Emerging Markets: What Role Should they Play?
As you know from reading this blog I am a big believer in having a lot of exposure to foreign stocks that includes an allocation to emerging markets. I found this article on ETFzone.com, a site that has published some of my writing.
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Wikinvest Wire
Sunday, October 31, 2004
Deconstructing VIX
Click on the picture for a bigger chart.
This is a chart of the Volatility Index going back to its inception. Much has been made about the low level of the VIX for the last couple of years. VIX measures volatility of options on the S+P 500 index. This is often used as a contrary indicator. A low VIX is said to mean complacency exits in the market and so the market may drop when VIX is low. Conversely the market may rise when VIX is at a high level. Barron's has fixated on how low the VIX is. Actually it is not that low. If you look at the chart you see that it has spent half of its life below 20, like it is now.
The time spent above 20 occurred when technology, a relatively volatile group, had a record weighting in the index. Keep in mind that the S+P 500 is capitalization weighted. During the bubble days tech grew to become 30% of the index. Juniper Networks, Yahoo!, JDSU, Broadcom, the old AOL and a couple others I am forgetting had market caps greater than $200 billion. So all that giant volatility was embedded into the price of SPX options back then and the VIX traded between 20 and 40. Now that these stocks are a fraction of their former value and the tech weighting in the S+P is in the teens it only makes sense that VIX has been below 20 for quite a while.
Tech alone might account for a lower VIX but the other thing holding down the VIX is low interest rates. The risk free rate of return an investor can get from a Treasury Bill goes into every type of options pricing model that I have ever heard of. Generally speaking lower interest rates will reduce option prices, everything else being equal. The conclusion here is that it may not make sense to think VIX is low by comparing it to 1998-2002.
Happy Halloween.
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Saturday, October 30, 2004
Random Market Musings
Well we are almost done with the election season, thank goodness. I will stick with what I said last week, my gut says Bush wins the popular vote and Kerry will win the electoral college. Of course it doesn't really matter. Bush will bring more of the same, you can decide whether that is good or bad, and Kerry will bring a Clintonian gridlock to Washington and get nothing accomplished. At least not for the first two years anyway.
I believe I just coined a term, Clintonian.
Since 1972 there has only been one presidential election year where the market changed its trend in the first week of November, 1976. My point is that we may not see a post election rally with any teeth. Beside the historical evidence, it seems like too many people expect a rally. It has never been logical to me why the day after the election is a better day to buy stocks than the day of the election, and history would seem to agree. Great if it does rally; my clients will get to participate.
CNBC, on Friday, questioned whether we have seen the peak in oil and oil stocks and if a correction for both is coming. That could be the case. I have been overweight energy for a while now because I think there is huge growth in demand in China and India that will last for several years. So here I talking about long term demand. Some portion of the run up to $55 has been due to short term supply issues like hurricanes and labor unrest. The analyst community has been so wrong about the price of oil for so long that I have no reason to believe they are correct now when they say that oil will go back to the high $30's. If we follow this thought further if the analysts will be wrong about the high $30's that must mean it either goes lower than that or does not go that low. Because of the Chinese and Indian demand my vote is that it won't go as low as the high $30's. I have a stop order or two in place in case I am wrong.
There was an interesting article in Barron's European Trader column about Gazprom, the giant Russian gas company. The take away is that the shares may be allowed to trade more freely in a way that may create more demand for Gazprom stock. Clearly owning Russian stock carries quite a bit of risk but that does not make the story any less compelling. I would not be surprised to see Gazprom lift on the article for a couple of days. After that it may be worth exploring further.
Lastly, a quick rant about Gregg Hymowitz showing on Cavuto today. I have disliked this guy ever since he first showed up on TV. Has anyone ever learned anything about investing from this guy? I have not. Back when he would actually talk about stocks he only talked about huge over owned American companies. As I have written before, I think that any manager that only touts these types of stock either is sharing none of their insight or they have no insight. Either way what's the point? Now his political opinions are all he talks about. Kerry can do no wrong and Bush can do no right. I always thought successful portfolio management, regardless of method, required insightful analysis to multiple outcomes. Hymowitz talks as if he is utterly blinded. Again, if he has more insight that he won't share, what is the point of having him on? Is Fox not able to find someone to articulate the left side in an insightful way? I actually don't think Hymowitz is as dumb as he appears to be. I actually believe, based on what I see on FOX, he is not willing to share his firm's insights into anything related to capital markets.
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I believe I just coined a term, Clintonian.
Since 1972 there has only been one presidential election year where the market changed its trend in the first week of November, 1976. My point is that we may not see a post election rally with any teeth. Beside the historical evidence, it seems like too many people expect a rally. It has never been logical to me why the day after the election is a better day to buy stocks than the day of the election, and history would seem to agree. Great if it does rally; my clients will get to participate.
CNBC, on Friday, questioned whether we have seen the peak in oil and oil stocks and if a correction for both is coming. That could be the case. I have been overweight energy for a while now because I think there is huge growth in demand in China and India that will last for several years. So here I talking about long term demand. Some portion of the run up to $55 has been due to short term supply issues like hurricanes and labor unrest. The analyst community has been so wrong about the price of oil for so long that I have no reason to believe they are correct now when they say that oil will go back to the high $30's. If we follow this thought further if the analysts will be wrong about the high $30's that must mean it either goes lower than that or does not go that low. Because of the Chinese and Indian demand my vote is that it won't go as low as the high $30's. I have a stop order or two in place in case I am wrong.
There was an interesting article in Barron's European Trader column about Gazprom, the giant Russian gas company. The take away is that the shares may be allowed to trade more freely in a way that may create more demand for Gazprom stock. Clearly owning Russian stock carries quite a bit of risk but that does not make the story any less compelling. I would not be surprised to see Gazprom lift on the article for a couple of days. After that it may be worth exploring further.
Lastly, a quick rant about Gregg Hymowitz showing on Cavuto today. I have disliked this guy ever since he first showed up on TV. Has anyone ever learned anything about investing from this guy? I have not. Back when he would actually talk about stocks he only talked about huge over owned American companies. As I have written before, I think that any manager that only touts these types of stock either is sharing none of their insight or they have no insight. Either way what's the point? Now his political opinions are all he talks about. Kerry can do no wrong and Bush can do no right. I always thought successful portfolio management, regardless of method, required insightful analysis to multiple outcomes. Hymowitz talks as if he is utterly blinded. Again, if he has more insight that he won't share, what is the point of having him on? Is Fox not able to find someone to articulate the left side in an insightful way? I actually don't think Hymowitz is as dumb as he appears to be. I actually believe, based on what I see on FOX, he is not willing to share his firm's insights into anything related to capital markets.
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Friday, October 29, 2004
Snow on the Ground and Roger on CNBC Asia
Walker, where I live, had its second snow storm of the season this week. We live on a mountain at 7000 feet with lots of pine trees and it is very picturesque.
I am scheduled to appear on CNBC Asia Sunday night about 13 minutes into the first hour of Market Watch.
On to market related things, well sort of. Yesterday afternoon I had to attend a luncheon (the details of why I had to attend would take to long to type) hosted by another money manager. Joe, as I will call him, talked at us about what he sees for the next few years and what he is doing to position around his expectations. He also had opinions about China, our savings rate, and some other things that I don't remember. This went on for 90 minutes.
The reason I am posting this is because of the philosophical differences between the way Joe manages money and the way I do. Joe thinks he is very smart and believes he can out smart the market. His bottom up stock pick themes are not simple. My approach is to listen to what the market is saying, to take what the market is giving and get out of the way when the path of least resistance is down. For example the market is saying there are problems with large American pharma stocks, I first wrote about this in May for Motley Fool. Chances are we can figure out why the group is having problems but even if we can't we can look at the price action over the last two years to give us a clue. Ditto with the insurers. I wrote a negative piece on AIG, also in the spring for the Fool. While I had no idea that the group would get hit like it has I just didn't (and still don't) think it was the right place to be. Joe owns AON corp. I'm sure his logic is very compelling, but as it turned out his logic was not smarter than the market.
He also employs no counter strategy, in case he is wrong with any of his themes. As I have said before, to be properly diversified against the unknown and your opinions being wrong you should always have some stocks going up and some going down. The way you out perform the market is by getting the big picture things correct more often than not. When I am wrong about some things my clients won't be hurt. This should be very important to anyone that manages money, except Joe.
The reason I like to keep things very simple to assess the big picture and help guide investing themes is that I have noticed the most successful investors all keep things quite simple. Michael Steinhardt, George Soros (back when he didn't talk about politics so much), and Jim Rogers all can articulate what they believe in a sentence or two. While I am no Julian Robertson I do try to emulate these guys where possible. For example, I am overweight Australia because they are one of China's largest trade partners and will be selling more and more stuff to China. Anyone else think that is simple?
Moving on to one last issue. Michael Kahn had an interesting nugget in his column in Barron's online this week. Any time the Dow closes down more than 0.5% in the October before the election the incumbent has lost. The number the Dow needs to take back today is 10029.87. As I am about to hit the button to post this the Dow is at 10005.16.
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I am scheduled to appear on CNBC Asia Sunday night about 13 minutes into the first hour of Market Watch.
On to market related things, well sort of. Yesterday afternoon I had to attend a luncheon (the details of why I had to attend would take to long to type) hosted by another money manager. Joe, as I will call him, talked at us about what he sees for the next few years and what he is doing to position around his expectations. He also had opinions about China, our savings rate, and some other things that I don't remember. This went on for 90 minutes.
The reason I am posting this is because of the philosophical differences between the way Joe manages money and the way I do. Joe thinks he is very smart and believes he can out smart the market. His bottom up stock pick themes are not simple. My approach is to listen to what the market is saying, to take what the market is giving and get out of the way when the path of least resistance is down. For example the market is saying there are problems with large American pharma stocks, I first wrote about this in May for Motley Fool. Chances are we can figure out why the group is having problems but even if we can't we can look at the price action over the last two years to give us a clue. Ditto with the insurers. I wrote a negative piece on AIG, also in the spring for the Fool. While I had no idea that the group would get hit like it has I just didn't (and still don't) think it was the right place to be. Joe owns AON corp. I'm sure his logic is very compelling, but as it turned out his logic was not smarter than the market.
He also employs no counter strategy, in case he is wrong with any of his themes. As I have said before, to be properly diversified against the unknown and your opinions being wrong you should always have some stocks going up and some going down. The way you out perform the market is by getting the big picture things correct more often than not. When I am wrong about some things my clients won't be hurt. This should be very important to anyone that manages money, except Joe.
The reason I like to keep things very simple to assess the big picture and help guide investing themes is that I have noticed the most successful investors all keep things quite simple. Michael Steinhardt, George Soros (back when he didn't talk about politics so much), and Jim Rogers all can articulate what they believe in a sentence or two. While I am no Julian Robertson I do try to emulate these guys where possible. For example, I am overweight Australia because they are one of China's largest trade partners and will be selling more and more stuff to China. Anyone else think that is simple?
Moving on to one last issue. Michael Kahn had an interesting nugget in his column in Barron's online this week. Any time the Dow closes down more than 0.5% in the October before the election the incumbent has lost. The number the Dow needs to take back today is 10029.87. As I am about to hit the button to post this the Dow is at 10005.16.
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Thursday, October 28, 2004
Phelps Dodge
Fool.com: Digging In at Phelps Dodge October 28, 2004
I had this published today if you are interested.
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I had this published today if you are interested.
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Where will investment dollars flow?
It seems many bloggers read The Trader Wizard written by Bill Cara. He has a lot of experience and a lot of insight. If I am reading his stuff correctly, he seems to be very pessimistic about the US markets for the foreseeable future. He and I share similar concerns about what could hurt US stocks but I believe he comes to a more negative conclusion than I do.
The US financial markets not doing well brings up some interesting questions, most importantly is where will investment capital that is fleeing US stock and bonds go to? Some of it I'm sure will go into money markets and t-bills, but being too conservative can be as bad as being too aggressive. If you have been too conservative it will be inflation that will hurt you.
Investment capital, I believe, will have to find a place to invest. If the US gets knocked off of its perch somehow for some reason I have to believe it would be to the benefit of some other country or region. We all know China will one day be the largest economy on the planet so it makes sense to find a way to benefit from that and have at least a little exposure to China. That might mean Chinese equities, or investing in one of China trading partners (like Australia), or having exposure to the resources that China is consuming. There are probably other ways I am not thinking of too that could help you capture the effect of China.
Ditto India.
The Trader Wizard lays out a very compelling case for owning gold. I have to say I am not much of a gold bug but I maintain a small exposure with Anglo Gold as a counter strategy to equities. If something catastrophic happens again that causes a short violent down trend; gold and gold stocks would do well. The reason for Anglo Gold in particular is that it would capture the above effect but if there is some sort of slow spiral down of the US economic and financial system (which I do not believe will happen) Anglo Gold would benefit from strength in the South African Rand.
I have done some reading that concludes the bull market for stocks is over and now will be a twenty year bull market for all commodities. Maybe maybe not, but some exposure to commodities is probably a good idea. I do this in the equity markets and it captures most of the effect plus usually these stocks have some yield to them.
I believe emerging markets could come to play a more important role for American investors. Navigating emerging markets can be tricky They often are at different points in the economic and stock market cycles than the US and as such can zig when our markets zag which provides true diversification.
In a big picture sense, as I have written before, I think investment demand will flow to foreign stocks, foreign bonds (both industrialized and emerging for stock and bonds), other non-dollar denominated assets and commodities.
Part of my approach to portfolio construction is that I don't make oversized bets on any one outcome. I will overweight to what ever outcome I expect. However if I expect one thing to happen and I am wrong my clients aren't hurt by my being wrong. It would be correct to say I am worried about US stocks and I have been defensive for months now but I still have 35-40% of my equity exposure in US stocks, about 30% in foreign stocks and the rest in cash. I covered what I am looking for to invest some of that cash in a posting I put up yesterday.
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The US financial markets not doing well brings up some interesting questions, most importantly is where will investment capital that is fleeing US stock and bonds go to? Some of it I'm sure will go into money markets and t-bills, but being too conservative can be as bad as being too aggressive. If you have been too conservative it will be inflation that will hurt you.
Investment capital, I believe, will have to find a place to invest. If the US gets knocked off of its perch somehow for some reason I have to believe it would be to the benefit of some other country or region. We all know China will one day be the largest economy on the planet so it makes sense to find a way to benefit from that and have at least a little exposure to China. That might mean Chinese equities, or investing in one of China trading partners (like Australia), or having exposure to the resources that China is consuming. There are probably other ways I am not thinking of too that could help you capture the effect of China.
Ditto India.
The Trader Wizard lays out a very compelling case for owning gold. I have to say I am not much of a gold bug but I maintain a small exposure with Anglo Gold as a counter strategy to equities. If something catastrophic happens again that causes a short violent down trend; gold and gold stocks would do well. The reason for Anglo Gold in particular is that it would capture the above effect but if there is some sort of slow spiral down of the US economic and financial system (which I do not believe will happen) Anglo Gold would benefit from strength in the South African Rand.
