The Big Picture For The Week Of March 1, 2009

No video this week we are out of town.

Sometimes I get emails from Motley Fool that promote articles on their site. I actually read one of the articles; it was called Why You Should Sell. The title hooked me in.

In the first part of the article they cite a study that concluded that people hold onto stocks that they no longer think are good buys. They call this Realization utility.

The article then goes on to say you should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale.

There is something to this but from where I sit the article is woefully incomplete and strikes me as reactive not proactive. If you believe in top down portfolio construction then you believe the stock chosen is the least important part of the process (not unimportant but less important than defense or not followed by selection of sector, country, size, style, volatility, yield). In top down most stocks included in the portfolio offer several attributes, for example a large telecom stock from an emerging market that adds volatility. If a stock like that fits in then you would seek out what you think is the best way to capture this.

Maybe you did this exercise three years ago and came up with Telefonica de Argentina (TAR). Then maybe after a couple of years you decided that Argentina was not a good place to stay but you felt from the top down that you wanted to capture some emerging market exposure through the telecom sector so you then needed to find a better proxy for emerging market telecom and maybe that lead you to Magyar Telekom (MTA) the ma bell of Hungary. If TAR was the best proxy but then MTA became a better proxy then it would make sense to swap regardless of when (remember above, the assumption is you still want emerging market telecom).

I would caution against selling a stock simply because it is down, that is not enough information. In the last two years JP Morgan (JPM) is down about 52% while the Financial Sector SPDR (XLF) is down about 75%. JPM appears to be one of the healthier banks and while in hindsight selling at $53 on May 9, 2007 would have been better than holding it a case could be made for JPM being the healthiest proxy for US financials. Selling JPM now to go after some better mousetrap is probably a bad idea. Obviously if you had reason to think that from here JPM would stop being "the healthiest proxy" then you might want to sell.

This is subtle stuff. In sticking with financials, the best thing would have been the top down decision to reduce the exposure when the yield curve started doing funky things. From the top down, reducing financial exposure two years ago become far more important than whether JPM is or is not a healthy proxy.

If you use ETFs and go narrower than SPY/EFA/IWM chances are whatever ETF you think is the best way to capture utilities still has the same attributes you thought it did when you bought. Swapping from one utilities ETF to another (XLU to PUI for example) is unlikely to change the portfolio.

This topic can get more granular with increasing or decreasing position size as I believe in doing and of course when you buy a stock you may be wrong about it being the best proxy. Everyone gets this wrong at some frequency either because the conclusion was wrong or maybe at some point something at the company changes. Bank of America (BAC) was a great proxy for financials until, IMO, the Merrill Lynch merger. The company took action that changed the story.
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"The Science Seemed So Solid"

On the plane yesterday we watched Madagascar 2 and there was a point in the movie where King Julian lamented that "the science seemed so solid" after a sacrifice into the volcano did not work as expected.

On a related note Professor Jeremy Siegel wrote an opinion piece in the Wall Street Journal making a case for calculating earnings for the S&P 500 by market cap as opposed to allowing the largest company losing $1 to have the same impact on the earnings as a $1 loss when it comes from the smallest company in the index.

By his reckoning in 2008 the S&P 500 would have earned $71.10 which he says is 80% above the earnings number calculated by the S&P's method. Felix Salmon and Paul Kedrosky each jumped on this as not making sense. Felix called it astonishing and Paul said the professor was a "little nutty."

I don't think there is anything wrong with the exploration--throw it on the wall and it might stick but I don't see where this one does stick. That Jones Apparel should have less impact on SPX earnings than Exxon Mobil could make some sense but it seems that the index' earnings would not feel the full effect of AIG going from $180 billion down to $1.4 billion or Fannie Mae dropping from $65 billion down to half a bil, not even close.

If Siegal is somehow right then I suspect if they went back and refigured everthang what needed refigurin' then the current 9.4 P/E for the index that he calculated would not be anywhere near as cheap as he thinks.

I don't talk a whole lot about the P/E ratio for the market because it offers no useful predictive value. The market can be cheap or expensive based on P/E for a very long time and get cheaper or more expensive.
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The Latest From Niall Ferguson

reportonbusiness.com: 'There will be blood'
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Not So Fast My Friend

The other day Jeff Mackey was on Power Lunch making some comments about how scared everyone is.

I do not doubt the anguish caused in 401ks and the like but I'm not sure how scared "everyone" really is.

We flew to Hawaii yesterday, and the plane was packed. In order for us to get here we have to drive to Phoenix the night before (we stay at my in-laws house) and we usually get dinner. The restaurant we went to was packed. The parking lot at the snooty mall in between where we ate and Trader Joe's (two birds, eh?) was packed.

My wife has mentioned several times about how packed various parking lots are and then makes the same joke, "in case you haven't heard there's recession."

So are things not as bad as we who touch this stuff every day believe it to be? Are the masses in complete denial continuing to charge it up (good times)? Is there something else?

I suspect both are correct. I believe "they" are worried about 9 million more foreclosures. If all 9 million do get that far that might be something near 23 million people that would be displaced. That is a big number but less than 10% of the population. If unemployment gets to 10% then I think the number of people displaced by that would be less than 23 million (size of labor force not population, and I realize under-employment might be a bigger problem). If these numbers stand up that means most people will have homes, jobs and consumer demands that they will continue to meet.

Up to this point how many people do you know that have been directly effected (job loss or foreclosure)? I know a few, not many. Let's face it, if you keep your job and can afford your house you may not feel this at all. Maybe that will be wrong, maybe Michael Panzner will be right after all (he is much closer to right than when I first heard about him several years ago--got to give him props on that).

It is difficult for me to hop on the end times bandwagon but it is easy to get on the scare the hell out of them bandwagon, I think I was early on that one. Let me reiterate, to tie in with previous posts, I don't rule anything out but I do not think this is the end. It is possible that we the well (?) read might be more worried than what the situation calls for. Demand for equities is unhealthy so I remain defensive.
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Right!

Yesterday's post was about the likelihood that my near term thesis for the market would be wrong but after yesterday's rally now that thesis is right! Almost to the point!

That is of course a humor attempt to try to capture the big swings in sentiment, the extent to which market participants live 20-30 SPX points at a time. If that 20-30 points is down then the world is coming to an end (intentional hyperbole) and if it is up then the bottom is in and we should buy the financials with both hands(intentional hyperbole).

I feel as though the fraying of nerves has manifest itself in the comments in the last couple of days which also belies emotion. Emotion after 15 months of market declines is reasonable but it is unproductive. Much like the joke about more money not making things worse, more emotion doesn't make things better.

Short post today, hopping on a plane in a few minutes.
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Wrong!

For months I have been saying that the stock market was in a stumble along the bottom, we would not meaningfully breach the November low and somewhere in there as part of this backdrop would see a massive bear market rally with a run back down to 800 or so afterward.

I still believe in this thesis but now that we are essentially at the low the chance of being wrong is now front and center. In the paragraph above I say not meaningfully breach, candidly I'm not exactly sure what that means but for example a 3-4% breach would not be meaningful to me nor would a one week decline that scared the hell out of everybody followed by a run right back up to 800 the following week.

