Here is a link to a Bloomberg article (really just the usual recap) about emerging market debt spreads of like maturities over US treasuries.Columbia 1.61%
Panama 1.58%
Turkey 2.2%
The average is 1.73%
Meanwhile Australian bonds yield 1.23% above like treasuries.
The context here is bonds not overnight rates.
The concept of reaching for yield applies. Any argument for some exposure to emerging market debt, even with spreads so narrow, is probably valid but narrow spreads are an indication that market is not very fearful these days.
You can decide for yourself whether the market is right or not but I have been taking this as a cue to be more conservative with fixed income. Instead of going heavy in emerging market debt I think it makes more sense to add yield with preferred stocks (I prefer individual issues instead of products) and a little bit with convertibles (here I use a CEF).
25 comments:
I think that stretching oneself into a contorted fixed income position to get an extra 2% yield with more risk of being whipsawed by foreign currency fluctuations is not worth the effort. When I get 5.43% from GE Interest Plus, why bother? Especially if you have adequate international currency exposure in your stock portfolio, where a good stock pick helps mitigate currency risk.
This is off topic, but I am trying to figure out how to determine the "best of breed" stocks in each Dow catagory. It occured to me that perhaps using the first or second choice of non cap waited ETFs may be a good starting point. Does anyone have an opinion re the above. thanks
11:39 this might be a great question but when you say the first or second choice of a NON cap weighted, you lose me. Do you mean the equal weighted ETFs, because they are equal. Do you mean fundamentally weighted ETFs like WisdomTree? Please elaborate; id like to write a post on this.
TY
Anonymous: I might recommend that you look at Bill Cara's (billcara.com) website and look at his Cara 100--it's a look at best of breed in each GICS category. You can also download it to excel.
I really am not sure which type of ETF would be the right vechile. I guess that was inherently part of my question thanks. Ron
ok thanks. i will post something in the AM.
roger, if you can comment, how widely read is billcara.com?
Nice consolidation after the runup from yesterday. I am glad that my portfolio stayed invested despite what many people were saying only a few days ago. Those double short index etfs really stabbed those suckers who bought them for protection last week.
anon 1:45
As my favorite grandmother used to say, "betta be careful, the evil eye may be watchn'".
how widely read is Bill Cara? He has been blogging much longer than me (I think) and I am under the impression he has a lot of readers and traffic, certainly more than I do.
I don't think anyone who bought a hedge last week would feel stabbed. For anyone who bought more than a hedge, they probably knew they were making a bet. Anyone making a bet probably has made other bets. Chances are they win some and lose some so this should be no different.
Have only read Cara recently.
Like me, we are both failing in health, but we long to kick the market's AR...
IMHO, this is the last run before debackle. If you have retirement funds at risk, they better perform now. A secular 7 year bear awaits, maybe worse.
Not trying to sell books here. Will write my book after the masses have been devastated and I've retired rich.
I'll tell you "how to do it" then, just like the same fraudulent authors tell you to do it now.
Anyone invested in real estate has got to be a total moron.
My father sold the last Dana Pointe property earlier this year, and I thank God! We're out, clean, and he's rich. (Not me; faaaar from it.) Let the lemmings feed.
Just prey I will find the next Fed Bubble and profit from it.
Hope the last batch see they have to get out before the debackle. That wasn't free money... it was the Greater Fool's Game.
There's a BIG difference between piling Gold bars in your basement than looking at a financial statement that says you have home equity. The equity is TOTALLY reversible. And it will, to the mean 6% annual rate.
Watch the fireworks.
DB
http://www.financialsense.com/fsu/editorials/wagner/2007/0322.html
This commentary reminded me that a rising tide lifts all boats, a tsunami leaves you sputtering fish out your nostrils.
Sniping from anonymous posters aside, understanding how to hedge one's portfolio is probably the least understood concepts among average investors (like me). I understand the hedge though, but my friends, almost universally, do not. I hate the moniker "dumb money". I'm officially registering my deep disdain (not of you Roger, for you go above and beyond) for the impugning of people like me, my colleagues, my friends as "dumb money" and the "retail investor". We are the people who create jobs, heal wounds, fight fires, teach your children. That we have a financial system that takes advantage of such folk does not speak well for our society.
I've been spending a bit of time reading 10-K's of some of these mortgage lenders and insurers. I graduated at the top of my class in college--in accounting. I cannot f'in fathom what some of these loans pretend to be. I read FED's (not the Fed but ticker symbol, FED). They have 40 year mortgages. Why? Because housing is unaffordable!!!! They say so. FED has NO interest rate exposure because they have loans that have the interest adjusted (guess the frequency!!!_......MONTHLY. Payment caps? Oh it sounds so plausible, I can hear the weasel now telling the couple...the payment is capped at 7.5% per year. Yeah, well read it carefully. That 7.5% per year cap includes the negative amort, and in 5 years (on your 40 year mortgage) we are going to recompute your mortgage so that it fully amortizes. So throw that 7.5% cap out of the window. It means nothing other than..."here is another way that we are going to take advantage of you."
These people aren't "dead beats". These are normal, hardworking people that, because the housing appreciation (thanks to the Fed, no ticker) has gone parabolic, have to resort to these "boutique" (read: oblique) loans to get something so basic as shelter.
Roger, my apologies to you and your readers for my vitriole, and feel free to remove this post. But I'm beyond being mad has hell, I'm disgusted beyond belief. Everyone will have taken their fees and it will be the ordinary person left holding the bag. That we have chosen to classify this as a "sub-prime" issue should only add to our shame.
