Sunday, November 30, 2008
Barry had a post about Bob Rubin's diminished credibility and while the post was a good read there was a secondary point in there that I think is a very useful learning tool (or reminder) for just about anybody.
In there was a snippet from the WSJ that included the following;
“Mr. Rubin... acknowledged that he was involved in a board decision to ramp up risk-taking in 2004 and 2005, even though he was warning publicly that investors were taking too much risk."
My take on this (and if you click through and read the whole thing you might agree) is that he knew there was greater risk but felt the bank would be able to out-maneuver that risk. I imagine there was some sort of complex plan of exactly how they were going to that. No doubt that going in it probably sounded pretty good.
Conclusion (fair or not): They were too smart for their own good. This is a behavior that does in all sorts of people.
This is something I have tried to be aware of over the years and why I try to make the big portfolio decisions based on very simplistic things like yield curve inversions and the market going below its 200 DMA. Both indicators warn you trouble is coming. They do nothing to tell you the magnitude of the trouble. I don't believe magnitude is the most important thing, certainly not as important as heeding the warning. Heeding the warning is more difficult than it sounds because there are so many people telling you why this time is different.
A good example of this is a debate of sorts I had with Howard Simons on the columnist conversation section of the RealMoney website in November, 2005 (I recapped this on my blog here). If you know who Howard is you know I will not out debate him on anything. My point was essentially inverted curve bad for financials and the market. Howard said it was less relevant because of how much financing was being done with floating rates. He clearly out debated me, his argument had many more points than my inverted curve bad but of course none that stuff mattered.
No one could accuse me of being too smart for my own good as I set out a very simplistic truism and stuck to it--sort of an Occam's Razor, maybe. No one can be perfect but I think making keeping it simple a priority can be a big contributing factor to long term success in the markets.
The picture is from the little mountain town of Makawao on Maui. It is one of our favoritve places in the islands.
Saturday, November 29, 2008
Videos will resume next week.
One of my RSS feeds had this from a site called TickerSpy about the ETFs (and a couple of individual stocks) owned in the Harvard Endowment. You can click here for the full list which includes position size. The ETFs are all either broad based (like IWM, EEM, VWO) or iShares single country funds (like Brazil, Taiwan, South Korea and India--that one is an ETN).
Eyeballing the list these holdings total $2.3 billion out of about $36 billion so I'm not sure how much this tells us about overall positioning. The article makes it seem like this is a portfolio withing the endowment (maybe I have that wrong though). If that is correct then I am surprised there are no sector decisions expressed. Clearly many ETFs would be difficult for Harvard to access due to the endowment fund being too big (a couple of the positions are close to half a billion) but I'd think that iShares and the Sector SPDRs could accommodate.
This is a potential advantage a do-it-yourselfer has over the endowment. If you deem a narrow based ETF with only $30 million in assets trading $75,000 dollar volume per day as the best way to capture a given sector you can buy that fund pretty easily. There is obviously risk of that fund closing but a fund that closes for lack of interest is not a total loss. It doesn't necessarily have to be a loss at all. If the market was up 30% this year then most of the HealthShares that are being closed would also be up but probably still be closing for lack of interest.
Chances are we do not have the advantage over an endowment in terms of brainpower but in terms of executing what we think is best for our own portfolios we do.
It is interesting to see ETFs being used at all in any endowment. It is a good bet there will be more about this as more and more big pools of capital use ETFs either to capture the market, actively manage with passive tools or just passively manage their funds. This is great for learning how but not for mimicking.
One last point is that in looking at the list there are 15 holdings; 10 ETFs and 5 individual stocks. This is an example of a point I have made before. An individual may not want to do the work or take the risk of owning 20 or 40 or 60 individual stocks but using a bunch of ETFs with a few individual stocks mixed in is something many people are capable of doing.
Friday, November 28, 2008
As people maybe have thought about the things they are thankful for in the last couple of days I had a thought about people also being very worried about their financial situations. How many people have mortgages that are too big, are over extended on credit cards and whatever else you can think of?
As you can maybe tell by my thoughts about portfolio management I am very conservative (I think) with personal finance issues. We paid off our small mortgage in Prescott very quickly, have not had a credit card balance since 1992 or 3 and the mortgage on our Hilo house is not even 20% of our income. This sort of approach prevents most problems from ever happening. Similar to my portfolio is down 40% now what do I do, waking up one morning and realizing there is not enough money for the bills is a bad place to be.
That is the crux for living below your means. Some people do thrive on that sort of stress, I want no part of it.
Different subject. I first made mention of the dollar's status as world reserve currency changing in some way in 2004. Now four years later the path to this is easier to see (it may not happen of course but things in the US have deteriorated mightily). Here is a snippet from the FT on Thursday about the yen possibly filling that role.
I'm not sure what I think about the likelihood of yen becoming a world reserve currency just yet as I believe the vast majority of the yen rally has come from unwinding/deleveraging/forced selling. If some country does share this role with the US (I think that more likely) or supplants the US (less likely IMO) it will make sense to own some of that currency. Something that has helped the US through all of this crisis is the need for dollars around the world. This contributes to the willingness to buy our debt for close to no yield. Were the US not the center of the universe I imagine things would be much worse than they are. I think a country ascending to that status would be a very attractive hold.
Lastly here is a link from RGE about SWF performance (free registration required but worth it). I am a huge fan of looking at what SWFs and endowments do with their portfolios but not a fan of trying mimic them. It is very difficult, if not impossible, for them to take a defensive position. I wrote about this a few weeks ago for TSCM. Take from these what you need but realize they too have flaws.
Thursday, November 27, 2008
A reader left a question asking about the implosion with Macquarie Infrastructure Trust (MIC), which until very recently was close to an across the board holding, and if there are any implications for, as the reader put it, absolute return. I'll expand his thought a little to ask about implications for investment products that either should be in their own world or otherwise be a portfolio diversifier.
If you care about MIC specifically read the news, also reader RW gave a recap in the comments yesterday. Bigger picture MIC, along with other similar products require access to the capital markets to buy assets and they also need the capital markets to function for them to sell assets, these are transaction oriented businesses often using a lot of leverage.
Another layer of complexity with Macqaurie is that they have many many funds listed all over the world with similar a structure and so there has been doubt about the parent bank's health. Yet one more layer is that Babcock and Brown (BNB.AX) which has a lot of similarities to Macquarie has dropped to about zero.
Under all of that MIC just collapsed.
