Good Morning South Dakota

We are in South Dakota for the week. More on that in a moment.

IndexUniverse had a post the other day looking at some ETFs that are in the pipeline. The article seemed to imply that the ten funds the profiled would begin trading soon but I am not sure if that is the case (and maybe the article was not implying they'd be out soon).

The first fund in their list was the Index IQ Physical Diamond Trust. I had a little fun with this one when it was first filed for by Index IQ. This will be a difficult asset class to track and consistency of the stones will require some extra work as well. I am not aware of any sort of capital market proxy for diamonds and so if that is true the fund will be breaking new ground. That is good because it will offer something new to investors and it is bad because things may not work as smoothly a they hope. The fun with this idea is the Jason Bourne's safety deposit box aspect of the fund and the possibility that when it starts out the entire AUM of the fund will fit into one envelope.

The next fund on the list was the CurrencyShares Singapore Dollar Trust. The Sing dollar has safe haven attributes but it runs on the small side. When CurrencyShares first started issuing funds I asked them about a Sing dollar fund and there were logistical issues that apparently have been overcome. I believe that stashing some money in assorted, select currencies is a valid concept even if difficult to implement. My take on the concept is not an end of society thing, more of a slow deterioration in the value of the USD and ETPs offering the exposure would be good enough.

Kind of related from the list is the Merk Hard Currency ETF (HRD) which will apparently own both currencies (active management) and gold. WisdomTree has a couple of interesting currency funds and this seems like it will cover some of the same ground but again HRD will be actively managed.

There were also several emerging market/frontier market types of funds including a Sri Lanka country fund from from Global X. Sri Lanka got some attention in the last few years for being one of the top performing markets one year and Jim Rogers made the rounds extolling the country's virtues. I would be more interested in Kazakhstan and Mongolia.

Zooming out a little it is interesting to look at different and now investable asset classes or market segments that may not have been previously accessible. To yesterday's post, if a sophisticated, well diversified portfolio can be simply constructed with a handful of holdings bought at $8 per trade then you have two of the four things mentioned yesterday; diversification and asset allocation. You still need to save and you have to avoid panic.

As mentioned above we are in South Dakota for the week, we got here yesterday. We're staying at Custer State Park for two days and then on to the Black Hills for two days. The scenery here is amazing and of course there is some old-west history to check out too.
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Trust Your Gear

The above picture was posted on Facebook by Bivouac which is kind of like REI in New Zealand. The caption read trust your gear. Investors need to trust the long term strategy they have chosen for their portfolios and by extension their financial futures.

Investing can be as simple or as complicated as anyone wants to make it. The building block here is that an adequate savings rate combined with proper asset allocation and reasonable diversification gives people a very good chance of having what they need when they need it. From there all of the decisions that people make, behavioral defects they succumb to and extra time they spend on their portfolios will either help that a long to a little better result or hinder the end result which could mean simply coming up a little short or being completely wiped out.

Reasonable diversification could be as simple as 50-70% in an ETF like iShares All World Country ETF (ACWI) and the rest in iShares Aggregate Bond (AGG). The performance will never be lights out (in a good way) but will never get taken down any sort of oversized bet like a mutual fund that got caught with 50% in financials in 2008.

On the complicated side of the ledger are quant mutual funds with thousands of positions making dozens of trades every day (this is not to say these types of funds are good or bad simply that they are complicated).

Most people are in between those two extremes. Chances are whatever strategy you have chosen to implement for yourself or whatever strategy you pay a professional to implement for you has a very reasonable basis to work just fine as long as there aren't too many behavioral defects allowed to get in the way. Intuitively I think most people can accept that a financial plan that includes savings, proper allocation, diversification and avoids freak outs can get the job done even if that is difficult to remember when things are hitting the fan.

To me this places a lot of importance on everything but performance. If you can save, allocate, diversify and then not screw it up it should work out. I'll repeat that, if you can save, allocate, diversify and then not screw it up it should work out. From there if you can find a way to add value then you have increased the odds that things will indeed work out financially.

Adding value can come from several directions. The obvious way of course is to add value by outperforming markets over some period of time relevant to you whether you do this or pay someone to do it for you. Beating the market every year is of course unrealistic for most the vast majority of investors but if an investor avoided the decline in 2008 and avoids the great decline of 2023 (not an actual prediction) and stay reasonably close the rest of the time they will come out way ahead.

Another form of value add is avoiding panic. Again people can do this on their own or pay someone to help them not panic but anytime the market spikes lower in a shocking fashion there are always investors who panic sell right into the low of those spikes and this will always be the case in the future. Avoiding this behavior is very prominent in the not screw it up part of investing.

This blog and all the posts about foreign and the 200 DMA and themes and all the rest are how I try to add value. Chances are some aspect of my thoughts appeal to you to make this blog one of the ones you read and you probably also take ideas from other places/people on how they try to add value but underlying all of that is trusting your gear, that is trusting that saving, allocating , diversifying and not screwing it up will do most of the work for you and any value that can be added from there is gravy.
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The Big Picture for the Week of July 29, 2012

A few quick items this morning.

Yesterday I met with my colleagues at our offices in Phoenix to discuss various things that most RIA firms need to touch on including some sort of market recap/look ahead from me. An important nugget on this front that is worth remembering is that central banks all over the world have employed desperate and unprecedented action to try to stimulate growth and economic activity.

At best, the actions taken have not created as much growth or activity as expected and at worse they have been a failure but either way it is reasonable to expect that desperate and unprecedented action is distorting markets. It is easier to remember that this distortion exists when looking at the treasury market but all markets have been impacted and no one should be shocked if there is even more volatility whenever central banks cease their desperate and unprecedented actions.

A reader left a very kind comment yesterday about a certain ETF that will not lower your cholesterol having an outsized gain in yesterday's session. It is very human to react to a very good day or very bad day for your portfolio but if you are an investor (as opposed to a trader) it is important to think in terms of the time frame you actually are investing for. As I like to joke; quick, how'd you do in the second quarter of 2010? That you don't know without looking hopefully is a reminder that it is the longer term that is most important.

The Olympics are now underway of course. First item to mention there is my favorite Olympic story which is about the 1956 Hungarian Water Polo Team. The short version is that before the games Russia invaded Hungary but the water polo team was out of city training and so was safe. They met in what was called the Blood in the Water Match.

In addition to water polo another less popular sport to watch but which has great action is team handball. I mentioned this one four years ago too. It really is very exciting and worth using up some bandwidth if the interweb turns out to be the only place to see it.

The picture is of my grandparents on my father's side. It is an old picture of course but my father just turned 86 and he had a brother who was ten years older than him. Judging by the handlebar mustache I may not be the first firefighter in the family.
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Another 50% Decline?

