Robert Powell from MarketWatch posted a reasonably thorough assessment as to why retirement in the US is "endangered" with topics ranging from Social Security not being able to meet its obligation to why various demographic segments should expect a higher retirement age, smaller payouts and means testing.
This has been a popular topic here and from 50,000 feet something is going to have to have, actually a whole lot of somethings will have to give. From 30,000 feet a solution is probably going to include some combination of the above three ideas (higher retirement age, reduced payouts and means testing).
On the ground this means we all need to be out in front of this threat as part of our own solution. We all have our own emotional vulnerabilities and one of mine is being dependent on someone else or more precisely a bureaucracy that most people believe is grossly dysfunctional.
Consistent with past blog posts, for most people it is easier to control expenses than to go find an ever higher paying job meaning expenses are a function of our own discipline and that most of us won't find a job that pays us $50,000 a month.
One vague suggestion in the article was about giving more in the way of tax incentives for retirement savings. This might help but to the extent that people don't have enough saved I wonder if there is a way to stop taxing IRA distributions for retirees. I don't recall mentioning this here before and I am not sure if anyone else has talked about this but if someone has $300,000 saved and they take out $15,000 a year they might be paying $2250 in taxes on that money which sounds like a big number in relation to $15,000. Having access to the total distribution would be a difference maker for a lot of people (I realize some folks would pay more in taxes and some would pay less).
Most of my ideas on this subject focus more on things that people can do for themselves because, again, we have more control over the outcome than we do from positing what a dysfunctional bureaucracy should do but if we are in store for some combo of higher retirement age, lower payouts and means testing then not taxing IRA distributions could help smooth over the ill will that will come from social security austerity.
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Friday, January 27, 2012
Wednesday, January 25, 2012
Japan has a Trade Deficit
Yesterday was a busy day for me so I am not sure how much attention this got but Japan recorded its first trade deficit since 1980. Japan has always exported a ton of stuff and imported all of its oil. The earthquake on March 11, 2011 shut down the nuclear industry and so now the country needs to import more for all its energy needs, so much so that it caused the trade deficit.
This article from the Telegraph makes the case for the trade deficit to persist which can't be huge shock given the state of the nuclear industry there. The back drop for Japan has been poor for many years and I have thought this would continue to be the case long into the future even before the earthquake.
Japan has always been an interesting destination. It seems like every year, maybe not 2012 though, there is a contest for market pundits to come out and say that this is the year that Japan finally turns it around. There have been years here and there where Japan has done well but it never turned it around.
The problems with Japan appear to include an aging population, an enormous debt load and they seem to be getting undercut on manufacturing. The generally poor results, I believe, reveal a long term weighing of the fundamental backdrop with the conclusion being there is no visibility for a sustainable recovery. The Nikkei is down 76% from its high 22 years ago. That is a mind boggling nugget and the market is still not cheap. I remember from 1990 Japan's PE ratio being in the 50s and according to the iShares website the iShares Japan ETF (EWJ) has a PE ratio of 18.
PE ratios aren't necessarily a great predictor of future prices the combination of being relatively expensive (again, relying on iShares for this) and lousy economic fundamentals leaves little to be optimistic about. Simple avoidance of this type of trouble spot remains the path of least resistance.
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This article from the Telegraph makes the case for the trade deficit to persist which can't be huge shock given the state of the nuclear industry there. The back drop for Japan has been poor for many years and I have thought this would continue to be the case long into the future even before the earthquake.
Japan has always been an interesting destination. It seems like every year, maybe not 2012 though, there is a contest for market pundits to come out and say that this is the year that Japan finally turns it around. There have been years here and there where Japan has done well but it never turned it around.
The problems with Japan appear to include an aging population, an enormous debt load and they seem to be getting undercut on manufacturing. The generally poor results, I believe, reveal a long term weighing of the fundamental backdrop with the conclusion being there is no visibility for a sustainable recovery. The Nikkei is down 76% from its high 22 years ago. That is a mind boggling nugget and the market is still not cheap. I remember from 1990 Japan's PE ratio being in the 50s and according to the iShares website the iShares Japan ETF (EWJ) has a PE ratio of 18.
PE ratios aren't necessarily a great predictor of future prices the combination of being relatively expensive (again, relying on iShares for this) and lousy economic fundamentals leaves little to be optimistic about. Simple avoidance of this type of trouble spot remains the path of least resistance.
Read more!
Tuesday, January 24, 2012
A Foundation to an Investment Philosophy
Josh Brown had a fun post up yesterday about his Twenty Common Sense Investing Rules. While I would probably frame some of the points differently and don't necessarily agree with all of them there is plenty of utility in the post.
