Thursday, August 31, 2006
I did not know this but the rankings are derived by an evaluation of things like frequency and knowledge of content. This is similar, and the folks at InstantBull say as much, to what Brett Steenbarger wrote recently in his excellent state of the blogosphere-type post.
Hopefully InstantBull will continue to play a role in the development of the blogosphere.
I am aware of several things happening that stand to deliver further positive evolution of blogs and the content they provide. Blogs provide easy access to some great content and I expect them to become more and more relevant as time goes on.
I am thrilled to be a part of it.
There are two types of ETFs in this batch, one will be individual commodities and the other will be commodity baskets.
- Heating oil
- Lean Hogs
- Live cattle
- Nat Gas
- Soybean Oil
- All Commodities
- Industrial metals
- Precious Metals
- Softs (I assume this means soft commodities)
This is a double edged sword. In general I am all for having the choice of being able to access narrow themes like these but there will be people that use them incorrectly and hurt themselves because of it. It is not clear to me that too many do-it-yourselfers need to separate nickel from zinc.
The industrial metal ETF will be a great tool for capturing the early stages of future economic recoveries and expansions. Some aspect of industrial metals are present in some of the current commodity products already out there but isolating this one part offers some appeal.
Another basket that makes a good first impression (conceptually anyway) is the Soft Commodity basket which I assume will be sugar, soybeans, coffee, maybe rice and a couple of others-of course this might be the Agriculture basket instead (not much detail yet) but either way access to food stuffs seems like another positive.
The advantage to these, vs the existing broad based products that already exist, is that you can control how much of your commodity exposure goes to what type of asset.
The single commodity ETFs have merit too but these are more dangerous, fair warning.
It seemed like there was a fair bit of indecision, people questioning themselves, questioning me and readers seeking out new ideas. All of these are valid.
One reader asks how many people are ahead of buy and hold this year. Great question. It may not be the right question however. First it speaks to not trading too much or too nimbly. Over trading usually is not the best thing. Over time tweaks need to be made. The reason may be a good one like a stock may have been a home run, is now too big and needs some trimming or it may be a bad reason like you were wrong. In a diversified portfolio there will be some of both.
Even if you only make four changes a year not all of them will be correct. At 1304 the S&P 500 is up 4.29% plus dividends. Work with me here and assume every one benchmarks to this index. Chances are half the people are ahead and half are behind the index YTD. Next year it will not be the same half ahead. Some of those who are beating the market this year will beat it again next year and some will not.
What matters is whether what you are doing gives you a reasonable chance to meeting your goal pursuant, hopefully, to some sort of plan you have saved in a spread sheet somewhere.
If you beat the market last year by two points and you lag it this year by two points you are not hurting yourself. However if you beat last year by a little and you are trailing by 15% this year you may need to make some changes-this calls for some genuine introspection. It would be reasonable to apply other numbers here but you get the idea.
For me the focus is getting where I need to be in the time allotted good years and bad years included, and there will be bad years.
As far as fear being in vogue and the question does the market have to go down; Helene Meisler studied this and in the 1970's, sentiment was correctly bearish-contrarian thinking be damned.
One person who manages money left a comment saying that he is 75% in and sees "no fundamental value in the names propelling the market," yet he is 75% in. I think this guy gets it. He could be dead wrong in his no value comment (I don't know) but he lightened up a little, which is what he thinks is right, and won't hurt people if he is dead wrong. Let's face it, 1220 to 1304 is a nice move.
One reader shared going from 70% to 80% cash. I think that is extreme but he has to do what he has to do. I will correct him on one thing though. He says I am more concerned with missing a move up than being in a move down. I am far more motivated to miss a big move down. I am cognizant that big moves up often come when no one expects and the market has not done badly-circle back to my idea of too nimble.
One reader seems intent on going all ETF yet seems to have a lot of unanswered questions-some of which I could not follow. RW makes the right point (if this is the reader's concern) about day traders in ETFs. If you are buying 2000 shares of an ETF, that trades 10,000 shares per day, to hold for what you think is a long time I wonder what difference the noise made by traders would make. If you have owned an ETF for two years and six months ago there was some big trading one day and someone got a crappy fill (not that you would know) I submit it means nothing to you the holder.
The better question which RW also asks is do you have a plan based on something that makes sense? A lot of what I see out there does not make use of what is available, does not diversify very well and tends to be shorter term than what most folks need.
Take this post as a ramble but hopefully it is useful.
Wednesday, August 30, 2006
Is it time to increase equity esposure? what is your criteria? Do we end up buying back in at higher levels?
Tough question. The simple answer is buy when the market goes back above its 200 DMA but I have not done that this go around and I have lagged this move up from 1220. Lagged not missed. It seems like this person has been a reader for a while (thank you). For most clients I am about 75% invested and have not gone back in.
For now that looks wrong. The question is does that stay wrong? The yield curve inversion has been getting deeper and the rally has come on little volume, deteriorating internals (per Michael Kahn) for most of the move and has done exactly what a lot of people have said which is the market will rally but make a lower high. So far that is not wrong.
I should have been more invested but I did not get more aggressive. I have written a lot about not having too much cash raised and while some days it does feel like I have too much cash the things going on right now almost always lead to a bad market. Could this time be different? Of course, this is why I have much more than a toe in the water.
This is a situation where I know how the markets have reacted in the past, am only partially defensive which means the consequence for being wrong will not be bad.
Also keep in mind, that if you have read this site for any length of time you know I am not focused on trying to be right this week. Lastly I would add that like with any call this will be right or wrong. Being wrong absolutely goes with the territory. I think being a good manager includes not having the portfolio's success too levered to the manager being exactly right every single time.
To be clear I am generally a fan of dividend ETFs but I do not think they will be up if large cap value goes down. The comment from the reader says that SDY is superior and while that may be, if IWD, the reader's proxy for large cap value, goes down by 10% SDY will not be up 5%. According to Portfolioscience.com SDY and IWD have a .897 correlation.
If I understood correctly the reader looked at a similar chart as I have placed here. He looked at SDY's ratio to IWD. Since DVY has been around longer I used that one instead. I think this is valid because SDY and DVY have 0.92 correlation and the returns of each have been very similar since SDY's inception last November.
The chart covers two years and it shows DVY lagging IWD. Since May, the nod goes to DVY.
The second chart is the more typical comparison. It covers two years and shows IWD pulling away by a mile.
For the trailing twelve months IWD is up 13% and DVY is up 6%. The dividend advantage for DVY is only about 150 basis points.
For the last three months the two are dead even and SDY also had the same return for the last three months.
The reader then goes on to ask how I would allocate the large cap portion of the portfolio for what he calls moderate growth using ETFs.
I think the reader is looking for a simple two or three ETF suggestion. This is not easy for me to answer as I don't really use cap size ETFs in portfolio construction.
