Punch line: the current UST10y yield of 3.80%, combined with a VIX-adjusted risk premium of 1.88% (VIX@14), would suggest the stock market (S&P 500) valuation needs to compress by 13% to get to equilibrium fair value. Given the current stock-market insouciance,...

Punch line: the current UST10y yield of 3.50%, combined with a VIX-adjusted risk premium of 1.97% (VIX@17), would suggest the stock market (S&P 500) valuation needs to compress by 7% to get to equilibrium fair value. The oft-cited Fed model, popularized by...

Punch line: the halcyon days of risk-parity alchemy saw both stock and bond prices trend upwards over time, while their negatively correlated ST returns provided a risk-reducing diversification benefit; manna from heaven! Financial prognosticators will often reference...

Punch line: a stock-bond (price) correlation of 0.25 combined with a stock-bond risk premium of 4%, advocates a ~60% stock allocation (~40% bond allocation). Optimal stock-bond allocation, in a mean-variance framework, is heavily dependent on the stock-bond...

Punch line: for a retirement longevity horizon of 30 years, and a 95% confidence threshold of not outliving your wealth (5% likelihood of wealth shortfall), the initial wealth corpus required is 31.1 times the target real annual spend. Following my prior post -...

Punch line: using a simulation-based framework to evaluate retirement outcomes, and assuming an initial wealth of 32x real annual spend, projects a 1 in 8 chance of wealth wipeout in year 35; by year 40 that escalates to 1 in 4. The road to retirement is paved with...

Punch line: frenetic trend-following market-timing incurs a whipsaw cost from buying high/selling low, akin to the theta cost of option creation.  In contrast a more temperate approach of opportunistically, and judiciously, re-calibrating exposure, based on the...

Punch line: overall average correlation over large swathes of time and/or market environments masks significant correlation variability, which is dependent on the underlying market habitat; macro straitjacket in turbulent markets and stock-specific diffusion in more...

Punch line: the risk of insolvency has the potential to significantly disrupt projected cash-flow streams and going-concern value and, commensurately, the modeling and valuation of risky ventures.  This final high-growth VC illustration concludes the trilogy of...

Punch line: the risk of insolvency has the potential to significantly disrupt projected cash-flow streams and going-concern value and, commensurately, the modeling and valuation of risky ventures. Investing in risky projects where projected cash-flows and...

Punch line: hazard events have the potential to introduce significant dispersion in projected cash-flow streams and, commensurately, the modeling and valuation of risky projects. Investing in risky projects where projected cash-flows are subject to significant...

Punch line: the recent market draw-down saw several fundamental factors and stylistic biases play a prominent role: risk, economic growth sensitivity, leveraged crowding, analyst buy recommendation and ST price momentum were shunned; earnings revision held its own....

Punch line: Q3, 2018 witnessed a buoyant stock market led by out-sized gains in healthcare.  Intra-sector stock-returns were differentially dispersed: wider idiosyncratic-driven groupings in a few sectors and tighter macro-tinged groupings in others.  These...

Punch line: EM FX and EM vs. DM equity relative performance move concordantly particularly once the date-alignment constraint is loosened. Drilling down to EM sector performance, sector relative performance is colored by cyclicality during extreme EM FX selloff and...

Punch line: Q2, 2018 S&P 500 sector returns were mostly higher led by out-sized gains in energy.  Intra-sector stock-returns sported relatively tighter groupings in several macro-tinged sectors.  These risk-return outcomes are reflected in the charts and tables...

Punch line: the abnormally low term premium (-16bp; "pTP") has conspired to depress the 2/10 spread (35bp).  Using a simplistic heuristic, if the term premium were to revert to 10bp that would be consistent with a 2/10 spread of 83bp, all other parameters held...

Punch line: given the potential for systemic fragility in the wake of the Italian elections, Teflon-market notwithstanding, I looked at the most onerous episodes of a cross asset-class, Europe-driven contagion barometer, which spilt over into the US, and the resultant...

