And there’s joy at Fenway as  Boston Puts It To the Yankees.

If….you love the Yankees, I understand.

Every morning after a Red Sox game, Lisa’s grandmother tells me about the game. I already know what she tells me, but she gets quite excited at age 95.

She says, “Big Poppie (David Ortiz) clocked his third home run, and things are looking up for him” and “the stock market”, I add.

OK; not so fast, Randall. We have a lot of ground to travel before returning to solid ground. No banners hanging over Wall Street yet.

Just the same, the news is better.

Market analysts support viewpoints with statistics. Most of us find the data dreary. We scan the dull parts faster than a furtive glance.

Baseball stats dull the sound of the bat, the “wave”, and a Fenway Frank. Just the same, statistics and probabilities matter.

This summer, I went to my second Red Sox game. We sat perpendicular to third base. What seats! To my right and to my left, two middle-aged men kept track of every hit and every pitch for every inning.

I asked, “How come you do that?” They both said, “I just enjoy the game more when I do.”

So, for those who enjoy stock statistics, the attached SEI Investments commentary gives you plenty to ponder.

Quiz:  Can you guess the stat before reading the right coloumn? They all seem esoteric to me.

Here’s the article, “Small-Cap Stocks: Too Far Too Fast or Just the Beginning?” by James Solloway, CFA, Senior Portfolio Manager, Global Portfolio Strategies, SEI Investments, Inc.

Getting The Facts

“Just the facts, ma’am”

Sergeant Joe Friday never said, “Just the facts, ma’am.”

He said, “All we want are the facts, ma’am…All we know are the facts.”

“The story you are about to hear is true; only the names have been changed to protect the innocent.”

The narrator introduced the story.

On April 26, 1951, on a black and white Zenith television, viewers heard, “You’re Detective Sergeant, you’re assigned to auto theft detail. A well organized ring of car thieves begins operations in your city. It’s one of the most puzzling cases you’ve ever encountered. Your job: break it.”

The past two years of stockmarket activity is “the most puzzling” I’ve “ever encountered.” My job is to explain it with just the facts.

Finding facts stripped of emotion and sales pitch takes some searching.

Finding reliable sources for facts takes some investigation.

The facts you are about to read are accurate, to the best of my knowledge; the names have not been changed, and there’s plenty of guilt for everyone.

My best resource:

Asset Allocation: Balancing Financial Risk by Roger Gibson

So, what am I learning now from Mr. Gibson.

David Drucker, an independent registered investment advisor, interviewed Mr. Gibson on March 26, 2009. “Roger Gibson on the Market Crash” is available on Morningstar Advisor (a service provided by Morningstar).

“All we want are the facts…All we know are the facts.”

Drucker’s first question, “Do we need to somehow recognize and incorporate a new level of volatility in the asset classes we use?”

Gibson’s answer, “It depends on whether we’re looking at short- or long-term volatility. Certainly 2008 was without much precedent in terms of how big the losses were and how far they stretched across all asset classes….”

Facts:
• All of Morningstar tracks 3,734 funds invested primarily in U.S. stocks lost money
• All of the 978 non-USA funds lost money.
• All of the 144 U.S. and non-U.S. realestate funds lost money.
• All of the 128 natural resource funds lost money.
• More than 4,000 funds tracked by Morningstar lost value.

Before going back to Drucker’s interview, an overview of corporate earnings might add prespective to mutual fund returns.

Mutual funds gain or lose value because of corporate earnings. If corporations do well, thier stocks perform well (not always, but usually).

Stocks go up or down, most times, because corporate earnings go up or down. Standard and Poors reports that corporate earnings for the past 20 months decreased more than 90%. Corporate earnings have been recorded since 1936. Current corporate earnings, or lack of earnings, are the worst on record.

“In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.” (Chart of the Day)

Drucker proceeded to ask about bond/fixed income funds since asset allocation models include both. Gibson’s firms studied bond fund performance too.

Facts:
• The Morningstar database tracks 1,730 bond funds (taxable and municipal)
• 1176 (68%) fixed income funds lost money.

“In 2008, panic fed on itself. I had more than a couple of sleepless nights in the last quarter as foreign markets were in a freefall because the U.S. markets were in a freefall, and the next morning U.S. markets were again in a freefall because foreign markets were in a freefall, and so on.”

Roger Gibson, David J. Drucker interview, March 26, 2009

Risk premium may inprove in future years.

Risk premium is the difference between the return received for a risk-free investment and the return on a risk-investment (stocks, commodities, etc.)