A long time reader left the following;

Dr. Hussman has been convinced that we are going down 50% yesterday. i expect his next post to be written in a bomb shelter. The man is really bright, and a deep thinker. What do you see that he is missing , or vis versa?

John Hussman has influenced my approach in a couple of ways as I have spelled out many times before. He thinks in terms of the entire stock market cycle and weighs the current environment for risk factors and positives to draw a conclusion that determines how he constructs the portfolios he manages. In terms of walking the walk on taking bits of process from various sources to create your own process, the above is what I take from Hussman.

My recollection is that more often than not over the course of many years he has weighed the positives and negatives and drawn a negative conclusions (this blog popped up on his radar once so Dr. Hussman feel free to correct me if I have this wrong).

Where I differ with Dr. Hussman is that don't rely as much as should happen as I believe he does. Based on the fundamentals I would say there is no way the market should have gone up anywhere near the amount that it has in the last 40 months but it has, the SPX has more than doubled. I have said many times before that market history is full of examples of the market doing what it shouldn't.

I believe my use of the 200 DMA (which comes from Jim Stack) addresses this. If a 50% decline is coming to an S&P 500 near you then it will get there by way of 1316 which is where the 200 DMA is currently. While it is vitally important to be disciplined to whatever strategy you use it is also important to assess current events when you do take defensive action (assessing current events obviously needs to be done constantly). In late 2007/early 2008 the yield curve was inverted, the 2% rule (which comes from Ken Fisher) was kicking in and the 200 DMA line was sloping downward all in addition to the breach.

Those are all market indicators and of course fundamental indicators were not looking good either. To me this was reason to not give the benefit of the doubt to the market and to move a little more aggressively toward defense. The last couple of summers there were fewer negatives in place when the 200 DMA breaches occurred. This meant staying disciplined first and foremost but allowed for being less aggressive with defensive action.

If a strategy relies too much on what should be based on the fundamentals then you might convince yourself to never have any net long exposure. But as mentioned above the fundamentals stink for lack of natural demand created by many desperate policies enacted by the Fed and Treasury and yet the market is up a lot in the last three years (repeated for emphasis).

As for the market possibly dropping 50% for a third time since the tech bubble, this has a low probability in my opinion. 50% declines in developed markets don't happen that often. That it happened twice is truly stunning but it happened so it can happen a third time, I just think the probability is low. I also believe that the market will give multiple warnings that the chances of a 50% decline have increased as was the case in the tech wreck and then the financial crisis. In that light I believe you can wait until the market does warn of a large decline in the manner I describe above.
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In a post the other day I talked about what looks like a crash in Spain. I mentioned a couple of stocks from there including Telefonica (TEF). In that post I made a brief case for TEF being able to stay in business (which is not an argument to buy). While I think it can stay in business it made news yesterday for suspending its dividend and stock repurchase program obviously due to uncertainty with world events (I say world events so that you can plug in whatever you think that should mean).

Economic conditions in the Eurozone stink (as I've been saying for years) and I think they are going to continue to stink for many years to come. One relevant question is whether or not conditions in Europe can bring down the rest (or most) of the world economy. We can surmise that Australia will be immune to a global recession; only half joking but it only had one quarter of GDP contraction during what has been the worst of the financial crisis.

I don't know whether Europe would indeed bring down the rest of the world because so many parts of the world are looking at their own serious near term (think the next few years) threats to prosperity. Who can say for sure what is causal and what is coincident?

I will say that like last summer things seem to be deteriorating on many fronts in many places (many weak econ data points and corporate earnings). Market history would say good things for the second half of a presidential election year. Also the chart for the S&P 500 looks good as in the last few weeks the market has been making higher lows and the 200 DMA at 1316 has been gaining ground quickly.

So market indicators good (I realize there is always a mix of good and bad) and fundamental indicators not good. When you see certain talking heads on TV they will take a side and really defend it which seems odd. How can someone always be bullish or always be bearish? On this front I am influenced somewhat by John Hussman in that there are always risks to client portfolios (and my own) but do current conditions indicate heightened or reduced risks. This is an ongoing analysis.

Interpreting that correctly along with figuring out how to position the portfolio over the course of the entire stock market cycle will determine the success had and of course this site is in part a look over my shoulder at how I try to do that. If you can be correct a little more often than you are incorrect and if you can avoid being really wrong when you are wrong then you give your self a very good chance of having enough when you need (you also need to save some money).
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Innovative Ideas For Portfolio Construction

IndexUniverse ran an interview with Bill Bernstein that raised a couple of very interesting and useful points. I tend to draw very different conclusions than Bernstein but there is still a wealth of knowledge from him to learn from.

First interesting item was from his recent book "that you really cannot rest easy until you’ve got 25 years’ worth of living expenses saved up in safe assets." So this would seem to not be a stock market portfolio but things like cash and short dated fixed income. The post from the other day included a quote about having 20 years saved up which I am familiar with, one reader thought it was more like 12 years which I don't recall having heard before.

If someone has 25 years of expenses saved then they probably don't need much, if any stock market exposure. Some sort of strategy with a heavy reliance on TIPS even if that includes foreign TIPS would probably get the job done. The quote says having 25 years of expenses saved but hopefully everyone will get social security too so then the money saved just needs to keep up with inflation...for the most part. This line of thinking has an element of game over and avoidance of unnecessary risks. If you actually have 25 years of your expenses saved, how much stock market exposure do you need?

Bernstein is also a big fan of treasury bills. His comments have nothing to do with valuations as obviously a yield of zero isn't  very compelling but where t-bills are concerned the only cost for expensive t-bills is that of opportunity. Because of the short maturity the price doesn't really drop if yields go up. Bernstein quoted Warren Buffet on t-bills to support his belief of the opportunity to deploy that they represent.

He also mentioned a book called Expert Political Judgement by Philip Tetlock, specifically Tetlock's finding that "vehemence and the absence of nuance are markers for forecasting inaccuracy." This lead to a brief discussion about Peter Schiff and his $5000 gold call.

Bernstein then expressed interest in a book called Lifecycle Investing by Barry Nalebuff and Ian Ayres. One of their conclusions was that as Bernstein put the idea "that young people should leverage 2-to-1 in the stock market, not just invest 100 percent in stocks but leverage 2-to-1." This would be done using deep in the money LEAPs, calls obviously. Presumably instead of buying 100 shares at $50 you would buy two long dated calls struck at $25. There would probably be very little premium beyond intrinsic value unless the stock was very volatile. This could also be done with ETFs if the strike prices are available (the book uses an example with SPY).

Bernstein says of Nalebuff and Ayres "he trick is they are right. They’ve run the numbers six ways from Sunday. And they basically snuff out all the objections, all the theoretical objections to the technique. I’ve run the numbers my own way and have come to the same conclusion." Here is a link to the book on Amazon. Part of the work here is to think of salary as a bond portfolio. I skimmed through most of what was available from the preview and I could not find a precise definition of young. The example given was of a 25 year old law student but it was not clear from the preview when an investor would then change the allocation.

