Back in August, in preparation for a CNBC Asia appearance, I looked up the fact that there have only been six years in the last 20 where both August and September were down months for the SPX. In August the SPX was down about 15 points. I concluded that I thought September would not in fact be a down month like so many folks felt.
Subject to a last second tick, the SPX is up eight points for the month and while we are at it, 37 points for the quarter (half of that coming in the last couple of days).
At one point in September I said I had a good chance of being wrong but it turns out this thought was right.
While it is not clear to me how this sort of thing helps my clients, short term moves in the market can sometimes matter to long term money. To do this analysis all I did was go to BigCharts.com and look at the two months year by year and then I counted. While my family will tell you I am not that bright I am able to count to 20. That was the process and it is obviously easy for anyone.
Sometimes market certitudes are not that absolute.
The response for the WFPA has been great so far, thank you!
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Wikinvest Wire
Friday, September 30, 2005
Closing Out The Quarter
So the obvious question is will yesterdays lift be preserved or move higher before it might unwind next week?
The move yesterday was what I was expecting to occur earlier in the week resulting in a bigger move than we have seen so far. This kind of mark up is common. If yesterday's move up sticks, money managers, like me, will get paid a little more. I am not big enough to move anything but some IMs are. They move may have been that simple.
This same general idea is why I have thought that we might see a rally sometime this fall. I still think we can move higher but time is running a little short.
One recent obstacle to this thought is that a couple of my counter strategies/low correlation to US themes have been working very well lately, particularly gold and Australia. While anything could happen I think that higher equity prices would be tough if gold keeps going toward $500.
The treasury market at its current level is not an obstacle but what it may be pricing in could be the obstacle. It is moving toward horizontal or inverted. New 30 year paper could help here but there is visibility with this that should monitored closely.
If the curve does invert there will be, based on history, a big time lag before it hurts equities. Investors will have plenty of time to adjust portfolios.
Read more!
The move yesterday was what I was expecting to occur earlier in the week resulting in a bigger move than we have seen so far. This kind of mark up is common. If yesterday's move up sticks, money managers, like me, will get paid a little more. I am not big enough to move anything but some IMs are. They move may have been that simple.
This same general idea is why I have thought that we might see a rally sometime this fall. I still think we can move higher but time is running a little short.
One recent obstacle to this thought is that a couple of my counter strategies/low correlation to US themes have been working very well lately, particularly gold and Australia. While anything could happen I think that higher equity prices would be tough if gold keeps going toward $500.
The treasury market at its current level is not an obstacle but what it may be pricing in could be the obstacle. It is moving toward horizontal or inverted. New 30 year paper could help here but there is visibility with this that should monitored closely.
If the curve does invert there will be, based on history, a big time lag before it hurts equities. Investors will have plenty of time to adjust portfolios.
Read more!
Thursday, September 29, 2005
Maybe He Reads This Site??
Humor Attempt
Keith Wirtz, manager of the Fifth Third International Equity Fund (FIEIX) was on Kudlow and two of his picks were stocks I own for clients and have been writing about since the beginning, ANZ and SNP. Aussie banking and Chinese Oil. I have owned both for a long time. Both are important themes.
He was also on board with the Austria-as gateway-to Eastern Europe theme that I started in on last winter.
On a separate note, I had several comments and many emails giving a nod to my blogiversary, as Trader Mike put it. I try to answer emails and comments where called for but there are too many to respond to, which is great in different way.
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Keith Wirtz, manager of the Fifth Third International Equity Fund (FIEIX) was on Kudlow and two of his picks were stocks I own for clients and have been writing about since the beginning, ANZ and SNP. Aussie banking and Chinese Oil. I have owned both for a long time. Both are important themes.
He was also on board with the Austria-as gateway-to Eastern Europe theme that I started in on last winter.
On a separate note, I had several comments and many emails giving a nod to my blogiversary, as Trader Mike put it. I try to answer emails and comments where called for but there are too many to respond to, which is great in different way.
Read more!
One Year For Random Roger
Today marks the one year anniversary for this web site. I am thrilled and thankful for all of the luck, media attention and people that I have made contact with as this site has grown.
