Random Roger's Big Picture

I get a lot of stuff in my email that I never asked for but just get anyway.

One that I get had an interesting title, something about not paying Alpha fees (no not the sorority) for beta results.

This got me to thinking a little bit. I have read all sorts of things over the years, you probably have too, and one theory is that there is only so much alpha to go around. This may have come from MIT but either way alpha versus beta is useful to learn about in the context of trying to be a better portfolio manager (applies to do-it-yourselfers too)?

An often inferred or assumed point of information is that do-it-yourselfers cannot reliably add alpha. I don't know why people think this but I have seen that sentiment from professional research and from past comments to the blog. I don't think alpha is finite and I think anyone, with enough time, has a chance to add alpha.

Ooh, wait, alpha defined as excess return beyond the market and beta defined as the market itself, the volatility of the market.

If someone really cannot add alpha then the focus of their attention needs to be when to increase and decrease beta. The idea would be increasing exposure to beta, to the market, when it was going higher and decreasing when it went lower. This is far from an original concept but I don't think I have written about it in this context.

When the market is going up increase exposure, increase the octane and vice versa when it is going down. In a perfect world if the double long S&P 500 fund was intended to capture twice the daily move of the S&P 500 over time periods longer than one day you could just buy that (quick note, the double long S&P 500 ETF lagged SPY in calendar 2007).

This will be intellectually appealing to some folks but I think it is much harder to do. Markets turn quickly and it would be easy to get caught wrong footed with more octane in your account.

Most of the stuff I write about, and implement, explores how to put the odds in your favor based on how the market tends to work (examples; consumer discretionary does poorly late cycle, utilities do poorly in a rising rate environment).

I'm not big on alpha as a finite resource or it's all about the beta but the topic, at a minimum, is useful in the learning process.

Labels: process

Posted by Roger Nusbaum at 8:32 AM | Permalink | Comments

Well, we are rallying and what do you know, it feels good.

Stocks are up, commodities are down and every gas tank is full.

I wrote about this happening right before it started and now it is happening. No clairvoyance whatsoever, or even much in the way of smarts just a good memory of how these things work.

To repeat about how scripted this all has seemed to me; a yet to be fully quantified financial problem predicted by the yield curve, denial of the problem, rolling over of the market, fear that this time is different, eagerness to call the bottom too soon and some feel good rallies (I may take credit for the term feel good rally).

I've mentioned a few times about really trying to remember details of things like the emotions that people go through during these episodes, the market's behavior, the things that tend to work and so on. I think this sort of exercise goes a long way toward helping people keep their heads on straight when the market does turn down.

Long time readers will know my belief in planning ahead for a get defensive strategy but mental preparation along the lines of I have seen this before and this is what happened can be just as important.

Labels: market, psychology

Posted by Roger Nusbaum at 5:22 AM | Permalink | Comments

Well, it's not too shabby.

More pictures later.

Posted by Roger Nusbaum at 4:18 PM | Permalink | Comments

Rydex To Launch ETFs Tracking 4 Currencies - Yahoo! News

The four included above are the Singapore dollar, Russian ruble, HK dollar and the South African rand.

Of most interest to me is the Sing dollar. If they ever create a euro in Asia it would mostly likely be based on the Sing dollar.

If, as mentioned in the last post the US' AAA credit rating is cut, that would make holding a little foreign currency more important than it is now (and I think it is already important).

Posted by Roger Nusbaum at 7:48 AM | Permalink | Comments

Financial Armageddon: The Beginning of the End for America's AAA Rating?

Not a new subject but what if the triple rating is in jeopardy or is going to go away?

It is a waste of time to discuss whether it should or should not be downgraded, more important than should is what portfolio steps make sense if the rating is downgraded?

Posted by Roger Nusbaum at 7:28 AM | Permalink | Comments

We had to go to Fresno, I am standing in a wedding on Saturday. Since we were in the neighborhood we thought we'd head up to Yosemite.

I'll have some good pictures to post later.

The last time I did a video I said well not much of a video, this was at Fenway, and shockingly it turned out to be correct. It was dated June 24 and I thought the market would work lower and that a little more defense might make sense so maybe this one might be right too?

Of course being right for a few weeks does not matter but deciding after yesterday's rally that all of a sudden you are someone to trade a feel good rally is probably not smart.

Posted by Roger Nusbaum at 5:23 AM | Permalink | Comments

The other day I was chatting with another firefighter and when we were done with department business he asked me about the stock market. He told me he is down by some amount and like most folks he is not sure what to do and he is a tad dubious about what "his guy" is telling him.

On a related note the ROI column in the WSJ Monday talked about five actively managed funds to buy for this sort of market environment. The money quote from this article was;

It's at times like this that some actively managed funds start to gain real appeal.

Or are you really so comfortable with this market's overall valuation that you are happy to buy an index fund and go along for the ride? If so, by all means take those routes. I prefer to sleep at night.