As far as implications for portfolio diversfiers; a couple of points I've tried to convey is understanding what any of these that you are interested in are vulnerable to and not overloading on things vulnerable to the same risks. MIC is vulnerable to leverage issues and not being able to buy and sell assets. To me that sounds very similar to many of the Canadian trusts (like the hydro funds).
That is a different sort of threat than what is faced by something like Rydex Managed Futures (RYMFX), which I own, that faces realistic risks of being long or short something a couple of weeks too long due to its monthly rebalance. More of an outlier risk could be counterparty risk.
Anyone using a single currency as a diversifier faces different risks. There is no way the dollar should have gone up so much in the last few months but of course it has and the notion of "no way" doesn't really stand up.
If someone is trying to use VIX derivatives in this way they face other risks that I couldn't even tell you. As a side note it is pretty clear that very few people really understand VIX. I know almost nothing about VIX but I know that much. Farmland stocks have different risks as a final example.
So integrating any sort of diversifier into a diversified portfolio circles back to proper weighting and understanding how it works in with the rest of the holdings. I wish MIC hadn't imploded but it did. Owning it was not a big problem but owning too much of or owning a bunch of other stuff just like it would have been. This is a perfect example of why I prefer putting only 2-3% in narrow based products (including individual stocks). The consequence for being very wrong is a whole lot less when there's only a couple of hundred basis points on the line.
I hope you can have a great Thanksgiving, enjoy your family, football, a big meal or anything else you might do.
Wednesday, November 26, 2008
ProShares launched a bunch of new funds including double short yen (YCS), double short euro (EUO), double short broad commodities (CMD), double short crude oil (SCO), double long yen (YCL), double long euro (ULE), double long broad commodities (UCD) and double long crude oil (UCO).
I imagine they will be very popular.
My most recent TSCM article ran on Tuesday. It was about an interesting long short OEF called Dover Long Short Sector Fund (DLSAX). It is managed by Doug Cliggot and has done very well. I do not own it anywhere but that may change.
Funny story; I got back from getting coffee early on Tuesday morning (still in Maui then but back in Hilo now) turned the rental car off and the horn started honking at different volume levels. It was about 7:15 AM, we stayed in the middle of a neighborhood and couldn't get the car to stop going berserk. Finally I figured that leaving the key in the ignition was the answer. The rental company brought another car out to us.
I'll try to post more later.
Tuesday, November 25, 2008
If you are a fan of college basketball you know that is Bill Raftery standing next to yours truly. I've been listening to him call games since he first left coaching, he is a hoot. If you are a college basketball fan you also know the reference made in the title of this post. Bill was very personable, the picture is blurry because Bill's classmate took the picture and didn't know how to use the camera, but still it's pretty cool. Later we walked by each other and he heckled me about eating a muffin (shortest line in the concession area). How cool is that?
I'm not sure how cool it is that the market still has plenty of panic left it, up 13% (or whatever) in two days is a panic and as many have pointed out the biggest up days occur during bear markets. I still believe we can go much higher very quickly and come back down yet again quickly.
I do still believe that people that really think of themselves as long term investors will be thrilled with most purchases made while SPX still has an 8 handle.
Short post as we are in Maui and my wife has put up with an awful lot.
The second pic is from the Indiana Notre Dame game. I took a ton of action shots (I also went to Texas St. Joe's) and about three of them turned out.
Monday, November 24, 2008
A great comment came in last week amid the flurry of fear and frustration. A reader shared his asset allocation and noted being down about 11% for the year, obviously a very conservative allocation. A few readers felt the need to pound him in various way to which he responded along the lines of when the market goes up 20% he'll only go up 5%.
Crucial point there! Obviously he doesn't know for sure about being up 5% in an up 20% world but I'm sure he's about right. He structured his portfolio to go up less and go down less, a lot less, and it sounds like that is exactly what it is doing and he knows ahead of time that is what it will do.
This is something I've talked about quite a few times. A portfolio can be constructed such that you have a pretty good idea of how it will do under various conditions. Anyone defensively positioned right now will lag a monster rally, that should be obvious even if not precisely quantifiable. A portfolio that six months ago was fully invested, overweight agriculture, overweight emerging markets, overweight commodities and equalweight financials would have obviously been crushed.
Every portfolio has vulnerabilities. When fully invested you are vulnerable to a big decline, when sitting on too much cash you are vulnerable to a big rally. Going slightly smaller picture a portfolio is vulnerable to any big bets (intended or otherwise) going against them or having too little exposure (intended or otherwise) to something that goes up.
This sort of understanding of how your portfolio is constructed, whether intended or not (an example of not might be a portfolio that just uses broad based index funds), should help smooth out any emotional ups and downs.
The picture is from Lahaina looking out toward the ocean at sunset last night.
Sunday, November 23, 2008
A couple of weeks ago I made a reference or two to a concept brought up by Dr. Brett called hindsight bias. An example of hindsight bias would be to look back over the last couple of years and say "well of course there was going to be a fill in your own description of the current mess."
A hindsight bias in the making might be what is being done to try to fix the various problems that exist. There is an article in this week's Barron's that goes down this path some; Has the Fed Mortgaged Its Own Future? The article is a look at the balance sheet of the Fed now versus before this started.
The first things I think of are inflation and higher interest rates. By extension then a weak dollar.
We are printing money which has consequences. Our status in the world could soften the blow that another country doing the same thing might face but soften the blow does not mean no blow whatsoever.
Lately the dollar has of course rallied and treasury yields have gone lower. This has been a reaction to the crisis and the mess that is every other part of the fixed income market besides treasuries. The willingness to buy dollars during a crisis and accept all time low yields supports to the idea of a softer blow.
This is far from a certainty as the Barron's article points to one warning sign that the debt issued to pay for all the bailouts and other acronyms may have a longer maturity. Toby Smith made a comment on Bulls and Bears about our kids and grand kids being the ones to bail us out not the US government. You've probably read things in the past about our debt being to big to ever pay off and now all the more so with what has been done and what is still to come.
Sort out your thoughts on these things and prepare for some portfolio changes over the next few years.
On a lighter note we are heading to Maui for a couple of days this morning. Anyone reading this blog for a couple of years may know of my fondness for a particular sporting event that occurs during Thanksgiving week. I hope to have a couple of interesting pictures in the next couple of days. Today's picture is from Molokai.
