NFP preview


Author Cam Hui

Posted: 30 May 2012

For American investors, Friday will be the big data day which features the Non-Farm Payroll release. The last two NFP numbers have been below expectations. Looking ahead to Friday, however, I think that it is likely to come in either in-line or slightly above consensus expectations for a couple of reasons.

First, the Citigroup Surprise Index, which measures high-frequency economic numbers, is steadying after falling below the zero line, which indicates more negative than positive surprises. The rate of deterioration has been halted, which is mildly positive for the economic outlook.

In addition, Gallup does an employment tracking poll and Gallup forecasts a slight downtick in the unemployment figure in May.

I hate NFP days, because the number is so volatile and the error term is so large. In the last two months, I would have taken the “under” expectations bet if someone put a gun to my head and forced me to make a forecast. This month, I am taking the “over” because I am expecting a slight beat (by 10K or less).

Will good news really be good news?
If I am right, the stock market will likely rally if NFP beats expectations. But will this kind of good news be actually positive for stocks? An employment number that slightly beats expectations, which would be my forecast, would not be positive enough to significantly light a rocket under the growth outlook, but would be positive enough to keep the Fed from engaging in quantitative easing for the June FOMC meeting. After the June meeting, the Fed will not have the political cover for QE for the rest of 2012 because of the election, unless the economy really craters. I agree with Tim Duy in his post Is QE3 just around the corner? [emphasis added]:

Bottom Line: The data flow is soft, but Dudley indicates it is not soft enough to ease. And while some are pointing to falling TIPS-derived inflation as given the Fed room to move, they have traditionally delayed until conditions are more dire (they are not exactly prone to overshooting in the first place). The Fed doesn’t think they will ease further; they think their next move will be to tighten. Which means that financial conditions will need to deteriorate dramatically to prompt action in June. So if you are looking for the Fed to ease in just four weeks, you are looking for financial markets to turn very, very ugly. Lehman ugly. And I wish that I could say that it won’t happen, but European policymakers are hell-bent to push their economies to the wall while worshipping at the alter of moral hazard.

The Bernanke Put may still live, but the deductible on that insurance will be a lot higher for the remainder of 2012.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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Bernanke is Clear on Triggers for QE3, and We Aren’t Close to Them


Author Larry Berman

Posted: 26 Mar 2012 reposted from etfcm

This week’s educational segment on BNN’s Berman’s Call is focused on understanding some aspects of market breadth. For the car enthusiasts out there (I just got my new Audi A5 cabriolet), understanding market breadth is like looking under the hood to get a sense of what might go wrong in the future. Looking at all the gunk in the carburetor for example can tell you about the efficiency of your engine. In the case of a stock market index like the S&P 500 or NASDAQ 100, we can look under the hood in many ways.

One that was developed by our good friend Tom McClellan of the McClellan Oscillator, http://www.mcoscillator.com/, averages the amount that all stocks in an index are below their 52-week highs. The NASDAQ 100 as all will know, led by AAPL and a hand full of other stocks, has been making new highs, but the average stock in the index is still more than 10% below its own 52 week high. We can see that when divergence build in this indicator, as we have seen over the past market cycles, a significant market correction typically follows.

The current internal weakness in the NASDAQ 100 is the worst in years. There are other divergences popping up all over the place like IWO (US small cap stocks), underperforming large caps (SPY), and the DJ Transports (IYT) not confirming the new high in the DJ Industrials (DIA). The fact that sentiment readings are bullish and hedge fund investors have been chasing performance most of the year suggests we are likely getting very close to an important trading top.


Buy the dips & sell the rallies


Author Cam Hui

Posted: 04 Jan 2012 12:33 AM PST

I recently wrote that 2011 was a choppy market where it was very difficult for institutional investors to beat the market and for hedge funds to make any money because of the tendency of the market to whipsaw. In that case, my inner trader has observed that there is potential for nimble traders to profit from trading the swings of a range-bound market by buying the dips and selling the rallies.

The chart below shows the relative performance of SPY, which represents US stocks and the risk-on trade, against TLT, which represents long Treasury bonds and the risk-off trade. I have overlaid on top a short horizoned RSI indicator of 7 days. Note how it has been profitable to sell stocks and buy bonds when RSI approaches the 60-65 level and buy stocks and sell bonds RSI goes below 30.

Where are we now? With the opening day rally yesterday, the SPY/TLT 7-day RSI stands at 55, which is very near the sell zone for stocks, indicating that the upside is limited – unless you believe that stocks are on the verge of a major upside move.

My short term liquidity measures is also telling my inner trader to sell this rally. Measures of MZM growth are flattening out, which is generally not conducive to a sustainable equity rally, after an uptrend that largely coincided with QE2 earlier last year.