I have done some reading that concludes the bull market for stocks is over and now will be a twenty year bull market for all commodities. Maybe maybe not, but some exposure to commodities is probably a good idea. I do this in the equity markets and it captures most of the effect plus usually these stocks have some yield to them.
I believe emerging markets could come to play a more important role for American investors. Navigating emerging markets can be tricky They often are at different points in the economic and stock market cycles than the US and as such can zig when our markets zag which provides true diversification.
In a big picture sense, as I have written before, I think investment demand will flow to foreign stocks, foreign bonds (both industrialized and emerging for stock and bonds), other non-dollar denominated assets and commodities.
Part of my approach to portfolio construction is that I don't make oversized bets on any one outcome. I will overweight to what ever outcome I expect. However if I expect one thing to happen and I am wrong my clients aren't hurt by my being wrong. It would be correct to say I am worried about US stocks and I have been defensive for months now but I still have 35-40% of my equity exposure in US stocks, about 30% in foreign stocks and the rest in cash. I covered what I am looking for to invest some of that cash in a posting I put up yesterday.
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AT LAST!
Boston.com
In case you missed it the Red Sox won the World Series last night by completing a sweep of the St. Louis Cardinals. I can't begin to articulate the joy I am feeling. This coming after one of the greatest sports comebacks in history when the Sox beat the Yankees. Being a Bostonian I am also a Celtics, Pats and Bruin fan. I was five years old the last time the Bruins won, but I have lived through many Celtics championships and of course two Super Bowl wins but the Red Sox win feels different. The plight of the team and the fans is unique in sports.
One thing that separates the Sox from other teams, I believe, is the unusual closeness of the players. Kevin Millar should get a lot of credit for this. He is a good player, not great, who knows how to fill his role on the field. In the clubhouse he may be one of the all time greatest palyers, I am serious about this. As a group they are all exceptional, I hope one of them writes a book that captures what I am talking about. I also think the selfless nature of this group can be a lesson for the rest of us too, at least it is for me.
I think if you read this blog, even if you think I am a complete nimrod, it should be clear that I love all things pertaining to capital markets and I enjoy writing about them equally as much. I like sports even more. That's how big of a deal this is. I will post something that is market related later today.
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In case you missed it the Red Sox won the World Series last night by completing a sweep of the St. Louis Cardinals. I can't begin to articulate the joy I am feeling. This coming after one of the greatest sports comebacks in history when the Sox beat the Yankees. Being a Bostonian I am also a Celtics, Pats and Bruin fan. I was five years old the last time the Bruins won, but I have lived through many Celtics championships and of course two Super Bowl wins but the Red Sox win feels different. The plight of the team and the fans is unique in sports.
One thing that separates the Sox from other teams, I believe, is the unusual closeness of the players. Kevin Millar should get a lot of credit for this. He is a good player, not great, who knows how to fill his role on the field. In the clubhouse he may be one of the all time greatest palyers, I am serious about this. As a group they are all exceptional, I hope one of them writes a book that captures what I am talking about. I also think the selfless nature of this group can be a lesson for the rest of us too, at least it is for me.
I think if you read this blog, even if you think I am a complete nimrod, it should be clear that I love all things pertaining to capital markets and I enjoy writing about them equally as much. I like sports even more. That's how big of a deal this is. I will post something that is market related later today.
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Wednesday, October 27, 2004
Rally Rally
Is this it? Is the market all better? Could be but I think we need to see the S+P 500 make a higher high than what we saw three weeks ago. We have seen a series of lower highs for months now. I think we should hope for a higher high. What was nice today was the internal action of both the listed and NASDAQ markets. Both had volume above 2 billion shares. Advancers vs decliners was 1942/854 for the NYSE and 2091/906 for the NASDAQ. Up volume vs down volume was 1741/457 million on the NYSE and on the NASDAQ it was 1736/352. All in all good numbers. I wonder if there are any Dow Theorists out there that are concerned that the Utilities were down and the Trannies lagged the broader averages? I am not a huge Dow Theory guy myself, but it caught my eye that Utilities did so well early in the week but not today.
Over the weekend I wrote that the market was probably oversold, now it feels like we are overbought but I hope I am wrong.
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Over the weekend I wrote that the market was probably oversold, now it feels like we are overbought but I hope I am wrong.
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Brazil Fund VS Brazil iShares
Today I wanted to continue my ETF connect series by comparing the Brazil Fund (BZL) and the Brazil iShares (EWZ).
First I would point out that there is a lot going on in Brazil with respect to growth, natural resources, trade with China and India, and an evolving financial system. I have invested in Brazil both personally and for clients using individual stocks only. While I have been successful both times I have traded Brazil, I can't discount the possibility that I benefited more from luck than skill.
Energy makes up roughly 26% of both funds. Materials (mining names are included here) makes up 31% of the iShares and 25% of the closed end. Financials make up 11% of both funds. There are also similar weightings in telecom and food related stocks. So it should be no surprise that the performance has been almost identical with the nod going to the iShares, no doubt because of the lower expense ratio (0.74% vs. 2.04%).
Petroleo Brasileiro (and its preferred issue) and Companhia Vale do Rio Doce (and its preferred issue) make up 38.5% of the iShares and the common class of those two names make up 41.5% of the closed end.
One difference is the dividend. The iShares only yields 0.8% but the CEF yields 2.08%. Often, emerging market stocks pay a very healthy dividend. If you own either the ETF or CEF you may be getting less yield than you could by owning an individual name like Companhia Vale do Rio Doce which yields about 4.5% according to Yahoo finance or Petroleo Brasileiro which yields 4.2%. Keep in mind these dividends fluctuate.
I would rather own one of these names than either fund I have profiled. Both stocks have a high long term correlation to the index with a much better yield. I don't own either name now, I have owned each one in the past and may buy either one again.
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First I would point out that there is a lot going on in Brazil with respect to growth, natural resources, trade with China and India, and an evolving financial system. I have invested in Brazil both personally and for clients using individual stocks only. While I have been successful both times I have traded Brazil, I can't discount the possibility that I benefited more from luck than skill.
Energy makes up roughly 26% of both funds. Materials (mining names are included here) makes up 31% of the iShares and 25% of the closed end. Financials make up 11% of both funds. There are also similar weightings in telecom and food related stocks. So it should be no surprise that the performance has been almost identical with the nod going to the iShares, no doubt because of the lower expense ratio (0.74% vs. 2.04%).
Petroleo Brasileiro (and its preferred issue) and Companhia Vale do Rio Doce (and its preferred issue) make up 38.5% of the iShares and the common class of those two names make up 41.5% of the closed end.
One difference is the dividend. The iShares only yields 0.8% but the CEF yields 2.08%. Often, emerging market stocks pay a very healthy dividend. If you own either the ETF or CEF you may be getting less yield than you could by owning an individual name like Companhia Vale do Rio Doce which yields about 4.5% according to Yahoo finance or Petroleo Brasileiro which yields 4.2%. Keep in mind these dividends fluctuate.
I would rather own one of these names than either fund I have profiled. Both stocks have a high long term correlation to the index with a much better yield. I don't own either name now, I have owned each one in the past and may buy either one again.
Read more!
Tuesday, October 26, 2004
Kudlow & Cramer
Just curious if any one out there finds any value from this show. Is it just me? I find their contribution to be lousy. Cramer manages to talk about himself at every possible turn both on TV and his writing. Am I wrong about this? I believe Kudlow could find a positive angle if nukes dropped on US soil, but W was president. He has been so upbeat with every jobs report citing what a low unemployment rate we have. Does he not realize the work force has shrunk, that job growth is not even keeping up with natural population growth? Cramer has the TV show, he sells content on the internet, both of which are ok but why does he need to sell his email stock touting service? How much money does the guy need?
I contrast these two with Ron Insana and Mark Haynes. Both do a good job asking tough questions and injecting a little personality, but not so much that it becomes a distraction. Larry and Jim could take a lesson from Alexis Glick and Rick Santelli, both former floor traders. Alexis and Rick have plenty of insight to offer with out yelling.
If anyone has any thoughts I'd love to hear from you. Maybe I am 100% wrong about these two guys.
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I contrast these two with Ron Insana and Mark Haynes. Both do a good job asking tough questions and injecting a little personality, but not so much that it becomes a distraction. Larry and Jim could take a lesson from Alexis Glick and Rick Santelli, both former floor traders. Alexis and Rick have plenty of insight to offer with out yelling.
If anyone has any thoughts I'd love to hear from you. Maybe I am 100% wrong about these two guys.
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T. Rowe Price Has Wind in Its Sails October 26, 2004
Fool.com: T. Rowe Price Has Wind in Its Sails October 26, 2004
I had this published today. I am due to write about Phelps Dodge on Thursday.
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I had this published today. I am due to write about Phelps Dodge on Thursday.
Read more!
Are Capital Markets Telling Us Something?
Well, probably.
I have been writing for months (mostly on my other site, that doesn't have much of an archive) that action in markets seem to be building in some unpleasantness for US equities. I first noted flattening action in US Treasuries in the spring, back then it was a more benign maturing of the economic cycle. I now view the extreme move higher, in price, of the ten year to be a swift path to recession if the yields keep moving lower.
The strength in gold represents a capital flight of sorts. In the last few months gold has moved from $380 to almost $430. A portion of that move can be attributed to dollar weakness, but I believe heightened concern about the next few months accounts for most the move. Still we must factor in traditional seasonal demand this time of year from China and India.
You have probably read more than you care to about oil's move up. My spin on the issue is that it is more demand driven than most analysts assume it to be. There is nothing new about conflict in the middle east, hurricanes in the southeast, or labor issues anywhere else in world. It is not intuitive to me that this list of things could account for a doubling in the price. I also don't care for the term terror premium. It implies a short term lift due to mid-east violence. That only makes sense if you expect fighting to cease in 3-6 months. I don't, do you?
The newish thing is the accelerated decline in the dollar over the last few days. We are at multi-month lows vs. the Yen and the Euro. We are at a nine year low vs. the Swiss franc. The dollar is sliding dramatically vs. the commodity currencies, Australia, New Zealand and Canada. We may see this action spill into the Korean won, Sing dollar and Philippine peso as well.
This trend is due in part to the deficit issue, President Bush's lack of popularity outside the US, lingering questions about the US economy and other things.
I continue to be worried about all of these things and I don't see much going on to alter the direction of these trends.
On top of all that we can not do anything to screw up foreign demand four our Treasuries. I have written about this several times before. It could be several years before either candidate can begin to reduce the deficit That means Japan, China, India, Taiwan and others all need to keep buying US debt so we can pay our bills. If demand dries up, rates will move higher and higher until demand comes back.
How do you invest into this environment? I believe it makes sense to overweight foreign, low beta, dividend paying stocks. I still maintain exposure to all sectors in the US market, but underweighted. To capture some volatility I own secondary tech names and about 2% in emerging markets. I believe the high beta I own could gain 50% in a year. If that works out it would add a couple of hundred basis points to the portfolio's return. If I have chosen the wrong names and they cut in half, the loss would be off set by dividend throughout the portfolio. I should also mention I have allocated quite a bit to cash over the last few months. I will keep you up to date on any changes I make.
Read more!
I have been writing for months (mostly on my other site, that doesn't have much of an archive) that action in markets seem to be building in some unpleasantness for US equities. I first noted flattening action in US Treasuries in the spring, back then it was a more benign maturing of the economic cycle. I now view the extreme move higher, in price, of the ten year to be a swift path to recession if the yields keep moving lower.
The strength in gold represents a capital flight of sorts. In the last few months gold has moved from $380 to almost $430. A portion of that move can be attributed to dollar weakness, but I believe heightened concern about the next few months accounts for most the move. Still we must factor in traditional seasonal demand this time of year from China and India.
You have probably read more than you care to about oil's move up. My spin on the issue is that it is more demand driven than most analysts assume it to be. There is nothing new about conflict in the middle east, hurricanes in the southeast, or labor issues anywhere else in world. It is not intuitive to me that this list of things could account for a doubling in the price. I also don't care for the term terror premium. It implies a short term lift due to mid-east violence. That only makes sense if you expect fighting to cease in 3-6 months. I don't, do you?
The newish thing is the accelerated decline in the dollar over the last few days. We are at multi-month lows vs. the Yen and the Euro. We are at a nine year low vs. the Swiss franc. The dollar is sliding dramatically vs. the commodity currencies, Australia, New Zealand and Canada. We may see this action spill into the Korean won, Sing dollar and Philippine peso as well.
This trend is due in part to the deficit issue, President Bush's lack of popularity outside the US, lingering questions about the US economy and other things.
I continue to be worried about all of these things and I don't see much going on to alter the direction of these trends.
On top of all that we can not do anything to screw up foreign demand four our Treasuries. I have written about this several times before. It could be several years before either candidate can begin to reduce the deficit That means Japan, China, India, Taiwan and others all need to keep buying US debt so we can pay our bills. If demand dries up, rates will move higher and higher until demand comes back.
How do you invest into this environment? I believe it makes sense to overweight foreign, low beta, dividend paying stocks. I still maintain exposure to all sectors in the US market, but underweighted. To capture some volatility I own secondary tech names and about 2% in emerging markets. I believe the high beta I own could gain 50% in a year. If that works out it would add a couple of hundred basis points to the portfolio's return. If I have chosen the wrong names and they cut in half, the loss would be off set by dividend throughout the portfolio. I should also mention I have allocated quite a bit to cash over the last few months. I will keep you up to date on any changes I make.
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Monday, October 25, 2004
ETF Connect
ETF Connect
I recently revisited ETF connect. I had read in several places that is was an excellent site so the other day I checked it out and I think it can provide great research.
I am a big fan of ETFs and closed end funds. They can be used as tools in building a properly diversified portfolio. The site has an info page on almost every ETF and closed end fund. Click here for an example of what this looks like.
Over the next few weeks I plan to profile a series of funds and ETFs to try to assess quality and usefulness for a portfolio. I won't profile anything I own for myself or for clients to avoid any conflict of interest. But that is not to say I won't talk myself into buying something that I write about.
The first fund I'll examine for this series is Delaware Investments Dividend and Income fund (DDF). The description for this fund says income is the first priority and capital appreciation comes second. Its top holdings include Dow Chemical, Starwood Resorts, Alltel and a bunch of preferred stocks. The fund is a monthly pay with a current yield of 8.3%, nice, and it trades at a 5.6% discount to its net asset value.
If you don't have much experience with closed end funds there is a relevant issue with all of them which is leverage. This fund can use up to 25% leverage to achieve its income goal. There is not great way that I know of to get current information on how much leverage is being used. Usually, this is not a problem but it can be an issue. Not, very often but every few years you might hear of a fund that blew itself up due to leverage. By and large most managers know how to manage leverage, but the point is important to understand.
