Tuesday, July 7, 2009 0 comments ++[ CLICK TO COMMENT ]++

Four scariest words for bulls: "Correlations at All-Time Highs"

Actually not the worst words but Toro's Running of the Bulls had a post last week titled "Correlations at All-Time Highs". It cites some story from Bloomberg mentioning the high correlation between various assets and sectors.

This is scary, not because it means that prices will fall but, because, if prices do fall, all assets are going to drop at the same. I'm sure all of us will remember last year when everything plunged together. It wasn't a surprise to me given how Marc Faber had been warning about correlated assets for many years, but it is still an awesome sight to experience everything bleeding red.

This doesn't fit everyone's investing style or circle of competence, but you can generally get around the high correlation issue by investing in alternative strategies such as risk arbitrage, liquidations, distressed investments, and so on. Although these strategies also posted some poor numbers last year, it wasn't that bad. (The downside, of course, is that these strategies don't allow you to participate in any bullish market moves.)

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