Google+ Followers

Wednesday, April 16, 2014

Weekly Update 4 12 2014

Word for this week divergences.

"Many people think they are thinking when they are merely rearranging their prejudices." William James  

"When men yield up the privilege of thinking, the last shadow of liberty quits the horizon.  Thomas Paine  

"Becoming fearless isn't the point. That's impossible. It's learning how to control your fear, and how to be free from it."  Veronica RothDivergent

"But I will find new habits, new thoughts, new rules. I will become something else." Veronica RothDivergent

The hot movie series and book trilogy starts with a book titled "Divergent".
My daughter read the book and saw the movie recently in one of those midnight showings where you can be one of the first several thousand teens that see it the night before it is released.
Now it is her new favorite book and movie. She can't wait to read the next book and see the next movie.

It seems that you must fit into a certain category of personality type in the story. However for some reason the main character doesn't fit in where they are supposed to fit.
I haven't seen the movie yet.


From vocabulary.com

Divergence
"the act of moving away in different direction from a common point"


From Investopedia.com

Definition of 'Divergence'

When the price of an asset and an indicator, index or other related asset move in opposite directions. In technical analysis, traders make transaction decisions by identifying situations of divergence, where the price of a stock and a set of relevant indicators, such as the money flow index (MFI), are moving in opposite directions. 

In technical analysis, divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Positive divergence occurs when the price of a security makes a new low while the indicator starts to climb upward. Negative divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead closes lower than the previous high. 



There was a wide divergence between the direction of the treasury yield and bond values during the last decade.




Since May of last year the direction of yields on the ten year treasury has increased and bond values have suffered.




Another wide divergence was the direction of gold in relationship to stocks during the last decade.



The value of gold fell last year as the stock market rose significantly.





This year stocks are struggling and gold has risen. 




What should we take away from this?

  • Be widely diversified across non-correlated asset classes.
  • Focus on deep value and fundamentals.
  • Don't get carried away or enamored by momentum of any one asset class or investment, every investment moves through cycles of up and down.
  • Pay attention to risk.
  • Develop an ongoing and deepening relationship with a trusted investment advisor.
  • Investing is not as simple as some might lead you to believe.
  • Depth of research, full time vigilance, continuous updating of knowledge and training indicate for most, you need to consult a professional financial advisor.
  • The decision to "buy and hold" along with "passive investing" could become the road to going nowhere fast.

This was an interesting picture of the Tech heavy Nasdaq Composite Index I saw yesterday.








The S and P 500 index trended down last week - 2.65%
The 10 year Treasury Yield index trended down last week. 
-  3.93%
The US Dollar index trended down last week. - 1.22%
The CRB Commodities index trended up last week. + 1.49%
The Gold Index trended up last week + 1.24%
The US Aggregate Bond Index trended up last week. + .81%
The International Aggregate Bond Index trended up last week.
+ 1.56%
The New York Composite Index trended down last week.
- 2.24%
The Dow Jones World Index trended down last week - 1.99%

The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.

2013 4th qtr + 2.53

Year to date commodities and gold are outpacing other assets. Equities move back into negative territory for 2014. Bonds outpace stocks





Many investors take the wrong approach looking primarily at recent return and average percentage rates. Overall risk measures and managing downside risk play an increasing role in end results.

Investors instead should be focused on managing Dynamic Beta exposure, evaluation Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.

The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.



Saturday, April 5, 2014

Weekly Update 4 5 14

Words for this week front running, high frequency: advantageous.

"We live in an increasingly sophisticated world that makes it difficult to make simple comments on stuff. There are too many people on both sides of the border who are taking advantage of circumstances and the situation." Arlo Guthrie

 "Luck can often mean simply taking advantage of a situation at the right moment. It is possible to make your luck by being always prepared." Michael Korda

"Every advantage is temporary." Katerina Stoykova Klemer

"If, on the other hand, in the midst of difficulties we are always ready to seize an advantage, we may extricate ourselves from misfortune." Sun Tzu

"That is the way to achieve higher standards of living for all is through science and technology, taking advantage of better tools, methods and organization." Charles E. Wilson

There was a lot of buzz around investors being told they are being taken advantage of by "High Frequency Trading". These individuals, as it was accused, are taking money away from the little guy by getting in on the trade of a security ahead of their trades.

First and foremost I want to assure you that we make trades on behalf of our investor clients making sure that best execution of that trade is exercised.


