Tuesday, May 31, 2005
There was not a lot of meat on the bone. Morgan Stanley recommends 12%-20% in foreign stocks with their favorite area being emerging markets.
Mr. Pacetti said that a minimum of 10% a portfolio should be foreign but was not given time to elaborate, although he clearly had more to say.
For what its worth I have around 30% of my clients portfolios in foreign equities, mostly through individual stocks.
If anyone watching did not know that there are ETFs that provide foreign exposure, they know now but I think we may be a ways from some real meaty content on TV.
I hate this type of product. How would any investor feel if at the end of one year the allocation to equities drops from 60% to 40%, the next year the market embarks on a 30% rally and money flows out of bonds to facilitate that rally? Devastated.
The other thing I read in this article is that Schwab's offering will be funds of funds. I have to confess I did not know that any company uses the fund of funds approach with these target products. This makes them even less appealing than I thought.
This ties in with the last post I put on the blog. Sometimes the direction of the markets are clearer than other times. Do you think that some one in their 70's needs to capture a good chunk of a huge up year for stocks? I do.
While there are never any guarantees there are times where a do it yourselfer can survey the landscape and put the odds in their favor without using an ill-conceived, statically allocated product.
Based solely on numbers this is a compelling data point to argue for 100% equities, again for people with long time horizons. Long time readers will know that I favor equities over bonds most of the time for most people. That does not mean 100% necessarily but bonds do not offer growth for long term money.
Bonds are a tool to be used, if desired, to help navigate choppy waters. There are times like the late 1990's and 2003 where stocks have a clear tail wind and should be overweighted. This year is not one of those years, at least not yet.
Think of it this way, in a volatile year where the market closes out the year up 4% would you trade 1% or maybe 1.5% for a lot less volatility. Maybe you would or maybe you wouldn't but you can probably see where that prospect would appeal to a lot of people. I don't think I made this term up but this addresses an individual's sleep factor.
Whether you manage your own money or hire someone to do it for you chances are you have some sort of target allocation for stocks, bonds and cash. Don't be bashful about overweighting or underweighting equities as you feel circumstances dictate. It makes sense to avoid wildly extreme weightings, relative to your target, because no matter what you think will happen you could be wrong. This is true of everyone.
He was recommending a few open end funds for people. Mr. Hayden is a CFP. I imagine he makes money creating financial plans for people. I would also imagine that he makes money one way or another off of the funds he buys for clients. I do not know if he charges an ongoing fee management fee or "sells" a portfolio of funds to clients or something else. The reason I don't know is it appears Mr. Hayden has no web site. I spent about 15 minutes searching for one. I did find a listing for him in the Chamber of Commerce in Westport, CT. Other businesses listed had websites but Mr. Hayden's listing had no website.
In the interview he started one sentence with "I look for managers..." This type of service baffles me. Well, does and it doesn't. People often tend to be willing to pay multiple layers of fees. When funds do poorly the client can blame the advisor who can then blame the fund manager and switch to a different fund. There is something psychilogical about this type of interaction. It lets people blame someone else.
The other aspect of this is what kind of intelligence does it take to assemble a portfolio of five star funds. Funds that achieve that distinction may or may not beat the market in the next 12 months but the client doesn't get hurt. One of those funds having a bad year is easily dismissed as a one off.
Is this type of service really worth 1% or more of anyone's money? It would seem that more often than not the answer is yes. That is what I do not understand. I'd like to think one layer of management fees are worth it but I am hard pressed to see where that second layer is worth it for an entire portfolio. What I mean here is I use a couple of CEFs in most accounts and an inverse fund or two. I use these as tools to create the effect I am looking for in client accounts. To me this is worth it. I think it makes sense to make use of what is available. This is much different than charging 1.25% to pick a half dozen OEFs.
Whether someone is a total hands on wants no help from anyone or a I want to delegate the whole thing and only look at the statement once a year investor or more likely somewhere in between there is no need to pay 2% or more for portfolio management.
Monday, May 30, 2005
Jimmy Buffet fans will know those words.
I feel this song is relevant to Sunday's well telegraphed no vote from France on the Euro Constitution. Markets anticipate and price in known information. France voting no has been known for weeks. The Euro has dropped from around 130 to just above 125 before the vote.
In Monday trade the Euro moved down a little into the mid 124's. Most, maybe not all, of the move has already occurred. The French stock market was down very slightly while most other markets in Europe were up. As further evidence that this was priced in is the action in Turkey. Turkey stands to be the most impacted because of EU accession issues. Yet after selling off at the open, Turkey rallied over 1%.
Markets price in big bad events. Remember in August 2002 what horrible things were going to happen when CEOs would have to sign off on earnings reports. This was going to cause a catastrophic sell off. Uh huh. The sell off came in May and June.
In the future there will be many other big bad events. The market will begin pricing them in as soon as the market knows about it not some drop dead date two months in the future. This is just how markets work.
Sunday, May 29, 2005
Lately these stocks have had good moves up. At this point I am starting to sell call options on small portions of the positions (in two instances the clients own tens of thousands of shares). The goal is to create a little dividend after a solid move up but allow most of the position to participate should these stocks, or more likely the overall market, keep moving higher. At this point I am only covering 20-25% of these positions.
To reiterate, these stocks have moved up. Selling calls now takes advantage of that move.
I wrote that I put a stop order under one holding, a specialty retailer, that has had an outsized move up. I have a couple of other stocks also have outsized moves up that I may look to put stop orders under as well.
As matter of style I don't like to use stop orders for a stock I just bought. Often a stock that drops quickly, but for no tangible reason, bounces back quickly. Getting stopped out in that situation is more of a negative.
I have a couple of names that have outperformed and using stop orders now after a big move up is a way to protect the gains and give the clients a shot of outperforming the market this quarter should the market test its recent low in the next few weeks (would anyone be truly shocked if that happened?).
These steps are just tweaks that make sense after a big move up. If the market keeps going up no action gets taken.
I would expect any diversified portfolio to have at least a couple of names really moving. It kind of makes sense that in a stretch where the market moves 5% there would be plenty of stocks moving noticeably more than that.
With so many things working I think that makes the theme even bigger than a sector pickers market (a saying I have written on this site quite often). The first part of top down analysis is deciding whether to be invested in stocks or not. There are multiple studies that show 70% of your return is attributed to getting that one question right. I think that applies to the last few weeks. A proper amount of exposure allowed investors to capture most of the effect.
I continue to believe stock pickers market is a wildly empty comment.
To continue on that theme; Tobin Smith had a stock pick on Bulls & Bears that is relevant to this post. He picked NS Group (NSS). NSS makes steel tubes for energy companies. It is a small cap stock and the stats look good. Maybe this stock should be thought of as a materials company or maybe it should be thought of as an energy stock, you could argue either way.
NSS out performed XLB and XLE on the way up late last year and early this year and NSS lagged badly over the last three months as both groups corrected. For all I know NSS could skyrocket from here. The point though is that the market has not really rewarded stocks. In fact over the last month, as the market has rallied, NSS is down 5% while XLE and XLB are both up about 2% or 3%.
Part of top down analysis is having a feel for when to ramp up risk and volatility and when to ease up. Despite the move in the broad market, riskier stocks that come out with bad news are getting crushed. Owning NSS, and names like it, is kind of swimming up stream in this market.
Saturday, May 28, 2005
It can be very worthwhile to look at stocks (as an asset class) in this way. Most of the banks mentioned yield about 4%, same as the ten year bond. It is a good bet that none of those banks will run the risk of disappearing soon either.
One asset class pays you 4% and returns your money in ten years. The other assets class pays the same 4%, but what would you think any of those banks would be worth in ten years? We all know that stocks average 10% per year. Assuming a 5% average return for ten years, instead of just getting your money back after ten years you'd have another 62% on top of your principal.