I'm not a poilitical guy. They are ALL rotten. But just look at this:
http://www.youtube.com/watch?v=WqA2Hs5dTFM
And this:
http://www.rgemonitor.com/blog/roubini/
These links might be dynamic... dunno.
Anyone informed can't having a very good time these days, IMHO.
Leisa:
Your posts are revelant and appropriate.
So much so after seing your posts only the last few weeks, I am pleasantly surprised to see someone else echoing my thoughts.
We must be on the same frequency, and it's nice to have someone receive the broadcast.
Have no idea how you drew your conclusions, but hope my method was completely independant so we have a higher probability of being right.
My best regards from Austin. DB
I never should have listened to you bears in the comment section. The shorts I put on with my portfolio have ruined me so far this year. Congrats guys and thank you so much.
kpmn
Here's some good news:
http://tinyurl.com/27h73w
kpmn
You have to be nimble with shorts. My QID is still hurting me, but I refuse to remove it. When they fail, they fail BIG with little warning.
I have upside expertise to a limited degree and no downside expertose.
When the market finally puts in the turn into the 4 year cycle low, and starts into the K-wave winter, I'll put the shorts back on in full force. They are too dangerous unless the market has confirmed a turn. The last head fake hurt a lot of us.
I think this rally is where the smart money exits. I'll hold oil and precious metals, and high dividend payers like FRO.
Otherwise, I think we are in a short term plateau "coyote off the edge of the cliff, 'till he looks down and falls to RR delight". Bernacke is just painting that arch on the side of the mountain that looks like a tunnel. Beep Beep!
DB
http://www.etfdigest.com/members/davesdaily/davesdaily032207_files/image002.jpg
Good post Leisa,
In the investment world, as in life, almost nothing turns out as expected so planning for the unexpected is the only rational course of action; hedging is an essential feature of that planning and, like insurance, is both aligned with relevant measure(s) of risk as well as representing a 'profitless' cost that must be continuously born ...until it covers what would otherwise be a catastrophic loss.
My strategic portfolio has not changed substantively since May '06: Net long but strongly hedged w/ more cash than usual (approx 15%).
My tactical portfolio has changed a lot and was adding appreciable alpha until fairly recently when, like OldVet, my short positions grew too large and cost me some profit. I've made appropriate adjustments in most sectors but, although I exited most short positions in the subprime lenders last week, the recent strong upswing in stock prices there convinced me to add some more shorts in that sector yesterday.
It remains my opinion that the housing inflation/mortgage mess -- accompanied by greed and stupidity in the financial industry coupled w/ compliant regulation and an accommodating Fed (if anyone can provide an adequate explanation of how 'deadbeat' borrowers can come within a dozen yards of obtaining a loan that is based on rational underwriting standards I will listen however) -- will probably not lead to recession but will continue to depress GDP and unwind through '07 and very possibly into '08 so current appearances of recovery are illusory; i.e., long-term, long positions established in the past year will be 'dead money' but swing trades from long to short and back again should continue to work well for a few more quarters at least.
After posting my comment above I realized it only referred to the 'insurance' aspect of hedging but, as I have mentioned in the past, that is only part of the story. Another even more critical part is that, generally speaking, volatility is not a friend to long-term investors.
Of course, one could invest in low volatility instruments but the returns on these also tend to be low (often less than inflation which translates into a net reduction in real wealth); the alternative is to invest in more volatile instruments with higher returns but to counter that with hedges (which are not always short positions btw).
Some basic algebra is the best way to explain why volatility can be a problem and I have done that in the past but I found an article at Crestmont Research that does it much better so here it is; http://tinyurl.com/yxqqdz
And while we're at it, here is another article from Crestmont that expands this theme within the larger context of portfolio diversification; http://tinyurl.com/223ea5
"the payment is capped at 7.5% per year. Yeah, well read it carefully. That 7.5% per year cap includes the negative amort, and in 5 years (on your 40 year mortgage) we are going to recompute your mortgage so that it fully amortizes. So throw that 7.5% cap out of the window. It means nothing other than..."here is another way that we are going to take advantage of you."
It's capped in both directions. And, the 7.5% cap is in the change of payment. So that after 5 years, when re-amortized, the balance of months many not be sufficient to payoff the loan on time, per the note, thus the recast. What's the issue? After all, the average life of a loan in America is only 4-5 years.....
Today seems to be my day for adding modifiers. NY Times business section has an article on automated loan underwriting (http://tinyurl.com/33euuk) that entices me to modify my previous phrase "rational underwriting standards" to "rational and realistic underwriting standards." Along with the usual suspects there appears to have been insufficient real-world testing of, and over-reliance upon, computer software designed to automate the loan underwriting process.
It certainly does appear some rather unfounded (some might say rash, self-serving or idiotic) assumptions were made. What's the old coach's epigram? When you "assume" you make an "ass" out of "u" and "me." Wonder how many billions of dollars it's going to take to cover the exposed buttocks in the building and financial industries: (sarcasm on) Don't think they would be so crass as to make us pay for all the 'cloth' required do you? (sarcasm off)
Larry: My take on Leisa's comment is that the loan she referred to (and more subprime and alt-A types of loans besides) does not work if the house's price doesn't go up and/or if the intent of the borrower is to actually make a home (commit to community, way of life and all that other boring stuff). That aside, an average (arithmetic mean) is not a meaningful statistic in the absence of range and standard deviation so, if you know, what is the median life of a loan for a primary (not second) single-family residence? I would guess on the order of 15-20 years but have no source to confirm or falsify that.
"I would guess on the order of 15-20 years but have no source to confirm or falsify that."
Average: about 4 years
Median: about 7
Larry's comments got a good chuckle here.
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