What about this claim about High Frequency Trading and "The Market" being rigged?
Several thoughtful pieces appeared this week. I will give you the flavor of what was said?

Matthew Philips writes that all trading even so called high frequency trading is based on public knowledge.

Is High-Frequency Trading Insider Trading? By Matthew Philips

"While the purpose of the public feed is to ensure that everyone gets the same price information at the same time, the playing field isn't as level as it would seem since exchanges sell proprietary feeds. And not just to HFT firms. Lots of different types of investors buy proprietary market data from exchanges. By law, prices must be entered into the SIP and the proprietary feeds at the same time, but once the data leaves the exchanges, the proprietary systems often process and transmit the information faster. These feeds arrive sooner and contain more robust information-including all prices being offered, not just the best ones."
"This if it is an advantage is based on money spent, the cost of excelling at their particular business."
"Speed traders spend a lot of money for faster access to better information. This allows them to react more quickly to news and, in some cases, jump in front of other people's orders by figuring out which way the market is going to move. So is that insider trading?"
"They pay for that feed, just as they pay for other technological advantages. So what happens when some traders are able to hear information quicker than others, not through nefarious means but by dint of their technology? There are plenty of examples in history where early adopters used technologies-the telegraph, say, or the telephone-to get information quicker than everyone else, and then profited from it. As a defender of high-frequency trading put it to me: The high-speed, algorithmic trading computer is the new carrier pigeon."

Gene Marcial points out how high frequency trading hurts day traders and short term investors, but has very little impact on long term investors.
In fact, he says it may help the long term investor.

Gene Marcial, High-Frequency Trading Mainly Hurts the Traders and Short-Term Investors writes in Forbes

"The flash traders aren't in hiding. They are in fact proud of what they have been able to achieve in the stock market that has bewildered a lot of people. But who really gets hurt from such so-called high-frequency trading?"
"Not so much the small individual investor, to be sure. But the largest victims are the professional traders and short-term investors among the institutional investors who are major heavyweights in stock investing, and whose strategies matter most to the market. It is the insight and advanced peek into these big investors' massive scale of buying and selling that high-frequency traders lust after as it's pure gold to their bottom lines."
"Both traders and short-term investors who invariably whirl in and out of financial securities are victimized in that they end up paying a higher price over a short window or limited time for what they buy. But for long term investors, the impact is much less and not as dramatic on their total returns since they don't depend on quick returns."

Rishi K. Narang makes the point that front running is illegal. Sometimes there are traders who get caught doing illegal things. This comes as no surprise.
Is this what High Frequency Traders are doing?

High-frequency traders can't front-run anyone Rishi K. Narang

"HFTs generally use direct connections to exchanges in order to post bids and offers and collect market data, rather than relying on the centralized SIP feed. This is because the SIP feed is unacceptably slow. Surely we cannot expect market makers to make markets without actually knowing what the current market is. When an order is placed, it takes some time to be reflected in the NBBO. But that order is already in the market before the HFT can see it, even on the direct feed, by definition. HFTs never know what a customer's order is before it's in the market. HFTs have no customers."
"HFTs can, by virtue of having invested in superior infrastructure, react faster to the information embedded in a new order, but let us not confuse speed with front-running. This information is public and available to anyone willing to overcome the challenges of acquiring and processing it very quickly."

Larry Swedroe writes about the impact of high frequency trading.
For one thing, he says that spreads have tightened and trading has become less expensive.

The Impact of High-Frequency Traders Larry Swedroe

"While in the pre-decimalization days you used to be able to drive the proverbial truck through the bid-offer prices on stocks, today spreads are much tighter, often pennies or even a single penny. The result is that, in general, trading is much less expensive than it used to be. The spreads that used to go the market makers have come way down. In fact, the narrow spreads have driven the spreads so far down that it doesn't pay for the old market makers to risk their capital any longer. In effect, in terms of providing liquidity to the market, HFTs have replaced the old market makers. Thus, if the HFT industry is making money, much of it is simply a transfer from one group to another. But with the narrower spreads, total profits are down."

"The narrower spreads have eliminated the incentive to make deep markets, taking the risks of holding positions. That means you cannot trade large amounts without large "market impact costs" - and that hurts the active traders who "must" move large positions quickly, or at least they think they do. Thus, we have some winners and losers."

The winners are individual investors, Swedroe claims.

