Monday, January 31, 2005
I read an article about the Alpine Dynamic Dividend Fund (ADVDX). The fund was created out of the changes in tax laws that made dividends more favorable. In a nutshell the fund will buy a stock in such a way as to capture the quarterly dividend, keep it long enough to get the favorable tax treatment and then sell the stock to do the same thing with another name. I am way over simplifying what they do but there is a good article in Kiplinger's if you want to pay for it (BTW Kiplinger's actually charges per article, could be a topic for another post) that explains in much more detail.
The fund has done very well but it has been the right time for dividend paying stocks (top down look). The question is how well can it do when growth is clearly in favor, maybe it will do great then too but that is the obstacle it will face.
If you use the link above to go to the fund's website you will see a couple of interesting things. First is in the top holdings section, the three largest holdings listed are all oil shipping stocks, comprising 7.27% of the fund. I like the idea of the shipping stocks very much. I own one for clients and wrote about another one for Motley Fool, I'm a fan. But these stocks are hot potatoes. And while the holdings listed may be out of date and all three names may be out of the fund there were all there together at one point. The manager is clearly willing to make some big bets. She may be very good at that, but big bets nonetheless.
Many years ago I had an idea similar to what this fund does and did nothing with it. To be clear I am not taking credit for anything and for all I know tons of people may have had the same idea before me and not done anything with it either.
As I lay this out, I am not thinking about the taxes or most of the other obstacles that exist. I'm just brainstorming here.
US companies pay dividends quarterly. In a simplified approach if you bought one stock that paid on the Jan-April-July-Oct cycle, another stock that paid on the Feb-May-Aug-Nov cycle and a third stock that paid on the Mar-June-Sep-Dec cycle you would triple the yield (assuming all three have the same yield).
To get a stock's dividend you have to have bought it before the ex-date and still have it on the ex-date. When a stock goes ex-dividend the price of the stock is reduced by the amount of the dividend. If a stock that pays a $0.25 dividend closed the day before the ex-date at $20.00, assuming everything else remains the same it would open the next day at $19.75.
Anyone undertaking this dividend trading idea would, at a minimum, want to hold the stock long enough to make the dividend reduction back. So keeping with the same example if the stock is bought at $20, held through ex-date and not sold until it gets back to at least $20 (maybe a little higher to make back the commission too). I suppose it would be possible to weave together a system where positions are closed and new ones opened every week (assuming the dividend gets recaptured that quickly). That would involve a lot of trading and several types of risk.
Another, less intense tactic would be to find three good stocks, that are on different dividend cycles in each of the S&P sectors, that usually pay dividends (maybe that means financials, industrials, energy, telecom, materials and utilities) and hold each one for the quarter.
A further twist would be to sprinkle in some foreign stocks that pay dividend once or twice year. Of course by paying larger dividends less frequently it would be more difficult to make back that ex-dividend reduction. Stick with the $20.00 stock from earlier. Making back $1 would probably take a lot longer than $0.25, probably.
This type of idea has all sorts of flaws but it is still interesting, even if only academically. Maybe I will pursue some sort of paper trade service to try it out. Feel free to comment about this one but since I am only brainstorming, please keep the insults to a minimum
Sunday, January 30, 2005
Looks like a few new names will enter the ETF mix in 2005. I disagree with Mr. Harvey's conclusion at the end of the article.
Jeb wanted my two cents on what this might mean for the industry if/when we do start opening earlier. John Thain said in an interview one hour earlier might be closer to the mark but that such a change would still be many months away.
One catalyst for an earlier open is to capture more of the trading that goes on during European trading hours. Currently most European markets close two hours after US markets open. More overlap might mean more business done on the NYSE and other US markets.
No one will be surprised that it will become easier to access foreign markets. Improvements in technology and communication along with investor demand will cause capital to flow all over the planet with fewer and fewer obstacles as time goes on. This will be one more manifestation of a global economy.
This may cause some difficult adjustments for market participants of all sorts. I believe this will trigger a wave communications upgrades at many Investment Banks. A small investment in letting personnel access some portion of the network from home along with some sort of phone system to participate in morning calls or make other calls would offset personal issues created by telling a floor full of traders they have to come in two hours earlier. Rolling out of bed at 4 am to be on a call at 4:30 would be much easier than being in your car and on the road at 3:50.
There would obviously be more to the start up of something like this ( I can think of a dozen security issues) but markets are transforming and so will the jobs of people that make the markets work. The point is that the industry will have to think about thing differently on a micro level.
I also believe the way individuals access information and manage their investments will change dramatically. Blogs, or more correctly what blogs will become, may play a role in this. The emergence of more passive investment tools, like ETFs, speaks to the idea. The brokerage house/mutual fund model that so many people rely on is wildly flawed. I believe that a lot of brokerage clients already realize this and will start to seek alternatives.
The catalyst for change is easier access to information; information about companies, markets, asset classes, countries, investment processes and so on. Brokerage firms will figure a way to evolve with the times, they always do. I do think that the services firms sell to public companies will change a whole lot less. Banking and underwriting will evolve but not get turned inside out, as is the threat in retail.
I also think a lot of the trading done by big firms will change. Orderflow will go to where ever the business can get done cheaply and efficiently.
So what will the big firms do? Maybe their future growth will be helping emerging economies to develop. One thing the brokerages do is provide access to capital. Some of the markets that never get talked about will have tremendous demand for capital; places like Egypt, Sri Lanka or the Ukraine. All risky but potentially lucrative.
Or maybe not.
Saturday, January 29, 2005
If I received your payment I sent an acknowledgement to you. If you have not received such an email it means I did not receive your payment.
There were a few people that did express interest in subscribing but I never received payment from. While that is clearly to be expected, I want to reiterate that I am only sending the newsletter to people that I have received payment from.
Good two way communication will let this run smoother for everyone. If I made any mistakes with the distribution of the letter I'd obviously like to get that resolved as soon as possible.
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What interests me is the extreme nature of his call. There are some pundits that always make very extreme market calls. While easily dismissed by a lot of people I think the work behind these out there predictions can be worth reading. A nugget or two of good data could still be a part of the work done by someone you think is a crackpot. The point here is that we can learn from anyone.
I heard a very funny one liner on Bulls and Bears from Gary B. Smith, fallout shelter stocks. I laughed out loud at that one.
We are having a big snowstorm and the lights just flickered, uh oh.
This is a good article about the convergence of mutual funds and hedge funds. The Fund of Information article also touches on the subject too. You will need a subscription to read them.
Friday, January 28, 2005
This has all the makings of a very hot potato. I went to the Powershares website but I didn't see anything about this fund.
I have been intrigued by the uranium stocks for a long time. There are two that I know of, Cameco (CCJ) and USEC (USU). CCJ has been the far better performer long term. USU has a 4.8% dividend, $0.55. Yahoo finance has the 2005 earnings estimate of $0.28. Is that an uh-oh or am I missing something? CCJ has been selling off for the last couple of days. The stats are mixed and they don't have much cash. As well as the stock has done this would seem to me to be a long term payoff type of thing like eastern Europe. The stock is optionable if you don't want to commit a lot of capital. I instituted a two week rule for things I mention, that won't save in the description part of this blog. I don't know if I will buy CCJ or not, but I can not buy it for two weeks now because I mentioned it here.
Am I crazy or did I just hear Jim Cramer say he would buy BSX here, but pan it the other day when JNJ (client holding) was mentioned on Power Lunch?
