I don't know.
My inclination is to think that it is too soon to know whether the Fed successfully engineered a soft landing or not but the GDP number seems promising.
I'm sorry, what was that? The Chicago number was what? No, I'm sorry that gets in the way of the greatest story never told.
I have not been in the soft landing crowd because it happens so rarely. I would be thrilled to be wrong but I don't think this is resolved just yet. Further will all of the statistics floating around about how long it has been since an x% correction over xtimeperiod I feel no rush to invest every last nickel.
Read more!
Wikinvest Wire
Wednesday, January 31, 2007
AOD Is In The House
The Alpine Total Dynamic Dividend Fund (AOD), or is it Dynamic Total Dividend, listed and is trading. You can click here for a good video explanation.
According to the video AOD can go 100% foreign as opposed to AGD which has a limit of 80% foreign. AOD has put tax qualified lower as a priority than AGD. The bigger thing will be foreign dividends and its capture method for taking in more dividends.
The idea goes something like this; lets say you find three financial stocks that each yield 3%. Further, all three are on different dividend cycles; one goes ex-dividend on the Jan, April, July and Oct and the other two go ex-dividend on the other two cycles. Pretending everything else is static this idea could yield 9%. There are plenty of things to get in the way of this going perfectly but for now that is not the point.
Many foreign companies pay once or twice a year so depending on what you can find on the calendar, with no regard for taxes and the yield could up a lot. This is not going to yield 20% or anything like that but Alpine knows what they are doing as demonstrated by their other funds.
If it is not clear by now AOD is probably a better fit for an IRA.
One last thing, like all CEFs that come to market the underwriting fees are embedded in the price and so the fund will be at a premium to NAV for a while or maybe longer. AGD has traded at a premium its entire life, according to ETFconnect.
On a related note, Barron's had an article over the weekend about a Dogs of the Dow strategy for European stocks. I own several of the stocks listed in client accounts.
Regardless of how you access dividends for your account, a high yield is vital to make your job as your own portfolio manager much easier.
Too many OEFs come up short on yield, IMO.
Read more!
According to the video AOD can go 100% foreign as opposed to AGD which has a limit of 80% foreign. AOD has put tax qualified lower as a priority than AGD. The bigger thing will be foreign dividends and its capture method for taking in more dividends.
The idea goes something like this; lets say you find three financial stocks that each yield 3%. Further, all three are on different dividend cycles; one goes ex-dividend on the Jan, April, July and Oct and the other two go ex-dividend on the other two cycles. Pretending everything else is static this idea could yield 9%. There are plenty of things to get in the way of this going perfectly but for now that is not the point.
Many foreign companies pay once or twice a year so depending on what you can find on the calendar, with no regard for taxes and the yield could up a lot. This is not going to yield 20% or anything like that but Alpine knows what they are doing as demonstrated by their other funds.
If it is not clear by now AOD is probably a better fit for an IRA.
One last thing, like all CEFs that come to market the underwriting fees are embedded in the price and so the fund will be at a premium to NAV for a while or maybe longer. AGD has traded at a premium its entire life, according to ETFconnect.
On a related note, Barron's had an article over the weekend about a Dogs of the Dow strategy for European stocks. I own several of the stocks listed in client accounts.
Regardless of how you access dividends for your account, a high yield is vital to make your job as your own portfolio manager much easier.
Too many OEFs come up short on yield, IMO.
Read more!
Tuesday, January 30, 2007
Here We Go
Long time reader Russell120 sent me a copy of John Mauldin's newsletter entitled CAPM is Crap which is an attempt to turn the ideas of Alpha and Beta upside down.
Among other things was a chart that showed taking on higher beta does not result in higher returns. The article also has some positive things to say about fundamental indexing.
Quite frankly I felt as though I was ready things similar to what I have been writing about since I started this site (not claiming anyone stole my work just a sort of like mindedness). I think I can address some of the points made fairly concisely.
Higher beta does not result in better returns. Well there is one problem with this conclusion. A high beta stock is likely to have its day in the sun but eventually it will start to rain. Pick any internet stock from the bubble. Chances are it gave ten years', or more, worth of appreciation from 1998-1999. The person who sold his net stock on Dec 31, 1999 and never went back had a different experience than someone who held on to internet stocks too long. This is true for every stock market fad. Success with the next fad will not come from holding forever; it will come from holding for a couple of years, give or take.
When I write about beta I use the word volatility, not risk. Increasing risk is really not something people want to do, they may want to increase volatility to capture a general rise in the market but there is never a good time to absorb an 80% hit to one of your stocks.
The primary objective of a portfolio is that there is enough money to meet whatever the goal is. Time horizon and how much you have will determine what the portfolio has to do to meet the goal. A 35 year old with $100,000 is probably off to a good start but that person needs to save a lot and needs a normal exposure to the stock market. A 45 year old with $5 million does not need to save as much nor does he need as much stock market exposure.
Let me define exposure here with an example. Take two $100,000 portfolios; one with a beta of 0.80 and one with a beta of 1.20. The latter has more exposure.
I have many posts up about low octane portfolios. This is relevant here. People that save properly probably do not need to go for heroic returns. Getting market equaling returns, or even returns that lag slightly, with much less volatility is an excellent outcome. I would consider anyone that can get away with taking this approach as being lucky.
It seems that fundamental indexing could be a path to this concept as perhaps an anti-alpha. I believe in it in moderation but I think of it differently than most of the articles on the subject. I have disclosed many times owning WisdomTree Energy (DKA) for most clients. I did not buy it because I wanted a fundamental index. I wanted to sell British Pete (BP) and needed to replace it.
Based on my view at the time (this was last November) I felt that single stock risk would not be rewarded so that meant buying a sector fund. In the energy sector I favor more foreign exposure so that meant I wanted a foreign sector fund. I looked under the hood and decided DKA would be my best bet. Fundamental or not was not a consideration.
Based on market history the likelihood of future corrections, bear markets and even a crash or two are very high. The emotional and financial benefit to reducing the impact of one or more of those future events would be colossal.
This topic can't be completely covered in this sort of a post but you get the idea.
Read more!
Among other things was a chart that showed taking on higher beta does not result in higher returns. The article also has some positive things to say about fundamental indexing.
Quite frankly I felt as though I was ready things similar to what I have been writing about since I started this site (not claiming anyone stole my work just a sort of like mindedness). I think I can address some of the points made fairly concisely.
Higher beta does not result in better returns. Well there is one problem with this conclusion. A high beta stock is likely to have its day in the sun but eventually it will start to rain. Pick any internet stock from the bubble. Chances are it gave ten years', or more, worth of appreciation from 1998-1999. The person who sold his net stock on Dec 31, 1999 and never went back had a different experience than someone who held on to internet stocks too long. This is true for every stock market fad. Success with the next fad will not come from holding forever; it will come from holding for a couple of years, give or take.
When I write about beta I use the word volatility, not risk. Increasing risk is really not something people want to do, they may want to increase volatility to capture a general rise in the market but there is never a good time to absorb an 80% hit to one of your stocks.
The primary objective of a portfolio is that there is enough money to meet whatever the goal is. Time horizon and how much you have will determine what the portfolio has to do to meet the goal. A 35 year old with $100,000 is probably off to a good start but that person needs to save a lot and needs a normal exposure to the stock market. A 45 year old with $5 million does not need to save as much nor does he need as much stock market exposure.
Let me define exposure here with an example. Take two $100,000 portfolios; one with a beta of 0.80 and one with a beta of 1.20. The latter has more exposure.
I have many posts up about low octane portfolios. This is relevant here. People that save properly probably do not need to go for heroic returns. Getting market equaling returns, or even returns that lag slightly, with much less volatility is an excellent outcome. I would consider anyone that can get away with taking this approach as being lucky.
It seems that fundamental indexing could be a path to this concept as perhaps an anti-alpha. I believe in it in moderation but I think of it differently than most of the articles on the subject. I have disclosed many times owning WisdomTree Energy (DKA) for most clients. I did not buy it because I wanted a fundamental index. I wanted to sell British Pete (BP) and needed to replace it.
Based on my view at the time (this was last November) I felt that single stock risk would not be rewarded so that meant buying a sector fund. In the energy sector I favor more foreign exposure so that meant I wanted a foreign sector fund. I looked under the hood and decided DKA would be my best bet. Fundamental or not was not a consideration.
Based on market history the likelihood of future corrections, bear markets and even a crash or two are very high. The emotional and financial benefit to reducing the impact of one or more of those future events would be colossal.
This topic can't be completely covered in this sort of a post but you get the idea.
Read more!
GII Delayed
The Macquarie Global Infrastructure 100 ETF (GII) was delayed. I called in to get some info and was told they do not have an ETA for when it will list.
Read more!
Read more!
Sauter Strikes Back
MarketWatch interviewed Gus Sauter from Vanguard about ETFs including a little bit about fundamental indexing.
Of fundamental indexing Sauter says among other things;
It seems to me that people in the market cap weighting business could be in a bit of a pickle. First, what are they supposed to say about fundamental indexing? "Um, yeah, we think our way is inferior."
For the individual investor none of this matters. You have the luxury of having all sorts of methodologies in your account without having to be loyal to any of them. I would imagine that for some things, market cap weighting is better but for others you should probably use a fundamentally weighted product, if you use these things at all.
It is not intuitive to me that investing methods can't evolve which is my take on what the market cap crowd is saying. Yesterday I posited that the newer commodity ETFs might be a better way to go than the older ETFs (just a theory with no conclusion). In the last 35 years or so we have seen the options market, the Nasdaq and I believe most of the futures markets all created. So, again, the idea that things always stay the same is upside down.
As an administrative note, I had said I wanted to put labels on all of the past posts but there are over 2100 of them that I would have to do and I also think it screws up the various syndication feeds. We'll see how it goes.
Read more!
Of fundamental indexing Sauter says among other things;
Why does anyone think it's simple to come up with a formula that's going to be able to add a return above the market when active managers haven't been able to?While he has a point, WisdomTree has back tested their domestic funds back to 1964 and, well, the results are better than cap weighting. There are plenty of caveats to be sure but 40 years may not be a fluke.
It seems to me that people in the market cap weighting business could be in a bit of a pickle. First, what are they supposed to say about fundamental indexing? "Um, yeah, we think our way is inferior."
For the individual investor none of this matters. You have the luxury of having all sorts of methodologies in your account without having to be loyal to any of them. I would imagine that for some things, market cap weighting is better but for others you should probably use a fundamentally weighted product, if you use these things at all.
It is not intuitive to me that investing methods can't evolve which is my take on what the market cap crowd is saying. Yesterday I posited that the newer commodity ETFs might be a better way to go than the older ETFs (just a theory with no conclusion). In the last 35 years or so we have seen the options market, the Nasdaq and I believe most of the futures markets all created. So, again, the idea that things always stay the same is upside down.
As an administrative note, I had said I wanted to put labels on all of the past posts but there are over 2100 of them that I would have to do and I also think it screws up the various syndication feeds. We'll see how it goes.
Read more!
Monday, January 29, 2007
Working On A Theory
I have written many times that if you use investment products, like ETFs, you need to stay on top of new products that come out in case they are better than existing products. I have started to wonder if the DB Gold ETF (DGL) and the DB Silver ETF (DBS) might be better to use than streetTRACKS Gold (GLD) or iShares Silver (SLV). GLD is a client holding.
DGL and DBS own mostly treasury bills and enough futures contracts to create the exposure. The big plus is that the interest on the T-bills pays the fee and could pay out to shareholders after the fee is covered. The big negative is that contango could work against the performance of the fund. DB uses something call Optimum Yield which allows to cherry pick the best contract to roll to. In theory contango on any roll forward could be a money loser.
With GLD and SLV holding the actual metal contango is not an issue but both funds have a fee that has to be covered. They sell a little of the metal to cover the fee and in a few years the difference could matter, some would say it matters now.
It seems to me that if Optimum Yield works, it is too early to know now, then the total return from DBS and DGL would be higher than GLD and SLV. DBS and DGL would provide the returns of the metal plus treasury interest (no guarantee it will pay of course) whereas GLD and SLV provide the returns of the metal minus the fee.
I am not saying I am the first one to think of this, but I can't recall reading about this anywhere. I don't think it can be known for a while whether this can stand up but I wonder.
Further, although far from my skill set, I wonder if this, if it even exists, could create some sort of unintended consequence due to potential arbitrage as is going on with the MacroShares.
For its part, DB says that interest from treasuries will pay out once a year in a special dividend, that is if there is anything to pay.
Read more!
DGL and DBS own mostly treasury bills and enough futures contracts to create the exposure. The big plus is that the interest on the T-bills pays the fee and could pay out to shareholders after the fee is covered. The big negative is that contango could work against the performance of the fund. DB uses something call Optimum Yield which allows to cherry pick the best contract to roll to. In theory contango on any roll forward could be a money loser.
With GLD and SLV holding the actual metal contango is not an issue but both funds have a fee that has to be covered. They sell a little of the metal to cover the fee and in a few years the difference could matter, some would say it matters now.
It seems to me that if Optimum Yield works, it is too early to know now, then the total return from DBS and DGL would be higher than GLD and SLV. DBS and DGL would provide the returns of the metal plus treasury interest (no guarantee it will pay of course) whereas GLD and SLV provide the returns of the metal minus the fee.
I am not saying I am the first one to think of this, but I can't recall reading about this anywhere. I don't think it can be known for a while whether this can stand up but I wonder.
Further, although far from my skill set, I wonder if this, if it even exists, could create some sort of unintended consequence due to potential arbitrage as is going on with the MacroShares.
For its part, DB says that interest from treasuries will pay out once a year in a special dividend, that is if there is anything to pay.