"The winners are the individual investors who can now sell their relatively small amounts of stocks at much narrower spreads, and with much lower commissions as well. In addition, there are institutional money management firms that because of their patient trading strategy benefit from the narrower spreads. And at times they can also provide liquidity to active traders who want to move a large position quickly, and thus have to pay up more today since there is less depth to the market."

"So who are the losers? The losers are the large institutional investors who haven't altered their trading strategies. Thus, to them is seems like HFT is costing them money. But perhaps it's not costing more than it did in the old days when they paid large spreads to market makers. It's just that today they cannot trade large orders as easily, having to make more trades in smaller amounts, and that can lead to markets moving against them faster than they did in the past."

All of this points to the fact that most agree on, the speed of trading is making markets more volatile and susceptible to a possible flash crash.

This puts us more and more on the side of Robert Shiller who recently won a Nobel Prize in economics.
Shiller has made the case that markets are not efficient.
Shiller has demonstrated, while all have available the same public information, humans are subject to over reaction to that information causing bubbles and over correction in market pricing and security pricing.
For years efficient market proponents have claimed low cost index investing cannot be beaten by investors.
However there are many examples that can be shown how active management and an efficient allocation process can outpace the stock market over time.

Nancy Folbre writes in the New York Times about Robert Schiller.

 "He disputes Professor Fama's leap from evidence that individual investors cannot outperform stock market averages (sometimes termed the "random walk" theory) to the so-called efficient market hypothesis. But this hypothesis is not as grand as it sounds. It relies on a very narrow definition of efficiency: that market prices immediately adjust to all available information. This is rather like telling a patient that the hospital immediately adjusts to all the information about your disease that can be provided by diagnostic tests. It says nothing about its probable success in improving your health."

Dan Weil has written of Shiller's claims, "If the theory said nothing more than that it is unlikely that the average amateur investor can get rich quickly by trading in the markets based on publicly available information, the theory would be spot on," Shiller writes in The New York Times. But the theory has been used to argue that "markets reflect a wisdom that transcends the best understanding of even the top professionals, and that it is hopeless for an ordinary mortal, even with a lifetime of work and preparation, to question pricing," he says. This view has gained great currency among economists, Shiller says. "And its implications are dangerous," he maintains."

Hersh Shefrin writes in Forbes "The neoclassical approach is based on the idea that financial events can be explained as if most people are fully rational. In contrast, the behavioral approach is based on the idea that some financial events can only be explained by recognizing that psychological imperfections often cause people to behave irrationally."
"Shiller's great contribution has been to point out that in practice, asset prices are far too volatile for markets to be efficient and feature rational expectations."
Shefrin states; "Looking back in time, I can say that I was persuaded long ago by Shiller that financial markets are vulnerable to asset pricing bubbles, and that such bubbles are inconsistent with rational expectations."

Why is this debate and the message from Robert Shiller important to you?
Large asset bubbles have occurred more frequently and with greater devastation to investor portfolios.
It is no longer prudent and wise to follow the markets through passive capitalization weighted index and do it yourself portfolio management.
Low cost means no management. A susceptibility to very large downturns in portfolio values.  

Stock Traders Daily A Research Newsletter Provider- Says currently: Economic Growth is Exaggerated By 66%!

They indicate that their Macro-Economic Analysis called "The Investment Rate, has never been wrong.

"Therefore, it is important for us to understand just how distorted the growth rates are in the United States as a result of the stimulus efforts. My macro-economic analysis is called The Investment Rate, and since 1900 it has never been wrong about identifying longer term economic cycles here in the United States. It is a demographic analysis based on societal norms and the lifetime investment patterns of individuals in our country. It tells us that we are in the third major down period in US history, not unlike the great depression or stagflation, and the natural rate of change in the amount of new money available to be invested into the economy declines every year between 2007, the year this down period began, and 2023, the year the down period comes to an end."
"Without stimulus, the Investment Rate tells us that economic growth would actually have declined between 2007 and 2014, but the growth rates clearly stabilized and began to increase after the fallout in 2008. My analysis also suggests that the decline in 2008 was an overshoot to the downside, and a return to parity was necessary from there, but in 2011 the market came back to parity only to be met shortly thereafter with additional and aggressive stimulus, which significantly distorted economic growth and masked the economic weakness that otherwise would exist."
"Quantifiably, the economic growth that brought our economy and stock market to these levels was 66% higher than it should have been according to the natural growth rate proven by the Investment Rate, which has been accurate at predicting longer term economic cycles since 1900. That 66% exaggeration can also be translated directly into risk, and it was risk that followed the Internet bubble as well."