Back in the days before Exchange Traded Funds were so popular, a lot of attention was devoted to whether a particular closed end fund traded at a discount or premium. I would not get too caught up on this issue. A discount or premium can persist indefinitely. I would be more interested in whether there has been a sharp move in the discount or premium. Fortunately ETF Connect has a chart of this on each fund page. DDF has not had a substantial change in many months.
I use preferred stocks in the portfolios I manage to create an income component. I like the blend of high yielding low beta stocks this fund offers. Reguardless of what is going on in the market some low beta high yield is appropriate, some times more, sometimes less but at least some. By the way it is much easier to trade preferred stocks on the NYSE than to buy bonds over the counter. You can email me for more details if you would like.
So how can this fit into a portfolio? Given the names in the fund I am inclined to think that if it correlates to any type of equity investment the closest would be large cap value. You can click here to see that it does correlate to the iShares Russell 1000 Value fund (IWD). In the last four years however DDF is down 8% and IWD is up 8%. The correlation gets tighter and tighter with shorter time periods. It is not clear why the correlation has become tighter, Michael Dugan has been the manager since 1998 (by the way I had to go to Morningstar's site to see how long the manager has run the fund). It is important to note that DDF yields 8.3% compared to 2.4% for IWD. In a trading range market that could be an important difference. Based on past performance I would expect that if the market has a huge rally IWD will leave DDF in the dust.
My conclusion is that this seems like a good fund, and if you can realize it will lag in an up market but give a good yield, and it might be a good hold in a portfolio that is less than $100,000.
Read more!
I recently revisited ETF connect. I had read in several places that is was an excellent site so the other day I checked it out and I think it can provide great research.
I am a big fan of ETFs and closed end funds. They can be used as tools in building a properly diversified portfolio. The site has an info page on almost every ETF and closed end fund. Click here for an example of what this looks like.
Over the next few weeks I plan to profile a series of funds and ETFs to try to assess quality and usefulness for a portfolio. I won't profile anything I own for myself or for clients to avoid any conflict of interest. But that is not to say I won't talk myself into buying something that I write about.
The first fund I'll examine for this series is Delaware Investments Dividend and Income fund (DDF). The description for this fund says income is the first priority and capital appreciation comes second. Its top holdings include Dow Chemical, Starwood Resorts, Alltel and a bunch of preferred stocks. The fund is a monthly pay with a current yield of 8.3%, nice, and it trades at a 5.6% discount to its net asset value.
If you don't have much experience with closed end funds there is a relevant issue with all of them which is leverage. This fund can use up to 25% leverage to achieve its income goal. There is not great way that I know of to get current information on how much leverage is being used. Usually, this is not a problem but it can be an issue. Not, very often but every few years you might hear of a fund that blew itself up due to leverage. By and large most managers know how to manage leverage, but the point is important to understand.
Back in the days before Exchange Traded Funds were so popular, a lot of attention was devoted to whether a particular closed end fund traded at a discount or premium. I would not get too caught up on this issue. A discount or premium can persist indefinitely. I would be more interested in whether there has been a sharp move in the discount or premium. Fortunately ETF Connect has a chart of this on each fund page. DDF has not had a substantial change in many months.
I use preferred stocks in the portfolios I manage to create an income component. I like the blend of high yielding low beta stocks this fund offers. Reguardless of what is going on in the market some low beta high yield is appropriate, some times more, sometimes less but at least some. By the way it is much easier to trade preferred stocks on the NYSE than to buy bonds over the counter. You can email me for more details if you would like.
So how can this fit into a portfolio? Given the names in the fund I am inclined to think that if it correlates to any type of equity investment the closest would be large cap value. You can click here to see that it does correlate to the iShares Russell 1000 Value fund (IWD). In the last four years however DDF is down 8% and IWD is up 8%. The correlation gets tighter and tighter with shorter time periods. It is not clear why the correlation has become tighter, Michael Dugan has been the manager since 1998 (by the way I had to go to Morningstar's site to see how long the manager has run the fund). It is important to note that DDF yields 8.3% compared to 2.4% for IWD. In a trading range market that could be an important difference. Based on past performance I would expect that if the market has a huge rally IWD will leave DDF in the dust.
My conclusion is that this seems like a good fund, and if you can realize it will lag in an up market but give a good yield, and it might be a good hold in a portfolio that is less than $100,000.
Read more!
Sunday, October 24, 2004
The Big Picture for the Week of October 24, 2004
The equity market has continued to deteriorate and the bond market has continued to flatten. This week may be a little better than last week's news driven slide. First, on a short term basis, the market is clearly oversold so a snap back, even if just fleeting, would not be a surprise. Also since 1980 the S+P 500 has been up 1% on average the last full week before the election with 1980 being lone down pre-election week. 2000 was also an exception in that the S+P was up about 3%.
There is an old adage about the direction of the stock market from the incumbent convention to election day determines who wins. The Dow needs to add 500 points this week for Bush to win, if you believe in that sort of thing. I am totally apolitcal but I think what may happen is Bush wins the popular but Kerry wins the electoral college vote, just a gut feeling. I will be shocked if we have a repeat of the 2000 debacle trying to figure the winner.
There was an interesting article in the New York Times business section about the impact of the Marsh & McClennan blowup. The article said the rank and file employees are forced to own a bunch of Marsh stock in their various retirement plans. There are some very sinister sounding elements to this aspect of the story.
The insurance scandal has been bad for everyone except Eliot Spitzer. This has hurt all sorts of index fund investors that have nothing to do with the malfeasance that has occurred. I can't see how such a public prosecution was the best way to go. Had he gone to them privately and worked out repaying clients for what they were overcharged and announced the resolution after the fact I doubt we would have had all this lost market cap. AIG has lost close to $60 billion in market cap and Marsh has lost about $12 billion. Additionally a lot of uninvolved insurers have been hit too. Not good.
So you know I am not talking my book, I have never owned an insurance stock for myself or for clients and I have been underweight the financial sector for 18 months. I have focused on foreign banks as opposed to US banks, other than my Bank of America position. I like foreign banks because there are plenty of good banks to choose from with very high dividends and low betas which ties into an ongoing theme of mine. My portfolios are roughly 29% invested in foreign stocks. I would offer a word of caution about banks from the UK. The banks themselves seem to be very well run solid companies. I don't really see any bottoms up problems. But from the top down there may be an issue to worry about and pay attention to. The UK yield curve is flat. This usually means an economic slow down of some magnitude. We are not there yet but it should be monitored closely.
Lastly a word about the Red Sox. They have won the first game of the World Series in a strange fashion, but win they did. Beating the Yankees was great, but just a step. Now they need to focus on beating the Cardinals. I have no idea if they will win or not but they showed last night that they have come to play hard and try to win.
Read more!
There is an old adage about the direction of the stock market from the incumbent convention to election day determines who wins. The Dow needs to add 500 points this week for Bush to win, if you believe in that sort of thing. I am totally apolitcal but I think what may happen is Bush wins the popular but Kerry wins the electoral college vote, just a gut feeling. I will be shocked if we have a repeat of the 2000 debacle trying to figure the winner.
There was an interesting article in the New York Times business section about the impact of the Marsh & McClennan blowup. The article said the rank and file employees are forced to own a bunch of Marsh stock in their various retirement plans. There are some very sinister sounding elements to this aspect of the story.
The insurance scandal has been bad for everyone except Eliot Spitzer. This has hurt all sorts of index fund investors that have nothing to do with the malfeasance that has occurred. I can't see how such a public prosecution was the best way to go. Had he gone to them privately and worked out repaying clients for what they were overcharged and announced the resolution after the fact I doubt we would have had all this lost market cap. AIG has lost close to $60 billion in market cap and Marsh has lost about $12 billion. Additionally a lot of uninvolved insurers have been hit too. Not good.
So you know I am not talking my book, I have never owned an insurance stock for myself or for clients and I have been underweight the financial sector for 18 months. I have focused on foreign banks as opposed to US banks, other than my Bank of America position. I like foreign banks because there are plenty of good banks to choose from with very high dividends and low betas which ties into an ongoing theme of mine. My portfolios are roughly 29% invested in foreign stocks. I would offer a word of caution about banks from the UK. The banks themselves seem to be very well run solid companies. I don't really see any bottoms up problems. But from the top down there may be an issue to worry about and pay attention to. The UK yield curve is flat. This usually means an economic slow down of some magnitude. We are not there yet but it should be monitored closely.
Lastly a word about the Red Sox. They have won the first game of the World Series in a strange fashion, but win they did. Beating the Yankees was great, but just a step. Now they need to focus on beating the Cardinals. I have no idea if they will win or not but they showed last night that they have come to play hard and try to win.
Read more!
Stock-Market-Idea Blog Review
Part of what makes the internet a great tool is the chance to find good content that is useful for your needs. As such I am always looking for new market related sites or blogs. One site that has really impressed me is James Trotta's Stock Market Ideas located at http://www.stock-market-idea.com/.
Jim's blog is a great combination of big picture commentary, and some very good stock picking. Jim also has a good eye for content aggregation, he consistently provides links to excellent articles. Jim's current outlook seems fairly similar to mine, he has overweight dividend payers, has exposure to precious metals and has underweighted volatility. You can click through to Stock Market Ideas from my links section.
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Jim's blog is a great combination of big picture commentary, and some very good stock picking. Jim also has a good eye for content aggregation, he consistently provides links to excellent articles. Jim's current outlook seems fairly similar to mine, he has overweight dividend payers, has exposure to precious metals and has underweighted volatility. You can click through to Stock Market Ideas from my links section.
Read more!
Friday, October 22, 2004
The New TED Spread?
The first time that I ever got an inkling that capital markets can be very complex and sophisticated was in 1993 when I read an article about the TED spread in the Bloomberg Professional magazine, now known as Bloomberg Markets.
Before I dive into this, let me say that the Bloomberg magazine is a great resource. I have learned a lot from it over the years and I pay for a subscription for it now that I am working without a Bloomberg terminal, the magazine is free to terminal users.
If you are unfamiliar with the TED (Treasury Euro Dollar) spread, it is the spread between the price of a three month Treasury bill and the three month Euro dollar. Usually this is captured in the futures market but doesn't have to be and I have heard of some that use LIBOR futures instead of the Euro dollar. When the spread widens there is said to be more worry in global financial markets and when the spread narrows there is said to be less worry in the financial world. Specifically when there is more worry, Euro dollar is sold and t-bills are bought and the spread widens. It works in reverse when there is less to worry about. Watching the TED spread can help guide when to overweight volatility or underweight it, regardless of what you trade.
While this is all very interesting, the TED spread seems to not be utilized as it once was. A Yahoo search for the term did not yield any recent results, other than definitions. I can quickly come up with a couple of reasons why the TED spread has lost its relevance. First the creation of the Euro as a currency has reduced the role of the Euro dollar. I don't think the Euro would automatically replace the Euro dollar due to increased synchronization between the American and European economic cycles. The synchronization is a theory of mine that I have not found elsewhere yet, so I may be wrong about that.
While the TED spread has lost its luster there may be a replacement for it in the Australian dollar/Swiss franc cross rate. The Aussie, as its known, getting stronger versus the Swissee (while that is how it is known I can not vouch for the spelling) would be equivalent to a narrowing of the TED spread, meaning less concern about global financial current events, and when the Aussie weakens it would be like the TED spread getting wider. The logic here is that among industrialized nations Australia and Switzerland are at different ends of the same spectrum.
In the last six months the Aussie has weakened considerably and we have seen most world equity markets not make much progress, bond yields go down in the US, short rates rise in the UK, US, Canada, Euroland and New Zealand as yield curves have flattened. After a summer rally in the Aussie, it has broken down in the last few weeks. I find it interesting that the break down in the Aussie also coincides with the action in the S+P 500 index. The recent high for the Aussie was October 4th or 5th, just a day or two off from the SPX's recent high.
The correlation repeats itself often. My conclusion is that the AUD/CHF cross is a good tool for confirming other indicators. I am not prepared to say that it should be my primary indicator.
This is fascinating stuff, no? Maybe now it makes a little more sense why I wanted to explore Switzerland as an equity investment theme. While that did not really pan out I do think this cross rate should be followed.
Read more!
Before I dive into this, let me say that the Bloomberg magazine is a great resource. I have learned a lot from it over the years and I pay for a subscription for it now that I am working without a Bloomberg terminal, the magazine is free to terminal users.
If you are unfamiliar with the TED (Treasury Euro Dollar) spread, it is the spread between the price of a three month Treasury bill and the three month Euro dollar. Usually this is captured in the futures market but doesn't have to be and I have heard of some that use LIBOR futures instead of the Euro dollar. When the spread widens there is said to be more worry in global financial markets and when the spread narrows there is said to be less worry in the financial world. Specifically when there is more worry, Euro dollar is sold and t-bills are bought and the spread widens. It works in reverse when there is less to worry about. Watching the TED spread can help guide when to overweight volatility or underweight it, regardless of what you trade.
While this is all very interesting, the TED spread seems to not be utilized as it once was. A Yahoo search for the term did not yield any recent results, other than definitions. I can quickly come up with a couple of reasons why the TED spread has lost its relevance. First the creation of the Euro as a currency has reduced the role of the Euro dollar. I don't think the Euro would automatically replace the Euro dollar due to increased synchronization between the American and European economic cycles. The synchronization is a theory of mine that I have not found elsewhere yet, so I may be wrong about that.
While the TED spread has lost its luster there may be a replacement for it in the Australian dollar/Swiss franc cross rate. The Aussie, as its known, getting stronger versus the Swissee (while that is how it is known I can not vouch for the spelling) would be equivalent to a narrowing of the TED spread, meaning less concern about global financial current events, and when the Aussie weakens it would be like the TED spread getting wider. The logic here is that among industrialized nations Australia and Switzerland are at different ends of the same spectrum.
In the last six months the Aussie has weakened considerably and we have seen most world equity markets not make much progress, bond yields go down in the US, short rates rise in the UK, US, Canada, Euroland and New Zealand as yield curves have flattened. After a summer rally in the Aussie, it has broken down in the last few weeks. I find it interesting that the break down in the Aussie also coincides with the action in the S+P 500 index. The recent high for the Aussie was October 4th or 5th, just a day or two off from the SPX's recent high.
The correlation repeats itself often. My conclusion is that the AUD/CHF cross is a good tool for confirming other indicators. I am not prepared to say that it should be my primary indicator.
This is fascinating stuff, no? Maybe now it makes a little more sense why I wanted to explore Switzerland as an equity investment theme. While that did not really pan out I do think this cross rate should be followed.
Read more!
CNBC's Personal Finance Help?
Every Friday at about an hour after the open CNBC has a Financial planner come on for 90 seconds to give advice that is so generic it could not possibly help anyone. And it is always either Al Gobo (today's guest planner), Vern Hayden or Kathy Boyle. As we all know there are only three financial planners in the world. This is great for a comparison between CNBC and sister stations CNBC Europe and CNBC Asia. The typical interview on US CNBC is 90 seconds to two minutes. The foreign CNBC's typically average four minutes for an interview. Four minutes gives the viewer a chance to hear some real insight. Even if the opinion is bad a viewer can learn by pick apart who is dumb and learn from someone who is smart.