Josh's number 4;
This is tricky because there have been many exceptions over the years. Actually too many for me to take this rule at face value. When a stock misses earnings by a few pennies and takes a 10% drop selling might be the right thing but it may not. What I mean is that some sort of disappointment might merit revisiting the investment thesis to see if it is still valid and then making a decision.
For example in late 2002 and into 2003 Altria (MO) was facing some serious problems as this was the height of the law suit frenzy around tobacco litigation. The market was generally doing poorly but MO almost cut in half during this time. This was a bad stretch for the stock but for the last ten years it is up 151% (per Morningstar which I believe includes the dividends) compared to 16% for the S&P 500 (SPX including dividends might be about 36%).
The other side of the coin might be Yahoo. At some point it went from owning the world to something akin to a no growth utility. The reason to mention these two specifically is because I have owned both for clients. We sold Yahoo a few Mays ago when MSFT wanted to buy it but Jerry Yang famously said no and we kept Philip Morris International as an across the board holding but some clients still have some MO.
While no one can be right 100% of the time, this part of the management process requires understanding not just the stocks that you own but also the respective industries that your holdings are in.
Josh also has several bullet points about not being emotional; don't get too excited and don't get too angry. This is of course correct. No matter what type of investor you are or what you own there will be times that you are wrong. This is guaranteed to happen. If you know this ahead of time then it should lessen the emotional toll when it happens. Similarly there will be times when the market goes down a lot. We know this rationally but we seem to forget our well reasoned understanding of large declines when they actually happen.
It probably takes some training but the extent you remove the emotional highs and lows, the better your long term result will be.
The other point to share from Josh is don't blow up. Any market segment, I'll repeat that; any market segment can blow up. Blowups are improbable but they are not impossible. You might be heavy in some area that has a very low probability of blowing up but if it does then you will be in a world of hurt. Trust me when I tell you things that could never blow up have indeed blown up in the past and this sort of blow up will happen in the future. Your weighting will determine the magnitude of the consequence.
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Josh's number 4;
The moment a stock disappoints you or makes you wish you hadn't bought it, sell it. Immediately and regardless of price. Life is too short to hope a bad decision reverses itself.
This is tricky because there have been many exceptions over the years. Actually too many for me to take this rule at face value. When a stock misses earnings by a few pennies and takes a 10% drop selling might be the right thing but it may not. What I mean is that some sort of disappointment might merit revisiting the investment thesis to see if it is still valid and then making a decision.
For example in late 2002 and into 2003 Altria (MO) was facing some serious problems as this was the height of the law suit frenzy around tobacco litigation. The market was generally doing poorly but MO almost cut in half during this time. This was a bad stretch for the stock but for the last ten years it is up 151% (per Morningstar which I believe includes the dividends) compared to 16% for the S&P 500 (SPX including dividends might be about 36%).
The other side of the coin might be Yahoo. At some point it went from owning the world to something akin to a no growth utility. The reason to mention these two specifically is because I have owned both for clients. We sold Yahoo a few Mays ago when MSFT wanted to buy it but Jerry Yang famously said no and we kept Philip Morris International as an across the board holding but some clients still have some MO.
While no one can be right 100% of the time, this part of the management process requires understanding not just the stocks that you own but also the respective industries that your holdings are in.
Josh also has several bullet points about not being emotional; don't get too excited and don't get too angry. This is of course correct. No matter what type of investor you are or what you own there will be times that you are wrong. This is guaranteed to happen. If you know this ahead of time then it should lessen the emotional toll when it happens. Similarly there will be times when the market goes down a lot. We know this rationally but we seem to forget our well reasoned understanding of large declines when they actually happen.
It probably takes some training but the extent you remove the emotional highs and lows, the better your long term result will be.
The other point to share from Josh is don't blow up. Any market segment, I'll repeat that; any market segment can blow up. Blowups are improbable but they are not impossible. You might be heavy in some area that has a very low probability of blowing up but if it does then you will be in a world of hurt. Trust me when I tell you things that could never blow up have indeed blown up in the past and this sort of blow up will happen in the future. Your weighting will determine the magnitude of the consequence.
Read more!
Monday, January 23, 2012
Barron's on Dividends
The Barron's cover story was about seeking a 4% yield from stocks. It was a broad look across many sectors in the S&P 500 at stocks that have the room to increase their dividends substantially or in some cases initiate a substantial dividend.
My take on dividends has been consistent; they are crucial to long term portfolio success but I do not believe in owning high yielders or dividend growers exclusively. There was one point made early in the article that I think needs to be dissected because I think it distorts how markets tend to work.
