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.

This cat sleeps.

Dead cat stock market bounces are “A temporary recovery from a prolonged decline or bear market, after which the market continues to fall.” (Investopedia)

If dead cats bounce, the metaphor is useful when predicting stock market trends.

Dead cats bounce along Wall Street after short sellers cover their yet-to-be-owned stock. Their doubt about the market’s continued price-drop prompts them to buy the stock (ie. cover their short position).

Dead cats bounce along Wall Street when investors cover their option positions. Their action may encourage false hopes of a bounce in the markets.

Dead cats bounce along Wall Street when speculating investors throw a dart at Wall Street “blue light specials” (for you KMart shoppers). When checking their purchase in the Sunday papers, they find their shares for sale at a deeper discount.

The dead cat bounce is a silly idiom; no experiment I know of proves a dead cat bounces. No economist or analyst predicts dead cat bounces in the stock market consistently.

“8 Who Saw the Crisis Coming…” (Fortune Magazine, August 2008)
• Sean Egan
• Nouriel Roubini
• Michael Mayo
• Robert Rodriguez
• William Poole
• Richard Baker
• David Einhorn
• Bill Eickman

  “…And 8 Who Didn’t”

• Angelo Mozilo
• Jeff Larson
• Moody’s, Fitch, Standard & Poor’s
• Greenspan, Bernanke, Paulson
• James Cayne
• Chuck Prince, Former Citigroup CEO
• Stan O’Neal, Former CEO, Merrill Lynch
• Zoe Cruz, Former CEO, Morgan Stanley

An ancient test for a prophet requires exact and fulfilled predictions every time, not some of the time.

Stock market moves are not dead or alive, bullish or bearish unless investors make them so. Momentum comes when the greater number of investors take action that opposes other investors. This makes momentum possible.

Most importantly, you don’t know until you presume the cat bounced. Predicting market direction expresses chutzpah blended with keen observations.
You may be right, but the likelihood of accurate and successive predictions confirms the unparalleled dimensions of uncertainty.

Market optimism or pessimism occurs when a mass of people make the result theoretically probable. The determination or prediction of probable outcome never eliminates uncertainty unless there are glaring market anomalies (**see Robert Schiller).

Italian economist Vilfredo Pareto’s principle asserts that 80% of value comes from 20% of those who have the potential to create value. The calculations do not support the 80/20 rule every time, but at minimum the concept retains its assertion.

Therefore, 80% of market analysts are right 20% of the time or 80% of stock market predictions are right 20% of the time. As with all predictions, there’s no certainty of which prediction is right.

For me, further proof that asset allocation, with static weighting and dynamic investment methods works when market anomalies lack affect.

When Vilfredo’s cat died, he did not drop her stiff body out of his bedroom window to see if she’d bounce.

“It is a maxim of empirical economics that if you torture the data sufficiently, they will confess.”
(Stephen A. Marglin, The Dismal Science “How Thinking Like An Economist Undermines Community” (Cambridge: Harvard University Press, 2008) 122.

Empirical economics is distinct from theoretical economic theory or the fundamental distinction between deductive and inductive economic ideas.

We’ll all know in six months.

“If you want to have a better performance than the crowd, you must do things differently from the crowd.” – John Templeton

Templeton is right, but most of us act according to John Emerson’s views posted on Scienceblogs.com.

Economists have always had trouble with bubbles, like the one we just experience (sic), and this is partly because not only are people not totally rational and not only do they not have perfect knowledge, but besides that, they communicate with one another, so the irrationality is not randomly distributed so that the irrational individuals are weeded out, but can pervade a whole population.

What will the maddening crowds do? Uncertainty prevails for the moment. We may presume, I think, that Americans possess an unwavering commitment toward work and prosperity, and these ethics should become evident in the value of stocks.

October 29th, 2008

Nothing about the stock market is too predictable…what you expect usually does not happen.

Some will disagree. For them, the direction of the market is clear. At least clear when claiming prescience. They’ll never admit when wrong; they will boldy exclaim and humiliate when right.

Stock trading intra-day has relevance, but what seems to matter most is what the market indexes say at 4PM (or after the final trades settle around 4:10 or later).

Here are three observations:
• Volatility prevails
• The better hedge funds seem to be standing on the sideline
• Nobody is really certain about what happens next; Those who are certain see “gloom and doom”
• Many wait for the next economic “shoe-to-drop”

Finally, whatever happened to dollar-cost-averaging?