I have had another email or two that say they like the K&C show, I am clearly an island ;-)
There clearly is a problem with demand for stocks. How long it lasts is the question that becomes most important. Some think the Iraqi election going well this weekend will help the market get back on track. The other night Mandy, on CNBC Asia, asked me about this. My take on is it will only matter if something really bad happens. While I don't think a peaceful election will help, I'd love to be wrong about this.
Lower beta names seem to be holding up better than the rest of the market. I have a couple of holdings, personally and for clients, that are up on positive earnings news too (clearly luck is involved with that).
A while ago I wrote an article where I outlined my extremely conservative personal portfolio. The logic is that I hope to be less emotionally wrapped up in an ugly market. I do my job better when emotion is not involved. This month that approach has worked like a charm. I have not made any changes in client accounts. I made a lot of changes last fall. I don't think anything is really different. My outlook for stocks, interest rates, the dollar and so on are still the same. When something that I think matters does change I will take the action I hope will be correct.
Here's hoping stocks get back on track soon.
We have had very mixed signals from different data points. None of this changes my expectations for what the Fed will do. I expect, barring some extraordinary event, this tightening cycle to continue 25 beeps at a time to either 3% or 3.25%. This is toward the low end of what people expect but the inflationary pressures that clearly exist are not coming through to most of the stats watched by the Fed. That's not me saying there is no inflation, I am saying most numbers don't pick up where the inflation is occurring.
Proctor & Gamble is buying Gillette in a $55 billion stock deal. That's a big one. A lot of people have been predicting that M&A would increase. Looks like that might pan out. One good thing is this takes away from the supply of consumer stocks. It would be reasonable to think that anyone that owns shares in both might sell the new P&G stock they receive in the deal and put that money into other consumer names. This will have some impact in various indexes too. Its open for debate whether this effect will be noticeable or not, but it won't hurt.
Thursday, January 27, 2005
I am thrilled to be on the ballot, but I am getting smoked. Big kudos to Gary over at Between The Hedges. Its a landslide!
The market action today does not look great. But below the surface its not as bad as first glance seems. The NYSE advance/decline and up volume/down volume are still positive, but that might change in five minutes. Some things are still working today. Energy, foreign (especially Australia after huge day for that market last night) and the fixed income stuff I have are doing well today. Emerging, tech and other growth stocks are mixed. I have a couple of holdings that are down a lot today. That's how it goes.
You don't need me to tell you the market is not acting well. This is what markets do. Volatility seems to be creeping back into the market, this is normal. Today's action is a nice validation for having a diversified portfolio. You may begin to see more emotion expressed if the selling continues. Don't give into it. Hopefully you have some sort of exit strategy you devised when you weren't emotional. Whatever that might be, stick to it.
If you step back and take a breath, you'll realize the market is only down a little.
Ron Insana dug up some data(with the help of Natexis Bleichroeder) about selloffs like we are having now and the takeaway was that we could have a rally of between 3.5% and about 8% that would happen very quickly if/when it starts. While I don't know if that will happen or not, as I wrote the other day, any rally in here will likely happen for no reason at all and catch a lot of people with too much cash or, even worse, too short.
Pay attention but keep your cool.
Lastly I have had 50/50 feedback on Cramer. I guess people really do like him. Not the first time I've been wrong or just not gotten it.
So what is CNBC's latest attempt to address this problem? Another Jim Cramer show called Mad Money. Is this really the answer? I've never heard anyone say they like him, I don't know anyone that likes K&C, his current show. I will say this, he absolutely nailed the Sierra Wireless (SWIR) quarter the other day on Power Lunch. I never watch his show, read his columns or hear him on the radio. Some have told me he is not right as often as he used to be. While I don't know about that I do know watching him is quite agonizing for me.
I would suggest that CNBC just show CNBC Asia and CNBC Europe at night. Very few people have access and I am telling you that the content is so much better that anyone who doesn't have it is truly missing out.
I've written several times about investing in Eastern Europe. While there are a couple of CEFs available, this article makes it seem like ETFs are still a ways away due to a lack of demand.
Let's see if the blogosphere has any influence yet. Click here to send an email to iShares to express interest in an Eastern Europe ETF.
I got the Nokia call totally wrong but I am pleased their quarter went well.
Wednesday, January 26, 2005
Here's hoping the report goes a little better, but I doubt it.
The catalyst cited in this article to lift Mexico was similar to what lifted Austria in 2004.
I'm not planning on implementing any immediate changes, for clients or personally, but it is worth studying.
Dividends are nice. While this is a fine article (and we are seeing a lot like this), divdend paying stocks is just one tool available. Sometimes you own a lot and sometimes you don't. I don't believe any one thing can work for all times.
One friend, I'll call him Ernie, is a broker at one of the big wire house firms. He uses a lot of ETFs to manage his practice. The last few clients he has brought in have all had similar portfolios, extremely overweight growth stocks. Ernie has been trying to explain the virtue of having a sense of game over (that is being conservative once you accumulate enough money). Ernie is restructuring these portfolios to that end. Based on what he was describing he is being too conservative. One of the clients has $1.1 million and needs $54,000 per year. 5% is a good draw down percentage. If, and this may be a big if, inflation stays at the same rate for the next ten years as the last ten years the income need in 2014 will be about $81,000. The account will need to be at least $1.62 million to produce that income safely. The account will have to average about 10% per year to pay the income need and cover the inflation of that income need.
Realistically, a lot of the average return from the market over the next ten years will come from two or three huge years. Ernie's too conservative portfolio will not capture enough of the effect to give his chance a realistic chance to get where he needs to be.
The other friend, I'll call him Bert, used to work with me in my days as a trader. He was recently separated from his job after a restructuring. He took the package and ran, good for him. Bert takes risk I can't begin to understand. He builds huge positions in very small four letter stocks and usually does well. He does the research, has a clear exit strategy for each one and is emotionally prepared to deal with the consequences. I usually hear about the winners, but not the losers (that is human nature, and I am not critical) so I don't know how much he beats the market by, but I do know he takes a lot more risk than the market. Bert is relying on a lot of things to go right. He may never face the consequence of the risk he takes, but he takes it nonetheless.
Every investment style has drawbacks. I don't know if Ernie and Bert see the drawbacks to there methods or not. Hopefully this will motivate you to get in touch, if you haven't already done so, with the drawbacks of your strategy. This is not a call to tell anyone to change they way they do things, but I do believe a little introspection can give anyone a shot at better results.
You'll need a subscription but this is a good primer on converts if you want to learn a little more.
Tuesday, January 25, 2005
Funny, I've been thinking about bonds for several day's now. Since you bring it up, I have a question. I agree with you that removing bonds from the portfolio misses the point of including bonds. My question has to do with what the mix of bonds should be... How much should be muni, international, government, and corporate? Do you know of a good resource for determining the proper mix? I know that I should lean toward short term in a rising rate environment, it's determining the rest of it that I'm not sure of. Thanks!
This may seem familiar to some readers. Owning individual bonds can be tough because of something called trading friction. Basically small bond positions have large markups and markdowns hidden in the price you get. If your account is large enough to buy $100,000 face value of one bond this becomes less of an issue. That being said owning individual muni's, if you need that part of the market is probably ok. A reader let me know about Nuveen Muni Value (NUV) because it is a closed end fund with no leverage and it yields 5.04%. I have not looked at the fund so I can't vouch for it.
In putting together the fixed income part of the portfolio I take a similar approach as with equities in that I want to capture many different parts of the market in an attempt to reduce volatility that might come from some extreme event or movement. Most of the tools I use all yield between 5.5% and 7% but one or two things yield a little more. I also use a inverse bond fund as a hedge against rising rates.
