Investment Strategy: Risk Parity

Some say that the benefits of diversification are enhanced by "risk parity" strategies.  The Financial Times had a good article on this increasingly-popular investment approach.

... (The) formula for diversifying is not to spread money equally between asset classes, but to spread risk, in a concept known as risk parity.

This approach allows investors to specify the risk they can accept, measured by volatility, then maximise the return they can get for that risk.

Please read more here:
http://www.ft.com/cms/s/0/10cd4030-af0b-11e1-a8a7-00144feabdc0.html#ixzz1xU1ox0JG

Risk Parity approaches have been growing in popularity.  However, the use of leverage for some of the lower risk approaches means that this strategy is not for everyone.  Some investors -- and especially institutional investors -- prefer to avoid leverage.  Indeed, the investment policies of some large institutions prohibit the use of leverage.

Our work and investment approaches are similar to risk parity methods.  In addition, our strategies adjust portfolio allocations / mixes based on technical and fundamental indicators and market action.

A Sobering Account: The Corruption of America

Here is a very sobering report on the many problems that face America -- and the world. In particular, the report, entitled "The Corruption of America" by Stansberry Research -- discusses corruption within the government, corporate America, the consumer (and debt), and more.

We have lost our sense of honor, humility, and the dedication to personal responsibility that, for more than 200 years, made our country the greatest hope for mankind. I want to detail some of the factors that gave rise to the current entitlement society. We have become a country of people who believe their well-being is someone else's responsibility.I've labeled these problems: The Corruption of America.

Read more here:

http://www.stansberryresearch.com/pub/reports/201112PSI_issue.html#continue

S&P Earnings - Q3 record!

Here is an excerpt on S&P earnings.  Earnings and fundamentals are looking up...

Recession fears or not, based on Corporate America’s latest financial results, happy days are here again.

With nearly 90% of S&P 500 companies having reported, the third-quarter earnings season is on pace for a record, according to Bespoke Investment Group.

S&P 500 SPX companies are on pace for overall earnings of $25.42. The four quarter trailing earnings total $94.77, topping the old record of $91.47, which was set in the second quarter of 2007.

Read more here:


http://blogs.marketwatch.com/thetell/2011/11/07/happy-days-are-here-again-for-sp-500/

Oversold Indicators turn Bullish 7/29/11

Our overbought/oversold indicators are turning bullish at current S&P levels.  The S&P currently stands at about 1296.  Our intermediate-term overbought/oversold indicators last triggered a "neutral" signal on June 24th, when the S&P was at 1282.  The market has been very volatile, with spikes in both directions -- based on news related to "debt talks" as well as the economy.  

Our long-term stock market models remain long.  The market will continue to be volatile -- as debt talks continue, the potential for credit downgrades "cast a shadow," and as the economy struggles to emerge from the recession.  

On the Budget, Default and Potential Downgrade

We normally focus on the technical moves within the financial markets, but enjoyed this article on the Washington "happenings."

Washington (CNN) -- With America now perilously close to default, here's where I sense we stand. My observations may be off as I have only had a brief time in Washington to take measure, but let me give it my best shot.

First off, the good news: The next several days are likely to be tortuous, but odds are shifting now in favor of a resolution that will prevent default. Behind the scenes, congressional leaders on both sides are talking to each other about ways out of this mess -- talks that are quiet, frequent and urgent.

Importantly, the two key plans now on the table -- one from House Speaker John Boehner, the other from Senate Majority Leader Harry Reid -- bear important similarities. Both are based squarely on spending cuts, and the Democrats aren't now pushing for tax increases. That makes it easier to find common ground.

Finally, there are hints that if a bipartisan deal is shaping up, President Barack Obama may be willing to accept an extension of the debt ceiling for a couple of weeks, give or take a bit. Default is still a serious threat, but there may be enough will and enough time to hammer out a compromise that both sides can swallow.

Read more here:

http://www.cnn.com/2011/OPINION/07/26/gergen.debt.solution/index.html?hpt=hp_t1

Comparing Greece to US: OK, but need to tighten belts

"...how different, really, is the United States?

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are..."

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Check out this article for more info.

http://www.nytimes.com/2010/05/12/business/economy/12leonhardt.html

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Flyer RMBS ready to Fly??

One of the stocks we mention as a "flyer" (high potential return, high risk) has been making thenews. Here is a recent mention in "Smart Money" / "Barrons."

http://www.smartmoney.com/Investing/Stocks/How-to-Play-the-Odds-on-Rambus/?afl=yahoo

If the court finds in its favor, the damages would be tripled to roughly $13 billion. Bulls deduct taxes from that result, divide it by Rambus' 117.5 million shares outstanding to determine that the company will enjoy a $66-per-share windfall.

Runaway Markets: Technical Analysis and Fundamentals

The stock market has been in a sustained rise since its March lows. Using 20-20 hindsight, people have said it was an inevitable bounce from scary lows, followed by a short squeeze that lasted longer than expected (due to the excessive fear and shorts in the market). Whatever the reasons, equities have been in a runaway market for almost six months now -- with the S&P rallying an amazing 50% in just five months!

We agree with many naysayers -- that our global economy isn't the greatest -- and that this might be a bear market rally. However, we are technical traders and our mentality is to "shoot first and ask questions later." Emotions can really move markets and cause them to overshoot -- often past where fundamentals might dictate. For the most part, our trading systems have kept us on the right side of the market (stocks, bonds, currencies, etc.) during this rally. We don't "fight the tape" -- and let the markets direct our actions. We believe that emotions and technical action move the market in the intermediate and short-term, but that fundamentals move the markets in the long-term.

We're wary of the direction that the world's economic fundamentals will eventually move the markets, but hope that our technical approach to the markets will keep us on a good path.