1/1 newsletter
*** Market
The year of 2005 has closed with a weak note. In a broader scope, DJIA closes with +0% while SP500 at +5% range. If you are candlestick chartist, DJIA's cross shape close for the year will send you strong alarm that the market is "in doubt". Why is the last week so weak? My view is that on Tuesday, 10-year Treasury yield touched FED discount rate briefly. This signals the so-called inverted yield curve, which historically is a prelude of recession. Although FED has been comforting Wall street this time it will be different, it remains questionable how things will develop. Will long bond drop to give way? Or discount rate has to drop? Or economy can still find its way without the arbitrage opportunity in yield curve? Your answer is as good as everybody else (since this time it will be different).
*** Portfolio
My portfolio returns 18% since 12/2004, which is about +15% YTD. I counted the yield of top Lipper funds, it beats 94% of them. Not bad... From factor model, this coincides with mid-cap sector. (However, both large-cap and small-cap both performed under par) Value did not show advantage over growth. But most outperforming funds have claims on the value camps. Other funds are international funds (which is corelated with mid-cap). Emerging market is very strong as well as everything related to oil. Korea, India, Latin America stood out. Japan also had a late rally toward its 2000 high.
*** Comment
Energy is a widely known story. Your prediction is as good as mine. You also need to understand that in many emerging countries, PetroXYZ is often the large, heavily weighted stock in their indexes, while in SP500, it is only a small sector (10% and has negative correlation to other sectors). Therefore, it is not surprising that these countries are doing very well when oil industry is profitable.
The other factor is that US is pushing to widen the free-trade zone. Flow of globalization is benefiting these emerging markets once again -- until the next currency crisis? Emerging market is historically high return but high volatility. It is not an easy game to play. Particularly you can only buy indexes. It is hard to buy stocks in these countries. As I said, many of these indexes are dominated by a few stocks. You are basically buying these stocks whether you like them or not. I have allocated a few stocks in these areas. We will see how it goes.
The number posted by these markets are mind-boggling. +50% to +100% a year. However, the fact that you do not see these numbers in top Lipper funds tells you something. Either these rating agencies are cheating you. Or those numbers are hard to get. If you check into where these numbers are coming from. It kind of gives you a clue.
These numbers are coming from two sources. One, sector funds or country funds. Two, leveraged play of sector funds. In the first catagory, the firm (such as Morgan Stanley, Fidelity) has a fund for everything you can imagine. And the hot ones will always stand out (right?) in any sorted list you see on the newspaper/website as if they got something right... In the second catagory, the best example is a small firm called ProFund. It has funds in every sector you want to play. And each fund has a basic version and a leveraged version (2x, called ultra-somthing). Therefore, in any sorted listing you see, if the basic fund performs in par, the ultra ones will definitely stand out (since it is ~100% outperforming other funds). Quite tricky, Hum?
I have been reading a lot of material about hedge funds. One concept in hedge fund is particularly useful in these plays. Sharpe Ratio, it measures the return per unit risk. If a fund is leveraged, the SR is the same or worse than the basic one. If a fund is very volatile, its SR is small even its one-year can be very large. It is a good concept, telling you how much risk you are taking in persuing the return. But whether you want to take heed of these numbers (or the firm/newspaper/website is telling you the numbers), that is still your homework...
Steve
The year of 2005 has closed with a weak note. In a broader scope, DJIA closes with +0% while SP500 at +5% range. If you are candlestick chartist, DJIA's cross shape close for the year will send you strong alarm that the market is "in doubt". Why is the last week so weak? My view is that on Tuesday, 10-year Treasury yield touched FED discount rate briefly. This signals the so-called inverted yield curve, which historically is a prelude of recession. Although FED has been comforting Wall street this time it will be different, it remains questionable how things will develop. Will long bond drop to give way? Or discount rate has to drop? Or economy can still find its way without the arbitrage opportunity in yield curve? Your answer is as good as everybody else (since this time it will be different).
*** Portfolio
My portfolio returns 18% since 12/2004, which is about +15% YTD. I counted the yield of top Lipper funds, it beats 94% of them. Not bad... From factor model, this coincides with mid-cap sector. (However, both large-cap and small-cap both performed under par) Value did not show advantage over growth. But most outperforming funds have claims on the value camps. Other funds are international funds (which is corelated with mid-cap). Emerging market is very strong as well as everything related to oil. Korea, India, Latin America stood out. Japan also had a late rally toward its 2000 high.
*** Comment
Energy is a widely known story. Your prediction is as good as mine. You also need to understand that in many emerging countries, PetroXYZ is often the large, heavily weighted stock in their indexes, while in SP500, it is only a small sector (10% and has negative correlation to other sectors). Therefore, it is not surprising that these countries are doing very well when oil industry is profitable.
The other factor is that US is pushing to widen the free-trade zone. Flow of globalization is benefiting these emerging markets once again -- until the next currency crisis? Emerging market is historically high return but high volatility. It is not an easy game to play. Particularly you can only buy indexes. It is hard to buy stocks in these countries. As I said, many of these indexes are dominated by a few stocks. You are basically buying these stocks whether you like them or not. I have allocated a few stocks in these areas. We will see how it goes.
The number posted by these markets are mind-boggling. +50% to +100% a year. However, the fact that you do not see these numbers in top Lipper funds tells you something. Either these rating agencies are cheating you. Or those numbers are hard to get. If you check into where these numbers are coming from. It kind of gives you a clue.
These numbers are coming from two sources. One, sector funds or country funds. Two, leveraged play of sector funds. In the first catagory, the firm (such as Morgan Stanley, Fidelity) has a fund for everything you can imagine. And the hot ones will always stand out (right?) in any sorted list you see on the newspaper/website as if they got something right... In the second catagory, the best example is a small firm called ProFund. It has funds in every sector you want to play. And each fund has a basic version and a leveraged version (2x, called ultra-somthing). Therefore, in any sorted listing you see, if the basic fund performs in par, the ultra ones will definitely stand out (since it is ~100% outperforming other funds). Quite tricky, Hum?
I have been reading a lot of material about hedge funds. One concept in hedge fund is particularly useful in these plays. Sharpe Ratio, it measures the return per unit risk. If a fund is leveraged, the SR is the same or worse than the basic one. If a fund is very volatile, its SR is small even its one-year can be very large. It is a good concept, telling you how much risk you are taking in persuing the return. But whether you want to take heed of these numbers (or the firm/newspaper/website is telling you the numbers), that is still your homework...
Steve
posted by Steve at 11:07 AM
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