● Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks
By Frank Travers
Excerpt via publisher, Wiley
I recently read an article printed in the financial press that questioned the viability of hedge funds as an asset class. Following the bear market decline and the corresponding volatile market environment, the article suggested that investors had begun to question whether or not hedge funds actually hedge and whether or not the asset class was doomed. Managers responded that it had become too hard to find profitable shorts, as all the best shorts quickly become crowded trades—which can lead to short squeezes.
The author of the article suggested that many hedge fund managers had become overconfident going into the market decline and had begun to invest outside of their core mandates and, even worse, did not do a good job of matching the liquidity of their fund’s underlying investments with that of their underlying investors….
What is most striking about the article (titled ‘‘Hard Times Come to the Hedge Funds’’) is that it was written by Carol Loomis and was published by Fortune magazine in June 1970.
Is October’s Weak Spending & Income Report Another Victim Of Sandy?
Personal income and spending in October was sluggish, and that’s the charitable interpretation. But any talk of weak growth these days is quickly followed by the word “hurricane,” along with the excuse that the devastating storm that struck the Northeast U.S. in late-October took a bite out of what would have been a more favorable profile for the month. There’s a lot of debate about how much to blame on the weather, if at all. The Bureau of Economic Analysis notes in its income and spending report today that the storm was a factor in some degree that reduced wages and salaries. The implication, of course, is that what nature has taken away the economy will replace down the line. As such, the weather factor is an issue for the future, for good or ill. Meantime, on to the numbers as reported this morning.
There’s Another Recession Out There Somewhere… Now & Forever
Lakshman Achuthan of Economic Cycle Research Institute toured the TV circuit again yesterday to revive and defend his firm’s long-standing forecast that recession risk is high (see interviews on Bloomberg, and Yahoo Finance). He asserted that the recession started several months ago, noting that this past July marks the peak in the current business cycle for the U.S. The supporting evidence for this analysis, he explained, is patently clear in the behavior of three indicators. It all sounds plausible, but there’s plenty of room for doubt too. The main problem is the ambiguity of the model, as it was outlined. Transparency and clarity regarding the underlying process are essential in business cycle analysis, particularly if you’re arguing in no uncertain terms that the forecast is a virtual certainty. Essential, that is, if you’re trying to evaluate the legitimacy of the prediction. Unfortunately, those features were in short supply in yesterday warnings.
Q3 GDP Revised Up, Jobless Claims Down
One up, one down. That’s a good thing when it comes to the latest macro data points. GDP in the third quarter increased at a faster pace than initially reported and jobless claims continue to fall in the wake of the storm-related surge that drove new filings skyrocketing earlier in the month. The GDP news is a convincing sign that the economy continues to roll along in a slow-growth mode. The post-hurricane decline in jobless claims is also a positive, although the rate is a bit sluggish. What does it all mean? Let’s take a closer look, starting with today’s update on initial claims.
Managing Expectations & Expected Returns
One of the most influential lines of research in financial economics over the past generation has been the “discovery” that asset returns are predictable. The predictability, as documented in the literature, isn’t much help to day traders. Instead, numerous studies lay out the empirical case for arguing that a) expected returns fluctuate, and b) they fluctuate with some degree of recurring patterns relative to various factors, such as dividend yield and price-to-earnings ratio across medium- and long-term horizons in the equity market, for instance. This news surprised a lot of economists, including several who have helped lay the groundwork for indexing, which is widely favored by investors who think that forecasting generally is bunk. So far, so good, although it’s easy abuse this discovery, as a recent research paper from Vanguard reminds.
The Trend For Durable Goods Orders Remains Weak
New orders for durable goods were flat last month, the Census Bureau reports. That follows a strong 9.2% gain in September. Stripping out the volatile transport sector, however, reveals that new orders jumped a respectable 1.5% in October. Meantime, business investment gained some ground last month, with new orders for non-defense capital goods ex-aircraft rising 1.7%–the best month since May. Corporate America’s willingness to invest isn’t dead yet. Even so, new orders for big-ticket items overall remains sluggish. Today’s report suggests that the bottom isn’t falling out on this leading indicator, at least not yet, but the numbers are still well short of offering robust confidence for arguing that demand is strong.
Chicago Fed: Slower Economic Activity In October
The economy’s momentum weakened last month, according to today’s update of the Chicago Fed National Activity Index (CFNAI). The slowdown isn’t surprising, given the monthly declines cited in several reports for October data—retail sales and industrial production, for instance. The question remains if Hurricane Sandy distorted the data? That’s a possibility, although it’s not clear how much we can blame on weather for last month’s deceleration. Meantime, with the fiscal cliff approaching, today’s CFNAI report will surely promote worries that the economy is headed for rough seas.
Tactical ETF Review: 11.26.2012
If investors are worried about the threat from the fiscal cliff, it’s not obvious in the recent price trends for the major asset classes. Our ETF proxies for the primary slices of the world’s capital and commodity markets remain in the black for the year through November 23. For the month so far, only foreign developed-market bonds and REITs are suffering from the red ink disease, albeit in moderate doses, while the U.S. stock market overall is near the tipping point.
Book Bits | 11.24.12
● Antifragile: Things That Gain from Disorder
By Nassim Nicholas Taleb
Summary via publisher, Random House
Nassim Nicholas Taleb, the bestselling author of The Black Swan and one of the foremost thinkers of our time, reveals how to thrive in an uncertain world. Just as human bones get stronger when subjected to stress and tension, and rumors or riots intensify when someone tries to repress them, many things in life benefit from stress, disorder, volatility, and turmoil. What Taleb has identified and calls “antifragile” is that category of things that not only gain from chaos but need it in order to survive and flourish. In The Black Swan, Taleb showed us that highly improbable and unpredictable events underlie almost everything about our world. In Antifragile, Taleb stands uncertainty on its head, making it desirable, even necessary, and proposes that things be built in an antifragile manner.
Q4:2012 U.S. GDP Nowcast Update | 11.23.2012
The post-Hurricane Sandy economic updates have taken a slight toll on the GDP outlook for the fourth quarter. Since our previous Q4:2012 nowcast on November 5, the average estimate for real GDP growth has slipped to 1.2% from 1.7% previously, based on five econometric methodologies (see list below). That compares with the actual 2.0% increase for Q3, according to the government’s announcement last month. (All percentage changes cited based on quarter-over-quarter data in annualized terms). Keep in mind that there’s still a long way to go until the release of the initial estimate of Q4 GDP on January 30, 2013 from the Bureau of Economic Analysis. Meantime, if the data favors us with a degree of post-hurricane bounce back, the nowcasts will rise in the weeks ahead. Turning back to the present, let’s take a closer look at how The Capital Spectator’s current nowcasts stack up.