Tuesday, October 31, 2006
The euro, FXE, clearly has the most volume by a mile but I'm not sure I can agree with AI's conclusion that "FXE is clearly the best choice for a low cost, exchange-traded hedge against a weakening dollar."
FXE has been the volume leader of the bunch ever since the others were listed in last summer but, to use an analogy, Microsoft is not a better proxy for tech solely by the virtue of having more volume than Qlogic (QLGC).
Those two tech stocks are totally unrelated. The fundamental goings on with the seven different countries behind the currency ETFs may or may not be totally unrelated. Making a decision between several investments based on volume alone doesn't seem to make sense to me, maybe I am missing something.
The chart captures all of the single currency ETFs. Three other currencies have outperformed the euro; the peso, the Aussie and the British pound. The argument seems to be based on volume, which of course looks back but the volume leader has not been the price leader, not even close. Looking forward the euro may or may not be the top performer but volume in the ETF will not determine what currency does lead.
FXA and FXS are client and personal holdings.
This is a year to date chart of the ICEX-15 ETF I own personally. For new readers, I wrote several pieces about investing in Iceland over the last year and half. For now access is very limited. One way in is to open an account at Kaupthing Bank, the largest bank in Iceland, and wire money into the account for investment.
The long term thesis, as I see it, is that Iceland will become much more important in the world economic order in the coming years. There has been and will be a lot of growth, some inflation, deficit issues and I think I saw first hand a very adaptable economy and society. This is my perception not an attempt to sway you to buy something. Given that this is what see I have a small investment account that I will add to in small amounts maybe once a year.
I labeled my entry point on the chart. It has been quite a ride so far. The worst of the news maybe behind the Icelandic market but the volatility could persist for a while still.
While this may require training on your part, if you have invested in something that you really think is a five year, or longer, theme it is very important to really embrace the fact that short term moves, up or down, are not what's important. There is no guarantee I will be right about Iceland but there is no way I can be right or wrong in just eight months.
TomG who knows a thing or three stated a point I have been making, only worded a little differently, he said he wants to capture stocks' general trend of going higher. He rightly questions the value of paying for help that may not get you to your financial goal.
TomK logically points out that a portion actively managed (either on your own or with help) blended with passive buy and hold has merit which it does.
George tied it all together noting that to many do-it-yourselfers succumb to emotion, make mistakes and then repeat those mistakes later. The context of George's point is along the lines of mutual fund shareholders lagging the funds they own by a mile due to poor investment decisions. The studies done on this reveal some horrible numbers.
There are obviously a lot of moving parts and aspects of this to analyze and believe it or not we won't solve this here. Capturing most of the effect, as TomG says, is the big macro behind this entire discussion. What is the best way to capture most of the effect is the entire discussion. Success can be had with buying four funds and rebalancing once a year, scalping $0.20 a dozen times a day and everything in between. So this is about finding the strategy that is right for you.
The obstacle to doing it yourself is emotion. I write this about when I say this is just how market's work. Markets go down every now and then and the economy has a recession every now and then. The markets also have fast nasty declines that seem to come out of the blue. The events triggering these declines may change a little but the market response is very similar to past market responses. A common mistake is to sell into these declines; selling stock on September 17, 2001 was not the right trade. Likewise buying hog wild at the height of euphoria is also not the right trade very often.
This is probably the type of thing that has to be learned first hand, meaning bad trades have to be experienced in order to understand this.
I will say I am not a fan of blind devotion to indexing. I do not buy into the idea that a US index fund, foreign index fund, REIT fund and a bond fund are all you need. This has its proponents, and I hear you but it is not for me and I certainly do not think people should pay ongoing management fees for this type of portfolio.
I believe a lot of value can be added by taking a top down approach to the world and adding a few ideas in with whatever you have going on in your portfolio. I have been writing about Ireland and Australia since I started this blog. I own a bank stock for each country. In the last three years the Irish stock is up 85%, the Australian stock is up 70% and neither one has been the best possible way to own these countries but these stocks each capture most of the effect. In the same time period the S&P 500 is up 30%.
The idea of picking these stocks was not that I thought these stocks would go up by X percent in a certain time frame but instead these are countries that I want to maintain exposure to over the long term. These themes, Ireland and Australia, are important to me. Chances are there are other themes that are important to you. Much as I would like you to think this type of thing is difficult, it isn't. An economic expansion is generally good for a stock market. Beyond that selecting the best way to access a theme, in this case a foreign country, requires a lot more work. Obviously a fund of some sort takes less work than picking a stock.
If you only limit yourself to the broadest funds you will not benefit from some ideas that could add value and again are not that complicated. While this will not be for everyone I think more than a few people could withstand exposure to a country if they are willing to stay up to date with that country's current events.
There was one comment left that I think dangerously misses the boat. The reader says that "In practice, it is relatively easy to beat S&P 500 index as an individual or portfolio manager. The 30% gain of foreign currencies over US dollar in the past 5 years gave international large cap stocks a 30% advantage over US large cap stocks assuming everything elase being equal. So you decide to beat S&P 500 by choosing international stocks."
I'm as big a fan as anyone of foreign investing but I don't put that kind of faith in it. I am not an expert in behavioral finance I think this comment is hitting several fallacies at once. I probably can't make this commenter believe otherwise but trust me it is not that simple.
This issue is not resolvable so this post can't really have a conclusion. While I believe you have to be comfortable with your investment strategy I also believe in trying expand your horizons. If you read a site like this one, maybe you believe expanding your horizons too.
Monday, October 30, 2006
SLW is an interesting stock (I have no position personally or for clients). The basic story as I understand it is that silver often (maybe always?) is a byproduct of mining for other things. Meaning at a copper mine for example they may also pull out silver. SLW contracts with those miners to buy their silver at pre-set rates that are below market rates. SLW then sells it to silver buyers and makes a profit on the trade. Apparently this arrangement is a good deal for these miners that pull it up with other things.
That is my understanding anyway, you can read Bill's post and find plenty of other content about the company to get all the facts for yourself.
The debate between passive and active has been around for a while and is not likely to go away but I think it overlooks something that I have tried to explore here with a few posts. Being 100% invested in a particular index will have a certain amount of growth that can be expected and some measure of volatility associated with that growth.
A mutual fund manager, hedge fund manager and in many instances an investment manager (what I do) do need to show outperformance at some point for their clients or partners or they may start to lose business.
If you are managing your own portfolio the need to beat the market becomes less significant. A 50 year old with several million saved, a high paying job he wants to keep doing and a modest lifestyle needs growth but probably not market beating growth and the volatility that might go with it.
A 60 year old with $300,000 saved probably has a much greater need to be exposed to normal market volatility because this person is more likely to need to keep up with the market.
Part of managing your own portfolio is accurately assessing what you need your portfolio to do. Being too aggressive when you have more than enough saved can have the same result as being too conservative when you haven't saved what you need; not enough money for when you start drawing paycheck off of your savings.
