Jackson Lake Lodge

The first picture is from the walkway at the Jackson Lake Lodge similar to what you see in the interviews being done from there for the Fed Symposium hosted by the KC Fed. The second picture is a funky old bus that has obviously been beautifully maintained.

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Malthusian Investing

A long time reader left the following question yesterday;

Suppose that you have a history in farming, and you recognize that food supply will be a bigger and bigger issue in the future. Suppose you believe Jeremy Grantham is right that this will be a massive issue, but you can't really execute his idea of buying land. 
Are there "types" of investments that could act as a proxy for agriculture beyond grain futures ETFs or agriculture equipment manufacturers?

This is obviously as theme I have been writing about and investing in for a while. It is also one I have spent a lot of time exploring ways to invest in (do a search for Random Roger farmland and you should get quite a few results). We have always maintained at least a small exposure to the theme. Currently we own the PowerShares Water Portfolio (PHO) and the Global X Fertilizer ETF (SOIL) in "large" separate accounts and RRGR.

As important as I believe thematic investing is I typically only allocate a small percentage to any theme. The Malthusian theme gets about 5% weight in our portfolios.

What I think the reader is asking is whether or not things like PHO, SOIL or any other ETPs can be effective proxies for the theme. A little over four years ago I posted a list of farmland stocks from various countries and added a little bit of color to the names listed. The nature of the stocks has been to be very volatile, to trade at times like they are going out of business very soon to occasionally looking like Apple (AAPL).

To zoom out a little, this theme is based on the population expanding meaningfully over the next few decades which, the theory goes, will strain the planet's ability to produce enough food and water for everyone. This is more of a problem for the future and even Grantham says it will be unlikely to meaningfully effect wealthy nations like the US.

If the real problem is a couple of decades away then the most that could be hoped for is some general outperformance here and there as opposed to going up 100% every year while the broad market goes up 5% (or whatever). As a microcosm, in the last the three months we've all read and heard a lot about the drought and in that three months SOIL is up almost 14% while the S&P 500 is up a little over 6%. This might be related fundamentally to the drought but it could also be a simple beta benefit; SOIL has a higher beta than the broad market so when the broad market goes up a lot then SOIL could be expected to go up a lot more.

If it is the case that the recent lift in SOIL is all about beta then the theme means very little right now. The reality is for the most part unknowable so part of thematic investing is to believe in the long term dynamics. With a small nod to Karl Popper, the last three months doesn't disprove the validity of the theme.

As to the future effectiveness of any proxy chosen for this theme (or any other theme) we are a long way from things getting very serious on a global scale. For now the related stocks seem to be more closely tied to the stock market cycle. Based on past cycles, I would expect that in the next bear market (2013, 2014 or 2015?) that related stocks will get pasted. In the face of the next bear phase the long term prospects will be the same as they are now but the cycle will matter more than the long term prospects, IMO.

As far as buying actual farm land and either leasing it or otherwise working the land I would say that for now the various equities that would seem to be related will not really capture owning a farm directly. I think that can change as/if the world moves closer to the extreme outcome Grantham envisions (I agree with Grantham directionally but not to the same magnitude) and the related equities would start to capture the effect. But to be clear that is not where I think the world is right now.

I do believe in having exposure but the expectation is for slight outperformance for the time being as opposed to up 100% in an up 5% world as noted above.

Another reader left his opinion to the original question which included the warning that you could invest in some Malthusian proxy but then the thesis turns out to be incorrect. That can be true of any kind of holding not just one that is part of a theme. This then becomes about position sizing. What is the consequence for being totally wrong about something with 20% of your portfolio versus 5%? Can you live with either? How you answer that question will help in figuring a suitable position size for any type of exposure.

One last bit on this is that anyone who is remotely interested in this theme, either investing in or just learning about it, should think about it on a global scale not just a domestic scale.

The picture is of the Grand Tetons and Jenny Lake.
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We Reduced Our Apple Position

In my articles for theStreet.com I often talk about taking the time to keep tabs on any individual stocks with disproportionately large weightings in any ETFs owned. There are quite a few sector funds and single country funds that have 15-20%, even more, in just one stock or in the case some telecom ETFs there can be that much in a couple of stocks.

So it is with most technology ETFs that have 20-25% in Apple (AAPL) including the ETFs we use for "large" separate account and RRGR which is the ETF we manage. The way the numbers work out our position in Apple, by virtue of its weighting in IYW and IXN was around 4% of the portfolio. I seem to remember Apple's weight being 10-12% of tech ETFs a few years ago but of course the stock has done much better than most of the sector and has grown to now being 20-25%.

In the last month the stock is up 15% which is far ahead of the sector. The recent lift is probably due at least in part to excitement about the next version of the iPhone, apparently iPhone 5, the iPad Mini and the prospects of what iTV might end up being. The recently initiated dividend hasn't hurt either.

In the last few years the products and the stock have both become ubiquitous. The stock has been the largest by market cap for a while now and it seems like there has been a contest among sell side analysts to come up with ever higher price targets.

I have no great bear case for Apple specifically but there are some markers in this instance that have meant trouble in the past for other stocks. Other than Exxon Mobil (XOM) it has been difficult for companies to maintain the top market cap spot. Many people believe the stock is different. The business with analysts and price targets is reminiscent of the dot com era. A little more anecdotal, it seems like any interview with a portfolio manager includes "so how much Apple do you own." As mentioned in a recent post, if you watch stock market television for a few hours you will be made acutely aware that there at least a serious infatuation with the stock although you probably know this already.

Again, this is not a fundamental bear case just a few words of caution about a stock that has grown dramatically to become about 4% of the portfolio picking up some warning signs along the way.

Our trade was to sell half of clients' core tech ETF position and roll that dollar for dollar into the new First Trust Nasdaq Technology Dividend ETF (TDIV). TDIV has no Apple for now and based on my understanding of the methodology will not have Apple for at least a year and when it finally is added it will target about a 7% weighting.

The net effect was to cut our Apple exposure in half after a breakout that I think is discounting in near term future news such that I think the product announcements are mostly in the price now.

TDIV is a dividend oriented fund. I called into First Trust and was told the yield for the index is "a little over 3%" which would put the yield for the fund in the mid-high twos but I have seen other commentary that says the yield is quite a bit higher than what I was told. TDIV, similar to XLK from SPDR has a small allocation to telecom so to be precise we have reduced our tech exposure a little but if the market rips higher then the tech portion will grow faster and the fund should pick up some tech beta until the next rebalance. If the market pukes down then the tech portion will will go down faster and the fund will become more defensive until the next rebalance.

As far as the yield I will assume mid-high twos which is better than we've been getting in our other funds. This shift also makes some sense if we are later in the stock market cycle and given that the SPX bottomed 41 months ago, that seems plausible.

If Apple skyrockets from here, we still own the stock albeit in a smaller weighting, a little under 2% now. If the stock goes to $1,111, as one analyst is calling for, then our position would grow to a little over 3%.

We've had good/lucky experiences with reducing positions into what seems like a euphoric environment quite a few times in the past including gold about a year ago and are likely to stick with the strategy. I view it as a can't lose trade; if it goes down then we reduced at a good time and if it goes up we still own it.

The picture is of the Grand Tetons through a window at the Cunningham Cabin.
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Unplugged or Checked Out?

There was an article in the WSJ titled US Markets Let Traders Unplug. When I saw the headline I figured it would be a puff piece about traders/portfolio managers working half days in the Hamptons via their tablets but actually it was about various professionals unplugging completely for a week or two.