Read more!
New Exposure
The NY Times had an article over the weekend which touched on something I have written about countless times. It was about do-it-yourselfers now having access to asset classes that were not easily available previously. The article mentions currency, private equity, the water ETF (which is a personal and client holding) but does not mention commodities which of course are now much easier than before with even more products on the way.
I am a big believer in learning about new products and asset classes and where appropriate, integrating them into a diversified portfolio. I should note that the article included a quote from someone at Morningstar saying these are a bad idea, what a shock.
I will agree with the naysayers that the new products represent a great chance to over manage and get hurt. It is a certainty that some investors, both do-it-yourselfers and pros, will misuse these products. Many folks probably should not use them but that is more about experience combined with the ability to spend time studying.
I think these products, if they are going to be used at all, should be used to help diversify a portfolio. Most stock investors, me included, probably don't have the enough experience to build and manage a commodity portfolio. However realizing the potential diversification benefits of a little commodity exposure and learning the supply and demand characteristics of one or two commodities is not such a stretch, in my opinion.
Some clients own the Swedish krona CurrencyShares (FXS), some own Australia (FXA) and some own both. Staying in touch with the fundamentals of both currencies requires studying more than just their respective economies; it also means studying their respective regions and their roles in the world economic order. I think that owning these without some sort of plan for ongoing study is a speculation. Speculating does not have to be a bad thing but it is a different type of trade and probably not right for most folks. I personally own FXS and FXA.
The biggest thing, if you are going to use some of these newer (to retail investors) types of products is to use them in moderation. I say this over and over yet still many investors do not grasp how important this is. I think back to the commenter who said he had 25% of his portfolio in NUVO when it dropped 80%. While it is unlikely a currency can cut in half it is not unprecedented. If your intention is not to speculate but to create diversification you should revisit your weighting in not only these sorts of products but all your holdings.
Read more!
I am a big believer in learning about new products and asset classes and where appropriate, integrating them into a diversified portfolio. I should note that the article included a quote from someone at Morningstar saying these are a bad idea, what a shock.
I will agree with the naysayers that the new products represent a great chance to over manage and get hurt. It is a certainty that some investors, both do-it-yourselfers and pros, will misuse these products. Many folks probably should not use them but that is more about experience combined with the ability to spend time studying.
I think these products, if they are going to be used at all, should be used to help diversify a portfolio. Most stock investors, me included, probably don't have the enough experience to build and manage a commodity portfolio. However realizing the potential diversification benefits of a little commodity exposure and learning the supply and demand characteristics of one or two commodities is not such a stretch, in my opinion.
Some clients own the Swedish krona CurrencyShares (FXS), some own Australia (FXA) and some own both. Staying in touch with the fundamentals of both currencies requires studying more than just their respective economies; it also means studying their respective regions and their roles in the world economic order. I think that owning these without some sort of plan for ongoing study is a speculation. Speculating does not have to be a bad thing but it is a different type of trade and probably not right for most folks. I personally own FXS and FXA.
The biggest thing, if you are going to use some of these newer (to retail investors) types of products is to use them in moderation. I say this over and over yet still many investors do not grasp how important this is. I think back to the commenter who said he had 25% of his portfolio in NUVO when it dropped 80%. While it is unlikely a currency can cut in half it is not unprecedented. If your intention is not to speculate but to create diversification you should revisit your weighting in not only these sorts of products but all your holdings.
Read more!
Sunday, January 28, 2007
New Blogger
OK so after four hours of waiting blogger moved my blog over to the new version. I can add tags to new posts (I don't know if I can go back and add tags to past posts, if possible I will) but I'm not sure what else I can do so stay tuned!
Read more!
Read more!
Coffee Talk
A few things this morning; no big whoop.With a hat tip to Richard Kang the first (in the US) infrastructure ETF is on the way very soon. You can read Richard's write up here and the Bloomberg write up here.
Macquarie is behind this one, you probably know about there other US listed products, none of which are ETFs.
This coming ETF owns stocks as opposed to MIC (personal and client holding) which invests directly in different infrastructure-like assets. Macquarie has funds like MIC listed all over the world, this is something they know how to do very well. My initial reaction is that I would rather not own this new ETF in favor of MIC. The coming ETF has a lot of US exposure so in order to buy it I would need to think it provided unusual access to the US but stay tuned. Macquarie has indices created that would lend themselves to other ETFs from places like Asia, Australia and Europe which could be more interesting, stay tuned.
With a hat tip to Tom Lydon, the ProShares sector funds, the ones that go short, will be coming soon as well. ProShares quietly listed ETFs that go double long, short and double short the Russell 2000 and S&P 600. These funds will open the door to all sorts of very inexpensive market neutral strategies. One big plus is that short exposure can be created with out having to pay interest or the dividend. If the existing inverse ETFs haven't done so already, these funds stand to do some funny things with short interest readings. Going forward the people that follow these things may need to factor the assets in these funds into their analysis.
Marc Faber gave his picks in the Barron's roundtable this weekend. As usual, most of his ideas are not easily accessible to US based, retail investors. He said the 30 year treasury is a great short, he likes Malaysia and some soft commodities among other things.
One reader left a question asking about the run up in Vanguard REIT ETF (VNQ). He noted that it is up 7% YTD, he also said the PE was 45 and wondered if that is high. I can't vouch for the PE but if correct it seems high to me and I also do not know whether it is up 7% or not but will take his word.
Equity Office (EOP) is one of largest names in the fund. EOP is in the middle of being sold and has moved a lot lately. Two other holdings, that I checked, are also up what appears to be 10% YTD. While this may be an unlikely answer, I wonder if the money that has rotated out of bonds, as ten years have gone up in yield, has gone into REITs? That is not how it usually works but maybe and combine that with the deal action and that could be an answer.
Lastly thank you for all the comments about my laptop issue. I got some great input and Joellyn no longer things I am being unusually rough on my laptop. There is an Apple store in Phoenix, I think there's one at the Biltmore, so I will check them out but am dubious about Schwab Institutional's java trading platform. It seems line Think Pads are the way to go if I stick with windows-based. We are taking a trip in April so I hope I will have it all mopped up by then. Seriously, thank you for the input.
Read more!
Saturday, January 27, 2007
Friday, January 26, 2007
I Need Readers' Help
This is for real.
I use a laptop for 99% of what I do; work and blogging. My laptop is starting to die in the same manner as my last lap top. The battery does not take a charge and now the connection made by the cord in the back of the machine is starting to have problems.
I spend about 75 hours a week on my lap top, seriously. Does anyone know, are laptops not meant for that kind of use? I am on the couch when I work with the computer on a pillow, on my lap. The set up is such that the cord is bent a little bit but it is not positioned in such a way where it seems like it would obviously break.
I may get a Mac but I need to find out if Schwab trading platform will work on a Mac or not.
The help I am asking for is whether the use I have described is a clear and obvious path to short life. Since both laptops have had the problem I have to wonder if it is a behavioral issue.
Any suggestions for especially durable laptops? After I get a new one, when I use it should I not plug it in and then charge it after the battery runs down?
Any help or input along these lines would be appreciated. Thank you.
Read more!
I use a laptop for 99% of what I do; work and blogging. My laptop is starting to die in the same manner as my last lap top. The battery does not take a charge and now the connection made by the cord in the back of the machine is starting to have problems.
I spend about 75 hours a week on my lap top, seriously. Does anyone know, are laptops not meant for that kind of use? I am on the couch when I work with the computer on a pillow, on my lap. The set up is such that the cord is bent a little bit but it is not positioned in such a way where it seems like it would obviously break.
I may get a Mac but I need to find out if Schwab trading platform will work on a Mac or not.
The help I am asking for is whether the use I have described is a clear and obvious path to short life. Since both laptops have had the problem I have to wonder if it is a behavioral issue.
Any suggestions for especially durable laptops? After I get a new one, when I use it should I not plug it in and then charge it after the battery runs down?
Any help or input along these lines would be appreciated. Thank you.
Read more!
A State Of Flux
It seems like there is a lot happening in all the markets this week. It is times like this when people who are not really traders get tempted to trade more than they probably should.
I do not know whether this is a bad week for stocks or if this is the turning point for a correction or a bear market. What I do know is that the market has not really moved down a lot. I also know that bear markets start by rolling over and last on average for many months giving plenty of time to reduce exposure consistent with what is hopefully a strategy to get defensive that you planned early on.
Long time readers will know I have tilted defensive for a while so I have no trade to do for now.
Read more!
I do not know whether this is a bad week for stocks or if this is the turning point for a correction or a bear market. What I do know is that the market has not really moved down a lot. I also know that bear markets start by rolling over and last on average for many months giving plenty of time to reduce exposure consistent with what is hopefully a strategy to get defensive that you planned early on.
Long time readers will know I have tilted defensive for a while so I have no trade to do for now.
Read more!
Friday Tidbits
A reader asked for clarification on how a high or low yen impacts equities. Well, here is a funny answer; most of the time it does not matter but occasionally it does. Last spring, as the chart shows, the dollar started rolling over against the yen before the S&P 500 started its decline.
I have no idea, looking forward, how often currencies will impact stocks in a meaningful way but they can and that is the important thing. I think big moves, an upsetting of the apple cart, is what causes equities to react swiftly.
For anyone who cares I reinstated my position in DB Agriculture ETF (DBA) yesterday at $25.90. If the entry point turns out to be a good one, well lucky for me, if it turns out to be a bad one I will have taken out two points which is OK too.
Bill Cara has a post up that expresses concern about a rising ten year yield. He feels that 5-5.25% could be real trouble for equities. I'm not sure if it would be real trouble or simply an excuse for a correction but at some point when enough time has passed after 1% Fed Funds and because of all of the dollar issues I tend to think that the ten year will yield 6.5-7% again. I can't predict when with any confidence but I think it will happen.
The benchmark ICEX-15 index in Iceland has been perking up of late; interesting that the recent yen strength has not seemed to hurt Iceland. Yet?
Iceland has very high interest rates and so is a beneficiary of the carry trade.
This is a very long term theme for me personally but not for clients. I have ridden out a few bumps along the way and will continue to do so. A couple of weeks ago, maybe longer, I reinstated a position in the Stockholm listing of Kaupthing Bank that I had previously sold months ago.
I find it interesting that the rally in SPX on Wednesday took VIX below ten and immediately had a big down day taking VIX back above eleven. I don't have much of a rebuttal to anyone who says it means nothing but nonetheless.
Read more!
Thursday, January 25, 2007
NZD
The New Zealand economy is not sick but it's not well due to various imbalances yet the kiwi has shown quite a bit of strength over the last three months.The RBNZ was hawkish over night causing a run back above $0.70.
For now there is probably not much of a conclusion to draw but it is interesting to me that NZ has less ambiguity about its short run than we have here in the US.
I believe that staying current with various currencies is productive even if you are an equities-only person. The currency markets can help with better understanding of foreign stock markets.
Read more!
Back To The Yen
On Tuesday I put up a post about the yen. I noted that the carry trade has been very popular and that some point the yen would get stronger against the high yielders, I was not trying to make a call on the yen so much as point out that if the yen gets stronger it will hit and maybe hurt a lot of things.
Later that night, Wednesday morning down under, Australia reported a weak inflation number which some are saying takes a hike by the RBA (Reserve Bank of Oz) off the table in February. A big chunk of the report being weak is attributable to the price of oil, so stay tuned on that one.
The point of this follow up is to point out a few obvious things. A strong yen, whether it happens or not, is a threat to quite a few themes (a repeat from Tuesday). If you are going to invest beyond SPY, EFA and AGG it behooves you to know what threatens the themes you have chosen to own.
If the yen is one thing that threatens your holdings, it is mine, then you should know that USDJPY at 120 or higher is expensive (in dollar terms) relative to the last few years and so some sort of correction should not be a surprise which is what I was saying on Tuesday.
Some things like this are a little easier to take measure of than some other things. You can't possibly account for everything that might come a long but you can get your arms around some of them.
Read more!
Wednesday, January 24, 2007
Norway Raises Rates
You are probably sick of all the CNBC coverage of this, ahem, but the Norges Bank, the central bank of Norway, raised rates by 25 basis points to 3.75%.The news is reflected in USDNOK rate.
I have been a fan of Norway as an investment destination for a while now and that continues to be the case.
Read more!
Maria, I Have An Answer
Early this morning Maria asked Bill Browder from Hermitage what the catalyst for higher oil will be (part of Mr. Browder's thesis for Russia).
Regardless of you think about oil going higher or lower the fact is that markets in all sorts of things turn in the other direction, go on to make very large moves in that opposite direction over and over for no reason at all.
If you think about it, its true. Yes, sometimes there are reasons but the exact turning point is usually more about emotion/sentiment than anything else.
I think oil will head higher, I don't know if it will, but it is a fair bet that $80 was an over reaction as will the bottom of this move, if it is still in front of us, be an over reaction.
That markets can turn fast an hard with no warning is yet another reason why I am not a fan of big bets. Being wrong is too easy.
Read more!
Regardless of you think about oil going higher or lower the fact is that markets in all sorts of things turn in the other direction, go on to make very large moves in that opposite direction over and over for no reason at all.
If you think about it, its true. Yes, sometimes there are reasons but the exact turning point is usually more about emotion/sentiment than anything else.
I think oil will head higher, I don't know if it will, but it is a fair bet that $80 was an over reaction as will the bottom of this move, if it is still in front of us, be an over reaction.
That markets can turn fast an hard with no warning is yet another reason why I am not a fan of big bets. Being wrong is too easy.
Read more!
