Tuesday, September 30, 2008
How many times before has the market been scared and how many of those times has panicking been the right thing to do?
The time for meaningful action has long since passed.
Doing the wrong thing at times like this is how people alter their financial futures.
You have heard this before from many other people and you know it is true.
Monday, September 29, 2008
You can read about it here, here and here.
I have written about Iceland many times, invested there, made a little money, lost a little money and have been out for a while.
The GDP in Iceland was $11 billion in 2006 so the €600 million is a very big number but they obviously feel this must be done.
I continue to be long term optimistic (but again, no position for quite a while) because among other things Iceland essentially has free energy (except for gas for cars) which makes it an attractive place to set up shop for a global business, especially certain types of manufacturing and data centers.
The country was on the path to greater global relevance and so it appears to be set back by some number of years. A bad period of time? Yes. Permanently flushed? Not likely.
One reader expressed concern for an L shaped recovery, which is to say stocks not going up for a long time.
One thing is certain, having an emotional reaction will not make things better.
We know a couple of things about the big picture. The crisis is such that there will be big failures. Hang with me on this. There are always big failures during events of this sort. The failure of WaMu seemed to not matter to markets. The shock of big failures on this go around is over. This may help toward easing apprehension which IMO contributes to the idea that in terms of points lost we are much closer to the bottom than the top (my thought all along has been a bottom around SPX 1095), the timeline for a bottom is anyone's guess I'll go Q2 2009.
We know that dramatic action is at hand, either a bailout comes through or it does not and if not we may have a bit of a panic as a reaction (a no-bailout-panic might actually resolve this a little faster).
So that is my opinion about what will happen (nothing new). It will either be right or wrong but hopefully I have conveyed my being less concerned with being right about bear market magnitude and more focused on sticking to the defensive strategy I laid out long before the crisis began. If you did the same then you took proactive action and were not faced with we're down 20%, what should we do?
I would suggest anyone focus more on their portfolio than full and first comprehension of the bailout and other current events. If this market decline turns out to be worse than a normal-ish bear what will you do? If it takes longer for the US market to begin to come back what will you do? If you really think the end is nigh what will you do? As you answer those questions you need to also ask yourself what you will do if you are wrong.
I've mentioned a few times that if the US is facing more of a secular thing (but we are already an ten years with no stock market progress) ok, but there are some countries that are only dealing with cyclical issues, so those countries become attractive as a starting point. I've been in the camp thinking higher US rates are coming (way way too early with this), so an inverse treasury fund might become a good hold. If the dollar is headed lower then maybe a diverse mix of foreign t-bills becomes attractive. A lot of the absolute products that were supposed to do well in a bear market will probably begin to work better as we start to stumble along the bottom (the idea with that one being the strange distortions caused them to behave strangely).
There will be no shortage of things that can work but they may be more difficult to find. The task might not be so bad if you have been willing to go narrower than SPY/EFA/IWM for your equity exposure.
As you think about this I would add that if the outcome for the US turns out to be as bad as the gloomiest people think then we all need to heed that Will Rogers quote about return of as opposed to return on.
I will paraphrase from above, more emotion will not help you but less probably will. The outcome is beyond your control but staying level headed and calculated is within your control and focusing on this give a better chance for a superior outcome for you personally.
Sunday, September 28, 2008
Just a few stray thoughts this morning.
What did you think about the presidential debate? I watched so I wouldn't miss anything as opposed to expecting to hear something great.
I think I have been consistent in expecting that Obama is going to end up winning (not a preference just an expectation) but one thing I just don't get and am surprised that we don't hear more about, but why do so many people think that a senator in his mid 40s serving first term (of which he has spent a lot of the time campaigning) is the best choice for the job?
My dad made a comment about Palin lacking experience and having her only be one heart beat away makes him uncomfortable. Fair enough but Obama is only a couple of years older and he would be the heartbeat.
Is Fox all done with the Business Block on Saturday morning? For several weeks now the shows have been preempted (maybe they were shown later in the weekend?) for special crisis coverage. At some point the special coverage becomes the regular show, doesn't it?
As I write this there is no deal yet on the bailout. There is a consensus that says if they announce a deal that the market will then rally. It certainly could but if everyone thinks it will go up I'm not sure how it can go up.
One reader noted that muni money markets are yielding more than taxable money markets and wonders if that is where money should be placed. I tend to be very conservative with this sort of thing. In my opinion this is exactly the wrong time to reach for yield (return of versus retrurn on). Aside from just thinking this is a bad time to that, how do municipalities use the credit market to function? They have short term financing needs just like companies and the US government. What happens to your muni money fund if there is a problem there?
It would be reasonable to assume that at some number (yield) you are seeing some concern about being able to access capital? Other than Valejo, CA and Jefferson County, AL there have not been any other municipalities to have trouble (but maybe there have been and I missed them?). At this point with the way the dominos have fallen would it be shocking to to hear the the muni market ends up getting touched? I'd rather have an individual issue that will very likely pay me back par when it is supposed to than have a money market right now. And for short term money I'll take the crappy yield for now.
Update Update; Looks like a tentative bailout was agreed upon. Here is the WSJ version. I still am uncertain why so many people can be correct about the market going up so much come Monday but it'll very probably be me who is wrong about this.
We have a house guest for the next couple of weeks. That is him in the picture, his name is Ben and he is a golden retriever.
Saturday, September 27, 2008
I misspoke a few times. I said company twice when I should have said country. Gold and currency restrictions have happened before as I said but I meant in other countries if that was not clear. And Faber did do that interview at two in the morning not eleven at night.
Friday, September 26, 2008
The importance and many questions notwithstanding it is wearying. OK, rant over.
One little nugget you may have heard yesterday after the close; a guest on CNBC said the bailout plan is too small. He said that Wamu alone has $100 billion in bad debt making $700 billion, in his estimation, too small.
Marc Faber was on CNBC Asia for 90 minutes last night saying something very similar.
I continue to marvel at how unimportant everything else is in light of the bailout story.
Yesterday I spent a little time trying to wrap my hands around an OEF from Index IQ which tries to blend together six different hedge funds strategies to deliver an absolute return.
I really had some trouble understanding this and still don't fully get it. The fund owns 13 ETFs. It replicates and blends the six hedge fund strategies using those 13 ETF. I could not glean how it weights the six strategies or how 13 ETFs can actually replicate even one hedge fund.
I will say that based on the holdings as of June 30 the fund has probably done very well. It was heavy in fixed income ETFs, close to flat commodities and short equities. I say probably done well because I don't know, the fund does not have a ticker symbol yet and is only available through eTrade and perhaps one other brokerage (not Schwab).
I don't think I ever said anything about the ETF conference I just attended. The mood was not particularly heavy in light of what the stock market is doing. I'm not sure whether there is a contrarian nugget there or not. The panelists ranged from rocket scientists to guys with almost nothing to say, I'd like to think I was somewhere in the middle (nervous chuckle).
One thing I have noticed at these conferences is the swag giveaways in the exhibition room is getting less and less. The first one of these I went to I could barely carry it all. On this go around there was almost nothing. Is this a barometer of economic health of the industry? I don't know the answer but I do wonder.