There certainly seems to be no reason for the market to go up right now but of course that very fact has often been the exact time when the market does turn up, either for a bear market rally or the real thing. Another thing to realize is that when the market does turn up no one will expect it and no one will think it is justified which is exactly what is going on with the China market over the last couple of months and why I went back in in November.

There is nothing wrong with having opinions about short term goings on in the market. Some folks do in fact have a knack and I think anyone who pays any kind of attention to the market could be right about a short term move every so often at a minimum. This sentiment has nothing to do with trading or otherwise making yourself vulnerable to that sort of gut feeling.

The scenario I have been working with will either be right or wrong. You may have some sort of expectation about the stock market for the next year and that will either be right or wrong. A point I have tried to make over and over is to not be too vulnerable to whatever you think is going on in case you turn out to be wrong. I think we have a big bear market rally coming, so I added a couple of things along the way (a couple of months ago). I did not deploy all the cash raised, had I done that I'd be down a whole lot more.

I get a lot of emails in my TSCM account from readers there who just don't get or don't believe in avoiding big bets. The concept is not that difficult and the way I view the world this is when small bets pays off the most and when you need that benefit the most.
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What Do You Think?

Last week a commenter said something about Obama still campaigning being unpresidential. I did not give it much thought at the time. This is now the second time I'm seeing him speak today.

His supporters would say he is being more transparent and I'm not sure I could refute that but the notion that it is unpresidential resonates more with me this week. I don't know the answer but I do know transparency or not we still have very few details and the markets have been punished for it. I realize the decline is a counter factual thing but I gotta agree with the people saying he is off to a bad start and it probably won't be long before people lose patience.

What do you think?
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Role Play

The Amgen Tour of California concluded yesterday with Levi Leipheimer closing out the event with his third straight title. The picture shows Levi getting help along the way from Lance Armstrong and Chechu Rubiera. A cyclist cannot win a stage race without a lot of help from teammates. Teams are typically built in such a way as to have cyclists with of different strengths to help the team leader win the event.

Over the weekend I had an email exchange with a client and he said something in passing about two healthcare stocks we own having done pretty well. The two he mentioned, one is up about 12% in the last year and the other is down about 6% in the last year compared to iShares Healthcare (IYH) being down 21% and the S&P 500 being down forty something percent. While the two have down well I would venture to say that in any reasonably constructed portfolio of stocks holding 40 or 50 names there would be at least couple of stocks that have done well. After such a hideous year for the market I would attribute owning a couple of "winners" to be far more about diversification than stock picking.

If you add in a little gold, absolute return, inverse funds, cash (things I have been writing about) and treasuries (which I have not written much about) you probably created some zig to the stock market zag. Even as correlations in most asset classes increased during the decline gold lived up to role of going up in the face of a meltdown.

The magnitude of the declines on this go around have skewed a lot of things but I would submit that IYH going down in the neighborhood of half the amount of the market is a pretty reasonable result. Staples as measured by the Staples Sector SPDR (XLP) has also been down 21-ish percent in the last 12 months which again I would say is reasonable. Energy and Industrials were each down close to what the market was down which is not a surprise. Financials obviously were the worst performers and although many people made bad calls in buying too early I can't imagine that too many investors were surprised that financials have been the worst performers.

With proper expectations I would say most sectors did what they were supposed to in the bear. Where the surprise came was the magnitude of it all. Down 50% from the peak for the market, down 70-80% for the financial sector, 75% in oil, 70% for China and whatever else you care to throw in and it is easy to lose focus on the concepts that have held to form. Relative performance has generally worked but the magnitude of it all has been far worse.

Top down portfolio construction's first priority is defense or not. The second priority (as I see it) are sector and country decisions. The proper expectations for sector and country decisions should, IMO, focus on relative performance for sectors and the right countries turning up a little sooner when a new bull starts.

The idea that most sectors filled their respective roles and that a couple of countries might be starting to do the same will fall deaf for some folks. Many believe that it is all collapsing and headed much lower. I do not believe that is the case but as mentioned over the weekend I continue to be very defensively positioned.
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Sunday Morning Coffee

The questions have really piled in the last couple of days so I'll try to address some of them in this post and then share a little bit of wisdom/philosophy imparted to me by someone I have tremendous respect for.

First up is a theme in the comments from Friday's post about the people in government not be intellectually equipped to know how to fixit (hello Oscar Rogers). The financial services industry owns some of the blame (you can decide for yourself how much), certainly they are more equipped than the politicians but they don't know either. If they did know it would have never unraveled and they would still be shaking that same moneytree today.

To the extent that getting the housing market (mortgages, prices, all of it) to start getting healthy is important; we know time can fix it, just not how much time. The various plans will either shorten the time, lengthen it or not matter at all and we will be left to contemplate whether the money spent was worth it. Ditto with employment.

One reader asked about the PIMCO Stock Plus Short Strategy Fund (PSSDX). It is an inverse fund that is mostly owns debt to collateralize being short SPX futures. The biggest drawback for me would be a lack of access during the day. This has mattered before (for things I have done with SDS), may matter again so I would rather not be hampered in that manner but that's just me.

From yesterday's post;

One reader said when a client trusts you or any one else with their wealth,(-)20% or simalar returns should never happen. So a couple of things with this one. Usually advisers set expectations. Hire a guy who is a DFA person or otherwise an indexer and he will tell you that the market cannot be timed so you will own the market (assumes proper asset allocation) which means occasionally you will go down a lot.

I tell clients that when the S&P 500 goes below its 200 DMA we will begin to take defensive action with the goal being to go down less (ie miss a chunk) than the full brunt of the bear. No guarantees but that is the goal. A more aggressive defensive strategy might go down close to nothing.

I would ask the commenter if down 20% should never happen, what is acceptable to you, how do you do it and do you understand the risk you take in trying to deliver to that expectation? If you take clients to 100% cash after a 5% decline, what if that 5% decline was the bottom, when do you get back in? If you take clients to 50% cash after an 8% decline what happens if the market then drops another 60% (you'd be way below the down 20% at that point)?

One reader left an instructive comment about his father-in-law with portfolio problems and that the father-in-law is considering some sort of go for broke gambit. The situation probably arises from a lack of defensive strategy, improper asset allocation or both. The reader also believes his in-laws did not educate themselves properly.

One reader thinks I am too nice of a guy not to have some compassion for those whose lives get screwed up through the fault of others. Losing a job or getting sick can be dreadful events but can happen to anyone at anytime. The people in these circumstances seem to be a target of the plans.

I got laid off once, knew it was coming way ahead of time and built up a warchest in case I needed it--so I have walked in those shoes. In addition to having a warchest I was also willing to take a job at a retail store (but something in the industry came along) because that is what was needed to not go too deep into the warchest. For about ten months from 2003-2004 I was in between my last job and hiring on where I am now and I did logging, digging, put a roof on a garage, other handiwork and some paid firefighter work to supplement having only a couple of clients because that is what needed to be done.

I reject the concept of fault of others. Occasionally we get tested, we can blame others or we can pull ourselves up and do whatever it takes. For anyone living below their means doing whatever it takes is much easier. All of that and I didn't even touch on the economic failings of this sort of bailout.

