Flav's Comments

The Twenty Year Stock Bubble Is Still Inflated

Fri, 20 Nov 2009 11:29:39 -0500

But testing wether the coefficient is somewhat constant, which means a constant mean, is precisely what a Dickey Fuller test wants to verify. The test would be like this: (MC/GDP)t = a*(MC/GDP)t-1 + et et~N(0,sigma2)

Ho: a = 1
H1: a < 1

Of course, the test should be made using difference expressions, but the nature is the same. If it happens to be stationary, then i would agree that you can compute a historical average, but i'm really skeptic about the series being stationary

On Nov 20 09:38 AM BSD77 wrote:

> Well, if for example the two variables (GDP and MC) are perfectly
> correlated, than the ratio doesn't change at all. E.g. if MC=5 at
> t=0 , GDP=10, growth rate = 5% and corr.coef.=1 --> ratio=2 constantly.
> Of course the assumption of correlation of 1 in this case is not
> realistic but I think I can see the author's point that strong correlation
> between the two should hold in long term (or should in the perfectly
> efficient market environment).

The Twenty Year Stock Bubble Is Still Inflated

Fri, 20 Nov 2009 09:15:26 -0500

The Twenty Year Stock Bubble Is Still Inflated

Fri, 20 Nov 2009 09:11:58 -0500

But market capitalization and GDP are both non-stationary series, so, why would you expect a variable constructed as a ratio of this two to be stationary? I believe the Dickey-Fuller test is still suitable for this situation, as you define the new variable as MC/GDP

On Nov 20 08:14 AM BSD77 wrote:

> I see that sbd. was sitting for the Level 2 exam ;-) but still I'm
> not sure that Dickey Fuller test is relevant here - it is a test
> for non-stationarity of data that's for sure but it would be more
> appropriate for a time series of one dependent variable in time,
> not a ratio, since both of the variables here are (or should be)
> strongly correlated and hence there ratio should be constant over
> time.

The Twenty Year Stock Bubble Is Still Inflated

Fri, 20 Nov 2009 08:01:49 -0500

So, have you test the stationarity of the series in order to claim that a historical average has any meaning? In case you're unaware of, i remind you that when a time series is not stationary, then both its mean and its variance depend and hence change with time, so to compute a historical mean is absolutely worhtless, as i think it is the case here.
Please, before making any statement regarding a financial time series, at least try to make a Dickey-Fuller test

Dividend Aristocrats Will Continue to Outperform

Sun, 03 May 2009 20:54:08 -0400

Geoff:
If agents are rational and forward looking, and past information of returns and risk are at their disposal; knowing that a montecarlo simulation which uses this information shows that a basket of stocks will outperform the S&P, shouldn't create an arbitrage opportunity that will soon erase the return diferential, so that the future expected return of this basket is the same of that of the S&P?

The Road Ahead for Investors

Tue, 24 Mar 2009 19:45:00 -0400

Geoff, great article (as always). You made me wait almost a month since the last one you wrote, please write more often!! :)

Kass' Short Bet on Berkshire Falls Short of Reason

Wed, 11 Feb 2009 06:51:08 -0500

Kass is just a deceptive clown. Earlier in 2008, after the Bear Sterns meltdown, he suggested that the market had limited downside. On July, he recommended initiate a long position in financials. He even disclosed he had Citi as one of its holdings (when it was trading near the low 20's). Not satisfied with that, he even disclosed (and adviced initiating) a position in LEH!!!! Want the proof? Here it is: www.thestreet.com/stor...
His sponsor web site exalts him as an investment magician, advertising him as if he had been "right as rain"... with the market falling an astonishing +30%, and running a short only fund, it was kind of impossible to have a bad performance and not beat the market (i think).
What's really ludicrous and hilarious at once, are his investments surpirses, dubbed "outlier" events. He posts a series of delirious events that never actually take place, and assimilates market deveopments to his stupid advice. How in the hell does this person gets all that media attention?
This post is getting too long, but i want to highlight other lousy advices from Mr Kass. These posts are some proof of his misjudgment: www.thestreet.com/stor..., www.thestreet.com/stor..., www.thestreet.com/stor...
Just check the stocks his fund bought at the time it did it. It would be really interesting to see what really was his funds performance, if it really did had thoso holdings on its portfolio

