ask Dcifrths...well, anything...about finance/mkts/ports that is.

[philnewall]

Barron have you seen this book?

http://www.amazon.com/exec/obidos/ASIN/0470034157

It looks like the kind of thing your into.

[ahnuld]

Barron,

Obviously home builders, lenders and others are directly exposed to the subprime issues. But in the past few weeks a lot of stocks who dont seem to have direct exposure hyave been getting killed. Citigroup dropped 4-5% today and as far as I can tell has almost zero subprime risk. Obviously im missing something, so where is the exposure for these other guys, why are they getting killed as well?

[Nomad84]

In light of the recent mortgage problems, what is the outlook for someone like me who is looking to buy a house in the next 1-2 months? I have no credit history in my name, but can document on time car, rent, and utility payments for the past year+. I have not been in my job for 2 years, but it's because I only graduated 15 months ago. I have a 10% down payment. I can document the ability to make the payment (i.e. monthly rent + savings toward down payment > mortgage payment). Will lending standards tighten up to the point that I will have a hard time getting 90% financing? Should I expect rates to go up or down?

Thanks.

[rsliu]

Barron

Completely disagree with your suggested asset allocation for Statutory. Trying to maximize your risk adjusted returns makes sense for a pension fund trying to pay out yearly obligations. If you're a 24 year old kid who won't be needing most of his savings for decades AND you can't lever yourself then your ideal strategy is basically to maximize absolute returns regardless of risk. In this sense a strategy composing mostly of emerging market equities is very strong.

FWIW both Phil and myself are investing our 401ks in this manner.

[DcifrThs]

[ QUOTE ]
Barron have you seen this book?

http://www.amazon.com/exec/obidos/ASIN/0470034157

It looks like the kind of thing your into.

[/ QUOTE ]

definitely something i'd be into.

i'm learning now about the previous models that tried to deal with non-well behaving first 2 moments. i also will be reading this shortly, "active portfolio management: a quantitative approach for producitn superior returns and selecting superior returns and controlling risk"

it was recommended highly by a former professor of mine.

your suggestion looks very solid though so i've put it on teh to read list.

Thanks,
Barron

[DcifrThs]

[ QUOTE ]
Barron

Completely disagree with your suggested asset allocation for Statutory. Trying to maximize your risk adjusted returns makes sense for a pension fund trying to pay out yearly obligations. If you're a 24 year old kid who won't be needing most of his savings for decades AND you can't lever yourself then your ideal strategy is basically to maximize absolute returns regardless of risk. In this sense a strategy composing mostly of emerging market equities is very strong.

FWIW both Phil and myself are investing our 401ks in this manner.

[/ QUOTE ]

the theory makes sense. if you can withstand a great deal of risk then unconstrained absolute return maximization seems optimals.

but with compounding, the cost of drawdowns is more than the simple loss. it is the money you could have made had yoiu had a smaller drawdown. that is why, theoretically, maximum sharpe ratio portfolios dominate larger return (and larger risk) portfolios in almost every instance.

but, given that i've said that, maximizing absolute returns is your best bet if you can't use derivatives optimally and can't lever yourself to the best degree.

therefore, it seems that youa nd phil are on the right track [img]/images/graemlins/smile.gif[/img]

good points though as always.

Barron

[DcifrThs]

[ QUOTE ]
Barron,

Obviously home builders, lenders and others are directly exposed to the subprime issues. But in the past few weeks a lot of stocks who dont seem to have direct exposure hyave been getting killed. Citigroup dropped 4-5% today and as far as I can tell has almost zero subprime risk. Obviously im missing something, so where is the exposure for these other guys, why are they getting killed as well?

[/ QUOTE ]

if you own a house on a beach with a balcony help up by wooden stilts and your neighbor's house is held up by similar stilts, things that affect his property value will likely affect yours.

even if the ocean only took out his balcony, the probability that it may soon take out yours brings down thevalue of your seemingly untouched beachfront property.

similarly, the "subprime woes" can work through the economy in a variety of ways:

1) fist and foremost, losses will need to be realized by everybody who has a hand in the market. some of the losses are likely attributable to direct losses in investments in securities backed by subprime mortgages (or alt-a or similarly distressed loans backed by not ideal borrowers). further, many of these investments are hard to value so an additional amt of uncertainty is being added to the ability of the models to correctly price non-well traded assets

2) subrpime (et.al) mortgage woes affect consumer spending. consumer spending affects 2/3rds of GDP. so anything that hurts the US consumer can likely hurt the earnings flows of companies seemingly untouched by the subprime issue directly

