Evidence Investing

I know, I know...its been a long time.  Life has been getting in the way.

Good peice from Bloomburg:

May 24 (Bloomberg) -- Speculators are buying gold faster than the world’s biggest producers can mine it as analysts forecast a 27 percent rally that may extend the longest run of annual gains since at least 1920. 

Exchange-traded products backed by bullion added 41.7 metric tons in the week to May 14, the most in 14 months…  The largest mining nations averaged weekly output of 41.6 tons last year.  [A]nalysts and investors shows it will reach $1,500 by the end of the year. 

Holders of ETPs, including George Soros and John Paulson, accumulated a record 1,938 tons by May 21, eclipsing all but four of the biggest central-bank holdings.

“You could see gold go up another $1,000,” said Evan Smith, who helps manage $2 billion at U.S. Global Investors Inc. in San Antonio and in 2006 correctly predicted that gold would reach $700 within two years. “All of the turmoil and problems we’ve seen in Europe is just another reminder that there’s a lot of value in gold as a safe haven.” 

The risk to gold bulls lies in economic growth, which should buoy the prospects of metals linked to industrial demand, such as copper and silver. The world economy will expand 4.2 percent this year, the International Monetary Fund said April 21, raising its January projection from 3.9 percent. 

While gold is favored by investors when the dollar weakens and inflation gains, the metal can also advance at other times. Gold rose 5.8 percent in 2008 as U.S. consumer prices gained 0.1 percent. The metal added 18 percent in 2005 when the U.S. Dollar Index, a measure against six counterparts, advanced 13 percent. Gold rose 8 percent this year as the U.S. Dollar Index jumped 11 percent. U.S. consumer prices dropped in April.

“People are afraid of the debasement of all the currencies,” said Peter Schiff, president and chief global strategist for Darien, Connecticut-based Euro Pacific Capital, whose clients have more than $2 billion in assets. “What’s surprising is that gold is still as low as it is,” he said, predicting $5,000 to $10,000 an ounce in the next five to 10 years. 

Since the last week of April, ETPs have been adding bullion at a pace not seen since the first quarter of 2009, in the wake of the collapse of Lehman Brothers Holdings Inc.  

Assets in gold-backed products increased 18.3 tons last week, according to UBS data. The bank revised its estimate for the previous week’s holdings.  Gold is still at half the peak set in 1980, after adjusting for inflation. Then, prices rose to $850, equal to $2,266 today, according to a calculator on the website of the Federal Reserve Bank of Minneapolis. 

Supply from mines, which peaked in 2001, fell in five of the last eight years, data from London-based GFMS show. Companies are digging deeper to extract dwindling reserves, with mines in South Africa extending as far as 2.35 miles (3.8 kilometers) down.

Investment almost doubled to 1,901 tons last year, exceeding jewelry demand for the first time in three decades, according to GFMS.

Central banks and governments are also buying gold, adding 425.4 tons last year, for a combined 30,116.9 tons, the most since 1964 and the first expansion since 1988, data from the World Gold Council show. Official reserves of central banks and governments may expand by another 192 to 289 tons this year, according to CPM Group, a research and asset-management company in New York. 

 “The second half of this year will likely show very anemic growth on a global basis,” he said. “The crisis in Greece is going to spread to Spain and it’s going to be very difficult to deal with. They are bailing out debt with more debt and it isn’t sustainable. It’s a wonderful scenario for gold.” 

Billionaire John Paulson’s New York-based Paulson & Co. hedge fund is the SPDR gold trust’s biggest investor, with 31.5 million shares, or about 96 tons, a May 17 regulatory filing showed. Kyle Bass, the head of Dallas-based Hayman Advisors LP who made $500 million in 2007 on the U.S. subprime collapse, bought gold this month, according to a letter to clients.  

Buying at the start of a bubble is “rational,” Soros said in January. His New York-based Soros Fund Management LLC was the sixth-biggest investor in the SPDR fund in the first quarter, a May 17 filing with the Securities and Exchange Commission shows. He trimmed his holding by 9.6 percent from the previous quarter. 

Sorry for this "strictly opinion" peice.  Been a little busy here... :)  Still pretty interesting, though...

