Hello CNBC readers! Thank you for checking out our blog. Since we last wrote, things have not come easy for the Johnson team (and our ranking reflects this). But alas, such is the nature of the beast when investing. We remain committed to our strategy and are confident that it’s just a matter of time until the pendulum swings back in our direction.» Read More
One of the fundamental measures of the strength of consumer demand is housing. Consumer decisions are necessarily dependent on what is happening with their largest expenditure/investment. Today, existing home sales in September were down 3% month over month. On Wednesday, housing starts for September were up an annualized 15%, driven by strength in multifamily homes (up 51.3%), but not single-family homes (up only 1.7%).
As a long-short fund manager, your objective is to put dollars to work in issues that offer the most opportunity for above average returns. If no such opportunity exists, the better play is to hold to a strong risk management policy and avoid the market altogether. Sitting in cash (i.e. having no investments in your portfolio) from time to time has a few key benefits that are often overlooked.
An interesting backdrop to the recent rally in equity markets has been a somewhat persistent rise in some indicators of risk in the market that give us pause. Looking at the TED spread, or the spread between the 3 Month T-bill and 3 Month Libor we see that it currently stands at just under 40bps, this is its highest level since QE2 was announced last fall.
Last week, two of my finance colleagues and I took our team to lunch to celebrate the fun of the competition to date. We hope all your teams are enjoying the ride as much as ours. We find our students are using a lot of what we’ve taught them, although sometimes in unexpected and creative ways.
With earnings season officially underway, the first crop of announcements has proven to be somewhat disappointing. Combined with negative reactions to Alcoa (AA), Fastenal (FAST), and JP Morgan (JPM), the market is in a strange state of flux. The Nasdaq (up 13% in 8 days) is demonstrating that it wants to move higher, but there’s no leadership to support the move. The best growth stocks always power the market in both directions. The market is yearning for leadership, but all of the leaders are tired. Perhaps earnings season will usher in a new crop of institutional favorites. If an uptrend is to continue, a catalyst is needed and it must come in the form of liquid, leading stocks.
We agree with our friends at Cornell about the need to deviate from what many of us spend time learning in business school – fundamental analysis. James Mackintosh echoed this view in his column in the FT yesterday. Correlations across sectors and asset classes are very high. When the bulls charge the bears hibernate, as we’ve seen this week. People are investing in binary bets on geopolitical events. That is a complex game. Take Europe – Sure, there is a plan to have a plan, but who will make the plan? The Troika, Merkel or Shäuble? This is an Organizational Behavior - Financial Economics mishmash case study nightmare.
Its October, the leaves are starting to change, Halloween costumes are in stores, ciders are starting to be spiked and apparently you can flavor anything with pumpkin and sell it (beer, coffee and even ice cream). It also means that Q3 earnings are upon us.
Pollution persists. From one day to the next we continue to see similar stories in the news, yet hope for a different outcome. The reality of the financial condition faced by Europe (and to a far lesser degree the U.S.) is similar to that of environmental pollution, which is to say that anything short of a permanent and complete solution does not restore confidence. Clearly, this is evidenced by the amount of volatility seen in the markets since the beginning of the CNBC Million Dollar Portfolio Challenge, with the well-timed use of levered ETFs being an effective way of capitalizing upon such movement.
I’d like to take a moment to talk about some of the events that took place last week at Fisher College of Business. On Wednesday morning our team had an opportunity to work with a CNBC camera crew to film a team meeting and conduct a live broadcast, while also being interviewed by another crew for the TV show Ohio Means Business. While that provided a great experience, the excitement was only beginning!
Here are some observations that the Ross team has made through MBA-Faceoff the first three weeks of trading: 1) For all of the strategizing/commentary so far in the MBA Face-off Blogs so far, it appears that the primary source of competition returns is Bonus Bucks 2) Three Georgetown team members have bolted for the Atlantic Coast Conference 3) Ohio State is just happy to be ranked
Our economy continues to trudge along. In a time when rates are already at historic lows, it’s difficult to see outsized benefits from Operation Twist. Further fiscal stimulus is also unlikely with deficits at around 10% of GDP. During a time when the Fed is out of bullets and Congress unwilling to enact other economic boosting measures, it’s hard to see where the domestic economic recovery would come from. Unemployment has stayed at 9.1%, dampening chances of increases in housing prices. Corporations are holding off investments despite historically low borrowing costs because there are few worthwhile projects in the U.S. Some investors, including George Soros, are arguing that we’re already in a recession.
Who or what can? To be fair, September estimates were clearly modest after the disappointing (although now revised) August number. So the 103,000 new jobs added last month shouldn’t impress anyone. Even if job creation continues at this rate, it won’t be enough to crack a dent in the 9.1% unemployment. This does not bode well for the US economy, nor asset prices that are correlated with it.
From Tuesday’s lows to Thursday’s close, the Nasdaq climbed an impressive 9%. A reasonable person should ask themselves, “Is this sustainable?” An old maxim seems to be appropriate to help explain this action: “In the stock market as in life, the road to the top comes by the stairs and the trip back down usually happens via elevator.” The fact that we came screaming off the bottom goes against this philosophy and puts into question the validity of the move.
After climbing out of the basement last week, Team Tepper is focused on taking targeted risks to catch the Chicago Bears. Looking at the impressive returns of the Booth team, we see that they are clearly net short, which has paid off so far. Ohio State seems to be adopting a similar strategy. We do not have a great deal of confidence about the direction of the markets with all these Seinfeldian rallies and retreats about nothing.
OK, to start, a quick recheck of our team goals: 1) Crush Michigan (more or less, but it’s a long competition), 2) Shout-out on Mad Money (negative—currently considering more proactive efforts) and 3) Win (Booth/Fisher – go buy BAC or something).
Tuesday was not for the faint of heart. All intra-day activity suggested another close at the day’s low - right up until the rumor mill went to work. In the last forty five minutes of trading, the S&P roared upward on news that European leaders were going to create a plan for Greece. And all this time I thought they had already done that…
MBA Face-off: Meet The Georgetown Team
If you’re going through Hell, keep going…Winston Churchill said these words, presumably during a crisis much greater than the one we are in currently. At the moment our team takes solace in these words, and we are constantly on the search for ways to recover some of our drawdowns. Any aberration in normalcy presents opportunities, lurking in a far corner. As we had our flashlights on full beam over the last few days looking for the seemingly elusive opportunities, we stumbled upon some interesting facts:
As our colleagues at Ohio State noted just this week, “with the constantly changing tone of the markets it appears as if anything is possible.” After the markets dipped on Wednesday, news came this morning that the American economy grew at a rate .3 percentage points higher than predicted and that jobless claims fell below 400,000 for the first time in almost two months to 391,000. Along with word that Germany, Europe’s largest economy, approved the expansion of the Euro bailout fund, stocks gained enough this morning to erase yesterday’s losses and to help out our portfolios a bit.
During the current week, our consistently bearish outlook has not proven successful. After a robust debate, we decided to maintain our recent short positions even during the market rally of the past few days. We think that this is mostly a short-covering rally, and do not trust the recent positive macroeconomic headlines to last. That being said, we are actively looking to add to our short positions should this current rally continue.