If you don't need the money for a specific purpose in the next ten years, what choice would you make? This is a just a sniff test. I would not just pick any old 4% yielder but there are several very good candidates out there.
If you can find one or two you can feel comfortable with I think they would be better than holding a financial sector ETF.
I found five financial sector ETFs. Here are the tickers and their respective yields.
The financial sector is one where there are often very good, safe dividends available. To me, it makes sense to find one of the high yielding stocks that has a good track record of out performing the sector. You should do some research to satisfy yourself that the outperformance can continue.
Friday, May 27, 2005
This is from the bad news begets more bad news file. Doral Financial (DRL) is down 21% today to $10 and change. There is a problem with write downs and indentures. The 52 week high on this stock is $49.45.
DRL was a popular stock pick a while back (thank goodness I've never owned it) because of its footprint in the Hispanic community, that fastest growing segment of the population. I remember there was news a few weeks ago that took it down about $2 to $17 but the big hit came in March. On March 14 the stock closed at $38.47. On March 18 it closed at $21.24.
So since the stock cut in half in March, it has since cut in half again. Anyone that did not react to the first ten points but sold anywhere close to $20 spared themselves a lot of pain, relatively. Funny, I see a headline from January that says the stock fails the smell test.
I never thought about buying the stock so I honestly don't know how risky it was back then relative to other financial stocks (no wise cracks:-) I am using no hindsight).
We have a client that has some money with a bottoms up firm in California. At one point the client had a 4% weight in DRL. I believe he was in it for at least one 50% hit. Whether that is correct or not a 4% weight in a stock that is capable of cutting in half can derail the entire year, benchmark performance wise. You need another stock at 4% to go up 100% just to break even.
My single worst stock over the last year was Symantec (which I have since sold) that lost about a third of its value on merger news. It was a 2% weight for most clients so the drag on the portfolio was about 2/3 of a percent.
If you have 4% or more in any stock that is capable of cutting in half, be careful.
Zero growth would be a surprise but not growth at a slower rate. Still I suppose zero could be correct, who knows for sure?
This ties in with my I Was Wrong post from yesterday. I have been on the European bandwagon since before the start of this blog last fall. Most of the European stocks I own for clients have done exactly what I'd hoped for; low volatility, good yield and periods of price appreciation.
Part of the reason for my interest on Europe has been potential demand, that I think still exists, for Euros. If the demand for Euros does not play out I still have low beta and high yield. I think that will continue to be a good overweight for the foreseeable future.
I believe this positions my clients for more than one probable outcome.
Thursday, May 26, 2005
I have written about Morningstar a couple of times before. I subscribe to what I think is called the premium service. It cost about $120 per year. I like the X-ray function on the tools menu and the stock reports have a lot of information about each company. It has never been obvious to me that their opinions about stocks have particularly successful but I might be missing that part of the story.
What I can't figure out is the articles on the Stocks page and the ETF page. The stocks page has two articles on it, one by Pat Dorsey that is an updated version of an article first written on October 13, 2004 and the other is by Julie Stralow from May 20th that appears to a be a weekly column. There are other articles you can find. It looks like there are about two to four articles per week.
The ETF page has four articles. One looks like a couple of news items written by both Dieter Owen Bardy and Dan Culloton dated May 20. The other three are by Dan Culloton and dated April 12, 2005, May 10, 2005 and March 9, 2005 respectively.
Mr. Dorsey is a regular on Bulls and Bears on Fox News. He is a bottoms up guy through and through, to point of seeming to ignore what is going on in the world completely. That last point is my perception and may be wrong but I don't recall him factoring in the macro into his stock picking at all. I also find that he makes some very good stock picks and some very bad ones, like most people.
Mr. Culloton gets quoted in a measurable percentage of every ETF article published and it seems as though he does the majority of ETF work for Morningstar.
Anyone that writes for Morningstar has a high profile job and a very wide audience. It looks like they are all CFAs which is a very difficult designation to obtain, so they are no doubt all very smart people.
Being smart does not ensure knowledge or insight. As I read their articles I can not get a feel for how much these guys really know. I read a lot of stuff from plenty of people that I can tell know more than I do but not these guys. It may be something in the editorial process. When I wrote for Motley Fool I had several articles that had the meaning changed by an editor who did not know any better. It may also be the case that they are trying to dumb down the content. I think complex content can be explained in such a way that most Morningstar readers could grasp it though.
Pat is a bottoms up guy and I am not so my comments may just boil down to that distinction. Dan has written about applying bottoms up processes to ETFs, which as I wrote the other day does not make sense to me. I have never been impressed with Dan's process on anything of his I have read. Most of his content is simply a relay of factual information.
I may have this wrong or am being overly critical but this has been a theme of mine lately; there is dearth of good content.
If you go back and read the posts where I spelled out the little bit of defensive action I took I made it clear that I thought that if I was wrong and the market went up, my clients would still capture most of the effect. Thanks to some big moves in some consumer and health stocks and a few names bouncing back nicely in energy and some other areas I have been able to capture this move up.
So I was wrong yet clients have not been hurt. This is crucial to what I do. There are buy siders, that are very concerned about ego and being right that bet client money on only one probability, trust me on this.
This should also be important to anyone managing their own money. Too much of a bet only one probability will come back to bite you.
What is weird is what was left out.
The story talks about Turkey's effort for entrance into the EU, the consequences to that with the votes in France and The Netherlands, how the political news from Germany could also influence this part of the story.
The article also gets comments from various emerging market funds that have some Turkish exposure and mentions the one NYSE listed ADR; Turkcell (TKC).
What was left out, news wise, may be more important than the EU. There is now an oil pipeline that carries oil from Azerbaijan, across the Caspian Sea, through Turkey to the rest of Europe. Turkey collects what amounts to a toll for this. I first read about this months ago in Bloomberg. The estimate was that Turkey would get around $100 million per year for this.
I think this is a major part of the story and it was left out. Also left out was the Turkish Investment Fund (TKF) as a way to access the country.
I sent the author an email to ask about these things and she said there was not enough room for the pipeline issue and that calls to TKF were not returned. I think I'm being naive but this makes no sense to me. It makes me wonder what I'm missing when I read about things I know less about than I do with Turkey. Yikes.
Wednesday, May 25, 2005
These two new vehicles do seem to offer a lot of promise.
Obe advantage that I see is that the funds would offer the private investor without forex trading account, a simple way to hedge his or her foreign currency exposure to some extent. Using these funds may be helpful even those with an fx trading account as they avoid the convolutions that are likely to occur if that fx account is not at the same firm as the stock investing /trading account.
The biggest drawbacks I see are:
a) they are not much direct help in hedging Emerging Markets investments - given that the weightings in the USDX are so skewed toward the Euro, Yen, and Sterling (combined, about 83% of the USDX);
http://www.profunds.com/usermedia/pdf/currencybro.pdf [page 5]
b) they "look" expensive funds, for passive index-tracking funds, with estimated expenses of 1.6%, or 2.6% if we are talking about the Adviser-sold version with its 1% 12b-1 fee.
http://www.profunds.com/usermedia/pdf/prospectus.pdf [page 71]
These expenses estimates are probably conservative, as the funds are brand new, expenses should come down a bit as the funds grow. The Management Fee is still quite steep (I think) at 75bps.
You make a fair point about the amount you'd have to tie-up in the funds to make any real difference to hedging the foreign part of a portfolio. It is late as I write this, and I am not that swift anyway, but maybe clients with the capacity for it could leverage their EFAs (margin them) and release some money for the hedge??
