Random Roger's Big Picture

In the last few days I have heard several comments on the network from on air personalities saying how ticked or mad comments when the market is down or "you must be happy" types of comments on up days.

This does a disservice to anyone who might be new to the markets as it encourages people to assign emotions to otherwise normal market action.

I doubt the current trading elicits too much of an emotional response from people so saying don't get worked up may be obvious but in all likelihood the chance to succumb to emotion will occur again.

So if your response today to don't get worked up is no kidding, hopefully you will remember that response if the market does in fact slide off the mountain again.

Labels: market, psychology

Posted by Roger Nusbaum at 9:37 AM | Permalink | Comments

Country funds often get a bad rap from MSM even though any S&P 500 index fund is also a single country product. The utility of country funds is that they allow access into an investment destination without having to pick a stock. The downside to them, for example, could be that a weighting in banks might hold back what might generally be a technology exporting based country.

A potential issue with using a bunch of country funds is ending up too lopsided in some sectors and zeroed out in others. I was curious to see if a portfolio of just country funds could be assembled that captured some regional and economic diversification without ending up 35% in financials. So I plugged in the following ETFs into Morningstar to see what I could see.

iShares Canada (EWC)
S&P 500 (SPY)
iShares Australia (EWA)--personal holding
iShares UK (EWU)
iShares France (EWQ)
Market Vectors Russia (RSX)
iShares Taiwan (EWT)--a few clients own this one
iShares Malaysia (EWM)
iShares Israel (EIS)
iShares Brazil (EWZ)

A quick disclaimer before proceeding, I gave very little thought to the ten chosen and I'm not disclosing the simplistic weighting on the off chance someone tries to implement this.

Without looking under the hood just yet it is clear that the mix captures regional and economic diversification. You don't need to know too much about stock picking or portfolio construction to realize that but this was probably never in doubt.

As for the sector break down, shockingly the weight to financials (all sector info according to Morningstar) was only 19.95% versus 17.43 for the S&P 500. Tech was a meaningful underweight at 8.42 versus 16.73. The other overweights were telecom, materials, energy and industrials. The underweights were healthcare, staples, discretionary and utilities by a whisker.

According to portfolio science the stats are mediocre. The overall beta was 0.95, the correlation to the S&P 500 0.88 and the standard deviation was 23.91 versus 21.08 for six months. The average market cap was about half of the S&P 500 and the yield was a little better at 1.96%.

Morningstar was not able to calculate the performance for 1 year because EIS is too new. So backing that one out the portfolio was up 7.57% for one year (actually it only went back to May 31, 2007 for some reason) versus a 7.46% loss for the S&P 500 as measured by SPY. The Tel Aviv 100 Index was down 8.9% in the period studied so if EIS had existed it would have take a small bite out of the return.

The portfolio is mostly foreign and foreign did much better so the result is not a surprise--again foreign has done better. The next time the US is the best performing market a portfolio like this that is mostly foreign would obviously lag.

The bigger macro of this exercise is that it probably removes home bias (well, I think it does anyway). I also think that by drawing various types of countries it reduces, not eliminates, currency risk, for example lately the British pound has generally struggled against USD while the Aussie has been strong.

I think anyone putting some thought into country selection and weighting, and again I did not, could create a diversified portfolio without having to pick stocks or sectors or manage things like cap size or style.

The downside includes ignoring the things listed in the above paragraph which at times will hurt performance although that might not be fair, if you don't manage those things now you would not miss them in the future.

Labels: portfolio strategy, theory

Posted by Roger Nusbaum at 5:22 AM | Permalink | Comments

World Interest Rates Table

Posted by Roger Nusbaum at 10:42 AM | Permalink | Comments

Another ETF filing with a hat tip to IndexUniverse.

WisdomTree has filed for the Middle East Dividend Fund that will include Bahrain, Dubai, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar and the United Arab Emirates.

The prospectus has no info on country weightings (none that I found anyway) but surprisingly 54% of the companies have market caps greater than $2 billion.

