Insights on the Current Financial Markets
June 10, 2009
| Year of the Quant
Anchor Absolute Returns Update
Quantitative Strategies for Chuck E. Cheese
Is The Volatility Over? Minsky Revisited
Reflecting History: 2003 or 2008
Anchor Capital is a Registered Investment Advisor that serves successful individuals, families and institutions who expect excellence and have made a firm commitment to achieving it themselves. The firm provides strategies for
It’s been a great year to be a Quant. While the headlines are rife with panic and euphoria like; “Banking Collapse”, “Green Shoots” and “Auto Bankruptcy”, our mathematical trend models continue to generate positive returns. After the market plunged more than -25% the first two months of the year, the S&P 500 Index
clawed its way back to a slight gain. A positive development for investors, yet a harrowing experience for anyone forced to ride it out.
Here is a quick update on our Year-to-Date results:
| Anchor Absolute Return Portfolios |
2009 YTD |
2009 Risk* |
 |
| Anchor Radius |
12.9% |
-1.9% |
| Anchor Stratus |
8.9% |
-3.1% |
| Anchor Terras |
6.6% |
-4.0% |
| S&P 500 Index |
4.0% |
-27.6% |
 |
|
|
| Anchor Alpha High Yield |
-1.8% |
-9.8% |
| Merrill Lynch HY Index |
28.5% |
-9.9% |
Results as of 6/9/2009. Risk: measured as Monthly Peak-to-Valley Drawdown.
We provide these inter-month updates to keep you informed on our progress. Keep in mind however that these are only snapshots, and we may finish the month higher or lower than the above results.
Even with the market’s recent strength, the S&P 500 Index is still down over -40% since peaking in 2007. During the same period, Anchor’s Absolute Return portfolios have positive results, with a fraction of the market’s volatility.
These are incredibly challenging markets, even for professionals. If you believe it’s time to hire a more active manager, or would like our team to provide you with a complimentary portfolio review, click here or call our offices toll free at 888.482.2200.
Quantitative Strategies for Chuck E. Cheese
A few weeks ago I took my seven-year-old son, Ryan, to Chuck E. Cheese. Ryan loves Chuck E. Cheese-- not for the pizza of course, but for the games. My son isn’t drawn to the racing, fighting or simulation games, though. His vice is far worse: The Claw.
I’m sure you have seen these ridiculous money traps. A glass enclosure, laden with a treasure of toys and stuffed animals larger than a seven year-old’s head. A metal claw dangles above, and for a mere $1.00, you can have a shot at grabbing a toy with the claw. If the toy stays in the claw’s grip as it’s hoisted out of the pile, you win the toy. It’s a lure few kids can resist.
These games drive me crazy because they are a sucker’s bet. The claw is purposefully designed to provide very little grip. Time and again the claw will drop down to a pile of toys, grab a teddy bear or stuffed dragon by the tail and just before making it out of the pile to freedom, the claw loses it’s grip and the toy plunges back to the safety of the enclosure. Of course the toy could be purchased for $5.95 at the counter, yet young risk takers will spend $10 because each attempt is “so close”. The worst part is watching your kids pump their coins into a game you know can’t be won.
It wasn’t 20 seconds after arriving at Chuck E. Cheese that my son, like the proverbial moth drawn to light, located The Claw.
I had already rehearsed the conversation that should take place, educating Ryan on the very poor risk-return ratio, the value of his money, and better ideas on how to spend his tokens. I knew he would be disappointed, but life lessons are rarely fun.
Ryan already stood at the glass, eyes wide, locating his target:
a giant stuffed basketball. I was about to direct him to a lovely round of Skee-Ball, but before I could begin my fatherly lecture, I noticed something about The Claw. An anomaly. I began to ponder, considering various options. It seemed we may actually have an edge here. Ryan of course had targeted the largest toy in the collection, going for the "home run". But there was a much higher probability trade, that may even be repeatable.
The Quant in me took over. The stuffed basketball was indeed a beautiful prize, but the odds of getting it were skewed against us. It simply was not a high probability outcome. Instead, there were several smaller toys we had a shot at. We counted our money, counted the odds, and went for the prize. I don’t know who was more excited, me or Ryan. Not only did he beat the machine but he did it 3 times, walking away with 3 toys instead of one with just a few coins at risk.
