Portfolio design



Note 271: Top-Down Answers to Money QuestionsDon Gimpel – October 2017TABLE 1: KEY MARKET QUESTIONS WITH LINKS TO ANSWERSTOPIC QUESTIONANSWER/RESOURCEBusiness, forecastHow’s business?Future business conditions are often based upon how business people feel about business conditions. Trading Economics has a number of indexes that help answer this question. Under “Business” look for Business Confidence, Ease of Doing Business, Competitive Index, Corruption Index. Under Consumer look for the Consumer Confidence Index and the Economic Optimism Index. Budget, USA simulationWhat Congress does to the budget has an immediate impact on the economy and the market. How ca I obtain a deep insight into the impact of Congressional actions.The University of Pennsylvania’s Wharton School of Business makes a Budget Simulator available to the public. Adjust some of the buttons and you will get the effect of your changes on key macroeconomic issues. Calculators, financialWhere can I find financial calculators that will allow me to calculate most everything financial?Professor of Statistics, Dr. Peter Ponzo, provided hundreds of calculators on is Gummy-stuff internet site. He included hundreds of links to files that explained and derived downloadable Excel calculators. His original sit is no longer active but the files are still available from the link below. The problem is that the selection is so deep that it is easy to get lost. With patience, you can find what you are looking for. Without patience, you can contact me and ask for Notes 241 or 247, an unabridged and abridged concordance to Gummy-stuff files.This is a listing of topics covered with the number of available calculators:Anomalies 9 filesBonds 9Calculate, how to27Downloading, how to12Indicators39Markets13Options16Portfolio design38Price Patterns 9Retirement25Statistics34Stock 32Strategies46 Consumer, sentimentConsumer, current economic conditionsConsumer, expectationsHow do people feel about the economy, current economic conditions and their expectations?The University of Michigan publishes their Consumer Confidence Index which is a measure of how people feel about the economy. The commentary on the site is a must read. If people feel good about the economy, they will continue to spend their disposable income. High sustained expectations may lead to an overstimulated economy. Economy, overheatingIs the economy overheating?One of the two Federal Reserve System mandates is for orderly economic growth. When the economy overheats from increasing sales and disposable income, companies may find it difficult to satisfy that demand unless they invest in new facilities and equipment increasing demand for financing loans. The Capacity Utilization Index measures where the economy stands relative to full capacity (100). When the CU goes above 84, experience has shown that the economy begins to overheat. Economy, statusIn the simplest possible terms, is there a problem with the economy?The Chicago branch of the Federal Reserve System publishes an activity figure for the Chicago area which is applicable to the country as a whole. It is the Chicago Fed National Activity index (CFNAI) and is commonly found in its 3M moving version CFNAI-MA3. It’s interpretation is as follows:I is the CFNAI-MA3 and D is the Diffusion Index. I < -0.7 and D < -0.35 The economy is contracting. -0.7 < I and 0.35 < D The economy is expanding. I = 0 The economy is expanding at its normal rate. +0.7 < I Sustained inflation is expected if the economy is already 2-years into a period of economic expansion.+1.0 <1 There is a substantial likelihood of a period of sustained increasing inflation when the economy is already 2-years into economic expansion. Economy, status, FedWhere can I find an early analysis of the economies status.The New York Branch of the Federal Reserve System issues a monthly update on US economic health about 2-weeks after the close of the report. Its current 17-page report is an early of our economic health ForecastsAre there reliable economic forecasts that I can access?There are a number of institutional and service company forecasts available. A full summary can be found at: DGimpel@, Note 269, Quarterly Economic Reports, October 2017. A few of the most interesting are: Look for Pre-tax Corporate Profits forecast and supporting information in the following: Gold, price increaseIs the price of gold likely to go up?TD Economics provides a 2-year forecast of the Real Output per Hour, one of the drivers of monetary conversion rates and the price of gold. The underlying rational is that when labor productivity continues to go up, the value of the dollar will go when compared to a basket of other currencies. This makes it easier to buy gold so the expectation is that the price of gold will go down. Gurus, forecast