ETP Utility and Silliness

First utility. IndexIQ is coming out of the gate as a bit of an enigma. The new Merger Arbitrage ETF (MNA) at first glance seems odd to me. There have been several articles already that have ripped it up for not really being an arbitrage product and I will say I don't get why shorting the broad market against long positions in takeout targets is the best way to go but clearly they did not get a crappy result from the backtest and decide "well even though the backtest is lousy we'll run with it anyway."

But that is not what I wanted to talk about. IndexUniverse has reported that IndexIQ has filed for a bunch of single country small cap ETFs. The countries included are Australia, Canada, Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Taiwan. They also filed for global small cap industry funds; agriculture, natural gas, crude oil and gold (Market Vectors may have beaten them to the punch on that last one).

While I always add the caveat that until a fund lists the filing doesn't mean much but these are interesting ideas for two reasons. First is the obvious which is access to parts of the market that are not easy to get to. Small caps in Malaysia? An evolving dialogue on this site has been the opening up of "new" parts of the market to do it yourselfers giving the chance for more diverse and sophisticated portfolios. These types of funds are exactly what I'm talking about.

The other thing that these funds do is provide starting points for researching names for people willing to pick individual stocks. I have talked before about going to the websites of foreign exchanges as being a way to learn about what companies are there but that is not always easy to do. Here's hoping IndexIQ follows through with these. This seems to have the potential to offer more value than 15 different ways of getting an absolute 6-8% return.

Now for some silliness. Barclays has launched a bunch of ETNs that are too complex to explain briefly so I will let IndexUniverse to the talking. But they offer different sorts of levered exposure to the S&P 500 both long and short. They give a payout based on where the index stands five years from now and you are paying for the leverage as you go. The important thing to realize is that they are nothing like the ProShares or Direxion funds.

These strike me as being very similar to brokerage house products that offered some exposure to the market but protecting principal along with several other moving parts.

I am making no attempt to sort these out. I am quite certain that the science behind these things is very compelling but it doesn't take much experience in the industry to realize the most complex of products often turn out very badly. These things should make an individual investor run screaming from the room with his hands flailing above his head.

I will be truly shocked if these resonate at all with retail investors. I can envision some sort of institutional trade off of some sort of unintended byproduct that I am not smart enough to see ahead of time (to be clear something along these lines would not be my type of trade).
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Risk Assets And Other Greenback Fun

Yves Smith from Naked Capitalism had a particularly meaty post earlier in the week about the current affairs of the US dollar. Of most interest was the following one-liner;

But one difference this time is now the dollar, rather than the yen, looks like the best funding currency, and the dollar is a deeper market, so the scale of potential damage is much greater.

The size of currencies has come up a couple of times during this event in terms of certain countries (like Iceland and Switzerland) simply not being big enough to bail out their banks if they needed to. This context though is new, to me, but of course also matters. There are greenbacks everywhere. Many countries use USD for all sorts of purposes and so the breadth or scale as Yves says stands to be much larger if things become disorderly with the dollar as compared to the yen or the euro for that matter.

The word disorderly as a benchmark for concern gets used all the time but without definition. Perhaps we will "know it when we see it." Ooof.

Here is a link to the Hugh Hendry investor's letter. John Mauldin posted in on Barry's site and I saw a link to it on Seeking Alpha as well. I mentioned Hendry several years ago after seeing him on CNBC Europe. He is always a good read, but a better listen for the Scottish accent, because he tends to come at things with a unique viewpoint. I tend not to focus on whether he is right about something so much as trying to see what I can learn from the viewpoint (agree or disagree) and whether there is some kernel to work into my viewpoint.

He warms up with this;

The ability of fractional reserve banking to leverage this liquidity many times over provided the monetary mo-jo to instigate ever higher commodity prices.

There are quite a few fractional zealots out there and while this subject may not be my wheelhouse and definitely not my passion this part of the model becoming warped has contributed to whatever history will ultimately say about this decade.


It is not clear to me that the current prices of popular risk assets are at levels that will prove to be ruinous should they drop but perhaps we are early on in a trajectory that will prove to be ruinous. This is possible but do keep in mind that iShares Emerging Markets made a high two years ago near $55 and today after (or in the middle of) a heroic run it is at $41. The PowerShares Commodity ETF (DBC) hit $45 in the summer of 2008 thanks to crude craziness and is now up a good amount to $25. Even the SPDR Gold Trust (GLD), which I own personally and for clients, at $112 is only up 13% from its 2007 high.