Further down in the article is a table that notes the performance of each of the sectors in 2011. Utilities did the best at 14.8% followed by staples at 10.5% and healthcare at 10.2%. While there can be no absolutes it is a good bet that in a year where the S&P 500 is flat, and some might say it was lucky to have been flat, it is going to be the defensive sectors that do better.
Things like utilities, healthcare and staples do better in years like 2011 for two reasons; the dividends of course and more fundamentally the steadiness of the demand for the products.
So far in 2012 the S&P 500 is up 4.58% which is pretty good for three weeks. In that same three weeks utilities are down 3.8%, healthcare is up 3.3% and staples are down 0.2%. Again, there are no absolutes but if 2012 is somehow a repeat of 2009 then these three sectors will very likely lag and the dividends won't mean much as was the case in 2009. Of course 2008 was a terrible year for stocks and all three of the dividend sectors mentioned above outperformed.
For the long term there is no question in my mind that dividends are crucial but the assertion that dividend stocks will have a good year in 2012 because...is simply the wrong way to frame this. The other day I mentioned about the importance of thinking in long term increments like complete stock market cycles or even decade long chunks. The importance of the yield of the portfolio can be better understood in those time frames. In one year time frames the more correct framing is that in a great year for stocks dividend payers will usually lag.
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My take on dividends has been consistent; they are crucial to long term portfolio success but I do not believe in owning high yielders or dividend growers exclusively. There was one point made early in the article that I think needs to be dissected because I think it distorts how markets tend to work.
During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011—all with 4%-plus yields—returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates.
Further down in the article is a table that notes the performance of each of the sectors in 2011. Utilities did the best at 14.8% followed by staples at 10.5% and healthcare at 10.2%. While there can be no absolutes it is a good bet that in a year where the S&P 500 is flat, and some might say it was lucky to have been flat, it is going to be the defensive sectors that do better.
Things like utilities, healthcare and staples do better in years like 2011 for two reasons; the dividends of course and more fundamentally the steadiness of the demand for the products.
So far in 2012 the S&P 500 is up 4.58% which is pretty good for three weeks. In that same three weeks utilities are down 3.8%, healthcare is up 3.3% and staples are down 0.2%. Again, there are no absolutes but if 2012 is somehow a repeat of 2009 then these three sectors will very likely lag and the dividends won't mean much as was the case in 2009. Of course 2008 was a terrible year for stocks and all three of the dividend sectors mentioned above outperformed.
For the long term there is no question in my mind that dividends are crucial but the assertion that dividend stocks will have a good year in 2012 because...is simply the wrong way to frame this. The other day I mentioned about the importance of thinking in long term increments like complete stock market cycles or even decade long chunks. The importance of the yield of the portfolio can be better understood in those time frames. In one year time frames the more correct framing is that in a great year for stocks dividend payers will usually lag.
Read more!
Sunday, January 22, 2012
Sunday Morning Coffee
Bernie Schaeffer had a write up in Barron's in which he referred to an article from the New Yorker. There was one line in there that intrigued Bernie that was particularly interesting;
The cash that is built up on the sidelines has been talked about for a while with some believing that it will provide a big lift to equities. I tend to discount the argument because the cash we hear about includes money that was never and will never be put into the stock market.
The more interesting nugget is the psychology or impatience that leads to people giving up. Many believe that capitalism is broken and that capital markets no longer work. I hope I have been clear that I disagree with that idea. Clearly some things have changed with economies and debt levels such that it has weighed heavily on equity market returns for many of the largest markets but long dry spells have occurred in the past--this is not unprecedented in terms of how the market has reacted.
That we are 12 years into this for the US and almost 23 years in for Japan certainly makes the slog long in the tooth but as pointed out in many previous blog posts there have been plenty of other markets that have had normal returns or better than normal over the last 12 years.
The extent to which the above New Yorker quote has any merit it expresses people's inability to see the long term and to understand why they are actually invested. I contend that for most people the real objective is to have enough money when you need it which is usually upon retirement. Then of course the money needs to last during retirement.
In that context the time horizon becomes decades and for many of those decades there are two elements of portfolio growth; price appreciation and savings. Periods where the growth is not so hot needs to be met with more savings. Some will say that this is unknowable but I don't think that is exactly right.
It is not terribly difficult to look at some basic macro economic indicators and see whether things look relatively healthy or relatively unhealthy. Looking at the big picture and concluding things aren't going well and that an increase in savings, if possible, is warranted is not a form of wild speculation. Similarly concluding that things look ok and maybe the normal 10% 401k contribution might suffice is also not reckless. Neither scenario guarantees success but this is not black box type work.
