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Global economy
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Global economy
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Outline
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
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Global economy
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Know the answer to How much can I lose? Market has not yet peaked but is getting close. Moderate economic growth ahead. Be mindful of policy impact on investing. The middle class is struggling and shrinking. Consider investing in Europe. Be wary of emerging markets. Technicals do matter. Math skills are needed but unfortunately lacking in current college graduates.
Introduction
Global economy
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Outline
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
Introduction
Global economy
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Global-ness
Accuracy of growth rates domestically and overseas.
Follow numbers from non-China sources for import/export numbers. (JS) Tend not to believe economic statistics from communist dictators. (DC)
Future ination since long term rates have risen. Where do corporate prots originate, domestic or abroad? For instance, many prots of S&P500 companies are made overseas.
Nearly half of S&P500 revenues come from abroad. (BD) The disconnect between S&P500 and US economic growth could be attributed to signicant non-US revenues. (BD, JS)
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Global economy
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Economic drivers
Beige Book: comments on the economy from the Fed. Orange Book: comments on the economy based on earnings calls and conversations with executives.
Compare comments in this book with your analysis of a given company.
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Global economy
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Energy
Energy is a competitive weapon. Prediction: US will be net exporter by end of 2015 driven largely by energy. (BD) Weightings: underweight integrated oil companies, overweight US. (BD) Demand for energy is overstated but still part of the growth picture. (RY) Who benets from lower energy prices? (JS) Differential US/Global prices for energy may not be sustainable. (JS) Energy is a source of growth over next
Introduction
Global economy
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Introduction
Global economy
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Housing
Record low mortgage rates but no signicant growth in housing is a concern. (RY) The secondary market will continue to exist with some government involvement. (JS) Single family home occupancy has been falling. We are more of an apartment society. (JS) Townhouse/condos: less lumber but really nice kitchens and bathrooms. Who is making this stuff? (JS) People cant buy homes become income has fallen. (RY) Short home builders. The quantity and quality of buyers is a concern. (BD)
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Global economy
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Introduction
Global economy
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NINJA loans are the next subprime crisis. (RY) Choose the right major to maximize ROI. College is not a right. (JS) An interesting exchange...
The shrinking middle class is a problem. (RY) Retail sales are up. There is no middle class problem. (DC) Retail is up but what retail? Neiman Marcus, Mortons Steakhouse, Ruths Chris. Comment from the Orange Book from Oliver Garden: 70K guy is not coming in anymore.
Biggest personal mistakes: too focused on valuation (BD), hedge fund at the wrong time (DC), not talking to clothing company contact (RY), failure to stay up to date on great ideas (JS)
Introduction
Global economy
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Outline
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
Introduction
Global economy
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During the 80s and 90s stocks and bonds had positive correlation s,b > 0. However, 7 or 8 years ago1 s,b < 0 and s,alt > 0. During 1994 to 2004 the correlation between stocks and commodities was zero s,comm = 0 but commodity performance was poor. Now, s,comm = 0.4. (BP)
Low correlation leads to risk mitigating impact. Positive returns leads to return enhancing impact.
If < 0 you are effectively deleveraging your portfolio. Expecting prior losers such as volatility arbitrage to outperform going forward. (MK)
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REITs and commodities may be more correlated to the stock market now than in the past. (BP) Return on capital is highest where capital is scarce. Be the only bank in town. Current E [R ] estimates are too high. (RB) Bearish on emerging markets. US small caps have a better future growth story when looking at the nancials. (RB) There is a distinction between anti-correlated and negatively correlated. (MK) Bitcoin is not a currency. It is possibly a means for transactions. (RB) GLD and SLV are fairly priced. Natural gas is tougher to value (storage, use, production, volatility). (MK)
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Global economy
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Expect to see hiring pickup as clarity on healthcare plan impact is improved. Be mindful of policy implications on investing. (MK) On using derivatives to protect downside. (BP)
Initial thought: best defense is well diversied portfolio. Now: Some protection via derivatives may be a good idea.
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Global economy
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VIX is a derivative of a derivative and negatively correlated to the market. (JK) Concerned about xed income. This could be addressed with a portion of your equity portfolio. (BP) Uncertainty equals opportunity. It is tough for nancial managers to advise agains investing at or near peaks. Clients wants equity. Firm wants equity. Advisor knows it is high. (RB)
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Some advice
Investors lose 2% to 5% per year trying to time the market. Dont try to time the market. (RB) Focus on what things are worth, not what you think others think. Consider risk vs. reward. (MK) Consider What can I lose on this trade? Learn how to not lose money. (JK) S&P500 target is 1925 for 2014. Invest, dont trade. (RB) Ignore the noise. If you can trade your own P&L do it. (MK) Dont ght the fed. (BP)
Introduction
Global economy
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Outline
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
Introduction
Global economy
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The central bank will always matter. Something articial is going on in China. Google ghost towns and China. We dont know what would have happened without fed intervention in the Great Recession. Can part time America move to full time America? Read executive summaries from the CBO. Find May 2003 Ben Bernanke lecture in Japan.
