The Big Picture

Nelson Mandela & South African Inequality
BBC: Inside the US Federal Reserve
10 Monday PM Reads
The Hierarchy of Innovation
Advance Decline Line (Market Breadth) Says No Top Yet
10 Monday AM Reads
A Closer Look at Hedge Fund Under-Performance
TDS: Blackstone & Codere

Nelson Mandela & South African Inequality

Posted: 09 Dec 2013 04:30 PM PST

Discuss . . .

Source: Economist

BBC: Inside the US Federal Reserve

Posted: 09 Dec 2013 04:00 PM PST

No, that is not what DONT FIGHT THE FED means

Source: BBC

10 Monday PM Reads

Posted: 09 Dec 2013 01:30 PM PST

My afternoon train reading:

• Cheer Up: World Growth Is Accelerating (Bloomberg) see also The Myth of America’s Decline: Why the ‘Declinists’ Are Wrong (Again) (Yahoo Finance)
• Why investors are more bullish about the S&P 500 than Goldman and other analysts (MarketWatch)
• Bubbles: No One Has Any Idea What’s Going On (Motley Fool) see also Let Fear Be Your Friend in the Market (Forbes)
• Does a Federal Reserve taper even matter for stocks? (CNBC)
• Microsoft’s Apple Investment: The Worst Deal of Them All? (Businessweek)
• Yay! Less than half of 1996! For IPOs, 2013 Nears Busiest Year Since Dot-Com Era (WSJ)
• The Volcker rule is nearly finished. Here's how we'll know if it's any good. (Washington Post) see also Near a Vote, Volcker Rule Is Weathering New Attacks (DealBook)
• By George, Britain’s Austerity Experiment Didn’t Work! (New Yorker)
• On Mars, an Ancient Lake and Perhaps Life (NY Times)
• China Mobile Adds the iPhone Follow-up (stratēchery)

What are you reading?

Greece has lost more than one-fifth of its pre-crisis economy

Source: Quartz

The Hierarchy of Innovation

Posted: 09 Dec 2013 11:30 AM PST

I find this intriguing:

From Rough Type:

If progress is shaped by human needs, then general shifts in needs would also bring shifts in the nature of technological innovation. The tools we invent would move through the hierarchy of needs, from tools that help safeguard our bodies on up to tools that allow us to modify our internal states, from tools of survival to tools of the self.

Source: Rough Type

Advance Decline Line (Market Breadth) Says No Top Yet

Posted: 09 Dec 2013 09:30 AM PST

Source: Chart courtesy of Carl Swenlin, Decision Point (annotations by Ritholtz)

One of the best ways to identify a market that is exhausted is to look for divergences between Breadth (i.e, the numbers of Advancing equities versus the number of declining ones) and Price (ie., New Highs). That is a concept which Paul Desmond of Lowry’s has researched and written about many times over the years (See e.g., The Warning Signs of Market Tops, August 16, 2013).

As the chart above shows, markets saw major divergences in both 2000 and 2008, as stocks continued to make new highs in prices but failed to do so in the advance decline line. Prices kept rising, but fewer and fewer issues were participating in the new highs.

Continues here

10 Monday AM Reads

Posted: 09 Dec 2013 06:29 AM PST

Good Monday morning. These are the items that will make the start of your week a little better informed:

• Rising riches: 1 in 5 in U.S. reaches affluence (USA Today) but see also Cash is still king for affluent investors (FT)

• The Hubble bubble theory of the continuous expansion of the financial universe (FT Alphaville)

• WSJ vs NYT: Fed Closes In on Bond Exit (WSJ) but see Fed's Plan to Taper Stimulus Effort Not Expected Until Next Year (NY Times)

Continues here

A Closer Look at Hedge Fund Under-Performance

Posted: 09 Dec 2013 05:00 AM PST

"The $2.5 trillion hedge-fund industry, whose money managers are among the finance world's highest paid, is headed for its worst annual performance relative to U.S. stocks since at least 2005.

The funds returned 7.1 percent in 2013 through November, according to data compiled by Bloomberg. That's 22 percentage points less than the 29.1 percent return of the Standard & Poor's 500 Index, with reinvested dividends, as markets rallied to records."

-Hedge Funds Trail Stocks by the Widest Margin Since 2005, Bloomberg

Hedge fund performance – and under-performance – is an area of research I have been intrigued about for several years now. It is a complex, nuanced issue which many folks misunderstand. I was reminded of this over the weekend, courtesy of a Bloomberg article titled Hedge Funds Trail Stocks by the Widest Margin Since 2005.

The numbers cited above are eye-popping: The average hedge fund is under-performing the S&P500 by over 2000 basis points this year alone. That is an astonishingly poor showing. As Saijel Kishan & Kelly Bit point out in their article, hedge funds have "underperformed the S&P 500 by 97 percentage points since the end of 2008." The last time the fund industry outperformed U.S. stocks was in 2008. That year, they lost (depending upon which industry data you use) somewhere between 19 and 29 percent; the S&P 500 declined 37 percent. Prior to 2008, you need to go back to 1993 to find similar outperformance when they were up 31 percent versus a 10 percent increase for the S&P.

In a presentation at the Retirement Security conference at the Kennedy School at Harvard University this summer (The High Cost of Neuro-Financial Errors: How Cognitive Bias and Performance Chasing leads to Investing Failures) I divided the explanations for hedge fund performance into five categories: 1) Industry Size; 2) Fund Size; 3) Unhedged Hedge Funds and the Financial Crisis; 4) Drag from fees; 5) Unsmooth alpha distribution. A brief look at each will put the poor performance into some context.