Iceland

I first wrote about Iceland as an investment destination back on March 31. I recently started the process to invest some money personally up there. It involves mailing a whole bunch of stuff up there and I am not sure it will happen on the first go around but I'll keep you updated.

Recently the folks over at Everbank created a CD that is tied to the Icelandic Krona. Everbank also has a free daily newsletter that I get call the Daily Pfennig that is usually a good read and I would encourage anyone to take a look.

In today's letter there was a lot of detail about Iceland that I thought I would pass on.

The Icelandic Krona continues to be the 'hot currency investment' here
on the desk.  We are receiving a number of calls from investors both
new and old who are interested in this tiny economy and its potential
currency gains.  But we are not the only ones who have noticed this
opportunity.  Neil George, editor of popular Personal Finance newsletter has
written several times on the benefits of investing in this country.
Here is an excerpt from his daily newsletter 'By George':

"ICY HOT

For years now, I've been pushing folks to invest in and travel to one
of my favorite islands in the North Atlantic. Now, thanks to some
changes and more participation in Iceland's currency, stock and bond markets,
it's time for us to take a harder look and send some cash to the small
island economy.

This is no puffy travel piece on Iceland. This is about a market that's
made up of 286,275 people who have taken what the rock-strewn island
has to offer and are making it work. And they do such an impressive job
that we're devoting valuable space and your time to convince you to give
this market consideration.

After all, Iceland's stock market has trounced the performance of the
S&P during the past five years. And the bond market makes the US look
third world when it comes to yield and total return. Plus, there's the
Icelandic krona, which is one of the few currencies taking on the US
dollar.

The island republic was formed by volcanic eruptions and other
geophysical activities that continue to affect the geography of the country.
Beyond just appearances, Iceland is blessed with copious amounts of
natural springs of boiling hot water that are harnessed to provide cheap
energy. In addition, its water sources and mountainous terrain provide
ideal settings for hydro-powered electricity. In a world that's power poor
and searching for the nirvana of fossil and nuclear-free energy,
Iceland is the only economy that truly has a shot at being the first fossil
fuel-free economy in the world.

It's not just about power, either. The blessings of natural resources
extend to agriculture as well. On land, Iceland's climate is
surprisingly moderate, with temperatures running from the low 30s to the mid-50s
much of the year. This is due to the airflows from the Gulf Stream and
the Atlantic Drift, which bring warmer water and air to the North
Atlantic.

With grasslands and other feedstock, livestock is an important source
of revenue for the market. Lamb and beef are hormone free and highly
desirable in the demanding markets of Europe. The meat commands premium
prices. Beyond meat, wool and leather are core contributions to the
national product. And there's fishing, which varies from freshwater salmon
to offshore Atlantic species such as cod. Eager buyers from across
Europe, Asia and North America come to get it.

But it's the people who truly add the value to the economy.
The education system is first rate--the population maintains one of the
world's highest literacy rates. With education largely provided with
little cost to citizens, secondary and post-secondary education levels
are enviable by most global standards. Linguistic skills are extensive,
with the locals understanding and speaking English and many European
languages.

This is good for tourism, which is another big contributor to Iceland's
economy. Although hindered with last year's global event-driven
pullback in travel, Iceland is picking up the pace. It's seen as a safe and
interesting destination.

Hotel occupancy is heavy to full, and the yield is climbing. The
flagship air carrier is seeing improvements, which are expected to provide
strong positive growth for this year over last. All these factors should
contribute to the construction industry, which is already breaking
ground for various new hotel and resort property developments.

Technology and manufacturing are in store for the economy to expand.
With extensive telecommunications links internally and externally, along
with its isolation and educated workforce, Iceland is a prime location
for information and bio-sciences. With the world's economic contraction
quick and shallow, Iceland should continue to rebound with internal and
direct investment flows during the coming year.

And there's manufacturing. Everything from aluminum smelting
to other energy-intensive operations is desirable to build and operate
in this economy. While the sector softened with the global slowing last
year, any global growth should support local production and greater
direct capital investment into the economy.

Setting the stage for investment flows is the government. It's been
deregulating the capital markets aggressively while reforming and
tightening fiscal and monetary policies, which credit rating agencies and
global investors are lauding. Iceland is a AAA credit, which the bond market
is rapidly recognizing."

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Investors Cannot Live by ETFs Alone

Investors Cannot Live by ETFs Alone

I wrote the above article for TheStreet.com. Long time readers will know that I have not been a fan of 100% ETF portfolios but the article is the most complete article on my thoughts about this.
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Processing Through

It looks like the most recent economic data has been equity friendly. That gas prices have come down so much I think opens the door to some good retail sales for Christmas. To me, this creates a tail wind for stocks.

I have repeatedly laid out a bearish case for 2006. And while I do not plan to change that outlook, there is no reason that equities can't go up. I will be in there until my exit strategy triggers again because markets do not have to be logical. It is for this reason that I do not try to out guess or out maneuver big shifts in the market. They may never come.

I think too many people, pros and do-it-yourselfers, get too caught up in trying to time these things based on gut. Realistically I think you might be able to be right about this sort of thing once or twice. The rest of the time not. I think it is just simpler to let the market drive the bus.

No one needs to be out at the very top nor in at the very bottom.
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Cripes

I watch a lot of stock market television. Aside from catching news I like to hear process from other people. Unfortunately some of the people conducting the interviews don't know what to ask.

Yesterday right before the close Maria interviewed Alex Motola who manages the Thornburg Core Growth Fund (THCGX). The fund is a bottom up growth fund that is up almost 20% on the year. The fund only owns 40 stocks so clearly the guy is good at picking stocks. As a note just because I am top down does not mean I can not learn from a bottom up guy and at some point in the top down process, stocks do have to be chosen.

Motola mentioned that he likes Microsoft now. He cited a couple of reasons why and while they make sense who knows whether he will be right but that is not the point. The point to me is that despite the market already knowing about the new OS and so on he still likes it. Process not product. OK, good stuff.

After mentioning Microsoft, Maria's first question was about the stock having done nothing in 5 years. First the comment plays into a mistake too many people make. Often, investors care more where a stock has been than where it is going. If a stock has doubled, you buy and it then triples, who cares that it doubled before you bought it?

As Maria was saying it hasn't done anything they put up a chart that showed a nice lift over the last month or so. He said he bought it recently which Maria did not respond to. Actually since October 11 MSFT is up just under 14%. That is a big move any way you cut it.

With all those years being at the NYSE, as a reporter, I am really surprised she cannot come up with better questions.
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Inverted Curve

I have been having a fun back and forth discussion with Howard Simons on the RealMoney columnist conversation section about the implication of an inverted yield curve. Howard knows much more than I do and has more experience. I do not believe I can out-debate him on anything related to capital markets but that does not mean he is right either.

I'm not sure that it is ok to just paste content from RM in this blog but I can tell you that he believes that since more financing is done with floating rate debt, the old notion of un-profitable lending is not the same as it once was. One thing that I think he mis-understood from my comments (which I will paste below) was about flat yield curves. The curve was flat during most of the bubble inflation. Flat can mean slowing is coming but my concern on this blog and in my RealMoney posts was just about inversion.

11/28/2005 10:38 AM EST I've been concerned about inversion for a while and I have been writing about on my blog as well.

For what it's worth I am not concerned in and of itself of an inversion of the two year and the three year. Inverted curves making bank lending un-profitable. Most banks don't borrow for two years to lend at three.

I see one of two outcomes given that the Fed looks like it is going to at least 4.5%. Either the ten year will yield less than t-bills (inversion) or the curve will normalize and the yield of the ten year will be much higher than it is now.

Both outcomes create big headwinds, at a minimum, for equities. I've been formulating a thesis for a rough 2006 based on this and a few other things.

We'll know soon enough.

11/28/2005 11:19 AM EST
There is no way I'm going to out-debate Howard on anything and I certainly hope he is right.

While I'm not trying to outguess the market on this, that this yield curve inversion (should it happen) could be different is not a bet I am willing to make with client money.

11/28/2005 12:01 PM EST
I'm sure you're sick of hearing from me!

I have no concern about a flat curve. The curve was horizontal for a while in the late 1990s. I am not aware of precedent for bad things coming from just flat.

When the curve inverts it makes accessing needed capital more difficult. Lack of that access is what causes problems.

To be clear my concern is if the curve actaully inverts (and I hope I'm wrong) not threatens to invert.