Punch line: over the mid-term past, dollar-rally episodes have virtually always been associated with EM equity under-performance.  Drilling down to EM sector performance, healthcare and consumer staples have fairly consistently out-performed, and real estate has quite...

Punch line: the malevolent trifecta of lower equities, higher rates and a weaker US$, while infrequent, is particularly noxious. Gold, more up than down during these episodes, is buttressed higher by a weaker US$ and buffeted lower by higher rates.   Earlier this...

Punch line: Q1, 2018 S&P 500 sector, save info tech and consumer discretionary, and index returns were painted red. Intra-sector stock-returns sported tight groupings tarred by a common macro brush.  These risk-return outcomes are reflected in the charts and...

Punch line: extreme episodes of UST 10y rates rising with the MSCI EM concurrently selling off, a potential risk scenario, has EM consumer staples and EM healthcare as relatively consistent out-performers; recently, post the early 2000 “nesting” phase, EM real estate...

Punch line: over the past 18 months the S&P 500-UST 10y relationship on average appears noisily marginally +ve. However, this aggregated data belies the more forceful regime behavior (risk-premium: equity-rates directional synchronicity vs. duration-based:...

Punch line:  per historical precedent, an MSCI EM annual return of 10.0% is consistent with an average intra-annum E(drawdown) estimate of -14.2% (-11.4% median).   Following up on the recent Return and drawdown post, which attempted to temper euphoria with...

Punch line: following the recent “Macro asset-class risk premium” post, the below chart updates the recent stock-bond risk-premium (VIX/term premium “uTP”) dynamic, perhaps reminiscent of the winter-2016 inflation-driven risk-parity scare when both rose in unison...

Punch line: the current local rally is very long in the tooth; both time elapsed since a 5% pullback (longest) as well as magnitude of the local rally (greatest), per the splicing detailed below. Tempering euphoria with caution, per historical precedent, a market...

Punch line: over the past year the S&P 500-USD relationship on average appears quite random. However, this aggregated data belies the forceful regime behavior (traditional FX: S&P 500 +ve/-ve while USD -ve/+ve vs. pro-growth: S&P 500 and USD +ve/-ve in...

Punch line: risk premiums across most macro asset-classes tend to expand synchronously at times of market angst.  However, the interest-rate term premium has heretofore tended to provide a risk-mitigation benefit.   Dovetailing on the recent, Unsophisticated term...

Punch line: S&P 500 sector and index returns were stupendous in 2017.  Sector returns were virtually unanimously positive led by secular-growth info tech.  Intra-sector stock-returns were exceedingly well dispersed for most sectors; providing a fertile...

Punch line: with the Fed in the midst of a rate-hike cycle coupled with perplexingly quiescent long yields, à la 2004-06, the elusive term premium is back in vogue.  The following analysis presents a practitioner’s estimate of the term premium, documents its recent...

Punch line: with the UST 2/10 spread plumbing local lows chatter of an impending slowdown has risen.  However, the gravitational pull of lower overseas yields maybe muddying the waters.   Recently, there has been a fair bit of hand-wringing at the signals...

Punch line: the following analysis presents a dashboard of style-factor gauges to potentially telegraph extended factor behavior.  Current breaches: • z-score: R1K Growth/Value 3m & 6m z-score trigger a 2-sigma breach; R1KTech to R1K 3m, 6m & 12m z-score...

Punch line: the current “FANGAM” out-performance falls shy of the pace and magnitude recorded during this stage of the epic 2015 “FANG” run.   Give the current hype surrounding “FANGAM” stocks (FB, AMZN, NFLX, GOOGL, AAPL, MSFT) I revisited an earlier expose,...

Punch line: over the mid-term past, dollar-rally episodes have virtually always been associated with EM under-performance.  Country-specific performance during these episodes, intra and inter, has been quite dispersed driven by unique macro dynamics and idiosyncratic...