I believe I mentioned this concept one other time. Like any other strategy, if the numbers are compelling it will draw an audience. The idea may not be right for you but success can be had many different ways and that is important to remember in reading about something different from what you do in trying to learn something new. For example why not buy one long dated in the money call with no time premium  instead of 100 shares for a stock that pays no dividend? The money not spent buying stock could be put in TIPS or t-bills. As a note we do not do this trade in separate accounts or the ETF we manage but the above is not insane, potentially life-ruining recklessness.

A recurring theme on this site is people needing to figure out innovative solutions that fit their lives to have a better chance for a successful financial plan. This pertains to creating income streams and also portfolio construction as covered in the above interview. This is a very useful type of content.

The picture is from the other day, I was out doing a couple of errands and the green Cadillac was parked in front of a gas station.
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Successful Retirement Planning Requires New Solutions

A friend passed along an "opinion" piece from the NY Times by Teresa Ghilarducci an economic professor at the New School. The title is Our Ridiculous Approach to Retirement. There were a couple of what I'll call brave points in terms of pointing out serious drawbacks to the 401k plan, human defects that make investing difficult for many people and even a suggestion with a little detail about what should be done instead. You may or may not agree with what Professor Ghilarducci believes we should do but she does offer an idea.

Unfortunately some of the points that appear to be building blocks to her conclusions are so inside the box (so to speak) as to have no value. It would be nice to think that people of influence would advance the conversation before trying to solve the problem, kind of like a doctor curing the wrong malady because they assume the wrong symptoms.

She notes that "to maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security." I guess my beef here is the extent to which this rule of thumb reinforces people living at or above their means. I would have hoped that thought leaders would advance the conversation to the point where they talk about spending less, saving more, not focusing on replacing income but instead becoming financially literate enough to  build a reasonable budgetary framework for a financially suitable lifestyle. 


Part of the solution must be orienting to the correct situation. A $100,000 lifestyle has no relevance when the person who has had a $100,000 lifestyle turns 68, wants to retire and only has $700,000. To be clear, that is a decent chunk of money to accumulate but even with a combined $48,000 social security benefit it will not generate $52,000 in a sustainable fashion to get to $100,000. 


The other point that stuck in my craw was the point made about it possibly being difficult to work longer as many people like to suggest. It can be difficult for all sorts of people to keep their jobs in this economy not just someone on the verge of retiring who then realizes they need to stay on another year or two or whatever the case may be.

Necessity can be the mother of innovative ideas and for many folks it may need to be. If you would like or need a certain income then what are you willing to do to make it happen. Over the years I have tried to share many anecdotes as I've heard about them to convey the extent to which people have figured out something that was right for them like operating backhoe or teaching hazmat classes. 

The point of this post is that chances are you reading this blog and others are probably influential in your various social circles on this sort of thing. I believe that people need education which will hopefully lead to thinking outside of old-line constructs to have a better chance of a successful financial plan and there is a good chance that quite a few people you know will listen to what you think.  

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Sunday Morning Coffee

From the Barron's Interview with Stephanie Pomboy;

...what is still underappreciated is that, if you look at the recovery in GDP since before the crisis, 83% of the increase is explained by higher prices. Only 17% is from an increase in demand. That explains the profit margin story. Companies have been able to pass on higher prices, even in the most discretionary forms of consumer spending. If you look at retail sales, actual units sold are lower than they were before the crisis. It's entirely an inflation story on the retail sales side. Consumers aren't buying more because they feel great. They are spending more because the prices have gone up. But now consumers are reaching their limits. Since June 2010, households have drawn down savings. But in the past three months, they've put $65 billion back into the cookie jar, which suggests that they've reached their threshold. Middle-income consumers are also adjusting to the new realities of living within a budget.

The picture is from the Prescott Wild Fire Expo. Walker Fire was there with a truck and several firefighters. The truck you see is Central Yavapai Engine Number 1.
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The Big Picture for the Week of July 22, 2012

In case you missed it, Spain had a good old fashioned crash on Friday. The attached chart shows Madrid listings of Telefonica (TEF) and Banco Santander (SAN) along with the benchmark IBEX index. Based on the weightings of the iShares Spain ETF (EWP) TEF and SAN are the two largest companies in the Spanish market. As a quick note, SAN used to be the symbol for client holding Santander de Chile but a few weeks ago the Chilean bank changed its symbol to BSAC. A couple of days later the Spanish bank changed its symbol from STD to SAN. For any clients reading this you have always owned the Chilean bank which now has symbol BSAC you have never owned the Spanish bank.

Some clients may recall that we owned Telefonica a while back. We bought it in January 2006, sold it in August 2008 and collected a couple of dividends along the way. For such a short holding period it worked out well and the logic for selling was similar to other sales back then; how many times are you going to read that things in such and such (in this case Spain) are lousy and are going to be lousy for a long time before you take action?

Since TEF's peak the ADR is down 66% and the chart looks dreadful. The company is profitable, earnings are expected to keep growing but like many telecoms it has a lot of debt. I think it can remain a going concern pretty easily which is not argument for buying the stock. As for Santander the odds of remaining a going concern are much less. At this point it seems unlikely that the bank would be allowed to fail which again is not a reason to buy but as slowly as I believe the financial crisis is playing out in the US I believe it will end up being much slower in Europe.

I know people see it otherwise which is of course reasonable and to be expected but unwinding the totality of the financial crisis in the affected market segments will take years. That BAC and Citi are still single digit stocks all these years later (had Citi not done a 1 for 10 reverse split it would be at $2.58) is a clear signal of this in my opinion.

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Delivering Alpha Delivers "Best Ideas"

With a big tip of the hat to Pragmatic Capitalist who linked to Absolute Return +Alpha, the following ideas are offered without opinion but with names for anyone interested in mimicking the conference speakers.

Taylor Woods Capital likes Brent Oil which can be captured with the US Commodities Brent Oil Fund (BNO). This is not a contango busting fund. Since the launch of US Commodities Oil Fund (USO) which tracks WTI fund providers have launched many other funds that mitigate the impact of contango but again BNO which tracks Brent does not and I am not aware of any contango busting funds that track Brent.

Ospraie Management like farmland. There are plenty of small cap farm/plantation stocks trading on foreign markets. The easiest two to trade and get information on are Cresud (CRESY) and Adecoagro (AGRO). CRESY has about cut in half over the last year. It does not help that the company is in Argentina but the trailing yield is 3.5%. AGRO has done far better over the last year but has no dividend. This is the one that George Soros has been involved with.