My presentation was about portfolio construction. What I tried to do was go sector by sector and get as close as I could to the portfolio that I use for clients (which is mostly individual stocks). This is getting easier and easier to do as more products come out.
The advantage to this would be you avoid single stock risk but still create some very specific effects. The down side is that the dividend yield is likely to be lower and I tend to believe that you can build a portfolio of 40 stocks (or whatever your number might be), have a couple that go up a lot and have none that go to zero. If you can do that, and get the sector decisions mostly right, you have a good chance of adding some outperformance.
That product innovation is making sophisticated portfolio construction more accessible is a great thing for anyone able to spend the time.
If you look at what is in registration but not yet listed (IndexUniverse is the best resource for this) there are all sorts of potentially interesting things. Two that seem to be missing are the CBOE Put Write Index and something tied to the Baltic Dry Index.
I hope that WisdomTree follows through on their currency filings. I think it would open the door to a lot possibilities; either casting your lot with one or two currencies based on their fundamentals or constructing a combo of currencies with different characteristics that collectively might not move much in price but could generate quite a bit of yield (this would be rather research intensive).
One thing that I have no interest in is 130/30.
Thursday, September 25, 2008
For purposes of this post it does not matter what the Opta ETNs tracked or whether Barclays makes good or not.
If you are interested in that part of it both Index Universe and Tom Lydon are all over it.
I wrote about several ETNs for theStreet.com about certain funds that I thought were interesting.
A typical disclaimer I put in those articles was that it is unlikely that an issuer would go under (despite what has happened, that is still a true statement) but that it would not be a good idea to own a bunch of ETNs from the same issuer.
If you have 2-3% in one ETN provider and it goes under you will not have sabotaged your financial future. It would be a drag on returns of course but would not trigger a "honey we have to talk" conversation.
ETNs have the potential for unintended consequences. There are two products that track the Chinese yuan; one from Market Vectors (CNY) which is an ETN and one from WisdomTree (CYB) which is an ETF. The issuer for CNY is Morgan Stanley. On September 16 CNY had a bit of a freak out as it may have traded more or less in line with MS debt as opposed to the yuan and CNY was down 5.8%. It snapped back the next day but still someone sold at the lows.
Of course if MS had gone under the next day then the low on the 16th would have looked pretty good and obviously on the 16th the market was worried about something. That this happened once means it can happen again. As past crises have shown us, anyone can fail. The current crisis has supported that notion and then some.
I think where there is a choice you're probably better off with the ETF and if you are going to use ETNs, keep your issuer risk small. In addition to Barclays having a lot of commodity ETNs, so does UBS. The UBS method is a little different, and of course the back test is superior, but their is overlap such that you could access a couple of different parts of the commodity complex and keep the issuer risk in check.
I got the picture from Alphaville who inturn got it from Dealbreaker.
Wednesday, September 24, 2008
SDS is a client holding.
Thank you to reader Jody for pointing this out.
The hold to maturity price phrase that has popped up in the last few days that seems to be being used for the benefit of our elected officials seems odd to me. It strikes me as something a parent might say at career day in explaining what a bond trader does.
Am I overreacting?
I am currently having trouble assessing what is really going on with sentiment over the last couple of days.
It is not crucial to the way I do the job at hand but it opens the door to an interesting line of thought that to some will seem insensitive but could be very constructive in terms of getting through the current bear market and could help with future bear markets.
The context will be for diversified portfolios.
For anyone feeling a sense of fear now at any point previously or at anytime before this bear ends, what exactly are you afraid of? Not being a wise-guy, in your fear you are assigning some probability to an outcome that is not acceptable to you.
Losing all of your money, literally going to zero, is not acceptable to anyone. Nor is it in the realm of possibility (remember, diversified portfolios). How many stocks do you own that have gone to zero? Do you even use stocks or do you use indexes?
From the peak the S&P 500 is down 24% (add in dividends if you care to). If you have a reasonably diversified portfolio and took no defensive action you are down something similar in the equity portion of your portfolio, maybe a little better maybe a little worse but close.
How low do you fear the market will go? 100% is off the table. I have yet to read anywhere that makes a compelling case for this being worse than the great depression, so that would take 80% down off the table. Earlier in the decade the market cut in half with a starting PE ratio in the mid thirties (charted above). Based on the chart the PE at the peak on this go around was in the teens. I am not a fan of PE ratios for predicting anything but at a minimum it contributes to the case for the market not cutting in half in this bear phase.
Even if it does cut in half what will happen after that? After it bottoms, regardless of the level or the date, what will happen? You know the answer because you have lived through this before it will turn up. Bear markets end with new bull markets. You know this will happen but don't know when.
When the last bear bottomed it took five years to make a new high. At some point we will look at the bottom of this bear and say it took X years to make new high.
Another dimension to the fear is "I won't have enough money when I retire." Assuming proper asset allocation (that is important) and a diversified portfolio your fate in this regard will not be determined by one bear market.
If you are 60 and you retire today you have two outcomes, you either live a long time or you do not. If you live a long time you need the portfolio to grow to keep up with inflation (assuming a prudent withdrawal rate) for a long time. If you get hit by lightning carrying your box of stuff out to the car on your last day you don't need any money but you might leave a spouse who will face the same thing; living a long time or not, same worries about inflation or not.
If you dropped all 50% in the last bear market what have you done about it since? Save more? Take out less (if you are retired)? Seek out defensive a strategy? Something else? In all likelihood you did something (even if not in the portfolio) that otherwise mitigates at least some of the setback of cutting in half a few years ago.
The reason people run out of money (again assuming a diversified portfolio and not total mismanagement of a bear market like selling out at the low and buying back after a 20% lift) is they spend too much money or manage debt poorly one way or another (the two are obviously related). If the portfolio drops 25% and at the same time you take out 10% you're going to have a problem. That magic four point whatever percent withdrawal rate is such that it can withstand big drops. Bigger withdrawals; not so much.
As kind of a repeat theme, the numbers work a certain way. One way to mitigate the fear of not having enough; don't bet you can outsmart the numbers.
Tuesday, September 23, 2008
I'm sure neither of us had anything truly insightful to add but I asked one rhetorical question that had Larry laughing out loud so I thought I would share it here.
No matter what you think about the bailout, is there anyway possible the gang on the banking committee is going make it any better?
Many interviews we see on CNBC include a question about how to make money now. I 've heard Hugh Johnson say this once or twice but most do not, for most people a bear market is better to protect what you have than trying to find a couple of things that might do well. As I have been saying this does not have to mean zero exposure but one way or another reducing exposure.
As I looked at how the things I use in portfolios did on Monday they were of course mostly down a lot. Obviously having some double short (despite it not capturing the full effect yesterday), having a fair bit of cash and having sold a little on Friday meant not feeling all 382 beeps the SPX went down which is fine but the point is that the stocks I own are dropping plenty but that is not what matters.
Obviously this is an argument for allocation, more specifically being willing to take defensive action in the face of bear and not getting greedy at the wrong time. Not that there won't be tactical mistakes, I've poorly timed a couple of things of late but that is the smaller picture. The big picture issue of this being a bear market has been quite important.
