, 2009

Corporate spreads have declined considerably since the “panic peaks” of late last year. For example, the current Baa spread in the US is 374 basis points compared with 611 basis points in December as shown in the chart below.

The chart also shows corporate spreads during other periods of intense economic, financial and geopolitical strains. Strikingly, corporate spreads widened to 724 basis points in 1932 during the Great Depression.

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, said: “To be sure, corporate spreads have come in a long way from their near crisis highs, but looking at prior peaks around major events and economic downturns, it does appear as though there is still a lot of very bad news priced into the sector.”

Most indications are that the credit market tide has turned on the back of the massive reflation efforts orchestrated by central banks worldwide and that the credit system has started thawing. However, although the convalescence process seems to be well on track, it still has a way to go before confidence in the world’s financial system returns to more “normal” levels, liquidity starts to flow freely again, and the economic recovery can commence.

Click here or on the image below for a larger chart.

Source: Gluskin Sheff & Associates, June 19, 2009.

Tags: Amp, Bad News, Basis Points, Cape Town, Central Banks, Chart Source, Chief Economist, Convalescence, David Rosenberg, Economic Downturns, Economic Recovery, Gluskin Sheff, Great Depression, liquidity, Periods, Postcards, Strains, Strategist, Target, Tide
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US Stocks Today versus 1938

Wednesday, May 20th, 2009

As investors debate the longevity of the nascent stock market advance, they are increasingly falling back on similar historical situations to glean perspective. In this regard, a comparison of the current market and that of 1936 - 1938 makes for interesting reading.

Strikingly, the charts below, courtesy of Bespoke, show similar patterns in the movements of the S&P 500 Index from 2007 to 2009 to those of 1936 to 1938.

Given the similarity of the advances and declines in these periods, Bespoke looked at how the S&P 500 would have to perform going forward in order to keep the relationship intact.

At its peak on May 8, the S&P 500 had notched up gains of 38.2% from the March lows. In 1938, the S&P advanced 50.5% in the four months following its low.

Bespoke said: “If the S&P 500 were to have a similar rally off its lows today, it would top out at 1,018. While breaking 1,000 on the S&P 500 seems remarkable given where we were in March, it is still nearly 200 points lower than where the index was trading before the Lehman Brothers bankruptcy.” Time will tell …

Source: Bespoke, May 18, 2009.

Tags: Advances And Declines, Amp, Bankruptcy, Current Market, Debate, Four Months, Investors, Lehman Brothers, Longevity, Lows, Market Advance, Periods, Perspective, Rally, Regard, Relationship, Similarity, Stock Market, Stocks
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Overbought Bear Market Rally or New Bull?

Tuesday, May 5th, 2009

Are we in a mother of a bear market rally, and is the market overbought? Or is this 1982, or better yet, 1974 all over again, and as some are suggesting, the beginning of a new bull? Several ideas below are worthy of debate at this time.

First, investor sentiment seems to have rebounded far too quickly, considering the absence of strong indications that the economy is recovering, and quantitative easing moves have failed to re-ignite lending so far. Second, winning streaks this long are rare. Third, it appears that according to breadth measures, the market is in an overbought state. Is it different this time, or is it the topping out of a large sucker rally? Has the market just chosen to forget that there are still widespread problems in the banking systems of the US, Japan, Europe and the UK?

Sentiment may have changed too quickly, a characteristic of past bear market rallies.

“I’ve lived through a lot of bear markets, and I must say I’ve never seen sentiment change so quickly after an horrendous drop in the market.” So wrote Richard Russell, editor of Dow Theory Letters, after the close on Monday, following yet another impressive day for stocks, in which the Dow Jones Industrial Average tacked on another 214 pts,” writes Mark Hulbert for Marketwatch.com.

Winning streaks this long are quite rare for markets.

With the Nasdaq Composite index working on its 9th consecutive positive week, many are curious about just how unusual this is.

I’m not a huge fan of “streaking” in and of itself to try to determine when a trend might exhaust, but it can be quite useful in helping to time shorter-term entries and exits.  For example, if the S&P is up 5 weeks in a row and then it gaps up +0.5% one morning, that can give us a better edge than not knowing where we are in the streak.

Anyway, the tables below give the number of weekly streaks for the S&P 500, Nasdaq Composite and Dow Jones Industrial Average since the dates given under each index.  There is an interesting wrinkle that becomes evident very quickly.

The current stretch of 9 weeks (maybe) for the Nas would be pretty unusual, but not unheard-of.  12 other periods went for this long or longer since ‘71.