When I first started Random Roger it was not going to be about investing but I ran out things to talk about after a couple of days.
As the site evolved I felt I wanted share how I do my job. Then I started to feel that a lot of the coverage of markets and investment products was lacking so I began to write about that more as well.
Writing as much as I do (about 930 posts since I started) is a lot of fun and I plan to continue with it. Hopefully the content will continue to be useful to some of you.
Thanks.
Read more!
When I first started Random Roger it was not going to be about investing but I ran out things to talk about after a couple of days.
As the site evolved I felt I wanted share how I do my job. Then I started to feel that a lot of the coverage of markets and investment products was lacking so I began to write about that more as well.
Writing as much as I do (about 930 posts since I started) is a lot of fun and I plan to continue with it. Hopefully the content will continue to be useful to some of you.
Thanks.
Read more!
"What Do You Think Of Materials?"
Good question.
Like most sectors it depends on what part of the sector you mean. I own one chemical stock for clients and it has gotten hit due to oil issues. It is down more than some but not as bad as some others. That part of the sector is reacting to something very specific that may or may not be short term. Since a lot of chemical stocks are down at the same I don't see much reason to consider selling.
The other parts of the sector that I own for clients have helped a lot with what looks like will be a very good quarter. Here I am talking about a foreign gold stock and a Brazilian commodity company which were up 20% and 50% respectively for the quarter. While those moves may seem like a lot, the truth is I have owned them for ages and every now that they have their day in the sun.
Part of having a diversified portfolio means that there is always something working. Well, almost always:-)
I also own Plum Creek Timber which is unchanged for the quarter but it paid $0.38 in dividends this quarter.
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Like most sectors it depends on what part of the sector you mean. I own one chemical stock for clients and it has gotten hit due to oil issues. It is down more than some but not as bad as some others. That part of the sector is reacting to something very specific that may or may not be short term. Since a lot of chemical stocks are down at the same I don't see much reason to consider selling.
The other parts of the sector that I own for clients have helped a lot with what looks like will be a very good quarter. Here I am talking about a foreign gold stock and a Brazilian commodity company which were up 20% and 50% respectively for the quarter. While those moves may seem like a lot, the truth is I have owned them for ages and every now that they have their day in the sun.
Part of having a diversified portfolio means that there is always something working. Well, almost always:-)
I also own Plum Creek Timber which is unchanged for the quarter but it paid $0.38 in dividends this quarter.
Read more!
Wednesday, September 28, 2005
Gold $3600?
Jim Walker, chief economist of CLSA was the guest host on Asian Squawk Box. Right before he signed off he mentioned that CLSA's gold analyst, Chris Wood, thinks gold will go to $3600 by the end of 2010. While Dr. Walker did spell out a bullish case for gold that was not that different from other bullish cases, there was not enough time to get into how Mr. Wood arrives at the target.
It is possible that Wood is not the analysts last name. Dr. Walker has a Scottish accent that is so thick that I can't be sure I heard the name correctly, but I did hear $3600 correctly.
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It is possible that Wood is not the analysts last name. Dr. Walker has a Scottish accent that is so thick that I can't be sure I heard the name correctly, but I did hear $3600 correctly.
Read more!
Media Appearance....
I am scheduled to appear in my regular slot during the first half our of Asian Market Watch tonight.Here is a list of what I think is important this week.
- Treasury yields have moved back up a little over the last couple of weeks as expected. I believe the hurricane reaction is now of the bond market. Bonds are back to worrying about the Fed as a priority and to a lesser extent what 2006 will look like.
- There have been a few earnings warnings so far but we do not have a good feel yet for what the hurricanes will mean for stocks yet. I expect this to be more visible in the fourth quarter.
- I view the action in equities as favorable, short term. There is not a lot of selling pressure with what is known now.
- With the S+P 500 up 0.4% for the year I continue to believe that there will be a positive move as managers try to salvage the year.
- The energy market has not unwound from the hurricanes. As someone who has been bullish on oil for a couple of years, I am surprised that it is not closer to $60 right now. Given the amount of refineries shut down it makes sense to me that gasoline is still very high.
