Fool.com: Gold Bugs of the World, Rejoice November 30, 2004
I had this published on the Fool today if you are interested.
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Wikinvest Wire
Tuesday, November 30, 2004
Nicole Elliott on Currencies
Regular readers will know my respect for Nicole Elliott, technical analyst from Mizuho in the UK. She has a regular appearance on CNBC Europe on Tuesdays right before the European equity markets close.
Today she gave an outlook of sorts for the currency markets to start 2005. Three of her favorite currencies are the New Zealand Dollar (Kiwi), British Pound, and the Euro. Her least favorite is the US Dollar. This ties in with what I have been writing about for a while. There is a demand problem for US dollars. This will act as a headwind for US equities. Not that US stocks can't go higher, this is just an obstacle that will need be to overcome.
To add some fundamental color to Nicole's technical opinion, both the Pound and the Kiwi are high yielding currencies (that is interest rates are higher because of recent economic strength). This creates demand for those currencies. I believe that one of the reasons for strength in the Euro, which has not had much of an economic tailwind, is there are no real threats of serious changes to the economic landscape in Euroland. Growth is slow, unemployment is high but there is not anywhere near the uncertainty in Europe these days as in the US, so the Euro gets stronger against the dollar.
Another cross rate that has had a lot of attention lately is the US Dollar/Swiss Franc which has the dollar close to nine year lows. There have been more Petro dollars available to invest because of the high price of oil. I think a lot of the dollar's slide against the Swissi can be explained by Petro dollars (remember oil is denominated in US dollars) being sold in favor of Swiss Francs. The flaw in that thought is that the S+P 500 has outperformed the Swiss market over the last six months, which means if the Swissi is being bought with Petro dollars those Francs are not going into equities.
Against this backdrop I continue to have a heavy weighting in foreign stocks, about 30%, and other assets that will benefit if the dollar continues the trend. I think that a reversal in the dollar, meaning more global confidence in the US, would be good for all markets so I don't expect to be left behind in the event of a huge US rally.
Anyone else wonder if next week we will hear that the pounding in the bond market was a hedge fund or maybe Pimco unwinding some trades?
One last tidbit. On Sunday night on CNBC Asia Mandy asked me about the rumors of China selling US bonds and what that would mean. I said that the bigger concern to me is not do they sell, I don't think they will in any size, but do they stop buying? That seems so obvious that I can't imagine I thought of it first, but yet I've never heard anyone else talk about the issue in that way before. Until today. Rick Santelli said the same thing on CNBC in his regular report. Hmmm.
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Today she gave an outlook of sorts for the currency markets to start 2005. Three of her favorite currencies are the New Zealand Dollar (Kiwi), British Pound, and the Euro. Her least favorite is the US Dollar. This ties in with what I have been writing about for a while. There is a demand problem for US dollars. This will act as a headwind for US equities. Not that US stocks can't go higher, this is just an obstacle that will need be to overcome.
To add some fundamental color to Nicole's technical opinion, both the Pound and the Kiwi are high yielding currencies (that is interest rates are higher because of recent economic strength). This creates demand for those currencies. I believe that one of the reasons for strength in the Euro, which has not had much of an economic tailwind, is there are no real threats of serious changes to the economic landscape in Euroland. Growth is slow, unemployment is high but there is not anywhere near the uncertainty in Europe these days as in the US, so the Euro gets stronger against the dollar.
Another cross rate that has had a lot of attention lately is the US Dollar/Swiss Franc which has the dollar close to nine year lows. There have been more Petro dollars available to invest because of the high price of oil. I think a lot of the dollar's slide against the Swissi can be explained by Petro dollars (remember oil is denominated in US dollars) being sold in favor of Swiss Francs. The flaw in that thought is that the S+P 500 has outperformed the Swiss market over the last six months, which means if the Swissi is being bought with Petro dollars those Francs are not going into equities.
Against this backdrop I continue to have a heavy weighting in foreign stocks, about 30%, and other assets that will benefit if the dollar continues the trend. I think that a reversal in the dollar, meaning more global confidence in the US, would be good for all markets so I don't expect to be left behind in the event of a huge US rally.
Anyone else wonder if next week we will hear that the pounding in the bond market was a hedge fund or maybe Pimco unwinding some trades?
One last tidbit. On Sunday night on CNBC Asia Mandy asked me about the rumors of China selling US bonds and what that would mean. I said that the bigger concern to me is not do they sell, I don't think they will in any size, but do they stop buying? That seems so obvious that I can't imagine I thought of it first, but yet I've never heard anyone else talk about the issue in that way before. Until today. Rick Santelli said the same thing on CNBC in his regular report. Hmmm.
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Update
I wanted to pass on a little news about this blog. Starting today the content that I post here will also be posted on a blog at PairsTrader.com. To be clear, I will post the same content to both sites. This gives me the opportunity to share what I know(insert your favorite heckel here) and my thoughts with a wider audience. I will post a market related article a little later today.
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Monday, November 29, 2004
Ireland
Over the weekend CBS Marketwatch had an article about investing in Ireland and what is going on in the Irish pro-business economy. I first read about Ireland as an investment theme about ten years ago in what is now the Bloomberg Markets magazine. Since that article the ISEQ has tripled, surviving a 33% hit when the US markets declined post bubble.
The pro-business part of the story has been roughly the same all these years. The Irish government is openly trying to lure business by offering 12.5% tax rate, the lowest in Western Europe, and a 20% tax credit for research and development. You can read the article for more details.
I have been on board with Ireland for a while, my clients and I own one of the Irish banks (some disclosure for those of you that like that sort of thing). There are not too many ways to invest in Ireland currently. There is no Irish iShare, nor could I find any index fund available to US investors. iShares does have a United Kingdom Fund (EWU), but it captures very little of Ireland. In just about every time period you can find Ireland has outperformed the UK which reiterates EWU as a poor proxy.
There is one closed end fund called the New Irish Fund (IRL). According to ADR.com there are 17 Irish companies that trade as ADRs but only three of them trade on the NYSE.
The New Irish fund trades at a 12.5% discount an offers a very small dividend but over the last 12 months it has returned more than 40% while the ISEQ index has returned about 25%. Over time the ISEQ has offered a low correlation to the US markets. In the last five years Ireland has outperformed the S+P 500 dramatically.
While I expect the US to continue to move higher I think it is more about momentum and managers playing catch up. Longer term I have real concerns about the US market. Ireland is small, 79 billion euros for the entire market, and doing what it takes to draw foreign companies in. The GDP(4.1%) is growing faster than most of Europe and unemployment(4.4%) is lower than most of Europe. Makes sense to me.
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The pro-business part of the story has been roughly the same all these years. The Irish government is openly trying to lure business by offering 12.5% tax rate, the lowest in Western Europe, and a 20% tax credit for research and development. You can read the article for more details.
I have been on board with Ireland for a while, my clients and I own one of the Irish banks (some disclosure for those of you that like that sort of thing). There are not too many ways to invest in Ireland currently. There is no Irish iShare, nor could I find any index fund available to US investors. iShares does have a United Kingdom Fund (EWU), but it captures very little of Ireland. In just about every time period you can find Ireland has outperformed the UK which reiterates EWU as a poor proxy.
There is one closed end fund called the New Irish Fund (IRL). According to ADR.com there are 17 Irish companies that trade as ADRs but only three of them trade on the NYSE.
The New Irish fund trades at a 12.5% discount an offers a very small dividend but over the last 12 months it has returned more than 40% while the ISEQ index has returned about 25%. Over time the ISEQ has offered a low correlation to the US markets. In the last five years Ireland has outperformed the S+P 500 dramatically.
While I expect the US to continue to move higher I think it is more about momentum and managers playing catch up. Longer term I have real concerns about the US market. Ireland is small, 79 billion euros for the entire market, and doing what it takes to draw foreign companies in. The GDP(4.1%) is growing faster than most of Europe and unemployment(4.4%) is lower than most of Europe. Makes sense to me.
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Debunking the Microsoft Dividend
By now you no doubt have heard that Microsoft will be paying $3 per share in dividends to shareholders. Yahoo finance says there are about ten billion shares so $30 billion will be paid. This has created a buzz because a lot of market participants think that the $30 billion will be reinvested back into stocks.
I'm gonna say I don't think so, at least not to the extent that a lot of people are hoping for. About 46% of the shares are held by individuals. Thats a lot of odd lots and other positions under 200 shares. My point is that a lot of the $30 is going to be paid a few hundred dollars at a time. Most stock investors are not going to immediately buy $200, $300, or $400 of stock because of the commission expense. The dividend for those folks will likely end up in a money market for while. Bill Gates stands to get $3 billion for his dividend. Am I the only that thinks most of that money is going the various charities supported by his foundation?
The institutional holders will reinvest the dividend, this will be in the neighborhood of $17 billion. I think a best case scenario might be $20 billion getting reinvested. I would not be surprised if specialists and market makers have already accumulated some inventory to meet demand. If that is correct that will take some of the steam out of the lift expected my some pundits.
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I'm gonna say I don't think so, at least not to the extent that a lot of people are hoping for. About 46% of the shares are held by individuals. Thats a lot of odd lots and other positions under 200 shares. My point is that a lot of the $30 is going to be paid a few hundred dollars at a time. Most stock investors are not going to immediately buy $200, $300, or $400 of stock because of the commission expense. The dividend for those folks will likely end up in a money market for while. Bill Gates stands to get $3 billion for his dividend. Am I the only that thinks most of that money is going the various charities supported by his foundation?
The institutional holders will reinvest the dividend, this will be in the neighborhood of $17 billion. I think a best case scenario might be $20 billion getting reinvested. I would not be surprised if specialists and market makers have already accumulated some inventory to meet demand. If that is correct that will take some of the steam out of the lift expected my some pundits.
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Sunday, November 28, 2004
The Big Picture for the Week of November 28, 2004
Anyone have any thoughts about what is next for US capital markets? To borrow from an old joke about economists, if you put ten different equity strategists in a room you'd get eleven different opinions. There is ample historical precedent for equities to rise in price when there seems to be no reason for a rise. As more experts get confounded by a market that should not be going up, more capital will flow in and life prices more for a while.
That being said, nothing has changed with regard to the composition of the wall of worry. It makes sense to continue to diligently study the dollar, the deficits, and so on because there is a good chance that these problems will at some point hurt US markets. Ongoing study will allow a better understanding of how to invest around current and future events. For example the dollar hitting multi year lows against the Korean won has different implications for investing in Korea than investing in other countries whose currencies are hitting multi year highs like Switzerland or Australia.
If today's concerns never materialize, well that great just don't bet on it.
There is an article in Business Week dated Dec 6 about value fund managers that have high cash positions because the managers are having trouble finding names to invest in. The brings out one of the many many reasons why I don't like open end funds. Let me say up front that this is not about the managers but the world they operate in. The article mentions five funds with cash positions ranging from 20% to 45%. There is a quote where one of the managers says he is a "glorified money market manager." This starts to become a style drift problem from investors. By having such a huge cash position, the fund's investors now have more riding on stock picking than if the fund were 100% invested. Said another way; if value stocks do ok as a group, a manager that is only 60% invested has to hope that is 60% can keep up with a 100% invested benchmark. That's not easy, especially when you figure, like any manager, he will be wrong about a couple of names he owns.
I am scheduled to appear on CNBC Asia tonight at about 14 minutes into the first hour of Market Watch. I will probably say that I am a skeptical believer in this rally we have underway.
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That being said, nothing has changed with regard to the composition of the wall of worry. It makes sense to continue to diligently study the dollar, the deficits, and so on because there is a good chance that these problems will at some point hurt US markets. Ongoing study will allow a better understanding of how to invest around current and future events. For example the dollar hitting multi year lows against the Korean won has different implications for investing in Korea than investing in other countries whose currencies are hitting multi year highs like Switzerland or Australia.
If today's concerns never materialize, well that great just don't bet on it.
There is an article in Business Week dated Dec 6 about value fund managers that have high cash positions because the managers are having trouble finding names to invest in. The brings out one of the many many reasons why I don't like open end funds. Let me say up front that this is not about the managers but the world they operate in. The article mentions five funds with cash positions ranging from 20% to 45%. There is a quote where one of the managers says he is a "glorified money market manager." This starts to become a style drift problem from investors. By having such a huge cash position, the fund's investors now have more riding on stock picking than if the fund were 100% invested. Said another way; if value stocks do ok as a group, a manager that is only 60% invested has to hope that is 60% can keep up with a 100% invested benchmark. That's not easy, especially when you figure, like any manager, he will be wrong about a couple of names he owns.
I am scheduled to appear on CNBC Asia tonight at about 14 minutes into the first hour of Market Watch. I will probably say that I am a skeptical believer in this rally we have underway.
Read more!
Saturday, November 27, 2004
Trader Wizard
Trader Wizard
Congratulations to Bill Cara on the Barron's write up! This type of attention, as I have written before, is good for the entire Blogosphere.
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Congratulations to Bill Cara on the Barron's write up! This type of attention, as I have written before, is good for the entire Blogosphere.
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Friday, November 26, 2004
Whats Working Now
Not to sound like Jonathan Hoenig (who I think brings a lot to the table), but I thought it would be worthwhile to talk a little about what has been working lately. A few weeks ago I mentioned that I was increasing equity exposure and beta in the portfolios I manage. I further said I was adding more low beta, high yielding foreign stocks and adding beta with domestic names.
The core strategy was that the dollar will get weaker bond yields will go up and owning foreign stocks and bonds, increasing exposure to commodity based economies would provide outperformance. The counter straetgy was that I don't expect great things from the US markets but if I am wrong the high beta I have added should provide enough alpha for me to keep up with the market.