Any of these things could drop or collapse as some might say but it is not obvious that the pricing of these things is here today nuts; N V T S (History of the World Part I reference). Money has flowed in yes but the prices do not appear ruinous. No matter the best way to describe the price action of these things, if you now own more than you should the logical course of action is to shave the positions down. If the dollar starts a meaningful counter trend rally tomorrow it should be obvious that the things we are talking about here would likely get hit very hard.

Hendry later ties in a similar idea as Yves Smith about the dollar being used in so many global financial functions. Hendry differs a little, as I read it, saying that the dollar has already devalued. Well it is down a lot and I have opined before that with so many other countries having a stake in the dollar an implosion seems unlikely because so many participants would be motivated by self interest to step in. A continued slow erosion still seems very likely though which should result in higher interest rates here.

Toward the end he lands this self-deprecating jab; "you have to discount the solace I seek in finding people even more miserable than myself."

There are no easy answers here. I believe the simplest approach involves a view from 30,000 feet. The US faces some fundamental obstacles that other countries do not. I would focus on the "do not" crowd.

The picture is from the United Animal Friends 2010 calendar that my wife and her friend Gayle put together. They are for sale at the UAF website and there are a lot of great pictures. I hope you can check it out.
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Death Blow ETFs

Kelly Capital launches 100x leveraged ETFs | ETF Express

I'm trying to be the first to coin the term Death Blow ETFs. LOL. Read the link above, these things are 100X levered. The symbols are SINK and SOAR. Death Blow ETFs, you (may have) heard it here first.
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What Was I Saying?

The other day I made a passing reference to the fact (hope?) that there would be some new ETP launched as the year winding down was a busy time. Well there have indeed been several interesting product launches that we can talk about.

First up is First Trust with the Smart Grid Infrastructure Fund (GRID)--the symbol is GRID; nice. As an amusing anecdote before talking about the fund I was asked to go on CNBC for a segment about Smart Grid stuff a few weeks ago but had to decline because about all I could have said was that I think a smart grid is better than a dumb one; ahem.

Anywhoo GRID is an international fund with noticeable weightings in France, Germany and Japan (I did not see the country breakdown anywhere) but is heaviest by far in the US. Industrials are the largest sector at 72%. While the foreign exposure is light, it seems as though the fund will actually capture this segment of the market for better or for worse. It has a couple of mega-caps in it as space filler (GE and Siemens) but they are not the largest stocks in the fund which is a good thing.

There are several funds in this general space already and more on the way. While I do not think the construction is bad there doesn't seem to be anything that really grabs your attention. I will be surprised if this gains any meaningful traction.

Next up is the iShares Diversified Alternative Trust (ALT). This is an absolute return vehicle that appears to be actively managed. Looking at the holdings, this thing is funky. It is long some currency futures and equity index futures and short some other currency and equity index futures. There have been a lot of absolute type product that have come in the last couple of years and some have worked better than others and some have stunk. You can read about the strategy from IndexUniverse and without criticizing the folks at IU it is not easy to glean the specifics of the overall tactic. The fund does not make a good first impression.

If the fund can prove itself great but by prove itself I mean hold up in a nasty downturn.

The Build American Bond ETF (BAB) is finally out and the PowerShares website avails a look under the hood. As I mentioned before it is a long dated product. Half of the holdings are 25 years or more and a quarter of the fund is 20-25 years. The average coupon reports at 6.37% but with no indication of current prices the actual yield of the fund is not yet available (if the average price paid is 110 then the yield would obviously be less than the coupon).

California appears to be the largest state with four issues totaling 16% of the fund. While a real problem is unlikely a good scare is quite possible meaning that prices on those issues could face a blip at some point. There is no North Dakota or Montana (the only two states without a budget problem) in the fund but maybe there are no BAB issues for those states or maybe if there are they are too small for the fund.

Pending the info on what the fund will yield (keep in mind yields for bond ETFs fluctuate) I think this fund will be popular. Just about every fixed income segment offers better value than the US treasury market but some are still quite risky. BAB might offer a tie in to closer to normal yields without crazy risk although I would like to see the exposure to California come down some as new assets come into the fund and it buys more issues from the index (it is my understanding that the fund is sampling the index).
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"Its Not Obvious To Me That There Is Any Large Misalignment Currently"

Sweet Fancy Moses.

I am not a big fan of the word bubble as I think it gets overused. Not everything that goes up a lot and then goes down a lot is a bubble. In all likelihood the best time to really assess whether something is a bubble or not is well after the fact. That does not mean you can't assess when something is better to sell but declaring bubble or not is not easy and I don't believe relevant.