One reader asked for an update on my belief that the market would bottom in Q2 2009. The way I manage accounts it doesn't really matter whether a call like that turns out to be correct or not. No matter when things bottom it is a good bet stocks will turn up before the economy does. There obviously can be variance in the lead time of equities. In December 2009 the recession will be two years old (if it is still a recession then). Two years is a long time for a recession, not record breaking obviously. To think the economy could bottom in December, January or February is not ludicrous (Roubini said 2010 when he was on CNBC with Taleb). So a six-eight month lead time for equities is not ludicrous either. It may turn out to be wrong of course but that was thinking behind Q2 2009. I would add that even if my timeline is anywhere close to correct that does not mean the US will be the best investment destination.

I was wrong about the magnitude of the bear market; cutting in half twice in a decade is an incredibly long shot. Now that we are so low the reader says he thinks the market is in the despair phase. He notes I did not see the market going much below the 750-800 (it still hasn't) and wonders if I think the increased uncertainty means that we will go lower.

Hopefully I have been clear that I have opinions but concede anything can happen. We know that uncertainty peaks at the bottom. As a microcosm, when it looked like the banks were going to be nationalized mid-day Friday things started to really meltdown; the banks are done. I don't know where the bottom will be. I have been saying for months that I thought the market would continue to stumble along the bottom (if anyone knows who originated that saying, please leave a comment) without going meaningfully below the November low. So far that has been correct. Now that we are close to the low it is only logical that people would be more worried about it breaking the low. Maybe that will happen but the more important thing to me is that demand for equities is unhealthy so I remain defensively positioned.

Now for some wisdom imparted to me. In past posts I have mentioned my 77 year old neighbor who supplements his income with all the backhoe work he wants (getting paid $60/hour to drive a big tonka toy is appealing to most men on some level). He is also a firefighter. Yesterday was pack test day (three miles in 45 minutes wearing a 45 lbs pack, because the station is at 6300 feet and the road is a hilly we go a little less). A bunch of us went out and did the hike but we were one pack short for my 77 year old neighbor to go in the first group. So when we got back he went out but since he was the only one left to take it I went out with him (I did not wear the pack the second time). He did it four and half minutes slower than I did, yapping the entire time--77 years old.

In the middle of the conversation he said "I can put up with a lot of bullshit from someone who is willing to work hard." I think that circles back to pulling yourself up as discussed above.
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The Big Picture For The Week Of February 22, 2009

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Holy Crud!

That is a snapshot from the close on Thursday, wow those are some small numbers. The market caps respectively are $105 billion, $19.7 billion and $13.6 billion. I'm surprised GE is still that big and kind of surprised that BAC and C are that small. Obviously BAC and C were mega cap stocks not too long ago.

Not that this is a newsflash but these numbers are a reminder of how FUBAR the stock market is these days and it may be a while before things get back on track. While I was struck by a lack of (relative) negative sentiment the other day in the 4.5% drop and yesterday's action didn't seem to cause panic exactly it feels like the anxiety ratcheted up some.

From 30,000 feet it is fascinating how long this has been going on and how fast the decline was (38% in just one year is huge) and understandably people are very worried. If the SPX going to 600 crowd ends up being right that will scare a lot more people but at 778 the market is down 50% from its peak. Another 178 points from here is 22% more (11% as measured from 1565) so in that light we have already endured the worst in terms of numbers. I imagine that another 178 points from here would be worse in terms of fear created. I don't know about you I think these numbers are important.
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I Have No Solution

First a funny; at about 4:50 am Arizona time on Wednesday (I woke up early with the first cold I've had in about five years) there was a guest on Squawk Box who was trying to give a pep talk to the US economy and he concluded by saying "and Plan B is Vancouver, British Columbia because New Zealand (pictured above) is too far away."

As I listened to Obama try to explain what we are doing with the bailout it sounded like much more of broad based helping hand for people with everyday hardships as opposed to an economic solution based on numbers. I don't mean to minimize losing a job, getting sick or anything like that but should the government be bailing out that sort of bad luck? Hasn't sickness and job loss always been a risk that people took with no expectation of a bailout? Maybe my take is wrong but it sounded like this sort of thing is part of the equation.

There is also a tricky element of what we are teaching all sorts of people about what behaviors might get rewarded. While it is not completely correct that the bigger a screw up someone is the more they get bailed out the plan does head down this path at least a little.

Mark Haines asked a good question about whether the government will get paid back when prices start back up (when ever that is). If you bought a house in 2006 for $400,000, it goes to $500,000 in 2021 by way of $300,000 and you some how get $25,000 of help because you are under water in 2009; do you have to pay that $25,000 back? Looking back from 2021 should you have ever gotten any help? As the title of this post says, I don't know.

I heard all sorts of statistics thrown around about how many people face foreclosure, how many people can be helped by the bill. I'm sure of the various numbers I heard at least one was correct, spin notwithstanding, but none of the numbers sound very large as a percentage of the population. If that is correct then we are spending a trillion or two, thus borrowing very heavily from our future, to play big brother to less than 10% of the population? It would be reasonable for more people to ask if that is the best course of action.

One problem facing people is that their LTV prevents them from refinancing (pre Obama plan). This is preventing us from refinancing our house in Hilo (yes I know second homes are not covered). However when we first applied to the bank in the buying process we could have borrowed more than the purchase price of the house which I think creates an LTV problem right out of the gate, had we done it. Now I'm thinkin' that if I can pay $1930 per month (plus a few hundred extra principal every month) then it is a safe bet that I could still handle the payment if it dropped by $400, can I get a hollah?

Despite the news flow more people are actually in my shoes than are in trouble. Wouldn't there be a positive impact on the economy putting $300-$600 more into healthy consumers' pockets than bringing unhealthy consumers back to the Mendoza line? And wouldn't that be cheaper? Do I have this wrong, is there an unintended consequence of telling banks to work with healthy borrowers?

Lastly did I miss the extent to which there will be a consequence to people who get bailed out?

Most people get nothing directly. Maybe you get the benefit of fewer foreclosures on your block, but maybe not. Most people get nothing, that I do have right.

Now for something completely different. Are you watching the Tour of California bike race on Versus? I am a huge cycling fan. If you watch any cycling ever then you are familiar with Phil and Paul, the announcers. Well for the Tour of California they have inserted third wheel Craig Hummer and Craig is doing most of the talking which takes a lot away from the enjoyment of watching the tour. If you are a cycling fan and agree with me you can click here and let Versus know how you feel. If you don't care about cycling maybe you can do a good turn by the people who do like it and tell Versus less Craig, more Phil and Paul.
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Interesting Table

From Alphaville
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Back To The Charts

In technical analysis some chart patterns are easier to recognize than others.

The stock market got hit very hard yesterday but odd to me is that there did not seem to be a lot fear accompanying the decline despite the S&P 500 spending most of the day below 800. The volume was not huge, 2.5 billion shares, it was not quite a 90% down day, I think maybe the biggest sign that it was a bad day (besides what the actual index did) was that huge move in gold continued higher.

Michael Kahn wrote in Barron's yesterday about a bull market in gold, the yellow metal is up better than 10% YTD. There might also be a bull market of sorts in the absolute return funds as well. The ones I have been using and writing about are generally up a couple of percent YTD which sounds boring but as of yesterday's close the S&P 500 is down 12.6% for 2009, 12.6%.