Queen Anne's Gate Capital Management says shorting the Euro is difficult so short the British pound and platinum and go long the US dollar. It is not clear why shorting the euro is difficult but ProShares offers 1x short exposure through EUFX and double short exposure through EUO.  I am not aware of an inverse British pound ETF but someone with a margin account could short the British Pound CurrencyShares (FXB) or buy puts on that fund. Shorting platinum can be done with the ETRACS CMCI Short Platinum Excess Return ETN (PTD).

Leon Cooperman said to avoid US Government bonds and apparently he likes the following stocks; AAIGY, COF, ESRX, GCI, HAL, KMI, MET, QCOM, WPI, WU, AAPL and KKR.

There were a few others that were kind of vague but quite a few speakers like European debt. One likes European bank debt and another likes sovereign debt from Italy and Spain.

I find these sorts of things to be interesting and that more and more of these kinds lists can be executed using ETPs is democratizing even if not any trades you'd be interested in for your portfolio. Of course anyone liking the Italian debt idea could buy the PowerShares DB Italian Treasury Bond Futures ETN (ITLY)--I am not making this one up.

Please note we do not own any of the above and are not recommending any of the above.

Finally an unrelated but humorous note. There is a new cop show on A&E on Sunday nights called Longmire that takes place in Wyoming (filmed in New Mexico). In this week's episode there was a reference to Ranchester, WY which as long time readers might recall came out on top of an unscientific Random Roger study as the best place to live and capture what one reader dubbed the tax arbitrage; live in a state with no state income tax which borders a state with no sales tax to go buy your stuff.
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The State of the Cities

Yesterday I found a couple of articles about an increasingly popular subject these days-- the various fiscal troubles that municipalities are now facing. This was a sort of looming threat a couple of years ago in terms of lower income tax for states because of the employment situation, lower sales tax revenue due to decreasing disposable income and lower property tax revenue due to dropping values and increased vacancies. These all stand to impair the various places along the municipal food chain that receive these revenues.

There have been three cities in California to go into bankruptcy and now Compton may need to take that same action in a few weeks. I recently wrote a post about city employees, including police and fire, in Scranton, PA now earning minimum wage while the city figures a few things out.

This article from the WSJ isolates threats at the state level tied to things like underfunded pensions and various forms of revenue and budget short falls. For several years I have been saying that muni bonds have become very risky relative to their own histories (as an asset class). Municipalities are confronting serious issues they have not confronted in decades (the Great Depression?) if ever.

Meredith Whitney drew a lot of flack for a big prediction about a lot of defaults that were supposed to have happened long before now but did not. Before the last few weeks there were a couple here and there but not on the scale that Whitney called for. In terms of number of bankruptcies it seems unlikely that Whitney will end up being correct but in terms of their being far more bankruptcies than there ever has been before, that seems very plausible.

The economy is impaired versus "normal" so it stands to reason that revenues of states, counties and cities will remain impaired. I tweeted about this yesterday including mentioning my ongoing belief that the worst financial crisis in 80 years will take many years to play out.

I've mostly avoided the space for clients for several years expect to stay away for quite a while. To me this is pretty simple in that the relative health of many municipalities is very poor and the various retirement obligations aren't going to disappear which creates visibility for the problems to continue. Some investors will absolutely seek and find opportunity in this space but I would prefer to take risks in the equity portion of portfolio than the fixed income portion but people do see this differently.

There has been a little bit of pushback against my belief of more fundamental shoes to drop. I think this has been because there have been some great trades along the way but I have been saying all along that would be the case. For my money there continue to be weak fundamentals and signs that the banks have learned nothing from the experience. Obviously anyone believing otherwise would be comfortable with the banks and muni bonds but I am glad to leave those segments to other people for the time being.
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A Whole Lot Of Nothing

A whole lot of nothing is what has been happening in the market lately. There has been plenty of news some of it truly eye-popping like the LIBOR scandal, the JPM trading loss and the launch of an ETF that will not lower your cholesterol or whiten your teeth (joke from the other day).

This is a handy reminder of the extent to which patience must be a cornerstone to long term investing. You know how when you look at a ten year chart of some stock that is up a bazillion percent in that time and you think why didn't I own that you also see some stretches where the stock got hit pretty hard yet there it is up a bazillion percent for the ten years.

For the last few weeks or so the market has been churning around the same general area without going far in either direction. Any sort of reasonably diversified equity portfolio has probably had a similar result. For people who pay attention to markets and their portfolios the combination of big news and little to no net progress could create a level of impatience and cause trigger fingers to get itchy.

At a moment of reasoned thought everyone will tell you well of course investing requires patience but that can be very difficult to remember at a time like this where markets don't seem to be making any progress but the news seems particularly bad or "different."

One useful idea here is that you are very unlikely to remember much about the summer of 2012 from a market standpoint; without looking, how'd you do in the 3rd quarter of 2010? A few years from now you might read something that mentions the JP Morgan trading loss and the London Whale and have to remind yourself if it occurred in 2011, 2012 or 2013.

It is also useful to remember your real goal in investing. For most people it is simple to have enough when they need it. Someone who is 35 probably won't need to draw on it for quite a while but someone who is 60 who might need to start drawing on it soon will (hopefully) need to draw on it for many years. I think this makes the argument that all ages need to employ patience with their investing.

An example is how bear markets tend to start which is that they rollover slowly for several months (look at the charts for 2000 and from late 2007). This is not to say you can ignore when the fundamentals of a stock you own change but does anyone think that the LIBOR scandal effect Apple's earnings? Excluding financials what is the visibility for the fundamentals of any of your holdings to be effected by the LIBOR scandal? Hopefully you have some sort of process discipline and you stick to it without growing impatient or over trading your account.
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Sunday Morning Coffee

This week's Barron's had special ETF coverage with a series of articles exploring different aspects of the current state of the ETF union--so to speak. Unfortunately there was not a tremendous amount of depth but there was an article about why growth in ETF AUM might struggle to repeat the growth from the previous ten years.

The article cited several bullish arguments for ETF asset growth including penetration into the 401k market. The argument for is that ETFs are cheap, offer transparency and are generally a superior wrapper. The argument against as laid out in the article said traditional mutual funds "have a tight grip on retirement plans, and may not want to cede those fees to cheaper products." OK, that doesn't mean anything or address why ETFs will or won't proliferate in 401k plans.

Obviously mutual funds dominate the 401k space. One aspect of my job and presumably just about any other advisor is looking at clients' 401k plan choices and helping them build a portfolio with the funds offered. The choices almost always are terrible, truly godawful. We manage a 401k plan for a company where participants above a certain dollar amount have brokerage account that we manage with individual issues and/or ETFs as appropriate based on account size and the client's particulars--same as any other client. Generically speaking having more choices is better than 12 mutual funds.

