Tony Ash

Portfolio strategy, momentum, etf investing, cfa
Tony Ash
Portfolio strategy, momentum, ETF investing, CFA
Contributor since: 2012
Company: Julex Capital Management, LLC
Yes, retirees could be attracted to this kind of product and I think this is a good warning for them. Income products are typically considered "conservative", but these approach the aggressive volatility of stocks. For a long term investor with a healthy risk appetite these products fill a strategic niche. Understand what you are getting and the niche you are trying to fill.
Thanks for your comment. The idea here is you need to know what you are getting. There is a class of income investors who are trapped in bank CDs and are looking to move up the risk curve to get more income. They need to know that some multi-asset income products are riskier than others. It might work out in the long term, but if you have a short horizon it might not.
If she will need this $5k within the next year or two she should be in cash. Like others said, seems like a lot of work for only $5k.
Yes,this is tough scenario to manage in for sure, so long-only, long duration bonds are not the play right now. This is going to be a rude awakening for investors, if and when rates start rising. Once rates start up, everyone will be rushing for the door at the same time, leaving long duration bond funds. The exodus will feed on itself and I doubt that the Fed has enough capacity to prevent it from happening. The new breed of financial planner does not want to take the blame for losing market value when they have been putting their clients into long bond funds (not to mention losing fees as AUM declines!) Don't forget, timing is everything!
No one wants to buy or hold bonds when they think rates are going to rise, a classic "liquidity trap" problem, but Bernanke has done his best to allay rate fears by saying rates will stay low for an "extended" period. Aside from an unlikely Japan-scenario in the U.S., we know that rates have to rise someday if for no other reason than to bail out the insurance industry that is on precarious footing with all of the long term liabilities on their books that can't be supported by the low level of rates in the U.S. as well as retirees trying to live on bank CDs (are you kidding!!) In these cases, the sooner rates rise the better. Just not too quickly, or that will shock the economy back into another crisis. High yield bonds, investment grade bonds, medium term bonds, and high dividend stocks are best plays in this market, as the market activity has shown by its actions.
Yes, that would be good info. From the S&P Indices site, SPLV would have had only a 3.5% Financials weighting as of July 2008 compared to the S&P 500 weighting of 15.11%. That should have translated into better relative performance compared to the S&P 500. Unfortunately, since that is only a backtesting result and a full set of statistics is not available to measure, it is hard to calculate and say with certainty how much better SPLV would have performed during 2008. The only thing we have at this early stage in SPLV's short life is the past 18 months.
It feels like Vz has been performing in a "counter-cyclical" manner this year. Good economic news has been bad for Vz. I didn't do the math to support this, though. I will be more careful making comments like this without the data to back it up. Sorry.
Best guess is that VZ pull back is due to risk-on trades, sell VZ buy growth equity. VZ is considered stable play and in the face of more QE will underperform other higher growth equity in Tech, cyclicals, and EM.
Yes, you are right, in general industrials are cyclical and high beta. Some of the best dividend payers, though, are less volatile and lower beta industrials like Waste Management, Lockheed Martin, and Watsco. Stay away from high beta industrials.
I haven't spent much time on HDIV. I checked the filter methodology and it looks reasonable, too, if not more troublesome to rationalize. For example, not sure if price momentum should or should not be a filter? And not sure how they use it. DVY filter feels more intuitive.
This is the first time I read you and liked your logical approach. I thought you were going to get into the risk-adjusted return aspect, since high dividend stocks most likely will underperform small cap or emerging markets on a total return basis over the long term. I don't think most people would trade a higher total return for a dividend-payer if they knew the total return would be lower. But on a risk-adjusted basis, we would make that trade every day!
Hard to think that bonds can outperform equities over the near to medium term given the low rate environment where bonds are starting out. Mathematically, a 2 or 3% return is all you can expect if rates stay relatively flat. Any increase in rates, which we all should expect after 2013, will obviously lower the return.
Stocks, on the other hand, have no mathematical limiter so therefore at least have a chance to beat 2% returns; whether by expanded multiples, increased earnings, or other traditional reasons for increased stock returns.
I think DVY performed worse during the Crisis since it held the most "liquid" stocks and those were the stocks that were sold to fund liquidity needs to fund outflows, margin calls, etc.
On another note, I'm not a big fan of efficient frontier modeling in today's environment unless someone can convince me that they have a good basis for "expected" returns over the next 10+ years. Historical returns have NO bearing going forward from today's levels. Stochastic modeling is a better approach.
The "accounting" loss to the banks should already be in their financial statements. I haven't checked, but I am assuming any holders of Greek debt have already taken writedowns into income reflecting the mark-to-market of the Greek bonds at 50%. The problem for the holders of the Greek debt is that they won't be able to recover any of that loss, unlike in "normal" bankruptcies.
