Thursday, August 12, 2010

Hello Myrna Loy

Nineteen hundred and thirty-five was by most accounts another in a succession of crappy years. The dustbowl on the American plains, enactment of the Nuremberg Laws, a devastating Hurricane that slammed into Florida killing many hundreds though this paled to the devastation of Yangtze Floods that wiped out several hundred-thousands. This year also witnessed Italy's invasion of Ethiopia, as well as Japan's of Manchuria, presaging the horrors to come. Despite these ominous telltales, the march of progress saw rapid advances in many fields though particularly aviation, Jesse Owens setting a dramatic new long-jump record while the young Donald Bradman racked up a double-century in just 191 minutes somewhere in Queensland. More to the poiint of this post, nineteen thirty-five was also the year that the seductive Myrna Loy and handsome Spencer Tracy starred in the thriller "Whipsawed". I bring this to your attention not least since it was (by the NY Times account) a reasonably entertaining film worthy of a diversion on a rainy Sunday morning, but because like the film's eponymous title, Whipsaw has been eclipsed in the last decade by the success of the tribe of trend followers, and the ear-boxing and deprecation of the counter-trend trader.

Such style success has historically been, if not cyclical, then irregular at best. Older practitioners know this, and the more honest do not shy away from it in their marketing pitches, though many have admittedly watered-down its purity in recent years with diversified programmes and time-frames ostensibly to smooth returns for more risk-averse investors. In its purer form, the fat years have indeed been fat but historically fewer and farther between, whereas the lean years, though more numerous as they have been have (at least for the more disciplined) been negative, though of decidedly smaller magnitudes than the positive. The honest argument (stylistically) remains that such modestly positive aggregate returns with admittedly high variability and prolonged periods of drought have high utility due to their unusual lack of traditional asset class correlations during times of stress. Fair enough. And while intellectually I must admit that I remain snobbish about such a seemingly mindless pursuit, I do accept the premise of the arguments and their agnostic point of departure with regards to the underlying and believe there is a role for such in portfolios. A victory perhaps for function over form.

That said, I believe one can state that during the last decade, price trends across markets and asset classes have been reasonably attractive to this pursuit stylistically - perhaps more attractive than historically one might surmise or forecast it ought to have been. Now, of course, each epoch is different. This epoch may indeed be driven by forces that cause prices to maintain long extended trends that bear no relation to the apparent mean-reversion (stylistically-speaking) of the past. This is an argument one might make with fortitude, given the macro state of the world. But, then again, perhaps not. Perhaps not because perhaps stylistically too many moths may have been attracted to the stylistic flame. Perhaps because the volatility of volatility might have increased and (Hello Myrna) the return of episodic whipsaws might be both more numerous and of heretofore not seen magnitudes that, in a word, bugger existing model parameters, and perhaps more importantly to those who've over-specified, bugger the adaptations to emergent regimes.

It might be foolish to forecast with certitude such a future. Nonetheless, I suspect there is a sea-change about, a sea-change worthy of contemplation in the same thought as Myrna and Spencer. There can be no table-pounding in this regard, for it is not proverbial low-hanging fruit. But for the introspective (and Andy Grove paranoid) it is always worth looking around to see who is playing, how they are playing, and in what relative size they are playing. The now-hackneyed "Risk-on, Risk-Off" paradigm being exemplary. For when too many pursue the same, using similar methods, returns inevitably drop, while unexpected shit happens. So look around, observe, and ruminate upon the old saw..."too clever by half".


Rich said...

I've been in the business since the early 70's, and have never seen quality stocks as cheap as they are vs. bonds. XOM (a random blue-chip) at a 3 yield and 10 PE is a no-brainer choice vs the 10 year at 2.74%.

People approaching retirement are really scared of the volatility of stocks, but don't understand that bonds can be every bit as volatile. I bought Treasury 12's- 2013 in the auction, and watched them go down to the low 80's. The backdrop was Volcker aggressively pursuing the demise of inflation.

Now Mr. Bernanke rightly is scared of deflation, but his ultimate Rx is not bond friendly, despite his buying bonds in the short run.

All it would take to set this market on fire is some optimism, and few appear to be positioned for it.

Anonymous said...

Rich -I concur (on the relative statement). You buy NTT (9432) equity at 9.9x (3x+ CE) with a 3.25% div yield. Given the mild deflation this is a fantastic relative real cash yield and real earnings yield (Caution: non-japanese investors should hedge ccy), or Takeda (4502) at 10x with a 4.5% yield, or J-Power (9513) at a safe 13x trailing & 2.6% yield but with large earnings growth ahead. While I am not hugely bullish the relative case is glaring.


Anonymous said...

Shocked and saddened to hear of Tony Judt's passing away recently.This critcal thinker of our age definitely deserves a write up by Cassandra.

Eric said...

Rich et al. Just because stocks are cheap vs bonds does not mean they are cheap.
It may mean that they are cheaper to finance (if you can get it).