The first category I'll cover is preferred stocks. A great resource to research these is QuantumOnline. Most accounts have three or four of these. I use mostly, but not only, shorter dated issues. Longer dated issues got hit very hard in the summer of 2003 when rates had that nasty spike. You can easily find quality issues that yield in the low and mid sixes. I would avoid CEFs that owns preferreds, they can be more volatile than individual issues.
I also use very generic government bond or govie/corporate blend funds that do not leverage. These are by far the most conservative tool I use and for the most part yield in the mid fives.
Next is high yield (junk). I use a CEF here as well. High yield bonds tend to react differently than higher quality bonds to a lot of types of stimuli. Statistically speaking very few bonds in this category default, owning a CEF here reduces that element almost to nothing.
I own a convertible bond CEF. Converts, as I have written many times, tend to trade like stocks when the stock is moving up to the conversion price and tend to trade more like bonds if the underlying is going down, away, from the conversion price. CEFs in this category usually yield in the eights and do use leverage. Owning individual issues here can be very difficult.
There are a couple of very low beta MLPs that I use for some clients for income. Be very careful here. Even a low beta MLP will get hit hard if energy prices plummet. I would not buy a fund of MLPs for income, I think these will turn out to be more volatile than most people think.
Foreign bond fund funds usually do well when the dollar falls and I expect they will hold up better if/when US rates go up in the middle and long end of the yield curve.
I've written a lot about CEFs that sell covered calls. My original thought was that these equity funds would trade more like bonds but be a little less interest rate sensitive. These types of funds yield 8% or more. Year to date MCN is up just under 1% while the S+P 500 is down about 3%. So it seems to trade more like a bond but we'll see if it has less interest rate sensitivity in the future.
Lastly, TIPS. I have been considering adding a CEF that is a blend of mostly TIPS and some higher yielding bonds. There are a couple of these out there, I own one personally but still haven't added one to client portfolios. I have written before that I would not buy an open end TIPS fund.
I have the heaviest weightings for clients in preferreds and lower yielding CEFs. Actual percentages depends on the client. Hope that helps.
Monday, January 24, 2005
One other thing, I am getting some hits from some sort of Motley Fool message board. I wonder if he trashed me, its all fair game.
First, thank you for the very kind words in your post.
On the points in your post regarding my article, I would offer the following:
I believe I was actually a bit more specific in the article than you denote, as I clearly stated that Treasury bonds are the least compelling option in the bond world right now, not all bonds. I further stated that -- even so -- TIPS still present a reasonable return potential in that universe.
However, you're absolutely right in that my main point in the piece was that dividend-paying stocks do represent a better option than most bonds, for most investors, right now (the "most" term must be stipulated, as certainly you recognize the limitations of addressing a broad class of investors within a 1,000 word article).
Your statement that bonds are -- by default -- always less risky than stocks (specifically dividend-paying stocks), and that they are automatically the choice for those seeking safety is exactly the kind of flawed logic that I was attempting to negate with this article.
Indeed, what's so safe about a 0% return, no matter the level of stability that one experiences along the way to that return? My point is simply that substandard returns pose a material risk in their own right, and in my opinion investors looking at long-term bonds (particularly Treasuries) are facing such returns. Though admittedly this is just a single example to demonstrate my point, I would say that the chart at the following link could give one an idea of the "risk" of investing in bonds over stocks for longer time periods that I'm talking about:
Again, certainly there will always be individual opportunities to make money within any asset class and any market. But taken as a whole, current yields represent a poor risk/reward trade off in my opinion.
Your statements also seem to suggest that stocks and bonds never move together, or that bonds always posses less price risk in a down market than stocks, yet this is not always the case. Bond and stock prices have been highly correlated over many periods, as they are often affected by the same things (i.e., neither bonds nor stocks favor inflation or higher interest rates).
So, yes, in this specific environment, I'm saying that there are many, many cases where investors would be better off buying high-quality, dividend-paying stocks as opposed to bonds. Clearly, the factors that influence this decision can change very quickly (as they did back in April and May of 2004 when yields went substantially higher on initial interest-rate fears), and if that happened I would alter my recommendation to reflect the change. However, again, if I had money to put to work right now, today, that money would be in high-quality dividend payers, not bonds.
Feel free to post this response to your blog. Wish you continued success with your business and the site.
Mathew Emmert (TMFGambit)
I ran across this article from TMF. Before I get into it, let me say that the author, Matthew Emmert knows more than any of the other full time people at TMF.
I believe he is wrong in this article which if I read it right is saying that investors implementing a new portfolio should own no bonds. That you should own dividend paying stocks instead. Yikes.
His assertion that bonds may lag dividend paying stock may be correct and I would be inclined to agree with about that. From a portfolio construction stand point, his idea is flawed. He notes that short term yields are not great and that longer term rates are even worse. There are ways to get some yield, for that part of your portfolio, without owning stocks. If you follow Mr. Emmert's advice and stocks tank for some reason, you can bet that dividend paying stocks will participate to some degree in a down turn, much more so than bonds might. In fact an event driven selloff might actually cause a rally in bonds.
People own bonds, among other reasons, to contain risk. When a portfolio that should own bonds, owns 100% equities the risk taken ratchets up dramatically.
He is a very good stock picker but this article misses the mark for portfolio construction.
To be clear, I am still overweight dividend paying stocks, but that is in the equity component of client portfolios, not the fixed income portion. This is an important distinction.
I will forward this post to Mr. Emmert and give him the chance to respond. Could be interesting!
Growth stocks are getting it and I am feeling it there.
A day like today really underscores the value of maintaining a diversified portfolio. I have not been jump up and down bullish in quite a while but because the market is above its 200 DMA I have very little cash. Most accounts have 10% cash. Younger or more aggressive clients have almost no cash, but even those accounts are not very aggressively positioned.
If you read this blog you know my opinions but who knows what is next.
Tonight on CNBC Asia I will repeat that I think guidance is going to be more important than results this week, as about 1/3 of S+P 500 companies report. I will also say that I think we may be due for some sort of trading rally but there is no visibility for fundamentals to lift the stock market anytime soon. I am assuming I know what Mandy will ask me. I may be wrong about the direction of the interview.
They spend that half hour dissecting the US markets with a depth that I never see on US television. Yesterday was no different but the quality of the analysis was particularly empty. The guest was Stephen Gollop from Bridgewater. I've written about Mr. Gollop's outlook before. His pessimism rivals Marc Faber on the scale of gloom and doom. He usually makes a compelling and articulate case that makes me uneasy.
He has lost a little impact because according to him from a year ago, gold should be above $500 by now and every American asset type should be worth a lot less than it is now. This week he talked about liking gold, silver and oil but could not talk about what commodities he would avoid. Mark Laudi tried to call him out on that "don't you have to know what to avoid to pick the winners?" Nothing.
I think there may be a couple of ways to interpret this type of sputtering. I lean to a feeling that his firm may be implementing some sort of tactical change and he was not willing to share any details.
One other catalyst for a little snap back rally might be options expiration. We ended up with a negative expiration, often the week after expiration unwinds the expiration (Austin Powers might say "one too many expirations, baby").
Lastly, I recently posted an article that addressed option premiums for REIT ETFs where I wondered if the large premiums were indicative of a large move. I invited Kaushik from Galatime to weigh in. He said the IV was inline with the last few months and because of that he did not expect a big move. After a little more thought, I have to say I disagree. In the last six months the these ETFs are up huge. If the volatility is about the same as it was during that huge move I would take that to mean big moves are still possible.
Sunday, January 23, 2005
I think I have been fairly transparent with any changes I make and if you have read this site for a while you know I get some right and get some wrong. Success comes from being right more often.
