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Transcript
Contrarian Investing
Prof. Gerlach
Sacred Heart University
Deborah J. Weir, CFA
Author, TIMING THE MARKET (Wiley, 2005)
Fundamental Economics
As
Contrarian Investing
Because
Emotions Get In the Way
2
Background
• SEC Registered to sell hedge funds
• MBA in finance: NYU Stern School of
Business
• Stamford CFA Society, Past President
• Deutsche Bank/Scudder: United
Technologies, Rockwell, Mayo Clinic
• Instructor: NY Institute of Finance
3
We Will Forecast
GDP
Interest rates (up or down)
Direction of stock & bond markets
4
Economic Forecasting
Tools
1) Yield curve shape
2) Quality spreads
3) Central bank actions
5
Contrarian Tools?
• These tools are fundamental economic
analysis
• People get caught up in emotion and
overlook them
• It is always “different this time”
6
Ground your thinking in solid economic
analysis to rise above hysteria.
Old adage, “Keep your head while all
about you are losing theirs.”
New adage:
Make money when all about you are
losing theirs.
7
1) Yield Curve Shapes
Positive Slope (normal)
Negative Slope (inverted)
http://stockcharts.com/freecharts/yieldcurve.html
8
Curve Reflects Investor
Expectations for Future Rates
• Investors stay short if they expect rates to
increase
• Investors go long if they expect rates to
decrease
9
Asset Allocation Using Yield Curve
Shapes
• Positive slope – increase risk: buy
stocks, real estate, gold
• Negative slope – decrease risk: buy
bonds or cash
• US Federal Reserve uses the shape of
the yield curve to help forecast the
economy
10
Economic Forecasting Theory
Normal
Curve,
Normal
Growth:
Inverted
Curve,
Recession:
Nov. 2004
March 2007
Equities
Fixedincome or
Cash
Steep Curve, Inflation:
July 2009
Gold, Foreign Currencies, Real Estate
11
Forecasting Practice
The yield curve helps forecast the recent US
investment cycle.
Click on the “animate” option to see how these two markets
move:
http://stockcharts.com/charts/YieldCurve.html
12
Inverted Curve 2006
Forecast the financial crisis of 2007 – 2009 and
the decline of the S&P 500 Index.
http://stockcharts.com/charts/YieldCurve.html
13
Normal Curve 2009
Forecast strong stock market.
http://stockcharts.com/charts/YieldCurve.html
14
Steep Curve 2010
(3mo./10yr. Spread > 300 bp)
Forecast inflation expectations.
http://stockcharts.com/charts/YieldCurve.html
15
Steep Curve 2009 - 2010
Inflation expectations weakened the US dollar.
http://stockcharts.com/h-sc/ui
16
Steep Curve 2009 - 2012
Inflation expectations increased the
price of gold
http://finance.yahoo.com/q?s=GLD
17
Steep Curve 2009 – 2011
Inflation fears may end the decline in real estate.
http://www.dallasfed.org/microsites/research/econdata/housing-charts.pdf
18
Inverted Curve
Forecasts recessions
• Lower stock market
• Higher bond prices (& lower yields)
• Lower inflation
• Stronger currency
19
Ten-yr./Three-mo. Spread 1953–2012
http://www.clevelandfed.org/research/trends.cfm
20
Stocks Inverse of Bonds
Curve forecast stock market losses, bond market gains.