WisdomTree has an awful lot of very interesting funds on the shelf that I'd love to see list but thus far have not. Some of the filings are so old now that I doubt they will list so we'll see if this middle east fund ever lists or not.

One thing seems pretty clear to me, frontier markets will open up to investors one way or another pretty quickly. PowerShares has a frontier fund in the works which takes in a few other countries but given the role of middle eastern countries and investment funds are now playing on the global stage a narrower fund like the one WT filed for is inevitable even if it is from another provider.

As I was working on this post the following comment came in on this morning's post that deserves a follow up.

I sure wouldn't attempt the kind of sophisticated trades that you're positing. For me, it's just enough to know that they're out there if I ever get to that point.

I mentioned the potential of trading the spread between platinum and gold or AUD/NZD. No argument from me on the reader's point. I would add though, is that a dynamic exists between many different things like Oz and New Zealand. As it becomes possible to more easily trade off of these dynamics means that people will submit articles to places like Seeking Alpha. And while you may never trade AUDNZD via ETFs you might equity exposure to Australia and understanding the dynamic might make you more knowledgeable about the country you own.

Now apply that to other exposures in your portfolio like maybe gold.

Labels: investment products, portfolio strategy

Posted by Roger Nusbaum at 10:07 AM | Permalink | Comments

Speaking of Romania the Slovakian koruna will be no more as Slovakia has been accepted into adopting the euro starting Jan 1, 2009 (save for a potential snag or two). I don't know a lot about Slovakia but the bigger macro for these countries is smaller, faster growing, cheaper labor, younger population than the European old gard makes them generally attractive as an investment destination.

IndexUniverse is reporting that there will be two platinum related ETNs from ETRACS listing very soon, one will go long platinum and have ticker PTM and the other will go short platinum with ticker PTD.

This chart compares the platinum product from ETF Securities in the UK versus GLD (client holding). The basic case for platinum as I understand it is there is less of it than gold and it gets consumed for industrial purposes.

Van Eck launched a double long euro ETN, ticker URR, and a double short euro ETN, ticker DRR. These look a little funky to me as there are more moving parts to the calculation than you might think. IndexUniverse explains it here.

According to the IndexUniverse article the index for URR is up 12.8% YTD through April 30. According to Yahoo Finance the Rydex Euro Fund (FXE) is up 6.9% so despite my perceived funkiness that seems pretty reasonable. DRR YTD through April 30 is down 10.68%.

Rydex has filed for new currency ETFs; Russian ruble, Hong Kong dollar (this is an odd one, HKD is pegged to the greenback), South African rand and Singapore dollar. Hat tip to 24/7 Wallstreet for this info.

All of these new products, which I just heard about yesterday, tie in with the ongoing thread of more products allowing for more sophisticated portfolios. For do-it-yourselfers who are inclined to learn about them and proceed with moderation (this comment assumes the products all work which remains to be seen) I think this is a big positive.

Anyone saying they can't keep track of all of them, I hear you. There have been a slew of double long and double short commodity products that I cannot keep straight. For my tastes commodities are volatile enough that single exposure is good enough for me.

As more things come it creates some interesting sorts of pairings like trading the spread between platinum and gold or the AUDNZD rate (once/if the WisdomTree New Zealand ETF lists). Even if you have no plans to make these sorts of trades learning about them may offer some utility for what you are comfortable doing.

Of the products mentioned in this post I am most interested in the Sing dollar. I have been interested in it for a while, hopefully they follow through with it.

One commodity ETF or ETN I'd like to see is coffee. I am of the opinion that coffee consumption in Asia could skyrocket yet still have virtually no market share but if correct that could have a meaningful impact on the supply and demand equation for coffee. To be clear coffee will never be the drink of choice in Asia.

And finally from the hey that farm in Uruguay doesn't look so bad file is this rather lengthy look at the state of the US power grid. Yikes.

Labels: economics, foreign, investment products

Posted by Roger Nusbaum at 5:29 AM | Permalink | Comments

A reader left a lengthy comment about Modern Portfolio Theory that you can read here.

Where better to go to discuss theory than the Delta Tau Chi house at Faber College? Fortunately this post will be short as I am no MPT scholar.