Aiming To Please
A question came in about the Alpine funds. The reader is considering buying Alpine Global Dynamic Dividend Fund (AGD). Apparently they have a new fund coming called Alpine Total Dynamic Dividend Fund (AOD). I am favorably disposed to the concept. I wrote about AGD for TSCM when it first listed.
As best as I can tell the difference between the two is that AGD will manage for qualified dividends were AOD will not. That could be an important distinction.
Not sure if I need to disclose that I own an open end version of this for what I think is four very small accounts; Alpine Dynamic Dividend Fund(ADVDX).
The reader says he may add AGD or the new AOD as a fixed income proxy. He notes that the time is not right high yield bonds.
There are only a few months to look at but AGD may not quack like a bond fund. I don't think the reader is taking crazy risk but he is not buying a bond fund and I am not sure if AGD could be called a bond proxy either.
Also in this question was whether these CEFs might be like the WisdomTree funds. I think that is a possibility. The two seem to have similar characteristics but that is all the more reason not think of AGD as a bond proxy. If there was a stock market crash I would expect AGD to capture most of it. One positive aspect about this as a bond proxy could be that AGD would probably not be as interest rate sensitive the next time rates spike up.
Please note I am not knocking the merits of the fund just questioning whether it could be a fixed income substitute.
Another reader asked for clarification on what I mean by low correlation and what I look for when I say low correlation.
I'm not sure I can make it crystal clear but I can describe how I integrate this into client accounts. First, at certain points in the stock market cycle it makes sense to have a portfolio look a lot like the benchmark, for me the S&P 500. At other times it makes sense to move away from the S&P 500.
Moving toward SPX would mean owning a lot of big US companies in the index such that the point for point movement is pretty close. This would entail the sector weighting being about the same as the index with the names held being the largest with in each sector.
Moving away from the index could entail several things including changing cap size, going foreign, making sector bets and raising cash.
Turning the entire portfolio upside down in pursuit of this is not practical. So this is where adding in things with a low or negative correlation to SPX comes in handy. An inverse fund will obviously have an inverse correlation and can be an efficient way to reduce the correlation of the portfolio. Gold seems drift to from a slightly negative to slightly positive but it is never high. So 5% in a gold something or other and 10% in an inverse fund goes along way to reducing the correlation of the entire portfolio even if every other holding is a mega cap.
I have written numerous times about the various things I use to reduce correlation of the portfolio from foreign stocks to high yielding to commodity to foreign currencies. If this is something you really want to be able to quantify you will probably need to pay for the information from some sort of data service.
Read more!
As best as I can tell the difference between the two is that AGD will manage for qualified dividends were AOD will not. That could be an important distinction.
Not sure if I need to disclose that I own an open end version of this for what I think is four very small accounts; Alpine Dynamic Dividend Fund(ADVDX).
The reader says he may add AGD or the new AOD as a fixed income proxy. He notes that the time is not right high yield bonds.
There are only a few months to look at but AGD may not quack like a bond fund. I don't think the reader is taking crazy risk but he is not buying a bond fund and I am not sure if AGD could be called a bond proxy either.
Also in this question was whether these CEFs might be like the WisdomTree funds. I think that is a possibility. The two seem to have similar characteristics but that is all the more reason not think of AGD as a bond proxy. If there was a stock market crash I would expect AGD to capture most of it. One positive aspect about this as a bond proxy could be that AGD would probably not be as interest rate sensitive the next time rates spike up.
Please note I am not knocking the merits of the fund just questioning whether it could be a fixed income substitute.
Another reader asked for clarification on what I mean by low correlation and what I look for when I say low correlation.
I'm not sure I can make it crystal clear but I can describe how I integrate this into client accounts. First, at certain points in the stock market cycle it makes sense to have a portfolio look a lot like the benchmark, for me the S&P 500. At other times it makes sense to move away from the S&P 500.
Moving toward SPX would mean owning a lot of big US companies in the index such that the point for point movement is pretty close. This would entail the sector weighting being about the same as the index with the names held being the largest with in each sector.
Moving away from the index could entail several things including changing cap size, going foreign, making sector bets and raising cash.
Turning the entire portfolio upside down in pursuit of this is not practical. So this is where adding in things with a low or negative correlation to SPX comes in handy. An inverse fund will obviously have an inverse correlation and can be an efficient way to reduce the correlation of the portfolio. Gold seems drift to from a slightly negative to slightly positive but it is never high. So 5% in a gold something or other and 10% in an inverse fund goes along way to reducing the correlation of the entire portfolio even if every other holding is a mega cap.
I have written numerous times about the various things I use to reduce correlation of the portfolio from foreign stocks to high yielding to commodity to foreign currencies. If this is something you really want to be able to quantify you will probably need to pay for the information from some sort of data service.
Read more!
Tuesday, January 23, 2007
When The Yen Turns
This chart shows the British pound going up 8% versus the yen over the last three months. This is kind of a big move for a currency pair.The carry trade has been working of late, this after the unraveling of the carry last spring in what was dubbed the risk aversion trade.
I do not know how much longer the yen will stay weak but at some point it will turn up (whether it would then stays strong is another issue) and a lot of the high yielding currencies will feel it as might their respective stock markets.
This is not something I feel the need to trade as I am not predicting a repeat of last spring but if news coverage of any correction does not include yen strength, perhaps we will have someplace to look. Also, knowing where a bump in the road might come from helps in not being caught off guard.
Read more!
How To Think About Emerging Markets?
I stumbled across this post about emerging markets. Most of it is an interview with an investment advisor named Jeffrey Troutner who is a DFA guy.
Troutner is questioning the value of investing in emerging markets due to increased correlation to US markets and returns over the last 12 years that have not justified the volatility taken on to get those returns.
The benchmark for these conclusions was a DFA emerging market index that, according Troutner in the interview, has outperformed the MSCI Emerging market index.
A tipping point for Troutner's concern was the correction of both the emerging markets and the S&P 500 last spring. Emerging markets did not zig when the S&P 500 zagged, he is right. Also supporting his case, but he did not mention it, was the Asian contagion back in 1997. The magnitudes may have been different in each instance but during these times of panic (or if you prefer, stress tests) emerging markets did not offer a low correlation.
There are several issues here that cause me to view this much differently.
In no particular order; making this decision based on six week or 2 month stress tests that pop up every now and then seems to contradict the long term approach that DFA people believe in. I am a believer in blending different things together but in times of crisis I would not expect another stock market to provide something positive and in fact they don't. Gold does this, inverse funds can do it, certain parts of the bond market can do this as can defense (not defensive) stocks, depending on the nature of the crisis. I conceded this on May 30, 2006 for TSCM.
During normal rises and declines, emerging markets can add diversification but it depends how you invest in them. The broader an emerging market index is the more likely that index will correlate with the US market. A few days ago I wrote a post comparing Turkey and Malaysia that pointed out the low correlation between the two due to vast differences between them. There is potentially some offset between the two which during a crisis could be a good thing.
An entire broad-based index with all sorts of countries zigging and zagging is going to dilute some of portion of the effect of investing in emerging markets. This makes the case of investing in countries or regions as opposed to something like EEM. I realize that many people may not be comfortable with a single country but the argument that broad-based emerging market funds is not a great way to go has merit.
If you look at the correlation between SPY and just about any single country product you will see a lower correlation than the number for EEM; I realize I am stating the obvious.
However as a investment advisor I don't think I could justify ignoring the space to a client because the broadest vehicles out there may not deliver. Top down analysis of a country combined with a bottom up pick of a country fund or, heaven forbid, an individual stock seems like it should be within the wheelhouse of someone with my job title.
Read more!
Troutner is questioning the value of investing in emerging markets due to increased correlation to US markets and returns over the last 12 years that have not justified the volatility taken on to get those returns.
The benchmark for these conclusions was a DFA emerging market index that, according Troutner in the interview, has outperformed the MSCI Emerging market index.
A tipping point for Troutner's concern was the correction of both the emerging markets and the S&P 500 last spring. Emerging markets did not zig when the S&P 500 zagged, he is right. Also supporting his case, but he did not mention it, was the Asian contagion back in 1997. The magnitudes may have been different in each instance but during these times of panic (or if you prefer, stress tests) emerging markets did not offer a low correlation.
There are several issues here that cause me to view this much differently.
In no particular order; making this decision based on six week or 2 month stress tests that pop up every now and then seems to contradict the long term approach that DFA people believe in. I am a believer in blending different things together but in times of crisis I would not expect another stock market to provide something positive and in fact they don't. Gold does this, inverse funds can do it, certain parts of the bond market can do this as can defense (not defensive) stocks, depending on the nature of the crisis. I conceded this on May 30, 2006 for TSCM.
During normal rises and declines, emerging markets can add diversification but it depends how you invest in them. The broader an emerging market index is the more likely that index will correlate with the US market. A few days ago I wrote a post comparing Turkey and Malaysia that pointed out the low correlation between the two due to vast differences between them. There is potentially some offset between the two which during a crisis could be a good thing.
An entire broad-based index with all sorts of countries zigging and zagging is going to dilute some of portion of the effect of investing in emerging markets. This makes the case of investing in countries or regions as opposed to something like EEM. I realize that many people may not be comfortable with a single country but the argument that broad-based emerging market funds is not a great way to go has merit.
If you look at the correlation between SPY and just about any single country product you will see a lower correlation than the number for EEM; I realize I am stating the obvious.
However as a investment advisor I don't think I could justify ignoring the space to a client because the broadest vehicles out there may not deliver. Top down analysis of a country combined with a bottom up pick of a country fund or, heaven forbid, an individual stock seems like it should be within the wheelhouse of someone with my job title.
Read more!
Monday, January 22, 2007
Odds 'N Ends
A reader asked for my thoughts on the new All World ETF from StateStreet that trades under CWI. I have an article up on TSCM (free) if you are curious.
Another reader asked about buying stocks either before or after earnings. I don't see how gaming earnings can be anything but a guess. Granted some folks are in a better position to make a guess than other but still. One truthism of course is that there is less uncertainty after earnings but for the long term, who cares about one earnings report? Gaming earning is not something I ever do for clients. Every once in a while I have made a personal trade based on the reaction to earnings, so after the fact, but it has been a while since I have done that.
Propers to the gang at Wallstrip for the Businessweek nod.
I stumbled across a site with some otherwise difficult to find commodity charts called InfoMine.
Read more!
Another reader asked about buying stocks either before or after earnings. I don't see how gaming earnings can be anything but a guess. Granted some folks are in a better position to make a guess than other but still. One truthism of course is that there is less uncertainty after earnings but for the long term, who cares about one earnings report? Gaming earning is not something I ever do for clients. Every once in a while I have made a personal trade based on the reaction to earnings, so after the fact, but it has been a while since I have done that.
Propers to the gang at Wallstrip for the Businessweek nod.
I stumbled across a site with some otherwise difficult to find commodity charts called InfoMine.
Read more!
Goals
A reader left a comment asking what my goal is in trying to construct a portfolio but he did not specify for clients or personally. The tone of the question was more big picture.
The market goes higher over time, trying not get in the way of that is one big goal. Most of the people that hire us have saved or are saving properly. Proper savings means the portfolio needs to do fewer things. The biggest macro is to give clients the best chance possible of reaching their goals. Big bets that blow up are a sure fire way to screw that up so I don't make big bets.
One bit of philosophy that has come up before is that I would gladly lag the market by a little every year in exchange for substantially less volatility than the market. This was how the portfolio behaved last year for most clients.
All modesty aside I think I have a good understanding of how to blend different things together to get a result I want to get. The various things I write about like, gold, Australia, the double short fund and so on are all things that help me do this, even with the miserable timing of buying the double short ETF last summer.
I am not a big risk taker where other people's money is concerned. In a year where the market is up 10%, I can't imagine I would be up 20%.
If the reader meant personally, well we also need to save and invest for our future. I own many of the themes I put in client accounts but I also have an eye toward less volatility than I have for most clients. Never being emotional is a both a goal and a job requirement (as I see my job). I am pretty good at not being emotional but I think less volatility and less domestic exposure give me the best chance of remaining unemotional.
I probably do a little more with currencies than what I do for clients and I tilt a little heavier to things like Macquarie Infrastructure (MIC) in my account than in client accounts, for anyone new MIC has been a longtime (relative to how long it has been trading) personal and client holding.
The Patriots just could not stop the Colts at all for the last 35 mintues, doh.
Read more!
The market goes higher over time, trying not get in the way of that is one big goal. Most of the people that hire us have saved or are saving properly. Proper savings means the portfolio needs to do fewer things. The biggest macro is to give clients the best chance possible of reaching their goals. Big bets that blow up are a sure fire way to screw that up so I don't make big bets.
One bit of philosophy that has come up before is that I would gladly lag the market by a little every year in exchange for substantially less volatility than the market. This was how the portfolio behaved last year for most clients.
All modesty aside I think I have a good understanding of how to blend different things together to get a result I want to get. The various things I write about like, gold, Australia, the double short fund and so on are all things that help me do this, even with the miserable timing of buying the double short ETF last summer.
I am not a big risk taker where other people's money is concerned. In a year where the market is up 10%, I can't imagine I would be up 20%.
If the reader meant personally, well we also need to save and invest for our future. I own many of the themes I put in client accounts but I also have an eye toward less volatility than I have for most clients. Never being emotional is a both a goal and a job requirement (as I see my job). I am pretty good at not being emotional but I think less volatility and less domestic exposure give me the best chance of remaining unemotional.
I probably do a little more with currencies than what I do for clients and I tilt a little heavier to things like Macquarie Infrastructure (MIC) in my account than in client accounts, for anyone new MIC has been a longtime (relative to how long it has been trading) personal and client holding.
The Patriots just could not stop the Colts at all for the last 35 mintues, doh.