There are plenty of ways to construct a portfolio to meet your specific needs that should blend together things that behave like the Yield Hog ETF is supposed to (low volatility high yield) and things that behave like Research In Motion is supposed to (high octane explosive growth potential). These are just examples I don't own either one.
The point here is, as an individual, your portfolio needs to do something. A financial plan (not a pitch for hiring someone, you can devise one yourself but at least read up on the how to do it) can tell you what your portfolio needs to do. If you only need 5% a year you may think twice about trying to make 20% a year.
I can appreciate that a trader will not have much interest in this line of thought.
Sunday, October 29, 2006
This doesn't look like spin on his part. There appears to be a big error with how much autos should have contributed to the number.
Read the post, it included an entire Bloomberg article about this.
On a side note, as I publish this, Blogger has moved all of my sidebar links to the bottom of the page into the main body of the blog. It did this on its own without my making any changes. You may be aware that Blogger has been having a lot of problems lately, goody.
Saturday, October 28, 2006
Friday, October 27, 2006
One stock is Telenor (TELN) the Norwegian phone company. It is up about $7 in two days. I sold it this morning at around $47.20. This is not the type of stock where I think a stop order works very well. I have owned the stock for clients for close to two years. The stock tends to not do much for long periods and then hop around furiously like it is doing this week. I would not be shocked to see it open with a $3 gap in either direction, which is what it has done for the last two days. Hence my not using a stop order.
I have a stop order in on another foreign stock. Since the order is still open I'll hold off on the name for now. This second stock does not hop around $3 at a time and so I did use a stop order on this one.
Either trade is open to second guessing but I for one do not know what the stock will do next. My hope would be to either buy them back cheaper or buy them back in six months at the price they are now; I would be happy with either outcome. Of course the second one has not sold yet.
This gives a little bit of perspective, to me anyway, about things. Things have to go very bad very quickly for firefighters to die in a wildfire.
Yesterday DBV was down $0.18. The reader noted that all the single currency ETFs (the ones from Rydex) were up and wanted to know if those funds up-DBV down would be a normal correlation.
My idiocy notwithstanding, DBV is unlikely to correlate to the dollar. DBV does not make a directional bet on the dollar. It offsets high yielding currencies and low yielding currencies. The idea is that higher yielding currencies outperform lower yielding currency; this is the big macro idea of the fund.
Quoting Kevin Rich who is the CEO of the area at Deutsche Bank that is running the fund "When you ask whether it's a bullish or bearish dollar play, it's neither. It's really a currency strategy."
DBV was down yesterday because the Riksbank in Sweden (a currency the fund is short) raised rates and the kroner went up. Also there was economic data from New Zealand (a currency the fund is long) that seemed to remove the possibility of another hike which hit the kiwi very hard.
There was another comment where the reader said he sees a correlation to the dollar and thinks the fund will be stuck with a long dollar which he thinks will be a negative. The fund has been out for a month. It is not clear to me that any correlation he sees will stand up. The length of the back test (which is not chartable that I know of on any website) takes in big moves for the dollar in both directions.
I think the better question is can an extreme move in the dollar have some sort of second derivative effect on the strategy. The dollar has not moved enough in the last month for this to come into play yet. What I mean is could a move in the dollar cause a distortion in the other G-10 currencies. I am not talking about the dollar going up or down vs. the yen, this should not matter according to the interview quoted above. But I wonder if a big lift in the yen vs. the dollar distort the cross rates of the yen vs. other currencies.
This all brings up an important idea. If you are going to own this fund, or any product really, you need to stay in touch with what underlies the fund. In the case of DBV it is, at a minimum, the goings on in the currencies it is long or short. This is not much different than keeping up with the goings on in a stock you own.
Keeping in touch with the currencies is not that difficult. You can subscribe to the Daily Pfennig, visit the web sites of the various central banks (every one I have ever looked at translates their site into English), I also read commentary from Jyske Bank, DailyFX, Bloomberg, blogger David Andrew Taylor, Brad Sester and Marc Chandler who among other things writes for RealMoney.com.
I don't think the average do-it-yourselfer needs to read this many different sources of forex every day but one or two to at least know when there will be central bank activity and a couple of big releases is doable and probably necessary.
Thursday, October 26, 2006
I see no reason to try to counterpoint his idea, it will be right or wrong. I think there is more utility for do-it-yourselfers to instead think about what they would do if it ever starts to look like he will be right. He likes TIPs and Local Market (foreign bonds) bonds.
I would also think that, relative to equities, the myriad of dividend ETFs might make sense. I also think the Currency shares, especially higher yielding products also might do well (the idea is a bear market combined with the Fed lowering rates would cause a decline in the dollar). Foreign stocks from countries that don't export consumer goods heavily to the US, here Sweden, Chile, Australia come to mind first, might work. I think staples would stand up too. One last one I would mention is certain emerging markets that are in their own world in terms of their growth stories. Here I think of places like Hungary, Poland, Iceland and Vietnam. To be clear these countries have their problems but they are not too dependent on the fate of the US.
This is just meant to be something to put on the back burner. Arnott's scenario is not unfolding now. But it is kind of a dour outlook from a smart guy. There is nothing wrong with thinking about what you would do now while there are no emotions clouding your logic.
The market has defied countless fundamental, technical and cyclical obstacles this summer and now into the fall. I have been expecting a decline for a while and have been wrong. In almost every post on this topic I have said the market could work higher in spite of these obstacles and that has been the case. While confounding, this is not unprecedented. This month has gone better for the portfolios I manage because energy and materials have started to retrace nicely.
Markets obviously cannot go in just one direction. There will be a correction again. The next one may or may not be painful as corrections go but at some point again in our lives there will be a 30% correction, I just don't think it is coming now. Keeping in the realm of normal I might guess 15% or so. Again this is normal in the nature of market cycles but if you have been reading this site for a while you know I would have already expected it to start. For now I am out of touch with the timing of such a move which is just fine because I don't really object to higher stock prices.
Yesterday on my visit to the Daytrade Team's Trading Room I said that I thought that the market had discounted a hawkish statement. I felt that too dovish would cause yields, the dollar and stocks to go down. Some folks are saying that the statement was too dovish and yields and the dollar did go down but stocks rallied; more confounding action maybe?
Now it looks like the S&P just went into the red, maybe on the housing data. Maybe the open today will be the near term top but since I am so out of touch maybe instead a week from now we'll be at 1405 on SPX. I am being a little sarcastic. For now though the market clearly has momentum regardless of where it is coming from and I don't need to be exactly correct about when it turns.
This is an intelligent comment. If you manage your own portfolio all you need to focus on is building a portfolio you can live with, obviously I think it would need to be diversified but maybe you don't. As your own portfolio manager your job is to make sure the account does what it needs to over time. Beating or lagging the market in a given year or another time interval should not matter; I concede this is easier said than done if you are a very competitive person.
I think the bigger theme here is that building and then managing your own portfolio can be a simple or complex as you want to make it. The simpler you can make your portfolio relative to your experience and the time you want to spend, the less effort you will expend consoling your restless client.
