You gotta love the blue turf! I think some people call it smurf turf but I am not sure.I found this article on IndexUniverse noting that growth swamped value in 2007.
You know how I talk about the "textbook" of investing? Growth beating value during a flat or inverted yield curve is in there, probably a chapter 2 type of thing.
This has to do with how value companies access capital (via debt) versus how growth companies access capital (secondaries). The earliest instance I found that I wrote this was two years ago, I know I mentioned it earlier but did not want to spend all day looking for it.
I write about these things a lot because knowing them makes the job easier.
Moving on... there were quite a few markets around the world that did not have a great 2007. Ireland was down 25%. That is a significant haircut and I have to think the vast majority of the selling is done. If you believe that stock markets move ahead of the economy there could be more economic issues in Ireland that surface to be sure but I would be surprised if there is a lot more downside for stocks there. For perspective though I started with a 3% allocation to Ireland that is now smaller--point being I have moderate exposure that did not crucify me.
Sweden is an interesting one. The market there was down about 8% but most of that can be attributed to a 40% (in dollar terms) decline in Ericsson (ERIC). I have one Swedish stock that although way off its high was up about 20% this year (that includes a small tailwind from SEK strength).
The FTSE 100 was up about the same as the S&P 500 in 2007. I disclosed recently cutting back my exposure here as the economy looks like it could be rolling over but stocks have not started to do so.
The New Zealand market was up 20% in 2006 and flat in 2007 but all of the structural problems notwithstanding the kiwi was up 10% against the dollar this year. My hunch is that New Zealand index has a good year but for now I am not considering exposure for clients.
The S&P 500 was up 3.5% in 2007, add in the dividend and we get 5.2% total. I thought we would be down a little this year, between 1350 and 1375. Going below consensus was the right idea but the magnitude was off considerably.
I think this year will be below consensus again and I suspect we will be down for the year as a function of normal market cycles. We have not had a down year or a bear market in a very long time. As noted frequently I do believe a bear market has started, if correct it would be unlikely that it would end and then bounce back all the way by next December 31.
As noted many times the rolling over in the market of the last couple of months is how bear markets start. We are only down a little and I am still very long after making a few defensive tweaks.
I am not sure I am in the big-rally-in-gold camp, for 2008 anyway. Gold is up 30% over the last year and 60% in the last two. Taking a rest for a while seems plausible but I own gold for clients and would welcome another 30% lift this year. If a flat or down year for gold pans out it could make owning soft or agricultural commodities all the more important.
I thought the yield curve would have started to steepen meaningfully in 2007 but that did not happen. I guess I'll stick with that idea for 2008. It seems like the Fed will do some more cutting. Hopefully the middle of the curve and further out will move up in yield. This would make lending money more profitable and so the financials more attractive. Generally speaking it is pretty tough for an index to go somewhere with out its largest sector.
So this post evolved into a 2008 prediction of sorts. A diversified portfolio is a mix of things that are doing what you expect and things that are not. A list of predictions, like last year and the year before, are mix of things that are right and things that are wrong. Of course none of it matters or at least it shouldn't matter. If you are not a big risk taker you might tilt to certain outcomes but not bet the ranch. You know from reading this site I favor moderation at every turn and never losing of sight of the things that could go wrong.
27 comments:
isn't the goal of the fed to lower long term rates as much as possible? How do you refinance all those mortgages if the rates are to high? If longterm rates are not kept low I think you will see to many people walk away from their homes.
Bernanke is in pickle imo
John Authers, Financial Times, has an insightful video on his 2008 predictions. Here it is:
http://tiny.cc/UvSXg
He cites several decouplings, among them materials from emerging markets. The graph, as well as others he presents, is quite revealing. He also juxtaposes data projections from optimistic analysts next those who are more conservative.
Though he sees 2008 as bipolar in possibilities, he calls its risk as "firmly on the downside."
I could be wrong but I saw yesterdays little sell-off as investors selling their losers in their taxable accounts. That is always normal and a good idea for some in any year. However if there's a sell-off of winners tomorrow in those same accounts it could be another bad omen for '08 IMHO.
