Garth Friesen

"Looking at the historical relationship between the S&P 500 forward P/E ratio and subsequent three-year returns in the benchmark index shows that the current forward P/E ratio at almost 22 implies a 3% annualized return over the coming three years", writes Torsten Slok the Chief Economist at Apollo Global Management via The Daily Spark. A 3% annualized return from the S&P 500 indicates that the go-forward performance of all of the passive and active public equity strategies designed to mimic the returns of the market index will be insufficiently below an asset owner's minimum nominal return threshold (estimated to be 5% plus CPI). Add the well-chronicled backlog of private companies awaiting exits and the resulting illiquidity travails of private equity funds, how and from where will asset owners source suitable investment results to fund their organization's on-going spending and payout needs? Asset owners should now be untethering their public equity exposure from the anemic expected results of the S&P 500 (3% annualized?). Continued fealty to status quo, tracking-error constraints and style-box fidelity will impede an asset owner's ability to earn adequate nominal investment results. Investors should now consider the merits of liquid, publicly-listed equity strategies that pursue satisfactory absolute returns that reliably exceed an asset owner's minimum spending hurdle (estimated to be approximately 7%-8%). See link: https://lnkd.in/eQseqFHi

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As the market changes, its breadth plays a large role in investment performance. Recently, I've been analyzing the rolling returns of VFV (S&P 500 Index ETF, blue) versus EQL (Equal Weight S&P 500 ETF, red), and the insights are telling. The below chart is interesting as I’m looking at rolling returns over 12-month periods. There are clear periods where one ETF outperforms the other and periods where they are very close in performance.    When VFV outperforms EQL, it's often a sign of narrow market breadth, with a few mega-cap stocks driving the bulk of returns. This environment tends to favor passive strategies tied to cap-weighted indices. When EQL takes the lead, market participation broadens, and opportunities for active managers expand. A broader market allows stock pickers to uncover mispriced assets and generate alpha. You can see the two converging after periods of VFV outperformance. Historically, these periods of EQL outperformance have aligned with moments where active managers have added value. I applied this to the S&P 500, which is historically one of the most difficult benchmarks to beat. It’s also something to consider in less efficient areas of the market. Active management is never easy, but there are times when the market might cooperate a little bit more. What does that mean for investors? I think it means using a combination of well-thought-active and passive managers like allocating to managers with differing styles. #ActiveManagement #MarketBreadth #InvestmentStrategy #PortfolioManagement 

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#hedgefund stockpickers are doing something right this year. Per Goldman Sachs data: - Longs up 30% -- 500 bps ahead of the roaring S&P Global 500 index and 1200 bps ahead of the MSCI Inc. ACWI index. - Shorts only up 12%. Impressive.

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Türkiye’s pivot musings: => Türkiye’s manufacturing PMI dropped to the post-pandemic low in September - yet another sign (alongside positive net reserves, improving external balances, lower gold imports and FX-protected deposits) that the policy U-turn is working as intended. => But is it enough for a monetary policy pivot and a rate cut already this year? A lot will depend on the central bank’s ability to meet its year-end inflation target of 38%. Quick calculations show that for this to happen, monthly CPI should average 1.15% or less in September/December. The September print (on Thursday) will show whether this is feasible.

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If ISM Manufacturing PMI’s trough (orange) for this cycle was back in mid-2023, it would be unique relative to prior Fed cycles, given PMI was recovering when/after Fed cut rates (blue) aggressively  

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S&P 500 Index...As I expected at the time, there remains little question as to whether the price action since mid-December break of the Lower Parallel (solid violet line) of the Schiff Modified Pitchfork (violet P1 through P3) was a correction of a larger degree and that a potential distribution pattern was building. Prices have broken the cluster of key short-term support at the Lower Warning Line of the Pitchfork, the belly of the Cloud and price support at 5,855. There is nary a clue that there has been a let up in downside price momentum as witnessed by the oscillators. I now mark key support at the 5,715 / 5,730 level. More detailed analysis in this afternoons Market's Compass Substack Blog....https://lnkd.in/gMqMV9a

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We use the VecViz dashboards to review a third party price forecast for Gold in order to illustrate how they can facilitate related understanding and dialogue in: https://lnkd.in/eu9b8Y5k #forecasting #visualization #cognition #investing #dialogue

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Cheap Agency MBS? The bulk of outstanding fixed MBS is not cheap. Index bonds are yielding under 5% and are long duration. If you're invested in an index fund, this is what you likely own. Only newer production coupons (5+%) are > 100 spread and are yielding above t-bills.