Seriously one way to have less stress is to know ahead of time what will cause your portfolio to lag. With the portfolios I manage declines in energy, resources and foreign markets are the most obvious obstacles for me. Serious declines in any or all of the three would clearly cause a lag which is what happened last quarter. If energy goes down again there will be another period of lag. The long term (multi year) theme has not changed in my view but a few months of correction (or further correction) every so often is within the, ahem, fat tail.
Chances are your portfolio is looking pretty good these days. Back in May and June I wrote several times about what that decline taught you about your own tolerance for volatility. Earlier last spring I had a lot of emails, mostly in my Street.com, account from people telling me they had as much as 30% in emerging markets and I did what I could to question if that was too much. One person emailed me during the height of the emerging market selloff from late spring to say he wished he'd lightened up.
Now that your portfolio is looking good, are you way out of balance? Will something nasty in take your pick create more downside volatility than you want to be exposed to? If so sell now.
This is not part of my general bearish tone of the last few months but is instead an attempt to head off trouble. If you are, sticking with the example above, 30% in emerging markets and another dislocation comes along like the one that started in Iceland earlier this year, maybe this time something with Hungary, what do you think would happen to your portfolio? Now apply the same line of thought to any area you might be over exposed to.
This may not be an analysis you want to do but this is the best time to do it for folks that are so inclined.
Wednesday, October 25, 2006
I think there will be more appearances in the future.
I incorrectly wrote that the Deutsche Bank Currency Harvest ETF is double long and single short. I got that from an article at Index Universe from last May that says double long and single short and that stayed with me.
"The fund will have 2X leverage to the long side, meaning that it will invest twice as much money in the long currencies as it does in the short currencies."
When I read the info card from Deutsche Bank I saw the part about leverage and assumed long 2:1 and short 1:1 based on the previous article.
"the Index will reflect an investment on a 2:1 leveraged basis in the three long futures contracts and in the three short futures contracts."
I did not take that to mean double short but after a call to the fund and rereading it, I was wrong. It doesn't change my thinking but it was a mistake nonetheless. I can't control anyone thinking I am dumb but I can account for myself.
Recently I bought a Russian stock for a few (literally just a few) clients and personally as well. I only bought it for clients my around my age, in a small amount with a tolerance for volatility. The name does not really matter but the stock is probably not ideal for the vast majority of our clients.
In trolling around the net I found a website that appears to comprehensively cover the Russian stock market run by a company called Finam. The site has some quote information, financial data, sector listings, news, analysis and more. They also maintain a blog called Russian Stock Market Blog with very short but informative posts.
A theme like Russia, and there are others like this, should, IMO, be owned in small amounts (for people for whom this is even appropriate) with an eye to the long term and with the expectation of extreme volatility.
I tend to think there is room in a diversified portfolio for this type of holding even if Russia specifically is too dicey. This might be especially reasonable if the rest of your portfolio tends to be a lot less volatile than the broad market, by design.
A quick administrative note; I made a typo in my post yesterday about DBV. I said that my purchase price was $24.48 which was incorrect it was $25.48. It was just a typo-the four and the five are right next to each other on the key board; apologies. I corrected it on the original post and noted the mistake but chances are you don't read a post twice.
Tuesday, October 24, 2006
I did not buy it for any clients. It is an active strategy, of sorts, and I am not sure putting it in client accounts is ideal until it has something more than just back test results to go on. I have concluded that the strategy has utility. For a recap the fund goes double long the three highest yielding G-10 currencies and single short the three lowest yielding G-10 currencies; excluding the US dollar. The fund uses derivatives for this so the fund is mostly cash that will go into short term treasuries so there will be some yield.
The big picture idea is that, to bring up a theme of the last few weeks, it has offered market beating returns with only about a slice of the volatility. I think the market beating part will turn out to be an anomaly due to a distortion caused by the stock market crash earlier this decade.
The strategy has not done well over the last year. I think this can be attributed to being long the kiwi, which has retraced nicely in the last couple of months after a nasty decline earlier this year, and short the Swedish krona which I am favorably disposed to.
The idea in buying this is low beta, a little yield and very little fundamental connection, as I see it, to the US economy.
I am not suggesting anyone buy this but I did want to post an update.
On a different note, the new buzz about dow 13,000? I had a vision of the classic Joey Batts line about Nasdaq 6000 being a chip shot. I'm sure its just me.
For the record while I would have thought there would have been a correction by now I am not saying any correction that mih come would be anywhere near as big as what happened after the chip shot line.
Here is the financial sector as measured by iShares Financial (IYF) against the S&P 500. The financials account for about 20% of the S&P 500.
Here is tech as measured by iShares Tech (IYW), roughly 15% of the market, against the S&P 500. If there is a rolling over here it is certainly much more subtle than with financials. With this sector it is more visible with the 200 DMA than the actual ratio.
Here is iShares Health (IYH) which had a big lag which may or may not be retracing, you can decide for yourself. Health's weight is about 15%.
OK, the last one is iShares Energy (IYE) which is about 10% of the market. This ratio may have found a bottom too.
The point of this post is that arguably the rally of the last few weeks has come without the support of some big sectors. This sort of action historically is a negative for the market as evidence of a tiring rally. It clearly does not have to play out negatively and certainly there have been plenty of things this year that usually hinder markets but have seemingly had no effect.
The issue addressed here will either matter or it won't but these sectors probably need to turn up relative to the market for the rally to continue.
Monday, October 23, 2006
There are a couple of different things at work here. First is the idea of investing in REITs to capture a real estate effect, specifically commercial real estate. Another big draw is the low correlation to stocks and accompanying high dividend yields.
Most of what I could offer here will be subjective, I don't think there is a hard right or wrong.
I maintain much less than 10% in REITs. Most clients are 3% or so and some clients who are less tolerant of volatility have 6% or so. I can't say 10% is wrong but just not where I want to position.
Personally I don't think of my home as an investment in the context of how it balances out my portfolio. When we first bought our house it was a second home and so maybe then it made sense to think of it in terms of our portfolio then but we have been living here full time for several years now, with no plans of selling anytime soon so its value has no significance to my portfolio. Plenty of folks would view this differently and that is very valid but whether my house is worth $100,000 or $600,000 plays no role in how I manage my own portfolio. I would feel differently, I suppose, if I were going to sell soon.
As far as whether McDonalds (MCD) and Walmart (WMT) capture the effect; I'd say no. These companies and companies like these may benefit from real estate to be sure but I don't think they capture the effect. Using streetTRACKS REIT Fund (RWR) as a proxy, WMT has a 0.33 correlation while MCD correlates at only 0.29.
To me this is similar to the question of whether a multinational that sells to China captures the China effect; it doesn't.
To get even fuzzier, there is another aspect to REITs which is what they offer to a diversified portfolio. Typically they offer lower volatility, higher yield and more predictability than equities. This is desirable within a portfolio but REITs are not the only type of thing that brings these attributes to the table. While I don't have 10% in REITs it might be correct to say I have 10% in holdings that behave similarly to REITs most of the time. If REITs ever get pasted it is reasonable to think that some of these other areas that behave similarly might hold up just fine but of course there is no way to know for sure unless a crisis ensues.
