Correlation Inflation

Correlation is an extremely important factor when building portfolios and hedging risk.  Correlation is the relationship between two variables and explains how they move together or move apart.  Correlation range between 1 (perfect positive correlation) to -1 (perfect negative correlation) while 0 would mean no correlation at all.

One of the issues we have had over the course of the past decade is how asset classes have started moving together meaning their correlations are moving towards 1 which is trouble for someone trying to diversify assets.  Correlation was because a huge ordeal during the 08/09 crisis as people who thought that they were diversified when they held assets that were supposed to move in the opposite direct of the stock markets ended up going the same way which was in a downward trend.

The Capital Speculator has put together some additional charts one how correlations have started to come together


Correlations have also risen for REITs and U.S. stocks in recent years, with a similar story describing the relationship between commodities and U.S. stocks. A notable exception: correlations between U.S. stocks and U.S. bonds have fallen lately (as depicted by the red line in chart below).

Who are the 1%

If your trying to get into the 1% club (and who isn't) these charts below may give you some insight as to what direction you may want to follow.  Courtesy of Mother Jones which is "a nonprofit news organization that specializes in investigative, political, and social justice reporting."


Looks like your best way to reach the top is to become a CEO

Google and Your Memory

From the Social Times comes a fascinating article on how Google affects your memory (see graph below).  Ironically I just started using Google Chrome this year with Google as my default browser.  The point of the article concludes the following:

• Through using Google and the internet in general your memory becomes weakened through less and less use. 
• Although you can find just about anything on the internet doesn't mean that the data you find is actually correct.

I also came across an article in Wired Magazine is Google making you stupid which is on the same topic, a good read as well.

Consumers Most Negative on U.S. Economy Outlook Since Recession

Scrolling through some month old data my how a month can change.  This Bloomberg article detail how low consumer sentiment has gotten especially since the last recession.  

• The Bloomberg Consumer Comfort Index’s monthly expectations gauge dropped to minus 45, the worst reading since February 2009. The weekly measure of current conditions was minus 48.4 for the period ended Oct. 16, up from minus 50.8 the prior week that was close to a record low.
• The Bloomberg comfort index, which began in December 1985, has averaged minus 46.1 this year compared with minus 45.7 for all of 2010 and minus 47.9 in 2009, the year the recession ended, the report showed.
• Other data point to erosion in confidence. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped in October as Americans’ outlooks for the economy and their finances slumped to the lowest level since 1980.

However when you read the papers today or listen to the news you hear all about the record breaking Black Friday turnout.  Maybe it's just me but it feels like very year is bigger and actually physically more violent than the year before with a few years thrown in as exceptions such as 2008's low turnout.


Personally I stayed in and can't remember the last time I was out shopping on a Black Friday weekend.  Today as you know is Cyber Monday and I can just imagine how well today will go for retailers.  Combine these events with yet again of hope of a solution (not counting on it) out of Europe and you had an explosion in the major indexes today with the NASDAQ leading the way with a 3.5% gain.


Who knows what to expect tomorrow but if you follow the markets at all you know that most of the action usually occurs at the beginning and end of the day.  Today was the 10th time this year that the DOW gained at least 250 points.  As a point of reference there were only 5 occurrences last year.  Let the volatility yo yo continue.

Just about everything turning RED this week

Week over week fund performance went red again this week.  The only two positions now in the black for the year are defensive plays with GLD (gold) and SDS (which is the double short of the S&P 500).  I added BMW this week as it hit my limit order buy of $22.  Same story on the option side of the fund with Disney being the exception but even it could not escape the wrath of the past week.

Basically the week of Thanksgiving usually has a 50/50 shot of being positive but this year was obviously a downward trend as both the DOW and S&P 500 were of about 4.5% respectively.  This week we saw a double dose as of bad news as Europe continues to see no improvement efforts with its fiscal crisis and the super committee came up empty.  In my opinion I didn't expect any real results coming from the group as compromise and bipartisanship is just not in the vernacular of congress men and woman these days.  I think this gave traders a reason to trade down this week which I should have anticipated.  However most of the long positions I wanted to stay in, so for the most part I just stood on the sidelines and watch the downfall.


This week I will likely look to add to current positions, pick through the watch list, or add some defensive positions such as some shorts or put positions.  Currently we trail our benchmark (Russell 3000) by about 4% YTD.  We have a lot of powder left in the keg with 81% of the fund in cash.

What are the Millionaires Investing in?

First of all Happy Thanksgiving.  This was my first Thanksgiving as a father and my wife and I enjoyed it with our new triplets in downtown Detroit at the traditional Thanksgiving day parade.  The kids met Santa for the first time without any meltdowns so I consider the day a success.