Great summary and insight! HPQ is the new definition of why NOT to "buy-and-hold". It is amazing to me how a blue chip company can fall so far, so fast. Yet, it happens all the time! Recover or not, that seems to be the lesson here.
I have a position put on in 1998 that is now under water. Rode it way up and way down. I don't expect to sell it in next 72 hours. Maybe take tax losses later in the year?
Yup, cash or dividend-paying equities: depends on your risk appetite! The risk-return tradeoff is skewed away from bonds at these levels.
This Treasury "bubble" is different.
It is being created and controlled by the Fed and federal govt and we can't fight it. We all know the Fed is limiting supply of Treasuries through QEx thus keeping rates artificially low. Another factor that is less apparent is the role regulators and the federal government is doing to force large financial institutions to hold US Treasuries as a "risk free" asset under the pretense of capital adequacy and financial management (e.g., Dodd-Frank treasury collateral posting). This is another flavor of QE and is how the govt has cornered the market in Treasuries to manipulate price.
This is broadly defined by the idea of "financial repression" (check out Rogoff/Reinhart to learn more on this). This will keep rates low until we move into a new paradigm (i.e., the economy grows out of this current state without increasing the amount of repression).
The challenge, of course, is how to translate this economic reality into a profitable investment strategy.
p.s. this is a re-posted comment from another article, but is worth showing in relation to the data above.
This Treasury "bubble" is different.  It is being created and controlled by the Fed and federal govt and we can't fight it.  We all know the Fed is limiting supply of Treasuries through QEx thus keeping rates artificially low.  Another factor that is less apparent is the role regulators and the federal government is doing to force large financial institutions to hold US Treasuries as a "risk free" asset under the pretense of capital adequacy and financial management (ala Dodd-Frank treasury collateral posting).  This is another flavor of QE and is how the govt has cornered the market in Treasuries to manipulate price. 
This is broadly defined by the idea of "financial repression" (check out Rogoff/Reinhart to learn more on this).  This will keep rates low until we move into a new paradigm (i.e., the economy grows out of this current state without increasing the amount of repression).  
The challenge, of course, is how to translate this economic reality into a profitable investment strategy.  
The risk-on trade is getting more problematic. We talk a lot about "catching a falling knife" and it sure feels that way now. The biggest risk right now is that the U.S. economy degrades to a "Japan Scenario", something that most of us thought was unlikely a year or two ago. The more you think about it, though, the more it seems possible (likely?). Certainly, this mirrors the Bill Gross "new normal" theory and matches up well with emerging demographics and no good fiscal/monetary tools left to jump start the economy from where we are today. Five years from now we may be saying 30-yr Treasuries yielding 3.5% were a great buy!
Very powerful stuff here. Most likely, we will see a gradual weakening of bonds and strengthening of stocks from these levels to get better in line. A result that is consistent with the Fed ZIRP. The best answer in this scenario, of course, is to stay overweighted to equities. Timing is everything, though, and we should expect more volatility as this divergence normalizes.
Yes, risk on is the story! But, regulators and onerous capital requirements won't allow it for institutions. Not sure how this inconsistency will get resolved. What institution is going to make risky loans or buy junk to put their capital at risk? It has to be the retail market that bails out the capital markets; not the insurance companies, pension plans, or banks!
The US Treasury market is playing out as it should. The overwhelming role of the UST in the capital markets is as a risk-free store of capital. That can not change overnight since institutional investors are locked into this framework by regulators and investment policies. For example, the most common (if not only) form of collateral accepted for derivative counterparty arrangements and FHLB secured borrowing are US Treasuries and US-Gtd obligations. Also, risk-based capital math gives financial institutions special preferential (i.e., no capital) treatment of UST. Financial institutions will have NO incentive to unload UST thus increasing their capital needs by going into more risky assets. This creates a floor on demand for UST.
The only "new" news here is that S&P downgraded the US - the underlying facts are as we all know and nothing else has changed. And by the way, it is only S&Ps "view", as said repeatedly in the press release. Others are entitled to different views as we all know, including bond portfolio managers and investors who had continued to bid up US Treasuries through Friday. This SHOULD be a non-event, but it won't be because perception becomes reality. It should be bad on Monday, we will get some damage control from ECB and Fed, and then start the slow grind back.
Good analysis. Everyone should read this. Trouble is, there is no place to hide. What is the new risk free asset?
I recently read the "Rational Optimist" by Matt Ridley and the book's main premise really doesn't do much to help everyone feel a little better. Basically, he says don't worry about the future since we exist in a dynamic society that has always found a way to fix problems. It just may take a long time and as we all know we, "in the long run we are all dead!" So we need to keep understanding the short run implications of policy decisions and be proactive to maximize our personal utility.
Or, as Alan Greenspan once said, "we don't forecast very well but we must forecast, since embedded in every position is an implicit forecast"!!