While I remain skeptical I did think of a way where these might make sense, but it will depend on how the ETFs are constructed. This will just be an example as I am no expert on small cap or micro cap biotech stocks and I would think that is what most of the stocks included in these funds would be.
Let's say an investor find a stock that is a big fish in metabolic and endocrine disorders but still an early stage and volatile company. A stock like this could have a big-ish weight in the Metabolic-Endocrine Disorders ETF. By big-ish I mean 15% or so. As I am thinking of this type of stock, bad FDA or efficacy news (or something similar) could crush the stock making owning it as an individual pick less than ideal for some folks. But the ETF could provide exposure without red or black kinds of stakes riding on the stock.
Obviously at this point I do not know how the funds will be made up. For all I know Pfizer could be the biggest weight in every ETF, but I doubt it. We will know soon enough. For now I remain skeptical, this post just isolates one way that they could have some utility but it may not play out as I describe.
Sunday, October 22, 2006
Who are you kidding Roger? It appears that you are emotionally attached to this stock.
CAT is in a cyclical industry and the cycle is turning down. Maybe you should not be emotionally attached to it and sell CAT before it hits the bottom. If you love it so much you can buy it back with significant discount later. Just a reminder: buy at low and sell at high (not buy at high and hold it until it goes higher, even if it is 10-20 years from now) Good Luck with holding cyclical stocks!
The big difference, I think, with where this person is coming from compared with where I am coming from is it seems like he is more of a trader than a long term investor. I take from his comment he owns zero industrial stocks. Going zero in anything is a big bet that is more appropriate for people that take more of a trading tact to their account. Since I manage long term money for other people and tell them we maintain diversified portfolios (which is the right way for me to go) going zero is off the table. If you don't view yourself as being a nimble trader you may want to think twice about going zero in a sector of the market.
The sale of half the CAT position in May was done out of an attempt to look forward due to concern that the economy would slow down in some magnitude. Reducing industrials made sense on that basis. The long term fundamentals, in my opinion, did not change the day I sold and they did not change with earnings news from Friday. The shorter term story though has changed a little to be sure.
This is a chart of another industrial name that most clients own; Volvo (VOLV). The other day I mentioned that industrial stocks are prone to big swings and this chart shows a rough patch for Volvo last spring.
I did not sell into this as I did not think the long term story had changed. Someone bought at the top tick in May and someone sold at the bottom tick in June. Neither person thought they were placing the wrong trade.
For about a month the buyer looked dead wrong but now doesn't look so bad. From a price of $54 on May 10, that buyer is up 14.8% compared to 3.4% for the S&P 500 index for the same time period.
The point here for an investor, as opposed to a trader, is that there is no way to know whether CAT is, after the decline on Friday, now still higher that it will be for the next year, whether $59 is a bottom or if this point is the middle of a range.
Part of the decision to keep or sell a stock after a big decline for an investor is whether or not you think the stock is still a good way to capture whatever you intended it to capture. It is not too often that the entire fundamental picture of a company changes at the same time the stock price moves by 10% in a day.
Again this is not to say stocks never get sold, I write about tweaking positions whenever I make changes, but it is to say that a big price change does not have to automatically mean a trade has to be made when the outlook is long term.
Obviously a trader would view this differently which is fair game and where I think the commenter is coming from.
A last point is about diversified portfolios. In a diversified portfolio not every stock you own will be going up. If they are all going up at the same time, what do you suppose would happen during a downturn? Volvo is up 30% YTD. There are a couple of other names that are up similar amounts. These offset any names that are down or lagging the market (of which there are several in client accounts). Hopefully the blend of winners and losers gives an overall result that is acceptable.
Saturday, October 21, 2006
Friday, October 20, 2006
Because it is such a big name on the global scene and so widely followed it is easy to keep track of what is going on with the company. Because it is such a low octane name I find myself not needing to keep very close tabs (this is relative) on the share price. This morning I noticed that it went above $60 for the first time yesterday making a new all time high.
YTD the stock is up 15%, ahead of the market and ahead of the sector as measured by iShares DJ Healthcare Index Fund (IYH). Admittedly some of the lift in NVS can be attributed to the dollar being down about 5% vs. the Swiss franc YTD.
In a diversified portfolio you would expect a mix of stocks that are ahead of the market and stocks that are lagging. One point of this post is that to me this type of action is exactly what investing longer term is all about. This is not a tout for Novartis, it is a tout for long term ownership for a company you believe in. It is not all roses all the time of course. During the spring correction NVS dropped 10%, much more than the market. I did not think about selling, I would say that all stocks have bumps in the road now and then.
This brings the conversation to Caterpillar (CAT). It is a name I have owned for clients for several years. I disclosed selling half the position back in the spring thinking an economic slowdown was in the offing. Reducing industrials in front of a slowdown is really a by-the-book type of trade. The mind set needs to be similar but the stock also needs to be understood. A stock like CAT is capable of going down a lot. I don't mean in one day, which is obviously the case, but over a longer period of time. If you are 100% buy and hold then you need to really grab on to the idea that industrial stocks have periods of serious volatility in both direction.
The trade to lighten up looks good but the decision to keep half looks bad. For a few months (or longer) CAT's growth rate is going to be slower than some were previously expecting. The company is still a big big fish in its pond and will likely be a big big fish when growth for the entire industry starts to accelerate again.
I called this post Mind Set because if you are investing toward some goal in the future you probably should not focus on today or next week or next month or even next quarter. Both stocks listed in the piece will have time periods in the future when they lag and lead.
One last point, this is not to say that stocks should never be monitored, reviewed and possibly sold outright but people selling CAT today are probably more driven by emotion than logic.
A few readers asked what Mohamed El-Erian meant when he said "If world goes into recession, you want a liquid market. We think of recession as a risk under our ‘fat-tail’ insurance."
This is a little dense and not that easy to explain. You can click here to get the Wikipedia definition of fat tail. You an also click here to read a thorough definition left by a reader. Now that you are back I can tell you how I take his comment but can't vouch for being correct. He says that he expects a soft landing in the US, putting a lot of faith in the Fed.
Right or wrong he believes a soft landing is coming. He can probably assemble an argument with data of reasonable probabilities that lead him to this conclusion. The fat tail comment implies, to me anyway, that just because his analysis and conclusion says soft landing he still allows for the chance of a recession coming anyway and is either hedged a little in the fund's allocation or is ready to quickly makes changes in case the result falls outside his analysis but within his fat tail, that is a recession and not a soft landing.
I think I'll have some coffee now.
Thursday, October 19, 2006
Some thoughts from the guy who runs Harvard's endowment fund.
In no particular order there was one comment about whether to go with annuities to some degree. Annuities can be expensive, inefficient and have a few other flaws but they do give peace of mind, at least to the people I know that have them. In making your own decision about this you need to weigh the expense and the other issues vs. the security that goes with them. This is a subjective thing and I can't say that someone else is right or wrong regardless of what they decide.