Where the portfolio is large enough to diversify fully I think I would rather add yield from other places, like maybe from foreign exposure. I will say that the WisdomTree domestic ETFs, in the context of this conversation, look very interesting. The domestic high yielding fund (DHS) yields 3.96% and it is heavily weighted in large cap stocks. There is no real track record yet to speak of for the fund. I have no doubt the back testing of the index looks great but going on back testing alone is a tough one for me for something that I view as being very broad based.
Another point, relative to the original comment is there seems to be no mention of large cap growth. Ignoring growth is a bad idea. I think ignoring anything is a bad idea. I am not saying the reader is ignoring growth but there is no mention of it in the question.
I do own DVY in some accounts where full diverisification, the way I think of it, is not an option.
Tuesday, August 29, 2006
I have had some fun questioning why John Connor from Third Millennium Russia Fund (TMRFX) is viewed as being so smart about the Russian Stock Market when it seems like the fund always badly lags the market.
Barron's interviewed Samuel Oubadia, manager of the ING Russia Fund (LETRX). The chart I attached is YTD so there are no dividend distortions.
LETRX is Chip Bunker and TMRFX is me.
Do the people at CNBC know about this fund?
Gold? Forget it. Silver? No way. A country fund? Only use play money you can afford to lose. I am surprised the article didn't call for a firing squad for the double long and double short ETFs.
Clearly there is an element of striking while the iron is hot with some of the products but that does not mean they are useless for all time.
There is no doubt that people will use these funds to speculate and some of those speculators will get hit. It would have been nice to see some more exploration of how these can be used prudently.
All investment products have flaws and risks but they are not going to zero and since the tech crash investors are more aware of the dangers of betting too much on one area of the market.
More aware does not ensure success of course or prevent stupidity but it is a start to better investing. Biotech and Internet stocks are very volatile but some weight to each is appropriate in a diversified portfolio. If you put 20% into each one, yeah, you will either have heroic returns or blow yourself up. A lot more people realize this today. Volatility in and of itself is neither good nor bad. The measure should be how much volatility you expose your portfolio to.
If an investor has 97% of his portfolio in a diversified blend of mutual funds and puts the remaining 4% into the most volatile and most speculative ETF out there or heavens-to-Betsy a wildly unpredictable stock with a great story I don't think they are gambling the financial life away. They might be risking a lag but not ruin.
It seems like the initial reaction of MSM with anything new is to talk it down and then at some point in the future warm up to it a tad. The poster child for this might be Morningstar who pooh-poohed all ETFs a while back and now is selling ETF newsletters and ranking ETFs.
I get some (but not a lot) similar push back here when I try to explore something new. I think new and innovative should be explored in such a way to seek out the positives as well as the negatives. Only a balanced look can tell you whether to buy something or not. Also keep in mind that some of the products represent some serious evolution. Evolution implies, to me anyway, improvement.
The line which I have made purple was resistance and is now support and the green line is now resistance. Candidly I don't think I have ever looked at such a steep slope for a line of resistance and while his analysis may or may not be correct it is interesting. He noted the market needs to break above 1320 for him to believe good things will happen.
On a note that may or may not be different, Don Hays called for a fast and big up 30% move the other day. He seemed to be implying some urgency to this.
While I do not agree with the call, 30% in just a few months has happened in the past, but more frequent have been 20% moves out of nowhere.
I tried to find some content on the website with more details but could not. I did find the following headlines, but could not access the content, that surprised me given the interview he gave to Erin Burnett. I must be missing something.
Last Days of August
The Last Vestiges of Unstable Vigilantes
OEX Put/Call Signals Weakness…Yet Again
Don’t Shoot the Messenger
Smart Investors Bearish/Dumb Investors Bearish
Non-Confirmations Say Bull Not Ready to Romp Just Yet
Monday, August 28, 2006
This particular fund has brought very little to the table from the outset, its anemic volume made the decision for them about closing the fund.
One idea I have expressed repeatedly is that some new ETFs will be useless and some will offer a lot. We will continue to have to put up with the former to find the latter.
His bullish assessment may be right or wrong but he said something that I thought was particularly interesting. He said that at one point his fund was up 16% and now it is only up 6%. He did not seem very worried which is the thing.
No one wants to see their portfolio go down like that but sometimes it goes with the territory. I do not know if that type of move is normal for the fund or not but since he brought it up I take it that the move has in no way incited panic.
This is an important mindset to keep for anyone in the market. There will be periods where things don't go your way, guaranteed. More often than not, selling is the wrong course of action. Here I am talking about investors as opposed to traders.
I commend Hodges' lack of emotion and realization that markets do this. I have no idea how good or mediocre his fund is and this is not the point. Staying calm and rational is the point.
While that is good news it raises an interesting point. The trade today is about short term events. I recently read (may have been in Barron's) that China currently imports 3 million barrels of oil per day. By 2011 it is estimated that China will import more than 5 million barrels per day--that's only five years from now.
Fair enough to draw different conclusions about what this means but my take is that the long term theme is more important and these demand trends mean oil is likely to stay higher in price than what is historically normal.
This is not a call for $100 oil next year but more of a big picture concept. Demand for oil is increasing. There is some debate about supply but adding up what I read and hear I think demand is growing faster than supply.
As the China anecdote shows, this is not a call for the next few weeks. You either buy into this as a multi year idea or you don't. But if you do you need to realize that you will not get rewarded every month or every quarter. Part of successfully navigating the markets is patience and this is a case in point.
I was very surprised to hear they only use ETFs. I think I have heard him mention ETFs but never the extent to which they use them. He mentioned using them to capture different sectors, similar, I think, to the way I use ETFs for certain accounts.
Since the show starts at 3 am Arizona time I did not see if there was any other mention of this earlier in the morning. The Cumberland site does not have any sample portfolios that I could find to get a real feel for how they use the product.
The site does specifically mention selecting sectors, industry groups, market caps, styles and region-kind of like what I have been writing about. Obviously there is no mention on the site of how they have done, could be great or mediocre.
They lead with the fact that they are a top down manager- me too. The thing I have to wonder is, if they are truly top down (and I am not doubting them), there must be all sorts of themes that they think will do well but they can't own because they only use ETFs.
There are a lot of countries that fall through the cracks, and before this last wave of sector ETFs there were very few sub-sectors to buy into. I have thought all along that gaps would be filled, and that is happening slowly.
Sunday, August 27, 2006
I have written quite a few times that I don't think there can be a nationwide crash in home prices but this lending bubble seems like a much better way to describe the situation.
Anyone with an interest only ARM, facing a reset they cannot afford is in trouble. Even a refi to a fixed rate will spell trouble for some overleveraged homeowners.
Here's the thing as I see it; there has been an excess. Excesses get corrected. I am not sure I need to correctly predict the magnitude of the correction to successfully navigate it. Chances are you are just trying to avoid something ugly in stocks. If so, you do not need Nobel Prize winning accuracy in predicting what will happen.
I do not think the worst case scenario is the most likely scenario as consistent with my thinking on these things. Usually the best and worst possible scenarios are wrong; the real outcome is usually in the middle.