accuracyCan I rely on Guru forecasts?Guru forecast accuracy has been tracked by CXO Advisory and others. Though Gurus express confidence in their forecasts, the best of the test lot was 78.7% success rate and the worst, 17.0%. Generally, the best is not as predictive as you would hope foe and the worst far less accurate than you can live with. Gurus, linksWhere can I obtain solid investing advice? See Table 2: Links to Gurus.Gurus, performance Why not just copy what famous Guru’s do? They are famous because they are winners, aren’t they.Most Guru’s make no secret of the way that their portfolios perform. You can perform an extensive analysis of 14 such portfolios at: Click on “Asset Allocation” for a selection of 14 Guru portfolios and other classics. Included are Bill Berstein’s “No Brainer,” Bogleheads ”Three Funds” and “Four Funds, Scott burns “Couch Potato” and other classics.This site allows you to select the time span over which the test is to be conducted, whether or not there are any periodic adjustments, rebalancing, the benchmark and the asset allocation. Another source of Guru portfolios is from: ValIdea has 23 suggestions and their Motley Fool’s “Small-Cap Growth” has the top returns of 14.9%. The Peter Lynch portfolio yields 12.2%The answer to this question is that the reason investors don’t simply emulate these classics is that their performance is not outstanding. People believe that there are better ways of receiving higher returns. Health, US delivery systemWhat is the problem with the US health care delivery system?Common knowledge is that the US health care delivery system is broken and needs to be even though most people believe that the actual health care received is the best in the world albeit the most expensive per capita in the world. The following two links provide a quality of health delivery from most countries and one major factor causing high costs. You will find that the cost of the US health delivery system is significantly higher than any other country in terms of fraction of GDP, that actual quality of health is not the best in the world and that MD’s pay is almost the highest in the world. Download app and click on vertical axis to select data set. Choose “Health” and then “Health Economics” and select “Per-capita” cost. Hot markets, choosing investmentsKnowing which markets are “hot,” how can I narrow my search for investible securities?It makes sense to identify “hot” markets and then investable within those markets. The following three yahoo sites do exactly that for stocks, mutual funds and ETFs. InflationAre there any inflationary pressures?The Labor Department publishes data on the percent unemployment. There is a natural level of unemployment caused by people transferring from one job to another or being unemployed by choice. This is called the Core Unemployment and it is about 4.6%. When the unemployment level drops below this value, companies find it more and more difficult to hire new employees and so offer increasingly high wages – a strong inflationary pressure. Interest Rate, short term, expectationsThe cost of short term loans is a significant business cost. Is the Fed acting to stimulate or curb business activity?The 30-day Fed Funds Rate is what banks charge each other for overnight borrowing. Futures settlement cost reflect what “smart money” things the rate will be in 30-days. The market reacts to differences between the current Fed Funds rate and the expected rate. Any sudden differences signals that the Fed Open Market Committee is intending to increase the rate to curb business activity or reducing rate to stimulate business.To find the values, look in the Wall Street Journal, Section B under commodities then Interest Rate Futures/30-days Federal Funds and record the “Settlement” value. The expected interest is 100 – settlement value. Compare the expected rate with the current rate found under Money Rates/US Government Rates/Federal Funds. Look for Interest Rate Futures/30-day Federal Funds. Investing, responsibilityWhat is my Brokers/Registered Investment Advisors responsibility to me?An excellent short statement about “Best Interest of the client” and Fiduciary Standard can be found at: Click on “Contents” and then select “Stockbrokers, Registered Investment Advisors, and the Fiduciary Standard” by Gary Karz.Manufacturing, healthHow healthy is US manufacturing?The manufacturing sector is the largest contributor to the GNP and its economic health is very important. The Institute for Supply Management issues it’s ISM Report monthly and it provides a deep insight into the health of manufacturing. It provides a Manufacturing Index indicating change, direction of growth and rate of change and the length of the trend. The same information is provided for New Orders, Production, Employment, Supplier