The Big Picture For The Week of December 20, 2009

A few odds and ends this morning.

From the Generalisimo Franco is still dead file Morningstar still does not get it with ETFs. You can read Matt Hougan's takedown of an article about buying an energy related ETF on takeover speculation based on the recent XTO news. Good gravy, the only thing I would add to Matt's thoughts is that it wreaks of Ten Hottest Stocks Now!

Felix Salmon has a funny post about never investing in Art Funds. There are a couple of these floating out there along with a wine fund or two. The angle on these is always the same; the returns appear to be great and the correlations to equity indexes low. Learning about these things is always interesting (well, to me anyway), I've mentioned the Australian Meat Fund a few times before (real concept, not the correct name, Macquarie has the fund I'm talking about but it is not listed).

Owning one or two "diversifiers" in moderate weightings is fine but I prefer exchanged traded vehicles and I prefer them to be simple. Too much exposure and you end up with a portfolio of diversifiers hedged with a little bit of equity exposure.

Pimco has raised the cash level in its total return fund to 7% from a negative 7% and reduced its exposure to government related securities recently. The obvious conclusion would be concern over a back up in interest rates. I'm not positive if that is the reason but I thought it'd be worthwhile to pass this along.

Barclays has labeled ten countries as "advanced emerging markets." The ten are Brazil, Chile, Singapore, Korea, Taiwan, Israel, China, South Africa, Poland and the Czech Republic. We can worry about the idea that several of them may not be emerging anymore later. The logic here is that these countries have "a future of solid growth without the volatility and tail risk characteristic of the original emerging-market countries."

This reminds me of the N-11 concept that originated from Goldman Sachs JB Were. Those countries are Mexico, Korea, Bangladesh, Egypt, Indonesia, Iran, Nigeria, Pakistan, the Philippines, Turkey and Vietnam. As my thoughts on the importance of country selection evolves I think the delineation between developed and emerging will become less important.

Mebane Faber has a post up about asking yourself tough questions regarding tolerances for risk (I would replace the word risk with volatility). Basically the market puked down then had a massive rally in last nine months of 2009 which is a gift relative to where the market was in March. Mebane asks you to ask yourself what have you learned and what are you going to do with what you have learned?

And one closing thought. Part of the problem in 2008 was that correlations all went up causing people to doubt the merits of diversification. Um, how different has 2009 been in this regard?