This week's Striking Price column profiled a do-it-yourselfer who very successfully maintains an account with 10-12 positions of naked puts. Based on what I read it seems like most positions are about 20 lots in size. The way the numbers work out the margin requirements are about $125,000 and the premiums taken in work out to an annual return in the mid 20%'s on the minimum maintenance requirement for the positions.
The article devoted a little space to the what can go wrong part of this strategy but I would have like to have seen a little more. I don't doubt the success of the investor profiled but the way the article was written it made it seem like he was taking a tremendous amount of risk by way of being over leveraged.
The minimum requirement for a naked put is usually about 20% of the cost to buy the stock. So if I read the article correctly it seems the investor in question is controlling $500,000 worth of stock with $100,000. The downside of this is a drop in the market. If the market goes down by 3% a $500,000 account would go down in value by $15,000. That same $15,000 hit to a leveraged $100,000 portfolio is obviously a 15% hit. This only comes into play, however, if you buy back the puts or get assigned.
Bottom line is be careful with the leverage.
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Wikinvest Wire
Sunday, July 31, 2005
The Big Picture For The Week of July 31, 2005
I am concerned about how much optimism seems to be out there. This is not a call to get out but after a great July there seems to be a fair bit of giddiness about stocks. A 3%-4% back slide would not shock me. That would take the SPX down to 1190-1200. This is just a gut feeling and I think the market has a shot of seeing 1270 sometime this year. I don't know that it will finish the year that high but we might get there and that would probably be a point where I would slightly reduce exposure.
Here is a link to a good article at Bloomberg.com about emerging markets. I have been a big believer in the asset class for a long time. The big thing here that the article might allude to, but I'm not sure, is that over the next few years I think capital previously earmarked for US equities will migrate overseas in search of better growth. Developed Europe has been a slower growth region for a while and I believe the US is headed down the same path. Investment capital will seek out better opportunities which to me means emerging markets. I mentioned, earlier this week, that most clients have 4%-5% to emerging markets. This is not an unusual number amongst investment managers. I think in the next few years 10%-15% will become the norm. This would mean massive inflows into the asset class. A massive inflow should result in higher prices.
I am writing this post early Sunday morning while I am watching Tivo'd Fox Business shows from Saturday. I saw something that I do not know how to react to. Last weekend I was in the hot seat on Forbes on Fox for the Makers & Breakers segment. During the taping of that show I met John Rutledge, who in the last couple of months has been making the rounds on all of the shows. One of the stock I picked on the show was Quest Diagnostics (DGX). I have owned DGX for clients since the fall of 2003. If you saw the show you know my logic for owning it. This weekend I saw Dr. Rutledge pick the same stock on Cavuto on Business. I don't know what to make of this. I do not know if John saw me pick the stock or not and it is possible that he has owned it for clients longer than I have but I wonder if there is an etiquette thing here? I honestly don't know.
I do so few TV appearances that I go out of my way to make sure I come up with names other people are unlikely to pick. If I did a lot of TV appearance I would want to have consistent themes for viewers to pick up on. I have never seen Dr. Rutledge pick a smaller cap stock on the air before. It seems like he always mentions one of the small cap ETFs, which is perfectly valid. I could be 100% wrong to even think this is anything at all but it did strike me as I met the man last week.
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Here is a link to a good article at Bloomberg.com about emerging markets. I have been a big believer in the asset class for a long time. The big thing here that the article might allude to, but I'm not sure, is that over the next few years I think capital previously earmarked for US equities will migrate overseas in search of better growth. Developed Europe has been a slower growth region for a while and I believe the US is headed down the same path. Investment capital will seek out better opportunities which to me means emerging markets. I mentioned, earlier this week, that most clients have 4%-5% to emerging markets. This is not an unusual number amongst investment managers. I think in the next few years 10%-15% will become the norm. This would mean massive inflows into the asset class. A massive inflow should result in higher prices.
I am writing this post early Sunday morning while I am watching Tivo'd Fox Business shows from Saturday. I saw something that I do not know how to react to. Last weekend I was in the hot seat on Forbes on Fox for the Makers & Breakers segment. During the taping of that show I met John Rutledge, who in the last couple of months has been making the rounds on all of the shows. One of the stock I picked on the show was Quest Diagnostics (DGX). I have owned DGX for clients since the fall of 2003. If you saw the show you know my logic for owning it. This weekend I saw Dr. Rutledge pick the same stock on Cavuto on Business. I don't know what to make of this. I do not know if John saw me pick the stock or not and it is possible that he has owned it for clients longer than I have but I wonder if there is an etiquette thing here? I honestly don't know.
I do so few TV appearances that I go out of my way to make sure I come up with names other people are unlikely to pick. If I did a lot of TV appearance I would want to have consistent themes for viewers to pick up on. I have never seen Dr. Rutledge pick a smaller cap stock on the air before. It seems like he always mentions one of the small cap ETFs, which is perfectly valid. I could be 100% wrong to even think this is anything at all but it did strike me as I met the man last week.
Read more!
Friday, July 29, 2005
Austrian Coverage
Today on CNBC Europe they put this chart up showing the extent to which the benchmark Austrian ATX Index has outperformed the Dow Jones Stoxx 50 which is a broad, European,
large cap index.
Simon Hobbs, the show host, then went on saying they want to do more coverage of Austria and he asked for viewer help. He said that a lot of firms in the US might actually have better access to Austria than they do in the rest of Europe.
So I think we may see more attention, one way or another, given to what is going on in Austria. In general terms more attention might be expected to lift equity prices but it has had a nice run so an immediate reaction is not clear to me.
I first wrote about Austria last November as an investment destination and have mentioned it a couple of times since. I view it as a low impact way to play emerging markets for clients that are not comfortable with a normal emerging marker weight. The idea is that Austrian banks are financing a lot of the growth and expansion in central and eastern Europe.
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large cap index.Simon Hobbs, the show host, then went on saying they want to do more coverage of Austria and he asked for viewer help. He said that a lot of firms in the US might actually have better access to Austria than they do in the rest of Europe.
So I think we may see more attention, one way or another, given to what is going on in Austria. In general terms more attention might be expected to lift equity prices but it has had a nice run so an immediate reaction is not clear to me.
I first wrote about Austria last November as an investment destination and have mentioned it a couple of times since. I view it as a low impact way to play emerging markets for clients that are not comfortable with a normal emerging marker weight. The idea is that Austrian banks are financing a lot of the growth and expansion in central and eastern Europe.
Read more!
$35?
I stumbled across an old article about covered call funds on The Street.com. As I read through I saw a reference to a fund in the group called the Eaton Vance Tax Managed Buy Write Fund (ETB).
Like all articles that mention specific securities it had a link to a quote, commentary and research. So I clicked on the research link to see what would be there. You can click here to see for yourself.
The link took me to a page at the Reuters web site offering a two page report that costs $35. Two or three pages to analyze a CEF makes sense to me but $35? I can't imagine someone's insight about one CEF is worth half that. I am hard pressed to think they are selling too many reports like this for $35.
Is it me? Maybe it is me. Maybe people are lining up to buy this type of report but I don't get it.
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Like all articles that mention specific securities it had a link to a quote, commentary and research. So I clicked on the research link to see what would be there. You can click here to see for yourself.
The link took me to a page at the Reuters web site offering a two page report that costs $35. Two or three pages to analyze a CEF makes sense to me but $35? I can't imagine someone's insight about one CEF is worth half that. I am hard pressed to think they are selling too many reports like this for $35.
Is it me? Maybe it is me. Maybe people are lining up to buy this type of report but I don't get it.
Read more!
Thursday, July 28, 2005
Morningstar Writes Back
I heard back from the author of the Morningstar report on VWO that I wrote about on Thursday. His name is Dan Lefkovitz and he was very cordial.
He answered my questions about his report and I will paraphrase his replies and try to analyze the logic. He said that difference in performance is mainly attributable to EEM having Russian exposure, VWO managers choose not to have Russia in the ETF. OK so no Russia? Anyone else think that not having Russia causes a big style drift and misses a big chunk of the asset class?
I think there may be less to the Russia argument than meets the eye. I counted Russia as having a 4.22% weight the following are the top four; Lukoil 1.79%, Surgutneftgaz 1.28%, Norlisk Nickel 0.38% and Vimplecom 0.32%. I may have missed some in my total but ETFconnect confirmed that EEM has less than 5% in Russia.
This is a chart comparing the four largest Russian components to EEM for the last year. Norlisk at a 0.38% weight is the only one in the top four that beat EEM in that time period. Any alpha added by Norlisk was more than offset by Surgutneftgaz, which lagged the fund by what looks like 25% (again I am eyeballing the chart). Dan's point about Russia stands up much better when you look at a two year chart. I didn't paste it in to the article because formatting two pictures into one post is brutal or I just have poor blogging skills. All four names outperformed by a wide margin for two years.
Given what might be coming for oil and other natural resources in the next few years I have to wonder why anyone would prefer emerging market exposure that does not include Russia.
In my email I also questioned if there was any forward looking analysis in his preferring VWO because I don't think there really was any. He said that Morningstar has done several studies that show expenses are a far better predictor of future returns than past performance. Ahem, none of that sounds like forward looking analysis to me. It also does not address how much emerging market exposure to have in a diversified portfolio or why, looking forward and based on portfolio composition, he thinks EEM is a better choice.
To his point about expenses being a better predictor of future returns I asked him in a second email if they have done those studies on ETFs because that sound like a nugget that would pertain to OEFs more than ETFs. He emailed back that they haven't looked at ETFs yet in that way but he thinks that low expenses will hold up for ETFs too. Kudos to for him admitting this but this is a big oops for his argument.
He also mentioned the work that Morningstar has done studying expenses on index funds and they say cheaper is better. I'm not sure that holds up universally for ETFs because while there are too many ETFs that are similar there are not too many that are exactly identical.
Lastly I would add another point he made which is that although EEM has outperformed VWO and its OEF counterpart, VEIEX, since its inception, he feels that two years is not enough time to base a judgment. To which I would add if you are looking in the rear view mirror to analyze what emerging market product is right for you.
The point of this article is not to pick on the author but to point out that a lot of ETF content looks at the wrong the thing; my opinion. You can still learn from these articles but drawing conclusions based on them may not be ideal.
Read more!
He answered my questions about his report and I will paraphrase his replies and try to analyze the logic. He said that difference in performance is mainly attributable to EEM having Russian exposure, VWO managers choose not to have Russia in the ETF. OK so no Russia? Anyone else think that not having Russia causes a big style drift and misses a big chunk of the asset class?
I think there may be less to the Russia argument than meets the eye. I counted Russia as having a 4.22% weight the following are the top four; Lukoil 1.79%, Surgutneftgaz 1.28%, Norlisk Nickel 0.38% and Vimplecom 0.32%. I may have missed some in my total but ETFconnect confirmed that EEM has less than 5% in Russia.
This is a chart comparing the four largest Russian components to EEM for the last year. Norlisk at a 0.38% weight is the only one in the top four that beat EEM in that time period. Any alpha added by Norlisk was more than offset by Surgutneftgaz, which lagged the fund by what looks like 25% (again I am eyeballing the chart). Dan's point about Russia stands up much better when you look at a two year chart. I didn't paste it in to the article because formatting two pictures into one post is brutal or I just have poor blogging skills. All four names outperformed by a wide margin for two years.
Given what might be coming for oil and other natural resources in the next few years I have to wonder why anyone would prefer emerging market exposure that does not include Russia.
In my email I also questioned if there was any forward looking analysis in his preferring VWO because I don't think there really was any. He said that Morningstar has done several studies that show expenses are a far better predictor of future returns than past performance. Ahem, none of that sounds like forward looking analysis to me. It also does not address how much emerging market exposure to have in a diversified portfolio or why, looking forward and based on portfolio composition, he thinks EEM is a better choice.
To his point about expenses being a better predictor of future returns I asked him in a second email if they have done those studies on ETFs because that sound like a nugget that would pertain to OEFs more than ETFs. He emailed back that they haven't looked at ETFs yet in that way but he thinks that low expenses will hold up for ETFs too. Kudos to for him admitting this but this is a big oops for his argument.
He also mentioned the work that Morningstar has done studying expenses on index funds and they say cheaper is better. I'm not sure that holds up universally for ETFs because while there are too many ETFs that are similar there are not too many that are exactly identical.
Lastly I would add another point he made which is that although EEM has outperformed VWO and its OEF counterpart, VEIEX, since its inception, he feels that two years is not enough time to base a judgment. To which I would add if you are looking in the rear view mirror to analyze what emerging market product is right for you.
The point of this article is not to pick on the author but to point out that a lot of ETF content looks at the wrong the thing; my opinion. You can still learn from these articles but drawing conclusions based on them may not be ideal.
Read more!
Deconstructing A Blow Up
I had a stock blow up in client portfolios this week. Last December on Forbes on Fox I picked Zebra Technology (ZBRA). They are in the RFID business which helps with supply chain management. There are also interesting applications with drug prescriptions and security. The story is simple, the demand for this is clear yet the company has struggled and this week the company gave its second bad earnings report in a row and also guided lower for the foreseeable future.