Saturday, November 22, 2008
If you were having a rough week emotionally then maybe the Geithner rally will allow you to have a better weekend. If you were freaked 24 hours ago and now you're feeling better I would say a couple things. One, stop freaking out. Markets go down sometimes. Two, now that you are feeling better maybe you should sort through a few things and lay out a plan of action in case either a huge rally or another big leg down.
Embedded in those comments is an assumption that if you were freaking out you did no real pre-planning and you had the wrong asset allocation. From the something has got to give department if your numbers require 80% in equities but your stomach can only tolerate 50% something will have to give somewhere.
On Friday Joellyn and I drove over to Kona which is about two hours so we were talking on the way and I told her how many comments had been coming into the blog this week and noting the stress from some folks and I told her that I think people make this stuff much tougher than it needs to be.
Long before this bear market started I would write posts about when the next bear starts or normal stock market cycles include and back then commenters acted like they realized well of course there will be bear markets and yes the market can be very volatile but when the rubber hit the road this time it seems like a lot of people forgot.
So to repeat from the past, this bear will end, there will be a recovery of some magnitude and then another bear. That next bear probably won't go down as much as this one and the last one but it might. This is a certainty (do not read anything into that comment about bull market magnitude or prediction of when) and I am not telling you anything you don't already know. In fact you knew this before this bear market started--the market goes down sometimes and sometimes when it goes down it goes down a lot.
You can count on one or two of these per decade. If you are 50 you can probably figure out how many more there will be in your lifetime. If you are 50 and figure on seven or eight more of these and you freaked out this time are you going to freak in the seven or eight more you know are coming? Hopefully not.
Friday, November 21, 2008
"Let's start with what's really important tonight," he told viewers. "It's just your money, not your life. Everybody who really loved you a week ago still loves you tonight. And now that that's all fully in perspective, let me say. .. Ouch! And: Eek! And: Medic!"
The stock market had another puke down yesterday and clearly fear has escalated if yesterday's comments are any guide. It may not be exhausted yet but there is a freak out happening.
Now that we have cut in half (down 48% on the year and down 51.9% from the peak) people are afraid and no one knows what to expect next. Lou's quote above is still relevant. I am an optimist by nature I have had opinions about how this would play out and while I've generally been wrong about magnitude the 200 DMA breach was a reliable indicator.
You are down whatever you are down and while that may seem to be too much for you it is what it is. The decline to this point is beyond you're control. I tried to write about things that can be controlled like a trigger point for defense (I started in on that in 2004) to miss a chunk of the bear but it is clear from the comments that many folks had no such trigger in place. Next time you will.
I'm sorry to be cold here but if you have a financial plan, that plan will either work or not based on a combination of luck, minimizing poor decisions and discipline. Not every plan can work because of all the variables in those determining factors (and I'm sure I left some out). If your plan has not worked then something has to give when the time comes. If you are a little younger and worried about whether your plan will work or not then something will have to give right now.
I say above I'm an optimist, I am quite certain the S&P 500 will make a new high in the future. The time table will not be acceptable for some folks but I am convinced it will happen. So between here, the bottom and there what can you do to recover a little quicker? Well if you have missed some of this bear market you have already helped yourself in this regard. If you buy into what I have been saying that some countries that are down just as much as the US are down for cyclical reasons and not structural reasons like the US then you probably know where you need to start researching.
If you have started to learn about new (to you) asset classes then you are giving yourself a better shot for a little faster recovery than just sticking with broad based, domestic exposures. You have a chance to shape your financial future by proactively seeking out this sort of stuff. That is why I write so often about things like Norwegian fisheries or hydro funds. Learn about all this stuff, select what makes sense to you and then keep learning. Someone will say there is not enough time in the week for this ok, something somewhere will have to give.
I realize from a couple of off the wall comments that people get the wrong idea about my point of view on things but I am very much a pull yourself up by your own bootstraps, play the biggest role in determining your own outcome and quit worrying about how other people are doing.
Thursday, November 20, 2008
My comment was it shows confidence on the part of management which is good but that it does nothing to tell us where the next 30-40% in the price would be.
Well, 72 hours later and we got our down 40%/
I read one quick snippet about JP Morgan and Bank America going to mid 90s levels. I find the selling in the financials to be fascinating but also scary (not to imply emotion but for the sake of word economy). BAC closed at $13.06! What would Krazy Eyez Killah from Curb say about that one? I sold BAC recently in the $28s, about ten minutes later they banned short selling and the stock went to about $37. So since then it has fallen by almost 2/3? Another name I sold a long time ago and still follow is Barclays Bank. I sold it after it had fallen a lot and it is down 80% since then.
One thing that has to happen is that the decline needs to scare people. One way to think of this is that after yesterday, enough people are either scared or not. There is no science here just fuzzy stuff but market participants will either get collectively scared enough after yesterday's puke down or not. If yes then we would be done if not then more to come. The concept here is seller exhaustion or put another way enough true fear to trigger a turn around. Just one way to look at it.
I found this in Barron's yesterday noting that the S&P 500 now yields more than ten year treasuries. This got a little attention very recently in the NY Times, I think from Peter Berstein. The Times piece spelled it out as possibility and now I guess we have it. Yet more paradigm shifting kraziness.
Lastly a word from Felix about the extent to which fund managers lag their respective benchmark indices. I have talked about this before. It is reasonable for a fund manager to believe the asset allocation decision has been made and the money they receive needs to go all in and so be down about the same as the market. It does not matter if a fund you own is down 45%, what matters is how much of that fund you own. That said, that they lag their respective benchmarks in the manner Felix says, well that it a bummer.
Wednesday, November 19, 2008
That is an SNL bit with Mike Myers from way back.
Should the US government bailout the big three automakers including guaranteeing the warranties?
Tuesday, November 18, 2008
This leads to some meaty theoretical stuff and I certainly don't have all the answers. By now you should have figured out whether you think 40-50% down will be about it or more like 80% is it (just picking two extremes you can think of it however you want).
I said weeks ago that if you really thought this was the great depression coming at us again you should sell. That probably sill stands up now. If you do not think down 80% is in the cards then selling now would simply be selling low, very low.
Anyone reading this site for a while knows I do not think this will be a depression, I think the bottom is about in in terms of price but that we will have several more months of running up and down in roughly the same range we have been in recently.
If that pans out as I think then it will be a long time before we start to feel good about stocks. Individual issues could continue to get pasted even if the market doesn't do anything very different for a while.