How We Can Avoid Another Tragic Ponzi Scheme

Wed, 17 Dec 2008 10:38:27 -0500

Quote by James Quinn: "Morality is essential for our financial system to operate. The lack of truth and morality is the reason the system is breaking down"
The thing is Mr Quinn, each one of us (human beings) have a different conception on what regards to morality. Maybe some person believes that though Madoff did scam his investors, he should be punished, but in a different way than "a place in hell with Stalin". Maybe other person (like me) thinks that in an economics and financial blog, that kind of statements are a little out of place, and involve subjects that are far from the main objective of the blog.

Another quote from Mr Quinn: "I'll stick to whatever themes I want to discuss. You are free not to read my articles"
Of course, you can (and i think you will) discuss everything you want. I was just suggesting that maybe, asserting that divine punishment will be imposed to someone is a little out of order in a financial blog.
Again, of course i'm free not to read your articles; as a matter of fact, i won't do it. The lack of economic subtstance of them are a convincing proof that you're an accountant (hope a good one) and not an economist

How We Can Avoid Another Tragic Ponzi Scheme

Tue, 16 Dec 2008 10:21:31 -0500

"Ultimately, Mr. Madoff will be judged by his Maker. A special place in Hell awaits him, next to Hitler, Stalin, and Timothy McVeigh. The victims of his crimes are many."
Maybe we should stick to economic and financial themes, don't you think? Let the moral conclusions be brought about by each one privately.

Testing Forward Looking Asset Allocation

Sat, 01 Nov 2008 18:14:33 -0400

Geoff: Again, thank you very much for your quick response. I’ve been reading past articles from yours, and i have a few questions (i must apologise first, they aren't fully related to this article):
Does QPP estimate covariances, so that you can optimize using Excel's solver in order to build the model portfolio? If that's the case, you can compute the correlation coefficients between stocks (or assets)?

If you entered QPP the time series of, for example, the SPY, using the last year and a half data, did the tail risk signal this kind of drop?

Thanks in advance

Testing Forward Looking Asset Allocation

Fri, 24 Oct 2008 10:05:22 -0400

Geoff: How would shorting stocks affect the analysis? Considering than when you short, you profit when the stock goes down, it would have a negative correlation with the other portfolio assets, and therefore, coud short-sale improve the risk/return profile of the portfolio?

Thanks in advance

Tactical Asset Allocation, Part I

Sat, 04 Oct 2008 14:11:30 -0400

Geoff: i hope you don't get tired of my posts, but i have to tell you, once again, great article!!!!!!!

Risk Management and Concentrated Positions

Mon, 29 Sep 2008 13:35:20 -0400

You can check last weekend's Barron's interview with Merril Lynch's top investment executive for more insights on the subject

Risk Management and Concentrated Positions

Mon, 29 Sep 2008 13:12:19 -0400

Geoff, once again, thanks. Maybe if you run it again now, the numbers will be much worse. Your articles are great, and you're very polite with readers' questions.
The reason i asked the first question was beacuse the main strategists of investment banks (what were investment banks) always make projections of posible market trajectories of no more than 2 years, and they say they use computational models, that's why i asked if a program like QPP could be useful for the short term, though you said to me in other question i asked you before that QPP makes long term projections

Risk Management and Concentrated Positions

Thu, 25 Sep 2008 09:35:27 -0400

Geoff, another question:
What's the tail risk for homebuilders like CTX or KBH?
Does it point to a brisk stock price change like it was for financials?

Risk Management and Concentrated Positions

Tue, 23 Sep 2008 13:01:15 -0400

Again, a great article. It is as explicative as useful.
Have a question, suppose you're just a trader, i mean, you're time horizon lasts no more than a month; does this kind of modelling is helpful for that kind of investment profile?
If you run a long-short fund, how does the model change in that circumstances? And in an only-short one?