However Ben Bernanke's comments yesterday essentially saying there are no bubbles would seem to be very misguided or poorly planned or something--something that is not right.

The folks on CNBC said that Bernanke seemed to be greenlighting the continued move higher in equities, commodities and anything else that seems to go up when the US dollar goes down. CNBC gets heckled a lot but the conclusion of Bernanke greenlighting speculation on risk assets is not an unreasonable inference to draw.

Greenspan came to be remembered, among other things, for a couple of very wrong comments and while I certainly don't know what comes next this sort of comment from the Fed Chairman, aside from striking me as inappropriate, has a great chance of being spectacularly wrong.

The notion of anyone with influence saying "keep on buying folks, its all good in the hood" seems outrageous. I typically do not get this worked up about things but this seems weird and not in a good way.

Short post, I am hopping on a plane but hopefully this will whip up some good dialogue.
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Virtual ETF Conference

ETF Trends Partners with InvestmentNews on First Virtual ETF Conference

I'm participating in this event at 2pm EST on the day of the conference. It is aimed at advisors but I am not sure if it is limited to advisors or not but it is an all day ETF Palooza.
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She Loves Gold!

My brother forwarded this link from the NY Post by Hilary Kramer (remember her?) about gold. The article spelled out the recent history of the price of gold, some reasonable opinions as to why gold could go higher and then different ways to get into the space.

Over the last few years gold has gone up a lot in price due to several reasons. Collectively we know a lot more about gold than we did ten years ago and are collectively much more interested in owning it one way or another than we used to be.

The article itself was somewhat generic tilting toward owning gold as being a good idea based on what appears to be a visible path toward loss of purchasing power of the greenback at some point.

Unfortunately there was very little heed given to the risk of initiating a position in something that is up a ton already.

I have been very consistent in talking about owning gold as a little bit of insurance against an external shock and if it is going up for other reasons that is ok but I expect that if gold is doing well it probably means most other things are not. That sentiment is certainly true over the course of this decade even if not true for the last six months.

Now gold is at an all time high and concerns about the dollar could contribute to pushing the price higher or not. It seems like the price will go up but that is usually the case when something has already gone up a lot. With gold up here it is very likely that there will be a lot of articles in mainstream publications like the one linked to above that go heavy on the virtues and light on the risks.

Gold may go up a lot more or not but it makes sense to be skeptical if, as it keeps going up more and more people hop on the bandwagon. Obviously this could apply to any sort of tradeable, investable asset and while this line of thinking is not new it is worth repeating every so often.

Gold iPod! I'd hate to put that one through the wash.
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Sunday Morning Coffee

In the last couple of months I have taken to reading John Mauldin's weekly commentary via Barry Ritholtz' website. A few years ago, not knowing anything about him, I picked on some comments from Mauldin which was shortsighted on my part. But you learn and I have come to be quite fond of his letter.

He seems to do a good job of weeding through things and then rendering an opinion that is very easy to follow. Agreeing with him, or anyone for that matter, is not the point so much as learning about a particular point of view. He articulates his point very well whether you agree or not.

This week he knocks it out of the park with a couple of great one-liners and does a good job, with spreadsheet work from Mike Shedlock, of painting a pretty good picture of what the next decade in the US could look like economically and the influence certain political action could have over that period of time.

Mauldin takes Shedlock's spreadsheet of his expectation and creates a rosy outlook, a gloomy outlook and a middle of the road outlook. Based on the number of jobs needed to tread water, about 125,000 per month (1.5 million per year) there is no scenario where the unemployment rate goes back to where it was two years ago between now out to 2020 (there are numbers to back up the opinion so as mentioned above you can agree or disagree with the conclusion). The good scenario has the unemployment rate above 10% through 2013, the middle scenario has it up there through 2015 and the gloomy scenario stays at double digits through 2017 and above 8% through 2020.

Mauldin's gut leads him to conclude we will have a double dip recession starting in 2011. Part of his logic as follows;

I have serious doubts that we can have what amounts to the largest tax increase of all time in what will be a very weak (albeit growing) economy, without putting us back into recession. And Speaker Pelosi thinks it is a smart thing to add another 5.4% surtax on what will already be a rising capital gains and dividend tax.

