Thursday, March 31, 2005
Cramer has an amusing article up about the agenda of money managers on TV. I laughed out loud as I read his skepticism about the folks that get interviewed.
Maybe it's just me.
Oh by the way, I am scheduled in my usual slot in the first half hour of Asian Market Watch tonight.
Yes, Iceland has a stock market. I stumbled across this article at the Index Universe site. Apparently the ICEX-15 has been on fire for the last two years. They recently created an ETF based on the ICEX-15 that appear to only be available in Iceland. In fact I can't find any way for Americans to easily access that market.
I looked through the listings of companies (the information is available in English for those of you that are not fluent in Icelandic) and two types of companies seem to dominate the roster; financials and companies one way or another associated with the fishing industry.
Iceland had GDP growth in 2004 of 5.2%, prices rose by 4.7% over the trailing twelve months (TTM), incomes rose by 6.7% TTM, unemployment is running at 2.5%, the value of fish caught rose by 11% (no joke this is in the stats). The other thing that caught my eye is that they have a very small trade deficit. The reason I think this is noteworthy is other than fish what else do they have? Either more than I think or they are selling a lot of fish, whatever the case there is demand for their goods which may mean good things can continue to happen economically which may domino to good things for the ICEX-15.
As you look at the five year chart posted above it seems to me that Iceland has a low correlation to the US, if I am right I think it is because the economy of Iceland is basically one giant food stock with little controversy. Food stocks are thought to be defensive plays. The last six years have not been great for the US but have been good for the ICEX-15. The food stock concept loses some steam because Iceland has such a small market and very little global capital would likely seek refuge there during major market downturns.
Just something interesting.
Then he will pick out one name that he thinks is down a lot and ask if we should sell it. Whatever name he picks will be down in a similar fashion to its competitors and I will ask him if we sell that one what should we do? Buy a substitute that I don't think is as good of a company?
Next he will ask if we should have more money in preferred stocks, we already have a lot given his conservative allocation, he will ask what's wrong with getting 6% on the whole thing? I will remind him that the market goes up a lot only so often and we don't want to miss too much of it, like we did in 2003. He was afraid of stocks at precisely the wrong time.
The next time we have an up quarter he will question why we are not exposed to more technology.
I am not making this up. While I doubt too many of you are this guy, how many of you have a little bit of him in you? While I wish this had been a good quarter, it wasn't. If you can really embrace the fact that this is how it works and that no emotion can alter that fact it will make the ups and downs much easier to deal with, I promise.
Wednesday, March 30, 2005
The name of the fund is a mouthful but the ticker is IGD. The fund owns foreign stocks as well as US names that tend to have high dividends and the managers will sell calls against the holdings. I did not see if the fund will sell any index call options or any puts on either the common or an index. The impression I get from the article is covered calls only.
The global aspect interests me. I think this is now the 97th CEF that uses options (97 is a humor attempt). Usually newly issued CEFs have, for lack of a better description, an embedded sales charge that needs to be worked off in the market place. In this case the fund was priced at $20, perhaps $0.50 per share went to the sales force that sold the shares thus making the NAV $19.50 not $20, $0.50 is an example only I do not know what the sales concession is for this one.
I am not positive how long it takes to work this out but if you have any interest in buying this with out a premium to NAV it might make sense to wait a few weeks.
A few weeks ago I subscribed to a premium service at Morningstar that I think is called Portfolio Manager, specifically the X-Ray function. It is in the tools link and costs a little over $100 for the year. My primary use for this is to analyze portfolios of prospective new clients for the firm's planners (as a side note the structure of our firm is that we have three financial planners who bring in new clients, do financial plans and determine asset allocations, I then implement portfolios based on the allocation determined by the planners) and for any portfolio consultation I do for people that are not clients.
While there are a lot of functions that this can do my primary use is to input holdings and share amounts to then assess weightings for sector, country, style, cap size and other statistics. The depth of the reports is very good.
There are a couple of quirks that are either issues with the application or user error;-) When I plugged in my portfolio it told me that 79% of my holdings are in large cap. It also says that the median market cap of my holdings is $14.5 billion which is, according to Morningstar is .30 of the S+P 500 median cap size which based on that I calculate to be $48.3 billion. I don't think that classifies the cap size of my portfolio as large cap as implied by the style box part of the report. As an example I have one stock with a $3 billion cap that shows up as large cap growth, $3 billion?
It also put some high yield foreign stocks in the value box and some high yield foreign in the core box and I'm not sure why. It had no data one one stock I own that is a NYSE listed ADR which surprised me. I also looked high and low on all of the pages for the beta and could not find it.
The Interpreter tab told me that my portfolio is aggressive and warned me that I may have too much in foreign and emerging stocks. Only 18% of my holdings have a beta greater than 1 so I'm not sure that I have an aggressive portfolio. Perhaps just having a lot foreign exposure leads them to generically conclude more aggressive.
The flaws are minor and the tool is very good. I would encourage anyone take the free trial and see what it has to offer. I can't imagine you won't learn a lot about your holdings.
Then he gets whipsawed on some news and wants to go back in and trade again.
To me all the commercial does is underscore the pitfalls of actively trading and if anything would make me want to trade less.
Maybe it's just me, but I am amused nonetheless.
Do I need to disclose that our personal accounts are at Ameritrade? I really don't know but they are.
I have lightened up on a couple of things for clients but not enough. I underestimated the reaction that emerging markets would have to rising rates. While I have never had a huge percentage in emerging markets I have some and it is getting hit.
The S+P still has a ways to go before it breaches its 200 DMA but I wanted to lay out my preliminary thoughts about what action I will take if/when it happens. I have talked about getting defensive by reducing equity exposure. One thing I will need to keep in mind is that the market may go below the 200 DMA by ten points and then embark on a screaming rally.
First things first, should the market tank in the last two days of the quarter I will give it a chance to reverse the quarter end in the first week or so of April. Quarter end and options expirations tend to go in one direction before the day and reverse that direction after the day.
The key for me is to reduce equity exposure. Long time readers will know I use inverse index funds to hedge market exposure. Primarily I use the ProFunds Ultra Bear (URPIX) which correlates to twice the inverse move of the S+P 500, meaning that if SPX is up 2% the fund will be down about 4%. I say about because of the expense of the fund. By adding more of the fund to a client account I am reducing the net long exposure. At this point I do not know how much more I will add.
I will sell some stock, but hopefully not a lot. I expect to trim a name or two from most sectors. I will not sell either all the volatile names or all the low beta names. I want to cause as little upheaval as possible.
While I expect to have cash in the portfolio, I will add more short dated preferred stocks. They have dropped a little as a group but as a worse case scenario for them you will get the par value back in a couple of years and take in 6% or so in the interim.
So you understand where I am coming from, the money I manage is long term money. I can not know where the market will bottom. I am quite certain that very few stocks will go to zero in this move down. I am also quite certain that no emerging market indices will go to zero.
If you have any kind of long term time horizon, the action over the last week in, say, Deere (DE), a name I do not own, should have very little impact on your financial plan.
Remember that the market can only do four things, up a lot, up a little, down a little or down a lot. I want to be invested in the first three and I use the 200 DMA to help me avoid most of that last one.
Relative to what I write, this post is very important.
Tuesday, March 29, 2005
i tried to answer at your blog but it didn't take.
> here's my observation ...
