Abstract

https://ssrn.com/abstract=2604248
 


 



Lumber: Worth It's Weight in Gold Offense and Defense in Active Portfolio Management


Charles V. Bilello


Pension Partners, LLC

Michael A. Gayed


Pension Partners, LLC

May 8, 2015

2015 NAAIM Wagner Award Winner

Abstract:     
Prior academic research focuses on commodities in isolation as leading economic indicators, ignoring the message price behavior may have on other asset classes. We find that the relative movement of Lumber to Gold provides important information on economic growth and inflation expectations, which gradually diffuses with a lag to stock and bond markets. Lumber’s sensitivity to housing, a key source of domestic economic growth in the U.S., makes it a unique commodity as it pertains to macro fundamentals and risk-seeking behavior. On the opposite end of the spectrum is Gold, which is distinctive in that it historically exhibits safe-haven properties during periods of heightened volatility and stock market stress. We find that the relationship between Lumber and Gold helps to answer the critical question of when to “play defense” and when to “play offense” within the context of active portfolio management. In this paper, we show that a strategy using the signaling power of Lumber and Gold results in stronger absolute and risk-adjusted returns than a passive buy-and-hold index. This outperformance stems from being more aggressive in a portfolio during periods when Lumber is leading Gold and being more defensive during periods when Gold is leading Lumber. The results are robust to various time frames and across multiple economic and financial market cycles.

Number of Pages in PDF File: 18

Keywords: Intermarket Analysis, Stocks, Risk, Trading, Market, Momentum, Rotation, Volatility, Bonds, Fixed Income, Treasuries, Equities, Rebalancing, Quantitative, Efficient Markets, Hedge, Asset Allocation, Gold, Lumber, Offense, Defense, Small-Caps, Large-Caps, Cyclicals

JEL Classification: C00, C10, C50, G00, G11


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Date posted: May 11, 2015 ; Last revised: March 3, 2016

Suggested Citation

Bilello, Charles V. and Gayed, Michael A., Lumber: Worth It's Weight in Gold Offense and Defense in Active Portfolio Management (May 8, 2015). 2015 NAAIM Wagner Award Winner. Available at SSRN: https://ssrn.com/abstract=2604248 or http://dx.doi.org/10.2139/ssrn.2604248

Contact Information

Charles V. Bilello
Pension Partners, LLC ( email )
430 West 14th Street
Suite 505
New York, NY 10014
United States
212-255-5000 (Phone)
HOME PAGE: http://www.pensionpartners.com
Michael A. Gayed (Contact Author)
Pension Partners, LLC ( email )
430 West 14th Street
Suite 505
New York, NY 10014
United States
2122555000 (Phone)
HOME PAGE: http://www.pensionpartners.com
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