Just an intersting visual way to look at the market...in this case, the ETF world. 

Click on this link for the interactive version.  Thanks so FinViz.com.

This is the performance over 1 month.  Gold doing well...

As we now hear the printing presses in Europe starting to rev up with a new order of about 800 billion shiny new euros which need to be printed to fund the Trillion Dollar Bailout, something else is reving up too -> gold.    Apparently, (as expented) the funnier money is getting the more serious investors are becoming about gold (and silver and other metals).   Look at this graph:

FYI: I'm long GDX and SLV

On May 5th, we posted a table of the credit defalt swaps on soverign debt around the world. 

Check out the calming effect of the Trillion Dollar Bailout:

Well, with all the recent excitement and the ‘fix’ put in last night by the ECB, it’s been a while since I posted about our momentum research.  So I thought I would go ahead and take the next step in developing our momentum model. 

I hope by now I have convinced you about the existence of momentum as a real phenomenon.   So here is the outline or frame work we will be using in the future to move forward.

1.       How do we measure momentum?

2.       What time period of data do we use to measure momentum?

3.       How often do we rebalance the portfolio?

4.       On what day of the month (week/year) do we rebalance the portfolio?

5.       What universe of securities should we use?

6.       Can we go both long and short?

7.       Should we use a skip month/period?

8.       What can we do to further maximize the model?

We will get to each one of these in turn…and hopefully create something tradable, practical, and profitable!

Remember, each and everyone of these will be answered with evidence and data...we are gonna do this right!  :)

From here and there on Bloomburg:

“Whether the markets completely unravel depends on whether politicians can stabilize the peripheral government market,” said James Gledhill, who helps manage about 58 billion pounds ($85 billion) as head of fixed income at Henderson Global Investors Ltd. in London. “The tail risk is the stress on banks which stops them from lending to corporates and feeds through to become a real economy problem.”

When anything is in the hands of politicians, I'm scared.

“At the moment, it feels worse than 2008,” said Geraud Charpin, a fund manager at BlueBay Asset Management in London. “There is no buyer of risk in the market.”

Sounds like he's scard too.

“There is a concern the market may be ceasing to function, with government bond liquidity drying up completely as everyone looks to sell,” said Mark Austen, managing director at the Association for Financial Markets in Europe.

Lets look at the TED Spread:

The TED, or Treasury Eurodollar, spread is calculated by subtracting the interest rate on treasury bills from the three-month dollar LIBOR.

The treasury bill rate is the interest rate paid by the U.S. treasury - often used to represent "risk-free" lending (on the assumption that U.S. government is always good for it), while the LIBOR is the rate at which banks lend to each other. Therefore, the difference in the two rates represents the "risk premium" of lending to a bank instead of to the U.S. government. At its lowest, the TED spread can be as low as 20 basis points, as it was in early 2007. A TED spread this low occurs when banks are seen as strong and in good financial health; the risk of default or banktruptcy is low, and therefore other banks are willing to lend them money at nearly the risk-free interest rates paid by the U.S. government. By contrast, the Ted spread stood at 330 basis points in early October 2008, after a series of bankruptcies by banks and other financial insitutions that occured as part of the 2008 Financial Crisis. On October 10th, the TED spread hit a new record of 460 basis points, reflecting a breakdown in interbank lending.
 
In short, when the TED is up, we are in or heading to a credit crunch...

Here's the chart of TED.  Not bad yet, but we are seeing a significant up-tick. 

  As you all know, I really try to stay away from theorizing and philosophy…but today I ran across a piece (at Systemic Relative Strength) which is so good, I have to share it with you.  [I have edited it somewhat]

"Here is the naked truth: capital markets are designed to reallocate money from dumb people to smart people.  If that weren’t true, smart people wouldn’t play.  Smart people don’t play unless they have a probability of winning.  For example, smart people don’t tend to play the lottery.  (If you have ever wondered why the PowerBall winner is always a nitwit and flat broke again in three years, now you know.)  This might be the real reason that the rich continue to get richer.  I have a high degree of conviction that if one took all of the money in the world and split it equally among all of its inhabitants, ten years later the people who have the money now would be likely to have the money again, simply because they understand what it takes to be successful in capital markets.  Although I wrote the first sentence of this article for shock value, the naked truth is actually quite comforting.