The environment for stocks has been lousy for a while, over a year. Before all this happened I wrote many posts that focused on planning for the next bear market; I talked about breaching the 200 DMA, raising cash, figuring ways to look less like the stock market and waiting for things to get healthy. The open end funds I use in this regard did not yet exist when I started writing about the planning which speaks, I think, to the evolution of portfolio construction.

There is utility to having explored this line of portfolio construction before the bear phase started, now during the bear and then after it ends. I think it helps with reorienting thinking toward time frames of an entire stock market cycle as opposed to a few weeks or months.

As bad as this market has been we are, in a way, lucky that "new" segments of the market are so easily accessed. Products that own commodities, currencies and absolute return were far fewer than today. While a good question might be has the existence of these "new" segments contributed to the bear the fact is that many of these things have done a good job as equities all over the world went down.

These things are working now but they may not work as well next time. A point I have tried to convey is to learn as much as you can about new products or new asset classes. You don't need to invest in all of them or really very many of them but they can allow for better protection and management of volatility when you most need it.
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If You Got It, Flaunt It

There was an article in the NY Times that recapped, sort of, the Roubini Taleb appearance on CNBC from the other day. Included in the article was this quote;

...what didn’t change much was the fundamental lessons: have a diversified portfolio, don’t buy more house than you can afford, don’t take on more debt than you can support, or trade on the margin.

These are hopefully just common sense but of course we know that for many people this was not common sense. I can see a big big problem coming with people spending beyond what their savings can safely generate. My thought all along has been 4%, or less, of whatever you got (more like withdraw 1% every quarter). I'm not real clear on where the willingness to take huge risks with withdrawal rates comes from but I think the willingness to take a lot of money out "now" and hope for the best or expect to take out less later or something else is going to do a lot of people in.

Even in the best of times, or perhaps more appropriately worded in very normal times, plenty of people spend their way to financial oblivion. I can tell you first hand this is very difficult for people to grasp. To the extent that a lot of people have these blinders there stands to be societal problem waiting for us at some point along the lines of the US government spending too much or the problem that might be awaiting the entitlement programs.

I do not do a good job of explaining the potential consequences of this to the people who need to hear this the most. The more you take out the further you are pushing the envelope. Taking 10% out at age 62 for a "one time" thing that coincides with a nasty market decline could become a game changer before you even get started. A slight tweak up to 6% withdrawal rate could become a game changer.

I suspect that this sort of behavioral issue does more people in than poor performance. Maybe people live $200,000 lifestyles when then work but only save for $80,000 lifestyles in retirement and they just don't realize it but whatever the case this afflicts many people. I think it would be much easier to alter the behavior than get better returns but altering behavior might itself be too big of an obstacle.
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Psychology

In the last couple of days I've had the chance to encounter a very wide range psychological processes to the current sate of affairs in the US economy.

Your level of concern about all that is going on is what it is. There are people more concerned than you are and people who are less concerned. It is possible that the people more concerned than you are themselves not concerned enough or that the people who are less concerned than you should be more aggressive than they are being.

In the last few days I've spoken to one of each along with a third person who included me on a fear monger type of email. The psychology of these people is what it is and while I may disagree with them and they me they could be right and I could be wrong; maybe it is Ivory soap and tuna time or maybe I should take all the equity out of my home and buy solar stocks on margin (neither of the people I spoke to are anywhere near that extreme).

The person who might seem overly concerned and the person who appears to be whistling past the graveyard are both driven some sort of psychology and either one can be beneficial and either one can be costly. Does it matter if you run out of money when you're 80 and healthy because you were to aggressive or too conservative? Does why make a difference at that point?

Most of the time the capital markets work. When they warn of trouble (the stuff I've been writing about for four years) the best thing is defensive action. Defensive action means different things to different people but something that can spare a little pain. Then when things get healthy again a normal positioning then becomes appropriate. For now things are not healthy so the best thing is just to wait (assuming you did something defensive early enough to miss some of the pain). Things may get healthy soon or they may not get healthy for a while but what is nice about something like the 200 DMA is that you don't have to be exactly right, you can afford to wait as long as it takes and your psychology won't get in the way.

Or maybe we should move to a small rural farm in New Zealand, as pictured above, and grow our own vegetables.
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Sunday Morning Coffee

Barry Ritholtz has a post up spelling out a simple argument for fair value for the S&P 500 being at 440. There has been a little bit of chatter about this in one or two other places as well.

Fair value is not a simple concept. The math is simple; whatever number you want to use for earnings and then whatever multiple you think is correct.

Where it gets a little more complicated is that fair value doesn't usually end coinciding with any sort of stopping point in either direction nor is their any sort of indication of how long stocks might stay above or below fair value.

If Barry is right there is nothing to say that stocks go anywhere near that low or conversely that a massive decline would somehow stop at 440. Maybe I have this wrong but I can't recall a time where a fair value number has been a primary factor for the market. There is utility in knowing whether the market is relatively expensive or inexpensive. Generically speaking if the market is expensive the risk of a decline might be a little higher.

The current state of the market however is not generic. The market has had a massive decline and has been stumbling along the bottom for several months now. Based on the market action thus far the days of massive declines could be behind us until the next cycle. Now factor in the fundamentals and the never ending bad news and uncertainty and going down a lot more is certainly possible.

I continue to believe the low is in, give or take a few percent, that there will be more ups and downs but no violation to the downside and I also think we still have a massive bear market rally in here soon as well. I've been whistling this tune for a while as some may know. But since I first piped up on this idea the news has continued to get worse yet the market is churning around the same range as opposed to following the news lower. This action makes me more comfortable with my thesis. I don't view this as a bullish call.

A big feel good rally followed by a run back down to 800-ish will scare a lot of people and generally not be a good thing for most folks. Further, I don't have a real sense for when the next bull market will be. A lot of people are calling for trading ranges with no progress for many years. Looking out for 12 months is difficult enough let alone looking out for years and thinking a prediction can be correct.
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The Big Picture For The Week Of February 15, 2009

No video this week.

A reader asked the following question about advisers using actively managed mutual funds;

(could you) discuss a little about Planners using funds that are actively managed, but really only out perform 3% or so as opposed to "real" investors that go off script. I have viewed this as a business risk v. doing what you should for your clients.

I'm not entirely sure what is being asked so I'll just wing it. Broad based, actively managed funds are very problematic. There are of course the statistics about actively managed funds lagging the market. That seems like the sort of thing that while probably true there might be more to the story like risk adjusted returns and maybe even data mining.

From my point of view the problems arise in constructing the portfolio. If you own a bunch different funds you may still have all sorts of overlap. Many fund companies honing in on the same areas and then those being the wrong areas to favor is far from an outlying event. Additionally if you own several funds from the same fund company the chances of the same names showing up (it's the same research department after all) in funds with seemingly different objectives is also far from an outlying event.

Another issue is never knowing what you own. Most funds disclose holdings two or four times a year. You're always several months behind knowing what is in your funds. Also there is no way to do any forward looking analysis with an actively managed fund. How many times have you heard someone from Morningstar say something along the lines of "well the fund had a bad year but we think the manager will turns things around so we like the fund." That could turn out to be true of course but it is a guess. There is no way to do forward looking analysis on a fund, no way to know what a manager will do six months from now.

This is not to say that active fund managers are bad or whatever, some are obviously better than good, some are mediocre and some are lousy. The issues above regarding holdings and overlap apply to whatever mutual fund you think is the best one. It may not be a problem very often but it is always an issue.