That brings up a useful distinction; "what should investors be doing now?" Any buying someone might be inclined to do now can try to do one of two things (talking about long term investors not traders) either buy stocks that you think will work now or buy stocks that you think reposition for whenever the turn up finally occurs.
Buying the stocks that should work now is likely not the way to go because really what is working now (this gets at the heart of top down)? Pretty much nothing is working now. Buying something now as a place to hide out is the wrong strategy. When the market turns just about everything still standing will work as was the case in 2003. In that light it makes more sense to to point any buying you are inclined to do toward the recovery even if that is a couple of years from now.
This is not a call to buy them with both hands, I am not doing that. I disclosed having done a little buying and having plenty of cash still. The names I've bought are places I expect to lead a recovery or otherwise snap back quickly.
This idea concedes that a recovery could still be a long way off but going overweight health, telecom and staples now seems late in the game. I've been overweight those areas for a while and generally it has been right, relatively, but now that we are down 45% from the peak I'd say it's too late to overweight those areas.
Monday, November 17, 2008
It is possible that this decade ends up being breakeven (or worse) for equities. While a ten year hitch with little to show is not unprecedented you figure most people have three to three and half decades to accumulate money. It seems like most people don't save much in their 20s but maybe that is wrong. So they have their 30s, 40s, 50s and a few years in their 60s.
Once we get out of this funk domestic equity returns could be a few percentage points below normal for a while and folks may not put enough in foreign or other assets to make up for weak domestic results.
How many people are going to be able to save more money? It would be difficult for someone saving 10% to say to themselves 'equities might be in trouble I need to up my savings to 20%' and then actually follow through on that.
How many people can look at the things they spend money on and realize 'hey I need to spend less money starting right now' and then actually do it?
It seems like the biggest risks to a successfully executed financial plan are poor investment results (either from the market or bad decisions made), not enough saved or spending too much. Another risk is inflation but I think that is less about poor execution than just how the chips fall. Another element is the idea of retiring early like at 55 or 60. So being cynical for a moment, people want to retire ten years early, spend as much as they want, never have a bear market again and not have to do anything in retirement but play golf and travel.
Well, something will have to give.
If a plan does not allow for snags and then there is a snag; big trouble. I've written about this topic quite a few times and I think the way to come at it is figuring how to take pressure off the portfolio. Working (either retiring later or post-retirement work) is one way to relieve portfolio pressure.
I've mentioned what a couple of retired people I know do for income before, one new one is a friend who does dog sitting, has more work than she wants and covers about 1/4 of her expenses. Finding something the can be part time to cover a meaningful chunk of the monthly budget can be the thing that gets a person under 4% thus becoming a real difference maker.
One outside the box idea that will appeal to some people is working in professional sports. I got an email from Major League Baseball (something I apparently subscribed to through redsox.com) about job opportunities throughout major league baseball like operating the electronic strike zone equipment and a couple of other things.
We have three minor league teams here in Prescott and they each provide about three or four months of seasonal work to all sorts of people who are on the ball enough to check it out.
The possibility of having to give something up is difficult for many people to accept. People who can come to grips with this have a better chance of their plan working out the way they hope.
Sunday, November 16, 2008
So here is a thought that might whip a few people up; how long it takes to get back to even is the wrong thing to think about.
The value of your portfolio today is what it is. It has either outperformed or lagged the market during this bear phase but whatever the dollar amount that is it. The day you start to draw income from it (or if you are taking income now) the value will be whatever it is. For someone drawing income now, the value a few years ago means nothing.
A 55 year old who wants to start taking an income in ten years will need to base that income on what he has then. If he has $800,000 ten years from now then that is his reality. If three years before he draws money it was worth $650,000 or $950,000, he needs to base his withdrawal on $800,000 not some high water mark from the past.
I think this circles back to my whatever you got, 4% rule about how much to take out every year. If you had $1 million one year, took out $40,000 and the portfolio lost 10% you now have $860,000 (simplistic math). If you take out the same $40,000 the next year and also had a 5% loss you now have $777,000 (again, simplistic math). Now $40,000 is more than a 5% drawdown and the path to trouble is much easier to see.
Sticking to 4% (or more practically 1% of the value of your portfolio on the last day of the quarter) is problematic because it means the income generated can fluctuate in such way as to create a lot of uncertainty in the family budget. Obviously whatever you got, 4% is not perfect but it beats running out of money.
I think it makes more sense to stick with a strategy of saving and maintaining the proper asset allocation along with going on defense every now and then when market circumstances dictate. Right here right now is a little trickier. There is a balance to be struck between defense and not letting a massive rally that comes from nowhere that catches everyone by surprise happen without you. The blog posts of the last couple of months have covered how I am trying to strike that balance which is not easy. I would add that regardless of the fundamentals or whatever the bottom is or when it comes, after a greater than 40% decline a massive rally that comes from nowhere and catches everyone by surprise would be far from a black swan.
Saturday, November 15, 2008
Friday, November 14, 2008
Regardless of whether this is the depression, the end of the US financial system or something worse the path down has been remarkably fast and all encompassing. Some sort of massive retracement, even if short lived, should not be a shock.
Regardless of whether yesterday was short covering or natural buyers coming in I believe it speaks to a willingness (hopefulness?) to take them higher very quickly. I would not take this as a prediction but more something to think about in terms of what you would or would not do in case it happens.
Second item; There have been a few sour comments left in the last few days ranging from disagreeing with my approach (cool) to questioning my integrity (not cool) to name calling (not cool). There was quite a bit of this in the summer of 2007 when I wrote a lot about a bear market coming. For the last few weeks I've been writing about preparing to go back in and the couple of small steps I've taken in that direction. Is this an indicator of some sort? That would be nice.
One particularly frustrated reader said I was a trader speculating on the future. A couple of days ago someone said what I do is overly complex. I'm certainly not going to change someones mind about those sorts of things. I believe in and write about active portfolio management. In active management decisions get made and in time some of those decisions are correct and some are incorrect. Be right more often and you probably end up with a good result.
In this regard I've chronicled how I got defensive and now am chronicling the slow path to getting back in after a huge decline in the market. In a way this could be speculation because getting defensive could have turned out to be wrong and doing a little buying down here could turn out to be wrong, we won't know for a while.
In terms of overly complex it might be more correct to say a lot of moving parts. I build portfolios sector by sector and I follow a lot of things to try to make decisions. This isn't right for everyone but an idea I have tried to convey numerous times is to take a little process from me, take a little from other places and create your own process.