I got an email after the fact from my editor saying they are not sick of me. That's always nice (insert smile).

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More Cheer From Bridgewater

I have written several times on this blog about the gloom and doom for the US that is predicted by a firm in Hong Kong called Bridgewater. Usually it is Stephen Gollop who comes on CNBC Asia but yesterday it was a chap named Martin Hennecke.

The bear/apocalypse case always sound more compelling and intellectual. Included in yesterday's interview was the word apocalypse. Show host Mark Laudi used the word twice, kind of tongue in cheek I thought, but Mr. Hennecke never tried to bring the reins on that one.

He had a couple of interesting nuggets of information that are worth knowing. He said that 63 units of debt need to be created to create one unit of GDP growth, this is dangerously high. The word unit was not defined.

He also said that the way inflation is calculated by the US government understates the problem and that GDP growth is actually negative when inflation is accounted for properly. Again no tangible numbers but this is clearly his belief.

He also expressed concern about the debt situation in the US being similar to various "banana republics" that fell. He said debt is worse now than it was in 1929.

Despite the lack of data for the interview I do not doubt that they believe in this I also do not doubt they have data to support all of this. Data can be mined to say anything, afterall.

That too much debt is bad and could result in a horrible outcome is not impossible. This concern has been on the plate of the US economy for years. I never hear anything different about why it matters more right now to trigger a financial apocalypse and why not ten years from now?

The folks at Bridgewater have been predicting these things for several years, at least, but I don't think I hear any sort of change in their thought process that makes now more probable than two years ago.

Mr. Hennecke did talk about preparing now for when the inevitable comes. I can buy into that. Have some sort of counter strategy and exit strategy.

If some sort of financial apocalypse does come it will happen slowly giving plenty of time to get out. Long term investors don't need to top-tick the market. Taking steps to miss big chunks of down a lot (recurring theme), no matter what the cause, is what's important. If you lose 10%-15% while the market is cutting in half how would you feel? You'd feel pretty good about things.

I personally don't believe we will have a financial and economic apocalypse. I'm thinking 2006 will not be great but that does not equate to Armageddon.
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The Big Picture: Gold versus Stocks

The Big Picture: Gold versus Stocks

Yet another great piece from Barry.
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The Big Picture For The Week Of November 27, 2005

In this week's Barron's there is a roundtable (subscription required) of sorts about the hedge fund industry with three panelists.

Among other things each of the three recounted what strategies have worked well for them this year and which ones have not. They talked about things like distressed investing, covertible arbitrage and and merger arbitrage.

Hedge funds-like strategies are starting to become more accessible with smaller minimum investments and through more outlets. Hedge funds are a hot area, there is a lot of new money going into them which causes the markets chased to become more efficient. As an example if ten years ago there were 50 investors out there to arb a merger like JNJ (client holding) and Guidant, today there might be 250 chasing the same type of deal. This causes the spread to close quicker making it more difficult make money. This is just an example, my numbers could easily be wrong.

I don't know if the outcome will be some sort of investment apocalypse or not but the old requirements that used to be in force for hedge fund investing were there for a reason.

The demand (or maybe I have it backwards and should say the supply) for more exotic investments is to me a clarion call to make things simpler not more complex. This could be important.

A do-it-yourselfer, just getting started might want to think about something as simple as;

• 40% Rydex S+P 500 Equal Weight (RSP)
• 30% iShares Dividend Select (DVY)
  
• 20% PowerShares Intl Dividend Achievers (PID) this is the foreign DVY
• 10% Any emerging market ETF

This could be for the equity portion of a portfolio. It is not overweight mega cap stocks, picks up a market equivalent yield with plenty of foreign exposure. Its simple and captures many effects. The first (of many) flaw I see is it will no real exposure to commodities but the idea of a four or five holding portfolio is appealing for people that do want to keep it very simple and not spend too much managing their portfolio.

The specific allocation above is not the point but the concept of simple at a time when so many other people are looking for complex is the point.

I absolutely believe value can be added by actively managing a portfolio, a decent percentage of the time (whether you do it on your own or hire someone), with enough diligence. Just because that might be so doesn't invalidate something low maintenance and simple.

I have been particularly inspired by simple lately due to what seems to be a step up in innovative ETFs. This leaves me steadfast in my belief that do-it-yourselfers who have no intention of ever hiring someone like me (which is most people) will have a much better shot of getting to where they need to be financially.
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Amusing

Some of you may know that I wrote for Motley Fool for a short time (about 60 articles in 2004). My experience with them was difficult at every turn. There were emails never answered (I am still waiting to a reply to my last email), articles that they forgot to publish and I was left with the impression that they were never that fond of me as a writer (I am not talking about personally disliking me).

At one point I got some feedback that I was not as good of a writer as their other contributors. While I would not doubt that for a second, if you do a search on their site for article I wrote you will see I got a lot more calls right than wrong. A lot more. I concede that this might have been more attributable to luck than skill they couldn't have known either way yet they made no effort to try just a little harder to communicate better.

However dumb or smart I may be, I haven't changed a whole lot in the last year and clearly there is reader demand for my type of process. I base this on the good fortune I have had with my writing since I moved on from Motley Fool.

The reason I am writing this is that I was mentioned in their Fool's Look Ahead for next week. Back on June 9 , 2004 I did a favorable write-up on Quanex (NX) when the stock was $30.34 (split adjusted) and the article today referenced that piece.

I just find it amusing and I can't imagine I will ever really know why it was so difficult to work with them.

If anyone from Motley Fool reads this site and cares to comment, please feel free. I won't edit the comments unless they are profane.
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Using ETFs

I don't have a feel for how many new readers come to this site and how many readers get bored and move on.

Some of this will be repeat for long term readers.

I just read an article about ETFs that did not have anything new to add but one advisor was quoted as saying "I've moved totally over to ETFs from mutual funds, I'm doing it for my clients as well. ETFs are the wave of the future."

The person's name does not matter nor does his exact meaning, as I'm not sure if the quote is saying ETFs are literally the only tool he uses.

I am obviously a huge fan of ETFs. I use them in my practice and I use them personally. But they are just one of many tools available. I am a big believer in individual stocks but even for people that are not comfortable taking single stock risk there are things like CEFs, even OEFs and I am starting to warm up to structured products. Anyone willing to devote enough time to an ETF to buy it, should consider devoting time to these other products as well.

Of all of the themes I have in client accounts, I believe there are only two (Norway and New Zealand) that cannot be captured with a product as a substitute.
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Taser Delisted?

Taser may get delisted from the Nasdaq. Wow. This stock has been one of the great fad stocks of the last few years. The problem centers around filing reports.

I wrote about the stock for Motley Fool a long time ago. My conclusion was that there is clear an obvious demand for the product which was and I believe still is a positive but I also wrote that anything could happen with the stock price in either direction and it would be tough to own. As I recall the stock went up a little longer and then started to work lower but I has no idea it was in the sevens, before today's news.

I repeat, wow.
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It's An Asset Class

Last night I was IM-ing with a friend who has some experience working in the investment industry and now works elsewhere but manages is own portfolio.

He says he reads this site but who knows. People that do read this site no doubt tire of how much I carry on about foreign and emerging market investing.

My friend told me he has no exposure to emerging markets. He said he missed that boat. My friend is not one to take advice so I didn't offer.

Emerging markets is an investment class. My friend does not look at it from the perspective of having a diversified portfolio. If you were starting a portfolio today and you wanted proper diversification you would include emerging markets. Perhaps, given the run, you would hold back on a full allocation for a little while but completely ignoring an asset class could be a big mistake.

I have previously disclosed owning BLDRS Emerging Markets 50 (ADRE) personally and for clients. Over the last 12 months ADRE is up 38%. This is not great stock picking, I haven't picked a stock. I picked an asset class that any article in Money Magazine would tell you to own. I haven't looked, recently, to see if ADRE is been a leader or laggard compared to other emerging market ETFs but they are all up similar amounts I imagine. The key is the exposure.

A diversified portfolio needs a couple of holdings to go up a lot in a year to have a shot of outperformance. Just having the diversification is a whole lot easier than just trying to pick stocks.

Even in top down management, eventually stocks have to be picked. Lets use my exposure to Chile, that I've written about many time before, as an example. Clients with more tolerance for volatility own a Chilean bank. From a top down assessment I decided I wanted to own Chile. Since commodities are what drive the economy (similar to Australia) I didn't think I necessarily needed a materials stock.