The biggest story for me this week was the implosion of eBAY's stock. I don't own that one but I do own one of the other net biggies. Fortunately that one has held up ok. The market still seems to not want to reward risk taking which conflicts historically with a flatter yield curve. So either something is different this time or riskier stocks will have a nice snap back (although perhaps ex-eBay?, but I sure wouldn't want to short it either).
There are plenty of things that investors are afraid of that can hold the market back. Isn't that when markets usually go up? I have written and said there really is not much that can move the market right now. Doesn't this sound like a wall of worry to anyone else?
Oh well, for now no changes. I let you know when I do make changes.
I am from the Boston area so I will be glued to the action when the Patriots play the Steelers. Fortunately for me the game will no conflict with the first half hour of Asian Squawk Box, which on Sundays is one of the most important half hours on TV during the week. And one of the least important half hours? Hopefully not the first half hour of Asian Market Watch on Monday night because I will be on giving commentary about the US markets.
Saturday, January 22, 2005
MGB is now selling at a 51.7% premium to NAV. The clueless writer of that article doesn't realize the only reason it has hit a new high everyday since January 11 is its on the SHO threshold list and a naked short squeeze is in progress. If and when the shorts cover expect that stock to drop like a rock back to the premiums its peer group has. I would short it myself but then I would be caught in the squeeze.
If the reader's comment turns out be correct about what will move MGB the most; not only did the writer miss it but so did Mr. Tepper, and me for that matter. The reason I posted the excerpt was to illustrate some of the potentially sophisticated uses of CEFs not to tout shorting MGB. Personally I have no interest in shorting a CEF on a discount/premium arb but the idea is interesting.
I'll also add that while I don't worry too much about discounts and premiums I would not buy anything with a premium anywhere close to 50%.
Openings in Closed-Ends
The Morgan Stanley Global Opportunity Bond Fund has more than a few fans. The closed-end fund, which invests roughly 50% in emerging- markets debt and 50% in U.S. junk bonds, is selling at a premium to net asset value of over 50%.
Many funds, which invest in emerging markets and high-yield junk bonds, sell at a premium to net asset value because their yields are high and investors, more than ever, are craving yield.
David Tepper of San Francisco-based Tepper Capital Management, a specialist in closed-end funds, says investors could be purchasing the Global Opportunity Fund thinking that it is a true "global" bond fund.
Indeed, the Global fund has only $34 million in assets, while the Emerging Markets and High Yield funds have $229 million and $85 million, respectively. Therefore, it wouldn't take much to move the Global fund because of its small market capitalization. That said, by buying shares of Morgan Stanley's Emerging Markets Debt Fund and the High-Yield Fund, an investor can replicate Morgan's Global Opportunity Bond Fund's investment portfolio for 60% less, says Tepper.
He adds: "This is the most logical, pure arbitrage opportunity you can find, where the whole is selling for way more than the sum-of-the-parts."
Tepper suggests being long MSD and MSY, versus being short MGB. Morgan Stanley declined to comment.
I am quite certain I have placed trades for Mr. Tepper back in my days as a trader. We had an advisor named David Tepper call in to our desk regularly, if it is the same David Tepper I doubt he would remember me.
Barron's Electronic Trader column had not blogs mentioned for the second week in a row. I hope they haven't given up on us.
Friday, January 21, 2005
Bill believes that the market will not provide much upside. He said investors should own dividend paying stocks, not be buy and hold, and try to trade around the market's gyrations.
Ron didn't call him on that so I will, sort of. His assessment of the market may be 100% correct. He may also be right about trading in and out being the best way to make money.
But trying to trade like this is a bad idea for almost everyone. I have written before that plenty of people have success short term trading, but it is very difficult and not the best thing for most people.
It surprises me that CNBC would air that type of advice.
Sentiment in the market seems to be washing out. CNBC has had all sorts of programming devoted to what's wrong. Phil Orlando, the guest host on Squawk Box this morning, said he is disappointed and confused. What?
I have no doubt Phil is very smart and good at what he does but I was surprised to hear someone like him speak with such emotion. I'm not quite sure how Phil was so caught off guard. I've written many time that earnings estimates for 2005 are a lot lower. He knows that. The year end mark up and subsequent unwinding of that mark up seemed quite obvious which is what I wrote here and said in the few interviews I do. The last time I was on CNBC Asia, I think Mandy was caught off guard by my negative outlook because she came at me a couple of different ways on the subject.
I will say that now we are in the midst of this move I'm not sure exactly where it stops. I still don't think, though, that we will breach the 200 DMA.
I hope you do not succumb to emotion in your portfolios. There aren't a lot of stocks I follow or own that are having problems unique to their businesses. I wrote a while ago that guidance would not be great, and that has come to pass so far. Very little has worked in the market this month but we are not down a lot, at least not yet.
We can't know what will happen, but we can have opinions. Being really worried about a bad month is very short term oriented. Most people have longer time frames than one month, or one year for that matter. I am quite certain that in stock market history there have been other 3-4 week down periods before. That it is occurring in January which is rare, I think, means nothing. Stick to whatever your strategy is and realize sometimes they go down.
Thursday, January 20, 2005
If you haven't already done so go read this article.
I have written a lot about owning dividend paying stocks right now. Very simply, they have been working. I would expect dividend paying stocks to continue to work when the market is up a little or down a little.
I take that article is saying there is a sense of complacency among some managers. No one thing works forever, and anyone that thinks that will have a problem at some point. I am overweight foreign dividend payers. I doubt I will be overweight this type of stock forever. Long time readers will know one thing I focus on is trying to get more big picture themes right than wrong. To this point I wrote about adding some non-tech beta back before the election.
I will always have some weighting in dividend payers, maybe more maybe less but always some. That is diversification.
As for David's article I don't disagree with him on too much. If you look at a name like Pinnacle West (PNW) it has a 4.4% dividend yield. The stock rose about 8% last year, so the total return was 12% or so. I don't own it and since they can't keep my electricity on during a snow storm I won't be buying it but there are tons of stories like this in the market. I doubt the stock will have a radically different year in 2005. In a diversified portfolio this stock gave market beating returns, but not too many people by a stock like PNW to get 30% in a year.
Compare this to Adobe Systems (ADBE), again something I don't own. Adobe pays less than one tenth of one percent in dividends. I don't think to many people buy this one for the yield, it gets bought because people think it can go up 30% in a year, it may not but it has the potential. In 2004 it was up about 51%, factor in that dividend and it was still 51%.
To be clear dividends (as David says) are not, by themselves, a catalyst. At different points in the stock market cycle there will be more demand for dividend payers, and that is the time to overweight them.
David talks about other ways for companies to utilize capital. It probably makes sense for growth companies to reinvest earnings, buy stock back or issue stock options. A company with very little earnings is not really diluting itself by issuing stock in the same way a mature company trading at ten times earnings would.
David throws out some cliche's being used by IMs about dividends. I would urge anyone to be skeptical of an advisor that can't articulate some sort of game plan that acknowledges dividend payers won't be it forever.
This question came from a Mr. Richard Feder in Fort Lee, NJ.
There seems to be an income steam thread going this week and thus this question. Have you had any experience with energy trusts either Canadian or US based? I have sold naked puts for some time and one of the ways that I have found to help limit the kind of instant volatility that you use in your CREE example is to try to avoid earnings season entirely for this type of strategy and understand that what you don't know seems to goes up exponentially as your time horizon gets longer.