It has worked out incredibly well, you can call it luck or skill I don't care. The bottom line is I have slightly outperformed the market with about 15% still in cash, the cash position helps reduce the beta. While I have increased beta, I still don't want to have a beta greater than the market just now.
I believe both of these themes will continue to work and I would build a new account around most of these same names today.
Here's a rundown of the areas I have bought recently, I will avoid naming some of the less liquid names so no one thinks I am pumping and dumping. In higher beta I added Dell, before the earnings (lucky), a software name that is up about 5%, and a smaller networking stock that is down just under one percent. I added a medical device maker that is down two percent. There was one gaming stock that closed at exactly my average price today. The big beta winner was an oil shipping stock that is up 20% in about three weeks (even luckier).
In foreign I added a Brazilian mining stock that is up 17% and a Norwegian stock (Norway is a huge non-OPEC producer, so it is a commodity based economy) that is up 11%. I've also had modest gains in an Australian retailer and UK consumer products company. All of the foreigns mentioned have at least a 3% yield.
There have also been some names in the portfolio for a while that have come to life, most notably Starbucks, Dow Chemical, Volvo, an Irish bank, Caterpillar, a generic drug stock, and a couple of others.
If you've been reading this blog for a while you know I have been writing about these themes for weeks and they have been working. You also know that process behind my sticking with these themes is very simple. Simple is always better, at least I believe that.
The bottom line is what is going on in my clients' accounts. Right now the best performers are up a lot and the worst performers are only down a little. That is a good way to think about what I am trying to do.
I recently exchanged emails with someone who manages his sizable portfolio himself, lets call him Gus. I know Gus is smart but he never told me what his approach is. He finally opened up and laid out a wildly cumbersome bottoms up style that tilts toward value. He says he pays no attention to the "message of the market" and gave me a quote that I think is from Benjamin Graham about the market being a short term voting machine and a long term weighing machine.
Bottoms up is not wrong, but it is not right for me. In a market environment where the SPX is below its 200 DMA, you have short term moving averages crossing over long term moving average and so on, it doesn't make much sense to find the few names that might swim upstream which is the method of a true bottom upper. I don't know if Gus is that devoted to his method but he clearly has no need for top down.
I know a money manager, let call him Ike, that invests similarly to Gus. Ike is a Growth At a Reasonable Price stock picker. He recently bought AON Corp (AOC) before the Spitzer news, ouch. It passed whatever GARP screen he uses. OK, but taking a look at the big picture it makes sense to think that Spizter wasn't done before the insurance news and probably isn't done yet.
Read more!
The core strategy was that the dollar will get weaker bond yields will go up and owning foreign stocks and bonds, increasing exposure to commodity based economies would provide outperformance. The counter straetgy was that I don't expect great things from the US markets but if I am wrong the high beta I have added should provide enough alpha for me to keep up with the market.
It has worked out incredibly well, you can call it luck or skill I don't care. The bottom line is I have slightly outperformed the market with about 15% still in cash, the cash position helps reduce the beta. While I have increased beta, I still don't want to have a beta greater than the market just now.
I believe both of these themes will continue to work and I would build a new account around most of these same names today.
Here's a rundown of the areas I have bought recently, I will avoid naming some of the less liquid names so no one thinks I am pumping and dumping. In higher beta I added Dell, before the earnings (lucky), a software name that is up about 5%, and a smaller networking stock that is down just under one percent. I added a medical device maker that is down two percent. There was one gaming stock that closed at exactly my average price today. The big beta winner was an oil shipping stock that is up 20% in about three weeks (even luckier).
In foreign I added a Brazilian mining stock that is up 17% and a Norwegian stock (Norway is a huge non-OPEC producer, so it is a commodity based economy) that is up 11%. I've also had modest gains in an Australian retailer and UK consumer products company. All of the foreigns mentioned have at least a 3% yield.
There have also been some names in the portfolio for a while that have come to life, most notably Starbucks, Dow Chemical, Volvo, an Irish bank, Caterpillar, a generic drug stock, and a couple of others.
If you've been reading this blog for a while you know I have been writing about these themes for weeks and they have been working. You also know that process behind my sticking with these themes is very simple. Simple is always better, at least I believe that.
The bottom line is what is going on in my clients' accounts. Right now the best performers are up a lot and the worst performers are only down a little. That is a good way to think about what I am trying to do.
I recently exchanged emails with someone who manages his sizable portfolio himself, lets call him Gus. I know Gus is smart but he never told me what his approach is. He finally opened up and laid out a wildly cumbersome bottoms up style that tilts toward value. He says he pays no attention to the "message of the market" and gave me a quote that I think is from Benjamin Graham about the market being a short term voting machine and a long term weighing machine.
Bottoms up is not wrong, but it is not right for me. In a market environment where the SPX is below its 200 DMA, you have short term moving averages crossing over long term moving average and so on, it doesn't make much sense to find the few names that might swim upstream which is the method of a true bottom upper. I don't know if Gus is that devoted to his method but he clearly has no need for top down.
I know a money manager, let call him Ike, that invests similarly to Gus. Ike is a Growth At a Reasonable Price stock picker. He recently bought AON Corp (AOC) before the Spitzer news, ouch. It passed whatever GARP screen he uses. OK, but taking a look at the big picture it makes sense to think that Spizter wasn't done before the insurance news and probably isn't done yet.
Read more!
Frustrating Morning
The futures point to a higher opening. I touched briefly on the history of Black Friday yesterday, so a lift would not be surprising.
There is a lot going on in the world today with the dollar and some chatter about China doing something its US treasury holdings. I read that Chinese officials are denying any selling but it might be useful to hear a little more detailed information. CNBC is talking about purple Ugg boots and whether Black Friday should be a national holiday.
Simon Hobbs, from CNBC Europe, will probably be all over the dollar story on European Closing Bell. (Hey Spongebob is on the floor, wahoo!).
A lot of bloggers and other market participants express frustration with CNBC and today is my turn. They dumb down almost everything they talk about, the target audience must not be people in the business. Fox News is starting a stock market channel, which I believe may be a catalyst for my tryout next month, perhaps that will be a little better? I will say Bloomberg TV offers more insight but the data on the screen is seems poorly formatted.
A good question to ask is if the US stock market continues to do well with the ever weakening dollar and all the problems is does any of it matter? Many people think deficits and a weak currency don't matter. I have written before that I am concerned about these issues and more but US stocks keep going up. That is after all the bottom line.
Read more!
There is a lot going on in the world today with the dollar and some chatter about China doing something its US treasury holdings. I read that Chinese officials are denying any selling but it might be useful to hear a little more detailed information. CNBC is talking about purple Ugg boots and whether Black Friday should be a national holiday.
Simon Hobbs, from CNBC Europe, will probably be all over the dollar story on European Closing Bell. (Hey Spongebob is on the floor, wahoo!).
A lot of bloggers and other market participants express frustration with CNBC and today is my turn. They dumb down almost everything they talk about, the target audience must not be people in the business. Fox News is starting a stock market channel, which I believe may be a catalyst for my tryout next month, perhaps that will be a little better? I will say Bloomberg TV offers more insight but the data on the screen is seems poorly formatted.
A good question to ask is if the US stock market continues to do well with the ever weakening dollar and all the problems is does any of it matter? Many people think deficits and a weak currency don't matter. I have written before that I am concerned about these issues and more but US stocks keep going up. That is after all the bottom line.
Read more!
Thursday, November 25, 2004
Happy Thanksgiving
Just a couple of random thoughts before I go cook a turkey:
The dollar is continuing lower today. It has a 1.32 handle against the Euro, a 1.14 handle against the Swissi (thanks to DD for posting the correct spelling!), and it is well below 1100 against the Korean Won which is a multi year low . The US equity market had a decent rally Wednesday, albeit on very light volume, in the face of this dollar event. Will this ever matter? I would think eventually it has to but maybe not. The Bush administration seems content so maybe the market should be content too.
The US stock market is always up on Black Friday (the day after Thanksgiving which always is a big Christmas shopping day). While I don't plan to trade the event I will be curious to see if it happens again.
Earlier this week I mentioned that Bill McClaren thought the ASX would drop 300-400 points after making a major reversal. Since then that market has rallied 2% in three trading days which is a lot for the Australian market. If Bill thinks a correction is coming I'm not going to disagree, but I wonder if it can rally some more before that happens?
European markets are mostly higher, Russia is standing out a loser today due I'm sure to what is going on in the Ukraine. Am I the only one that thinks that news footage from the Ukraine covering the contested election looks like its from the 1980's?
Lastly, thanks to all of you that read my commentary, put up links and say good things about this blog. My traffic numbers are increasing rapidly. I have readers from at least ten other countries. I have written before that I think blogging is evolving into something very useful and I hope I can be a part of it.
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The dollar is continuing lower today. It has a 1.32 handle against the Euro, a 1.14 handle against the Swissi (thanks to DD for posting the correct spelling!), and it is well below 1100 against the Korean Won which is a multi year low . The US equity market had a decent rally Wednesday, albeit on very light volume, in the face of this dollar event. Will this ever matter? I would think eventually it has to but maybe not. The Bush administration seems content so maybe the market should be content too.
The US stock market is always up on Black Friday (the day after Thanksgiving which always is a big Christmas shopping day). While I don't plan to trade the event I will be curious to see if it happens again.
Earlier this week I mentioned that Bill McClaren thought the ASX would drop 300-400 points after making a major reversal. Since then that market has rallied 2% in three trading days which is a lot for the Australian market. If Bill thinks a correction is coming I'm not going to disagree, but I wonder if it can rally some more before that happens?
European markets are mostly higher, Russia is standing out a loser today due I'm sure to what is going on in the Ukraine. Am I the only one that thinks that news footage from the Ukraine covering the contested election looks like its from the 1980's?
Lastly, thanks to all of you that read my commentary, put up links and say good things about this blog. My traffic numbers are increasing rapidly. I have readers from at least ten other countries. I have written before that I think blogging is evolving into something very useful and I hope I can be a part of it.
Read more!
Wednesday, November 24, 2004
Nasty Action
Last week I wrote that I thought the dollar was oversold, it may come back a little, but the trend was unlikely to change and the action would be less violent. Well I would call today's dollar selling as violent. I have to say it feels like panic selling as if some very bad outcome is being built in to the market. The yield curve is still flattening which means increased chance of an economic slowdown of some sort.
I still don't feel the need to out guess this but I am starting to wonder if things may get very unpleasant for US markets. The reason I don't want to try to out guess this is because it would be very easy to listen to emotion instead of logic. Some of the commentary making the rounds is coming from people who have called five out the last two bear markets, if you catch my drift. Listen to too much of this and you will end up selling at a bottom. There is nothing wrong with being nervous but do not let that emotion dictate your actions. I write often about having an exit strategy that is simple and having the discipline to stick to it. Having that type of plan makes being right or wrong much less important.
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I still don't feel the need to out guess this but I am starting to wonder if things may get very unpleasant for US markets. The reason I don't want to try to out guess this is because it would be very easy to listen to emotion instead of logic. Some of the commentary making the rounds is coming from people who have called five out the last two bear markets, if you catch my drift. Listen to too much of this and you will end up selling at a bottom. There is nothing wrong with being nervous but do not let that emotion dictate your actions. I write often about having an exit strategy that is simple and having the discipline to stick to it. Having that type of plan makes being right or wrong much less important.
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Dollar's Dip Shows Greenspan in Denial
Dollar's Dip Shows Greenspan in Denial
This story gives some more specific detail about "armageddon" than the link to Boston Herald article about Stephen Roach I posted last night. I have been writing for a while about how I have invested client portfolios in case this comes true to any degree; gold, timber, foreign stocks, foreign bonds, energy and other natural resources.
As I said in last night's post, I think self interest would motivate other countries to intervene if this eroded badly, but I could be wrong. I don't want to try to out guess this. I have said countless times I will use a breach of the 200 DMA as a cue to get defensive with my equity exposure. If Mr. Roach and Mr. Eavis are correct, no one will worry about the first 5% or 6% down they will worry about the last 30% down.
One last thing is if "financial armageddon" does occur it is very unlikely to start with a crash, it will more likely roll over slowly for a couple of months and plenty of folks will come on CNBC and tell us not to worry. That will be a good time to worry.
Read more!
This story gives some more specific detail about "armageddon" than the link to Boston Herald article about Stephen Roach I posted last night. I have been writing for a while about how I have invested client portfolios in case this comes true to any degree; gold, timber, foreign stocks, foreign bonds, energy and other natural resources.
As I said in last night's post, I think self interest would motivate other countries to intervene if this eroded badly, but I could be wrong. I don't want to try to out guess this. I have said countless times I will use a breach of the 200 DMA as a cue to get defensive with my equity exposure. If Mr. Roach and Mr. Eavis are correct, no one will worry about the first 5% or 6% down they will worry about the last 30% down.
One last thing is if "financial armageddon" does occur it is very unlikely to start with a crash, it will more likely roll over slowly for a couple of months and plenty of folks will come on CNBC and tell us not to worry. That will be a good time to worry.
Read more!
Tuesday, November 23, 2004
BostonHerald.com - Business: Economic `Armageddon' predicted
BostonHerald.com - Business: Economic `Armageddon' predicted
This article is making its way around the blogosphere, I picked it up at the Trader Wizard site. Apparently Stephen Roach has become more bearish, saying the US only has a one in ten chance of avoiding economic armageddon.
Roach has been so bearish for so long that this is probably not shocking to you. All of the concerns he cites are valid and he could be right but I don't think he has a 90% chance of being right.