> i took note of energy at the end of the third
> last year, saying at the time i thought it was a
> better short than a long. it corrected in the fourth
> quarter and looked good for the first. it still
> good, and few other domestic holdings are as
> i remarked on CNBC that energy is, for the time
> the new health care--a growth sector. it is
> cyclical, of course, but the supply/demand imbalance
> is so great at the moment i think it needs to be
> overweighted. the whiff of inflation in the air will
> help this fund, as well; it owns gold and other
> resources as well as energy.
I take from his reply that he is not concerned with such a large weighting in energy. Hopefully his readers take the time to understand this. I maintain an overweight position in energy stocks for clients but by only a couple of percentage points, compared to the S+P 500. I still stick by my original thought that his portfolio will either lag badly or beat by a lot.
The bigger point is to understand how to analyze these types of portfolios. IGE is not the only energy exposure his portfolio has. When you read about other portfolios like this by other people I would suggest taking the time to pick it apart.
The other components of the portfolio are S&P SPDR (SPY) 10%, iShares Dividend Index (DVY) 18%, iShares EAFE (EFA) 20%, iShares Russell 2000 (IWM) 5.9%, QQQQ 5.4%, iShares Emerging Markets (EEM) 5.1%.
Equity based ETFs make up 71.6% of assets in the portfolio. By my calculation energy makes up 14.3% of the equity component, factoring in the energy weightings of all the funds. The energy weight in the SPX is 8.7%. Whether he realizes it or not he is making a huge bet on energy, in my opinion. I would think this portfolio will either lag the market by a lot or beat it by a lot. We'll see.
Huge, unrealized weightings are very common in these types of portfolios. Since Tim did not mention it I have to assume he does not realize. There will be flaws in any type of all anything portfolio. This is why I believe in making use of different types of tools.
I will email this to Tim and see if he responds.
The segment seemed to focus on Pfizer and toward the end they brought on an analyst from AG Edwards who is not as bullish on the stock as Vince. Apologies, I could not jot down his name while I was driving.
The analyst cited the fact that with over $50 billion in revenue it can not create enough new revenue to maintain decent growth. I wrote something similar about PFE for Motley Fool last year and got flamed.
Vince said that was already priced in. Of course there was no mention of how long Vince has been recommending the name but it has been at least a couple of years, probably longer, meaning the stock has been going lower for a long time that he has liked it.
I went to his company's website to look for performance data. I found that they have six mutual funds, each with several share classes, not including an index fund. Four of the six funds tend to beat their respective categories over various time periods, they have mixed results against the S+P 500 and the one obvious small cap fund woefully lags the Russell 2000.
That any of their funds beat the market speaks to a point (or maybe proves the point) I made about him a long time ago; he is not sharing any names that result from the firm's process. All the names he has touted have done worse than the markets, collectively, yet the funds have done ok. Hopefully the point is clear?
I could look at Morningstar and maybe see the other names but that is not the point. Does this not occur to anyone at the various TV networks on which he appears?
I believe it makes more sense to own a healthcare ETF than Pfizer. I don't think Pfizer can offer material outperformance but it could have bad news that knocks it down, again. I would make the same argument for Microsoft and a tech ETF. My clients own Johnson and Johnson and Novartis for large cap pharma.
Monday, March 28, 2005
As I was driving to Phoenix this morning I heard an interview (gotta love satellite radio) with a GM analyst from some sell side firm who is concerned that GM might cut the dividend on its common stock. Tying this in with my earlier post, do you really need help seeing this one?
GM is going to earn about 25% of what was previously expected for 2005, it has debt ratings issues, it spends too much on health care costs and the cars aren't that popular. Do you really need to be a forensic accountant or a CFA to think "hey they might have to cut the dividend?"
The totality of the GM situation will be a great thing for all do-it-yourselfers to learn from.
The Big Picture: (Why) You Suck at Investing
Read both of the above links.
Paul's article says to fire your advisor. Barry's article says most humans are not equipped to succeed as investors.
Both articles have points that I agree with and points with which I disagree. Paul advocates getting rid of a fee-only manager that puts you in mutual funds and employing his lazy portfolio which is a diverse blend of index funds and bond funds. He never mentions separate account managers (what I do for a living) so I don't know what he thinks about them. Perhaps he lumps them all together.
Barry cites several knowledgeable sources and reasons for why people tend to have poor results. There are multiple studies that show mutual fund holders do poorer than the funds they own due to succumbing to emotion at the wrong time.
There are plenty of people that can manage their own portfolios. A couple of big mistakes can cause long lasting damage for these people. Mind you I am not saying financially ruin, just cause damage. A flaw in Paul's article is that it assumes anyone can manage their own money. Whether you can do this, though, calls for some introspection. Will you succumb to the emotions of fear and greed? Putting together a lazy portfolio is much easier than managing it around all the things that effect capital markets and human emotion. I also think that Paul's article does not respect the effort to accumulate your money. A 55 year old who has put together a $1 million portfolio did something over his lifetime to create this nest egg. It is not clear to me that putting all your money into a half dozen funds is the absolute best course of action. It may not be bad but it may not be the best plan.
Barry lays out a compelling argument that points out most (or maybe all) of the human flaws that can get in the way of successful results. I think people can overcome a lot of the flaws. I write a lot about this sort of thing trying to help people learn how to overcome their investing flaws. I have trained myself to be very unemotional and I try to convey that. I try not to be short term oriented and I try to convey that as well. There are going to be bad months, quarters and years over the course of our investing lifetimes. There is no getting away from that. How many people do you think have been shaken out of stocks this month that will not be back in time for the next move up? I preach about have a simple exit strategy and sticking with it. This will ensure that sometimes you will beat the market and sometimes you will lag but will give yourself a good shot of getting where you need to be.
I don't think the advice model will shut down but it will evolve (I've written this sort of stuff before). I expect that I, as a typical investment manager, will add less assets under management but have more growth in consulting and investment coaching (for lack of a better term). People want help but are leery, for good reason, of most types of planners or other types of agents.
Allowing that commercial to run seems fundamentally dishonest. With all the problems AIG is having, why run this? I ran a market cap screen at Yahoo Finance and found that AIG is the 13th largest public company in the world (according to the screen anyway).
On a separate note Donald Luskin from Trend Macrolytics was on Asian Market Watch and is very bullish about the Fed getting more aggressive with inflation. He says this will be very positive for stocks, except for energy and basic materials stocks which he dubbed as inflation plays. I hope he is right.
Sunday, March 27, 2005
First up is an email asking for my opinion about using options on the various CBOE interest rate products. There are options on the 13 week treasury bill (IRX), the five year treasury note (FVX), the ten year treasury note (TNX) and the 30 year bond (TYX). All the products work the same way. I'll just use TNX as an example to address the question. The question asks whether I think using options on these products is a better hedge than inverse bond funds.
The TNX index closed Thursday at 45.91. This corresponds with a 4.59% yield. If you wanted to use TNX options to either hedge or speculate on rates going up you would by a call option on the index. If you buy a May 47.50 call and the ten year yield moves above 4.75% your option would be in the money.
The option has a multiplier of 100. That means that 1 contract struck at 47.50 would hedge $4750 worth of bonds. So 21 contracts would fully hedge a $100,000 bond portfolio with a ten year maturity (I have simplified this for the sake of the posting) at a cost, based on Thursday's close, of $2415. That's a lot of basis points your giving up for two months. At the May expiration you would need to replace position.
The bid ask spread on most of the series I saw was very wide and the open interest is very low. Both signs that not too many professionals hedge with these.
My own preference is to have a small position in an inverse bond fund and use short dated preferreds. A preferred stock that matures in two years is very unlikely to be get crushed with rising rates.