- The market seems to be pricing in a higher likelihood of 4.25% in Fed Funds. There is concern about the real estate market. I thought they should have stopped at 3.5%, I think a few months of $3.00 gasoline will make them wish they had.
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Maybe Today's Lift Will Stick
Today the lift may stick because there is less emotion than there was on Monday as the market was relieved about Rita.
Perhaps this invalidates my idea from yesterday about the quarter closing out quietly. Maybe we can see a nice lift. Obviously I can't know how many buy-siders need the market to rally, if you know what I mean.
Oil is continuing to work higher, the curve is getting a little flatter, the dollar weaker against the commodity currencies and stronger against the others.
I like the merger Gazprom is doing, although this one is foreign. M&A is a sign of confidence about the future. I am worried about 2006 domestically but it can still be a great year for foreign markets and I could be wrong about 2006 being bad in the US.
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Perhaps this invalidates my idea from yesterday about the quarter closing out quietly. Maybe we can see a nice lift. Obviously I can't know how many buy-siders need the market to rally, if you know what I mean.
Oil is continuing to work higher, the curve is getting a little flatter, the dollar weaker against the commodity currencies and stronger against the others.
I like the merger Gazprom is doing, although this one is foreign. M&A is a sign of confidence about the future. I am worried about 2006 domestically but it can still be a great year for foreign markets and I could be wrong about 2006 being bad in the US.
Read more!
Tuesday, September 27, 2005
Middleton ETF Portfolio
Tim Middleton posted the 3Q results for his all ETF portfolio today. For the quarter his portfolio was up 4.9% vs 0.5% for the SPX (his quarter is off by a couple of days due to something about when articles publish but is it still a valid three month period).
I wrote about his portfolio six months ago and noted that he had a 14.3% weight in energy, much bigger than the then 8.7% of the SPX. I said that with such a big bet on energy he would either beat by a lot or lag by a lot. Energy has been on fire and he has beat by a lot.
The current article spells out what the portfolio will look like for the fourth quarter. The weight in energy is again high at what I count to be 14.1% vs now 10.19% for the S+P 500. I emailed him about this six months ago and I got a reply that I did not fully understand so I won't try to email again.
He is effectively 40% overweight the sector. It could easily turn out to be the right call but it is a big enough bet that it should be mentioned with some detail in the article and people that implement the portfolio for themselves should know that they have this much energy and that they will lag if crude drops to $45.
I would note that energy's weight has grown by about 150 basis points over that last six months. That is not meaningless. For what its worth I took some beta out of the sector in the spring.
It might not occur to people that most of the equity components of Tim's portfolio has energy stocks in them. Too many folks might just look at the 11% weight in IGE and think 11% is in energy (for the record 84% of IGE is in energy stocks).
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I wrote about his portfolio six months ago and noted that he had a 14.3% weight in energy, much bigger than the then 8.7% of the SPX. I said that with such a big bet on energy he would either beat by a lot or lag by a lot. Energy has been on fire and he has beat by a lot.
The current article spells out what the portfolio will look like for the fourth quarter. The weight in energy is again high at what I count to be 14.1% vs now 10.19% for the S+P 500. I emailed him about this six months ago and I got a reply that I did not fully understand so I won't try to email again.
He is effectively 40% overweight the sector. It could easily turn out to be the right call but it is a big enough bet that it should be mentioned with some detail in the article and people that implement the portfolio for themselves should know that they have this much energy and that they will lag if crude drops to $45.
I would note that energy's weight has grown by about 150 basis points over that last six months. That is not meaningless. For what its worth I took some beta out of the sector in the spring.
It might not occur to people that most of the equity components of Tim's portfolio has energy stocks in them. Too many folks might just look at the 11% weight in IGE and think 11% is in energy (for the record 84% of IGE is in energy stocks).
Read more!
Fizzle
I meant to touch on this yesterday, early, but I forgot. I kind of thought the early rally would fizzle, but I don't get credit for writing about it after the fact.