We can see from that tables that the “down” weeks one is quite a bit shorter, and is much more heavily weighted at 1 and 2 weeks.  This shouldn’t be too much of a surprise, but it means that the market is less likely (or has been less likely, anyway) to stage long stretches of down weeks without an interruption.  Those bulls just get way too antsy and need to jump in.

Also interesting is the streakiness of the Nasdaq compared to the others.  It’s more heavily weighted towards the longer streaks, and has the record for both up and down stretches.  The suggestion from that would be that some higher-beta indices like the Nasdaq are more prone to trends than are the more-staid indexes that are used far more for benchmarking purposes.

Breadth measures suggest the market is overbought.

Quantifiable Edges says “I’m seeing some breadth measures again hitting all-time extremes. Worden Bros. measures the % of stocks trading at least 1 and 2 standard deviations above their 40-day moving average. I mentioned the 1-standard deviation indicator (T2110) in the blog a couple of weeks ago. At the time it was hitting an all-time high of nearly 81%. Tonight it broke that record registering over 83%. The number of stocks closing 2-standard deviations above their 40-day ma (T2112) also hit a new extreme Monday - and in a big way. Before Monday this indicator had never reached 40%. Monday it spiked up to 52.14%. A chart with the complete history is below.”

“This suggests the market is incredibly overbought. As I went over a couple of weeks ago, this doesn’t necessarily mean we’ll see a sharp selloff. At such incredible levels, though I’d certainly be careful taking long positions. These overbought levels will be worked off at some point. A selloff is one way to accomplish that.”

Barry Ritholtz offers this view:

Over the past month, I have heard quite a few people declare this to be the start of a new bull market. The kindest thing I can say in response to that is the jury is still out, but the weight of the evidence is inconclusive.

In terms of historical analogies, investors should be asking themselves: Is this move more like 1982 or 1974?

Consider: 1982 marked the end of a 16 year, secular bear market, which saw the Dow finally get over 1,000 on a permanent basis. It kissed that level in 1966, and again a few more times prior to breaching that level for good in 1982. After 16 years, nominal returns were zero, but on a real (inflation adjusted) basis, buy & hold investors lost nearly 90% of the purchasing power.

At the beginning of that 18 year long Bull market, equities were despised, bond yields were high and P/E ratios were single digits. History does not repeat precisely, but there is usually a rhyme involved.

I have noted in the past that following major bull runs, markets often have a major refractory period, wherein it takes years to work off the excesses of the prior period. Even in that period, markets will get deeply oversold and rally, and deeply overbought and sell off.The current secular bear is no different.

This could be 1982, but I doubt it. Instead, consider the 1973-76 period as a analog: The 23 month, 45% sell off was followed by 22 month, 76% rally. I could live through that again, as long as disco doesn’t come back also . . .

I’ll see if I can dig up a few relevant charts later.

And, Corey Rosenbloom at GreenFaucet.com puts forward his argument, Are we Reliving the1982 Scenario?

Could history be repeating itself directly?  Might there be an exact roadmap to follow as it relates to the current stock market trajectory?  If only it were so easy, but I did want to highlight some eerie similarities in the charts you might want to as it relates to the end of the 1982 Bear Market in what was called the “Melt-Up” action.  Let’s take a look and see if we might be reliving the “1982 Melt-Up Scenario”.

First, let’s take a look at our current market structure as of May 4th, 2009:

Taking a quick look, we see a negative volume divergence accompanying a negative momentum divergence (shown in the 3/10 Oscillator and in other momentum oscillators).  Divergences are non-confirmations of higher prices and hint that odds favor a reversal (or at least a retracement) rather than immediate continuation of the rising price action.

A geometric ‘arc’ has also formed, which hints at a gentle transfer between buyers and sellers (supply and demand) - also a reversal/retracement signal.

Next, let’s look at an eerily similar pattern that formed as we hit the absolute lows of the 1982 Bear Market:

We can apply the same analysis - rounded arc, negative volume and momentum divergences.  In the case of September 1982, we did see a much larger volume and momentum spike than we’re seeing now.  Price had broken down out of a rising trendline and beneath the 20 day exponential moving average (all charts are showing the 20 and 50 exponential average as well as the 200 day simple moving average).

Speaking in terms of visual charting or technical analysis, virtually any market forecast would have returned a bearish implication from the negative divergences combined with the trendline and moving average break, and the persistent downward trend in prices.

But what happened just after I captured this chart?

Finally, here is the resolution of the pattern and what happened afterwards.

Much to the surprise to both technical and fundamental analysts, investors, and traders, price completely  shrugged-off the negative technical and fundamental analyses and rallied quite sharply - most likely in response to the persistent negativity, as funds who were short were forced to cover and equity funds who were in cash rushed to chase alpha buy putting cash to work, not wanting to ‘miss the boat.’

