Time to Look Back

The cliché says, those who don't study history are doomed to repeat its mistakes. After snowballed by the financial crisis, we might want spend some time concentrating on the history of finance. The Ascent of Money, written by Harvard Professor Ferguson, covers the development of the world financial system and how a means of exchange and store of wealth become parcelled and packaged in subprime mortgage back securities and sold around the world. Recently, for those who do not have time to read through his 500-page book, PBS has adapted his book into a documentary series, also named The Ascent of Money. As what I agree with Prof Ferguson about, for a means of participating the future, the past is as good a guide as others.

Asset Allocation Backtesting Softwares

Asset allocation is a basic strategy an investor uses to distribute his investments among various classes of investment vehicles in order to hedge against the risk. But somehow for an individual investor, the approaches used to forecast forward-looking inputs for return or risk in the traditional mean-variance optimization are complicated and time-costly. To trade with the help of some asset allocation software is usually preferred.

I am currently using Windham Portfolio Advisor, which is comprehensive and the most user-friendly software I have used so far.

Pertrac Analytical Platform is one of the biggest competitors against Windham Portfolio Advisor. It has more pre-installed asset classes and data than Windham has, such as Nasdaq and all types of government bonds. But the default Pertrac Analytical Platform version comes without a Black-Litterman model, which requires to pay additional fee if needed.

For an individual investor who is looking for a good bargain on a tight budget, MvoPlus is a good choice. However, it does not have a Black-Litterman model or Monte Carlo methods, and requires users himself to import all the data. It can still be tempting at its price level, which is relevantly much cheaper than Windham or Pertrac.

But nothing can compete with Morningstar EnCorrr, the most fully-scaled asset allocation backtesting software in the industry. The whole package consists of Data Center, EnCorr Allocator, EnCorr Analyzer and other five portfolio tools. Considering how sophisticated it is, Morningstar highly encourages its users to take online tutoring courses.

Of course, there are a lot of fish in the sea. Besides all above, Zephyr Allocation Advisor, DynaPorte Portfolio Solution and other softwares can be wise choices for investors as well.

The SEC Blew the Bubble?

Ms Drucker wrote 'The SEC Killed Wall Street On April 28, 2004', which is an extraordinary piece of work. The five SEC commissioners anonymously voted a program which took away the supervision on the Wall Street back in 2004. The SEC deregulation let Big Five Banks leverage up on their methodology:

The broker dealers – Bear Stearns, Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers – were all keen to see their holding companies monitored by the SEC under a new Consolidated Supervised Entities (CSE) program.

... Once more, we return to the climber who is scaling the building without the safety net. To what extent did the added leverage directly lead to the end of the five giant banks? Bear Stearns sold its decimated stock to JP Morgan in March, on September 15, Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America, and on September 22 Goldman Sachs and Morgan Stanley converted themselves into commercial banks. “I’d call it res ipsa loquitur – in other words the thing speaks for itself,” Ritholtz comments. “It’s no coincidence that since the SEC created the exemption, all five are now gone.”

... Cox himself admitted on September 26, 2008, that the CSE experiment had been “an utter failure”, as the SEC ended the program. Meanwhile, the remaining investment banks were flailing. The Chairman attributed the breakdown to the voluntary aspect of the arrangement, whereby the banks could opt in and out of supervision at will. He said, “The fact that the investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the CSE program, and weakened its effectiveness.” In ending the program, Cox was plainly stating that self regulation had fallen far short. “He was implicitly saying that the oversight of the regulators had failed,” says Daugherty.

Continue reading here.

Impact of GDP

Thanks to Bureau of Economic Analysis (BEA), which published the latest data set of GDP yesterday, the expectation of the economy is falling down to the lowest level in the past five years. The real-GDP of the fourth quarter of 2008 decreased at an annual rate of 6.2 percent, according to a preliminary estimated by BEA.

Source: EconompicData

In response, the Dow Jones plunged by 43.1 points, from 7099.5 to 7056.4; S&P dropped by 8.13 points, from 745.23 to 737.1, in the first 30 minutes after the BEA's report. It warns that, next Monday, the market should continue to fall after 3 down days this week, because of the low expectations in the market.