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That all began to change, however, in 1986 In another example of the linkage between the CRB Index and bonds, both began to change direction in 1986 The commodity price level began to level off after a six-year decline Interest rates bottomed at the same time and the bond market peaked I discussed in 2 the beginning of the "head and shoulders" bottom that began to form in the CRB Index during 1986 and the warning that bullish pattern gave of the impending top in the bond market Although the collapse in the bond market in early 1987, accompanied by a sharp rally in the CRB Index, provided a dramatic example of their inverse relationship, there's no need to repeat that analysis here.





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Instead, attention will be focused on the events following the 1987 peak in bonds and the bottom in the CRB Index to see if the intermarket linkage holds up BONDS AND THE CRB INDEX FROM THE 1987 TURNING POINTS Figures 33 through 38 provide different views of the price action of bonds versus the CRB Index since 1987 Figure 33 provides a four-year view of the interaction between bond yields and the CRB Index from the end of 1985 into the second half of 1989 Although not a perfect match it can be seen that both lines generally rose and fell together Figure 34 uses bond prices in place of yields for the same time span.

69 71 72 72 74 76 77

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25. Do you set price targets for all purchases If yes, do you ever hold a security beyond the initial price target Explain. 26. Describe your portfolio construction procedures. Include detail on each of the following: a. b. c. d. What types of securities are considered for purchase What is the universe of possible investments Do you have a minimum number of holdings What were the fewest and most holdings ever held in the portfolio Indicate the appropriate dates. e. How are individual position weights determined f. What is the maximum position size at cost and at market value for any individual position Have you ever violated this constraint g. List any portfolio constraints regarding geography, sector, industry, market cap, and liquidity. 27. What is your investment edge What differentiates you from your competition Include a list of the rms/products that you consider to be your biggest competitors. 28. Is there a sector or industry in which you believe your rm has a particular edge If yes, please elaborate.

The three major points of interest on this four-year chart are the major peak in bonds and the bottom in the CRB Index in the spring of 1987, the major spike in the CRB Index in mid-1988 (caused by rising grain prices resulting from the midwestern drought in the United States) during which time the bond market remained on the defensive, and finally the rally in the bond market and the accompanying decline in the CRB Index going into the second half of 1989 This chart shows that the inverse relationship between the CRB Index and bonds held up pretty well during that time period Figure 35 provides a closer view of the 1987 price trends and demonstrates - the inverse relationship between the CRB Index and bond prices during that year The first half of 1987 saw strong commodity markets and a falling bond market.

for t = 1, . . . , T. To start the recursion, we need presamples for 2 and 2 for t 0, t t so a good choice is the OLS unconditional variance estimate, 1 T

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