Thanks Geoff, keep up with these great articles

The Nature of Risk

Mon, 15 Sep 2008 22:08:27 -0400

My last post brought to my mind me some questions to Geoff Considine:

What kind of information did you use to build the graph "Projected Probability of Default vs. Annualized Volatility for Stocks", credit ratings, historic quotes (to compute the Std deviation)?

When you use the QPP to build a model portfolio, do you use some data of fundamentals for a given company?

Does technical analysis play any role at the moment of building a portfolio or making an investment decision (in your investment scheme)?

This question fits better your other articles, but as you have demonstrated before, a diversified asset class portfolio is better (more return with less risk) than one concentrated in one asset class (stock for example); but is there the posibility of an all stock portfolio that, maybe with more risk, it still locates on the efficient frontier (more return with more risk, but still on the frontier) ?

Thanks in advance

The Nature of Risk

Mon, 15 Sep 2008 21:56:47 -0400

Quote by PrudentMan,
CFA: "To use statistics to try and understand risk is lazy. Considering that human nature is impossible to explain, what makes anyone think a computer can make sense of what they are going to do"
I believe you're not understanding the message of this article. Using the Montecarlo simulation, you had that there was an increase in the probability of default when you had a larger standard deviation. So there's the link between statistics (hence, volatility) and risk. As Considine remarks, there was a considerable probability of a large price move in Bear Sterns stock based on past information. It's not that it will surely happen, but there's a high probability. As you're a financial adviser, i believe that, if you recommend a client to invest in a distressed company with the characteristics described above, just beacuse it went down in price and you think will get back to normal, ignoring the great volatility on the stock, maybe you should work on other area, like casino gambling or sports bets. That's akin to that kind of reasoning.
Another quote from this guy: "Good old fundamentals combined with technical analysis, intellect, skill and guts will trump any statistician"
Who in the hell ever told you that fundamental and technichal analysis are substitutes of statistical research? They complement each other. Of course, if you are a strong believer of the efficient market theory, then fundamental and technical analysis are useless, but otherwise, all three instruments are useful

Defining a Set of Core Asset Classes

Thu, 14 Aug 2008 21:28:03 -0400

Hello Geoff:

Thank you very much for your quick response. It does clarify.
I'm an economics and finance student, and i often have discussions with classmates and friends about several subjects regarding portfolio management. I must say that i have used some of your articles to support some of my arguments. I believe that for long term planning, there's nothing better than the analysis being made in your articles. But suppose that some investor or trader has a shorter time horizon; that person is willing to take on larger risks, in order to achieve larger returns. Would you still recommend this individual to diversify? Or given the shorter time frame and less risk aversion, should this investor have a more concentrated portfolio?

Again, thank you very much

Looking forward to read more of your articles

Defining a Set of Core Asset Classes

Thu, 14 Aug 2008 19:48:35 -0400

Hi Geoff. I made a question to you in other article that wasn't answered, so i will reformulate it in this one.
You say that hisorical data is of no use, but in order to obtain forward looking assets class combinations with QPP, you have to enter past information about those assets classes. So, as i asked before, to determine the correct weight asigned to each holding (the way that produces the highest return with a given level of risk), should the oldest available information be introduced? or is it sufficient with just a few years back?