Most clients have a cost basis in the mid $40 and I think the highest entry point was around $52. When the news came out Wednesday about the earnings, the stock dropped to about $40 from about $47 in the pre-market. I decided to sell it at the open. I got an average price of $40.35.
Often it makes sense to not sell into the kneejerk reaction but I did anyway. For now that was the right call. The stock looks like it closed at $38.21 on Thursday. A month from now it may be back to $45, I don't know. I do know I got something wrong. As time goes on I will have more mistakes, that is how it goes. How I manage those mistakes is what matters.
My decision to sell was based on two bad reports in a row and similar struggles at Symbol Tech (SBL). I think I learned that I should have taken a cue from the action in SBL before the ZBRA news to get out.
ZBRA had about a 2% weight in client portfolios so the damage is minimal. This episode is a great example of why I have so many stocks in such small percentages for client accounts.
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Most clients have a cost basis in the mid $40 and I think the highest entry point was around $52. When the news came out Wednesday about the earnings, the stock dropped to about $40 from about $47 in the pre-market. I decided to sell it at the open. I got an average price of $40.35.
Often it makes sense to not sell into the kneejerk reaction but I did anyway. For now that was the right call. The stock looks like it closed at $38.21 on Thursday. A month from now it may be back to $45, I don't know. I do know I got something wrong. As time goes on I will have more mistakes, that is how it goes. How I manage those mistakes is what matters.
My decision to sell was based on two bad reports in a row and similar struggles at Symbol Tech (SBL). I think I learned that I should have taken a cue from the action in SBL before the ZBRA news to get out.
ZBRA had about a 2% weight in client portfolios so the damage is minimal. This episode is a great example of why I have so many stocks in such small percentages for client accounts.
Read more!
Lots O' Vanguard
I found a couple of interesting nuggets in the news about Vanguard ETFs that I thought would be worth exploring.
The first was an article (might require a subscription) on the Morningstar site that evaluated the Vanguard Emerging Market Viper (VWO). The way I read these articles it seems like they are aimed at trying to help you decide whether or not a particular ETF is a good trade or not. This is the wrong way to look at for most people. A diversified portfolio means always including some amount of emerging markets. The amount depends on tolerance for volatility and normal asset class analysis.
Most of my clients have about 5% allocated to emerging markets. Sometimes, based on current events and what I think might happen over the next six months or a year I may increase or reduce that exposure. Maybe I read these articles incorrectly but I would like to read why now is a time for more or less exposure not that a particular segment of the market may be to pricey. If some area of the market is too pricey is Morningstar suggesting no exposure? That is not clear to me.
Another thing in the article that I thought was strange was the author's implication the VWO is a better choice, if you have to have emerging market exposure, than EEM because the expense ratio is a lot less. For the record VWO's expense ratio is 0.30% (according to the article) and EEM's expense ratio is 0.76% (according to Yahoo Finance). I think of this as forest for the trees analysis. At this point I will note that VWO has an OEF equivalent (VEIEX). Since VWO's inception in March it has lagged EEM by at least 200 basis points (I am eyeballing the chart). For one year EEM looks to have outperformed the OEF equivalent by about 300 basis points. And for two years EEM seems to be ahead by about 1000 basis points. Even if the numbers are off, EEM has clearly outperformed by more than the expense ratio at every normal time interval since its inception.
There was no mention about this at all in the article. I emailed the author about this but I am quite certain I will get no response. If he does reply I will let you know.
The other item was this article about the inclusion of Vanguard ETFs in the model ETF portfolios at several of the big brokerage firms. The way these usually work is that the salesman will put you into any one of three to six cookie cutter portfolios. Often, but not always, there is a lot of duplication and then not much in the way of analysis going forward to implement changes, but at least these products are expensive.
That these woefully flawed products continue to exist and be popular is testament to the fact that people are willing to pay for shortcuts and like being able to blame someone else when something does not work out. Often the fees for this type of thing are 2%. The S+P 500 is up 2.4% so far this year. Lets say, hypothetically it finishes the year up 4.8%. Do you think it would easy to overcome a 200 basis point fee with "the right mix" of index funds? It certainly is possible but this is not the path of the least resistance.
To repeat an oft stated theme of this site, there are many tools out there, make use of more than one.
Read more!
The first was an article (might require a subscription) on the Morningstar site that evaluated the Vanguard Emerging Market Viper (VWO). The way I read these articles it seems like they are aimed at trying to help you decide whether or not a particular ETF is a good trade or not. This is the wrong way to look at for most people. A diversified portfolio means always including some amount of emerging markets. The amount depends on tolerance for volatility and normal asset class analysis.
Most of my clients have about 5% allocated to emerging markets. Sometimes, based on current events and what I think might happen over the next six months or a year I may increase or reduce that exposure. Maybe I read these articles incorrectly but I would like to read why now is a time for more or less exposure not that a particular segment of the market may be to pricey. If some area of the market is too pricey is Morningstar suggesting no exposure? That is not clear to me.
Another thing in the article that I thought was strange was the author's implication the VWO is a better choice, if you have to have emerging market exposure, than EEM because the expense ratio is a lot less. For the record VWO's expense ratio is 0.30% (according to the article) and EEM's expense ratio is 0.76% (according to Yahoo Finance). I think of this as forest for the trees analysis. At this point I will note that VWO has an OEF equivalent (VEIEX). Since VWO's inception in March it has lagged EEM by at least 200 basis points (I am eyeballing the chart). For one year EEM looks to have outperformed the OEF equivalent by about 300 basis points. And for two years EEM seems to be ahead by about 1000 basis points. Even if the numbers are off, EEM has clearly outperformed by more than the expense ratio at every normal time interval since its inception.
There was no mention about this at all in the article. I emailed the author about this but I am quite certain I will get no response. If he does reply I will let you know.
The other item was this article about the inclusion of Vanguard ETFs in the model ETF portfolios at several of the big brokerage firms. The way these usually work is that the salesman will put you into any one of three to six cookie cutter portfolios. Often, but not always, there is a lot of duplication and then not much in the way of analysis going forward to implement changes, but at least these products are expensive.
That these woefully flawed products continue to exist and be popular is testament to the fact that people are willing to pay for shortcuts and like being able to blame someone else when something does not work out. Often the fees for this type of thing are 2%. The S+P 500 is up 2.4% so far this year. Lets say, hypothetically it finishes the year up 4.8%. Do you think it would easy to overcome a 200 basis point fee with "the right mix" of index funds? It certainly is possible but this is not the path of the least resistance.
To repeat an oft stated theme of this site, there are many tools out there, make use of more than one.
Read more!
I Don't Think So
One of the themes of this blog is trying to help do-it-yourselfers become a little more knowledgeable about how markets work and to share my process for portfolio construction. This can be as simple or complicated as anyone wants to make it. I try to make the starting points for sector and country weights very simple on this site and more importantly in my practice. The final step, for me, of picking stocks is probably the most complex part of my process but its not cryptic nor is it rocket science.
This brings me to comments from Gary Kaminski, today's guest host on Squawk Box. He went on and on about how to add value you have to be on the road all the time and meet with managements. It was a lengthy "pitch" for whatever it is he does; separate account management mutual fund management or both I imagine.
This is just flat out not the case. Whether you are top down or bottoms up, any implication like Gary's, that a do-it-yourselfer can't pick stocks ticks me off plenty. Anyone out there have an oil stock that is up a lot that they did not visit? I have a few of them. Anyone own Target (TGT)? I have owned it for clients for a long time, its up about 30% in the last year. TGT is hardly complex. How about Intel (not a name I own for clients)? It is up about 30% since its low last fall.
That a do-it-yourselfer might own a couple of oil stocks, TGT and INTC is not really a stretch is it? Stock picking is not easy nor is it for everyone but it is not as difficult as Gary makes it out to be either, not by a long shot. I just hope he did not derail anyone from managing their own money.
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This brings me to comments from Gary Kaminski, today's guest host on Squawk Box. He went on and on about how to add value you have to be on the road all the time and meet with managements. It was a lengthy "pitch" for whatever it is he does; separate account management mutual fund management or both I imagine.
This is just flat out not the case. Whether you are top down or bottoms up, any implication like Gary's, that a do-it-yourselfer can't pick stocks ticks me off plenty. Anyone out there have an oil stock that is up a lot that they did not visit? I have a few of them. Anyone own Target (TGT)? I have owned it for clients for a long time, its up about 30% in the last year. TGT is hardly complex. How about Intel (not a name I own for clients)? It is up about 30% since its low last fall.
That a do-it-yourselfer might own a couple of oil stocks, TGT and INTC is not really a stretch is it? Stock picking is not easy nor is it for everyone but it is not as difficult as Gary makes it out to be either, not by a long shot. I just hope he did not derail anyone from managing their own money.
Read more!
Wednesday, July 27, 2005
Constructive Action
Last night in my interview I made it clear I think we have a good shot at some upward movement in equity prices. I think this is more of a trade higher though, as opposed to something based on fundamentals.
At this point I still have some cash in client accounts although less than I had a couple of weeks ago. I can see adding some more foreign toward the end of the year and I am hoping that tech continues to do well and add some performance. I am still cautious because I do not see why the market can have a sustained run based on fundamentals.
This is just opinion. I will be disciplined to my exit strategies to reduce exposure. This is important. It would be easy to get caught up trying to out think the market.
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At this point I still have some cash in client accounts although less than I had a couple of weeks ago. I can see adding some more foreign toward the end of the year and I am hoping that tech continues to do well and add some performance. I am still cautious because I do not see why the market can have a sustained run based on fundamentals.
This is just opinion. I will be disciplined to my exit strategies to reduce exposure. This is important. It would be easy to get caught up trying to out think the market.
Read more!
Foreign Investing Roundup
Toward the end of European Closing Bell Simon had Richard Fox, director of Sovereign Ratings from Fitch on to talk about Fitch's new rating system. Only five countries get the top rating, US, UK, Netherlands, Luxembourg and Australia. The second group gets the rest of the developed countries plus five emerging markets which are South Africa, Chile, Estonia, Saudi Arabia and Kuwait.
Austria and Iceland are only adequate because of the recent strength in the housing market and banking sector in the former and in currency strength in the latter. Part of this new system is to be on the look out for new bubbles. Hungary is a watch out situation due to some banking issues having to do with too much growth too soon.
This is interesting to me because of what they said about Australia, Chile, Iceland and Hungary. That the changes in the rating system are predicated on trying to save investors from future bubbles seems strange and my guess would be it is abandoned soon.
Changing subjects, US Closing Bell had a good interview with Audrey Kaplan who is one of the managers of the Rochdale Atlas Fund (RIMAX). Ms. Kaplan's three favorite countries are Norway, Brazil and Germany but these were not the heaviest weightings in the fund. Rochdale's web site does a nice job reporting the holdings.
The country breakdown is Austria 7.9%, Belgium 7.6%, Brazil 9.7%, China 7.9%, France 9.7%, Germany 9.5%, Korea 8.9%, Mexico 7.2%, Netherlands 6.9%, Norway 8.3%, Taiwan 5.9% and Thailand 5.2%. I think it is useful to see what other managers are doing. Austria interests me. I personally own iShares Austria (EWO) and I see that one of the fund's largest holdings is Erste Bank which is the largest component of EWO. I view Austria as a hot potato with two things going for it; financing eastern European growth and expansion and it has public pension money steadily streaming into the stock market.
I also took a look at the holdings page for the Rochdale Dividend and Income Fund and I was surprised to see many closed end funds in the fund, I counted seven. I think this stuff is worth checking out.
Read more!
Austria and Iceland are only adequate because of the recent strength in the housing market and banking sector in the former and in currency strength in the latter. Part of this new system is to be on the look out for new bubbles. Hungary is a watch out situation due to some banking issues having to do with too much growth too soon.
This is interesting to me because of what they said about Australia, Chile, Iceland and Hungary. That the changes in the rating system are predicated on trying to save investors from future bubbles seems strange and my guess would be it is abandoned soon.
Changing subjects, US Closing Bell had a good interview with Audrey Kaplan who is one of the managers of the Rochdale Atlas Fund (RIMAX). Ms. Kaplan's three favorite countries are Norway, Brazil and Germany but these were not the heaviest weightings in the fund. Rochdale's web site does a nice job reporting the holdings.
The country breakdown is Austria 7.9%, Belgium 7.6%, Brazil 9.7%, China 7.9%, France 9.7%, Germany 9.5%, Korea 8.9%, Mexico 7.2%, Netherlands 6.9%, Norway 8.3%, Taiwan 5.9% and Thailand 5.2%. I think it is useful to see what other managers are doing. Austria interests me. I personally own iShares Austria (EWO) and I see that one of the fund's largest holdings is Erste Bank which is the largest component of EWO. I view Austria as a hot potato with two things going for it; financing eastern European growth and expansion and it has public pension money steadily streaming into the stock market.
I also took a look at the holdings page for the Rochdale Dividend and Income Fund and I was surprised to see many closed end funds in the fund, I counted seven. I think this stuff is worth checking out.
Read more!
