The Times They Are A-Changing

July 17, 2009

This is stunning news. I am probably a typical American who had no idea that the equity market in China had grown so rapidly. Sure, we all know about China ETFs and a few of the large-cap names, but I am still surprised. The amount of capital formation that has occurred in Asia since WWII is astounding. First, Japan overtook London during its period of phenomenal growth rebuilding after the war. Now, the forces of capitalism that have been unleashed in China have caused the market cap to exceed that of Japan.

This is a good wake-up call. Capital will migrate to wherever the innovation is taking place, wherever it is treated best. And this will also be true of your investment capital. We are all going to need to learn to think globally.

Leave a Comment » | Markets | Permalink
Posted by Mike Moody

Defenders of EMH On The Defensive

July 17, 2009

The Economist has a nice discussion about the current state of support for the Efficient Markets Hypothesis (click here to read.) However, it seems that as the weaknesses of the EMH have become evident to a broader audience in recent years, many still seem to conclude that there is no better alternative.

To those who are still confused about a better approach, I would suggest that they start by reading Mebane Faber’s paper, A Quantitative Approach to Tactical Asset Allocation, which was published in 2007 in The Journal of Wealth Management (click here to read.) The numbers speak for themselves.

Our work on Global Tactical Asset Allocation strategies can be seen in the Arrow DWA Balanced Fund (DWAFX) and, more recently, in our Global Macro strategy which is currently available as a separately managed account, but will soon be available as a mutual fund with Arrow Funds.

Click here to visit ArrowFunds.com for a prospectus & disclosures. Click here for disclosures from Dorsey Wright Money Management.

Leave a Comment » | Tactical Asset Alloc | Permalink
Posted by Andy Hyer

Birds of a Feather

July 17, 2009

Economists have a lot of the same problems as believers in the Efficient Markets Hypothesis. (See article here.) It turns out that people are not completely rational in their economic choices—surprise, surprise. And it turns out that unfettered free markets do not allocate resources and rewards perfectly. There are always plenty of bubbles and artificial shortages. Now there is a new field of behavioral economics, not unlike behavioral finance, where they are trying to understand the impact of human behavior in economic systems.

Eventually, they may strip economics down once again to what really works: the basics of supply and demand. Technical analysis can be useful because it makes no assumption of rationality—and let’s face it: lots of times the rationale for either supply or demand is ridiculous. A technical analyst is willing to follow the trend until it ends, and then switch to another trend. Economists and EMH types are burdened with trying to justify why the rationale was sound.

Leave a Comment » | Investor Behavior, Markets | Permalink
Posted by Mike Moody

Efficient Markets

July 17, 2009

For markets to be efficient, investors must react rationally to new information as it enters the public domain. One of the big problems with the Efficient Markets Hypothesis is that investors do some crazy things. They are not always rational!

General Motors recently emerged from bankruptcy as two new entities. There is the “new” General Motors Corp that will continue to sell cars, and there is also a Motors Liquidation Corp that owns all of the bad assets the new GM didn’t want anymore. Matt Phillips wrote an interesting column for the Wall Street Journal (click here to read it) about what happened to GM stock on the day it emerged from bankruptcy. People who still held the old stock were thrilled that GM came out of bankruptcy and bid the stock up 35%. But there was one small problem. Those GM shares have nothing to do with the company that is still selling cars. They represent ownership in Motors Liquidation Corp, which is still looking to sell all of GM’s bad assets.

The stock price reaction to GM emergence from bankruptcy was so irrational FINRA had to step in to protect all the investors that hadn’t bothered to consider what stock they owned. They changed the name to Motors Liquidation Corp and the symbol to MTLQQ to avoid any confusion. The stock promptly dropped 50%.

Investors do strange things. Humans are not hard wired to be good investors. As a result, there are market inefficiencies that a disciplined process can exploit over time.

Leave a Comment » | Investor Behavior, Thought Process | Permalink
Posted by John Lewis