Speaking of the double short Pro Shares SDS that I own, in a session I sat in on at this conference I am attending there was someone from ProShares who took most of the questions. On Monday SDS was up less than you'd hope for a down 3.82% day. I asked if the deviation Monday was bigger than the other day because GE was added to the no short list and GE has such a big weight (2.5%) in the S&P 500; he didn't know. Great. Maybe he did know but didn't want to say? If Exxon Mobil or a couple of the other biggies somehow get added to the no short list it might be time to say sayonara until the short ban ends.
Monday, September 22, 2008
Mark asked about buying emerging stocks if you have a five to ten year time horizon. Riedel said "oh I think you should be very heavy stocks if you have a five to ten year horizon."
A rule of thumb, with a child's college fund as an example; when the child gets to about 13 you should be cutting back a lot on equity exposure.
If someone tells me they need the money in five years I would tell them to be quite light in equities. The odds of a 20% decline occurring within a five year period are pretty good. If it is a fast one like 1998 then there would be no problem but if it was a slow one like 2000-2002 there would be a big problem.
To be fair I think the question was not framed well. In this context, ten years is different than five years. But, again, if you need the money in five years you do not want to go heavy equities.
This is different than starting to draw on a pool of money than needs to last for several decades.
I almost wonder if the person is in the business. I will try to answer this without making too salesy.
Hopefully you read the comment (linked above) and at least a few of the factoids. The reader frames the question differently than how I approach performance and what it is I am trying to do.
The reason people invest is so they have enough money when they need it and for what they need it for, usually retirement. An idea I have expressed before; a 62 year old does not look back to when they were 48 and lament that as a bad year or celebrate it as a good year. The goal as I see it, starting big picture first is giving someone the best chance of having enough money when they need it.
I have settled in on trying to miss big chunks of down a lot as a means of trying to add value over the entire stock market cycle. I have unyielding faith that something involving the 200 DMA is the best chance to make that happen. When the market is going up I am just trying to capture most of the effect. Someone who is at least mediocre can count on lagging some up years and beating some up years. If the up years net out as a push and I can avoid a chunk of down a lot I have not only a chance of adding value for the client but also smoothing out the ride for the client too.
One other aspect of the reader's comment needs addressing. All of the factoids he left are about actively managed mutual funds which has a skew that might put them at a disadvantage versus someone who does what I do.
A mutual fund manager should assume that anyone buying the fund they manage has already made the stocks/bonds/cash allocation decisions. That manager should assume that when someone buys $20,000 into his large cap value fund that the person wants $20,000 put into large cap value.
Obviously there are funds that have large cash balances but there is nothing wrong with a fund manager assuming the money he is given should be invested. If you are down less than the market this year or since the peak in October, is it because of superior stock picking or because you raised some amount of cash? It is much easier to outperform a bear market by raising cash than picking better stocks.
There may also be a skew in this sort of research because of how many OEFs there are. There are thousands of them and most of them are actively managed. With a universe that big I think it would be more difficult to find outperformers.
Lastly there may be an issue in the stats cited by the reader of proper benchmark comparisons. Some of the studies cited compare everything to the S&P 500 which is the wrong thing to do. Barron's does this all the time but comparing a small cap fund to the S&P 500 (or other similar examples) makes for unreliable data.
I am not saying that it is easy to beat the market. I am just naturally skeptical of all sorts of market research and maybe it is not as difficult as some studies would have us believe. Maybe instead of 10% beating the market over long periods it is closer to 30%? I have no idea about the reality, and I don't really care.
One thing missing even still (there are probably many gaps in this post) is strategies that try to, for example, capture 80% of the upside with only half the downside so a risk adjusted result that is not even about trying to beat the market. How many funds like that (absolute funds) are there and are they included?
We try to do what we try to do. Other RIA's try to do what they try to do. I think that an RIA who generally does what they say they are trying to do is likely to add value for his clients.
Sunday, September 21, 2008
Regardless of what anyone thinks of bailouts it is clear that holding up the bailout at this point would be immediately bad for markets (markets may very well go down a lot anyway).
The dems seem more focused than republicans (my perception of what I have read and seen) on the issue of CEO golden parachutes. While the idea that CEOs of failed companies should not get a seven or eight figure check on the way out the door is very logical should it hold up the bailout?
At fire training on Saturday a couple of guys older than me were talking about things in the market after one of them asked me if this made me busier than normal. Stock market stuff never comes up at the fire station.
Two of our part time neighbors (most of the houses near us are vacation homes), coincidentally, called us on Saturday and both of them asked Joellyn if I was freaking out. Very amusingly Joellyn told them both what I have been writing about for a while, "the market goes down sometimes and the market warned ahead of time." Very funny.
On Monday and Tuesday I will be attending the IMN World Series of ETFs in Phoenix. I will be moderating a panel about portfolio construction using ETFs and also giving a presentation on that same panel. I think it will be a great chance to see what people are doing and thinking in the midst of all this beef. Should be a good learning opportunity, at least I hope so.
Blog traffic tends to go up during times of greater volatility (not just me, other bloggers have noted this effect too) which often leads to more comments and questions which is always appreciated.
One reader left a comment about trying to buy VT which is the Vanguard Total World ETF. He said the "bid was 46 (but) when I got it it was 49...yikes...very low volume...please help thanks."
First, as a buyer you are more concerned with the offer than the bid. A market order to buy is entitled to the offer. The bid means very little unless you are trying to split the middle with a limit order. Based on the one day chart on Yahoo Finance it appears he executed during the minute of 9:37 which undoubtedly was a fast market condition as the market was in the process of panicking up. The reader says low volume, yes, it appears the fund's last trade of the day was at 12:33. It wasn't halted, just a lack of interest.
This is not really my type of trade but whatever you had in mind with this you have probably surmised by now that the strategy would have been better suited to something that trades a bazillion shares instead of something that trades 83,000 shares. VT is a broad proxy, there are plenty of other broad proxies with more volume.
Another reader asked if I would stick reequitizing if we went above the 200 DMA on Monday. The short answer is yes but there are a few more moving parts. The way I have always worked around this is the day it first goes above (or below) is not the day I do anything. I wait to see what happens the next day. If, late in that next day, it looks like it will hold then I make a move. Notice I say "a move." As I said in the video and in countless other posts, I wade in slowly, not all at once. The impact on the client is less if the move turns out to be a head fake or I am otherwise wrong, which has happened before and will happen again.
If SPX were to take back the 200 DMA so quickly (even if we are talking further out than Monday too) I would be inclined to add exposure for now with an ETF (sorry, can't front run clients with a specific name) as opposed to a an individual stock.
The idea with that is that if it crossed back over so quickly the 50 DMA would probably still be below the 200 DMA and the 200 DMA would probably still be pointed down. Both of these give me less confidence of being correct with that first move if it needed to happen so soon. The reason to stick with it is that you can look at a chart for the last year and a half to see how it has worked and I think it is a bad idea to switch in midstream. The start of the next bull market would be a better time to reassess as to whether a tweak to the idea makes sense or not. Again, just a slight tweaking of the concept.
In describing this you hopefully noticed I am preparing to be wrong. If you manage portfolios, even just your own, you will get things wrong. We know this. The next move you make might be one of the things that goes wrong or not but there will be things that do not work out as you hope. If you know that now you don't need to have an emotional response to it then.
