Commentary and Stocks for Friday

Teresa, February 28, 2008 @ 4:49PM ET | Link | RSS | Read via Email | Start a Discussion

After publishing the first installment of Build Your Own Investment Portfolio, Mebane Faber from World Beta sent me a link, reminding me to bring up risk parity portfolios.

I first saw the concept a few years ago when The Quant pointed me to Ray Dalio’s Engineering Targeted Returns and Risk (more at Bridgewater).

At the bottom of Mebane’s post were some links to PanAgora’s risk parity portfolio performance. I was shocked. For one, the dates of inception were 2006 and 2007. For two, commodities are now firmly entrenched as an asset class.

Five years ago, clients would have FIRED a manager for dabbling in commodities, but with the benefit of hindsight and a bull market, it appears as if fund managers have engaged in back-dating and market-timing the addition of and/or overweighting of an entire asset class to beef up performance …and sales!

That brings us to another point. Why is it that quants get to foist backtested stuff upon the investing public so easily, albeit cleverly disguised as an “index”? They’re going down a very slippery slope. Should we expect late-night infomercials from commodity-related or “active” exchange traded funds to knock the likes of Michael Parness and WizeTrade off the air? Who needs them when a team of CFAs and PhDs can do a better job?

Perhaps we can coin a new word today. Bubble + Bull = Bubbull, defined as price increases supported by fundamentals, wildly exaggerated by insane performance-chasing investor demand. Don’t get me wrong. I am not about to stand in the way of the oncoming train because, as Mullainathan & Thaler wrote in their classic paper, “…it may often pay ’smart money’ to follow ‘dumb money’ rather than to lean against it.”

Video of the day

Calpers is increasing their allocation to commodities from $450 million last year to $7.2 billion through 2010. Sentiment cycle fans will love watching commodity bull Rob Lutts utter the words “new era”:

Making Money Off Commodities
Betting big on commodities, with Rob Lutts, Cabot Money Management founder & CIO and CNBC’s Erin Burnett.

And the Winners Are…

The stock scan conducted after the close on Thursday found 64 winners and 37 losers.

The top 50 winners are listed in alphabetical order below. Click on the column headers to sort the list. Our scan criteria incorporates price movement, range and liquidity (500,000 shares on the day, 20-day average of 1.5 million).

Get your All Access Pass to our research and find out which ones to buy, sell or hold.

Ticker	Close	Change	Sell	Buy	ToSignal
AA	39.12	0.26%	33.52		-14.31
AAUK	33.13	-0.41%	28.89		-12.8
ACH	50.9	-2.24%	44.04		-13.47
ACN	36.8	-1.31%	34.23		-6.99
ADM	46.47	1.81%	41.56		-10.56
AEM	70.16	1.08%	62.81		-10.48
AGU	76.32	3.28%	64.68		-15.26
ANR	43.05	5.52%	31.84		-26.04
APA	119.4	5.33%	102		-14.57
AUY	18.63	2.36%	16.1		-13.57
AZ	18.47	0.93%	16.49		-10.7
BBD	32.41	0.47%	28.12		-13.25
BHP	75.75	0.28%	65.77		-13.17
BID	35.19	1.04%	29.11		-17.27
CAT	74.39	-0.41%	66.23		-10.97
CCJ	40.17	3.78%	35.03		-12.8
CLF	126.93	2.15%	104.6		-17.59
CLS	6.86	1.43%	5.96		-13.08
CNQ	77.34	4.08%	65.46		-15.36
CVS	40.93	0.50%	37.67		-7.96
CX	28.85	1.64%	24.14		-16.34
DELL	20.87	-3.51%		21.11	1.17
ECA	78.12	3.34%	68.85		-11.86
EOG	124.73	17.16%	96.95		-22.27
EWZ	88.17	-0.49%	77.84		-11.72
FCX	106.57	2.54%	84.39		-20.81
FLR	142.48	7.67%	114.19		-19.86
FMCN	53.5	2.70%	41.16		-23.07
FTI	59.88	2.70%	50.59		-15.51
GDX	54.38	1.58%	48.29		-11.2
GG	44.71	3.02%	39.51		-11.62
GGB	33.81	-1.04%	29.07		-14.01
GYI	32.19	0.59%	25.43		-20.99
HAL	39.06	3.86%	33.53		-14.15
HL	11.77	4.54%	9.45		-19.68
HMY	12.64	-2.86%	11.29		-10.7
IR	43.04	1.37%	38.63		-10.24
ITU	26.44	-2.11%	23.7		-10.37
JNPR	28.59	-1.40%	26.63		-6.85
KGC	25.29	2.12%	21.74		-14.05
KWK	35.22	2.73%	30.83		-12.47
LFC	60.39	-1.74%	52.56		-12.96
LINE	23.44	0.86%	20.54		-12.39
LRCX(E)	42.38	-1.53%	38.28		-9.66
MUR	83.31	2.32%	73.21		-12.12
NE	51.43	2.23%	43.79		-14.85
NFLX	31.54	-3.36%	26.67		-15.44
NFX	56.7	6.33%	48.14		-15.09
OXY	80.41	0.91%	71.22		-11.43
PAAS	41	0.31%	35.25		-14.03