First here is the Investopedia quick and dirty on MPT.

Basically the reader aspires to be a money manager, spent some time working for someone very big in the industry who succeeded by not using MPT and so the reader seems conflicted by this.

Really, I don't think the reader is conflicted, he doesn't believe in it, maybe that will be temporary or maybe not.

MPT is a very important building block for professional management of a portfolio. The principles behind it are important and despite the reader's experience and what is contained in this link left by the reader MPT can work. I think this is rather obvious.

However, like anything else it is unreasonable to expect it to be the single best method for all market times. My advice to the reader, since he cares at all about not believing in MPT, is to learn it as best as he can. MPT is a building block. Once you learn something cold you can then begin to pick it apart, explore the flaws and finally take from it what you need (if anything) and discard what you do not.

FWIW, I think I take some from MPT but also discard parts of it as well which I think is consistent with my idea of taking bits of process from many places to create your own process. I would also note that I have never thought so tangibly about believing in it or not in the same manner as the reader.

Labels: theory

Posted by Roger Nusbaum at 9:09 AM | Permalink | Comments

Despite Flo's excitement that headline is misleading.

In posts that talk about stock picking versus all fund portfolios versus some combination of the two, comments get left opining that stock picking is difficult or risky or whatever. So for the fund investor who goes narrower than an SPY, EFA, AGG mix could they spend the time and do the work to own three stocks from themes that were especially compelling to them for which there was no sector or country product?

Sticking with three narrow themes for which I have no exposure, let's say an investor believes Cyprus (oh yeah, there's a stock market there) is the place to be, well for that person there is only one choice (that I know of); The Bank Of Cyprus (BCYPF) and it has been a pretty good proxy for the General Index of Cyprus (YTD the bank is down 28% and the index is down 29% and the charts look identical).

How about shipping stocks? A lot of people seem to like these, the story is clearly compelling (stuff's gotta get there from here) and many of them pay very large dividends. There are quite a few stocks that are in shipping one way or another but no sector fund to own.

Lastly let's say an investor thinks the plane leasing stocks are going to finally turnaround (they have been bludgeoned), there's a handful of these but no fund. Some of them capture the growth in passengers in places like India and if they can get their cash flow squared away they offer the chance for enormous dividends.

To be clear I don't own any of the three, I've tried to learn a little about them and do watch them to varying degrees.

So the question is could a fund investor reasonably learn about two or three or four disparate themes and devote 5% or maybe even 10% of the portfolio to them while putting the rest into some sort of well planned, properly diversified combo of broad-based ETFs or, if they are so inclined, sector funds (properly weighted)?

This is obviously core and explore. As far as risk of individual stocks, let's start with the premise that regardless of anyone's stock picking acumen it not difficult to discern when a stock is a lottery ticket, like a biotech whose only drug is in phase 1 or a mining company that has never actually mined anything. So that pretty much rules out a one day 75% hit to one of the three stocks.

The realistic risk from a bottoms up problem (meaning the wrong stock was selected), as opposed to a top down problem (like you buy a Chinese stock that cuts in half at the same time the market cuts in half), might be from an earnings problem which seems is usually no worse than a 20-25% hit (that is a relatively extreme reaction but of course there has been worse).

Another risk might come from something like losing out on a contract as recently happened to Boeing (BA), although the immediate impact was quite mild.

One last risk that seems to come up a few times lately (to be clear this is in no way an exhaustive list of risks) is some sort of balance sheet/accounting issue which again seems to max out at worse with a 20-25% immediate reaction.

One risk that is not very likely is fraud. If the probability of fraud is low then the probability of owning more than one fraud stock at the same time is incredibly low.

Additionally 2-3% each into three different stocks from different themes can mitigate some of the top down risk (like owning three discretionary stocks late in the cycle). Combine all of that with some sort of stop loss strategy on the three and the risk would seem to come in off the ledge a little bit.

The point of all of this is not that you should go out and buy stocks today. But if the only way into an important theme important is with a stock you should be open to the possibility of buying a stock.