The funds' biggest attraction to me is for those NOT seeking alpha - just wanting a play on the US dollar, without the complications of company and market related risks inherent in foreign stocks. They certainly offer those clients a much lower dollar-amount threshold to get involved than would, say, a short-dated Euro bond.
A couple of the Powershares products do something vaguely similar.
Wouldn't an actively managed ETF just be a closed end fund? In theory I would say yes but mechanically, no.
I will be curious to see if this comes to market and if anyone cares.
I write often about Australia and New Zealand as being an important theme (you can do a search at the top of the page for other articles). The ETF this article will focus on is iShares Asia Ex Japan (EPP).
The country make up of this ETF is 65% Australia, 20% Hong Kong and 10% Singapore. Neither iShares.com nor ETFconnect has more detail than this but there are a couple of New Zealand companies in there with a small weighting.
The sector breakdown is (although incomplete on both pages) is 25% in banks, 15% for real estate and materials, 6% for capital goods, 5% for utilities, 4% for transportation, telecom and insurance. 3% for other financials and food retailers.
EPP has a fairly tight correlation, most of the time, with the major Aussie banks while outperforming. EPP has a very high yield for an ETF at 3.3%.
In deciding how this ETF might fit in to your portfolio it makes sense to explore the weighting in financials. As I look at the paragraph above I count 31% that would be considered financial stocks. So it makes sense to see if EPP correlates with financial sector ETFs. The goal with this part of the exercise is to avoid overlap. In comparing EPP with IYF and XLF there lengthy periods of divergence such that I would say the correlation is not that tight. A big reason to have any interest in EPP at all is for the chance to own markets that have a low correlation to the US stock market and that seems to clearly be the case.
The sector make up of EPP kind of reminds iShares Dividend Select (DVY), a personal holding. I think the chart comparison is interesting. The correlation sort of ebbs and flows but is tighter than I expected. In the last six months there has been more of a divergence.
You can decide for yourself whether EPP makes sense for you but the point is the process of analysis. In trying to assemble a portfolio it makes sense to explore these types of relationships.
The analysis done here would come after you decide that want to invest in Australia.
There are several other ETFs, CEFs and ADRs to capture the Australian market.
Tuesday, May 24, 2005
No he doesn't.
Maybe a better comment would be; him and what army?
I have written a little bit about my personal holdings in the past. My approach is to have a very boring, low beta, high yielding portfolio that is very overweight foreign stocks, more so than my clients. The idea is that worrying about my own account takes almost no time away from the work I do for clients. My entire financial life is wrapped up in the stock market, taking on a higher risk profile seems like it would be counter productive to my job.
I use inverse index funds for some clients as a counter strategy. But these are only available (as far as I know) for US indices. This probably would not be helpful for a heavy weighting in foreign but one of the currency funds might be.
The dollar index ($USD) looks to have a low correlation to the iShares EAFE (EFA) which is probably a good enough proxy for foreign stocks for this article. There is a zig and zag effect between the dollar and foreign stocks. So a possible hedge to foreign stocks might be to buy RDPIX.
While I like the concept I don't like the trade just yet. More specifically I don't think I could own enough RDPIX to hedge enough of my portfolio. If I bought 5% in RDPIX and the dollar moved 3%, how much help would this really be? Probably not enough.
I imagine we will soon see currency OEFs that use leverage, along the lines of the Pro Funds Ultras. That is to say these OEF would provide double, or more, of the effect of the dollar index. This would make for a more volatile single holding but a more effective tool for a portfolio.
Interesting stuff, no?
Be careful relying on this too much. Looking at a list of top performing vs worst performing ETFs or over valued vs under valued can potentially miss the point. Does anyone think the ETF that was the top performer last year will be the top performer this year? There might be an argument to be made that picking last year's best ETF is dumber than picking last year's top performing OEF.
Is Morningstar saying that if an investor is building a diversified portfolio with sector ETFs they should not own an energy sector ETF because they are over valued (the article quotes the company as believing energy is over valued and financials are under valued)? The article doesn't say and I doubt that is the implication but who knows what people will do.
Energy may be over valued but often these types of things tend to go to huge extremes. Additionally, despite being over valued is there any doubt that energy as a group will do well on crude's next run at $60?
I tend to rely on other big picture issues to make sector decisions. I find macro issues to be better forward looking indicators.
Monday, May 23, 2005
After I read this article on Bloomberg I wanted to write a piece to question whether the typical investor needs a hedge fund. The article addresses the situation with Bailey Coats and Quadriga Capital Management.
Quadriga's clients are less wealthy than most hedge fund investors, according to the article. One theme of this blog has been to keep things in your portfolio as simple as possible. A lot of different strategies end up with similar returns over long periods of time, keep in mind there are exceptions.
The idea of most strategies yielding similar results makes an argument for having the least volatile ride you can find. My idea of that involves dividend but there are several approaches that should (no guarantee) make things less volatile. This is the type of thing that appeals to most of the people that hire a firm like the one I work for (at least the majority of our clients).
It is not clear to me why the person with $1.5 million or so to invest needs exposure to a convertible arbitrage hedge fund. Being long GM bonds and short GM common may have been a great trade for a while but why is it better than a simple, diversified portfolio.
There are a lot of stocks and different types of funds that even people with substantial wealth can benefit from. There are plenty of very good reasons to use hedge funds and I wouldn't quibble with them but keeping things very simple should at least be considered.
This was published today. It is a good read. Gregg and I have emailed back and forth about these before, too bad I didn't get a mention in the article :-).
I am hoping that after a wave of introductory articles like this one we will see some more analysis.
Watch out for that last one. If you are in your 50's and everyone in your family has made it past 90, how long do you think you should be planning for? Regardless of your age, a 40 year time horizon needs a healthy portion in equities, in general terms. People are concerned with having enough money when they get older, this makes sense. Being too conservative can have the same consequence as being too aggressive. If you are 85 and have run out of money, the reason why doesn't really matter.
I think I wrote about this once before. Exactly 30 years ago the S+P 500 was at 91.15 and yielding about 3%. A ten year bond was yielding about 8%. An investor retiring then at age 50 who put his $150,000 life savings into the bond had an income back then of $12,000. The investor that put the money in stocks had an income of $4500. You can see where a lot of people would have taken the bonds. Now 30 years later the bond portfolios still worth $150,000 and the income is $6000. If this same investor had instead put it in the S+P 500 he would have $1.9 million with an income of $31,463 (assumes a 1.6% yield on the SPX).
The example is woefully simplified but the numbers illustrate the point. Plenty of big firms use generic you're 55 so 55% should be in bonds type of allocation models. Watch out for this!
This week Gus Sauter from Vanguard was on talking about ETFs. Vanguard has made a real effort to become a presence in the ETF industry. So far it has not done much to differentiate though.
Mr. Sauter has a lot of experience managing money and is a decision maker at an important firm. The interview had the potential to dig deep and really be about something.
Instead the interview focused a definition of ETFs and how important, or not, an ETF that invests in the S+P 500 is for investors to have in their portfolios. Big dud.
I have written before about ETF coverage. There seems to be a shortage of quality ETF analysis in the main stream media. There are a lot of very smart people doing interesting things with ETFs and I think being able to access a little of this strategy, through interviews and other coverage could be very beneficial.
All articles now seem to devote too much space to an ETF is a basket of stocks that trades throughout the day on an exchange. Back when PowerShares came out with its dividend based ETF to sort of compete with DVY (personal holding) every media outlet on the web (it is possible I have exaggerated here) wrote an article comparing the two. Likewise after the second China ETF (BTW I did an article for Motley Fool comparing the China ETFs, but I think mine was very early on in this wave).