The article missed a big, big point that is relevant here which is liability. A company can create problems for itself if 401k choices end up hurting people. This leads to some sort of "safe" suite of funds that is chosen. Allowing employees to have it in a brokerage account without providing training has bad outcome written all over it. This makes a weak fund lineup acceptable; "it may not make them rich but no one will get hurt."

The bigger impediment to 401k proliferation into ETFs is likely to be people not wanting the hassle of getting sued. Not hurting people is a bigger priority than offering what should be a superior plan. As soon as someone puts it all into Dendreon (DNDN) the day before that stock cuts in half again restrictions would possibly be imposed. Limits can be imposed such that they can only buy ETFs or mutual funds. But then someone puts it all into US Natural Gas Fund (UNG) and more restrictions would be imposed...probably.

401k plans need to improve, there is no question of that. Each constituency has its own motivations and they don't seem to be aligned with each other. Administrators as mentioned, don't want to get sued and often don't want to spend a lot of time on this. Employees often don't want unlimited choices--think time available and general interest level. I imagine mutual fund companies primary interest is making money which I am not critical of but that is probably not their only motivation. Candidly I am not sure of their various motivations. The big fund companies all have a lot of lousy funds in their respective lineups that remain open.

The takeaway for me is that I do believe that people with the inclination should have the opportunity to access more than a stale mutual fund offering. With no claim of originality perhaps making a brokerage account available for anyone so inclined subject to some sort of screening like with options paperwork could work.
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The Big Picture for the Week of Jul 15, 2012

From Jeremy Grantham in Barron's European Trader Column:

GMO CHIEF INVESTMENT STRATEGIST Jeremy Grantham last week dispensed advice at ReSource 2012, a forum on global-resource issues at England's Oxford University. Grantham, who with his wife founded the Grantham Foundation for the Protection of the Environment, recommended long-term investors allocate about 30% of their portfolios to resources and resource-efficiency strategies. His foundation puts 15% of its investment into forestry and farmland, 10% into resources "in the ground," and 5% into efficiency plays. "Even more important, though, is to recognize the vulnerability of all the other traditional investments" and the impact of resource shortages on growth rates and profit margins, says Grantham, who shied away from specifics.

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Of Investment Fads and Evolution

Seeking Alpha ran an article from Elliott Orsillo (any relation to Red Sox announcer Don?) that explored the utility of low volatility ETFs, specifically looking at the PowerShares S&P 500 Low Volatility ETF (SPLV). We own SPLV for a few clients.

The title included the word fad but it was more of a study of the effectiveness of the fund long term based on the sector makeup. The sector makeup of SPLV could change in the future but regardless of whether Orsillo was really looking at the faddish nature of low volatility funds, it is a good question. Are low volatility ETFs just a fad.

In a way they clearly are a fad. Based on investor demand many ETF providers have created low volatility ETFs and there is plenty of differentiation in methodology between the various providers. That description also applies to dividend ETFs. Investor demand, many providers, different methodologies and now investors have many dividend ETFs to choose from. I'm sure this description could be applied to other ETP segments too; VIX products?

The negative connotation here is a herd mentality and people getting in late. This is a valid issue and investors should be cognizant of getting in late to anything they choose to buy.

However it is also true that investing evolves. Think about commissions. When I was pitching Kodak at Lehman Brothers 22 years ago a $10,000 order had a $300 commission. Does anyone pay more than $10 for a retail trade anymore?

Products also evolve. What portion of investors believe indexing is the only way invest? Index funds only came into being in the 1970s and now there are legions of indexers or otherwise passive investors. The first US ETF came almost 20 years ago and it simply provided a different wrapper for an already easily accessed exposure. A few years later came the WEBS (since bought and rebranded by iShares) that offered index exposure to foreign countries. This type of exposure was not so easily accessed if at all before the WEBS. Then came the Sector SPDRs which was more of a different wrapper as Fidelity and Invesco had actively managed sector funds (I'm sure there were other fund companies that did too).

Since then ETPs have evolved to offer brokerage account access to all kinds of commodities, currencies, obscure countries and strategies. These are merely investing tools that some will use very effectively to create very sophisticated portfolios while others will not get it, use the funds incorrectly and have a bad experience.

As mentioned new products are often driven by investor demand. How do investors know what to demand? They are probably learning more about investment strategies and market segments than they previously knew about. It is a reasonable conclusion that investors know far more about Brazil, for example, than they did 15 years ago. Maybe this is because of the internet but whatever the reason investors know far more about many market segments and strategies than they did ten, 15 or 20 years ago.

The knowledge base has gotten broader in conjunction with access offered by exchange traded products.

I haven't said anything yet about this year's Tour de France but the action has been fantastic. Phil Liggett may have had his best line ever at the end of Tuesday's finish. It was an uphill finish to the stage and the riders were exhausted and Phil said "this is the slowest sprint I've ever seen." Great stuff.
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Something Will Have To Give

My involvement with our fire department makes it worthwhile for me to follow fire-related people and agencies on Twitter. There is frequently information that is useful one way or another or just interesting to read as was this about city workers, including the fire department in Scranton, PA.

Long story short is that Scranton as serious budget problems and had to cut the pay of city workers, including the fire department, to minimum wage. The article notes that the average fire fighter salary is $56,000 so the (temporary?) drop to minimum wage is profound.

This is becoming a more prevalent conversation in terms of cities having financial problems; three towns in California have recently filed for bankruptcy protection and it seems likely there will be more. There were a few quotes in the article from people from the union but none of them acknowledged that the city doesn't have the money it needs to conduct business. The mayor is quoted as saying he would pay them if he could. 


This is a good microcosm for all sorts of financial matters. If there is not enough money to pay the bills and service the debt then something will have give. It is the same with pension assumptions and retirement plans. Pensions of varying types have return assumptions that seem ridiculous when they are 7-8%, which many of them are. Of course many pensions are underfunded. Underfunding is calculated using return assumptions which as mentioned are often unrealistic in a post-2000 world. 


However if these underfunded pensions apply what would seem to be more realistic return assumptions then the extent to which they are underfunded becomes much larger. For a municipal type of pension this becomes a political issue which won't makes things better. 


A similar dynamic of course exists in personal financial plans. An accumulated piece of money can only be sustainable to a certain point and then it becomes unsustainable. At a time of reason and ration every knows this but when reason and ration disappear, and trust me this happens, people make overly optimistic return assumptions and withdraw at an unsustainable rate.


Regardless of whether it is a personal financial plan, some sort of pension or an entitlement program the combination of being overly optimistic and withdrawing too much is a deathblow. A pension going bust hurts pensioners who might make some back through insurance but if everyone hits up PBGC at the same time there won't enough to pay everyone out. If a personal financial plan blows up then chances are desperation becomes part of the equation. With entitlements we don't know. It could go bust or reduce payments or perhaps pay in dollars that have less purchasing power. Obviously some kind of impairment to entitlements would derail many personal financial plans too.


