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Getting Back Into It

It is mid-February and my last post was from the end of October. I consider that a word or two of explanation is necessary – at least if I plan on continuing this blog. In short, I’ve been dedicated to working on software helping individuals keep their Internet privacy. I’ve also been approached to do some options education seminars by a friend who is one of the traders that I respect after watching him trading gold options for years.

While I’d normally recommend focusing on one thing and relentlessly beating it into submission (and earning the coin associated with it), I believe that my best option is to pursue a few directions and see what sticks. My time is going to be spent on the following three things:

  1. Internet Privacy Software. I’m not ready to go too public on this until I get an alpha version going. I have a prototype done but I’d like to have more done and am trying to reach out to people that can directly help me. If you are one of those people or are just very interested in regaining personal privacy, please reach out.
  2. Options Education. I’ve been trading for around two decades and much of that has been dedicated to many, many options transactions in varied markets. Without being too self-aggrandizing, I think it is safe to say that I can help current and potential traders take advantage of the option markets. If all goes as planned, I will be giving a talk in NYC very soon. I’ll post details shortly. As I mentioned above, my friend and partner in options education are looking for paid engagements either domestically or abroad. The upcoming talk is on “Practical Options Trading.” The others are dedicated to what is necessary to make markets. Please contact me for further information.
  3. Automation for money management. I’m looking to both improve my personal money management and reduce expenses. This actually coincides fairly well with my effort in privacy software as I am using Python for both (at least at the moment). This will likely be the most useful area for readers and potential readers of this blog.

I will continue to use this blog to communicate with people, organize my thoughts and enforce additional discipline on my routine. In addition, I’m going to try adding some “product.” By product, I mean something that is standardized, recurring and useful. My idea is to come up with some economic & market chartbooks. That flows naturally from my own needs and my goal of focusing on process.

You Got Equities in my Bond Fund …

You got chocolate in my peanut butter …

I had already begun thinking that dividend stocks have become a crowded trade for some time. And then I read this article in the Wall Street Journal about how bond funds are investing in dividend paying stocks. At this point, it is an easy jump of bias confirmation to call a market top. A commenter questioned the data and I thought it would be worthwhile to investigate more. That was yesterday morning and I’m still trying to get my head around it. It is, after all, an important question. We know that yield is too expensive, that it is artificially manipulated (for our own good by all knowing central bankers) and that the (intentional) effect is to cause allocations in other areas of the economy to adjust. But how expensive? Is it an allocation or a mis-allocation? Has the search for yield become too crowded? And, most importantly, is there a trade in it?

Sorry to disappoint, but this post is only going to be a starter kit. This is a big question. It is, arguably, THE big question for investors right now.

I’ve reached out to the author of the article via email. He responded very quickly and indicated that Morningstar tracks just under 2,000 bond funds. Most funds’ allocations to stocks are small, but there are several dozen with allocations >5% and a couple dozen with allocations > 10%.

I was able to run a fund search to try to replicate the findings from the article. I also looked at the MorningStar site but didn’t find the article. I’m not a subscriber, so if you read this and are, please let me know if you find anything. Instead, I used what I have available, which is a Bloomberg terminal. I brought up the fund screening tool. The criteria that I used was: US domiciled, focus on debt asset class, USD denominated and equity fund allocation > 1%. I also only looked at primary share classes to avoid repetition of funds & assets.

According to Bloomberg’s database, there are 14,672 primary share class funds of all types active and domiciled in the US. Of those, there are 2,540 focusing on debt. Finally, of those 2540, 162 have an allocation to equities greater than 1%. 60 have an allocation greater than 5%. Like all screens, these are not perfect. Many of these look like funds that were oriented to have mixtures of fixed income and equity. Others consider preferred stocks as fixed income.  Out of the top 10 for those holding more than 1% equities, 3 are Loomis Sayles. There is not an easy way to track these allocations over time, at least not in aggregate. There is nothing, therefore, to add about evolution of these equity allocations.

Overall, I don’t see a clear conclusion. I suspect that there is a reach for yield and allocations are indeed higher. The incentives in place for portfolio managers encourage a reach for yield. It seems unfortunate that there is not a smoking gun here, but sometimes finding out something is not evidently true can be as valuable as finding out that it is. At any rate, there is more to be said about the reach for yield but not tonight and not in this post.

Please Allow me to Introduce Myself …

Not so much a man of wealth and taste. One out of three aint so bad.

Welcome. This is the first post for what I hope will be a blog useful for others and myself. I think that the discipline of producing posts/articles on a regular basis and that will be publicly available will force some structure and productivity on me.

My hope is that I will produce good quality material that can also provide some humor now and again. The Macro-Man blog (both current and original flavors) is what I’d like to be benchmarked against. Although realism demands that I view that as a Platonic ideal and I’ll leave it as my aspiration.

Although I expect any initial plans to get sacrificed quickly, look for financial markets commentary focusing on value and quantitative research. Not everything will be quantitative; I’ve been around long enough to know that you can’t model everything. Incidentally, while I have a background in engineering, I’ve had to re-educate myself in the mathematical arts. Years of being a knuckledragger in the ring making markets (see the photo in the header — not me, though. Those guys are from the gold futures ring when it was how I hedged my options) had me focused on liquidity provision and reaction. I have to reset my perspective; this blog will document at least some of that. Expect quite a bit about options as that has been my specialization for over a deca- , er, a while.