I have tried to provide analysis of ETFs, and CEFs for that matter, that goes deeper than the mainstream sites. I try to analyze holdings, study correlation and offer innovative ideas about how to utilize these products. For as much as I write it would be logical to assume that my conclusions will be correct sometimes and incorrect other times but I am trying to share process. There are other blogs that provide similar analysis, that I have mentioned before.
If you would like to see mainstream sites offer articles about ETFs with more meat on the bone I would encourage you to email into sites like MSN or Marketwatch and other big sites and ask for better content.
Saturday, May 21, 2005
The Striking Price column in Barron's had some interesting content. The primary focus was on the incremental extra returns realized by selling calls. Selling calls enhanced returns for any S+P group where stock prices did not have very big returns. No shock there. This ties in with whether or not to reach for yield and the consequences for reaching too far. Often, investors take on too much risk relative to the yield realized. This was a point made by Tom McManus on Squawk Box. Selling calls every so often can be beneficial but I as I write often, too much of any one thing is not good and results in losing diversification. What I mean by that is if an investor owned a couple of energy stocks in the first quarter but had calls, 5% out of the money, written against his stock that investor got left behind on the way to a 15% or 20% move for most of the group. It is not too often that a stock gives 20% in a quarter. Taking that away from yourself too often is tough to make up.
A regular reader sent an email asking about this article by John Hussman and whether I disagreed with Dr. Hussman. The article appealed to the emailer's sense of logic but wanted to know if I find any flaws. If I read the article correctly, it questions the manner in which P/E ratios are calculated, now and in the past. The consequence potentially being the market is more over valued now than a lot of people think.
I'm not sure the logic in the article is flawed but I'm not sure how important the conclusion is. P/E ratios are very rarely the single most important thing moving equity markets. I do not believe P/E ratios were the driver behind the net bubble. The catalyst there was too much supply of over hyped poorly thought out companies. If there had only been, say, ten Internet IPOs and only one spectacular failure we can conclude things would have turned out much differently on the way up and the way down.
P/E ratios might be a little hot these days, maybe. They are not at historical extremes however. It is not clear to me why slightly high P/E ratios would even be the fifth most important thing to influence the direction of the stock market over the next six months. Markets with high a P/E can rally huge and markets with low a P/E can tank. If, back in 2002, we had captured Osama I am quite certain the market would have skyrocketed regardless of P/E ratios.
In my opinion the trend of P/Es is more important than the actual level. Even so, most of the time I think the trend will only create head wind or a tail wind and that's all.
For the folks that subscribe to my newsletter there will be no letter this week due to a very limited battery on my computer and everyone's email being on Thunderbird. I may not be able to send a letter out until the new computer arrives. I will extend all subscriptions by the amount of time that I can not send a letter out, probably three or four weeks but I will keep you updated through the blog.
Lastly, about my lap top. It was not the power cord. I bought a new one and it did not work. In layman's terms the thing inside my computer that the power cord attaches to is what is broken. My Dell (client holding) should arrive in mid June.
When I first turn on the computer in the morning I read the Briefing.com In Play on Yahoo then I check out what the futures are doing and read the MarketWatch pre-opening summary. Then I will look at the global markets page on MarketWatch to see if there is anything in the European markets I need to know. After that, in no particular order I will see what there is to read on Bloomberg.com, Marketwatch, The Street.com, Reuters, Yahoo Finance, WSJ.com and MSN.com. At some point in the middle of that the market opens.
Right around the open of the market I get an email about emerging markets that I then read. About a half hour after the market opens my wife gets up and we watch CNBC together, ahem, feed the dogs, make our mochas and she tells me anything I need to know for the day. At that point I head off to Phoenix, if I am going that day.
Assuming I am working from home I then check out any of the dozen blogs or so blogs that are in the regular rotation. I get big news on any companies I follow from In Play or CNBC. At 8am I watch European Closing Bell. If any of my European holdings have news I get that from the MarketWatch Europe page or the night before on Today's Business Europe. Closing Bell will devote a lot of time to European news makers, global investment strategy, currency and the US markets.
While I am able to keep up with the stocks in my universe I am unlikely to catch something in the Des Moines Register.
There are also a few weekly reads like Nicole Elliott and John Hussman.
If I need to do any errands, fire department business (I have been the treasurer of the board for two years but as of next week I will be vice-president and have a lot less work) or honey do's I take care of that between 10 am and noon, usually (subscribing to Sirius was a great investment).
When I get back I revisit the various sites to look for new content to read (actually most of it gets fed to MyYahoo but you get the idea).
When the market closes I go through one last look at prices (fyi I only look prices four or five times a day), I don't feel the need to watch every tick all day. If there is something unusual, good or bad, with any stocks I care about I will watch the trading more closely. At 1:30 or so I usually do yoga for about 45 minutes for exercise (you may chuckle but it is a rough workout).
My wife usually gets home right around the time Asian Squawk Box comes on. Again here there is a lot of insight about US Markets and currencies. At this time of day I read Bloomberg's Asian News page, the New Zealand Herald, Barron's online exclusive and continue to pay attention to the blogosphere.
I should mention that I also have news search on MyYahoo for ETFs, CEFs and emerging markets. I often stumble across good content from these. Chances are I am forgetting a site or two.
After about 4pm I have to ease up on the stock market TV for the sake of my marriage, but I have CNBC Asia on the other tuner (TiVo users know what I mean) so I can catch some of the interviews I have written about. I always watch the first half hour Asian Market Watch (this is the show that appear regularly on, although I was on Squawk once).
I keep the computer on during the evening to keep with the Asian markets. The last thing I do in a day is watch Today's Business Europe.
I do a lot of writing in between the reading and the watching. Most of what I write is reacting to something I have seen, read or was emailed about. The writing helps me process some of what I take in. I get new stocks to watch (not that often) from something I see or read. I'll write about the process of buying a new stock another time.
I work in any trading I need to do for clients as my first priority. That obviously comes first.
All of these things are behind the decision process of what changes to make and when. My goal with all of this to do what I can to get more big picture decisions right than wrong. As I write here, often, I take little bit from what I read and watch to continually hone my process.
This is my weekday routine. Another time I'll write a post about my weekend routine.
Friday, May 20, 2005
Tom's thought was that the stocks have been up pushing the yields lower. He may be right or he may be wrong. I think he is wrong but who knows? What is relevant is that he said underweight. I have no doubt he believes this but if he is wrong, clients (that listen) will get some of the benefit dividends would offer if he is wrong..
Squak Box has a blog. There is no real market related content but I'll be curious to see if it develops into something useful.
This is a link to a good article at ETFzone about country ETFs (disclosure that I own EWO).
Thanks for sticking with me through all the computer hassles. Still no spell check.
As a housekeeping item, there will be no newsletter this weekend for those that subscribe.
There is a great post at ETF Investor about foreign holdings. I would add a couple of things. First though, the article points out a couple of things that I have addresed before. There has been an increased correlation between the US market and a lot of foreign markets. There are still plenty of foreign markets that do offer a better chance of diversification.
I have written about this stuff a zillion times. Think about this from a common sense starting point. Countries that rely on completely different types of products tend to be at different points in various cycles. I think anyone can get a hold on this concept.
The article does not address the commodity angle that I am so fond of. The author mentions owning EFA, EEM ans EWJ totalling 33% of their portfolio but not how much is in each ETF. Depending on the weightings of the three they might be making a huge bet on Japan. Japan makes up 21% of EFA and EWJ is Japan. With the mix they have I don't think they are making the most of the diversification that they could with other ETFs. That may be ok, they might think there will be huge things from Japan and they may be right (not my belief but who knows). My point is that any time you blend ETFs together you should look for overlap of stocks and countries.