There are several financial ADRs from Chile. Once I decided I wanted to own Chile, I hoped that by some sort of bottom up study I could find one to own. I picked one and lucked out. The name I bought actually did a little better than ADRE over the last year.

Even if I had not been lucky with the pick and gone with one of the other names I would have wound up with a stock up almost 20% and better than a 5% dividend.

I'm not sure that Chile finds its way on to the radar of a lot of bottoms up people. In this example I only had to get one thing right, Chile. I did not have to be right about emerging markets because I will always have some exposure, that's just being diversified.

My wife just woke up, I have to help cook a turkey. Happy Thanksgiving!
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CNBC Asia

I am scheduled to appear in my usual spot on Asia MarketWatch between 8:10pm and 8:25pm EST tonight.

Here are some things that might come up;

• Every one wants to know if we will have a year-end rally? The S+P 500 is up about 80 points in a very short time, this is the rally. The question should be how long can it last. Coming into Wednesday the US market had been up 14 our of 18 days. Clearly the market is overbought to some degree. Overbought markets can always get more overbought, of course.
• The market has a stunning track record for being up on black Friday, to pick otherwise would be 100% guess.
• The last time I was on the show Mandy asked what fundamentals could cause a rally, my reply was the market could rally for no reason at all but from a fundamental perspective a drop in oil would likely be the only catalyst. Clearly some part of the rally is attributable to oil's drop in price.
• The ten year treasury is around 4.46%. It has almost corrected down to what I thought could be a low. The news about the Fed minutes was taken as very important by equities and the two year treasury. The move in the ten year was less significant. I take this to mean that a move down in yield from here could only happen with a new event that the market is not now discounting. Yields will either go up or the curve will invert. Both pose headwinds for equities for 2006.
• I have no doubt that holiday spending will be just fine. I don't know about blow-out numbers but it won't be bad. What I wonder about is to what extent gift cards will dampen sales. When gift cards are sold they are not recognized as revenue. That happens when they get redeemed. Until they are redeemed they are counted as being a liability. The convenience factor may make for a good January for the retailers.
• There has been a lot of chatter about the narrowing breadth of the rally as being a cause for concern. If everyone is talking about it, it's priced in and won't be that important. When too many people take the same side of an issue, that issue has less predictive value.
  

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Enhanced Indexing

Enhanced Indexing

This is a good read from ETFzone.
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Back To Stock Picker's?

It has been a while since I wrote about my disdain for the term stock picker's market. Do you remember at the beginning of 2005 and all of 2004 how many people said it was a stock picker's market.

Newer readers can use the search function at the top of the page to see how consistently I have derided that term. Look at this last rally. Stock picker's? I say not. 2004 and most of 2005 was about picking the right sectors or themes. The rally of the last few weeks might even be broader than that.

Top down management says that 90% of your return comes from asset allocation and sector weighting. I would say that given the action today in ALXN and RIMM, an arguement could be made against stock picking. I have been writing for a long time about the market not rewarding single stock risk taking and these two names today offer more anecdotal evidence.

This does not mean only use index funds, not at all. But overweighting a great story, from the bottom up, is a type of risk that just is not being rewarded. This is a headwind that stock pickers should be aware if.
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Oil

It's getting a little attention but not a lot. The temperature dropped a little in the Northeast and oil is creeping a touch higher.

I have been quite repetitive and public about my belief that oil demand will keep prices high and mean good things for the stocks. I thought $71 was probably too high but I also don't think it can stay below $50, should it correct that low, for very long either.

That the most recent creep up isn't getting a lot of attention is probably a good thing.

It would be easy for someone that buys into the long term theme to have been shaken out recently. A bit of warn weather is not going to do much to alter a long term them, if you believe in that theme in the first place.

There are plenty of very smart people that do not. You can decide for yourself.
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Aussie Aussie Aussie

The Australian dollar has generally moved lower against the US dollar, along with just about every other currency, in the last few weeks. I read the almost daily comment about the Aussie on Bloomberg last night that said the Aussie's lift in the last couple of days has been because of the move in gold. The article reminded readers the Aussie has a 0.96 correlation to gold.

The article then quoted a couple of analysts saying that the lift from gold will be less important than the erosion of the yield differential (advantage) that has Australia has had for a while.

So it boils down to the gold (and other commodities) correlation versus yield advantage. Your opinion would drive what type of trade you would make. It seems to me that the yield differential is more of a short term issue where increased demand for commodities (if you believe in that) is more of a long term driver.

That commodities have rotated back into favor for the first time since the 1970's makes sense to me. That this would be at the expense of equity markets from service based economies also makes some sense.

The leads me to still believe exposure to Australia and Canada and a couple of others will be the right thing for a while to come yet.

On another note, it would appear my content is working out at theStreet.com and RealMoney.com. They have started ETF Tuesday on the free site. I do not know if I will be the only one contributing to this or not but I'm glad I haven't made an ass out of myself after ten minutes.
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Woo Hoo, Maui!

Every so often I get a chance to mention how much of a sports fan I am. Today is the start of one of my favorite events, the Maui Invitational. For the next three days there will be a lot of broad scenic shots from Lahaina and some good early season college hoops action.
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2006 Strategies

Over the next few weeks CNBC Europe will devote a lot of air time to 2006 strategy ideas from various strategists about global equities, European equities and US equities.

Today it was Merrill Lynch European strategist Khuram Chaudry's turn to weigh in. He is concerned that central banks will continue raising rates into 2006 and that globally, profit growth is peaking. This leads him to own more defensive and high quality names.

He is recommending overweight positions in health, energy and financials. He is underweight tech and consumer staples. More often than not, consumer staples correlate to healthcare. Unfortunately there wasn't enough time in the interview to explore what would cause the two to diverge.

Since so few people have access I will try to pass on what I can about these interviews. The point is not to blindly follow these ideas but to take in process from other people and form your own process.
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Useful

Yesterday I stumbled across a white paper on the Rydex Funds web site about something called Essential Portfolio Theory (EPT).

EPT is meant to be an update to Modern Portfolio Theory (MPT) by Harry Markowitz in 1952. EPT adds inverse index funds or shorting, commodity exposure, real estate and different ways to access these parts of the market.

The catalyst behind EPT is that MPT needs updating because of technological innovations, access to better information and the idea that stocks, bonds and cash may not be sufficient to properly diversify against losses or down markets.

This is the type of stuff I have been writing about since the beginning, but with no where near the insight or detail. I think this type of thinking is important to incorporate into your process as you manage your own portfolio.

For example there has been a renewed visibility for increased global demand for commodities. Increased demand guarantees nothing but it creates a simple tailwind for the area. There are many ways to access this part of the market. Some exposure offers a chance for strong returns and an asset class with a historically low correlation to US equities.

Foreign investing, not in terms of chasing heat but, as an asset class has a new importance. More investors have come to realize this. However for most people this means heavy exposure to western Europe. The creates the need to look beyond the England, France and Germany.

The white paper devoted a lot to inverse index funds/shorting but I wish it would have devoted more to foreign, commodities and real estate. Nevertheless it was a great read but it took a while.
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Clough CEFs

Barron's had an interview with Chuck Clough, former equity strategist from Merrill Lynch. Since leaving Merrill he hung his own shingle at Clough Capital Partners in Boston. Chuck also runs two closed end funds; Clough Global Allocation Fund (GLV) and the recently listed Clough Global Equity Fund (GLQ).

I did a little looking under the hood and these are kind of interesting. First things first, Clough is clearly a sharp guy and given what he has done in his career I'm sure I will never know as much as he knows.

The funds may be difficult to own for a couple of reasons. First I'm not sure why there are two funds. They both seem very similar. The difference in performance seems to be attributable to the fact that GLV trades a large premium to NAV but GLQ trades right at NAV (give or take). The funds each have similar yields. In looking at the holdings of each fund there is a fair bit of duplication too.

And about the holdings; GLV has about 190 equity holdings plus 6 ETFs, it also sells short and does a little with options. GLQ has about 200 equity holdings, 10 ETFs, 1 CEF and does some things with options. I can't guarantee the 190 and 200 as exact but it's close.

There is a fair bit of turnover (not unreasonable) which makes knowing what you own, for your own allocation purposes, very difficult. As changes get made in the fund in reaction to changes in his outlook the fund may look very different six months from now than it does today.