Ted David asked Gobo about every type of asset class that exists and for whom each one would be appropriate for... all in 90 seconds. Complete waste of time. In the early 1990's CNBC has entire TV shows after the market closed devoted to personal finance. Maybe they should return to that?
I'll write more, later today.
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Ted David asked Gobo about every type of asset class that exists and for whom each one would be appropriate for... all in 90 seconds. Complete waste of time. In the early 1990's CNBC has entire TV shows after the market closed devoted to personal finance. Maybe they should return to that?
I'll write more, later today.
Read more!
This chart is from FX Street. It is the cross rate between the Aussie Dollar and the Swiss Franc. This is an important cross rate. Click on the picture to see it better. I will write about it later today.
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Thursday, October 21, 2004
Fool.com: Pictures of Lilly
Fool.com: Pictures of Lilly [Motley Fool Take] October 21, 2004
I had this published today if you have any interest in my toughts about Eli Lilly.
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I had this published today if you have any interest in my toughts about Eli Lilly.
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Differing Opinions
I have been exchanging emails over the last couple of days with a friend of mine who also manages money. We have been volleying back and forth about what the market has done and will do, or so we think. He and I have completely different opinions about what the risks are to the market and what is likely to happen over the next few months. Looking back he has been less right than I have about a couple of themes and while his returns are good he has lagged my results slightly. I believe that is a short term phenomena that would favor him as often as it would favor me and as such is inconsequential. The bigger point is that we had a lot of the same training when we worked together a few years ago. That training has lead him down one path of portfolio construction and analysis and I have taken a much different route. I suppose one of us could evolve to have better results than the other but I am intrigued by differences that exist. There really is two sides to every trade.
This is constructive to think about because I know I can learn from my friend. I don't know if he tries to learn from me or not, and I don't really care about that. I would suggest never under estimating anyone ever. Perhaps if the Yankees had followed that advice they would not have lost. Who knows?
I will conclude the Switzerland commentary tomorrow.
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This is constructive to think about because I know I can learn from my friend. I don't know if he tries to learn from me or not, and I don't really care about that. I would suggest never under estimating anyone ever. Perhaps if the Yankees had followed that advice they would not have lost. Who knows?
I will conclude the Switzerland commentary tomorrow.
Read more!
A Quick Word About The Red Sox
The Red Sox beat the Yankees Wednesday night to move on to the World Series. While I am thrilled with this, you must realize that the Red Sox Nation universe has an incredibly fragile balance. The slightest little wrinkle can turn things completely upside down. Two outs in the ninth inning was not enough for me to relax. I may have been singly responsible for Aaron Boone because I moved from the chair to the couch last year in the tenth inning.
All that silliness aside the curse is about the World Series not the ALCS. Last night was great but it was also just a necessary step. Bring on the national league on Saturday. What ever is meant to happen is what will happen and hopefully that is something positive for the Red Sox.
I will post about the market a little later.
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All that silliness aside the curse is about the World Series not the ALCS. Last night was great but it was also just a necessary step. Bring on the national league on Saturday. What ever is meant to happen is what will happen and hopefully that is something positive for the Red Sox.
I will post about the market a little later.
Read more!
Wednesday, October 20, 2004
Simple, Simple Analysis
I met an old friend of my mine, Steve, for a Starbucks this afternoon. Steve is a wildly successful money manager. We stay in touch from time to time and bounce ideas off of each other. I do a lot of foreign investing so Steve asked what I thought about HSBC Holdings. Coincidently I had an opinion from an article I wrote about European Bank Consolidation that I submitted to the Fool but they did not run. I told him I liked Barclays better because iShares is only 15% of their business and should grow very quickly and it has a better dividend than HSBC. But the thing about HSBC is that while they stand to open a lot of bank accounts in China, I think it will be tough for them to make a good profit on what is likely to be a lot of very small accounts. The idea, whether I'm right or wrong, is very simple. I don't like the answer to that question so that is the end of the work on HSBC. Very simple, no? For disclosure purposes while I like Barclays, there is another UK bank I like more so I do not own Barclays personally or for clients.
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Switzerland Investment Ideas
I wanted to follow up on yesterday's posting about Switzerland with some different ways to access the Swiss Stock Market. Yesterday I concluded that there was no evidence that broadly owning the Swiss market provided any kind of safe haven diversification against US holdings. The SMI and the S+P 500 have had a close correlation over time and if there is a safe haven play out there it should have a low correlation to the US.
That does not mean that Switzerland should be avoided, necessarily, either. There are three ways that I have found to easily access the Swiss market. The obvious way would be to buy ADRs or ADSs traded in the states. According to ADR.com there are 19 stocks to choose from but only eleven of them are listed on the NYSE or NASDAQ. It will be very difficult to get information on those other eight without a Bloomberg Terminal.
There is also an iShares for Switzerland (EWL). It has all the components of the index that you can see by clicking on the Swiss Screen Shot below. It has a beta of .72 but no real dividend yield. According to Wendy at Ameritrade it pays only annually and this past January it paid just over $0.05 per share for a yield of about 1/3 of 1%. A more attractive alternative is the Swiss Helvetia Fund (SWZ). It yields 1.65%, inline with the SMI. It also trades at a 15% discount to its NAV. Both funds own the same top four holdings, Novartis, Nestle, Roche, and UBS (albeit in different percentages). While no one can say whether it will make up that discount or not, the discount along with the yield make it more attractive than the iShares.
For disclosure purposes I, as well as my clients, own one Swiss company, Novartis. The reason for that one is it makes up 30% of the index so we capture a lot of the index with just the one holding. Also, I am bearish on the US big pharma stocks so Novartis provides good exposure for the group. It has almost no Beta which fits in with my ongoing theme to underweight volatility for my clients. Lastly the fundamentals are better than most other pharma stocks with market caps greater than $50 billion.
As an investment theme I have to say I am disappointed with how these postings turned out. I thought a Swiss theme would be more interesting than it turned out to be. The high correlation between Switzerland and the US even held up during the fall of 2001, one of the worst periods from a fear standpoint ever.
The one thing that may make Switzerland become more interesting in the future is if the dollar loses its status as the global benchmark currency for some reason, which though unlikely is not impossible. Some sort of event that creates an unprecedented demand for Swiss Francs could decouple the two markets. I'll let you decide whether that is something to put your money behind.
I'll conclude this tomorrow with a way to use the Swiss Franc as an analytical tool.
Read more!
That does not mean that Switzerland should be avoided, necessarily, either. There are three ways that I have found to easily access the Swiss market. The obvious way would be to buy ADRs or ADSs traded in the states. According to ADR.com there are 19 stocks to choose from but only eleven of them are listed on the NYSE or NASDAQ. It will be very difficult to get information on those other eight without a Bloomberg Terminal.
There is also an iShares for Switzerland (EWL). It has all the components of the index that you can see by clicking on the Swiss Screen Shot below. It has a beta of .72 but no real dividend yield. According to Wendy at Ameritrade it pays only annually and this past January it paid just over $0.05 per share for a yield of about 1/3 of 1%. A more attractive alternative is the Swiss Helvetia Fund (SWZ). It yields 1.65%, inline with the SMI. It also trades at a 15% discount to its NAV. Both funds own the same top four holdings, Novartis, Nestle, Roche, and UBS (albeit in different percentages). While no one can say whether it will make up that discount or not, the discount along with the yield make it more attractive than the iShares.
For disclosure purposes I, as well as my clients, own one Swiss company, Novartis. The reason for that one is it makes up 30% of the index so we capture a lot of the index with just the one holding. Also, I am bearish on the US big pharma stocks so Novartis provides good exposure for the group. It has almost no Beta which fits in with my ongoing theme to underweight volatility for my clients. Lastly the fundamentals are better than most other pharma stocks with market caps greater than $50 billion.
As an investment theme I have to say I am disappointed with how these postings turned out. I thought a Swiss theme would be more interesting than it turned out to be. The high correlation between Switzerland and the US even held up during the fall of 2001, one of the worst periods from a fear standpoint ever.
The one thing that may make Switzerland become more interesting in the future is if the dollar loses its status as the global benchmark currency for some reason, which though unlikely is not impossible. Some sort of event that creates an unprecedented demand for Swiss Francs could decouple the two markets. I'll let you decide whether that is something to put your money behind.
I'll conclude this tomorrow with a way to use the Swiss Franc as an analytical tool.
Read more!
Tuesday, October 19, 2004
Exploring Switzerland
Today I thought I would start to explore Switzerland as an investment theme.
Safe Haven
The starting point for my intrigue happened a few months ago when I first heard about the Permanent Portfolio fund (PRPFX). The fund is a kind of hell or high water type of investment. It's top ten holdings include Zero Coupon Treasuries, Gold, Swiss Bonds, and warrants for virus protection software maker Symantec. This fund has done well over the years and would likely do well if something truly awful happened in the world. It is a play on the safe haven aspect of the country. You can click here to read more about it and see whether you buy into the need for this type of investment.
As a matter of investment philosophy, I always hold a few "safe haven" stocks that would go up in bad times as a sort of counter strategy. Typically that means a gold stock, a defense stock and a Profunds bear fund.
Reinvested Petro Dollars
Recently in Business Week there was a short article that tried to game where Petro dollars would go to be invested. The article thought that the US might be a beneficiary of this investment demand. Petro dollars refers to increased money being made by large oil producing nations due to the lift in oil prices over the last year.
Switzerland has always been viewed as a safe haven of sorts because of its neutrality and acceptance of numbered accounts among other things. While it is true that New York is a logical destination for petro dollars, a lot of the money in question is run from Switzerland. And with all of the issues confronting US markets, like the deficit and weak currency, it may make sense for that capital to look for a new investment safe spot. Switzerland might fit that need. While this might happen in the future, it hasn't been happening in stock prices yet.
The Chart keeps disapearing. Click here to see the correlation.
The above chart shows a high correlation between the US and Switzerland. That could be a strike against overweighting Switzerland. The P/E ratio of the SMI is about 16 compared to 17 for the S+P 500 and the SMI has a dividend yield 1.6% compared to 1.7 % for the S+P, very similar.
No doubt you know that foreign investing has become more popular in the last few years because of the diversification aspect, although effect may be more difficult to capture than it used to be.
On the positive side CNBC Europe has recently stared to devote more attention to the SMI. They moved Dan Scott from covering Germany, early in the European day, to covering the Swiss market all day. As they talk more about Switzerland and more investors become educated about the country it may be that more investment dollars will flow to that market.
The SMI weightings are very heavy in healthcare (35%) and financials (24%). This compares to the US at 12% and 20% respectively. Credit Suisse is the largest financial component of the SMI and seems to have a low correlation to US financial stocks. Drug company Novartis, the largest component of the SMI, has a low correlation to US healthcare stocks. That bodes well for investing in Switzerland.
Divergence of Analysis
We have mixed signals. I am inclined to believe that investing in Switzerland as an index will not provide safe haven diversity. I think it may be a good place to invest, but realize the index correlates highly with the S+P 500 index, and it is not obvious to me that that will change soon.
Later this week I will look at different ways to access Swiss markets. I will also address how owning some part of this market might fit into a portfolio.
Lastly, I had an article published today about E*Trade, if you are interested.
Read more!
Safe Haven
The starting point for my intrigue happened a few months ago when I first heard about the Permanent Portfolio fund (PRPFX). The fund is a kind of hell or high water type of investment. It's top ten holdings include Zero Coupon Treasuries, Gold, Swiss Bonds, and warrants for virus protection software maker Symantec. This fund has done well over the years and would likely do well if something truly awful happened in the world. It is a play on the safe haven aspect of the country. You can click here to read more about it and see whether you buy into the need for this type of investment.
As a matter of investment philosophy, I always hold a few "safe haven" stocks that would go up in bad times as a sort of counter strategy. Typically that means a gold stock, a defense stock and a Profunds bear fund.
Reinvested Petro Dollars
Recently in Business Week there was a short article that tried to game where Petro dollars would go to be invested. The article thought that the US might be a beneficiary of this investment demand. Petro dollars refers to increased money being made by large oil producing nations due to the lift in oil prices over the last year.
Switzerland has always been viewed as a safe haven of sorts because of its neutrality and acceptance of numbered accounts among other things. While it is true that New York is a logical destination for petro dollars, a lot of the money in question is run from Switzerland. And with all of the issues confronting US markets, like the deficit and weak currency, it may make sense for that capital to look for a new investment safe spot. Switzerland might fit that need. While this might happen in the future, it hasn't been happening in stock prices yet.
The Chart keeps disapearing. Click here to see the correlation.
The above chart shows a high correlation between the US and Switzerland. That could be a strike against overweighting Switzerland. The P/E ratio of the SMI is about 16 compared to 17 for the S+P 500 and the SMI has a dividend yield 1.6% compared to 1.7 % for the S+P, very similar.
No doubt you know that foreign investing has become more popular in the last few years because of the diversification aspect, although effect may be more difficult to capture than it used to be.
On the positive side CNBC Europe has recently stared to devote more attention to the SMI. They moved Dan Scott from covering Germany, early in the European day, to covering the Swiss market all day. As they talk more about Switzerland and more investors become educated about the country it may be that more investment dollars will flow to that market.
The SMI weightings are very heavy in healthcare (35%) and financials (24%). This compares to the US at 12% and 20% respectively. Credit Suisse is the largest financial component of the SMI and seems to have a low correlation to US financial stocks. Drug company Novartis, the largest component of the SMI, has a low correlation to US healthcare stocks. That bodes well for investing in Switzerland.
Divergence of Analysis
We have mixed signals. I am inclined to believe that investing in Switzerland as an index will not provide safe haven diversity. I think it may be a good place to invest, but realize the index correlates highly with the S+P 500 index, and it is not obvious to me that that will change soon.
Later this week I will look at different ways to access Swiss markets. I will also address how owning some part of this market might fit into a portfolio.
Lastly, I had an article published today about E*Trade, if you are interested.
Read more!
Thank You
I will post later today about the market but I wanted to put up a quick thank you. If you look at my blog it is probably obvious that I have only been doing this for about ten minutes (blogging that is). Nonetheless the stock market blog community has been very friendly and helpful. Thank you to all of you that have offered input, kind words or links on their blogs.
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Read more!
Monday, October 18, 2004
Covered Calls and Red Sox
Not much to talk about today in the market. The major indices are all up slightly with about 30 minutes to go. Marsh McClennan and Minnie Mining are getting hit. I read an interesting article on The Street Dot Com by Steve Smith about closed end funds that index to the S+P 500 buy-write index.
For space sake, I will assume you know about selling covered calls, if not click here. I have read studies that say selling covered call options increases returns and I have read studies that say the opposite. There is no shortage of places to get good insight about this type of trade.