I would think that if his scenario unfolds it would domino across the planet and cause "economic armageddon" in many countries. I may be wrong but we are not exactly a Wiemar Republic (in terms of fate that awaits us) in the making. If events unfolded in such a way that started what could be a meltdown I am inclined to think that other countries would intervene, if for nothing else, out of self interest.
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This article is making its way around the blogosphere, I picked it up at the Trader Wizard site. Apparently Stephen Roach has become more bearish, saying the US only has a one in ten chance of avoiding economic armageddon.
Roach has been so bearish for so long that this is probably not shocking to you. All of the concerns he cites are valid and he could be right but I don't think he has a 90% chance of being right.
I would think that if his scenario unfolds it would domino across the planet and cause "economic armageddon" in many countries. I may be wrong but we are not exactly a Wiemar Republic (in terms of fate that awaits us) in the making. If events unfolded in such a way that started what could be a meltdown I am inclined to think that other countries would intervene, if for nothing else, out of self interest.
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ETF Connect | Quick Facts Page UTG
ETF Connect | Quick Facts Page
I found another closed end fund to profile from ETF Connect called the Reaves Utility Income Trust (UTG). The fund invests at least 80% of its assets in utility areas which include electric, telephone, water, or infrastructure. The other 20% can be invested anywhere. The fund yields 6.45% and trades a discount of 6.5% to its NAV. Don't get too caught up in the discount, discounts or premiums to NAV can go on for years, UTG has been at a discount since April.
The fund tries to offer a tax advantaged yield by only owning stocks the qualify for the 15% tax rate. This means the fund has no REITs, MLPs or anything else that does not get the 15% tax rate. The fund, like a lot of CEFs, can also leverage up to 38% of its assets to enhance yield. While I have no doubt that the managers know how to manage leverage, some sort of strange dislocation in the market can create problems for any leveraged portfolio.
Performance counts and this fund has not done very well compared to the iShares Utilities fund (IDU). UTG yields abut 3% more than IDU but as you can see by the chart, since UTG's inception it is down about 9% while IDU is up about 11%. Obviously UTG is not benchmarked to IDU but yikes, UTG must be badly lagging whatever it is benchmarked to. It is an equity fund after all. In fairness to UTG the NAV is down less than the price but if you add the discount back in you still have a negative return and adding in the dividend gives you about a breakeven. You can decide whether to give the management the benefit of the doubt about whether it makes sense to add the NAV discount back in.
Utilities is an area I have been overweight for a while and it has been working quite well. I have to guess that the poor performance has come from the 20% that did not go into utilities. If that is right there must have been some very unlucky stock picks. In looking at the top ten holdings on the ETFconnect page (yes I realize they are dated) it is not clear what happened. I tried on several websites, including www.reavesutilityincomefund.com to get more recent holdings but had no luck.
I have done a few of these CEF profiles or CEF/ETF comparisons and in most of the ones I have done the actively managed CEF usually makes more sense but not this time unless I'm missing something.
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I found another closed end fund to profile from ETF Connect called the Reaves Utility Income Trust (UTG). The fund invests at least 80% of its assets in utility areas which include electric, telephone, water, or infrastructure. The other 20% can be invested anywhere. The fund yields 6.45% and trades a discount of 6.5% to its NAV. Don't get too caught up in the discount, discounts or premiums to NAV can go on for years, UTG has been at a discount since April.
The fund tries to offer a tax advantaged yield by only owning stocks the qualify for the 15% tax rate. This means the fund has no REITs, MLPs or anything else that does not get the 15% tax rate. The fund, like a lot of CEFs, can also leverage up to 38% of its assets to enhance yield. While I have no doubt that the managers know how to manage leverage, some sort of strange dislocation in the market can create problems for any leveraged portfolio.
Performance counts and this fund has not done very well compared to the iShares Utilities fund (IDU). UTG yields abut 3% more than IDU but as you can see by the chart, since UTG's inception it is down about 9% while IDU is up about 11%. Obviously UTG is not benchmarked to IDU but yikes, UTG must be badly lagging whatever it is benchmarked to. It is an equity fund after all. In fairness to UTG the NAV is down less than the price but if you add the discount back in you still have a negative return and adding in the dividend gives you about a breakeven. You can decide whether to give the management the benefit of the doubt about whether it makes sense to add the NAV discount back in.
Utilities is an area I have been overweight for a while and it has been working quite well. I have to guess that the poor performance has come from the 20% that did not go into utilities. If that is right there must have been some very unlucky stock picks. In looking at the top ten holdings on the ETFconnect page (yes I realize they are dated) it is not clear what happened. I tried on several websites, including www.reavesutilityincomefund.com to get more recent holdings but had no luck.
I have done a few of these CEF profiles or CEF/ETF comparisons and in most of the ones I have done the actively managed CEF usually makes more sense but not this time unless I'm missing something.
Read more!
Russian Currency Moves | Reuters.com
Latest News and Financial Information | Reuters.com
That Russia may start to favor holding Euros instead of dollar is in the market today and putting downward pressure on the greenback, which is at fresh lows against the Swissee (I still haven't found how to spell that nickname for the Swiss Franc) and the Kiwi among others.
I haven't read this anywhere yet, but it seems to me that Russia sells a lot of oil now, and is likely to sell more in the future. Oil is denominated in US dollars. I don't think it would make sense for Russia to abandon the dollar. If no one else is talking about this maybe I am wrong.
I will say that back in 1999 when the Euro debuted a lot of people though it would supplant the dollar as the world reserve currency. If my thoughts about Russia and the Euro are wrong then perhaps today's news is step number one to the Euro gaining a new standing in the currency world. Stay tuned.
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That Russia may start to favor holding Euros instead of dollar is in the market today and putting downward pressure on the greenback, which is at fresh lows against the Swissee (I still haven't found how to spell that nickname for the Swiss Franc) and the Kiwi among others.
I haven't read this anywhere yet, but it seems to me that Russia sells a lot of oil now, and is likely to sell more in the future. Oil is denominated in US dollars. I don't think it would make sense for Russia to abandon the dollar. If no one else is talking about this maybe I am wrong.
I will say that back in 1999 when the Euro debuted a lot of people though it would supplant the dollar as the world reserve currency. If my thoughts about Russia and the Euro are wrong then perhaps today's news is step number one to the Euro gaining a new standing in the currency world. Stay tuned.
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Vienna Calling
As the year winds down we will start to see all sorts of lists about what performed best and worst in 2004. There will be lists of stocks, mutual funds, sectors, countries, and more.
One name that is bound to pop up on a list or two is the Ishares Austria Fund (EWO). Year to date EWO, in case it isn't obvious EWO correlates very highly to the Austrian ATX Index, is up about 55%. I can envision people seeing that and getting excited about investing in Austria. Not so fast my friend.
While finding information on Austria is not easy I was able to learn a little. First, the market is tiny. The total market cap is 54 billion Euros, that is for the entire market. Second is the country and the exchange are almost done with privatizing a lot of state owned companies (privatizing state run companies has always been a popular investment theme). Third is that the market has been boosted by a new state-subsidized retirement product, think social security.
I was able to find some economic data about Austria for 2003, oh well it was the best I could do. GDP grew at 1.7%, inflation was 1.3% and unemployment was 7%. These numbers are consistent with the rest of Europe and provide no obvious reason why the ATX has out performed.
So I think the outperformance can be traced back to the privatizations and the retirement product. The easiest analysis occurs when you can see a clear catalyst that will impact supply and demand as has been the case in Austria in 2004, although I freely admit Austria has never been on my radar. The next new demand may come from pensions funds that while only having 1% in equities collectively views the stock market as a "casino." Pensions are not the same thing the "retirement product"
Intuitively, I have to think this pension opportunity is floating out there as another demand catalyst but gaming when this might occur seems like it will be unknowable.
I do a lot of foreign investing for my clients. The investment theme for every country I have exposure to, and I have exposure to 12 foreign countries, is much easier to dissect and explain. While no one can know for sure I think getting into Austria now would be chasing last year's heat, but I could be wrong.
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One name that is bound to pop up on a list or two is the Ishares Austria Fund (EWO). Year to date EWO, in case it isn't obvious EWO correlates very highly to the Austrian ATX Index, is up about 55%. I can envision people seeing that and getting excited about investing in Austria. Not so fast my friend.
While finding information on Austria is not easy I was able to learn a little. First, the market is tiny. The total market cap is 54 billion Euros, that is for the entire market. Second is the country and the exchange are almost done with privatizing a lot of state owned companies (privatizing state run companies has always been a popular investment theme). Third is that the market has been boosted by a new state-subsidized retirement product, think social security.
I was able to find some economic data about Austria for 2003, oh well it was the best I could do. GDP grew at 1.7%, inflation was 1.3% and unemployment was 7%. These numbers are consistent with the rest of Europe and provide no obvious reason why the ATX has out performed.
So I think the outperformance can be traced back to the privatizations and the retirement product. The easiest analysis occurs when you can see a clear catalyst that will impact supply and demand as has been the case in Austria in 2004, although I freely admit Austria has never been on my radar. The next new demand may come from pensions funds that while only having 1% in equities collectively views the stock market as a "casino." Pensions are not the same thing the "retirement product"
Intuitively, I have to think this pension opportunity is floating out there as another demand catalyst but gaming when this might occur seems like it will be unknowable.
I do a lot of foreign investing for my clients. The investment theme for every country I have exposure to, and I have exposure to 12 foreign countries, is much easier to dissect and explain. While no one can know for sure I think getting into Austria now would be chasing last year's heat, but I could be wrong.
Read more!
Monday, November 22, 2004
Fool.com: An Attractive Energy Stock November 22, 2004
Fool.com: An Attractive Energy Stock November 22, 2004
I had this published today on the Fool if you are interested. Unfortunately they dumbed up some of my commentary.
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I had this published today on the Fool if you are interested. Unfortunately they dumbed up some of my commentary.
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Bill Nygren
Bill Nygren, manager of the Oakmark fund, is getting interviewed on CNBC. Dylan Ratigan asked him for his top stock pick and he said it was Washington Mutual (WM). He has been saying that for years and years. This is a classic example of someone talking his book. I have no idea if he is buying more at these prices because the question wasn't asked but his cost basis must be in the single digits. It is much more useful for all concerned to talk about what they are buying right now or at least disclose if they would be a buyer right now, in size, for the stock they are touting.
I am scheduled to appear on Forbes on Fox on Dec 11, I can promise that the two names I give will be ones that I would gladly buy that day and I will say so on the air. About a year or so ago I bought a Russian oil stock that has just about doubled since I bought it but I would not buy the name for new clients today. Mr. Nygren touting Wamu is the equivalent of my touting the Russian oil stock as my favorite stock even though I wouldn't buy it now. That type of comment motivates people to buy. I question the motive of Mr. Nygren saying Wamu is his favorite stock. I can not believe he does not know the question means what is going to have the best 2005. "Would you buy it now (in size)? " is a far more important piece of information than the other disclosures they are required to make.
Off the soap box and on to the Maui Classic just starting on ESPN. I am as diehard a college hoops fan as there is and watching this tourney is always exciting and the scenery going to and coming back from commercial is spectacular. The other great thing about today is we have had about 10 inches of snow in the last five hours here on the mountain.
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I am scheduled to appear on Forbes on Fox on Dec 11, I can promise that the two names I give will be ones that I would gladly buy that day and I will say so on the air. About a year or so ago I bought a Russian oil stock that has just about doubled since I bought it but I would not buy the name for new clients today. Mr. Nygren touting Wamu is the equivalent of my touting the Russian oil stock as my favorite stock even though I wouldn't buy it now. That type of comment motivates people to buy. I question the motive of Mr. Nygren saying Wamu is his favorite stock. I can not believe he does not know the question means what is going to have the best 2005. "Would you buy it now (in size)? " is a far more important piece of information than the other disclosures they are required to make.
Off the soap box and on to the Maui Classic just starting on ESPN. I am as diehard a college hoops fan as there is and watching this tourney is always exciting and the scenery going to and coming back from commercial is spectacular. The other great thing about today is we have had about 10 inches of snow in the last five hours here on the mountain.
Read more!
Gloom And More Gloom
One of the most productive half hours of stock market television is the first 30 minutes of CNBC Asia's Squawk Box on Sunday afternoon. Typically they have one portfolio manager or strategist on for most of the time and they really pick apart the US markets and the things that influence them. What is unique is that they get to a depth of analysis that no other network explores. They have a pool of about five or six people for this segment that they choose from to bring on and all of them work from Asia.
This week's guest was Stephen Gollop who is head of Hong Kong based Bridgewater, which is an investment advisory firm. He has been wildly bearish on all aspects of US assets for ages and very bullish on gold for ages. He has been spot on with the gold call and, uh, well a little early on the demise of US capital markets.
The reason that I am posting this is that his position on the US markets is not unique among foreign money managers. Mr. Gollop has come on CNBC repeatedly laid out the same general thesis and thus far has been wrong. He lays out a clear concise explanation of why he feels the way he does and it sounds plausible. I don't know enough about him to know how smart he is. The point is to not get too caught up in this rhetoric. A key component to moderately successful navigation of capital markets is some sort of exit strategy, some point at which you get defensive in your portfolio. When and how you do this probably isn't the most important thing just that you take some action when you say you are going to.
I am doubtful that the US stock market is poised for some hideous decline. The S+P 500 is more than 20% lower than where it was four years ago. The Nasdaq is about 60% lower than where it was four and half years ago. This isn't to say the market can't go down 10% or 15% from here or I could be very wrong and we do have a hideous decline, but if you read this blog you know I have a clear simple exit strategy.
Lastly, Bill McClaren thinks today is a pivotal reversal day for the Australian and that it will drop 10% over the next three or four months. If he is right, most about New Zealand will be wrong before it is right. I still think the long term theme is positive for both countries.