Read more!
Sunday, January 21, 2007
"I Have Not Saved Enough"
I think this needs to be the mind set when thinking about retirement savings. This probably applies more to folks that are still in the accumulation phase, but maybe not.
The motivation for this post was an article in Barron's that, while not providing anything new, was thought provoking. It included ideas about working longer, living longer, potential threats to social security solvency and the extent to which boomers are or are not good savers.
The idea of working longer, in your first career or some post retirement career, is something that I believe in wholeheartedly but one reader left a comment on this point a while back noting that sometimes circumstances may make that impossible. Planning to do some work is a good idea but a financial plan that hinders on it could be asking for trouble.
I tend not to believe that social security will be there as we now know it. There is data to support both sides of this point but I just don't have faith in it. According to a calculator on Yahoo my wife and I will receive about $3000 per month in today's dollars. Isn't the annual cap about $15000 (for self employed people)? So I'm paying in $15,000 and I'm getting $36,000? The kicker for inflation makes the estimate in future dollars more like $70,000. Hasn't the ratio of workers to retirees been shrinking for a while with more, ahem, shrinkage, still to come?
I will say that the $3000, if it actually happens, would cover about 90% of every nickel we spent last year, literally every nickel which includes a down payment on a Tundra. I can stop saving now and just party. In all seriousness we live an incredibly modest (cheap?) lifestyle motivated by my parents financial miseries.
Saving too much is not going to be a problem, if you should be so lucky. The "I have not saved enough" mindset will serve me well. You may or may not buy into this but the numbers of people that have saved enough, relative to their age, is woefully low. My wife's friend who is about 50 said she only has $4000. There is some stat floating out there about most people having less than $50,000 saved.
There is probably some sort of sport analogy about playing with at least some desperation. This can apply to saving habits too. If you focus on investing such that you have found a site like mine to read you are probably less likely to be so far behind the game as my wife's friend.
Part of financial planning has to be laying out a worst case scenario which for me means not working (even though I plan to work), no social security (I don't plan on it anyway), below average stock market growth and above average inflation.
If you undo some of the assumptions embedded in your financial plan, where does that leave you? You can go to any online calculator, plug in 5% investment returns and 5% inflation (or any other set of numbers) to get an idea.
I am not a planner of any sort. Portfolio management is not financial planning. A post from me on this topic will not solve anything but might ask one or two constructive questions. My wife and I are admittedly peculiarly conservative in these matters for reasons touched on above and so we are not a benchmark for anyone.
We all have gaps and quirks, no one is immune, that potentially get in the way of the desired outcome. These need to be addressed and mitigated to give a better chance for success.
Lastly, thanks for all the great comments in the last few days. It is tough to reply to all of them but I am thankful for them.
Read more!
The motivation for this post was an article in Barron's that, while not providing anything new, was thought provoking. It included ideas about working longer, living longer, potential threats to social security solvency and the extent to which boomers are or are not good savers.
The idea of working longer, in your first career or some post retirement career, is something that I believe in wholeheartedly but one reader left a comment on this point a while back noting that sometimes circumstances may make that impossible. Planning to do some work is a good idea but a financial plan that hinders on it could be asking for trouble.
I tend not to believe that social security will be there as we now know it. There is data to support both sides of this point but I just don't have faith in it. According to a calculator on Yahoo my wife and I will receive about $3000 per month in today's dollars. Isn't the annual cap about $15000 (for self employed people)? So I'm paying in $15,000 and I'm getting $36,000? The kicker for inflation makes the estimate in future dollars more like $70,000. Hasn't the ratio of workers to retirees been shrinking for a while with more, ahem, shrinkage, still to come?
I will say that the $3000, if it actually happens, would cover about 90% of every nickel we spent last year, literally every nickel which includes a down payment on a Tundra. I can stop saving now and just party. In all seriousness we live an incredibly modest (cheap?) lifestyle motivated by my parents financial miseries.
Saving too much is not going to be a problem, if you should be so lucky. The "I have not saved enough" mindset will serve me well. You may or may not buy into this but the numbers of people that have saved enough, relative to their age, is woefully low. My wife's friend who is about 50 said she only has $4000. There is some stat floating out there about most people having less than $50,000 saved.
There is probably some sort of sport analogy about playing with at least some desperation. This can apply to saving habits too. If you focus on investing such that you have found a site like mine to read you are probably less likely to be so far behind the game as my wife's friend.
Part of financial planning has to be laying out a worst case scenario which for me means not working (even though I plan to work), no social security (I don't plan on it anyway), below average stock market growth and above average inflation.
If you undo some of the assumptions embedded in your financial plan, where does that leave you? You can go to any online calculator, plug in 5% investment returns and 5% inflation (or any other set of numbers) to get an idea.
I am not a planner of any sort. Portfolio management is not financial planning. A post from me on this topic will not solve anything but might ask one or two constructive questions. My wife and I are admittedly peculiarly conservative in these matters for reasons touched on above and so we are not a benchmark for anyone.
We all have gaps and quirks, no one is immune, that potentially get in the way of the desired outcome. These need to be addressed and mitigated to give a better chance for success.
Lastly, thanks for all the great comments in the last few days. It is tough to reply to all of them but I am thankful for them.
Read more!
Saturday, January 20, 2007
Friday, January 19, 2007
Two Bilzzards
I have two blizzards to tell you about. One is the one we are having here in Walker; a real white out.
The other blizzard is the hype about private equity. These funds have access to mountains of capital and they are going after businesses in an effort to make a profit for their investors. That sentence is not much different than a description of venture capital which was the hot hot thing a few years ago.
It got to the point where venture had too much money, funded tons of deals, took them public, even the ones that shouldn't have been public. VC drew new people, new money and mistakes were made. Can private equity be much different? It is already drawing more people (both investors and workers).
Is it a stretch to think really bad PE deals will get done by people with maybe a little less experience? I am not an expert in VC or PE but it is easy to see that there is a tremendous amount of capital looking to participate. I do not know if this will end badly or not but the potential is there.
My clients can reach their financial goals without this, how about you?
Read more!
The other blizzard is the hype about private equity. These funds have access to mountains of capital and they are going after businesses in an effort to make a profit for their investors. That sentence is not much different than a description of venture capital which was the hot hot thing a few years ago.
It got to the point where venture had too much money, funded tons of deals, took them public, even the ones that shouldn't have been public. VC drew new people, new money and mistakes were made. Can private equity be much different? It is already drawing more people (both investors and workers).
Is it a stretch to think really bad PE deals will get done by people with maybe a little less experience? I am not an expert in VC or PE but it is easy to see that there is a tremendous amount of capital looking to participate. I do not know if this will end badly or not but the potential is there.
My clients can reach their financial goals without this, how about you?
Read more!
Not A Risk?
A reader left the following;
Further Enron was not an oil company it was a utility with a huge trading operation.
This may seem cold but worrying about statistically insignificant events, where investing is concerned, makes very little sense to me. If you have 3% of your portfolio in the next major fraud you will end up having a bad day and might set your portfolio back a couple of months. This is not a ruinous outcome.
The reader says he is seeking out a commodity product for this part of his portfolio. Over the last three months USO and OIL had standard deviations of 27.5 and 27.3 respectively. In that same time BP had a standard deviation of 18.2, XOM 19.6, Chevron 19.4, Total 17.8 and the Energy Sector SPDR (XLE), which might be the least compelling energy ETF out there, comes in at 20.5.
Individual stocks are not right for every one and trading a commodity ETF is a valid way to go for people that want to assume that kind of action but the logic of picking a very volatile commodity ETF over a stock for fear of fraud is lost on me.
An update; I disclosed buying the Currency Harvest ETF (DBV), aka the carry trade fund, back in October. I feel like it is living up to its billing of capturing most of the market with less volatility. Over the last three months SPY has a volatility of 7.07 and DBV is 6.14. In that same time SPY is up 4% while DBV is up 3%. While that is fine I think it is too early to know for sure that it is a success.
For now I have no intention of putting client money into this. I prefer the single currency ETFs, they are simpler and have provided a better return.
On a more positive note I am scheduled to do a podcast-like interview with WallStreet.net. I've done this many times before. The show is hosted by Bobby Illich and my counterpart this go around will be Jonathan Hoenig from Cashin' In. I'm looking forward to it.
Read more!
Why would you indirectly suggest owning a company oil stock over an ETF?Well this is a good comment as it brings up what really is a risk to worry about and what isn't, in terms of being realistic. Enron perpetrated a fraud, as did Worldcom. How many reasonably big companies (both of these were of course much larger than reasonably big) and larger are frauds that go to zero? We can define reasonably big as NYSE listed or NASDAQ listed. It happens so infrequently that it is statistically insignificant. There have been a few other companies that have failed for reasons other than fraud, this is also rare.
Have the memories of ENRON faded that quickly within the market?
I am purposely trying to get out of company stock and get into a commodity for a portion of my portfolio.
Further Enron was not an oil company it was a utility with a huge trading operation.
This may seem cold but worrying about statistically insignificant events, where investing is concerned, makes very little sense to me. If you have 3% of your portfolio in the next major fraud you will end up having a bad day and might set your portfolio back a couple of months. This is not a ruinous outcome.
The reader says he is seeking out a commodity product for this part of his portfolio. Over the last three months USO and OIL had standard deviations of 27.5 and 27.3 respectively. In that same time BP had a standard deviation of 18.2, XOM 19.6, Chevron 19.4, Total 17.8 and the Energy Sector SPDR (XLE), which might be the least compelling energy ETF out there, comes in at 20.5.
Individual stocks are not right for every one and trading a commodity ETF is a valid way to go for people that want to assume that kind of action but the logic of picking a very volatile commodity ETF over a stock for fear of fraud is lost on me.
An update; I disclosed buying the Currency Harvest ETF (DBV), aka the carry trade fund, back in October. I feel like it is living up to its billing of capturing most of the market with less volatility. Over the last three months SPY has a volatility of 7.07 and DBV is 6.14. In that same time SPY is up 4% while DBV is up 3%. While that is fine I think it is too early to know for sure that it is a success.
For now I have no intention of putting client money into this. I prefer the single currency ETFs, they are simpler and have provided a better return.
On a more positive note I am scheduled to do a podcast-like interview with WallStreet.net. I've done this many times before. The show is hosted by Bobby Illich and my counterpart this go around will be Jonathan Hoenig from Cashin' In. I'm looking forward to it.
Read more!
Thursday, January 18, 2007
Funds? We Don't Need No Stinkin Funds
An eager reader left a couple of comments asking what funds are good to capture the countries I wrote about yesterday; Australia, Ireland, Norway, Sweden, Chile, China and Vietnam.
For the first six I use common stocks. There are funds or ETFs available of course (except Norway) but as is usually the case stocks are my preference. Personally I use iShares Australia (EWA) but WisdomTree has one in the works that could turn out to be better. A couple of clients (a big minority as a function of circumstance) own iShares China (FXI) but I sold a little recently and got stopped out on my own position in it.
For Vietnam I have disclosed several times owning the Vietnam Opportunity Fund (VTOPF) but it is up about 80% or so since I bought last spring. I am certainly not buying it here for any clients. I would not be the least bit surprised if the next dollar in price was down (it trades around $4.60).
I don't know if the reader only buys funds but if so he might be hamstrung. This circles back to owning some funds and some stocks in a combination that is manageable for you.
Another reader asked for my thoughts on Singapore and Malaysia. Both offer similar attributes. Both have surpluses, well managed, export driven economies. Interest rates are low and they each offer good diversification against any deficit country you may be exposed to.
From a US based investor's view point their may not be much need to own both. If you compare the two on a chart using the respective iShares funds, EWM and EWS, you will see they have a very tight correlation. Oddly though, PortfolioScience shows the correlation at less than 0.60 which appears to be wrong versus the chart.
Read more!
For the first six I use common stocks. There are funds or ETFs available of course (except Norway) but as is usually the case stocks are my preference. Personally I use iShares Australia (EWA) but WisdomTree has one in the works that could turn out to be better. A couple of clients (a big minority as a function of circumstance) own iShares China (FXI) but I sold a little recently and got stopped out on my own position in it.
For Vietnam I have disclosed several times owning the Vietnam Opportunity Fund (VTOPF) but it is up about 80% or so since I bought last spring. I am certainly not buying it here for any clients. I would not be the least bit surprised if the next dollar in price was down (it trades around $4.60).
I don't know if the reader only buys funds but if so he might be hamstrung. This circles back to owning some funds and some stocks in a combination that is manageable for you.
Another reader asked for my thoughts on Singapore and Malaysia. Both offer similar attributes. Both have surpluses, well managed, export driven economies. Interest rates are low and they each offer good diversification against any deficit country you may be exposed to.
From a US based investor's view point their may not be much need to own both. If you compare the two on a chart using the respective iShares funds, EWM and EWS, you will see they have a very tight correlation. Oddly though, PortfolioScience shows the correlation at less than 0.60 which appears to be wrong versus the chart.
Read more!
Flapjack And A Smoke
As much as flapjacks and a smoke don't go together, neither do any of these topics relate to each other.
The oil ETF issues and questions that sprung up in the last few days (at least on this blog) raise an interesting point that I have addressed before about keeping things simple. I never considered adding any of the oil ETFs for energy sector exposure.
A big thing in my thought process is finding the best tool to capture various effects. For me the best thing is probably going to be simple, the caveat being that each person might have a different idea of simple.
When I write about a new fund (mostly in my TSCM stuff) I always say the same thing about giving something new some to trade to see what it actually does in the market, backtest grooviness notwithstanding.
Whatever is the best way to describe the current state of the Macroshares, they are only one month old. In general terms I am surprised that a problem with any ETF would manifest itself after such a short time but either way it makes the point.
