A noted manager of financial sector funds finds little to like out there.  (WSJ.com)

Goldman Sachs (GS) raises $10 billion to invest in loans backing LBOs.  (FT Alphaville also Deal Journal)

The Mexican Peso is at a six year high.  (Money & Co.)

If Apple (AAPL) says the economy is depressed, what does that mean for the rest of us?  (footnoted.org, Big Picture)

Not surprisingly, the options market is now the home of financial shorts.  (MarketBeat also Alea)

“(I)nvesting overseas is more about an expanded opportunity set and less about diversification…”  (Morningstar.com)

How did the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) hold up through the credit crisis? (TheStreet.com)

“If you have a reasonably long time horizon, lower stock prices are a positive development, not a negative one…”  (Morningstar.com)

Is the commodity bubble on its last legs?  (MarketBeat)

Infrastructure investing takes a step towards the mainstream with a new set of indices.  (IndexUniverse.com, Random Roger)

What are state budgets saying about the state of the economy?  (naked capitalism)

A handful of films that provide a business school education.  (Deal Journal)

Why does the January Effect persist?  (CXO Advisory Group)

A BlogTalkRadio star is born.  (Daily Options Report)

A bull market in…garbage and water.  (NYTimes.com, TheStalwart.com)

Yet another macroeconomic model predicting gloom for John McCain’s chances.  (Free exchange, Real Time Economics)

The process to purchase the Chicago Cubs moves forward, with one previously favored bidder seemingly falling by the wayside.  (ChicagoTribune.com)

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“Will Wall Street sober up?” after this most recent crisis.  (Floyd Norris)

“The concept of a crowded trade is simple.  Trades are crowded when those that hold the assets in question have short time horizons.”  (Aleph Blog)

Want to buy a mutual fund operation?  Banks are selling.  (WSJ.com)

“Since 1926 US stocks have beaten the world market in 75 per cent of the presidential election years and by an average spread of 13.4 per cent per cycle from June through October.”  (FT.com)

Are emerging market equities a portfolio diversifier, a hedge, or neither?  (Abnormal Returns)

A closer look at a new set of international sector ETFs.  (Random Roger)

Don’t rely too heavily on any single market indicator.  (Big Picture)

Biotech in the spotlight.  (Money & Co.)

Why oil prices are coming down.  (Jeff Matthews)

“The best plays in MBS are securities where extension risk is limited.”  (Accrued Interest)

John Paulson raises a fund to turn the tables on troubled financials.  (TheDeal.com, DealBreaker.com)

If you can find a job in finance right now you might very well be set.  (Mergers & Inquisitions)

Buying and selling bandwidth.  (BusinessWeek.com)

What are the odds the Fed raises rates this year to stem inflationary pressures?  (Odd Numbers)

Mortgage rates are on the rise.  (Calculated Risk)

The Icahn Report on the Yahoo! deal!  (FT Alphaville)

Mark Cuban is keeping his bid for the Chicago Cubs on the down low.  (Deal Journal)

Just what is the “social responsibility” of the corporation?  (Curious Capitalist)

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At what point does a diversifier become a hedge?  Asset allocation has been driven of late by the desire to access a wide range of alternative asset classes.  University endowments like Harvard and Yale have become the gold standard in investment management.  (See this post by Mebane Faber at World Beta on the subject.)  The entire drive for broad diversification is an attempt to access a diverse set of risk premia in addition to generating active alpha.

The case for including an asset class in a portfolio is often made on the correlation of that asset with other “core” asset classes.  Emerging markets have been touted for some time as an excellent portfolio diversifier due in large part to their low correlation with developed market equities.  (The folks at Bespoke Investment Group have a cool correlation matrix showing recent changes in asset class correlations.)

This question about diversification came to mind when reading an article by Agnieszka Baczyk and Herbert Mayo at IndexUniverse.com.  In it the authors examine the correlation coefficients of a variety of emerging market equity ETFs against the S&P 500 (SPY).  In their research they find that the correlations are higher (and rising) than that previously reported in the literature.  Where they go off track is in their conclusion:

To achieve diversification, the numerical values of the correlation coefficients relating the returns on the alternative investments need to be small or even negative. The correlation coefficients calculated in this study are relatively large and inconsistent with prior research. Based on these results, investing in emerging market ETFs traded on American securities markets no longer offers much potential to diversify a portfolio consisting of American stock.