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This week's guest was Stephen Gollop who is head of Hong Kong based Bridgewater, which is an investment advisory firm. He has been wildly bearish on all aspects of US assets for ages and very bullish on gold for ages. He has been spot on with the gold call and, uh, well a little early on the demise of US capital markets.
The reason that I am posting this is that his position on the US markets is not unique among foreign money managers. Mr. Gollop has come on CNBC repeatedly laid out the same general thesis and thus far has been wrong. He lays out a clear concise explanation of why he feels the way he does and it sounds plausible. I don't know enough about him to know how smart he is. The point is to not get too caught up in this rhetoric. A key component to moderately successful navigation of capital markets is some sort of exit strategy, some point at which you get defensive in your portfolio. When and how you do this probably isn't the most important thing just that you take some action when you say you are going to.
I am doubtful that the US stock market is poised for some hideous decline. The S+P 500 is more than 20% lower than where it was four years ago. The Nasdaq is about 60% lower than where it was four and half years ago. This isn't to say the market can't go down 10% or 15% from here or I could be very wrong and we do have a hideous decline, but if you read this blog you know I have a clear simple exit strategy.
Lastly, Bill McClaren thinks today is a pivotal reversal day for the Australian and that it will drop 10% over the next three or four months. If he is right, most about New Zealand will be wrong before it is right. I still think the long term theme is positive for both countries.
Read more!
Sunday, November 21, 2004
Business News - Roubles on the trade agenda
Business News - Roubles on the trade agenda
This article addresses one of the reasons why I think New Zealand is a very good place to invest. The NZX 50 is close to its high but there are multiple themes working at once that I believe will let the market continue to work higher.
Unfortunately there are very few easy ways to invest in New Zealand. At the risk of being accused of talking my book, I have owned Telecom New Zealand (NZT) personally and for clients for quite a while, but more importantly I will continue buy it for new clients at current prices. It equals about 1/5 of the NZX 50 and pays a 6% dividend with a beta of 0.86.
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This article addresses one of the reasons why I think New Zealand is a very good place to invest. The NZX 50 is close to its high but there are multiple themes working at once that I believe will let the market continue to work higher.
Unfortunately there are very few easy ways to invest in New Zealand. At the risk of being accused of talking my book, I have owned Telecom New Zealand (NZT) personally and for clients for quite a while, but more importantly I will continue buy it for new clients at current prices. It equals about 1/5 of the NZX 50 and pays a 6% dividend with a beta of 0.86.
Read more!
The Big Picture for the Week of Nov 21, 2004
I saw in interesting interview of David Neeleman, CEO of Jetblue (JBLU), on Bloomberg TV. What interested me was the extent that he was saying that several airlines are under hedged against the rise in oil over the last few months. The reason for the lack of hedging is the reliance of brokerage firm price predictions.
For whatever reason, the analysts community has mostly missed the mark repeatedly, which I believe creates an opportunity for stock investors. I first wrote about this in May for the Fool. The idea is very simple and not very unique, but a catalyst for oil stocks nonetheless.
Many oil companies use a much lower price for oil in whatever price modeling needed to run an oil company in an effort to be conservative. When we start to have quarter after quarter of operations with $45-$50 oil, even oil above $40 creates the effect, it makes all sorts of oil companies very cheap. Also low oil prices are used by brokerage firms for their forecasting models too. This makes oil stocks cheap.
I expect very good things to continue for oil stocks for the foreseeable future. I have written before that on a down move oil might find a home in the low $40's and that might impact oil stocks for a short while but this pricing anomaly and what I believe is a change in worldwide global demand because of China and India are the reasons for my optimism.
Energy stocks make up 7% of the S+P 500. I am overweight the group with about an 11% weight. As bullish as I am, I could be wrong so my idea of overweight is 3%-6% more than the benchmark weight.
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For whatever reason, the analysts community has mostly missed the mark repeatedly, which I believe creates an opportunity for stock investors. I first wrote about this in May for the Fool. The idea is very simple and not very unique, but a catalyst for oil stocks nonetheless.
Many oil companies use a much lower price for oil in whatever price modeling needed to run an oil company in an effort to be conservative. When we start to have quarter after quarter of operations with $45-$50 oil, even oil above $40 creates the effect, it makes all sorts of oil companies very cheap. Also low oil prices are used by brokerage firms for their forecasting models too. This makes oil stocks cheap.
I expect very good things to continue for oil stocks for the foreseeable future. I have written before that on a down move oil might find a home in the low $40's and that might impact oil stocks for a short while but this pricing anomaly and what I believe is a change in worldwide global demand because of China and India are the reasons for my optimism.
Energy stocks make up 7% of the S+P 500. I am overweight the group with about an 11% weight. As bullish as I am, I could be wrong so my idea of overweight is 3%-6% more than the benchmark weight.
Read more!
Saturday, November 20, 2004
Forecast Looks Stormy
I am spending this weekend mulling over a couple of different forecasts. The mountain I live on is expected to have 10 inches of snow on Monday. The other forecast is that the stock market is going to correct some of the gains of the last month.
Barron's has an article about the momentum of the market and what could derail that momentum (since Barron's is subscription based, the link would be useless). A lot more strategists, traders, and fund managers hopped on the correction train late in the week, so many that I wonder how Market Vane can be at 70% bullish and how the put call ratio can be where it is.
There a lot of things that would seem to stand in the way of equities moving higher, some in the business call that a wall of worry. I can't get away from the feeling that a lot of people running money have missed too much of the election rally and need to catch up before the year closes out. If that plays out then the market will go higher through the holidays. I don't think it makes sense to worry about 2005 for another month or two. To call me bullish would not be entirely right, I just perceive that the market's message is to go a little higher.
I wrote yesterday what I have done to protect against some dollar induced calamity and I will consider my thought about the next couple of months to be wrong if the S+P 500 goes back below its 200 DMA. If that happens I will probably use Profunds to hedge my US equity exposure.
As an unrelated side note; Barron's did not profile any stock market blogs this week. My money is still on Seeking Alpha to be next.
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Barron's has an article about the momentum of the market and what could derail that momentum (since Barron's is subscription based, the link would be useless). A lot more strategists, traders, and fund managers hopped on the correction train late in the week, so many that I wonder how Market Vane can be at 70% bullish and how the put call ratio can be where it is.
There a lot of things that would seem to stand in the way of equities moving higher, some in the business call that a wall of worry. I can't get away from the feeling that a lot of people running money have missed too much of the election rally and need to catch up before the year closes out. If that plays out then the market will go higher through the holidays. I don't think it makes sense to worry about 2005 for another month or two. To call me bullish would not be entirely right, I just perceive that the market's message is to go a little higher.
I wrote yesterday what I have done to protect against some dollar induced calamity and I will consider my thought about the next couple of months to be wrong if the S+P 500 goes back below its 200 DMA. If that happens I will probably use Profunds to hedge my US equity exposure.
As an unrelated side note; Barron's did not profile any stock market blogs this week. My money is still on Seeking Alpha to be next.
Read more!
Friday, November 19, 2004
The Dollar is Oversold....
...but may not be due for pullback.
The move this week has been too extreme. When the price of tradeable assets moves this much in such a short time period the sentiment behind the move is almost always overdone. I doubt it is different this time. Today had several catalysts to make the dollar come undone. Oil & gold rallied (but what was the tail and what was the dog?), options expired, and Greenspan and Snow scared all sorts of traders into trading down US assets.
Neither of them said anything new, but that it came from Greenspan so bluntly was not everyday stuff. There are real problems confronting the dollar, the bond market and the stock market. What I think might happen is that the dollar may regain some of the ground lost this week, but I don't think a correction will change the trend. The twin deficits are likely to continue to send the dollar lower but with less violence than we saw this week.
I will either be right or wrong about that last prediction. The more important thing is how to invest around the issue? I don't think this will evolve some sort of market crisis, but it is a possibility. I am overweight foreign equities, foreign bonds, energy stocks, and natural resource stocks with a little bit of gold exposure. Those groups will do well if something extreme occurs and they have been doing well all this time without anything truly bad having happened. Clearly my allocation is not perfect but it is proactive and I know too many managers with their heads in the sand.
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The move this week has been too extreme. When the price of tradeable assets moves this much in such a short time period the sentiment behind the move is almost always overdone. I doubt it is different this time. Today had several catalysts to make the dollar come undone. Oil & gold rallied (but what was the tail and what was the dog?), options expired, and Greenspan and Snow scared all sorts of traders into trading down US assets.
Neither of them said anything new, but that it came from Greenspan so bluntly was not everyday stuff. There are real problems confronting the dollar, the bond market and the stock market. What I think might happen is that the dollar may regain some of the ground lost this week, but I don't think a correction will change the trend. The twin deficits are likely to continue to send the dollar lower but with less violence than we saw this week.
I will either be right or wrong about that last prediction. The more important thing is how to invest around the issue? I don't think this will evolve some sort of market crisis, but it is a possibility. I am overweight foreign equities, foreign bonds, energy stocks, and natural resource stocks with a little bit of gold exposure. Those groups will do well if something extreme occurs and they have been doing well all this time without anything truly bad having happened. Clearly my allocation is not perfect but it is proactive and I know too many managers with their heads in the sand.
Read more!
Mid Day Thoughts About The Dollar
The dollar is getting whacked against just about every currency on the planet except for maybe the Polish Zloty, actually I didn't look up the Zloty cross rate. The decline is contributing to the stock market selloff today along with options expiration and oil.
Oil now has a $48 handle. Remember that oil is a dollar denominated asset like gold. A weaker dollar, everything else being equal, should mean that oil goes up in price. I think that oil may be catching up to the dollar's most recent leg down. Just a quick reminder.
As a side note, is anyone else out there getting a kick out of Simon Hobbs from CNBC Europe going berserk about the action in the dollar this week?
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Oil now has a $48 handle. Remember that oil is a dollar denominated asset like gold. A weaker dollar, everything else being equal, should mean that oil goes up in price. I think that oil may be catching up to the dollar's most recent leg down. Just a quick reminder.
As a side note, is anyone else out there getting a kick out of Simon Hobbs from CNBC Europe going berserk about the action in the dollar this week?
Read more!
Barron's Online - Are Gold Stocks Still Golden?
Barron's Online - Are Gold Stocks Still Golden?
I didn't know about this article when I wrote the other piece. It says gold stocks are over bought. What is interesting is that there is no mention of the gold ETF.
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I didn't know about this article when I wrote the other piece. It says gold stocks are over bought. What is interesting is that there is no mention of the gold ETF.
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I'm No Gold Bug, But....
I thought I would throw in my two cents about the new StreetTracks Gold ETF (GLD) that started trading on Thursday. Right out of the chute I'll recommend you read this post on Seeking Alpha.
An ETF that is a pure gold play seems like it has been in the works for years. Like most investment vehicles there will be advantages and drawbacks. Before the ETF, you could access gold a few different ways; own equity shares of mining companies, trade XAU options, trade futures, and there is probably some other way that I am not thinking of. The biggest drawback to the futures and XAU options is expiration, they are potentially decaying assets. If you are a speculator and you are wrong by a day your investment can be wiped out. The biggest drawback to mining stocks is that they don't have to perfectly correlate to what the metal is doing, its usually close but not exact.
The Gold ETF has no expiration and no real tracking error, save for the management fee. What it does not offer, that a lot of the stocks do, is a dividend. Investors don't usually place a high priority on gold stocks' dividends but still GLD does not have one.
I always have exposure to a gold stock for my clients. Should something like 9/11 ever happen again gold would be likely to rise quickly. It is a good counter strategy to an equity portfolio, plus I don't mind the dividend.
GLD is likely to be very popular both as a hedge and to speculate. I think GLD, and the soon to be issued Barclays gold ETF, will compete for investment capital that currently is in gold equities. I allocate about 3% to my one gold stock. If I ever decide to buy a gold ETF I would also sell my current gold stock. I doubt the uniqueness of that type of trade. We may have seen that type of action Thursday. Volume of GLD was high and the gold stocks I watch were all down more than I would expect given the size of the metal's Thursday decline.
I tend to look at supply and demand for investments and GLD creates the potential for a lot more investment supply. More supply doesn't have to be bad but is usually not good.
The article I linked to from Seeking Alpha addresses the theory that the amount of gold that either has been bought or will be bought could lift the gold price temporarily. It is possible that some of the recent run up was from buying enough gold to start the ETF. Yes the dollar has sold off dramatically, which usually causes gold to rise, but some of gold's price rise could be attributable to ETF implementation too.
Read more!
An ETF that is a pure gold play seems like it has been in the works for years. Like most investment vehicles there will be advantages and drawbacks. Before the ETF, you could access gold a few different ways; own equity shares of mining companies, trade XAU options, trade futures, and there is probably some other way that I am not thinking of. The biggest drawback to the futures and XAU options is expiration, they are potentially decaying assets. If you are a speculator and you are wrong by a day your investment can be wiped out. The biggest drawback to mining stocks is that they don't have to perfectly correlate to what the metal is doing, its usually close but not exact.
The Gold ETF has no expiration and no real tracking error, save for the management fee. What it does not offer, that a lot of the stocks do, is a dividend. Investors don't usually place a high priority on gold stocks' dividends but still GLD does not have one.
I always have exposure to a gold stock for my clients. Should something like 9/11 ever happen again gold would be likely to rise quickly. It is a good counter strategy to an equity portfolio, plus I don't mind the dividend.
