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Top 82. May 16, 2000 6:18 PM

» Kirk - Well Mark,

Well Mark,

We already have had the "Go away in May" selloff so why should we not have the "after the meeting rally" before the meeting?

BTW, when do those census workers get their pink slips?

-- posted by Kirk

Top 83. May 16, 2000 8:32 PM

» Mark_J - I was just commenting on what I saw on TV.

I was just commenting on what I saw on TV. There was a huge sigh of relief that the Fed rate hike is over, and my guess is that within a day or two, folks will look at their Franklin Planners/Palm Pilots/Pocket PCs and realize that OH MY GOD! There's another Fed meeting in June! Batten down the hatches! The debate will ensue on whether it will be .25 or .50, number watching will commence, and whatever the market decides will be priced into stocks.

Another rate hike in June makes alot of sense, if the Fed wants to skip the Kudlow articles and continue the fight against the roaring GDP. I doubt they'll want to muck with rates near the conventions or election, then December is egg nog drinkin' time... Next month may be their last opportunity before next year. So, will they be cautious and raise them again? My guess is yes.

That being said, I don't think we'll slip into a recession. I think a soft landing is likely because the economy is humming right now.

Conversely, I'm already starting to hear from some friends and friends of friends who are putting off the new home purchases because interest rates have priced them out of "moving up" and buying a bigger home. If I'm hearing it, my guess is that other folks are hearing it, too.

The Fed hikes may already be having an affect on demand.

Of course, I'm not sure if I'm whistlin' past the graveyard or not. I trade when I have time, but most of the time, I just come here and chat and debate with you fine folks. I hope we all reach critical mass sooner then later, and can continue to debate, whistle, chat...etc.

Looks like the Phoenix Suns are whistling past the graveyard...no wait...they've stopped...they have shovels...looks like they're digging 6 foot holes...

-- posted by Mark_J

Top 84. May 16, 2000 8:46 PM

» Kirk - Actually Mark

...you make alot of sense .25 or .50 then rest and watch what happens. Perhaps we get some huge slowing or downturn and we get no increase or we remain hot and we get .50.

I KNOW it is already going to cost me a ton as my variable loan will adjust up 2% to 8.5% and a refi for another 1 yr won't help as the rates are inverted! Can't go short to save money now. This will surely slow MY personal spending.

-- posted by Kirk

Top 85. May 17, 2000 5:50 AM

» Rande - Mark,

Mark,

I don't think June will be the Fed's last chance. They could act in August if they feel the need. There will be all kinds of scenarios put forth in the coming weeks -- the Fed stands pat in June since there isn't enough data from the May meeting and then raises in August if need be, OR the Fed raises in June and then that's it, OR the Fed raises 25 bp in June and 25 pb in Aug, waits out the rest of the year, then starts again, etc. Fact is NOBODY knows at this point, not even the Fed. I tend to agree with Abby Cohen on two points in here:

1. The markets continue to show faith that Greenspan's actions will prolong, not abort, the greatest economic expansion in history.

2. Even if we do tilt to recession there is sound reason to believe it will be mild and short-lived, primarily because of new information systems and technologies that have allowed companies to fine-tune inventory control (one of the principal excaerbating problems of past recessions).

Anyway, if this morning's futures are any indication, it looks like the hangover is coming early.

-- posted by Rande

Top 86. May 17, 2000 5:51 AM

» FCSTECKIII - Rande: Re: MPT

I'm evaluating a software package for calculating
an an asset allocation for the efficient frontier.

Since this is a 30-day free trial, I'm limited to
only five assets. I've chosen back-test data from
1984-1999 using five mutual funds from Vanguard:

1. S&P 500 Index Fund
2. Small-Cap Index Fund
3. International Growth Fund
4. GNMA Fund
5. Prime Money Market Fund

I let the optimizer program choose the best risk/
reward allocation for a standard deviation of .10
and here were the results:

Asset Allocation:

S&P 500: 72.71%
Small-Cap: 0.0%
International Growth: 10.14%
GNMA: 0.0%
Money Market: 17.15%

Standard Deviation: 0.10
Balanced Return: 16.27%

What I found interesting was that the GNMA fund
was never included in any of the allocations in
the efficient frontier. As expected, the small
cap fund was included in the mix as the standard
deviation (risk) was increased.