The flaw here, both with "his guy" and in the WSJ article is what appears to be a lack of proactive thought and execution as well as just mentally wrapping your arms around the fact that cycles end with declines and those declines make people uncomfortable.

If you have been reading this site for a while hopefully you thought about the fact that this is how the market works, even if you disagreed with me that we were headed for a bear. If you are new or did not think about the possibility of a bear hopefully you can remember what this feels like (this is harder than it sounds) so that the next one does not catch you off guard.

Unfortunately there is a dearth of MSM coverage from this angle and maybe even a lack of proactive moves made by people in the industry? I don't know about that last one, it is just an anecdotal observation based on interviews I read and interviews I see on TV.

It would seem to me that one of the worst things any investor can do is wake up one morning and say "uh oh the market is down 20% what should I do?"

Not everyone should utilize an exit strategy or a get defensive trigger point, that falls under the investor know thyself category but anyone prone to emotion during declines needs to do some planning ahead of time. Planning either means deciding what action to take or telling yourself that your will hold on no matter what and that if you have, say, $100,000 understanding ahead of time that might shrink to $70,000 in a normal bear.

Mental preparation can go a long way to mollify the distress. This a point often repeated here but it is true and I find it very unfortunate that anyone working in the business doesn't do more ahead of time to to avoid emotional problems that arise.

The picture is from Watson Lake here in Prescott.

Posted by Roger Nusbaum at 5:20 AM | Permalink | Comments

Yesterday I talked a little about a possible bounce coming, what I have been referring to as a feel good rally. Jon Hussman this week also talked about the possibility of some sort of bounce in the offing.

Hopefully as the months have worn on in this cycle you have taken that market cycles end with bear phases and that during bear phases there are bounces that come along. I talked about it during the winter then we had one start in March and it makes sense to expect another feel good rally, at least one more, during this bear phase.

So think about that ahead of time, hopefully you thought about the last one before it happened too.

Why might a feel good rally start soon? The decline from May 19 has been swift. While I don't look at too many things along these lines I'm sure it would be easy to pull out all sorts of stats that "prove" the market is oversold. I suppose it would be fair to say sentiment has also spiked down, the action on Monday is a good tell for this. These sorts of things are short term trend changers not big cycle changers.

If there is a feel good rally it will be appropriate for some people to trade and for others to leave it alone, know what camp you fall in to. If there is a feel good rally there will be plenty of commentary on TV and in print telling you that the bottom is in and that now is the time to go back in.

At some point a bottom will come but in bear markets people get faked out by these sorts of rallies. From a common sense standpoint how can a bear market that results from whatever is happening in the housing market/financial crisis (you can quantify the reality if you want to) be milder than normal?

I talk about pre-planning an awful lot and while no one can account for every variable that might come, stick to your original plan for re-entry--that is if you took any defensive action earlier.

For me that means wading back in when the market takes back its 200 DMA. If we are down 30% at some point maybe I'll add one name but the focus is health of demand (or more correctly my perception of it based on the 200 DMA) for equities.

If you still believe that stock market investing will still work, even if that means investing more in foreign markets, for the long term you do not need to nail the turn around no matter when it actually comes.

The point of this post was not to predict a bounce but to realize that another one is likely at some point (based on how bear markets tend to work) and it makes sense to think now so that you remember later.

Labels: cycles

Posted by Roger Nusbaum at 5:29 AM | Permalink | Comments

The pop from the open has obviously petered out for now, about flat for the S&P 500 as I write this.

One general observation; news like we had over the weekend about Fannie, Freddie, Paulie and Bennie and the Feds could turn out to be the catalyst for another feel good rally.

I don't think a bear market can end with "I'm from the government and I'm here to help," to quote Mark Haines from this morning, news.

Whether this is a normal bear market (my opinion) or something else it does make sense to think there will be another feel good rally at some point. The one from March to May 19 was longer than normal but shallower than normal.

For all I know, and on second glance, today's bailout news may not be fuel for a feel good rally but another one is likely before the market really bottoms. And if there is a feel good rally the pundits will come out of the woodwork to tell us a real bottom is in.

Labels: market

Posted by Roger Nusbaum at 7:53 AM | Permalink | Comments

In continuing this thread (not only here but on greenfaucet and TheStreet.com) about sectors and proxies and such...

I've mentioned a few times over the years that it would become easier to build very narrow portfolios with very specific effects by using ETFs (this was not something particularly clever but more of a statement of the obvious), certainly this has come to pass and and will continue to evolve further.

The global shipping ETF I mentioned yesterday is the most recent example of the potential.

One aspect of this that I write about often is funds being proxies for other things. One example I mentioned a few days ago is the possibility that the WisdomTree South Africa Currency ETF (SZR) could be a proxy for gold.

For now this does not exist as gold, measured but GLD which is a client holding, seems to almost have a negative correlation. If or when South Africa gets a handle on some of its imbalances and inflation the correlation between the two could go up.

If it does happen (I'm not trying to assign any probability with this post) then think about what what SZR would become; something that tracks gold and yields 6 or 7%. This type of thing would be of interest even if it ends up not being for you.