This is not, in my opinion, necessarily the same type of obstacle for narrower funds. A domestic financial sector fund is always going to own domestic financial stocks--maybe the right stocks or maybe not but it will always be a narrow proxy for, in this case, domestic financials.
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Irregahdless

A favorite word in and around my hometown. The picture is (not very good) of Harvard Square.

Yesterday Paul Kedrosky (you read him right?) posted some info about the holdings of the Harvard Management Company.

Before we get too far into this, I would remind that these are just the holdings of publicly traded stocks and funds directly managed by HMC and not representative of the part of the fund that is hired out.

Below is the table that Paul had of the top ten holdings via filings dated December 31. That it is so heavy in narrower ETFs says a couple of things to me. Given their resources and personnel if they wanted to own more individual stocks they certainly have the wherewithal to pick more stocks. So I take the ETFs as a comment about individual stocks not having a great risk reward proposition which, if correct, is an interesting comment at SPX 800.

Also interesting is how heavy it is in emerging market ETFs. I'm not sure what to conclude from that. It actually seems rather unsophisticated. Perhaps it is beyond my grasp (there are plenty of smaller positions that are individual stocks) or some sort of manner of hiding out until things improve, the filing does not say how much is in cash.

Also odd is that almost 40% of the portfolio is in EEM. I would not doubt that the reasoning is beyond me but I don't get it. In fact 72% appears to be in emerging market ETFs. I'm sure there is more to this story but this makes a great argument for something I have been saying for a while about the endowments which is read and learn as much as you can from them but trying to emulate them is probably not a great idea.
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ADRpalooza

Nothing says China like a Starbucks store.

I'm working on a theStreet.com article about one way to recreate the portfolio put forth by Mohamed El-Erian in When Markets Collide using ETFs (mostly).

One part of the allocation is infrastructure and while there are several ETFs they all focus on different areas. If infrastructure is as big as many think (FWIW I tend in that direction) then it is still very early, the pitcher might still be warming so to speak.

There will be plenty of time to build an allocation that makes sense in terms of capturing the effect without being taken down if it doesn't work out as expected. I have been saying the same thing about China in this regard for a long time; there is a middle class ascendancy going on in many places including China and this is something that I want to capture as I invest in China and infrastructure.

I do not want to own Chinese banks any more, when the theme was easier I owned FXI for some clients which is heavy in banks, and I don't want to own companies that rely on exports. The way I figure it the ascendancy of a middle class and the modernization of the country is going to happen. It will be cyclical and lumpy but it will happen--again, the way I see it.

Back to the article I am working on, without frontrunning the article I was aware of a particular Chinese stock that plays into the infrastructure build out I think I see coming. I called into Schwab to make sure I had the correct A-share symbol, Hong Kong symbol and US symbol for the ordinary shares. The trader at Schwab Global told me that there is an ADR for the stock that just started trading in the last couple of weeks.

He went on to tell me that they (not exactly sure who they are) are bringing 150 un-sponsored ADRs every week. I can't vouch for that but the guy I spoke to has been on this same desk for close to ten years. The relevance here ties in with something I have talking about for a while about easier access to various markets via more choices.

While many folks do not want to manage a portfolio of 40 different stocks, if you are familiar with the portfolio on page 198 in When Markets Collide, most of it can be built with ETFs or other funds but with his allocations to infrastructure and "special opportunities" it might make sense to include a couple of stocks in the mix.

A point I have made along these lines before is that in a portfolio that mostly avoids single stock risk it is not crazy to add in two or three names moderately weighted that capture very narrow effects.
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Allow Myself To ...Introduce.....

Everyday Yahoo Finance has a fresh article that pertains to retirement planning, retirement investing or other relevant topic. Yesterday's article was particularly interesting and might tie in with past concepts covered here.

The basic premise of yesterday's article, in the context of retirement planning, was that you will be a much different person when you retire. Your interests, health, risk tolerances and whatever else will be much different twenty years from now. Here is a great quote from the article;

Richard Posner, a judge and law professor, has written that aging changes us so dramatically that we should imagine different people "time-sharing" our bodies. And the earlier tenants often leave messes for the next one to clean up.

Good stuff.

One bit of philosophy from our friend Bill that pertains to the mess to be cleaned up; Bill says you can figure it out now or you can figure it out later but the sooner you figure it out the happier you'll be.

How many times have you plugged your numbers into a retirement calculator and it tells you that you'll have a gajillion dollars left over? Then you go to another one and you're way short? Not being a financial planner (portfolio manager is a much different job) I come at these things from my own biases and other personal distortions.

My take on not knowing what you'll be like in the future is simply to just save as much as you can, hopefully as much as you can is more than you think you'll need, while we're at it I'll throw in live below your means. The article notes that someone in their 40s or 50s may want to work as long as they can but then come their mid-60s they may not view working the same way in terms of choice and of course there could be health issues the prevent someone from continuing to work.

The reason to save as much as you can is maybe better thought of as you never know what will happen in the future. With due respect to the article I'm sure there are plenty of people who make a plan at 30 and their life goes as planned, plenty of other people's lives take all sorts of turns (good and bad) and as the article notes we can't know where we fit in and we can't know what will happen.

Whatever life throws at us it is unlikely that more money will make things worse. Save as much as you can.
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Take Your Pick

30 SPX points or 30 inches of snow (more like 3 feet)?

No shock that the market's initial reaction to the Geitner is bad. Interesting that everyone on Friday, while the market was going up, said the market would go down on the news.

It is not snowing today so I need to dig out the car and the woodpile.
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A Noreaster

We are in the middle of a huge storm that started Saturday night. It is going to take a break for a day or two and then start snowing again through the weekend. The picture is from yesterday around 4 pm. We now have about two feet. About every three hours I go out to shovel out the little pen to get to the woodshed, then up the path past the cars to the satellite dishes to wipe them off and finally the path you see on the deck. It is repetitive but it means shoveling four or five inches instead of two feet all at once, it is great exercise and minimizes wet feet from sinking in the snow.

CNBC had what could have been phenomenal business television yesterday when they managed to get Nouriel Roubini and Nassim Nicolas Talleb on for a double segment. They billed it as Dr. Doom and Black Swan.

Unfortunately it was mostly squandered. Whatever you think of either one of them they have contributed a stream of consciousness to the current crisis (Roubini more economic, Talleb more philosophical). To the extent they have been useful to anyone we are at a certain point between the beginning and the end of the crisis and the greatest benefit now comes from their assessment of where things are now along with some investment philosophy. That is these guys A-game.

Robin Farzad was on there and asked a ridiculous question about how to invest a college fund for a new born. Michelle Caruso Cabrera devoted about 30 seconds to a monologue that their status as "rock stars" could be sign of a bottom. Someone else asked if there was anything to the financials being up today (Monday). Dennis Kneale was asking square one questions thus preventing the dialogue from advancing beyond elementary. I gather from what I have read from Talleb that he has a lot of disdain for this sort of thing, I doubt anything about yesterday changed his mind.

A couple of things that emerged are that Roubini thinks a bottom might come sometime in 2010 which is not that far away in terms of time but in terms of price he thinks another 20% down from here. Talleb said we haven't even started deleveraging, a lot of private equity will go out of business but I did not hear him quantify what he thought the decline in equity prices would be or the time needed for this to all play out.