GLD is likely to be very popular both as a hedge and to speculate. I think GLD, and the soon to be issued Barclays gold ETF, will compete for investment capital that currently is in gold equities. I allocate about 3% to my one gold stock. If I ever decide to buy a gold ETF I would also sell my current gold stock. I doubt the uniqueness of that type of trade. We may have seen that type of action Thursday. Volume of GLD was high and the gold stocks I watch were all down more than I would expect given the size of the metal's Thursday decline.
I tend to look at supply and demand for investments and GLD creates the potential for a lot more investment supply. More supply doesn't have to be bad but is usually not good.
The article I linked to from Seeking Alpha addresses the theory that the amount of gold that either has been bought or will be bought could lift the gold price temporarily. It is possible that some of the recent run up was from buying enough gold to start the ETF. Yes the dollar has sold off dramatically, which usually causes gold to rise, but some of gold's price rise could be attributable to ETF implementation too.
Read more!
Thursday, November 18, 2004
What To Make Of It
Usually on Wednesdays I go to Phoenix and work at Your Source's office (as a side note I am the portfolio manager for a financial planning firm. I go to the office two or three days a week and work at home in Prescott the rest of the time). I woke up Wednesday with a bad headache so I stayed home and worked from there. This morning one of the planners was asking me how I felt and asked if it was stress related due to the market.
I was shocked by the question for a couple of reasons. So it got me curious how many people actually stress out. I can understand active traders being stressed. That is a high mental energy task. It requires tremendous skill and luck and when one of the two go against you; ouch.
I don't think I have the mental make up to make relatively large, short term trades that rely on a particular outcome. I think of the market as a great place to get rich slowly. When I build a portfolio for clients, no individual name makes up more than 3% of the account. That way if I am wrong about a stock it doesn't really hurt my clients financial well being.
As quarters come and go there will be times where I outperform the index and times where I lag, that's just how it is. To stress out about it seems counter productive. The thing I am trying to do is get most of the big picture themes correct, luckily I have been able to do so. In a properly diversified portfolio you should always have some stuff that is up and some that is down. If everything goes in the same direction all the time, how diversified are you?
Perhaps the question about stress came from his own way of dealing with the ups and downs of the market, who knows? But to answer the question directly, I never get stressed out by what the market is doing. I think my personality type is such that I am able to take a long term look at things. Stocks have an up year 72% of the time. To paraphrase Peter Lynch, I don't know whether the next 100 S+P points are up or down, but I know where the next 1000 points are.
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I was shocked by the question for a couple of reasons. So it got me curious how many people actually stress out. I can understand active traders being stressed. That is a high mental energy task. It requires tremendous skill and luck and when one of the two go against you; ouch.
I don't think I have the mental make up to make relatively large, short term trades that rely on a particular outcome. I think of the market as a great place to get rich slowly. When I build a portfolio for clients, no individual name makes up more than 3% of the account. That way if I am wrong about a stock it doesn't really hurt my clients financial well being.
As quarters come and go there will be times where I outperform the index and times where I lag, that's just how it is. To stress out about it seems counter productive. The thing I am trying to do is get most of the big picture themes correct, luckily I have been able to do so. In a properly diversified portfolio you should always have some stuff that is up and some that is down. If everything goes in the same direction all the time, how diversified are you?
Perhaps the question about stress came from his own way of dealing with the ups and downs of the market, who knows? But to answer the question directly, I never get stressed out by what the market is doing. I think my personality type is such that I am able to take a long term look at things. Stocks have an up year 72% of the time. To paraphrase Peter Lynch, I don't know whether the next 100 S+P points are up or down, but I know where the next 1000 points are.
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What is Applied Materials Telling Us?
Applied Materials (AMAT) reported earnings last night and gave a very dour sounding warning for 2005. Management expects orders to drop considerably, by 35% in the 1st Q 2005.
This news may have significant relevance for the economy. Semiconductor production has historically been a leading indicator for the economy, similar to copper. Equipment to make semiconductors, what AMAT sells, is thought by some to be a real early leading indicator.
Assuming AMAT knows its business, this would be corroboration of what the bond market is telling with a flattening yield curve, the economic cycle is maturing. This could all change but this is the current message of the market. If investment demand continues to flow away from semiconductors, you might see software, internet and other non-semiconductor tech outperform. I have not owned any semiconductor stocks for tech exposure in quite a while. Despite the obvious appeal of something like Sandisk which stands to benefit from a remarkably easy to understand demand catalyst I would think there is a high likelihood it could get thrown out with the bath water. But I could be wrong.
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This news may have significant relevance for the economy. Semiconductor production has historically been a leading indicator for the economy, similar to copper. Equipment to make semiconductors, what AMAT sells, is thought by some to be a real early leading indicator.
Assuming AMAT knows its business, this would be corroboration of what the bond market is telling with a flattening yield curve, the economic cycle is maturing. This could all change but this is the current message of the market. If investment demand continues to flow away from semiconductors, you might see software, internet and other non-semiconductor tech outperform. I have not owned any semiconductor stocks for tech exposure in quite a while. Despite the obvious appeal of something like Sandisk which stands to benefit from a remarkably easy to understand demand catalyst I would think there is a high likelihood it could get thrown out with the bath water. But I could be wrong.
Read more!
Wednesday, November 17, 2004
Principle Protected Notes
Today, Sharon Epperson did a story on Priniciple Protected Notes (PPNs) as a form of alternative investments. some investment products I think are great, but not these. Although there are several different flavors of these things they all are quite similar.
The idea behind them sounds pretty good. You are guaranteed to get back your original $10 per share plus a small amount of interest based on the appreciation of a stock index over a period of several years. In a worst case scenario for the market you can't lose money at maturity. In the meantime the price does fluctuate, but not a lot.
The drawbacks to these things is they have very high fees and if the market goes on an absolute tear the extent to which PPNs would participate is quite limited. PPNs are pitched as being safe, and I suppose they are but investors don't get much stock market appreciation and they don't get much bond yield, so what's the point?
There is a much better, simpler, and cheaper, way to accomplish creating real equity exposure for people who are truly afraid of stock but are too young to have an all bond portfolio. Lets say an investor has $200,000 of investable assets. That investor could buy $200,000 face value of a Zero Coupon Treasury Bond. A Zero maturing in February, 2005 can be bought for about 65 cents on the dollar. So in this example the investor would spend $135,000 buying what would become $200,000 in ten years. The remaining $65,000 would then be invested in equities, one way or another. That $65,ooo would be fully exposed to what ever the stock market does. So ten years from now the investor would have, as I already mentioned, $200,000 from the Zero and has a 92% chance of having more money than what you started with. That is in a study of all rolling ten year periods in the 20th century, the stock market was up in 92% of all rolling ten year periods.
This is a much better way to go for fraidy cat investors, but it doesn't pay the same commission to a retail broker. For the record I am not claiming to have invented this idea I first heard about it years ago and it also makes a much better investment than most variable annuities.
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The idea behind them sounds pretty good. You are guaranteed to get back your original $10 per share plus a small amount of interest based on the appreciation of a stock index over a period of several years. In a worst case scenario for the market you can't lose money at maturity. In the meantime the price does fluctuate, but not a lot.
The drawbacks to these things is they have very high fees and if the market goes on an absolute tear the extent to which PPNs would participate is quite limited. PPNs are pitched as being safe, and I suppose they are but investors don't get much stock market appreciation and they don't get much bond yield, so what's the point?
There is a much better, simpler, and cheaper, way to accomplish creating real equity exposure for people who are truly afraid of stock but are too young to have an all bond portfolio. Lets say an investor has $200,000 of investable assets. That investor could buy $200,000 face value of a Zero Coupon Treasury Bond. A Zero maturing in February, 2005 can be bought for about 65 cents on the dollar. So in this example the investor would spend $135,000 buying what would become $200,000 in ten years. The remaining $65,000 would then be invested in equities, one way or another. That $65,ooo would be fully exposed to what ever the stock market does. So ten years from now the investor would have, as I already mentioned, $200,000 from the Zero and has a 92% chance of having more money than what you started with. That is in a study of all rolling ten year periods in the 20th century, the stock market was up in 92% of all rolling ten year periods.
This is a much better way to go for fraidy cat investors, but it doesn't pay the same commission to a retail broker. For the record I am not claiming to have invented this idea I first heard about it years ago and it also makes a much better investment than most variable annuities.
Read more!
Fannie Fallout
Fannie Mae faces all sorts of allegations. I don't know how it will work out but I can't really imagine that it is anybody's best interest to radically disrupt the business, it is too enmeshed in the mortgage business, which is vital to President Bush's ownership society. That does not mean that things could not be radically different for the stock price.
89% of Fannie's of shares are owned by institutions, including mutual funds. Fannie has always been an over owned stock. A lot of that institutional money is benchmarked to an index and so needs a certain amount of exposure to the financial sector. While I don't think this has started to occur yet, it would not be surprising to see money flow from Fannie to other financial stocks, thus lifting the price of those other financials.
I took a look at the financial sector ETFs to see if there might be a way to play this. Ideally the best ETF would have a little exposure to Fannie and Freddie Mac as possible and I would want to minimize exposure to the insurance group if possible because there is plenty of headline risk there too.
ETF Fannie Weight Insurance Exposure
XLF 2.8% AIG 8%
VFH Yes* AIG*
IYF 2.4% AIG 6%
IYG 3.4% not in top 10
IXG 1.4% AIG 4%
RKH 0% 0%
* percentage not available
RKH is the Regional Bank HOLDRs so there is no Fannie and no insurance so this might be the purest play if this idea has any merit at all. Another way would be IXG iShares S&P Global Financial Sector ETF.
For disclosure purpose I will say that this is not the type of narrow trade I try to find for my clients. I have been thinking about increasing domestic exposure to the financial sector and this may be a catalyst in the next few weeks.
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Econ Recon
The CPI came in up 0.6% vs an estimate of up 0.4%. Core CPI was up 0.2% vs 0.1%. Last night on CNBC Asia Mandy, the host of the show, asked me if the PPI yesterday might be a one-off. I said I thought so because often when a number is so far off trend it usually gets disregarded by the market. I think that if yesterday's number was perceived to be in line with the trend the sell off would have been much worse. Also the CPI today shows that producers could not pass on all of the increase to consumers. The early moring action in equity prices ties this all together.
All of the concerns that confront the market, that I have been writing about are still there but they are taking a back seat to the year end lift, for now.
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All of the concerns that confront the market, that I have been writing about are still there but they are taking a back seat to the year end lift, for now.
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Tuesday, November 16, 2004
ETFs Profiled on CNBC
Today I caught part two of a three part series about ETFs by Sharon Epperson. The main point of the story was that you can avoid single stock risk by owning sector ETFs. If you are interested enough in investing to be reading this blog you probably already know about sector ETFs.
In a bigger picture sense it does bring up the issue of stock picking being fruitless. There are many studies that cite evidence that the most important thing is to be in the market at the right time. Getting that biggest of big picture questions correct accounts for 70% of your returns. The next most important thing is correctly getting into the best sectors, which accounts for 20% of your returns. Think about it for a moment. If you were smart enough to overweight tech in 1998 & 1999 you probably outperformed the S+P 500. In 2004 if you have been overweight energy and materials you are probably up on the S+P even if you own mediocre stocks from these groups you are still most likely ahead. Stock selection only accounts for 10% of your return. There are countless studies that draw the numbers I have noted in this paragraph. This big picture approach is the essence of top down portfolio management.
Sector ETFs allow investors to capture most of the effect of a sector without single stock risk. So the question is does it make sense to avoid the risk the comes with owning individual stocks? I believe that in a raging bull market stock selection is less important than at other points in the cycle. In flat or down markets stock selection becomes more important. Remember how most actively managed mutual funds lagged the index in the late 1990's? The managers have been doing better in the last couple of years.
As I have written before, dividends become more important in a dicey market. The dividend effect is much harder to capture in an all ETF portfolio. I cited some specific examples in the other article. ETFs are just a product. All investment products have advantages and drawbacks. ETFs are no different and this is an important point to understand.
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In a bigger picture sense it does bring up the issue of stock picking being fruitless. There are many studies that cite evidence that the most important thing is to be in the market at the right time. Getting that biggest of big picture questions correct accounts for 70% of your returns. The next most important thing is correctly getting into the best sectors, which accounts for 20% of your returns. Think about it for a moment. If you were smart enough to overweight tech in 1998 & 1999 you probably outperformed the S+P 500. In 2004 if you have been overweight energy and materials you are probably up on the S+P even if you own mediocre stocks from these groups you are still most likely ahead. Stock selection only accounts for 10% of your return. There are countless studies that draw the numbers I have noted in this paragraph. This big picture approach is the essence of top down portfolio management.
Sector ETFs allow investors to capture most of the effect of a sector without single stock risk. So the question is does it make sense to avoid the risk the comes with owning individual stocks? I believe that in a raging bull market stock selection is less important than at other points in the cycle. In flat or down markets stock selection becomes more important. Remember how most actively managed mutual funds lagged the index in the late 1990's? The managers have been doing better in the last couple of years.
As I have written before, dividends become more important in a dicey market. The dividend effect is much harder to capture in an all ETF portfolio. I cited some specific examples in the other article. ETFs are just a product. All investment products have advantages and drawbacks. ETFs are no different and this is an important point to understand.
Read more!
Monday, November 15, 2004
Trading China
The title of this piece is from a post on the GalaTime blog. The article references two new optionable indexes, the Halter USX China (HXC) and the CBOE China Index (CYX), although it looks like options haven't started trading on HXC yet.
For the last year or two investing in China has been an investment theme that has garnered a lot of attention created more awareness about the role emerging markets can play in a properly diversified portfolio. Both good things.
I have written about this before on the Fool. Sometimes investment themes turn into manias and bubbles. I doubt investing in China is at a bubble yet and it may never be a bubble but there are some things that are worth paying attention to.