Personally I don't use the word vacation to describe going on a trip for the simple but important reason that clients don't care that you are away and neither do markets. It comes up that clients need money for something like a house purchase that they never told you about and so raising that cash cannot wait for two weeks. If a client has a question or concern about something, from the client's perspective, that cannot wait two weeks either.

There are things in the market place that will not wait for you either. Occasionally something will need to be sold unexpectedly. In the past I've blogged about wanting to sell just about any holding that gets a takeover offer. Typically I won't hold onto to something through the close of the deal as the vast majority of the lift comes right away. Not that other people should do this or not but as I believe it is prudent to sell right away then being disconnected for two week does not work.

This is not to say that someone should not go places, see things and enjoy life experiences that you are able to afford--I am obviously a huge believer in going places but an advisor's lifestyle and income derive from clients, more correctly keeping clients which is achieved by delivering the best service possible and meeting expectations you set for those clients.

Every investment advisor has his own ideas about how to do the job and what providing good service is. If an advisor sets an expectation of possibly being unreachable for two weeks and then is in fact unreachable for two weeks then the fault of frustration falls on the client who bought in to the advisor in the first place. 

Fortunately my wife gets this and puts up with my booting up the laptop and flipping on CNBC at a reasonable volume (insert picture of Milton from Office Space) in the wee hours when we are away and also putting up with my needing a couple of more hours later in the day. This also applied in New Zealand and Rarotonga except without CNBC. Tanzania is on our life list of places to go and while we have not researched it yet, we will need to wait until internet access is ubiquitous.

In addition to valuing our client base as an asset the actual work of following markets and making decisions is a lot of fun. My vocation (managing money) and my hobby (firefighting) both allow for always learning more and are both you get out what you put in endeavors at least I view them that way. When viewed in that light you don't necessarily want to unplug for weeks at a time and there is no doubt it would be a daunting task to catch up.

Zooming out a little, this rant is about finding a career that you love doing. I tend to believe that if you love what you are doing will perform better and enjoy more success in the manner that you define the word.

In honor of the KC Fed confab going on at the Jackson Lake Lodge in Grand Teton National Park; a few pictures this week from our visit there last summer.
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Monday Roundup

A whole bunch of stuff today.

One of the articles in Barron's was a peculiar piece about whether or not investors should sell stocks in front of the fiscal cliff not because markets might go down but for tax reasons. One of the building blocks of the cliff is the expiration of the Bush era tax cuts which means tax rates on dividends and gains will go up.

To get the obvious out of the way, the article made no real attempt to assess whether any or all of the blocks making up the cliff will be mitigated one way or another. Long term capital gains would go from 15% to 20% if nothing happens. In terms of being peculiar, the article seem to be quoting various advisors who believe that investors should sell stocks with large capital gains to save the 5% in taxes. The only thing is that it is not clear why it makes sense to sell a stock and pay the 15% on a stock that you would not otherwise be selling.

If somehow you knew you needed the money in February then it would make sense to save the 5%--of course if you needed money that soon it shouldn't be in equities in the first place.

There was then an substantiated assertion that brokers and advisors would use this opportunity to sell these holdings and put their clients into high commission products. It is not clear why this would be a catalyst for unethical or illegal behavior. What, have these would-be unethical advisors been lying in wait for years for the fiscal cliff to now take unethical action? Like many professions there are plenty of dirtbags in financial services but the notion that they've been waiting until now to prey on their clients doesn't make sense.

Taxes and investing are very personal things meaning that everyone has their own ideas and sensitivities and one person can't judge another person's thought process. My own personal belief is that taxes should not be the primary driver of portfolio decisions.

Next item, for many years here I have talked about managing a portfolio that combines individual stocks and ETFs--wrapper agnostic. There was a profile of a hedge fund company called Whitebox (love that name) that also has a mutual fund with symbol WBMRX for anyone interested.

In the holdings are various ETFs, individual stocks and a very large cash balance. I believe it is worth noting the extent which more and more investment managers do use different tools. The importance here is that the manner in which the ETF industry will evolve will be driven primarily investment advisor/portfolio manager demand. Do-it-yourselfers able to spend the time benefit from this because they have an ever expanding investment universe to choose from but I do not believe do-it-yourselfers are driving product development.

Last from Barron's is the Streetwise column trying to warn investors of the Dangers of Dividend Stocks. Vadim Zlotnikov is quoted as saying that utilities and telecom stocks are very expensive relative to their own recent histories based on PE ratios. Interestingly utilities are not expensive based on the recent history for dividend yield. Using the Utility Sector SPDR (XLU) as a proxy, the yield actually seems to be higher than average over the life of that ETF which goes back to the late 1990s.

In taking a similar look at the dividend history of the iShares Telecom ETF (IYZ); again, based on dividend yield the stocks to not appear to be relatively expensive. Dividend stocks is clearly a crowded and popular trade and caution of crowded and popular trades is always worthwhile but I am not sure that deciding something expensive by only one metric makes the most sense. Yield as a valid way to measure how expensive something is along with PE ratio and several other measures. If people buy utilities and ma bell telecoms for the yields then it seems that it would be important to consider whether the current yield is high or low in trying to evaluate valuation.

Finally a couple of lighter sports items. The Red Sox blew up the team over the weekend trading away all sorts of salary and possibly team-malcontents to the Dodgers for a goat and two sacks of rice. If the team needs to be overhauled then so be it but my concern is that this trade means that manager Bobby Valentine might actually be back next season. He was obviously the wrong guy from the start and while the vote of confidence he got earlier in the season was to be expected, a second season however would be another wasted season.

Hopefully you saw some of the US Pro Challenge which was essentially the tour of Colorado bicycle race. The scenery was spectacular and the action was great. Also sports related, Bill Lee age 65 pitched in an independent league game in Northern California Thursday night and got the win. I mentioned Lee a couple of years ago when he won a game in Brockton. You may have also seen where Roger Clemens pitched 3 and 1/3 for the Sugarland Skeeters (as in mosquitoes) which may pave the way for a gimmicky comeback with the Astros. He was pitching around 87-88 mph which is amazing for a 50 year old. While it would seem very unlikely he could get into the high 90s again, maybe he could get into the low 90s.

The picture is of a dog named Kodi outside of the Palace on Whiskey Row in Prescott. My wife is working on the 2013 United Animal Friends calendar and a similar picture of Kodi will probably be on the cover. The Palace is something of an institution or landmark in Prescott. Among other things it featured prominently in the Steve McQueen movie Junior Bonner and a bunch of us hung out there the night before Joellyn and I got married in 1993. At some point along the way it went from being a dive bar though to more of a family restaurant.
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The Big Picture for the Week of August 26, 2012

Just a quick fun post;

For a while now I've been kicking around an idea called the live by (dividend) sword die by the (dividend) sword portfolio. The two names I've always thought of in this regard have been Seadrill (SDRL) and Terra Nitrogen (TNH). In the last few days a couple more names with some similar attributes have come to my attention that makes the portfolio name ready for prime time.

Last week's Barron's had a profile on a company called Prosafe whose ADRs have symbol PRSEY and a couple of days ago I stumbled across an article at Seeking Alpha about Navios Maritime Partners (NMM).