Price continued higher with nary a meaningful retracement at all (finding support each time at the rising 20 day EMA) despite further weakness in the momentum oscillator and in volume.

If I extended the chart further to the right, you would see price continue its steady trek higher, rising persistently into August 1983 before any meaningful pullback occurred.  We often refer to this period as the “Market Melt-Up” (as opposed to a melt-down) or as the “Creeping/Oozing Trend Up” that continued to defy the bears (sellers).

We’ll need to do more analysis to draw further parallels, so one might do well to turn back your charts to 1982 and see if the current S&P 500 continues to behave in the manner it did almost 30 years ago.  It might be an eerie coincidence, but there may also be something deeper of value to consider in the price structure parallels of then and now.

Finally, after reading Corey Rosenbloom’s discussion, one counterpoint arose to his argument, that being that the US prime lending rate in 1981 had topped at 20.5%, and in the period thereafter, interest rates began their return to normal levels over many years. Today, we are faced with an empty monetary tool box and trillions of dollars in Quantitative and Credit Easing - an altogether different set of circumstances, i.e. fully tightened in 1982 vs. fully eased in 2009. Today’s pretext is deflationary, not inflationary. And, worse, there appears to be a lot of hope, for hope’s sake, that the worst of the problems of the banking sector are behind us. Are they?

To wit, stocks are not yet quite among the despised of assets, they are not yet in the single digit P/Es yet, and government bond yields are at historic lows. Where is the rhyme with either of 1982 or 1973-74?

The charts sure are interesting, and perhaps in some cases they do rhyme, or show high correlation to past markets, however, they remain inconclusive.

To reiterate Barry Ritholtz, the jury is still out. You decide.

Tags: Amp, Banking Systems, Bear Market, Bear Markets, Breadth, Different This Time, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Dow Theory Letters, Gaps, Investor Sentiment, Mark Hulbert, Market Rallies, Market Rally, Nasdaq Composite Index, Periods, Quantitative Easing, Richard Russell, Stocks, Streaking, Sucker, Term Entries, Winning Streaks
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Commodities Performance in 2008

Sunday, December 28th, 2008

Commodity price performance has been a wild ride in 2008. The record of price movement is outlined in the table and chart below. For each commodity, the table details year-to-date (YTD) %-age change, drop from 52-week high, and start of year to the 52-week high.

Oil has had the roughest ride falling 62% YTD, 75% from its 52-week high, and preceded by a rise of 53% to its 52-week high. This was followed by Copper, Platinum, and Natural Gas, which had a meteoric rise to its 52-week high of 83%.

Most of the commodities, save Gold, have behaved in kind, thanks to the long-only commodity indices like GSCI which enabled investors of all kinds to invest naked in long-only baskets of commodities. They all went up together, and they all came down together. Platinum and Silver, the other two precious metals dropped along with other commodities, while Gold resumed its dual status as favoured currency and store of value during periods of turmoil.

Commodities are indeed more volatile than stocks. When, and if, we see the return of expansionary and/or inflationary (or worse, hyper-inflationary) conditions, however, these will be a key asset class to allocate to. With all of the printing presses at the Fed whirring right now, some would say its inevitable.

Tags: Array, asset class, Baskets, Commodities, Commodity Indices, Commodity Price, Copper, Currency, Dual Status, Gsci, Investors, Kind Thanks, Meteoric Rise, Natural Gas, Periods, Platinum, precious metals, Price Performance, Printing Presses, Table Details, Turmoil, Wild Ride
Posted in Commodities, Gold, Markets, Oil and Gas | No Comments »

Doug Kass’ 12 Sound Investment Principles

Sunday, January 20th, 2008

Jan. 20, 2008 - Doug Kass writes in RealMoney.com recent article for investors looking into the abyss, however, the advice is good anytime. 

1. Err on the side of conservatism.

2. Learn from the best, in classic investing books or through conversations with trustworthy individuals.

3. Avoid advice from those who lack flexibility and are dogmatic.

4. Be more concerned with return of capital than return on capital.

5. Trade/invest with below-average positions in order to take advantage of the market’s volatility and opportunity.

6. Take a base on balls, hit a single, but don’t go for the fences.

7. Buy straw hats in the winter (meaning, but out of favor items).

8. Buy only the best of breed in periods of economic/market uncertainty.

9. Always leg into a position.

10. Be patient.

11. Buy when your hands are shaking; sell when you become overconfident and complacent.

12. Always remember investing is about common sense.

Source:
12 Investment Principles for the Abyss
Doug Kass
RealMoney Silver, 1/17/2008 11:40 AM EST

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