Thursday, May 19, 2005
I am typing this on the computer at our fire house, and I beleive the machine is a 486, no joke. There is no spell check or any other blogger tools available. What a hoot.
I have purchaed a new Dell (client holding)that should be here in mid June. A neighbor supposedly has an extra lap top I can borrow which I hope to pick up tomorrow or over the weekend.
I will need to access my old computer to take stuff off of it when the new one arrives. If that last sentence makes me sound like an idiot, I may be but one of the guys I work with is not and will help me if I need it.
I'll mention one thing about the market and I will come back down to the fire house tomorrow to post again if I can't get the loaner. It is important to me to keep the blog going.
The market feels good right now. But it has gone in one direction for several days in a row. Even if we have embarked on the mother of all rallies, nothing can go in one direction for too long.
There is some good stuff in the blogosphere today that I can not link to because of the computer, but check out Bill Cara, Barry Ritholtz and David Jackson's ETF Investor page.
One trading note; about half of my cleints own a specialty retailer that has had a monster run (about 28% since I bought late fall). I put a tight stop under it to preserve the move. If you have anything that you have not planned on marrying that has moved in that fashion, some sort exit plan may make sense.
Please remember I have typed this with no spell check:-))
We have been in touch with several companies that, for lack of a better phrase, host all of the services we would need to employ. We are at a point in our research where we have questions that would best be answered by anyone that has gone through this experience and might be able to help us with a couple of questions from the small fund manager's perspective.
So if you or someone you know has experience starting up a mutual fund and you'd be willing to answer a few generic questions about starting up please email me at firstname.lastname@example.org. Thank you!
The client made a comment that a lot of people think and that I have heard before. He said he would just like to get 10% a year. I met with another client about two weeks ago that said the same thing. One thing I have written several times before is that the way you get 10% every year is by getting 20% one year, losing 3% another, then being up 2% and so on.
Before that meeting two weeks ago I lookup up just how often the market hits that magical 10% number. Since 1971 that market was up 10% three times. Three. Actually two of those three was more like 9%.
To own stocks means you have to capture most of the effect of up a lot, when it happens. The next time the SPX is up 30% in a year and you get 26% or 27% you will be fine. In those types of years just go along for the ride. It is years like 2004, or maybe 2005, where you need to do some heavy lifting. I am not saying 2000, 2001 and 2002 because any type of disciplined exit strategy would of spared a lot of pain from those years.
Wednesday, May 18, 2005
This is also something I have written about many times. It does not benefit my clients to have too much riding on one probability.
I would be thrilled to be wrong in this direction, if that is how it turns out. I think that is yet to be seen, but thrilled nonetheless.
Either way I think the earnings for the first quarter were very good. Yesterday the SPX closed at 1173. I think of earnings season ramping up on April 7th, but you can pick any day from that week and the SPX is lower than it was before this very good reporting season.
Oops. There are plenty of things out there that could lift the market but this type of action in the face of good news tells me that the market is more concerned with the macro (the Fed, bonds, oil, inflation, CNY revaluation, other things) than the micro (stock pickers market:-).
These cues are worth looking out for. I have been writing for a long time that there is a problem with demand for stocks. This earnings season corroborates the idea. For the market to go up from here, as I read it, would require overcoming this demand problem. Not impossible but difficult.
Tuesday, May 17, 2005
David's article identifies the market sectors and corresponding ETFs. David further writes about creating your own hedge fund (more on that to come later from David). As pointed out an investor can use sector ETFs to effectively create a personal hedge fund.
There are products like CEFs and OEFs to capture other areas of the capital markets like countries, certain slices of the bond market (such as convertibles, foreign, high yield), currency (Pro Funds Falling Dollar and Pro Funds Rising Dollar) and so on. There will be more choices available in the future.
All of these products will allow investors to capture different effects without having to pick individual issues. The benefit is clear, less damage to portfolios from individual situations that blow up. The downside is missing some dividend yield from individual stocks. For example National City (NCC) yields 4.17% but iShares Financial (IYF) and the Financial Sector SPDR (XLF) yield 1.95% and 2.27% respectively. And NCC has wildly outperformed the sector over the last five years.
This may not be a reason to abandon an all product no individual issue personal hedge fund idea, just know what you are giving up. This is why I always advocate a blend of multiple products. A do-it-yourselfer may not have time to monitor 40 stocks, as is often used as a reason to use ETFs, but I do think a lot of people can stay on top of a half dozen stocks worked into portfolio of ETFs and CEFs. More on this in future posts.
Monday, May 16, 2005
This makes no sense to me. It is a list of the top performing ETFs. I'm not sure what the time frame is. I could see people looking at this list and buying the Utilities HOLDRs (UTH) because it is number one. This is worse than buying the best OEF from last year.
Looking at the list is the same as looking in the rear view mirror. It is a window to what was working before.
On a personal note the computer problem may just be a power cord thing but I need to get a new machine anyway. I lost about 90 minutes of work time this morning so I feel like I have been 90 minutes behind all day. I'll do a little extra yoga when I get back from Phoenix this afternoon.
I need to get a new computer on the hop. My next issue will be whether I can retrieve everything off of the old hard drive with minimal nuisance. I have had a lot of emails and comments pile up, especially on my tax post from Sunday.
To broadly answer most of the email I got about this; I realize there are flaws in a flat tax. There are also flaws in every other proposed solution. To be 100% clear every national consumption tax plan I have heard would exempt food, gas utilities, health and any other vital necessity I am forgetting. This came back to me more than once.
It turns out Kelmoore manages three funds that total about $450 million. There is the Strategy Fund (KSOIX), the Eagle Fund (KSECX) and the Liberty Fund (KSCLX). KSOIX buys large cap stocks and sell calls against those stocks. Eagle buys mid caps and large caps and sells calls. KSCLX buys large cap stocks, sells calls and buys puts with some of the premium (this strategy is called a collar).
The performance of these funds has been bad. KSOIX has lagged its category and the S+P 500 four years in a row. KSECX has lagged both four out of the last five years. KSLCX has lagged four of the last five years. Ouch.
I have written several times that most managers beat the market some of the time and lag the market some of the time. That just makes sense, doesn't it? Maybe these guys are the exception that proves the rule.
Looking at the current holdings they have made some poor choices with stock selection, really poor.
I'm not sure how they still have assets in the funds. They also have a separate account business. How can they get anyone to hire them or stay with them? "So tell me a little about your performance."
"Um, er, well..."
Sunday, May 15, 2005
Here's my two cents. I think a mix of both could work as a five year, or so, transition. They could scrap the tax code and replace it with a 5% flat tax. Maybe a single worker's first $20,000 would be exempt. Married couples could have $40,000 exempt and then maybe $5000 exempt for each child under 18 or 21 and in college, something like that.
The sales tax to start could maybe 15%? Food, medicine, gas for cars and utilities for housing would not be subject to the sales tax. A few years later the 5% could be retired and the sales tax upped to 25%?
I don't believe that consumption would be hurt. Wealthy people, with now more in the pocket thanks to no income tax, will still consume and spend.
No tax on savings and investing could help capital markets but no mortgage deduction could hurt the real estate market. I'm sure there would be all sorts of lobbyists representing realtors to prevent such a thing. There would also be huge opposition from the accounting profession.
There are far to many flaws with my thoughts to address all of them but something like this certainly could be a starting point, couldn't it?
Here's another crackpot idea although clearly not my idea. I just remembered it today. What about legalizing and taxing marijuana? To be clear I don't use marijuana but a lot of people do. I'm no expert but it is any worse than alcohol and cigarettes? There would be plenty of obstacles here as well. But successfully capturing a tax on some portion of the marijuana industry would help reduce a couple of the financial problems the country now has.