Tuesday, July 26, 2005
Media Appearance
I am scheduled to appear on Asian Market Watch tonight in my usual slot during the first half hour of the show.Here is a bullet pointed list of what I am most interested in right now.
- There is clearly demand for equities these days
- I am encouraged that the yield of the ten year US treasury is up a little bit creating a better chance for the curve to keep a normal slope
- I have been a little more positive about the market over the last few weeks for the intermediate term
- I believe the USD/CNY situation will cause a lot of problems for all US capital markets over the next couple of years but I think the environment for equities looks good, not great, for the next few months
- The earnings season is going as I thought it might. The numbers are just fine with the occasional disaster mixed in. I do not think earnings are the most important thing moving markets
- All of the economic data points continue to confuse the market. Clearly the GDP number on Friday has the potential to move the market, but I think that an equity friendly number may already be priced in, meaning a good number may not lift the market
- Oil continues to trade in what I have been calling a no man's land. I continue to believe oil above $50 is going to stay with us for a while
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Brazilian Real
This chart shows the dollar getting weaker against the Brazilian real over the last year.Bob Pisani touched on this today but missed the bigger story here. CNBC Europe devoted a little more time. David Bloom from HSBC talked about this and the possible implications at length.
He said there is a carry trade starting to get more attention which is to buy Brazilian debt which yields 8.08%. He sees money coming out of Australia and the US, where ten year paper yields 4.23% and 5.2% respectively.
He might be right but it seems to be that Australia and Brazil each draw different types of foreign capital. Brazil is emerging and Oz is not. There very well could be some capital flow to Brazil from Australia and most clients have exposure to Brazilian equities should a move up come at Oz' expense but I have to think there is plenty of demand for highly rated sovereign debt yielding better than 5%.
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Media Stocks
One area of the market I have always avoided has been traditional media stocks. The chart here shows the drop in Reuters today because of its earnings news.This group is too hard to own. One part of this group is the newspaper stocks. There is visibility for the newspaper as we know it to disappear. I don't know the last time I bought a newspaper, I get what I need from the internet.
I don't have any data but I would not be surprised if magazine sales were less than they were a few years ago. At a minimum growth must be slower? At least that is my perception and so I avoid the group.
Reuters is sort of in this group providing news and financial information. I do not know the story but CNBC Europe has talked a lot today about a long run of revenue and earnings problems. Without knowing the story I think you can just apply a sniff test to this type of company to know it might have trouble delivering great growth.
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Advisors Using ETFs
Fund Action
I had never looked at the advisors stories section on the iShares site until I found the above article. Yesterday I looked at most of the stories and felt encouraged about the plight of the do-it-yourself that relies on ETFs. As I read the way in which these advisors rely on ETFs I had the feeling that what they are doing is very simplistic, easily done on your own and I doubt would be worth the 1.25%-1.5% that most managers charge clients.
With the proliferation of ETF coverage and portfolios like Tim Middleton's free on the internet I think the role of an ETF advisor make more sense as a consultant charging 40 or 50 basis points or paying a few hundred dollars for a timing service instead.
One of the profiles I read was a firm that uses ETFs like I do, sort of. The one firm also buys stocks, uses CEFs and other products. For anyone that is new to this site, as much as I like ETFs they have one serious flaw which is usually a lack of dividends. There are only a handful that yield above 3%. If the experts that think we will have flat equity returns for the next decade are correct, dividends will be very important. Dividends are better captured with individual stocks and CEFs. Another lesser flaw of an all ETF is the limits on constructing portfolios. One component of what I do is manage how much beta there is in the portfolio. I think there are times where it makes sense to have more or less beta than the overall market, not too revolutionary. I'm not sure how I could do this with just ETFs other than adding or reducing tech which is not really what I have in mind.
I really am surprised that there is not more attention devoted to utilizing multiple tools. For example if you want exposure to Switzerland wouldn't it make sense to look at the ETF, CEF and some of the common stocks to figure out what your best option is, as opposed to saying "oh I want Switzerland so I'll buy the ETF." I can't be the only one that sees this.
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I had never looked at the advisors stories section on the iShares site until I found the above article. Yesterday I looked at most of the stories and felt encouraged about the plight of the do-it-yourself that relies on ETFs. As I read the way in which these advisors rely on ETFs I had the feeling that what they are doing is very simplistic, easily done on your own and I doubt would be worth the 1.25%-1.5% that most managers charge clients.
With the proliferation of ETF coverage and portfolios like Tim Middleton's free on the internet I think the role of an ETF advisor make more sense as a consultant charging 40 or 50 basis points or paying a few hundred dollars for a timing service instead.
One of the profiles I read was a firm that uses ETFs like I do, sort of. The one firm also buys stocks, uses CEFs and other products. For anyone that is new to this site, as much as I like ETFs they have one serious flaw which is usually a lack of dividends. There are only a handful that yield above 3%. If the experts that think we will have flat equity returns for the next decade are correct, dividends will be very important. Dividends are better captured with individual stocks and CEFs. Another lesser flaw of an all ETF is the limits on constructing portfolios. One component of what I do is manage how much beta there is in the portfolio. I think there are times where it makes sense to have more or less beta than the overall market, not too revolutionary. I'm not sure how I could do this with just ETFs other than adding or reducing tech which is not really what I have in mind.
I really am surprised that there is not more attention devoted to utilizing multiple tools. For example if you want exposure to Switzerland wouldn't it make sense to look at the ETF, CEF and some of the common stocks to figure out what your best option is, as opposed to saying "oh I want Switzerland so I'll buy the ETF." I can't be the only one that sees this.
Read more!
Monday, July 25, 2005
A Reader Question About The Dollar
A reader left the following question about how to manage equities around the current dollar situation.
So the guess is a decline in the dollar in the next months and years? Of course with the realization that currency speculators along with China's desire to make them pay and maybe profit from them along with other events means that it won't be straightforward. So let's say one is going with this guess and is also guessing that at some point this is going to impact the US stock market. Is it a reasonable risk to hold cash with the expectation that many foreign stock markets will echo the (hypothesized) US fall? Then buy into these markets.
The question looks at this issue from several angles. The first one is easy for me to address; yes I expect the dollar will start to get weaker and debt yields would move higher everything else being equal. To the second paragraph I expect that if I am right it would start to happen slowly over a period of months or maybe longer. I would not think that levels reached from a knee jerk reaction will stick.
Is it a reasonable risk to hold cash? This one is much tougher. The short answer is that I think an extreme cash position in not the best path. Right now the US equity market seems to be doing well. Who's to say that doesn't continue for another year? There are plenty of easily accessible, foreign equity markets doing even better.
I am not looking for some sort of crash but more of a US getting left behind scenario. If that turns out to be right we would see a lot of what's wrong with the Dow type of TV coverage. This would likely mean that foreign markets would not have to fall in sympathy (in fact the Australian market went up during the darkest years of the US tech bubble aftermath).
Of course this could turn in to a real calamity. If so back to one of my original portfolio construction tenets which is to have a couple counter strategy holdings like gold and/or an inverse index fund. Beyond that I have written many times about have a clear and simple exit strategy that you can be faithful to when things go badly, for me that is the SPX going under its 200 DMA. Regardless of the reason it happens I begin to get defensive when that happens. I don't think it would makes sense to try to guess that the market is going to go down and raise a lot of cash now. The line of thinking is that no matter what anyone thinks the market is fine right now. If, over the next 12 months, that market has a twice a decade up 25% run and I am 50% or more in cash I will have hurt my clients and should expect them to fire me.
Most people can handle down a little. If that happens and then I take defensive action because of a breach of the 200 DMA I am actually taking less risk for the client, at least that is how I look at it.
Bigger picture I believe in listening to the message of the market. While I see visibility for scary things the market does not seem to be communicating this yet. Hope that helps.
Read more!
So the guess is a decline in the dollar in the next months and years? Of course with the realization that currency speculators along with China's desire to make them pay and maybe profit from them along with other events means that it won't be straightforward. So let's say one is going with this guess and is also guessing that at some point this is going to impact the US stock market. Is it a reasonable risk to hold cash with the expectation that many foreign stock markets will echo the (hypothesized) US fall? Then buy into these markets.
The question looks at this issue from several angles. The first one is easy for me to address; yes I expect the dollar will start to get weaker and debt yields would move higher everything else being equal. To the second paragraph I expect that if I am right it would start to happen slowly over a period of months or maybe longer. I would not think that levels reached from a knee jerk reaction will stick.
Is it a reasonable risk to hold cash? This one is much tougher. The short answer is that I think an extreme cash position in not the best path. Right now the US equity market seems to be doing well. Who's to say that doesn't continue for another year? There are plenty of easily accessible, foreign equity markets doing even better.
I am not looking for some sort of crash but more of a US getting left behind scenario. If that turns out to be right we would see a lot of what's wrong with the Dow type of TV coverage. This would likely mean that foreign markets would not have to fall in sympathy (in fact the Australian market went up during the darkest years of the US tech bubble aftermath).
Of course this could turn in to a real calamity. If so back to one of my original portfolio construction tenets which is to have a couple counter strategy holdings like gold and/or an inverse index fund. Beyond that I have written many times about have a clear and simple exit strategy that you can be faithful to when things go badly, for me that is the SPX going under its 200 DMA. Regardless of the reason it happens I begin to get defensive when that happens. I don't think it would makes sense to try to guess that the market is going to go down and raise a lot of cash now. The line of thinking is that no matter what anyone thinks the market is fine right now. If, over the next 12 months, that market has a twice a decade up 25% run and I am 50% or more in cash I will have hurt my clients and should expect them to fire me.
Most people can handle down a little. If that happens and then I take defensive action because of a breach of the 200 DMA I am actually taking less risk for the client, at least that is how I look at it.
Bigger picture I believe in listening to the message of the market. While I see visibility for scary things the market does not seem to be communicating this yet. Hope that helps.
Read more!
Hussman Funds - Weekly Market Comment: July 25, 2005 - China Revalues
Hussman Funds - Weekly Market Comment: July 25, 2005 - China Revalues
In his weekly commentary, John Hussman takes a similar view of the USD/CNY situation as I do. He goes into much more detail if you want a good read.
Read more!
In his weekly commentary, John Hussman takes a similar view of the USD/CNY situation as I do. He goes into much more detail if you want a good read.
Read more!
Monday
Nicole Elliott noted in her weekly commentary that she thought the action last week in the US dollar vs the yen, Aussie and Kiwi signify that the strength in the dollar that has occurred in the last couple of months is now over.
In a big picture sense I agree but in trying to figure out the short term look I have to say I'm not sure I have a feel for the next few weeks. My ideas about demand for US dollars, and by extension US debt, are longer term.
We have something new with the yuan and the market may take some time to figure out what this means and a little bit of volatility is likely to be part of the learning process.
I have written more than a few times the market fears the unknown. We are facing something new with the USD/CNY cross rate. I think I have some visibility to what might happen with higher rates and weaker currency but for now we have to wait and see.
Read more!
In a big picture sense I agree but in trying to figure out the short term look I have to say I'm not sure I have a feel for the next few weeks. My ideas about demand for US dollars, and by extension US debt, are longer term.
We have something new with the yuan and the market may take some time to figure out what this means and a little bit of volatility is likely to be part of the learning process.
I have written more than a few times the market fears the unknown. We are facing something new with the USD/CNY cross rate. I think I have some visibility to what might happen with higher rates and weaker currency but for now we have to wait and see.
Read more!
Sunday, July 24, 2005
Is There An Analogy Here?
Thor Hushovd became the first Norwegian cyclist to ever win the green jersey, sprinter's competition, at the Tour de France. This is a big deal for Norway in the cycling world. Few people think about Norway as country of great cyclists.Few people think about Norway as an investment destination either. Of the people that write about foreign investing, many mention Australia (me included). I have written a few times about Norway here and mentioned it other places too. I think that as oil continues to be an important theme, Norway will become a more important investment destination.
The reason for this old photo is that it is more interesting than the only one of him I could find from today.
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The Big Picture For The Week of July 24, 2005
The markets have been getting more and more interesting lately which is why I spend so much of my time studying and trying to decipher what it all means.
Right before earnings season started I said in an interview that, like the first quarter, I did not think that earnings would be the most important thing moving the market. Not unimportant just not the most important. Earnings help assess the health of a company to be sure but we have so many other things going on that are capable of driving the bus shorter term.
Recently I added some tech exposure for clients. I had a severe underweight in the sector, some cash built up and was liking the action in the yield curve (getting a little steeper). I am still underweight the group but not as much and I lucked out with a decent entry point.
Then the revaluation news came from China. Most clients have owned one Chinese stock for a long time. I may add more exposure but I have not figured out how I will do that just yet. I'm not sure what, if any, further reaction will come from the revaluation over the next couple of months but I do have real long term concerns, as I have written about before. If you don't do much foreign investing this might be the bell ringing telling you to learn more about it and get going.
One byproduct of the revaluation is that, according to Barron's, Malaysia has now dumped its currency peg between its ringgit and the US dollar. While there is not much economic consequence this is symbolic that the US dollar is now a less important currency.
