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Contrarian Investing Prof. Gerlach Sacred Heart University

Contrarian Investing Prof. Gerlach Sacred Heart University. Deborah J. Weir, CFA Author, TIMING THE MARKET (Wiley, 2005). Fundamental Economics As Contrarian Investing Because Emotions Get In the Way. SEC Registered to sell hedge funds MBA in finance: NYU Stern School of Business

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Contrarian Investing Prof. Gerlach Sacred Heart University

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  1. Contrarian InvestingProf. GerlachSacred Heart University Deborah J. Weir, CFA Author, TIMING THE MARKET (Wiley, 2005)

  2. Fundamental Economics As Contrarian Investing Because Emotions Get In the Way

  3. SEC Registered to sell hedge funds MBA in finance: NYU Stern School of Business Stamford CFA Society, Past President Deutsche Bank/Scudder: United Technologies, Rockwell, Mayo Clinic Instructor: NY Institute of Finance Background

  4. We Will Forecast • GDP • Interest rates (up or down) • Direction of stock & bond markets

  5. Yield curve shape Quality spreads Central bank actions Economic ForecastingTools

  6. Contrarian Tools? • These tools are fundamental economic analysis • People get caught up in emotion and overlook them • It is always “different this time”

  7. Ground your thinking in solid economic analysis to rise above hysteria. Old adage, “Keep your head while all about you are losing theirs.” New adage: Make money when all about you are losing theirs.

  8. 1) Yield Curve Shapes Positive Slope (normal) Negative Slope (inverted) http://stockcharts.com/freecharts/yieldcurve.html

  9. Curve Reflects Investor Expectations for Future Rates • Investors stay short if they expect rates to increase • Investors go long if they expect rates to decrease

  10. Asset Allocation Using Yield Curve Shapes • Positive slope – increase risk: buy stocks, real estate, gold • Negative slope – decrease risk: buy bonds or cash • US Federal Reserve uses the shape of the yield curve to help forecast the economy

  11. Economic Forecasting Theory Normal Curve, Normal Growth:Nov. 2004 Equities Inverted Curve, Recession:March 2007 Fixed-income or Cash Steep Curve, Inflation: July 2009 Gold, Foreign Currencies, Real Estate

  12. http://stockcharts.com/charts/YieldCurve.html Forecasting Practice The yield curve helps forecast the recent US investment cycle. Click on the “animate” option to see how these two markets move:

  13. Forecast the financial crisis of 2007 – 2009 and the decline of the S&P 500 Index. Inverted Curve 2006 http://stockcharts.com/charts/YieldCurve.html

  14. Normal Curve 2009 Forecast strong stock market. http://stockcharts.com/charts/YieldCurve.html

  15. Steep Curve 2010(3mo./10yr. Spread > 300 bp) Forecast inflation expectations. http://stockcharts.com/charts/YieldCurve.html

  16. Steep Curve 2009 - 2010 Inflation expectations weakened the US dollar. http://stockcharts.com/h-sc/ui

  17. Steep Curve 2009 - 2012 Inflation expectations increased the price of gold http://finance.yahoo.com/q?s=GLD

  18. Steep Curve 2009 – 2011 Inflation fears may end the decline in real estate. http://www.dallasfed.org/microsites/research/econdata/housing-charts.pdf

  19. Inverted Curve Forecasts recessions • Lower stock market • Higher bond prices (& lower yields) • Lower inflation • Stronger currency

  20. Ten-yr./Three-mo. Spread 1953–2012 http://www.clevelandfed.org/research/trends.cfm

  21. Stocks Inverse of Bonds Curve forecast stock market losses, bond market gains. S&P 500 Index 30-yr Bond Price http://stockcharts.com/charts/historical/

  22. Federal Reserve Bank Uses the Yield Curve http://www.clevelandfed.org/Research/Data/Yield_Curve/

  23. October 26, 2012 Covering September 26, 2012–October 26, 2012 Highlights   October September August 3-month Treasury bill rate (percent) 0.10 0.11 0.10 10-year Treasury bond rate (percent) 1.79 1.81 1.76 Yield curve slope (basis points) 169 170 166 Expected real GDP growth (percent) 0.6 0.6 0.6 Old Formula: GDP = 1.87 + (.97 X spread) New Formula: GDP is weighted by the previous growth rates Probability of recession in 1 year 8.2 8.1 8.5 This Site Has Monthly Updates http://www.clevelandfed.org/Research/Data/Yield_Curve/