Seadrill operates oil rigs. The revenue comes from renting out the rigs based on negotiated terms. The way in which the company is managed they pay out a lot in dividends and rely heavily on debt for expansion (that being new rigs). The stock has not been around very long but has generally moved from the lower left to the upper right. The debt seems to be the biggest risk factor but thus far has not been a problem. Google finance shows the trailing yield at 7.97% but that will be a moving target based on how well the company does but dividends are a priority and should remain high as long as the company executes well. Seadrill has a fairly large weighting in both the iShares Norway ETF (ENOR) and the Global X Norway ETF (NORW).

TNH is a fertilizer company. The history of the unit price has been to be very volatile. Buy it at the right time and you make a lot of money quickly but buy at the wrong time and the loss could be crushing--based on TNH's history anyway. Volatility seems to have tapered off in the last year but that could be due to volatiltiy in the broader market having tapered off.  The stock obviously plays into the Malthusian theme and has about a 5% weight in the Global X Fertilizer ETF (SOIL), we own SOIL in many separate accounts and in RRGR. Google Finance reports TNH's distribution rate to be 7.8% but again it should be thought of as a moving target.

Prosafe makes living quarters for oil rig workers. The facilities appear to be very comprehensive for being out in the middle of the cold foreboding North Sea (and other parts of the world). Despite getting crushed during the financial crisis the stock has not been that volatile for a oil service-ish stock yielding north of 7%. Most of the ratios seem pretty good and although the debt situation is not ideal it has been coming down. This is one I still need to look at in more detail so for now the name is merely interesting.

Navios is a shipping company. Most of the shipping companies have very high dividend yields and very volatile share prices. Amusingly it has what is probably the chart for a shipping stock that I have ever seen which isn't necessarily saying much as many of them have been crushed and never came back. NMM has only been trading since 2008. It went down a lot during the crisis but managed to make a lot of it back since the March 2009 low. Google finance shows the distribution yield to be 12.4%.

The article I read on NMM painted a very positive picture but without having investigated further I don't know if that is accurate. Just eyeballying a couple of things it appears to not be a sickly dog with fleas which is not enough of an argument to buy.

Both TNH and NMM are partnership stocks so there are tax implications to understand before considering either one. Most partnership stocks have something to do with the movement of oil or gas and although there are a couple of others that are similar to TNH, I am not familiar with any other shippers that are structured as partnerships. While I can't quite put my finger on it, there is something interesting about stocks other than oil and gas being structured as partnerships.

Back to the idea of the live by (dividend) sword die by the (dividend) sword portfolio. The yields here are pretty fat but the potential for the bad kind of volatility is very high. Generally it seems like these types of things do well except for when they don't which is to say that whenever the next bear market comes I would expect holdings like these to get pasted. I don't yet know whether these specific companies are great, good, mediocre or lousy (I think a couple of them are pretty decent) but even great companies can get pasted in a bear market with Caterpillar (CAT) being an example I use often in this context. I believe it is an excellent company with great prospects but whenever the next bear comes it could easily go down by 50-60%.

I don't know whether I could own a name with these types of attributes for separate accounts or not in that buying one at the wrong time could be stress inducing for clients but might fit better under the hood of the fund we manage in a smaller than normal weighting.

One aspect of this blog is looking over my shoulder at process and so the above paragraph is thought process. If I do anything in this space I will be sure to share it here.
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The Jumbo Shrimp of Permanent Portfolios

Long time readers will know that I find the concept of the Permanent Portfolio (the Harry Browne idea from 30 years ago) to be intellectually interesting and fun to write about. The original idea of course is to put equal portions into domestic equities (via a broad index fund), domestic long term bonds, gold and cash and then rebalance as needed.

In past posts I've written about using different weightings, using different proxies for the four asset classes and using foreign exposures for the asset classes (except gold). In this post I will go at the above ideas but also question the application of the word permanent, hence the oxymoronic title.

A couple of weeks ago I blogged about a filing from iShares for a bunch of new currency ETFs and talked about their application as the cash component in a permanent-inspired portfolio. For example, with the context being people willing and able to spend the time, maybe right now is the time for the cash to be a combo of the New Zealand dollar and the Thai baht. If something comes of the latest Israel/Iran business which causes some sort of reaction in markets then switching to the dollar (flight to safety thing) would make sense to do.

The fixed income market has been at an extreme in low rates for several years as the Fed and Treasury have implemented various and mostly unprecedented policies to try to stimulate natural demand with an expectation set that it will last a little while longer. When/if unprecedented policy measures are removed it would be reasonable to think that the dynamics of the bond market will change such that the best way to position now may not be the best way to position in 2017.

From an ease of investing standpoint it would be great if rates normalized. It would make constructing a bond portfolio easier to do than it has been for the last few years but that is not where are now and who knows when things will normalize. Again, for anyone willing and able to spend the time it very well could be productive to make active decisions in regard to things like duration, quality, sectors, foreign countries and so on.

We have a lot of short dated individual corporate issues to reduce interest rate risk that comes from some of our other holdings such as a couple of preferred stocks and a few broader funds with varying average maturities and attributes. We also own short dated sovereign debt from a couple of countries.

With the gold allocation, I have been pretty consistent in saying that 25% would be way too much for me but why not increase or decrease exposure based on price action or based on geopolitical events? Again, I would never want 25% but maybe some combination of events would lead me to take it up to 10% (that is much more than we have ever owned).

For equities there are countless ways to go but in this context I have about 90% of my equity exposure in a fund I manage so most of what I would say here would be self-serving. I will resist that temptation and just  repeat that there are many strategies that can work.

The bigger picture here is to explore whether the bones of the original concept should cause anyone to meaningfully change they way they manage their portfolio, only make slight tweaks to how they manage their portfolio or maybe just a way to learn how other people do things. As mentioned the other day, investing is a process that continues to evolve. It will probably have a tougher time evolving without learning how about other ways to invest.
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The FB Debacle

The latest news on Facebook (FB) has Peter Thiel selling most of his shares pursuant to a plan to sell that was apparently filed properly. The stink raised as a reaction comes from his still being a board member (as of when this post is being written). Had he only sold 5-10% of his shares then maybe there would not be such a commotion but he sold 78% of his position based on the numbers here. Gary Kaminsky called it a shitstorm on the air yesterday morning.

The arc for the story thus far seems to be one that has repeated many times before which means that the behaviors have been repeated before. There was obviously a lot of excitement that built up before the IPO, speculation about how high it would go when it started trading and then things unraveled very quickly from there. Since the IPO in mid May the stock has cut in half, raising all sorts of questions with the Thiel sale being the latest.

Throughout all of this there has been a never ending stream of coverage of the stock in print and on the air. Facebook, along with the other social media stocks are a fad and have been a fad from the start with many of the stocks in the fad doing very poorly.

I've pointed out several times the extent to which this is a fad including here and here and I believe I have been consistent over the years in saying that fads are usually better to be avoided. A couple of easy ways to know when something is a fad is to watch CNBC for a day to see how much airtime the supposed fad is given and click over to Seeking Alpha to see how much attention it gets there.

That is not a shot at either CNBC or Seeking Alpha. I am very motivated to avoid fads for the simple reason that I do not want to bet client money that I can recognize the top and so anything that makes it easier to decide that some stock or group of stocks is a fad ends up being a huge time saver. Obviously it is a more effective use of time when you can rule something out before committing the time you might need to decide to buy something.

Certainly many people view this differently as evidenced by the interest and volume in the stock. My opinion on this stems from having the goals of smoothing out the ride as much as possible and giving clients the best shot of having enough when they need it. Recognizing a fad is not the most difficult part of participating in markets and so avoiding it, if that is what you want to do, is also not the most difficult part of participating in markets.