I sell calls occasionally in my money management practice, but not too often. I have known some advisors that sells calls on every stock they own. I don't think this is the best way to go. If you have a properly diversified portfolio with 30-40 stocks you should expect that some of them will skyrocket and some will not. If you sell calls on one that does go way up you will hurt your overall return.
My goal in selling options, I believe, is unique and may be a good way to think about the strategy, or maybe not that is up to you. This year we have had a flat stock market. No doubt you have heard someone smart predict that the market will be range bound for the next 10 years or so. While I don't think anyone can predict what a stock market will do for that length of time, they could be right. If that is the case, dividends will play a large role in your total return. If the S+P 500 is up only 2% this year, a portfolio structured to yield 3% will go a long way to helping you outperform. I use covered calls in an effort to gain an extra 1% for the portfolio over the course of the year, kind of like sneaking in a few extra dividends. I only need a few option trades per year to achieve this goal. If the market lifts dramatically, a portfolio with only a few calls written will capture almost all of the effect.
As for the funds, which are First Trust Fiduciary Asset Management Covered Call Fund (FFA) and the Madison/Claymore Covered Call Fund (MCN), they seem very interesting. According to Yahoo Finance MCN has 7.9% yield and FFA has no yield although I suspect that is due to the newness of the fund. If the market stays range bound these funds should outperform. My first thought is that I would not want to have my entire portfolio in something I know will lag that next time we have a 2003-like rally but as one of several tools for an account that has less than $100,000 it may makes sense. I plan to watch these for a while to make a final judgment. At this point I think the funds do merit some study.
Now the Red Sox. Holy cow! I have to admit I have been shocked at some of the decisions manager Terry Francona has made, like if Schilling was hurt why did he pitch in game one, but I have come to expect strange things from the Sox in October. Some writer had a great line about the Red Sox several years ago. He said, as a man close to 60 years old, "the Red Sox killed my father and now they are coming after me." Such is the plight of being a fan. I have come to expect the worst and hope for the best. That way I don't get too upset when they leave Pedro in too long. Speaking of Pedro, does anyone think he has anything left? The bullpen is so over used that he has to be able to go a long way today for them to have a realistic chance. Pass the pepto!
Read more!
For space sake, I will assume you know about selling covered calls, if not click here. I have read studies that say selling covered call options increases returns and I have read studies that say the opposite. There is no shortage of places to get good insight about this type of trade.
I sell calls occasionally in my money management practice, but not too often. I have known some advisors that sells calls on every stock they own. I don't think this is the best way to go. If you have a properly diversified portfolio with 30-40 stocks you should expect that some of them will skyrocket and some will not. If you sell calls on one that does go way up you will hurt your overall return.
My goal in selling options, I believe, is unique and may be a good way to think about the strategy, or maybe not that is up to you. This year we have had a flat stock market. No doubt you have heard someone smart predict that the market will be range bound for the next 10 years or so. While I don't think anyone can predict what a stock market will do for that length of time, they could be right. If that is the case, dividends will play a large role in your total return. If the S+P 500 is up only 2% this year, a portfolio structured to yield 3% will go a long way to helping you outperform. I use covered calls in an effort to gain an extra 1% for the portfolio over the course of the year, kind of like sneaking in a few extra dividends. I only need a few option trades per year to achieve this goal. If the market lifts dramatically, a portfolio with only a few calls written will capture almost all of the effect.
As for the funds, which are First Trust Fiduciary Asset Management Covered Call Fund (FFA) and the Madison/Claymore Covered Call Fund (MCN), they seem very interesting. According to Yahoo Finance MCN has 7.9% yield and FFA has no yield although I suspect that is due to the newness of the fund. If the market stays range bound these funds should outperform. My first thought is that I would not want to have my entire portfolio in something I know will lag that next time we have a 2003-like rally but as one of several tools for an account that has less than $100,000 it may makes sense. I plan to watch these for a while to make a final judgment. At this point I think the funds do merit some study.
Now the Red Sox. Holy cow! I have to admit I have been shocked at some of the decisions manager Terry Francona has made, like if Schilling was hurt why did he pitch in game one, but I have come to expect strange things from the Sox in October. Some writer had a great line about the Red Sox several years ago. He said, as a man close to 60 years old, "the Red Sox killed my father and now they are coming after me." Such is the plight of being a fan. I have come to expect the worst and hope for the best. That way I don't get too upset when they leave Pedro in too long. Speaking of Pedro, does anyone think he has anything left? The bullpen is so over used that he has to be able to go a long way today for them to have a realistic chance. Pass the pepto!
Read more!
Sunday, October 17, 2004
The Big Picture for the Week of October 17
Despite the passage of time the stock market does not seem to be making any progress to getting better. The yield curve resumed its flattening. I have written before about the consequence of that. For a while we saw the yield on the 10 year treasury go back up to 4.2%. Now we are back close to 4.0%. We had a fake out break out in the S+P 500 when it spiked up to 1140 recently. The S+P is now at 1108, ouch. While I did slightly increase my clients equity exposure, I still have all accounts defensively structured.
I was quoted in the Arizona Republic on October 1st that I think tech is likely to struggle for a while. The mega cap names, I think, will continue to lag. If you want to own tech and I think every one needs to own some, I would stick with secondary names that have obvious user demand for their products.
There have been a lot of stocks that have blowup recently. The market is clearly nervous even though the VIX is still quite low. The nervousness that exists may be positive in a contrarian way. There have been several times in the last ten years when the market, faced with scary things, has rallied for no real reason at all. It just went higher. That will happen again, but I don't know when.
I would not count on the election result to lift the market. Since 1972 there has only been one time, 1976, that the market reversed a down trend after the election. The market was down in 1984 and 2000 and every other time the uptrend was already in place. While a rally would be great it should not be counted on. Dang!
Later this week I hope to have an interesting article about investing in Switzerland. I am in the process of research and drawing a conclusion. Either way it should be interesting so please check back on the blog.
Read more!
I was quoted in the Arizona Republic on October 1st that I think tech is likely to struggle for a while. The mega cap names, I think, will continue to lag. If you want to own tech and I think every one needs to own some, I would stick with secondary names that have obvious user demand for their products.
There have been a lot of stocks that have blowup recently. The market is clearly nervous even though the VIX is still quite low. The nervousness that exists may be positive in a contrarian way. There have been several times in the last ten years when the market, faced with scary things, has rallied for no real reason at all. It just went higher. That will happen again, but I don't know when.
I would not count on the election result to lift the market. Since 1972 there has only been one time, 1976, that the market reversed a down trend after the election. The market was down in 1984 and 2000 and every other time the uptrend was already in place. While a rally would be great it should not be counted on. Dang!
Later this week I hope to have an interesting article about investing in Switzerland. I am in the process of research and drawing a conclusion. Either way it should be interesting so please check back on the blog.
Read more!
Saturday, October 16, 2004
ETFs Have Two Serious Flaws
I recently discovered an excellent blog called The Finance Blog Resource Page. I liked it so much I linked it to this page. One great thing they have is a lot of content devoted to exchange traded funds.
I'm sure you know about exchange traded funds but you can go to the American Stock Exchange or the iShares site for even more great info. ETFs are an excellent tool and I use them occasionally to implement smaller accounts at our firm or to capture the effect of emerging market stocks for larger, but more conservative clients. I have written several articles for ETFzone.com and touched on them in some of my work at the Fool. Lastly, I have also done some consulting for a couple of friends that work at wirehouse brokers putting together all ETF portfolios. So believe me when I tell you I think highly of them.
The ETF page at Finance Blog Resource is from a guide called A Better Way To Invest which is about the most comprehensive ETF resource I have ever seen. There was one section that intrigued me more than the others, titled The Single (But Serious) Disadvantage of ETFs. The take away from the article is that you have to pay equity commissions to trade them and you may give up some money in the bid-ask spread. While the article is correct about this, it is not the only disadvantage, there is one more that I know of.
Dividends, depending on what study you read, have historically accounted for 40% of the total return enjoyed by equity investors. Most ETFs do not have a very high dividend yield. The Spyders yield 1.6% and the VIPERs total stock market yields 1.44%, but those are broad market ETFs.
We see the same types of yields for sector ETFs too. The iShares for US Financials (AMEX:IYF) yields 1.82%. Compare that to the 3.7% yield you can get from National City Corp. There are in fact 39 financial companies in the S+P 500 that have a higher yield than IYF. The iShares for US Healthcare (IYH)yields 0.71%. AstraZeneca, for example,yields 1.55% and there are seven other healthcare stocks in the S+P 500 that yield more than 2%. Lastly lets look at energy. The iShares for US Energy (IYE) yields 1.19%. Total, the French oil company yields 2.74% and there are six energy stocks in the S+P 500 that yield more than IYE. In putting together these examples I made it appoint to avoid mentioning stocks and ETFs that I own for clients and I stuck with S+P 500 stock to keep the article as simple as possible. But I don't believe in limiting your portfolio to domestic large cap stocks, as you might glean from my other postings.
The point to take away here is that an all ETF portfolio is likely to yield much less that a diversified portfolio of individual stocks. The consequence is that an all ETF portfolio has a much heavier reliance on price appreciation. Dividends can do a lot of heavy lifting in a portfolio, 2004 has shown that to be the case.
Don't get me wrong I still think ETFs are a great tool. Just like anything else they have their pluses and minuses. I think it is important to know the drawbacks of any investment you make.
Oh by the way there is an hybrid ETF that is a direct argument to my thesis and that is iShares Dow Jones Select Dividend Index (DVY). I own this personally, but I don't think my comments here could possibly lift the price. With its 40% weighting in financials, high correlation to IYF and its 3% yield you could use it as a proxy for financials.
Read more!
I'm sure you know about exchange traded funds but you can go to the American Stock Exchange or the iShares site for even more great info. ETFs are an excellent tool and I use them occasionally to implement smaller accounts at our firm or to capture the effect of emerging market stocks for larger, but more conservative clients. I have written several articles for ETFzone.com and touched on them in some of my work at the Fool. Lastly, I have also done some consulting for a couple of friends that work at wirehouse brokers putting together all ETF portfolios. So believe me when I tell you I think highly of them.
The ETF page at Finance Blog Resource is from a guide called A Better Way To Invest which is about the most comprehensive ETF resource I have ever seen. There was one section that intrigued me more than the others, titled The Single (But Serious) Disadvantage of ETFs. The take away from the article is that you have to pay equity commissions to trade them and you may give up some money in the bid-ask spread. While the article is correct about this, it is not the only disadvantage, there is one more that I know of.
Dividends, depending on what study you read, have historically accounted for 40% of the total return enjoyed by equity investors. Most ETFs do not have a very high dividend yield. The Spyders yield 1.6% and the VIPERs total stock market yields 1.44%, but those are broad market ETFs.
We see the same types of yields for sector ETFs too. The iShares for US Financials (AMEX:IYF) yields 1.82%. Compare that to the 3.7% yield you can get from National City Corp. There are in fact 39 financial companies in the S+P 500 that have a higher yield than IYF. The iShares for US Healthcare (IYH)yields 0.71%. AstraZeneca, for example,yields 1.55% and there are seven other healthcare stocks in the S+P 500 that yield more than 2%. Lastly lets look at energy. The iShares for US Energy (IYE) yields 1.19%. Total, the French oil company yields 2.74% and there are six energy stocks in the S+P 500 that yield more than IYE. In putting together these examples I made it appoint to avoid mentioning stocks and ETFs that I own for clients and I stuck with S+P 500 stock to keep the article as simple as possible. But I don't believe in limiting your portfolio to domestic large cap stocks, as you might glean from my other postings.
The point to take away here is that an all ETF portfolio is likely to yield much less that a diversified portfolio of individual stocks. The consequence is that an all ETF portfolio has a much heavier reliance on price appreciation. Dividends can do a lot of heavy lifting in a portfolio, 2004 has shown that to be the case.
Don't get me wrong I still think ETFs are a great tool. Just like anything else they have their pluses and minuses. I think it is important to know the drawbacks of any investment you make.
Oh by the way there is an hybrid ETF that is a direct argument to my thesis and that is iShares Dow Jones Select Dividend Index (DVY). I own this personally, but I don't think my comments here could possibly lift the price. With its 40% weighting in financials, high correlation to IYF and its 3% yield you could use it as a proxy for financials.
Read more!
Friday, October 15, 2004
One Quick Item
I had an article about China published today on the Fool. The ideas about how supply and demand work are crucial to my entire investment approach.
Read more!
Read more!
Simple Bliss
I watch an inordinate amount of stock market television. I feel I can, potentially, learn from anyone. While I am not usually interested in the stock picks I am interested in the process that someone goes through to pick stocks.
Every morning on Squawk Box, at about 15 minutes before the open, they have a pretty good non-fluff interview about the US stock market. This morning's interview was with James Abate from GAM Investors. The interview was incredible because of how complicated he tried to make the investment process. He talked about a commodity prism, the Fed altering its focus, and that consumer staples is his favorite group. Having watched Squawk Box since the beginning, I know how they react to people that come on the show and Mr. Abate was not going over well. I have no doubt that he is much smarter than I am (I am not being sarcastic here), and placed very highly at whatever B-school he attended but he is not, nor is anyone, smarter than the market. I believe what I was hearing from him was an attempt to outsmart the market. No one can outsmart the market.
The most successful investors I have ever seen, read, heard all keep their investment themes very simple. I try to do the same. For example a simple theme these days is that China and India's demand for oil and natural resources is increasing dramatically. This is part of the equation as to why the materials and energy sectors have out performed. You don't need to be that bright to realize this is going on.
Another simple theme making news this week is what Eliot Spitzer is doing to the insurance companies. I wrote a negative piece for the Fool about AIG back in June. What do insurance companies do? They sell protection. Draw your own conclusion about that but the premiums we pay don't buy anything tangible, just peace of mind. I can tell you that insurance products are wildly expensive with regard to the commissions that go to the sales people. While I did not expect this weeks news to come about, that there are allegations of corruption, collusion and more is not the least bit surprising. I have never owned an insurance stock personally or for clients. I don't think my analysis is especially complex or insightful, quite the opposite it is very simple.
A simple analysis of supply and demand for any investment theme is a key to success. In looking at the US market there is clearly a demand problem for US stocks. How can we know this? There are a couple of ways, first subjectively the market feels like it wants to go lower, it has been trending lower for quite a while. Relying on gut feeling alone may not be the best analysis though. I would rather remove most emotions from the decision process. Objectively speaking we can look the 200 day moving average to assess demand for stocks. When the S+P 500 is below its 200 day be defensive, when the S+P is above its 200 day, be invested. The market is telling us that there is a demand problem when it is below its 200 day moving average.
