If you weren't bearish before you will be after you read this post on IndexUniverse from John Serrapere. I have written about and linked to Serrapere's past work for Index Universe.John constructs his thesis around several big macros and uses some interesting techniques to reduce volatility as, similar to what I have been writing about, he is playing defense.
He cites a very common issue, one that I have mentioned before, that marks the maturation of the cycle which leadership rotating from, as he calls them, low quality to high quality.
He also notes that when S&P revises earnings downward that is a major sign for caution. He notes "Standard and Poor’s just announced a cut on estimated S&P 500 earnings for 2007 by 7%, which results in a 3.2% year-over-year decline."
He also attributes much of the excess of the last few years to the carry trade which he calls the root of all evil although in the past he has been long the DB Carry Trade ETF (DBV).
In the defensive portfolio profiled in the post he outlined how he reduces volatility with yen (FXY) and swissi (FXF) longs, he shorts EEM, he manages beta with various sector ETFs by analyzing how they react to trends in GDP and how they should react liquidity issues.
He also makes a lot of interesting observations that you might have read about elsewhere but that he really delves into.
Based on what I have read from him (he does not post very often that I am aware) he seems to be very sophisticated, the mixing and matching of volatilities, segments and products is very heady stuff. I believe the things I do are similar but on a much simpler level. I have no idea if he views what he does as simple or complex but my intention is to make things as simple as I can for myself and I try to promote to others that they keep things simple.
Diving into an article like this one that is very complex provides a great learning opportunity for anyone, IMO. Learning about complex, if you do it often enough can go a long way to a better understanding of simple.
This article in particular explores a position's effect on the entire portfolio as opposed to the singular result, something I write about a lot. If a portfolio is diversified there should be always be stocks that are up and others that are down. There are all sorts of technique to change volatility, change the impact of a sector or event on a portfolio to name a few.
This is important stuff to understand.
One last point is that Serrapere's bear case is very compelling, as they always are, and I will lean the same way it is important to remember that capital markets do exactly what they shouldn't all the time. Maybe that could be said about the action we have had thus far but if a bear is here or in the offing you should have plenty of time to get defensive if that is something you would want to do.
Finally thanks to Bill Cara who had a couple of kind mentions for this blog in the last few days.
22 comments:
Thanks for posting this John Serrapere research note! This is an excellent piece of research in terms of the quality and depth of analysis. Lot of food for thought on what one can do to position a portfolio defensively.
Do you know if he posts anywhere on a regular basis?
Roger, I posted Serrapere's, here, what I think was his first article in IU. He introduced his defensive portfolio in detail but then again not something easily understood or even duplicated. For a lover of simplicity, this guy is the pox. But, I do admire your willingness to plow into it and the idea that it's the theme behind it that counts. A track record of actual returns would help lend more creditability.
Due to the cylicical nature of financial markets, you can be both right and wrong if you wait long enough. Many savy investors rightly called the direction of the market but a lot of times they did too early( I heard this a lot). Thus a quantitaive approach seems to become popular lately beacuse you remove yourself and your emotion out of the equation.
I am so glad I am running slow this morning. I was so pleased to see the negative take on this rather reasoned article. I have felt there is to much complacency out there for far to long, thanks for all your comments and confirming it for me.
To the jerks who are filled with sarcasm: If you think that second-guessing Roger is easy, why don't you do your own market-action blog and put your ass on the line every day?
John,
The point is, you don't need to read all of this blather to be a good long term investor. You don't need to make market timing calls. In fact, this type of "advice" is bad for your portfolio, but good for "investment advisors".
You need a well diversified portfolio....preferable ETFs...read David Swenson if you need to learn more.
"That argument was neatly stood on its head recently by Morgan Stanley’s European strategy team. Suppose three years ago, they said, you had been given the following scenario for November 2007: oil close to $100 a barrel, the dollar at $1.50 to the euro, corporate profit margins at a record high but starting to turn, house prices falling in the US and the UK and the global banking system in chaos. Would you have predicted that European equities would be only 6 per cent off their peak?
Jackson’s glum conclusion is that equity investors are still in denial. The governor of the Bank of England recently remarked that the prospect of a fall in equities was at least as worrying as the credit crisis and he finds it hard to disagree."