I have written a couple of time about Energy Trusts/MLPs before. The big difference between Canadian and American is that the assets in an American trust deplete, so part of what you are getting back is capital. The Canadian ones are/can be perpetual. At this point I only own one these for clients, I used to own more. The reason I have reduced exposure is that many of them had phenomenal runs. I used to have San Juan Basin (SJT). I bought it in early 2003 somewhere near $14. I sold most of it late last year at what I think was about $32. When I bought it I never expected that type of move, not even close. Many of them had similar moves to SJT. The one I kept has less volatility. I do not expect oil to break $40 anytime soon. If it does I think the trusts, as a group, will get crushed. There is way more risk in them now. I'd look to step back in if/when oil does get that low.
What got me thinking about REITs today was an article on TheStreet by Gregg Greenberg. The article did a brief compare and contrast of the four different REIT ETFs. Two of the REITs, iShares Dow Jones US Real Estate (IYR) and iShares Cohen & Steers Realty Majors (ICF), have options available which I thought would tie into the article the other day about ETF options.
The options market often communicates different messages by the way it prices options. The options for both IYR and ICF seem to me to be implying a big move in the shares. IYR yields 3.9% and ICF Yields 4.88% (I got both yields from iShares.com). This won't be an apples to apples comparison to the other article but the June 121 options for IYR (the underlying is at $117.67) were bid at $3.10. The May 135 options are bid at $2.60 (the underlying is $130.06). I could have this upside down for all I know but these premiums seem very high given that the funds have betas in the 0.60's.
Compare those premiums to Equity Office Prop (EOP), a large component of both ETFs. A July 30 call is bid at $0.75. Usually premiums for ETFs would be much lower, in real terms, than premiums for the components of the ETFs. In this example it seems kind of close, closer than it should be anyway.
I believe that this situation is the market's way of communicating a big move may be coming. So would this mean a big move up or down? I'm inclined to take the under here. REITs have had a great run for a long time, and eventually they will lag. I see two risks if someone wants to try to sell these call options. If the ETFs go down a lot the call premium will only absorb a small portion of the loss, if the ETFs go up a lot money might get left on the table.
Where selling these options may make more sense is if you have owned either of these ETFs for a while. They are both up nicely in the last year. If you are already up 15%, or more, on these the $3 premiums look more compelling.
Kaushik, feel free to weigh in here.
For what it is worth most of my clients own only one of the big REITs. It has a big dividend and a lower beta than the ETFs.
I had a lot of comments posted yesterday that I wanted to try to address this morning.
One comment came from someone that is concerned that we may have down a lot in the stock market very soon. The comment cites Faber, Roach and so on. The commenter (is that a word?) also says he sees several things on the charts that make him bearish. He wanted my opinion on debt, spending, asset bubbles an so on.
The thing this person should care most about (and I believe he does) is what will all the legitimately scary things do to the capital markets. The honest answer is I don't know. I have opinions I'll share but the most important thing to me is that the market will warn us if there is a problem for demand of equities. The 200 DMA for the S+P 500 (broken record time) is down at around 1130 or so. Regardless of my opinions about any of this stuff, a breach of that moving average will cause me to get defensive one way or another. There are a few different ways to accomplish this and if/when it happens I'll go over my plan, I don't have it finalized because drifting down as opposed to crashing down might cause me to act differently.
Everything that Faber and Roach say about problems the US has are true. We don't save, we have too much debt, in certain markets RE is too high and so on. These conditions have ebbed and flowed for years, we are currently at one extreme of the oscillator for them. RE can't crash because there is no national market. That does not mean that prices in Boston and the Bay Area can't drop painfully. We have already had a nasty correction in Las Vegas. I have no doubt that in certain places the wave of interest only (IO) mortgages could have negative consequences in some places. I tend to be a glass half full guy but pockets of real financial despair seems possible to me.
To close out on this readers comments he asks about over valued markets. Assuming he means stock markets, I would say we do not have overvalued markets. What I mean is that the S+P 500 is down about 21% from its 2000 high. The Nasdaq is down almost 60% from its high. The Russell 2000 is up 38% in the last 4.5 years, a little less than 9% average over that time. To me that is clearly not a bubble. The bottom line is that my clients aren't relying on me to guess correctly. I have written before that I don't think we will have down a lot in here, but I don't care about being right. I maintain my clear and simple exit strategy which is more important than my opinion.
The next question was about the impact of trading costs on my ETF dividend replacement idea. I touched on this at one point in the article, I assumed $10 per trade. If you are a 10 lot trader (10 lot is jargon for trading 10 contracts) and you pay $10 or $20 per trade you are not really changing the trade. If you are at a wirehouse firm and you pay $50 per trade it becomes less attractive. Using the XLB example from the article, I wrote about selling the June 32 calls when they were bid at $0.20. So if you sell ten contracts you bring in $200 less $15 for commission is still $185. Do that twice a year and you have $370. That generates an extra 1.25% for calls that are about 10% out of the money. In dividend terms I think that is substantial, given that XLB yields 1.7%. After yesterday's selloff and the way we will start today, all the numbers are different. But there is nothing that says you can't buy the underlying ETF one day and sell calls later. Please remember the numbers were real when I first wrote the article but these are just examples I'm not recommending you buy XLB.
There was another comment about the option article wondering if the ETF/call combo was better that an individual stock because you create a very high stock like yield. Good question and I think it depends. Using utilities to address this one, I own three utilities for clients to capture a high yield and low beta. All three have out performed XLU over 3, 4 and 5 year periods but lagged for one and two years. XLU did very poorly in 2001,2002 due to Enron and Dynegy. While I still like the individual stock better, the question makes a compelling argument. Of course I could sell calls against the individual stocks and take the yield from 4.5-5% to 6.5-7%.
Lastly were a couple of comments about Marc Faber. Faber is smart because people say he is (humor attempt). I can't cite his tack record. I can say that I have read his stuff and seen him interviewed over the years and he does have insight into things. His seeming to be anti-American is a valid criticism. My approach to everyone I read or see is to try to learn about what they do to come to their conclusion not what their conclusion is. Process not product. I believe Faber is smart, smarter than me. That does not mean he will be right more often than anyone else though.
One of the reasons I write this blog is to share my process I'm no rocket scientist to be sure but I am not as dumb as the man eating ice cream at the top of this page appears to be either. Take my process, Faber's process and others and come up with your process (or more correctly continue to refine your process). This is, I believe is the value of the blogosphere.
Wednesday, January 19, 2005
The market has been smacked recently. I have written a couple of somewhat negative articles lately, hoping I'd be wrong. I was talking to a buddy at Merrill Lynch this morning and, no great shock, there's no catalyst for stocks to go up. I wrote for months that I though the year end would be up but that I didn't see why it would keep going in the new year, but the extent of the selling has surprised me. I continue to preach the same plan of owning a lot of high yielding foreign, US growth but not a lot in tech, emerging markets and some innovative CEFs that have a good yield.
Many months ago it was popular to say we would have a range bound market. If that turns out to be correct, the selloff would be perfectly normal. I don't expect this to evolve into down a lot but you know you know the things I am looking at to determine whether or not to get defensive and we are not there yet.
The foreign stocks I own have held up a little better than the domestic stuff but that could change at any time and I am not hung up on that. The market moves around a little but the dividend keep paying. The dividends do a lot of my job for me in a market like this.
One observation about this year is that money is flowing out of a lot types of assets that have low correlations to each other. For example stocks and gold tend not to correlate but both are trending lower. No great revelation but it makes me think this is more emotion than fundamentals. I think there is something to the thought that short term emotions rule the market but in the long run its fundamentals. Some of the companies that have reported already have had great reports or gave good guidance or are taking market share. I am lucky enough to have some companies like that, but they are down this week anyway. Usually that is a good time to buy. We'll see.