Barron's had an interview with Felix Zulauf that was rather bleak. He seems to be very focused on deleveraging causing this malaise to continue longer than most people think. While I don't know about years more of this the notion that (repeat theme coming here) the "worst financial (whatever this is) since the great depression" results in a milder than normal bear market with no declared recession seems very short sighted. We can kick up our heels if that is what happens but expecting it seems like the wrong path.
It stands to be another interesting week even if it is less volatile. It might be worth your time to check out CNBC Asia or Bloomberg TV when they kick up their coverage later today.
Saturday, September 20, 2008
Friday, September 19, 2008
Could we close flat today? Is this type of open ripe for a fade?
What do you think?
This will be a tricky post, hopefully I can articulate this clearly--not joking around.
The biggest decisions in top down management is whether to be in the market or be out. If you have been reading this site for more than 20 minutes you know that my take on that is defensively postured versus fully invested hindering on the market being below the 200 DMA (demand unhealthy) or above the 200 DMA (demand healthy). No matter what you think of that, it is simple.
Sector decisions and country decisions are not quite as simple as being in or being out but certain sectors do well early cycle other do well late cycle, I've written about the inverted yield curve's important probably 100 times. Regardless of how complex (or not) you perceive the things I write about I stick to them and you can look at the quarter end video's to see how it has worked out.
I have no plans to change the big picture aspect of how I do things. No matter what is going on, if demand is healthy I will be much closer to fully invested, if demand is poor I will be defensive. Feast, famine, pestilence, boom, raining gold coins, whatever; demand is either healthy or it is not.
Taking this approach means it doesn't really matter whether you are right about too many things going on in the world. This leads me to what is happening right now.
Part of this entire mess before us may have come from unintended consequences of past actions (some think this, some do not, I think there is something to this line of thought). There is also an element of the store not having been properly minded contributing also. The store not being minded is due in part to either incompetence or negligence.
If any of the last paragraph seems within the realm to you then it makes sense to think about the unintended consequences of the efforts being made to fix our grand mess. At some point do we jeopardize our credit rating? Would there be political pressure to maintain the AAA rating? If so, isn't part of the current problem that paper that was not really AAA was rated that way anyway?
Just how much will the RTC-like solution cost? How will they value what they buy? How will they dispose of the assets? Who will buy them? What about moral hazard?
Doesn't the idea of banning short sales has unintended consequence written all over it? Anything that impedes two-way markets is scary territory.
Anyone who says we had to have these things put in probably has a point, I certainly don't have a great argument beyond I think there will be bad consequences. Part of the issue is that the excesses that built, that so threaten the US financial system were allowed to develop under the set of rules that existed. If the rules had been better constructed things would have been different. Of course that is utterly useless to say because things were how they were and then blew up like it did.
The stock market is obviously behaving strangely. It is difficult to conceive that the type of action we have seen can be thought of as healthy, it is certainly not normal. Do you own individual stocks, if so how many were up double digits? I had a bunch which is not a brag, it shows just how odd things are right now. This move up certainly could last a few days but who would be shocked if there was another four point something percent drop one day very soon?
I certainly do not have all the answers, I may not have any answers but the S&P 500 is below its 200 DMA so I am defensive. When it goes back above the 200 DMA I will move toward reequitizing.
Thursday, September 18, 2008
Yesterday at the studio for my segment just about everyone there was asking me about the market and what to do. One of the guys looked at his 401k balance while I was there and he became bummed out.
A couple of different friends said they saw the segment but didn't really know what the segment was about.
The first one tells me that people who don't usually follow the market closely are paying more attention than normal. Obviously this belies more fear or some other emotion as the market is lower and maybe the regular news covering it more than normal too. BTW my visit to the dentist on Monday was similar.
The second anecdote might be important. The segment was about the (financial) news of the day but still it was difficult to follow for these friends. As I have been saying this is a normal bear market (regardless of whether that turns out to be true or not) what I have meant is how it is manifested in the stock market; the slow rollover, the feel good rallies, the magnitude of the decline and so on have happened before despite some of the comments to the contrary.
The details of these events certainly can be different from event to event; Mexican peso, Kennedy assassination, oil embargo, whatever. One thing that dawned on me with this is the difficulty with which people who don't spend all day with the market might have in trying to understand what is happening.
Wachovia (WB) CDS spreads freaked on Wednesday, absolutely freaked. Did that contribute to the decline yesterday or over the course of the entire three days so far? And if it did how would someone explain what that means to someone else?
What about the action in Constellation Energy (CEG)? Friday it closed at $58.37, Monday $47.99, Tuesday $30.76 and yesterday $24.77. CEG appears to have connections to Lehman Brothers (sort of counter party thing) you can read about here. There is nothing simple about this story.
The move down in commodities over the last couple of months was odd for several reasons. Wednesday commodities panicked higher. Ninety day t-bills were yielding zero (CNBC said it was negative for a while, I was in the car when they said it and the low quote on yahoo finance was 0.01). I haven't really even touched on the bailouts, bridge loans or shotgun weddings from the last few days.
Past events were probably easier to understand (Russia defaulted, Orange County went bankrupt). The current event is seems more complex but I would also note that this week might end up being the craziest of the entire bear phase. In addition to the stuff mentioned above the price declines of some of stocks here and there has been bizarre.
This being the craziest week (if that stands up) has nothing to do with a bottom coming this week. There has been so much tumult in this bear market that I think the real bottom will be a quiet one.
No one can explain everything or anticipate all the shoes that will drop which is ok. I think the big macro besides that this is a bear market is that right here right now things are a mess. I would brace for more fallout and reverberation but I also think the velocity will slow down markedly--hopefully by the end of the month.
Wednesday, September 17, 2008
If panic builds and we do have a modern day crash, that should set the stage for a rally, dead cat or otherwise, which would be a chance to then lighten up. Selling along with the panicked is a bad idea.
In my post on greenfaucet yesterday I mentioned that the stage was set for a strong finish depending on the Fed news. I used that to sell my Bank Of America at $29.22 after having first bought it in 2002.
I don't like big mergers and I don't understand why they did not wait a day and make an offer on a discounted stock price after the Lehman kablooey. That the market was the same as it was two months ago yet BAC was up 50% from that time seemed like a gift to me so I took it.
Very few companies are permanently damaged. Taking GMO action is a bad idea.
On a related note I am going to be on CNBC 30 minutes after the close to talk about, go figure, the financial sector.
Yesterday I called for a snapback to come but I was not expecting it to come a few hours later. Ditto earlier this summer.
One little trick, if you will, calling for a reversal of a very fast move has a high likelihood of being right. Getting something like that correct is not particularly clever as the odds are overwhelmingly in your favor.
This is obviously a fascinating time in the market. I questioned whether Monday's decline was constructive with regard to sentiment and that the market snapped back so soon leaves me thinking that Monday's decline was not helpful at all--as if it never happened. All the more so if fear doesn't come back today.
I wonder if this lack of fear (if that is what's going on) will persist ultimately pushing the ultimate bottom further out. In looking back at how past bear markets and other nasty periods ended there is a mix of quiet (late 1990 until the explosive we bombed Iraq rally three months after the bottom) and loud (fall 2002 was pretty big pretty quick).