Last item; A theory of mine (can't really claim originality) made its way onto a page at the Bogleheads site. I don't know much about Bogleheads but I think they are devoted to passive investing, I believe in active management, they have a very popular site where people write about passive investing "inspired by Jack Bogle." If passive investing is set forget and rebalance then I'm not sure what there is to write about. Not a knock, I really am not sure.
The theory of mine that came up was my opinion that EAFE is inferior to investing at the country level because of EAFE's heavy weighting to the UK and Japan and the blending away various attributes of the countries you might want to own. I doubt too many members of Bogleheads have ever read my stuff (why would they, they're passive I'm active) so there was a fair bit of context missing along with some misunderstanding of my point.
The first bit of context is that I think picking countries with different economic attributes adds value over the entire stock market cycle in terms of providing better returns during the bull phase and rolling over and recovering at different points than the US which potentially smooths out the ride better than EAFE which has about 0.90 correlation to the US and turned down within in a couple of weeks of the US in October 2007. Brazil and Norway on the other hand peaked 8-9 months after the US.
Someone posted as Rick Ferri saying that "It is basically impossible to predict where the US equity market is going, let alone any individual foreign market. So, I don't see how picking individual countries is a wise decision." I serve on an ETF advisory panel for IMN with a Rick Ferri, not sure if it is the same guy or not. Whoever this Rick Ferri is, he appears to be an indexer so would be inclined to disagree with someone who believes in active management.
His comment misses my point which I made above. Further it is not about picking what country is hot now or is the most own for the next six months. Australia has a different type of economy than the US. It stands to reason that a different type of economy offers better potential for diversification than a country that is very similar to the US like the UK. Do the legwork yourself. Compare various countries over time and decide for yourself. You may agree that there is more long term benefit going to the country level or you may not. You know what I think, you know what the indexers think, so decide for yourself.
One poster at Bogleheads takes issue with the fact that I am writing about something "new and different from what's been proposed before." So I guess he's giving me credit for originality. I do believe things evolve in the investing world and I believe it useful to try to stay out in front of that.
I am not a fan of indexing, despite the mountain of data they have to support the argument, because I do not believe in letting my account go down as much as the market does during the bear phase without trying to protect the portfolio. This website has been around long enough for anyone who cares to look back and draw their own conclusion about whether it has worked or not.
Thursday, November 13, 2008
All of those articles you've read telling you how 1974 ended up being a great time to buy stocks; late 1987, late 1990, fall 1997, summer 1998, late September 2001, late 2002 well what do you think was going on then? I was around for most of those and fear within the investing public was off the chart and in several instances the declines were smaller than the current bear.
In the future, late 2008/early 2009 will be looked at as having been one of those times. Late 2008/early 2009 will be looked at as one of those times even if the bottom is SPX 600.
For the entire life of this web site I've addressed this sort of thing. In early days I wrote about when I would take defensive action, then wrote about actually taking that action when the time came and in the last couple of months I've been talking about the slow process of redeploying the cash raised in my effort to be defensive.
In yesterday's ugly selloff I bought a small position in the Consumer Discretionary Sector SPDR (XLY). I've been very underweight the sector because discretionary always does poorly during slow downs. When the market turns, discretionary usually is one of the leaders but even after the purchase I am still underweight discretionary.
If/when we follow through with another step down (here I am thinking more than 1-2% for the broad market) I have an order for something else to buy ready to go.
This has been the plan all along, as written about, and I am sticking to it. I would still have enough cash even if I buy something today to meet any reasonable definition of defensive which will allow for wading in slowly as I have been doing.
At the point I hit the button on XLY the SPX was at 867 which is down 44% from the peak and 40% YTD. I believe that is buying low, it may not be buying at the bottom but if you believe no one can pick the bottom then all you can do is buy low. If down 44% isn't low, what is?
A real big risk floating out there that I don't think I've read elsewhere is that we get a huge rally that draws people in at, I dunno, SPX 1300 and then it whooshes right back down to 850. In that sort of scenario where will have been people that previously panicked out between SPX 1000 and 900 who get back in at 1300, or whatever, only to panic out again after another 30% loss. This sort of tail chasing is not uncommon and is the sort of thing that wipes people out.
Wednesday, November 12, 2008
The reader used the word deworsification to describe what has happened to the tenets of diversification and what it is supposed to do for a portfolio during adverse market conditions.
This hits a few points I have tried to make over the last few years. The broader you go, so something like MSCI EAFE, the more that you blend away any positive attributes that might exist. The EAFE index is heaviest in Japan and the UK. Japan has had a whole bunch of problems while the UK looks very similar to the US. The heavy countries in EAFE are heavy due to size. Big is not necessarily better. How long do want to be be in countries with a headline-making banking crisis, deflationary issues and any other problems you want to throw in?
I'm not sure how many times I've talked about foreign investing at the country level. There are countries whose economies are much healthier than that of the US. There are countries whose economies run on different inputs than that of the US. There are countries whose economies are at different ends of the economic spectrum than that of the US (meaning surplus countries).
Of course all of those markets are down a lot. Other than cash, a couple of absolute return vehicles and inverse funds there hasn't been any place to hide in this bear market. However most of these kinds of markets hit their peaks at different points than the US. Brazil kept going up for nine months after the SPX peaked. Exposure to these sorts of countries combined with a clearly defined defensive strategy is a much better idea than buying the EFA ETF and thinking you are diversified. By the way the EAFE index peaked a couple of weeks after the SPX did.
The bigger idea is simple and you either buy into it or you don't. A country that has surpluses or is an exporter or a commodity based economy or all of the above has a good chance of being at a different point in the economic cycle and by extension a different point in the stock market cycle. Making them potentially better candidates for diversification.
None of this has to be difficult. If you buy into the idea that countries with different economic attributes off a chance for better diversification over the long term then the next step is learning about different countries and then making small investments to spread out the risk.
This won't be right for everyone of course but I have been making this same point about EAFE for ages, it does not provide as good a diversification as going to the country level.
Tuesday, November 11, 2008
The utility here is that accessing individual bonds can be tough for do-it-yourselfers in terms of friendly pricing or in terms of proper analysis for certain types of corporate or muni bonds.
The bigger picture of course is an old theme which is investment products evolving to allow ever more thoroughly diversified portfolios.
