John Lewis, Tammy DeRosier, and Tom Dorsey discuss the performance of Dorsey Wright managed products in the second quarter. This is a good refresher on the basics of relative strength and how we apply it to different strategies.
Second Quarter Review Podcast
July 8, 2009
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Posted by Andy Hyer
Stabilization
July 8, 2009I haven’t posted much in the way of performance of the RS quartiles and deciles because lately there hasn’t been much to write about. The market has pulled back during the first 5 trading days of the quarter, and it seems as if everything has moved together. In looking at the data you can see the top 2 deciles have outperformed the universe average, and the bottom decile has really taken it on the chin. But other than that, all the other deciles are pretty close to the universe average.
The bottom decile has really been hurt by some of the low-priced laggards that are beginning to come back to earth.
This is actually a good thing given the laggard rally we had last quarter! These periods of stabilization often occur before the spread between the high RS and low RS names begins to widen. We certainly haven’t seen the relentless outperformance by the laggards that characterized the second quarter so far this quarter.
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Posted by John Lewis
Debt Bomb
July 8, 2009Here in California, the state government is already handing out IOUs—which the big banks say they won’t accept after July 11. California’s debt has already been downgraded to BAA and it might fall out of investment grade completely if they can’t get the latest budget crisis resolved.
The same thing is going on in a dozen other states and with the federal government. Too much borrowing and not enough tax revenues to pay for it. (Or, to my way of thinking, too much waste, fraud, and abuse.) To cushion the blow of the current recession, more money has been borrowed-and now economists are wondering if debt is the next bubble. If you want to scare yourself, you can click here to see a real-time debt clock.
The debt problem could get resolved in a lot of ways, but however it turns out, we could see a materially different environment going forward-one in which adaptability is key. Relative strength, we believe, is unparalleled in its ability to adapt and that might prove to be a lifesaver.
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Posted by Mike Moody
Millionaires Tumble
July 8, 2009Clients have had a rough year, according to this graphic from The Economist. Millionaire households lost almost 20% of their net worth last year and their ranks thinned notably, especially in North America. Most high net worth individuals are quite diversified and this is testimony to how difficult financial markets have been over the last year.
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Posted by Mike Moody
The Power of Data
July 8, 2009What is the root cause of the foreclosure crisis? In the popular imagination, it is rapacious mortgage companies making irresponsible loans to a bunch of naive borrowers. So government policy now addresses that scenario and tries to modify loans so that people can stay in their homes. Yet, data shows that the biggest single foreclosure risk is someone who never had equity in their home-the no-money-down crowd.
Data is funny like that. Often a thoughtful analysis of the data reveals something unexpected. We have found this to be true repeatedly as we’ve done research for our Systematic Relative Strength accounts over the years. At least once a week, we get a call suggesting that if we handled stops or rotation or something differently, our results would be better. We are always open to improvement, so I always ask for their data so we can take a look at it. “Data? Well, I don’t have any data,” is the inevitable response.
Data, in fact, is critical to distinguish between something that has worked recently and something that has worked consistently over a decade or more. I ask for the data so that we can compare it to the testing we have already done. (We’ve already tested for everything that we normally get inquiries on-usually in multiple ways. I’m not always sure callers generally realize that.) We have two hurdles: 1) the method has to be capable of being applied in a systematic way, and 2) the method has to have consistent success over a long period of time. When both hurdles are met, we may have something useful that can be applied to accounts in a rules-based way over many years that will give clients a shot to build real wealth.
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Posted by Mike Moody