Labels: equities, portfolio strategy

Posted by Roger Nusbaum at 5:27 AM | Permalink | Comments

This rather sparse chart is of the benchmark BET index from Romania.

It may not be obvious on first glance but the market is down 34% from its closing high last July 24.

Romania is part of the EU but not the EMU. Today their central bank raised rates by 25 beeps, 50 was expected, to 9.75%. Inflation is pretty hot (in the eights), GDP growth is good, estimated in the fives this year but it has been on a down trend for the last couple of years and it is a deficit country.

I'm not sure how keen they are about trying to join the EMU but the mix of stats says that is probably a ways off but interestingly the currency, the leu, is up about 4% against the greenback this year but the ride to 4% has been wild.

I think Romania might be one of many countries where owning the currency as a proxy for the country might be just as good if not better than equity exposure. Romania does have that ascendancy theme that most of central and eastern Europe has and that stands to benefit a lot of the currencies (maybe it already has), also the currencies returns (ex-Turkey and maybe Hungary) may not be as lumpy as equities over the next few years.

For now there is no easy way to capture Romanian equities or the leu. Take this for a bigger macro. There will be more choices along these lines. In the next few days investors keen on Brazil will have access to the real via a Wisdom Tree fund that will trade under ticker BZF. The landscape for stocks, bonds and cash from other countries will only get bigger.

Before you read an article from Morningstar poo-poohing currency ETFs, for some people the currency might be a more suitable proxy than equity for frontier markets. Something to explore.

In looking at a few thing to write this post I gotta say I found the country looks to be beautiful. Lots of mountains, old and interesting architecture and of course it borders on the Adriatic (that is a Cheers reference and actually Romania is on the Black Sea). Anyone ever visited, is it a interesting as it appears to be?

Labels: currency, frontier markets, investment products

Posted by Roger Nusbaum at 9:22 AM | Permalink | Comments

I've always wondered whether there really is a way make money long term by renting stocks for the dividend-dividend capture as it is known. There are of course funds that do this but the results while generally ok over longer periods of time have been not so great in the last few months.

Before we get into this, even if it makes sense strategically it would be very tax inefficient so the context is in an IRA of some sort. Lets say the theory would be to put something like 50-60% of the portfolio in one of the total world funds and the rest would be used to rent stocks around their dividend dates.

To keep the math simple lets assume 3% into 15 names at any one time. A quick mechanics note is that on ex-date a stock price is reduced before the open to account for the dividend. For example a stock closes at $100 today. Tomorrow it goes ex-div for $0.50. If it closed tomorrow at $99.50 it would show unchanged. Obviously buying at $100, taking in a $0.50 dividend and selling at $99.50 is a waste of time and commission dollars.

The idea would be to buy before ex-date and sell it for at least what you paid for it after ex-date or in the example about buy at $100, take in the $0.50 and then sell for at least $100. So the stock would need to work back up to the pre-dividend price. In a healthy market this doesn't take that long but of course it may never make back the dividend.

Below is a list of real stocks with the name changed (we're not handing out fish here) along with the most recent dividend and the days needed to make back the ex-date reduction.

Enormous Domestic Bank 1.6% (this was the yield for the quarter, so annual 6.4%) made back the ex-div reduction in six trading days (intra-day)

Big Foreign Oil 5.4% (this was a once a year div) made back the reduction in six trading days

Hot Potato Shipping 1.6% (for the quarter) made back the reduction the next day

Fat Yield Foreign Tech 2.1% (for the quarter) made back the reduction in five trading days

Big Cap Telecom 1.1% (for the quarter) made back the reduction in 15 trading days

Good Ole Boys Tobacco 1.04% (for the quarter) made back the reduction in six trading days

Widows and Orphans Electric 1.34% (for the quarter) 58 days and counting (the next div is right around the corner)

Emerging Market Bank 4.9% (annual) four days to make back the reduction

Big Global Health 1.1% (quarterly) two days to make back the reduction

US of A Chemical 1.1% (quarterly) five days to make back the reduction

Not So Big Chinese Company 5.3% (annual) 16 trading days to make back the reduction