Punch line: Q3, 2017 S&P 500 sector and index returns were munificent.  Sector returns were virtually unanimously positive led by secular-growth info tech.  Intra-sector stock-returns were well dispersed within the consumer discretionary, healthcare, industrial...

Punch line: over the mid-term past, dollar-rally episodes have virtually always been associated with EM under-performance.  The message telegraphed by EM industry excess returns, over these episodes, largely hues to intuition with the magnitude of the industry...

Punch line: global equity returns, led by EM, have, once again, surprised to the upside. However, the pure underlying regional signal, stripping away the correlated return element, is a lot more varied with Europe displaying a flat-to-negative independent impulse....

Punch line: inter-stock correlation has rarely been lower, providing a propitious stock-picking environment.  Consumer, healthcare and info tech stocks represent auspicious alpha-propensity sectors given their higher stock-specific idiosyncratic risk.   It could...

Punch line: the following analysis displays the trailing 1y cumulative abnormal return (“CAR”; summation of daily beta-adjusted excess return) of the 24 MSCI EM industry-groups (1y generally conforms to the horizon used in several price-momentum barometers). I ran the...

Punch line: the return-to-trough ratio (“RtT”) attempts to measure return generated relative to maximum pain incurred.  Computationally, RtT = return, divided by, worst drawdown. The following table computes the RtT for MSCI EM sectors.   The trailing 5-year...

Punch line: Q2, 2017 S&P 500 sector returns were mostly firmer contributing to a modest index gain.  Sector returns were led by healthcare and lagged by telecom services.  Intra-sector stock-returns were well dispersed within the consumer and industrial space,...

Punch line: over the past year the Stoxx-Euro relationship on average appears quite random. However, this aggregated data belies the forceful regime behavior (traditional FX: SXXE +ve/-ve while Euro -ve/+ve vs. pro-growth: SXXE and Euro +ve/-ve in tandem) that has...

Punch line: the current “FANG” out-performance falls shy of the pace and magnitude recorded during this stage of their epic 2015 run.   Give the current hype surrounding “FANG” stocks (FB, AMZN, NFLX, GOOGL) I revisited an earlier expose, “Anatomy of a crowded...

Punch line: Given the recent fleeting market wobble, in the midst of a molasses-like volatility environment, and at the risk of being a Cassandra, the following analysis revisits the drawdown experienced by a variety of representative indices.   The attached...

Punch line: the following analysis illustrates the S&P 500 optimal sector allocation and sensitivity to correlation regimes. One takeaway that jumps out is the increased allocation to financials and energy, and reduced allocation to bond-proxy utilities and...

Punch line: Q1, 2017 S&P 500 sector returns were mostly firmer contributing to a healthy index gain.  Sector returns were led by secular-growth tech and lagged by energy.  Intra-sector stock-returns were well dispersed within several sectors including consumer...

Punch line:  the following analysis illustrates the macro asset-class optimal portfolio allocation sensitivity to correlation regimes.  Aside from minor variations across most correlation regimes studied, the biggest takeaway is the dramatic reordering in optimal...

Punch line:  the following expose displays a time-series analysis of the macro asset-class correlation regime (equity, rates, currency and commodity) and presents a qualitative hypothesis of macro regime evolution.   The shifting sands of equity (S&P 500),...

Punchline: the return-to-trough ratio (“RtT”) attempts to measure return generated relative to maximum pain incurred.  Computationally, RtT = return, divided by, worst drawdown. The following table computes the RtT for hedge fund strategies.   The trailing 7-year...

Punchline: the return-to-trough ratio (“RtT”) attempts to measure return generated relative to maximum pain incurred.  Computationally, RtT = return, divided by, worst drawdown. The road to hell is paved with good intentions and risk-reward metrics. At the risk of...

Punch line: stating the intuitively obvious: telecom services, utilities, real estate and consumer staples underperform and financials (post GFC) outperform during higher and steeper rate environments.  The tables below illustrate this dynamic.   Stating the...