George plainly spells out something important that I alluded to. A bond, regardless of its maturity date, can only return its par value at maturity (TIPS and convertibles noted). A plain vanilla bond has no possibility of growth. Your expenses are guaranteed to grow. Based on how markets work the vast majority of the time, the growth from the stock market outpaces inflation. This point has nothing to do with individual tolerances, time horizon or market timing this is simply about mechanics.
Things like individual tolerances, time horizon and market timing go into how portfolios are allocated. Most clients have fixed income exposure and that is unlikely to change but the long term drawbacks to bonds, IMO, far outweigh the long term drawbacks of equities.
One reader asks what the best way to have exposure to the fixed income market. I don't think there is a best way. There are different parts of the bond market and as it is with equities, if your portfolio is large enough you should have diversification in your bond portfolio. Most segments have a couple of different ways to invest; individual issues and funds. In most segments of the market the liquidity for individual issues will be very unfavorable especially if you need to sell. Treasuries, which have a place, don't really have liquidity issues.
For clients I own individual issues for treasuries, preferred stocks and muni bonds. I use funds for foreign, convertibles, high yield and I use the TIP ETF.
The same reader also asks "So what if rates are going up and the principal is going down because one is still collecting coupon interest and the ladder distributes depreciation."
As an example, if you buy a ten year treasury today your yield will be 4.76%. If over the next two years the curve normalizes and the then current ten year yield goes to 6.75%, well within in the range of normal, you can expect the price of your treasury to fall by about 16% (a general rule of thumb is that a bond's price will fall 8% for every 1% rise in interest rates). So you are down 16% and your yield is substantially less than prevailing rates. This certainly is not the end of the world but it is far from ideal and if you had to sell for some reason you'd be in a bit of a bind.
One point about stock dividends that was also alluded to is that they grow. 30 years ago the S&P was around 100 and yielded about 2% (a little more than today). With the S&P 500 now at 1365 it yields 1.7%. The index is up 13 fold and dividends kept up with 85% of the market's growth (round numbers here).
None of this mitigates the risks or volatility of equities and there is nothing wrong with yield and predictability either but you need to know the pluses and minuses of stocks and bonds. Stocks can lose value and bonds don't grow.
Wednesday, October 18, 2006
I did a write up on the Steel ETF (SLX) for TheStreet.com can you can read here without a subscription.
He was there to work on the gutters. He co-worker told me he got a little complacent and lost his balance.
Hmmm, I wonder if there is an analogy here.
He could have been up there and complacent all day without falling but the danger of falling would have been there the whole time. If he had not fallen it would not have meant there was no consequence for the risk taken.
All of the points that bears make today about the market are true and the market has thus far overcome those obstacles to get to this point. The market may continue to overcome its obstacles, defy the history of how markets usually work and go much higher but the risk has not gone away.
The point, I think, is not to get caught up in the hype, the wearing of hats (ahem) or anything else. Hopefully you have some sort of financial plan, some sort of investment strategy you are comfortable with and you don't take huge deviations away from your plan.
Apollo Group (APOL), one of the for-profit education companies, looks like it is down 14% in pre-market trading coming off on earnings news. All of these stocks are capable of nasty hits and every so often take dives like this one today.
This ties in with knowing what your stocks are capable of doing. These seem to get smacked like this a couple of times a year.
Before the hit the stock was only at 19 times earnings; I did not read the news but a one day 15% decline is nothing new. I have never had any interest in these so I haven't tried to learn the story but intuitively the declines seem to be bigger than the type of business they are in would justify but as I say this happens frequently with this type of stock.
I am not going to defend the portfolio, its not something I would do for anyone. If you can buy three funds and "get on with your life" you can probably buy more than three and also get on with your life if you want to be that hands off.
WITY (the pseudonym of the blog's writer) gives several reasons why he does not like the portfolio including "For a 65 year-old, for example, the equal-weight three fund allocation suggested by Schultheis is inappropriate, because 66.7% equities is too much."
His sentiment is not wrong per se but it is open to opinion and interpretation. I would say that a 65 year old with $500,000 and healthy 90 year old parents might need more than 2/3rds in equities. $500,000 properly diversified can meet an income need of $25,000 which is not a lot of money. The person in my example could live to 100 quite easily. With only $500,000 he needs growth badly. If he can live on $25,000 today, OK but ten years from now with normal inflation he may need $35,000 to live the exact same lifestyle. That means his $500,000 needs to meet his income need every year and then be worth $700,000 (minimum) in ten years.
Ten years later still a $35,000 life style in 2016 dollars may cost $50,000 in 2026. So from 2016 to 2026 the money needs pay the investor his annual income and be worth $1 million (minimum) in 2026.
Too much in bonds could result in financial crisis for this investor and the situation could be typical. $500,000 to start is a fine number but does not make anyone wealthy and more and more of us will be faced with living much longer than our grandparents.
In the coming years more and more people will need to really come to accept this and allocate appropriately. If the above investor put 40% of his $500,000 into some mix of bonds with an average maturity of ten years, his $200,000 today will still be worth $200,000 in 2016. This means that what he does have in equities will need to work much harder (read be more aggressive) to get to where he needs it to be.
There is no right or wrong with this, just subjective opinion.
Tuesday, October 17, 2006
There is one quirk with all of them that jumped out first that should be understood which is they exclude Canada. I was told that the funds generally target MSCI EAFE which also excludes Canada. I seem to remember hearing something different about why no Canada but regardless of why, know that it is excluded.
I was a little disappointed by the yields. They, as a group, clearly yield more than the existing sector ETFs. Here are the yields
Basic Materials 2.87%
Consumer Cyc 3.86
Consumer Non-Cyc 2.61%
Another fun little oddity is that the Consumer Non-Cyclical Fund (DPN) has a big weight to health care. There is at least 27% (this number only taken from the top ten) in healthcare. The total weight of the top ten is 46.5%.The largest stock is Glaxosmithkine at 9.45%, Astrazeneca is number 3 at 4.98% and Novartis is fourth at 4.88%. I have a vision of the Vince Lombardi clip that they show on ESPN every so often where he is pacing around and yelling "what the hell is goin' on around here?"
Claymore has a fund in the works that will be called the Defensive Fund, or something similar, that will look like DPN, albeit with domestic names, that will invest in stocks that should do well during an economic down turn. It is a neat idea, but that last sentence is all I know about it. The WisdomTree fund in question here, DPN, seems like it will be a foreign version of that and not a true consumer non-cyclical fund.
If you are curious, healthcare, as measured by iShares Healthcare (IYH), has 0.68 correlation to consumer non-cyclical as measured by the Staples Sector SPDR (XLP). So for now I am a tad puzzled by the DPN.
I'll have more on these in the next couple of weeks.