It makes sense to expect further krazeeness for a while. It seems various unwindings are moving all sorts of markets. If that is true it will take more time to finish processing through--at least I think that will be the case.
Tuesday, September 16, 2008
Well, unfortunately I don't know. It is clear that this is an important micro (in the sense of time) event that is still unfolding. Fast moves like this, regardless of when they come are obviously dislocations that often trigger a snap back.
As this is a bear market I would expect a snap back to be short lived, a couple of weeks or so, but these snapbacks are the essence of feel good rallies.
We just had one that started on July 15th that took the S&P 500 up 8% in about a month. At the same time the financials, as measured by Financial Sector SPDR (XLF), were up 30%.
The last feel good rally did not mean the end of the bear and this one, if it comes, won't be the end of the bear either. Hopefully you avoid meaningful selling on days like today or yesterday and avoid meaningful buying on days like August 11.
The reason I write so much about how bear markets work, how they happen every few years and so on ties in with a comment I made yesterday about knowing ahead of time that bear markets come. I believe that the more you can deconstruct bear markets, understand that they are normal, realize your account will go down at least a little the less likely you are to panic. No one gets every decision right but your percentages probably go up if you never panic.
Monday, September 15, 2008
As I type this the SPX is down 40 points which isn't even the largest point decline this month. Maybe my thinking is off but the issue I am trying to raise is that the decline today after Lehman's failure may not be large enough for people to freak out, I'm talking about people that don't follow the market as closely as someone inclined to read a blog.
If I am wrong then ok but people have seen declines of today's magnitude several times this year. I'm not sure that yet another 3% drop triggers panic..
I responded with some numbers but wanted to reply in writing too with some of my thinking about the current situation and also my thought process in general.
One way to break this down is into two categories; facts and the things that people are afraid will become facts. As of Friday's close the S&P 500 was down 20%. It was a little lower earlier this summer and it seems like it will open a little lower today. Obviously no one knows where it will bottom out. Plenty of people have an opinion (including me; 1095) of course but that's all anyone has; opinion.
All the news of the last 18 months, SPX 1251 (as of Friday). That is a fact. The market might get much worse or it might not but what it might do is not fact. Even the news from the weekend, 1095 is still kind of a long way from here, not very far, but kind of. If the bottom were 33% (still close to normal) from the peak that would be 1049, that is a noticeable drop from here.
Before I go any further, let me say for anyone new I have been thinking we would have a normal bear market since before summer 2007, I said that I thought a bear had started on December 13, 2007 and have been consistent in thinking a normal bear would be about 30% down from the peak. As I began to write about my thoughts in this regard a commenter heckled me daily about my thoughts that a bear was coming--I was too bearish and now although I still have the same opinion some think, albeit much more respectfully and intelligently than the heckler, that I am too bullish.
Bear markets have certain sentiment based things in common, little truisms that repeat over and over. They repeat with such consistency that they are almost facts.
During every one of these big bad events that I have been through, I have been in the business since 1984, there is incredible fear about how bad this time is and the reasons why this time is different are always well reasoned and plausible. I have tried to make this point before and invariably a comment gets left telling me why this time really is different.
The fear is always bigger than the reality. One thing I am very good at is remembering how afraid people have been during other events. I can tell you the fear now is the same as it is every time. I also realize this point will fall totally deaf for some people.
Let me be clear about something which is that the context here is about what the stock market is doing. Whatever the deficit is doing, whatever the foreclosure numbers are, whatever houses are dropping, my job is to navigate the capital markets and in this post that is the only context.
For many months before the bear market started I described how bear markets start which is that the roll over slowly for several months (look at the chart in the post I linked to above), that an inverted yield curve (when they occur) is a reliable catalyst, that most talking heads tell us not worry, the bull is alive and all of this was the case for this bear. It has been so textbook that there is a humorous element to it.
Another part of normal is enormous failures; I'd say Fannie and Freddie fit the bill here.
There is a historical element that is also sentiment-based that leads me to conclude normal bear market which is the frequency with which the US market cuts in half. Typically there are decades in between 50% declines. This has been fact. The reason for this, IMO, is that once you go through a 50% decline you are so fearful of it happening that you sell before it happens. A 50% decline, again IMO, requires a new generation of investors who do not know this fear.
So in terms of the normal fear that now exists, the text book nature of the bear thus far, the big failures thus far and how recently the S&P 500 cut in half I conclude this will be looked at as having been a normal bear market. This is my opinion and so of course it could be wrong. Nothing has changed my mind but still none of the things I cited have to matter and again I could be wrong.
As many times as I have talked about my expectations for the bear I have also talked about having a larger cash position than normal, having some double short and remaining underweight financials throughout all of this with the goal of missing a chunk, not all but a chunk, of down a lot. You can look at the quarter end videos for the last couple of years to see how that has worked out.
This all as opposed to having no defensive plan ahead of time, left having to try to decide what should be done now after a 20% drop. So if I am wrong I feel as though the consequence of being wrong about the bottom is not that great, I am already defensively positioned and would get progressively more so if no other action is taken (the idea being SDS would hedge more portfolio as it went up in price).
As for general thought process the stock market goes up most of the time and occasionally it goes down in bear markets. The cycles repeat over and over with different details but similar results. This is an inevitability. Fortunately bear markets offer some warning ahead of time and heeding those warnings can add to the return over the entire stock market cycle which is a better measurement of time for people trying to accumulate enough money for retirement.
If bear markets are inevitable then as I see it there is very little to worry about, you know ahead of time they will come, you know this.
In terms of the US being somehow broken ok, but other countries are not broken. They may take longer than normal to come back but I believe many other countries are dealing with cyclical issues. If this turns out to be a secular issue for the US, ok, but the cycles in other countries will start to turn up. We need to have exposure to those countries whenever that happens.
Is this is shocking or new to anyone? Of course not.
Let me again reiterate that the context of this is the capital markets and protecting client assets as best as I can, not being right about how low the market goes or how bad anything else gets. I think that being correct directionally, which I have been and have shared on this site every step of the way, does a lot of the portfolio work. I will also reiterate that I could easily be wrong about where the bottom of this bear is.
Sunday, September 14, 2008
Man, there is a lot of moving parts tonight, hopefully you have an inkling of the situation.
BAC is a client holding.
The best article had five snippets of varying length from five "risk experts" to "explain how to keep your nest egg from cracking."
The five were Peter Bernstein, Charlie Ellis, Barton Biggs, Jeremy Siegel and David Darst.
Berstein's post was a mix of general concerns and specific suggests that may not be very new but it was worthwhile to get is take.
Charlie Ellis focused on global diversification which is important but the post was very short.
Barton Biggs' post was totally worthless in the context of talking about retirement. He essentially spelled out why he likes tech right now. Even if he is 100% right about tech in the time horizon he is talking about it adds zero value for retirement planning.
Jeremy Siegel made a very articulate case for dividend investing which I generally believe in but I felt like it was a pitch for WisdomTree funds, which I am favorably disposed to. I would have liked to have read at least a little about his thoughts about emerging markets for the next few years. He has some interesting ideas about how money will flow over the next decade or two and even if you disagree with his conclusion on that his idea is worth exploring.