On a different note I got to meet Gregg Greenberg who writes about mutual funds and ETFs for the Street.com. He's a very nice guy and he's quite funny. I don't expect that anything will come of it but it was neat to see the office and meet him. He seemed particularly curious about something I said about having finished the quarter with 10%-15% in cash in client accounts. He kind of joked that I had too much cash. I think this speaks to a philosophical difference between me a lot of other people he speaks to and I think this is important for people that manage their own money. You don't have to be 100% invested if you have some short term concerns. I feel no need to manage for my legacy. Many managers do. If your gut tells you that risks are heightened it is ok to have more cash built up. If you turn out to be right, great. But if you turn out to be wrong, learn from your mistake. If you can keep up with the market with your entire portfolio but always maintain 10%-20% cash I would say that is ideal, don't all managers say they try to beat the market with less risk?
Recently a reader forwarded an article about several US companies that are setting up new facilities in Ireland. I have been writing about Ireland on this site since last fall as being an important economic destination. This is only going to become more commonplace which I think will continue to make Ireland an important investment destination. I have no link for the article because the reader copied it from Reuters and emailed it from the brokerage firm he works at.
Lastly a word about terrorism. A few weeks I wrote that terrorism was back on the table in a piece that was to serve as a prep for a CNBC Asia interview. I suggested that capital markets are not afraid of single strike non-nuclear attacks. While I don't think that analysis was particularly insightful it is proving out to be true. The market only fears the unknown. This is crucial to remember.
Read more!
Right before earnings season started I said in an interview that, like the first quarter, I did not think that earnings would be the most important thing moving the market. Not unimportant just not the most important. Earnings help assess the health of a company to be sure but we have so many other things going on that are capable of driving the bus shorter term.
Recently I added some tech exposure for clients. I had a severe underweight in the sector, some cash built up and was liking the action in the yield curve (getting a little steeper). I am still underweight the group but not as much and I lucked out with a decent entry point.
Then the revaluation news came from China. Most clients have owned one Chinese stock for a long time. I may add more exposure but I have not figured out how I will do that just yet. I'm not sure what, if any, further reaction will come from the revaluation over the next couple of months but I do have real long term concerns, as I have written about before. If you don't do much foreign investing this might be the bell ringing telling you to learn more about it and get going.
One byproduct of the revaluation is that, according to Barron's, Malaysia has now dumped its currency peg between its ringgit and the US dollar. While there is not much economic consequence this is symbolic that the US dollar is now a less important currency.
On a different note I got to meet Gregg Greenberg who writes about mutual funds and ETFs for the Street.com. He's a very nice guy and he's quite funny. I don't expect that anything will come of it but it was neat to see the office and meet him. He seemed particularly curious about something I said about having finished the quarter with 10%-15% in cash in client accounts. He kind of joked that I had too much cash. I think this speaks to a philosophical difference between me a lot of other people he speaks to and I think this is important for people that manage their own money. You don't have to be 100% invested if you have some short term concerns. I feel no need to manage for my legacy. Many managers do. If your gut tells you that risks are heightened it is ok to have more cash built up. If you turn out to be right, great. But if you turn out to be wrong, learn from your mistake. If you can keep up with the market with your entire portfolio but always maintain 10%-20% cash I would say that is ideal, don't all managers say they try to beat the market with less risk?
Recently a reader forwarded an article about several US companies that are setting up new facilities in Ireland. I have been writing about Ireland on this site since last fall as being an important economic destination. This is only going to become more commonplace which I think will continue to make Ireland an important investment destination. I have no link for the article because the reader copied it from Reuters and emailed it from the brokerage firm he works at.
Lastly a word about terrorism. A few weeks I wrote that terrorism was back on the table in a piece that was to serve as a prep for a CNBC Asia interview. I suggested that capital markets are not afraid of single strike non-nuclear attacks. While I don't think that analysis was particularly insightful it is proving out to be true. The market only fears the unknown. This is crucial to remember.
Read more!
Saturday, July 23, 2005
Back In The Saddle
I am back from my very fast trip to NYC. I had a great time at the Fox News Studio. If you saw the segment, the reason for my stupidly big grin during the segment is that (show host) David Asman said something very funny without realizing it and we were all in hysterics.
I also met John Rutledge. He did a couple of other segments on the show. He was very friendly.
When I got back to the apartment where I stayed I saw him doing a segment on CNBC right after having shot the Forbes show. Wow.
I don't really know how some of the guys that make the rounds to so many media appearances do that and do their primary jobs. Perhaps if you have enough people working for you to keep you informed. For now I am my own staff:-)
I had a heck of a time trying to get the story with yuan that broke while I was traveling. According to the blogger archive, the first time I wrote about yuan valuation was on May 7. I have been concerned about this from the start. There is now less demand for US dollar and US debt, I have never been worried about any country selling the US debt they already have though. But future demand is now less than it was.
I don't think it will change a lot short term, but I think it will have a negative impact in the intermediate and longer term. We'll see and I'll write more about it after I have had a little more sleep (I got home at 1 am last night and had to give some attention to our dogs before I could go to sleep).
Read more!
I also met John Rutledge. He did a couple of other segments on the show. He was very friendly.
When I got back to the apartment where I stayed I saw him doing a segment on CNBC right after having shot the Forbes show. Wow.
I don't really know how some of the guys that make the rounds to so many media appearances do that and do their primary jobs. Perhaps if you have enough people working for you to keep you informed. For now I am my own staff:-)
I had a heck of a time trying to get the story with yuan that broke while I was traveling. According to the blogger archive, the first time I wrote about yuan valuation was on May 7. I have been concerned about this from the start. There is now less demand for US dollar and US debt, I have never been worried about any country selling the US debt they already have though. But future demand is now less than it was.
I don't think it will change a lot short term, but I think it will have a negative impact in the intermediate and longer term. We'll see and I'll write more about it after I have had a little more sleep (I got home at 1 am last night and had to give some attention to our dogs before I could go to sleep).
Read more!
Wednesday, July 20, 2005
Media Appearance
I am scheduled to appear on Forbes on Fox this Saturday in the Makers & Breakers segment. If the show gets preempted for a news event the show will repeat overnight Sunday-Monday. The two stock picks will tie into two of the bigger themes I currently have in client portfolios.I am flying all day Thursday and coming back late Friday night. I don't expect to be blogging while I'm away and I don't know about responding to emails either but I'll be back in the saddle on Saturday.
My wife, Joellyn is not coming this time so my biggest dilemma is what to bring back for her. She said something from Zabar's would nice. Oh yeah, this is going to go well.
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A Kinder Gentler Greenspan Effect
Greenspan speaks and the market goes from down a little to up a little less. Whether it is by Greenspan's design or just that the market has become more efficient the market has had little to fear from his visits to capitol hill.
Hopefully all of the folks that know they are on the short list to replace him are taking notes.
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Hopefully all of the folks that know they are on the short list to replace him are taking notes.
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Nasty To The Bitter End
Barney Frank, US Representative for the town in Massachusetts where I grew up, started his questioning by landing a shot about Greenspan not having the time to answer Chairman Oxley's question about the Laffer curve.
What a miserable son of a gun. But he has made watching these hearings very entertaining for the last umpteen years.
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What a miserable son of a gun. But he has made watching these hearings very entertaining for the last umpteen years.
Read more!
Problematic Stock Picking
Barron's Online Exclusives posted an interview (subscription required) on Tuesday with Robert Zagunis who manages the Jensen Fund (JENSX). Despite having lagged the S+P 500 in 2003, 2004 and so far in 2005 the fund has a 5 Star rating from Morningstar.
The interview delved a little into how the fund has a long term outlook, that the managers expect to hold stocks for ten years and that a lot of their work is focused on ROE and "picking stocks that will outperform in the long term."
The top ten holdings per the Barron's piece are:
SYK* KRB OMC GE EFX PDCO EMR PG ABT MHP
*client holding
According to Yahoo Finance the top ten account for 47% of the fund although that was as of March 31 and there is one change in the top ten since then. According to both Yahoo Finance and Morningstar the fund has zero in energy and utilities. Um, haven't those two sectors been the top two sectors in the S+P for a while?
This speaks to why I am not a fan of bottoms up portfolio construction. This is from the standpoint of seeing the forest for the trees. There have been clear and obvious positives for energy and utilities for a while now. While I don't know what the screening criteria are for JENSX I think it is safe to think that no names from these two sectors made the cut.
I think if the manager had just picked his head up away from his computer screen he might have seen that oil and gas prices have gone up a lot and energy stocks might benefit.
Lest anyone thing this is an argument for indexing it is not. In top down stock picks come last in the process. Once you know you want to be overweight energy you then start to look for what to own. If you get the sector right you have less riding on what stocks you pick. Value is added by picking better performers but the effect can be captured with most of the names in that sector. Compare that with trying make money in the semiconductor group in 2004. Doable, but much more difficult.
Number crunching and screening as a first step, as opposed to a last step, often (not always to be clear) leads to missing big themes in the market.
Read more!
The interview delved a little into how the fund has a long term outlook, that the managers expect to hold stocks for ten years and that a lot of their work is focused on ROE and "picking stocks that will outperform in the long term."
The top ten holdings per the Barron's piece are:
SYK* KRB OMC GE EFX PDCO EMR PG ABT MHP
*client holding
According to Yahoo Finance the top ten account for 47% of the fund although that was as of March 31 and there is one change in the top ten since then. According to both Yahoo Finance and Morningstar the fund has zero in energy and utilities. Um, haven't those two sectors been the top two sectors in the S+P for a while?
This speaks to why I am not a fan of bottoms up portfolio construction. This is from the standpoint of seeing the forest for the trees. There have been clear and obvious positives for energy and utilities for a while now. While I don't know what the screening criteria are for JENSX I think it is safe to think that no names from these two sectors made the cut.
I think if the manager had just picked his head up away from his computer screen he might have seen that oil and gas prices have gone up a lot and energy stocks might benefit.
Lest anyone thing this is an argument for indexing it is not. In top down stock picks come last in the process. Once you know you want to be overweight energy you then start to look for what to own. If you get the sector right you have less riding on what stocks you pick. Value is added by picking better performers but the effect can be captured with most of the names in that sector. Compare that with trying make money in the semiconductor group in 2004. Doable, but much more difficult.
Number crunching and screening as a first step, as opposed to a last step, often (not always to be clear) leads to missing big themes in the market.
Read more!
Tuesday, July 19, 2005
Michael Metz is Bullish
Last week Michael Metz switched to being bullish from bearish, or was it the week before?
Last week, the technician from Metz' firm, Carter Worth, was on Closing Bell and Maria brought up Metz's switch. What is Worth, or anyone, supposed to say? Metz was so wrong for so long why would his now being bullish matter to anyone?
I think I first saw Metz in the mid 1990's. He was bearish back then, straight through to the recent switch. At least I believe this was the case. He was a regular back then, like now, but then disappeared for years. I have to think that if he had been bullish he would have been on more.
This episode can be constructive for anyone who manages money or handles their own portfolios. Repeat coming, the market has an up year 72% of the time. You probably want to be close to fully invested, with long term money, most of the time. I have been somewhat negative for a long time but have been 90% invested because the market had not violated any of my get defensive thresholds. I was wrong about my sentiment but that did not hurt my clients' returns. Everyone has opinions but for me being faithful to what the market is saying is more important.
Read more!
Last week, the technician from Metz' firm, Carter Worth, was on Closing Bell and Maria brought up Metz's switch. What is Worth, or anyone, supposed to say? Metz was so wrong for so long why would his now being bullish matter to anyone?
I think I first saw Metz in the mid 1990's. He was bearish back then, straight through to the recent switch. At least I believe this was the case. He was a regular back then, like now, but then disappeared for years. I have to think that if he had been bullish he would have been on more.
This episode can be constructive for anyone who manages money or handles their own portfolios. Repeat coming, the market has an up year 72% of the time. You probably want to be close to fully invested, with long term money, most of the time. I have been somewhat negative for a long time but have been 90% invested because the market had not violated any of my get defensive thresholds. I was wrong about my sentiment but that did not hurt my clients' returns. Everyone has opinions but for me being faithful to what the market is saying is more important.
Read more!
What About This One?
This chart shows a high correlation between the Australian dollar and the Norwegian krone, where the US dollar is concerned.Since both are commodity currencies the chart should not be a total surprise.
One thing I wonder about is that with the increased awareness of commodity stocks by US investors but the relative lack of attention Norway gets, compared to Australia, if there might not be some sort of catchup in Norway to Oz. What I mean is that if awareness of Norway as an investment destination increases it could be a possible catalyst for the OBX, Norway's benchmark index.
I would not expect much from this for now. It is possible I am the only one that writes Norway in this manner. I looked on Technorati and didn't find much. If you know of any other blogs that mention Norway I'd love to hear about them.
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Is There Something Here?
This chart shows the strength of the FTSE 100 (which is the UK benchmark index) and the weakness of the British pound vs the US dollar. For a lot of the past two years there has almost been an inverse relationship. Hmmm.Of course with this last divergence since May 5th US investors have not made much in dollar terms.
Most clients own two or three UK companies. The FTSE and the S+P 500 seem, to me, to have a high correlation. So I don't own UK stocks looking for true diversification but do own them because I think some of the companies are great investments.