As a top down investor I think the important decision is whether to invest in theme at all. PHO may be the best way to invest or it may lag many individual stocks that are related but directionally they should be very similar. I think the theme could be huge over the next ten years so taking single stock risk seems unnecessary to me if I turn out to be right. If the theme is huge then even the index would go up a lot, again if I am right.
For people needing or wanting to make 50% this year on a water play I would say to try to pick a stock they think can deliver because I doubt the ETF will go up that much over the next year.
The NY Times had an article about the covered call funds that were all the rage for a while and that I wrote about quite frequently in late 2004, early 2005 and a couple of times since. Like most articles on the topic the focus is on the various flaws and why this is not the right strategy for most folks.
I think my take on these has been sort of unique. The concept also has plenty of proponents as well as detractors. While I do buy into the concept I have urged moderation every step of the way. Most clients own one of these funds anywhere from 2%-4% of the portfolio. I do not think the strategy or the various funds that invest this way will blow up but at 3% there is not much reason for me to devote too much time to worrying about it.
I had owned Madison Claymore Covered Call Fund (MCN) but I swapped it a short while back for Blackrock Global Opportunities Equity Trust (BOE). The reason for the swap was to maintain the same general effect but have this kind of holding spared (hopefully) if the US economy does go into a recession. Since the swap the two have moved in lockstep. If the economy never goes into recession again the two should trade similarly more often than not, I think.
On a related note European index provider Stoxx Limited just listed the Dow Jones Stoxx 50 BuyWrite Index. The general intention is to create an ETF to track the index. This is something I touched on a few days ago. I think in the next couple of years we will see ETFs on the various buy-write indices, foreign and domestic. And if they do come I'll urge the same moderation.
Monday, October 16, 2006
I hope you will check it out and give it a chance. I am excited about it because it is very much a new thing. From the start of this site it has been clear to me, and I have been writing this all along, that the blogosphere will evolve to become a better source of information and investment process. Wallstrip captures a lot of process in the conversation and some humor in the video.
Will this end up as the thing? I have no idea but I think the concept is clever and I hope will be useful.
Unrelated; I have had some great comments like T's admission he made simple more complicated, a link to Jeff Saut's commentary from Mark and some genuine sharing of process from reader TomK.
If you are only an occasional reader of his commentary, this week should be an occasion.
Even if I am wrong about that the ETF is the Environmental Services ETF (EVX). They also listed the Steel ETF (SLX). I will have more on these later.
I am in no way passing judgment but I do find this interesting. There is a lot of money out there that just uses ETFs. It will be interesting to see if these types of managers find utility in the newer ETFs that seem to list by the dozen these days. I hope they do in that if ETF innovation is rewarded with volume we may see ETF providers become more and more creative, naysayers notwithstanding.
Barry Ritholtz republished a nine point investment plan by Scott Adams, the Dilbert cartoonist.
1. Make a will
2 .Pay off your credit cards
3. Get term life insurance if you have a family to support
4. Fund your 401k to the maximum
5. Fund your IRA to the maximum
6. Buy a house if you want to live in a house and can afford it
7. Put six months worth of expenses in a money-market account
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio
As it is just an opinion people maybe inclined to pick on certain points made but I think it is very useful for its simplicity. When possible I try to gravitate toward simple. Capturing equities in three or four broad ETFs is perfectly valid and for some folks it is the best way to go. Obviously I tend to think a diversified portfolio needs to have a few more moving parts than that which is why I manage they way I do and write about what hopefully seems like a wide range of investment themes.
A reader has left a couple questions as an attempt to better understand this pairs trade idea I have been kicking around lately. The reader expresses a concern about "free lunch." While something could certainly go wrong the goal of the trade is to deliver an outcome that lags the market and at no time in the exploration of this have I thought it was riskless. If the items paired have correlation between -0.90 and -1.00 it seems highly unlikely that both things could go in the same direction. I laid out a scenario in the comments where maybe both the long and the short decline slightly in a flat environment.
The reader then asks if the new inverse sector ETFs would pay a dividend, how important the dividend is and whether just being in the money market would be better.
Last one first; I don't know which is the point of the study. I was able to create one backwards looking example that clearly beat the money market. The RWR/SRPIX pair returned about 2/3's of the S&P 500 Index and the dollars at risk, when the two are combined, was almost nil. Looking forward there is no way to know if the concept could ever work again but I think it can.
I would not expect an inverse fund of any sort to pay a dividend although it happens every now and then.
The dividend paid by the long is very important to the theory. The idea is to pair two things that are highly correlated from the same part of the market. The hope is the long (like maybe an "intelligent" indexed product) out performs the short (like an indexed product with no enhancement) and hopefully the long out-yields the short, or better yet with an inverse fund any dividend paid is by debiting fund's NAV not your account.
For now don't lose sight of the fact that this is just a concept I am exploring. I have committed no money, there is not much selection for inverse sector funds (OEFs three I think, ETFs none). This is the early stages of an idea and anything I have posted so far is simply thought process.
Saturday, October 14, 2006
This chart compares the StateStreet REIT ETF (RWR), which was the highest yielding ETF in the sector I could find, against the Short Real Estate ProFund (SRPIX). According to PortfolioScience.com the two have a negative 0.962 correlation.
So if last October 13 you put $20,000 into RWR and $20,000 SRPIX you would have bought 336 shares of RWR and 605 shares of SRPIX.
RWR would now be worth $28,717 a gain of $8717 and SRPIX would have dropped to $14780 a decline of $5220. The $40,000 invested a year ago would have had gain of $3497. You also would have picked up $1162.22 in dividends from RWR and a $24.20 dividend from SRPIX (I did not read the prospectus to see how this fund could pay a dividend but Yahoo Finance says it paid $0.04 this past September 29). The total return was 11.7%.
During the same time period the S&P 500 was up about 15%. So you captured most of the return of the market, although clearly with a lag, with very little volatility.
If RWR had declined in price by 10% SRPIX might have gone up by 9.6% for a net loss of $80 but add in the dividends of $1186.42 and it would have netted out a 2.7% gain. Of course since this is not what happened there is no way to know how realistic this downside scenario is nor can we know what the S&P 500 would have done if the REIT sector declined by 10%. This was just an example.
Another flaw in this exercise is of course that it is looking backwards. The example as it worked out though does make the point; this concept is not the single dumbest idea ever written. I will continue to explore this idea.
Friday, October 13, 2006
According to the article, proponents say this can add two percentage points of returns while reducing volatility. The article also has a dissenting view that says there is no free lunch. Strangely the article does not have ticker symbols or even specific names of these funds, unless I missed it. I exchanged emails with the author and one of the funds is the ING 130-30 Fundamental Research Fund (IOTAX). Neither Yahoo nor Morningstar had much on the fund.
This concept is in the same general realm of the low beta pairs trading I wrote about a couple of weeks ago, at least that is the idea behind the funds. The 2% of alpha mentioned seems like it could be rather unpredictable. Getting the longs or the shorts or both wrong could easily result in a lag. The article makes it seem like the longs and shorts would be bottoms up stock picking which potentially adds in a layer of volatility.