  24. Applications to Global Economies • BRIC • PIIGS • Managed economies limit the use but still can indicate the direction of growth • 2011 indicators were negative

  25. Outlook for the BRICshttp://www.economist.com/news/economic-and-financial-indicators/21567095-trade-exchange-rates-budget-balances-and-interest-rates%20%20 Country 3-month 10-year BP Spread Brazil 7.10% 9.57% +274 Russia 7.66% 7.36% - 30 India 8.18% 8.21% + 3 China 3.80% 3.19% - 61 Given these spreads, what’s your forecast: GDP Interest rates (up or down) Inflation Currency Direction of stock & bond markets

  26. Outlook for PIIGS http://www.economist.com/news/economic-and-financial-indicators/21567095 -trade-exchange-rates-budget-balances-and-interest-rates%20%20 Country 3-month 10-year BP Spread *Portugal 0.19% 7.89% +770 Italy 0.90% 4.84% +394 *Ireland 0.19% 4.58% +439 Greece 0.19% 16.08% +1589 Spain 0.19% 5.74% +555 • No information for Portugal or Ireland in 2011 • Given these spreads, what’s your forecast: GDP Interest rates (up or down) Inflation Currency Direction of stock & bond markets

  27. 2) Quality spreads • Forecasts trouble in emerging markets (1998 Russian bond default) • Forecasts trouble in developed markets (1987 S&L crisis, 2008 crisis)

  28. Merrill-Lynch High-yield Index Constrained Less the Ten-year US Treasury Note: (sometimes not available & no history) http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html

  29. Wall St. Journal Publishes High-yield Index Nov. 2011 Nov. 2012 = 4.87% http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html

  30. Other Sources Federal Reserve Bank of St. Louis (two-day lag) Gives previous five days for easy comparison http://research.stlouisfed.org/fred2/series/BAMLH0A0HYM2

  31. You Can Get the Spread in Real Time Good for trading options during the day… High-yield ETF (JNK) – Ten-year yield http://finance.yahoo.com/q?s=JNK&ql=0 http://finance.yahoo.com/q?s=%5ETNX

  32. Is This Stock Market Recovery Sustainable? • Fiscal Cliff • Greek Default • Global Slowdown

  33. Bull Market Confirmed by Quality Spreads Merrill-Lynch High Yield Less the Ten Year Note

  34. 3) Central Bank Actions • Open Market Operations • Money Supply

  35. Federal Reserve Open Market Operations • Normal repurchase agreements = $3.25 billion daily prior to 9/11 • September 11, 2001 = $35 billion http://www.ny.frb.org/markets/omo/dmm/temp.cfm What is the Fed doing today? Tightening? Easing?

  36. Federal Reserve Controls Money Supply and the Shape of the Yield Curve http://www.dallasfed.org/assets/documents/research/econdata/us-charts.pdf Financial Crisis QE2 Market Turn QE3 Turn Turn?

  37. Yield curve shape Quality spreads Central bank actions Global Economic ForecastingTools

  38. Fixed-income Is a Good Data Set for Forecasting Economies and Markets Large Data Set (Eight Times the Volume of Equities) Depicts Investors’ Actions Rather Than Opinions Forward-looking; No Reliance on Historical Financial Statements Low Turnover and Transactions Costs Government influence on the shape of the yield curve works for you; not fighting City Hall

  39. Blog:http://timingthemarket.blogspot.com/ Twitter.com: @debweir Voices of New York Institute of Finance Faculty: http://www.nyif.com/blog.html Email DebWeir@WealthStrategies.bz Updates

  40. Contrarian InvestingProf. GerlachSacred Heart University Deborah J. Weir, CFA Author, TIMING THE MARKET (Wiley, 2005)

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