At Marrs Wealth Management we are constantly vigilant to guard our investor client's portfolios and maintain portfolio management that seeks to mitigate against fast and deep loss events. 




The S and P 500 index trended up last week + .40%
The 10 year Treasury Yield index trended up last week. 
+ .52%
The US Dollar index trended up last week. + .27%
The CRB Commodities index trended down last week. - .12%
The Gold Index trended up last week + .66%
The US Aggregate Bond Index trended down last week. - .01%
The International Aggregate Bond Index trended up last week.
+ .01%
The New York Composite Index trended up last week.
 + .79%
The Dow Jones World Index trended up last week + 1.02%

The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.

2013 4th qtr + 2.53

Year to date commodities and gold are outpacing other assets. Equities move into slightly positive levels for 2014. Bonds outpace stocks




Many investors take the wrong approach looking primarily at recent return and average percentage rates. Overall risk measures and managing downside risk play an increasing role in end results.

Investors instead should be focused on managing Dynamic Beta exposure, evaluation Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.


The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.


Tuesday, April 1, 2014

Getting to the right Investment Professional and Investment Strategy for you!

Yogi Berra is quoted to say; “You’ve got to be very careful if 

you don’t know where you are going, because you might

not get there.” Investors should take these words to heart.


The first consideration in investing is what is the end goal? Is

there a time frame in mind? Is the time frame indefinite? If 

you do not answer this question then you may well not 

invest prudently.


Remember a goal must be quantified, it must achievable 

and measurable.


The end point may be near as in a large purchase in a few 

years, college expense several years from now for children, 

or life expectancy and beyond for retirement and legacy.


Many fall down in this first area.


Answering questions such as will I need income from these

investments or how will these investments provide for my 

heirs after I am gone. Who will be in charge of these 

investments in the event I can no longer oversee them?


Is my return expectation reasonable for the expectations I 

have for the investment goal? Is the investment strategy one 

that I can commit to for the duration of time it takes to 

achieve the goal? Do I have a strategy to review and adjust 

the investments over time? Risks must be assessed and it 

must be determined are those risks manageable.


What could cause my plan to succeed and what could 

interfere and cause it to fail? You most likely need a trusted 

advisor to help you ask and answer many difficult questions 

along the way.


It finally comes down to choosing an advisor. Most are well 

trained to answer the questions I have posed.


What should you look for in a financial advisor relationship? 


The difference may be best discerned in knowing how an 

advisor is compensated and how the advisors practice is 

structured. 


Do they hold out a fiduciary standard for investment advisor 

only a suitable standard?


There are basically three models. 


Employees of a single company, independent advisors 

attached to an insurance or investment broker, or fully 

independent advisors. 


Try to determine if there are any conflicts of interest 

between what is best for you and the investment advice 

offered.




If you are compensating the independent fee only advisor a 

fee, you are the only person of interest. 


If the company or another third party is paying the advisors 

salary or a portion of commissions, the employer’s wishes

and or the pay incentives from commissions may be a 

priority interest.

Monday, March 31, 2014

Weekly Update 3 29 2014

Words for this week change: easy, rewarding and normal.

"It is easy to hate and it is difficult to love. This is how the whole scheme of things works. All good things are difficult to achieve; and bad things are very easy to get." Confucius

"Happiness does not come from doing easy work but from the afterglow of satisfaction that comes after the achievement of a difficult task that demanded our best." Theodore Isaac Rubin

"Nobody realizes that some people expend tremendous energy merely to be normal." Albert Camus 

 "The only normal people are the ones you don't know very well." Alfred Adler   

 "While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster" Benjamin Graham

"The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking." 


"People will change their behavior if they see the new behavior as easy, rewarding and normal." Erika Andersen writes in an article in Forbes 8/17/2012

Erica says three things are needed to give enough impetus to change!

 "Easy:  This means the person being asked to behave differently believes, "I have the skills and knowledge to do this, and there are no organizational obstacles to me doing this - I won't get in trouble, and nobody will get in my way."  Too often, we ask people to behave in new ways that seem hard to them - either we haven't taught them the necessary skills, or they've experienced pushback from others in the past when they've tried to do them, and don't want to run into that again."