If you are managing your own portfolio and want energy exposure it does not get much simpler than an oil stock. Recently I heard that energy stocks have a 0.95 correlation to crude oil. That number seems too high to me but there is obviously some connection.
One thing that kept me away from the oil ETFs was some awareness of what I don't know. Being in touch with supply and demand for oil (something I am comfortable with) is much different than understanding the dynamics and inner workings of the futures market for oil which is a lesson some folks have learned the hard way.
It is very unlikely that you need every new thing that comes along. While I believe this, a few new things will add value and utility to your portfolio.
StateStreet listed a new ETF yesterday called the SPDR MSCI ACWI ex-US ETF which trades under the ticker CWI. I got an email from StateStreet to announce it but the link to the information was a dead link and the regular info page on StateStreet.com did not really have anything but the prospectus did (have fun).
It seems like it will be similar to iShares EAFE (EFA) but it includes Canada and EFA does not. EFA has a little (just under 3% per the iShares site) emerging market exposure but CWI might have more but I did not find the exact info on the website. Countries in CWI include Argentina, Czech Republic and Pakistan. I don't know if this will turn out to be better than EFA or not but you can check it out for yourself.
I heard this last night on CNBC Asia; Singapore Airlines wants to outsource its call center to India. Outsourcing is an issue in Singapore? I would not have guessed.
Read more!
The oil ETF issues and questions that sprung up in the last few days (at least on this blog) raise an interesting point that I have addressed before about keeping things simple. I never considered adding any of the oil ETFs for energy sector exposure.
A big thing in my thought process is finding the best tool to capture various effects. For me the best thing is probably going to be simple, the caveat being that each person might have a different idea of simple.
When I write about a new fund (mostly in my TSCM stuff) I always say the same thing about giving something new some to trade to see what it actually does in the market, backtest grooviness notwithstanding.
Whatever is the best way to describe the current state of the Macroshares, they are only one month old. In general terms I am surprised that a problem with any ETF would manifest itself after such a short time but either way it makes the point.
If you are managing your own portfolio and want energy exposure it does not get much simpler than an oil stock. Recently I heard that energy stocks have a 0.95 correlation to crude oil. That number seems too high to me but there is obviously some connection.
One thing that kept me away from the oil ETFs was some awareness of what I don't know. Being in touch with supply and demand for oil (something I am comfortable with) is much different than understanding the dynamics and inner workings of the futures market for oil which is a lesson some folks have learned the hard way.
It is very unlikely that you need every new thing that comes along. While I believe this, a few new things will add value and utility to your portfolio.
StateStreet listed a new ETF yesterday called the SPDR MSCI ACWI ex-US ETF which trades under the ticker CWI. I got an email from StateStreet to announce it but the link to the information was a dead link and the regular info page on StateStreet.com did not really have anything but the prospectus did (have fun).
It seems like it will be similar to iShares EAFE (EFA) but it includes Canada and EFA does not. EFA has a little (just under 3% per the iShares site) emerging market exposure but CWI might have more but I did not find the exact info on the website. Countries in CWI include Argentina, Czech Republic and Pakistan. I don't know if this will turn out to be better than EFA or not but you can check it out for yourself.
I heard this last night on CNBC Asia; Singapore Airlines wants to outsource its call center to India. Outsourcing is an issue in Singapore? I would not have guessed.
Read more!
Wednesday, January 17, 2007
Follow Up To Homeward Bound
Larry asked what regions were my "favorites" for the next 5-10 years.
I don't really think in terms of favorite per se. Ideally there would be no need to go heavier into foreign because the Kudlowite view will turn out to be right. While I believe in what is going on in these countries I write about and exposure client money to the other part of it is concern over things not going well in the US.
If the US does poorly (not talking about some world wide contagion that starts in the US but simply a lag) there are many different foreign countries that could do well.
I tend to group some of these countries together into categories. The developed countries that I think could do best with a slow deterioration here are Australia, Ireland, Norway and Sweden. They don't rely too heavily on the US. They each have other attributes that I buy into and that I have written about before.
I also buy into emerging markets over a longer period of time but here, as I mentioned yesterday, I want diversification within this part of the market. While I have no Chilean exposure now it is a country that I believe in and will probably buy back into. They rely on exporting copper, similar to Brazil which I also own but with less juice than Chile. I buy into China for the long term, China is obviously a buyer of copper as opposed to a seller. I have written several times about Vietnam which I've described as being in its own world, as are a lot of frontier markets.
There are plenty of other countries that I own for clients and at anytime one of them could offer a lot of return, like Spain last year, but the ones above seem to me to be intellectually the most promising. However each will have disappointments along the way that will seem like surprises but I think of all of them as multi year themes. I would be hardpressed to guess what country will do the best this year but the way I manage I don't have to.
Read more!
I don't really think in terms of favorite per se. Ideally there would be no need to go heavier into foreign because the Kudlowite view will turn out to be right. While I believe in what is going on in these countries I write about and exposure client money to the other part of it is concern over things not going well in the US.
If the US does poorly (not talking about some world wide contagion that starts in the US but simply a lag) there are many different foreign countries that could do well.
I tend to group some of these countries together into categories. The developed countries that I think could do best with a slow deterioration here are Australia, Ireland, Norway and Sweden. They don't rely too heavily on the US. They each have other attributes that I buy into and that I have written about before.
I also buy into emerging markets over a longer period of time but here, as I mentioned yesterday, I want diversification within this part of the market. While I have no Chilean exposure now it is a country that I believe in and will probably buy back into. They rely on exporting copper, similar to Brazil which I also own but with less juice than Chile. I buy into China for the long term, China is obviously a buyer of copper as opposed to a seller. I have written several times about Vietnam which I've described as being in its own world, as are a lot of frontier markets.
There are plenty of other countries that I own for clients and at anytime one of them could offer a lot of return, like Spain last year, but the ones above seem to me to be intellectually the most promising. However each will have disappointments along the way that will seem like surprises but I think of all of them as multi year themes. I would be hardpressed to guess what country will do the best this year but the way I manage I don't have to.
Read more!
Homeward Bound
The topic of home bias was raised the other day by reader Macro Man who left a comment about equity portfolio home (country) bias and a link that included this table on page 32. I don't actually know who authored the report but you can click here to take a look.Coincidently I received an email from a portfolio manager in Australia who sent me one of his firm's marketing pieces. I did not seek out permission to specifically spell out what they are doing but he is welcome to leave any information he would like in the comments.
His "balanced" portfolio has quite a few different assets classes including what looks like 62% in equities. Of that 62% roughly 60%, or 37% of the entire account, is domestic (so for his clients that is 60% in Australian) and 40% in foreign. Of the foreign I wonder how much is in the US?
The data on the table, albeit dated, don't seem much different than the US with a couple of exceptions like Netherlands or Austria and I don't know how Ireland came up with 118%.
I have been consistent in maintaining client exposure to foreign in the mid thirties, I have tweaked a little bit now and then but have not made a major change. I have said before and still believe that over the next few years I could see moving closer to 50%.
Michael Metz made an interesting comment that is relevant here. He said the biggest thing this century will be the transference of wealth to some of the larger emerging markets, I am paraphrasing.
I buy into this. The way I think of it is that quite a few countries will come to player bigger roles in the world's economy than they do now. I've written about a few of these countries in the past and I plan to continue to study more of them in the future I would suggest you do the same.
Read more!
Tuesday, January 16, 2007
Wild Stuff
This map comes from Carl Stromer via Barry Ritholtz.It shows us the GDP of various countries and compares them to the GDP of US states. A few are more interesting to me than others.
Arizona=Thailand
Rhode Island =Vietnam
Mississippi=Chile
I readily concede there is probably not much utility to this but it is interesting and I think for people that might be new to foreign it offers some perspective.
Read more!
Closure
Well the Agriculture ETF (DBA) popped on the open and I sold it. I got a split fill with half at $27.95 and half at $28.00. I looked a few minutes later and it was at $28.10. Right before I published this post I saw $27.85.
Based on what I have seen I did not think DBA lent itself to a stop order, it was up $0.90 on the opening print today. I plan to own it again but I am not sure when. I was very surprised it moved so much in such a short time and while I intended to hold it I decided to take the trade for now.
A reader emailed me an interesting question; he wanted to know if the listing of the fund, so the buying if the four components, could have pushed prices up.
While anything is possible I think the answer here is no. The total volume since DBA listed is just under 2 million shares or about $50 million, give or take. If we were to assume that each share traded was newly created to meet buyer demand, which is no doubt a faulty assumption, then you are talking about $12.5 million going into each of the four components. I don't think that kind of money could move the spot prices by that much.
Read more!
Based on what I have seen I did not think DBA lent itself to a stop order, it was up $0.90 on the opening print today. I plan to own it again but I am not sure when. I was very surprised it moved so much in such a short time and while I intended to hold it I decided to take the trade for now.
A reader emailed me an interesting question; he wanted to know if the listing of the fund, so the buying if the four components, could have pushed prices up.
While anything is possible I think the answer here is no. The total volume since DBA listed is just under 2 million shares or about $50 million, give or take. If we were to assume that each share traded was newly created to meet buyer demand, which is no doubt a faulty assumption, then you are talking about $12.5 million going into each of the four components. I don't think that kind of money could move the spot prices by that much.
Read more!
Example Of Diversification
Not all emerging markets are the same. Some are commodity based, some export technology or sneakers, some are in their own world and so on.If you want emerging market exposure that goes beyond owning one broad-based ETF or OEF you need to be cognizant of the differences and similarities of the countries you own.
If all you owned in 1997 were SE Asian countries you got hit very hard, relative to the wide spread emerging market pain that went with the Asian contagion. If you only owned current account deficit countries during the risk aversion correction you got hit harder than some other folks.
If all you own now is Brazil and Russia you will get crushed if commodities ever endure a serious correction.
The chart above compares the Turkish market with iShares Malaysia (EWM). Regardless of what you think of either country's investment merit the fact is both countries are driven by different things and have much different economies.
Turkey has big deficits all over the place, Malaysia is one of the surplus countries. Turkey has a lot of inflation and very high (high-teens) short term rates, Malaysia's rates (last I looked) are lower than ours with very little inflation.
If you like Turkey it is because you buy into their potential role in the EU (fraught with open ended questions), their very young and large population, the pipeline and a few other lesser things.
If you like Malaysia it is because they are less volatile than a lot of emerging markets, have a well managed economy, you see continuing export growth and you probably have something positive to say about palm oil.
This chart compares the Malaysian ringgit to the Turkish lira. The point of this chart is to show how well the surplus currency did against the deficit country during last spring's stress test.
That is a huge move. If there is ever a repeat of 1997 the chart might simply flip over?
These two countries appear to me to zig and zag against each other which probably makes for good diversification. Lest anyone add 1+1 and get 11, I don't own either country, I am merely pointing out the potential diversification available within emerging markets.
As a side note if there was an ETF indexed to Turkish sovereign debt I would probably buy a little for a few clients. As far as proportion it would be very small, maybe $3000 in a $200,000 fixed income portfolio. I think it would be a good bet that Turkish bonds won't go to zero even if it were to encounter some big bumps along the way. Just a hint of more stability combined with resolution of the Japan tightening cycle (maybe a year from now?) could give a big carry trade bid under the lira. Just a thought, but no easy way to invest in it.
Read more!
Monday, January 15, 2007
Things We Don't Need
I live about 3/4 of the way up a mountain on a windy dirt road in the woods.This picture is the Holden Efigy concept car. I believe Holden is an Australian car company, I know we saw a lot of them when we went to New Zealand. I stumbled across this car in at NY Times article about the Detroit Auto Show.
As neat as I think this car is, it has no utility for where I live. Are there things in your portfolio that have no utility?
I have written countless times about keeping your portfolio as simple as possible relative to the time you want to put in, assumes your are managing your own portfolio. Most of the accounts I manage have 40-45 holdings. For the time I spend (this is my job and hobby all rolled into one, remember) this is simple for me.
The right number for you probably depends on the time you want to put in and your experience with managing your own portfolio and even then still, it depends.
There are many schools of thought on this but my idea of simple is more than just staying current with your holdings but also staying current with the various themes that each holding ties into, this goes for ETFs and OEFs. The notion of themes should not come as a surprise to long time readers as I believe in top down management. This is not rocket science but it does take work.
A reader left a question that I think is relevant to this. He noted that since I don't think all-ETF portfolios are ideal; what do I think about all mutual fund portfolios. I have touched on this in the past.
From the top down, once you know the themes you want in your portfolio you then need to seek out what you think is the best way for you to capture each theme. For some things that could be an ETF, others an individual stock and so on. The idea that ETFs are the best tool for every theme you want to own, even if there are just six you have in mind, doesn't really make sense to me.
I tend to believe that most people that manage their own portfolios have the wherewithal to follow at least four or five stocks as a part of their mix along with following the fundamentals of one or two other countries besides the US.
A lot of MSM tends to portray owning individual stocks as complete black box voodoo. It is not. I'll concede that 40 stocks might be a bit much for folks that don't spend a lot of time but a portfolio with 20 diversified holdings, four of which are individual stocks weighted at 2-4% is far from reckless and self destructive.
Read more!
Sunday, January 14, 2007
Your Inner Geek
My inner geek has a couple of big things today. First Jack Bauer, Chloe and the gang from 24 are back tonight. I look forward to the show and Adam Warner's expert analysis of each episode.My inner geek is agog over this post from Matt Hougan with all of the ETFs that are in registration. It is the motherlode for this sort of thing.
I am most interested in the State Shares Missouri 50 and the HealthShares GI/Gender Health. Those are not made up funds but I am kidding about being interested.