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We May Not Be Ready For This
Morningstar.com - Attention Schwab Shoppers: Five Funds to Dump
You may need a subscription to access this article. One of the funds mentioned is the Marketocracy Masters 100 (MOFQX). The author was very blunt in saying why this is a bad fund. Marketocracy is a web site that lets anyone have up to ten paper portfolios. Marketocracy has the one mutual fund and I believe they would like to have others based on the ability of its members to construct portfolios.
Morningstar rips on this fund as having too much expense due to a lot of turnover and Morningstar contends that the amateur managers are not as good as professionals.
Comparing the fund to SPY and IWM bears out what Morningstar says. Some how the fund was down what looks to be 20% in 2004. That kind of lag is very substantial.
Personally I like the concept and I have to admit I am surprised that the fund has done so badly. I may have it upside down but I think the people that apply themselves and can spend the time should be able to get returns reasonably close to what the market is doing. Keep in mind I am saying people that have the time and I am saying keeping close to the market not putting up Bill Miller numbers.
So maybe the world isn't quite ready for this type of fund. More seriously, I guess keeping close to the market is not as easy as I might think.
Read more!
You may need a subscription to access this article. One of the funds mentioned is the Marketocracy Masters 100 (MOFQX). The author was very blunt in saying why this is a bad fund. Marketocracy is a web site that lets anyone have up to ten paper portfolios. Marketocracy has the one mutual fund and I believe they would like to have others based on the ability of its members to construct portfolios.
Morningstar rips on this fund as having too much expense due to a lot of turnover and Morningstar contends that the amateur managers are not as good as professionals.
Comparing the fund to SPY and IWM bears out what Morningstar says. Some how the fund was down what looks to be 20% in 2004. That kind of lag is very substantial.
Personally I like the concept and I have to admit I am surprised that the fund has done so badly. I may have it upside down but I think the people that apply themselves and can spend the time should be able to get returns reasonably close to what the market is doing. Keep in mind I am saying people that have the time and I am saying keeping close to the market not putting up Bill Miller numbers.
So maybe the world isn't quite ready for this type of fund. More seriously, I guess keeping close to the market is not as easy as I might think.
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Asia Market Watch
I left the office yesterday feeling very crappy. I got home and my wife told me that CNBC Asia had called a few minutes earlier asking if I could do an interview. I took a quick nap before the interview and then talked about being fairly positive about the market for the next few months.I think the steepening of the yield curve, if it sticks, will be a plus as it means an yield curve inversion is unlikely. This is more of a short term call than anything else. Last week I added a little bit of tech in client accounts.
I was asked about earnings. I have not thought that earnings would be the most important thing for the market right now. Yesterday was a good example of what I mean. Citigroup's number was not so hot and the market went down a little. IBM had a good number and the market is up a little. I would expect more one good number one bad number without much net effect on the market.
The thing I did not get to mention in the interview was that I think, similar to late last year, there may be a lot of managers that need to catch up after a bad first half of the year. If that is correct it would be a positive catalyst.
After the interview I slept for about 12 hours and feel much better.
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Monday, July 18, 2005
Using ETFs to boost portfolio income
ETF Investing: Using ETFs to boost portfolio income - Financial - Financial Services - Markets/Exchanges - Mutual Funds - Market News
I thought this might be an interesting article, maybe offer something new? No. It was the same tired rehash that dividends are popular and that there have been several ETFs created to offer investors better yields. I don't know how many readers of John Spence's columns are new but I am thinking the vast majority of his readers can handle a little more meat on the bone.
How about something that explores selling call options on the ETFs he mentioned? The iShares Cohen & Steers Realty Fund (ICF) yields 3.69%. There are not too many out of the money strike prices for some reason but a Sept call struck at $76 was bid earlier today at $0.95. If you own 800 shares and sell call options on just 200 shares you would bring in $180 after commission. The options in question expire in two months. So if you could bring in $180 six times a year you would be netting an extra 1.8% on top of the 3.69% yield of the fund with just a quarter of the position covered. If the fund goes to $85 you would still get most of the benefit.
Or you could do a similar strategy with DVY. A December 65 call, the highest strike for now, was bid at $1.00 earlier today. Using similar numbers a holder of 800 shares could sell two options like this twice a year and net an extra $370 per year which works out to an extra 73 basis points.
Both examples make big assumptions about what you could do in future months as far as selling new options, but these are just examples.
These are not recommendations and I don't plan to do either of these trades but hopefully the process in this post can get you thinking a little bit about things that don't get a lot of attention on too many mainstream stock market sites.
For disclosure DVY is a personal holding and a couple of clients own it too.
Read more!
I thought this might be an interesting article, maybe offer something new? No. It was the same tired rehash that dividends are popular and that there have been several ETFs created to offer investors better yields. I don't know how many readers of John Spence's columns are new but I am thinking the vast majority of his readers can handle a little more meat on the bone.
How about something that explores selling call options on the ETFs he mentioned? The iShares Cohen & Steers Realty Fund (ICF) yields 3.69%. There are not too many out of the money strike prices for some reason but a Sept call struck at $76 was bid earlier today at $0.95. If you own 800 shares and sell call options on just 200 shares you would bring in $180 after commission. The options in question expire in two months. So if you could bring in $180 six times a year you would be netting an extra 1.8% on top of the 3.69% yield of the fund with just a quarter of the position covered. If the fund goes to $85 you would still get most of the benefit.
Or you could do a similar strategy with DVY. A December 65 call, the highest strike for now, was bid at $1.00 earlier today. Using similar numbers a holder of 800 shares could sell two options like this twice a year and net an extra $370 per year which works out to an extra 73 basis points.
Both examples make big assumptions about what you could do in future months as far as selling new options, but these are just examples.
These are not recommendations and I don't plan to do either of these trades but hopefully the process in this post can get you thinking a little bit about things that don't get a lot of attention on too many mainstream stock market sites.
For disclosure DVY is a personal holding and a couple of clients own it too.
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Horn O' Plenty
Jim Rogers was the guest host of Asian Squawk Box on Monday Morning (Sunday night US time) and he let loose with a cornucopia of his thoughts about current investing events and how he his investing around these events.
He is convinced that the current debasing of the US dollar will result in the dollar being essentially worthless in his daughter's lifetime. He said the US has $8 trillion in debt and that we are on pace to add another $1 trillion in debt every 20 months. He said to "do the math, that is serious money."
He also thinks the euro will not be around 15 years from now but he does own some euros because he thinks they are better than US dollars.
He feels that the commodity bull market has another ten or 15 years left because that's how markets work. Mega bull (my word not his) cycles last for 15-20 years at the expense of other asset classes. Meaning that while commodities do well stocks will trade around but not keep gains, as was the case from 1968-1982 for equities and 1982-2000 (roughly) for commodities.
He says that commodity based currencies will do better through this commodity bull market which seems obvious but is worth noting. I believe that by extension a strong commodity currencies creates a nice tailwind for equities of those countries. New readers can check the archives to see that I have been writing about having exposure to commodity based economies from the very beginning of this blog.
Jim feels that the Singapore dollar is the soundest currency in the world based on government policy. He also has exposure to the Swiss franc Canadian dollar, the Aussie, the NZ dollar and the yuan. He does not own the South African rand because he is suspicious of the folks running that country but he expects the rand to be an outperformer before too long.
Interesting to me was that the Norwegian Krone did not come up in the conversation because he says he owns oil and oil stocks. Speaking of oil he said that if the US blocks CEO/UCL deal there would be a disastrous trade war that would hurt everyone badly. He believes oil is going higher which will also benefit coal.
He said the yuan will be convertible at some point in the next few years and while he does not know when it will happen he will buy more yuan at that time but would not be surprised if the initial reaction was for the yuan to drop.
He further expects US equity markets to have a very bad 2006 and though he is net long now he expects to be net short US equities in advance of 2006.
In Jim's last segment he said he has a lot of exposure to Australia but he did not quantify a lot. He does have some concerns about their government spending however.
So is he right about all of this? I don't know but there is visibility for all of the scenarios he lays out. I tend to discount the probability of very extreme outcomes, but I could be wrong. Long time readers will notice that I have covered some of the same things Mr. Rogers is concerned about.
What made the show so useful was that Jim was on for the entire three hour show being interviewed two times every 30 minutes for six or seven minutes at a time. This gave time to delve into the way he thinks about everything. This was far better than anything he does on US television. This is why I devote time to watching CNBC World and why I am thankful for all the times that CNBC Asia books me on as a guest.
My take about the US dollar and economy is not that it becomes worthless but that it might lose its role as world reserve currency causing less demand for US denominated assets resulting in higher interest rates and slower domestic growth rates. This may make the average annual 10% stock market return come down to 5%-6%. If any of this happens it will be to the commodity based economies benefit which means it will become more important for US investors to have exposure to places like Australia, Canada and some resource rich emerging markets too.
Being in touch with long term themes is very important to the way I manage money.
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He is convinced that the current debasing of the US dollar will result in the dollar being essentially worthless in his daughter's lifetime. He said the US has $8 trillion in debt and that we are on pace to add another $1 trillion in debt every 20 months. He said to "do the math, that is serious money."
He also thinks the euro will not be around 15 years from now but he does own some euros because he thinks they are better than US dollars.
He feels that the commodity bull market has another ten or 15 years left because that's how markets work. Mega bull (my word not his) cycles last for 15-20 years at the expense of other asset classes. Meaning that while commodities do well stocks will trade around but not keep gains, as was the case from 1968-1982 for equities and 1982-2000 (roughly) for commodities.
He says that commodity based currencies will do better through this commodity bull market which seems obvious but is worth noting. I believe that by extension a strong commodity currencies creates a nice tailwind for equities of those countries. New readers can check the archives to see that I have been writing about having exposure to commodity based economies from the very beginning of this blog.
Jim feels that the Singapore dollar is the soundest currency in the world based on government policy. He also has exposure to the Swiss franc Canadian dollar, the Aussie, the NZ dollar and the yuan. He does not own the South African rand because he is suspicious of the folks running that country but he expects the rand to be an outperformer before too long.
Interesting to me was that the Norwegian Krone did not come up in the conversation because he says he owns oil and oil stocks. Speaking of oil he said that if the US blocks CEO/UCL deal there would be a disastrous trade war that would hurt everyone badly. He believes oil is going higher which will also benefit coal.
He said the yuan will be convertible at some point in the next few years and while he does not know when it will happen he will buy more yuan at that time but would not be surprised if the initial reaction was for the yuan to drop.
He further expects US equity markets to have a very bad 2006 and though he is net long now he expects to be net short US equities in advance of 2006.
In Jim's last segment he said he has a lot of exposure to Australia but he did not quantify a lot. He does have some concerns about their government spending however.
So is he right about all of this? I don't know but there is visibility for all of the scenarios he lays out. I tend to discount the probability of very extreme outcomes, but I could be wrong. Long time readers will notice that I have covered some of the same things Mr. Rogers is concerned about.
What made the show so useful was that Jim was on for the entire three hour show being interviewed two times every 30 minutes for six or seven minutes at a time. This gave time to delve into the way he thinks about everything. This was far better than anything he does on US television. This is why I devote time to watching CNBC World and why I am thankful for all the times that CNBC Asia books me on as a guest.
My take about the US dollar and economy is not that it becomes worthless but that it might lose its role as world reserve currency causing less demand for US denominated assets resulting in higher interest rates and slower domestic growth rates. This may make the average annual 10% stock market return come down to 5%-6%. If any of this happens it will be to the commodity based economies benefit which means it will become more important for US investors to have exposure to places like Australia, Canada and some resource rich emerging markets too.
Being in touch with long term themes is very important to the way I manage money.
Read more!
Sunday, July 17, 2005
The Big Picture For The Week of July 17, 2005
I had a good question emailed to me that I thought would make for a good post for several reasons.
i invest primarily through mutual funds and ETFs. I don't have the time to research individual stocks -- nor the stomach to watch them tank (which they have done occasionally). you must have some opinions on the various mutual fund managers out there. specifically, i'm interested in knowing about the ones you think are really good. would be great to see a blog on which managers you like and the names of their funds . . .
I don't think the emailer will like my answer very much, but here it goes. I don't really use OEFs in my practice (inverse index funds are an exception but they are index funds). I manage one account that is a 401k that I inherited with two OEFs in it. A few thousand comes into that account every month and occasionally I add to the OEFs there, but I don't do that often.
I believe that the way OEFs are structured makes them less than ideal as a product choice. There are managers that consistently beat their benchmark and you can go to Morningstar and screen for five star funds for more information. Since I don't really think they are the best possible choice I don't spend time researching different OEFs to render any picks.
I do read interviews to learn process and I have referred to John Hussman several times on this blog and link to him from this page as well. Still I have no plans to buy his fund for anybody.
The emailer says that he is not comfortable with individual stocks and so he uses mostly ETFs and OEFs. Clearly a portfolio of individual stocks is not right for everyone. There are several reasons for this including portfolio size, tolerance for volatility and (as the reader points out) time spent monitoring the stocks.