To say that economic and corporate growth in the U.S. were good is a joke. Measured in Polish zloty, the U.S. economy contracted by 19% last year.
Marc Faber has forgotten more about capital markets than I'll ever know but I laughed out loud at this one. It was, by far, the single funniest thing I have ever read in Barron's, I go back to the late 1980's if you are curious.
Marc is, and has been, wildly bearish on the US due to asset inflation in housing prices being the catalyst for economic growth. He feels this is unsustainable and has a very gloomy forecast for the US. While he makes good points, such extreme forecasts very rarely turn out to be correct.
Unfortunately my idea will only be useful if you have a very large account, but don't want to deal with trying to buy individual stocks.
Quick editorial for new readers: I believe if you have an account that is at least $150,000 to $200,000 you should have the equity portion of your portfolio in individual stocks, at least some anyway.
You may be able to replicate a dividend yield by selling covered calls against some of the ETFs. I'll cite some examples with ETFs that I do not own personally or for clients. The reason why I say this will only work with larger accounts is that commissions may get in the way of selling one or two call options.
The way I am approaching this is to create a dividend not sell close to the money calls trying to make 5% a month, please keep that in mind. As a dividend proxy, I think it makes sense to try to sell calls two or three times a year.
First I'll look at the Financial SPDR (XLF) which closed Tuesday at $30.21. XLF already has a
2.05% yield. The June 33 call was bid at $0.15 at the close on Tuesday. The options are a little more than 9% out of the money and expire in five months. On 1000 shares you bring in $140 net of commissions. Do that twice a year and you add almost 100 basis points to the yield. The risk is that XLF goes up by more than 9% by June and you would leave money on the table. If the market is flat, as I believe it will be, basis points will matter.
Next lets look at the Basic Materials SPDR (XLB). XLB closed Tuesday at $29.03 and has a yield of 1.7%. The June 32 calls closed with a bid of $0.20. This trade is very similar to XLF, you are potentially adding 130 basis points to the yield if you can get the trade done twice in a year.
Lastly the Utilities SPDR (XLU); XLU closed Tuesday at $27.79 and has a yield of 3.14%. The June 29 call options (there are no 30s for June) were bid at $0.35. This might add an extra 2.5% in yield but the options are very close to the money. If you have any interest in this trade it may make sense to only cover a portion of the position.
One thing that looms in the distance for this type of trade is that if/when interest rates go up option premiums might then go up too. Every options pricing model I have ever heard of uses some sort of short term interest rate in its calculations. Higher interest rates, everything else being equal, results in higher premiums. Of course everything else being equal isn't reality.
You may or may not be able to do these trades as described because the market may move in either direction making them less attractive. The point of the article is to think about different ways to manage your portfolio. This type of trade is not right for everyone but there is no reason not to learn about it so you can make an informed decision about various tools available.
Tuesday, January 18, 2005
But I think the importance of earnings for 4Q 2004 is far less than the importance of the guidance for 2005 and even that might not help the market.
It is generally accepted (but maybe will be wrong) that the earnings growth rate in the market for 2005 will be about half of what it was in 2004. We will start to hear guidance about this now and again in April. In this circumstance it is not a stretch to think that some of the guidance might stink.
Since last year was a sector pickers market (spin on one of the dumbest Wall St cliche's) I might expect bad guidance to run in sectors, maybe companies that rely heavily on consumption of resources (like Alcoa) or companies that have high energy costs (like airlines). I'm not sure but that makes sense to me.
I know a lot more people have been bullish on gold for the last year or so, and it may just be me but I think there may be a problem on the chart. There has been a nasty downtrend since gold topped out in early December. There is a very clear downtrend (resistance) in place and the current price looks to be running up into it. There are plenty of people that know more about gold's fundamentals and plenty of people that know charts better than I do but is gold in trouble? is the right question to ask these days. You can see the chart above to get a feel for the way I am seeing it.
As I have written before, all of my clients own a gold stock as a counter strategy (historically gold and gold stocks have a low correlation to stocks).
The response I received to my newsletter announcement exceeded my expectations, so thank you to everyone that has signed up so far.
Monday, January 17, 2005
That was what was going through my head as I watched Vern Hayden recommend open end funds on Bloomberg TV this morning. He actually recommended a fund of funds with a 1.8% expense ratio. Mr. Hayden is a planner of some sort who has been a TV favorite for a long time.
For the life of me I can't fathom how a professional can use open end funds to build a portfolio around. I am not talking about accounts below $50,000, he was talking all clients. Most asset based advisors charge between 1% and 1.5%. So if Mr. Hayden is a fee based planner his clients are paying 2.8% to 3.3% on the assets directed into the one fund of funds. That seem high to anyone else?
If he is not fee based he is either getting a commission or getting paid a consulting fee. I am really surprised this type of service still exists. An alternative for a planner that does not want to pick stocks would be to hire a sub-advisor to manage the separate accounts.
With this posting I will lay out what the newsletter will be, what it won't be, what the goal is and anything else I can think of to set expectations.
The basic idea is to offer mostly innovative ways to give your portfolio a chance to grow. I say mostly innovative because diversified means owning household names too.
As a matter of philosophy I believe in building diversified portfolios. The picks will be from all sectors, cap sizes, countries, styles and so forth. There will be a minimum of 45 picks through the year. My intention is to have a pick every week but it is possible that during our fire season I will miss a couple of weeks (I really do fight wildfires).
Some of the names may be familiar and some may not. Also there will be some ETFs and CEFs mixed in as well. For each pick I will lay out the theme, the fundamental story and what is going on with the charts, if the chart action is relevant. I will also try to provide an alternative pick that may be more or less aggressive. I will also lay out what could go wrong with each pick as well. This is important because if anyone gives 45 or 50 picks in a year, there is no realistic way that all of them will work out as expected. I will update each pick as circumstances dictate.
Some of the stocks profiled may already be owned by me or my clients, if so I will disclose all the details of that. If I profile a stock not owned by me or my clients I will wait at least two weeks before buying. I want to assure you there will be no front running.
In building a diversified portfolio, as I have written, it makes sense to expect that some names will be up a lot. I would expect that to be the case with this newsletter but there is no guarantee. Also as often happens the thing I might expect to go up a little might be the one to go up a lot.
If you subscribe to this newsletter you should do so because you believe that I do a good job sorting out the big picture and you think that I will be able to continue to get more stock picks right than wrong, but there is no performance guarantee associated with what I am trying to do.
The way this will work is via email. Subscribers will receive an email no later than 6pm pacific time on Sunday night or if there will no pick that week an email telling you that. There may be additional emails during the week as well. The cost will be $40.00 annually due in advance. I want this to be low cost, I believe $40.00 is low cost. For $40.00 your decision comes down to whether you think you can learn from my process not whether you can afford it. For $70.00 you can be signed up for two years. You can buy the subscription through paypal or by sending me a check. I have set up an email address specifically for the newsletter that you can use to subscribe and paypal at email@example.com.
Let me assure that no personal information given to me will be sold or given to any third party.
If you would like to sign up you can email firstname.lastname@example.org for check mailing instructions or you can paypal with a credit card to email@example.com.
The newsletter will begin January 30, 2005.
Lastly let me assure everyone that reads my blog that the newsletter will not alter the flow of posting I do nor will it change my attempts to respond to every post and email that asks a question.
Put buyers are either hedging stock they own or speculating that a stock will drop. Put sellers hope the stock stays where it is or goes up.