While combing through the articles of the day I found this interesting piece via the WSJ on how millionaires are making their investment choices

• Only one in ten millionaires are optimistic about the U.S. economy – the lowest since the survey started in 2006, and even below the 2008-2009 crisis levels.
• 75% surveyed are pessimistic about the economy’s prospects in the next six months.
• They say the private sector is generally working, but nearly half say the U.S. financial system has “serious flaws in how it’s working.”  In other words, they think Washington is incompetent, the U.S. is going to the dogs and Wall Street is still out of control. Sounds like most Americans.

Most indexes were down in steep fashion the first three days this week thanks to continued issues in Europe and the failure of the super committee.  On this day of thanks it probably best to take a moment to regroup and think about all of the things that we are truly thankful for as the relative bad news continues to swirl around us.  Remember someone always has it better than you and someone always has it worse than you.

Millionaires Control more of the World's Wealth

From the WSJ, we discover that the wealth of millionaires in the world increased 29% which was two times greater than the world as a whole.  The article also points out that Millionaires Control 39% of Global Wealth which is something that we keep seeing over and over is how so much wealth is controlled by so few individuals.  Below is a chart that appears in the article detailing the wealth pyramid and the number of people associated with each slice.

Despite all of the protests I would assume that most people would just like to end up on this pyramid somewhere.

The Best Six Months of the Year

Barry Ritholtz at the Big Picture put together A Tale of Two Seasons data regarding the seasonality of the market.  Many of you have probably heard the phrase sell in May, go away but the data here over a 52 year period is pretty astonishing.  One could argue that there is some potential data mining going on but either way you slice it tough to argue with the results.

What would be interesting is to see the breakout by sector/industry

The Life of Steve Jobs

This is a two part 60 Minute piece about Steve Jobs.  Besides being a creative genius what is remarkable about Jobs is that he was a far Superior manager than most people realized although his approaches might now work with most.

One of the best pieces that I have come across regarding Jobs was his commencement speech given at Stanford in 2005.  I've got this one saved for my triplets to share with them when they are oldest enough to understand the message.

What I like about these pieces is that is shows both the good and bad of Jobs.  Regardless, Jobs was truly remarkable person weather you like Apple or not.

Rage Against the Machine

Listening to a conversation this week on CNBC and I can't remember who the discussion was with but someone made the point that the Occupy Wall Street protesters are railing against the wrong people.  I would tend to agree.  The Economist had the following article Rage Against the Machine that discusses this point.

Rather than occupy Wall Street people should be occupying Washington.

Green Mountain crumbles after hours with sales and accounting disappointments

A big momentum play Green Mountain Coffee Roasters shares dropped 25% to $50.40 in late trades Wednesday after the company's sales fell well short of analyst expectations. Sales were forecasted to be $760.5 million vs. actual of $712 million.  


Most of you may use products produced by GMCR maker of the popular Keurig single-cup coffee brewer.  Green Mountain also produces its own line of k-cups as well as distribution agreement with the likes of Starbucks and Dunkin Donuts.


Hedge fund manager David Einhorn of Greenlight Capital who is short the stock has questioned the coffee company's accounting and transparency to investors. Here is the link to his detailed analysis that outlays his short position.  Before Wednesday's earnings report, Green Mountain shares had tumbled 27% in last month. But the stock was still up 104% year-to-date.

Full disclosure DWCM holds shares of GMCR in its portfolio, no personal position is held.

The Largest Private Company in the US

Who could tell me who the largest private company is in the US?  Think big AG and you have Cargill.  Growing up in the Midwest I am quite familiar with the name as you pass rows of corn you can see the Cargill signs who are the manufacturer of the seeds.  Cargill actually exited the seed business some time ago and diversified into other areas.

A few things to point out in the article

• On a size scale they would rank 18 in the Fortune 500
• 60% of revenues come from outside of the US
• Cargill does not own any farming land

After-tax income trend favors the 1%

In case you don't watch the national evening news or pick up the WSJ, this has been an attention grabbing head line as the government released income distribution trends from 1979 to 2007.  Clearly the 1% has certainly done well for itself.  What's sticks out to me besides the wide spread is the 81 to 99 percent who still do incredibly well but still nothing compared to the 1%.  Most people would see this class as extremely wealthy but even compared to the 1% they appear to be in a lower class.

Full report here

All Sectors Point to Overbought

According to Bespoke Investment we are in a very serious overbought situation in the S&P.   "The table below represents between two and three standard deviations above the sector's 50-day moving average, and moves into this range are considered extremely overbought.