As opposed to investing advice I would have rather heard more about Talleb's philosophy on investing. They got into it a little but there were a lot of interruptions. From Roubini I would have liked to have heard a little more detail on what he thinks is going on currently and maybe a couple of if/then scenarios about what is being proposed and what he thinks should be done. Instead we learned that both of them have a large allocation to cash.

As I started to write this I did not intend it to be a rant. I get plenty of utility from watching in terms of straight news. For years I have spent more of my reading time on more opinion-oriented commentary as opposed to straight news because of the network. This is a tremendous time saver. An example of this that I have used before is the car companies. I have never owned a car company and doubt I ever will. I don't need every last detail I just need to be in touch with the story. When something comes up that I hear about on the network that I need to read more about I can seek that out later.
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Coolest Corporate Logo Ever

Last night I did a write up on the new GlobalX Columbia ETF (GXG) for theStreet.com. Ecopetrol, which has an ADR on the NYSE with ticker EC, is the largest holding.
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What's Missing Here?

I had a thought yesterday, "boy it would be nice to be off the grid." There is something about the self sufficiency that I find appealing. I have mentioned a couple of times that we are adding water catchment to our house. We already had a metal roof, have done the gutter work and this year we will be getting a storage tank.

We are nestled in a little valley such that we don't get a lot of wind but we do get a lot of sunlight like the little guy on the rock is taking in so what about solar?

Our cabin is small and our electric use is low. We average about 500 kWh per month. I did a little looking and the Suntech STP 175S-24/Ab-1 could produce 65 kWh per month assuming five hours of sunlight per day. We would need eight Suntech STP 175S-24/Ab-1 modules to pay our bill. The site I looked at netted out the cost (after tax credits and the like) to $2735 per module. So if I am figuring this correctly (and I may not be) that works out to $21,880 to get off the electric grid.

We bought this house in 1998. In almost eleven years I doubt we have paid $7000 in electric bills. Based on that math the solar modules would pay for themselves in 33 years. A few things then; anyone know about this stuff, is the general framework of the cost/benefit outlined above close to being right?

If so then how many people are going to convert to solar? Anyone building house where they need to bring electricity to the property could do it but if electric is already there or if it is an existing home then it does not seem to make economic sense. I would remind that the $21,000 is to replace a below average usage.

A possible use ties in with a joke I made along time ago about making desolate parts of Arizona and Nevada giant solar panel farms that the utility companies would then transmit into the home--I don't know what the economics of this would be but when I mentioned it a reader commented that there was something like this already in Nevada, on a smaller scale.

A hopeful item is that solar is a technology and the cost for most technologies comes down over time. There are cheaper concepts being worked on so maybe there can be something that could make more sense for more people. Given this, it seems difficult to get excited about the solar stocks for the next couple of years.

The psychic value of being off the electric grid is worth some amount of money (a different figure for different people). Maybe it is worth ten years worth of electric bills to do this, maybe only five years but for me nowhere close to 33 years.

Unrelated item, have you heard about this movie The International? My take from the commercials is that it is about a really bad bank. Given the timing of the release, why aren't there more jokes about this?
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Horrible Wildfires in Australia

The fires have killed 93 people so far. You can read about it here.

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Sunday Morning Coffee

The other night a reader pasted an entire article from Morningstar about the new VIX ETNs (I think it was the whole thing anyway). I'm not sure if the article drew the correct conclusion or not but it struck me as far more balanced than what I have read previously from Morningstar about new types of products. The VIX ETNs are only about ten minutes old but they are different.

For years I have been writing about ETF innovation allowing investors to create more sophisticated portfolios. This is a fairly obvious observation but I have been making the point for a while and although progress has been made I wish the industry was a little further down the innovation trail.

I thought it might be interesting to put together a list of ETPs that I'd like most like to see. Some have already been filed for and some others I just think should be created. ETP stands for exchange trade product.

Working down the IndexUniverse list of filings the first thing that catches my attention is a Peru ETF from iShares (a company called Global X as also filed for a Peru fund). Peru is an interesting country that is worth learning about. It is obviously resource rich, has been a surplus country (that might change this year) but I still have some learning to do. There are a couple of stocks from Peru that trade here but an ETF would obviously create more choice and make it easier for people to buy who may not want to pick a stock but like the top down story.

EGA Emerging Global Shares is a company I have mentioned before. They have filed for emerging market sector funds which I think would be a big deal in terms of top down portfolio construction done at the sector level. One of the brains behind this company is one of my blogging friends, Richard Kang and about all I know is that the company exists, but I think these would be huge; specifically, telecom, financials, utilities, materials and maybe industrials. Tech would be tough unless that fund is all the contract manufacturers in SE Asia.

Back to Global X which in addition to Peru has also filed for an Egypt fund. I have long been intrigued by Egypt as an investment destination. There is some sort of trust that trades very thinly in London but if you learn the story you might think this one would come soon--that is if Global X is actually a company. Market Vectors also has an Egypt fund in the hopper and a Vietnam fund too.

IndexIQ has filed for some ETFs that try to create hedge fund strategies using ETFs (so funds of funds). Included in the proposed roster is a market neutral fund that will try to not be effected by what the overall market is doing. It will go long and short ETFs based on a strategy that is not clear to me from reading the prospectus. For now I am curious.

Macroshares has filed for a Medical Costs Up/Medical Costs Down combo. I must be missing something because this seems like a one way trade.

WisdomTree has one of the more interesting pipelines but they have been very slow to move the filings to fruition. I am not sure if it is a business conditions thing or something else but they have dividend weighted country funds and currency funds galore in their filings. Dividend weighted country funds would allow for a rotation to favor value in a country at certain points and then rotate back to a slightly growthier feel later or use their fund, which presumably would be less volatile than the iShares equivalent, as the core exposure for the country with a more volatile stock as the explore exposure.

As far as the currency filings I am most interested in the Singapore dollar, the Chilean Peso and the Israeli shekel. If the dollar is going to be as doomed as so many people think it would be nice to spread around some cash into different types of currencies.

Included in the list of ETPs I would like to see but that are not filed for include something that tracks the CBOE Put Write Index. Similar to the buy write index it's history has better returns over the entire cycle with less volatility. In a similar vein I'd like to see buy write versions of country indexes. Several of these already exist around the world, they tend to do the same thing versus the benchmark index as the US buy write index does against the S&P 500.

I think there is all sorts of room for fixed income products that focus on foreign markets. There are plenty of very specific indexes that already exist but I'd like to see funds for as many individual countries as they want to make or even regional funds or funds with countries that have like qualities.

There are many different themes I'd like to see like global ports/toll roads/airports. There are also more commodity ETFs I'd like to see (iPath ETNs cover a lot of ground but I am not crazy about the wrapper).

The big obstacle to these is investor demand which I realize would probably be quite low. How about you? Got any ideas? This site gets a little bit of readership from people in the industry maybe an idea you have can strike a cord with someone.

A-Rod testing positive for steroids in 2003? Not a black swan. The picture is from a hike in New Zealand.
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The Big Picture For The Week Of February 8, 2009

IndexUniverse article
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Equities And Inflation

A Citigroup equity strategist named Robert Buckland was cited in the FT yesterday making a bearish case for equities. Included was this little snippet about inflation and equities;

Equities have never been particularly good at hedging inflation anyway, and now index-linked bonds can do a much better job .

