What Kind Of Investor Are You? The Market Doesn't Care!

Via ConvergEx's Nick Colas,

Our monthly look at asset price correlations finds it’s getting just a little bit easier to beat the U.S. stock market with savvy sector bets. OK, not by a lot: average correlations for the 10 sectors of the S&P 500 to the index itself are down to 79.9% versus the year’s typical reading of 80.7%. The best hunting grounds have been in Technology (84.9% correlation, down from +90% the last three months) and, surprisingly, Utilities (32.9% correlation, down from 47-77% in the last three months).  Both have beaten the overall market over the last month as well. Looking forward, the quickest way to even lower correlations (which are good for active managers and passive investors alike) is for the Federal Reserve to move on rates sooner rather than later.  By our reckoning, the currently still-high correlations show that markets don’t quite think the Fed is moving in September.  If they did, correlations would be dropping more quickly.

In my 25 years doing just about every job in finance I have had the chance to meet a wide array of money managers. This experience has taught me that there are only three kinds of people that can reliably “Beat” the market once you put aside obvious inputs like competent risk management and a stress-resistant personality. These are:

The savant.  There is a certain type of person that can read price movements and consistently extrapolate signal from noise.  You could plop them on a desert island with little more than a Bloomberg machine, some dip, a Chinese takeout menu and some way to make trades and they would still make money.  A lot of it.  They tend to read to the New York Post, never miss a free meal, and will die between 4pm and 9:30am because during trading hours nothing will deter them from seeing the close.

The information hound.  This breed makes it their business to know every single important source of knowledge about the companies in which they invest.  They don’t know everything, but they know where to find any piece of information necessary to price a security.  Twenty years ago this type of investor visited every single company they followed every quarter. Now, they do that AND they hire satellites to fly over production facilities AND use online tracking software to monitor company fundamentals in real time.  Effective activists fall into this camp, by the way.

The big picture thinker. Some people are just better than the population as a whole at assimilating large quantities of information and synthesizing it into profitable action.  The advent of computerized trading over the last decade has pushed a lot of these individuals into routinizing their approach into systematic algorithms, of course.  But the best of the bunch see linkages through the capital markets the way spiders feel their webs – in analog waves, not digital bits and bytes. If the butterfly flaps its wings in Thailand, they know to get short insurers in Texas.

All three types of investors/traders need the same thing to deliver the best results: asset prices that move at least somewhat independently of each other.  After all, their special set of skills is in separating the wheat from the chaff, the good from the bad, or the stars from the airplane lights. The more those differences cause divergent prices, the higher the potential profit.  For example, consider the S&P 500 – how many names in this index are up more than 20% on the year?  The answer is 70 by our count, or just over 1 in 7.  Only one name is a clean double in 2015: Netflix. Conversely, there are 60 names in the index that are down more than 20% but only three – Freeport-McMoRan, Consol Energy and Chesapeake Energy – are down by 50% or more. That leaves 372 names in the S&P 500 in a performance band of +20% to -20%.  Close down the range to +10/-10%, and we count 197 names in that range.  That’s 40% of the entire S&P 500 clinging to a pretty narrow band around the “Unchanged on the year” line.


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zerohedge.com/Tyler Durden/ August 6,2015

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Sun Tzu on Value Investing

In 506 BC, the ancient Chinese general Sun Tzu was in command of a vast army of the Wu Kingdom, preparing for battle against the neighboring Chu.

Sun Tzu and his colleagues immediately sensed that the Chu army lacked the will to fight; so the general acted quickly and ordered the main attack to seize the initiative.

His surprise assault spurred a chaotic route of the Chu army, bringing an easy, low-risk victory for Sun Tzu.

This battle exemplifies Sun Tzu’s approach to military strategy, which he later outlined in his book Art of War.

Like all Chinese philosophy at the time (Sun Tzu was a contemporary of Confucius), there’s a beauty in the simplicity of his wisdom, all of which still applies today.

I was re-reading Art of War recently, and I couldn’t help noticing how much the principles apply to investing.

We’re living through some of the most insane financial conditions in modern history.