The behavior of investors getting too excited about anything, including the wrong thing, is something that will continue to occur. It would be nice to view it as a behavioral curiosity as opposed to a huge problem you have to solve for yourself.
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Tuesday Tidbits

Barron's had a bearish piece on Waste Management (WM) over the weekend that highlighted lousy growth prospects and making the case that the now 4% dividend will get harder to maintain. Fifteen or 20 years ago this was very much a fad stock along with other names in the group.

I don't follow WM or the group so I can't say whether the specifics in the Barron's article are correct or not but certainly things have slowed down meaningfully and the article creates the impression that the company is primarily in the business of paying and hopefully (from the point of view of the shareholders) increasing their dividend.

There were a couple of comments on the article that sought to disagree with the conclusions drawn. Obviously it is a stock with a story and a set of fundamentals for anyone who cares to form an opinion. Ultimately either the article will be right or the comments will be right but there was one comment in particular that I thought was interesting;

As a dividend investor, I'm not at all concerned about a 10-15% slide in appreciation. Appreciation is nice, but tasty dividends trumps all. Interesting point Mr. Brochstein, last year I sold a portion of ED and SO and acquired WM.

You can look at the other comments to see the context of that last sentence but the first two sentences reveal a thought process that I believe to be prevalent with dividend investors. In past posts re-run on Seeking Alpha I have had comments that seem to be saying all I care about are dividends along with others that don't seem quite so devoted but my message all along has simply not to put every egg into one strategy basket.

The other tidbit was a post from Josh Brown that carves up something called Motif Investing which I think I mentioned once before. Basically Motif creates baskets of stocks that target specific narrow themes that might be of interest to retail investors. Brown noted the extent to which this seems faddish and adds an unnecessary later of fees to the investing process. Josh also seemed to think the website is unprofessional and concludes that investors can just pick a couple of ETFs and be done with it.

There was a related tweet that expressed skepticism that any motif created would be very unlikely to be early in the life of the particular theme with the implication being that something like hackey sack stocks (I assume there is no such thing) become popular, run up and then the motif gets created.

There isn't too much there I could disagree with but the reality is that there are drawbacks to all investment products. Additionally many get used incorrectly such that the drawbacks are actually magnified than if they were used as intended.

However if there are drawbacks then there might be positives too. I think the Motif website implies that you can create your own Motif. This is sort of correct. Per a phone call to the company, for now their customers must choose from their universe of 90 Motifs but you can sell out every holding in the Motif and populate it with whatever names you want. So if I understood correctly every holding in your version of the Pet Passion Motif could be related to hackey sack stocks (if they actually existed).

Many of the names of Motifs seemed just as silly as Pet Passion but there is a potential application here when you really can create a custom basket of your own and once they offer foreign stocks, I mean actual foreign stocks as for now they only allow for NYSE and NASDAQ ADR trading.

I've had a couple of posts over the years talking about a basket-like product that would be narrower than thematic ETFs that might have four, six or eight stocks targeting things like cement, Nordic banks, Chinese toll roads and a couple of others. These would concentrate more risks than regular ETFs but in most instances be less risky than individual stocks. Perhaps such a vehicle like this should require something akin to options paperwork to placate those who would say this is too risky.

So maybe Motif will evolve into something like I mention above which would offer more meat on the bone than might be there now.
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Trade Executed

Late last week I published a post that was mostly about investing in Australia. As is often the case I wrote that post the night before it published on the blog. In a strange coincidence almost immediately after that post published there was news on our holding down under, ASX Limited (ASXFF or ASXFY), that I felt warranted an immediate sale of the position.

The company will have to compete in its exchange business (not new news), will also have to compete in its clearing business (this was new to me) and like many markets, the volume is way down. This has not yet been reflected in any meaningful way in the price of the stock and it may never, however the nature of exchange stocks is that when they do start to go down that can do so very quickly. At least this is my observation.

All holdings have various types of attributes or characteristics that I believe need to be understood and with publicly traded exchanges they are capable of turn around in a hurry--more so than most segments.

Clients who were with us in late December had a small gain plus they collected good sized dividend a few months ago. RRGR had slightly smaller gain but the inception of the fund was after the dividend. I am disappointed that we had to sell so soon and feel a little silly given the post that ran the other day but these things are of course far less important than being willing to sell when you perceive that the fundamental story could be threatened.

Again the reasons above may not actually hurt the stock but the number of risks just increased so I took action. This was not a top down decision to sell Australia, it was a bottom up sale based on news from the company so the next step will be working on how to replace the exposure. For large accounts, Australia has always meant individual stocks but maybe one of the ETFs will make more sense--either way I will post about it when the time comes.
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The Big Picture for the Week of August 19, 2012

This week I wrote an article for theStreet.com about the new EG Shares Emerging Market Domestic Demand ETF (EMDD). The idea is that this fund owns companies with products and services used by people on the ground in various emerging market countries. In related news Global X filed for consumer sector ETFs for Asia, Latin America and Africa.

In the early days of this emerging markets renaissance, maybe eight or nine years ago, investing in the segment required very little work relative to today. The segment has evolved because the stories on the ground in many of the countries has evolved.

A simple example can be observed with a 30,000 foot view of China. Over the last ten or 15 years there has been a serious urbanization as hundreds of millions of people moved to cities. Actually many cities were built to accommodate this migration of people who were seeking a better lifestyle, like maybe something they would think of as being an American-esque middle class lifestyle. They would get there by moving to new cities and getting jobs that were not agricultural jobs. As their finances improved they came to have some amount of disposable income to buy consumer goods.

Along the way the financial system evolved too. When growth was going great guns without any consideration for policy action to maintain the growth things like over capacity or poor loan quality didn't really have any consequence but that is changing and will continue to change and the consequence will get ever larger.

There are other trajectories in China and other emerging markets have their own trajectories or arcs along these lines. That is to say the countries are evolving and so the segments within the markets will evolve too.

I write frequently about top down investing and the extent to which I believe in monitoring countries for these changes. The top down stories change much slower than the bottom stories for individual stocks...usually. I expect to write about a bottom up example in my next post.

One way to think of this might be the extent to which different sectors within these countries come to have headwinds where they once had tailwinds. As taken from above, for a while the banks in China could get away with risky business practices, like US banks six years ago, but as also noted above I don't believe that is the case anymore. Consequences for poor loan quality were not a headwind but now they are.

If China no longer needed to build more housing, as an example, then materials companies would likely see their revenues and earnings decline. This would not have to fundamentally impact the extent to which get more expensive calling plans for their cell phones or buy more cosmetics at the department store.

The question now for consumer stocks is whether from the top down they have the most tailwinds or perhaps better stated, the fewest headwinds. I tend to believe the demand behind consumer products will be steadier than than things like GDP or PMI prints as there are literally hundreds of millions of people making more money than they ever have and are living a far more modern lifestyle than they ever have.

If this theory is correct then the issuing of funds that target this idea would seem to be well timed. I will be most curious to see whether this stands up for Africa or whether it is still relatively early days in that part of the world.  
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Safe Havens or Just Core Exposure?

The Wall Street Journal ran a piece about Australian sovereign debt's safe haven status. The bull case has been made here many times since 2004 (the start of this blog) which is that Australia benefits from global demand for natural resources with China being the largest customer. This has created prosperity across the entire economy-- there has been no recession in Australia since 1992; GDP only contracted for one quarter during the financial crisis. And as the above linked article points out, Australia is one of the few countries remaining with a AAA rating.