Interpreting the Economy and Its Direction

Sun, 03 Aug 2008 09:50:55 -0400

I disagree with the author on several subjects. First, of course that demand shocks are not the sole responsibles for deviations of economic growth with respect to the trend rate, but to postulate that only supply shocks are is incorrect. Both types of disturbances have played (and play) a role in determining movements in output and prices. The 2001-2007 expansion was mainly spured by a growing aggregate demand stemming from a loose monetary policy that meant easy credit for both consumption and investment, and there you have the housing boom and ever rising retail sales (of course, dating back to mid-2007).
In similar fashion, the 90's expansion was primarily prompted by a huge jump in productivity coming from the IT wave, assimilable to a supply shock, that allowed an important reductions in costs and, as the definition of productivity states, greater output with a given amount of inputs. Therefore, given this context, real wages experienced a considerable rise, increasing aggregate demand and then further output growth in order to satsfy this rising demand.
With this example, i want to show that, despite the initial shock might come from one of the two sides, it rapidly translates into the other, having second, third, fourth round of effects and so on. So it is kind of incomplete to asign the responsability of output and prices fluctuations to just one of the sides.
As for the suggestion that the government should take measures destined to stimulate supply, i believe that again you are heading into the wrong direction. Supply shocks are one of the most unpredictable economic events, and when they happen, it is almost imposible to counteract them. The only way their effects on the economy can be appeased is through actions directed to the demand side. An expansion that leads to an overheat of the economy is counteracted by a rise on interest rates or stricter lending, for example (look at what's happening to China).
When you talk about incentives to investment, that's a component of demand, and though it has its influence on supply via capital accumulation, supply disturbances mean a much more severe movements on output and prices, and they're, as i said before, imposible to predict. You can give all the fiscal incentives available to investment, but you may not end up having another procuctivity jump like the 90's IT boom. As Shumpeter remarked, technological shocks more than often comes from the innovative entrpeneur, and although with fiscal incentives you may help rise the odds of that kind of figure to emerge, there's of course no certainty about it

What Are the Prospects for Stagflation?

Thu, 24 Jul 2008 19:27:28 -0400

@IThinkBig: if you consider this is a deflation period, and the most you've learned from this site is through flow5's comments is maybe beacuse you're absolutely, completely and thoroughly clueless about any subject about finance or economy (as your dumb heatlhcare site suggests).
As to flow5, who remarks Keynessian economics to be not up to date on their analysis of the interest rate, maybe you should check economy books a little more often. The simple IS-LM model, along with the original Philips curve have been updated to new and more comprehensive frameworks in which interest rates are determined by other factors than just the liquidity preference. I believe that your comments are totally useless and inaccurate. But well, writing (like talking and breathing) is free, so...

What Are the Prospects for Stagflation?

Wed, 23 Jul 2008 16:44:34 -0400

@CLH: where exactly do you live? If you dare to say that only food and energy prices are rising, you must not live in the U.S.
You don't need to look at a particular sector, just check the core CPI issued last week, which shows a YOY increase of nearly 3%, the fastest since 1995

Ron Paul's Investment Portfolio

Fri, 11 Jul 2008 01:19:35 -0400

Is this really Ron Paul's portfolio? Is it displayed thoroughly, or it's just part of its total holdings? Beacuse i would be really scared that someone who boasts about being so instructed in economics has such a concentrated portfolio.
As to some comments about fiat money systems, so your opinion is to go back to gold standard? Do you have at least the notion of what would that mean for US and the world's monetary system? Beacuse i believe that if you support a return to gold standard you're clueless about any subject regarding economics.
Austrian economists haven't been particularly accurate in their predictions... just check their main reference, Frederich Von Hayek. He said in his book "Denationalisation of money" that a unified european currency was imposible in practice, and would be prejudicial to monetary policy's health. We can see now that both statements are being rebuffed by facts.
This is the second nonsense article i've read from Iacono in 2 days. I think that from now on, i will avoid any piece of work with his name on it. My advice to that man is: please, before having any opinion on economics or finance, learn something about them

What If What Economists Taught Us Is Wrong?

Wed, 09 Jul 2008 11:07:57 -0400

New Keynessian economics does not state that money and credit have no influence on the economy but just the opposite. Ben Bernanke belongs to that school, and he developed several models that emphasize the main role of credit in economic growth. Bernanke and Blinder developed a model in which they show how bank lending affects the real economy. The person who wrote this article, or the man which is quoted (i believe his name is Munchau) suffers from a severe grade of a decease called ignorance

Choosing Your Portfolio Risk Tolerance

Wed, 11 Jun 2008 21:04:25 -0400

Geoff:

Great article. Have one question for you: if you used historical data from a larger range than 5 years, let's say 20 years, would the assets' weight be more accurate? Or does the equal-weight still outperform?