I've been blogging here at TPMCafe a bit about my idea to have the US Gov't start up a public mutual fund, US Mutual.

This idea is not completely new with me. Here is an article that describes how a similar idea was considered during the Clinton Admin. The bottom line is that

The projected annual rate of return on U.S Treasury securities held in the Social Security trust funds is 2.7 percent, after inflation. In contrast, stocks generated an annual return of about 7 percent above the inflation rate from 1900 to 1995. If past serves as prologue and stocks continue to significantly outperform Treasuries in the future, diversification would bolster the trust funds.

Now my idea has some significant differences from the above idea. Differences that address some legitimate concerns about the politicization of the fund and the use of its market power. US Mutual would target a 6% control of the US Companies in the NYSE. According to Wikipedia, that would make the targeted holdings .84 Trillion or 840 billion, approximately half of the 1.7 trillion that was in the Social Security Trust Fund at the end of calendar year 2004. This would be seriously larger than other mutual funds, like the Vanguard Group with only .1 Trillion in holdings. However, as a public mutual fund, it would not compete with other mutual funds.

It would be a new form of index fund that would be low-cost and have a wide diversification and have a low turnover in its long holdings(it would also have short holdings.). It would determine its weekly holdings using a simple algorithm that would use 29 weeks of publicly available NYSE weekly valuations and embody a conservative investment strategy.

The key to the algorithm is that it would use more robust median AR(1) statistics to predict the weekly log-return(=ln(1+return)) and its standard deviations. Log-returns would be used because they are easier to predict in stock markets and usefully underweight large gains and overweight large losses. It will make predictions conditional on the past week's values and unconditional predictions. It will combine the unconditional and conditional predictions, giving the unconditional predictions twice as much weight since their values would vary less on a weekly basis. The result would be predicted values of the median weekly log-return and its median standard deviations for all the US stocks that have been traded publicly on the NYSE for at least 29 weeks. An index will be formed that would weight the predicted median standard deviations twice as much as the predicted median log-returns.

Then, using predicted values of the total market capitalizations for stocks as weights, US Mutual will use 2/3rds of its investments to buy long on the top 20% of stocks based on the index formed. This would result in holdings of an average of 20% in these stocks. The individual stock holdings would be determined by taking the index values for the stocks bought and standardizing their index values and using the standardized values as weights.

US Mutual would also capitalize on the information in its algorithm by using 1/3rd of its funds to sell short(meaning we make money when the value goes down)on the bottom 5% of stocks evaluated by the index, with the individual levels determined by weights formed as above. What this would do is have US Mutual profit some from exerting some market power on unstable underperforming stocks that are likely overvalued. It would also help US Mutual to have a low beta, as it would buy long in more stable stocks (that likely have lower betas like Berkshire Hathaway), and sell short in unstable stocks (that likely have higher betas). This would hedge well against a worse-case scenario of a general downturn. It would also affect a general change in stock-market behavior, discouraging high turnover strategies that tend to increase stocks' volatility.

The algorithm described above is designed with the goal to determine holdings mechanically in a way that would be stable and easy to replicate. This serves to both keep the costs of the fund down and to prevent its "managers" from being corrupted or influenced in their stock-holdings. Attempts at arbitrage would be limited by how the limited levels of weekly fund turnover would be staggered over the course of the week, using algorithms that would make use of the information in the conditional predictions.

So, so long as the buy long holdings do not vary significantly over time(as could be verified easily using historical data), the considerable market power of US Mutual would serve to help stabilize the market. As for the impact of its short interests, there would likely be a transition phase where some unstable stocks would leave the market, but eventually the fund would simply bleed regularly the more volatile and overvalued stocks in the market, perhaps in exchange for helping to reduce the general volatility of the market. A reduction in volatility would attract more capital to the market and increase the growth rate of our economy. It would also make it easier for smaller investors and corporations to trade and raise capital on the market.