Typically one thing we see when a theme turns into a mania is that investment banks create more stocks and products to invest in. To think of this in Econ 101 terms, first there is demand for ways to invest in China (or the internet six years ago or alternative energy in the very early 1980's which was a more severe investment bubble). The investment banks, realizing the demand create more supply of IPO's and stock baskets and optionable indexes etc. It turns ugly when/if supply dwarfs demand as what happened with internet stocks. I am not saying China is like the internet. But I am saying that this supply issue could become an issue for the China theme.
Today China Netcom (CN) is debuting on the NYSE and off to a great start. Another recent IPO, Hutchison Telecom (HTX) has not done as well. The iShares FTSE/Xinhua China 25 Index (FXI) has done ok price wise but the volume shows it is a popular product.
I am a big believer in the entire China theme, and I have direct exposure for my clients and some other secondary plays on the theme too. But it is just an investment theme and one obstacle to the theme is too much supply. This is worth paying attention to.
Read more!
For the last year or two investing in China has been an investment theme that has garnered a lot of attention created more awareness about the role emerging markets can play in a properly diversified portfolio. Both good things.
I have written about this before on the Fool. Sometimes investment themes turn into manias and bubbles. I doubt investing in China is at a bubble yet and it may never be a bubble but there are some things that are worth paying attention to.
Typically one thing we see when a theme turns into a mania is that investment banks create more stocks and products to invest in. To think of this in Econ 101 terms, first there is demand for ways to invest in China (or the internet six years ago or alternative energy in the very early 1980's which was a more severe investment bubble). The investment banks, realizing the demand create more supply of IPO's and stock baskets and optionable indexes etc. It turns ugly when/if supply dwarfs demand as what happened with internet stocks. I am not saying China is like the internet. But I am saying that this supply issue could become an issue for the China theme.
Today China Netcom (CN) is debuting on the NYSE and off to a great start. Another recent IPO, Hutchison Telecom (HTX) has not done as well. The iShares FTSE/Xinhua China 25 Index (FXI) has done ok price wise but the volume shows it is a popular product.
I am a big believer in the entire China theme, and I have direct exposure for my clients and some other secondary plays on the theme too. But it is just an investment theme and one obstacle to the theme is too much supply. This is worth paying attention to.
Read more!
Fool.com: What's Next for This $200 Stock? November 15, 2004
Fool.com: What's Next for This $200 Stock? November 15, 2004
I had this published today at the Fool about Chicago Mercantile Exchange Holdings.
On a separate note, I posted a quick missive last Monday that Ned Riley was now cautious on the US market, I titled it Hell May Have Frozen Over. Not worry, good ole' Ned is back on the bullish bandwagon after the nice lift over the last week. I hope Ned's clients ignored is stellar advice!
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I had this published today at the Fool about Chicago Mercantile Exchange Holdings.
On a separate note, I posted a quick missive last Monday that Ned Riley was now cautious on the US market, I titled it Hell May Have Frozen Over. Not worry, good ole' Ned is back on the bullish bandwagon after the nice lift over the last week. I hope Ned's clients ignored is stellar advice!
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CNBC Asia Appearance
For the six of you that get CNBC Asia, I will be on Tuesday night, US time, about ten minutes into the first hour of Asia Market Watch in my usual time slot. I hope you can check it out.
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Predictions
At the beginning of 2004 I predicted that the S+P 500 would be up in the neighborhood of 15% for the year. I find the idea of predicting the market to be quite useless. About six weeks after that prediction I started to get progressively more defensive because the I thought the market would perform poorly and then a few months later it went below its 200 DMA for a while. I then got more positive on the market a few weeks ago as I have written several times already.
I certainly don't know how the market will close out the year but it looks like that original prediction may be much closer to the final number than I originally thought. I find this to be quite amusing. The reason why I hold predictions in such low regard is that they don't do anything to help investors. If in January of a particular year I was absolutely convinced the market will be up 20% I would be fully invested. But if something changed for the worse, like this year, it is in my client's best interest for me to get defensive. Who cares about predictions from 11 months ago if the market is trending in a completely different way? At that point, investing around an old prediction goes more toward serving ego than client's assets.
That being said, if you care, my prediction process is very simple and not one I invented. Every December Business Week surveys various Wall Street strategists for their predictions for the upcoming year. The history of the survey is that the consensus is always wrong, always. In December, 2003 the consensus of the survey called for high single digit growth for the S+P 500. If that is going to be wrong than the S+P would either do worse or better than the high single digits being predicted. Taking into account 2004 being the fourth year of the presidential cycle, good earnings growth and a steep yield curve I thought the market would outperform the consensus. 15% felt about right. Interesting, but not the least bit relevant.
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I certainly don't know how the market will close out the year but it looks like that original prediction may be much closer to the final number than I originally thought. I find this to be quite amusing. The reason why I hold predictions in such low regard is that they don't do anything to help investors. If in January of a particular year I was absolutely convinced the market will be up 20% I would be fully invested. But if something changed for the worse, like this year, it is in my client's best interest for me to get defensive. Who cares about predictions from 11 months ago if the market is trending in a completely different way? At that point, investing around an old prediction goes more toward serving ego than client's assets.
That being said, if you care, my prediction process is very simple and not one I invented. Every December Business Week surveys various Wall Street strategists for their predictions for the upcoming year. The history of the survey is that the consensus is always wrong, always. In December, 2003 the consensus of the survey called for high single digit growth for the S+P 500. If that is going to be wrong than the S+P would either do worse or better than the high single digits being predicted. Taking into account 2004 being the fourth year of the presidential cycle, good earnings growth and a steep yield curve I thought the market would outperform the consensus. 15% felt about right. Interesting, but not the least bit relevant.
Read more!
Sunday, November 14, 2004
Business News - China trade talks: Clark grabs chance to be first
China trade talks: Clark grabs chance to be first
This is an interesting article from the New Zealand Herald on Nov, 15 (New Zealand time). Investing down under is a theme I have been writing about for a while. Both Australia and New Zealand stand to benefit from what is going on in China.
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This is an interesting article from the New Zealand Herald on Nov, 15 (New Zealand time). Investing down under is a theme I have been writing about for a while. Both Australia and New Zealand stand to benefit from what is going on in China.
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The Big Picture for the Week of Nov 14, 2004
There are all sorts of chart indicators that point to very little resistance for the S+P 500. The Trader Wizard made a compelling point about the market needing to make a higher low for this up move to mean anything. While I have no doubt Bill knows more than me about technical analysis, by a mile, it still may be possible the S+P goes almost straight up for a couple of months before something changes. I don't know what will happen but I have been adding equity exposure for my clients as I have been talking about for several weeks.
I wanted to talk a little about the state of Stock Market blogs. Given my many minutes of blogging experience..... (humor attempt). Barron's is doing a good thing by creating awareness of the medium. So far they have profiled The Kirk Report and Trader Mike, I wouldn't be surprised to see Barron's write up Seeking Alpha some time soon too.
Blogging is far from perfect, but that is OK. In general terms there are factual mistakes, typos, grammatical issues and so on. I am guilty of all three. There are also blogs written by people that don't really know much about investing. If you buy into the notion that blogging is a form of empowerment than you have to believe that it is up to the reader to learn how to filter the content. I write this blog primarily to share my process for portfolio management. Learning what I can about someone else's process has helped me immensely over the years. While I like to think I am somewhat knowledgeable, who can say for sure? I do think that my approach is unique and that you can learn from it even if to decide what not to do. I read a lot of blogs, among other content outlets, some of them I can really learn from, some I only get snippets from here and there, and some that I think the writer is clueless.
Stock market blogging is at the early stages of whatever it will become. Trader Mike is one of the long time veterans and he has only been blogging for a short while. The Barron's attention and any other press that might come for different blogs helps the entire blogging community. I think we will see more very smart people throw their hats into the ring. This has started already on a small scale with Barry Ritholtz, Larry Kudlow (although I am not much of a fan he is a heavyweight), and James Enck.
I believe all of this is part of an evolution of analysis and the flow of information. Since I first started blogging I have been pleasantly surprised at how friendly and helpful most bloggers seem to be. Many have been willing to answer technical questions for me and have been very willing to do link exchanges too. I hope this cooperative spirit continues to flourish, it helps everyone.
Read more!
I wanted to talk a little about the state of Stock Market blogs. Given my many minutes of blogging experience..... (humor attempt). Barron's is doing a good thing by creating awareness of the medium. So far they have profiled The Kirk Report and Trader Mike, I wouldn't be surprised to see Barron's write up Seeking Alpha some time soon too.
Blogging is far from perfect, but that is OK. In general terms there are factual mistakes, typos, grammatical issues and so on. I am guilty of all three. There are also blogs written by people that don't really know much about investing. If you buy into the notion that blogging is a form of empowerment than you have to believe that it is up to the reader to learn how to filter the content. I write this blog primarily to share my process for portfolio management. Learning what I can about someone else's process has helped me immensely over the years. While I like to think I am somewhat knowledgeable, who can say for sure? I do think that my approach is unique and that you can learn from it even if to decide what not to do. I read a lot of blogs, among other content outlets, some of them I can really learn from, some I only get snippets from here and there, and some that I think the writer is clueless.
Stock market blogging is at the early stages of whatever it will become. Trader Mike is one of the long time veterans and he has only been blogging for a short while. The Barron's attention and any other press that might come for different blogs helps the entire blogging community. I think we will see more very smart people throw their hats into the ring. This has started already on a small scale with Barry Ritholtz, Larry Kudlow (although I am not much of a fan he is a heavyweight), and James Enck.
I believe all of this is part of an evolution of analysis and the flow of information. Since I first started blogging I have been pleasantly surprised at how friendly and helpful most bloggers seem to be. Many have been willing to answer technical questions for me and have been very willing to do link exchanges too. I hope this cooperative spirit continues to flourish, it helps everyone.
Read more!
Saturday, November 13, 2004
Rudolph-Riad Younes
Earlier this week I posted an article that studied the Templeton Russia and East European Fund, the Central Europe and Russia Fund, and the Turkish Investment Fund.
This week's Barron's has in interview with Rudolph-Riad Younes of the Julius Baer International Equity Fund. One of his favorite countries to invest in is Turkey, it is a great read.
Congrats to Mike Seneadza better known as Trader Mike for a nice write up in Barron's. Mike has a great site and has helped me get this blog off the ground.
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This week's Barron's has in interview with Rudolph-Riad Younes of the Julius Baer International Equity Fund. One of his favorite countries to invest in is Turkey, it is a great read.
Congrats to Mike Seneadza better known as Trader Mike for a nice write up in Barron's. Mike has a great site and has helped me get this blog off the ground.
Read more!
Benchmarking
Lane Bajardi interviewed a gentleman named Glenn Kautt of The Monitor Group about how to benchmark your portfolio on the Bloomberg Personal Finance show.
Understanding how to benchmark your portfolio is very important and I believe needs to tie in to whatever your goal is. I like to think I know quite about this and based on what I know I believe the entire concept will evolve considerably over the next few years.
Very simply, most managers compare, or benchmark, the returns achieved in client portfolios versus a particular index, usually the S+P 500. Other common equity benchmarks might be the Wilshire 5000 or the MSCI World Index. There are also various bond indices to benchmark a fixed income portfolio to. The manager then tries to outperform whatever the particular index does by overweighting and underweighting certain sectors and with stock picking.
There are several flaws with this approach, depending on how a manager adheres to it. A manager that is truly benchmarked to an index must be fully invested at all times. If the market falls 20% and a fully invested manager is only down 17%, technically he has done a good job but that doesn't help the client. This is more of an issue for mutual fund managers than separate account managers. Closet indexing also becomes an issue in benchmarking a portfolio. If a manager deviates too radically from the sector constituency of his index he is taking a big risk. In this situation if the market goes up by 30% in a year and a portfolio, due to poor sector bets, is only up 18% it would likely be mathematically impossible to ever make up those 1200 basis points. A lot of managers simply won't take the risk.
The interview of Mr. Kautt talked in vague terms about creating customized benchmarks for clients that combines different asset classes. There was not a lot of detail given but I think that if a client has a personal benchmark comprised of US stocks, foreign stocks, bonds, gold, real estate and maybe more it then becomes confusing and worse may lead to constantly changing benchmarks. Changing benchmarks, I believe, makes it easier to end up chasing after what was hot last year.
For whatever its worth I loosely benchmark to whatever the client's asset allocation is. If a client is 70/30 stocks/bonds I measure returns by weighting against a proportional blend of the S+P 500 and the Vanguard Long Term Bond fund. Very simple. I try to add value to each component by increasing or reducing volatility or over weighting certain sectors and hopefully good stock picking for equities and by managing duration and knowing when to favor things like foreign bonds or convertibles for the fixed income side.
The reason I say "loosely" benchmark is because I use a couple of indicators to get very defensive in the equity market. I consider breaching the 200 DMA and an inverted yield curve as signs to raise cash. My goal is to miss most of the pain caused by bear markets. Historically this has worked but my clients realize it means most but not all of the pain and even then there are no certainties.
So do I benchmark or not? I think that depends on who you talk to. My primary goal is not building a great composite it is to grow my clients assets when the market allows for that and to protect client assets when that is what the market is saying to do. Simple.
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Understanding how to benchmark your portfolio is very important and I believe needs to tie in to whatever your goal is. I like to think I know quite about this and based on what I know I believe the entire concept will evolve considerably over the next few years.
Very simply, most managers compare, or benchmark, the returns achieved in client portfolios versus a particular index, usually the S+P 500. Other common equity benchmarks might be the Wilshire 5000 or the MSCI World Index. There are also various bond indices to benchmark a fixed income portfolio to. The manager then tries to outperform whatever the particular index does by overweighting and underweighting certain sectors and with stock picking.