I believe you can only take what the market is giving you. What I mean by that is you will not be up 25% in a year that the market is up 3% unless you take tremendous risk. If you take the kind of risk necessary to beat the market by 20% you have to be prepared for the consequence that you may trail the market by that much. To be clear there are investors that successfully take that type of risk again and again and have great returns. Philosophically, I think of the market as a great place to get rich slowly. In a flat market environment I look to add a couple of hundred basis points through dividends, low beta and selling an occasional covered call option. In a market that is moving dramatically higher I make sure I go along for the ride and when the market is below its 200 day I make sure I am defensive enough to miss most, not all but most, of the pain.
The market averages 10% returns per year but it is hardly ever up by that exact amount. It is usually a lot more or a lot less. If the goal of you financial plan is to average something close to 10% per year and your are faithful to an indicator like the 200 day, and by the way there are several like this that are just as good, and miss most of the pain you have a chance to be dramatically ahead of your target for growth.
I'll expand more on this in future postings.
Read more!
Every morning on Squawk Box, at about 15 minutes before the open, they have a pretty good non-fluff interview about the US stock market. This morning's interview was with James Abate from GAM Investors. The interview was incredible because of how complicated he tried to make the investment process. He talked about a commodity prism, the Fed altering its focus, and that consumer staples is his favorite group. Having watched Squawk Box since the beginning, I know how they react to people that come on the show and Mr. Abate was not going over well. I have no doubt that he is much smarter than I am (I am not being sarcastic here), and placed very highly at whatever B-school he attended but he is not, nor is anyone, smarter than the market. I believe what I was hearing from him was an attempt to outsmart the market. No one can outsmart the market.
The most successful investors I have ever seen, read, heard all keep their investment themes very simple. I try to do the same. For example a simple theme these days is that China and India's demand for oil and natural resources is increasing dramatically. This is part of the equation as to why the materials and energy sectors have out performed. You don't need to be that bright to realize this is going on.
Another simple theme making news this week is what Eliot Spitzer is doing to the insurance companies. I wrote a negative piece for the Fool about AIG back in June. What do insurance companies do? They sell protection. Draw your own conclusion about that but the premiums we pay don't buy anything tangible, just peace of mind. I can tell you that insurance products are wildly expensive with regard to the commissions that go to the sales people. While I did not expect this weeks news to come about, that there are allegations of corruption, collusion and more is not the least bit surprising. I have never owned an insurance stock personally or for clients. I don't think my analysis is especially complex or insightful, quite the opposite it is very simple.
A simple analysis of supply and demand for any investment theme is a key to success. In looking at the US market there is clearly a demand problem for US stocks. How can we know this? There are a couple of ways, first subjectively the market feels like it wants to go lower, it has been trending lower for quite a while. Relying on gut feeling alone may not be the best analysis though. I would rather remove most emotions from the decision process. Objectively speaking we can look the 200 day moving average to assess demand for stocks. When the S+P 500 is below its 200 day be defensive, when the S+P is above its 200 day, be invested. The market is telling us that there is a demand problem when it is below its 200 day moving average.
I believe you can only take what the market is giving you. What I mean by that is you will not be up 25% in a year that the market is up 3% unless you take tremendous risk. If you take the kind of risk necessary to beat the market by 20% you have to be prepared for the consequence that you may trail the market by that much. To be clear there are investors that successfully take that type of risk again and again and have great returns. Philosophically, I think of the market as a great place to get rich slowly. In a flat market environment I look to add a couple of hundred basis points through dividends, low beta and selling an occasional covered call option. In a market that is moving dramatically higher I make sure I go along for the ride and when the market is below its 200 day I make sure I am defensive enough to miss most, not all but most, of the pain.
The market averages 10% returns per year but it is hardly ever up by that exact amount. It is usually a lot more or a lot less. If the goal of you financial plan is to average something close to 10% per year and your are faithful to an indicator like the 200 day, and by the way there are several like this that are just as good, and miss most of the pain you have a chance to be dramatically ahead of your target for growth.
I'll expand more on this in future postings.
Read more!
Thursday, October 14, 2004
What A Day!
Are you kidding me? Days like today is why I love this business. We had all sorts of things hitting the fan all contributing to a dramatic selloff.
The weekly oil inventory number showed a decrease, is anyone really shocked by this? Oil rallied to $54.90, yet another all time high. Sandisk absolutely imploded after missing earnings by a mile last night, and along with Novellus took the semiconductor group down over 3%. Eliot Spitzer has declared war on the insurance industry saying they have no moral compass and he will not negotiate with them. His tone was far more aggressive than anything I have ever heard from him. Marsh & McClennan was down 25%. This was $22 billion dollar market cap and it dropped that much! Wow.
The S+P 500 has violated all sorts of technical resistance points. A lot of my writing and portfolio structuring for months has been about overweighting energy, materials, and foreign. These areas have held up well and should continue to do well in this environment.
I have seen a lot of "smart" people on CNBC saying the market would rally into the end of the year. Unfortunately there is never a lot of insight to go along with these optimistic forecasts. The market may go up so it is important to not give up on stocks. But you can still be defensive.
Vince Farrell was on Squawk Box this morning. He stopped sharing his insights about a year or so ago. The only stocks I have heard him tout have market caps bigger than $200 billion. If you follow the market you know that giant companies have lagged badly.
My brother has given up on the Red Sox now that they are down 2-0. They were down 2-0 last year in a five game series and came back to win. Keep hope alive.
I didn't think I would be able to write anything today but it was such a great day that I made the time.
Read more!
The weekly oil inventory number showed a decrease, is anyone really shocked by this? Oil rallied to $54.90, yet another all time high. Sandisk absolutely imploded after missing earnings by a mile last night, and along with Novellus took the semiconductor group down over 3%. Eliot Spitzer has declared war on the insurance industry saying they have no moral compass and he will not negotiate with them. His tone was far more aggressive than anything I have ever heard from him. Marsh & McClennan was down 25%. This was $22 billion dollar market cap and it dropped that much! Wow.
The S+P 500 has violated all sorts of technical resistance points. A lot of my writing and portfolio structuring for months has been about overweighting energy, materials, and foreign. These areas have held up well and should continue to do well in this environment.
I have seen a lot of "smart" people on CNBC saying the market would rally into the end of the year. Unfortunately there is never a lot of insight to go along with these optimistic forecasts. The market may go up so it is important to not give up on stocks. But you can still be defensive.
Vince Farrell was on Squawk Box this morning. He stopped sharing his insights about a year or so ago. The only stocks I have heard him tout have market caps bigger than $200 billion. If you follow the market you know that giant companies have lagged badly.
My brother has given up on the Red Sox now that they are down 2-0. They were down 2-0 last year in a five game series and came back to win. Keep hope alive.
I didn't think I would be able to write anything today but it was such a great day that I made the time.
Read more!
Wednesday, October 13, 2004
Is Buy and Hold Really Dead?
I don't think so.
You probably have heard some of this buy and hold stuff being good in the 1980's & 1990's but it can't work anymore, the bubble taught us that, right?
Buy and hold is not dead but it has changed, and that is ok. Any stock you buy for a properly diversified should have a purpose. Maybe the stock is a good proxy for its sector, or has a high dividend, or a high beta, or is a good way to access the stock market of a foreign country. For example one stock I own for clients is Bank Of America, it serves many purposes; mega cap, 4% dividend, good proxy for financials etc. I bought it with the intention of holding it forever. Last spring when I got defensive in the portfolio B of A was not a name I sold for several reasons. Although there is no visibility as to why I would ever sell it I don't really expect to hold it for ever. I imagine that at some point it will no longer serve one of the purposes for which I hold it. I employ this logic for almost every stock I buy.
One exception was last year I bought the semiconductor Ishares thinking I would only own it for a few months. Typically semiconductors, along with copper stocks, is one of the first groups to turn up in anticipation of an economic recovery. In the summer and fall of 2003 this played true to form. Semi's outperformed the broad tech sector for several months. Sometimes history repeats itself.
When I get it wrong I take that as a good reason to sell too. I thought Colgate would be a good proxy for consumer stocks and got that wrong, it lagged the group the entire year that I owned it. I gave it a fair chance but it was not serving its purpose so I sold it.
Investing is a dynamic process. When things change it is important to be out in front of those changes and base decisions of any new information you get. Always look forward. I know plenty of people that, whether they realize it or not, care more about where a stock has been than where it is going. The market tells you what you need to know if you listen. That is easier said than done, but once you take that to heart your returns are bound to improve.
Well I have to get ready for the Red Sox game, pass the Pepto.
There are times I get it wrong and so I sell.
Read more!
You probably have heard some of this buy and hold stuff being good in the 1980's & 1990's but it can't work anymore, the bubble taught us that, right?
Buy and hold is not dead but it has changed, and that is ok. Any stock you buy for a properly diversified should have a purpose. Maybe the stock is a good proxy for its sector, or has a high dividend, or a high beta, or is a good way to access the stock market of a foreign country. For example one stock I own for clients is Bank Of America, it serves many purposes; mega cap, 4% dividend, good proxy for financials etc. I bought it with the intention of holding it forever. Last spring when I got defensive in the portfolio B of A was not a name I sold for several reasons. Although there is no visibility as to why I would ever sell it I don't really expect to hold it for ever. I imagine that at some point it will no longer serve one of the purposes for which I hold it. I employ this logic for almost every stock I buy.
One exception was last year I bought the semiconductor Ishares thinking I would only own it for a few months. Typically semiconductors, along with copper stocks, is one of the first groups to turn up in anticipation of an economic recovery. In the summer and fall of 2003 this played true to form. Semi's outperformed the broad tech sector for several months. Sometimes history repeats itself.
When I get it wrong I take that as a good reason to sell too. I thought Colgate would be a good proxy for consumer stocks and got that wrong, it lagged the group the entire year that I owned it. I gave it a fair chance but it was not serving its purpose so I sold it.
Investing is a dynamic process. When things change it is important to be out in front of those changes and base decisions of any new information you get. Always look forward. I know plenty of people that, whether they realize it or not, care more about where a stock has been than where it is going. The market tells you what you need to know if you listen. That is easier said than done, but once you take that to heart your returns are bound to improve.
Well I have to get ready for the Red Sox game, pass the Pepto.
There are times I get it wrong and so I sell.
Read more!
Commodity Correction
There is blood in the commodity streets today. Well not really, but copper, aluminum, gold, nickel and just about every other commodity is getting hit very hard due to a rumor/anecdotal evidence of a slow down in China. The stocks are getting hit too. Click here to look at some of the commodity stocks I watch. Time to sell? That would depend on a few things but for most people the answer is probably no.
Part of the run up in the price of commodity and resource stocks has been hot money, like the hedgies, chasing heat and performance. Today's selloff is so big because a lot of that heat is rotating out of the group. The fundamental reason for the run up has been demand from China ramping up and the visibility for a similar ramp up from India, remember India has over one billion people and is several years behind China in modernization. These two countries are changing demand for all sorts of resources. Northwest China, which makes up most of the land and close to half the population, is about as modernized as the western US was 150 years ago. I don't know how many years it will take to bring that part of the country into modern times but there is no question about what this will do to demand.
If you are too overweight the materials sector, then today definitely hurts. Materials, which is the S+P sector that commodity stocks belongs to (except for oil stocks), comprise 3.1% of the S+P 500. The accounts I manage have been overweight materials for months at about 6% of the portfolio. One of the names I own for clients, Dow Chemical, is far from a direct play on resources, pays 3% and has not been subject to the same type of volatility.
One thing that hurt people in the tech crash was having half their money in internet stocks. People that have 25% of their money in resource stocks are making the same mistake. I am convinced that commodity and resource stocks will outperform over the next few years. I could be wrong though. If I am wrong and I had a quarter of the portfolio in resource stocks my clients would be damaged financially. I don't won't to hurt my clients and should not hurt yourself. I am double the weight of the S+P but this exposure yields about 2.5% which is a nice cushion.
If you are in the market to speculate than my approach is not for you. But if you have a financial plan that calls for X% of reasonable growth per year, it makes no sense to make oversized bets on one outcome.
On a different not the Red Sox loss last night was one of the stranger ones in their playoff history. What matters though is can Curt Schilling get healthy in time to pitch his next start? He could not push off of his back foot properly. It would be a big surprise for the Red Sox to win the series with out any wins from Schilling. It could happen but it would be a surprise.
I took a look at my blog profile and the number of profile views has sky rocketed. I hope people are reading this although I don't have a lot of expectations in that regard. If you have any questions about anything I have written feel free to post a comment or email me at rogernu@yahoo.com.
Lastly I will have a long day in Morador (that's what we call Phoenix) so I will probably post again this afternoon instead of tomorrow.
Read more!
Part of the run up in the price of commodity and resource stocks has been hot money, like the hedgies, chasing heat and performance. Today's selloff is so big because a lot of that heat is rotating out of the group. The fundamental reason for the run up has been demand from China ramping up and the visibility for a similar ramp up from India, remember India has over one billion people and is several years behind China in modernization. These two countries are changing demand for all sorts of resources. Northwest China, which makes up most of the land and close to half the population, is about as modernized as the western US was 150 years ago. I don't know how many years it will take to bring that part of the country into modern times but there is no question about what this will do to demand.
If you are too overweight the materials sector, then today definitely hurts. Materials, which is the S+P sector that commodity stocks belongs to (except for oil stocks), comprise 3.1% of the S+P 500. The accounts I manage have been overweight materials for months at about 6% of the portfolio. One of the names I own for clients, Dow Chemical, is far from a direct play on resources, pays 3% and has not been subject to the same type of volatility.
One thing that hurt people in the tech crash was having half their money in internet stocks. People that have 25% of their money in resource stocks are making the same mistake. I am convinced that commodity and resource stocks will outperform over the next few years. I could be wrong though. If I am wrong and I had a quarter of the portfolio in resource stocks my clients would be damaged financially. I don't won't to hurt my clients and should not hurt yourself. I am double the weight of the S+P but this exposure yields about 2.5% which is a nice cushion.
If you are in the market to speculate than my approach is not for you. But if you have a financial plan that calls for X% of reasonable growth per year, it makes no sense to make oversized bets on one outcome.
On a different not the Red Sox loss last night was one of the stranger ones in their playoff history. What matters though is can Curt Schilling get healthy in time to pitch his next start? He could not push off of his back foot properly. It would be a big surprise for the Red Sox to win the series with out any wins from Schilling. It could happen but it would be a surprise.
I took a look at my blog profile and the number of profile views has sky rocketed. I hope people are reading this although I don't have a lot of expectations in that regard. If you have any questions about anything I have written feel free to post a comment or email me at rogernu@yahoo.com.
Lastly I will have a long day in Morador (that's what we call Phoenix) so I will probably post again this afternoon instead of tomorrow.
Read more!
Tuesday, October 12, 2004
Luddite Fails
Today was not a very important day in the market unless $54 turns out to be the top in oil, which I am not expecting. We had a small lift into the close as oil sold off. After the bell Intel and Yahoo reported earnings but neither report elicited much of a reaction. My clients and I own Yahoo.
Kiplinger's may want to include me in an article they are working on about how to chose an advisor. I emailed about an old article and the author asked if I would be available and I said yes. Hopefully she follows through and it works out.