One of the newer funds is the iShares
A broader fund that has been around for a while is the iShares (still) Lehman Government/Credit Bond Fund (GBF) which has been around for a while, is relatively short, has been yielding in the fours of late and is comprised of 38% treasuries, 19% agencies, 16% industrials, 13% financials and a few smaller ones from there.
One you may find along the way is the iShares Lehman MBS Fund (MBB). Similar to AGZ a lot or mortages (obviously) but the difference is that AGZ is backed by the full faith and credit of the US government where as MBB is backed by the assets.
One last one to mention is the iShares Lehman Credit Bond Fund (CFT) which focuses on corporates with a 39% weight in industrials and a 33% weight in financials. If you look at this one you'll see it has been on a wild ride. I'm not sure what weight financials used to have but there are quite a few issues in the fund trading in the 80's or lower.
I would like to see a convertible bond ETF and a developed foreign bond ETF (they have been filed for). A convertible bond ETF would have been hit hard in the meltdown but I think it would have done better than the CEFs.
I am still convinced that equities are by far the best shot at having a financial plan work but I also can see the psychological need to allocate more to lower octane investments like fixed income is supposed to be.
Last night we got around to watching Whale Wars in the Tivo. It is on Animal Planet on Friday nights. Holy crap, it is wild. Trust me, tape the show and watch it.
Monday, November 10, 2008
One problem Kaffitar is having is getting suppliers to conduct business with it. At some point in the process someone has to buy Icelandic kronas to complete the transaction and no one is willing to do that.
Another problem is that Kaffitar borrowed money in euros for expansion. The monthly payment used to be ISK 120 million but now it is ISK 200 million after the collapse of the currency. What would a 66% increase in your mortgage do to you? This is happening to many businesses in Iceland.
When Joellyn and I were in Reykjavik in July 2006 there was a Kaffitar a couple of doors down from where we stayed. They make a hell of a soy mocha and had great bagels and pastry.
Reading that reminded me of this article from Bloomberg in October that featured an interview with Arni Einarsson who is the manager of the Room With A View Hotel in Reykjavik which is where we stayed when we went. It really is a small country.
The house pictured above is for sale about and is an hour east of Reykjavik in Reykholt. The seller is asking €135,000 negotiable which works out to $171,000. I'm thinking it might be available for a whole lot less. Even if this one isn't available for less many others are.
The second picture is a view from the deck of the neighbors and off to the left is where I think the town is. According to the listing the town, which has 100-200 people, has a supermarket, pub and restaurant.
I'm not sure how far it is if you need a dentist or need to get your transmission worked on--maybe over to Selfoss which is 30k away or if need be Reykjavik is an hour away.
One interesting thing, but not unusual for Iceland, is that the home heating is free. One word; geothermal.
I'm not suggesting anyone buy a house in Iceland. The point is that like many assets all things Iceland are now much, much cheaper than they were, there seems to be no near term solution at hand but it is also true there is less risk after the collapse. The Icelandic countryside will not disappear if Iceland defaults on its debt, or needs more bailout money or the krona drops a lot more. I also believe that at some point free heat from geothermal pays off for the country in attracting manufacturing to set up shop.
This general outline applies to many other types of investments these days. Down a lot, no clarity on how low it goes, some sort of redeeming value that cannot go to zero and something to look forward to in the future.
This is not a call to buy them with both hands but to step back and remember there is less risk in the stock market after a 40% drop. Any given stock might be a different story. If you were lucky enough to raise cash early on, be smart enough now to recognize that fear might exceed reality. If you think that is a crazy thought then I would submit that you have the wrong asset allocation which has caused you to have a big emotional reaction.
Sunday, November 09, 2008
It started out as hail but is now snow, very cool. Hussman is out early if you are interested.
If you are thinking about that, aside from my thinking that long term that is a catastrophic mistake, I would say to wait until the market makes back a meaningful chunk of what it dropped and while you're waiting try to figure out how to save more money.
Barron's really outdid itself this week with a couple of very interesting articles.
First up was an interview with Donald Coxe from BMO Financial Group. He outlined several longer term themes. He likes all things food as part of the ascendancy theme (this is a term I have been using for a while but he did not use that word). Each successive generation in emerging markets is larger than the previous, they are demanding more high-protein food (he specifically mentioned milk, beef and pork) and more and more they can afford better nutrition. He said he likes fertilizer stocks, the genetically modified seed stocks and the farm-equipment stocks.
He also likes energy, noting that delivery for 2015 is trading near $90. Although not stated it seemed like he was tying in the notion of US using 25 barrels per capita, China using two and India using just under one barrel.
He likes base and industrial metals for a recovery. He said that copper always doubles as the economy recovers. I don't know about it doubling but copper historically turns up big before just about everything else in a recovery.
It seems to me the best investors can spell out their ideas very plainly which is something I admire and try to emulate. The more complicated a strategist or the like makes something sound the more suspicious I become.
The other article I really got a kick out of was the cover story about the rough shape college endowments might be in. The timing of the article is kind of funny because I wrote up something very similar about the Alaska Permanent Fund for TheStreet.com which ran on Friday.
The Barron's piece touched on declines is assets traded on exchanges, taking appropriate markdowns on their private equity and other illiquid investments and that some of the smaller endowments may have created a lot of problems for themselves by trying to emulate Harvard and Yale. There was a comment about timberland being bid up in a frenzy by a bunch of endowments stemming from Harvard's long disclosed investment. The take away from the article is that many of the endowments are down 25%.
Endowment funds and sovereign wealth funds fascinate me. I write about them a lot on the blog and for theStreet.com. I think I say the same thing about them every time which is we can learn from them but emulating them is a very bad idea--apparently even for some of the other endowments. My point has been that we cannot be privy to the timing or have access to the managers.
All of the endowments profiled along with average educational endowment compiled by Bloomberg have in the neighborhood of 20% in hedge funds, a wide range in private equity allocations with an average of 7% and an average of 10% (much higher for Harvard and Yale) in real assets which can include illiquid assets. Just using the average the endowments have 27-37% in illiquid assets (again much higher for Harvard and Yale). The logic for this is spelled out with a quote from David Swensen who notes that endowments have suitably long time horizons to go heavy in this stuff.
One suggestion from the article that is a point I have made before is that maybe the endowments should focus less on the alternative assets and more on the basics. The low correlation effect stopped working a while ago (in most instances) and now many of the endowments have a portfolio full of diversfiers hedged with some public equity exposure.