Here I think the middle is a recession, not depression, consistent with a normal economic cycle. If correct and if it turns out that the lending excess is a driver behind the recession then yes the consumer will be hurt a little worse than in most recessions.
To me this is just common sense not clever thinking. I live in a little cabin we bought as a weekend place in 1998 for $87,000. There are lesser cabins (my wife has redone the entire interior with a little help from me) near by listed (but not selling yet) for $300,000. More than a tripling in eight years is an excess. I don't think this is debatable. The debate, in my mind, is the consequence of the correction.
The 40 year old (my age) guy with $7000 in mortgage payments who makes $10,000 a month is in a much riskier position than the guy with an $800 mortgage making $3500 a month. The first guy won't last too long if he loses his job.
If Jimmy Rogers is correct and housing prices drop by 30, 40 or 50% it will be too bad but won't hurt the homeowner who is properly leveraged. While the bank does not want to take back houses from people what do you think a borrower with a barely affordable, interest only $600,000 mortgage will do if the house is worth $400,000? I don't think declines will be that big but if they are....
Saturday, August 26, 2006
Forbes.com has an article up written by Will McClatchy from ETFzone.com (I wrote two or three articles for ETFzone in 2004) that explores the notion of whether or not to take defensive action in a portfolio.
Long time readers will know that I am a fan of occasionally taking defensive action with an eye toward trying to sidestep a portion of a big move down.
While I agree with the idea from 30,000 feet I'm not sure the method Will mentions is ideal. In the article he notes the long list issues confronting the market today and he is correct that the list is scary. However it is not new or unique.
It could be argued that the list of worries from the summer of 2002 was worse that what we have now. I'm not saying 2002 was absolutely scarier, but it might have been. Of course the summer of 2002 was very close to a big market bottom.
I think that a get defensive plan is a must but I think some sort of objective trigger that is market related as opposed to sentiment based is a better way to go. There are many instances in history where markets go up when sentiment stinks.
Various indicators reveal supply/demand problems for equities which I think are more reliable than India arguing with Pakistan.
I should note that Will's article does not advocate very extreme cash level but a lot of people managing their own portfolios like to raise a lot of cash when they think declines are coming.
One thing to consider in getting defensive is dividends. There are a lot of products with big dividends, less beta and a low correlation to the stock market. From the stand point that 100% cash is too extreme, a tilt toward this type of stock or fund makes a lot of sense. The WisdomTree ETFs could fit here but it may be too soon to know for sure.
Friday, August 25, 2006
I can't even find any day baseball to watch.
All in all though being able to take a day or two off, mentally, is always a good thing for investors and traders alike.
I know from emails, comment and client questions that people really fixate on the very short term. One of the reasons I think top down with big themes is an easier way to go is that big themes take a long time to play out.
For example, most clients have exposure to China one way or another, and no I do not count a US multinational doing business as exposure. The China theme is big, obvious, volatile at times and will happen over time. Because the theme is likely to last longer than the rest of this decade, a quick move down is unlikely to ruffle my feathers.
Not every theme or holding is a five year idea but if you buy a stock with a two year time horizon, a bad week shouldn't necessarily send you fleeing from the name either. This ties in with knowing what is moving your stock. If every Chinese stock corrects by 15% and the name you own does the same thing, it probably is not a sell.
To be clear I do actively manage these things though. I was very public about reducing exposure to China in April.
If on the other hand if every Chinese stock goes up by 10% and your stock drops be 2%, you may be in the wrong name.
This type of thinking is why I am not a fan of blindly setting an 8% stop. In the example above where every Chinese stock drops 15%, presumably you chose the one you thought was the best one. So if you get stopped out do you pick one that was previously inferior? Do you buy back the same name? What if the point where you get stopped out is the low? What if you buy back and it keeps dropping? Given this minefield of obstacles how often will you get this correct?
Plenty of people can nail this sort of thing but it is very difficult to do which is my point.
A reader noted that the WisdomTree Pacific Ex-Japan High Yielding Equity Fund (DNH) is 87% invested in Australia as a follow up to my post yesterday. There is also 6% in New Zealand. This is similar to an iShares Fund with a similar name that trades under ticker EPP but EPP is only 66% Australia.
DNH may not be so hot as a truly regional fund but it looks like it fits the bill as a proxy for Australia. Also DNH is expected to yield 6.79% compared to a roughly 3.3% yield for EPP and 3.1% for EWA.
I have disclosed owning EWA personally and for a few clients. The big difference in DNH's composition is that BHP has no weight in the fund (at least I did not find it) but even if I missed it the basic materials sector only has a 3.95% weight in the fund. BHP weighs in at 8.2% of EPP and 12.3% of EWA.
BHP has been a fine stock through this commodity cycle. If that continues, DNH may get left behind. One idea I will study is 75% of Australian exposure in DNH and 25% in BHP, or maybe Rio Tinto. As an example; if 4% of an entire portfolio in Australia makes sense then 3% would be DNH and 1% in a mining stock.
Obviously this does not fly in certain portfolios and it is just an early morning thought but even if the tactic dies not fit, the idea of blending products does make a lot of sense to me.
Thursday, August 24, 2006
He works in the business and needs to blog anonymously. The name of the blog is FinancialRX and his pseudonym is FRX. The blog really is very new but so far he has posted about the over use of the word bubble, some bottoms up analysis, the bond market and a few other things. The writing is plain (this is a positive) and the posts are not 2000 words long.
As the site is new I'm not sure what type of blog this will ultimately be but he is off to a good start.
Australia is a commodity-based economy. Because of that there is the expectation that it would have a different economic cycle than in the US. It stands to reason that the stock market cycle would then be different as well. That is why I own the country.
I did not find the country weights on the WisdomTree site but ETFconnect has it at 11.75% for Oz. The largest country weight is the UK which is 33%. The UK is heavier in materials than you might think, iShares UK (EWU) has an 8% weight but the top holdings in DTH don't have a lot of commodity-based exposure. There is a fair bit of energy names in DTH but I think I would differentiate between energy and materials where Australia (or a proxy for) is concerned.
The largest commodity or commodity-based stock is Commonwealth Bank of Australia at 1.23% but that is just the 17th largest holding.
I don't think DTH will end up being a proxy for Australia but there is not enough track record yet to know. This has nothing to do with the merits of the fund. For low beta, big cap, high yielding foreign exposure it looks good at first glance.
There is an Australian ETF, plenty of ADRs and a CEF or two as well. Most clients own Australia New Zealand Bank (ANZ) or iShares Australia (EWA) which is a personal holding.
The American Stock (options) Exchange is going to start trading options that expire on a quarterly basis for iShares Energy (IYE), iShares Russell 2000, SPY and QQQQ. This is interesting to me. The options that retail investors trade are listed options. There is another options market that is an OTC market. In this market, investment banks create options for institutional that are described as being OTC. The options will meet a specific need for the client. The bank will then either sell the other side of that trade to another client or very rarely just take the other side of the trade. The quarterly option concept could be a bridge of sorts between regular listed options and some of the strategies executed in OTC options.