Media Digest

Vanguard parts company with GMO
[Editor: Beating the market is harder than you think…] Asset manager Vanguard has replaced investment firm Grantham, Mayo, Van Otterloo (GMO) as an external manager of three mutual funds worth a combined $12.2bn, as part of a larger shake-up in some of its underperforming equity funds. According a statement, GMO has been removed as manager of the $10.5bn Vanguard Explorer fund as well as co-manager of the $975m US Value Fund and the $695m VVIF Small Company Growth Portfolio. Vanguard’s quantitative equity group will be replacing GMO in its previous roles.
UK ‘missed chance to build up £450bn sovereign wealth fund’
[Editor: Shouldda, wouldda, couldda…but didn’t.] A study from PricewaterhouseCoopers found that the UK could have built up a nest egg of £450bn - bigger than those of Kuwait, Russia and Qatar combined - had it put tax receipts from oil and gas fields into a long-term fund. Instead, the report said, successive governments used the proceeds from oil and gas fields to keep public borrowing down rather than build up a fighting fund to tackle long-term problems such as the ageing of the population. Norway has used its North Sea revenues to build up a sovereign wealth fund, while Middle Eastern states have recently used their funds to take stakes in banks that have run into trouble as a result of the global credit crunch.
Huge bonuses for bankers encourage too much risk-taking, watchdog warns
The boss of the Financial Services Authority this morning launched an attack on the culture of big City bonuses, warning that they could encourage too much risk taking. Hector Sants also said the markets would never go back to “normal” following the credit crunch and that the days of easy credit for customers may be over. The banks, which have become increasingly sophisticated in their use of financial engineering, may be forced to revert to more straightforward forms of lending, he said. “There is a risk that the remuneration systems are too short-term and that they do incentivise behaviour which is not helpful in terms of maintaining long-term financial stability,” Sants told BBC Radio 4’s Today programme.
Suddenly teen pregnancy is cool?
[Editor: Seems like there will indeed be people around to fund the liabilities of the boomers…] It could be that teens are just following what is really a nationwide trend in the U.S. Across all ages (from 15 to 44) the birth rate is up, according to the NCHS. Between 2005 and 2006, more women had babies than had since 1961 — in excess of 4.2 million. And the 2006 fertility rate was the highest it had been since 1971. Explanations for the overall increase are as elusive as for the rising teen birth rate.
Interview with David Frum
For example, the rise in inequality is driven by events in the economy, yes, but it’s also driven by changes in family structure. Children who grow up with two parents have a much better chance in life than children who don’t. The fact that families of the wealthiest third of Americans are becoming more stable, while the families in the bottom third are becoming more unstable, is as important as globalization, or trade, or technology. And yet, if you held the Democratic candidates over a hot griddle, they wouldn’t talk about that. Secondly, though immigration is not the most important cause of the increase in inequality, when you import 40 million poor people into your country since 1970, as the U.S. has done, you should not be surprised if they gather at the bottom income distribution, especially when your public school systems have broken down as a mechanism of assimilation and upward mobility.
Adding fuel to the doctor crisis
[Editor: That’s one out of every six, folks.] It’s been proven repeatedly–female doctors “will not work the same hours or have the same lifespan of contributions to the medical system as males,” says Dr. Brian Day, president of the Canadian Medical Association (CMA). Family duties are at least partly to blame. Day’s own wife and his sister-in-law, both trained physicians, haven’t practised since having kids 10 years ago. . . . Today, five million Canadians are without a family doctor. A 2005 survey found that just 23 per cent of Canadians were able to see a physician the same day they needed one–placing this country last among the six studied, including the U.S., Britain and Australia. Canada’s doctor-patient ratio is among the worst of any industrialized nation: with just 2.2 physicians per thousand people, it ranks 24th out of 28 OECD countries (well below the average of three). And among the G8 countries, Canada ranks dead last when it comes to physician supply.
Russia Inflation Threatens Putin Legacy, Tests Successor
The shadow of inflation is threatening Russian President Vladimir Putin’s economic legacy and complicating the decisions facing chosen successor Dmitry Medvedev. The likely winner of the March 2 election must find ways of containing inflation that accelerated to 11.9 percent in 2007. Failure to do so may trigger unsustainable wage demands, squeeze consumer spending and dent company profits. Bloomberg’s Ellen Pinchuk reports from Moscow. Chris Weafer, chief strategist at Moscow-based UralSib Financial Corp, and Yaroslav Lissovolik, the chief economist at Deutsche Bank AG’s Moscow office, also comment.
AXA CFO on Earnings
“The subprime impact on our balance sheet is very limited, because our exposure is very limited,” Denis Duverne, CFO of AXA, told CNBC’s Stephane Pedrazzi Thursday.
Nickel Strike
Workers at a BHP Billiton’s nickel plant in Colombia have gone on strike in demand of increased wages. CNBC’s Sri Jegarajah reports.
Crash course
Chinese investors had a rare opportunity for good cheer on Wednesday February 27th. The country’s two stock exchanges shrugged off Monday’s blues, when both indices dropped by about 4%, and gained a bit instead. Unfortunately Monday is far more typical of trading conditions in recent months in the country’s two markets, in Shanghai and Shenzhen. Despite the power of China’s interventionist government, the importance of maintaining appearances for the Olympics and the country’s relatively strong economic growth, China’s stockmarkets have been suffering from a protracted slide.
‘Made in China’ Is Cheap No More
South China is the world’s factory floor. For years, it has churned out cheap products like toys, shoes and clothing. But now rising costs — and shifts in Chinese government policy — are knocking hundreds of smaller factories out of business.
The next bubble: Priming the markets for tomorrow’s big crash
[Editor: via Trader Mike, recent links.] When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.

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