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MSO earnings season starts this week, with eight of the top ten US operators reporting. Consensus analyst expectations are for the top ten MSOs to show a Q/Q 2.62% contraction in revenue and adjusted EBITDA to decline 6.18%. (1/3) The top ten MSOs' Y/Y revenue is expected to grow by 3.20%, and AEBITDA is expected to expand by 17.30%. Analysts predict the highest Y/Y revenue growth for Ascend Wellness Holdings (CSE: AAWH.U / OTCQX:AAWH) at +22.40%, and Cresco Labs is predicted to have the best Y/Y improvement in AEBITDA at +62.00%. Finally, here are some of the companies reporting this week: May 7: Ascend Wellness Holdings (CSE: AAWH.U / OTCQX:AAWH) May 8: Green Thumb Industries (GTI), Verano, MariMed, Inc. May 9: Curaleaf, Trulieve, TerrAscend, Cannabist, Jushi Holdings Inc. Source: FactSet

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#ETF #hedgefunds Ray Dalio's Bridgewater Associates is set to introduce its renowned All Weather investment strategy to the ETF market through a partnership with State Street Global Advisors (SSGA). According to a regulatory filing on Tuesday, November 19, SSGA plans to launch the SPDR Bridgewater All Weather ETF, with Bridgewater acting as a sub-advisor by providing a daily model portfolio tailored for this product. This collaboration signifies a notable expansion of hedge funds into the ETF arena, a market that has grown to $14 trillion globally due to advantages like ease of trading, tax benefits, and generally lower fees. The move also enhances SSGA's lineup of alternative investment offerings, following its September filing for a private credit ETF in partnership with Apollo Global Management, aimed at providing retail investors access to private credit markets. Developed in 1996 to manage Dalio's trust assets, the All Weather strategy is a risk-parity approach that allocates assets based on their volatility. Instead of heavily investing in high-risk assets like stocks to chase substantial returns, the strategy seeks to achieve similar results with reduced risk by diversifying across various asset classes—including equities, bonds, commodities, and inflation-protected securities—and leveraging safer investments. The goal is to create a portfolio that remains resilient across different economic environments. Bridgewater's method focuses on maintaining balance across four key economic scenarios: rising growth, falling growth, rising inflation, and falling inflation. By investing in assets that perform well in each of these conditions—such as equities and commodities during periods of rising growth and government bonds during times of falling growth—the strategy aims to provide consistent returns regardless of market fluctuations. The portfolio typically targets an annualized volatility level between 10% and 12%. Karen Karniol-Tambour, Bridgewater's co-chief investment officer, emphasized the importance of diversification in preparing for future market conditions. "Investors have been rewarded through traditional approaches to asset allocation in recent decades, but going forward, a wide range of economic environments could materialize," she stated in a press release announcing the partnership. She also highlighted the opportunity to broaden access to Bridgewater's strategies through collaboration with an innovative organization like SSGA. Despite its innovative approach, interest in risk-parity and similar diversified strategies has diminished in recent years as they have underperformed compared to benchmarks like the S&P 500 Index. For instance, an S&P risk-parity index targeting 12% volatility has gained only 3% this year, while a Bloomberg index with a traditional 60/40 split between stocks and bonds has risen 11%. In contrast, the S&P 500 has surged approximately 24% through Monday's close.

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THE END TO FED-WATCHING Yesterday on Bloomberg News we discussed how the Fed has taken the backseat to the US Treasury. Jannet Yellen has a much bigger effect on both inflation and yields, via debt issuance and driving growth higher ahead of the election, at all costs. Today the Fed will more than likely announce that it's keeping rates high, and investors will look for hints as to its next moves. They -really- shouldn't. The Fed's commentary has shifted many times in the past few months, suggesting that they are not in the driver's seat. Investors are better off if they just wait patiently for the election to end and accept that inflation may hover above 2.5% for the next couple of years - which could possibly make the current rate close to "appropriate". Mazars Mazars in the UK #markets #Fed #interestrates #economy #wealthmanagement

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I just posted my latest #StockMarket note and commentary, "Trucks and Towers Stock Market (and Sentiment Results)..." You can find it here: https://lnkd.in/ebXqP2Wc

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Macro: do lower rates mean recession? Now that the Fed’s rate-cutting cycle has started, what message should investors derive from the move? Typically, the #Fed favors small, incremental rate adjustments of 25 bps. Initial cuts of 50 bps are rare, so they carry significant implications when they do happen. The Fed's recent 50 bps rate cut is fundamentally a response to an altered outlook in its #employment scenario – current projections indicate an expected rise in unemployment rates to 4.4% by year-end – and suggests the Fed is bracing for a potential broad downturn in the #businesscycle. Despite these concerns, it is important to note that the global #growth cycle is not yet deemed dead. Our collection of growth #nowcasting signals across eight countries and country zones currently offers a divided message: - The aggregated #recession probability stands at 42% - This situation has persisted for nearly a year - This reading is consistent with a #softlanding scenario: a prolonged period marked by near-recession signals without plunging into an actual recession. Read more of what our macro dashboard has to say about the current situation on Lombard Odier Investment Managers webiste in our Quarterly #SimplyPut here: https://lnkd.in/gSvm4KhF #macro #econometrics