For now these are not that different but may be a first step to more innovation for retail investors.
Seeking Alpha's ETF page has a good article up on Singapore as a haven of stability. This is an interesting idea. I wrote an article about this for TSCM in May. One point I would note is that Singapore will not be immune from emerging market woes, as they come every now and then. The iShares Singapore (EWS) held up better than iShares Emerging Market (EEM) during the spring selloff but it did decline a noticeable amount.
Bill Cara laid out a scenario for a global bear market starting within 60 days with Australia being the maker or breaker. I have been writing about Australia since I started this blog and while I think it is an important investment destination I am not sure it is capable of global leadership of that magnitude.
One reader comment asked about the election in Sweden and how it could impact the krona. While I am no political analyst, the less liberal candidate is favored to beat the more liberal incumbent. This is all relative of course but a slightly more conservative winner is being viewed as krona-bullish by the forex market.
Another reader asks whether ADRs provide a hedge against a falling dollar. I have written about this a few times and the short answer is I believe they do. To see this in action you can overlay the ADR, with the ordinary share and the currency in question to see this at work. The differences between the ords and the ADRs are accounted for by moves in the currency. ADRs are not a perfect hedge but I think they go a long way to getting the job done.
Kennycan had another good point about 1966-1981. He asks if the average investor is better equipped to handle a repeat of that type of action. Good question and while I don't know the answer I think he might be better equipped, maybe you are too.
A reader who goes by m00m said that he sees the coming period looking more like the 1930's. The up years in the 1930's were huge. He goes on to say that he sees a bull market in the next decade of less magnitude than what we had from 1982 to 1999. What I think is not said is that we would have a lot of net sideways action between now and then?
Wednesday, August 23, 2006
So a lot of comments to catch up on.
ETFguy doesn't get currency trading relative to buy and hold. He asks if the currencies aren't just range bound. In early 1990 it took 160 yen to buy $1. Five years later it cut in half to 80. In 1998 it was back up to 145. In early 2002 it took 135 yen to buy $1. Today it is 116 yen to buy $1. The issue, if there will be one is that the dollar could get much weaker. Some currency exposure spares some of that decline. This either appeals to you or it doesn't but that is the concept.
Kennycan notes that after inflation the market was a loser from 1966-1981. Buy, hold and never open the statement, yes. However the market was far from going nowhere. There were seven years in that period where market moved (up or down) by 15% or more. Five of those seven were moves of 20% or more. IMO going nowhere misses the boat.
One reader asked about the Rydex currency funds (RYSBX and RYWBX). These funds allow participation with the movement (or inverse) of the Dollar Index. The Dollar Index is heavily weighted in yen and euros which both have their respective issues. My intention is to try to isolate currencies that show potential for stability (so strength vs. the dollar). Both the euro and the yen are not high on my list for this. The leverage offered is compelling though for people looking to be a little more aggressive.
A month ago, with Pimco's bets misfiring, Mr. Gross was so stressed that he left the office, taking an unplanned vacation, sitting at his home with his wife, he says.
"I just had to leave for nine days, I couldn't turn on business television, I couldn't pick up the paper, it was just devastating," Mr. Gross says in an interview at Pimco's headquarters, near the Pacific Ocean. "We've increased the volatility [of the portfolio] but I'm not enjoying it. You can't sleep at night."
This is just a theory and I am not making any portfolio decisions based on this, well not now anyway.
The thing about an inverted curve is, as you read everywhere, it indicates a slowdown, or worse, is coming. The fundamental behind that is that lending money is not profitable when the curve is upside down. This inability to access capital is what contributes significantly to the slowdown.
Enter the HELOC, home equity line of credit. This obviously is a part of the home as ATM issue that, rightly, concerns many people. The growth in HELOCs has been huge and the yield curve for these adjustable loans is still very positive. Passbook, money markets and CD rates are in the fours and fives while rates charged for HELOCs are in the eights for people with good credit.
The chart is not so great nor is it very timely (if anyone has a better one please leave the link) but it shows almost a tripling in HELOCs.
The theory would be that now that HELOCs are more popular and presumably more available they do provide access to capital to the retail banking client that any slowdown could be muted or even negated by a favorable lending environment for HELOCS.
There are of course several flaws here. Many believe that the quality of these loans is poor, that consumers are already over-leveraged and more consumer debt would be a negative, this is not a product used by companies (perhaps the yield curve for the types of short term credit facilities used by businesses is also positive) and it would not take too long to come up with a couple of others.
As I said I am not making portfolio changes around this.
The idea with this is to seek out a more plausible explanation than some of what we may be hearing if this time turns out to be different.
As a side note, there were a lot of interesting comments left over night. I will respond later but Muckdog's comment about the Red Sox needing some of the little leaugers would really tick me off if wasn't so close to right, doh!
Tuesday, August 22, 2006
What makes this amusing is that I started writing about this in November 2004 and, this just in, I'm not the one who first came up with the idea.
I do not know if CNBC has ever talked about this before but it is important to be in touch with. To be clear, oil will not one day switch from dollars to euros. The more reasonable scenario would be some small sliver of oil might trade in euros between two non-US parties as a function of convenience.
The big macro to this is that it seems reasonably logical (even if it never happens) that oil could trade in euros. Assuming it starts small and stays small it creates a path to less demand for dollars.
This type of shift would happen very slowly. Fair enough to anyone that sees no chance of this but that is not how I see it.
Aaron Pressman has a great post up that ties in the laughably bad series put in by the Sox this weekend and portfolio construction, but did we need the Bucky Dent reference?
Of course it is tough to win games when you need to start pitchers that don't actually have big league stuff.
I will always be a Sox fan but this was a poor showing.
I have been writing about gold since the start for its historically low correlation to the US stock market and that it tends to go up in the face of war and terror. Regardless of the fundamentals, when there is a terror event gold goes up. From that standpoint it will always have a place in the portfolios I manage. The weight and how it is accessed, GLD (client holding) or a mining stock or both may change based on my perception of the fundamentals.
I have not thought about adding silver. The supply and demand dynamics are different than gold and I have not been able to reconcile both sides of the argument yet.
I have written about the currency ETFs since long before they were issued. My theory from the start with these has been that they allow easy foreign diversification of cash just like an investor would do with stocks and bonds.
For now I have more interest in some of the other currencies as opposed to the euro. While I generally expect the euro will rise against the dollar, the economic fundies for Germany and France seem so week that I would rather go with the strength that other countries offer.
On a different note Seeking Alpha seems to have expanded its reach yet again. On MyYahoo I have a news feed for ETFs. One of the headlines this morning was an article I wrote over the weekend that Seeking Alpha ran yesterday. I don't know if this is new for them or not but I haven't seen this before. Personally speaking I derive a lot of fulfillment from the idea that the content I produce might help some folks be better and more knowledgeable investors.
Doug is a short seller and so tends to be more of a glass half empty guy.
What I find interesting is what appears to be absolutely no correlation at the left of the chart, evolving into a very tight correlation.