I do not know Mauldin's politics but the things that the current leadership appears to believe in do not seem to be conducive to actually fixing things with an eye beyond the next election cycle. Not that the Republicans can take any high ground here as we'll be digging out from under the complete mismangement of almost everything under the Bush administration for a long time even if the seeds were planted during the Clinton years.

Here is a grim little nugget;

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about that. We have had a decade where there have been no new jobs added by the private sector. Real incomes are roughly where they were, and the stock market is down. Talk about a lost decade.

A year or so ago I talked about the idea of a lost decade. The the economy and the stock market were starting to roll over people were asking whether we could have a lost decade like Japan. I contended that with no stock market progress we had already lost a decade even before we start thinking about jobs and stagnant (adjusted for inflation) wages.

Ten years, or more, is a long time for things to be this lousy but even after the ten years we've had it isn't all that bad. People like Peter Schiff and a few others paint a picture of society crumbling under the weight of these problems. If this were a realistic threat I think it would have started by now. Japan has been on a similar ride for 20 years and their society has not crumbled. The problems here and there are significant but ruinous on a societal level? No.

It reminds me of a story from Western Civ 101. I do not remember where this was or who it was but some sect was calling for the end of the world at 9:15 am on October 15 of whatever the year was. After 9:15 on October 15 came and went without the end of the world the sect then proclaimed the world had indeed ended but that no one realized it.

Japan has been a lousy investment destination and the US appears to have gone in that same direction but the world has not ended. If things are this bad then the solution must be to figure out where "normal" returns can be had and then invest in those places.

On a lighter note yesterday was a fantastic day for sports. Purdue-Michigan State was a squeaker, Boise State won a big one on the blue turf, Ohio State won the Big Ten in OT, Utah got smoked by the Horned Frogs while at the same time North Dakota hockey was on (I love UND hockey and they are on all the time) and then the Pacquiao win over Cotto which I did not buy. Even New Zealand jumped in, making its first World Cup since 1982. Not too shabby!

The picture is of Roscoe jumping out of the "fish pond" near our house taken by our friend Amy. What a shot.
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The Big Picture for the Week of November 15, 2009

This past week kicked off what stands to be a very busy couple of months in terms of conferences, panels, what do you think for 2010 interview requests and maybe new exchange traded products.

What to make of a new year always makes for good discussion but 2010 could make for an especially engaging debate. 2008 was horrible and 2009 in terms of US equity market results is pretty good so far. Before getting to any sort of analysis a YTD gain for the S&P 500 of 21% is a good result.

Once we begin to peel away the layers some will conclude that in fact things are really as good as a 21% lift would indicate and others will find reasons to doubt how "real" the move is.

It is my nature to be skeptical of big moves up in the market against this type of backdrop for the simple reason that The Greatest Story Never Told (does Kudlow still use that one?) does not hurt my clients or cause them to freak out. We are certainly going along for the ride but doing so cautiously. People tend forget what it feels like when the market is puking down, I don't. It is those times, during a puke down, when the biggest mistakes get made so trying avoid ever being the position to potentially panic takes on a lot of importance.

Doug Kass made an interesting point on Thursday;

The message of the markets over the past few weeks is that, with increased certainty, investors are growing more comfortable with the forecast of a smooth and self-sustaining economic recovery in 2010 and beyond. Many now have even adopted the view that the current cycle is the start of a normal multiyear recovery that could resemble the average 45-month expansionary phases that have typically followed a recession.

Not too long long ago this was the worst crisis in 80 years, maybe even worse than the Great Depression. Now sentiment seems to be headed in the direction Kass mentions. From where I sit, for the recovery to be close to normal in terms of magnitude and when it starts then the world's assessment of the crisis being so bad would have to be wrong--meaning it wasn't that bad. But how can that be given the higher number of failures than normal, the higher number of foreclosures than normal, the current state of unemployment and under-employment and the very extreme actions being taken by the Fed and Treasury?

If this was worse than normal then it would be reasonable to conclude the stock market has it wrong, that there will be more economic and fundamental shoes to drop and if that is true then the chance of another shake out or a few more years of trading range becomes very plausible.

That being said I been very consistent (and wrong so far) about one more decline that scares a lot of people but does not make a new low. I don't think we get anywhere close to 670 on the SPX but maybe it trades with an eight handle again.

The goal with this sort of assessment is not to be correct so much as to not get blown up or totally blindsided in case it does play out this way. After all no one will panic if SPX closes out the year at 1200 but some folks might if it closed out the year at 850.

The picture is from downtown Juneau. I think it is neat how Mount Robson shoots straight up behind the town.
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