This chart of the growth of broader monetary aggregates also tell the same story. Money supply growth is now either flattening out or decelerating after a period of acceleration that began in mid-2010. Everything else being equal, an environment of slowing money supply growth usually provide headwinds to further advances in equity prices.

My inner traders is telling me that the upside in stocks is limited at these levels and to fade this rally, but to be prepared to buy the dips.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Have a plan for 2012


Author Cam Hui

Posted: 03 Jan 2012 12:27 AM PST

Sometimes the investment process is more important than the investment decision. In the past few days, I have outlined:

I urge all investors to have a game plan for the year ahead and beyond. Despite all of our best efforts, our forecasts can and will fail and how you react to the change in direction is more important than the decision you take today.

Strategies for different parts of the cycle
Barry Ritholz recently showed a series of charts of the economic cycle and how investors should react to them, two of which I show below. However you approach the market, whether it’s asset and sector rotation, or stock picking, recognizing your investment environment is key to alpha generation. This chart shows the analytical framework for the asset and sector rotators:

 

And this one is a framework for the stock pickers:

Be tactically aware of the investment environment
My approach is to become more tactical in my asset allocation using my Asset Inflation-Deflation Trend Model. An article in Registered Rep shows how many investment advisors are turning to tactical asset allocation as an investment solution to dampen portfolio volatility:

Following the twin market implosions of the past decade—first tech, then real estate—many retail financial advisors are looking for more tactical, meaning active, asset allocation solutions for client portfolios to dampen volatility, improve total returns and avoid market catastrophes. At least some of them fear that if they don’t dramatically change the way they allocate client portfolios, moving away from traditional buy-and-hold investing strategies, they could lose clients. So say a handful of advisors and an investing expert.

Not becoming more tactial could pose a business risk:

Things could get especially bad if another bear market hits, says Ron Carson, founder and CEO of Carson Wealth Management Group. “[Investors] are hanging on by a thread right now, and I don’t think they’re going to forgive.” A Natixis Investor Insights Study found that 63 percent of investors are now paying more attention to risk than ever before. If the market nose-dives, advisors are going to want to have a different story to tell. They can’t just tell clients to hang on and wait it out like many of them did in 2008.

The movement to tactical asset allocation has turned from a trickle to a flood:

According to a survey by Cerulli Associates, the number of FAs using either a pure tactical allocation or strategic allocation with a tactical overlay is now at 61 percent, up 8.3 percent from 2010. A Jefferson National survey from September 2011 found that 75.5 percent of advisors believe that active portfolio managers can outperform an index over the long term. In Jefferson National’s 2010 survey, 66 percent of advisors said clients were more confident with a tactical asset management strategy, while only 34 percent said clients were more confident with a traditional buy-and-hold strategy.

Are you betting the farm?
Stocks didn’t go anywhere in 2011. In fact, they haven’t gone anywhere since the NASDAQ peak in 2000. In the current low-return environment, advisors find that clients are less forgiving of draw-downs in their portfolio.

In days past, the practice of overweight a portfolio with a manager to make a big style or macro bet that “looks through the economic cycle”, e.g. a value manager, was perfectly acceptable. The downside to managers that make such style bets is they tend to badly underperform during certain periods when their style is out of favor – and investors are far less tolerant of such draw-downs in the current volatile and low return environment.

As an example, there were numerous managers who were wary of internet stocks during the Tech Bubble runup. I had watched many good managers and strategists go down in flames because they were one or two years early because their investors couldn’t stand the underperformance. Today, investors are highly intolerant of negative volatility, largely because of the low return environment that we have been stuck in for the last decade.

Have an investment plan
The message is clear. Take control of your portfolio. Be aware of the investment environment. Your investment philosophy and objectives are up to you. However, you should make sure that you have engineered your portfolio’s risk profile sufficiently so you survive to get to your objective.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Back to fundamentals in 2012


Author Cam Hui

Posted: 02 Jan 2012 12:24 AM PST

Imagine playing a football game in a driving rainstorm on a muddy field. Players slip and slide all over the place. The quarterback has trouble throwing the ball. Receivers can’t grip thrown balls. Running backs are virtually skating on the field and can only occasionally get good footing. Kickers can’t judge the wind as it shifts at a moment’s notice.

That was the story of disappointing returns in 2011 for many hedge fund and active investment managers, which I wrote about last week.

Consider the experience of star hedge fund managers like Mark Kingdon and John Paulson, who can be described as the proverbial smartest guys in the room. The Wall Street Journal reported that Kingdon and Paulson were whipsawed by the market action in 2011:

Like other high-profile investors, Kingdon has been whipsawed throughout the year by stock market swings that have been hard to predict, turning on a dime. John Paulson (who had a terrific 2008) has had the most humbling year of his own storied career, with his largest funds sinking in value amid wrong-headed bets on an economic recovery.

