Answer this interview question interested, interview, recommend

bpdulog

I had this one recently. I didn’t answer it very well. I’d be interested to see what you guys come up with.
What is your view on equities vs bonds? What would you recommend to clients. Use a 3 to 6 month time horizon.

scr879

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tikfed

My essay was on another thread.
I don’t think you can answer an Equities vs. FI question without knowing the client’s risk tolerance. All you can say is that you want some of each for diversification, and how much of each depends on risk tolerance.
Within Equities, I’d say there is more downside risk right now than upside potential, so I’d be underweight equities from a tactical standpoint. The austerity crowd is gathering strength, meaning that stimulus is less likely to continue, and the expiration of the Bush tax cuts are also likely causing some drag on current investment and will cause economic drag afterwards (though probably less than the right claims it will - the expiration of Bush tax cuts will probably do more to help control the deficit than it will in terms of drag on the economy.) In terms of sectors, you’d want to pay attention to sectors that sell to businesses and emerging markets… though we’d still need to pay attention to valuation.
In fixed income, we’re likely to have a new round of mortgage resets, and now we have high unemployment, and the fed has stopped buying MBS and putting them on its balance sheet. So I’d tread carefully in the mortgage sector. While the rest of the world is freaked out about Europe, long term treasuries have been doing better than people predicted (when Nassim Taleb said “everyone in the world should be short the LT UST”). Some foreign commodity based fixed income is probably a good bet.
It may make sense to use equity LEAPS to catch the possibility of positive equity surprises, and buy some floors to protect against an eventual selloff in LT US Treasurys. Depending on the price, a floor might give you better yield than a T-Bill with downside protection.

cjs238

Muddahudda Wrote:
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Bchadwick is probably writing an essay at this
very moment…
Still waiting. I’m sure he will deliver the goods as macroeconomy is his strong suit.

YouCanDoIt

Would you really say t-bill as a response to that question? Next please.
Bchadwick is probably writing an essay at this very moment…

spreads

pup dawg is right - fed model, t-bill approach

anothercfainnyc

Ceredwyn Wrote:
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If you have a 3 to 6 month time horizon you
shouldn’t be in either equities or bonds. You want
either tbills or commercial paper. Any other
answer is a complete mismatch of duration and time
horizon.
Maybe the question is more of a tactical/trading idea and not a wealth planning/management idea.

bleach

If you have a 3 to 6 month time horizon you shouldn’t be in either equities or bonds. You want either tbills or commercial paper. Any other answer is a complete mismatch of duration and time horizon.

wizofoz

Buy - Italian CDS (naked italians please)
Sell - HG Corporate paper as the market positions for higher rates. (rates are going to slaughter people soon)

former

If I’m a FI guy,
The uncertanties continue to cast the equities market providing unquantifiable downside risk. The risk reward does not justify investment in risky assets at this stage. With the possibility of a double dip recession, I would suggest you to park the money on short term govies. While this does not give you the upside it contains the downside. In addition, it’s liquid and you can rotate out relatively easily.
If I’m an equities guy,
Providing positive economic indicators taking the headline of most press recently mixed with some concern from the China and EU situations, heightened volatility is understandable. A situtation like where we are now, reminds me Jan/Feb 2009 right before the market had its best rally. However, what’s different this time is that 2009 was clearly a beta rally but 2010 is not. The proliferation of corporate suprises provides a good playground for true stock pickers. (insert your stock pitch)
My answer,
A close-to-zero rate provides limited upside for traditional fixed income securities and the uncertainties surround EU and China issues provide a difficult macro environment for traditional equities managers. However, this is a great opportunity for a global macro manager whom navigates 2008 well, or an distrssed credit even driven manager who can profit from the “wall of maturity” (depends on which strategy you want to push but I think global macro and distressed event driven are the best). Look at the beautiful charts, graphs and numbers….
That shows you which camp I’m in…