If you look though the listings I think you might draw the same conclusion that I a drew awhile back and have been repeating over and over which is most of these will be useless but a few here and there that will hold some promise. Up above I made fun of the Gender fund. That same company (the former Ferghana Wellspring) has one in its list called European Drug. Well drug companies are a great way to access Europe. This fund could turn out to be better than iShares Global Health (IXJ) or WisdomTree International Health (DBR), both of which show up in a few accounts I manage. I don't know if it will be better, I don't know anything about the fund yet but in scanning the list it sticks out.
The flood of ETFs is nowhere near the bugaboo that some folks cite. Many of them will live in obscurity with less than $50 million and will never wag the dog. It is also unlikely that any of them leave so many confused and disgruntled shareholders as USO appears to be doing. One thing that seems be true is that very few ETFs are perceived as "not working." There may be some that lag but here I am differentiating between lagging and malfunctioning.
I write over and over about not believing in all ETF portfolios as being the best way to go. While ETFs allow us to do things we could not do before, nothing so far is changing my mind on this point. This coming June I will be a
One last point, as you look through the listings in Matt's post you will see a lot of funds that have some degree of active management. Some of them, by the nature of what they screen for, can capture a certain effect, like the Patent ETF (OTP) possibly being a proxy for large cap growth. But these funds can also be problematic too. Too many of these and you may end up with a bigger bias to growth or large cap or something else. I'm not too excited about these like I was with water, agriculture, currency and a couple others.
Did you see that hit on Reggie Bush early on last night, holy cow.
Amusing anecdote; blogger finally told me I was ready to switch to the new version but then denied me early on in the process. When ever it does convert I will start using tags to make searching easier. I will also tag old posts but that will take a while as there are almost 2100 of them.
Read more!
Saturday, January 13, 2007
Friday, January 12, 2007
DBA
A comment was left about the Agriculture ETF (DBA) being up 5% today along with some snapback in other commodity related things.
I disclosed buying DBA personally the other day. My price was $24.98. It immediately dropped $0.30 and as the reader notes it is up 5% today. My intention in buying was that I would pay closer attention to it as I am interested in buying for clients once I get a feel for how it trades. The 5% is fine personally but is a little bit of a bummer professionally. Today's move is probably due to corn but if 5% daily moves happen with any frequency, and to be clear I would not be shock if DBA gave this back next week, I doubt I would hold it for clients. Too early to know yet.
I have an email into someone I know ( sorry if that sounds pretentious) at Claymore about the huge premium in NAV of UCR and the huge discount in DCR; the MacroShares.
Read more!
I disclosed buying DBA personally the other day. My price was $24.98. It immediately dropped $0.30 and as the reader notes it is up 5% today. My intention in buying was that I would pay closer attention to it as I am interested in buying for clients once I get a feel for how it trades. The 5% is fine personally but is a little bit of a bummer professionally. Today's move is probably due to corn but if 5% daily moves happen with any frequency, and to be clear I would not be shock if DBA gave this back next week, I doubt I would hold it for clients. Too early to know yet.
I have an email into someone I know ( sorry if that sounds pretentious) at Claymore about the huge premium in NAV of UCR and the huge discount in DCR; the MacroShares.
Read more!
Friday Tidbits
China had a 3.68% decline on Friday.
Big congratulations for Andy Swan and the Daytrade Team.
Barclays listed eight domestic bond ETFs yesterday but more importantly Barclays' ETF guy says that foreign bond ETFs are on their radar. If/when they actually do this I think it will open the gates for a huge step up in innovation.
A couple of weeks ago I started subscribing, if that is the right word, to a service from Inveslogic that emails me a bunch of blog and other content. I know that many sites do this including Seeking Alpha and I am sure theirs is good too but I am impressed the Inveslogic and get a lot of utility from it.
Jyske Bank (pronounced Yee-Ska) thinks the decline in oil is good news for Turkey.
I have an article that should post today on either RealMoney or TSCM about opening an HSA account through Options Express to be able to trade stocks or mutual funds. We had our account at Bank of America that just started offering mutual fund but when I went to place an OEF trade the site did not work. BTW I checked with Ameritrade based on an old reader comment and was told they don't have HSAs anymore.
Adam Warner has a post here and here about naked puts. I am a fan of the strategy when done in moderation. Just a few trades a year can add more than a few basis points to the overall portfolio.
You gotta look at this chart from Barry Ritholtz.
We have no snow yet from this current storm that is supposed to come but it is windy as can be right now and we are just waiting for the electricity to go out.
Read more!
Big congratulations for Andy Swan and the Daytrade Team.
Barclays listed eight domestic bond ETFs yesterday but more importantly Barclays' ETF guy says that foreign bond ETFs are on their radar. If/when they actually do this I think it will open the gates for a huge step up in innovation.
A couple of weeks ago I started subscribing, if that is the right word, to a service from Inveslogic that emails me a bunch of blog and other content. I know that many sites do this including Seeking Alpha and I am sure theirs is good too but I am impressed the Inveslogic and get a lot of utility from it.
Jyske Bank (pronounced Yee-Ska) thinks the decline in oil is good news for Turkey.
I have an article that should post today on either RealMoney or TSCM about opening an HSA account through Options Express to be able to trade stocks or mutual funds. We had our account at Bank of America that just started offering mutual fund but when I went to place an OEF trade the site did not work. BTW I checked with Ameritrade based on an old reader comment and was told they don't have HSAs anymore.
Adam Warner has a post here and here about naked puts. I am a fan of the strategy when done in moderation. Just a few trades a year can add more than a few basis points to the overall portfolio.
You gotta look at this chart from Barry Ritholtz.
We have no snow yet from this current storm that is supposed to come but it is windy as can be right now and we are just waiting for the electricity to go out.
Read more!
Decide For Yourself
On December 19th I had an article published on RealMoney (which you can read here for free) that warned of what I believe are the perils of a covered call strategy that involves trying to generate 3-4% per month. I wrote the article in response to a TSCM video (scroll down to December 14th to find the video) with the co-authors of a book on the subject called Covered Calls and Leaps a Wealth Option by Joseph Hooper and Aaron Zalewski. They also have a website called Compound Stock Earnings.
The basic tone of my article, which I hope you will read, was skeptical and I said then, as I do now, that I don't think 3-4% in monthly premium is available except in stocks that are higher in volatility. I have talked about this on a past video along with a couple of posts. In the TSCM article I give some examples of what I mean.
Yesterday I heard from Mr. Hooper, who had initially given me permission to publish his emails but then said it was only OK if I read his book. His emails were so insulting that this episode scores very high for unintentional comedy.
I did not know about their website until I saw it in his auto-signature. The site has two banners crossing the screen, one of which was called Covered Calls Closed in September. By my count this banner had results for six different stocks that they sold calls against. The returns for all six ranged from 2.7% to 7.8%. I did not find anything associated with this banner to tell me if the six stocks (which I list below) were all of the trades placed for that time period or not. If anyone delves into the site in more detail and finds this info, please leave a comment with the details.
Their video was about generating 3-4% per month. My article was a response to that strategy. In the article I posited that 3-4% per month would require buying very volatile stocks to get that kind of premium for just one month. The six stocks are listed with their respective one month standard deviations, keep in mind the one month figure for S&P 500 SPDR (SPY) is 6.71, all of the data is from PortfolioScience.com.
Gymboree (GYMB) 37.17
BE Aerospace (BEAV) 32.90
Select Comfort (SCSS) 17.09
InterDigital Communications (IDCC) 18.58
MEMC Electronic Materials (WFR) 31.69
Continental Airlines (CAL) 43.25
To be crystal clear all six of these trades worked.
Do six stocks make up an entire portfolio for a month? If so is this mix diversified? During the stress test that occurred in the market last spring (as measured from May 11-June 15), IDCC +12%, GYMB -5%, SCSS -18%, CAL -19%, BEAV -30%, WFR -32%. In that same time the S&P 500 was down about 7%.
Clearly I have mined data with these numbers and concede any flaw you care to mention but that is the most recent stress test the market has had, it came as a surprise, as they usually do and I think to my point in the TSCM article was that to get 3-4% a month these are the types of stocks you need to buy and they could go down by similar amounts as the six listed here in future market stress tests. While I believe some exposure to these types of stocks makes for good diversification an entire portfolio of them, which is how I take their video, makes for some sleepless nights.
I hope you will check out the various links I have put in this post and leave a comment on this subject.
Read more!
The basic tone of my article, which I hope you will read, was skeptical and I said then, as I do now, that I don't think 3-4% in monthly premium is available except in stocks that are higher in volatility. I have talked about this on a past video along with a couple of posts. In the TSCM article I give some examples of what I mean.
Yesterday I heard from Mr. Hooper, who had initially given me permission to publish his emails but then said it was only OK if I read his book. His emails were so insulting that this episode scores very high for unintentional comedy.
I did not know about their website until I saw it in his auto-signature. The site has two banners crossing the screen, one of which was called Covered Calls Closed in September. By my count this banner had results for six different stocks that they sold calls against. The returns for all six ranged from 2.7% to 7.8%. I did not find anything associated with this banner to tell me if the six stocks (which I list below) were all of the trades placed for that time period or not. If anyone delves into the site in more detail and finds this info, please leave a comment with the details.
Their video was about generating 3-4% per month. My article was a response to that strategy. In the article I posited that 3-4% per month would require buying very volatile stocks to get that kind of premium for just one month. The six stocks are listed with their respective one month standard deviations, keep in mind the one month figure for S&P 500 SPDR (SPY) is 6.71, all of the data is from PortfolioScience.com.
Gymboree (GYMB) 37.17
BE Aerospace (BEAV) 32.90
Select Comfort (SCSS) 17.09
InterDigital Communications (IDCC) 18.58
MEMC Electronic Materials (WFR) 31.69
Continental Airlines (CAL) 43.25
To be crystal clear all six of these trades worked.
Do six stocks make up an entire portfolio for a month? If so is this mix diversified? During the stress test that occurred in the market last spring (as measured from May 11-June 15), IDCC +12%, GYMB -5%, SCSS -18%, CAL -19%, BEAV -30%, WFR -32%. In that same time the S&P 500 was down about 7%.
Clearly I have mined data with these numbers and concede any flaw you care to mention but that is the most recent stress test the market has had, it came as a surprise, as they usually do and I think to my point in the TSCM article was that to get 3-4% a month these are the types of stocks you need to buy and they could go down by similar amounts as the six listed here in future market stress tests. While I believe some exposure to these types of stocks makes for good diversification an entire portfolio of them, which is how I take their video, makes for some sleepless nights.
I hope you will check out the various links I have put in this post and leave a comment on this subject.
Read more!
Thursday, January 11, 2007
Follow Ups
No snow but our ISP was out all morning until now.
One reader asked if I thought the contango/backwardation issue would be a big deal with these new ETFs citing USO as an example. Regarding USO, the drop off, relative to oil, has been so steady and so pronounced that I have to wonder if it is all just from contango. If it were contango every single month (or however often it rolls) I would not expect the line to be so smooth, I would expect to see a straight line down each time it rolled. Maybe I am missing something.
The DB funds are allowed to pick any contract they want for the next 13 months in order to minimize contango and take advantage of backwardation when it occurs. The Oil macro shares from Claymore (UCR and DCR) have no exposure to oil they instead replicate exposure. You can read two articles about the mechanics here and here. GLD and I believe SLV hold the actual metal. I know this is the case with GLD and if so with SLV, again this won't be an issue. I have not studied the ETN's yet, any one who has should feel free to comment whether they are susceptible contango. In looking at a chart that compares USO and the iPath Oil ETN (OIL), they are identical so maybe the ETN's do have contango issues but again this is just a casual observation.
I based on what I have studied and what I have merely casually observed it looks as though the concept behind USO might be flawed for an ETF. Commodity pools manage these issues to spare investors of this problem or, depending on the objective, to exploit it.
At every turn I have talked about simplicity with this sort of thing. I have disclosed owning GLD for clients countless times. I have recently disclosed an interest in the Agriculture ETF (personal holding) as a possible candidate for client money. That would be it. Someone on CNBC on Wednesday said that oil (the commodity) has 0.95 correlation to oil stocks. Personally I don't think it is that high but it might be but oils stocks certainly capture a lot of the effect. Obviously some stocks would track closer to oil than some others (part of the research process if you use individual stocks).
A byproduct of the post yesterday about Merriman was the question of how much to allocate to foreign markets. A reader who goes by Macro Man pointed out that most investors weight too heavily to their home country. This is interesting and seems like it would be true even if unverifiable. It is not clear to me that home country bias is absolutely a bad thing. I need to think about that one for a little while to form an opinion.
An easier point to form an opinion on is how much foreign to have. This sort of number lends itself to a lot of black box science and maybe a little voodoo. I do not think there is a precisely right number. At different times we should have more than we do now and at other times, less. There is a fluidity to it. I seem to hover in the mid-thirties as a percentage. I could see that number being much higher ten years from now as a few emerging markets "arrive" and as a few frontier markets move up to emerging status.
My own thought is that I want my portfolio and the portfolios I manage to get to where I need my account to be and where my clients need their portfolios to be. This is a long term view of course, very long term. My thought about the best way to do that with the smoothest ride is with a lot of foreign exposure. Plenty of other people think otherwise and some believe in capturing foreign with US multinationals. This quickly moves into the realm of no wrong answers. I do it my way, you do it your way and so on.
This leads to a final reader comment asking what is happening with world markets. "I own some well rated international funds and all have been whacked in the last week," the reader writes.