So the question then becomes are we back to no correlation? Kass believes the correlation will stick.
Monday, August 21, 2006
On November 30, 1992 the S&P 500 was at 431.35. Ten years later it was 936.31, a 117% gain. I picked November because that is when some say the SPX bottomed after the tech crash.
From 1968-1981, a particularly dark period for domestic equities, there were six years of double digit gains. That is the same number of double digit years in the 1990's, the greatest decade ever for equities. Point conceded that I am comparing a 14 year period to a ten year period but still.
On August 21, 1996 the S&P 500 closed at 665.07. As I write this it is at 1297.48, a 95% gain.
In 1989 the S&P 500 was up 27.3%. Do you even remember the mini crash on October 12 of that year? The market fell 6.1% as the UAL LBO unraveled.
If you bought the S&P 500 on October 15 1987, the market actually fell about 5% the day before the crash, at 298.08 you were back to even on a closing basis on February 7, 1989. It took less than 16 months to break even from the worst crash since the depression when buying at about the worst time possible.
On October 27, 1997 the S&P 500 fell 6.8% because of the Asian Contagion. It was back to pre-contagion levels seven trading days later.
The market dealt with more serious matters in 1998 with the LTCM blowup and the Russian debt crisis. In that go around the S&P 500 fell from its July 17 peak of 1186.75 to a low of 959.44 on October 8. That was a 19% decline in less than three months. The market closed at 1186.76 on November 25. It took back the 227 points in about six weeks.
How long is your portfolio's time horizon? These numbers show horrible events in the market are quickly recovered most of the time. The 1930's and the 1970's (mentioned above) stand out a two exceptions.
For all anyone knows this decade may be like both periods. If so there could be some huge up years mixed in. Don't get so scared that you miss huge up years. As an idea, raise some cash after an up 30% year.
Too many people focus on the wrong thing, the short term. If you need the money in two years, equities are the wrong asset class. If you need the money in 20 years, equities are the right asset class. The market is higher ten years out the vast majority of the time.
If you own stocks keep in mind that the things noted here are the back drop to what you need to deal with and that the short term has less importance.
According to the article there are $2.7 trillion worth of adjustable mortgages that will reset in 2006 and 2007. A $250,000 note, again per the article, could have a monthly payment today of $1123. After the first reset that payment could be $1419 and after the second reset the payment could jump up to $1748. For the person who needed that $1123, either larger number could be a budget buster.
Here are some other numbers;
• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000
• 43% of first-time home buyers in 2005 put no money down
• 15.2% of 2005 buyers owe at least 10% more than their home is worth
• 10% of all home owners with mortgages have no equity in their homes
A fairly obvious point here would be that this stuff only hurts people who are over-leveraged. Too much leverage is always a big danger. $1748 may not seem like a lot but to a couple where both workers make close to $30,000, the extra $625 is a big bite out of their take home pay.
The bullet points above about home equity raise concerns about home equity loans. We all see the myriad of TV commercials offering equity loans. Many consumers have taken out equity and spent it. Spending on home improvements would be the most benign use of equity and I suppose a new flat panel TV and a trip to Aruba would be the most wasteful use of equity.
I am hard pressed to think that the housing market can crash in the way we think of equity market crashes but I do think dislocations that originate due to housing related issues that hurt the consumer could impact all capital markets and housing prices. I'm sure data could be found to support the idea that residential prices are a little softer than a few months ago. I don't think an average 10% decline (I am not saying all prices would do the same thing, just saying an average) would be a deathblow but some sort of domino effect where higher rates lift mortgages which hurts consumer spending yada yada and the stock market has a new and obvious headwind.
I don't think there will be an extreme outcome from this for reasons I have written about before; calamitous crashes just do not happen very often and we already had one this decade. I certainly hope that holds up.
Saturday, August 19, 2006
We are going to do the hike on October 6. We went nine miles this morning so I am off to a late start today.
A reader sent an email asking for an update to an ETF portfolio that I wrote about previously.
I think he was referring to a post from June 27 that you can read here.
I need to disclaim that this type of thing is not my first choice for any portfolio. Please keep that in mind as you read this, you know, that this is not my best suggestion to anyone.
The starting point for me for portfolio construction is how I want to weight the sectors. Right away this means that the large/mid/small cap ETF are off the table (for me). As I wrote earlier this week I am convinced that value can be added by making active decisions with all ten S&P 500 sectors. At this point let me concede all the flaws that go with using the S&P 500 as a benchmark but it is what I use.
For the do-it-yourselfer willing to learn about what sectors usually do well at different points in the economic and stock market cycle and also able to catch the really big themes like tech in the late 90s (kept in reasonable proportion) or energy and commodities in the last couple of years can add measurable value to their results without being correct about any stocks or taking single stock risk. Adding individual stocks could either help or hurt returns depending on some combination of skill and luck (don't underestimate luck's importance).
A great resource to know how the benchmark of your choice is weighted for sector is to look at the iShares fund that mimics your benchmark at the iShares website. The financial sector comprises about 21% of the S&P 500. An inverted curve means that lending is unprofitable. If lending is unprofitable it is not a stretch to think that financials will struggle. That has been my thinking and for the last month or so it has been wrong. I target that sector at about 15-16%, the stocks have been doing well (actually most of my exposure is in foreign banks from Canada, UK, Australia and Ireland). The important point is that the consequence for be wrong is almost nil because I have not made a big bet.
There are sector ETFs from iShares, StateStreet, Vanguard and PowerShares. Some of the other providers (First Trust comes to mind) have the occasional sector ETF here and there. Given my preference for foreign, I use the iShares Global ETFs, where available. Given the myriad of unique client circumstance I have exposure to all the Global ETFs for at least one client, not the same client mind but spread across our practice.
The global sector ETFs include Financials (IXG), Health (IXJ), Energy (IXC), Telecom (IXP) and Tech (IXN). There is no such fund for the Industrials, Utilities, Staples, Durables or Materials. WisdomTree has ten sector ETFs in the registration pipeline that will have global exposure.
I do use the occasional narrow-themed ETFs as well. I have been most public about my exposure to the PowerShares Water ETF (PHO). The theme of water seems very obvious to me. As a secondary effect, I view PHO as a way to get smaller cap exposure in the industrial sector as PHO is 57% industrials and the average cap size of the fund is $10 billion. All of the narrow ETFs offer the potential for a secondary effect. You may not want or need the secondary (or primary) effect of a given ETF but the potential is there.
Another example of this is the IPO ETF (FPX). FPX is a decent proxy for small cap growth.
The notion of ETF secondary effects is not something I have read anywhere else so I may be an island but think this is a very important benefit to the product and can help do-it-yourselfers isolate some very narrow effects without single stock risk.
Friday, August 18, 2006
I am a huge baseball fan, although Adam and Larry have forgotten more about the game than I will ever know but nonetheless.
I put this picture up because of the glove. Is Jose Mesa's glove lavender? My wife says yes.
A pastel colored glove?