Last up was Darst who was the most useful. He was very specific about long term allocation and why it should include alternative assets and how the alternative assets portion should break down. Regardless of what you think of Darst his comments reflect of collective wisdom that I am willing to listen to (maybe not adhere to, but listen).
This leads me to an article on diversification from James Picerno which gives a couple of horror stories from the last couple of financial firm blow ups.
For some reason people seem to want to make big bets, do things that are very complicated (relative to their experience or the time they are able to commit to their portfolio) and allow emotion to do them in.
Investing does not have to be complicated. If you are a lazy portfolio person then you already understand simple.
If you make sector decisions then realize you are starting to take on risk when you let any sector get bigger than 20% of the portfolio. If you invest at the asset class level (emerging, commodities, REITs and the like) you have to know which of these is more volatile than broad market and not get carried away there. And if you don't know which asset classes are more volatile than the broad market then you should not be investing this way.
Many segments can drop 20% very quickly and it seems like 20% is a little past were emotion starts to ramp up. Anyone with 20% each in emerging and commodities has made this summer much bumpier than it needed to be.
If you invest in stocks you need to realize that any stock can go to zero. Owning a stock that goes to zero does not have to be a catastrophe if you don't own too much. Too much is in the eye of the beholder but if a stock you won went to zero over night what would the fall out be? If you have 20% in that stock you might set yourself back two years. If the weight was 2 or 3% you might not even set yourself back for a week.
As common sense as this stuff seems to be it gets away from many people. I view this in part as a lack of respect for the work done to accumulate the money. That one is potentially a big matzoh ball.
Saturday, September 13, 2008
Just before the five minute mark I word something poorly.
Replace up nicely with ahead nicely.
Friday, September 12, 2008
This is not about bear market magnitudes or whether there will be recession, depression, famine, pestilence or anything else.
No matter whether you are a Roubinian or a Kudlowite it is important to realize that the current velocities of market action in certain segments is not what the market normally does and any trades you might make (more specifically any big portfolio shifts) would be done so at a time of abnormality.
Going with the crowd during times like this, and right now the crowd is selling, is often a mistake. If you need to sacrifice one stock in order to sleep then you probably should do that but there are parts of the market that are trading like they are permanently broken (no one will ever need oil again, some emerging countries will be out of business by the end of the month, the NZ dollar is going to zero) which of course is not the case.
Periods of abnormality (fast declines) have happened before, will happen again and to be clear is happening right now.
For anyone new to this site I am not 100% at all times guy. I'm a huge believer in defensive action (when SPX crosses below its 200 DMA as a trigger point) but not in the middle of what could be described as a panic 11 months after the peak.
Periods of abnormal trading often end with a reversal of some sort. If you think this time is different then maybe you should get out now, but if you were smart enough to have had a defensive strategy in place before things got this ugly you have a much better shot of facing this without emotion.
I'll close with couple of great, but unrelated, quotes.
I don't remember where I read this but one person who must be particularly concerned about all of the problems unfolding used the baseball inning analogy to say we are about to throw out the first pitch.
Max R, a fraternity buddy, who is a republican but who was not thrilled about the VP choice said "the wild thing is that at some point they all pushed away from the table agreeing she was the answer."
Thursday, September 11, 2008
My add on to the greenfaucet post would be about evolution which is a popular word in my posts. You either agree the investment world is evolving or you don't but if you do then it only stands to reason that the rest of the world (well most of it) is developing and moving ahead at a faster rate than the US. It will be those countries that provide a better chance for "normal" equity market returns, something that the US has not provided in a long time now.
In addition to increasing foreign weighting there also need to be some mental adjustments made. I have had an unoriginal theory that the US, being so mature an economy, will have lower highs and higher lows than it used to have--that is to say narrower moves within its cycles.
I think this has been happening slowly over time and we have become gradually used to this-witness the reactions when there are big market moves.
If this is true then it should also be true that countries that are not so mature will still have the volatility that the US used to have, especially commodity based economies, emerging countries and frontier countries.
The point is that if you are going to add more foreign there will be periods, like now, where you may find the volatility uncomfortable. From its April 2003 inception (if I am reading Yahoo correctly about the inception date) though last October EEM was up 350%. YTD EEM is down 30%. Clearly a bad year so far but anyone buying at inception and not lucky enough to have reduced is still far better off over the course of the entire cycle.
Wednesday, September 10, 2008
We are scheduled to fly back to the mainland today a couple of hours after the close, unless we accidentally miss our flight.
Did you see the Greenspan interview with Maria yesterday? A panel of financial experts? I didn't know any existed.
I did not get a sense of panic being conveyed yesterday which could be taken a couple of different ways I suppose but I noticed something in the parade of what's happening now segments more so in the questions asked than the answers given.
This hearkens to something Taleb talked about; the need to explain. Sometimes the best explanation is no explanation. If this is a bear market then we can count on it doing certain things. One of which is sawtoothing down to a 30% drop (maybe a little less, maybe a little more or maybe a lot more). The reason for Tuesday's 3.4% drop might be X but it is simply one more tooth in the saw.
The best thing investors can do is wrap their arms around that this is a bear market and this is how they work.
My target for a bottom for SPX has been 1095 because that is 30% from the top and I still believe the bear will be close to normal.
Everyone knows oil, gold, currencies, mining and emerging markets have been pasted in the last couple of months. This has naturally drawn out many people that are extrapolating the trends to continue like $80 oil and $650 gold similar to the $200 oil calls back when it was in the $140s.
If you are interested in just maintaining a diversified portfolio then you don't really need to get too caught up in this sort of thing (diversified portfolio assumes no lopsided bets). Over the last few years these segments have provided an awful lot of lift without having to pick stocks (as opposed to tech where only a few names have done consistently well).
The period where these segments can do this may be over (but i don't think that will be the case, I think this is a big fast panic as the others have been). If so then there will be other parts of the market that fill this role. Yesterday healthcare, telecom, utilities and staples did relatively well.
It is much easier to try to figure whether you have enough or too much as opposed to whether you should have any.
Tuesday, September 09, 2008
Generally the stocks in the portfolio did what they were supposed versus how their sectors did. The financials were up a lot, the resource names were down and so on.
The moment of clarity came from seeing some of the stocks go up and realizing that most of them (hopefully all of them) are the good companies that I think they are. They might be down with the market (or maybe doing worse) but there is not a reasonable risk of a bunch of them going out of business (I don't think any of them will go under).
At some point global stock markets will get right, probably on different time tables, and good companies will start their next bull phase.
This is meant to be really big picture stuff. I'm 42 and hope to do what I am doing now until the end. I hope to never need what I am saving so in theory I am looking at an infinite time horizon for my personal portfolio. If our firm's typical client is 50 or 60 or some other age they probably want to work until some point and then need to plan on their money lasting for many years (retiring today at 60 and living past 90 is not unrealistic these days). Someone who is 75 today and fit enough to exercise regularly should also probably plan long term too.
How old are you? Are you going to retire, if so when? Then how long after retirement is prudent to plan for?
If you fall in here anywhere then, and this is a point I have made before, beating or lagging over some short duration of time means nothing; quick what was your return in 2004? Did that number beat your benchmark? Even quicker, when emerging markets corrected 23.7% from May 10, 2006-June 12, 2006 how much did your portfolio go down in that month?