I can appreciate that these ideas are out there but the people trying to address tax reform need to be open to anything at the start. And whether pot gets legalized or not a lot of people are going to smoke it.
Saturday, May 14, 2005
The funniest thing was that a post of mine was number 14. Unfortunately I did not find too much there other than sites selling something, but I found a couple of things.
One site that was interesting was for some type of fund run by OZ Capital Management called the Covered Call Fund. I never found a ticker symbol and there were no performance numbers past 2001. Maybe this was a private fund and it is now no longer a fund?
The reason I am mentioning this is there was something strange on the site's strategy page. It said "If your option is exercised your stock will be sold at the agreed price." Any option people out there as nit-picky as I am see something odd in that sentence? Investors who buy options have the right to exercise their options at or before expiration (save for European indices). The resulting action of an exercised option is that the seller is assigned. A seller may get assigned not exercised. I realize it may just be me but if I was thinking about investing in this fund I would have to question the expertise of the managers.
The other interesting thing was a short commentary by Bernie Schaeffer dated April 27, 2005. Bernie appears on TV quite a bit and I have learned a few things from him over the years but I can't get a feel for how much he knows. Bernie expresses some of the concern I have expressed about the supply of covered call CEFs that has come to market in the last few months.
Bernie feels that that these portfolios could get "destroyed" in a major market decline. He further believes that the selling done by these funds has "created a stranglehold on volatility." Obviously volatility plays a major role in every type of options strategy. From the blogosphere, Jack Miller is no fan of these either.
I thought it would be worthwhile to look at a couple of open end call funds to see how they weathered a major market decline and then offer my two cents about the fate of the CEFs. I found two OEFs, KSOIX and DBCCX. If you click on them you will see that KSOIX has lagged badly at every turn and DBCCX has outperformed the SPX on a regular basis, but if you click here you will see DBCCX has lagged the CBOE Buy Write Index (BXM) by a lot. Galatime has also addressed this point on his site.
My original expectation for owning a covered call CEF was that I thought it would be less volatile that the market in both directions, have less interest rate sensitivity than a bond fund and provide an 8% yield. The fund I own has a 4% weighting in my account, not a particularly large amount for something I expect to behave more like a bond fund.
Bernie and Jack seem to have similar reasoning for not liking these funds and they may turn out to be correct. Since these CEFs came to be they have in fact generally behaved they way I thought. While we have not had a major market decline the SPX at one point declined about 9% from its early February high yet the group of CEFs did quite a bit better except the NFJ Strategy Fund (NFJ).
Also since the CBOE Buy Write Index came into existence in early 2002 it went down less and has bounced back faster than the SPX. At a minimum the strategy has merit.
I have a theory about the performance of KSOIX beyond just bad stock picking. Clearly when the fund was created in 1999 the world of call writing was much different. Premiums were very very high providing a lot of leeway for being wrong. This started to change early on in the life of the fund making proper portfolio construction more important than while the bubble was still inflating. In looking at the holdings on the Yahoo page I see a lot of big caps that have not worked including GM. I am hard pressed to give the manager, Matthew Kelmon, the benefit of doubt here but it is true that the covered call environment did change and probably had some impact.
But to conclude this long analysis these are working now as expected and the Buy Write Index has weathered some rough periods in its three plus years. If I turn out to be wrong I will have no problem making a change but given the results so far and the small weighting I maintain, I feel very comfortable with the concept.
Friday, May 13, 2005
Hi Roger. For those miserly folks that don't want to stump up a Barrons sub to read the article the post will be somewhat of a mystery... How bearish is he? As I am new to this blogsite may I ask how bearish are you?
From what I can gather some folks seem to think 1060 test for SP500 is scary, whereas others looking to at least retest and maybe undercut March 2003 lows, though less clear about when, understandably. May I be so bold as to ask for more details on your bearish technical thoughts ;)
First let me say if you spend a few minutes in the archives you will find a lot of the same stuff in more detail.
To the first point I don't read Mr. Kahn as jump up and down bearish but he had multiple charts showing all sorts of down trends and resistance lines. The points he made were compelling. You can look at a chart and usually pull anything out that you want but Mr. Kahn clearly had a point and he has a good track record.
I try to stay away from labeling my sentiment. Building on my belief of taking what the market gives I see signs of poor demand for equities. There are things going on with the yield curve, the economy and so on the lead me to conclude we are not very likely to have a great year. At the beginning of 2005 I said I thought we'd be lucky to have mid single digit returns. My reaction to this has been to reduce exposure a little and beta a lot. My positioning has allowed me to out perform the market year to date by a couple of percentage points for most accounts, accounts added since then are all over in terms of beating or lagging the market. Not earth shattering by any means but I would not want to be down 6% or 7% year to date to be sure.
The thing I rely on above all else is the 200 DMA of the S+P 500. This is the trigger point for being fully invested (or close to it) or defensive. The SPX recently breached is 200 DMA and I chronicled the action I took on this site. The trades done recently are still in place. I think we may be in for more of the same so increased exposure to boring consumer stocks still makes sense as does the reduced beta.
1164 seems to be an important level for a lot of people I read as does the 200 day for me. Hope that helps.
I think we have a ways to go before the fundamentals lead to a rally. That probably means more sideways trading. One thing that I don't hear very often is the thing that seems most logical based on other recent time periods (like last year). If we have a rally I think it will be for no reason at all. In that scenario a rally would catch a lot of people flat footed with how quickly it happens.
The point of this post is if you are feeling very bearish to not too carried away with how defensive you get. I had an email from one reader who mentioned that he was 95% in cash. Chances are that person will miss a move up, when it comes.
Or maybe not but I just would be very careful with very extreme portfolio allocations.
I had some great comments and questions over night. I have to drive to Phoenix today. I will post later in the morning to answer the questions. Thanks.
Thursday, May 12, 2005
I tuned into this one when the IPO priced late last year. This is my type of pick, on the surface. The business is things like parking lots and toll roads. Low cost and cash generating. I think I remember hearing that this has a 7% yield.
There are a couple of funny things that I can't find news to help me sort out. According to the company site it was supposed to declare its first dividend on March 31, 2005 of $0.50. I looked on multiple sites and saw no news to update the dividend. The trust has been public since last year and there has been no dividend. That seems strange to me. Mr. Gallagher said the dividend would pay later this month and in fact work out to a 7% yield.
Perhaps its me but something doesn't feel right.
By the way Mr. Gallagher has 35% in the US and 65% foreign. He likes Europe, emerging markets, Japan and banks in Italy and Scandinavia.
Michael Kahn from Barron's is still bearish. He has been right more often than not. The charts in this article look grim and sort of tie in with what I have been writing about.
One theme of this blog has been bad news begets more bad news. You don't need to be a very smart stock analyst to understand this and spare yourself a lot of hassle.
I've done tons of study about HMC and Jack Meyer. The allocations make perfect sense. Multiple high beta assets with low correlations. Each of the different asset classes offer substantial returns over traditional bonds.
HMC doesn't care if EM's lose 10 b/c something else will be negatively correlated at hedge the position. HMC also does no tactical allocation. They don't believe they can add value over the short run. They set up trading parameters (asset allocation policy) which they adhere to. It's their asset allocation policy that is great, not just their secuity picking skills. If you took a standard asset allocation over 10 years and compared the results to their allocation (index returns only) you'd see 300 bps annualized outperformance. Some great reading on them can be bought at Harvard Business Online or at the Yale IMC site.
The comment expands on some of what I wrote back than. The concept is very important to proper portfolio construction. By blending together different stocks or assets you can achieve better returns with less volatility. While I believe that I can say it is easier to manage the volatility than ensure better returns. You should expect periods of being on both sides of the SPX in terms of returns. And that's ok.
