S&P 500's Worst Start to Year Since 2010?

That's right, according to bespoke (this is as of last week, Feb 18th). For all the talk of the "great rotation" from bonds/cash into equities and the melt-up reaction to qe3+, the market hasn't even kept up with the last two years. What does this mean, if anything?

The relative positions continue to hold this week in the resulting sell-off, with investor sentiment reflecting an abrupt reversal from highs (even before the indices fell):

 *Credit for both picture to Bespoke Investment Group

The previous two years' early out performance were matched only by the subsequent corrects - will history repeat itself?

Japan's "Exposion of Greatness"

Now that Soros has made another billion, this time from the yen, have things finally changed for Japan?

A recap: for decades now, the Nikkei and indeed the Japanese economy has languished despite having the 3rd largest GDP by country. After the Japanese asset bubble of the the late 80s, the Japanese unsuccessfully used lower interest rates to revive growth and left two lost decades. However, the Abe-trade has revived interest in the short yen/long nikkei macro trade:

Now that Japan's finance minister has explicitly set a stock market goal of 13,000 by March of this year, is this just be beginning? After all, if Bernanke said s&p 500 to 1600 in 2 months, wouldn't that be... eventful?

For reference, the quote above is from Tepper's CNBC/call from earlier this year which predicted an "explosion of greatness" for US equity markets. His reasoning included bull views on housing, autos.

A Tale of Two Funds

In my wanderings this weekend, I stumbled onto two funds which, on face, have similar strategies: the Yacktman Fund (YACKX) and the Hussman Strategic Growth Fund (HSGFX). The goal of both is long-term appreciation through investing in common stocks. There are some differences: the former allows up to 20% in foreign equity as well as some debt and the latter adds a focus on capital protection. Nonetheless, both focus on common stocks to grow capital.

How then, did one outperform the other by nearly 120% since 2009?

We are not talking a few percentage points or even double-digit differentiation through stock selection, and it is not like one fund bet everything on one stock Yacktman's largest position is 9%, Hussman's is 3%. Essentially, Yacktman doubled his fund while Hussman lost money. 

Where is the difference then? It seems that Hussman sold calls on equity indices which more than offset his long equity positions. The nearly 30% short/macro hedge is now the single largest position that, now way in the money, is an outright short position in us equities. This contributed to his fund losing more than 11% in 2012. An expensive hedge indeed. The ironic thing is that Hussman is the fund which adds the capital protection component and describes a strategy that combines valuation with market action. 

On the other hand, Yactkman focuses far more on company-specific factors such as high market share and and cheap purchase price. Indeed, there is little mention of the overall economy and more elaboration on what he defines as a "good business." He keeps things simple, buying good companies at good prices.

My view: Hussman doesn't believe he is trying to time the market, but he is. The fact that he sends out weekly commentary is a pretty short term viewpoint, and far more importantly, his market positioning is short term - using options (especially selling calls) is by definition a time-dependent vehicle.  It doesn't matter if they are long dated options - there is an inherent path/time dependency risk he is taking and he could be "right" and still lose too much capital before. His arguments, on the other hand, don't have have a time-dependent path to resolution - i.e. risk assets are overbought, but when will then come down then? 

Then again, he has been around longer than most of us have been active (fund at least since 2000) in the markets. Perhaps Hussman will have his day?



   
 

Managed futures, CTAs and trend-following

It is no secret that hedge funds have been all the rage in the past decade, epitomized perhaps by this 2005 article in nymag dubbed "Get Richest Quickest." From Dan Loeb's heated exchanges with recruits to Paulson's credit derivative coup, these diverse set of funds have flourished under the legal exemptions of the SEC. However, the swash-buckling nature seen here is far from the only source of excitement. Before quants, fundamental short-selling, hft, there was the cult of trend-following commodity trading advisors (usually synonymous with managed futures).

Trend-following is a set of systematic, medium term strategies (weeks or longer holding period) which trade usually in liquid futures markets and were popular in the 70s and 80s. These funds are regulated by the CFTC (Commodity Futures Trading Commission) and follow a different set of rules regarding disclosure, fees etc.. In fact, performance tables and other details for most ctas are public info at http://www.iasg.com/ (free registration).

In essence, trend-following is almost antithetical to traditional ben-graham value-investing. It buys high, sells higher, shorts low, covers lower. Typically, there is no attempt to "value" assets - it merely judges whether a trend is valid and seeks to ride it until the trend exhausts itself:

 
(source: http://www.tradingopinions.com/wp-content/uploads/2012/11/trend_followers.jpg)

This is of course a highly simplistic description; nonetheless it captures the fundamental beliefs in trend-following which have resulted in outsized returns:

(Source: http://trendfollowing.com/images/comp1.jpg)


This is not an endorsement by any means - like any other strategy group the winners could have just been lucky just as much as there is a successful "school"  a la Graham and Doddsville. Such strategies continue to evolve and some, such as Jerry Parker of Chesapeake Capital continue to manage hundred-million-dollar funds successfully.