I'm not sure that's right. Over the last ten years this is correct but 20 years ago the S&P 500 was at 296, so it is up 185% (again that is after cutting in half over the last year) plus dividends and the US postage stamp which is a good proxy for longer term inflation is up 110% for the same period and that is much closer than normal.

Be that as it may it raises an interesting theoretical question. If financial plans rely on growth and equity indexes can't grow then investment capital must be allocated to substitutes for equity indexes. From a bigger picture wen you buy equities you are buying that which you expect (or hope) will grow. TIPS are a relatively new product that cover the inflation protection part of the dilemma but not the growth part.

For purposes of what is being explored in this post I should note that even if equity indexes continue to flounder there will be individual stocks that do well but those will be harder to find. If the big names in various sectors won't do it then it stands to create a huge problem for many people and the need to be very innovative.

Can one avenue of solution come from buying growth on the ground in various countries? Increasing commerce that might come from a turn up in the economy would seem to create revenue growth for shipping ports, airports and state of the art toll roads like the one pictured above in Bolivia (I don't know if that is a toll road or not I just get a kick out of those photos).

I looked at a few countries just to get a sense of whether, during the previous bull market, these types of "commerce" stocks generally moved up with the market. In past cycles there has been a correlation between broad stock market indexes turning up and the economy turning up (obvious). In a way the broad indexes have been proxies for economic expansion (also obvious) but the question is whether the broad indexes which are made up mostly of banks, oils stocks, the phone company and so on will struggle to go up at a reasonable rate and if they do struggle can ports and roads be proxies?

So it worked in Australia with Transurban (TCL.AX), New Zealand had mixed results with Auckland Airport (AIA.NZ) and Port of Tauranga (POT.NZ), it worked in France with Societe Des Autoroutes Paris (ARR.PA) but Aeroports de Paris (ADP.PA) doesn't chart far back enough and the last one I looked at was China which had a mixed result in terms of correlation between a couple of toll road stocks and Beijing Capital which is an airport stock.

In terms of practical investment application, well first there needs to be something to it and we don't know yet because almost nothing is going up these days. If I dip a toe into these waters it would be with one stock at first and then maybe a second for a max of 5%.

As this post was just a theoretical exploration there is no answer, maybe just more questions or a push to get you to think about this on your own or explore different things that catch your interest. I think there is something here with these stocks there is still more to learn.
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Wild Scene

Did you see that interview with Michigan Governor Jennifer Granholm?

Man, that was wild.
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Not So Out Of Left Field

You see the picture is actually left field. LOL.

On Asia Squawk Box on Wednesday morning (so Tuesday afternoon in the US) they had a guest named Bob Iaccino from a firm called Regan Global Capital. He is on every so often and this time he made a brilliant comment, brilliant for its simplicity.

I'm paraphrasing but he said that for 8 years or so the market goes up about 10% a year and then the market correct down by 40%.

It doesn't quite go down 40% that often, this decade notwithstanding, but the concept is fantastic as was the this is just how it is tone with which he said it.

Different subject. There was an interview with Dan Dolan from SPDR on IndexUniverse and while the interview was not that deep there was a comment from Dan (BTW Dan and I were on the same panel at that conference in Boca Raton last month) about sector investor becoming more popular. It was said in such a way that made me think not many advisers invest at the sector level and this might be right based on some of the things I have heard from other people over the years.

If you have been reading this site for a while you know I am a huge believer in portfolio construction sector by sector. I'd love to tell you it is black box stuff that only sophisticated investors can do but that is not true. You have a template with any benchmark index (we use the S&P 500). If energy is 14% of the S&P 500 (which was the case a/o a couple of days ago), based on what you know do you want to be over, under or equal weight versus that 14%?

On the plus side many energy stocks are down a ton as is the price of crude. On the negative side it could be a while before demand ramps up again because of the current state of the global economy. I am underweight but keep in mind I am underweight almost everything because the market is below its 200 DMA and I have a lot of cash still on the sideline.

And its not like overweight would be 28% or underweight would be 0%. It doesn't take much too change how the portfolio behaves. Additionally the volatility of the sector can be managed too. In a simplistic example of owning just one energy stock; what energy sector allocation will be more volatile, going all in on Exxon Mobil (XOM) or Petrobras (PBR)? You know PBR will give a more volatile ride and you know that when energy does well again it is likely that PBR will go up more than XOM. This could end up being right or wrong during any single event but this is far from difficult to understand.

One last little item, the sector weightings in the SPX have changed dramatically of late, I mean big time. Also XOM is now more than 5% of the index.
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Why Isn't There a Diamond ETF?

Or even chatter of a diamond ETF.

In this article from the NY Times about Chinese citizens trying to get their money out of the local currency there are people buying jewelry (three carats per ear) among other things.

With what has happened to the global financial system and the paranoia that has ensued you'd think some ETF provider would try to capitalize on that with a diamond ETF.

No doubt there would be plenty of things to figure out like valuation, consistency of quality, storage and so on but it is an interesting thought.
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Still Stumbling

My general expectation for the the US equity market for a couple of months now has been that the market would stumble along the bottom, that the low was in give or take, that there would be a large bear market rally that would be followed with another run back down to the lows, give or take.

Most of that has been right but I do believe there will be a large rally, larger than what we have seen so far but for now it has not happened. On days that the market goes down people on TV are pessimistic and on days the market is up people on TV are optimistic. Regardless of whether we have a really big bear market rally this is exactly what a stumble along the bottom feels like.

Last week I expressed concern about protectionism starting to percolate. If that comes, as I said last week, I would make a change or two within the portfolio and I still would but for now we continue to stumble.

Hopefully you are in touch with what appears to be unfolding in California with the IOUs, the budget problems and the short term cash flow needs. I don't know what will happen or whether or not the state will default on its municipal bonds. I don't have exposure to California muni bonds so I don't have to know. In a video post a couple of weeks ago I mentioned having sold the coffee ETN from iPath because I didn't want to have to even think about what would happen to the ETNs on a credit downgrade. I have been suspicious of the yields available in the muni market for a while and maybe California is a head fake or the real thing but I like not having to worry about being right.

Obviously you can't do this for everything and you may miss a couple here and there but Barclays has been wallowing for a long time and more bad news certainly wouldn't be a surprise to anyone. Ditto for Cali.

These are things that are easily addressed, actionable and solved on a micro level for anyone so inclined. If Barclays and California both default (very low probability) then anyone selling ahead of that would have taken the problem head on and solved it for themselves.

This contrasts with all the attention being given to bonuses and proper uses for TARP money. I'm not arguing either way about about how messed up these things are or are not but there is no problem to solve at the micro level here. If you still own Citi form before you are down 90%, maybe more, selling a stock after a 90% drop is cleaning up a nuisance not solving a potential problem.

If you want have an opinion that is fine obviously but the time spent formulating that opinion is unlikely to help you figure out anything about your portfolio. A lot of other people are rolling up their sleeves on this stuff but I do not see the point.
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Isn't That Too Much?

A week or two ago we had a couple of friends over, they are a married couple in their late 20s--Joellyn knows her from from animal rescue work. They are interested in buying their first home sometime very soon.