If you manage your own money and you can accept that you will lag the market sometimes as well as beat it, your job gets much easier.
Here is the allocation as of December;
15% US equities
13% Commodities (about 3/4 of this part is in timber)
13% Private Equity
12% Hedge Funds
11% US Bonds
10% Foreign Equities
10% Real Estate
6% Inflation Index Bonds
5% Emerging Markets
5% High Yields
5% Foreign Bonds
-5% Borrowed Money
The first site is called Trade Foreign Stocks. It is run by Duncan Ellis. I just found out about the site yesterday but I used to work with Duncan in years past. He and I had similar jobs on different trading desks. He, of course worked on the global desk. The site is so comprehensive, I can't imagine the work that went into creating it. In addition to current data there is all sorts of content about ETFs, country funds and so on. The site formatted strangly on my screen. The menu was off to the far right. If any of the gloomy things I wrote about last weekend come to pass, foreign investing will become more important. This site will help us learn and know more.
The other site is a part of the Seeking Alpha blog complex called The Utility Stock Blog. It is brand new but worth reading. Funny thing, as I went to this page just now to get the link I saw that there is also an Energy Stock Blog. I'll have to check that out later. The knock on utilities at this point would be that rising rates pulls money away from the group and into bonds. That might be the case but I think the more important theme for the time being will be the element of safety offered. Utilities make up about 3% of the SPX, I continue to weight the group at about 4%-5%.
Wednesday, May 11, 2005
Mr. Mandel continually promoted why people should own funds of funds, the thing he sells for a living and Mr. Bove countered every time about how expensive funds of funds are.
I was reminded of a joke about the worst five words any CEO can hear, "60 Minutes on line one."Mr. Mandel got his ears pinned back. As I heard it, his argument was just a series of salesy cliches. Mr. Bove made him look foolish.
I knew Mr. Mandel was in over his head when he said owning just one hedge fund is like owning one stock. Really? I attribute that one to nerves but nonetheless he made a terrible case for the product.
For all I know he may be very smart, get great returns for clients and maybe we should all have our money in funds of funds? I tried to get more info from the site but you need to register just to read the About Us page.
This is a play on words from Monty Python.
Rydex launched the Russell Top 50 Fund (XLG). This is an ETF that invests in the largest 50 American companies. I saw an interview with Steve Sachs from Rydex yesterday and he admitted this fund has a 0.98 correlation with one of the other large cap ETFs. Apologies, I do not recall if he said SPY or OEF or another one but XLG will correlate very highly to all of them. I am surprised by this type of fund. Rydex' first foray into the ETF world was very innovative, the S+P 500 Equal Weight (RSP), so I'm not sure why they think we need another mega cap fund but so be it.
Last night as my wife watched the painfully long season finally of Amazing Race I searched for websites that provide insight about ETFs. I was woefully disappointed. All of the big media outlets and brokerage firms have ETF centers. I have written about a couple of portfolio building products recently but this was a quest for subjective opinion.
The various ETF centers were really just listings of ETFs. Some went so far as to group them by category. I found plenty of sites willing to sell timing services using ETFs. Every one I found had market beating returns for every time period. I didn't think everyone could be above average.
Bill Cara and David Jackson's ETF Investor Blog offer some great commentary. Bill wrote up a bunch of excellent content when he started his new site and ETF Investor offers David's opinion and opinions from other people, including me, as well. You should explore David's sites. The ETF content is great.
I've written a few times that I try to learn from process not product. Finding content about process is still difficult and that is surprising. Plenty of media outlets have occasional quality content but it is not very steady.
I almost forgot Index Universe. They have good content but they don't publish new stuff very often.
If you know of a site that has consistently good insight and opinion, please let me know.
Tuesday, May 10, 2005
The starting point for my thoughts on this issue was very very simple. There will be many parts of the market and different investors impacted by the downgrades. We may have seen this start to play out today.
The domino effect was that financials were down, the Financial Sector SPDR (XLF) was down about 1.3%. The brokerage stocks were down 2.5%-3.5% today.
I have been underweight and wary of financials for a long time. I own one big bank (that had a better day than the sector), a bunch of smaller foreign banks (two did better and three lagged but all five were really just shades of gray) and one mutual fund company that did noticeably better. More importantly I own no brokerage stocks and no insurance stocks.
So far this has been right more often than not, and I have been writing this since the start of this blog. It seemed like an fairly easy assessment to make and it continues to play out. I try to make things as simple for myself as I can. This episode, so far, is just a case in point.
The market continues to punish risk takers. The odds of trading an event for a profit, even if you get the event right, are not in your corner. We have had a move higher over the last few sessions, longer actually, and today does not have to mean the end of that move. I would be surprised if he had a huge rally starting right away but hopefully I am positioned to capture most of a huge move.
The story for equities has not changed a lot since I took a couple of defensive steps in April. Earnings growth is decelerating, the bond market is doing strange things, the mood is not good and so on. I would like to see the market continue to build a base here, above the 200 DMA but I'm not sure it will.
We are about half way through the quarter and not much has happened yet. The market could very well rally nicely from here. During the lows a couple of weeks ago I noted that we could have a fast and furious rally for no real reason.
At this point I have to believe that any rally would be more about technicals and sentiment as opposed to oil prices, earnings results and so on. In order for fundamentals to be the driver I think we would need to clearly see improvements in data and see earnings go back to last year's growth rate. Both seem unlikely. A big rally with no fundamental underpinnings should probably be sold into. I'm not saying 100% cash just reduced exposure.
Monday, May 09, 2005
BLDRS has one broad European ETF that does a good job of capturing big Europe with a higher yield than SPY. That fund is NASDAQ BLDRS Europe 100 ADR Index Fund (ADRU). The Yahoo finance page says ADRU yields 0.98%. This is incorrect. According to Schwab, over the last twelve months ADRU has paid $1.54 in dividends and $0.07 in capital gains. The $1.54 works out to a yield of 2.2%. You can click here for a list of the holdings in ADRU.
Another proxy is the iShares Europe 350 (IEV) which only yields 1.79% but has had better price appreciation.
The other ETF that I am aware that capture big Europe is the streetTRAKS Euro Stoxx 50 (FEZ) which yields 2.2%.
The knock on Europe is that it is growing slower than the US and unemployment has been much higher than in the US. Both true but not new. At times Europe offers a low correlation to US markets, but not so much lately. I have written many times about potential demand for Euros, at the expense of dollars, could help move European stock markets higher. The other things is I'm not advocating you put half your money here either. But some exposure probably makes sense.
I do not own any of the three personally or for clients nor am I likely to buy them because I use individual stocks to capture Europe. The volume in all three, especially ADRU is extremely low, so limit orders would a smarter way to trade these.
Occasionally there will be a technical snafu on Sundays that will prevent it from showing on Directv. This Sunday was one of those times. Oh well, I guessed I'd just miss the content this week. Here's where the humor starts. At 3:15 the phone rings and the caller ID says out of area, which is what it says when CNBC Asia calls me. Sure enough it was Singapore asking if I could do an interview in five minutes, I said sure. So they called back in 90 seconds, I'm on hold for 15 seconds listening to the last segment end and BANG, I'm on the air getting interviewed. This was my first time on Squawk Box (I have been on Market Watch about 20 times) and this interview was, by about a minute, the longest interview I've ever done.
Show host, Martin Soong asked me about the Fed, the future of rates, the treasury issuing the 30 year, the GM/Ford mess and the environment for equities. I'm not sure what happened to leave them in a pinch but there was not much margin for error, if I wasn't home, on their part. Very, very funny.
Sunday, May 08, 2005
This is worth reading. It is more about blogging in general than investment related blogs.