Great White North Bank 1% (quarterly) made back the reduction next day (intraday)

Ginourmous Conglomerate 0.9% (quarterly) made back the reduction next day (intraday)

Non-Oil MLP 2.2% (quarterly) made back the reduction next day

Emerging Market Oil 8.1% (annually) made back the reduction in nine days

That's 15 names, one did not work and I was able to find these by only looking at 21 stocks. There is a long term upward bias to the market so it may be so that since I grabbed the most recent dividends and the market has generally trended higher in that time it appears to be working out. If I had done this two months ago it may not have worked out as well as now and to be clear a lot of ideas work when the market is in an uptrend.

These stocks listed above are real stocks but they would just be a sampling of what I think would be needed to to maintain a fully invested portfolio that presumably would turn over ever month. If all 15 of these paid in the same month (sorry but I didn't want spend all day building a database I'm not going to use) then the yield on this portion of the portfolio would have been 2.65% for the month.

Is that representative of every month? The argument no is because the list brings in several annual pays to which I would say there would be a few months in the year where you could really load up on annual pays.

If someone with the time and inclination to do this could muster 1.5% per month it would be a monster home run.

It is possible that certain CEFs and other sorts of investment products could work too.

How large would the data base of stocks need to be to pull this off? The example above is with 15 stocks. 15 times 12 is 180 stocks but obviously you could bring that number way down as most of the stocks pay quarterly and so they could be bought four times per year.

The flaws abound but there is not much realistic risk of a bunch of stocks like this (notice there is no undue sector risk relative to SPX) cutting in half all at once unless the overall market cuts in half. Of all of the stocks studied plenty dropped close to 20% with the market and only one, the Chinese stock, from the top down to the bottom dropped by 50%.

I am in no way advocating picking stocks just for the yield. Buying a stock without a thorough study of the company is straight up stupid. Obviously there would need to be some sort of exit strategy discipline. Widows and Orphans Electric has not worked out on this go around, probably because utilities in general have not done great, but nonetheless it has not worked. Holding for 58 days would not make sense, relative to the strategy because that's a long time to not capture another dividend which is the point of the exercise.

Obviously just because I had an easy time finding names that worked does not mean it would work in the future. There is an up-market logic that says it could work but there is no guarantee.

Another big risk that comes to mind is behavioral. For instance this could start out, in an up market, working just fine leading to a little more risk being taken, which might also work out, leading to a little more risk and the next thing you know you have six shipping stocks with colossal dividends and then the rug gets pulled out from underneath as was the case last year.

The human reaction of taking more and more risk when something seems to be working for a while repeats over and over.

This is not something I am going to do. I do not think it is a substitute for a diversified portfolio. I do think it is very worthwhile to explore crackpot ideas like this because it does provide the chance to look at portfolio construction from different perspective which is very constructive.

Labels: theory

Posted by Roger Nusbaum at 5:24 AM | Permalink | Comments

The picture and chart are from one of two rice articles I found today in the WSJ.

As you can see the price of rice has sold off about as quickly as it lifted at the very end. There is nothing too unusual about that sort of chart action during manias.

While I do not know where the decline stops I think it is a good bet that the selling will slow before the price gets back to the levels it was late last year.

Not long ago rice was at $10 so obviously even if this correction goes all the way back to $15 that leaves it 50% above where it was.

That probably means the panic and rationing would be over but as I mentioned a few weeks ago the longer term consequence of a 30-50% rise could turn out to be meaningful.

I think this is something to pay especially close attention to.

Labels: commodity

Posted by Roger Nusbaum at 8:29 AM | Permalink | Comments

Feliz Cinco de Mayo, amigos.

Yesterday on the Connie Mack show, retired Oppenheimer fund manager Bill Wilby made a very simple but very smart observation about oil that resonated with me.

Essentially he said that oil has made its way up to $120 all the while as the US has struggled economically. Not to turn this into a debate about whether there is a recession or not or how bad or whatever, but clearly the US economy, which consumes about a quarter of the world's oil supply, has not been going great guns yet oil has rocketed higher.