Deliveries, Inventories, Customer’s Inventories, Prices, Order Backlog, Net Export Orders and Imports. As of this date, every single component is growing or increasing at a faster rate with the single exception of Customer Inventories growing at a slower rate. Market, Up or DownIs the market likely to go up or down?Wells Fargo publishes a “Monthly Outlook” report on the US Economy. Included is a forecast of year over year Pre-tax corporate profits. Assuming a constant value for the Price/Earnings ratio, one can expect that price will increase in proportion to earnings. Thus a series of annualized profits by quarter signal an upward market. The numbers hold steady at slightly below 3% until 2029 where they decline slightly indicate a weakening market.One good is the sensitivity of the market (index) to earnings. If you examine a P/E chart you will see that up until about 1995, P/E varied between a low of 5 and a high of 30. Since that time, the P/E has trended up and is now about 31.4 with a big spike about the year 2000. The point is that the sensitivity is a variable. Fund, rankingsCan I rely on Mutual Fund rankings?You can rely on Mutual Fund rankings such as the “Star” rankings from Morningstar is you know what they mean and how they are generated. Their widely used rankings are for funds within an economic sector and based on both return and risk data for the past three years. As for the next three years they serve as an excellent demonstration of “reversion to the mean.” They are simply unsuitable as the basis for fund selection.Grind, Kirsten and Krouse, “Mutual-Fund Ratings Are Not What They Seem,” The Wall Street Journal, October 26, 2017, page A1Mutual Funds, Morningstar Star RatingsWhy isn’t investing as simple as buying Morningstar’s 5 star rated mutual funds?Morningstar 9is a highly respected investment data service that has a star rating system for Mutual Funds. Their rating system ranges from 1 to 5 stars. Why not simply buy their 5 star rated funds? The answer is that the valuations are based upon past performance and Morningstar makes no claim about their ability to predict how well these funds will perform in the future. Rather, they seem to provide a good example of the classic axiom of “Reversion to the Mean.” There is a deep misunderstanding of the nature of the rankings in that they are meant to reflect performance adjusted for their degree of risk. Morningstar has another rating system that’s unknown to most investors that rates based upon other factors. Funds are rated against other funds with the same focus.Kirsten Grind & Sarah Krouse, “Mutual-fund Ratings, Are Not What They Seem,” Wall Street Journal, October 26, 2017, A1Options, calculatorsWhat option type is my best choice right now?Where can I find really sophisticated option calculators?Try Option Trading Strategies which ask a few questions your opinion of the market and how you view investing and it will make an optimal option strategy recommendation. Once you know which of 32 possible option types are the best choice for the expected market conditions, WolframAlpha will provide a specialized calculator for each type. Enter the name of the option in the Query box to open up the calculator type. This combination does it all. Performance, USAHow is the USA doing on most any topic, against any other country, at any point in brilliantly displays the data on any country, on most any topic at any point in time. If you are looking for a deep insight into health care, for example, Gapminder will provide not only the raw data but it will display the data so it can be deeply understood. Their base includes:Economy, Society, Education, Energy, Environment, Health Infrastructure, Population and Work. Recession, likelihoodIs there a likelihood of a recession?Wells Fargo publishes a “Monthly Outlook” report on the US economy. Included are projections for the Real Gross Domestic Product for the next 10-quarters. A recession occurs when there are two successive quarters of declining GDP. For this date, all GDP projections are positive and range from 2.4 to 3.0% annualized. One could conclude that there is little likelihood of recession through 2019. High sustained expectations , safe withdrawal levelWhat is a safe retirement withdrawal level?A safe withdrawal level depends upon retirement horizon and the portfolio asset allocation. The link refers you to the Trinity Report which provides a set of tables on the likelihood of a stable (successful) portfolio as a function of withdrawal rate, duration and portfolio mix. Returns, highest possibleHow can I calculate the allocations for an “Efficient” portfolio?Modern Portfolio Theory explains that an “Efficient” portfolio yields the allocations for the highest possible returns for any level of risk or the lowest level of risk