Most clients have around 40 stocks in their accounts. 40 is probably too many to monitor for most folks. Also keep in mind that if you own Caterpillar (as my clients do) it might make sense to watch Deere & Co too, as an example. I have about 230 names on MyYahoo page. I also regularly watch 25 or 30 world stock markets. The time issue is spot on.
Portfolio size and volatility tolerance kind of blend together for me. If a stock with a 2% weight in your account cuts in half on an up day you might not even notice, but you are not going to put $1200 into 40 different stocks either.
Building your own portfolio can be as simple or as complicated as you want to make it. I think that the more work you put in the better results you will have. For people that do not want to make portfolio management a full time job but want to own more than just SPY, I think a reasonably diversified portfolio, with limited individual stock exposure, can be put together with just a few holdings:
Equity
i invest primarily through mutual funds and ETFs. I don't have the time to research individual stocks -- nor the stomach to watch them tank (which they have done occasionally). you must have some opinions on the various mutual fund managers out there. specifically, i'm interested in knowing about the ones you think are really good. would be great to see a blog on which managers you like and the names of their funds . . .
I don't think the emailer will like my answer very much, but here it goes. I don't really use OEFs in my practice (inverse index funds are an exception but they are index funds). I manage one account that is a 401k that I inherited with two OEFs in it. A few thousand comes into that account every month and occasionally I add to the OEFs there, but I don't do that often.
I believe that the way OEFs are structured makes them less than ideal as a product choice. There are managers that consistently beat their benchmark and you can go to Morningstar and screen for five star funds for more information. Since I don't really think they are the best possible choice I don't spend time researching different OEFs to render any picks.
I do read interviews to learn process and I have referred to John Hussman several times on this blog and link to him from this page as well. Still I have no plans to buy his fund for anybody.
The emailer says that he is not comfortable with individual stocks and so he uses mostly ETFs and OEFs. Clearly a portfolio of individual stocks is not right for everyone. There are several reasons for this including portfolio size, tolerance for volatility and (as the reader points out) time spent monitoring the stocks.
Most clients have around 40 stocks in their accounts. 40 is probably too many to monitor for most folks. Also keep in mind that if you own Caterpillar (as my clients do) it might make sense to watch Deere & Co too, as an example. I have about 230 names on MyYahoo page. I also regularly watch 25 or 30 world stock markets. The time issue is spot on.
Portfolio size and volatility tolerance kind of blend together for me. If a stock with a 2% weight in your account cuts in half on an up day you might not even notice, but you are not going to put $1200 into 40 different stocks either.
Building your own portfolio can be as simple or as complicated as you want to make it. I think that the more work you put in the better results you will have. For people that do not want to make portfolio management a full time job but want to own more than just SPY, I think a reasonably diversified portfolio, with limited individual stock exposure, can be put together with just a few holdings:
Equity
- Large Cap ETF
- Small or Mid Cap ETF*
- Broad Foreign ETF
- Emerging Market ETF or CEF
- Specialty ETF (like DVY or a REIT ETF for yield)
- Any product with good Australian exposure
- One of the timber REITs for low correlation to SPX
Fixed Income
- Plain Vanilla CEF
- TIPS product
- Call writing CEF (despite the naysayers, these have done exactly what I'd hoped for when I first started writing about these last October)
- Foreign bond CEF
What I have is not a be all end all mix and I have specifically left percentages out. This list hopefully gives an idea or two. There are OEFs to fit into every category I have here. The list does, I think, cover most bases for a relatively easy to manage portfolio.
In looking at my list there is one obvious and immediate thing to watch out for, financials. Financials have a heavy weight in big cap ETFs, DVY and any product that is exposed to Australia. I'm sure there are other flaws as well. This is just a starting point for you, not an ending point for my clients.
I should also be clear that I don't have the above portfolio for any clients because I believe in using individual stocks. For disclosure, DVY is a personal holding and a couple of clients own it too.
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Saturday, July 16, 2005
Barron's On CEFs
The Electronic Trader column (subscription required) was all about closed end funds. It went over a few basics and then referenced a few web sites for investors to get information on the product.
The sites mentioned were;
http://www.closedendfundforum.com/
http://www.closed-endfunds.com/
http://www.etfconnect.com/
http://www.herzfeld.com/
I use ETFconnect all time and link to it on the side bar of this site. I have been to the other three sites before. I have had mixed luck finding useful content.
I think there is room for more good content about CEFs. Most of what I find talks about premiums and discounts as a primary reason to trade them. I would like to see more content that goes into how certain funds fit into a portfolio or comparing a CEF to other products that capture same thing. I have done several of these over the life of the blog. Some have been right and some have been wrong but they have been good for capturing what I try to do for clients. A recurring theme of this sight is to share my process. I hope readers take a little from me, a little bit from some others and create their own process.
Read more!
The sites mentioned were;
http://www.closedendfundforum.com/
http://www.closed-endfunds.com/
http://www.etfconnect.com/
http://www.herzfeld.com/
I use ETFconnect all time and link to it on the side bar of this site. I have been to the other three sites before. I have had mixed luck finding useful content.
I think there is room for more good content about CEFs. Most of what I find talks about premiums and discounts as a primary reason to trade them. I would like to see more content that goes into how certain funds fit into a portfolio or comparing a CEF to other products that capture same thing. I have done several of these over the life of the blog. Some have been right and some have been wrong but they have been good for capturing what I try to do for clients. A recurring theme of this sight is to share my process. I hope readers take a little from me, a little bit from some others and create their own process.
Read more!
Friday, July 15, 2005
MSN Money - China: the dragon that isn't - Jubak's Journal
MSN Money - China: the dragon that isn't - Jubak's Journal
This is an interesting take on what China's role in the world economy may or may not evolve into and some of the problems that confront China.
You can get a feel for the article just from the title. I think, though, it entirely misses a crucial concept here. China will continue to modernize and play a bigger role in the world. They will demand more resources, expand where it does business and expand the businesses it is in. I do not know at what rate GDP will grow in the coming years but China will continue to need more of what it does not have and make more of what it does have. Because of this, it will have more and more hand (Seinfeld reference) on the world stage. To me, that is the real story.
GDP has been running around 9% in the last couple of years and the stock market is down a lot. Maybe the next big run in Chinese stocks will be when GDP slows down? I own one Chinese stock for clients. I think there may be visibility for a big move up for US holders of Chinese ADRs if China does something with the currency peg. This would be along the lines of the currency issue moving other ADRs that I have written about before. As a side note I think removing the peg could be very bad for the US.
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This is an interesting take on what China's role in the world economy may or may not evolve into and some of the problems that confront China.
You can get a feel for the article just from the title. I think, though, it entirely misses a crucial concept here. China will continue to modernize and play a bigger role in the world. They will demand more resources, expand where it does business and expand the businesses it is in. I do not know at what rate GDP will grow in the coming years but China will continue to need more of what it does not have and make more of what it does have. Because of this, it will have more and more hand (Seinfeld reference) on the world stage. To me, that is the real story.
GDP has been running around 9% in the last couple of years and the stock market is down a lot. Maybe the next big run in Chinese stocks will be when GDP slows down? I own one Chinese stock for clients. I think there may be visibility for a big move up for US holders of Chinese ADRs if China does something with the currency peg. This would be along the lines of the currency issue moving other ADRs that I have written about before. As a side note I think removing the peg could be very bad for the US.
Read more!
Busy Busy
Today I am manning our fire station with another of our firefighters. Our wildfire danger is at its peak this week due to very hot weather. For those who don't know I actively volunteer as firefighter in my little community. All we do is wildfires and structure protection we do not go into burning buildings which, to me, is a huge step up in risk. The day doesn't start until 9am. Before then I have a new account to implement and some other work to do.
The market has had a big run, is it dumb to implement a new client up here? I can't know until later but this is a question that comes up all the time. This is easy, if the market goes up from here it is a good idea. If the market goes down from here it is a bad idea. Doh! That's the point, there is no way to know. As a matter of philosophy I do not invest an entire account all at once. If the market goes up the account will lag for a while and if the market goes down the account will outperform. There is no way around this that I can see whether I wade in or go all at once. Usually, on day one, I go in with 40%-50%. If it matters, with this new account I will be going in with only 25% today. While I don't know what the next two weeks will bring, would anyone be shocked if the next 40 SPX points was down?
Different point; my thought that earnings would not be the most important thing may really get challenged today with the GE news.
Today is options expiration, I wonder if anyone cares?
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The market has had a big run, is it dumb to implement a new client up here? I can't know until later but this is a question that comes up all the time. This is easy, if the market goes up from here it is a good idea. If the market goes down from here it is a bad idea. Doh! That's the point, there is no way to know. As a matter of philosophy I do not invest an entire account all at once. If the market goes up the account will lag for a while and if the market goes down the account will outperform. There is no way around this that I can see whether I wade in or go all at once. Usually, on day one, I go in with 40%-50%. If it matters, with this new account I will be going in with only 25% today. While I don't know what the next two weeks will bring, would anyone be shocked if the next 40 SPX points was down?
Different point; my thought that earnings would not be the most important thing may really get challenged today with the GE news.
Today is options expiration, I wonder if anyone cares?
Read more!
Thursday, July 14, 2005
More Australia
Bloomberg.com: Australia & New Zealand
This article is a good follow on to what I wrote earlier about the near term future of the AUD/USD cross rate, interest rates and the ASX 200.
The article quotes two analysts calling for a lower Aussie because the yield advantage of Aussie debt over US debt will narrow causing the AUD to get weaker. One of the analysts also believes the Fed is going to 4.25%. I think if the Fed goes to 4.25% the rest of the thesis will unravel as the curve will invert. If we do get there, however, I hope I am wrong.
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This article is a good follow on to what I wrote earlier about the near term future of the AUD/USD cross rate, interest rates and the ASX 200.
The article quotes two analysts calling for a lower Aussie because the yield advantage of Aussie debt over US debt will narrow causing the AUD to get weaker. One of the analysts also believes the Fed is going to 4.25%. I think if the Fed goes to 4.25% the rest of the thesis will unravel as the curve will invert. If we do get there, however, I hope I am wrong.
Read more!
Process
Dismally, as it relates to the markets.: My approach.
Here is a good post from David Taylor over at Dismally. It goes into his process for trading. Even if you don't focus on currencies, as he does, you can probably learn something.
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Here is a good post from David Taylor over at Dismally. It goes into his process for trading. Even if you don't focus on currencies, as he does, you can probably learn something.
Read more!
Hornets Nest
CNBC cited results from a WSJ poll that showed 57% of those polled are against personal accounts as part of a social security fix. It has been a while since I have written about this so I wanted to touch on it again for anyone who is new.
Personally I love the concept. Having some control and the ability to have a shot at better returns should be appealing to most folks. It starts to unravel for me as soon as it gets beyond the concept stage. The start up costs, anywhere from $700 billion-$2 trillion, I find to be overwhelming. I also think, and this is the big one for me, a lot (maybe close to half) of the participants, by virtue of no other experience, will not be suited to managing an investment account. Unfortunately too many professionals are not suited to managing investment accounts either.
I think this will lead to too much buying at tops and too much selling at bottoms. This ties in with studies that show fund shareholders do far worse than the funds they own. Further I think that during the next real bubble (maybe in 2020 or 2025 if history is any guide) a lot of people will blow these accounts up. Then what?
A first step to fixing the problem, in my opinion, should be raising the ages for collecting benefits. Currently 62 or 65 is the starting point for most folks. I believe the life expectancy for someone in this country who has already made it to 65 is about 85. So that means drawing a benefit for 20 years. You no doubt are aware that when social security started it was expected that someone would draw a benefit for just a couple of years. Maybe for anyone between 40 and 50 years old today the starting ages should be 67 and 70. Then maybe for today's 30-39 year olds the starting points should be 69 and 72.
I think the startup costs for raising the ages would be a little less that the $700 billion-$2 trillion startup money needed for personal accounts.
Under my plan (sounds like Gore, eh?) I would not be eligible until I am 69, I am 39 now. For what its worth I am less concerned about whether social security will carry me into old age than Medicare. I am planning with the assumption social security will not be there but I am hoping for Medicare which is in bigger trouble, but gets no attention. At the rate at which healthcare costs are going I doubt my social security check will cover health insurance premiums but I do think it will cover supplemental insurance when the time comes.
Health insurance and related expenses will be our biggest costs so I am hoping some tackles the Medicare issue soon.
Read more!
Personally I love the concept. Having some control and the ability to have a shot at better returns should be appealing to most folks. It starts to unravel for me as soon as it gets beyond the concept stage. The start up costs, anywhere from $700 billion-$2 trillion, I find to be overwhelming. I also think, and this is the big one for me, a lot (maybe close to half) of the participants, by virtue of no other experience, will not be suited to managing an investment account. Unfortunately too many professionals are not suited to managing investment accounts either.
I think this will lead to too much buying at tops and too much selling at bottoms. This ties in with studies that show fund shareholders do far worse than the funds they own. Further I think that during the next real bubble (maybe in 2020 or 2025 if history is any guide) a lot of people will blow these accounts up. Then what?