One of the first things new options traders are told is that naked options is a very speculative strategy. Like most strategies it can be as risky or conservative as you want to make it.
First I'll go over what can go wrong with naked puts with a real example. On Friday Cree (CREE) dropped over $9 due to bad earnings guidance. The stock went from about $35 to $26 in one day. If you had sold a January 30 put a few weeks ago you might have taken in $100 or so, probably a little less. Now after the drop you might get assigned and have to pay $30 for a stock that is trading at $26, you are down four points. Three points I guess, if you took in $100 to sell the put. A whole portfolio of trades like this and you take a nasty hit. When the bubble was popping there were people with too much exposure to naked puts on companies like Ariba, JDSU and Commerce One.
These stocks were trading at $220 or $230, puts struck at $180 expiring in a year could be sold for a lot of money. Trouble came when these stocks dropped to $50 before expiration. In that example a put seller would be out $13,000. More trouble came when put sellers used leverage to get into these positions. Usually, to sell naked puts you have to put up a minimum of 25% of the cost to buy the stock if you are assigned (the formula is more complex but 25% is a good rule of thumb).
To play this out an account that starts with $20,000 on Jan1, 2000 could have sold four puts in the circumstance from the last paragraph. That person loses $52,000 on a $20,000 investment. That's about as bad as it gets. I know people that misused leverage in exactly this manner.
There is a low impact way to sell puts that is much more conservative (there is still risk). Instead of a four letter stock with a beta of 2 an investor could consider a stock like Toro (TTC). Toro makes lawn equipment, has a good track record and growth looks to be solid but not much of a dividend. Instead of buying the stock you could sell a put for June struck at $75 for $2.10 (that's $210). You may have to buy 100 shares at $75. Instead of keeping just $1875, the approximate minimum requirement, you could keep the entire $7500 in cash in case you have to buy the stock. If you do this trade twice a year you could bring in $400 (net of commission). The $400 is like interest on the $7500, 5.3%. There are two drawbacks to this trade. If the stock cuts in half you will be down about $3000. If the stock doubles your opportunity cost is substantial.
I think its an individual decision whether it makes sense to enter into a trade that has more risk than reward but clearly the TTC trade is a relatively conservative way to sell naked puts. For disclosure I had a lucky trade a year ago on TTC and haven't owned it since but I still watch it on my MyYahoo! page.
Sunday, January 16, 2005
The interview was about retirement planning with the idea that most people will be retired for much longer than they might expect, thanks to longer life expectancy. Chris's advice was wildly generic and uninsightful. He did manage to slip in that people should only work with large firms. I'll leave that one alone, but what do you think about that idea?
That interview combined with the Businessweek special report on social security private accounts has motivated me to write my, possibly quasi-radical, thoughts on retirement planning and share what steps my wife and I are taking in our planning. Now, realize I live in a cabin on a mountain in the woods. Apologies if this resembles an excerpt from a manifesto.
It looks like people my age (38) will have a private account to provide some portion of their social security benefit. According to the Businessweek article the contribution will be capped at $1000 a year into the private account. I did not see where that cap might be raised, but maybe it will. If not, I might have 23 years of $1000 contributions. If I average 7% per year my account will be worth about $53,000. The article assumes we will buy an annuity with the lump sum. Annuity or not, if my calculations are anywhere close to right, the private account plus the "regular" benefit may not only fall short but may turn out to be a small fraction of what will be needed.
I don't think anyone should expect social security to be there, nothing unique about that I realize. I also believe that there are enough savings mechanisms available to save what you need, but you need to take advantage of them.
I think I saw Suze Orman say not to put money in a 401k, to use a Roth instead. So that I don't get sued; I'll just say I disagree. If you have a 401k use it. I would say to max it out but at the very least put in enough to get the most out of the employer match. There are some instances where a 401k may not be the best thing but the reason I like it is you only need to be disciplined once (when you sign up), not every paycheck. A 401k builds up very quickly. Being self employed I do not have access to a 401k, although recently a product called an individual 401k has popped up, but I haven't looked into it yet.
The next thing I would recommend after your 401k is a Health Savings Account, as soon as one is available to you. There are plenty of articles out there you can read to learn about them, they are a great vehicle, my wife and I are going to start one this quarter.
After funding the HSA the next account we use is a Roth IRA. We each have one, and I'm sure by now you know the advantages over a Traditional IRA.
Between the HSA and two Roths we will put away about $11,000 this year. While that doesn't sound like much it is more than we need thanks to some diligent savings that started in my mid 20's.
Here's where I start to veer off the path. Planners say you need 70% of your income in retirement. I have never understood this. Most of the people I know that are retired or close to it have no mortgage. That might be something to shoot for. Also most retirees I know don't have car payments. That may be a little tougher, but with minimal planning you should be able to work it so you never have two car payments, right? With no mortgage and only one car payment I would think that might cut fixed expenses in half if not more. It is also unlikely you will have the expense of raising children in your retirement years. If you think about your expenses ex-mortgage and only one car payment the only variable is the cost of health insurance. You know what to expect inflation-wise from just about every other fixed expense. I would encourage you to think in these terms.
Another thing to think about is Multiple Streams of Income. I read this book a few years ago. I don't remember the details but the concept made quite an impression on me. I love the type of work I do enough to keep doing it until the end. It probably makes sense to find something you like that much. For example a neighbor, who is 74, owns a back hoe and has to turn business away. He gets paid $65 an hour to play around on his Tonka Toy. Work you love can be one stream.
Your investment portfolio will be another stream of income. Keep withdrawals to 5% or less.
Another potential stream I believe in, that I don't write about much is real estate. Let me say up front I like simple. In a year or two we plan to buy a six unit apartment building (maybe four units or maybe eight). The idea is that ten years from now normal inflation may cause rents to go up 50% from where they are now while the mortgage payment will be the same, giving a substantial positive cash flow. Real estate in Prescott (the town where I live) is not very expensive so we will be able to afford to cover any negative cash flow that might come from vacancies. If you go that route it may make sense to learn how to do some simple repairs. I have a little experience with plumbing and a little more with electrical work. Expect a lot of little problems, owning rental property is not easy.
Lastly is live below your means. There is something I heard a long time ago that rings true for me as a philosophy; who is richer, than man who makes $20,000 but only spends $10,000 or the man who makes $200,000 but spends $210,000?
Obviously I have simplified every point made in this article. The idea was not to imply one way is right for everyone or that I think I have all the answers. I did want to try to get you to think outside the lines a little bit. Like investing, personal finance continues to evolve. This is why you have a financial plan and why you review it.
But that's just me.
Saturday, January 15, 2005
There are many of this type of fund from many different providers.
The funds leverage up by borrowing at short term rates and buying more bonds. Problems occur when rate go up. These funds can get crushed in a rising rate environment (this is true of all closed end income funds not just muni funds). Take a look at the chart for any CEF income fund in June and July of 2003 to see how volatile they can be. The issue is that most people buy these CEFs for income. It can be very stressful when your income producing portfolio takes a 15% or 20% hit in few weeks.
The article quoted an analyst named Mariana Bush from Wachovia as saying you may not want to sell these funds in the face of continuing rate hikes and the threat of the market taking up the rest of the curve. She says it would be difficult to replace the income.