There are several flaws with this approach, depending on how a manager adheres to it. A manager that is truly benchmarked to an index must be fully invested at all times. If the market falls 20% and a fully invested manager is only down 17%, technically he has done a good job but that doesn't help the client. This is more of an issue for mutual fund managers than separate account managers. Closet indexing also becomes an issue in benchmarking a portfolio. If a manager deviates too radically from the sector constituency of his index he is taking a big risk. In this situation if the market goes up by 30% in a year and a portfolio, due to poor sector bets, is only up 18% it would likely be mathematically impossible to ever make up those 1200 basis points. A lot of managers simply won't take the risk.
The interview of Mr. Kautt talked in vague terms about creating customized benchmarks for clients that combines different asset classes. There was not a lot of detail given but I think that if a client has a personal benchmark comprised of US stocks, foreign stocks, bonds, gold, real estate and maybe more it then becomes confusing and worse may lead to constantly changing benchmarks. Changing benchmarks, I believe, makes it easier to end up chasing after what was hot last year.
For whatever its worth I loosely benchmark to whatever the client's asset allocation is. If a client is 70/30 stocks/bonds I measure returns by weighting against a proportional blend of the S+P 500 and the Vanguard Long Term Bond fund. Very simple. I try to add value to each component by increasing or reducing volatility or over weighting certain sectors and hopefully good stock picking for equities and by managing duration and knowing when to favor things like foreign bonds or convertibles for the fixed income side.
The reason I say "loosely" benchmark is because I use a couple of indicators to get very defensive in the equity market. I consider breaching the 200 DMA and an inverted yield curve as signs to raise cash. My goal is to miss most of the pain caused by bear markets. Historically this has worked but my clients realize it means most but not all of the pain and even then there are no certainties.
So do I benchmark or not? I think that depends on who you talk to. My primary goal is not building a great composite it is to grow my clients assets when the market allows for that and to protect client assets when that is what the market is saying to do. Simple.
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Friday, November 12, 2004
Interesting Interview
Geoff Cutmore interviewed David Blood on European Squawk Box this morning. Blood is the former head of Goldman Sachs asset management who is now one of the founding partners of Generations Asset Management, Al Gore's company. News accounts say the firm will focus on "environmentally friendly" portfolios for pension funds, endowments, and high net worth individuals.
It was a six minute interview so it gave Blood plenty of time talk about what Generations plans to do. Blood said they plan to be longterm investors, holding stocks three to five years. Blood said there is demand for this type of investing and that mutual funds have become too short term oriented. He also said that long term buy and hold has a better track record. Generations plans to do typical fundamental research and also something called sustainability analysis. I've never heard the that term before but, as the wording implies, it is an attempt to asses what competitive threats might do to a company's business execution and ability to differentiate.
The portfolios will be long only, global, and concentrated. Although Blood did not put a number on concentrated, that usually means owning 20-25 names. They plan to benchmark against the MSCI World and he made it clear that they will not be going for absolute returns.
The brains of the company is composed of heavyweights and I am sure they will do well. There was no talk in the interview about what Al Gore's role is and at no point was there any mention of environmentally friendly and how that plays into the portfolio.
I posted this only because I found it interesting.
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It was a six minute interview so it gave Blood plenty of time talk about what Generations plans to do. Blood said they plan to be longterm investors, holding stocks three to five years. Blood said there is demand for this type of investing and that mutual funds have become too short term oriented. He also said that long term buy and hold has a better track record. Generations plans to do typical fundamental research and also something called sustainability analysis. I've never heard the that term before but, as the wording implies, it is an attempt to asses what competitive threats might do to a company's business execution and ability to differentiate.
The portfolios will be long only, global, and concentrated. Although Blood did not put a number on concentrated, that usually means owning 20-25 names. They plan to benchmark against the MSCI World and he made it clear that they will not be going for absolute returns.
The brains of the company is composed of heavyweights and I am sure they will do well. There was no talk in the interview about what Al Gore's role is and at no point was there any mention of environmentally friendly and how that plays into the portfolio.
I posted this only because I found it interesting.
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Trying to Understand Japan
I have worked in the investment industry since I was 18 years old. Throughout my time Japan has always been a land of investment intrigue. 2004 is no different. There is a lot of chatter about and capital driven to iShares Japan (EWJ).
On Friday Japan reported very underwhelming GDP growth of 0.1% compared to an estimate of 0.3% growth. Japanese stocks sold off for about five minutes before rallying significantly in Friday trade. I believe Japan rallied on the heels of the US rally and in concert with the Hang Seng index.
Japan is a very unique market. In 1990 the Nikkei topped out at about 38000. The Nikkei then spent 13 years going down to a bottom of 7500 in spring 2003. Along the way there were pockets of great performance like in 1999 when Japan was up 50% to 21000. Think about that, at about the same time the Nasdaq was going down 75% Japan dropped by two thirds.
There is no shortage of commentary available to explain Japan's problems. There are issues with too high of a savings rate, meaning not enough consumption, that not even negative interest rates can fix. There are various inefficiencies that occur in business from cross ownership, lack of write downs, and old "rules" about lifetime employment.
Japan exports a lot of goods to the US so a strong yen is a headwind. Japan is constantly selling yen and buying treasuries in an attempt to reduce the dollar selloff. Taiwan, Hong Kong, China etc are all growing their respective imports to the US at the expense of Japan.
I don't think it makes sense to own Japan here. I would expect growth to continue to lag. Over the last 15 years Hong Kong has substantially outperformed Japan and looking forward economic growth prospects are far better for Hong Kong. I think buying Japan is more of a speculation, which might be ok, than an investment. It would be easy to see Japan outperform in various short term periods as hot money moves around to different type of investments but there is very little fundamental support behind that type of trade.
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On Friday Japan reported very underwhelming GDP growth of 0.1% compared to an estimate of 0.3% growth. Japanese stocks sold off for about five minutes before rallying significantly in Friday trade. I believe Japan rallied on the heels of the US rally and in concert with the Hang Seng index.
Japan is a very unique market. In 1990 the Nikkei topped out at about 38000. The Nikkei then spent 13 years going down to a bottom of 7500 in spring 2003. Along the way there were pockets of great performance like in 1999 when Japan was up 50% to 21000. Think about that, at about the same time the Nasdaq was going down 75% Japan dropped by two thirds.
There is no shortage of commentary available to explain Japan's problems. There are issues with too high of a savings rate, meaning not enough consumption, that not even negative interest rates can fix. There are various inefficiencies that occur in business from cross ownership, lack of write downs, and old "rules" about lifetime employment.
Japan exports a lot of goods to the US so a strong yen is a headwind. Japan is constantly selling yen and buying treasuries in an attempt to reduce the dollar selloff. Taiwan, Hong Kong, China etc are all growing their respective imports to the US at the expense of Japan.
I don't think it makes sense to own Japan here. I would expect growth to continue to lag. Over the last 15 years Hong Kong has substantially outperformed Japan and looking forward economic growth prospects are far better for Hong Kong. I think buying Japan is more of a speculation, which might be ok, than an investment. It would be easy to see Japan outperform in various short term periods as hot money moves around to different type of investments but there is very little fundamental support behind that type of trade.
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What Does Dell Have that Cisco Doesn't?
I don't know the answer but I might understand enough about the two businesses to start to figure out what is going on.
One of the first things I think about when I think of Cisco is all those quarters of beating estimates by a penny. No doubt you know the accusations about engineered earnings. If it is true that they do engineer earnings I think it may be fair to assume that when they can not beat by a penny the problems may be worse than they appear, think about that one for second.
Dell has a good track record of not disappointing the street over that last ten years but I don't remember the same overt devotion to always beating be a penny. They tend to meet estimates which passes the sniff test a little better, at least for me.
Cisco makes networks. It would seem that there should be demand for all things associated with networking. While I am no expert, I do know that Cisco does have inventory issues that do not apply to Dell and I think it may be Cisco's size combined with the inventory issues that make the problem. If you look at Juniper Networks you see it has trounced Cisco in stock price appreciation. Over the last twelve months Cisco is down 15% and Juniper is up 50%. The market is sending a message there.
Dell has various business lines that are growing, they also seek out new lines of business and do a good job of telling the street about new products, like printers, servers and storage.
The market is a voting mechanism. In a way the market is saying Cisco has a lot of problems and there is not much visibility for a turn around anytime soon. If that is the case then why does Cisco have a 20% larger market cap with only half the revenue of Dell? Is the street hanging on to some sort of optimism or is Cisco wildly overpriced?
I don't short stocks in my practice so I don't try to analyze whether a stock is a good candidate for a short sale but I think Cisco may deteriorate some more or at the very least continue to drift around when the rest of tech is rallying.
For disclosure, Dell is one of the names I add to client accounts at the beginning of the week.
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One of the first things I think about when I think of Cisco is all those quarters of beating estimates by a penny. No doubt you know the accusations about engineered earnings. If it is true that they do engineer earnings I think it may be fair to assume that when they can not beat by a penny the problems may be worse than they appear, think about that one for second.
Dell has a good track record of not disappointing the street over that last ten years but I don't remember the same overt devotion to always beating be a penny. They tend to meet estimates which passes the sniff test a little better, at least for me.
Cisco makes networks. It would seem that there should be demand for all things associated with networking. While I am no expert, I do know that Cisco does have inventory issues that do not apply to Dell and I think it may be Cisco's size combined with the inventory issues that make the problem. If you look at Juniper Networks you see it has trounced Cisco in stock price appreciation. Over the last twelve months Cisco is down 15% and Juniper is up 50%. The market is sending a message there.
Dell has various business lines that are growing, they also seek out new lines of business and do a good job of telling the street about new products, like printers, servers and storage.
The market is a voting mechanism. In a way the market is saying Cisco has a lot of problems and there is not much visibility for a turn around anytime soon. If that is the case then why does Cisco have a 20% larger market cap with only half the revenue of Dell? Is the street hanging on to some sort of optimism or is Cisco wildly overpriced?
I don't short stocks in my practice so I don't try to analyze whether a stock is a good candidate for a short sale but I think Cisco may deteriorate some more or at the very least continue to drift around when the rest of tech is rallying.
For disclosure, Dell is one of the names I add to client accounts at the beginning of the week.
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Thursday, November 11, 2004
Fool Article on NAB
Click on chart to enlarge
I had an article on National Australia Bank published on the Fool today. It hit Yahoo at 11:56 AM and looks like it may have lifted the stock for a few minutes, or maybe not. This is why I usually try to avoid talking my book.
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Really Emerging Markets
Click on chart to make it bigger
I have had some nice feedback about the ETF/iShares postings so I thought I would do another comparison, this time between iShares South Africa (EZA) and the South Africa Fund (SOA), a closed end fund.
There are a couple of reasons to own a fund that invests in Africa. One, it is clearly an emerging continent. South Africa, while the most developed country in Africa, is still developing. Very simply, Africa would seem to have great potential to experience tremendous growth. What is not so simple is picking the correct decade in which this will happen. There are still many political issues and various degrees of genocide that go on there.
Another reason to invest in Africa is the exposure to Gold. Everything else being equal a falling dollar means the price of gold has to go up. Of course it is never as simple as "everything else being equal" but you get the idea. Gold as a catalyst for equities is not something that occurs in US markets. This is what causes South Africa to have a low correlation to the S+P 500. The South African Rand has been going up against the dollar(see chart above) which is no great shock based on how the dollar has fared against other currencies recently. There are several things that could make the dollar continue to slide, which I have gone over before. The Rand rally could continue to be a nice tailwind for South African stocks.
In case it is not obvious, both EZA and SOA both invest 100% in South Africa.
This is the sector break down for SOA:
| |||||
| As of 5/31/2004 | |||||
 | |||||
| |||||
| Resources | |||||
 | 36.90% | ||||
| |||||
| Industrial | |||||
| 35.00% | ||||
| |||||
| Financial | |||||
| 28.10% | ||||
And for EZA:
| |||||
| As of 7/31/2004 | |||||
| |||||
| |||||
| Materials | |||||
| 43.07% | ||||
| |||||
| Banks | |||||
| 11.99% | ||||
| |||||
| Insurance | |||||
| 10.67% | ||||
| |||||
| Energy | |||||
| 7.60% | ||||
| |||||
| Telecommunicaton Services | |||||
| 6.24% | ||||
| |||||
| Capital Goods | |||||
| 4.48% | ||||
The tables reveal that EZA is more diverse fund. This is not a surprise because iShares focus more on trying to capture an index effect and the actively managed SOA reveals a heavier bet on fewer groups.
SOA trades at slight discount to NAV and EZA trades at premium of 1.3%, which is much larger that I would expect for an ETF. Both funds have a decent dividend yield just below 2%.
Lastly and most importantly is performance. SOA over the last two years, the life of the iShares, has trounced EZA returning 120% versus 80%. Active management by someone that really understands a country makes sense. The active manager would know, for example, the state of telecom and whether it should be avoided as it is in SOA. I am inclined to think active management will continue to stand up against indexing for a while to come for Africa.
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Barron's Online - Getting Technical
Barron's Online - Getting Technical
Michael Kahn, writer of Barron's Getting Technical column says we can consider this a breakout in the S+P 500 if it holds 1138 on the next move down. Read the article to see why that is.
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Michael Kahn, writer of Barron's Getting Technical column says we can consider this a breakout in the S+P 500 if it holds 1138 on the next move down. Read the article to see why that is.
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Wednesday, November 10, 2004
Taserians Fight Back!
Everyone has something to say about Taser, so why not me too?