I had another question about GM's debt in response to the data from Barron's. The question asks for links to other blog entries about GM. Click here, here, here, here and here. The question also asks for my opinion. If you read those links, that's all I've got. In one of the articles I wrote that I don't think the company is going away anytime soon, the company has all sorts of problems, I wouldn't touch the common but I am quite certain the paper will make its way back to par at maturity, if not sooner. At about $0.80 on the dollar the market doesn't seem to place a high probability of failure on the situation.
There was also a question about my opinion of annuities. I am not a fan at all. The commissions are almost criminal. Buyers tie up their capital. Insurance companies have been known to fail. The safety of any type of non-immediate annuity can be recreated with zero coupon treasury bonds and an index fund for next to nothing. What I mean is if you have $100,000 for a variable annuity that guarantees your principle, you could instead buy $100,000 face value of a zero coupon bond, maybe $0.70 on the dollar for ten years (maybe?), for $70,000. Then put the remaining $30,000 into an index fund. In ten years the zero will be at 100 cents on the dollar. If the S+P 500 is anywhere above zero you've achieved an annuity effect that cost you $50 instead of $7000 (some commissions are that much) and you can get to your money without any type of surrender charge. That's just me. I'm sure it would be easy to lay out a compelling argument as to why they are a great thing.
Lastly there was a guy on Forbes on Fox in the makers & breakers hot seat named Adam Bold from something called the Mutual Fund Store. He picked two open ended funds and had price targets for them. I don't doubt Mr. Bold knows what he's doing. Perhaps I've been in the woods too long but I can't recall hearing about price targets for open end funds. He said he expected one of the funds to be up 20%. I do not know how you go about analyzing something like that. I can see where a good manager might lead you to conclude a fund might beat the market, like Bill Miller. But with picking an actively managed fund can there be any type of forward looking analysis? It just made no sense to me, but I may have completely upside down.
Thanks for all the emails, keep them coming.
Saturday, March 26, 2005
Ticker Coupon Maturity Price Yield Maturity Call
GMW 7.25% 4/15/41 $20.64 8.78% 8.87% 4/30/2006
XGM 7.25 7/15/41 20.60 8.80 8.89 7/15/2006
HGM 7.38 10/1/51 20.32 9.07 9.11 10/3/2006
RGM 7.25 2/15/52 20.26 8.95 8.98 2/14/2007
BGM 7.38 5/15/48 20.23 9.11 9.17 5/19/2008
GMS 7.50 7/1/44 20.60 9.10 9.17 6/30/2009
GXM 4.50 3/6/32 23.48 4.79 7.91* 3/6/2007
GBM 5.25 3/6/32 19.23 6.83 9.12** 3/6/2009
GPM 6.25 7/15/33 21.78 7.17 7.87*** 7/20/2010
GJM 7.35 8/8/32 20.87 8.80 9.00 8/8/2007
GKM 7.25 2/7/33 21.00 8.63 8.81 2/7/2008
GMA 7.30 3/9/31 20.85 8.75 8.97 3/9/2006
GOM 7.38 12/16/44 21.10 8.74 8.80 12/16/2009
Apologies for the formatting but you get the idea.
The conversation, as it often does these days, floated toward investing in China. Show host Brian Sullivan asked Mr. Santucci how much should be invested in China. He said "depending on your time horizon and risk tolerance he would have between 5% and 20% of equities in foreign. For a specific country closer to 5%. China overall is in good shape but you just don't want to be over exposed."
There was plenty of squirming to accompany the advice. This guy was on the wrong show. There was no agenda, I believe, but no field of expertise either. If you watch these types of shows try to recognize when people are out of their realm. For Mr. Santucci, his realm was mortgage refinancing and not chasing the heat of last year's best mutual funds.
This type of thing happens a lot. I would suggest paying attention for this when you watch these shows.
Friday, March 25, 2005
While I am not fan of Jim Cramer this article makes a point that I have made several times before. Sometimes the market goes up and sometimes it goes down. This is what it does, period.
As I see it you can either try to swim upstream or operate with what you know will always be the case.
Thursday, March 24, 2005
On a personal note I finished my fire classes for the year. We are participating in a prescribed burn on April 2. Here's hoping for an uneventful fire season.
I will resume normal blogging tomorrow.
Barry Ritholtz over the The Big Picture has an interesting take on Jeremy Siegel that is worth reading.
I have only a few years experience fighting wildfires. The things we cover in class are far from second nature to me. I think that people that try to manage their own money may face a similar issue. I know from talking to friends and clients that investing is not second nature to most people.
The mental energy I put into my classes may be similar to the mental energy people put into investing, it is not easy and at the end of the day I feel more tired than when I go work on a fire digging a fire line or manning an engine.
The amount of science and calculation that goes into firefighting is not completely unlike the math and other external factors that goes into investing.
The classes I am taking will allow me to take a small crew and an engine out to a fire and supervise them, a lot of responsibility. I could keep it simple and just scratch out fire line for as long as I am physically able but I pursue more.
In managing your account you could buy an index fund and never look at it again but you pursue more.
The effort to do more than the minimum might be the driver in both instances. I will have to spend more time sorting this out.
Wednesday, March 23, 2005
I do think some of the oils have over corrected and may look to add back some more exposure soon.
World markets continue to get hit hard as well. This is not easy but as I wrote previously this is part of the bargain. I have to think some sort of bounce will be coming soon. I hope it turns into a rally (perhaps oil can be a catalyst), but that may be a tall order.
One other thought I have, is a repeat from before, is that as long as we have the range bound market, that so many people predicted would be the case for years, this is what it will feel like.
Tomorrow is the last day of classes so normal blogging will resume on Friday.
Just about all of Asia was down last night. Every European market on the Yahoo Finance World Indices page, plus Turkey and Ireland which are not on the page, are down too. At some point one area of the world will move back into an uptrend first. For now money seems to be coming out of stocks, bonds, gold and oil.
As I have written many times, when (or maybe you are thinking if) markets reverse they do it very quickly and with a big move. I can't see why this time would be different, but obviously I'm not sure when. Perhaps this is an argument to substitute longer dated calls for certain stock positions.
The CPI just came in above expectations and has taken down stocks futures. Maybe that big turnaround will have to wait a while;-)
Tuesday, March 22, 2005
Most markets continued to erode today after taking in a rougher than expected Fed announcement. The path of least resistance is down for now. The market is oversold but could become more oversold before it goes back up. This is a tough market to stay ahead of, pros and individuals alike are feeling this so don't let emotion carry you away.
I had a comment left by Stephen from Public Mutual Fund as follows:
Tell me about it, the market sucks lately. It's bad enough when my portfolio goes down, but I can see how it can be a real headache to actively manage OPM. That's a lot of portfolios.
The market has good periods and bad periods, that's how it works. Fortunately I don't have headaches ever with the market. This is how the market works. Once you resign yourself to the fact that volatility is part of the deal it will be easier to accept that good stocks might go down if the market goes down.
Times like these often cause people to trade their accounts too much. If your trigger point to get defensive has already come, you should be disciplined enough to stick to your plan. If you have no plan, get one. I believe no plan is what causes buying high and selling low.
On a personal note I finished one class today at the Arizona Wildfire Academy and much to my shock I aced the final test. Tomorrow starts a two day class called Engine Boss. If you live in the southwest and are so inclined the academy can always use donations. I have no affiliation other than I am a student every year.
Although outside the scope of his fund, he also expects good thing to continue in western Europe ex the EMU countries, meaning he likes England, Ireland, Switzerland and Norway among others. Most of my clients have exposure to these countries. At this point clients have no exposure to Germany and France, I own one very low beta French stock.