I also don't understand the dividend, its huge. The yield of both funds is in the fives. The dividend paid is not necessarily all dividend. According to the Clough website it may include capital gains and return of capital. The fund will breakdown the composition of the payout at year end. I'm not sure why a return of capital is a good idea. Closed End Fund Association shows that GLV is about 31% leveraged so that could be how they keep the dividend too. GLQ does not show up on the list but it may be leveraged nonetheless.

To get a feel for how GLV has done, it was priced on July 27, 2004 with an NAV of $19.06. On Friday the NAV closed at $22.99 which is a gain since inception of 20.6% plus dividends. In that same time the S+P 500 has gained 13.9%. Since the fund has about 40% in foreign it might be worth noting that EAFE is up 29.7%. The S+P and EAFE blended together proportionally was up 20.24% (if I counted correctly) so the fund added a little price appreciation and a lot of dividend.

An actively managed fund (closed end or otherwise) with such a wide universe probably has no role in a top down strategy but for a bottom up approach either fund could be very solid. Since the two seem so similar (double check and draw your own conclusion) it probably makes more sense to pick the one trading at NAV, GLQ. That is if you have any interest in buying Chuck's portfolio management.
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The Big Picture For The Week Of November 20, 2005

My post called Managing Short Term Emotion incited several comments that I will try to address.

Roberto from Nasdaq Trader Blog asked whether I look at charts for individual stocks and whether looking at charts would improve stock picking. I sold half positions on three stocks and sold entirely out of one in an effort to begin getting defensive. Two of the four have struggled due to bad news since being sold and two have done well. As a top down investor I started with the big picture decision that I wanted to reduce domestic exposure.

If things were going to slow down it would make sense to reduce areas that tend to be more cyclical. For now I felt this meant tech, industrial and certain areas of consumer. It could be argued that as the market has gone up it has become riskier. I see problems for 2006 so I'm not in a hurry to re-deploy. Aside from concerns about 2006 this rally has been narrow breadth-wise. I realize there are many positives out there too.

I do look at charts, but like anything else that works sometimes and doesn't work other times. The bigger picture issues have more weight in my process. Please keep in mind I am only trying to be right more often than I am wrong, not get all of them right.

Mike says he does not see anything macro or micro that would make the market crash. Well I'm not worried about crashes. Crashes are bottoms, historically. I spend time looking for slow rolling over action, that is how bear markets start.

An oft stated goal of my approach is to try to miss big chunks of down a lot. I repeat often that down a lot starts with down a little. As George puts it in is comment to this post it is an objective point at which to assess supply and demand for equities. Sometimes this indicator will work and sometimes it won't. That it won't work sometimes is why I don't go 100% cash right away, or likely ever.

As for what concerns me about 2006; I have written about this at least a dozen times. We are at about the historical time limit for cyclical bull markets and economic cycles. Either the ten year treasury yield will be much higher than it is now or the yield curve will invert; neither is good for the consumer in general or the housing market specifically. I don't know when the deficits will matter but they are a problem. I can't see how the dollar doesn't get a lot weaker.

I don't want to try to out-guess these moves. I tend to be a this is how it usually works type of guy and I like to use that as a starting point.

If I'm wrong about this, I'm still quite long and I'm only a couple of trades from much more exposure. I would love the market to rally huge. As I am right now I would lag a 20% rally by a couple of hundred basis points and I'd be thrilled with that!

I will add more value to clients by outperforming in a down a lot market and staying close to up a lot.
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Managing Short Term Emotion

A few weeks ago the S+P 500 went below it's 200 DMA and stayed there for a few days before starting this current rally. At about the same time the dollar started a big rally of it's own.

So the combination my taking a little off the table with domestic and the lag in foreign caused my accounts to lag for a little while. I wrote at some point I would be happy with capturing some of the effect for awhile which has been the case; capturing some but with a lag.

This happens to professionals, this happens to do-it-yourselfers. It is a part of investing. Short little spikes that go against you will likely lead to chasing heat with a bad outcome if you give in to emotion.

Over the last few weeks I have had quite a few holdings go up a lot which has really helped out. I don't credit good stock picking but proper diversification. The moves in the S+P and the dollar have been very pronounced. I would expect any diversified portfolio to have a few stocks up much more than the broad market.

A couple of the movers have been otherwise dead money for a while. Most diversified portfolios probably have a few of these as well. This gives good lesson about not giving up on something just because it has been boring.

This reiterates my belief about doing most, not all, portfolio planning ahead of time when you are not in an emotional state.
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Promising New Blog

I found a new blog that focuses on ETFs called ETF Zen Garden written by Bay Area resident Mike. The site just started last month.

There is one article that is a great follow up to my piece on Structured Products and another one that weighs in on the hedge fund community's influence on ETF trading.

Hopefully Mike can stick with it.

I would encourage anyone with something to say to try their hand at blogging. I know from my own traffic that there are a lot of people in the industry with useful opinions and ideas, reading blogs. To those folks I would say to take a shot at writing one.

When I first started this site I had two emails that really stuck with me. One said that blogging would be very addictive another said it was very difficult to stick with it. I think the answer is in the middle.

A friend asked me an interesting question the other day about whether my writing costs me business from the standpoint of someone deciding not to hire me and just reading the site instead.

Interesting question. Personally I don't think I could do the job for hundreds of people. I don't know what my ceiling would be for accounts I could manage but it is far fewer than the number of people that read this site.

The idea that this site might help a few folks sort out a couple of investment issues is very fulfilling and that's why I do it. If this appeals to you, hop on in.
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Status Report

Awhile back I wrote a post imploring the media to do a better job with coverage of ETFs. The coverage back then and still today is generally not so great.

A very common type of article or TV report addresses what is hot right now. Last night on the Kudlow show was someone from Statestreet who I think was a marketing guy (feel free to correct me on that one). He gave a couple of his favorite longs and shorts right now. The calls made may turn out spot on but there is a real demand for more strategic ETF content as opposed to a one or two month trade.

Most of Morningstar's content looks at each ETF as a stand alone investment like a diversified OEF, which does not work either.

Tim Middleton does some interesting portfolio work but I'd like to see more under the hood analysis from him so as to better explain his ideas.

John Spense (and a couple of the other folks at Marketwatch) does a good job digging up new listings but I think he is more of a news reporter (anyone can correct me on this too) as opposed to working in the business.

What spurred this post was after refreshing my home page I saw the most recent ETF news item was something I wrote. This happens a lot. I think this clearly speaks to a lack of depth.

Maybe I am an island but if not, I would urge anyone reading this post to email into MSN or Morningstar or anywhere else and ask for better coverage.
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Progress!

I pick on Morningstar a lot for the ETF reports. I have been critical of their lack of forward looking analysis and their persistent open end fund way of looking at ETFs (which don't lend themselves to that type of study).

Well I have to give credit where it is due as change may be afoot. There is a report up about the iShares US Energy (IYE). I do not know if you need a subscription to access the report.

The report offers a little more than most of the others I have read from Morningstar. There is a little forward looking analysis that questions whether everything that can go right for the sector is already priced in based on fundamentals. Fair question.

There is a mention of volatility and a look under the hood to address concentration and (this is big) an acknowledgement that IYE or another energy ETF might have a place in a diversified portfolio.

OK, guys almost there. Some opinions about oil, the commodity, with a little something to support it would be useful. Perhaps an opinion about how much they think is right for the equity portion of a portfolio would help readers too.

Every report they do about ETFs contains the same paragraph under risks about having to pay commission to trade ETFs. This is a risk? Really? If that is a risk why isn't the fact that investors are stuck in an OEF until after the close contained on every single OEF report they do? Isn't that more of a risk than having to pay a $15 commission? Seriously.

That aside I think this report is a step closer to being useful.
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GM!? Dude!

I may be the last one to have noticed that GM has a $21 handle. Wow.

The ongoing saga of this continues as a great lesson for investors. Bad news begets bad news. This stock has not been a proxy for the industrial sector or anything else for a long time. I have been writing this about GM from the start of the story.

I still do not think the company will disappear but the fate of the stock is less clear to me. I have no idea if the government will step in or not. I do not think the government should help the company but that may be the way to save the pensioners. If so, how do you say no to all of the people getting there healthcare through the company? As for the company if it were somehow reorganized, product lines cut, costs cut and so on and if that were tough on some, that would be ok. Tough but ok.