Taking one step further I think that people can also look at macro economic indicators for several countries and see where things might look promising and perhaps favor those and see where things look bad (unfavorable demographics, lousy debt situation and so on) and either avoid underweight those markets.
Again there is no guarantee of success but I do believe in the long run the market weighs these attributes accordingly with the last decade as supporting evidence and for most people it makes more sense to think in terms of decades not years.
The picture is from yesterday's fire training.
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In effect, [investors have] decided that, in a market as volatile as this one, the only way to win the game is simply not to play.
The cash that is built up on the sidelines has been talked about for a while with some believing that it will provide a big lift to equities. I tend to discount the argument because the cash we hear about includes money that was never and will never be put into the stock market.
The more interesting nugget is the psychology or impatience that leads to people giving up. Many believe that capitalism is broken and that capital markets no longer work. I hope I have been clear that I disagree with that idea. Clearly some things have changed with economies and debt levels such that it has weighed heavily on equity market returns for many of the largest markets but long dry spells have occurred in the past--this is not unprecedented in terms of how the market has reacted.That we are 12 years into this for the US and almost 23 years in for Japan certainly makes the slog long in the tooth but as pointed out in many previous blog posts there have been plenty of other markets that have had normal returns or better than normal over the last 12 years.
The extent to which the above New Yorker quote has any merit it expresses people's inability to see the long term and to understand why they are actually invested. I contend that for most people the real objective is to have enough money when you need it which is usually upon retirement. Then of course the money needs to last during retirement.
In that context the time horizon becomes decades and for many of those decades there are two elements of portfolio growth; price appreciation and savings. Periods where the growth is not so hot needs to be met with more savings. Some will say that this is unknowable but I don't think that is exactly right.
It is not terribly difficult to look at some basic macro economic indicators and see whether things look relatively healthy or relatively unhealthy. Looking at the big picture and concluding things aren't going well and that an increase in savings, if possible, is warranted is not a form of wild speculation. Similarly concluding that things look ok and maybe the normal 10% 401k contribution might suffice is also not reckless. Neither scenario guarantees success but this is not black box type work.
Taking one step further I think that people can also look at macro economic indicators for several countries and see where things might look promising and perhaps favor those and see where things look bad (unfavorable demographics, lousy debt situation and so on) and either avoid underweight those markets.
Again there is no guarantee of success but I do believe in the long run the market weighs these attributes accordingly with the last decade as supporting evidence and for most people it makes more sense to think in terms of decades not years.
The picture is from yesterday's fire training.
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Saturday, January 21, 2012
The Big Picture for the Week of January 22, 2012
One of the first ETFs for Latin America is the iShares is the iShares S&P Latin America 40 Index Fund (ILF). I am pretty sure that iShares Brazil (EWZ) and iShares Mexico (EWW) predate ILF going back to the WEBS days (WEBS=world equity baskets).
A few days ago iShares came out with a surprisingly similar Latam fund with its new MSCI Emerging Markets Latin America Index Fund (EEML). Obviously the index provider is different but the I can't imagine there is any real differentiation.
Brazil is by far the largest country in both at 57% in ILF and 66% in EEML. Mexico weighs in at 24% and 20% respectively and Chile, Colombia and Peru round out the rest of the funds. Peculiarly, Peru accounts for 3.9% of ILF but lest than 1% in EEML. The sector weightings for the largest sectors are virtually identical with financials and materials being the largest.
ILF having only 40 stocks means the holdings are larger; America Movil (AMX), Petrobras (PBR) and client holding VALE are the largest in ILF at about 10% each and those three are also the largest in EEML.
iShares has done something similar in other segments. For China it has the FTSE Xinhua 25 (FXI), FTSE China (HK Listed) Index Fund (FCHI) and the MSCI China Index (MCHI). There is a lot of overlap under the hood and the performance has been identical.
On the other side of the coin iShares has all sorts of unique funds or at least funds that are not identical to there own funds; with examples including iShares New Zealand (ENZL) and iShares Small Cap Hong Kong (EWSS). At the same time as iShares launched EEML it launched iShares Emerging Market EMEA Index Fund (EEME) where EMEA stands for Europe, Middle East and Africa. I think the fund is unique to broad based emerging funds (but maybe someone else has a similar fund?) in that it weighs heavily to South Africa and Russia (those two add up to 73%) and energy is the largest sector at 28%.
iShares is due to come this week with iShares Norway and iShares Finland. Global X already has a Norway ETF (NORW) but Finland would be a first and I think that Finland would be a huge beneficiary (after the initial puke down) if the euro were to breakup.