Happy Newyears folks,
The first rule is,"to not lose your money", once you have grappled with that the field narrows a bit and if you are willing to put in the extra effort,,who knows?
It seems that , making money was never intended to be easy, the more you make,, the harder it gets.
Hummmm,,, Haw/Geo,, Haw by 14
Mac
I agree the Fed is in a pickle. It seems like something's gotta give, either the economy or the dollar. I hope they are smarter than everyone seems to be giving them credit for.
I am not sure that Authers is right about the bull market in metals being over. There have been 20% declines along the way before this one, I'm not sure why this is different and i don't think I heard him say.
JackS, I think the boys at Bespoke cited that the last day of the year is always down. If true or if I am remembering that correctly--it supports your thesis, but could it be a window dressing thing? i don't really know as I am not sure it is meaningful but...
I am rooting for Hawaii of course but there is no way I can stay late enough to see the end.
"I agree the Fed is in a pickle. It seems like something's gotta give, either the economy or the dollar. I hope they are smarter than everyone seems to be giving them credit for."
I hope they are smarter as well but I think there is only so much they can do.
I hate to point out that I believe in Japan both the economy and the currency suffered.
There is visibility for the Japan parallel but there were a lot of other things that contributed to the Japan result, of course there are things now that the US is dealing with that were not present in Japan.
If we turn in to Japan it will be over several years allowing plenty of time to make portfolio changes.
I just calculated my 2007 returns at 17.80% - which includes dividends, commissions, everything. Roughly half of this account is my TAA strategy and half my lazy portfolio.
Once again, the biggest factor was my overweighting towards internationals, particularly Latin America and the Pacific rim markets in my TAA portfolio. I also had significant exposure to energy ETFs most of the year.
http://tinyurl.com/22ervh
I have no idea what's in store for 2008, but my TAA portfolio is cash heavy right now. I just posted my models for last week here: www.regimenia.com
"I hope they are smarter than everyone seems to be giving them credit for."
This is the same Fed that created this debt bubble. What makes you think they have a clue how to do anything except expand debt? You can only expand household debt levels so far. I think we are there and the fed and our economy are toast. Of course I could be wrong and they could create an even bigger debt bubble but I would not bet the farm on it.
TomK, nice numbers.
I am sorry if you have said this and I don't remember but do you have access to risk stats of your approach?
Just curious, thanks.
Anon, I don't think I said I think they are going to get us out of the problems we have, i said I hope they are smarter than we think. That's not the same thing.
"Anon, I don't think I said I think they are going to get us out of the problems we have, i said I hope they are smarter than we think. That's not the same thing."
I am sorry. I am glad to see you are optimistic.
But, I think the fed sees money supply from one side and do not see the house hold debt on the other side.
These idiots have Phd's and I may be a lowly whatever, but I made 18% last year and I have never trashed an economy for millions of people.
"I am rooting for Hawaii of course but there is no way I can stay late enough to see the end."
Me too, but the game starts @ 6:00 in your time zone.
The run against small and micro cap will continue, since the S&P 500 is around 55Billion and the russel is around 1.5 billion, the S&P is global in nature where as the russel is much less, as a down turn approaches the flight to lrg cap begins.
I will be expecting some sort of continued rate cutting by the European central bank, this, will force the dollar higher..
(profit will be made here alone)
Mac
it won't end until 10pm AZ time at the earliest. I'm a 930 guy, have to be up early Wed to get to Phx for the day
Following up on Tom's post - I came in at 18.59% in USD terms because of my massive overweight to Australia. In AUD terms it was 6.28% and in currency neutral terms 9.8%. My Sharpe ratio for the last 36 months was 0.71. Beta to the MSCI AC World Gross Index was 0.89 and alpha 0.64%. To the SPX total return index 0.60and 6.5%.
Well Roger,,,
The game so seems to be a upset in the making, i had HAW by 14,,dont think its going to play, oh well, i had Florida by 7 also its been one of those days...
Have a good trip...
Mac
He can't post performance because of SEC compliance stuff.
Tom K, good performance! Congrats. Just curious, what did better, your TAA strategy or lazy portfolio?