The bear case has evolved to include possible excesses in the housing market that although different than the US housing market could end badly and the country's reliance on the fortunes of China. China has been confronting the possibility of a hard landing for a while now and this would logically impact demand for resources although I do not believe it would eliminate demand for resources.

For many years now I have been saying that Australia is one of many countries that are dealing with normal cyclical ups and downs not the type of systemic threats that Europe, the US and Japan are dealing with. I would add that I believe China is also dealing with something much closer to normal cyclical activity which if correct would be less of a threat for Australia.

This other item from the WSJ includes all sorts of factoids about quite a few different foreign countries including that the market cap of the Aussie banks now exceeds the market cap of the European banks. As you can see the Aussie banks have mostly been on a slow steady creep upward for years while the European banks went up in parabolic fashion and then fell even faster during the crisis.

For many years we owned one of the large Aussie banks which we sold a little over a year ago in case the housing market did crack. Obviously a crack in the housing market hurts the banks but this has not really occurred yet. It may never occur but it is one of the threats overhanging the market. A few months ago we bought the Australian Stock Exchange (ASXFF and ASXFY) for most large accounts and RRGR owns this name as well. The stock is up a little since we bought in the winter and paid out a large dividend.

For quite a few years we have owned short term sovereign debt from Australia for most large accounts and probably will continue to roll this over and maintain the exposure. The interest rates are close to what many investors would probably consider being normal but of course the position is vulnerable to a drop in the Aussie dollar.

I don't think of Australia as a safe haven so much as a core country exposure. We were out of that equity market for six or seven months between the bank and the exchange stock and would be willing to do that again if circumstances dictated but I expect to be in both the equity and fixed income market far more often than not.

Australia provides true diversification in my opinion because as a commodity based economy it will often be at different points in its economic cycle than a service based economy like the US and that has generally been true. If the two are at different points in the economic cycle then hopefully they will be at different points in their respective stock market cycles. This has not been universally true as 2008 showed us but I believe it can be correct often enough to warrant maintaining the exposure.
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Stocks Will Not Make You Rich

But they can adequately supplement a reasonable income need.

The equity market volume of late has been lousy and for years we have been hearing about various generations that are disillusioned with investing in stocks. This can create headwind for equity prices which leads to the title of this post and to ponder whether the weight of apathy can weigh on returns thus preventing people from getting rich in the equity market.

Contrast this with 15-20 years ago when people did become wealthy via stock market investing. The context here is not hundreds of millions wealthy but more like low to mid seven figures which is enough for many people to consider themselves wealthy. As some readers may know I worked for most of the 1990s at Charles Schwab and had occasion to see individual accounts and I have specific recollections of seeing what looked like fairly normal accounts save for an enormous position in some stock like Dell (DELL), Cisco (CSCO) or Microsoft (MSFT).

To be clear this was not an everyday occurrence just an occasional observation where someone was lucky enough or smart enough to have bought one of the great growers early on and hold on. Obviously I have no idea if any of these folks then went on to lose it all in the tech wreck but the stock market did make these people rich for a time even if not forever.

A week or two ago one well known blogger picked up on this apathy and made a big deal about all of this serving as a contrary indicator to buy. Of course it could be a bell ringing but questioning the effect of apathy on markets is probably the better question to address because it poses a greater threat to your financial plan.

What I mean by that is if the market goes up 15% per year from here for the next ten years then any reasonably well diversified, "normal" equity portfolio will capture most of that lift and there will be a little less work to do. If, as I have been postulating for years now, equity returns continue to be below what we think of as normal then that means the market will not make many of us rich and that we will have to accumulate what we need by doing more than just putting it into any old fund (I realize this is an over simplification).

On this site the context for doing more has meant an increased savings rate, living below your means, figuring out how to monetize a hobby such that it creates an income stream and finding other ways to relieve the portfolio's burden like seasonal work that lasts for a month or so or some sort of consulting type work. Consulting is not an empty suggestion here as I've written before about the former head of Prescott Fire's hazmat team teaching hazmat classes all over the state as a post retirement gig.

From an investment standpoint doing more has meant more of a tilt to yield and a larger allocation to foreign markets. I've never been in the end is nigh camp for US equities just of the opinion that returns would be muted for an extended period. Net net this has been the case for a while and I believe it will continue. I also believe select foreign markets (look beyond the Eurozone and Japan) will offer returns that are close to what most investors think of as being normal. If that turns out to be correct then an increased allocation to foreign will go a long way to getting the job done. If normal returns from foreign turns out to be incorrect and if the US struggles then it places a lot more importance on the ideas mentioned in the above paragraph.

Personally I would not be one to give up on equities. I have unyielding faith in achieving something close to normal returns over the long run even if that means looking in other markets. However I have also made a point of making sure I don't have to get 15% per year for my financial plan to work.
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"The Ryan Plan Will Kill 1 Out of Every 3 Newborns"

I thought that was what I heard Obama campaign wonk David Alexrod say on Meet the Press yesterday but I rewound and I misheard.

The Presidential season took a big step forward over the weekend as Mitt Romney selected Paul Ryan as his VP choice and Ryan accepted despite vehemently denying he would on CNBC, multiple times. The Ryan news seems to have kicked up the anti Ryan Plan rhetoric.

As a matter of personal opinion I think there needs to be meaningful change in how we tax, borrow, spend and care for the old, sick and poor. There is no plan that can possibly be as bad as the democrats say the Ryan Plan is. However there is no plan that will be immune from unintended consequences or otherwise not negatively impact some segments of the population--I've been saying for years I expect no social security benefits when the time comes.

One interesting observation from my friends on Facebook who comment on such things was that in the early days of Obamacare my friends who support Obama said things like "well Obamacare may not be perfect but we need to try something" but there is no such sentiment from them about the Ryan Plan.

It will be interesting to see whether Ryan turns out to be a good choice. He obviously brings in some segment of the party that is further to the right of Romney but might push away voters closer to the middle than Romney and make it more difficult to bring in Democrats who are disillusioned with Obama.

Unless the Romney campaign figures out a way to distance itself from the Ryan Plan while at the same time keeping the Tea Partiers on board I think Obama will win. The Ryan Plan offers some pretty aggressive ideas that are not populist on the surface as the Obama plan is. I believe the Obama plan sounds less frightening in a populist way than the Ryan Plan--Obama wants to give everything to everyone for free while Ryan admits something will have to give.

I would be inclined to lean toward the side of the ledger that more honestly acknowledges that something's gotta give.

One final thought on the Obama presidency up to this point that I wish would get more attention paid to it. It is well understood that congress has not worked with Obama to get much of anything accomplished. People sympathetic to Obama of course blame the GOP-led congress but it seems to me that effective leadership means figuring out how to move forward such that you lead from the middle, make progress on your own agenda without alienating the other side.

Obama has not succeeded in overcoming this obstacle and his continuing to devote so much face time to blaming other people after almost four years should leave little hope that this will behavior will change and if it does not change then Obama's next four years (if reelected) are likely to be as ineffective as his first four years.

We need to start fixing things whether that is the Ryan Plan or something else and a politically neutered President would not seem to offer much promise.
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Sunday Morning Coffee

The other day I posted a follow up about a money manager who believed she could short platinum as a proxy for shorting the euro. There were a lot of good comments including one reader who observed that investing should not be this hard. This is a great comment on many levels.