Our own sensitivities to these potential outcomes should influence how conservative or aggressive we are with these issues. The tone of posts that have been along these lines in the past have been about the self-sufficiency needed to avoid being at the mercy of some plan or market working the way it is "supposed to work." Where markets are concerned "working" means relying on annual returns being what they were in the 1980s and 1990s. 


The recipe here is save more, live below your means, monetize a hobby and where markets are concerned go along for the ride most of the time and try to avoid the full brunt of large declines when they come along.
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Big BIG Day!

Today is the big day, at last! The final season of Damages starts tonight, I thought this day would never arrive.

Oh, and the AdvisorShares Global Alpha & Beta ETF (RRGR) started trading today.

Someone beat me to the first print which is pretty cool. We hit a snag yesterday as it turned out my claims that this ETF will lower cholesterol and whiten teeth could not be substantiated (I stole that joke from a friend) but we were still able to list without delay.

Seriously there was a lot of work by a lot of people to get to this point and of course everyone at our firm and everyone in the Nusbaum household are grateful. But now the real work starts in terms of hopefully delivering a compelling proxy for the stock market and continuing to be accessible as I believe I have been for the last eight years.
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401k Daytrading For Dummies!

The corner of the twitosphere I follow had some fun yesterday with this article from the LA Times about people who day, or otherwise actively, trade their 401k accounts in order to "catch up." The entire article is worth reading but there were two things in particular that stood out to me.

First was a grim statistic that noted "the average 60-year-old has only $114,500 in his or her 401(k), and half have less than $37,300, according to Aon Hewitt." The specifics of these stats always differ but the message is almost always the same as people are generally woefully under prepared for retirement in terms of being ready now if they are of age or being where they should by age 40 or 50 or wherever they are at the moment.

It is too simple to blame it all on just a "rigged game" or just politics or just financial literacy issue or no fault of their own stuff it is a combination of all of these and more and each person has their own combination of reasons (I would include living beyond your means as part of literacy). It is never too late to improve things but it can be too late to have the "ideal" retirement--ideal is of course different for everyone.

This part of the discussion reminds of Nassim Taleb's comment that really we learned everything we need to know about finance from our grandmothers which is save a lot, don't borrow money and don't lend money (paraphrasing). It is a little more complicated than that but that is a good starting point.

People have their own set of deficits in their financial lives and they can be at least partially mitigated with changes in behavior. I don't minimize the difficulty here but as I've said before, something has to give. A person may now have a lot of consumer debt to service, they own those consequences, but they can also change their consumption habits going forward. 

The other point from the article that stuck out was a remarkably hubristic if not all too familiar comment; "that's what people usually say about day trading (about the risks) — but I don't see how it can be dangerous,"

Aside from the idea of actually actively trading a 401k and the books being sold that "teach" people how to do it stock market history is littered with people who misunderstood the risks they were taking on multiple levels. Behaviors like the one exhibited in the quote will always exist.

Things are still on schedule for RRGR. We submitted the portfolio last night, it should be actually implemented later today and then ready to trade on Wednesday per the original schedule.
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"Cognitive Deficits"

Barry Ritholtz has been running a series called Top Ten Investor Errors with one post per error. Over the weekend was Cognitive Deficits which included this conclusion;

In short, we are simply not wired for the required risk analysis inherent in investing.

Chances are every investor has confronted this on at least some level ranging from self doubt on a particular trade to ongoing self awareness to continually address and mitigate the deficits Barry spelled out in his post and maybe ones not included.

The starting point might be in the stock market's average annual return. It used to be around 10% annualized but has come down a couple of points over the last decade or so. Whatever the average annual return, it includes feast, famine, bust and boom. Proper asset allocation and an adequate savings rate can get the job done, of course a little luck helps too.

The work any investor does beyond buying a broad index will either make it a little better, a little worse, a lot better or a lot worse. A lot worse probably happens a disproportionate amount of the time for all the reasons Barry mentions. People get greedy sometimes, fearful other times, are prone to repeat past destructive behaviors, forget that much of what is happening today (in terms of market action) has happened before and will happen again.

The S&P 500 cut in half a few years ago and based on comments on this blog and elsewhere it seemed as though many people had forgotten that this had just happened just a few years earlier. The market recovered from cutting in half 12 years ago and will recover from doing do in 2008-09 with the variable being how long it takes. This is about market behavior and is a building block for navigating market cycles.

This is a long winded way of saying markets work. Each person believes that or they don't--I do. It might be better to say markets work if you let them. Everyone comes at this differently but a lot of trading is not really letting markets work for you. More likely people who trade frequently are working the markets which is a tougher proposition and hopefully the market is not working them but of course that happens too.

Also in line with letting the market work for you (you knew this was coming, right?) is heeding when the market warns that risk of a large decline is heightened. This speaks to smoothing out the ride that you go on in your investing lifetime which circles back to cognitive deficits. Panic is a cognitive deficit and panic can be avoided if the portfolio doesn't go down as much as the market the next time something like 2008 comes along. You get there by having a trigger point for defensive action that you have some basis to believe will work and to which you can be disciplined.


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The Big Picture For The Week of July 8, 2012

A couple of days ago I stumbled across a very interesting stock; PDL Biopharma (PDLI). I remember this name from quite a few years ago getting highly touted by someone and while I don't recall the specifics from back then I remember being compelled (never bought). The company has since gone through some sort of transformation (anyone knowing the details please comment). During the worst of the financial crisis it fell 76% per Google Finance but that may not be accounting for a one time dividend of $4.25 in 2008.

Since the March 2009 low the stock is up 15% but in 2009 it skyrocketed up, then came back down but that may not be accounting for another one time dividend of $1.67 in 2009. For the last couple of years it has had very little volatility, has been very cheap statistically and has a very high yield of 8.8%. Basically the company gets royalty payments for the use of its technology with the big money maker being the Queen et al patent portfolio.

The catch here is that the patents start to expire slowly in 2013 with an expiration cliff coming in late 2014. There will be continued revenue to some degree after the expirations but the fortunes of the company look like they will change meaningfully after the expiration cliff.

I saw the name and the yield somewhere so the first thing I did was look at it on Yahoo Finance to understand the basic numbers--this is backward looking but there is nothing wrong with understanding where  a stock has come from just make sure you look forward before you buy. The second thing I did was look to see if there were any articles on Seeking Alpha about it and there were a couple of recent ones including this one from someone named Paulo Santos.

Just a quick side note here, you do need to be very careful with SA articles but I found a couple that outlined the bullish argument and in the comments some folks mentioned the bear case. Knowing nothing about the name I got a sense of both sides to then further research if I was so inclined.