Mr. Mayo's concerns center around the very high unemployment rate, or at least that was all they had time to cover. While there are reasons to stay away from Germany and France both markets have noticeably outperformed the S+P 500 for the last three and six months.
Monday, March 21, 2005
The minus six points for the S+P 500 does not reveal the extent of the ugliness; the advance decline numbers were 28% up and 66% down at the NYSE. Sentiment feels like it has eroded. The VIX has moved up two points or so over the few weeks without much attention.
I continue to remain very concerned about future direction of the market. A lot of times markets like this will turn for no reason at all. If that happens but there is no fundamental improvement, selling some stock may make some sense.
I write a lot about yield and controlling the volatility of the overall portfolio (keep in mind some components should be more volatile than the market). The portfolios I manage are participating in the market's downward move but less so thanks to low beta, high yield and foreign stocks (though you wouldn't know it today).
This landscape makes my argument for me.
When Google went public I wrote, for a couple of Motley Fool articles, that all this new supply could hurt the group. The 'net stocks lifted with the market in the fall and have been doing poorly ever since. Was my supply demand analysis right or wrong? Who knows? But I still believe more supply is bad and less supply is good.
Sunday, March 20, 2005
I don't know what to write so I will answer an indepth comment/question from Michael that you can read here.
He asks about my 200 DMA indicator. First I am referring to the S+P 500 when I say market. Also, if we get close I will focus more on the exponential moving average as opposed to the simple moving average, just a matter of personal preference.
It is hard to say the exact manner with which I will become defensive in client portfolios because it depends what everything looks like. I expect I will sell some stock, I will add to positions of inverse market funds, add some short dated preferred stocks and maybe increase exposure to gold stocks and certain foreign stocks. I might do some or all of those but that captures my thoughts right now.
As for Michael's comments about GM, and Jaloti's too for that matter, I agree with what they say about poor execution, missing market trends, the health issues and the pension issues. I admit that, because the business is so bad I just know to stay away, I am not an expert here. With that said the GM situation is not new, huge American company has huge problems. More often than not the company survives (I am assuming no fraud). Survival may not mean the stock goes up but probably means the debt comes out ok. In case I wasn't clear with my comment the other day about GM's debt; it is not my type of trade and I won't be buying.
Saturday, March 19, 2005
I will stick with my oft stated plan of waiting for a breach of the 200 DMA. I do not want to try to outguess what may come next, in case I'm wrong. It is important to have some discipline and I think I do.
The Barron's cover story was about ways to invest for yield. I don't quite know what to make of that. Could it mark a bottom for growth? A top for value and yield? Something else? Nothing? I'm not sure, but I would not abandon parts of the market that aren't working. Underweight, sure, but don't be zero weight. If the market goes below its 200 DMA all bets would be off.
The GM situation will have some echo effect, or maybe I should say more echo effect. I have had no interest in the common stock, and still don't, but do you think the company will disappear? It may get worse before it gets better but in a few months or so we will be hearing from some smart people that they bought GM debt into this news and made a lot of money doing it. Of course I could be wrong and the company might default on its $300 billion in debt and go away. What do you think?
While I don't think options expiration caused the selloff on Friday I wonder if the market will unwind with an up day Monday and Tuesday?
Well I've got five 8 hour days of fire training in front of me starting on the 20th. As I mentioned I will be in touch with the market thanks to my cell phone, Sirius and a lot of breaks. I will post to the blog and reply to comments and emails in the evenings.
This is from Barron's so you will need a subscription. The article posits that there could be looming liquidity problems as there are less participating banks making markets.
If the article is right it will be a problem. I don't think the article is right about a lack of participants, however.
The the planet continues to globalize, if there is more demand for currency trading there will be more participants.
Friday, March 18, 2005
She said her fund is short Hungary, Poland and the Czech Republic.
Clearly there is not much to trade off of here but the interview was a learning opportunity. There will be more ways to access these markets soon. It makes sense to pay attention to what goes on in these little corners of the world. All emerging markets swing up and down. Brazil has been an easy to access market for years and years and it has had a great run. It will not be too late for these markets but there will be good entry points and bad ones.
Some emerging markets are again having a good day. The action of the last few days, I think, teaches us not to chase their heat. I mentioned that after a good run I took some off the table. There is nothing wrong with tweaking exposure now and then. I imagine I will increase exposure again, preferably when fewer people are talking about emerging markets but that won't be in my control.
Nicole Elliott from Mizuho expresses some concern about what a downgrade to the $300 billion debt load over at GM might to to the debt market. Too big of a downgrade will cause certain holders of GM paper to have to sell because of various types of prospectus requirements or other types of covenants that certain funds have. This could result in some serious upheaval.
Norway, as an investment theme, has shown some real grit lately. Norway is the second largest non-OPEC oil producer. This makes it a commodity based economy, it is zigging in the face of the US's zag. There are not too many ways for US investors to own Norway but there are some. All my clients have exposure and the names are doing well.
Bill Cara has a lengthy post that assess the current state of capital markets that is worth reading.
Lastly, as I have mentioned, I will be taking classes at the Arizona Wildfire Academy Sunday-Thursday. I will be in touch with the markets and post later in the evening. I will also reply to emails and comments in the evening too. I expect to post later today and have my normal Sunday commentary up as well.
This is an interesting article from Jim Jubak with ten bomb shelter type stocks. Jim is concerned about the next few years and the goal of this portfolio is to weather a bad decade.
In addition to what Jim has here I might add Switzerland (one way or another) and some emerging market exposure.
The thing with most of his picks is that they usually zig when US stocks zag. Capturing some of this, in my opinion, is always a good idea.
Thursday, March 17, 2005
Earlier today I posted a piece called Overdone where I suggested there might be a bounce in a lot of emerging market CEFs. It looks like I was correct within one hour. If I hosted the Cramer show I'd ride that one for a week.
But who traded on my call? Who traded on any of Jim's calls? The point is that I hope no one gets too caught up with hype. I've alluded to this before, if you say (or write) a lot of things about the stock market you can go back and cherry pick the times you were correct. This sort of thing goes on a lot.
Oh by the way I have been trying to publish the following for 30 minutes with no luck. Maybe I can get through with this post??
Somehow in between all the basketball I'm watching I was able to catch the CNBC Latin America segment, all 75 seconds of it.
All I caught was be selective in Brazil, Argentina has problems, Mexico allows pensions to buy stocks now (this could be important and help like it has in Austria and Chile), and one of the guests likes Chile but there was not enough time to find out why.
What is interesting is that CNBC World has multiple four minute segments every day about emerging markets. My depth of understanding about the subject may be questionable but I am far better off for having access.
All I caught was be selective in Brazil, Argentina has problems, Mexico allows pensions to buy stocks now (this could be important and help like it has in Austria and Chile), and one of the guests likes Chile but there was not enough time to find out why.
What is interesting is that CNBC World has multiple four minute segments every day about emerging markets. My depth of understanding about the subject may be questionable but I am far better off for having access.
Some of them are down 25% from recent price levels in no time at all. This may be more of a trading opportunity than an investment opportunity for the next couple of weeks so be careful.
CNBC may not be late but they certainly aren't early. I've been writing about Latin America through out the life of this blog. I see big things happening down there, but the stocks have moved a lot already. Latin stocks are capable of big corrections. I recently reduced client exposure by selling a telecom stock. I still have one Brazilian stock that is up a lot that I may keep as a way to maintain exposure. The one name is down some from its high but I still want some exposure in case I miss a turn around.