So the next time you are at Chuck E. Cheese and you hear someone declare “Be careful, no one beats The Claw…you tell them Ryan Leake did.
Ryan Leake, Chuck E. Cheese Quant
Market Update: Is The Volatility Over?
This summer will mark the second anniversary of the Sub-Prime market crisis. It goes without saying that the last two years have been some of the most challenging months in the history of financial markets. Long held beliefs about the safety of diversification and asset allocation have been shaken to the core. Many are questioning the future stability of the financial system. The question now is: after crashing -50% then recovering back 20%, is the high drama over or are we headed for pain once again?
The work of Dr. Hyman Minsky can probably shed some light.
In 1974, Minsky an economist best known for his work on understanding the characteristics of financial crises wrote:
“A fundamental characteristic of our economy is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."
Minsky went on to explain that the market exhibits periods of prolonged stability, followed by abrupt periods of instability. These cycles repeat over and over, regardless of the headlines of the day. In fact the longer the period of relative calm, the more complacent investors and consumers become, the more violent the return to volatility.
A simple look at the charts validates Dr. Minsky’s thesis.
The past 18 years have been marked with periods of relative calm, and high volatility. The headlines for each event over time are different. There are different catalysts, various heroes and villains, but the cycle repeats. Minsky would probably argue that regardless of the news story of the day, we are destined to repeat this cycle as long as we embrace a capitalist system.
The logical conclusion then, and the foundation to our investment methodology is that one must have the ability to profit from both rising AND falling markets, in both high AND low volatility environments. History makes it painfully clear that an investment method that is solely dependent upon ever rising prices is destined to fail eventually.
Reflecting History: 2003 or 2008
The rally from the March lows looks surprisingly similar to March inspired rallies seen during 2003 and 2008. This is interesting because there are stark differences between the two years of 2003 and 2008. The March to June rally in 2008 marked a brief, quiet rally sandwiched between two dramatic multi-month declines. The March to June rally in 2003 however was just the beginning of a multi-year recovery.
Here is a look at all three March market bottoms.
Current March Inspired Rally.
After declining -52% in 16 months, the S&P has staged a relatively quiet but consistent +38% rally over the past 2.5 months.
March 2008 Inspired Rally.
An almost identical low volatility rally occurred last year. Unfortunately, there was still substantial downside in the following months, with the worst of the bear market still ahead.
March 2003 Inspired Rally.
The 2003 Bear Market Bottom was also similar in duration and strength of the current rally that led to sustained gains over the months and quarters ahead.
While almost identical in timeframe to both the 2008 and 2003 March rallies, the current market strength more closely reflects the Bullish environment of 2003. While that would argue for continued market strength into the end of the year, be forewarned-- even the substantial rally in 2003 ran into some trouble during the summer months. Since mid May index prices have moved marginally higher, but on steadily lower volume. I would not be surprised to see consolidation during the summer months.
Conclusions
An objective look at market history suggests that the market cycles through periods of high and low volatility. Whether the market has indeed bottomed or if there is new selling ahead, it doesn’t much matter to us. To assume anything else would be simply foolish. Our Absolute Return portfolios are positioned to benefit equally from either rising, or falling market trends.
As always, we will remain disciplined to our quantitative strategies, allowing our risk models to drive our decisions.
To find out how to put Anchor Capital portfolios to work for you, click here.
Until next time,
Eric Leake
Chief Investment Officer,
Anchor Capital Management Group, Inc.
http://www.anchor-capital.com
Chief Executive Officer,
Anchor Research, LLC.
http://www.anchor-research.com
Anchor Capital Management Group, Inc., is a Securities and Exchange Commission Registered Investment Advisor. Opinions expressed are not to be construed as a solicitation to buy nor sell securities. *Anchor Capital utilizes a tiered fee schedule that offers lower management fees to accounts with higher balances. Any investment returns presented are calculated gross of fees utilizing actual accounts which represent a model strategy. Individual returns may vary substantially from those presented due to differences in the timing of contributions and withdrawals, account start dates, and actual fees paid. Past performance is not a guarantee or indication of future results. Presentation is for informational purposes only and no guarantee is made as to the accuracy of this information by Anchor Capital Management Group, Inc.
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