3) liquidity being withdrawn from the system disproportionately affects finance companies for a few reasons. first, consumers are now not as apt to purchase on borrowed money (hurting credit card fees). second, fewer consumer purchases could lead to fewer deals being done (less banking revenues), and finally, fewer institutional & individual purchases of private equity & other takeover bonds leads to the banks being forced to take losses on (now presumably ) very large corporate bond portfolios.

the chrystler deal is the example to be followed here. despite it being traded at near par now, the banks had to finally issue the debt at a 5% notional loss. take that loss amt over the $300bil expected to be in the pipeline and the finance companies appear to have immediately lost $15bil in revenues.

obviously that is simplistic but it gets the point accross.

combine those fundamental downside risks with just an overall market paranoia and you can easily see 5-10% drops in stocks that have virtually no connection directly to the subprime mess.

you can even take it a step farther: european companies will soon feel the pain and their imports will fall despite larger gains in their currency vs. the dollar as consumption can fall there as a result of the reduced credit liquidity & as a result of higher real rates forcast by the BOE & ECB.

clearly what i've provided here isn't the end all and be all, but just a brief glimpse into some of the possiblities behind sharp drops in a stock's value that may not appear to be directly associated with subprime mortgage issues (like american or MBIA etc.)

lemme know your additional thoughts/critiques.

thanks,
Barron

[Newt_Buggs]

From a recent thread you responded to:
[ QUOTE ]
Here's a way to beat the market.

SSO - Ultra S&P 500

The Ultra S&P500 seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the S&P 500® Index

If the market's "guaranteed" (equity risk premium) to be up over a 20 year holding period, then obviously this will do better. It's an ETF that's highly liquid for most on this forum I suspect.

[/ QUOTE ]
with
[ QUOTE ]

as long as you understand that in addition to your ERP, you're also getting 2x the risk. you've taken a .25 sharpe ratio asset class and simply levered it 2:1. having an investment with an expected return of 16% with an expected standard deviation of upwards of 50% can wreak havok on your returns and may be less efficient from a portfolio standpoint despite the higher returns. the problem is that downswings hurt more and you've increased your portfolio's risk allocation to equities by a ton.

i'd rather use leverage via ETFs to double the US2yr bond return or the lehman global agg bond fund, or (the best) get serious leverage on US TIPS or a global TIPS fund. that would be some really useful leverage.

that way, if you really want to hit a 16% return target, you can construct a .5 sharpe ratio portfolio and lever it to a 32% risk target (this will take a large amount of leverage btw...it's doable though).


[/ QUOTE ]
Would you mind elaborating more? I feel like I am not alone on this board when I am willing to assume significantly greater risk to build a portfolio with higher expected returns.

[DcifrThs]

[ QUOTE ]
From a recent thread you responded to:
[ QUOTE ]
Here's a way to beat the market.

SSO - Ultra S&P 500

The Ultra S&P500 seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the S&P 500® Index

If the market's "guaranteed" (equity risk premium) to be up over a 20 year holding period, then obviously this will do better. It's an ETF that's highly liquid for most on this forum I suspect.

[/ QUOTE ]
with
[ QUOTE ]

as long as you understand that in addition to your ERP, you're also getting 2x the risk. you've taken a .25 sharpe ratio asset class and simply levered it 2:1. having an investment with an expected return of 16% with an expected standard deviation of upwards of 50% can wreak havok on your returns and may be less efficient from a portfolio standpoint despite the higher returns. the problem is that downswings hurt more and you've increased your portfolio's risk allocation to equities by a ton.

i'd rather use leverage via ETFs to double the US2yr bond return or the lehman global agg bond fund, or (the best) get serious leverage on US TIPS or a global TIPS fund. that would be some really useful leverage.

that way, if you really want to hit a 16% return target, you can construct a .5 sharpe ratio portfolio and lever it to a 32% risk target (this will take a large amount of leverage btw...it's doable though).


[/ QUOTE ]
Would you mind elaborating more? I feel like I am not alone on this board when I am willing to assume significantly greater risk to build a portfolio with higher expected returns.

[/ QUOTE ]

sure, can you ask me a more specific question though since "elaborating" on the concepts in there could take a while and i'm not known for brevity.

like if you could ask a series of questions that i can deal with 1 at a time or just a slightly more specific request on what to elaborate on i'd be more than happy to.

thanks,
Barron

[Newt_Buggs]

Thanks Barron

Why would leveraging US TIPS be better than leveraging ETFs on 2yr bonds?

Why are you recommending leveraging bonds instead of equities?

What would be the best way to get a good rate on the money borrowed for leveraging?