If there are ten funds that invest in Paraguay (making this up as an example) and two of them are five star, six of them are three star and the last two are four star; none of them will be immune from a 30% one day crash. In the last week foreign, especially emerging and commodity related have corrected, even Australia corrected by 3%.
The reader asked why. Why is subject to opinion that may or may not be correct, like maybe it started in Thailand, maybe it is a capital flow thing, maybe it is an ongoing oil correction dominoing to other places. I actually don't think why matters in this case. This is obviously a wide spread trade out of a lot of different things. There is nothing new about this. These types of corrections have happened countless times before, as recently as last spring and last spring was much worse (look at a chart of EEM), and I promise there will be many more in future.
Other than Venezuela, the fundamentals for any story you likely care about have not changed unless you were betting on a cold winter as a catalyst for energy. Many corrections start for no reason at all and then turn up for no reason. This just flat out goes with the territory and you will have to think in time frames of longer than a week or two or you will drive yourself crazy.
Read more!
One reader asked if I thought the contango/backwardation issue would be a big deal with these new ETFs citing USO as an example. Regarding USO, the drop off, relative to oil, has been so steady and so pronounced that I have to wonder if it is all just from contango. If it were contango every single month (or however often it rolls) I would not expect the line to be so smooth, I would expect to see a straight line down each time it rolled. Maybe I am missing something.
The DB funds are allowed to pick any contract they want for the next 13 months in order to minimize contango and take advantage of backwardation when it occurs. The Oil macro shares from Claymore (UCR and DCR) have no exposure to oil they instead replicate exposure. You can read two articles about the mechanics here and here. GLD and I believe SLV hold the actual metal. I know this is the case with GLD and if so with SLV, again this won't be an issue. I have not studied the ETN's yet, any one who has should feel free to comment whether they are susceptible contango. In looking at a chart that compares USO and the iPath Oil ETN (OIL), they are identical so maybe the ETN's do have contango issues but again this is just a casual observation.
I based on what I have studied and what I have merely casually observed it looks as though the concept behind USO might be flawed for an ETF. Commodity pools manage these issues to spare investors of this problem or, depending on the objective, to exploit it.
At every turn I have talked about simplicity with this sort of thing. I have disclosed owning GLD for clients countless times. I have recently disclosed an interest in the Agriculture ETF (personal holding) as a possible candidate for client money. That would be it. Someone on CNBC on Wednesday said that oil (the commodity) has 0.95 correlation to oil stocks. Personally I don't think it is that high but it might be but oils stocks certainly capture a lot of the effect. Obviously some stocks would track closer to oil than some others (part of the research process if you use individual stocks).
A byproduct of the post yesterday about Merriman was the question of how much to allocate to foreign markets. A reader who goes by Macro Man pointed out that most investors weight too heavily to their home country. This is interesting and seems like it would be true even if unverifiable. It is not clear to me that home country bias is absolutely a bad thing. I need to think about that one for a little while to form an opinion.
An easier point to form an opinion on is how much foreign to have. This sort of number lends itself to a lot of black box science and maybe a little voodoo. I do not think there is a precisely right number. At different times we should have more than we do now and at other times, less. There is a fluidity to it. I seem to hover in the mid-thirties as a percentage. I could see that number being much higher ten years from now as a few emerging markets "arrive" and as a few frontier markets move up to emerging status.
My own thought is that I want my portfolio and the portfolios I manage to get to where I need my account to be and where my clients need their portfolios to be. This is a long term view of course, very long term. My thought about the best way to do that with the smoothest ride is with a lot of foreign exposure. Plenty of other people think otherwise and some believe in capturing foreign with US multinationals. This quickly moves into the realm of no wrong answers. I do it my way, you do it your way and so on.
This leads to a final reader comment asking what is happening with world markets. "I own some well rated international funds and all have been whacked in the last week," the reader writes.
If there are ten funds that invest in Paraguay (making this up as an example) and two of them are five star, six of them are three star and the last two are four star; none of them will be immune from a 30% one day crash. In the last week foreign, especially emerging and commodity related have corrected, even Australia corrected by 3%.
The reader asked why. Why is subject to opinion that may or may not be correct, like maybe it started in Thailand, maybe it is a capital flow thing, maybe it is an ongoing oil correction dominoing to other places. I actually don't think why matters in this case. This is obviously a wide spread trade out of a lot of different things. There is nothing new about this. These types of corrections have happened countless times before, as recently as last spring and last spring was much worse (look at a chart of EEM), and I promise there will be many more in future.
Other than Venezuela, the fundamentals for any story you likely care about have not changed unless you were betting on a cold winter as a catalyst for energy. Many corrections start for no reason at all and then turn up for no reason. This just flat out goes with the territory and you will have to think in time frames of longer than a week or two or you will drive yourself crazy.
Read more!
Wednesday, January 10, 2007
Administrative Note
We are due to have a foot of snow come our way. If it does snow, this is what it will look like and it may take down my satellite ISP. So if there is no post on Thursday morning you'll why and can check back later.
Read more!
Blame Canada!
Whether you heard about it from Greg Newton for from Jen Ryan you probably know that Vanguard is listing an EAFE-like ETF that includes 5% weighted to Canada, EAFE has no Canada in it.
In Jen's piece Greg Newton opines that it probably won't make much difference and Matt Hougan does. I think looking back, it is possible that having Canada did matter but if the doom and gloomers about the future of the US turn out to be anywhere close to right Canada would be impacted and save for oil sands (if that even?) I would want to be out of Canada. Just something to think about for later.
For now though I own Canada with a bank (nice yield) and an oil sands stock (potentially huge growth).
There was a lot of great feedback on the post this morning about The Ultimate Strategy. First, I just assumed that Merriman intended for it to be rebalanced at some sort of interval even though the article did not say as much. To one comment; it does include a lot of foreign per the article. Someone made the point that looking forward is very difficult or it is impossible or some similar sentiment. I will concede it is not easy I will not concede impossible. Further it only takes one great decision in an investing lifetime (here I am thinking something that misses a big chunk of down a lot) to dramatically alter your lifetime's returns.
One last item; where's Melissa Francis? She used to cover energy for CNBC and since they kept telling us how great she was I just assumed it was true but now she is gone.
I pulled this picture off the CNBC site today so she is not gone gone. If she is ill I wish her well but it is a little strange. It seems longer than a maternity leave to me.
Read more!
In Jen's piece Greg Newton opines that it probably won't make much difference and Matt Hougan does. I think looking back, it is possible that having Canada did matter but if the doom and gloomers about the future of the US turn out to be anywhere close to right Canada would be impacted and save for oil sands (if that even?) I would want to be out of Canada. Just something to think about for later.
For now though I own Canada with a bank (nice yield) and an oil sands stock (potentially huge growth).
There was a lot of great feedback on the post this morning about The Ultimate Strategy. First, I just assumed that Merriman intended for it to be rebalanced at some sort of interval even though the article did not say as much. To one comment; it does include a lot of foreign per the article. Someone made the point that looking forward is very difficult or it is impossible or some similar sentiment. I will concede it is not easy I will not concede impossible. Further it only takes one great decision in an investing lifetime (here I am thinking something that misses a big chunk of down a lot) to dramatically alter your lifetime's returns.
One last item; where's Melissa Francis? She used to cover energy for CNBC and since they kept telling us how great she was I just assumed it was true but now she is gone.
I pulled this picture off the CNBC site today so she is not gone gone. If she is ill I wish her well but it is a little strange. It seems longer than a maternity leave to me.
Read more!
Ultimate Buy & Hold?
A reader asked for my opinion on an article by Paul Merriman called The Ultimate Buy And Hold Strategy. I don't know much about Mr. Merriman other than he is a much bigger fish than I am in the world of stock market writing on the internet.
First a philosophical note; the notions of being able to set it and forget it or having a portfolio with very few moving parts are both very appealing for a lot of reasons. However, markets, companies, economies, global dynamics, cycles and probably a few other things are all ever-changing. For example most clients own Johnson & Johnson (JNJ). Every time I buy it for a new client I am hopeful that I can keep it forever. Chances are I wil be able to but who knows what the future will bring.
As for the article, Merriman makes it clear that this is a long-term strategy. From 30,000 feet this is crucial. You probably save and invest so that you will have enough to live on when you are no longer working. Beating or lagging the market by five percentage points 15 years before you retire means absolutely nothing. He also makes a great case for top down management.
The article goes step by step in building the portfolio using 60% S&P 500 and 40% Government & Corporate Bond Index as a starting point to get to the finished product which maybe the ultimate but it is not very simple, as I thought it would be before I read the article. The finished product has 10 holdings.
I am not going to outsmart Merriman but there are a couple obvious things that come up as possible road blocks to this idea working in the future. As I said the starting point is 60% S&P 500 and 40% Government & Corporate Bond Index studied from 1970 to 2005 to set a benchmark of 10.4% annual return and an annual standard deviation of 11.6%. The Ultimate has an average annual return of 13.2% and an annual standard deviation of 11.6%.
The numbers include the total return of bonds. I have to wonder whether a huge bias is embedded by many years of double digit bond yields and as yields worked down slowly, increasing bond prices. 25 years or so ago, long term bonds yielded 15% and shorter term notes were pretty close to that. Now it is possible that the increase in bonds leading up to the late 1970's would offset the effect I am talking about to some degree but weren't yields on the decline from 1982 to 2003 almost uninterrupted and wasn't that decline from the mid teens down to 1% for short dated paper and 3.1% for ten year paper?
Whatever the exact numbers, this effect is in the data series studied, might create a skew and should perhaps not be included in a forward looking model depending on the probability you would assign to bond yields going from the teens down to 3% at some point in the next 35 years. If my point here is valid it could change a lot of the assumptions that Merriman relies on to get started building The Ultimate.
Speaking of forward looking I don't think it does (do I have this wrong?). As noted above, markets and all things that influence markets are dynamic. The world today is very different than it was, say, 15 years ago let alone in 1970 when the study starts and will be much different 15 or 35 years from now.
I would have difficulty in going with a plan if it does not look forward. If this one does somehow look forward and I am missing how, I would rethink this part of my comment.
I will say I trust Merriman's intention behind the concept and it could work but keep in mind all ideas like this have flaws. Maybe I have found a couple and maybe I have not, but again, all portfolios have flaws.
Read more!
First a philosophical note; the notions of being able to set it and forget it or having a portfolio with very few moving parts are both very appealing for a lot of reasons. However, markets, companies, economies, global dynamics, cycles and probably a few other things are all ever-changing. For example most clients own Johnson & Johnson (JNJ). Every time I buy it for a new client I am hopeful that I can keep it forever. Chances are I wil be able to but who knows what the future will bring.
As for the article, Merriman makes it clear that this is a long-term strategy. From 30,000 feet this is crucial. You probably save and invest so that you will have enough to live on when you are no longer working. Beating or lagging the market by five percentage points 15 years before you retire means absolutely nothing. He also makes a great case for top down management.
The article goes step by step in building the portfolio using 60% S&P 500 and 40% Government & Corporate Bond Index as a starting point to get to the finished product which maybe the ultimate but it is not very simple, as I thought it would be before I read the article. The finished product has 10 holdings.
I am not going to outsmart Merriman but there are a couple obvious things that come up as possible road blocks to this idea working in the future. As I said the starting point is 60% S&P 500 and 40% Government & Corporate Bond Index studied from 1970 to 2005 to set a benchmark of 10.4% annual return and an annual standard deviation of 11.6%. The Ultimate has an average annual return of 13.2% and an annual standard deviation of 11.6%.
The numbers include the total return of bonds. I have to wonder whether a huge bias is embedded by many years of double digit bond yields and as yields worked down slowly, increasing bond prices. 25 years or so ago, long term bonds yielded 15% and shorter term notes were pretty close to that. Now it is possible that the increase in bonds leading up to the late 1970's would offset the effect I am talking about to some degree but weren't yields on the decline from 1982 to 2003 almost uninterrupted and wasn't that decline from the mid teens down to 1% for short dated paper and 3.1% for ten year paper?
Whatever the exact numbers, this effect is in the data series studied, might create a skew and should perhaps not be included in a forward looking model depending on the probability you would assign to bond yields going from the teens down to 3% at some point in the next 35 years. If my point here is valid it could change a lot of the assumptions that Merriman relies on to get started building The Ultimate.
Speaking of forward looking I don't think it does (do I have this wrong?). As noted above, markets and all things that influence markets are dynamic. The world today is very different than it was, say, 15 years ago let alone in 1970 when the study starts and will be much different 15 or 35 years from now.
I would have difficulty in going with a plan if it does not look forward. If this one does somehow look forward and I am missing how, I would rethink this part of my comment.
I will say I trust Merriman's intention behind the concept and it could work but keep in mind all ideas like this have flaws. Maybe I have found a couple and maybe I have not, but again, all portfolios have flaws.
Read more!
Tuesday, January 09, 2007
And We're Back?
Blogger had a scheduled outage today and it seems as though they over promised and under delivered on how long it would take.
The folks at ETFTrends.com have a top ten list of trends they see for 2007 and asked for my two cents on any of them. So #2 yes, #5 no and #7 maybe. Humor attempt.
Their number one is that foreign will continue to beat domestic. I'm not so sure that will be the case or more specifically I tend to think it will be a shades of gray difference not favoring either one very much. I expressed some concern in my 2007 prediction video that emerging markets might not have such a great year. I have no concern about the long term but it has had a great run over the last few years.
Their number 3 was that the ranks of ETFs will continue to explode. Based on what is in registration this is already true. I also hope some of the me too funds with no assets close. The funds in registration offer a lot of new things but we have a lot of mid cap value ETFs these days.