So that's the idea. We set up protections around the SSTF and allow it to grow by investing half of it in the US Companies in the NYSE. We do this with low overhead, using a strategy that hedges well against a general downturn. All that remains is to make the idea simple and compelling. And in the worse case scenario, whenever a Republican brings up the privatization of Social Security, we can counter with this idea, making them wish that they'd never brought up the subject...

dlw

I received this letter from George Patterson a Language Education Grad student in the Philippines.

It's not posted on the web at the blog of the union of Philippines journalists, but I have permission to repost it in its entirety.

NATIONAL UNION OF JOURNALISTS OF THE PHILIPPINES

www.nujp.org

Statement

July 19, 2006

KILLING OF MINDANAO BROADCASTER SHOWS GOV'T INABILITY TO PROTECT JOURNALISTS

Another colleague is dead.

Armando Pace, 51, hard-hitting commentator of Radyo Ukay dxDS in

Digos City, was felled on Tuesday, (18 July 2006) by two motorcycle-riding

men who shot him as he made his way home after hosting his program.

Pace was the 82nd journalist slain in the country since 1986, the 42nd

under President Gloria Macapagal-Arroyo's watch - the worst record of any

administration - and the ninth thus far this year, already two more

than last year's toll and with five more months to go.

Lest we forget, it was in 2005 that the country was given the dubious

title of "most murderous for journalists" for the 14 journalists murdered the

previous year.

News reports on Pace's death all describe him as a hard-hitting

anchorman who often attacked corrupt politicians and the illegal drug trade.

We will again point out, as we have done so in the past and, given the

trend, we are afraid we will continue to do so in the future, that the

utter failure of government and its security forces to stop the killings and

bring all those responsible to account has nurtured a culture of impunity

that emboldens those who ¯ officially or not ¯ wish to silence the truth and

stifle the free flow of information and ideas.

Whether Pace was killed by a crooked politician, a ruthless criminal,

or a government thug, the manner in which he was killed follows the all too

familiar pattern of motorcycle-riding gunmen that has become the common

denominator in the murders of journalists and activists.

Because nothing has been done against this modus operandi, killers of

all stripes and inclination have found what amounts to a convenient cloak

of anonymity.

This merely bolsters our contention and that of human rights

organizations that the continued refusal or inability of the very institutions and agencies mandated to protect our lives and liberties to fulfill their

sworn duties is tantamount to culpability.

Reference:

JOSE TORRES, JR.

Spokesperson

National Union of Journalists of the Philippines

09209010013

4117768

Imagine the changes it would cause for our economy. I got some feedback from a macroeconomist friend on how a reduced volatility in the NYSE equities market would affect our economy.

I believe that this could happen if we helped to save Social Security by starting a public mutual fund, US Mutual, like what I've described before.

The idea is that US Mutual would be a low overhead mutual fund that would use 28 or so weeks of data and conservative median log-return(=Ln(1+return)) predictions and their median standard deviations to rank stocks with an index. It would then use the same index to determine its long holdings in the top 20% of common stocks(weighted for total valuation) and short holdings in the bottom 5% of stocks.

It would exhibit economies of scale, targeting a 6% control of NYSE with 4% spread out over the top 20% and 2% focused on the bottom 5%. The selling short on the unstable underpeformers is what would reduce the overall volatility of the NYSE.

Some have brought up the issue of market power. I agree that the initial weeks of starting US Mutual would probably require expert assistance and maybe a little bit of persuasion, as the top companies would need to be reminded of how it is in their interest to maintain the stability of their stock value and the good will of the US gov't by not let the selling price for their stock rise up too dramatically.

It would be more of a matter of negotiation, a win-win situation for the companies and US Mutual that would ensure that the US public will benefit from these preferred stocks.

I think that it bears corroboration with historical data and simulations. I've already done some preliminary work that shows that median log-return regressions predict better than mean or median return regressions or mean log-return regressions. These stats are critical to the algorithm in that they help to keep the holdings patterns more stable so the levels of buying and selling of stocks on a weekly basis would be limited and US Mutual would use its considerable market power more as a force for stability than instability in the NYSE.

dlw