Never have I observed such a dispirit mass of views, political dysfunction, and public confusion. Dispirit views can be expected whenever discussion ocurrs, but political dysfunction is not what a democracy needs. Public confusion erupts because there is a lack of government leadership and public knowledge. When a crisis arrives, no one can decide on what works, and no one leads. All parties appear to play the zero-sum game: give me all I want and I’ll give you nothing of what you want, or I’ll give up something as long as you know there’s hell-to-pay.

Most people get their stock market updates from the evening news. The excitement on the way up with the gloom and doom during a market correction. Very few get much of an education. Duncan Niederauer, CEO of the New York Stock Exchange recognized this by statiing that many voters fail to understand the inextricable link between “Main Street and Wall Street”.

American voters think this is a “bailout of Wall Street”. What we face is a “credit-crisis”. Small businesses faces payroll challenges, the U.S. auto industry has no wheels, and the housing industry has no foundation. As Secretary Paulson said, “…this is much too important to let this fail,” Paulson said.

House Majority Leader Steny Hoyer said, “Why should taxpayers loan out their own money to solve a crisis brought on by someone else’s greed?” He answered his own question by saying, “…in our economy, none of us is an island. A meltdown would begin…on a few square miles of Manhattan, but before it was over…no city or town in America would be untouched.”

Mutual fund, 401(k), endowment fund, and pension investors can blame Wall Street “fat cats”, but we all chased the mice. We all gloated and took pride in the numbers on our statements. “No city or town in America” ran from the market upside, but everyone wants to blame someone on the downside.

The greater the excess or hubris, the greater the humiliation. The greater the cynicism, the greater the deliberative dysfunction when seeking a resolution. The greater the market avarice on both sides of a trade (long by owning stock and selling or shorting a stock)the worse the results for everyday, steady-hearted investors.

We can only hope that time and sensibility return our sanity. We can only hope that the stock market becomes a thermometer of economic growth, research and development, entrepreneural innovation, and a cooperative effort to keep this planet revolving for our kids.

A damaged market needs a “capitulation” phase followed by a “base-building” phase. Each phase defined by trading volume because trading volume confirms a trend. During “capitulation”, investors “cave-in” with dramatic selling, and significant way-above-average trading volume.

I wrote this a few weeks ago, and forgot to enter the thought. Maybe/maybe not, we have seen capitulation. Today’s U.S. market activity suggests that probability. Today’s (September 29, 2009) foreign market activity may validate this presumption.

Morningstar Mutual Funds Fiduciary Grades: What Investors Need to Know

Morningstar now provides Fiduciary Grades on mutual funds. How does Morningstar determine these grades? How can mutual fund investors use these grades to better manage their portfolios?

Mutual fund investors use Morningstar Ratingâ„¢ as a sign post of mutual fund performance. These ratings have proved to be a valuable tool for objectively comparing the performances of different mutual funds.

In 2003, New York Attorney General, Elliott Spitzer launched actions against some mutual fund companies for allowing their privileged clients to profit from improper activities such as late trading.

In the aftermath of these developments, investors realize that they need more than the historical performance based Morningstar Ratings to evaluate mutual funds. The Morningstar Ratings do not get at critical intangibles. How seriously does the mutual fund company take its fiduciary responsibility to mutual fund investors? How aligned are the interests of the mutual fund manager and the mutual fund company with those of the mutual fund investor?

To address this need, Morningstar has embarked on a system called the Fiduciary Grade. Morningstar has so far graded about 635 mutual funds, including 500 of the largest ones. Morningstar plans to provide Fiduciary Grades for a total of 2000 mutual funds over time.

The Morningstar Fiduciary Grade System Basics

The Morningstar Fiduciary Grade is based on the evaluation of five areas critical for mutual fund governance and mutual fund operations. Morningstar generally assigns to mutual funds points ranging from 0 (Very Poor) to 2 (Excellent) in increments of 0.5 for each of these five areas.

1. Regulatory Issues: Morningstar examines if the mutual fund company has had any regulatory issues within the past three years. If so, what corrective actions has the mutual fund company implemented? Unlike the other four areas, the minimum score here can be a minus 2.

2. Board Quality: Morningstar looks for a demonstrated track record of the mutual fund board protecting the interests of mutual fund investors. Mutual funds get kudos if their independent directors invest in the mutual funds.

3. Manager Incentives: This score is based on Morningstar’s evaluation of mutual fund ownership and compensation structure. Mutual funds where the fund’s manager owns a meaningful stake in the fund score high on the fund ownership dimension. A compensation structure that rewards the mutual fund manager for long-term mutual fund performance is favored.