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Global economy
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Corporate governance
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
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Global economy
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Corporate governance
Company doesnt know what to do with capital: no projects to invest in. Repurchases makes the what do I do with non-retained earnings? decision for shareholders as opposed to just paying dividends. Companies may buy high and sell low. There are better uses of capital DJM: Berkshire Hathaway does not pay dividends. They do repurchase shares. See my website for the dividend vs. repurchase choice.
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Global economy
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Corporate governance
Voting rights
If you own $2,000 of stock you can voice your opinion. Right now this is a burden. Small shareholders do have a voice but 90% of their initiatives are shot down. Look up shareholder-board engagement issues. Not worried about concentration of voting rights. Vote with your feet. (EK) Believe in 1 vote per share
Dual class share companies have underperformed single-class If you separate ownership for control there better be a good reason
Global economy
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Outline
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
Global economy
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Timing
Buy into the panic. Sell into the rally. (AC)
Buy when the worst case is priced in. Sell when the best case is priced in. Today: best case is not priced in. Good times are over for xed income
Monetary policy needs to get back to normal to avoid another asset bubble. Look to investing in Europe. Do what you love and the money will nd you. How can the Fed actions end well?
Global economy
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Historical context
March 2009 was a generational low. Not close to a bubble phase yet. Trillions of dollars are on the sidelines. On the US loss of leadership (AC)
We were #1 in innovation for the last 3 generations. 1960s: golden age of economic growth. Long-term investment in research and education totaled 4.5% of GDP. Today it is 2.5% of GDP. Before: 40% of prots2 were spent on R&D. Now: 25-30% of prots are spent on R&D. There were 3X more STEM degrees in the 1960s than today. Now we have very poor math and science literacy. Americans dont believe anything (a spiritual reference I believe).
Global economy
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Miscellaneous comments
Int he US 35% of total capital spending vs by energy companies. Energy investment by country
US: $140B Russia: $10B Saudi: $5B
DJM: be mindful of which factor(s) is(are) at play as rates go up. Consider Europe, not emerging markets. (DD, asset allocation breakout session)
Introduction
Global economy
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Outline
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
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Global economy
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Every day in 2013 the S&P closed higher than corresponding day in 2012.
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Global economy
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Introduction
Global economy
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What about Japanese REITs? Q: Is EPS growth due to share buybacks? A: Not worried about it due to CapEx and R&D. Pay attention to institutional money ow. Brazil is overextended w/ 2016 events, scal mess, government mess.
Global economy
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Outline
1 2
Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
Global economy
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Real assets
Main property types: Ofce, Apartment, Retail, Industrial Value property based on achievable income over next 5 to 10 years and cost of capital. Buy in places with net positive population migration. (DJM: dont buy in Detroit then!) Three primary valuation methods
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Discounted cash ow considering what you can sell at end of planned holding period. 10 years for core holding, 5 year for value add, 3 to 5 year for opportunistic. Capitalization rate Comparables - adjust for different factors
Introduction
Global economy
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Outline
1 2
Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
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Global economy
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Introduction
Global economy
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January top gaining sub-industries provide some information on next 11 months. 72% of the time Nov-Apr outperformed May-Oct but May-Oct is still up 1.3%. In May-Oct Consumer staples (4.6%) and Healthcare (4.6%) lead. 40% of S&P500 returns is from reinvested dividends. We are currently below the historical average dividend payout ratio. -> look to dividend aristocrats.
Global economy
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Outline
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
Global economy
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Read Advancing strategic allocation in a multi-factor world Read How Index Trading Increases Market Vulnerability correlations have increased.
Global economy
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Most large cap stocks underperform the large cap stock universe. A handful of good active managers with concentrated portfolios outperform the market (Cremers and Petajsto 2009) On the what can you lose tip: What could go wrong? DJM: Therefore diversication can be bad. This is similar in spirit to Yacktmans suggestion that you need not own your 500th best pick. Low volatility stocks have negative correlation with low P/B stocks (Empirical Research Partners December 3, 2012). The best way to generate alpha is to develop your own dataset.
Global economy
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Outline
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Introduction Global economy Global-ness, economic drivers, energy, and more! Alternative assets vs. equities Why, some examples, etc. Other keynote sessions Fed & Washington perspective (TK) Corporate governance Global markets Breakout sessions I Virtus: Search for growth Real assets Is it time to buy or bail? Breakout sessions II Future of Quant Financial services
Global economy
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Global economy
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Global economy
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Global economy
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Get good grades, get good with computer (Word, Excel, Powerpoint, etc.) Dont be afraid to ask questions. When I need something done I go to my Excel expert. Hes accurate, capable, and gets things done fast. Become known for something. Develop a roadmap with a timeline. Acknowledge areas of weakness.