The reason why I think the lift fizzled is that the S+P 500 was actually up last Thursday and Friday. For all of last week, SPX was only down 22 points, hardly a meltdown.
I am surprised how much yields have gone up. In the face of Katrina, I said in a CNBC Asia interview that I thought the ten year yield would go from 4.00% to about 4.20%. The idea was just about retracement not something very clever or insightful. The ten year closed on Monday at 4.29%. I don't think nine basis points matters a whole lot but I haven't figured out whether this is more of a spike and the yield will go a little lower or if the ten year will zip right to 4.50%. 4.50% very soon would be a surprise but I suppose it is possible. It also ties into to my belief that the 30 year bond will generally result in higher rates.
On a much different note, are there any other Yahoo Mail users that have been having problems lately? Just about every enhancement they've added in the last few years is now gone. I really would love to hear about this, even if you have had no problems. Thank you!
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The reason why I think the lift fizzled is that the S+P 500 was actually up last Thursday and Friday. For all of last week, SPX was only down 22 points, hardly a meltdown.
I am surprised how much yields have gone up. In the face of Katrina, I said in a CNBC Asia interview that I thought the ten year yield would go from 4.00% to about 4.20%. The idea was just about retracement not something very clever or insightful. The ten year closed on Monday at 4.29%. I don't think nine basis points matters a whole lot but I haven't figured out whether this is more of a spike and the yield will go a little lower or if the ten year will zip right to 4.50%. 4.50% very soon would be a surprise but I suppose it is possible. It also ties into to my belief that the 30 year bond will generally result in higher rates.
On a much different note, are there any other Yahoo Mail users that have been having problems lately? Just about every enhancement they've added in the last few years is now gone. I really would love to hear about this, even if you have had no problems. Thank you!
Read more!
Nothing
That's what the stock market seems to be doing. I might have expected a little more I don't know what than what we are seeing.
Bonds, Forex and gold have been much more interesting lately.
Based on past observances, I would not be shocked if the volatility ramped up next week (new quarter), assuming this entire post isn't totally wrong and things heat up this week.
For what its worth I have done very little lately, lightened up a hair on Latin America, added a little yield (both moves for a handful of more volatility tolerant clients). I had been holding off on buying short dated treasuries for clients that need them and I bought those last week.
For those of you that read this site at in late 2004 I wrote a post where I said how useless predictions are and proceeded to throw my hat in the ring. I thought that we would be lucky to be up mid single digits and so far that looks pretty good. I'd love to be wrong and see the market really pop for its next 60 SPX points (that would take it to about 1280 which is higher than the 1270 I see as a possible top).
I can't imagine that this could happen because of fundamentals. Often the market has big fast moves for no reason at all. That is what we would need, to see a rally of size and that is the type of thing that can happen at anytime.
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Bonds, Forex and gold have been much more interesting lately.
Based on past observances, I would not be shocked if the volatility ramped up next week (new quarter), assuming this entire post isn't totally wrong and things heat up this week.
For what its worth I have done very little lately, lightened up a hair on Latin America, added a little yield (both moves for a handful of more volatility tolerant clients). I had been holding off on buying short dated treasuries for clients that need them and I bought those last week.
For those of you that read this site at in late 2004 I wrote a post where I said how useless predictions are and proceeded to throw my hat in the ring. I thought that we would be lucky to be up mid single digits and so far that looks pretty good. I'd love to be wrong and see the market really pop for its next 60 SPX points (that would take it to about 1280 which is higher than the 1270 I see as a possible top).
I can't imagine that this could happen because of fundamentals. Often the market has big fast moves for no reason at all. That is what we would need, to see a rally of size and that is the type of thing that can happen at anytime.
Read more!
Monday, September 26, 2005
The Big Picture: Yale Endowment Manager: Index
The Big Picture: Yale Endowment Manager: Index
This is a great article, thanks Barry.
I have written about Mr. Swensen once or twice before. I have his book to read on the flight to New Zealand next month.
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This is a great article, thanks Barry.
I have written about Mr. Swensen once or twice before. I have his book to read on the flight to New Zealand next month.