Where I think we can learn from these funds is by learning about what they do, then picking one or two things, maybe three to work into your portfolio after proper study. Absolute return strikes a cord in me so I have a couple of percent or so in a fund. Jack Meyer convinced me years ago of the merit of a little timber exposure so I've had a bit of Plum Creek Timber (PCL) for quite a while. The other one I have stuck with is a small weight to commodities.
Some of the other things like private equity might be right for you or not but I think you should learn about all of them and as implied in the paragraph above use only moderate weightings.
Saturday, November 08, 2008
Friday, November 07, 2008
I (many folks actually) have been saying there will be more ups and downs as the current bear market processes through to the next bull market. A persnickety point; if the 839 SPX low from October 10 ends up holding then we are already in a bull market (of course this is unknowable until after the fact).
Recently I talked about adding the double short back in if SPX went high enough or buying some stock if we go low enough with the range of 900-1000 being a sort of no man's land. So for now, no man's land. Maybe action based on the employment rate or something else.
The MPC cutting rates by 150 basis points should be, in case you needed it, a reminder that we still need a lot of time for things to sort out. I continue to believe that the low is about in (give or take 20-30 SPX points) in terms of price but not time--I think there will be at least a couple of more runs down followed by some big panics up.
I've been writing about feel good rallies leading to more declines for I don't know how long in the hope that readers would not be shocked by this type of action. There is a tendency to forget but ups and downs like this are pretty standard fare in terms of direction even if the magnitude of the moves during the current cycle are not standard.
Much of short term market moves are determined by emotion. I am convinced that keeping your head while those about you lose theirs (or whatever that quote is) is relevant here. A reader asked why after such a big two day drop I had not commented on the volatility, was I used to it he wondered. I don't know if I'm used to it or not. Are you used it? Hopefully you have trained yourself not sweat it.
Thursday, November 06, 2008
Sometimes that smart person realizes how far in under his head (as opposed to in over) but still doesn't know how to dumb it down enough.
I had this thought as I watched Nassim Taleb get interviewed on the network a few minutes ago.
I'm not casting a stone because the same thing would happen to me were I to ever meet him.
The context was the Obama win and what it means for the US and global markets.
The interviewer was very well prepared. He had snippets of information and news accounts from all over and so I think he had a good sense for the world's sentiment toward the US.
One thing going in is that based on what I read, see and from people I talk to (including the interviewer), the global slant on the US', and now the world's, financial mess is squarely George Bush's fault. I think we get closer to the truth by looking at things like the Community Reinvestment Act (CRA) and 1% interest rates as providing fuel which then dominoed (not a real word apparently) over several years to the final result. It seems to me that Bush and his team were guilty of not recognizing what was happening and not starting to take any action until it was too late and of course it may turn out that the path they have set on will turn out to be the wrong path. I am not letting them off the hook in terms of incompetence but I don't think 100% blame is right either but it seems many folks abroad do.
With that context it was clear during the course of the interview that people in Europe are thrilled with the Obama win, expect great things from the Obama administration and cannot wait for him to get into office and get started.
They have very little regard for Bush. One of the questions was about Bush being perceived as a joke here and leaving office in disgrace. I don't think people in the US view it that way, I talked about how horrid the approval rating is and clearly his legacy is probably going to be one of the worst.
Before going on the air I was asked if I was excited about the Obama win and it came up again during the interview, the interviewer said I did not seem that excited and he wondered why. I said that the amount of changed hoped for will likely exceed the amount of change that actually occurs.
I do think Obama has a chance to get more done than McCain (I am not sure it will be the right things). I said that I hoped he listens to to advisers and comes to the center a bit relative to what he was saying a few months ago on the campaign (he may have started doing this already). I expressed concern about not moving to the center as transitioning from however far we are to the right any more toward the left could be bumpy.
Also McCain was rediculed for picking Palin, "how could she ever run the country?" Based on the extent to which the economy has fallen off a cliff McCain never had a shot. In the current sort of circumstance the incumbent party is in big, big trouble. In a way, he had to pull a stunt and it probably did what was hoped for for the first few days.
As many others have said we need to quickly get a sense of what Obama's economic team will look like and get a sense of what his reality is with regard to what he hoped to do versus what he can do.
Wednesday, November 05, 2008
In the few days since I bought the stock the story has not changed. As the story has not changed it is still, in my opinion, the right stock. Relative to a couple of days the timing was very bad. So to the title of this post, right stock wrong time. Obviously time may prove me wrong about right stock but after a week I am neither right nor wrong hence my belief it is the right stock.
If you pick stocks this sort of thing will happen occasionally (hopefully not more often than occasionally). Some folks believe in setting stop orders 8% below anything they buy. We can't arbitrarily say that is wrong but using this trade as an example I would have been stopped out the next day (the timing really was unlucky) but in very little time the position is now up, slightly.
I think the point here has to be not panicking out of a stock if it goes down with no meaningful news. The stock, as best as I can tell, dropped on an opinion that clearing derivatives would be a risky business. If you buy a stock for a long term catalyst it cannot be the wrong stock within a week unless they pack it in on that catalyst right away.
Another aspect of this is the extent to which a stock is a proxy. Let's say you buy a stock or fund that is meant to zig when the stock market zags. This means that if stocks are doing well it is likely that the zigger will be doing poorly, maybe very poorly. In that scenario of doing badly it is doing what it is supposed to (going the other way from the stock market) so I don't think that would necessarily be a sell.
I bring that point up because in the past people have left comment asking about selling something meant to be a zigger that was down when the market was up. It would be ideal for a diversifier, in this sense, to be going the other way from stocks.
Obviously the context of this post is managing a diversified portfolio. Not everyone has or wants a diversified portfolio.
Tuesday, November 04, 2008
She found this laptop at Walmart, you can read about it here. It is only $348, has wireless access and comes with XP.
Joellyn only needs to do three things. Email forwarding, data entry into excel and, ahem, browsing craigslist.
If you have any input it would be much appreciated. We would like to go cheap but would rather spend $450 than throw away $350.
Given the credit crisis and recent velocity of deterioration of the capital markets I think it is clear that McCain has had no chance to win (BTW I generally prefer McCain) so in a way he had to go rogue (Rogue was one of my college nicknames) with the VP choice.
Whoever wins has a good chance of being viewed as a great president due to the likelihood that the crisis will end under his watch. Policies implemented will either facilitate the recovery or hinder it (this is probably unknowable) but it is very likely to end all the same.
Any other thoughts come to mind?