I don't really like active trading for clients (or myself for that matter) but you have to understand what your holdings are capable of and how they trade. In a properly diversified portfolio you are going to own some hot potatoes. When a hot potato moves up 20%-30% in a month, you should be prepared for that much of a decline. Latin stocks moved up a lot in a very short time so I cut exposure, not complicated stuff.
I would not try to do that type of trade with a core holding that is not a hot potato. I've mentioned that most clients own British Petroleum (BP). I am very unlikely to sell this name because of a market event. At some point in my career something may change at BP to make me want to sell but this is a type of in the long run we are all dead type of analysis.
Honestly I am shocked there is demand for the histrionics that Cramer puts in to the show. That's the thing, I don't doubt that there are people that like him. I won't be surprised if the show does well. What does it say about us that the screaming and the facial contortions are what we want?
I was amused that Jim and I drew similar conclusions about the role of GM in the economy and the stock market, except I don't think I was yelling when I wrote my thoughts on the matter yesterday morning.
This morning I see that Jim is on Squawk. They were talking about oil and they kept making the bull sound and showing a cartoon graphic. From listening on the radio I didn't realize there were graphics to go with the sound effects.
When I write about Cramer I get a comment or two from someone that likes him and some that say he is only right half the time. I do not watch him anywhere near enough to comment on his track record these days.
The voice over on the show reminded the audience countless times that he said it was too early to buy GM on Tuesday's show but is there anyone out there who doesn't know that the auto stocks are fraught with problems. They've been laggards for a long time and while the magnitude of the decline may be a surprise was a warning of some sort that shocking?
Who in their right mind is going to buy an American car with out thousands in rebates and incentives?
One last item. Blogger has had serious problems for a week or two now. This makes posting content and replying to comments very difficult. They don't know what the problem is. This is why some posts show up multiple times. I also don't plan to spend 30 minutes trying to respond to an anonymous comment. Hopefully they get it fixed.
Wednesday, March 16, 2005
I have been enamored with Turkey for a while. I was lucky enough to catch the last run up and sold the Turkish Fund (TKF) right around $20. The Turkish market and the fund are getting smacked and the article linked above talks about why.
I did not replace TKF with another emerging market stock or fund. It seemed like all of the emerging markets had a big run. I told a couple of clients, when we sold TKF, that we might get a chance to get back in later. I was not expecting this kind of move all at once. Maybe not at all, in terms of magnitude.
My emerging market exposure is less than what it was but I still have some. The group feels heavy right now but will turn up at some point. I don't want to bet client money that I can nail the turnaround. If good things happen before I add more names, clients still get some benefit.
All in an effort to get more decisions right than wrong.
GM was about a $19 billion company before the news. That a company of this size could provide such leadership would not have been obvious to me. It would make more sense that GM would cause problems in the debt market. I heard that GM is the third largest issuer of corporate debt. I didn't know that but I did know that they are a big player in the debt market. They provide a source of fixed income liquidity for capital markets. This is an important thing.
Despite what I think may be an insignificant company for the equity market, GM is an American icon. A company of this stature having what looks to be problems getting worse, not better, is a reason for equities to drop on sentiment if nothing else.
Looking at the bigger picture I think this might turn out to be an important message from the market. If demand for equities was in good shape I think the market could shrug off bad GM news.
I also don't necessarily think oil is too much to blame today. The SPX was already down before oil started to print above $56. We may see oil take more of a center stage later today but GM was clearly the catalyst for a down day, at least to start.
Very few of the domestic stocks I watch are up today but close to half of the foreign stocks I watch are up. I have been writing about this for a while. Foreign may do very well on a relative basis. I quoted Joey Bats from CNBC saying foreign returns don't look compelling. I don't think he gets it, meaning he has not learned from his mistakes. I don't know if that is right, but I will keep my fingers crossed for his clients.
I am afraid that I think the US market will continue to erode for a while. My trigger point for changes will be a breach of the 200 DMA on the SPX but I think there is now a higher probability of such a breach occurring. I hope I'm wrong.
The upper end of a lot of currency forecasts is 140 to 145. I take the news to mean that the Bundesbank will not be concerned by a move above 140. So maybe this means 140 is more of a possibility that a lot of folks think.
Maybe, maybe not.
What is more interesting about the episode is that, unless I missed it, this story received no attention on CNBC US. Supposedly the dollar is an issue that confronts American capital markets.
Plenty of folks in the blogosphere have more defined opinions about this type of thing but I just think its odd.
Tuesday, March 15, 2005
Carter said that nothing is working in the market right now and that it makes sense to be defensive (my word not his). He responded to Joe's "materials and energy stocks are doing well" comment by noting that those are late cycle stocks and their success is not cause for optimism.
I would say that Carter pinned Joey Bats' ears back. I admit that I am biased so I could be incorrect. Props to Tyler for having the onions, as Bill Raftery would say (can you tell how thrilled I am about the NCAA tourney starting tonight), to call Joe out.
The fund has been trading for a short while so it is still at a premium to its NAV and it has not declared its first dividend. For all I know this fund may turn out to be the best income CEF in the US. I am still amused by the title and I take seriously the threat that is posed when a lot of products that do almost the same thing get created in a short time.
A lack of a flood of new investment products that focus on energy and materials may be anecdotal evidence that there is no problem in those sectors.
For the life of me I can not fathom the thought process that derives these names as his best ideas for so long now. I do know that one day he will be right.
I have written before that I doubt he is really sharing his insight.
Over last few months I have done very little with options because premiums are very low. I think part of good strategy is patience. At some point volatility will increase, lifting premiums, and that is when I'll do a little more with covered calls.
We have a couple clients that have covered calls in their accounts, I'll lay out the strategy for one in particular for this article.
One client is retired from one of the big tech companies, has sold most of his stock but still has 4700 shares that is down dramatically from its all time high. I've written before that one way to think about using covered calls is as creating extra dividend yield. With that idea as the goal it easier to stay away from calls that are too close to the money, that is they have less likelihood of getting assigned.
Back in mid-December I sold 10 call options that were about 20% out of the money, expiring in April for $0.35, that's $350 less commission. That same day I sold 20 options that were about 30% out of the money, expiring in July for $0.30, that's $600 less commission. These trades annualize out to $2250 in premium, all the ifs noted. This compares to the dividend of about $1500.
In order for any of the options to get assigned, the stock would have to make the type of move it has not made in years. Since December the stock is up a little less than 10%. The client would be thrilled if the stock was up 30% by July. The April calls are almost worthless and have a month to go. When they expire I will probably look to sell October calls if the premium similar for 30% out of the money. If not, I'll just wait. Also note that about one third of the position is uncovered in case the stock does move that much.
Patience is very important for all trades. No one has to place an order.
Monday, March 14, 2005
Click on image to enlarge
A while ago I wrote about some of the covered call funds and that I felt that these might act like a bond fund with regard to volatile times in the stock market but be less sensitive when interest rates go up a lot. The chart above revisits the idea by comparing the Madison Claymore Fund (MCN) and one of the Nuveen Covered call Funds (JPZ) against the yield of the ten year US treasury.
On February 15 the ten year yielded 4.1% today it is at 4.52%. A 100 basis point move is said to cause an 8% price decline in a bond (this is simplified). 8% would prorate to 3.36% for an 42 basis point move, like we've had. In that time MCN is down $0.34, which equals a 2.1% drop. In that same time frame JPZ is down $0.07 which equals 0.3%. Lastly the S+P 500 is down 9 points in the stated time period which is a drop of 0.7%.