"Rewarding:  For a behavior to be rewarding the person has to feel that, "Doing this behavior will give me results (emotionally or practically) that are valuable to me." This is where behavior connects to values; you have to show people how behaving in these new ways will support what they value.  For example, if someone deeply values having positive human interactions, and you help them to see how behaving in a certain way toward customers will improve the interaction - they'll find that behavior rewarding."    
   
"Normal: This is a big one.  In order to change the way they behave, most people need to feel that "People like me act this way, and people I admire and want to emulate act this way." Human beings, for the most part, don't want to be the odd man out. Even folks who consider themselves renegades tend to emulate renegades they admire!  If you want employees to behave differently, you have to be able to give them some evidence that their peers (at least the ones they like) and their role models are behaving in those ways.  And as their boss, you have to model the behavior yourself."

We know that many people make harmful decisions when it comes to investing. Studies have shown over and over again that the average investor underperforms significantly to the market and to investors who employ professional Investment Advisors.

Yet it is difficult to change.

Some see it as an affront to ask for help. Others are afraid of what they don't understand. Still others are at a loss to know who to trust.

Changing behavior is not easy. The normal behavior, for average investors, is making bad decisions.


A relationship with a trusted investment professional could be very rewarding!



In a recent Vanguard study they estimate that an Investment Advisor professional can add 3% annually in value added return to the average investor.
The added value is probably more as most people make poor decisions in investing.
Most people are not average, whatever average happens to be, in investment performance achieved.

Chris Brightman, CFA of Research Affiliates writes;"Whether we label investor choices as irrational behaviors or valid preferences, the results for investors' wealth accumulation are clear. In 2000, Terry Odean and Brad Barber documented that average individuals' investing behavior caused them to underperform the market by 1.5% per year, even before taking account of fees and expenses. In the 2014 update to his seminal 2005 white paper, "Mind the Gap," Kinnel shows that over the last 10 years the average mutual fund investor earned 2.5% less-on a dollar-weighted basis-than their funds delivered on a time-weighted basis. (In U.S. equity mutual funds, the gap was 1.7% per annum.) Their buy and sell decisions were that bad!"

Brightman talks about the cause of this apparent contradiction in returns available and returns actually achieved; "Today, above-market returns are readily available through simple, transparent, low cost, smart beta strategies. The excess returns are not relentless. If markets are rewarding momentum, growth, and risk aversion-in other words, when the "fear premium" for out-of-favor assets is growing-these strategies will lag the markets, until the markets begin to reward discomfort again."


"The evidence is clear, however, that a preference for the disciplined contrarian approach is likely to result in more wealth over time than the alternatives." says Brightman.


The problem is investor behavior can easily be driven by emotion in return events that lie at the outside of expected ranges.
  
Events like 2008 and the beginning of 2009 investors who grew too confident through the previous years, became overly aggressive.
  
These investors lost a lot of money and dumped those aggressive portfolios at or near the market bottom.
  
Now at the end of 2012 and through 2013 we heard individual investors are returning to equities.
  
The outlying return of 2013 was the highest annual return since 1999, sixteen years!
  
This truly makes 2013 an outlier in returns.
  
Those very investors who sold at or near the market low are now becoming more aggressive again


"It is optimism that is the enemy of the rational buyer." Warren Buffett

"Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed."  Benjamin Graham









The growth of debt, price to GDP and price relative to earnings should give you cause to think. 


"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." Warren Buffett


It is difficult to try to call a top or a bottom. 

At Marrs Wealth Management we search for and monitor managers that have excellent track records of achieving superior risk adjusted return consistently. 

We offer a powerful line up of asset managers, diversified across seven broad asset class allocations. We constantly monitor those managers and allocations. 

Reallocating and rebalancing as appropriate to client goals and market conditions.



The S and P 500 index trended down last week - 1.23%
The 10 year Treasury Yield index trended down last week.  - 3.71%
The US Dollar index trended down last week. - .12%
The CRB Commodities index trended up last week. 
+ 1.49%
The Gold Index trended down last week -2.77%
The US Aggregate Bond Index trended up last week. + .75%
The International Aggregate Bond Index trended up last week. + .59%
The New York Composite Index trended down last week. -.26%
The Dow Jones World Index trended up last week
 + .22%


The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.

2013 4th qtr + 2.53

Year to date commodities and gold continue to lead other asset classes. Bonds lead stocks.





Many investors take the wrong approach looking primarily at recent return and average percentage rates. Overall risk measures and managing downside risk play an increasing role in end results.

Investors instead should be focused on managing Dynamic Beta exposure, evaluation Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.

The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.