joseph-calhoun – Scalper1

Chart Of The Week – 2008 Or 2011?

By Joseph Y. Calhoun Credit spreads are a big input to our investment process. It was the widening of spreads that convinced us to reduce our equity allocation before the volatility of last year. But active asset allocation requires that you get two consecutive decisions correct and that isn’t an easy task. Right now, for instance, we are watching spreads intently trying to figure out whether the all clear has been sounded. Spreads have narrowed considerably over the last five weeks, and if they continue to do so, we will, in keeping with our process, be forced to raise our risk budget. When we did our monthly Global Asset Allocation review 11 days ago, the trend was still toward widening and the decision was obvious but spreads have continued to narrow. So, the big question facing us and all the other tactical allocators is this: Is it 2008 or 2011? If it’s the former, we have just been given a wonderful opportunity to get more defensive. If it is the latter, we need to figure out how to raise our risk allocation. Click to enlarge So which is it?

Greek Crisis Causes Market Volatility

By Douglas R. Terry, CFA Jeff Snider and I often speak of the balance sheet leverage effect in markets. In the modern system, computer models assess the risk of portfolios throughout the industry. One key input to any value at risk model is volatility. If the standard deviation of prices rises, the computer will tell the managers that there is a greater probability of losses to the portfolio. Thus, managers have a mandate to reduce the risk in the portfolio to get their VAR back in down to acceptable levels. Thus, rising volatility is like a deleveraging type event as assets are sold. Many times the best performing assets in the portfolio are the ones that get chopped. This is partially because the out-performance likely means they are currently overweight in the portfolio, thus a rebalancing. Second, valuations of recent high flyers can be frothy compared to lagging peers. And third, assets with underlying strength can be easier to sell during market turmoil. Chinese equity weakness this past week was blamed on the Chinese economy. But I’m not convinced China shares were not merely the victim of recent success during a time of risk reduction. The table below shows some recommended changes in your asset allocation in order to reduce risk in your portfolio until the current Greek crisis is resolved and volatility comes back down. (click to enlarge) Disclosure : None