That maybe so but it makes sense to consider actively managing this type of portfolio so you don't get badly hurt. A way to do this is to own a fund or two that has a short duration (there are several of these). Duration refers to the average date that the bonds mature or can be called. Another tool available is an open end fund that shorts the bond market, an inverse bond fund. They go up in price when yields go up. There are three that I know of and I use one of them for some of my clients. Another alternative is one of those floating rate funds. Proponents of these funds say that the dividend go up when rates rise, making them less interest rate sensitive. I have written before that I am not of fan of these. An investor in them is relying on the market to get it right about the interest sensitivity. Also they have poor credit quality and low yields.
It would have been nice if the article addressed some of these issues in more depth. I don't think most people realize how hard these funds can get hit. They tend to come back but I can see people getting shaken out at a low.
The article also referred readers to a favorite site of this blog, ETFConnect, for more info on CEFs.
Friday, January 14, 2005
Click On Image to Enlarge
Do you remember a few years ago when Millennium Pharmaceuticals (MLNM) was the next great biotech stock? I traded the stock, twice, very profitably a long time ago and haven't been back.
The short version of the story was/is that they have what is supposed to be a great drug called Velcade, a great pipeline and an incredible amount of cash. With all that going for it the stock never really lived up to it's expectations.
What went wrong? I don't know. The company still has a lot of cash but I do not know the status of the pipeline or what is going on with Velcade. The point of this post is that sometimes great stories don't work out.
There is room in most portfolios for a story stock or two. If you want to own this type of stock you need to be prepared to sell on good news or bad news. It makes sense, though its difficult, to figure out how long a story should take to move a stock higher. If you think something should happen with in twelve months prepared to sell if the stock does not do what you think it should.
What type of buying strategy do you recomend to implement a portfolio with a set amount of money? Do you look at long term charts? For example EEM is up over 24%, do you wait for a pull back and risk being left behind with cash?
The question is straightforward but I'm not sure the answer can be. Something that I try to follow is I care more where they are going than where they have been. It is possible I made up the saying but not the sentiment. I know too many people that care more about where a stock has been than where it is going. I have family members that still own things like Sun Micro because it was at $50 once. No joke. Do you know anyone like that?
That diverges from the question a little, sorry. My limited thinking process tells me there are two ways to implement a new portfolio. All in at once or go in with some sort of methodical pace over some time period. Neither one is right, neither one is wrong. If I implement a new account today all at once and tomorrow Osama gets captured the client wins big time. If I implement all at once today and tomorrow we have something worse than 9/11 the client loses. There is no way to know. There are studies that show there is no way to consistently win that game.
The way I usually implement a portfolio is go in about 50% right away, wait a week for another 25% and then try to finish when the market has a bad day. I finished implementing a few accounts late last week. Sometimes the strategy looks smart and sometimes dumb, that's just how it goes.
For the portfolio I talked about yesterday I would probably go all in at once unless the tech stock I wanted had just had a monster rally. In that case I would let that one trade sideways for a few days or pick another one.
Where ETFs are concerned I think waiting becomes less important, especially if it is long term money. Investor demand can't push an ETF higher in the same way a stock responds to demand. If there is a flood of demand for an ETF they create more shares so the tracking error doesn't get out of whack. (I realize this is a simplification of the ETF creation process).
Hope that helps.
Keep the questions coming and I'll try to answer them.
Thursday, January 13, 2005
I wanted to share what I came up with, the reasoning behind the five picks and maybe a substitute or two.
I suggested $8000 go into iShares Select Dividend (DVY). I have had some of this for a while and a couple of clients have it too. It gives large cap exposure, solid yield and low volatility.
Next was $6000 into iShares S&P SmallCap 600 Growth (IJT). Obviously it is small cap and I think growth will outperform value as the yield curve flattens. Neither I or any other clients own this.
$5000 is earmarked for Western Asset/Claymore TIP Fund (WIA). This is a neat CEF that is 80% TIPs and 20% corporate bonds. It yields 5.75% and trades at a small discount. Neither I nor clients own this one.
$3000 into iShares Emerging Markets ETF (EEM) . A lot of the countries in the fund have interesting things going on financially and socially (speaking to her being interested). It captures the effect well. There are several other emerging market ETFs that could substitute for EEM. We have no holding in EEM.
The last $3000 went into a tech stock that I and clients own that doesn't need to be named. The point is its a stock that she probably knows which again might create interest on her part and give a chance for some growth. There are probably 25 different tech stocks that could work in this slot.
This account probably won't double in year and probably won't cut in half either. I think it covers most of the bases. She can check on it with out having to worry a whole lot if the market trades weakly.
We could easily make substitutes for each of the holdings. I might substitute Rydex Equal Weight S+P 500 (RSP) for DVY. They have very similar returns but RSP does not have much of a dividend. There are numerous small cap ETFs that could replace IJT. There are plenty of innovative income funds that could replace WIA. And I already mentioned the interchangeability of the last two holdings.
One thing that might be missing is a more direct exposure to gold or other natural resources. I have written many times about why and how I have gold exposure. If gold does something really dramatic most of the names should have a fairly similar move (not an endorsement for a research shortcut though).
My friend will also get a call from me if/when I get defensive in client accounts so he can make changes for his daughter. I give a lot of help like this to friends of friends that don't necessarily have the assets to hire me but have $20,000, $40,000, $60,000 and need a little help. It is a lot of fun and people seem genuinely grateful. Good all the way around.
I recently instituted a two week trading policy pertaining to things I mention on this blog. Since this won't be a client I'm not sure if it is relevant when these trades get placed but my friend said she won't get this money for a couple of months.
While I believe the state of Intel is more relevant to the market and the tech spending that would really help the market, both reports show that there is not a lot of excitement for stocks right now. This could change at any moment but for now sentiment is not helping. Remember in the bubble days bad news was good, well we almost have a good news is bad environment.
I have no idea what someone that is a short term trader should do in here but people are uncomfortable right now and some of these prices will turn out to be good entry points for medium and long term people. Black and Decker (BDK) is down almost $8 from its high. It is a good profitable mid-sized company and the stats look cheap to me. I don't own it and I doubt I'll buy it (I do own four of their power tools and a toaster oven) but the point is simple. Fine company not going out of business and it is down for no fundamental reasons. The next three points or so could easily be down, but I would think the next 20 points are up. I'm not sure how long that will take but you get the idea and there are tons of these out there.
Wednesday, January 12, 2005
There are all sorts of cliches out there and this one bugs as much as any of them. When I hear someone on TV call for a soft landing I immediately think they either don't know what they are talking about or aren't sharing what they know. Either way soft landing has a broken clock's chance.
Click on Image to Enlarge
The other night on CNBC Asia they had Adrian Mowat, chief Asian equity strategist from JP Morgan giving his outlook for 2005. His two favorite Asian markets are Taiwan and Thailand. I wrote about Thailand before so I'll focus on Taiwan in this post.
One of the reasons Mr. Mowat likes Taiwan is that he expects good things for US markets in a kind of contrarian call. He expects tech spending to be robust in 2005. Taiwan is a very tech heavy market. I would a agree that what is good for US tech is good for Taiwan. It is not clear to me that tech spending will be robust in 2005. The accelerating depreciation that expired last year was not enough to cause a serious lift in stock prices and now that little tax perk is no more.
I have written before that a flatter yield curve favors growth over value. That does not mean growth will go up 20%. I have increased exposure to growth for client accounts but I have only added one tech name. Where I have added some growth is gaming, consumer and non-big-pharma healthcare.
Intel's capex numbers last night anecdotally refute my idea but I just don't think tech spending will be huge this year. I could be wrong but think it will easier to get good emerging market returns with out relying on a tech spending turnaround.
To give you an idea about how tech heavy Taiwan is; 50% of the iShares Taiwan (which is meant to mimic the Taiwanese market) is in technology. Tread with caution.