World Beta Blog

In February of ’08 I wrote an article titled "When is it Time to Buy Gold Stocks?".

Please read that post for background info as I don’t want to repeat myself, but the ratio of gold stocks to bullion is near all time lows at .86. I used to track this every week for a whole host of commodities (oil, silver, etc). More than anything it can help give perspective to how expensive or cheap a basket of stocks is relative to what a commodity is doing – kind of a "forest from the trees" analysis.

So, either gold has to come down, or gold stocks need to come up. . .a lot. Here is a recent article on the newsletters being bullish on bullion. Hussman uses the gold/XAU ratio which currently is above 7. (Hussman talks about a similar method here and here.)

Historical ratio vs. gold stocks.

Below are charts for the 3,6, and 12 month excess returns (nets out the average return for gold stocks over the time period). There is a nice stair step that you want to see with this type of analysis. The highest ratios (stocks expensive relative to the commodity) result in future underperformance, and vice versa.

The ratio is around .86 – near the lowest reading ever. Absolute returns for this decile have been strongly positive at 14%, 20%, and 43% for the following 3,6,12 months, and up 90% of the time a year later.

A little regression, and the red line is where we are currently. . .

I’ll be speaking at the Inside ETFs Conference next week. If you are in Miami or Boca Raton (or going to the conference) drop me a line.

Jan 11-13/14

A reader asked me to post the equity curves for the timing model, so here they are:

1973 – 2008, log chart:

1973 – 2008, non-log chart:

1973 – 2008, log chart, including leveraged model:

1973 – 2008, non-log chart, including leveraged model:

1/2006 – 1/2008 out of sample returns:

Testing TradingMarket’s Rules

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Time to buy stocks?

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The best links of 2008

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Top young economists

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US Listed Private Equity was down an astonishing 64% in 2008, and International only slightly better at 61%. Are there any LPs that hedge their private equity exposure? I am referring to the end investor ie family offices, endowments, etc. Using a simple trendfollowing model makes a ton of sense to me , but I have never heard of anyone doing it. . .

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Careful, Big Brother is watching. (HT: Seadog)

“The new iPhoto has face-recognition software that will make it easier for users to create galleries of friends and family members. It also contains GPS geotagging that will allow users to sort their photos geographically.”

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Shilling sees more of the same in 2009…

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Var Har Har Har

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Results are below for 2008, frictionless (no fees or trading costs are deducted), and monthly and yearly rebalances. The model is out-of-sample since 2006. I will be doing an update to the white paper by the end of the month, so stay tuned!

S&P 500: -36.77%
TIMING: 1.33%

EAFE: -43.06%
TIMING: -8.17%

10 YEAR: 21.51%
TIMING: 21.51%

GSCI: -46.49%
TIMING: 1.08%

REITs: -37.33%
TIMING: -9.67%

Monthly Rebalance, equal-weighted:
B&H: -29.76%
TIMING: 1.59%

Yearly Rebalance, equal-weighted:
B&H: -28.43%
TIMING: 1.22%

That’s 36 profitable years in a row for the timing model (just barely thanks to bonds ripping in November and December!).

Click on table to enlarge:

I thought I would summarize a few ideas mentioned on World Beta over the past few months as potential trading ideas based on some simple quant research. 

1.  Follow a simple tactical asset allocation model.  With returns near flat the model performed admirably in 2008 – look for an update to the white paper with out-of-sample numbers sometime in late January.  The model is currently 100% in cash/bonds.

2.  Look for a particularly pronounced January Effect in beaten down microcaps.  I found that following the worst 10 years in stocks since 1927, the average return for microcaps in January was around 18% with no down years.  An investor could either go long microcaps outright or created a hedged position by shorting large caps.  Sample small and microcap funds are PZI, FDM, and IWC. Large cap ETFs include SPY and VTI.   I mentioned a screen for beaten down microcaps here. 

3.  Look for a bounce across the board in January.  In one study I examined asset class performance after a really bad month and the take-aways from this study were:

- It does not pay to buy an asset class after a really bad month for the following 1 month.
- 12 months later the return is not much different than average.
- 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month.

4.  Follow the smart money.  A simple method of following the most popular stock holdings of the Tiger Cubs would have beaten the market by 12% a year since 2000.  Current holdings include:

Qualcomm (QCOM)
Visa (V)
Mastercard (MA)
America Movil (AMX)
Priceline (PCLN)
Transdigm (TGM)
Snadridge Energy (SD)
SBA Communications (SBAC)
American Tower (AMT)
XTO Energy (XTO)
 
AlphaClone lets you create an custom group of managers (and while I am biased it is a lot of fun to play around with the software).  In a future post I will take a look at the Hedge Fund Consensus and Hedge Fund Best Ideas Portfolios that would have outperform the market substantially over the past 8 years.
 
5.  Get long Japan.   Japan is back to where they were in 1982, and have experienced three down years in a row – a setup that generates large returns of around 20-30% historically.
 
I am sure there are some more I missed, but I will take a look when I get back to the US.

Happy New Years!