I saw Maria do an interview with John Burnham. This was exactly the type of interview I talked about in an earlier posting. He recommended mega caps General Electric and Walmart because they have good managements. My Pfizer article addressed why this is the wrong time for huge companies. There are 17 US companies that have market caps greater than $100 billion and eleven of them have lagged their respective sectors over the last three years.
If he really thinks GE and Walmart are the best companies to own, it would have been nice if he had acknowledged the lagging performance and offered real insight as to why now is the time to own these names. This type of interview benefits no one, hopefully CNBC recognizes that soon.
The Red Sox play their first game against the Yankees tonight. I am trained to hope for the best but expect the worst. My buddy Mike, at Merrill, thinks the Sox will beat the Cardinals in 7. I am afraid Mike has doomed Bostonians everywhere to another autumn letdown. See what I mean about being trained? Sometimes I can't even watch the whole game because I get so nervous. Check tomorrow to see how I held up.
Lastly, I spent a long time today trying to figure out exactly where to paste the code for Link in my side bar. If you look you can see I am close to figuring it out. I added the "Random Links" but every time I tried to code in a link it screwed up the entire layout of the page. I would be grateful if someone can tell exactly where to paste the code.
Read more!
Kiplinger's may want to include me in an article they are working on about how to chose an advisor. I emailed about an old article and the author asked if I would be available and I said yes. Hopefully she follows through and it works out.
I saw Maria do an interview with John Burnham. This was exactly the type of interview I talked about in an earlier posting. He recommended mega caps General Electric and Walmart because they have good managements. My Pfizer article addressed why this is the wrong time for huge companies. There are 17 US companies that have market caps greater than $100 billion and eleven of them have lagged their respective sectors over the last three years.
If he really thinks GE and Walmart are the best companies to own, it would have been nice if he had acknowledged the lagging performance and offered real insight as to why now is the time to own these names. This type of interview benefits no one, hopefully CNBC recognizes that soon.
The Red Sox play their first game against the Yankees tonight. I am trained to hope for the best but expect the worst. My buddy Mike, at Merrill, thinks the Sox will beat the Cardinals in 7. I am afraid Mike has doomed Bostonians everywhere to another autumn letdown. See what I mean about being trained? Sometimes I can't even watch the whole game because I get so nervous. Check tomorrow to see how I held up.
Lastly, I spent a long time today trying to figure out exactly where to paste the code for Link in my side bar. If you look you can see I am close to figuring it out. I added the "Random Links" but every time I tried to code in a link it screwed up the entire layout of the page. I would be grateful if someone can tell exactly where to paste the code.
Read more!
Monday, October 11, 2004
Confounding Economic Picture
For starters, I picked up a copy of the October issue of Futures Magazine. I am quoted extensively in the cover story even where I called John Kerry a weird Manchurian candidate type of guy. Wow.
I also had a negative piece on Pfizer published on the Fool today, check it out if you have a chance.
I worry more and more about all of the things that have to go right for our economy to chug along these days. Oil above $50 will start to be a problem for corporate earnings soon and may already be a problem for some consumer segments.
Until something real happens with budget deficit reduction, we need Japan, china, India, Taiwan and others to continue to buy our debt. Any policy or jawboning that threatens their demand for our debt could be catastrophic. The yield curve staying relatively flat historically has meant a slow down or recession. Is that something we need to worry about?
Is the recent gold rally just about normal seasonal demand or is it pricing in a big drop in the dollar?
I don't have answers but I do have opinions. China and India have changed global demand for oil. China used to export 2 million barrels per day now they import that amount. The thing in Nigeria and the hurricane issues are not long term issues confronting the oil market. There is nothing new about labor unrest or weather.
Gold could trade to $500 as some suggest but despite various accords and agreements, at some point central bank selling of gold may come in to the market putting a cap of sorts on the price. If something happens to cause the dollar to decline a lot, however, gold could go much higher just as a function of math. Gold is denominated in US dollars. Everything else being equal a weaker dollar would mean we would have to see a higher gold price.
While I don't know if we are going to have this economic cycle end soon, it should be clear that there is not going to be the typical job growth we see in most expansions. This is something I have been writing about for a long time. I believe we are seeing an evolution in our economy. By necessity we are becoming more oriented to small businesses. Many technical and analytical jobs are being outsourced. Kerry's tax incentive would not mean much when the work done by a junior stock analyst in the US for $80,000 can be done in India for $9,000.
Evolution in and of itself is not bad but there may be pain for some -like folks working in manufacturing jobs- as the country figures this out.
As these issue continue to play out I continue to favor low beta foreign stocks with high dividend yields, energy stocks, and materials companies that do business with commodities.
Read more!
I also had a negative piece on Pfizer published on the Fool today, check it out if you have a chance.
I worry more and more about all of the things that have to go right for our economy to chug along these days. Oil above $50 will start to be a problem for corporate earnings soon and may already be a problem for some consumer segments.
Until something real happens with budget deficit reduction, we need Japan, china, India, Taiwan and others to continue to buy our debt. Any policy or jawboning that threatens their demand for our debt could be catastrophic. The yield curve staying relatively flat historically has meant a slow down or recession. Is that something we need to worry about?
Is the recent gold rally just about normal seasonal demand or is it pricing in a big drop in the dollar?
I don't have answers but I do have opinions. China and India have changed global demand for oil. China used to export 2 million barrels per day now they import that amount. The thing in Nigeria and the hurricane issues are not long term issues confronting the oil market. There is nothing new about labor unrest or weather.
Gold could trade to $500 as some suggest but despite various accords and agreements, at some point central bank selling of gold may come in to the market putting a cap of sorts on the price. If something happens to cause the dollar to decline a lot, however, gold could go much higher just as a function of math. Gold is denominated in US dollars. Everything else being equal a weaker dollar would mean we would have to see a higher gold price.
While I don't know if we are going to have this economic cycle end soon, it should be clear that there is not going to be the typical job growth we see in most expansions. This is something I have been writing about for a long time. I believe we are seeing an evolution in our economy. By necessity we are becoming more oriented to small businesses. Many technical and analytical jobs are being outsourced. Kerry's tax incentive would not mean much when the work done by a junior stock analyst in the US for $80,000 can be done in India for $9,000.
Evolution in and of itself is not bad but there may be pain for some -like folks working in manufacturing jobs- as the country figures this out.
As these issue continue to play out I continue to favor low beta foreign stocks with high dividend yields, energy stocks, and materials companies that do business with commodities.
Read more!
BobsStock Advice
I can not figure out how to put links on my side bar so here a link to a very useful blog...
Bob's Advice For Stocks
Read more!
Bob's Advice For Stocks
Read more!
Sunday, October 10, 2004
Something the Fool Won't Use?
I submitted the following article a week ago but I don't think they will publish it, I hope it is useful.
How Not to Think of diversification
I feel the need to throw in my two cents about an article "How to Think about Diversification." The article talked about being over diversified or under diversified. Too many stocks and you don't benefit if one of them turns out to be a huge winner. Too few and a Merck like blow up has too much of a negative impact. There is truth in that but I disagree with the articles conclusion.
I would start by asking yourself why you invest. What realistic return are you trying to get by owning stocks. We all know the stock market averages 10%-11% per year, right? Well sort of except that the market hardly ever goes up by that exact amount. It is usually a lot more or a lot less.
A properly constructed portfolio will capture most of what the market does, regardless of what stocks you own. Your stock picking ability will determine the extent to which you beat or lag the market.
Owning about ten stocks, as the article suggests, puts too much reliance on your ability to pick stocks and may lead to poor performance and too much trading. The blow up at Merck and the precipitous deterioration at Fannie Mae illustrate the point. The Hennessy Total Return Fund, which owns ten stocks, had a 5.5% weight in Merck and the Sun America Focused Large Cap Value, which owned 25 stocks as of August 31, had a 10.6% weight in Fannie Mae. Neil Hennessy was not smart enough to avoid Merck and David Dreman was not smart enough to avoid Fannie.
If you own only ten stocks you must believe you are as good, or perhaps better, of a stock picker than Messrs. Hennessy and Dreman. Both of these gentlemen clearly know what they are doing. So are you better than these guys? I am not willing to bet that I am.
If you goal for growth is anywhere close to 5%-15% then taking the increased risk of only ten stocks is unnecessary. 30-40 should be sufficient to reduce single stock risk. If that many stocks would eat up too much of your account in commissions you can utilize exchange traded funds in conjunction with individual stocks. This should allow you to keep up with the market and hit your growth target.
One last little nugget, if you can avoid most of the pain of the next big downturn you will put yourself years ahead of your target. "How am I supposed to do" that you might ask? The next time the yield curve inverts, which has historically meant a recessions and a bear market, get very defensive with your portfolio. That worked like a charm in November of 2000.
Read more!
How Not to Think of diversification
I feel the need to throw in my two cents about an article "How to Think about Diversification." The article talked about being over diversified or under diversified. Too many stocks and you don't benefit if one of them turns out to be a huge winner. Too few and a Merck like blow up has too much of a negative impact. There is truth in that but I disagree with the articles conclusion.
I would start by asking yourself why you invest. What realistic return are you trying to get by owning stocks. We all know the stock market averages 10%-11% per year, right? Well sort of except that the market hardly ever goes up by that exact amount. It is usually a lot more or a lot less.
A properly constructed portfolio will capture most of what the market does, regardless of what stocks you own. Your stock picking ability will determine the extent to which you beat or lag the market.
Owning about ten stocks, as the article suggests, puts too much reliance on your ability to pick stocks and may lead to poor performance and too much trading. The blow up at Merck and the precipitous deterioration at Fannie Mae illustrate the point. The Hennessy Total Return Fund, which owns ten stocks, had a 5.5% weight in Merck and the Sun America Focused Large Cap Value, which owned 25 stocks as of August 31, had a 10.6% weight in Fannie Mae. Neil Hennessy was not smart enough to avoid Merck and David Dreman was not smart enough to avoid Fannie.
If you own only ten stocks you must believe you are as good, or perhaps better, of a stock picker than Messrs. Hennessy and Dreman. Both of these gentlemen clearly know what they are doing. So are you better than these guys? I am not willing to bet that I am.
If you goal for growth is anywhere close to 5%-15% then taking the increased risk of only ten stocks is unnecessary. 30-40 should be sufficient to reduce single stock risk. If that many stocks would eat up too much of your account in commissions you can utilize exchange traded funds in conjunction with individual stocks. This should allow you to keep up with the market and hit your growth target.
One last little nugget, if you can avoid most of the pain of the next big downturn you will put yourself years ahead of your target. "How am I supposed to do" that you might ask? The next time the yield curve inverts, which has historically meant a recessions and a bear market, get very defensive with your portfolio. That worked like a charm in November of 2000.
Read more!
Blog Search Engine
I stumbled accross how to list this blong on a blog search engine. The confirmation email said I should post the following code on my blog to show up better on their engine. Other than posting it I'm not sure where to place it, so with out further adeau.....
Blog Search Engine
-Search Engine and Directory of blogs. Looking for blogs? Find them on
BlogSearchEngine.com
Read more!
Blog Search Engine
-Search Engine and Directory of blogs. Looking for blogs? Find them on
BlogSearchEngine.com
Read more!
Saturday, October 09, 2004
The Big Picture for the Week of October 10, 2004
Financial Markets had a tricky week. It started out with stocks going up, bonds going down, oil going up, and we had a debate on Friday night to think about. At the end of the week stocks and bonds switched directions and oil hit its eighth record high price in the last 11 sessions.
The S+P 500 is unambiguously above its 200 day moving average. I have increased my client's equity exposure as a result but the portfolios still have a defensive tone to them. I plan to add more foreign low beta names and add a little more tech to add beta. Beta is a measure of volatility compared to the S+P 500, which has a beta of 1.0. For months the beta of my portfolios has been about .6 or .7. I might take it up to .8 or so but I have not decided yet.
I am concerned that if oil stays up above $50 for any serious length of time we will see damage to corporate earnings and consumer consumption. As you can imagine that would not be good. It is a possibility, and if it plays out it would be good for oil stocks, commodities (and by extension stocks of commodity companies), bonds and non-dollar denominated assets. While there is nothing brilliant about that assessment of what would do well, it will be important to recognize the environment and position accordingly if you have not already done so.
My wife Joellyn and I watched the debate Friday night. Actually she read a magazine or two while I watched. Even though she was only paying half attention her bulls&*t meter was beeping all throughout the show. I thought Kerry won the debate. That does not mean I am a Kerry guy. Actually I don't like either one. Kerry is devoting a lot of effort to his undefined plan, but if he wins the election he won't be able to implement very much of it due to gridlock. If Bush wins we can count on more of the same which is good in that he is not an unknown and he is pro business and pro consumer. What is bad about Bush is that every economic/financial idea his administration has come up with have all had wildly underwhelming results that were far short of what was promised.
Saturday morning, as I usually do, I watched the Fox News shows Bulls and Bears and Cavuto on Business. All the regulars were there to talk about the debate. I found very myself puzzled by something. Everyone on both shows was talking their political beliefs. I manage money for a living, same as most of the people on the shows. My job is to assess what either outcome might mean to the markets and how to manage around those potential outcomes. There are pluses and minuses to both candidates. My job is not to be blindly devoted to one side or the other. Am I the only one that sees this? The partisanship takes away from the quality of the analysis.
Read more!
The S+P 500 is unambiguously above its 200 day moving average. I have increased my client's equity exposure as a result but the portfolios still have a defensive tone to them. I plan to add more foreign low beta names and add a little more tech to add beta. Beta is a measure of volatility compared to the S+P 500, which has a beta of 1.0. For months the beta of my portfolios has been about .6 or .7. I might take it up to .8 or so but I have not decided yet.
I am concerned that if oil stays up above $50 for any serious length of time we will see damage to corporate earnings and consumer consumption. As you can imagine that would not be good. It is a possibility, and if it plays out it would be good for oil stocks, commodities (and by extension stocks of commodity companies), bonds and non-dollar denominated assets. While there is nothing brilliant about that assessment of what would do well, it will be important to recognize the environment and position accordingly if you have not already done so.
My wife Joellyn and I watched the debate Friday night. Actually she read a magazine or two while I watched. Even though she was only paying half attention her bulls&*t meter was beeping all throughout the show. I thought Kerry won the debate. That does not mean I am a Kerry guy. Actually I don't like either one. Kerry is devoting a lot of effort to his undefined plan, but if he wins the election he won't be able to implement very much of it due to gridlock. If Bush wins we can count on more of the same which is good in that he is not an unknown and he is pro business and pro consumer. What is bad about Bush is that every economic/financial idea his administration has come up with have all had wildly underwhelming results that were far short of what was promised.