I'm glad I don't have to figure it out. I would tell investors to stay away from the common and the debt as no outcome would surprise me. I have been saying that all along.

Traders, on the other hand, will likely get a couple of good trades out of both even if the company completely dies in the end.
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Buy And Hold Is Not Dead

I just read a bullish article about Starbucks (client and personal holding). You either buy into the growth or you don't and you can either live the high volatility or you can't.

I do and I can, personally and for some clients.

There has been a lot of buy and hold does not work anymore over the last few years. I don't believe that in such absolute terms. If you implement a portfolio today with 50 stocks, a lot of the names you pick could easily stay in there for many years. A best of breed stock today has a good chance of being a best of breed stock five years from now. In the interest of diversification some of what you have should be best of breed, not all but some. Some other names, maybe, are bought with the expectation that they would be not be held forever, that's ok too.

I think a better way to look at this is blindly buying and holding may be dead. A do-it-yourselfer that wants to own stocks has to be prepared to follow those stocks and decide a head of time what sort of catalyst necessitates changes.

When I buy a stock I hope that it can do exactly what I hope and that I can hold it for a long time. When a stock does much worse or much better than expected I sell it. This is more of the bottom up part of what I do.

Top down-wise if I think there is a need to get defensive I tend to sell half positions of stocks that I still like if something has to be sold. I recently cut a couple of core holdings in half. I will likely buy them back but I still have some exposure.
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Bernanke

Did you see Ben Bernanke testify? I thought he held his own just fine. I was amused by how silly some of the questions were.

Senator Sarbanes seemed to really not understand that there are a couple of big differences between the US and Europe to account for why they might have much higher unemployment rates and slower GDP growth.

Ahem, socialism.

This is not to say GDP can't slow down and that unemployment can't go up but BB gave a clear answer that should have made sense but BB's answer could not satisfy Mr. Sarbanes.

I do believe that there is some visibility over the next few years for the correlation between US and European markets and economic cycles to sync closer together as the world economy globalizes further.

It seems like there has been an increase in the chatter lately about the economic demise of the US due to deficits and all the other issues floating out there.

To be clear I think the US is in for a rough 2006, stock market-wise, and that growth might be generally slower but a demise seems a bit extreme. The 19th century belonged to the UK, the 20th century to the US, it makes sense to think that the 21st century will belong to someone else. I don't know if that means China or India but it does not have to mean the economic demise of the US. The UK is just fine not being the world economic power.

If this holds any water foreign investing will continue to grow in importance.
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Taking A Second Look

Lately I have been trying to learn more about structured products (SPs). I spent some time on Quantum Online's structured products page.

I wrote about an Asian currency-based SP (I actually found a second one too) for RealMoney earlier this week. I found several more that are linked to the CBOE Buy Write Index (BXM). A couple of the tickers look familiar from comments left by readers on previous posts about covered call CEFs.

Here are the symbols I found; BWR, BXA, DBY, MBJ, DBZ, MBS. Very simply, the better BXM does the more these SPs return at maturity. From there it gets very complex and trying to read a prospectus on one of these before going to sleep is not very productive.

The point of this post is that in SPs there might be an avenue for products that capture very specific themes not available with ETFs or CEFs. By virtue that there are two Asian currency SPs perhaps means that SPs linked to commodity based currencies (something I have felt is needed for a while) or commodity based equity baskets is possible.

For now I'm still figuring these out but in the past I was dismissive of these and now I think there is some value in some of them, if you roll up your sleeves.
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Email Exchange

Here is an email exchange I had with a long time reader. His email is green, mine is red, I added some notes in black and a little more at the end in the default color.

Hi Roger,

I have some of the Madison claymore covered call cef. My broker recommended it soon after it came out and I have been happy with it. I know some of your clients hold it. My broker has called me about a new CEF IPO doing covered calls on the S and P 500 from Nuveen, symbol JPG.

Somewhere, maybe on your blog, I remember reading that anyone that bought one of these at the IPOs was a damn fool (I don't think I was that harsh, but IPOs of CEFs have a premium that has nothing to do with supply and demand in the market, only paying people that sell the fund), because they typically drop to about the price that would have been paid without the commission which in this case is 4.5% ( the hidden commission on these is always very high) soon after the IPO. What is your take on this. It makes sense to me to wait a little bit after the IPO and then buy if this is the case. Have you ever noticed that they drop in NAV after the IPO? Thanks

Anytime you by a CEF on the IPO you are buying at a premium. The premium goes to pay your broker and the brokerage firm and so on. Usually the premium at IPO does erode and with these types of funds I would expect that to be the case (because there are so many funds like this already) (buying at a premium is not necessarily bad but as mentioned above the premium for an IPO has nothing to do with demand for the fund). There are plenty of call writing CEFs I can't imagine why, if you need to own another one (and I'm not questioning that) (I would wonder why someone needs more than one of these actually. I am a huge fan of the concept and have written about them as much as anyone on the web, maybe, but clients only need one and I only need one), it needs to be on the IPO (brokers have to get paid, there is some pressure on brokers to place new offerings) . There are plenty to choose from with no premium (PLENTY).

Hope that helps.

This may speak to a common Wall Street flaw. When something is popular, investment banks create a lot of supply. Most of the call writing CEFs are me toos. A few choices in domestic is a good thing, a few choices in foreign might be good too and I am aware of one the is benchmarked like an index fund to the CBOE Buy Write Index (BXM), although that one fund has lagged the others badly, and maybe a couple of others that offer something different. That does not add up to the now 25 or so of these that exist.

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FundX Follow Up

I've gathered a few more thoughts about the FundX funds I wrote about yesterday. I also spoke to someone at the fund company and got a little more info.

The fund managers screen no load funds, load funds that they can buy with out the load (this is common for institutional buyers of mutual funds) and ETFs. They have a proprietary screening process that finds the funds most likely to do well. It is fair to say the process works pretty well.

The composition can change at any time and so owning these can be difficult from the what do I own and how do I work it in to a diversified portfolio perspective.

The fund company says their approach is closer to bottom up (as opposed to top down) picking of funds. So the fund is not likely to be properly diversified very often. That may not be an obstacle for some people but its important to consider.

One role this type of fund could have is for people that use core and explore with mutual funds.

The expenses seem to be astronomical, that makes for a huge bogey to overcome but they have done it very well. The flagship FUNDX has averaged 650 basis points of outperformance per year vs. the S+P 500 since its inception. That's net of fees. That is very substantial.

The process seems fairly black box so who knows if they can continue at that pace.

I have no plans to use this fund personally or for clients but it is far from the worst thing out there.
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FUNDX

In response to my post the other day about a fund of ETFs I had a comment left about a fund and fund company that I hadn't heard of before, FundX Upgrader Funds.

According to the home page it looks like they have five funds;

1. Upgrader Fund (FUNDX)
2. Aggressive Upgrader Fund (HOTFX)
3. Conservative Upgrader Fund (RELAX)
4. Flexible Income Fund (INCMX)
5. Stock Upgrader Fund (STOCX)

STOCX looks like its brand new so I'll leave that out of the rest of the post.

The marketing department is very clever, those are great ticker symbols (not being sarcastic).

The funds are a blend of other open end funds and ETFs. I saw no CEFs in any of the funds. The returns for all four have been very good in terms of the funds doing what they are supposed to do. Morningstar gives FUNDX and HOTFX three stars, RELAX gets four stars and INCMX gets five stars.

What makes the rankings noteworthy is that these funds all look to be very expensive (as you might expect) with OERs in the mid and high twos, even the income fund. Morningstar places a lot of importance on fees. INCMX has five stars with a 2.41% expense. This is surprising to me.

I'm hard pressed to think a fund of funds is the best path but by and large the managers' approach does add risk adjusted value. There are plenty of drawbacks here and this type of thing gets written about a lot so I'll just leave it with a mostly positive post and say I will continue to watch these and see if I develop more of an opinion.
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Book Review

My most recent free book was Wealth Without Worry by James Whiddon and Lance Alston both from JWA Financial in Dallas.

I write a lot about trying to hone process. I believe that the building blocks for starting out is a thorough education of how markets work. The authors devote a lot of space to market history and how the numbers work. This is done to set up their conclusions about portfolio management which I'll get to.

