Knowing why an investment strategy has stumbled is just as important as recognizing why it succeeded. This obvious-but-often-unheeded bit of wisdom comes to mind after reading yesterday’s Bloomberg story that seven large, public US university endowments posted disappointing results for the year through the end of June 2016. “It was a bit of a bloodbath,” said Jagdeep Bachher, chief investment officer at the University of California system. The weakness is surprising because the year through the end of this year’s first half generated a modest upside bias for the Global Market Index (GMI), an unmanaged benchmark that holds all the major asset classes in market-value weights.
Continue reading →

Friday’s sharp selloff left most markets in the red last week, although commodities and foreign bonds (in unhedged US dollar terms) bucked the downside bias and posted gains, based on a set of proxy ETFs for the major asset classes. A factor in the firmer pricing for offshore fixed income via ETFs: a slightly weaker dollar in last week’s trading.
Continue reading →

● Book of Value: The Fine Art of Investing Wisely
By Anurag Sharma
Summary via publisher (Columbia University Press)
Financial markets are noisy and full of half-baked opinions, innuendo, and misinformation. With deep insights about investor psychology, Book of Value shows how to apply tools of business analysis to sort through the deceptions and self-deceptions in financial markets. Anurag Sharma joins philosophy with practical know-how to launch an integrated approach to building high-performance stock portfolios.
Continue reading →

A year ago, bear-market risk looked elevated for the US stock market, based on a Hidden Markov model (HMM). The warning, which was discussed on these pages at the time (see here, for instance), has had a mixed record. Although stocks swooned in late-2015 and early 2016, the growling was relatively muted in terms of the S&P 500’s drawdown. That’s easy to say now, of course, although the real-time outlook looked quite dark at times. In any case, we’ve come full circle in terms of the HMM signal, which turned bullish late last month for the first time since mid-August 2015. In the wake of what’s been a real-time test of the model, let’s review what we’ve learned about HMM for monitoring bear-market risk.
Continue reading →

The world is awash with backtests that lay claim to new portfolio techniques that provide superior results for managing risk, juicing return, or both. What’s often missing is a robust stress test to confirm that the good news is more than a statistical anomaly. Crunching the numbers on a single run of history that looks encouraging is one thing; taking the backtest to the next level by simulating results across a range of alternative scenarios as a proxy for kicking the tires on the future is something else entirely. Not surprisingly, only a tiny sliver of the strategies that look good on paper can survive this higher standard. That’s a problem if you’re intent on publishing a regular stream of upbeat research reports that appear to open the door to money-management glory. But for investors wary of committing real money to new and largely untested portfolio strategies, stress testing is critical for separating the wheat from the chaff.
Continue reading →

The surprisingly sharp drop in yesterday’s release of the ISM Non-Manufacturing Index for August has unleashed new worries that the US economy is weakening as it heads into the final months of 2016. It doesn’t help that the Federal Reserve’s broadly defined Labor Market Conditions Index (LMCI) dipped back into negative territory last month. Neither of these soft numbers present a smoking gun for arguing that the US is slipping into a new recession, but the news raises more doubts about the wisdom of raising interest rates at the Fed’s monetary policy meeting that’s scheduled for Sep. 20-21.
Continue reading →

Hawkish commentary from Fed officials in recent weeks has fueled speculation that the central bank may be poised to raise rates for a second time. Maybe so, but the newly retired governor of India’s central bank warns that the low- and negative-interest-rate regimen that’s become a staple in monetary policies around the world since 2008 won’t be easily reversed. “Often when monetary policy is really easy, it becomes the residual policy of choice,” Raghuram Rajan tells The New York Times.
Continue reading →

Emerging-market equities regained the lead last week in the horse race among the major asset classes, based on a set of proxy ETFs. This slice of global stocks has posted weekly gains in seven of the last eight weeks. Meanwhile, broadly defined commodities led the field lower last week, as negative momentum continues to weigh on prices for raw materials.
Continue reading →

● Progress: Ten Reasons to Look Forward to the Future
By Johan Norberg
Review via The Economist
Humans are a gloomy species. Some 71% of Britons think the world is getting worse; only 5% think it is improving. Asked whether global poverty had fallen by half, doubled or remained the same in the past 20 years, only 5% of Americans answered correctly that it had fallen by half. This is not simple ignorance, observes Johan Norberg, a Swedish economic historian and the author of a new book called “Progress”. By guessing randomly, a chimpanzee would pick the right answer (out of three choices) far more often.
Continue reading →

US job growth slowed in August, the Labor Dept. reports, although the year-over-year growth rate remained unchanged at 1.90%. Economists projected that the US companies would add 179,000 jobs last month—the actual increase was considerably lower at 126,000.
Continue reading →