I just thought the above from http://ftalphaville.ft.com/blog/ seemed appropriate here
John.
You mentioned, "To the jerks..."
That should be "jerk", singular. It's just our same old buddy the heckler pretending to be several folks that are mad at Roger. He is usually the first one to post before 7AM every day too I have noticed. He really needs to get a life.
At least he got his nicknames right a couple of times.
And BTW heckler aka, Bozo, three stooges, if you are a buy and hold indexer, and there's nothing wrong with that, why are you always complaining that you lost your shirt using double shorts? Wasn't that a defensive position you hypocrite! And why didn't you buy and hold that position if it wasn't defensive?
JackS
Jack: don't bother. The guy is here, 24/7, hanging on Roger's every post, yet doesn't take any stance of his own while claiming he gets no value from this blog.
He sees advice where none is provided. Doesn't that say volumes about the troll?
Thanks for the article, Roger. Do I read him right
about being 30+% in SHY? It sounds like US and high quality foreign bonds are looking better and
better. How many of you are similarly increasing
your bond allocations and if so, which vehicles
seem to show the most promise?
Secondly, it seems also, like the emerging markets theme is less popular with him than with you Roger....is that correct? Also the moves to FXF and GLD are hard, in my opinion, to argue against.
I certainly appreciate the stimulating articles, Roger....making one defend one's postions is helpful, and can take some of the emotional steam out of the equation.
Thanks,
Scoot
Darn, what's all this flack? Kudos for digging into it. For me, just frustrating because I want to understand more. Keep up the search and thanks for sharing.
May not be equal to the "Death of Equities" BW cover, but GW going down in flames, you never know, time will tell.
http://www.economist.com/opinion/displayStory.cfm?Story_ID=10215040
Roger,
I've googled and I can not find a single global currency fund...pure curency. James Grant posts one on seeking alpha but, I think, he's got it all mixed up. He cites a cef for franklin templeton that should be their oef. the one he cites has over 96% domestic bonds!
As for global income funds that profile currencies, most have done very poorly ytd, exception is anything to do with australia. And, could be loaded with equities.
Roger,
For a while you deleted the jerk-offs, and perhaps found the few hecklers too time consuming. If so, I understand, but these people tend to distract comments from the issues. If you note the commentary for today, most are by, or addressed to, El Jerko.
Very interesting article, but isn't there an easier way to do essentially the same thing for us small investors?
If you look at the point and figure charts at http://stockcharts.com for the S&P versus the russel 2000 or wilshire 5000 it is pretty clear small stocks broke the uptrend first and the S&P is now following. Much much easier IMO for us little guys to simply keep an eye on when this occurs. There is typically a rush to quality at the last stages of a bull market and the point and figure charts are kind of idiot proof IMO. I like idiot proof because so many people are just wrong even though they are trying real hard to be right.
Elaine Garzarelli was lucky with one complex analysis twenty years ago.
And how about Joe Granville? Another complex author of market strategy.
They all flame out sooner, rather than later.One could ponder the old financial guru maxim,"if you can't dazzle them with brilliance, baffle them with bullshit".
Time to roll out the latest Elliot Wave data and Fibonacci Numbers?
T:spot on.
But Roger is the quintessential translator for us diyj'rs. He can dumb it down as good as any, and he shares!
What happened to the "delete the asshole comments" policy? Was enjoying the new asshole-free zone while it lasted.
RE; Bill Cara...no flames, just thoughful comment, we're not here to protect the free speech of the malajusted. Reminds me of reading feminist blogs on craiglist, then blam, a color photo of a private part in great distress. Kind of ruins the mood. thanks for your help, charlie
Hello, Roger. I found your site recently and have become a frequent reader. I thought this past June it was time to start playing defense and made some adjustments. As an observer of cycles, I've noticed consistently that whenever a certain configuration occurs, so do recessions.
I found this chart this morning on sector rotation which is interesting given what's been happening in the markets lately. I thought you and your readers may want to take a look.
http://blog.afraidtotrade.com/
weekend-sector-rotation-overview/
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