Combining market history with current events to build a forward looking analysis is how I describe my process. Wealth Without Worry goes a long way toward building a solid foundation to understanding market history from a numbers standpoint.

This alone makes the book worth owning. Once a do-it-yourselfer has the basics of understanding down they can then better challenge what they read and hear from other people. It is this filtering that actually creates investment process.

The book also gives a very detailed blueprint for novice investors about how to construct a portfolio that captures the stock market, in the broadest sense, without making a full time job out of it.

It is these attributes that make the book a good read (I knocked it out as my wife watched Moving Up and Trading Spaces on Saturday night).

The authors also share their conclusions about how they manage money based on the historical data they study in the first couple of chapters. I disagree with most of their conclusions.

The authors do not believe in market timing of any sort, ever. They know their market history. History has many episodes where some moderate defensive action is the right thing to do, inverted yield curves as an example. Long time readers know I am not talking about going 100% cash, but just a few tweaks that could make a noticeable difference and help miss a portion of nasty declines. Keep in mind history bares this out and these guys clearly know their history (repeated on purpose).

They only use open end index funds. Actually a very specific type index funds from DFA which are purer than other index funds. I do believe in letting the market do its thing and making sure you are there to capture the effect but there are many important slices of the investment world that won't be captured with their approach.

There was also something important missing. Capital market continually evolve, industries continually evolve, countries continually evolve, there is more I could list but you get the idea. I cannot recall one reference to any type of forward looking analysis. Again I think a combination of understanding history plus current events can create a reasonable forward looking analysis.

I could not look a client in the eye and give them a portfolio that relies so heavily on the rearview mirror. It is the solid foundation built early in this book that makes the isolating the flaws possible. So you don't think I am being too harsh, every approach to portfolio management has flaws. No exceptions.

Apologies because this review may not be what they had in mind but this is my honest assessment. The numbers, history and interpretation of both are awesome. The application of the information is not.
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The Big Picture For The Week Of November 13, 2005

The International Trader-Europe column in this weeks Barron's has some interesting commentary about central and Eastern Europe. Many of the NYSE ADRs and CEFs that invest in the region are down noticeably (20% in some cases) in the last few weeks.

The article points to deficits growing faster than GDP as cause for concern in places like Hungary. There are quotes with word like overheated to assess the current sate of the equity markets in this part of the world.

Hungary, as an example, has had problems with its deficit for a long time, this is not new to equity investors.

The point here is that for investors that can tolerate emerging market volatility, Eastern European stocks and funds have dropped a lot with nothing really new added to the equation. From a contrarian standpoint it makes sense to think that in dollar terms this region might be closer to a low than to a high.

I think this line of thought can be applied to many themes. The negatives cited are old news and a lot of the stocks are much lower. This gets repeated often. Wading through this type of report can be a good way to improve your process.
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ETF Mutual Fund

Gregg Greenberg has an article up about a fund company that uses only ETFs in its funds. Their stock fund (as opposed to stock bond combo) is the AdvisorOne Amerigo Fund (CLSAX).

Here are the top ten holdings;
iShares MSCI Emerg Mkts (EEM) 14.28%
iShares Russell Midcap Growth (IWP)10.28%
iShares Russell 1000 Value (IWD) 10.05%
NASDAQ 100 Trust Shares (QQQQ) 7.70%
iShares MSCI EAFE (EFA) 7.05%
Vanguard Mid Cap VIPERs (VO) 6.29%
Consumer Staples Select Sector SPDR 5.69%
iShares Dow Jones Trannies (IYT) 4.80%
SPDRs (SPY) 4.07%
Vanguard Value VIPERs (VTV) 3.93%

This might be the first one of these funds that I have looked at that makes an attempt to capture certain effects using sector ETFs. I am also impressed by the willingness to have a lot of foreign exposure.

There are negatives as well. Yeah the fees, but that is not what I mean. Actually the fee is reasonable as the ETF fees is included in the 1.15% (this is the manager's description in the interview).

This might just be me and this may be unfair but as I read the part of the interview that addressed foreign there seemed to be something missing from their process. I can't point to anything specific, its just a feeling I got.

Assume my reaction is dead wrong, I would invite the managers to start a blog and share some process. If I am wrong and these guys really get it everyone comes out ahead.

The manager talks a little bit ETF selection and it seemed like there are a lot of narrow ETFs that they won't consider due to transparency (PowerShares).

Since they don't pick stocks it makes sense to think that they are top down managers. A big part of top down is sector allocation. I think it is tougher to manage sector weights using mostly broad based funds.

It is also difficult to really manage foreign with very broad products as this fund does.

I would lastly note the yield of the fund is only 0.07% (according to Yahoo Finance). While I think a drawback of an all ETF portfolios is low dividends this is really low (it does not get mentioned in the article but this might be what pays the fee).

I am still no fan of an open end fund that only uses ETFs but the interview was a chance to look at the product from the manager's perspective.
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Completely Different Worlds

Yesterday I had a client meeting with people that have been with me for a while. I have one big piece of their investible assets and another big chunk is at UBS with a broker. The client mentioned that the UBS account is now all cash because the broker doesn't have much feel for the market right now. The client asked me I felt the same way. "No I don't."

The client conceded that I am much more on top of things than their broker.

I also got a call yesterday from my friend who is salesman at a big bank. We were talking about another salesman for the bank in my area who apparently has about 1000 clients. My friend said the guy probably can only talk to 200 of them. 200? I say no way.

In trying to address retirement issues and who, if anyone, should help you manage your portfolio I hope to point out how unlikely it is you will find someone at a bank or brokerage that actually has time to manage your account.

This is not a pitch for anyone to hire a separate account manager. Manager's like me are not ideal for everyone, far from it. What this post is, hopefully, is a wakeup call for people that use brokers or salesmen at the bank and think their account is being looked after.

Ask your broker how many clients he has and then do a little math. A salesman successful enough to be in the business a while might have 200 clients. If he works 50 hours a week you can assume he spends at least half (probably more) of his time trying to bring in new assets. There are always multiple sales meeting in a given week so maybe 20 hours can be spent actually tending to client nest eggs. That averages out to six minutes per client per week or if you prefer 78 minutes per quarter.

Is that enough time?

A salesman has to make sales. The path of least resistance is to put client money into some sort of auto-pilot product that needs minimal follow up. I am amazed by how few people realize this. I have looked at statements of accounts managed by friends and it is no different.

The evolution of the investment industry makes it easier for people to do it themselves for a lot less money and come out no worse off than they'd have been with their broker.

I won't say better than with their broker, that has to be earned and or learned.
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We're Not Saving Enough

Bob Pisani was down in Florida reporting from the Securities Industry Association shindig. Turns out Americans aren't saving enough. Forgetting that some portion of their conclusion would be selfserving, it should not be a shock that we need to save more.

Over the next few days I hope to put a couple of posts about retirement planning and executing strategy. This is important stuff.
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Evergreen Investments Announces New Closed-End Fund IPO: Financial News - Yahoo! Finance

Evergreen Investments Announces New Closed-End Fund IPO: Financial News - Yahoo! Finance

Yet another closed end fund that uses options. Wall street sure has created a lot of these.
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Yet More Keep It Simple

Yale endowment manager David Swensen was in Barron's over the weekend and for some reason he was the mid-week interview too.

I write about this a fair bit. Keeping things very simple is absolutely the best thing for a lot of do-it-yourselfers. Every so often you will find an article giving how much time is needed for different types of investors. I have no idea how valid any of those articles are, I do know it takes me about 75 hours a week to everything I need to do. You really gotta love something to spend that much time on it.

One of the bigger themes of this site is new investment products and new types of information will make investing easier for do-it-yourselfers (and professionals too, I suspect). It is important to distinguish what I mean here. Beating the market will not get easier but staying close without portfolio implosions will be easier.

I don't think managing an equity portfolio with a half dozen ETFs needs to be a full time job, although many folks might devote that kind of time.

A very simple portfolio of 40% SPY, 30% EFA and 30% TLT (just an example) will not blow up. It can go down to be sure but you will not be down anywhere close to 50% unless the market is down that much.

Although Mr. Swensen doesn't offer many news things in his various interviews he is worth listening to on this topic.
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I Had No Idea and A Follow Up

Earlier today I mentioned Viropharma (VPHM), in the context of an emailer asking about as a substitute for healthcare ETF. I hope I was clear that it was no substitute for an ETF but that I knew very little about that specific stock.