Knowing what I do for a living the conversation turned to how to invest their 401ks which then moved to how much to put in to their 401k. Karen (not her real name) then said that a friend of hers puts 10% into her 401k and wasn't that crazy. Crazy too much or crazy too little I asked.

Too much.

Oh boy. I managed to keep the lecture to less than 30 seconds to minimize offending them but this is a great microcosm for attitudes about saving. These people are young, have decent jobs, no interest in following the market and while they may have some basics to learn about personal finance they know they need to save something. I don't know if they have credit card debt so I do not have a complete picture but they have accumulated something for a down payment for a house.

That they are trying figure out how much should be saved as opposed to whether they should save at all and that they have saved something for a house probably puts them ahead of most people their age but again they have plenty to learn.

I have mentioned a few times being particularly (or peculiarly) conservative in these matters. Over time stuff comes up, maybe you get laid off, maybe you want to venture out on your own, maybe something else but when these events do happen you can either be prepared or not. Being prepared means being able to last a little longer than the next payday.

Everyone likes stories about people who took some sort of career risk and then it worked into something viable. Anyone confronted with this at some point who would rather not max out every credit card in their wallet would probably like to have a cushion in their checking account to confront whatever the event is.

Using this logic it makes sense to save as much as possible in case it ends up being needed. Tying in an investment angle, an increased savings rate can also help offset portfolio mistakes and bear markets (that's help offset, not avoid). If a reasonably balanced $1 million portfolio only needs to generate $2500 per month and then the $1 million drops to $775,000 the withdrawal rate would still be below 4%. That's pretty good after such an ugly drop.

Things like this are consistent with a point I made in a video a couple of about just not wanting to have to worry about certain things. More correctly reducing the chance that you would have to worry about these sorts of things. You can't control the outcome, just your behavior.
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Reader Help

Anyone have one of these? It is an iPod Nano. I have a gift cert at Best Buy that will cover a chunk of the cost.

My primary use would be for the video to occupy a couple of hours when I need to fly.

We have a DVD player that is almost the size of a phone book (not quite that big) and I'd like to lighten the load given that when I go anywhere I also carry two laptops.

So for a short stint is the video at least moderately watchable? What is the battery life, same as the other iPod stuff? Is it like the music where I can put my DVDs into iTunes and then load from there onto the device?

I would be thankful for any input.
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Post Super Bowl Tidbits

Investing is in large part a psychological exercise. People often make poor decisions, succumb to emotion or otherwise make the task more difficult that it needs to be.

I tend to believe that people can reduce the difficulty they create for themselves before then even think about investing by making sure the rest of their life is in order or maybe a better word is balance.

Everyone's idea of a balanced life is of course different. I try exercise a lot, be involved with our fire department (I am the assistant chief and training coordinator), having a dog doesn't hurt and of course I enjoy most sports. When I'm trying not to get flung off the stairmaster or fighting a wildfire I don't think about the stock market although I have been asked about stocks while fighting a fire.

Quite a few times I have posted about my intellectual curiosity with Nassim Nicolas Taleb's idea of constructing a portfolio that is 90% (or thereabouts) invested in t-bill from around the world and then the remainder invested very speculatively. In the blink of an eye there are now two ETFs that create the foreign part of the equation; SPDR Barclays (six months ago that would have read Lehman) 1-3 Year International Treasury Bond Fund (BWZ) and the iShares S&P Citigroup 1-3 Year International Treasury Bond Fund (ISHG).

Despite the names being identical the funds are a little different. BWZ allocates 14% to emerging market t-bills (10% if you think of South Korea as a developed market). Aside from that they are very similar with the largest three country weightings being Japan followed by Germany then Italy. Someone wishing to implement something resembling Taleb's idea could buy some combination BWZ or ISHG and US treasury bills or even the SPDR Barclays 1-3 Month T-Bill ETF (BIL). The mix between the two would be up to the individual as would the how to allocate the 10% to be invested speculatively.

If I get so motivated maybe I'll try it with a small account like my one of my IRA's or maybe Joellyn's Roth IRA (hey honey, I wanna run something by you, lol).

A few years ago I stopped watching the Super Bowl pregame shows. The content has always been weak due to the difficulty of filling that much time. Yesterday as I was watching a little Cavaliers/Pistons I flipped over to NBC during a time out and was just in time for "now, Journey," as in the rock band from the 70s and 80s.

Journey has long been one of those bands that I wonder why the hell I ever listed to them, what was I thinking? Anywhoo, they start singing Don't Stop Believing as I am reading something, I look up and it is not Steve Perry but some dude with long hair who looks like he is one of the kids of an original band member. I yelled to Joellyn, who BTW had the good sense to never like this group, that's not Journey it is a Journey cover band. She doesn't care. I looked up Journey on Wikipedia and the lead singer was in fact hired out of a Journey cover band that the group saw on YouTube. WHAT? Has this ever happened before? Does anyone know about this? Needless to say this has amused me to no end.

As for the game itself, in yesterday's comments, responding to a reader question, I said I thought the Cardinals had more of a we shocked the world thing going on and thought they would win by four. The Harrison TD at the end of the first half may have been the freakiest play ever in the Super Bowl and like against the Eagles they had a bad 3rd quarter. Their inability to find Fitzgerald (for the most part) until halfway through the fourth quarter having no answer for Santonio Homes did them in. But what a great game.

I also enjoyed the halftime show; my buddy Dave turned me on to Springsteen in the mid 70s. Very cool that the concert had a Born to Run flavor but I'm not sure why he kept referring to Silvio Dante as Stevie during Glory Days (Born in the USA).
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Sunday Morning Coffee

Between the hub-bub with Peter Schiff, articles like this one from the WSJ and the wave of Ponzi schemes being uncovered I am reminded of how complicated people make investing and personal finance.

Keeping it simple (or if you prefer simplistic) avoids a lot of problems and a lot of tears.

I apply this in a couple of ways. First personal finance issues. How old were you when someone extolled the virtues of saving money? Did you want something as a kid and your parent told you to save for it? How did you feel when you finally had enough saved? How old were you when someone said something to you about not going into debt?

It is a good bet that you have known you should save money since before you were ten years old and you probably learned a little about debt shortly thereafter. Do those truthisms about saving and debt still stand up? If you are saving money and not incurring too much debt then you are probably living within your means and can absorb a shock like losing a job unexpectedly.

In terms of investing I am not sure if most people know what being diversified means or not. It seems like in conversation a lot of people say the right thing but often that ends up not being executed prudently. Safe to say it starts with the appropriate mix of stocks bonds and cash. The right mix is different for different people based on all sorts of variables. Then within the stock and bond portions cover all the bases and avoid big bets.

How much is a big bet? That also depends on the person but if it is a fund (narrower than the S&P 500 or total stock market) and it went down 75% what would be the damage, everything else being constant, would that be too much? Then keep in mind that if a fund did go down that much nothing else would be constant. If you have 5% in a stock that goes to zero is that hit too big? On a slightly deeper level if you have 20% or 30% of your equity portfolio riding on one outcome at that outcome sours you are going to take a nasty hit.

Keeping in with the theme of simplicity for this post, if across all your holdings you have more than 20% in any one sector of the market you are vulnerable to a outsized decline should the market start heading south.

The picture is from Hellnar, Iceland.
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