I am not necessarily drawn to the specific strategy of the fund but I find it interesting that there may be more attention given to concepts that focus more on low beta absolute returns. Here I am not talking about strategies that try to shoot the lights out but more along the lines of capturing most of the return of the market with just a fraction of the volatility.
On a completely unrelated note; this picture is from Bolivia. Holy cow!
Basic Materials (DBN)
Consumer Cyclical (DPC)
Consumer Non-Cyclical (DPN)
For now all I can say is I am favorably disposed to the concept but I will write more about these when I can see the composition maybe as soon as today? Intuitively I would think this would be a good way to capture financials and telecom but we'll see.
Just recently iShares rounded out its foreign sector line up but those blend foreign and domestic. For investors that do not want to take single stock risk these funds offer more choice and access for better diversification.
The country has several catalysts that make it compelling. Chile is a commodity based economy as one of the world leaders in copper exports but it only exports roughly 15% to the US, meaning a slowdown here won't be a deathblow to Chile.
The economy is healthy but without the volatility people usually associate with Latin American countries. Inflation is around 3%, GDP growth is in the high fives, inflation is a comfortable (for the central bank) 3%, they have a current account surplus but unemployment looks a little high at about 8%.
On the negative side the economy may be slowing. GDP in 2005 was 6.3% but might slow to 5% by the end of this year. The central bank held rates unchanged at 5.25% after a series of hikes and may soon cut rates.
Another catalyst is that a portion of everyone's paycheck goes into the stock market in a sort of forced savings plan that was first implemented in 1981. This means there is always a small but steady buying demand hitting the market which potentially makes Chile less volatile than other emerging markets.
This chart compares the benchmark IPSA index to iShares Emerging Market (EEM) and SPY.
In terms of volatility it looks more like the S&P 500 than the rest of emerging markets. The reduced volatility can be a negative like it was during the first few months of this year and be a positive as it was during the correction in May and June. I would also note for the last 12 months the IPSA is lagging both EEM and SPY but YTD it is ahead of both EEM and SPY.
For people willing to assume single stock risk from Chile the dividend yields tend to be high and conservatively covered.
Thursday, October 12, 2006
The short answer is no. The longer answer is that I tend to make those decisions with a top down eye to what I think will happen. I've written a few times about owning Sweden in a couple of different ways. The top down view is better economic data than Europe, a current account surplus, a new more conservative government and an outlook for a strong currency lead me to think it will do well.
Sweden, as measured by iShares Sweden (EWD) has done well this year. It could be argued that the indicators I cited created momentum in a technical sense. Fundamentals leading to good technicals is far from a new concept.
There are of course many instances where this cause and effect is not easily seen. This is when investors can lose patience and give up on a solid theme that does not appear to be working now. The notion of not every theme working today is important. Tech did not work for ages and now it is working although the fundamentals are not very evident. Despite my being underweight this is something I have mentioned countless times before. Assume for a moment I am correct about tech having no fundamental catalyst; sectors or countries or whatever, can turn in the opposite direction for what seems like no reason at all. IMO, case in point now with tech.
So with this example there is some sort of momentum underway with out fundamentals.
Aside from the fact that emerging markets had grown to be very large in portfolios and that staying double digits, percentage-wise, is not something I plan to do it is clear that there is no way I can with this guy. Although he said nothing about the energy trade I'm sure I can look forward to an equally lovely hello when energy turns up again.
While there is no way I will make this guy happy there might be some value in this anecdote and his comment.
Part of managing your portfolio is making decisions about how much to have exposed to what. Every so often something gets too big or too small and a trade needs to be made. Something that may be too small, as an underweight, when conditions change may make that thing better to overweight as an example.
The commenter even picked on the tax implication of reducing exposure. As a matter of philosophy I don't put tax considerations ahead of risk concerns.
The comment in question assumes that I will be "jumping in and out" which if you have read this blog you, rationally speaking, probably don't think I jump in and out of trades. The reader said I missed a 3.1% lift in EEM (again I never owned it) in the third quarter. Data mined another way did I miss a 4.9% decline from April 25 (the date of the post)?
Any position change chronicled was my attempt to do what I thought was best for clients. Obviously any trade you do is because you think it is the best thing to do. I guarantee you will not be pleased with the outcome of every trade you make.
All of the trades mentioned in the post being picked on were about managing risk (the catalysts to pick when to pull the trigger was the focus of the article). The way I look at things, something getting too large is a reason to reduce. I have not wanted to replace (which would mean going overweight again) what I sold and am not sure when I might want to go overweight again.
Now think about that 3.1% (which I did not double check BTW) for the quarter. The Schwab money market yields about 4.5% which works out to 1.125% for the quarter. I'm not so sure an extra two percentage point is a good trade off taking emerging market risk over a riskless money market is much of a success but if it annualizes out at that pace it would be.
There is one thing he said that I do need to sternly correct. He said the "advice" I gave to lighten up at the summer low seems flawed. This site is a look over my shoulder, I share process for better or for worse but I do not give advice. You are free to be critical of what I do and how I do but get it straight that this is a look at what I do and not a suggestion for you to do anything.
Wednesday, October 11, 2006
It varies, sometimes I get it wrong and sometimes I get it right (like most folks).
Technical analysis is sort of far down on my list of priorities but not ignored. I tend to gravitate closer to buy and hold than anything else. When I buy a stock for clients I tend to buy what I think is and will be a good proxy for that sector, country, cap size, style and so on for a long period of time. The Google trade from the summer of 2005 would be an exception to this.
I have written about a few of the sales, or more correctly position reductions, I made earlier in the year. I wrote about reducing energy and emerging markets in late April. There were two catalysts behind those trades; chart action and sentiment.
I am using EEM and XLE just to show what was going on generally at the time.
There was euphoria around both parts of the market. They had both come along way and being cognizant of both contributed to the decision to reduce.
A negative example would be not adding to tech at any point in the rally thus far. I have been very underweight the sector all summer and while the sales were pretty good I missed adding more exposure in a timely manner. I suppose it is possible this turns out to be a suckers rally but I missed some return.
Another trade that did utilize some TA was the gold trade from last February. I had clients in Anglo Gold for a long time. I felt that the miners had generally moved a lot more than the metal and thought some sort of reversion was likely. This was a decision made based on price movements of Anglo Gold vs. the GLD ETF.
I know that certain technicians utilize just a few indicators which I would not criticize but I tend to think that the indicator that matters today may not matter six months from now. Six months from now some things may matter instead of the thing that matters today.
Long time reader George left a supportive comment saying this person may not get it and I think that is probably true.
According to my Sitemeter, which is public, I average in the neighborhood of 1250 hits per day. Actually on days the market is open it is closer to 1500 and goes way down on the weekends. Add to that the number of people that read my content through various feeds and aggregators that don't even come to the site. Add to that however many people read my stuff on Seeking Alpha/Yahoo Finance. Lastly add the people that read the articles I write for RealMoney and TheStreet.com. While I don't know, it is possible I reach 5000 people a day.