Over the last 15 years there have been plenty of great companies that have cut in half along the way only to come back. This is also happening now and will happen again in the future.
This sort of big picture understanding is a starting point. From there things like defensive action in a bear market, sector decisions, country decisions, style decisions, market cap decisions, volatility decisions and so on are part of the next level of process. It filters down then to actual stock or fund selections.
At times obviously stocks or funds do need to be sold and new names bought but the need for change is less frequent than many people think.
The picture is from south of Hilo at the Kapoho tide pools. It is a huge area of pools formed by lava. The water is warm, clear and there are no waves in the pools. It is a very tranquil spot and good for clarity.
Sunday, September 07, 2008
The yen is getting hit against everything as it looks like it's back into the carry trade pool; more comfort taking risk.
New Zealand, Japan, Korea and Australia are all up meaningfully. SPX futures appear to be much higher (although Martin Soong on CNBC Asia has made two references to some indicator showing the US market as indicated lower).
Treasury yields are up a lot while gold is up a little. Oil is up but that might be more about Ike than the bailout.
In the post from earlier today I said I thought there would be a pop of some sort in equities. We have it right now, but who knows how long it will last.
Both Steve Forbes and Andy Xie said that this isn't resolved until we know what the gubment is going to do next with these. There was one comment about needing to inject $300 billion to give it a decent capital ratio versus about $5 trillion in debt.
Where does that money come from? Doesn't this have to be inflationary? If it is inflationary then how do we reconcile that with the asset deflation? What about that part of the story about the treasury working with smaller banks with "significant exposure" to Frannie paper? How much will that cost?
Slightly bigger picture the bailout has come about because of a massive failure of how the US does business. The failure as been unfolding for months now, this is the latest but unlikely the last news.
Maybe there is no negative domino effect coming but I'm not sure how that is possible.
One way or another this picture of a road overrun by lava must provide an apt metaphor to some aspect of this story.
Barry (multiple posts) has some coverage as does Barron's, Mike Shedlock (multiple posts) and the NY Times. The expectation is that we will know something this afternoon, US time, before the Monday Asian sessions start.
As an immediate reaction I would not be surprised if equities rallied for a day or two or three. A bailout removes one bit of uncertainty and a market not looking too far into the future could easily pop.
Mish, linked to above spells out the numbers and they are huge. Also there is potential consequence for the foreign holders of Frannie paper (there have been several commentaries about demand from China waning) depending on how the bailout would be orchestrated, executed and then what the unintended consequences would be.
Most folks attribute the real estate/MBS/and whatever else crisis to the Fed having kept rates at 1% for too long. That no doubt is part of the equation but the history of Frannie and the leverage they were allowed to accumulate is also part of the story. Had they not been allowed to lever the leverage (my little play on words) there would have been less liquidity to fuel the house mania--not that it wouldn't have happened necessarily but some portion of this mess can be attributed to the business model.
If this makes any sense then it may be that the full extent of the consequence of all of this takes years to play out. Accessing capital may be problematic for years which will make economic growth very difficult to come by. Mish's argument that treasuries are cheap has a much better chance of standing up in that light.
The outcome that I think I see from this not going well is "stumble along the bottom" where equity and home prices take much longer to start to come back. They do not necessarily have to keep cascading lower. Thought of in equity price terms, couldn't the S&P 500 spend most of the next few years trading between 1050 and 1200? Hasn't it spent most of the last few years trading between 1300 and 1500?
I'm not too focused on trying to be correct. A scenario with a really bad outcome (worse than I am spelling out) as a result of deleveraging is possible. I don't think really bad is most probable but if it is really bad what should be done portfolio-wise? I would want to continue to have more cash than normal and some double short. I think there are certain soft commodities that could do well as a function of supply and demand dynamics. Country selection would become more important (Vietnam for all its problems is having a pretty powerful rally lately) as countries that really are in their own world or have stuff the rest of the world really needs might do ok.
Despite my ardent beliefs in normal bear market cyclicality I am very optimistic by nature. Whatever does come from this, if you work hard now, you may need to work harder. If you resourceful with how you live, you may need to be even more resourceful. The manner in which the US seems to be evolving will bring challenges that we can either take head on or try to avoid.
I'm sorry I don't have all the answers but I think it is more important to to figure out some idea about what you would do with your portfolio than correctly quantify exactly what happens.
But that is where the lava meets the ocean. It was quite a show.
Saturday, September 06, 2008
A reader left a comment several days ago that I have been meaning to answer, sorry for the tardy response. The reader said that alternative investments are supposed to zig when equities zag but lately the alternatives have gone down more than regular equities. My take on this may not be palatable but I do believe it should be viewed this way.
Looked over the length of the bear market many of the alternatives have zigged. Over the last month many have given up the ghost. I have touched on this a few times in the past. If you can blend in some things that don't start to go down until much later (commodities and Brazil) and can find some things that turn up much sooner you have a chance for that zig zag effect over the whole cycle. Obviously the double short products are still zigging.
Here is a little tidbit from the WSJ about creating an exchange for airwave frequencies. Apparently there is some secondary trading of these but accessing information is difficult to do. I can tell you from fire department experience that the business of using, changing, accessing and anything else to do with frequencies is not simple. While I doubt I would want to trade a frequency ETN I do wonder if an index that captures price movements of this sort of thing might be a useful proxy for gaging the state of the economy.
There has been an interesting thread floating around about Bill Gross' recent commentaries that seem to be calling for a bailout. Barry questions whether Pimco is "genuinely terrified of a major meltdown in the global economy." I'm not sure what to make of any of this just yet but it is worth watching as the implications are obviously important.
Much has been made (including on this site) about the vicious decline in commodities and emerging markets in the last seven weeks. There have been numerous vicious declines in the last five years and at some point the vicious declines were followed by vicious rallies. That will either follow suit this time or not but fast moves do exhaust at some point, usually a point that is overdone, and then go back the other way.
I tend to put less long term significance on fast moves as this one has been than gradual moves that no one worries about.
Don't take that as my trying to call a bottom to the move as opposed to recognizing this for what it might be and if it is just another fast correction then we should expect a fast move up at some point.
Friday, September 05, 2008
The video is from yesterday afternoon from the Waipi'o Valley (yes it looks similar to the Pololu video from the other day).
Yesterday was nasty for the market. There were also a couple of comments left on the blog that I think belied some sort of emotion presumably caused by the market action of late. The reader was not happy with something I wrote. While I am not exactly sure how I ticked him off he seems to think that the deleveraging that is underway will mean something much worse than a normal bear market (please keep in mind I am trying to read between his lines) and I think he thinks I am not getting what is happening.
This is all pretty simple in a way. It will either be worse than normal or it won't. But the financial mess is now more than a year old, more like a year and a half old. I have been writing about having a defensive stance for over a year now. Plenty of other bloggers have been opining about the bear market we are now in for many months as well.