I first wrote about Taser in June of this year in an article for the Fool. The bottom line to the article was despite valuations that are hard to feel good about, the fact was there was tremendous demand for the product. Or at least the perception of tremendous demand. Since the article the stock has gone up about 68%. I was smart enough to make the right call but not smart enough to buy it. Every manager and trader has flaws, and I am clearly no exception!
About the only thing that has changed since I wrote the article is the price. Demand for the product is huge. In the article I touched on possible adoption by the airlines. News for Korean Air has helped with the most recent run up. There may also be a version available for home use too. I don't know how any of this will play out but I know strong demand when I see it and it is not unreasonable to think the stock may continue to work higher, valuations and detractors be damned.
My article may have lifted the stock when it was published, albeit only for a short while (if it even was the article, I'm not sure). Although my audience here is smaller than at the Fool I will not buy the stock for at least a week, if at all, to avoid any perceived conflict.
Thanks to the guys on CNBC Squawk Box (US version) for the term Taserian.
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I first wrote about Taser in June of this year in an article for the Fool. The bottom line to the article was despite valuations that are hard to feel good about, the fact was there was tremendous demand for the product. Or at least the perception of tremendous demand. Since the article the stock has gone up about 68%. I was smart enough to make the right call but not smart enough to buy it. Every manager and trader has flaws, and I am clearly no exception!
About the only thing that has changed since I wrote the article is the price. Demand for the product is huge. In the article I touched on possible adoption by the airlines. News for Korean Air has helped with the most recent run up. There may also be a version available for home use too. I don't know how any of this will play out but I know strong demand when I see it and it is not unreasonable to think the stock may continue to work higher, valuations and detractors be damned.
My article may have lifted the stock when it was published, albeit only for a short while (if it even was the article, I'm not sure). Although my audience here is smaller than at the Fool I will not buy the stock for at least a week, if at all, to avoid any perceived conflict.
Thanks to the guys on CNBC Squawk Box (US version) for the term Taserian.
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Various Market Observations
True to my previous posts I began to commit more capital to the equity markets this morning. My plan coming into the day was to buy before the fed announcement if the market was down or buy after if the market was up. So what happened? SPX up slightly and the Nasdaq down several points. I bought two tech names and one health name that has some beta. I will buy some more tomorrow.
The market is clearly taking Cisco's earnings report badly. Meeting the estimate is a miss based on Cisco's track record. While numbers across the report were good they did show some slowing. This combined with the comments out about semi conductor cap equipment stocks is a fundamental headwind for many areas of tech. Tread carefully.
Despite the consensus I like the way the S+P 500 is working off last week's election reaction. This is a nice consolidation after last week's strong move.
I am not sure what the Fed will say coming out of the meeting for future hikes. Whether they skip a hike next meeting is inconsequential. It seems clear to me they are moving to neutral from accommodative policy. What should be of more concern is what level is neutral? Neutral has usually meant 3.5%-4.5% or so. I think this time around it will be a lower range, say 2.5%-3.25%, unless the dollar trades lower than anyone expects.
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The market is clearly taking Cisco's earnings report badly. Meeting the estimate is a miss based on Cisco's track record. While numbers across the report were good they did show some slowing. This combined with the comments out about semi conductor cap equipment stocks is a fundamental headwind for many areas of tech. Tread carefully.
Despite the consensus I like the way the S+P 500 is working off last week's election reaction. This is a nice consolidation after last week's strong move.
I am not sure what the Fed will say coming out of the meeting for future hikes. Whether they skip a hike next meeting is inconsequential. It seems clear to me they are moving to neutral from accommodative policy. What should be of more concern is what level is neutral? Neutral has usually meant 3.5%-4.5% or so. I think this time around it will be a lower range, say 2.5%-3.25%, unless the dollar trades lower than anyone expects.
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Tuesday, November 09, 2004
Uneasy Feeling
I have told you that I bought a little stock yesterday for clients and I will be buying several names this week across the board to re-equitize some of the cash I have been sitting on. The S+P 500 rallied through its 200 DMA and its downtrend line. This type of action means, to me, that there is no longer a problem with demand for stocks. Historically it has not been wise to out guess this type of action but I am moving slowly.
The reason I have titled this piece Uneasy Feeling is because so many "smart people" seem to be on the same side of the trade. How often does consensus get it right? Not very. Gulp.
This is a good lesson for me. Over time, my approach works very well, which is why I won't try to out smart the market on these types of things. I am increasing volatility a little bit but will continue to overweight low beta high yielding names for the portfolio.
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The reason I have titled this piece Uneasy Feeling is because so many "smart people" seem to be on the same side of the trade. How often does consensus get it right? Not very. Gulp.
This is a good lesson for me. Over time, my approach works very well, which is why I won't try to out smart the market on these types of things. I am increasing volatility a little bit but will continue to overweight low beta high yielding names for the portfolio.
Read more!
Reader Mail
A Mr. Richard Feder from From Ft. Lee, New Jersey writes in....anyone know the reference?
Seriously I received an email from a reader asking about my time horizon and any sectors I focus on. This was my response:
As far as sector or time horizon for me? I'll try to spare you the manifesto but I am a top down manager. Once I decide to be in the market I then determine what sectors, style, cap size, countries etc to overweight, equal weight, and underweight. I do this based on a combination of market history and current events to put together what I hope is good forward looking analysis. When I buy a stock it has some sort of purpose or two or three. I have been overweight energy for months now. At some point it will makes sense to change that. I would peel off extra holdings like drillers and tankers until, in an underweight position I have a core holding or two that I would never sell unless something very bad happened at the company. Another reason to sell: I used to own GSK. I wanted to reduce UK exposure a couple of months ago because the yield curve was flat (afraid it might invert) so I swapped it for NVS. Not a huge diff between the names the economies are at different points in the economic cycle.
I own YHOO for everybody because from the top down it has a great track record of besting the tech sector in either direction, the name has added alpha. From the bottom up, there is nothing that will happen in the internet that Yahoo won't somehow be involved with. I have been increasing beta lately. When I want to reduce it I might take YHOO off the table or another big alpha name from biotech or whatever.
Another reason to sell if a stock does not live up to its purpose I would sell it. EG if medical devices are up 20% and I own a name that is up 50% I would take a profit. If the group were up 20% but my proxy was up 1%, that might be a reason to sell too.
sorry for the manifesto, but I do live in a mountain cabin in the woods (no joke).
The purpose of my sharing this with you is to give a little insight, for good or for bad, into my process. While I don't like to talk my book, I don't think I am capable of moving the names mentioned. Hopefully this is interesting.
Read more!
Seriously I received an email from a reader asking about my time horizon and any sectors I focus on. This was my response:
As far as sector or time horizon for me? I'll try to spare you the manifesto but I am a top down manager. Once I decide to be in the market I then determine what sectors, style, cap size, countries etc to overweight, equal weight, and underweight. I do this based on a combination of market history and current events to put together what I hope is good forward looking analysis. When I buy a stock it has some sort of purpose or two or three. I have been overweight energy for months now. At some point it will makes sense to change that. I would peel off extra holdings like drillers and tankers until, in an underweight position I have a core holding or two that I would never sell unless something very bad happened at the company. Another reason to sell: I used to own GSK. I wanted to reduce UK exposure a couple of months ago because the yield curve was flat (afraid it might invert) so I swapped it for NVS. Not a huge diff between the names the economies are at different points in the economic cycle.
I own YHOO for everybody because from the top down it has a great track record of besting the tech sector in either direction, the name has added alpha. From the bottom up, there is nothing that will happen in the internet that Yahoo won't somehow be involved with. I have been increasing beta lately. When I want to reduce it I might take YHOO off the table or another big alpha name from biotech or whatever.
Another reason to sell if a stock does not live up to its purpose I would sell it. EG if medical devices are up 20% and I own a name that is up 50% I would take a profit. If the group were up 20% but my proxy was up 1%, that might be a reason to sell too.
sorry for the manifesto, but I do live in a mountain cabin in the woods (no joke).
The purpose of my sharing this with you is to give a little insight, for good or for bad, into my process. While I don't like to talk my book, I don't think I am capable of moving the names mentioned. Hopefully this is interesting.
Read more!
Under Owned and Not Understood
I wanted to go back to my series of profiling investments from the ETF Connect site.
I am a huge believer in having exposure to emerging markets as part of a properly constructed portfolio. The are several reasons for this. There has been an increase in correlation between US markets and other industrialized markets due to the globalization of the world economy, even the S+P 500 has lagged Europe this year. Emerging markets have a much weaker correlation as do countries commodity dependent economies like Australia, Norway, New Zealand and Canada (see chart below).
Despite all the attention in the last year or so eastern Europe and Russia remains more under owned than Asia and Latin America, but not Africa. From a big picture standpoint you have huge populations trying to modernize. This will lead to expansion and growth of all sorts of things. It is logical to think that stock markets will capture some amount of that growth effect.
ETF Connect has information on three closed end funds, at least that is how many I found, that give exposure to the region. Depending on your politics and thoughts on the region you might consider the iShares Austria to be eastern Europe too.
The Templeton Russia Fund & East European Fund (TRF) is run by Mark Mobius, er maybe. I don't doubt he handles the thematic part of the fund but I doubt he does the stock picking if that matters to you. The country breakdown is 84% in Russia and 7% in Hungary, that is the only info given. The sector breakdown is
Telecom is usually heavy in all emerging market funds because it is elemental to forming and developing a market economy. I am surprised that energy does not have a larger weighting given the heavy exposure to Russia. TRF trades at a slight premium to its NAV I would say the fund does not cover the region broadly enough.
On to the Central Europe and Russia Fund (CEE). The country breakdown is much broader.
It also has more exposure to energy.
CEE trades at 12% discount and has a slim yield. This fund is a great way to capture the effect of the region. If you think you want to own the region I think CEE would be a better way to do it.
Lastly is the Turkish Investment Fund (TKF). Since it invests in only one country it carries more risk. Turkey is an interesting idea. When you think of Turkey you might remember quadruple digit inflation rates. Things have gotten much better there. They are in contention for inclusion in the European Union which would give a new legitimacy. Turkey would also be a power in the EU because they would have one of the fastest growing economies and largest populations. It is clear to me that Turkey, the country will experience some wonderful things. I am still trying to work out whether this will translate into high enough stock prices to justify the risk taken by owning the country. Turkcell (TKC) is the only ADR at this point. TKF trades at a slight premium and pays no dividend.
My exposure to the region for more aggrssive clients is in an individual Russian oil stock. It has worked out quite well as a theme, and I am inclined to stick with it for now. I would close out by saying this article is meant to get you to think about new ways to invest. While I have watched all the funds mentioned I have never owned any of them and I don't know if I will buy them in the future. Please keep that in mind.
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I am a huge believer in having exposure to emerging markets as part of a properly constructed portfolio. The are several reasons for this. There has been an increase in correlation between US markets and other industrialized markets due to the globalization of the world economy, even the S+P 500 has lagged Europe this year. Emerging markets have a much weaker correlation as do countries commodity dependent economies like Australia, Norway, New Zealand and Canada (see chart below).
Despite all the attention in the last year or so eastern Europe and Russia remains more under owned than Asia and Latin America, but not Africa. From a big picture standpoint you have huge populations trying to modernize. This will lead to expansion and growth of all sorts of things. It is logical to think that stock markets will capture some amount of that growth effect.
ETF Connect has information on three closed end funds, at least that is how many I found, that give exposure to the region. Depending on your politics and thoughts on the region you might consider the iShares Austria to be eastern Europe too.
The Templeton Russia Fund & East European Fund (TRF) is run by Mark Mobius, er maybe. I don't doubt he handles the thematic part of the fund but I doubt he does the stock picking if that matters to you. The country breakdown is 84% in Russia and 7% in Hungary, that is the only info given. The sector breakdown is
| Telecommunications | |
| 29.70% |
| |
| Financials | |
| 16.10% |
| |
| Energy | |
| 14.90% |
| |
| Material | |
| 14.40% |
| |
| Utilities | |
| 10.30% |
| |
| Healthcare | |
| 8.10% |
On to the Central Europe and Russia Fund (CEE). The country breakdown is much broader.
| Czech Republic | |
| 8.40% |
| |
| Turkey | |
| 9.90% |
| |
| Hungary | |
| 10.80% |
| |
| Poland | |
| 21.90% |
| |
| Russia | |
| 46.70% |
| As of 8/31/2004 | |
| |
| |
| Petroleum Refining | |
| 23.20% |
| |
| Commercial Banks | |
| 20.00% |
| |
| Crude Petroleum Natural Gas | |
| 11.60% |
| |
| Telephone Communications | |
| 8.80% |
| |
| Miscellaneous Metal Ores | |
| 7.30% |
| |
| Natural Gas Transmissions | |
| 3.80% |
Lastly is the Turkish Investment Fund (TKF). Since it invests in only one country it carries more risk. Turkey is an interesting idea. When you think of Turkey you might remember quadruple digit inflation rates. Things have gotten much better there. They are in contention for inclusion in the European Union which would give a new legitimacy. Turkey would also be a power in the EU because they would have one of the fastest growing economies and largest populations. It is clear to me that Turkey, the country will experience some wonderful things. I am still trying to work out whether this will translate into high enough stock prices to justify the risk taken by owning the country. Turkcell (TKC) is the only ADR at this point. TKF trades at a slight premium and pays no dividend.
My exposure to the region for more aggrssive clients is in an individual Russian oil stock. It has worked out quite well as a theme, and I am inclined to stick with it for now. I would close out by saying this article is meant to get you to think about new ways to invest. While I have watched all the funds mentioned I have never owned any of them and I don't know if I will buy them in the future. Please keep that in mind.
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