The Santos article went into great detail on the bear case including a slide from the company detailing what needs to happen for the company to do well past the expiration cliff. It did not take much time for me to decide I'll pass for the simple reason the end is a very tangible thing in just two and half years. It could remain viable after that time but the catalyst for the end is too soon and too simple for me to be comfortable. If the company is going to expire with the patent portfolio I would expect the stock to start pricing that in much sooner than 30 months from now--the market is forward looking after all.

As one comment from one of the articles reminded, it has an almost 9% yield for a reason. A point I have made before is that a, in this case, 9% yield in a 0% world is telling you there is a risk regardless of whether you can figure out what the risk is. In this case you can figure out the risk--the money maker may stop making money in 30 months.

Actually though the point of this post is not about whether to buy the stock or not but about the devotion to the stock in the comments on Santos' article. On last look there were 57 comments and the thread was probably one of the most entertaining I've ever read. Some comments defending PDLI expressed a belief that the company is doing what it needs to seek new revenue sources and get more life out of the expiring patents and maybe that is true and maybe the company will be alright.

Some of the other comments defending the stock were from people very content to collect the dividend for the next two and half years and then get out. In these comments there seemed to be no mention, so I assume no understanding, that if the company cannot mitigate the threat from the expiration the stock will start pricing in its demise long before the actual cliff arrives. Santos was very engaged in the conversation and I believe it would be correct to say that many of his answers boiled down to "did you look at the slide in the article and do you realize it is from the company?"

This one is easy in that both sides are easily articulated and anyone with any interest can decide on an easily framed debate. The important takeaway is the apparent emotion and devotion to the stock. Read the comments and decide for yourself about emotion and devotion but that is what I think I am reading and I would caution about too much of either in analyzing the merits of a stock.

A given stock either turns out to be a good hold or a bad hold or maybe it starts out well and something changes but owning a stock requires understanding what a company is and where it has come from and then being able to objectively monitor the future prospects and any changes in the future prospects. This becomes more difficult when a strong emotional attachment is formed.
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Why Pick Stocks

A reader who also believes in top down portfolio management left the following question;

...why even try to pick individual stocks at all? I tend to just stick to broad, low cost index funds, and try to figure out when to buy and sell, rather than trying to pick specific stocks in any country or portfolio. At most, sector selection is helpful, but if you believe that the top-down approach accounts for 70-90% of a stock's performance, then specific stock selection might be an inefficient allocation of your time and resources.

Of course not everyone should try to pick stocks. Whether or not to pick stocks boils down to a combination of investment philosophy and time available to devote to the task.

Broad index funds take in the good and the bad. Obviously any domestic broad index fund will own too much of the wrong thing when that wrong thing finally goes bad like tech 12 years ago and financial stock four-five years ago. Broad foreign index funds tend to be heaviest in the countries that have done the worst over the last few years and I expect these countries will continue to struggle moving forward; these being Western European countries and Japan.

The reader seems to believe sector selection is helpful. As mentioned many times here in the past, a sector growing to more than 20% of the S&P 500 is at a minimum a flashing yellow light with 30% being cause to run screaming from the room. In addition there are also pretty reliable cyclical indicators for some sectors. There are sectors that tend to be defensive and hold up much better during downturns. The industrial sector tends to go down more and recover quicker as another example. Utilities are vulnerable to rising rates. The Select Sector SPDRs offer the chance to see how these things can work as they date back to the late 1990s.

As for country selection, a couple of years ago I made many references to some number crunching of country returns for the previous decade done by Bespoke Investment Group. Several markets like the US, a few in Western Europe and Japan were down for the decade ended December 31, 2009 while Brazil was up 300%, Chile was up almost 190% and Norway about 120% as a few examples. Country selection can be picking a country based on an assessment of merits but it can also be a process of figuring out what to avoid. I believe the numbers from Bespoke are compelling because the it was not just off the wall investment destinations that did well.

One recurring theme here over the years has been managing the attributes of the portfolio. There are times when it makes sense to increase or decrease things like volatility, yield, the extent to which the portfolio is similar to the market and some other things as well. To the extent you believe in this philosophically or that it is in your wheelhouse it is much easier to accomplish with very narrow products like individual issues and niche ETFs.

Again this is not right for everyone but to the reader's question, why pick stocks, the above is part of the rationale.    
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A Retirement Success Story

The daily retirement article at Yahoo yesterday came from Business Insider and featured a couple who moved from California to Argentina to buy a vineyard. Their are aspects to their story that are interesting as were some of the comments. I would note that the actual writing of the article seems to be quite poor for being light on crucial details and otherwise (unintentionally?) vague. Also of interest is that the husband of the featured couple was very engaged in the comments on the BI version. He may have been so on the Yahoo version but I did not read the hundreds of comments to know for sure.

The basic story seems to be that these folks had a keen interest in wine making. They ran the numbers on doing this in California and could not make their math work with California wine country prices so they spent a couple of years figuring out that for them Argentina was the answer. Forgetting the politics and inflation for a moment, stuff can grow in that part of the world--I wonder if they looked at Uruguay. maybe it was too expensive?

Since setting up shop they have also created some sort of business where they appear to lease out some if their land to people who are interested in owning a vineyard but on a small scale. The Phelans (the featured couple) provide the workers for the leased land (if lease is the correct word) and I'm guessing it is cash flow positive and puts a few more dollars in their pocket. The details as presented were very thin.

At this level the story speaks to a thread frequently mentioned here of monetizing a hobby, or maybe in this case passion is a better word and applying some ingenuity to make the venture more sustainable. Good for them if all of the above was interpreted correctly from the article.

Of the couple of dozen comments I did read at Yahoo quite a few jumped all over this quote from the article

...they were facing a bleak reality: The $150,000 they'd managed to stash for their golden years wasn't going to stretch very far in the states.

The article says they spent $132,000 buying their vineyard. The numbers given along with what few details were written make this hard to envision. Readers at BI also wondered about this and the way I read Mr. Phelan's comments there did not seem to be a definitive answer from him. Even more puzzling was that the article said he was "an international speaker on IRA investments" which lead to more comments of disbelief as to only having $150,000. In the comments at BI he clarified that he speaks about buying real estate in IRA accounts. There was also talk of building a resort on their property.

Only having $150,000 given the circumstance described is difficult to understand so if this post makes its way to your news feed or alerts, Mr Phelan I think people would be curious. No one would reasonably expect you to divulge detailed personal information but based on the comment threads on both versions of the article I think people would like to know is the $150,000, plus social security, the totality of your financial picture?