I said in a post on December 13 that I thought a bear market had started and I don't think I was alone back then. In chronicling the bear market I have used the term feel good rally 19 times during this calendar year (not including videos). Plenty of other bloggers have talked about bear market or sucker's rally and bear market/sucker's/feel good rallies all give way to more declines. This is all normal stuff that requires no analytical acumen whatsoever. Additionally, people always forget how scary past events were and always believe this time is worse than the others.
At this point this is a very old story. Getting upset after 18 months of lead time...where ya been? If you are going to manage your own portfolio you need to think ahead. Getting upset now implies no plan of action having been implemented, no plan for defense and no forward looking thought.
If you think this time is different, the bear market market will be worse than normal, then you should have taken action months ago which would rationally head off being upset at the pass.
I have disclosed my actions and positioning many times in the last year; quite a bit more cash than normal and a position in SDS. This has been the case for about 13 months. The big macro has been the goal of missing a big chunk of down a lot. If the market keeps going down the size of the SDS should grow relative to the rest of the portfolio thus creating a bigger hedge on the way down. You can check the end of quarter videos if you are curious about the result.
I am still in the normal bear market camp which would be about 30% down from the peak; we are now 20% down. Optimistically speaking I think the market could bottom in Q1 2009 but I will begin to reequitize when the SPX goes back above its 200 DMA. I don't really care if that happens next month or two years from now. As a quick note equities will likely turn up for real well before economic fundamentals turn up.
You can leave all the emotional comments on blogs that you want but this bear market, like many others rolled over slowly giving plenty of time to implement some sort of defensive action. Hopefully you have heeded the textbook nature of how this bear has been unfolding (many bloggers have written about this including me) and you did what you had to (even if that means no trades) to avoid getting upset.
Now onto that jobs number.
Thursday, September 04, 2008
There is a new frontier market CEF from Morgan Stanley that has ticker FFD. Here is a little bit of info, here is a little more but for now the MS page has no info to speak of.
According to the Yahoo News release, linked above, frontier can include Bahrain, Bangladesh, Botswana, Bulgaria, Croatia, Ecuador, Estonia, Ghana, Jamaica, Jordan, Kazakhstan, Kenya, Kuwait, Latvia, Lebanon, Lithuania, Macao, Mauritius, Namibia, Nigeria, Oman, Panama, Qatar, Romania, Saudi Arabia, Serbia, Slovenia, Sri Lanka, Trinidad and Tobago, Tunisia, Ukraine, United Arab Emirates and Vietnam.
The money was just raised so the fund owns nothing yet. It may take a while to deploy the assets and for now it has a premium to NAV to pay for the sales charge that will likely erode over the next couple of months.
Frontier will become an increasingly important asset class to access. For now there is no way to know whether FFD will be any good or not. Generically speaking this space might lend itself to active management. For example an active fund could avoid Latvia for now, which could add value versus its benchmark. Further value could then be added by adding Latvia back in at some opportune time in the future.
When the fund populates and MS discloses I will write more about it.
Here is an interesting idea from James Picerno over at The Capital Spectator about benchmarking a portfolio against the yield of the ten year TIPS which he cites for the purposes of the article as 1.69%. It does not sound like a high hurdle but he makes an interesting observation that has fascinating implications. He said that five years ago the ten year TIPS yield was 2.43%. Five years ago to the day the S&P 500 closed at 1026.27. Yesterday it closed at 1274.98. Using simple math that averages out to 4.8% per year plus 2% (which is generous) for the dividend.
2003 was a great year for equities but most of the lift was in by the time September rolled around. The numbers for equities would look a lot better going back five years and a few months but at the same time there many people missed 2003 as they did not trust equities yet.
Additionally it would have only taken a couple of bad mistakes (panicking out at the wrong time or making an incorrect sector decision) for someone to have missed out on that 4.8% number in the last five years.
What makes this interesting is that I think the post helps to better conceptualize what benchmarking is about and although not mentioned by James I think it stresses the importance of dividends. 6.8% total return is low historically. Anyone who increased his yield in the time either had better returns or got the same returns without having to work as hard.
James Stewart had a post in the WSJ about investing like the Harvard Endowment. A caveat; you really need to be be careful reading this guy's stuff.
He says "Individual investors can emulate the principles, if not the exact returns, of Harvard's approach....But you too can achieve similar -- maybe even better -- results by embracing a variety of asset classes."
I say "No you can't."
Don't get me wrong I can't either, not with any regularity (applies to you and me). The point here might be granular but it is important. Access to many of the sorts of asset classes are now available in exchange traded vehicles. However I don't think it is a stretch to say that in addition to the asset classes available to the super endowments they also have a little bit of know how for when to make changes to these holdings that other people may not have.
As long commodities as we think these funds are, something tells me they did not take the full brunt of this summer's decline. If one of the endowments was 25% commodities on June 1 and somehow you knew that, took your position up to 25%, the market then corrects with much velocity which they sidestepped; they are fine. Would you have likely taken the same evasive measures? In real life did you take evasive measures?
If you had 25% or thereabouts you better hope you did. If you had a moderate weight then you didn't need to.
Learning from and being influenced by these funds (like owning some commodities as opposed to 25%) is plausible and unlikely to leave anyone holding the bag.
Finally, congrats to Charles Kirk on five years of blogging.
Wednesday, September 03, 2008
The speakers are a who's who of ETF experts. I have attended several of these events and always learn from the experience.
I will be moderating and presenting on a panel that is all about portfolio construction that names names.
Free registration is available for readers of this blog. If you would like to attend you need to email Janet Tariska at jtariska [at] aol [dot] com. You need to give your name, address, phone number, email, the company you work for (if you are in the financial services industry) and you need to mention that you heard about this opportunity on Random Roger's Big Picture.
I hope you can make it.
In case you have not surmised by now, the market action in the last few weeks has been abnormal. A lot of market leaders and popular segments have gotten crushed. Oil was down $60 yesterday (a slight exaggeration). Currencies have been whacked very hard in the last few weeks. Other commodities have been thoroughly pistol whipped.
The nature of these markets is such that the fundamentals do not change so quickly as to justify these sorts of price moves. Don't take that my saying the market is wrong or that these moves cannot happen because the last few weeks shows us it can happen...but it is abnormal.
This summer is not the first time you have encountered abnormal price action in certain markets and obviously will not be the last.
The important thing here, I think, is the ability to recognize when things do get cattywhompus as they are now and take a step back (if you are one to get too focused on the shorter term) and try to realize that things are disjointed and if you have a properly diversified portfolio you should be able to weather things just fine.
In all likelihood you will quickly forget this bit of turmoil quickly enough. On April 12, 2003 iShares MSCI Emerging Market Fund (EEM) closed at $20.20, adjusted for splits. On May 17 it closed at $15.88. That works out to 21% in 36 calendar days. Does anyone remember what happened? I do not but how much fear do you think there was then? How many segments on TV or written commentary proclaiming the end of emerging markets do you think there were?
On May 12, 2006 StreetTracks Gold (GLD), which is a client holding, closed at $71.12. On June 14 it closed at $55.62 which coincidentally was also a 21% decline. You might remember there was a decline during Q2 2006 but does anyone remember what the catalyst was? How many commodity corrections have there been in the last five years and how quickly are people ready to give up on diversification altogether when the drops do come?
Those were rapid dislocations that eventually stopped dislocating. The current dislocation will also stop dislocating.