FWIW, since some are putting up some numbers, my final performance for 2007 was 15.8%. Outperformance came from some good TAA decisions, and good stock-picks.
I held a 20% allocation to commodities via the PIMCO Commodity Real Return Fund and it returned 23% for the year. As I noted previously, I sold the vast majority of my REITs in May 2007 thus missing most of the year's decline. I had ZERO exposure to U.S. small-cap having sold all my small-cap mutual funds in 2006. I also had big energy exposure via a couple of stock picks CHK and XTO. CHK was up 35% for the year. I also had a substantial position in Berkshire Hathaway which was up close to 30% for the year.
One of the themes here on this blog is don't make big bets. In general, I agree with that sentiment, especially the more of a novice you are at investing, and may not have a good process/methodology for making bets with high expected returns. The flipside to that though is the only way to meaningfully outperform the market is to be meaningfully different. 50 2% positions are more likely to converge to the market return then 20 5% positions. And there is a huge difference in downside risk in taking a big position in something like Berkshire versus a big position in AAPL, RIMM, or emerging markets.
I don't know my risk statistics offhand, but I can say for sure I never had more then a 5 to 7% drawdown from peak value throughout the year. Berkshire always seemed to be zigging while the commodities were zagging so there was some major uncorrelation there.
Total international index fund from Vangiard (VGTSX) has an one-year return of 16%. I pointed this out merely because it is in line with some of the better returns reported by this blog. Sharpe ratio for VGTSX reported by Google Finance is 1.5 vs 0.3 for VFINX(Vanguard S&P 500 Index). If we can equate Sharpe ratio to value-additon then the message is quite clear.
Roger,
Sorry, I don't have the tools to report risk metrics (I wish I did).
mOOn - Unfortunately I can't determine the returns separately. This is mostly due to my laziness in recording several TAA trades later in the year.
Both questions address something I wish brokerage houses provided to their customers:
1. The ability to segment their assets into separate porfolios AND
2. Risk metrics for each portfolio...or a least for the entire account.
I just calculate this stuff in Excel using my monthly return data (which I also calculate in Excel).
Total international index fund from Vangiard (VGTSX) has an one-year return of 16%. I pointed this out merely because it is in line with some of the better returns reported by this blog. Sharpe ratio for VGTSX reported by Google Finance is 1.5 vs 0.3 for VFINX(Vanguard S&P 500 Index). If we can equate Sharpe ratio to value-additon then the message is quite clear.
Not clear to me. I'm not sure what the message is?
In any single given year, there will be some index fund with outstanding performance. I'm sure the return of Vanguard's Emerging Market Index fund was shoot out the lights this past year.
My view is the S&P 500 is the standard because a 100% passive investor with ZERO time or desire to do any research would just DCA into the S&P 500 over time.
Now if one wants to compare active management to a different index, fine. But then you can't play "move the goal post" as the game progresses on. At some point in the future, it is highly likely the international index fund will underperform the S&P 500 by a substantial amount, and in those years you have to stick to that benchmark for comparison to an active manager. You have to pick the index for comparison and stick with it for the very long-term (decades).
It simply isn't realistic or fair to constantly change the index for comparison to cherry-pick whichever one did great that year unless one makes the absurd proposition that the passive investor is going to pick one of the better performing indices each year before the fact.
You know, I saw a spot on a sports channel where the guy who is responsible for the blue turf says that birds crash into it all the time. They think it's water.
Agree that Fed is in a pickle -- but then again I am not really convinced that the Fed can really do anything substantial in the long term. The Fed makes for good trading events, a 2:15 showdown every 5-7 weeks. Nothing more.
Earlier this decade, the Fed lowers to 1% and bad ideas remain bad -- pets.com doesn't come back. This time if the Fed lowers to 1%, bad ideas still remain bad -- loaning money to people who can't/won't repay doesn't come back.
So, basically they are in a pickle -- and their main task now is to look like they are doing something without actually doing anything. I hear calls for inter-meeting cuts if the jobs report on Friday is bad, but I think that is foolhardy to do before PPI/CPI.
yup we call it the smurf turf...
and we are proud of it lol
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