That is indeed a high standard for a portfolio diversifier.  They seem to be saying that even mild portfolio diversification is not worth the effort.  For instance, most investors include both large and small cap equities in their portfolio despite their very high correlation.  It seems the authors are conflating the issue of diversifiers and hedges.  Hedges are explicitly designed to (or inherently) provide offsetting returns.  Applying that standard to portfolio diversifiers would in fact eliminate many asset classes from consideration.

Another point is that you cannot judge diversifiers simply by the results of a correlation matrix.  Portfolio construction involves assembling assets that generate different risk premia across time and space.  It is pretty clear that emerging markets, especially the frontier markets, are not simply S&P 500 wannabes.  Their returns come from a very different set of real economic factors.

Emerging market equities may (or may not) be the greatest asset class since sliced bread.  After a strong multi-year run, led by the BRICs, they have pulled back substantially this year.  But emerging markets do provide investors the opportunity to access risk premia that are different from typical core assets like the S&P 500.  The decision to include emerging market equities in your portfolio, especially via the raft of ETFs now available, is always your own.  But you should not be scared away from them simply because their correlations are at times closer to 1 than 0.

Bank sues analyst.  (DealBreaker.com, Big Picture, ClusterStock.com)

Recent changes in asset class correlations.  (Bespoke Investment Group)

The Roche-Genentech deal is going to be a “an expensive, time-consuming affair”.  (Deal Journal)

Two different approaches, two different results:  InBev and Microsoft.  (DealBook)

What can Microsoft (MSFT) do about its languishing stock price?  (Tech Trader Daily)

Some hedge fund stars from 2007 are having a repeat performance in 2008.  (WSJ.com)

An obscure market timing indicator turns positive for the first time in a while.  (Marketwatch.com)

Ten new international sector ETFs.  (24/7 Wall St.)

There is nothing magical about the VIX.  (Daily Options Report)

It has been a really bad quarter for dividends.  (MarketBeat)

Not all financials are ‘poison.’ (Aleph Blog)

Data on ‘naked shorts‘ is hard to come by.  (NakedShorts)

Traders need to deal with “should-have syndrome.”  (TraderFeed)

An interesting job post for a hedge fund.  (Infectious Greed)

The CBO weighs in on the GSE rescue plan.  (Odd Numbers, Curious Capitalist)

What is causing global food inflation?  (Economist’s View)

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Just how much will the financial crisis cost U.S. taxpayers?  (WSJ.com)

“Do we need Fannie and Freddie at all?”  (NewYorker.com)

One firm is doubling down on a bullish bet on residential mortgage securities.  (WSJ.com)

There is mixed evidence that last week was the low.  (Big Picture)

Look for more mergers and acquisitions, a lot more.  (Jeff Matthews)

“(G)ood old T2108 [% of stocks above their 40 day moving average] shows that the market is still pretty extremely oversold.”  (Trader Mike)

The global equity markets have not yet decoupled from the U.S.  (Infectious Greed)

There’s nothing magical about 30 on the VIX.  (Marketwatch.com also VIX and More)

The return of the hemline theory.  (Crossing Wall Street)

Anatomy of an IPO gone wrong.  (NakedShorts)

Yet another example proving that Goldman Sachs (GS) is running the world.  (FT Alphaville)

Carl Icahn gets his way with Yahoo! (YHOO), sort of.  (Silicon Alley Insider also Deal Journal)

What say CFOs on the equity risk premium?  (CXO Advisory Group)

“(T)he most accurate forecast of oil prices over the next month, year, or quarter is the current oil price.”  (Freakonomics)

Should gasoline taxes be raised or lowered?  (Becker-Posner Blog)

“In short, it seems that foreign central banks are willing to take up whatever slack emerges in demand for American assets.”  (Free exchange)

“Fed policy alone may not be enough to get the economy back on track…”  (Economist’s View)

The stadium naming curse rears its ugly head again.  (MarketBeat)

Speaking of curses, some 10 bidders are purportedly bidding for the Chicago Cubs.  (DealBook)

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