Thursday, February 22, 2007

Factor Failure

Hello Houston....We've got a problem!

And so it is with "growth factor" measures in Japan. Not that this has much historical return attribution in any event, but even so, February 07 has been horrid to growth! In big round "top v. bottom decile" numbers, irrespective of the inanity or robustness of the measure, they are down ~5% in the MTD. This is even more interesting because this is not on the heels of some extended outperformance in prior intervals. It is, for whatever reason, monumental factor failure in the grossest sense. Yet despite this failure, somple naive price-momentum continues to motor away, with long-window portfolios accounting for much of this. But growth often correlates with "quality", and here we see similar potholes for "quality" concious, be it Margin, ROE, CFROI, EVA, volatility of earnings, forecast dispersion, etc.

So what is responsible? Non-price earnings revision, somewhat idiosyncratic longer-dated momentum, sector-effects and the global liquidity-sensitive names, all skewed towards larger-cap resulting in a rather strange and narrow mixture that does not explain well systematically-speaking, nor bode-well for all but the most trend-hugging reactionaries. It is very Darwinian, as the survivors continue to see more money ploughed into them, while those that pause or miss - irrespective of attributes,get mercilessly torpedoed.

Explaining what's worked (the brokers' term) is always more useful with other practitioners' input, so anything that any other observers might wish to add would be interesting to ruminate upon.


Anonymous said...

For what it's worth, it'd be hard to forecast growth for domestic Japanese firms not in the export business. Population is shrinking, and population is the most fundamental driver of growth for companies. Flood of liquidity coming in may or may not take that into account. But like Italy, and Russia and other shrinking populations, you find a rise in wealth/capita. So the economy doesn't grow in the traditional sense, but the society is getting richer. So for a stock practitioner in Japan, I'd pick stocks that cater to people who are getting older and wealthier.

Other point keys off your own observation that ZIRP hasn't worked for 6 years, so why not try something else? Interest rates, after all, provide a broad "hurdle rate" for investment and for saving alike. Assuming ZIRP-like conditions continue, both consumer items and productive investments are seen as falling in value, so why make them?

If you don't do something about ZIRP, there's no key to the puzzle other than pure liquidity, which untethered by allocative interest rates, flows willy-nilly despite standard quality measures on equity. (I could be way off - OldVet)

Charles Butler said...

Add to that - for any money that has come from overseas, only the very best performers have managed to offset the currency decline. Perfect recipe for loading up on the chosen few. For the rest, mere market noise has been converted into reason to go home and lick your wounds over the last three months.

Anonymous said...

Despite lousy returns due to FX recently, the story is still being told:

Anonymous said...

I'm not holding my breath but maybe, the begining of end (as of 02/27)?

May the chaos be your friend, not your enemy.

Anonymous said...

Sigh, the cops showed up and the party was over, just like that. I'm going to lurk about and do some little Shorts until things settle down, then go nuts again. Hope to stay solvent while having so much fun.