With the recent run up in markets since the beginning of October it is no surprise to see some data that proves this out.  What does this mean for investors?  Tread lightly.  Usually October is one of the worst performing months of the year but this year just the opposite and enough to get the markets out of the red and into positive territory for the year.  Bespoke has indicated that this has been the 9th best month ever in the S&P 500

This week I added to my SDS position which is the leveraged inverse to the S&P 500.

Notice that most of the top returning months occurred in the 1930's?  I can't help but think of some similarities here with all of the volatility we have been experiencing and as I pointed out in a previous post that we could be having a bear market rally.

Is Siri a Google Killer?

Not sure how many of you have gone out and bought an iPhone 4S but I picked up on this article from Forbes on why-siri-is-a-google-killer.  The article emphasizes 6 points as to why Siri is such a killer.  Having not used the product....yet I can’t really comment on how well it works.  However like all things Apple it could be the next big growth story as it continues to improve upon its initial release.

1. Siri works
2. Siri has personality
3. Siri is hard to copy
4. Siri helps own the customer experience for Apple
5. Siri will vastly improve in the next 2 years based on all the data it’s amassing
6. When Siri opens up its API to 3rd party developers, this thing’s growth and adoption will go ballistic

The article stating that Siri is a Google killer in my mind is a stretch but if Siri does become a hit it only makes Apple that much stronger.

Morningstar Names Best 529 College-Savings Plans

For those of you looking at 529 College Savings plans, Morningstar has released it's list of top ranked plans.  I utilize Morningstar as third party research in managing portfolios and screening for investment ideas.

For those of you new to the world of 529 plans they are used as a college savings vehicle in which contributions are made on an after tax basis in which assets grow tax free and withdrawals are made tax free for qualifying expenses such as tuition and books.  I personally own and manage several plans and like them for the following reasons:

1. Anyone can setup an account for a child, friend, family member, etc. (Great for grandparents)
2. Although each plan varies, there is usually a high contribution amount vs. other savings plans which only allow you to contribute $2000 annually
3. You can transfer accounts between children if necessary
4. Most plans offer a variety of investment options.  If you don't like your own state plan you can always choose another. 

Another good college savings vehicle is actually an IRA.  Either a Traditional or Roth offers qualifying college expenses as a withdrawal option.  This gives you more control in case your child or person you are saving for does not attend college.

What's Your Kid Getting From College?

Being the father of new born triplets college is a little ways away for me.  However I manage 529 plans for clients and have discussions with people about how to save for college.  My wife and I have been having this discussion posted in the WSJ about weather college should be an option for our kids.  Many people would think that is ludicrous but when you start to break down college as a value proposition you can begin to see the merit of such an analysis.

A blogger that I follow James Altucher, has a few posts about how college does not work or alternatives to college (Why parents should not send their kids to college, 8-alternatives-to-college).  For example if you plan on raising an entrepreneur then college may not be the best option or value.  Both my wife and I went to college and as I see it our diplomas were an entry ticket for us to get into the game.  I don't think that it necessarily works that way any longer.  Even though employment is higher for those with college degrees what was the cost of that degree and what kind of earnings power does it create?  You can't just simply get rid of your college debt as you can with a credit card or mortgage debt even if you file for bankruptcy.

ECRI Recession Watch: Growth Index Virtually Unchanged

Here is some additional information on the ECRI recession call provide by Doug Short.  As noted the ECRI does not provide the analytical detail behind it's recession call and neither does is specify a recession date.  Even though the revised GDP at 2.5% was better than expected that number is rear view looking.

Again I believe we are suffering from a lack of confidence due to lack of government leadership and the  continued issues with the European financial crisis where one day you have a possible solution and the next day you do not.  It makes investing extremely difficult no matter what side of the trade you are on long or short.

ECRI Weekly Leading Index

Investing in Rocky Markets

Full disclosure although I didn't go to Notre Dame I am a huge Notre Dame fan.  I've been going there since age 7 and have season football tickets.  The Chief Investment Officer, David Malpass of the Notre Dame endowment fund and Jay Jordan were both on CNBC this past week discussing how they were able to grow the fund through the great recession.


Notre Dame has been one of the top performers among the large endowments of the past 15 years with a return rate of 12.1%, it is the 14 largest educational endowment in the country.  Here are some items to point our regarding their fund and strategy:

• Take a long-term horizon
• Asset Allocation - 30% hedge funds/30% private equity/25% Equities/15% Other
• 40% invested overseas
• Attempt to avoid leverage
• Corporate distress market (again long-term view)

A key take away as the managers point out is that most people can't invest in opportunities that an endowment invests in.  You can somewhat mirror their asset allocation strategy and take a long-term focus but getting into a hedge fund or private equity position is very difficult without a significant amount of capital.

Here is additional information on the Notre Dame endowment fund