This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions that should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
1. Once Again There’s Trouble in Quant Land – Wall Street Journal – May 11
“Quant Funds”, short for Quantitatively Managed Funds, are Investment Funds that are managed by computer models. Such funds build elaborate complex models to invest their monies. These are distinguished from “discretionary funds” or funds managed according to the views and perspectives of their managers.
Gregory Zuckerman of the Wall Street Journal wrote this article about the problems suffered by many Quant Funds during the recent rally in equity markets. Mr. Zuckerman begins the article by stating that “A number of quantitative hedge funds have been crushed lately, even as the stock market soars, causing a stir on Wall Street.”
Then he gives examples – “Jim Simons’s RIEF fund fell more than 16% this year, through April 24, while two big funds operated by MAN AHL, the largest publicly traded fund, are each down about 10%, investors said. Some trend-following funds, which had positioned themselves for more market troubles, have lost as much as 10% in the past month or so.”
Why should we care? As Mr. Zuckerman explains “Troubles in quant land sometimes are a canary in the market’s coal mine; when their computers are off kilter, it can suggest trouble below the market’s surface.”
Mr. Zuckerman is mainly speaking of Quant Funds that use factor models such as quality of the balance sheet, quality and sustainability of earnings, etc. Usually, “good companies” do much better in a difficult economy than “bad companies”. So these funds had bet on good, high-quality companies and bet against (sold short) low-quality, riskier companies.
We believe that markets are inherently cruel and tend to cause the maximum pain to the largest number of investors. Another market folklore states that when any strategy becomes too big and too well-understood, the markets tend to destroy that strategy.
An enormous amount of money was employed by factor-driven Quant Funds to be long high-quality stocks and short low-quality stocks. The market destroyed this strategy and punished the funds that bet on it.Low quality stocks exploded upwards while high quality stocks simply meandered and then went up a little bit.
The Quant Funds simply could not tolerate losing money at this rate and so they had to close out their positions as their losses mounted. This meant Quant Funds had to buy low-quality stocks they had shorted, adding fuel to the explosive rally under way. This might explain the resilience of the equity markets for the past month.
Unfortunately, such market rallies end when the losers close out their positions. This may be why the equity markets have lost their tail wind and have begun a pull-back. As Mr. Zuckerman puts it “The troubles of some big quant funds raise as many questions about the sustainability of the market’s recent surge as they do about the efficacy of their models.”
2. Cargo Ships Treading Water Off Singapore, Waiting for Work – New York Times – May 12, 2009
This is an excellent article. Any one interested in the health of global trade should read this article. We include some excerpts below:
- “One of the largest fleets of ships ever gathered idles here just outside one of the world’s busiest ports, marooned by the receding tide of global trade. There may be tentative signs of economic recovery in spots around the globe, but few here.”
- “The root of the problem lies in an unusually steep slump in global trade, confirmed by trade statistics announced on Tuesday.”
- “China said that its exports nose-dived 22.6 percent in April from a year earlier, while the Philippines said that its exports in March were down 30.9 percent from a year earlier. The United States announced on Tuesday that its exports had declined 2.4 percent in March.”
- “The cost of shipping a 40-foot steel container full of merchandise from southern China to northern Europe tumbled from $1,400 plus fuel charges a year ago to as little as $150 early this year, before rebounding to around $300, which is still below the cost of providing the service, said Neil Dekker, a container industry forecaster at Drewry Shipping Consultants in London.”
- “Investment trusts have poured billions of dollars over the last five years into buying ships and leasing them for a year at a time to shipping lines. As the leases expire and many of these vessels are returned, losses will be heavy at these trusts and the mainly European banks that lent to them, said Stephen Fletcher, the commercial director for AXS Marine, a consulting firm based in Paris.“
3. Europe’s Subprime Banking Problem– Wall Street Journal – May 14, 2009
Any one who still thinks that the banking crisis is mainly an America problem should read this article. A few excerpts are below:
- “Central and Eastern Europe are shaping up to be the European banking sector’s very own subprime crisis. Results on Thursday from two of the biggest lenders to the region confirmed the crisis in these markets is getting worse.”
- “Therein lies the problem facing KBC, Raffeissen and other banks like UniCredit, Societe Generale, Swedbank which own around half of CEE banking assets. The unprecedented nature of the slowdown these economies face this year, with a 5% decline in aggregate gross domestic product likely, makes it hard to estimate what loan-loss rates will peak at. One estimate is a jaw-dropping 20% for Ukraine, one of the weakest economies.”