As you read that you might wonder doesn't the Australian dollar already do that? To a point, yes it does but as highly as I think of Australia, and I do own the currency, this becomes a point where people risk allocating too much to one country.

Another, IMO, example of a proxy in the making might be the New Zealand Dollar ETF (BNZ). Many people think of the kiwi as being a commodity currency (I referred to it this way in the early days of this site) but that is not quite right. New Zealand produces a lot of dairy products, meat and wool. The government is very proactive in trying to increase its exports, it has a free trade agreement with China, and it seems to me that the kiwi could be a proxy for the burgeoning of the food theme without taking on the same volatility as an agriculture stock. I've had a lot of luck with Monsanto (MON) but that type of stock is not right for everyone.

The kiwi faces plenty of obstacles pertaining to deficits and imbalances but these issues are not new and have not crippled the currency (yet?). For now I do not own BNZ and I don't know if I will. The idea of BNZ being a low impact way to buy into the global food theme is just a bit of process/theory.

This post isn't about buying SZR or BNZ it is about recognizing themes and exploring whether there might be any other ways in that could increase volatility or decrease it depending on your own tolerances or the maturity of the cycle.

Labels: portfolio strategy, sectors, theory

Posted by Roger Nusbaum at 5:22 AM | Permalink | Comments

You know how if you turn a garden hose on and no one is holding it it whips around with no rhyme or reason?

Well the more I read about the Vix index from Adam and Bill Luby the more I am convinced that a Vix ETF would behave like the hose that no one is holding.

Quite a few times I mentioned that it seems logical for someone to get on the stick and figure out how to ETF (or ETN) it and that I thought it could add value to a portfolio.

Yeah, well forget it. Not that it shouldn't exist and that anyone so inclined shouldn't take a stab but if it ever does come I really doubt I would have an interest. Either something has changed or I know less than I thought I did, not that I was ever an expert by any means, or perhaps some of both. Seeking out volatility management is an important component to portfolio construction but there are less complicated ways to do it.

Anyone who has stuck with this blog over the last few summers may recall that I love to watch the Tour de France, doping and politics notwithstanding I enjoy the scenery, I get a kick out of Phil and Paul's announcing and the competition, anonymous as it has become, is very exciting. Well during yesterday's coverage Paul went on a little tangent about the Aussie reaching parody with the greenback, his preference for the kiwi and for good measure Phil chimed in with a joke about needing six dollars to buy a pound.

Maybe we should listen to Paul, he owns a goldmine in Uganda (I think it's Uganda).

On a related note, on Cashin' In Jonathan Hoenig suggested the South African rand via the WisdomTree product that has ticker SZR. That one might be a bit of a watch out. The rand has some deficit and inflation problems and somehow has managed to go down YTD against the greenback by more than 10%.

On a related note to the related note when watching the Saturday Fox shows as soon as I see the young looking professor from Temple University come on I know that segment won't be about the stock market and I can blast right through on the Tivo.

The crew over at IndexUniverse reported that Claymore has a shipping ETF in the pipeline. From an investing-other-people's-money standpoint this is a tough group to buy into because of the volatility that a lot of them exhibit. I think this group lends itself to an ETF very well because unlike some other specialty segments one shipper doesn't often win at the expense of another shipper. In taking a quick peak at the prospectus, and I do mean quick, there is a good chance that some of the 30 names will be new to you (and me) and that it will not lopside into a couple of stocks but we'll see.

To be clear owning shippers may not be the right hold but I don't think owning an ETF would be a disadvantage versus a stock.

Barron's profiled Nasdaq/OMX (NDAQ). I thought it was a good read and it included an interesting comment. The author, Sandra Ward, described exchanges as being like toll booths. For quite a while I have thought of publicly traded exchanges as being part of the financial infrastructure of a country. I've mentioned this a couple of times in writing so I find it interesting to read that elsewhere for once.

One positive catalyst that was mentioned is all of the cross border investments and alliances that NDAQ has in place. No question that this gives the company the chance to benefit from anything positive that might occur in Northern Europe, the Middle East or anywhere else it plants its flag but that does not make it a proxy for any other country. Seemed like a good time to toss that in again.

One last point, back to Fox News. While I am quite certain that Tobin Smith does not read this blog he pretty much spelled out part of an argument against my belief that the current bear market will be normal. All he said was that normal bear markets last 18 months or so and go down about 30% but that there is nothing about this time that is normal.

Unfortunately that was all he said, not a knock on him, the show is structured for sound bites not real analysis. As his comments were very brief I will simply remind everyone that in every bear market the this time is different sentiment is very pervasive. If you really believe this time is different I would implore you to at least take this into account. I would also remind/disclose that I have structured the portfolio in such a way where correctly quantifying what happens means close to nothing.

Labels: currency, humor attempt, investment products, market, sports

Posted by Roger Nusbaum at 5:48 AM | Permalink | Comments

Labels: video

Posted by Roger Nusbaum at 5:44 AM | Permalink | Comments