For example:

If stocks returns are 9%

and if Treasury returns are 4%

The risk-premuim is 5%

“During times of excessive optimism, people overshoot markets on the high side, and during times of extreme fear and panic, markets overshoot on the downside. In 2008, people panicked and dumped securities, which sets the stage for higher-than-normal rewards for people holding on.”

Roger Gibson, David J. Drucker interview, March 26, 2009

Drucker: So there will just be some years–like 2008–where asset allocation, with all its benefits, won’t keep us safe.

Gibson: Let me answer that with my favorite quote, by Paul Volcker, who, 15-20 years ago, was at CFA conference and said, “You cannot hedge the world.” I love that quote, if you’re living on this planet, you can manage risk, but you can’t eliminate it. We got that lesson in 2008.”

“All we want are the facts…All we know are the facts.”

I believe Harry Markowitz, and have committed my asset management approach to the concepts Markowitz identifies. My purpose, in the words of Harry Markowitz,  is to “…make sure that the client gets to the right point on this risk – return tradeoff.”

Watch and listen to Harry Markowitz whose contribution to asset management is relevant and reasonable, in my opinion. The Advertisement below the video has no relation to Ethos Advisory Services. Providing the video for you makes the advertisement inevitable.

   

Whole Earth from Space

 

Good news always encourages. When reading any news about the stock market, we read circumspectively. Caution, discipline, and purpose should drive investment decisions. Asset allocation works when applied with patience and consistent commitment.

Here is a positive Bloomberg.com stock market comment after four days of positive numbers and during the G-20 Meeting.

Global Stocks Rally on Improving Economic, Banking Outlook

Want to learn something about correlation, also known as correlation coefficient? Conceptually, correlation appears simple and recognizable. When two asset classes trade simultaneously in the same direction, they are in positive correlation. When two asset classes trade simultaneously in opposite directions, they are in negative correlation.

Correlations between asset classes differ constantly. Somewhat like a marriage. You go to bed, and synchronicity is positive (what I’ll call positive correlation). In the morning you wake up asking what happened! You both simultaneously disagree on everything (What I’ll call negative correlation.)

During 2007 and 2008, the U.S. $ suffers burdens against nearly every currency. At the same time, oil costs per barrel increase (Important to point out that the cost-per-barrel is dollar denominated.). When looking at a chart, you will notice that when oil goes up the dollar goes down. When the dollar goes up, the price-per-barrel goes down. We call this negative correlation; in fact, just about perfect negative correlation and this explains the trades back and forth between the dollar and oil.

Your asset allocation model wants as many cross correlated asset classes as possible. When one is up, the other is down.

Some school endowments willingly take risks others avoid, and the results prove that sticking your neck out “pays-off”, according to the Business section of the (click here to read the article) Boston Globe (November 2, 2007) Globe staff write Robert Weisman lists “buyout, venture capital, and hedge funds” as the dominant alternative asset classes. School endowments allocating to these broader asset classes out-performed other school endowments and corporate pension plans consistently.

Better endowment performance comes from the larger and better ivy league schools (such as Harvard, Yale, Brown, Columbia, Cornell, Dartmouth, and Princeton). Better schools have larger endowments. Elite schools hire smarter managers, smarter staffs, and wiser directors. Smarter endowment fund managers recognize and balance risk/reward strategies that include alternative asset classes.

Identifying opportunity early gave leading endowment funds a front-row seat in the alternative asset class arena. Others wanting similar results mimic, but smaller players lack the confluence of resources that gain the recognition accrued by the elite colleges, or they lack the courage, or they’re sitting too far from the front row in the arena of alternative asset classes.

Then there’s the other maddening unpredictability of any asset classes results going forward. “…it’s not clear the investment philosophy these guys had will be as well-suited,” Lerner said, “to the period going forward.”

Identifying a wide range of asset classes as an individual takes work. Typical asset allocation models exclude alternative asset classes such as water, alternative energy, and lumber. For large endowments, risk is not a bad word.

Just the same, don’t rush to find your seat in the investment alternative arena. Dr Lerner said, “To conclude that more investments in alternatives will lead to higher returns is simplistic…There are a considerable number of omitted variables that we are not measuring here, which may be impacting the results.”

Alexander Pope wrote, “Fools rush in where angels dare to tread.” (No; Jonny Mercer did not come up with that phrase; Pope did when writing (“An Essay on Criticism”).

Asset allocation prevents foolish acts.

Tags: alternative, assets, asset, allocation, endowments, Josh, Lerner,