for any selected return. The site offers a choice of up to 37 sectors and calculates the allocations for a portfolio of any size (up to 37 investments). Sector, “hot”Which sectors are currently hot?Morningstar publishes Market Fair Value charts for the broad market and for about 170 market sectors. These charts compare the current price to a sectors intrinsic value to determine over or under valuation. The width of the charts may be adjusted to obtain the valuation history. This technique is based on the work of Professor Ibbotson whose company was acquired by Morningstar. Hot markets are those currently undervalued (a bargain) and trending up (becoming less undervalued). It is important to know that ultimately a sector must become “fairly” valued simply because it cannot continue a long term over/under valuation. As of October 2017, the following sectors are undervalued and trending up: Energy, Home Improvement Stores, Hotel Real Estate, Discount Stores, Midstream Oil and Gas.The following sectors are fairly valued and trending up: Communication Services, Recreational vehicles, Residential Construction, Asset Management, Global Banks, Oil & Gas Equipment Services, and Metal Fabrication. What is missing so far is the link between a hot sector and an investible security. This can be done to a limited degree using etffamilyties/etf-finder with about 40 sectors or etfs/ which also allows for selection by category. Click on “Stock Research/Market Fair Value.” Alternatively, to go directly to the Fair Value Charts, enter: If there is difficulty in accessing Morningstar’s home page, it is possible to access some of their information content by linking through a local library. For example, Stocks, rankingHow do you select the best stock from a list?Use of this site is a real time saver. You’ve selected a list of up to 4 stocks and plan to pick and buy the best from the list. By going to and entering up to 4 stock CUSIP codes, you obtain the following for each:Fundamentals … revenue, capitalization, # employees … Key RatiosBalance sheet, income statement, cash flowPrice History chartProjected returns … Monte Carlo methodRealized and projected Return chart vs. risk as variance of return.Mean-variance optimal portfolio allocationsOperation summary. Strategies, investmentWhich investment strategies work best?CXOAdvisory publishes many papers on investment strategy with specific conclusions as to how well they work. Unfortunately, these papers are only available to subscribers. Subscription costs are $17.99 by the month and $179 for the year. They provide professional research for serious investors. Technical Analysis, indicatorsDo Technical Analysis indicators, i.e. do they enable an investor to beat a bogey?R. W. Colby’s book “The Encyclopedia of Technical Market Indicators,” McGraw-Hill 2003, 2nd edition tested over 100 different indicators over a very wide time span. He concluded that many did not work well when using their author’s procedures. Most procedures were not optimized. When using Colby’s optimized procedures, only two outperformed their bogey, the RSI and McClelland’s Summation indicators and even then not significantly. It is possible to develop a high profit “data-fitting” procedure but the developers neglect to do a parametric sensitivity study which make the procedure of little value for any future investments.Trading, profiCan I make any money trading?CXO Advisory provides a straight out answer to this question Wealth, nationalHow wealthy is the US compared to other countries?Whether or not the US can afford one infrastructure program or another requires its cost to the wealth of the country, its growth and its ability to finance the investment. The reference below provides the National Net Worth of the top 30 countries. It is based upon the stock market, human resources, natural resources, capital technological advancements and the national infrastructure. The US is currently ranked No. 1 in the world with $255.7 B in resources with a 2005-2015 compounded growth rate of 3.35%, 33% of the world’s resources. Switzerland and Australia have the highest annualized compounded rates of 7.73 and 7.69 respectively. TABLE 2: LINKS TO EXPERT COMMENTARYNAME SPECIALTY PUBLICATION LINKBrooks, DavidPolitics, cultureColumnist Friedman, ThomasWorld affairsColumnist Gross, BillBondsBill Gross Investment outlook Krugman, PaulEconomicsThe Conscience of a Liberal Mankiw, GregLawGreg Mankiw’s Blog Marks, HowardStrategic investmentsMemos from Howard Marx Richards, FredCommon senseTis only my opinion Yardeni, EdEconomics, chartsDr. Ed’s Blog Zweig, JasonStocks, statisticsIbbotson Associates, GaryMarketInvestor Home - Contents click “Contents”Motley FoolEquities, Don “Note 269: Quarterly Economic Reports ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download