Wilby says that when the US does get back on track it could push oil up to $200 per barrel. I'm not terribly concerned about getting to the figure or not but that big of a move in the next few years would, I have to think, create problems of a harsher magnitude than we think we have now.

In my opinion it seems fairly obvious that China and India's demand will continue to increase and with 2-2.5 billion people combined even small increases in demand can matter. Additionally there are a bunch of countries with 70-120 million people that are a little earlier stage in their development that will also consume more oil over the course of the next decade.

We know there is some oil out there that potentially adds to supply (Tupi, Carioca, Bakken, Alaska) but we also know there is decline (Cantarell, North Sea to name a couple off the top). I've read some divergent opinion as to what the net effect is, but at a minimum supply would seem to be challenged.

The one part of Wilby's comment I can't reconcile is that from here, US GDP growth really taking off with oil where it is or even $15 lower seems like a big headwind. To be clear I am saying that if we technically go into a recession and oil stays up around this level, when we come out of the recession to start the next expansion it might be a little more sluggish than normal. So maybe this removes the nearer term notion of $200 but still maintains a path for higher prices from here as the decade winds down.

The investment implication, if you buy into any of this, would seem to be either an overweight position in energy stocks or if equalweight, equalweight with higher beta than just owning Exxon (MOB) or iShares Energy (IYE).

What about solar and other alternative energies? I think I have more faith in the technology than the stocks. The industry is in its infancy, solar accounts for only 0.06% global electricity consumption. While I think solar will become much more relevant it might do so with different companies than we know now, point being be careful with that one.

Labels: economics, oil

Posted by Roger Nusbaum at 5:22 AM | Permalink | Comments

Get ready for that triple shot whatever it is you order.

Direxion Funds, the kings of levered products, just filed for a bunch of triple long and triple shot short ETFs.

According to Index Universe the list is as follows;

1) MSCI Broad Market
2) Nasdaq 100
3) Dow Jones Industrial
4) S&P Midcap 400
5) Russell 2000
6) Nikkei 225
7) MSCI EAFE
8) MSCI Emerging Market
9) S&P BRIC 40
10) FTSE/Xinhua China 25
11) Indus India
12) S&P Latin America
13) MSCI Commodity Related Equity
14) Energy Select Sector
15) Financial Select Sector
16) DJ US Real Estate
17) S&P US Home Building Select

As with the double long and double short these will, assuming they actually list and do what they are supposed to, open the door to several different types of strategies ranging from speculative gambling to what is essentially portfolio rocket science.

As with the double products, the Direxion ETFs objective is on a daily basis not over any longer period of time. For an understanding of how this can create surprises for people; over the last 12 months SPY is down 5% but over that same period the double long S&P 500 (SSO) is down 20%. For the calender year 2007 SPY was up 3.5% and SSO was down 3.5%. That doesn't necessarily mean the product doesn't work but somehow the combination of up and down days netted those two results.

I think the long products would give a better longer term result in a market that was trending up as opposed to a market that has been rolling over but that's just an opinion.

Chances are some folks will get very aggressive with these, I would probably only be interested in the triple short S&P 500 or maybe triple short EAFE as a hedge for when the market is below its 200 DMA and some other folks will create some very sophisticated pairings of long/short, single/double/triple, different indexes and so on.

A portfolio using only broad-based products could have neutralized out the financials very efficiently with the triple short financials without disrupting too much of the rest of the portfolio. Unfortunately the rocket science applications of these products don't get written about very often but maybe between now and when these funds list I can dig something up.

While it should go without saying I'll say it anyway levered products used incorrectly offer the risk of an absolute blowup. A position on the wrong side of the trade on a day where the market moves 2% could result in an 8% loss. Check the math? No, the goal would be three times but occasionally it moves more or less than the objective and this sort of scenario on a given day is plausible.

For anyone looking at these as an efficient hedge, trust me, a little bit will go a long way.

The picture is from a coffee house Parua Bay in New Zealand.

Posted by Roger Nusbaum at 5:57 AM | Permalink | Comments

Labels: video

Posted by Roger Nusbaum at 5:53 AM | Permalink | Comments