The Western world is drowning in debt, and entire nations are starting to go bankrupt despite interest rates being at record lows.

A multi-trillion dollar financial bubble in the second largest economy in the world has started to burst.

National pension funds are running out of money. Banking systems are dangerously illiquid and undercapitalized. Even central banks are borderline insolvent.

There’s clearly a tremendous amount of risk in the system.

And yet many western stock markets are crossing all-time highs with historically dangerous valuations, and retail investors are piling in like the good times will last forever.

In Chapter four of Art of War, Sun Tzu wrote that “he who is destined to defeat first fights and afterwards looks for victory.”

This is precisely what most retail investors are doing right now: they throw money at the market and hope that their stocks go up.

Expecting success from haphazard actions is as pitiful an investment strategy as it is a military strategy.

Sun Tzu continues, “The skillful fighter puts himself into a position which makes defeat impossible, and does not miss the moment for defeating the enemy.”

Victory comes from having a completely defensible position… and having the guts to seize the advantage when one is presented.

In investing, a defensible position is a strong, well-managed, highly profitable company with a pristine balance sheet and very little debt, and a stock price that trades at reasonable (or discount) valuations.

Better still, an even more defensible position is staying out of the market entirely, holding cash as you wait patiently to strike at the right opportunity.

(Chapter III- “He will win who knows when to fight and when not to fight.”)

As Sun Tzu wrote, it’s critical to not miss those opportunities to attack.

This happens from time to time when blood is running in the streets– the market presents no-brainer opportunities to buy high quality assets at a discount.

A great general will have the courage to seize the advantage. And a great investor will have the courage to buy assets that are widely despised and incredibly unpopular.

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sovereignman.com/Simon Black/August 3, 2015

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Smart Money Dumps Assets at Record Pace, But Who the Heck Is Borrowing and Buying Like There’s No Tomorrow?

Private Equity is a big force in the investment scene. There are nearly 4,000 of these firms in the US, and they’ve invested in about 13,000 companies. They’re considered the “smart money” because of their acumen, insider knowledge, and ability to time the markets, which they have to in order to profitably exit their their long-term illiquid investments.

OK, even the smartest among them got caught with their pants down last year when the oil price crashed. And those that invested in natural gas drillers have been regretting this move for years, after the natural gas price crashed in 2009 without ever really recovering since. Fracking, which boomed thanks to a near endless flood of money from Wall Street, including PE firms, has dished out costly lessons in return.
So, even the ultimate “smart money” can get carried away by its own hype. But recently, they’ve been doing something else: they’ve been dumping existing investments at record pace.

In the second quarter this year, exit volume by US-based PE firms “exploded” to $125 billion, according to a report by the Private Equity Growth Capital Council. This includes sales to the public via IPOs and to “strategic and financial investors,” such as corporations.

It brought the first-half exit volume to $195 billion, up 46% from the same period in 2014 and up a stunning 275% from the same period in 2013. Something is going on, and they want out.

And they’re not going to slow down anytime soon, “as corporate acquirers clamor for deals,” according to The Wall Street Journal:

On Monday, McGraw Hill Financial agreed to buy SNL Financial LC, the data provider backed by New Mountain Capital LLC, for $2.2 billion. That came on the heels of a $2.35 billion deal launched by WPX Energy Inc. for First Reserve-backed RKI Exploration & Production LLC.

They figured out, in an environment where nearly all assets are overpriced, it’s a great time to sell.

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wolfstreet.com / Wolf Richter/ August 2, 2015

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As China Admits It Lied About Its Local Debt Levels, Local Billionaires Are Quietly Liquidating Their Assets

It was almost exactly two years ago, when during China's long-forgotten attempt to actively deleverage its economy (remember that? good times...) we commented on the country's s first attempt to estimate what its local government debt is since June 2011.

This is what we said in July 2013:

"China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleed-inducing $1 trillion, or roughly 15% of China's goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is)."

Not at all surprisingly, after conducting the goalseeked "exercise" of estimating its local government debt, the final number was well below the worst case or even average scenario, while the level of NPLs was at a very leisurely pace around 1% of total.

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Zerohedge.com/Tyler Durden/ August 2, 2015

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