This is far from conclusive but I feel confident that I don't have it completely upside down. My clients and I own MCN.
This contest is a great idea.
I often write about the evolution of investing and accessing investment information. There is a new book out by Michael Panzner called The New Laws Of The Stock Market Jungle that addresses these types of issues. The book covers topics ranging from a new way of thinking about volatility to the evolution of derivatives and their role in today's capital markets to global influences on US markets. Each chapter has explanations and what Michael calls action points that offer his opinions about how to manages changes in the market.
Here is an excerpt from Chapter 1;
"Volatility is a word that usually strikes fear into the hearts of investors. Many who hear or read about it almost instantly imagine cliff-like drops in share prices or scenes of battered traders being dragged off the exchange floorcasualties of an especially nasty bout of market turbulence. Like rainy days and Mondays, volatility often seems to get people down, and positive associations are usually hard to come by. However, choppy, wide-ranging moves are not, in themselves, inherently negative, nor should they automatically be interpreted as a sign that participants should pull back and sit on their hands. They can, in fact, trigger profitable opportunities for patient and well-disciplined investors looking to take advantage of favorable entry points when acquiring new positions or to lock in extraordinary gains on existing holdings. Nonetheless, increasingly unstable market conditions can pose a threat to investing successone that must be understood to be challenged and outmaneuvered to be overcome.
The first difficulty, of course, is that volatility is one of those concepts, like beauty or quality, that everybody believes they have a handle on, but which few can really explain in any great detail. A dictionary provides some guidance with descriptions such as changeableness or fickleness, but these meanings seem somewhat vague in the context of modern financial markets. For academics and investment professionals, the term does have a more precise technical meaning, though it is something of a mouthful. Essentially, it refers to a measure of the annualized standard deviationor statistical variation from the averageof the daily percentage price changes of a security or commodity. In other words, it is a degree of uncertainty based on historical moves over some set period. While critical for fully understanding derivatives and a variety of related strategies, this definition is not necessarily what matters to most investors.
In general, when traders and money managers discuss share price volatility, they tend to look at it in terms of the impact it is havingor will haveon their own bottom-line performance, rather than in any academic or technical sense of the word. Consequently, it is the relevant time frame and natureor characterof the unpredictability, as well as the underlying directional bias of the shares or index they are making reference to, that seems to give it real meaning .You can click here to read more from the chapter on Michael's website. For disclosure purposes I have no stake in the financial success of the book, I am not being paid for this posting. I did receive a free copy of the book a few months ago. I think the book ties in with some aspects of my approach to things. Feel free to leave feedback at Michael's site with comments about the book.
He makes a compelling case. He advocates owning gold, oil and other hard commodities. Increased demand for resources, he feels, is obvious. He goes on to say the American economy will be crushed under the weight of higher rates, higher inflation and the consumer's inability to keep spending.
Barry Ritholtz published a series of what he called bearish quotes that should make anyone uneasy about the future direction on the US markets.
Any articulate follower of the market could support or refute either side of the argument. There are always people like Larry Kudlow (bullish no matter what) and Bill Fleckenstein (always bearish) that are very accessible.
It is human nature to be easily motivated by a talking head who sounds like he's smart. The fact is Ned Riley and Joe Battipaglia were wrong in ruinous proportions in 2000, 2001 and 2002. David Tice and Michael Metz missed 2003 and 2004. Riley and Batipaglia will miss the next bear move and Tice and Metz will miss the next bull move.
When I appear on TV I have a knack (maybe you would call it luck and I wouldn't argue) of getting more calls right than wrong. There are others that also get more right than wrong. How easy would it be to get only one thing wrong but have that one thing be the most important call? Very easy.
The point is to not get too carried away with anything that anyone says. Listen and learn, yes. Get panicked into buying or selling, no.
I believe all of this speaks to my philosophy of letting the market signal when there is a problem. There are a few ways to do this, I've written about the ones I use. In the article I linked to above to Barry Ritholtz' page there is a nugget about oil increases being behind every economic disaster, an 80% rise in the price of crude is likely to lead to a recession or a bear market.
OK, we'll take it as it comes and get defensive when it makes sense to do so.
Sunday, March 13, 2005
David Jackson over at Seeking Alpha had a nice write up on the New York Business web site.
My understanding of currencies and commodities might best be thought of as understanding their impact on equity markets. What I think makes trading currencies difficult is getting the magnitude of the move correct. I've done a decent job in my time getting the direction right but haven't even thought about the magnitude. Usually currency moves are much smaller than equity moves.
A lot of energy stocks are up 20% since the start of 2005. You could have made 20% from buying the right stock in January and holding it. To get 20% out of the currency market you would have had to been in and out several times. More trading, if your very good, means taking losses now and then. So instead of several trades it might be fair to say many trades. This requires a much more intensive use of time and method of study. Currency moves tend to be smaller than moves in equities. The other variable in the currency market that government treasuries are also involved in these markets with trading and jawboning. You never know when John Snow or his Korean counterpart will say something to move the market.
If you want to trade commodities I would suggest you read a book. Jim Rogers talks a lot about trading commodities. He says everyone understands sugar, which he is bullish on. I'm not sure I understand how sugar trades. I don't know about a lot of soft commodities. I think it would be arrogant to think I could successfully trade sugar because we use it home. I think understand oil, gold, and a couple of other industrial metals but maybe I don't. Jim Rogers clearly knows what he is doing and perhaps commodities are very easy to invest in but I am not comfortable committing capital to something I don't think I get.
I am probably not answering the questions in the way the reader had in mind. I believe in keeping things as simple as possible. When I think I see demand for a currency I will buy a stock from that country as I have written about Australia. I have written a lot about global demand for oil so I have bought oil stocks and invested in countries like Norway that stand to benefit from good things happening for oil. This is something that I'm comfortable doing so that is what I do. If you are comfortable trading the commodity, that is what you should do.
Thanks for the question.
Friday, March 11, 2005
At this point in the cycle I have been expecting other areas of tech to provide leadership. I haven't owned a chip stock personally or for clients in quite a while. Tech has been a tough place to hang out lately.
The action today in Intel (INTC) may not bode well for the sector for the next few weeks. INTC had good news yesterday. Maybe someone could poke holes in the report but the market liked the news as the stock lifted 1% after hours. The stock then proceeded to give that gain back about 30 minutes into the trading day this morning.
Head for the hills? Long time readers will know that I don't really believe in taking extreme action in client portfolios. The problems with tech create an obstacle for the market. We have seen that certain sectors and countries have done well. The market overall will do better when tech gets healthy. It would be logical to assume that tech will bottom and snap back faster than people expect, when it happens is the variable. I maintain an underweight exposure for now. If the Nasdaq is up 5% next week I'll lag a little bit but that's ok.
I think most would agree that the issue of oil being a bubble is a hot topic. It makes sense to explore the state of the oil market along with other relevant commodities.
I have written several articles that have tried to gage the current state of the oil market and the stocks that go with it. Bubbles are manic emotional rides, we learned that five years ago. It is tough for me to see where oil is currently a bubble. The media has been on quest to find the next bubble. Real estate? Oil? Any bubble will do.
Excesses in price are not the same thing as bubbles. The Japanese stock market is still down 2/3's from its highs 15 years ago. The Nasdaq is down about 60% from highs made five years ago. When the Japanese bubble was inflating there was real concern that Japan would supplant the US as the world's economic super power. When the internet bubble was inflating, street analysts were finding new and incorrect ways to value the new economy companies. The energy bubble from the early 1980's saw the sector from from 30% of the S+P 500 down to still only 8.5% today.