The article also talks about lessons not learned from the tech bubble, how poorly many of the largest funds have done and whole section on 401k disappointments.
Here's one money quote;
The situation is worse, he says, for people who were already withdrawing 5% a year from a retirement account that has now sustained 30% to 40% losses because of overweighted equity allocations. These investors are "highly likely" to run out of assets before the market recovers, according to Mr. Bernstein. "For them, I'm afraid the game is lost," he says. Mr. Bernstein is a financial adviser from Oregon.I'm not saying that there are not people who aren't permanently impacted by the double bear markets of this decade but I have trouble believing that so many people really are permanently impacted. What I think is more likely is that many people think they are permanently impacted.
A friend made a comment in passing about working a little longer because of all this. From some things I read, some comments on the blog and other anecdotal items I think more people are thinking in these terms. I am all for things like working longer (not just for financial reasons), saving more and generally being more financially conservative but this is a bear market. Bear markets end eventually, before most people realize, and then they go up. I touched on this in more detail a few days ago but the odds are that ten years from now the market will be a lot higher. It usually is after ten years and all the more likely after ten years like we've just had.
Whenever the next cycle starts it is a good bet that there will be one or two big up years. This will bail out a lot of people even if just emotionally.
When I started writing so much about a bear market coming back in 2007 I'm not sure if anyone thought of me as a perma-bear or not. Now that we have dropped forty whatever percent and have become more constructive I'm not sure if anyone would think perma-bull.
Of course neither perma bear nor bull makes sense. The things addressed on this site are obviously just the basic idea that stocks don't go up forever nor do they go down forever. They go up most of the time but sometimes they go down like now. I believe very few people will be truly ruined by this bear market.
One unrelated item. Yesterday a college buddy friended me on Facebook and I was surprised by a couple of things in his profile (nothing bad) and Joellyn asked me how surprised did I think people from college or high school would be when looking at my profile. It was a brilliant question and we had a deep and introspective conversation about it. So how different have things turned out in your life compared to what you thought when you were 20?
Monday, November 03, 2008
One of the tasks that goes with my job description is looking over clients' 401k plans and offering suggestions based on the choices available.
I had the occasion to do this yesterday and was dismayed at the lack of choices in terms of quantity and that almost all of the choices were from the firm administering the plan.
This is something that comes up a lot. Most of the plans I have ever looked at are extremely limited. The one yesterday had one foreign fund and one small cap fund. There were however eleven target date funds which in this case means fund of funds.
I find this to be despicable. I don't have statistics on this (this post is a rant after all) but many Americans work for big-ish companies and so their primary savings vehicle is a 401k. A crappy selection is usually the employer's fault. The plan in particular was with one of the two biggies and I have seen better plans for other employers at this same financial firm--I've also seen worse BTW.
Both Schwab and Fidelity have programs that allow access to the market via an account that quacks like a brokerage account so you can by anything you could through your brokerage account (stocks, ETFs and however many thousand mutual funds). Of course some people would blow themselves up but that can happen in any 401k plan.
I don't know if activism (IE complaining to the benefits department) can work but it is worth a try. Anyone having a 401k plan they believe to be unfriendly might want to only contribute enough to get the full benefit of any employer match and put the rest of their annual savings into an IRA of some sort (I'm not a planner, you need to figure what, if any, IRA could work for your situation). Obviously this would require a lot of discipline and if you can get a match on the entire $15,500 limit (I did not look up the catch up numbers) you need to stick to the 401k.
Now if you get a $0.25 on the dollar match for all $15,500 I think an argument for zero stock market exposure and zero bond market exposure could be made. You're already getting 25%. Not saying that's right but it is something to think about.
I'm self employed so I put money into a SEP (and also an HSA) which depending on how much you make can allow for much larger contributions than a 401k.
The bigger macro is of course saving money. As a matter of philosophy I think the amount you save should be a number that is a little difficult to get to. I also think there needs to be an element of resourcefulness and discipline. Resourcefulness to seek out other ways to save (HSAs, nondeductible IRAs and the like) and discipline to stick to it.
Sunday, November 02, 2008
First up is a book review in Barron's of Peter Schiff's latest book called The Little Book of Bull Moves in Bear Markets.
According to Barron's the book has plenty financial fire and brimstone and some very specific investment advice on Canada, Norway and Australia--turns out he likes them. Me too.
A reader left a link to a new fund from PIMCO called the PIMCO Global Multi Asset Fund (PGAIX). It is a fund of funds but can own other things too. The literature says the fund integrates optimized asset allocation, relative value strategies and hedging strategies. Well that all sounds vague but vague does not have to be bad thing. Anyone interested in hiring someone (by buying a fund) for active management might very well want that manager to have a lot of flexibility. The fund just started this week so any purchase is a bet that the crew at PIMCO, lead by Mohamed El-Erian, knows what it's doing.
Speaking of El-Erian, the Harvard Management Company's 2008 report is out. From June 2007 to June 2008 the fund was up 8.6% compared to a 14% decline for the S&P 500. Obviously the S&P 500 is not a proper benchmark but it does give a sense of what was going on in the world while HMC was getting its 8.6%.
Of the $43 Billion (think about that number for a moment);
- $5 billion was in domestic equity
- $5 billion in foreign equity
- $4 billion in emerging equity
- $5 billion in private equity
- $1.8 billion in domestic bonds
- $1.3 billion in foreign bonds
- $3 billion in inflation indexed bonds
- $800 million in high yield
- $4 billion in commodities
- $2.6 billion in timberland/agricultural land
- $3.4 billion in real estate
- $8 billion in absolute return.
That does not mean owning those things is a bad idea or that being influenced by HMC is bad either. I've owned Plum Creek Timber (PCL) for a while based on an interview of former HMC CEO Jack Meyer many years ago. Putting close to 20% into absolute return, as HMC does, is difficult. I'm not sure there are enough reliable products to do that as opposed to the managers that HMC can access.
I think this circles back to something I have been saying for a while; take bits of process from many places and create your own process.
Wanna bum out for the day? Take ten minutes to watch this video interview of Nassim Nicholas Taleb on PBS (I found this from Barry). Taleb thinks this is the worst financial crisis since the American Revolution. He feels that the complexity that exists is too great making things too fragile. He thinks that the ripple effect of forced hedge fund selling will be disastrous. He uses the example of a super market not being able to function financially as the ultimate result of this.
The picture is the last few steps to the top of Vernal Falls in Yosemite.