A first step to fixing the problem, in my opinion, should be raising the ages for collecting benefits. Currently 62 or 65 is the starting point for most folks. I believe the life expectancy for someone in this country who has already made it to 65 is about 85. So that means drawing a benefit for 20 years. You no doubt are aware that when social security started it was expected that someone would draw a benefit for just a couple of years. Maybe for anyone between 40 and 50 years old today the starting ages should be 67 and 70. Then maybe for today's 30-39 year olds the starting points should be 69 and 72.
I think the startup costs for raising the ages would be a little less that the $700 billion-$2 trillion startup money needed for personal accounts.
Under my plan (sounds like Gore, eh?) I would not be eligible until I am 69, I am 39 now. For what its worth I am less concerned about whether social security will carry me into old age than Medicare. I am planning with the assumption social security will not be there but I am hoping for Medicare which is in bigger trouble, but gets no attention. At the rate at which healthcare costs are going I doubt my social security check will cover health insurance premiums but I do think it will cover supplemental insurance when the time comes.
Health insurance and related expenses will be our biggest costs so I am hoping some tackles the Medicare issue soon.
Read more!
Oil Smackdown
Oil is down a couple of bucks but stocks haven't moved up in kind. There are many ways to take this;
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- There is very little short term buying power remaining
- Oil between $55-$60 is the new no man's land for the commodity
- The stock market expects oil to trade back above $60 quickly
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Maybe This Matters Or Maybe Not
This chart has a couple of financial current events depicted. One popular draw for capital has been the so called high yielding currencies; the pound, the Aussie and the Kiwi. High interest rates tend to make a currency more attractive.Over the last year the Aussie had gained as much as 10% on the USD and the pound had gained as much as 5% on the dollar. For the last couple of months or so the dollar has gained against both of these as the Fed has raised rates. Another aspect of this move is visibility for the UK and Australia to cut the respective Fed Funds equivalents. I take the pound's weakness vs the Aussie as an indication that the market expects the UK to cut first. This is consistent with a lot of the analysis being done on this topic.
The tie in for me is something I wrote recently about the US being the high yield alternative for the world's bond investors. I wrote that tongue in cheek as Australia, NZ and the UK still have higher yielding ten year paper, but Japan, Germany, France, Canada and Switzerland all have lower yielding bonds.
I wonder if this creates a ramp up in demand for Australian denominated assets. When UK yields go below US yields (I am making an assumption) money may flow out of UK assets and look for a non-US, higher yielding place to go, like Australia. If this happens it would be good for Australian assets but may not do much for US investors if the US dollar keeps getting stronger against the Aussie. The other fly in the ointment to my thesis is would the flow of capital from the pound to the Aussie offsetting the effect I am talking about; UK rates staying low and Aussie rates staying high.
This is not something that needs to be sorted out today. I just think this may be the visibility for the ASX 200's next leg up. We'll see.
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Correlation
U2 fans will recognize the title from the All That You Can't Leave Behind CD. Ahem.A reader asked what sectors do and do not correlate to the energy sector. The best way to look at the question is to compare sector ETFs for all ten S&P groups. You can click on the chart to make it bigger. The energy sector is in black. It seems to have a very low correlation with a lot of sectors. I thought this was interesting.
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Have Things Changed?
It feels like things are improving. The news the other day about increased tax revenue reducing the deficit could be very important. We have had a lot of data this week that has been quite friendly to equity prices. Sunday I said that good data would be more important, in terms of spurring a rally, than good earnings. Since both have been good so far, who can say for sure what has been more important.
I also like the slight move up in the ten year from the standpoint of giving the Fed a little more room, if it wants it, to raise rates without inverting the curve.
Bob Pisani made an interesting comment in passing this morning. He said "it doesn't get much better than this for the bulls." That is something to think about from a contrarian standpoint. The market might be going through the upper end of its range but could still fail.
I think there are some things changing for the better, fundamentally. Improved fundamentals does not automatically mean a higher stock market right away but does argue for a little more equity exposure. We have had a good few weeks. If you are more of a trader it would makes sense to think there might be some consolidation around the corner but longer term investors may want to think about having less cash in the next couple of weeks.
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I also like the slight move up in the ten year from the standpoint of giving the Fed a little more room, if it wants it, to raise rates without inverting the curve.
Bob Pisani made an interesting comment in passing this morning. He said "it doesn't get much better than this for the bulls." That is something to think about from a contrarian standpoint. The market might be going through the upper end of its range but could still fail.
I think there are some things changing for the better, fundamentally. Improved fundamentals does not automatically mean a higher stock market right away but does argue for a little more equity exposure. We have had a good few weeks. If you are more of a trader it would makes sense to think there might be some consolidation around the corner but longer term investors may want to think about having less cash in the next couple of weeks.
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Wednesday, July 13, 2005
Bloomberg.com: Australia & New Zealand
Bloomberg.com: Australia & New Zealand
This is an indepth article comparing Rio Tinto (RTP) and BHP Billiton (BHP). I have no direct exposure but they are both components of EWA, which I do own.
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This is an indepth article comparing Rio Tinto (RTP) and BHP Billiton (BHP). I have no direct exposure but they are both components of EWA, which I do own.
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Cut Back On Foreign?
There is a good article at the Wall Street Journal (subscription required) about whether now is a good time to cut back on foreign stocks. The article quotes several people that believe US investors should cut back, mainly because of the strength of the dollar. I have put up a couple of charts showing how the impact of this has caused ordinary shares to out perform ADRs in last few weeks. The article also suggests a couple of the currency OEFs I have written about before.
Taking the other side of this, from primarily a contrarian view, is David Jackson from Seeking Alpha. He posted his article on the ETF Investor page. I would encourage anyone to read both articles.
My take on this is a little different, maybe in the middle? The WSJ article says the dollar is up 12% this year. Well a big chunk of that has been in the last few weeks and caught a lot of people by surprise in terms of magnitude after the respective non and nee votes on the Euro Constitution. In the last couple of days, before this morning's trade numbers, the dollar had a serious, but short, decline.
I wrote a few days ago that it seems like FX volatility has increased. I think it makes more sense for most do-it-yourselfers to base decisions about foreign allocation on bigger picture issues than currency trends. Trying to game moves in the FX market with your stock and bond portfolio is likely to create excess trading without much added return.
I have a couple of big and simple themes behind my foreign decisions. I want developed commodity based exposure (Aus, NZ, Norway, Canada and maybe Sweden a little too) because of the different economic cycle, I want emerging market exposure (Brazil, Israel, India, China, South Africa) for the long term growth potential and I want foreign service based (Ireland England, Switzerland) for many reasons including dollar hedge and safe haven aspects. These themes have several intersecting stocks within client portfolios. The other big thing about foreign is the often superior dividends which continue to be attractive with a flattish US equity market.
I think it makes much more sense to focus on these more fundamental concepts than short term currency trades.
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Taking the other side of this, from primarily a contrarian view, is David Jackson from Seeking Alpha. He posted his article on the ETF Investor page. I would encourage anyone to read both articles.
My take on this is a little different, maybe in the middle? The WSJ article says the dollar is up 12% this year. Well a big chunk of that has been in the last few weeks and caught a lot of people by surprise in terms of magnitude after the respective non and nee votes on the Euro Constitution. In the last couple of days, before this morning's trade numbers, the dollar had a serious, but short, decline.
I wrote a few days ago that it seems like FX volatility has increased. I think it makes more sense for most do-it-yourselfers to base decisions about foreign allocation on bigger picture issues than currency trends. Trying to game moves in the FX market with your stock and bond portfolio is likely to create excess trading without much added return.
I have a couple of big and simple themes behind my foreign decisions. I want developed commodity based exposure (Aus, NZ, Norway, Canada and maybe Sweden a little too) because of the different economic cycle, I want emerging market exposure (Brazil, Israel, India, China, South Africa) for the long term growth potential and I want foreign service based (Ireland England, Switzerland) for many reasons including dollar hedge and safe haven aspects. These themes have several intersecting stocks within client portfolios. The other big thing about foreign is the often superior dividends which continue to be attractive with a flattish US equity market.
I think it makes much more sense to focus on these more fundamental concepts than short term currency trades.
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New Zealand & Ireland
I found this article in the New Zealand Herald. It is about a well known Irish business man suggesting that New Zealand adopt a similar pro-business stance that Ireland first adopted many years ago.
One interesting nugget in there was that Deutsche Bank projects Ireland to be the second largest economy in Europe by 2020.
I have exposure to both countries personally and for most clients. If either of these countries grow anywhere near what some project it would be logical to think that some of that growth would come at the US' expense. There are many countries that would also fit that bill.
This all speaks to trying to manage what is going on now and what might happen off in the future.
Trade numbers? Oops.
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One interesting nugget in there was that Deutsche Bank projects Ireland to be the second largest economy in Europe by 2020.
I have exposure to both countries personally and for most clients. If either of these countries grow anywhere near what some project it would be logical to think that some of that growth would come at the US' expense. There are many countries that would also fit that bill.
This all speaks to trying to manage what is going on now and what might happen off in the future.
Trade numbers? Oops.
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Tuesday, July 12, 2005
Here Goes Nothing
I will take the over on the trade deficit numbers Wednesday morning. I think there may be some confusion in the report which may cause some whipsaw. We'll see.
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Enhanced Index Funds
BusinessWeek had an article about Enhanced Index Funds. The general idea is to replicate the S+P 500 Index with futures contracts instead of stocks and then use the remaining cash to buy various types of fixed income. You would capture the return of the SPX with the futures and the yield from the fixed income would layer on top as the enhancement. There are also other ways to manage an enhanced index fund.
The article mentions six different open end fund that do this, there may be more. The six symbols are AXLVX, MWATX, PYMRX, PSPAX, PTOAX, and VQPNX.
I think this type of thing is worth learning about as far as learning different types of strategies. The concept seems to be in the same general area as something I have written about a few times which is buying zero coupon bonds and an index fund. Specifically if an investor has $100,000 and is generally uncomfortable with equities they could buy $100,000 face value of treasury zeros maybe maturing in 20 years for maybe $0.60 on the dollar and put the remaining $0.40 into an index fund.
Clearly there are differences but it seems to me to be a little similar.
I have no plans to buy an enhanced index fund nor do the zeros/index fund combo but learning the process here is worthwhile.
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The article mentions six different open end fund that do this, there may be more. The six symbols are AXLVX, MWATX, PYMRX, PSPAX, PTOAX, and VQPNX.
I think this type of thing is worth learning about as far as learning different types of strategies. The concept seems to be in the same general area as something I have written about a few times which is buying zero coupon bonds and an index fund. Specifically if an investor has $100,000 and is generally uncomfortable with equities they could buy $100,000 face value of treasury zeros maybe maturing in 20 years for maybe $0.60 on the dollar and put the remaining $0.40 into an index fund.
Clearly there are differences but it seems to me to be a little similar.
I have no plans to buy an enhanced index fund nor do the zeros/index fund combo but learning the process here is worthwhile.
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Wow
You have no doubt seen this already but it is the Thunder Horse oil rig that is 75% owned by BP and 25% owned by Exxon. Oops.My clients own BP.
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Kettle Or Pot?
I found what I think is a very funny article from Morningstar that questions whether some of the new commodity and currency ETFs that are coming are a good idea or not. The author questions the risk of these from several aspects. Commodities are high, after a good run. Currencies are very difficult to game, even Alan Greenspan says that the author writes. Also the fees may eat away performance.
What I find funny about this questioning of different types of ETFs is where it is coming from. Has there been a more irrelevant line of ETFs than the nine Morningstar Style Box ETFs? I would say the race for useless ETFs is neck and neck between Morningstar and the NYSE ETFs, NY and NYC.
The new types of ETFs are just that, new. They offer easy ways to access investment different parts of capital markets. They are no different in that some folks will use them incorrectly and lose out and some other will use them very smartly and do very well.
I was just amused by the whole thing.
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What I find funny about this questioning of different types of ETFs is where it is coming from. Has there been a more irrelevant line of ETFs than the nine Morningstar Style Box ETFs? I would say the race for useless ETFs is neck and neck between Morningstar and the NYSE ETFs, NY and NYC.
The new types of ETFs are just that, new. They offer easy ways to access investment different parts of capital markets. They are no different in that some folks will use them incorrectly and lose out and some other will use them very smartly and do very well.
I was just amused by the whole thing.
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Monday, July 11, 2005
Yahoo Finance Australia
I was going to write about the divergence, lately, between New Zealand Telecom ADR due to weakness in the NZD, the chart is to the left if you are curious. When I got to Yahoo Finance page for the NZT ordinary shares I saw a featured link to Yahoo Australia & NZ Finance. I had no idea this existed, for all I know this might be day one but I would encourage anyone that has any remote interest in investing in the region to check out the page.One of the more surprising things was the Aus/NZ version of the world indices page. It has several markets on it that are not on the US version of the page. The down under page has several more important emerging markets on it but the data doesn't quite seem updating just now. I emailed them about this one time and they said they were working on it.
Also on the finance home page was a list of the finance pages for other parts of the world too. Very useful.
For disclosure, clients and I own Yahoo and New Zealand Telecom.
