Category Archives: Strategy

Ports in the Storm

Since last fall, the S&P 500 has gone through three distinct downdrafts.  Between September 18 and October 15, the index fell by 7.3%.   It recovered that lost ground, and then some, rising 11.8% through December 5.  Then a second, less severe, decline began, as the index fell 4.9% between December 5 and December 16, followed by a 6.0% recovery through December 29.  This brought the S&P 500 to its (so far!) all-time high.  From December 29 through yesterday’s close, the index Read more […]

Fear of Fear Itself Reaches Crisis Levels

Franklin Delano Roosevelt would be disappointed. The US fear index, officially named the CBOE Volatility Index (VIX), has ticked up, averaging 16.4 since the beginning of Q4 2014, compared to 13.5 in the first three quarters of last year. If the story stopped there, we might still be able to look FDR in the eye. But we are in an even worse condition. Contrary to his advice, we are fearing “fear itself,” and doing so at levels typical of major crises, including the financial meltdown of 2008. How Read more […]

Inside the S&P 500: How Sector Weights Adjust for Oil

From May 30th 2014 to last Friday, January 9th, the energy sector in the S&P 500 was down 18.1% while the overall index was up 6.3%. As energy under-performs the overall index, its weight within the index is dropping, reducing the impact of further energy weakness on the index.  The energy sector weight is down by more than a fifth, from 10.8% at the end of May to 8.2% last week. The nature of a market cap weighted index is to adjust to mitigate the damage, or take advantage of, a trend Read more […]

Don’t Worry About the Fed

Money is often described has having four functions: store of value, unit of account, medium of exchange and a source of anxiety.  Investors reading about the FOMC minutes published earlier this week are focused exclusively on the last function worrying about what will happen when the Fed raises interest rates.  A glance at the last two times the Fed shifted from easing to raising rates suggests that these fears are misplaced.  As Boston Fed President Eric Rosengren explained in a speech this week, Read more […]

So Which Is It?

This morning’s inbox brought the suggestion that “Volatility in equity markets … could be the medicine active managers need to cure their woes…. Increased volatility and rising interest rates should present opportunities for actively managed products relative to indexes that track broad market movements.”  I was particularly struck by this comment because a year ago we were told that falling correlations would be the key to good active performance in 2014. The problem is that there is a Read more […]

The Rest of the Story

This morning’s Wall Street Journal offered a partial explanation for the failure of most active managers to outperform their cap-weighted index benchmarks in 2014.  The proffered explanation is that “the rally in U.S. stocks was generally led by giant-company shares, such as Apple Inc., which rose 40%.”  Since most active funds are underweight most mega-cap stocks, the argument goes, “it’s logical the S&P [500] would outperform most active funds.” Apple’s 40.6% total return far outpaced Read more […]

Don’t Confuse Me with the Facts

As surely as we saw the ball drop in Times Square, at the turn of the year we see predictions that this year, unlike last, will be the year when active equity management shows its true value.  Of course, similar predictions were made a year ago, and they didn’t work out particularly well, but that never seems to diminish the confidence of the new year’s forecasters.  A cynic might remember Upton SInclair’s observation that “It is difficult to get a man to understand something, when his Read more […]

The Petroleum Puzzle

With oil prices down 50% from last June and holding steady consumers are looking forward to cheaper gasoline and lower heating bills and investors are rethinking where to put their money; it is a good time to take stock of what might happen next. As discussed on this blog in late November, both lower demand and larger supply deserve credit (or blame) for the price drop. Weaker economies in Europe and Japan and lower economic growth in China are all reducing global oil demand.  Supply is being Read more […]

How Hell Freezes Over

Between Christmas and New Year, the familiar roar of events turns staccato and the market is gently buffeted by meager trading volumes; the relentless pursuit of profit that agitates the flight of global capital is sedated.  The books are largely closed; the offices of major financial institutions are staffed by fragile acolytes bereft of their titans.  Decisions, if any, are postponed. Considered contemplation (a luxury denied in more urgent times) is apt.  What more appropriate position Read more […]

Russian Ruble Rebounds (somewhat)

To paraphrase Mark Twain upon reading his own obituary, “Reports of the ruble’s demise have been exaggerated.”   A week ago as the ruble skidded 17% down and briefly traded at almost 80 to the US dollar, commentators were ready to add the ruble to a long list of currencies that cratered in crises. As seen in the chart, the ruble has staged a recovery and now trading at about 55 to the dollar, where it was at the beginning of December.  Oil, the supposed cause of the ruble’s weakness hasn’t Read more […]