I would value your opinion regarding whether or
not Money Market is an appropriate substitute
for GNMA for a long-term allocation. -Thanks

-- posted by FCSTECKIII

Top 87. May 17, 2000 6:04 AM

» Rande - Fred,

Fred,

For long-term investment purposes, I don't view cash as viable asset class. Cash is something you spend. Certainly, keeping cash on hand is wise to meet near-term liquidity needs. Excluding special, planned expenditures, how much depends on what you need for ongoing liquidity and emergencies. The old rule of thumb was six months or so, but just as with the old rule about refinancing (refinance if you can get a rate 2% below your current one -- bogus, since the analysis should be one of long it takes to "break even"), this one is subjective -- what other sources of cash flow do you have and how reliable are they, do you have a standby line of credit, etc.

For asset allocation purposes, you might want to try large-cap U.S., small-cap U.S., intermediate-term bonds, and international equity and see what happens. One other word of caution -- historical rates of return may not be the best to use in projecting expected returns. Certainly, you could use the historical covariance between asset classes, but you may want to plug in more reasonable expected rates of return for projection purposes if the software allows, perhaps as follows:

LC 9%
SC 11%
Intnl 12%
Intmd-term Bonds 6%

-- posted by Rande

Top 88. May 17, 2000 7:03 AM

» FCSTECKIII - Rande

As always, I value your expertise. Thanks again
for your timely response ...

PS: I need to pay attention to some of the other
links on this site. Happy (belated) Birthday !!!

-- posted by FCSTECKIII

Top 89. May 17, 2000 7:11 AM

» Rande - Fred,

Fred,

Thanks. BTW -- those expected rates of return are just averages over at least a ten-year period. The problem with average annual returns is they don't occur in a straight line, expectations being just that. Monte Carlo analysis can help solve the problem inherent with using average annual returns for future net worth projections, but it all comes down to a best guess in the end. Still, so long as the plan is updated periodically and based on reasonable data, there is no practical substitute for modeling an appropriate portfolio asset allocation based on a required rate of return (based on cash flow needs and net worth goals), time horizon and risk tolerance -- at least for those who seek the best possible chance of achieving their long-term goals and objectives.

-- posted by Rande

Top 90. May 17, 2000 7:36 AM

» Kirk - FCS

FCS
Interesting topic and research.

Q1: What does "Standard Deviation: 0.10" imply?

Does it mean you want to TRY to have a portfolio that has a one sigma variation in value of 10% off the "Balanced Return" it provides? Thus, 97% of the time, you will NOT get a 2 sigma variance (or a 20% deviation) from the line?

I think that would mean one 20% correction in your portfolio every 33 (100%/3%)years. This would apply for both positive and negative variances. If true, you would really have a great portfolio as you would only get a DOWN variance of 20% once every (100%/1.5%) 67 years!

[Please correct my statistics if they are off… been out of engineering for 18 months now!]

Q2: What standard deviation is most suitable for the different levels of wealth accumulation?

I believe 100% equities is best until sometime in your 30's or 20 years before you plan to retire. Charts I have seen at a seminar by Wells Fargo on asset allocation show that 80% in equities gives you almost all the return as 100% but significantly reduces the risk. On the flip side, 80% in cash with 20% in equities gives you most of the return of cash and little stock market risk (this is probably the TRUE reason Brinker went to 40% equities it is 20% equities in a 50:50 portfolio. Going to 100% stocks buys him little extra return in a down market and he loses the ability to tell you he kept you in the market if he was wrong).

From my reading of the Wells Fargo tables, 80% equities is ideal risk:return for ALL age levels but it takes some staying power in bad times where you have to stomach the pull-backs in order to get the better overall return (stocks have ALWAYS outperformed all asset classes in any 20 year window for the last 200 years).

I will confess from first hand experience that knowing the truth and feeling comfortable in correction times is hard. You can second guess yourself for not taking more profits when the portfolio was at the 1 or 2 sigma variance in the positive direction (I was up over 20% in my personal portfolio at one point this year and am now somewhere between 5 and 10% up YTD)

Thanks in advance and great discussion topic!

-- posted by Kirk