Their number eight is about narrow commodity funds. Seven just listed and I hope more come. Unfortunately many folks will use these to speculate with, the possibility that the next year won't be so hot seems reasonable and they may get a bad rap. If you read this site, chances are you are stock investor, I know I am. I am not a commodities investor. I am a commodity diversifier and there is a difference. I have 3% in GLD for clients, I disclosed the possibility of adding DBA (personal holding) at a 2% weight in a couple of months once I get a feel for how it trades day to day. That would total 5%. This is an effort to capture low correlation. It is not a complex commodity strategy. I have in the past and continue to now urge moderation in commodity ETF use.
Here is one of my own. I think the fixed income market is ripe for better ETF products to come. I do not think more treasury ETFs are the thing that would make this happen. Indexes already exist for many foreign bond markets along with other fixed income products. This seems so obvious that I am surprised more has not been done so far. Maybe I should broaden this to be 2007 and 2008 though.
Read more!
The folks at ETFTrends.com have a top ten list of trends they see for 2007 and asked for my two cents on any of them. So #2 yes, #5 no and #7 maybe. Humor attempt.
Their number one is that foreign will continue to beat domestic. I'm not so sure that will be the case or more specifically I tend to think it will be a shades of gray difference not favoring either one very much. I expressed some concern in my 2007 prediction video that emerging markets might not have such a great year. I have no concern about the long term but it has had a great run over the last few years.
Their number 3 was that the ranks of ETFs will continue to explode. Based on what is in registration this is already true. I also hope some of the me too funds with no assets close. The funds in registration offer a lot of new things but we have a lot of mid cap value ETFs these days.
Their number eight is about narrow commodity funds. Seven just listed and I hope more come. Unfortunately many folks will use these to speculate with, the possibility that the next year won't be so hot seems reasonable and they may get a bad rap. If you read this site, chances are you are stock investor, I know I am. I am not a commodities investor. I am a commodity diversifier and there is a difference. I have 3% in GLD for clients, I disclosed the possibility of adding DBA (personal holding) at a 2% weight in a couple of months once I get a feel for how it trades day to day. That would total 5%. This is an effort to capture low correlation. It is not a complex commodity strategy. I have in the past and continue to now urge moderation in commodity ETF use.
Here is one of my own. I think the fixed income market is ripe for better ETF products to come. I do not think more treasury ETFs are the thing that would make this happen. Indexes already exist for many foreign bond markets along with other fixed income products. This seems so obvious that I am surprised more has not been done so far. Maybe I should broaden this to be 2007 and 2008 though.
Read more!
Tuesday Tidbits
A few short items this morning.
A couple of weeks ago I added Nike (NKE) to clients accounts. I bought the stock for several reasons. I generally expect a modest decline for 2007 with some sort of normal but uncomfortable correction along the way. If I am wrong and the market has another great year I think Nike has a good chance to do very well in an up a lot environment, so the stock is a sort of counter strategy to my prediction. I could have gone with something smaller like Under Armor (UA) but even if we have great year it is late cycle and I would think large would do better than small, we'll see.
I added the Agriculture ETF (DBA) to my personal account in a small way, not for clients, yesterday. I may add this for clients in a couple of months but I need to have a better feel for how it trades before I expose client money. If I do add it it would be no more than 2%. Part of the reason I bought it is that I have faith in Deutsche Bank that their products will track what they are supposed to and I think corn and wheat hold a lot promise and you probably know that Jim Rogers loves sugar. More than anything else this is a diversifier and the worst year of the back test was minus 25% in 1998. The S&P 500 was up 28% that year, again I think of this as a diversifier.
This chart comes from Michael Kahn's Barron's column yesterday. It was a great read if you subscribe.
His basic take is that copper (the commodity) has a little way to correct, gold (the commodity) could have a lot further to correct and in this chart of Southern Copper (PCU) he sees support at $42. PCU's old name was Southern Peru Copper, they dropped the Peru a short while back. As I read the column and thought about the action last week I wondered how, with the commodity and emerging market aspects of this one it didn't go to zero, I had a good chuckle.
If you don't know the stock it has a huge dividend and trades like nitroglycerine. If you think you want to look into it double check on the security of that yield.
A personal item; one of my four readers here in Prescott said hello to me at the gym yesterday, go figure.
Who's the whiz in marketing who thought it would be a good idea to have the re-debut of Fast Money on against the BCS Championship game?
Read more!
A couple of weeks ago I added Nike (NKE) to clients accounts. I bought the stock for several reasons. I generally expect a modest decline for 2007 with some sort of normal but uncomfortable correction along the way. If I am wrong and the market has another great year I think Nike has a good chance to do very well in an up a lot environment, so the stock is a sort of counter strategy to my prediction. I could have gone with something smaller like Under Armor (UA) but even if we have great year it is late cycle and I would think large would do better than small, we'll see.
I added the Agriculture ETF (DBA) to my personal account in a small way, not for clients, yesterday. I may add this for clients in a couple of months but I need to have a better feel for how it trades before I expose client money. If I do add it it would be no more than 2%. Part of the reason I bought it is that I have faith in Deutsche Bank that their products will track what they are supposed to and I think corn and wheat hold a lot promise and you probably know that Jim Rogers loves sugar. More than anything else this is a diversifier and the worst year of the back test was minus 25% in 1998. The S&P 500 was up 28% that year, again I think of this as a diversifier.
This chart comes from Michael Kahn's Barron's column yesterday. It was a great read if you subscribe.
His basic take is that copper (the commodity) has a little way to correct, gold (the commodity) could have a lot further to correct and in this chart of Southern Copper (PCU) he sees support at $42. PCU's old name was Southern Peru Copper, they dropped the Peru a short while back. As I read the column and thought about the action last week I wondered how, with the commodity and emerging market aspects of this one it didn't go to zero, I had a good chuckle.
If you don't know the stock it has a huge dividend and trades like nitroglycerine. If you think you want to look into it double check on the security of that yield.
A personal item; one of my four readers here in Prescott said hello to me at the gym yesterday, go figure.
Who's the whiz in marketing who thought it would be a good idea to have the re-debut of Fast Money on against the BCS Championship game?
Read more!
Monday, January 08, 2007
USO
A reader asked if I knew why the Oil ETF that trades under ticker USO trades at such a big disparity to the price of crude oil. I do not have all the answers but the short answer is the prospectus gives it leeway to fluctuate by X% on a daily basis, you can read the prospectus to see what X is, I don't recall.
I looked at the fund on a superficial basis when it listed and it became clear to me that I would not be able to have a good feel for what the tracking error would do, meaning it could be bigger or smaller during different time periods.
In wanting to introduce commodities, or for that matter currencies as well, to client portfolios I want a relatively simple product that will capture the effect. The allowance for USO to diverge is not my idea of simple. Forming an opinion about what a commodity might do (note I am not saying being right, just forming an opinion) is much easier than forming an opinion AND guessing what a product will do relative to the thing it tracks.
As you look at the chart it is ugly. As I understand it, though the gap has grown larger it could possibly narrow in the future. I'm not saying it will, I have no idea, but gaming this and the actual price of oil too makes this something I have no interest in.
Read more!
Interesting Weekend Links
Ben Stein spelled out an ETF portfolio in a post on Yahoo Finance.
iShares MSCI EAFE (EFA) 15% (25% for longer term investors)
iShares Emerging Market (EEM) 10%
Vanguard Total Stock Market (VTI) 30% (he mentions a similar Fidelity fund, FSTMX)
iShares Cohen & Steers Realty (ICF) 10%
iShares Small Cap Russell 2000 (IWN) 10%
Cash 15%
I realize it only adds to 100% if EFA is weighted to 25%. Also IWN is the ticker for Small Cap Value. The paragraph about this fund never says the word value but IWN is the ticker given as opposed to IWM which the entire Russell 2000. You can decide for yourself what he meant.
This is neither the worst portfolio nor the best. For folks that do no want to devote much time to their investments (which is the vast majority of people) but still do it themselves, this gives a good chance for success, for people that save properly.
The portfolio misses a couple of very big things and forgoes the chance for narrow theme investing. One of the big things this misses is yield. ICF is the highest yielding component at 3.92%, IWN (if that is what he means) yields 2.22% and the yields go down from there.
I think anyone wanting to go this simple should take the time to explore what the portfolio lacks (all portfolios lack something) and think about what can go wrong, 10% in emerging markets is a lot, and Mr. Stein says as much. I also think a small weight in some sort of commodity something or other is appropriate.
I found this story, via Seeking Alpha, about frontier market investing. The article gives a fairly balanced view so there is not much conclusion to draw. I think this is an important segment to invest in but I believe that it requires an above average tolerance for stock market volatility.
I have disclosed owning the Vietnam Opportunity Fund (VTOPF or VOF.L) personally and for a handful of clients in an article for TSCM last April. Very often this just does its own thing. It has had a huge run of late and while I am convinced I can see $20 at some point (I bought in at $2.48, it closed Friday at $4.15 and at one point I was down 15% in it) I would not be surprised if it traded with a $2 handle several more times.
If you are going to venture in to this type of country, for you maybe it is Egypt or Pakistan or somewhere else, you have to have unyielding conviction in the theme. You also have to realize that 20% could easily come out of that market in no time at all without any real warning.
The accounts that I bought this for started with a 1-1.5% weight. With that starting point the fund could go to zero with no real consequence on the portfolio. The lift given though to the overall portfolio for people that own it is, for now anyway, 67 basis points which is a lot given that it is coming from just one holding. As an FYI VTOPF is not included in the generic Yahoo portfolio that I have cited before because only four clients own it and so it is not a representative holding.
That only four people have the fund should be a tell for how much respect I have for the potential volatility. This is magnified even more so with Iceland. I first wrote about Iceland as an investment destination almost two years ago. Iceland has been a wild ride during the last two years in both directions. I have not exposed any client money to Iceland despite my favorable disposition; I actually talked one client out of investing there.
There is an S&P Index to cover frontier markets (link out here to a PDF from S&P and scroll down). At some point someone will ETF this index or one similar.
The point is that there is no hurry; Ghana will still be a frontier market three years from now. I believe in frontier investing but in very small proportion and even still it is not right for most folks. Whether you should invest in one of these or not requires some introspection. Even a holding with a 1% portfolio weight that cuts in half is a big emotional speed bump for a lot of people.
If you can really think about, say, Estonia for five years and know that you can ride real ups and downs without angst that triggers a bail out at the wrong time then you probably can make room for one of these. Now you just need to decide which one.
Read more!
iShares MSCI EAFE (EFA) 15% (25% for longer term investors)
iShares Emerging Market (EEM) 10%
Vanguard Total Stock Market (VTI) 30% (he mentions a similar Fidelity fund, FSTMX)
iShares Cohen & Steers Realty (ICF) 10%
iShares Small Cap Russell 2000 (IWN) 10%
Cash 15%
I realize it only adds to 100% if EFA is weighted to 25%. Also IWN is the ticker for Small Cap Value. The paragraph about this fund never says the word value but IWN is the ticker given as opposed to IWM which the entire Russell 2000. You can decide for yourself what he meant.
This is neither the worst portfolio nor the best. For folks that do no want to devote much time to their investments (which is the vast majority of people) but still do it themselves, this gives a good chance for success, for people that save properly.
The portfolio misses a couple of very big things and forgoes the chance for narrow theme investing. One of the big things this misses is yield. ICF is the highest yielding component at 3.92%, IWN (if that is what he means) yields 2.22% and the yields go down from there.
I think anyone wanting to go this simple should take the time to explore what the portfolio lacks (all portfolios lack something) and think about what can go wrong, 10% in emerging markets is a lot, and Mr. Stein says as much. I also think a small weight in some sort of commodity something or other is appropriate.
I found this story, via Seeking Alpha, about frontier market investing. The article gives a fairly balanced view so there is not much conclusion to draw. I think this is an important segment to invest in but I believe that it requires an above average tolerance for stock market volatility.
I have disclosed owning the Vietnam Opportunity Fund (VTOPF or VOF.L) personally and for a handful of clients in an article for TSCM last April. Very often this just does its own thing. It has had a huge run of late and while I am convinced I can see $20 at some point (I bought in at $2.48, it closed Friday at $4.15 and at one point I was down 15% in it) I would not be surprised if it traded with a $2 handle several more times.
If you are going to venture in to this type of country, for you maybe it is Egypt or Pakistan or somewhere else, you have to have unyielding conviction in the theme. You also have to realize that 20% could easily come out of that market in no time at all without any real warning.
The accounts that I bought this for started with a 1-1.5% weight. With that starting point the fund could go to zero with no real consequence on the portfolio. The lift given though to the overall portfolio for people that own it is, for now anyway, 67 basis points which is a lot given that it is coming from just one holding. As an FYI VTOPF is not included in the generic Yahoo portfolio that I have cited before because only four clients own it and so it is not a representative holding.
That only four people have the fund should be a tell for how much respect I have for the potential volatility. This is magnified even more so with Iceland. I first wrote about Iceland as an investment destination almost two years ago. Iceland has been a wild ride during the last two years in both directions. I have not exposed any client money to Iceland despite my favorable disposition; I actually talked one client out of investing there.
There is an S&P Index to cover frontier markets (link out here to a PDF from S&P and scroll down). At some point someone will ETF this index or one similar.
The point is that there is no hurry; Ghana will still be a frontier market three years from now. I believe in frontier investing but in very small proportion and even still it is not right for most folks. Whether you should invest in one of these or not requires some introspection. Even a holding with a 1% portfolio weight that cuts in half is a big emotional speed bump for a lot of people.
If you can really think about, say, Estonia for five years and know that you can ride real ups and downs without angst that triggers a bail out at the wrong time then you probably can make room for one of these. Now you just need to decide which one.
Read more!
Subscribe to:
Posts (Atom)
