• Forex: EUR/USD, the 1.30 flirt goes on …

  • Session Recap: China data disappoints; Yen weakness stays

  • Forex: GBP/USD resting above 1.4900

  • Why Recession Forecasting Matters….Still

    Last October I wrote an important Orcam Research piece that described why recession forecasting can make a big difference.  Not only are recessions important in understanding future policy (since high unemployment tends to result of recession, but from the perspective of portfolio management, recessions tend to be when the worse loss of capital occurs.

    Now, if one is able to build a cyclical model that helps decipher when recession probabilities are high, you can protect your portfolio from the periods when the market is at the highest risk of resulting in a permanent loss environment.   Likewise, calling a recession when one is unlikely to occur, results in being out of the market during a strong likelihood of gains.  Obviously, anyone who has been out of the market over the last few years has suffered from this.

    Anyhow, it was nice Bill McBride at Calculated Risk elaborating on this point in a weekend post.  Like me, he was not calling for a recession in 2011 or 2012.  I call this “getting the direction of the tide right”.  In the macro world, if you get the direction of the tide right you’re very likely to look like a pretty good swimmer.

    Anyhow, here’s more from Bill (via Calculated Risk):

    “Imagine if we could call recessions in real time, and if we could predict recoveries in advance. The following table shows the performance of a buy-and-hold strategy (with dividend reinvestment), compared to a strategy of market timing based on 1) selling when a recession starts, and 2) buying 6 months before a recession ends.

    For the buy and sell prices, I averaged the S&P 500 closing price for the entire month (no cherry picking price – just cherry picking the timing with 20/20 hindsight).


    The “recession timing” column gives the annualized return for each of the starting dates. Timing the recession correctly always outperforms buy-and-hold. The last four columns show the performance if the investor is two months early (both in and out), one month early, one month late, and two months late. The investor doesn’t have to be perfect!”


    The post Why Recession Forecasting Matters….Still appeared first on PRAGMATIC CAPITALISM.

  • Chasing the Next Hot Market

    By Walter Kurtz, Sober Look

    The slide below from Abbott Capital (a private equity fund of funds) tells an amazing story of private equity investing. The first half of the slide is a table that shows returns (IRR) for the full spectrum of private equity investing – from “early venture” to “mega buyouts”. For those unfamiliar with private equity, each cell shows the annualized return for funds of that “vintage year” (the year the fund was raised) through today. For example the 2000 “large buyout” funds produced an 18.6% annualized average return over their life (typically 7-9 years).

    The lower chart shows the dollar amounts raised for the two major private equity groups over the same time period: venture and buyout.

    In the late 90s venture investing became fashionable. But by time large amounts of capital poured into the asset class, the party was already over. The best performing investments had been made before the wave of dollars came into venture funds. Those who came in at the height of this investing “craze” ended up with sub-par returns.

    But investors don’t seem to learn about chasing the next “fashionable” product. They piled into the buyout space in size during the 2005-2007 period, while most of the strong returns in the space had been made on investments from a few years earlier.

    It’s an age-old pattern of investors listening to their “consultants” and following each other in ever-increasing numbers/amounts into a market where returns have already peaked. Years later the same investors look back and question the whole asset class, cutting back their allocations just when it may be time to enter that market again. And analysts look at the returns of many large institutional investors (public and private pensions, endowments, and insurance firms) and wonder why their performance has been consistently poor.

    sl11 Chasing the Next Hot Market

    Source: Abbott Capital Management LLC (click to enlarge)

    The post Chasing the Next Hot Market appeared first on PRAGMATIC CAPITALISM.

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