The energy component of the S+P 500 began to outperform the broader index in June 2004. Since then the SPX is up about 9% while the energy sector, as measured by Energy Sector SPDR (XLE) is up a little over 40%. Before last June there was no sustained outperformance.
All the other bubbles cited, built up for years and were not accompanied by constant is this a bubble chatter. Energy stocks could correct in a painful manner. Wednesday's mini meltdown in the group should be evidence that traders are willing to bail out very quickly. I think this means that the group could easily shed 20% or so very quickly. I actually do not think that big of a correction is coming but I would not be surprised if it did.
Some sideways or downside trading could be a healthy development for the group. The backdrop, in my opinion, is that increases in global demand will dictate long term trends but as is always the case emotion will drive the short term.
Thursday, March 10, 2005
This picture is from the MSN website to commemorate the five year anniversary of the bubble. I chose not to use the mushroom cloud photo from Marketwatch.
I'm a genius!
For ten minutes anyway until the stock rallies right back up.
As wrote earlier about this, here the trade is executed. What is next? Either the stock goes higher or lower as its next move, there is no way to know. Is the right thing to go into another high beta energy name? Should I move that money into a low beta energy name? With this trade I am now slightly underweight the group, should I stay underweight? Fortunately I don't need to decide right here right now.
This was a good stock for my clients. It probably makes sense to, at a minimum, take some beta out of the group after the run it has had. My faith in the long term demand story for oil has not changed. I will probably add a lower beta name in a couple of weeks, maybe sooner. The energy sector may sell off a little bit after the white hot run its had.
The point of these posts was to work through the thought process of entering a stop order and deciding what to do next. I have a plan about what to do. The plan may work exactly as I hope or not, it is open ended.
I don't think this is any different than what the market has been doing for a while now. In March 2004 the S+P 500 dropped about 70 points. In May 2004 it dropped about 70 points again. Last July/August it dropped 80 points. In the first two weeks of this January it dropped about 50 points.
All these down moves have had corresponding up moves. I've written this a zillion times; awhile back people predicted that we would have a range bound market for years. While no one can say how long we will be range bound it seems like we still are and this is what it will feel like. If you own names like Wells Fargo or Intel or John Deere (all fine companies that I do not own) you are not stuck with names that might not be here in a year. Your realistic risk is that you don't have the best stocks to ride out a bumpy market (realize I am not saying these are bad to hold, I could have picked other names to make the same point).
The market goes up and the market goes down in the short run. This is how it works. It will continue to work this way whether you react well or poorly to these swings.
It is times like this where being able to avoid emotional reactions makes sense for long term investors. Successful short term traders probably got out Friday.
I wrote at the start of the week about a stop order I placed for a volatile energy stock. After I placed the order the stock rallied up a bit more, worked lower yesterday and is close to executing. The strategy of taking some volatility and profit off the table may or may not be the best thing but clearly, if you read the post, the decision to place the stop order was not done with emotion.
Wednesday, March 09, 2005
First up was an article by Jim Cramer called Don't Buy All at Once. When I saw the title I thought the article was referring to how you implement a new portfolio. Jim was talking about adding one position. He talked about his days as a trader and then as a hedgie. As a matter of technique he said when he was younger he would buy, as his example went, 50,000 Caterpillar all at once. Then as he got older he would, as they say, scale in to a position 5000 shares at a time in an attempt to lower cost basis. He thinks that scaling in is a good idea for your 500 share Exxon position, 100 shares at a time.
To me this is a 50/50 proposition at best. If you buy XOM today, what is next? Does it go higher or lower. For a short time frame there is no way to know. Forget that obstacle for a moment and assume you can buy 100 shares today and buy most of the balance cheaper. How much lower would it need to go for commissions to not get in the way? Jim did not lay out a time frame to enter a position in this manner but let's say you scale in over the course of a month. Over the last month the average daily move in XOM has been 80 cents. If you pick up 80 cents three times and lose it once you would be ahead by $1.60 cents or $160 for the 500 shares. Factor in five commissions at $10 a piece and you are ahead by $110. That's $110 on a $31000 position and you were right more often than not. Obviously there are flaws with the work but you get the idea, you could call the stock correctly more often than not but not be much better off for doing it.
Perhaps Jim is 100% right with his idea but it is lost on me.
The other article was actually a video interview at the Marketwatch site with Ben Stein touting his book, Yes, You Can Become A Successful Income Investor!: Reaching For Yield In Today's Market. I double checked the title on Amazon;-)
The book is mainly for people of retirement age. In the interview he talked about diversity of income products. Specifically he said investors should have REITs, utility funds, emerging market bond funds, and dividend paying stocks. I imagine the book mentions other vehicles as well. He quickly preaches diversity, he says to have you portfolio spread over hundreds of these which I took to mean owning a lot of funds. There was no specific mention of what type of funds. I have heard him mention ETFs before and open ended funds, I do not know if he believes in CEFs or not. Take that as an invitation to post a comment if you know whether Ben likes CEFs.
Ben used the term "reach for yield" which can be dangerous. The implication is that you take on more risk be reaching. Ben qualifies what he means but I am a little surprised he couldn't come up with a better way to express the thought, but I am nitpicking.
In a big picture sense Ben is trying to help readers put together a low impact portfolio that will produce income and grow a little bit. The growth component of a portfolio is crucial in old age and too many brokers miss this. If someone is 70 years old and everyone in their family lives to be 105 don't you think they need a little growth? I do and more importantly so does Ben.
Both stocks have soared. I would imagine that a big part of the move was from a lack of supply in the group. Whether there are more than two names or not I only hear about two and I think that is true for most people, perception not reality being the driver.
If you have made money in these it would makes sense to have enough introspection to realize the move may have been more about luck than skill. I first mentioned these stocks January 28th. Since then they are up 30% or so. Clearly I should have bought one of them but I didn't. My thinking here was there was money to be made was based on a couple of stock market related things, not my in-depth understanding of uranium. When fads start they can last for a very long time. For all I know CCJ could quintuple over the next couple of years but that the fad element will not go away until it implodes (if that happens).
Another way to play uranium is with Rio Tinto (RTP). RTP has uranium operations in Australia and Namibia. If uranium becomes huge, RTP will benefit and if uranium drops off the radar RTP will not take the hit that CCJ and USU would take.
I'm no expert here. But the stocks have taken off before much of the story has even started to play out. The run in the stocks will likely end before the story plays out.
We could say the same thing about another energy sub-sector; coal. The US is the Saudi Arabia of Coal. Except china produces a lot more than the US. Coal stocks have done very well also. The big difference between coal and uranium is that there have been a lot of coal IPOs. Take that to mean more supply has come to the market. This is a watch out situation. At some point supply will overtake demand. I think the coal story has a long way to go but who knows? Making a huge bet on coal could be costly.
In a diversified portfolio if you have 10% in energy, 4%-5% could be aggressively devoted to either fad. If your stock triples you are adding a lot of performance to the entire portfolio. If the stock cuts in half the damage may be unnoticeable in the context of the overall portfolio.
Last week I suggested that the equity market did not believe $55 oil could stick. A week later that might have changed. The market could be bumpy in here for the next few days. As its been for the last few years the market has a lot to figure out and this may mean some discomfort. As I recall, though, most of January was very uncomfortable and it seems like most people have already forgotten about it.
The point here is if we do in fact have an ugly couple of days it is just normal trading that should not in and of itself cause an emotional reaction.