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What's the best time to extend duration when rates start to come down and curves start to "disinvert"? Should you "T-bill and chill" until the central bank pulls the trigger and starts cutting, or is the juice all squeezed out of longer yields at that point? It’s a relevant question as more and more central banks start cutting rates, particularly for economies such as Iceland where policy rates are probably some distance above neutral. Thankfully, there’s a highly relevant and recent case study. A group of mostly EM economies with a thorny inflation history hiked rates early and fast in 2021, which helped bring inflation under control fairly quickly and allowed for rate cuts as early as last summer. I tried to search for clues based on the experience of these EM early hikers in a note to clients earlier this week (see link for a great summary by the editor of Innherji Hörður Ægisson: https://lnkd.in/ggNiP9sV). The average policy rate in these economies rose by 960bps, but has been cut by 290bps since last summer. During that period, 10Y yields rose on average 630bps, but have since rallied by 210bps. In other words, there is pretty strong transmission up the curve from the policy rate, leaving some interesting ways to play duration… which just leaves the question of timing. Here’s where things get interesting: On average, most of the rally in longer term yields takes place in around 300 trading sessions *before* the first cut. So far, there has been very little tightening of long yields *after* rate cuts commence. In other words, the rally tends to be driven by the end of hiking cycles, more than by the start of cutting cycles – when the cuts finally start, chances are there’s not a whole lot of juice left in longer term yields. Of course there’s no guarantee this pattern will be repeated, but it does support my gut feeling that the way to play policy normalisation is to be fairly discerning about placement on the curve, rather than blindly loading up on duration (even more so in markets where term premia have been eviscerated by QE).

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I recently read an older, but interesting paper by Laurence B. Siegel titled Benchmarks and Investment Management, published by The Research Foundation of AIMR in 2003. The paper describes profound impact benchmarks have on investment strategies, market behaviors, and the measurement of portfolio performance. Siegel’s work emphasizes that benchmarks do more than just reflect market sentiment—they actively shape the decisions of investment managers. A key takeaway is the "triple duty" of benchmarks: 1. Portfolios for Index Funds: Benchmarks provide a passive investment option, representing the return of an asset class with minimal costs. 2. Performance Standards: They serve as a yardstick for evaluating the effectiveness of active management strategies. 3. Proxies for Asset Classes: Benchmarks are essential in asset allocation, helping to understand risks and correlations among different asset classes. Siegel also addresses the unintended consequences of an intense focus on benchmarks, such as their potential role in market bubbles and the narrowing of investment opportunities. I found that portion of the paper to be relevant today, and the growth of passive investing. A lot of investors hear about benchmarking, but few truly understand what it means. A lot of us tend to compare our investments to the broadest measure possible such as the S&P 500, or the Russell 2000, etc. You hire managers to deliver alpha, which is the excess return above their respectable benchmarks or indices. The issue arises when managers are compared to improper benchmarks. If you hire a mutual fund manager to invest in small-cap stocks is it fair to compare them to the S&P 500? This type of comparison is dangerous to the investor and unfair to the manager. Comparing a fund that has a mandate completely different from your benchmark will cause distorted results which can lead to excessive risk taking. This small-cap manager could look good in some years, and horrible in others. The problem is that you haven't established a good base for comparison. #InvestmentManagement #Benchmarks #PortfolioManagement #Finance #AssetAllocation

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I just posted my latest Stock Market note and commentary, "'The Crown' Stock Market (and Sentiment Results)..." You can find it here 👇👇 👇 https://lnkd.in/ePxPp-ZB

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#banks The Federal Deposit Insurance Corp. (FDIC) reported an increase in US banks’ paper losses from securities holdings in the first quarter of 2024, driven by ongoing stresses in the housing market. Unrealized losses on available-for-sale and held-to-maturity securities rose by $39 billion, reaching a total of $517 billion. This marks the ninth consecutive quarter of unusually high unrealized losses since the Federal Reserve began its cycle of interest rate hikes. Despite the deepening losses, FDIC Chairman Martin Gruenberg assured that the banking industry remains solid. He highlighted that banks' net income has rebounded, asset quality metrics are generally favorable, and the industry's liquidity remains stable. Gruenberg also noted that FDIC supervisors are closely monitoring the situation, even as the number of lenders on the “Problem Bank List” has increased. The FDIC’s Quarterly Banking Profile underlined these trends, emphasizing the resilience of the banking sector amidst these financial challenges.

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