Indeed, the chart below of the S+P 500 shows that the stock market was trendless in the first half of the year and trendless and marked by extreme volatility in the second half. Investable swings, shown in red, were few in number. Many of the swings seen in the second half, shown in green, lasted less than a week – and woe to anyone who tried to invest on news flow in the second half as whipsaw would be the inevitable result.

2011 was an extremely unfriendly environment for investment managers because politics and policy, not fundamental and economics, drove market returns. The market began to worry about an extreme tail-risk, or black swan, event such as a Lehman-like crisis in the second half of 2011. Every news headline moved the markets and it, in a binary risk on/risk off framework, it was virtually impossible for an investment manager to discern direction.

It is therefore no surprise that managers with the freedom to be long or short performed poorly in 2011 because of the lack of a trend, or direction in the market. On my previous post, I showed that the worst performing hedge fund managers were Market Directional, Equity Hedge, or long-short equity managers, and Fundamental Value.

Bimodal distributions and multiple equilibria
Like the metaphor about the football players, the reason why hedge fund managers had disappointing returns in 2011. The environment was unfriendly to their approach. Like the football players, it didn’t matter how skilled they were, they kept slipping in the rain.
That’s because most managers are trained to focus on fundamentals and economics while largely ignoring politics. In a year where politics and policy decision dominated the investment environment, it is no wonder that managers showed disappointing returns.

Moreover, the investment term “multiple equilibria” or “bimodal distribution” began to pop up in year-end letter to investors. As an example, Pimco manager Vineer Bhansali wrote about this topic in an article entitled Asset Allocation and Risk Management in a Bimodal World. In the article he wrote:

For example, the policy risk that pervades the markets today causes high correlations among asset classes and a temperament of “risk on/risk off” among investors. This phenomenon can be traced to the connectedness of markets, the ease by which market participants can access these connected markets, and the speed of assimilation of information in response to political events. (See V. Bhansali, The Ps of Pricing and Risk Management, Revisited, Journal of Portfolio Management, Vol. 36, No. 2, Winter 2010.) This environment creates the possibility of multiple equilibria in the market, as well as trends that move markets between these equilibria, and once settled, restraining forces that trap markets in those equilibria (See V. Bhansali, Market Crises — Can the Physics of Phase Transitions and Symmetry Breaking Tell Us Anything Useful?, Journal of Investment Management, 2009).

Even though predicting which force will win is next to impossible given the real-time evolution of the interaction between markets and policy, we can still ask an important question: What would happen if the distribution of returns from a hypothetical portfolio looked more like the one shown in the chart on the right of Figure 1, i.e. a “bimodal” distribution with more than one peak? The bimodal distribution has two peaks, and interestingly, even though it is generated as the result of mixing two normal distributions, each from a different regime, it can exhibit both fat tails (a higher probability of larger losses due to unusual events results in a “fat tail” on the left side of the distribution curve) and skewness (a lack of symmetry between the left and right sides of the peak).

 

In other words, classical investment theory posits that investment returns follow a bell-shaped distribution, like the figure above on left. In the current environment where investors oscillate between a “risk-on” and “risk-off” trade, the true distribution may look like one with two peaks like the figure on the right. Under these circumstances, techniques used to manage funds assuming a bell-shaped distribution will not work in a multiple equilibrium world (like 2011).

The outlook for 2012
What happens now? Will the environment of 2011 persist into 2012 and the future?

The market should return to focusing on fundamental and economics in 2012. The financial market was largely driven by European news in 2011 as it was concerned the possibility of a Lehman-like market crash. When the news flow indicated that the Financial Apocalypse might be near, stocks sold off. When the European governments tabled a plan that indicated that the day of execution might be delayed, the markets rallied.

The events of 2008 are instructive for evaluating the current market environment. In 2008, the markets were concerned about the housing collapse and its effects on the markets and economy. Fast forward three years, the problems with the US housing market hasn’t gone away, nor have the concerns about the weakness of the American consumer and his balance sheet. But the fear of another Lehman-like Apocalypse in the United States is gone today.

Similarly, the ECB’s Long-Term Refinancing Operation (LTRO), which offers to lend eurozone banks unlimited amounts of money for up to three years, has largely taken the risk of Lehman-like event off the table. The long term problems of over-indebted eurozone sovereigns, weak European banking system and the competitiveness and productivity gap between Northern and Southern Europe remains.

Is the panic getting overdone? Probably. Given that the ECB has taken the market crash scenario off the table, the markets can now go back to focusing on what matters, such as earnings, growth outlook, interest rates, etc.

Under these circumstances, fundamentally driven investment strategies that depend on traditional techniques such as valuation, growth, momentum and trend spotting are likely to perform better in 2012 and beyond.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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