The part where they have monetized their passion has seemed obvious to me for many years probably inspired by my neighbor and his backhoe. It seems like the Phelans only needed a couple of years to figure this out which if correct is pretty quick. I might expect it would take longer to work something out but on the other side of the coin some folks will fall into something by accident that works out very well. My older brother's inlaws retired to Santa Fe and ended up as caretakers on an estate for many years. While I don't know their particulars a free place to stay, small stipend and light work would be ideal for some people.

There was another comment thread about people needing to leave the country in order to afford retirement. These comments were more of an indictment of the current state of things in the US. A point made here in the past is that moving to another country is intriguing on some level to just about everyone in varying degrees. For some people it stops with a comment during House Hunters International, some folks might visit countries they hear are good places for Americans just to see and and some goes as far as "living" some place for six months to really check it out.

Some people love it and so it is right for them. My father has lived in Spain since 1980. He'll be 86 later this month, is quite fit but has had a couple of medical  things come up that he's needed to get taken care of and he's done so there just fine. Medical care is one of the first things anyone thinks about in considering living abroad, I don't know what the reputation or perception is about Spain but so far so good for my father.

Medical care in the US can be dreadful in some places (I'm not sure I would get stitches at the hospital in Prescott) and patients can be just unlucky in hospitals with great reputations (Dick Schaap at Lenox Hill Hospital comes to mind).

The movie The Hangover Part 2 took place in Thailand and there was a joke in there when one of the characters got what I think was eight stitches for $6 and he asked "how do they do that?" The reality might be that the medical care will be fine except when it isn't and that definitely also applies here in the US too.

The people profiled in the above article (questions about money notwithstanding) found a solution that works for them which is the bottom line. This is something we all must do for ourselves. The part from this story that resonates personally is monetizing a hobby/passion, less so moving to another country.
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Top Down Can Work

One of the things that makes managing money a lot of fun (for me anyway) is that there is always opportunity to observe and learn (same with firefighting) or confirm some things. One building block of how I manage money and what I've written about for the last eight years is top down portfolio management.

Top down places the most importance on being in or out of the market. Over the years I've seen several studies that attribute 70% of returns to being in or out. An example I used when I first started this site was in 2000 would it have been easier to simply avoid stocks or find the few stocks that somehow went up as the market was cutting in half. I think the same thing applies to late 2007.

Top down would then say that the next 20% of returns is attributable to sector and country decisions and the final and least important 10% comes from stock selection. In practice this would play out with most of the names in a particular segment performing roughly in line with each other. Of course this is not a 100% certainty and the extent to which this occurs often enough would drive whether you think top down is best for you. It is right often enough for me.

The testing that we are doing for RRGR includes our placing a lot of mock trades for the portfolio. We are placing what amounts to paper trades and submitting them to Bank of New York so that they can account for the changes in the portfolio, calculate a mock NAV and create a mock basket for the fund. Many of the trades have been swapping like for like. So while there are quite a few names in the portfolio (this is a mock portfolio remember) that we don't own the portfolio has been behaving about the same as the regular portfolio.

As I believe in top down I am probably predisposed to see it this way and again, top down either resonates with you or it doesn't. That there can be less importance on stock picking means that investors can use things like sector and country funds for their portfolio while still managing the risk they are taking and the volatility they are exposing themselves to; for people who are inclined to take it that far.

The path here may not necessarily be about trying to beat the market but more along the lines of smoothing out your own ride and being reasonably close to the market. If you save enough and stay reasonably close then you've got a good chance of having enough when you need it.

Happy 4th.
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Barron's Hates China

The Barron's cover story was a generally bearish piece on China which included the following quote from Edward Chancellor from GMO

All I know is that China has all the earmarks of a classic mania that will end badly.

Barron's also explored an argument that the favoritism shown toward state owned enterprises like Sinopec (SNP) and China Mobil (CHL) crowds out smaller start ups which it was said will lead to a Japan-like stagnation. The article also goes after demographics, consumption, infrastructure and manufacturing efficiency. 

There is much to be skeptical  and wary of when it comes to investing in China most notably the banks and the real estate companies. And although it doesn't get a lot of attention these days a lot of fingers got burned buying Chinese companies whose primary listings were in the US (commonly referred to as reverse mergers).

Ok but look at the chart. From the peak of the US market in late 2007 the Shanghai Composite is down 61% and teh Hang Seng is down almost 40%. Shanghai recovered a little in 2009 and has been drifting down since. The Hang Seng recovered a little more and its drift has been more sideways than downward.

The performance of both markets has discounted some portion of the bearishness expressed in the article. The question is whether it has discounted the entire bear case not enough or too much. If you really draw the Japan conclusion then you definitely would want to avoid China.

On a relative basis I continue to believe that energy is one way to own China while avoiding what will be ground zero if there is a serious problem there similar to how consumer staples avoided ground zero in the US in 2008. Later today I should have an article out at thestreet.com that explores this a little further along with a look at the Global X China Energy ETF (CHIE).

Ultimately the decision to own China will have to be made by you. Every country has pros and cons to sort through and then decide upon. The approach I try to take is to minimize the consequence if I am wrong. I generally have a favorable outlook  for the long term excluding the banks and real estate companies but we do have a very small weighting for now via ETF exposure.

The testing for RRGR continues although it seems like most of it is about getting us oriented on how to use the Bank of New York systems and how to interact with their various departments. For now things are still on track or July 11th.
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Sunday Morning Coffee

On Friday a reader left a comment saying that it must be stressful to do things like CPR and manage other people's money in the stock market.

Obviously everyone manages these things in their own way but these don't have to be stressful tasks. With emergency medical services (EMS) the thing to remember is that it is their emergency and your job. The last thing you want in an emergency is an EMS worker who is somehow emotionally caught up in the moment. EMS workers get a lot of training and the best thing they can do for their patients is exactly what they are trained to do. 

As far as managing money (including your own) it can be stressful but again it is all in how you manage it. As covered here many times before the market goes down occasionally. During a bull market everyone will say they know it can go down and frequently they will overestimate their ability to tolerate volatility. A few years ago someone hired us and when things were going well he was a real gunslinger who then panicked and fired us in some brief downturn (this was before the financial crisis) that is probably too small to see on a chart and probably no one remembers.

Knowing that markets can go down is useful but it is more useful to remember that while it is happening. In the past I've mentioned one nervous Nelly client to whom I actually said "you've been through more of these than I have and you know how they turn out."

For the rest of our lives there will be periods that come along where the stock market scares the hell out of a lot of people. If you really understand that then you should be less inclined to panic--having a defensive strategy would help too.

The other point that should reduce stress is the understanding that you will be wrong about a few things in your portfolio. Everyone gets some wrong, this is guaranteed to happen, it is a certainty. We can have less fear of something we know to be certain and being wrong occasionally is definitely a certainty.

Walker had its annual meeting yesterday and it looks like I am still the fire chief  which I am happy about. 
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