Now, when I use the word “smart,” in the context of capital markets, I’m not talking about IQ at all.  Rather, being smart about the capital markets requires a very specific skill set consisting of three things.

1) Knowledge.  Smart means understanding which return factors are likely to outperform over time.  Success is mainly a matter of consistently exposing the portfolio to the return factor.  If you have just this small nugget of knowledge, you are miles ahead of the game. These factors must be researched and proven with data.   [I, and the good folks at Systemic Relative Strength, think that momentum/relative strength and value are the factors with the most/best data behind them.]

2) Discipline.  Smart means understanding that execution is more important than knowledge.  It’s not enough to have the knowledge of which return factors will likely work over time.  You need to have a systematic method of exposing the portfolio to your chosen return factor in a disciplined fashion.  You cannot waver or let your emotions get in the way–and believe me, your fear will try to run you into the ditch during every correction.  Maintain your emotional balance.  You must remain resolute up to and including the end-of-the-world scenario.  Maybe the world will end and I will be wrong about all of this.  Probably not.  If you consistently expose your investment capital to a good return factor in a disciplined way, you are light years ahead of your competition.

3) Patience.  Smart means understanding that great patience is required.  Most investors, I suppose, would like to get rich quick.  That’s unlikely to happen.  In a karmic kind of way, the universe actually makes you earn your money by going through trials and tribulations.  The E-ticket ride you get in capital markets is never easy, and often not pleasant.  Both relative strength and value go in and out of favor as return factors, sometimes slipping into eclipse for years at a time.  Great investors are enveloped with a kind of Zen-like calmness.  They are neither their profits nor their losses.  You can’t take giddy mental ownership of your equity high-water mark or despair at your drawdown during a correction.  Stay centered and let compounding work its magic.  The journey of a thousand miles really does begin with a single step, but don’t forget that it also takes a long, long time to walk a thousand miles!

Investors with a small kernel of knowledge and oodles of discipline and patience are likely to see money flow their way over time–that’s how capital markets are designed to work.  As you can see, “smart” relates much more to temperament than IQ.  I would go so far as to say the temperament piece is probably the most important.  While most investors engage in dumb behaviors like jumping from questionable method to method, adding money when they feel good about their results, pulling money out when they are temporarily panicked, measuring results over a short period of time, hiring and firing managers like a revolving door, and generally running about like a chicken with its head cut off, smart investors pursue reliable return factors with discipline and immense patience.  If you take the perspective that the market is designed to take your money when you do something dumb, investors would be well-advised to think about their behavior carefully before every portfolio change.”

Read it again…and again.   THIS IS THE KEY TO INVESTING!

Planet Money gives a basic explaination of what happend...

"[T]the decline may have been accelerated by a New York Stock Exchange system [Liquidity Replenishment Point, or LRP] that temporarily stops electronic trading in stocks that have fallen sharply. 

The system kicked in yesterday for stocks including Procter & Gamble and 3M, both of which are part of the Dow. It halts electronic trading for roughly a minute, and allows human buyers and sellers to consider the situation.

But stocks that are traded on the NYSE are also traded on other, smaller stock exchanges that are purely electronic. And -- crucially -- the system does not halt trading on those other exchanges.

So here's what may have happened yesterday afternoon:

The LRP was triggered for P&G and 3M, among other stocks. This stopped electronic trading in those stocks, very briefly, on the NYSE. During this brief pause, electronic trade orders were sent to other, smaller exchanges.

Those other exchanges may have been swamped by the volume of orders, Bloomberg and Felix Salmon note.

That's when prices in P&G and 3M briefly fell through the floor. The declines in those two stocks alone accounted for a 400 point drop in the Dow, the head of the NYSE said.

When the human traders at the NYSE stepped in a few seconds later, the prices shot back up again.

What's the upshot?

The heads of both the NYSE and the NASDAQ both suggest that it may not make sense to stop electronic trading of a stock on the NYSE but allow it to continue on other exchanges. "