Saturday morning, as I usually do, I watched the Fox News shows Bulls and Bears and Cavuto on Business. All the regulars were there to talk about the debate. I found very myself puzzled by something. Everyone on both shows was talking their political beliefs. I manage money for a living, same as most of the people on the shows. My job is to assess what either outcome might mean to the markets and how to manage around those potential outcomes. There are pluses and minuses to both candidates. My job is not to be blindly devoted to one side or the other. Am I the only one that sees this? The partisanship takes away from the quality of the analysis.
Read more!
Friday, October 08, 2004
Early Blogging
I am posting early today while I am still in Morador (a friend told me that's how to spell it, see yesterdays posting). I got in to the office at about 5:50 this morning. I woke up early at my brothers house so I got up an left.
The Red Sox are up 2-0 but I remain cautiously optimistic. The Red Sox nation has been down this road quite a few times before.
I had to place a bunch of trades in client accounts this morning. I have been in a very defensive posture for many months and I am starting to slightly increase my stock exposure. I added some secondary tech and health names. Mega sized tech and health have been lagging badly and I expect that to continue. I first wrote about Pfizer back in May, if you re interested. I was right back then and nothing has changed, in fact it may be worse.
I just got off the phone with my buddy John from my days back at Fisher Investments. John and a couple of other guys from Fisher started their own management firm called Trivant, I'm not sure I understand the name.
I stopped writing at this point yesterday, it is Friday now and I'm back. Anyway John is Pfizer bull. The market is clearly voting no on all giant American drug stocks. John is a smart guy, smarter than I am and he will figure this out I'm sure.
I had an article published today about Aloca. I may have two more published later today. Talking to John yesterday got me fired up to write a follow up about Pfizer and I sent in an article about diversification on Monday that they might use. Although when the Fool sits on a story of mine it tends to never run and when I ask if it will run they say yes and it never happens. I'll post it here if they don't use it.
The Red Sox are up 2-0 and could clinch their first round today. Easy does Red Sox nation. Just let it flow, don't get too worked up. Well that's all, I have to get a haircut. Fun times for me.
Read more!
The Red Sox are up 2-0 but I remain cautiously optimistic. The Red Sox nation has been down this road quite a few times before.
I had to place a bunch of trades in client accounts this morning. I have been in a very defensive posture for many months and I am starting to slightly increase my stock exposure. I added some secondary tech and health names. Mega sized tech and health have been lagging badly and I expect that to continue. I first wrote about Pfizer back in May, if you re interested. I was right back then and nothing has changed, in fact it may be worse.
I just got off the phone with my buddy John from my days back at Fisher Investments. John and a couple of other guys from Fisher started their own management firm called Trivant, I'm not sure I understand the name.
I stopped writing at this point yesterday, it is Friday now and I'm back. Anyway John is Pfizer bull. The market is clearly voting no on all giant American drug stocks. John is a smart guy, smarter than I am and he will figure this out I'm sure.
I had an article published today about Aloca. I may have two more published later today. Talking to John yesterday got me fired up to write a follow up about Pfizer and I sent in an article about diversification on Monday that they might use. Although when the Fool sits on a story of mine it tends to never run and when I ask if it will run they say yes and it never happens. I'll post it here if they don't use it.
The Red Sox are up 2-0 and could clinch their first round today. Easy does Red Sox nation. Just let it flow, don't get too worked up. Well that's all, I have to get a haircut. Fun times for me.
Read more!
Wednesday, October 06, 2004
Wednesday in Mordor
I usually work in Phoenix on Wednesday and this week is no exception. I have a friend who refers to Phoenix as Mordor from the Lord of the Rings movies. I'm sure I mis-spelled Mordor, but what can you do? The firm I work for is in Phoenix so I need to make an appearance several times a week. I usually stay at my brother's house Wednesday nights down here and come in Thursday's too.
I really dislike the valley, as it is known. The traffic is brutal, the heat is worse than it used to be because there is much more asphalt, which holds in the heat, because of the growth here. We bought our cabin, where we live now in 1998 as a weekend getaway. As soon as we bought it I wanted to move there full time. We made that happen in 2002 after a layoff in 2001 and a quick stint working at a huge buy side shop in the bay area. My goal has been to manage money and live at our cabin. Other than the couple of days I have to spend in Mordor my luck has been positively stupid.
I implemented a new portfolio today, at least partially implemented. I need to finish tomorrow. Its tough to do these days because I have been fairly defensive for a while but I think we may be on the verge of some good things happening short term. My gut says bad times ahead but the market is trading in such away that tells me my gut may be wrong. I am a huge believer in listening to the message of the market. No one is smarter than the market. I have seen first hand what happens when people confuse luck with skill.
The Red Sox won big last night, hopefully they can keep it up. An easy first round would be very helpful in terms of not letting the last couple of guys in their starting rotation get too much time on the mound. Schilling looks great, Pedro is usually on but can blowup at anytime, Derek Lowe could be great or horrible, Bronson Arroyo might have one great start in him and Tim Wakefield either is un hittable or gone in the 2nd.
Read more!
I really dislike the valley, as it is known. The traffic is brutal, the heat is worse than it used to be because there is much more asphalt, which holds in the heat, because of the growth here. We bought our cabin, where we live now in 1998 as a weekend getaway. As soon as we bought it I wanted to move there full time. We made that happen in 2002 after a layoff in 2001 and a quick stint working at a huge buy side shop in the bay area. My goal has been to manage money and live at our cabin. Other than the couple of days I have to spend in Mordor my luck has been positively stupid.
I implemented a new portfolio today, at least partially implemented. I need to finish tomorrow. Its tough to do these days because I have been fairly defensive for a while but I think we may be on the verge of some good things happening short term. My gut says bad times ahead but the market is trading in such away that tells me my gut may be wrong. I am a huge believer in listening to the message of the market. No one is smarter than the market. I have seen first hand what happens when people confuse luck with skill.
The Red Sox won big last night, hopefully they can keep it up. An easy first round would be very helpful in terms of not letting the last couple of guys in their starting rotation get too much time on the mound. Schilling looks great, Pedro is usually on but can blowup at anytime, Derek Lowe could be great or horrible, Bronson Arroyo might have one great start in him and Tim Wakefield either is un hittable or gone in the 2nd.
Read more!
Tuesday, October 05, 2004
Baseball Playoffs
Today has been a good day. I had client meetings all morning, that went well. Now I am home watching playoff baseball. I am a huge sports fan, so watching games during the day is always a good thing.
I am a huge Red Sox fan because I grew up just outside of Boston. The Sox are leading 1-0 but the Angels have a baserunner in their half of the first. Oh boy, here we go.
I am guessing that no one reads these postings of mine, but that is ok. I do a lot of writing for work, and I hope my blog will help me to be a better writer.
Read more!
I am a huge Red Sox fan because I grew up just outside of Boston. The Sox are leading 1-0 but the Angels have a baserunner in their half of the first. Oh boy, here we go.
I am guessing that no one reads these postings of mine, but that is ok. I do a lot of writing for work, and I hope my blog will help me to be a better writer.
Read more!
Monday, October 04, 2004
A CNBC Monday
I was on CNBC Asia's Market Watch last night. If you have Directv or Dish network you get CNBC Asia. They say it is on some digital cable systems but I have not seen it. Anyway I am a regular commentator on that channel giving my opinions on anything that impacts the US market. I think they like me, I have been on four times since September 1st. That is about as often as anyone they have on. While I'd like to think my insights being brilliant is why I am on, I think they have me back because I don't sound like Ben Stein from Ferris Buehler and I give everything I've got in the way of opinion. I have seem some people on various stock market channels that, based on what they say, can not be giving all they have. One regular to these programs, whom shall remain nameless actually recommends Pfizer, GE and Intel. Aside from being poor performers, what insight is being shared by touting three of the ten largest US companies.
If you have a chance to pick up the October issue of Futures Magazine look for me in the cover story giving quotes about what the election might do to the stock and bond markets. Hey I never heard of the magazine before they contacted me either and I have no idea how they got my name but it is a very good magazine if your are an investing nerd like me.
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If you have a chance to pick up the October issue of Futures Magazine look for me in the cover story giving quotes about what the election might do to the stock and bond markets. Hey I never heard of the magazine before they contacted me either and I have no idea how they got my name but it is a very good magazine if your are an investing nerd like me.
Read more!
Sunday, October 03, 2004
The Big Picture for the Week of October 3, 2004
I maintain a website at www.nusbaumcapital.com where I write a stock market commentary every week called The Big Picture. I am thinking of doing that commentary here and taking down the site when it is due to renew in January. For the time being, on Sundays I will post that commentary here as well.
Financial markets took a couple of big steps toward health last week. The S+P 500 dipped under its 200 day moving average early in the and then snapped back above at the end of the week. In fact it looks like it broke out above the downtrend channel. Another sign of health was the yield curve steepened a little. A flat yield curve means bad news for the economy, we should hope it gets steeper. Based on the action we have seen I expect to get a little less defensive this week by buying some stock in client accounts.
On the flip side, I read a very depressing interview in Barron's this weekend with, gold bug, James Turk. He laid out a smart and articulate argument for why every aspect of the American economy will unravel. He is worried about consumer debt, government debt, oversupply of US currency (which is inflationary), oil and on and on. In his scenario gold will skyrocket as will oil and inflation. Based on a ratio of grams of gold and the price of the Dow, the Dow is something like ten times overvalued. He thinks the Fed is being way too accommodative.
I wish Barron's would have asked him what might be a potential flaw in his analysis but they did not. One thing that makes no sense is his comments on the Dow. The starting point for his study is 1946. Over time stocks go up because companies grow their revenues and earnings. As a commodity, gold does not participate in growth of earnings and revenues. The price is solely determined by supply and demand. To my way of thinking, there is no clear line that connects these two asset classes. Gold may go up dramatically from here as may oil. We may have some sort of crisis involving debt. Any combination of these things could take 20% out of the stock market. We would need something apocalyptic to cause stocks to drop 70, 80, 90%. Should that happen the stock market would be far down on the list of things to worry about.
Read more!
Financial markets took a couple of big steps toward health last week. The S+P 500 dipped under its 200 day moving average early in the and then snapped back above at the end of the week. In fact it looks like it broke out above the downtrend channel. Another sign of health was the yield curve steepened a little. A flat yield curve means bad news for the economy, we should hope it gets steeper. Based on the action we have seen I expect to get a little less defensive this week by buying some stock in client accounts.
On the flip side, I read a very depressing interview in Barron's this weekend with, gold bug, James Turk. He laid out a smart and articulate argument for why every aspect of the American economy will unravel. He is worried about consumer debt, government debt, oversupply of US currency (which is inflationary), oil and on and on. In his scenario gold will skyrocket as will oil and inflation. Based on a ratio of grams of gold and the price of the Dow, the Dow is something like ten times overvalued. He thinks the Fed is being way too accommodative.
I wish Barron's would have asked him what might be a potential flaw in his analysis but they did not. One thing that makes no sense is his comments on the Dow. The starting point for his study is 1946. Over time stocks go up because companies grow their revenues and earnings. As a commodity, gold does not participate in growth of earnings and revenues. The price is solely determined by supply and demand. To my way of thinking, there is no clear line that connects these two asset classes. Gold may go up dramatically from here as may oil. We may have some sort of crisis involving debt. Any combination of these things could take 20% out of the stock market. We would need something apocalyptic to cause stocks to drop 70, 80, 90%. Should that happen the stock market would be far down on the list of things to worry about.
Read more!
Friday, October 01, 2004
Friday Follies
Today has been a good day so far. I worked from home. A day I don't have to be in Phoenix is a good day. I was quoted in the Arizona Republic in an article that talked about the 3rd quarter for stocks. The quotes used made me sound more negative than I actually am. Oh well, that I was in there at all is cool enough.
So I submitted my article on Travelzoo last night to Motley Fool. I heard back from them at 10 am because they had a question. I left the house at 9:55 and could not respond to the email until 11:45 and the article did not run today. I wish they got to editing the article a little earlier. As I was trolling my usual stock market sites I saw an article from Motley Fool written anonymously by the staff titled How many stocks should you hold? The article advocated owning only ten stocks, with the usual hedging. I hope people don't take that advice. I sent an email to my editor there to see if they would take an article that takes the other side of their point. In a nutshell there is a type of mutual fund called focused funds. These types of funds typically own 20-30 stocks and are usually very volatile. When one stock blows up, which happens from time to time, take Merck and Travelzoo this week, the fund gets punished. Any strategy that relies too much on stock picking is destined to be flawed. Keep in mind that my perspective on this comes from having missed many a devastated stock story in my time.
I really love this stuff. I hope you who is reading this has as much passion and purpose for something in your life.
Tonight we are going into town to get wet food for Stimpy, our oldest Pixy dog and go to dinner. Stimpy has lost interest in her dry food but will eat anything else. Joellyn has been worried about this because last year when we had to put Dinky, our Doberman, down because of cancer, lack of appetite was the first sign of trouble. I'll include a picture of Dinky with this post. She was red, as opposed to black like most dobies.
Tomorrow morning I have to attend a fire district meeting. Our fire department, remember we are volunteer wildland firefighters, is a volunteer FD. We are trying to become a district which means we get funding from tax revenue and have a couple of paid people to run the FD. These types of things are always much longer than they need to be and hey there is college football and baseball on. Oh well such is life here in Cicely, I mean Walker. Tomorrow I'll write about the parallels between Walker and Cicely, AK from the show Northern Exposure.
Read more!
So I submitted my article on Travelzoo last night to Motley Fool. I heard back from them at 10 am because they had a question. I left the house at 9:55 and could not respond to the email until 11:45 and the article did not run today. I wish they got to editing the article a little earlier. As I was trolling my usual stock market sites I saw an article from Motley Fool written anonymously by the staff titled How many stocks should you hold? The article advocated owning only ten stocks, with the usual hedging. I hope people don't take that advice. I sent an email to my editor there to see if they would take an article that takes the other side of their point. In a nutshell there is a type of mutual fund called focused funds. These types of funds typically own 20-30 stocks and are usually very volatile. When one stock blows up, which happens from time to time, take Merck and Travelzoo this week, the fund gets punished. Any strategy that relies too much on stock picking is destined to be flawed. Keep in mind that my perspective on this comes from having missed many a devastated stock story in my time.
I really love this stuff. I hope you who is reading this has as much passion and purpose for something in your life.
Tonight we are going into town to get wet food for Stimpy, our oldest Pixy dog and go to dinner. Stimpy has lost interest in her dry food but will eat anything else. Joellyn has been worried about this because last year when we had to put Dinky, our Doberman, down because of cancer, lack of appetite was the first sign of trouble. I'll include a picture of Dinky with this post. She was red, as opposed to black like most dobies.
Tomorrow morning I have to attend a fire district meeting. Our fire department, remember we are volunteer wildland firefighters, is a volunteer FD. We are trying to become a district which means we get funding from tax revenue and have a couple of paid people to run the FD. These types of things are always much longer than they need to be and hey there is college football and baseball on. Oh well such is life here in Cicely, I mean Walker. Tomorrow I'll write about the parallels between Walker and Cicely, AK from the show Northern Exposure.
Read more!
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