Tuesday, March 08, 2005
I believe Jeremy Siegel's other book was "Stocks for the Long Run"....I
think Burton Makiel (?) from Princeton wrote A Random Walk Down Wall Street.
Jeremy Siegel was just interviewed on Asian Squawk Box. He's got a book coming out called The Future For Investors that offers a slight twist on the indexing he recommended in A Random Walk Down Wall Street. He has jumped on the dividend band wagon. He now suggests 50% in index funds and 50% in quality dividend paying stocks. One other thing that is apparently new is a lot of foreign stocks. He suggests that 40% of the indexed bucket (20% of the total portfolio go into foreign based indices. The interview did not specify which foreign index.
These days I am about 30%-35% in foreign stocks for clients.
I tend to go for simple ideas, when possible and Professor Siegel's ideas are simple enough for anyone to implement.
I do know everyone loves the group. If my stop order does execute I will still have plenty of exposure to the group but with much less volatility. That may make sense from here.
I am not willing to bet my clients' money that I can nail the top of the move.
As a side note I find Bob's reverence for traders to be weird. I was a trader for a long time, we're not all that, just ask my wife.
I put a very tight stop order under the current price. I hope the stop does not get elected but who knows. If it does execute I will have the some of same issues I brought up before. The stock could easily run right back up, I could buy another stock that might not do as well. I have something in mind that I will write about when the time comes.
I don't know what's next for energy stocks. I suspect they can continue higher but over the last 15 months or so these stocks have done a lot of heavy lifting in client portfolios.
These fund usually allow the manager to go from 100% stock to 100% bonds or anywhere in between and possibly a chunk in cash too.
Setting aside my dislike for open end funds, this type of product does not make a lot of sense to me. Investors who have financial plans usually have some sort of asset allocation mix like 65% stocks, 30% bonds and 5% cash. Where would this type of fund fit in? What is the mix right now? What will it be in a month or next quarter? What if the manager is wrong with the mix occasionally (not an unreasonable question)? If the fund makes up 30% of a portfolio and the manager overweights bonds in a big up year for stocks the portfolio lags. If the fund makes up 5% of a portfolio it probably wouldn't be enough to help. Or maybe its just me.
On Squawk Box Brian Belsky posited that we may be in a value stock bubble because no one is talking about it. This may not be as far fetched as it sounds. In the last two years the Russell 3000 Value iShares (IWW) and the S+P 500 Barra Value iShares (IVE) are both up 60%. How many years did we average 20% growth during the bubble? The bubble idea loses some momentum on a four year chart. Over that time IWW is up 20% and IVE is flat.
There is no historical precedent, that I'm aware of anyway, for bubble to hit the same market every couple of years. Usually its more like 20 years. A correction in value stocks could come along at anytime for no reason at all but that we have not taken back the highs from five years ago leads me to think an implosion from here is a long shot.
Monday, March 07, 2005
If the rally is to continue I think the semi's will need to be involved. TXN was a negative but perhaps Intel and National Semi come with news later this week, here's keeping my fingers crossed.
That I am crossing my fingers should tell you how tenuously I view the current action. Maybe this is what a wall of worry feels like.
I will be on CNBC Asia's Market Watch tonight during the first half hour. They called my house at about 11pm last night to set it up. It is amazing how deep of a sleep you can achieve in just 30 minutes.
I will be on CNBC Asia's Market Watch tonight during the first half hour. They called my house at about 11pm last night to set it up. It is amazing how deep of a sleep you can achieve in just 30 minutes.
I had a response to my CNBC World idea from Bruce Lawrence. Turns out its not my idea. Bruce had the same idea two years ago. Even though I can no longer lay claim I still hope it happens. Bruce reiterated some of my thoughts about more time given to interviews and more insight being gleaned.
Harry Jaloti left a good comment about always having an exit strategy on my stop order piece. Hopefully no one took the article as an endorsement for no exit strategy. I believe wholeheartedly in exit strategies, even stop orders. The point was that plan has flaws. All strategies have flaws. I want to try to know what flaws I may face with any trading I do. Hopefully you are reading Harry's site.
I had one question come in asking my thoughts on dollar cost averaging. That depends on the context. Putting money away every month systematically and investing it is a great way to build assets. If you have a lump sum to invest I would say I don't think DCA is a great idea. You will either be better off or not by doing it, there is no way to know.
Since the market has an up year 72% of the time I think it makes sense to just invest a lump sum. The question specifically mentions DCA of an energy fund. Energy is going great guns. That is not an invitation to make reckless bets. Energy is about 8.6% of the SPX. Anything above a 13% or 14% weight in the sector is making a huge bet. So while I'm not sure exactly what the question is asking about an energy fund, if it would be the only exposure to the market he has I would say buying the fund at all is a huge bet. If this fund would be a small piece of an existing portfolio I would say invest in the fund to the extent you want to own it, as a matter of philosophy.
There was a last comment about Jubak, O'Neil and staying invested through different market cycles. The question quotes O'Neil as saying anytime is a good time to buy. Long time readers will know I don't try to get too clever with this. Almost any time is a good time to buy. My primary barometer about now being a good time to buy is whether the SPX is above its 200 DMA or below it. Above means be fully invested. Below means, at a minimum, be very defensive. What defensive looks like depends on the circumstance. I've written about a couple of other indicators that might warn me the market has a high probability of going below the 200 DMA.
The market can only do four things (this is a rerun for a lot of you); up a lot, up a little, down a little and down a lot. The market will go through the 200 DMA on its way to down a lot, usually. If I can miss big chunks of down a lot I will add a lot of value for my clients.
Sunday, March 06, 2005
As I wrote that post on Friday I was watching CNBC's Closing Bell and I thought it was a little odd that everyone was so excited. The performance seemed to really whip up Bill Cara. Things like this aren't a big deal to me. Most people you read or watch have some sort of agenda. The more malignant you think their agenda is the less likely you are to respect what they have to say but CNBC does provide information. Part of the learning process is to weed out hype from information.
About ten years ago one of my older brothers tried to give me advice about the options market. He said something silly to me about options being manipulated or whatever. Aside from the fact that he had no experience working in the field and I had ten years under my belt my reply was "so what." You can only operate in the world that exists. The world won't adapt to you, you have to adapt to the world. So getting worked up about things beyond your control is wasted energy. I try to apply this to other aspects of my life too.
No disrespect to Bill, I don't doubt he is 100% correct on the issue but I'm just trying to help my clients and my readers.
I get a lot of second opinion emails where the answer includes something about a stop order. I wanted to repeat what I've written before about some of the strategic flaws of stop orders.
A stop order would not have worked on Biogen or Elan this past week, assuming your stop price wasn't 50% below the then market price. Anything close to a normal stop order under Biogen would have executed at $37.79 at the open on Monday (according to Yahoo finance) after closing at $66.45 the Friday before. In theory any stock could have news come out that would cause that stock to drop dramatically. A month from now $37.79 could look like an awful price to have sold at or a great price, there is no way to know.
Assuming a less dramatic situation; You bought your favorite energy stock a year ago at $30 and now its at $45. You put a stop in 8% below the current price to protect your gain, $41.40. The energy sector drops and your stock participates and you sell at $41.40. Now what? If you want a diversified portfolio you need at least one energy stock. Are you going to buy what you think is a lesser company, remember you just sold your favorite stock.
What if after you get stopped out the stock rallies back up quickly? Would you buy it at $43 after you sold it at $41.40? Too much of this and you are swimming up stream.
I have this discussion with one client in particular all the time. Stop orders are not the be all end all exit strategy. Stop orders are just a tool. Sometimes they will work and sometimes they will not.