Shortly after I put the post up the stock sold off quite a bit. It may be a must own (still don't know) but it is no proxy low beta anything.

Last December I wrote about avoiding obvious and tangible risk in picking a stock and I mentioned Research In Motion (RIMM) as an example. Since then the stock is down almost 25%. I am mentioning it now because it is a great example of an important rule of thumb to keep investing simple.

Whatever it is that RIMM could have done in the last year to the upside it would have been easy to several stocks with similar potential that did not risk losing the ability to do business in the United States, holy cow.
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Surprising Email

I usually keep what goes on with this blog separate from what I do over at RealMoney.com but I got a surprising email worthy of writing about in response to an article I wrote about big domestic pharma.

The gist of the article was that a lot of the pharma stock as bond comparisons float around may miss the mark but perhaps some of the health ETFs could be a proxy for TIPS.

I received an email that asked why not just buy VPHM? VPHM is Viropharma. It is up 600%. I don't know enough about it to have a qualified opinion about the fundamentals.

You do not need to spend a whole lot of time studying the name to see it is a high octane stock that has a high probability of feast or famine. This type of stock has a place in a diversified portfolio. Please note I am saying this type of stock not VPHM specifically as I don't know a lot about it.

The article I mentioned above questions whether an ETF could be a proxy for TIPS. Whether my idea holds any water or not, VPHM or other stocks like it have no place in the discussion.

Hopefully it is clear to you that these two types of themes are dramatically different in terms of role played in a portfolio if not to the person that emailed me.
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Where Was The Beef?

Squawk Box just had a remarkably shallow segment with Bill Wilby from Oppenheimer Funds. Mr. Wilby said that the team at Oppenheimer has an annual brainstorming session to find market inefficiencies and try to isolate them for investment.

Based on the questions asked in the segment growth stocks are cheap compared to value. Stocks are cheaper than real estate. Tech looks very favorable as do all megacaps but healthcare investors should be more selective.

All the brainpower from a big company like Oppenheimer and all the crew could extract was the above three sentences. Nice work.

Did you see Senator Dorgan trying defend the windfall profit tax concept? Is he the best spokesman this movement has? I took great solace from the fact that his windfall profit tax will be different from the other one (read sarcastic tone). I did not know that he used to teach economics. I was shocked by that.
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Dividend Discount Model

Abby Joseph Cohen was just on Bloomberg TV. She believes the stock market is cheap and will go higher, she has been right a few times so why not now?

She cited the dividend discount model (DDM) as a part of her reasoning. Beware of this type of indicator! It can make stocks look very cheap, only to get much cheaper. Ditto on stocks being overvalued. This swings versus this indicator are quite wide.

DDM does tell you if stocks are cheap or overvalued but does not offer much predictive value as to when the inefficiency will correct itself.
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"It Just Doesn't Matter!"

That is a line from Bill Murray's motivational speech from the movie Stripes.

It has also been a theme on this web site for the last day or two. A regular reader and insightful commenter, George, left a note on my post from this morning saying that staying in the game is the most important thing for do-it-yourself investors (everyone really).

For another little nugget along these lines I would refer you to the book review of sorts in Barron's of Yale endowment manager David Swensen's book, Unconventional Success.

Excluding catastrophic stock market losses, the important thing is having enough money for what you need or want to do (reasonably speaking).

If your life style needs $65,000 in today's dollars, your long term money needs to be able to generate enough future income in tomorrow's dollars to create the income. If you steadily lag the market by 150 basis points but meet your goal, does the lag matter? I'd say probably not. If you consistently beat the market by 300 basis points and you don't have enough, then what?

In both situations, saving becomes the more important thing.

Tying to George's point about staying in the game, most of the market's gains come from very few big years. Miss those and you will lag a lot.

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Paris?

I can't believe this has been going on for twelve days!

The benchmark CAC 40 is actually up a little during this.

Strange stuff.
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Great Question

Do you think it is possible to beat the s and p average over a 15 year or twenty period, given the law of reversion to the mean and the length of time?
This is a great question. There is yes, a no and an it doesn't matter answer to this question and all three are valid.

There are a few, very few, people that have beat the market for 20 years, Warren Buffet comes to mind as one. As I write this I can't think of another but there are clearly some. So where there is one than can be another. As shallow as that reads, that's about all I think about trying to beat the market year in and year out.

I would be happy to lag by 200 basis points the next time the market is 25%.

There is one way to beat the market over a lengthy time period without a lot of stock picking smarts. Have a clear and simple exit strategy (longtime readers know my exit strategy involves the S+P 500's 200 DMA) to help you miss a big chunk of down a lot. We will have few down 20% years over the next two or three decades. Missing a big chunk of just one of them will likely mean you outperform for a long time. Remember the market averages 10% by being up a lot, up a little, down a little or down a lot. Staying close except for one down a lot and you have chance for long term outperformance.

My no part of this is that so few people have done it that it is an incredibly big mountain to climb. Very few people (pros and do-it-yourselfers) can see the big enough picture to realize the above paragraph might be the most important thing for a successful portfolio.

My goal this year, as it is most years, is to stay close. I've done a little better than that this year. One year, maybe next year or maybe the year after, I might get challenged by a client who cannot buy into the goal of staying close most of the time in a year where I do lag.

My it doesn't matter answer has to do with how the market works. The US market has an up year 72% of the time. The number of trades you place or the amount you worry about your portfolio won't change that. Nor is it likely that 10% as an average annual return will change much long term (over a few years maybe). If 8%-10% doesn't get you where you need to be you need to save more not invest better.

Of all of this I think the idea of staying close most of the time and missing a big chunk of one down a lot in our lifetime is the most important thing and I think it is doable. This will probably do little for anyone's ego but ego should not be driving the bus here.
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Book Review

Shortly before we left on our trip, the folks over at TradingMarkets.com sent me a copy of How Markets Really Work by Larry Connors and Conor Sen.

As a quick note, Conor's father is the blogosphere's own Ron Sen.

Longtime readers will know that I am a big believer in using stock market history, along with current events, to try to build a forward looking analysis. How Markets Really Work is a great tool to understand market history from a quant/technical view. The book debunks several stock market truisms that aren't really true.

The amount of data crunched to assess what really happens in down trends and up trends is very impressive and will come in handy for short term traders. Longer term investors, and do-it-yourselfers can benefit from the this is just how it is aspect of the data. This is something I touch on a lot. The market works a certain way and does certain things. A better understanding will lead to less trades done with too much emotion and not enough logic.

Simply put the data can be a useful part of your information war chest.

Being completely candid, I'm not sure why the book costs $49.95. I have no experience doing this type of comprehensive number crunching and maybe this price level is appropriate. You can decide for yourself but I am glad I have a copy of the book.
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Hussman Funds - Weekly Market Comment: November 7, 2005

Hussman Funds - Weekly Market Comment: November 7, 2005 - Speculating on Speculation

If you don't regularly read this, you might want to check it out this week.
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More Currency

On my way down to Phoenix I heard Bob Pisani talk twice about the strong dollar. The logical question is does this mark a top, intermediate or otherwise?

Part of the attention is coming from Warren Buffet who is unwinding his bet against the dollar.

The dollar has had a very strong move. That the move is getting a lot of attention on CNBC now is interesting. The issues that confront the US point to a weaker dollar long term, from the category that's just how markets work. However this just creates an expectation. Expectations do not have to come to fruition but a continued rally in the dollar going into next year would have to overcome some very big headwinds. Possible, but unlikely.
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Kiwi Cracking?

Sean Callow, currency analyst from Westpac Bank, was on Asia Squawk Box and he gave a very specific opinion on the New Zealand dollar.

The Kiwi has been strong relative to other currencies because its short term interest rates are higher than any non-emerging market country in the world. The so-called cash rate (fed funds equivalent) is at 7%.

Callow believes that the RBNZ will not raise rates at their next meeting in December. If he is correct the Kiwi could sell off which is one part of the call.

Another reason for Callow's Kiwi bearishness is that both RBNZ chief Alan Bollard and Finance Minister Michael Cullen have both been saying the Kiwi is overvalued and that it will fall.

I have written many times about my personal and client exposure to New Zealand through Telecom New Zealand (NZT). It is a slow growth high yielding stock that is a good proxy for a country that is at a different point in the economic cycle than the US and benefits from a different type of economic demand than the US. This provides very good potential diversification from US holdings.