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Today's Action
It might be fair to call the market action that started in the last hour on Thursday and ran through the first couple of hours today a buying panic. Last night in my interview, Mandy asked me what I thought it would take for the market to rally this week. I didn't give a complete answer. I talked about anything in the data that could signal the Fed is done would help. The way things worked out in the interview I did not get a chance to address the emotion that goes with buying panics, if that is what we have had (or are having).I think I see a couple of things that speak to a lot of emotion, relatively, moving markets. Friday's rally was huge by any internal measure. That it came after a big terror event tells me people were afraid of missing a bounce like was had shortly after the 9/11 attacks. I also think the back up in yields of ten year treasuries reveals money rotating out of bonds and into equities.
Is this move justified? Hard to say. A couple of weeks ago I might have said no way. I heard one interesting little nugget this morning, the treasury will be issue less debt than originally expected because of greater than expected tax receipts. That sounds bullish to me. That raises a question for me however. If supply is reduced but demand stays constant could that mean yields will go lower (prices higher)? Also if the US ten year continues to yield a lot more than bonds from so many other countries, might that be a catalyst for even more demand?
Taking this further, what does this mean for the slope of the yield curve? Does this create greater visibility for curve inversion because the Fed has said its not done? I don't buy that this time is different about yield curve inversions. If shorter rates are higher than longer rates, it stifles access to capital because lending becomes a losing proposition. In my opinion the circumstances that get you there are not that important.
At this point we don't have to know what will happen. This post points out one possible outcome. If you are managing money, yours or someone else's, it is always worthwhile to look ahead to what could go wrong.
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Russian Oil
BMI's Daily Brief on Emerging Europe
Are you interested in Russian oil companies? This is a good state of the industry type of article.
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Are you interested in Russian oil companies? This is a good state of the industry type of article.
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Internet HOLDRS are hot, but hold limited appeal
Coming Up A Little Short
I stumbled across this article about using options from Morningstar. The general point is to consider leaps as replacements for stocks because options are generally cheap these days and because they offer more potential reward while of course carrying more risk.
So the take away was maybe you should by leaps because they are cheap. Um what type of leap should we buy? How many?
The article came up very short about what strike to pick or how many to buy. The one example was McDonald's. The article gave details about buying a leap struck at $30, with the common at $28. The example was just nuts and bolt mechanics not strategic insight. Why does the author think the $30s are the best trade?
Options are a very complex investment vehicle. Articles that oversimplify or offer a vague idea for a strategy are not ideal.
My own ideas on the subject, leaps as a substitute for the common, are quite conservative. If you normally buy 300 shares you should only buy three options. Anymore and you would be over leveraged. Misusing leverage compounds this risk significantly. I tend to think that as an option buyer I want to pay as little time premium as possible. If you buy a deep in the money leap you would be paying little in time premium and possibly risking less capital.
Here is an example of what I mean with Qualcomm (QCOM). By the way this will be a repeat for long time readers. QCOM closed Friday at $34.75. A QCOM expiring in Jan 2007 struck at $22.50 was offered at $14.10. So $12.25 was intrinsic value and $1.85 was time value. Options that are deep in the money usually have a very high delta. A high delta means the stock will move close to point for point with the stock. So with this example you can get almost the same movement in the stock with only putting up a fraction of the cost. To me this is a logical use of leverage, in general terms. QCOM is just an example I have no position personally or for accounts I manage.
What about the less risk aspect? The QCOM option, above, is $12.25 in the money. Lets say an investor buys that contract now and then three weeks from now with not much movement in the stock bad news hits and the stock drops $10 per share to $24.75. So instead of being $12 in the money the option is now only $2 in the money. While we can't know exactly what the option in this example will do we may have a clue from the current option that is currently $2 in the money, the $32.50 option for the same month. That option was bid at $6.90 at the close Friday.
Using this as a rough template a $10 drop in the stock, or $1000 for a hundred shares, might only result in $7.20 drop in premium(I am factoring in the slippage from the bid/ask in my numbers), or $720 dollars for one option. This type of hit to the stock would cause the volatility to increase and the delta to decrease. The option at $12 in the money was cheaper in real term and the drop made it more expensive. If this is new to you, don't focus on the exact numbers because there are a lot of variables that could make this more or less favorable, instead focus on the concept. Once you have bought an option that has very little time premium, a sudden increase in time premium (volatility), caused by bad news, is not the worst possible outcome.
To be sure the are plausible arguments for buying only out of the money options in large quantities but that is not the right trade for me. I felt the Morningstar article lacked in spelling out a specific method. This post gives one idea, there are others.
Read more!
So the take away was maybe you should by leaps because they are cheap. Um what type of leap should we buy? How many?
The article came up very short about what strike to pick or how many to buy. The one example was McDonald's. The article gave details about buying a leap struck at $30, with the common at $28. The example was just nuts and bolt mechanics not strategic insight. Why does the author think the $30s are the best trade?
Options are a very complex investment vehicle. Articles that oversimplify or offer a vague idea for a strategy are not ideal.
My own ideas on the subject, leaps as a substitute for the common, are quite conservative. If you normally buy 300 shares you should only buy three options. Anymore and you would be over leveraged. Misusing leverage compounds this risk significantly. I tend to think that as an option buyer I want to pay as little time premium as possible. If you buy a deep in the money leap you would be paying little in time premium and possibly risking less capital.
Here is an example of what I mean with Qualcomm (QCOM). By the way this will be a repeat for long time readers. QCOM closed Friday at $34.75. A QCOM expiring in Jan 2007 struck at $22.50 was offered at $14.10. So $12.25 was intrinsic value and $1.85 was time value. Options that are deep in the money usually have a very high delta. A high delta means the stock will move close to point for point with the stock. So with this example you can get almost the same movement in the stock with only putting up a fraction of the cost. To me this is a logical use of leverage, in general terms. QCOM is just an example I have no position personally or for accounts I manage.
What about the less risk aspect? The QCOM option, above, is $12.25 in the money. Lets say an investor buys that contract now and then three weeks from now with not much movement in the stock bad news hits and the stock drops $10 per share to $24.75. So instead of being $12 in the money the option is now only $2 in the money. While we can't know exactly what the option in this example will do we may have a clue from the current option that is currently $2 in the money, the $32.50 option for the same month. That option was bid at $6.90 at the close Friday.
Using this as a rough template a $10 drop in the stock, or $1000 for a hundred shares, might only result in $7.20 drop in premium(I am factoring in the slippage from the bid/ask in my numbers), or $720 dollars for one option. This type of hit to the stock would cause the volatility to increase and the delta to decrease. The option at $12 in the money was cheaper in real term and the drop made it more expensive. If this is new to you, don't focus on the exact numbers because there are a lot of variables that could make this more or less favorable, instead focus on the concept. Once you have bought an option that has very little time premium, a sudden increase in time premium (volatility), caused by bad news, is not the worst possible outcome.
To be sure the are plausible arguments for buying only out of the money options in large quantities but that is not the right trade for me. I felt the Morningstar article lacked in spelling out a specific method. This post gives one idea, there are others.
Read more!
Sunday, July 10, 2005
The Big Picture For The Week of July 10, 2005
I am scheduled to appear in my usual slot during the first half hour of Asian Market Watch on Monday morning (Sunday night US time).My point of contact at the network asked for a bullet pointed list, like last time, of the various things that I think might be important for the next few days or so.
- Terrorism is back on the table. Capital markets have shown they now understand single strike, non nuclear attacks. Markets don't fear the known they fear the unknown. While it is sad that these attacks occur and it is sad that we are getting used to them it is clear that the types of attacks we have had do not threaten capital markets. I wrote many months ago that markets would bounce back faster to the trend that existed with each subsequent attack and so I did a little buying the morning of the attacks.
- The way to have a little protection against escalated terror for a diversified portfolio is by owning a defense stock or two, have exposure to gold and investing in foreign countries.
- Oil had a confusing close to the week but still remains quite high and poses threats to the consumer and to corporations. No one should be surprised if companies blame energy costs for missing earnings.
- US stock markets have been less volatile than historical norms but currencies, commodities and bonds have been far more interesting and volatile in the last few months or so. This might become more relevant in the coming months. Trying to look ahead, I would start to think about a commodity bull market having more legs to it and I would also start to think about the US market evolving into a slower growth market which will make certain foreign markets the place to increase exposure.
- Alcoa had a great earnings report for the first time in many quarters. Estimates call for the S+P 500 to grow earnings by 7%-8% this quarter, this is down significantly from the past few quarters. This still looms out there as a headwind for the market. I have said I don't think earnings will be a first priority for the market but great reports from General Electric or Intel or other big leaders could prove me wrong and lift the market nicely.
- I still think the Fed is the most important thing right now in terms of where they decide to stop raising rates. My last time on the show I said I thought they would figure out how to transition in such a way as to minimize shocks to the market. While there was not much disruption from the June meeting I was disappointed that we didn't learn anymore about the Fed than we knew before the June meeting.
- The jobs report took a back seat last week because of the UK bombings. The headline number was bad and the revisions were good. More importantly, I think next month's jobs report will be distorted by the hurricanes, hopefully the market digests this possibility before the report comes out.
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Saturday, July 09, 2005
Clarification
A reader left the following comment that I felt needed a response to clarify something.
...So long as the company's fundamentals underlying the ADR are sound, a broad diversified set of ADR's can give an investor a "flavor" for the growth potential in developed foreign markets. I know you've suggested before that you're a "fan" of ETF's due to their low cost and their breadth of offerings as well as holdings. I think ETF's are also a good way to capture value in foreign markets without as much of the market risk because you're essentially buying a market index fund that trades like a stock....
I am a fan of ETFs I suppose, but (and this is something I have written a hundred times) ETFs are just a tool to include in an investment plan. Some folks would use more ETFs than others due to a variety of factors. There are some countries where an ETF probably makes more sense that a stock, here I am thinking Belgium (which has only one NYSE listed ADR) and Austria (which also has only one NYSE listed ADR) and there may be others. By the way I did a poor job of communicating that I own iShares Austria when I wrote about it the other day, apologies.
On the flip side countries like Norway and Russia have no ETF so there is no choice if you want to own those countries.
Occasionally I get asked to post my thoughts for an all ETF portfolio and I decline that request because I tend to think only one of any product is not the best thing for most people. Usually a blend of several products is best.
For what its worth our personal accounts have mostly individual stocks, three or four ETFs and two or three CEFs.
To the readers comment I would say I think, more often than not, ADRs are preferable.
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...So long as the company's fundamentals underlying the ADR are sound, a broad diversified set of ADR's can give an investor a "flavor" for the growth potential in developed foreign markets. I know you've suggested before that you're a "fan" of ETF's due to their low cost and their breadth of offerings as well as holdings. I think ETF's are also a good way to capture value in foreign markets without as much of the market risk because you're essentially buying a market index fund that trades like a stock....
I am a fan of ETFs I suppose, but (and this is something I have written a hundred times) ETFs are just a tool to include in an investment plan. Some folks would use more ETFs than others due to a variety of factors. There are some countries where an ETF probably makes more sense that a stock, here I am thinking Belgium (which has only one NYSE listed ADR) and Austria (which also has only one NYSE listed ADR) and there may be others. By the way I did a poor job of communicating that I own iShares Austria when I wrote about it the other day, apologies.
On the flip side countries like Norway and Russia have no ETF so there is no choice if you want to own those countries.
Occasionally I get asked to post my thoughts for an all ETF portfolio and I decline that request because I tend to think only one of any product is not the best thing for most people. Usually a blend of several products is best.
For what its worth our personal accounts have mostly individual stocks, three or four ETFs and two or three CEFs.
To the readers comment I would say I think, more often than not, ADRs are preferable.
Read more!
Friday, July 08, 2005
Interesting Content
I found three articles that I thought were interesting.
The first one is on Yahoo from the LA Times about some of the exotic steps that some fund managers are taking to try to improve performance. The article gives some insight into what some folks are thinking they need to do. The article devotes some space to the PMFM family of funds that I have written about, negatively, once before.
The next one is from Forbes about foreign investing. It suggests several ways to capture the effect including owning US multi national companies. I still don't think this is a good way to capture foreign markets but there are studies that refute my opinion. If you think I am wrong on this I would encourage you to seek out commentary that really studies whether owning multi nationals for foreign exposure is a good idea and decide for yourself.
The last one is about a newsletter that focuses on closed end funds. It does not get too much into the process that the writer uses but there are some picks from last fall that I find interesting including Ireland which has been something I have been big on for a long time.
Read more!
The first one is on Yahoo from the LA Times about some of the exotic steps that some fund managers are taking to try to improve performance. The article gives some insight into what some folks are thinking they need to do. The article devotes some space to the PMFM family of funds that I have written about, negatively, once before.
The next one is from Forbes about foreign investing. It suggests several ways to capture the effect including owning US multi national companies. I still don't think this is a good way to capture foreign markets but there are studies that refute my opinion. If you think I am wrong on this I would encourage you to seek out commentary that really studies whether owning multi nationals for foreign exposure is a good idea and decide for yourself.
The last one is about a newsletter that focuses on closed end funds. It does not get too much into the process that the writer uses but there are some picks from last fall that I find interesting including Ireland which has been something I have been big on for a long time.
Read more!
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