4. Megacities Threaten to Choke India – Wall Street Journal – May 14, 2009
This is an excellent article that describes the growing concern in India about “the country’s teeming new megacities, which are swelling rapidly even as jobs dry up and funding for infrastructure disappears.” This article makes a case study of the north Indian city of Lucknow and draws conclusions about the country as a whole. Below are some excerpts:
- “Today, Lucknow has more than 780 slums, overflowing sewage pipes and streets choked by gridlock. Its population of 2.7 million, nearly triple the number in the 1980s, is adding as many as 150,000 new residents a year.”
(Lucknow)
- “What’s happening in India is part of a world-wide challenge. Megacities are sprouting around the globe. But in billion-person India, the trend is on steroids.”
- “The country already has 25 of the world’s 100-fastest growing urban areas, according to City Mayors, an international urban-affairs think tank. That compares with eight in China. Pune, near Mumbai, has more than four million people, about the same as the Houston area. Kanpur, in north central India, has more than three million, as does Surat, in western India. India is expected to add 10 million people a year between 2000 and 2030 to its 5,161 cities, according to the United Nations.”
- “At least it’s better than in the village,” says Shanti Kashyap, a 32-year-old mother of four who moved there from a rural town about 70 miles away. “In the village, you work all day long in the field and don’t even get two meals.” Now her husband works as a wall painter, earning about 100 rupees, or $2, a day.”
- “There is “no doubt that India’s future is in the cities,” says M. Ramachandran, secretary at India’s Ministry of Urban Development.”
5. Iraq: Hold And Build, Or Lose – By Anthony Cordesman – Washington Post – May 12, 2009
Regardless of your viewpoint on Iraq, we suggest you read this opinion. Below are a couple of excerpts:
- “Despite the violence of the past few weeks, it is Iraq that now risks becoming the “forgotten war.” Iraq has become both a perceived “victory” and a war that many Americans and members of Congress would like to forget. As a result, we may rush toward the “exit” without a strategy — and lose both the ongoing war and the peace that could follow.”
- “There are limits to what we can do in Iraq. We cannot force Iraqis into political accommodation. We cannot develop their economy for them. And we cannot act as a lasting substitute for effective Iraqi forces or the creation of local security and a rule of law. But there are steps we can and should take to complete the “clear, hold and build” strategy that has changed the war so dramatically since 2007. “
- “Yes, some of these actions will cost U.S. lives and dollars. Such costs, though, will be far lower than the mid- to long-term cost of throwing away a high probability of leaving Iraq with lasting security and stability. The United States must find a way to leave Iraq that ensures the stability of the Persian Gulf — a region with close to half of the world’s known oil and gas reserves and where America’s future credibility will be as critical to dealing with jihadist terrorism as is the war in Afghanistan and Pakistan. In strategic terms, Vietnam was always expendable. Iraq and the Gulf are not.”
We had expressed our own analysis in our article Iraq & Tibet – Strategic Will of The American and Chinese People
This article looks at America’s involvement in Iraq from a very different perspective. It has been a top 10 article on this blog since its publication on July 26, 2008.
6. Singh Warns Obama – Pakistan is Lost – India Gets Ready for a Taliban-Ruled Nuclear Neighbor
– India thinks Pak N-sites already in radical hands – Debka and Times of India – May 15-May 16, 2009
The original story was published in Debka, an Israeli publication said to have close ties with Israeli Intelligence. We are not subscribers to the Debka weekly. So, we also include an article in the Times of India that discusses the Debka story. The excerpts below are from the Times of India article.
- “India’s Prime Minister Manmohan Singh has told President Obama that nuclear sites in Pakistan’s restive frontier province are “already partly” in the hands of Islamic extremists, an Israeli journal has said.”
- “Claims about the high-level exchange between New Delhi and Washington were made in the Debka, a journal said to have close ties with Israeli intelligence, under the headline “Singh warns Obama: Pakistan is lost.” The brief story said the Indian prime minister had named Pakistani nuclear sites in the areas which were Taliban-Qaida strongholds and said the sites are already partly in the hands of “Muslim extremists.” A sub-head to the story said “India gets ready for a Taliban-ruled nuclear neighbor.”
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