I think Callow needs more than just jawboning for his call to be correct. Many consider New Zealand to be a commodity based economy and the kiwi correlates closely to the Aussie dollar, the Canadian dollar and the Norwegian kroner. I think that a decrease in demand for commodities hurting all four crosses would need to be part of the picture for the kiwi to sell off as hard as I think Callow called for.

Assume Callow is exactly right though, then what for NZT? Clearly it gets hit. With roughly a 3% weight in client accounts (NZT is my only NZ exposure) the impact would be minimal to the portfolio. A weak Kiwi does not automatically make it a sell. It will still be a good proxy for a different type of economy even if the Kiwi drops by 5%.
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The Big Picture For The Week Of November 6, 2005

The market knifed down through most of October. Then it snapped back quite aggressively. The move to the upside lost a little steam mid-day Thursday and the market lost yet more steam Friday.

It seemed like a lot of people came out of the woodwork calling for a rally in the last few days. Given the environment we have right now, a close to 40 point move (40 SPX points) so quickly calls for a little downside. Maybe the next 25 or 30 points will be lower. If that happens very quickly, we probably go higher after that. More often than not big, fast moves reverse themselves, at least a little.

I haven't weighed in yet on the excess profit tax idea for the energy companies being kicked around. I'm not sure how to define excess profit. Even if someone creates a definition, won't energy companies report smaller profits? One good question about this is the subsidies granted to the energy sector. Maybe the tax breaks should be taken back? That would be a little easier to calculate. Of course if the price of oil goes back $30, then everyone will be up the creek.

Energy is kind of a special case because of how important it is and how difficult it is to substitute for.

Here is my idea, maybe we could encourage domestic oil companies to donate money to the US government to help reduce the deficit. Yeah, donations. That's the ticket.

Seriously, history doesn't support higher taxes as a long term improvement. As was mentioned on one of the Fox shows this weekend the republicans are running the show and an excess profit tax will not happen. I do think we can look forward to a couple more weeks of time wasted discussing the topic though.
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Insane Retirement Planning Idea

I have some wild ideas now and then and I write about them every so often because they amuse me.

This latest one I hatched is about way to retire for people that have not been lucky enough to accumulate a large enough nest egg for an ideal retirement. Several assumptions are made with this idea and I realize this.

Last summer my wife and I went to Juneau, Alaska. We loved the scenery, the hiking and the food. Alaska has a social program that I believe is unique. In 1982 the state of Alaska began to pay a dividend to residents out of something called the Permanent Fund. You can click here for details but the basics are the fund is funded with oil money which is then managed in the capital markets. The amount of the dividend can fluctuate. This year's dividend was payable in October and was $845 for qualified residents. The dividend has gone down for the last five years. The all time high payout was $1963 back in 2000. $845 is the lowest dividend since 1988. The reduced dividends of late were attributed to stock market losses.

I think this dividend could be incorporated into retirement planning in the right circumstance. Over the last ten years the average dividend has been $1396 per person. Relative to our fixed monthly expenses (no mortgage or car payments), $1396 in today's dollars is a lot of money. For a retired couple that only has to pay for insurance bills, utilities and groceries it is possible that $1396 could cover the month. Two people, two months covered. Two months out of twelve is significant. Clearly this is only for a modest lifestyle.

I should note that there is no state income tax in Alaska and the first $150,000 of assessed value is exempt from property tax for people 65 and older.

What about the winter someone might ask? Southeast Alaska (the area near Juneau) does not have as much snow or as much darkness (but there is still plenty of both) as the rest of the state. However, as I read the requirements you can be out of state up to 180 days per year. So three or four months in the desert or Florida or somewhere else and you avoid winter's bite.

Here is how some numbers might play out. A quick reminder is that is an idea, as I intended it, for people of modest means who don't spend a lot. Real estate in Alaska is cheaper than most parts of the country. I think it would be realistic to sell a home for $350,000 in many parts of the country, buy a modest house or condo in Alaska for $185,000- $200,000 and a condo in some parts of Florida or the desert with the balance. So maybe eight months in Alaska and four months in some place warmer. There are alternatives to buying a winter condo. For example, in Arizona, there are seasonal jobs in the tourism industry where accommodations are provided. I'm sure there are other similar opportunities too.

I think it might be reasonable to think that the type of person I have in mind for this, long career, decent income, diligent saver, might have $300,000 in a 401k account and maybe $50,000 liquid in a taxable account. These numbers are not run of the mill but they are not impossible either. Invested properly a 5% income need should not deplete an account. So $350,000 might generate $17,500. Of course, not buying a winter condo could leave a portfolio of $500,000 which could generate $25,000 a year.

There is more and more consensus that being retired no longer means not working at all. More and more retirees will work one way or another. There are numerous health and emotional benefits to working part time after traditional retirement. This could involve consulting, writing, eBay (or other internet venture) or just something you love (my wife's uncle was offered a job with the Los Angeles Angels of Anaheim working at the stadium for about $10 an hour which he almost took). It would not take much effort or time to make $500-1000 per month working 10-15 hours per week. If both partners in the couple do this, there is another $10,000-$20,000 per year.

So lets see where this couple stands now in relation to their expenses;
$2792 Permanent fund dividend
$17500 Portfolio Income
$15000 Income from part time work
$35392 Total

One other element might be social security. I don't think it makes sense to rely on social security as we now know it. I do not think it will ever disappear either, more likely might be a reduced benefit. Instead of each spouse getting $1000 per month perhaps it makes sense to think about $500 per month per spouse. That adds another $12000 annually which takes the income up to $47392. While the $1400 in monthly expense seems silly to me, $2500 (in today's dollars) plus a little money for traveling may not be. $30,000 in expenses compared to $47000 income seems comfortable to me.

In this example the Permanent Fund contribute close to 10% of a reasonable income need. It makes sense to me that the dividend could increase in the future because of higher oil prices and less volatility in the stock market.

There are some flaws here to be sure. The permanent fund could pay out more or less at any time. The fund could theoretically go bust. You'd have to love the great outdoors of Alaska which is not for most people. While we love it up there a friend recently visited Alaska and while he and his family had fun it was not the be all end all destination.

The point here is not that everyone should move to Alaska. The big picture here is that many of us may need to use some ingenuity to have a financially stable retirement. If stock market returns are below normal and social security is compromised and health costs go way up there will be less people able retire to the country club.

I do not think people can rely on planners or other professionals to think outside the lines on this sort of thing. This ties into one of the themes of this blog which is do-it-yourselfers being more empowered to make better decisions about investing and planning thanks to new investment products and access to different types of information thanks to the internet.

While you may or may not think this idea is insane, as the title to this post implies, it is outside the lines to be sure. If you have a unique idea along these lines I'd love to hear about it.
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Amusing Anecdote

Last night I submitted an article to TheStreet.com about our New Zealand trip for their Good Life section.

There is one odd little story I did not include because I wasn't sure how appropriate it would be. I can't yet gauge how much humor I can or can not include in my work for them.

Throughout the trip we caught little snipets of local sporting events. The national rugby team, the All Blacks, were playing rival Australia and the national cricket team was playing in South Africa. We saw bits and pieces here and there.

Our last night in New Zealand we caught a few minutes of a sport called netball. Netball is kind of like basketball except there is no backboard just a hoop on a blue pole, seriously. Also it looked like there was no dribbling. I think the only way to advance the ball was by passing it. Players were only offense or only defense, kind of like lacrosse.

The game we saw was New Zealand vs. Australia, women's. For some reason the women play in skirts and collectively they looked a little older than what you might see in an international basketball tournament. NZ crushed Australia.

The hoop on a pole was really a weird thing to see. But that is not what makes the story odd. On our flight from Auckland to LA we sat in the middle of half the Australian team from the game we saw the night before. NZ really is a small country.

They were on their way to Jamaica for another tournament. We shared our row with a Kiwi man who looked to be about my age, he knew all about the team and he was moderately star struck.

This picture is from the game we watched. You can click here to see a picture of the hoop on the pole. In looking for a picture to include on this post I came across the fact that there are netball fantasy leagues in Australia. Fantasy leagues?! Hey now.

Maybe its just me but I think this is a hoot and a half.

Our flight over to Auckland was also noteworthy, maybe something more for your teenaged children. The cast of MTV Roadrules Challenge show on MTV were on our flight. They were off to Australia to film.
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