I'll be close by if catastrophe strikes.
A quick administrative note; there seems to be some sort of glitch between Blogger and Firefox. When you go to a Blogger blog (using Firefox) it does not load the most recent post/comment. Refreshing the page does the trick. I'm not sure if this is Blogger's problem, a Firefox issue, just certain blogs (have noticed this on a few sites) or what.
Despite talk of oil shortages, the reality is a glut. Rising crude supplies have prompted Saudi Arabia to cut production. Higher energy prices have also damped demand. Last year, U.S. oil consumption fell for the first time. China's growing appetite for oil has also slowed.
Geopolitical risks can't explain the current oil price. The probability of an interruption to Middle East supplies justifies about an additional $11 to the oil price, according to Goldman Sachs. Adding that to Mr. Miller's pessimistic forecast would suggest a reasonable price for oil of about $50.
It seems that demand from investors is largely responsible for today's inflated oil price. Flows into commodity indices, which are weighted heavily in oil, have surged eightfold over the past three years. This has pushed up the price of oil futures, making it profitable for traders to sell the futures and take physical delivery of oil, which they pay to store.Back in the real world, oil supply is outstripping demand. If production continues at its current pace, the world will run out of storage space within six months, says research firm Sanford Bernstein. If that happens, the cost of storing oil would soar. Traders would no longer make money by hoarding the stuff. Without their demand, both the oil price and energy stocks could tumble.
This was from an article in the WSJ about Bill Miller.
Thursday, August 17, 2006
Where are all the people that two weeks ago said $85? The people that are saying $55 today, where were they two weeks ago?
This is amusing.
My take has been the same for a while. Demand is growing faster than supply. This is not a one month or even a 2006 thing. This has been changing slowly and will continue to change, slowly, over the next few years. Something could happen to allow supply to keep up but that is not happening yet nor is there visibility for that.
My thoughts about price changed a little recently. For a long time I thought we would be unlikely to spend a lot of time below $60. Now I am thinking $65 makes more sense. Here I am saying if we go below that level I think it will only be for a very short time.
Bringing in portfolio construction to the conversation, while I have unyielding faith in the theme I do not have 30% in energy. Not even 15%. Energy has provided plenty of lift overall without having a huge overweight.
This list would also include private equity, Dick Grasso, the Faber Report and the latest news on any of the trials or investigations.
My interest in these things could best be measured in micro-givashits*
Maybe someone at CNBC will see this?
*I need to footnote my buddy Roy on that one.
Obviously that could be correct, and I would be pleased if it is, but I have to wonder if the idea is getting a little crowded. From the bottom the market is up 6.3%. That is a big move for just two months.
I have written many times about the market turning quickly and rallying a lot at exactly the time it should not. This description could be applied to the current move. I concede there is good debate about whether it should have rallied or not but the move has been fast and big.
This is just an observation; I hear very little caution these days. I am not really gaming this thought in a meaningful way as trying to trade too nimbly for the short term is not what I try to do.
I actually don't think things will be that painful.
My prediction from the end of last year was that the S&P 500 would finish this year between 1180 and 1219.
Since that was the prediction there is no changing it. The question becomes am I managing any differently in anticipation of that prediction being wrong. The short answer is not yet.
When the market was bottoming in June a lot of people I respect said that the market will rally to a lower high, setting up the probability of then a lower low. I jumped on that bandwagon myself and while I don't know if that will be right or wrong, so far it is playing out exactly as advertised.
It is true that there is less fear of equities these days compared to two months ago. The current economic data suggests a slowing of some magnitude and the inflation data (notice I said data not reality) is still mixed.
After a 6% rally in just two months it is reasonable to expect some giveback.
All of the things I cited in making my prediction are still true. Both the stock market cycle and economic cycle are historically long in the tooth. This is the worst year of the presidential cycle. I was worried about the yield curve (and still am). Earnings are slowing a tad (this may get worse or it may not, we will see). There is and has been less demand for the dollar.
Nothing has changed with any of the things that went into the prediction. That is not to say that this list of things won't be wrong. I could be very wrong about this but the reasons were all based on things that ultimately hurt the market and I think they are still in place.
I have written a lot about being wrong. That my prediction could be wrong is exactly why I am not sitting on a lot of cash. I have taken some defensive steps and while I have lagged the rally I have caught most of it. For I all I know Abby will be right about 1400.
I have had some comments from people sitting in a lot of cash saying it is tough to do right now. I don't doubt their word. I have never advocated a lot of cash I and wouldn't know what to tell someone who is 80%, or more, in cash what to do.
I would say going from 100% cash to 100% stocks right now would be a panic buy. It could be the right thing to do but it would be a reaction to panic. Hopefully no reading this will panic.
I have been very transparent with what I have done in the last few months and if you have been reading this site that long you might be in touch with the trades made. For now I feel quite comfortable with my positioning.
Wednesday, August 16, 2006
First is Modern Graham run by DePaul undergrads Ben Clark and Jonathon Ritchie. Their process tries to offer a modern application of value ideas attributed to Benjamin Graham. Among other things they do a stock of the week write up which a reasonably deep study of the company in question. They have recently also covered things like portfolios focusing on High ROIC and an overall assessment of the market.
The other site is called Investment Ideas by Yaser Anwar, a college student at York University, north of the border. Yaser has had little more press as he mentioned being in the WSJ Online and on Seeking Alpha. The site seems to be a blend of big macro and his stock picking which looks like it is parts stock screening and part fundamental bottoms up.
If I could offer one thing to these guys or anyone in a similar situation; they know number crunching and analysis but make sure you see the forest too.
He said the S&P 500 was down 8% from its May high. Taking yesterday's close of 1285 makes it down 40 points from the high which is closer to 3%, so that was a little confusing. He thinks there could be a rally first. The recent low was S&P 500 1220 so we have already rallied 5.3% (to yesterday's close).
Despite that confusion the call is a 20-25% drop from the May high. Ralph has been one to stick his neck out (kudos) over the years. I'm not sure that he is right a lot (anyone with that info can leave a comment). I know that he has been both right and wrong over the years so I am not sure how much stock to put in this call but plenty of people do care what he thinks and I don't know if this will make its way to regular CNBC.
As is often the case I find myself disagreeing with his conclusion. You should decide for yourself.
The general tone of the interview was the he does not believe that sector ETFs are necessary nor are single country ETFs. A part of the equation is that there are tracking errors in the narrower ETFs. That there are tracking is not really debatable, he is right. I concede all of the things that he says cause those tracking errors, like liquidity and constraints of position size within a fund.
The largest tracking error mentioned in the segment was 103 basis points; there could be ETFs out there with larger tracking errors. For the sector ETFs Herb said the largest tracking errors were 65 basis points.
I wonder whether the consequence of the tracking errors matter. I don' t think they are so important as to make these ETFs a bad idea.
Long time readers may know that for some accounts I manage I use a mostly ETF allocation (not my first choice but size constraints sometimes apply). In those instances I use sector ETFs to try to recreate what I do in accounts where I use mostly stocks (most accounts).