S&P 500 Index
30-yr
Bond
Price
http://stockcharts.com/charts/historical/
21
Federal Reserve Bank Uses the Yield Curve
http://www.clevelandfed.org/Research/Data/Yield_Curve/
22
This Site Has Monthly Updates
October 26, 2012
Covering September 26, 2012–October 26, 2012
Highlights
October September August
3-month Treasury bill rate (percent) 0.10
0.11
0.10
10-year Treasury bond rate (percent) 1.79
1.81
1.76
Yield curve slope (basis points)
169
170
166
Expected real GDP growth (percent) 0.6
0.6
0.6
Old Formula: GDP = 1.87 + (.97 X spread)
New Formula: GDP is weighted by the previous growth rates
Probability of recession in 1 year
8.2
8.1
8.5
http://www.clevelandfed.org/Research/Data/Yield_Curve/
23
Applications to Global Economies
• BRIC
• PIIGS
• Managed economies limit the use but still
can indicate the direction of growth
• 2011 indicators were negative
24
Outlook for the BRICs
http://www.economist.com/news/economic-and-financial-indicators/21567095trade-exchange-rates-budget-balances-and-interest-rates%20%20
Country
Brazil
Russia
India
China
3-month
7.10%
7.66%
8.18%
3.80%
10-year
9.57%
7.36%
8.21%
3.19%
BP Spread
+274
- 30
+ 3
- 61
Given these spreads, what’s your forecast:
GDP
Interest rates (up or down)
Inflation
Currency
Direction of stock & bond markets
25
Outlook for PIIGS
http://www.economist.com/news/economic-and-financial-indicators/21567095
-trade-exchange-rates-budget-balances-and-interest-rates%20%20
Country
*Portugal
Italy
*Ireland
Greece
Spain
3-month
0.19%
0.90%
0.19%
0.19%
0.19%
10-year
7.89%
4.84%
4.58%
16.08%
5.74%
BP Spread
+770
+394
+439
+1589
+555
•No information for Portugal or Ireland in 2011
Given these spreads, what’s your forecast:
GDP
Interest rates (up or down)
Inflation
Currency
Direction of stock & bond markets
26
2) Quality spreads
• Forecasts trouble in emerging markets (1998
Russian bond default)
• Forecasts trouble in developed markets (1987
S&L crisis, 2008 crisis)
27
Merrill-Lynch High-yield
Index Constrained Less the Ten-year
US Treasury Note:
(sometimes not available & no history)
http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html
28
Wall St. Journal Publishes High-yield Index
http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html
Nov. 2011
Nov. 2012 = 4.87%
29
Other Sources
Federal Reserve Bank of St. Louis (two-day lag)
Gives previous five days for easy comparison
http://research.stlouisfed.org/fred2/series/BAMLH0A0HYM2
30
You Can Get the Spread in Real
Time
Good for trading options during the day…
High-yield ETF (JNK) – Ten-year yield
http://finance.yahoo.com/q?s=JNK&ql=0 http://finance.yahoo.com/q?s=%5ETNX
31
Is This Stock Market Recovery
Sustainable?
•Fiscal Cliff
•Greek Default
•Global Slowdown
S&P October 1 - Nov. 23, 2012
S&P
12
11
/1
9/
20
12
11
/1
2/
20
2
11
/5
/2
01
12
10
/2
9/
20
12
10
/2
2/
20
12
10
/1
5/
20
2
10
/8
/2
01
10
/1
/2
01
2
1480
1460
1440
1420
1400
1380
1360
1340
32
Bull Market Confirmed
by Quality Spreads
Merrill-Lynch High Yield Less the Ten Year Note
12
11
/1
9/
20
12
11
/1
2/
20
2
11
/5
/2
01
12
10
/2
9/
20
12
10
/2
2/
20
12
10
/1
5/
20
2
10
/8
/2
01
2
5.4
5.2
5
4.8
4.6
4.4
4.2
4
3.8
10
/1
/2
01
%
Quality Spread Oct. 1 - Nov. 23, 2012
33
3) Central Bank Actions
• Open Market Operations
• Money Supply
34
Federal Reserve Open Market
Operations
• Normal repurchase agreements = $3.25
billion daily prior to 9/11
• September 11, 2001 = $35 billion
http://www.ny.frb.org/markets/omo/dmm/temp.cfm
What is the Fed doing today? Tightening?
Easing?
35
Federal Reserve Controls Money Supply and the
Shape of the Yield Curve
http://www.dallasfed.org/assets/documents/research/econdata/us-charts.pdf
Financial Crisis
QE2
Market Turn
QE3
Turn
Turn?
36
Global Economic Forecasting
Tools
1) Yield curve shape
2) Quality spreads
3) Central bank actions
37
Fixed-income Is a Good Data Set for
Forecasting Economies and Markets
Large Data Set (Eight Times the Volume of Equities)
Depicts Investors’ Actions Rather Than Opinions
Forward-looking; No Reliance on Historical
Financial Statements
Low Turnover and Transactions Costs
Government influence on the shape of the yield
curve works for you; not fighting City Hall
38
Updates
Blog:http://timingthemarket.blogspot.com/
Twitter.com: @debweir
Voices of New York Institute of Finance
Faculty: http://www.nyif.com/blog.html
Email [email protected]
39
Contrarian Investing
Prof. Gerlach
Sacred Heart University
Deborah J. Weir, CFA
Author, TIMING THE MARKET (Wiley, 2005)