In thinking about how to invest (this will be different for each person) the starting point is to figure out what the real goal is. In my opinion most people simply want to have enough money when they need it. Most people get there by having an adequate savings rate, staying diversified, having a suitable asset allocation and then not succumbing to panic.

Obviously people have a whole range of goals so the important thing would be figuring out the correct goal for their circumstance. I think too many people target the incorrect goal for their investing.

Everything else then becomes about how to invest toward that goal in a manner that is realistic with time available to spend on the task and consistent with thought process, personality quirks and tolerances. In hiring an advisor it is crucial that the client buy in to whatever the advisor does. Hiring the wrong philosophy, even if the results are good, is a bad way to go.

Just about any investing guru would likely tell anyone to keep it simple. In this context the word simple is vague and can take on many meanings. Whatever you do in your portfolio there will be someone who thinks it is simple and someone else who thinks it is complicated. The money manager using platinum as a proxy for the euro does not think it is so complicated.

Clearly people should not invest beyond their level of understanding or time available to spend on the task but I am all for learning as much as possible, make that continuing to learn as much as possible. This is also a function of time available to spend and also willing to spend.

My personal interest level is probably pretty evident both in terms of career and interest in writing which is why posts like the ones from the couple of days are of interest personally. An investment process is something that should evolve as more learning and market experiences are taken in. To that end I think there is also value in exploring how other people come at the problem--this is where take little bit of process from various sources to create your process comes into play.
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The Big Picture for the Week of August 12, 2012

iShares filed for 14 currency ETFs that it will actively manage, assuming the funds list. The currencies as follows;

Australian dollar
British pound
Canadian dollar
Chinese renminbi
Euro
Japanese yen
Mexican peso
New Zealand dollar
Norwegian krone
Sing dollar
Swedish krona
Swiss franc
Thai baht
Turkish lira

Rydex had the first currency ETFs a few years ago then WisdomTree came in filing for just about every currency on the planet but only actually brought a handful of them to the market. Interestingly most of them are still in registration according to IndexUniverse.

I was asked to comment on the iShares filing for an article and I made the observation that a line of currency funds seems to be consistent with iShares' line of single country equity funds and makes me wonder whether whether a line of single country bond funds can be close behind? PIMCO and WisdomTree have made some inroads here but not on an iShares-ian scale.

The exposure and access to currency is useful and valid for those who are inclined to put in the time needed to understand the dynamics of that market. Once someone has made that time commitment there are several potential uses for a broad array of currency ETFs.

The more plain vanilla way to use currency ETFs would be a small exposure in a "normal" 60/40-ish portfolio. This might mean buying something like the Turkish lira as a sort of carry trade or maybe buying the Sing dollar as some sort of safe haven.

Another potential strategy and more interesting to talk about is one we've talked about before which is Nassim Taleb's idea from quite a few years back which is to put 90% into t-bills (or just the currency) from various countries and then go berserk with the other 10% (go berserk is my word not his). This is intellectually appealing on some level even if an unlikely type of positioning and would be easy to construct with a wide scale of choices. Perhaps a more realistic version would be 5-7% in a basket of currencies.

The other application that is more interesting to talk about is in terms of the cash allocation in a permanent-style portfolio. For anyone not familiar the original permanent portfolio was conceived by Harry Browne 30 years ago that has equal allocations to gold, long bonds, cash and equities (equities via a broad index fund). There have been a few investment products launched that are based on the Browne idea.

Over the years I've posted quite a few times exploring different ways to come at this including a foreign permanent portfolio. Someone who lives in Sweden might only think about this in terms of Swedish stocks, bonds and cash. However someone from a country with a more volatile history, like maybe Argentina, might want a more global approach.

Browne was talking about US based and indexing but there is no reason that each asset class couldn't be global or actively managed to whatever degree comfortable.

For people willing to take the time to learn, the permanent portfolio is an interesting concept but it can evolve with the realities of the world. The relative prospects of the US are not what they used to be and with the US 30 year bond under 3% it may not make too much sense to put 25% of your money into that space.

Of the four the one I wouldn't tinker with is gold, at least not in terms of using other commodities. Personally, 25% is way too much gold but other commodities tend to be more tied to the economical cycle than gold which really is more about emotion one way or another. As a note the idea behind the idea with the permanent portfolio is that there is always at least one thing doing well. Cyclical things like stocks and industrial commodities are more likely to correlate together than stocks and gold.

Today's world might mean a basket of country funds for equities, bonds (if that ever becomes doable) and cash (if the above funds list). There are obviously some bond funds and some currency fund but I think only the single country equity funds offer comprehensive choices for investors.

Increased choices along these lines are in my opinion democratizing for do-it-yourselfers but it is crucial that the proper amount of time be put in before using products like these and time must also be spent monitoring various currencies. The potential for incorrect use is pretty high.
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Follow Up to Platinum as Proxy for the Euro

A few weeks ago I posted a recap from the Delivering Alpha Conference, as posted elsewhere, and talked about a couple of the ideas in a little more detail. One of the ideas not discussed for lack of detail provided elsewhere was shorting platinum as a proxy for shorting the euro.

This idea resurfaced yesterday in this article at the Wall Street Journal. The trade comes from Kathleen Kelly of Queen Anne's Gate Capital Management. The concept is easy to understand. Platinum is used to manage emissions from diesel vehicles and Europe has a lot of diesel vehicles. The rough economic times in Europe means fewer new cars are being purchased which means less demand for platinum so platinum drops in price.

The WSJ article notes that this has worked because platinum has indeed gone down in price. From the article though it is not clear whether the trade has been correct for the right reason or for the wrong reason. For example if 2% of platinum consumption is used in new cars sold in Europe then it becomes more difficult to connect the dots than if 15% of platinum consumption is used here and the article doesn't say.

Supporting the idea that this has actually been a well thought out and well executed trade is the history of the correlation between the euro as measured by FXE and platinum as measured by PPLT. At times, since the launch of PPLT, the correlation has been negative and at other times the correlation has been pretty tight as has been the case for much of 2012.

In picking platinum as a proxy for the euro, Kelly had to first draw a bearish conclusion on the euro and then correctly determine that the correlation would between platinum and the euro would tighten. It appears to me that the reason to use platinum as a proxy in this case for the euro was to get a sort of leverage in the trade.

Both the euro and platinum peaked in late February. Since that peak FXE is down 7.2% and  PPLT is down 18.3% so there was more bang for the buck using platinum. There is no mention as to whether Kelly used actual leverage in putting on the short platinum position but the more bang for the buck concept is something we've discussed here in the context of using SDS as a hedge while at other times increasing the beta of the portfolio as a means of increasing equity market exposure.

This specific type of trade is probably not one I would do because of the extra layer of the manner in which the correlation between the two can change meaningfully. This trade is like a two level proxy which becomes more difficult to explains to clients versus a one level proxy.

Zooming out a little we consider many of our holdings to be proxies for various effect we try to include in the portfolio like Statoil (STO) which is by far the largest company in Norway and is a proxy for Norway in our opinion and has been in client portfolios for many years, subject to the occasional rebalancing trade.

The picture is the Homestake Mining Hydro Electric Plan No 2 located in Spearfish Canyon.
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This One Really Was A Black Swan

I think it was, anyway.