A do-it-yourselfer may not want to make ten sector decisions, understood. YTD, though, making sector decisions with two sectors and being equal weight the other eight could have yielded a noticeable result. If you are involved enough in your investments to know about a site like mine, I assume you are capable of and interested in making at least a couple of active decisions. I think overweighting energy by 5%, underweighting tech by 5% and going equal weight all other sectors was not too complex as to be unrealistic.
By my math and the chart above, using sector ETFs that I own for clients you add 100 basis points to your YTD returns. In a $100,000 portfolio an extra 5% in energy would add $750 YTD and that 5% not in tech would have been spared $250 of loss. I do not know the tracking errors of IXC or IYW but the returns on the chart are net of errors and fees.
I view this as one decision you may view it as two. Either way it added 1% vs. the market YTD. Would this type of trade be beyond your scope? Again, for most people inclined to seek out stock market blogs I would say no.
Herb said the owning EFA captures the foreign markets, he does not believe in the single country products. Are you close enough to the markets to know about what is happening in China or Brazil? Again these are two countries that are not off the beaten path. If you are reading this post I don't think it is a stretch to think you have exposure to one of these places.
The blue line is China (I own that ETF personally) and the yellow line is Brazil. If an investor, not looking to do a lot of work, put 90% of his foreign portfolio into EFA (the black line) and 10% into Brazil he would again add about one percentage point to the return for the foreign part of the portfolio.
Like the example above this represents one decision. Further I do not believe this example is unrealistic either. For investors willing to make more decisions than this, and assuming they get some wrong, I believe the narrower themes could absolutely add value and be worth pursuing.
To close this out I apologize that this is so long but I feel very strongly about this sort of thing. Also I am fully aware that the funds and ideas cited in the piece are not for everyone but they offer utility in the context of a diversified portfolio for the right type of investor.
As I say in the title, you need to decide for yourself.
Barron's Online is now offering content from Seeking Alpha's ETF page. This can be found at the Barron's site on the funds page in the lower left entitled Latest Blog Coverage Of ETFs.
This is a big deal for a couple of reasons. This is a validation of the content that is out there in the blogosphere and the way it is helping do-it-yourself investors learn to be better money managers.
I think the big difference between the blogosphere and some of the monthly magazines is that where the monthlies provide a journalist's eye view of things like ETFs and other aspects of investing the blogosphere provides access to people that actually manage money, have managed money in the past or have otherwise had genuine success with investing.
To me, that difference is huge.
Barron's has been in touch with this for a long time. It started featuring blogs in the Electronic Trader Column in the fall of 2004. Their realization that the blogosphere offers some great content continues with the news about Seeking Alpha.
If you have been reading blogosphere content for any length of time you know that Seeking Alpha has been an important hub for information about many slices of the market. Hopefully SA's role in helping investors will only grow in the future.
Congrats to the entire SA crew for this.
I was working on a post before the call that I will have up shortly.
I TiVo'd the Siegel/Bogle smackdown. If there is anything there I will post about that later.
Tuesday, August 15, 2006
Why they backed out seems obvious but there is not much detail in the article. Maybe iShares can give the Kansas City Royals a cash infusion?
My starting point is that I am favorably disposed to products that give investors the chance to hedge dollar exposure. I have written about the concept many times.
For those who did not read the article or may not be familiar with warrants they quack like options. These warrants, which trade on the AMEX under ticker AAB.WS (go to the AMEX site to get a quote), mature/expire on February 13, 2008.
Options provide leverage. Leverage can either enhance returns or blow an investor up, depends how it is used. Per the article and the prospectus $6 and change (the issue price was $6.23) controls $95 worth of Asian currencies. Also keep in mind that someone is on the other side of these warrants. Either Lehman is taking the risk or more likely they sold the other side of the trade to another party.
Whoever is on the other side is smarter than I am, are they smarter than you?
This type of product is, in my opinion, different than the other products I have written about. The warrants could be worthless at expiration. With any of the currency ETFs zero won't happen, save for a repeat of the Weimar Republic somewhere.
I would probably be favorably disposed to a product with a little leverage, say 1.25 to 1, but the leverage in the warrant is enough for this to lose a lot of money.
On a side note I think today's lift has a better chance to stick than the lift yesterday.
One of the many free resources on StockCharts.com is that you can compare one stock to another via a ratio. In the symbol field type a symbol then a colon then the other symbol, as an example BP:XLE to compare BP to the Energy Sector SPDR (XLE).
Here is how it looks;
The chart allows you to see changes in the relationship. This is read kind of like reading a currency quote. The downward direction shows BP lagging behind XLE for the last year.
At times the lag of BP accelerated and at times it took some back.
You can see below what this looked like on a normal comparison chart.
There are probably quite a few uses for this (read the link above to Barry's site for one). I think the utility for me will be to have a better feel for how a stock is doing vs. all of the roles it plays in the portfolios I manage.
What I mean is if a stock serves as proxies for a country, a sector, is a high yielder and a large cap I can compare that stock in this manner vs. benchmarks (or more simply ETFs when applicable) for all those functions.
This has the chance to be a message of the markets analysis which I believe has value.
Work in progress.
Monday, August 14, 2006
Why would the Stallion, a journalist, be frustrated as he says he was? Maybe his comments lend credence to the idea that they are cheerleaders.
For now we have this.
Very few companies have trouble with their debt, very few. The notion of avoiding single stock risk in this part of the market is not as great as other parts. However if these funds will have exposure to lower quality, as a segment of the market, there could be some utility. It seems like most high quality preferreds yield in the sixes. A fund that reaches for yield in lower quality issues could be worth a look at a time in the cycle when lower quality makes sense. We'll have to stay tuned on these.
A reader left a comment asking about liquidity issues with ETFs and whether or not it matters. I think I am in the minority on this. For someone looking to make an investment, not a trade, of a few hundred shares I don't think it matters much. If the spread seems wide you can try a limit order in the middle for a while to see what happens. A point of caution would be that if you try a limit order for, say, 400 shares, get a fill on 200 and then the market moves away, at some brokerage firms (maybe all of them?) you might have to pay a second commission to get a fill, offsetting the couple of pennies per share you might have saved at the original limit.
Adam Warner has some interesting thoughts on a Monday gap up.
I stumbled across an article from the Fool about an OEF that is NASCAR themed (SCARX). According to Yahoo finance it is up 1.02% YTD. Oops.
My very short post this morning with the picture of George Costanza drew a lot of comments. The debate, if that's what it is, about the market is good stuff. Both arguments seem plausible. It is these points of confusion where big mistakes happen. I have tried to be clear about my expectation and my position; small but noticeable decline coming but still mostly invested.
This is an article I wrote about Sweden for TheStreet.com's goodlife section, if you are interested.
"In short, we should not be surprised to observe stagflation, falling stocks, weak profits, flat bonds, and a dollar crisis in the months ahead."
This from John Hussman.