Obviously iShares has the scale to create more funds even if there is little chance that they will gain traction or offer much that is new (the essentially perfect correlation of the three China funds can't be a surprise to anyone at iShares). It is more difficult for smaller ETF providers to mass produce funds.
I think part of the equation here is that iShares can create a lot of funds such that it might simply be trying to crowd out the smaller companies. This is of course what competition is often about but as users of ETFs we should hope that smaller competitors survive.
Read more!
A few days ago iShares came out with a surprisingly similar Latam fund with its new MSCI Emerging Markets Latin America Index Fund (EEML). Obviously the index provider is different but the I can't imagine there is any real differentiation.
Brazil is by far the largest country in both at 57% in ILF and 66% in EEML. Mexico weighs in at 24% and 20% respectively and Chile, Colombia and Peru round out the rest of the funds. Peculiarly, Peru accounts for 3.9% of ILF but lest than 1% in EEML. The sector weightings for the largest sectors are virtually identical with financials and materials being the largest.
ILF having only 40 stocks means the holdings are larger; America Movil (AMX), Petrobras (PBR) and client holding VALE are the largest in ILF at about 10% each and those three are also the largest in EEML.
iShares has done something similar in other segments. For China it has the FTSE Xinhua 25 (FXI), FTSE China (HK Listed) Index Fund (FCHI) and the MSCI China Index (MCHI). There is a lot of overlap under the hood and the performance has been identical.
On the other side of the coin iShares has all sorts of unique funds or at least funds that are not identical to there own funds; with examples including iShares New Zealand (ENZL) and iShares Small Cap Hong Kong (EWSS). At the same time as iShares launched EEML it launched iShares Emerging Market EMEA Index Fund (EEME) where EMEA stands for Europe, Middle East and Africa. I think the fund is unique to broad based emerging funds (but maybe someone else has a similar fund?) in that it weighs heavily to South Africa and Russia (those two add up to 73%) and energy is the largest sector at 28%.
iShares is due to come this week with iShares Norway and iShares Finland. Global X already has a Norway ETF (NORW) but Finland would be a first and I think that Finland would be a huge beneficiary (after the initial puke down) if the euro were to breakup.
Obviously iShares has the scale to create more funds even if there is little chance that they will gain traction or offer much that is new (the essentially perfect correlation of the three China funds can't be a surprise to anyone at iShares). It is more difficult for smaller ETF providers to mass produce funds.
I think part of the equation here is that iShares can create a lot of funds such that it might simply be trying to crowd out the smaller companies. This is of course what competition is often about but as users of ETFs we should hope that smaller competitors survive.
Read more!
Thursday, January 19, 2012
Market Favoring Risk Assets Right Now
A few weeks ago I shared an opinion (or hunch if you prefer) that I thought the US market was going to be in for a range busting rally that I think will then retrace. It is too early at this point to know whether this is yet correct or incorrect but I have made an observation that I hope is useful even if not original.
If you've been reading this site for a while you may be familiar with my preference for owning stocks with all different types of attributes, I think it makes for better diversification. The stocks at the riskier or more volatile end of the spectrum are up a lot of late. This is not a comment about what we own but about the recent performance of things like emerging markets, some tech, some financials (we do not own US banks but they are on a good run), some materials, some energy and some industrials.
Again, although not an original thought, when these types of areas outperform for a while like now it is often a sign of some sort of confidence being expressed and this can last for a while, like several months and many percentage points. As a bit of a contrarian nugget, it seems like many pundits were looking for a lift in the second half of the year and one outcome of that consensus being wrong is that the lift comes in the first half. Another contrarian outcome of course would be no lift, that the market in fact drops instead.
For all I know this run could of course end today but I think there is merit in assessing the current mentality of the market because occasionally you will make a change in the portfolio on this.
Short post, busy week.
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If you've been reading this site for a while you may be familiar with my preference for owning stocks with all different types of attributes, I think it makes for better diversification. The stocks at the riskier or more volatile end of the spectrum are up a lot of late. This is not a comment about what we own but about the recent performance of things like emerging markets, some tech, some financials (we do not own US banks but they are on a good run), some materials, some energy and some industrials.
Again, although not an original thought, when these types of areas outperform for a while like now it is often a sign of some sort of confidence being expressed and this can last for a while, like several months and many percentage points. As a bit of a contrarian nugget, it seems like many pundits were looking for a lift in the second half of the year and one outcome of that consensus being wrong is that the lift comes in the first half. Another contrarian outcome of course would be no lift, that the market in fact drops instead.
For all I know this run could of course end today but I think there is merit in assessing the current mentality of the market because occasionally you will make a change in the portfolio on this.
Short post, busy week.
Read more!
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