Saturday, May 07, 2005
I am not in favor of the Treasury reissuing the 30 year bond. I believe in the line of thought that says inflation and interest rates have been relatively low thinks in part to no new 30 year issuance. I for one would like to see less debt, less deficit and less spending (same as everyone else, I realize) and lengthening our debt does not achieve any of the lesses mentioned. We are already borrowing enough from our future.
From the department of careful what you wish for; it seems like a big step, emotionally if nothing else, was taken toward yuan revaluation. I am familiar with both sides of the argument, as you should be, and I'm not sure we should be pressing for this. I believe it will mark the beginning of the end of US as the world reserve currency. Here's my thinking on why this may matter, down the road. Over the last (insert what ever time period you want) the dollar is been in a serious down trend. I believe one thing that limited the amount of dollar selling was its role as the world reserve currency. The dollar is very important, economically, to many countries. Yuan revaluation is the start of making the dollar less important. At some point down the road the US will face another downtrend only there may be less propping up of the dollar at that point. Another byproduct could be less demand for our debt in the future. Since it doesn't look like our debt will be reducing anytime soon, foreign demand for our debt may become more important not less.
The other big thing was the GM and Ford debt downgrades. According to Alan Abelson (subscription required) the junk bond market is $600 billion. I don't know if that is correct because he cited $80 billion in GM and Ford debt as new junk supply and by my reckoning it is closer to $460 billion. Either way a downgrade from the other ratings agencies seems to be inevitable. Assuming that to be the case, that will be when some real dislocations in the bond market will happen. My concern is about what this does to liquidity and corporations ability to borrow money. Will this make borrowing more expensive for non-junk companies? This much supply changing this way could have all sorts of side effects that I am not smart enough to think of. One that I can think of is a massive amount of treasury bond buying that flattens the curve even more than it is now, I mean literally flat. If long dated debt yields the same of short dated paper it will be difficult for companies to access capital through debt offerings. Inability to access capital is not a good thing. What of GM and Ford, the companies? Both issue a lot of debt because they need it to function and pay retirees. I don't think their respective borrowing needs will lessen anytime soon. Can this possibly end well?
A few caveats. I may not be right about any of this, I will let the message from the market dictate my actions. If I am right about any of this, I would not expect the stock market to feel the consequences of any of these things for years. In fact I would not be surprised if we cycled through another roaring bull market before consequences from the 30 year bond and the yuan stories are fully known and understood. Big change is not easy. The point of this post is to begin to think about what could be out there waiting for us, thats all.
Lehman Brothers is offering a warrant that is like a call option that expires in May 2007. The article gets into some of the differences between calls and warrants. But basically these warrants go up in value if the Nikkei goes up. Warrant holders will break even, the article says when the Nikkei rallies almost 10% above the current level of 11,192.17.
There are a couple of things to keep in mind. One is that Lehman isn't selling these because they think the Nikkei is going to 14,000 and they want to take a huge loss.
iShares Japan (EWJ) won't be worthless if the Nikkei goes up 8% between now and May 2007 but the warrants would be.
Lastly warrants are not funds. Warrants succeed or fail based on a specific outcome. I write a lot about new products to invest in (although warrants aren't new). For all I know these could turn out to be a great buy but there are risks and these are the ones I can think of at first read.
Friday, May 06, 2005
About once a week or so I speak to a buddy who is a retail broker at one of the big wirehouse firms.
Usually we will ask each other what, if anything we are doing that is new or what we may have bought and sold or anything we are looking at. I told him about what I had done recently and rattled off a couple of consumer stocks I have been thinking about adding. He told me that he had added a market neutral fund recently but that he had not done much...because he doesn't have the time. Ouch.
As you know, most branch managers care about new assets and revenue generated. For the life of me I don't know why people keep money at these places. They are rife with conflict and a lot of sales people that are only trained to put assets into products and not think about big picture strategies. Obviously there are plenty of exceptions to this but how do you know who you're dealing with? Would it occur to you to say to someone, "ok convince me you have a clue about how to manage money."
To be fair and balanced here's an anecdote about how good some broker are. Earlier this week one of the partners and I met with some one that has an account at one of the big firms. I'm not sure why she agreed to meet with us because she was never going to hire us. Before the meeting she gave us her statements and I did an analysis of her holdings. Her broker is a phenomenal bottom up stock picker, or he's lucky. Either way the results were great. The average cap size of this portfolio was about $1.2 billion with no yield to speak of. Year to date the portfolio was up 9%.
For the last three months small caps have lagged badly. So he has had great returns in the wrong part of the market and with no foreign or much in the way of dividend payers. He has found great stocks in the wrong parts of the market. The portfolio is not diversified and has no counter strategy. All of her money is riding on his ability to pick stocks. I tried to explain that to her but the returns are much better than what I have done so I can not blame her for not listening to me.
But the risk she is taking is significant just the same. I think of it this way; If you put every dollar you had ever saved into Amazon (AMZN) in 1998 right after the IPO, call it $4 split adjusted, and rode it to its high at about $100 in late 1999, then sold it all put the money into a money market, did you take any risk on your way to umpteen thousand percent? Yes you did but now try telling the person that made that trade that they took reckless risk.
Similar story here. She is risking every dollar she has accumulated on one person's ability to pick stocks. For her sake I hope he is that good and not lucky.
This is a worthwhile article about biotech ETFs by Richard Sparks over at Schaeffers.
Biotech ETFs are problematic. iShares biotech (IBB) does not own Genentech (DNA) which has caused it to lag Biotech HOLDRs (BBH). IBB is down recently due in large part to the pasting at Biogen (BIIB). If you buy the HOLDRs you are, in theory, taking more risk because BBH is invested in so few names. IBB should be less risky thanks to more diversification yet has lagged for the risk not taken. Some less aggressive clients own IBB while other clients own a big individual stock in the group that has done well but is not DNA.
I am starting to think that biotechs may not lend themselves to ETF investing. If Amgen ever blows up, both ETFs will get crushed. I don't think that will happen but it could. To buy either ETF really requires that an investor learn the Amgen story and decide on its merits. If you do that and decide you like Amgen's prospects it may make sense to just buy Amgen.
This is a tough issue. The one individual name I am exposed to has done well and more importantly I believe in its longer term prospects. It may be smart to switch clients that own IBB into that one name. For the time being those clients are exposed to Biogen and Amgen which in fact may not be great places to be.
As a side note I was lucky enough to own DNA back in May 2003. I sold it into that first huge one day move and thought I was quite smart. Of course I was not smart enough to ever buy it back.
This all sprang up from an article in the Wall Street Journal. The article also quoted Robin Brooks an Economist at the IMF as saying "There is really is no link historically between demographics and demand for stocks." Well I'm no expert but doesn't Japan have an older population than the US? Isn't the Nikkei about 1/3 of the value that is was about 15 years ago? Obviously Japan has had many other problems to account for the stock market woes and an economy that defies logic for how long it has struggled but the demographic issue might play into this too.
There are those that would say the 19th century belonged to the United Kingdom, the 20th century belonged to the United States and the 21st century will belong to someone else, perhaps China or India?
I tend to think things like this play out less dramatically than what some portray. A newly retired 65 year old today has to plan for their money lasting for 25 years. That type of time horizon calls for a heavy weighting in equities, not a bunch of four letter tech stocks per se but a diversified equity portfolio.
It seems more plausible to me that effect that Professor Siegel addressed will result in average annual equity returns for US markets to ratchet down from 10% to maybe 4%-6%? This might domino to cheaper valuations and higher dividend payouts. Sounds like a good theory but I'm not that smart. I think I am just describing current state of equity markets in developed Europe.