4. Fees: Mutual funds are rewarded for having expense ratios lower than that of their peers and for effectively reducing their expense ratios with growth in their assets.

5. Corporate Culture: Morningstar looks for tangible evidence that the mutual fund company takes its fiduciary responsibility seriously. Among the factors Morningstar considers are softer issues like whether the company closes mutual funds when they get too large and whether the company starts trendy mutual funds to garner assets.

The points scored on each of the above areas are aggregated and the Fiduciary Grade is assigned based on the total: A=9-10, B=7-8.5, C=5-6.5, D=3-4.5, F=2.5 or less.

How Investors Can Use the Morningstar Fiduciary Grade

Here are some ways investors can use the Morningstar Fiduciary Grade.

1. Buy and Hold Investors: Buy and hold mutual fund investors first need to examine how mutual funds held in their portfolios stack up on the two dimensions, Morningstar Rating and Fiduciary Grade.

Mutual funds that rank favorably on both dimensions may be retained and mutual funds that rank unfavorably on both dimensions may be replaced by ones that rank favorably.

For mutual funds that rank favorably in one dimension but not in the other, the answer is not clear-cut. Retaining a fund with strong Morningstar Rating but lower Fiduciary Grade is a matter of personal choice. Conversely, a mutual fund’s Fiduciary Grade may be satisfactory but the Morningstar Rating may be unfavorable. This may just be a case of the mutual fund manager going through a temporary bad patch. Investors have to weigh these factors along with tax consequences before deciding to sell a mutual fund.

Given the number of mutual funds available, investors seeking new mutual funds to add to their portfolio should in general have no trouble in finding mutual funds with favorable Morningstar Rating as well as Fiduciary Grade.

2. Tactical Asset Allocators: A tactical asset allocator uses an active investment strategy and typically invests in mutual funds such as sector funds. For example, AlphaProfit uses its ValuM investment process to periodically alter the mix of its mutual fund model portfolios to take advantage of specific trends (e.g. rising natural gas prices, introduction of new wireless technologies).

Since tactical asset allocators seek superior performance during their mutual fund holding period, factors such as superior long-term performance which determine Morningstar Ratings are less important to them. However, these investors typically seek to own mutual funds within a single family such as Fidelity Investments for purposes of administrative ease. As such, tactical asset allocators will find the Fiduciary Grade useful in evaluating and choosing mutual fund families to implement their strategies.

Our Take on the Morningstar Fiduciary Grade System

The Fiduciary Grade system is a blend of several metrics. The grading of mutual funds on regulatory issues is backward looking rather than a prognosticator of potential future trouble. The grading system includes a quantitative dimension in mutual fund fees. Also included are qualitative dimensions such as mutual fund corporate culture, manager incentives, and board quality.

The Mutual Fund Fiduciary Grade ranking provides mutual fund investors with much needed insight on the governance and operations of mutual funds. The Morningstar Fiduciary Grade System is a good first step. We believe Morningstar will refine the Mutual Fund Fiduciary Grade system over time, just as they refined the Morningstar Ratings system.

While Morningstar Ratings do an excellent job of objectively evaluating past performance, financial markets by their very nature do not allow the investor to predict future performance based on these ratings alone. Many times, funds with Morningstar Ratings of 4- or 5-star do not live up to their expectations.

The utility of the Morningstar Fiduciary Grade will be significantly enhanced if superior Fiduciary Grade either by itself or in combination with the Morningstar Rating becomes a better indicator of superior future performance. We believe the Morningstar Fiduciary Grade has the potential to become a worthy metric of mutual fund stewardship over time.

Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive
this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied
upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein. Opinions expressed herein reflect the opinion of AlphaProfit Investments, LLC and are subject to change without notice. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. Morningstar Rating™ is a trademark of Morningstar, Inc. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Owners and employees of AlphaProfit Investments, LLC for their own accounts invest in the Fidelity Mutual Funds. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from Fidelity Investments. Past performance is neither an indication of nor a guarantee for future results. No part of this document may be reproduced in any manner without written permission of AlphaProfit Investments, LLC. Copyright © 2004 AlphaProfit Investments, LLC. All rights reserved.

Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. Sam developed the ValuMâ„¢ Investment Process for managing investments. He edits the AlphaProfit Sector Investors’ Newsletterâ„¢, a publication that discusses investments using Fidelity mutual funds. For the 5 year period ending December 31, 2003, AlphaProfit model portfolios increased by up to 252%, a compound annual return of 28.6%. To learn more about AlphaProfit and to subscribe to the FREE newsletter, visit http://www.alphaprofit.com