The black swan in question is the allegations about Standard Charted (SBCFF) doing business with Iran and the trouble the bank could get into if true. The point of this post will not be to try to dissect the story but explore the nature of getting blindsided by this sort of story that ends up taking a stock down a lot all at once.

Over the years I have been very specific about my belief in targeting individual stocks at 2-3% of the portfolio in most instances. If Stan Chart is accused of dealing with Iran and they are denying it then there is a very good chance that this was not reasonably analyzable which is why I think this story counts as a black swan. Maybe this will be nothing and the stock will go back to where it was (no idea) in which case it will have been a black swan that just resulted in a bad week.

There are plenty of investors who prefer to have much larger allocations to their favorite stock picks, like 8-10%. One observation I've made is that in a diversified portfolio of stocks there will be one that turns out to be the best performer over some random period of time and one that will be the worst performer over the same random period of time. Layer on top of that that no one can be correct 100% of the time and you realize that there is a good chance that the worst performer will in fact go down. If you knew ahead of time that a stock would go down and be the worst performer then you probably would not buy it.

If you can't know what the worst performing stock will be then how would know what the best performing stock will be? If you use more than 10-15 individual stocks at a time in you portfolio mix, how often have you been surprised by what the top performer was for some period of time?

This is why I prefer 2-3%. When a Stan Chart-like event happens you won't get blown up and when something does fantastically well a 2-3% starting point is large enough to be meaningful to the entire portfolio.

The other aspect to this type of story is the extent to which it is yet another anecdote that scares people away from individual stocks in favor of funds (obviously if the stock fully recovers in a week it wouldn't scare too many people). The ETF landscape is continually evolving to offer new access but there is still room for individual stocks to make for a more complete portfolio. ETFs could be the core with a few stocks to serve as the explore or a portfolio could consist of a diversified set of ETFs with a few individual stocks to add a higher dividend yield.

ETFs definitely can get a portfolio most of the way there but individual stocks are still a crucial component (most of the time) too.  
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Jeremy (Grantham) Spoke

With apologies to Pearl Jam the quarterly letter from Jeremy Grantham is out and as usual it is interesting and thought provoking. There was one particular tidbit that stuck from the usual Malthusian content as follows;

For my Foundation (i.e., personally as opposed to institutionally where, reasonably enough, we cannot impose 10-year plus horizons on our clients)...

This was taken from page 15 of the PDF so you can read it to get the full context but he is saying that for his money he is thinking in ten year terms not quarterly or annually and he is acknowledging that his firm's clients do not/can not think in ten year terms.

If you can get on board with the fact the Grantham knows more about investing than most of us and he is telling us that he thinks in very long time frames then this should be very thought provoking. Obviously this is for investors as opposed to traders.

A recurring theme on this site has been that for most investors, if they really think about it their real goal for their investing is simply to have enough money when they need it. I come to this conclusion as a product of my experiences with markets, my observations of other peoples' experience with markets and my general perceptions of peoples' emotional quirks and tolerances. Obviously the Grantham quote is intellectually appealing as I think it supports my conclusion.

For people who manage their own portfolios there is obviously no other constituency that you need to worry about. You are very unlikely to know how you've done in some random past quarter or maybe even year without looking but you probably do know that for the last five years the S&P 500 is down a little and you probably know where you stand in relation to that. For people who are at the point where their portfolio is supplementing their income then I think the goal shifts slightly from having enough when you need it to being able to maintain it for as long as you need it.

To the extent this rings true for anyone reading this post, a focus that orients to the long term allows for a more suitable investment choices because there would be no extra trades that focus on having a good quarter. It also allows for better risk management as there is less need to chase something that is hot to make a good quarter.

It can be difficult psychologically to embrace this line of thinking. I can tell you first hand that plenty of investors feel the need to think in three or 12 month time frames but that is arbitrary. If a year was 11 or 14 months then they would think in those time frames; arbitrary.

You may not want to listen to me on this but maybe you will listen to Grantham.

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Sunday Morning Coffee

Barron's had a couple of potentially distressing articles this week with one about allegations that JP Morgan transferred bad loans to stable value fund it managed at above mark to market prices and this other one about naked short selling where it is alleged that Goldman Sachs and Merrill Lynch told clients it would let them fail to deliver.

Obviously I have no basis to know if any of these are true, partially true or false but if you read the articles you are likely to think it is just one thing after another and you probably are not inclined to give them the benefit of the doubt. There is kind of like a pendulum swinging and now (meaning the last few years) there seems to be a flurry of these stories.

This also coincides with more instances of malfunctions like the failed IPO of the BATS Exchange, the seemingly bungled IPO of Facebook (FB) and whatever really happened with Knight Capital this past week.

The article about the naked short selling had an interesting line of thought about penny spreads between the bid and ask turning out to be a bad idea. Penny spreads create more liquidity but in a way too much liquidity to the extent there is far more scalping going on now than when the spread increments were larger. This raises the question about whether more of the market innovation (related to market mechanics) of the last 15 years is turning out to be a net negative in the way of unforeseen consequences. Are things like dark pools, algos and the like really productive in terms of allowing markets to allocate capital and act as a weighing machine?

A few days ago I said that in the long run fundamentals still matter and I believe that without a doubt but the current state of markets in the context above increases the difficulty on an emotional level in navigating the market cycles with an investment portfolio.

It is easy to become distracted with this short term noise but whether JP Morgan did it or not, apparently the funds in question were not hurt so neither were the fund holders. This is not to condone the activity if they did it but merely to point out that we will forget about this one very quickly and it will have no impact on any properly diversified portfolios built with a long term time horizon. Should Knight meet a bad end, that story too will quickly move off the front burner; when was the last time you thought about Paine Webber?

Noisy events will come and go for the rest of your investing lifetime and it is very unlikely that any of them will impact whether or not you have enough money when you need it. The things more likely to impact whether you have enough money when you need it will be whether you have an adequate savings rate, diversify properly, maintain a suitable asset allocation for your circumstance and tolerances and that you do not panic during some crisis (real or perceived).
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The Big Picture for the Week of August 5, 2012

A view of Deadwood from a high vantage point.

This is an alley in downtown Rapid City. The graffiti goes on for the entire block.

A different angle of the alley.

A sign in downtown Rapid City we thought was neat.
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Bill Gross is Bearish on Equities

A client passed along this article wherein Bill Gross says, among other things, that stocks are dying asset class. There was talk of zero real return for equities for some unspecified period of time. The context seemed to be US equities. The article was very short so there could have been some nuance missing but very little of this is new.

First, Gross has drawn criticism over the years for talking his book at the expense of giving an unbiased opinion and the article had people to refute him but it only makes sense for a portfolio manager to talk his book, to do otherwise would be deceitful. If you manage a portfolio of equities and you think banks and France are going to be the best performers then you are going to say that to anyone who asks and you are going to own banks and France in your portfolio. Credibility is lost IMO when someone is a permabull or permabear. As mentioned recently, a study shows that vehemence seems to correlate with incorrect predictions.

As far a zero real return from equities, well depending on the time frame he means that might be an improvement in performance. The SPX spent plenty of time above yesterday's close 12 years ago, hello! Ditto five years ago so zero could really be an improvement. Of course I would add that over that time there were many foreign markets that had normal returns for that decade+ time frame.

The forward looking opinion behind Gross' comments that were not really discussed in this article but that he has talked about elsewhere is what he has dubbed the new normal. This is not dramatically different than what I have been saying here for many years. The US faces headwinds that make it less attractive than it used to be, will likely weigh down GDP growth and US equity performance when looked over longer periods of time. I believe US markets will generally go up but at a much slower rate than before.