I am aware of three people in Prescott that read my blog. Three. Regardless of how many people actually to read my stuff I doubt that even 5% (I would be shocked if the number were even 1%) of people that that do read me are from Arizona, where that vast majority of our clients live.
Based on these numbers I don't think cannibalizing prospective clients is really an issue to be worried about.
The comment includes something I don't quite understand about my use of the term do-it-yourselfer. I think the blogosphere caters more to people that will never hire an investment manager, not exclusively but generally. These folks, whether they should or not, will manage their own portfolios.
There are many reasons why I have the blog and why I put so much into it. First and foremost I enjoy doing it, simple as that. Another reason is I learn from readers and I also hear about new products from readers too which helps me be better at my job. It has opened many doors to me in terms of other writing opportunities and making contact with much bigger fish that I would have never otherwise met.
Almost as important as enjoying writing the blog is that I get tremendous satisfaction helping people become more knowledgeable investors. I doubt the commenter can really grasp the extent of my sentiment here.
One last thing about this exercise was a tone that I think I picked up on in the question where I owed the commenter an answer. Answering reader questions is productive and I enjoy it but I don't owe this person anything, let's be clear about that. Equally off putting was that the comment in question was also left on Seeking Alpha.
For something that actually makes this post worthwhile and relevant; Alcoa (AA) reported earnings last night and for the 175th quarter in a row (hyperbole) they missed earnings and the stock went down. In all seriousness they miss earnings a lot, I wrote two different Motley Fool articles about Alcoa earnings misses (here and here). A thing I have touched on many times is knowing what the stocks you own are capable of doing and continual earnings misses should be included in this understanding.
Tuesday, October 10, 2006
SPDR S&P Asia Pacific Emerging
SPDR S&P China
SPDR S&P EPAC
SPDR S&P Europe
SPDR S&P European Emerging
SPDR S&P Latin America
SPDR S&P Middle East and Africa
SPDR S&P World (ex-US)
SPDR S&P World Small Cap (ex-US)
streetTRACKS DJ Wilshire Global Real Estate (ex-US)
streetTRACKS Macquarie Global Infrastructure
streetTRACKS MSCI ACWI (ex-US)
streetTRACKS Russell/Nomura Prime Japan
streetTRACKS Russell/Nomura Small Cap Japan
A couple of them are not clear by the name. The EPAC is Europe, Pacific and Asia. The ACWI is the All Country World Index.
I certainly want to learn about all of them. There is no reason not to explore these. Like all big filings there are some new and so far innovative ideas and some that appear to be different shades of the same color of existing ETFs.
The Africa Middle East fund owns Egypt, Israel, Jordan, Morocco, Nigeria, South Africa, and Turkey. The European Emerging ETF owns the Czech Republic, Hungary, Poland and Russia.
These are all clearly markets that could become important and lucrative investment destinations, some already have of course. There is no question that Africa is about as emerging as it gets. There are plenty of questions about whether or not any of your money should go there but that is an issue for another time.
The naysayers will have their usual negative comments but most of these markets are accessible in actively managed OEFs so why would an indexed product be any worse. And as a recurring theme the funds that turn out to not have any demand will get closed.
In general, that more and more parts of the market and asset classes are available in ETFs is a positive. Yes some of them will do poorly and some investors will do very stupid things with them but again this is no different than OEFs, common stocks, UITs and even bonds.
Before I get into this let me say two things; first, I am not a big believer of trading in and out of various stocks and funds based on a newsletter with a short term focus, even if the past results are excellent the risk is still high and second I have to assume Hulbert is a very smart guy, certainly smarter than me.
There are a couple things here that don't quite add up or better put seem difficult to quantify.
First lets look at the spread issue. One of the ETF mentioned in the article was PowerShares Retail ETF (PMR). At the close on Monday it was $18.50 by $18.59 with the last trade on the primary at $18.53. The spread is wide, yes. If you saw that quote would you try a limit order somewhere in the middle? The Hulbert comment, as I read it, implies you can only get an execution at the ask to buy or the bid to sell. There is no way to know whether that is true or not. The last trade was $18.53, in the middle. In fact all 45,000 shares traded on all markets on Monday were in between the bid ask spread. Bloomberg terminals have a function called Trade Summary Matrix that has this information and a quick call to Schwab got me the info. Keep in mind I picked PMR at random because it was mentioned in the article.
Any attempt to quantify the disadvantage of a wide spread is very unlikely to be accurate. This not to say wide spreads aren't a problem, I just don't see how it can be quantified and if it can't be quantified I'm not sure how to hold it against anyone's results.
I am also unclear on the commission obstacle. Does anyone pay more that $12.95 per trade anymore? Per the article Hulbert says "if you trade only five times a year you end up with fees that exceed even the most expensive mutual funds." Five trades at $12.95 adds up to $64.75 per year. Generally speaking 0.60% makes for an expensive ETF, but there are a few that are more expensive.
An investor with $30,000 (I am picking a small number on purpose) in OEFs that average 1% (I think this is on the low side for OEFs?) in fees would pay $300 for the year. If that same investor made ten ETF trades (as opposed to the five cited by Hulbert) with an average of 0.60% in fees plus $129.50 in commission his total outlay would be $309.50 for the year. The extra $9.50 works out to an almost immeasurable bogey.
Let me state again I am not a fan of following newsletters for short term trading but I am not sure I can see problems outside of risk. I would think that Hulbert's findings of ETF newsletters lagging would be more about process and narrower choices than about spreads and commissions.
I had a few comments left on the Teresa Lo commentary. Thanks for the kind words and the humor. I was not, by any means, looking for a validation of what I do here. There is enough buffoonery (love that word) in the blogosphere, mainstream and the sellside that we should all be wary of. There are also plenty of very smart people from all three providing great content.
I think your success as a do-it-yourselfer will mean you take in content from all three but also learn who can help you and what you do and who cannot.
Monday, October 09, 2006
I am not sure if she is lumping me into this description or not, I don't think too many people would think of this site as a trading blog per se and really I have no way of knowing if she has ever heard of this blog let alone included it in her thought process for this post. Either way I think it is all fair game. Anyone putting their opinion out there is going to be wrong some portion of the time and is subject to criticism.
One thing about blogs is that obviously there are no barriers to entry. This is something I have tried to point out before and tried to stress that you take little bits of process from various sources and create your own way of doing things. My approach to portfolio construction and management is right for me not other people. It is reasonable that one or two things I may do could fit in to your process as other little nuggets from other investors (or bloggers, or sell side strategists, or mutual fund managers) could also fit into your process.
One thing I would add to Teresa's post would be that I don't think bloggers have the market cornered on bad advice and being wrong. There are plenty of professionals that also get a lot of calls (broad and narrow) wrong. Here again you may be better off just listening to process as opposed to running out and buying XYZ because someone smart said to buy it.
I think type of introspection raised by Teresa's article is very constructive. I try to objectively talk about my successes and let downs here in an effort to get better at what I do, perhaps you could find value in this for your own portfolio too.