Perhaps this will be different. A point I try to convey is that while my expectations are dim I do hope the market will go higher. I think this is important. There are times where it is all systems go for the market and times where it is not. This is one of those not.
Long time readers may recall I have owned British Petroleum (BP) for clients for quite a while. Over the last couple of days I had two clients ask if I was concerned about BP's current events in Alaska. I suppose I have concerns but in the few years I have been involved with the name there have been several instances where the headlines have been scary but with no lasting impact on the stock.
This ties in with understanding how stocks trade and what types or moves they are capable of. There is some good news today that is going to lift the stock (at least at the start). My initial reaction was that this entire episode illustrates just how important Alaska is and BP has a big footprint there.
Actually the downside was not that bad with this news but there will be sellers that will regret having sold. This is not a call for a big move up but I think the stock will simply head back to about where it was.
Clearly this could turn out to be wrong but where BP is concerned I have seen this movie before. This same type of bump in the road-short term dip-go back to where it was move is very common in the market and I think BP is a name that does this.
Again the point is not buy BP. The point is do you own stocks that do this? If so selling into the bump in the road will be a mistake more often than not.
Sunday, August 13, 2006
The winning fund was the Third Millennium Russia Fund (TMRFX). I have written a couple of times about this fund and every time I look at the fund it is lagging, what I believe would have to be, its benchmark by a mile.
Barron's has returns in its table for YTD, 1 year, 3 years and 5 years.
This chart compares the fund with the RTS Index, which is the major benchmark in Russia, YTD.
This chart is for one year.
And finally the three year chart.
If the benchmark is, you know something logical, like the Russian Stock Market I think it is reasonable to wonder what is going on here.
Sometimes the chart can miss the dividend paid out by showing it as a drop in price.
YTD there has not been any payout from the fund to offset any of the lag on that chart.
Year end 2004 the fund paid out $5.66 in gains. That amount was 14% of the price of the fund. For the period August 13, 2004-August 13, 2005 the index was up 50% and the fund shows up 30%. Add the 14% payout back in and the fund lagged by six percentage points.
For the last 12 months the index is up 105% and the fund is up 30%. The 2005 yearend pay out amounted to 6.6% of the price at the time it paid. This doesn't account for much of the lag at all.
I looked at a couple of other time periods and could not find a time (on BigCharts) where the fund even stayed close to the Russian market.
Either I am missing something entirely or maybe someone is confusing genius with being in a bull market.
Saturday, August 12, 2006
The fund has large weightings in some pretty big losers like Sprint Nextel, United Healthcare, Amazon and Aetna. It has large weights in a couple of big winners too; Qwest and AES Corp.
I was struck by one thing in the Barron's article which was that the fund has no exposure to energy. Mr. Miller believes that current prices are not sustainable. If you have read this blog for any length of time you know I generally am bullish on energy and while I don't know about $75 I feel confident oil will be above $65 much more often than it is below for the foreseeable future.
Being wrong about energy does not make the fund a sale. The track record is outstanding where the S&P 500 is concerned and the occasional bad year goes with the territory of money management.
One thing that does not seem to come up very often with the fund that is worth considering is that its track record against large cap value is not quite as stellar as it is vs. the S&P 500.
As the chart shows it has generally outperformed the iShares Russell 1000 Value Fund (IWD) but the value added is much less than vs. the S&P 500.
You can decide for yourself whether you have any interest in this fund (I do not) but the lack of energy makes an important point.
If you use actively managed funds and believe in diversification you need to know where your funds are overweight and underweight and build in accordingly. Then keep tabs on the sector weights to make further changes in reaction to changes made within your funds.
Friday, August 11, 2006
I feel like I know his name but I cannot place it, maybe he has been quoted somewhere or maybe I grew up with a Tom Graff if not this Tom Graff.
Either way this guy knows his stuff and is good for a post every day. I will add him to my side bar links this weekend.
Now from the WTF file.
Last month we bought a new Tundra (we got zero% on a Toyota!). Yesterday my wife was driving it and the fan in the air conditioner started making a racket like there was a piece of paper or plastic stuck in it. We took it to the dealer and there was a rodent nest in there somewhere!
Who ever heard of such a thing? We have lived in the woods for quite a while and this has never happened to us. So $140 later it is ready for us to go pick up.
This is an interesting notion. What relationship does traffic have with stock prices? As Andy shows, with eBay there does seem to be a tight correlation but Amazon the correlation sort of decoupled when the stock tanked but the direction of traffic may have been a leading indicator.
Yes there are more bulls because Kudlow finds them and puts them on his show.
One comment seemed to wonder about raising more cash and buying more stock. Fair to say the market is confused? Fair to say investors are confused?
The overall market (S&P 500) is down less than 5% from its high from earlier this year. The market is up 60 points from its low a couple of months ago. This is all very narrow activity. People aren't bearish because the market is down a lot like you might see at a bottom, after a lot of selling. Even at SPX 1220 there had not been a lot of selling.
Sentiment does seem right for a contrarian rally but there just has not been a lot of selling to accommodate this type of move.
Frankly neither side has been in charge of the trading lately. There seems to be more bears out there but their sentiment does not seem to be firmly in charge of the trading.
To be clear the market can move big and fast in any direction at any time but with the market down so slightly it does not feel like there is fuel for a big rally.
Where client money is concerned I have been clear about not needing to top-tick or bottom-tick what may come next. I have been somewhat but not extremely defensive for a while which has not really hurt returns and I have no immediate plans to change.
The point here is that I don't have to nail it to generally be right. This is my preference. I know from comments that some folks do want to try to nail it. Some will of course get it exactly right but that is more difficult to do.
Thursday, August 10, 2006
This is a follow-up to a post that I wrote the other day that opined the US stock market could be in for a good year sometime before the decade ends.
Well my original post and thought process has more to do with typical market behavior as opposed to building a fundamental case for 2008. Recessions and bear markets, on average, don't last as long as expansions and bull markets. The possibility of a recession has been on my mind for a long time. I have not tried to narrowly predict the timing of a recession but the yield curve has been warning of a slowing for a while and the average duration of an expansion is only so long before the cycle usually ends.
Someone can check my math but I believe the average expansion runs about 4 years and the average recession runs about 12-18 months. If Dr. Roubini's timing is correct and the recession is normal and when you factor in that the stock market usually turns up about six months before the economy you may see 2008 be a good year, or maybe 2009.
Here we are looking at how markets and cycles usually work, that's all. Dr. Roubini thinks the recession will be severe so maybe that pushes out a recovery by a year or so. Another aspect is that, as mentioned in the other post, most decades have two or three great years (as defined by up 20% or more). This decade has only had one great year.
This means little today. It creates a frame of mind for the future. If, big if, we have a normal recession starting 1q of 2007 and the BusinessWeek forecast for 2008 (which will run in mid December 2007) is very dire, by consensus, I would probably take the over and expect a very good year.
Clearly, there are a lot of things that will happen between now and then that could crystallize this scenario or render it useless. This is really meant as just thinking aloud.