There are plenty of foreign markets that will not have to confront these secular headwinds but instead will simply have to endure normal cyclical events. This is what has in fact occurred in quite a few countries explored on this site and included in the portfolio (book talking).

The short answer is that this is not the least bit alarming to me as I've been trying to prepare clients for this for many years and embed the idea into the portfolio too. With a nod to yesterday's post I believe the fundamentals will matter over the longer term as has been the case looking back at the longer term but we know that in the shorter term fundamentals do not have to matter.

To repeat from many past posts, while growth here may not be great the US is still the world's largest customer and the dollar still plays an important role, even if a lessened role, in world commerce and so the rest of the planet has a vested stake in the US having some minimal level of health such that we at least muddle along.

We had a full day yesterday in the Black Hills and Devil's Tower in Wyoming but we also had a full day dealing with the situation with RRGR's lead market maker. The assets are at Bank of New York and safe. We are told that market making activity is operating as normal but that other market makers are stepping up to provide liquidity. That kind of seems like two different messages but that remains to be seen. There were multiple phone calls and countless emails including two phone calls at Devil's Tower.

The scope of Knight's market making operation is such that I believe there is no question it will survive. That does not rule out a name change as I have no idea about that but a name change is essentially what happened when Lehman went down and Barclays stepped in. As far as many analysts and traders were concerned after a period of uncertainty most of them simply got new business cards.

A reader poked fun at me for being on vacation so soon after the launch but I would say that I am never on vacation in that when we are away from home I still spend many hours per day doing my job; the market doesn't care that you want to go on a trip. Our client base is entitled to have any needs addressed at anytime including fund holders. If I can be on two phone calls in rural Wyoming then I can probably work from just about anywhere.

The same goes for my duties with the fire department; I dealt with one issue through the email on my phone while walking down the street in Queenstown, NZ. Again, our clients deserve that kind of accessibility as do the people who serve on and are served by our fire department (I also handled a payroll issue yesterday as well). To quote Hyman Roth; this is the life I have chosen. By the same token Joellyn is constantly putting out United Animal Friends fires anytime we go someplace.

Anywho we started out going to Spearfish yesterday and then on to Devils's Tower. We hadn't planned on going there but someone mentioned it on Facebook, I looked up how close it is and so we went. It was very cool as hopefully the pictures convey and it is massive. It is 647 ft tall and the trail around it is 1.3 miles. On the way out we saw what looked like a pretty substantial wildfire that popped essentially across the street in a stand of trees. We stopped back in Spearfish for lunch and then drove through Spearfish Canyon on the way back to Deadwood.We took a lot of pictures through Spearfish Canyon but very few of them capture the cope of what is going on there. The picture of the bank is from Hulett, Wyoming and I just thought it would be a neat shot.
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Knowing Roles

There is some news today about Wall Street firms that makes it suitable to quickly talk about a couple of roles in the ETF process.

Custodian bank--this is where ETF assets are held. To be clear, this is where the actual stocks that a fund owns are kept along with any cash--this is the fund.

Market makers are not custodian banks where ETFs are concerned. There is news about a market maker and the shares of that market maker are down dramatically. This has no impact on the value of a basket of stocks held at a bank.

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No New Stimulus

By now you probably know that the Fed offered no new ideas for stimulus despite a slowing of some sort recently in various economic data (although ADP was a little better than expected).

I've made quite a few comments over the last few years about the desperate actions that have been implemented by various central banks including the US (also the US Treasury too). There have been questions and concerns raised for a little while now about whether the Fed is running out of bullets and if it is, what does than mean.

The idea that the Fed is out of bullets is probably incorrect because we departed from what most people would think of as being normal policy years ago. The financial crisis is a different type of animal from anything country has experienced in decades and if the Fed was going to do anything it was going to be very heavy handed compared to anything that most people have experienced previously. Candidly other than deciding to buy up different forms of debt in the market than it has been buying or even buying SPUZ futures I am not sure what else they could do from here that would have a chance of having an impact. Do not take that as an endorsement just an opinion that something new would simply involve buying more stuff.

The realities of the above have not changed much since 2008 and are unlikely to change much for a couple of years longer at a minimum. This circles back to a few things I've been writing about that I believe to still be relevant. There is no question that US equities have done well far more often than not since the March 2009 low. It seems like a logical conclusion that much of this is attributable to the Fed however the fundamentals of the US still favors owning select foreign markets.

The fundamentals I speak of include the lousy progress with jobs growth, GDP growth and the housing market. It can of course be frustrating when the thing with superior top down fundamentals lags the thing with weaker top down fundamentals but of course that is where patience comes into play. I have unyielding faith that in the long run, fundamentals matter.

Another point to reiterate is avoidance. Europe and the US are working through generational events of which I contend they are not finished yet. Anyone agreeing or believing that much of the lift in the US has come from the Fed might want to avoid or underweight the thing being propped or or going through a once in a lifetime (hopefully) calamitous event.

I get some pushback on these ideas and of course they could turn out to be wrong but if they are correct then it is a multi year process. Several years ago I said I felt that history will look back on the period from 2000-20?? as a depression. It doesn't have to be anything like the 1930s (and it is not) to still be a depression. If it is a depression then it will take many years to fix; although not as bad as the 1930s it is more complex. Plenty of other countries have not been dealing with depression and will not be anytime soon. This describes the countries we own and that I have written about.

Yesterday we went to Sturgis and Deadwood (staying in Deadwood until we leave South Dakota on Friday). The first picture is from the Motorcycle Museum in Sturgis. It was very neat and had more Indians than anything else. The second picture is from out on the main drag in Sturgis. There are dozens and dozens of shops along the main drag all selling essentially the same stuff. Interestingly most of the store fronts remain empty the other 50 weeks of the year so it makes economic sense for the owners to only rent the space for two weeks...go figure. One funny story that I posted on FB; we are there walking around, lots of Harleys and Harley looking people and then all of a sudden a Tears for Fears song starts blasting over the sound system they have going.

The final picture is from Deadwood. The downtown has a lot of old brick buildings very close together, the streets in the tourist trap area are a fake cobble stone and there are hills/mountains that shoot straight up behind some of the buildings.

Much of what we have seen here has been in great condition. The roads seem to be very wide with zero potholes and very little traffic anywhere. A Facebook friend cautioned that we avoid Keystone which is the town near Mount Rushmore. We drove through it actually, after we saw the Mount Rushmore lighting and when we did it was empty but it looked like I imagine Branson, MO looks like (never been there). You're driving along with very little in the way of houses or commerce and then bam, Keystone with many hotels and a lot of lights. I'm glad we saw it but glad we could drive through with (literally) no traffic.

The final picture is also from Deadwood and hopefully captures the old brick buildings and the extent to which the hills do shoot straight up.
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The Badlands

The Badlands

The Badlands a little closer.

An old bank in Custer City that was or will be a coffee house.

A farm near Custer State Park.

We also visited with the Wall, SD fire department, traded shirts and patches and got a look at their fleet which was very impressive. The trucks are slightly different from what we are used to as their wildifres are typically grass fires as opposed to forest fires; their trucks had much beefier hardware to pump and roll. One other different thing is that in Arizona and many other places in the Mountain time zone there are national forests. Coming out of the Badlands we drove past the Buffalo Gap National Grassland.
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