Read more!
Bull Or Bear? What To Do?
This was the tone of a couple of comments left earlier today.
Are we in a cyclical bull market in a secular bear market? Can the markets make new lows?
To tell the truth I don't think it matters whether we are in a secular bear market. If the market makes no real ground to speak of for the next decade, is that really a bear market? Maybe but I don't really care. I tend to focus on the next year or so. I have started to write more about 2006 lately as I think I have more visibility for 2006 than we had last spring.
Almost every participant the annual Businessweek survey that predicts the coming year for the market gets it wrong, so how is the same crew going to get it right for a period of many years?
Regardless of the proper label, an investor needs to understand past similar periods in market history, be in touch with current market events and blend those together to come up with an opinion of what might be next. Going hand in hand with that should be a counter strategy of changes to make in case the analysis turns out to be wrong.
Obviously I am describing my approach. A person that thinks of themselves as a swing trader should care about other things. Again though, I doubt too many swing traders are concerned with whether this is a secular bear market either.
Where's a good place to park investments while everything (the Fed, weather, oil) sorts themselves out?
Since market has not deviated from its trading range I'm not sure too much needs to be changed. I have made a tweak here and there but that's it.
I have devoted a lot of space on this website to not trying to out maneuver what the market might do.
I have covered the fact that if the market does take a bad turn I plan to reduce domestic exposure, increase yield and increase foreign exposure. This is a plan that might never need to be implemented.
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Are we in a cyclical bull market in a secular bear market? Can the markets make new lows?
To tell the truth I don't think it matters whether we are in a secular bear market. If the market makes no real ground to speak of for the next decade, is that really a bear market? Maybe but I don't really care. I tend to focus on the next year or so. I have started to write more about 2006 lately as I think I have more visibility for 2006 than we had last spring.
Almost every participant the annual Businessweek survey that predicts the coming year for the market gets it wrong, so how is the same crew going to get it right for a period of many years?
Regardless of the proper label, an investor needs to understand past similar periods in market history, be in touch with current market events and blend those together to come up with an opinion of what might be next. Going hand in hand with that should be a counter strategy of changes to make in case the analysis turns out to be wrong.
Obviously I am describing my approach. A person that thinks of themselves as a swing trader should care about other things. Again though, I doubt too many swing traders are concerned with whether this is a secular bear market either.
Where's a good place to park investments while everything (the Fed, weather, oil) sorts themselves out?
Since market has not deviated from its trading range I'm not sure too much needs to be changed. I have made a tweak here and there but that's it.
I have devoted a lot of space on this website to not trying to out maneuver what the market might do.
I have covered the fact that if the market does take a bad turn I plan to reduce domestic exposure, increase yield and increase foreign exposure. This is a plan that might never need to be implemented.
Read more!
Interesting Comments
This week's commentary from John Hussman was interesting. It talked about the futility of trying to predict what the stock market will do.
The article looked at the issue in a way that is very different than what I try to do. I spend a lot of time trying to weigh different potential outcomes and then planning to some degree of likelihood what action I will take in the face of what ever scenario comes.
The key here is not to focus on whether I am right about what I think will happen but to have something in mind no matter what happens. I have spent a lot of time lately trying to plan for a negative environment for domestic equities. I am already invested for a positive environment for equities. I have a little more cash than normal but Google and Statoil have helped offset any cash drag for the third quarter.
I have put together a plan if I need to get more defensive or more aggressive. Doing this sort of thing on the fly is probably not my strong suit, hence my need for advanced planning.
Read more!
The article looked at the issue in a way that is very different than what I try to do. I spend a lot of time trying to weigh different potential outcomes and then planning to some degree of likelihood what action I will take in the face of what ever scenario comes.
The key here is not to focus on whether I am right about what I think will happen but to have something in mind no matter what happens. I have spent a lot of time lately trying to plan for a negative environment for domestic equities. I am already invested for a positive environment for equities. I have a little more cash than normal but Google and Statoil have helped offset any cash drag for the third quarter.
I have put together a plan if I need to get more defensive or more aggressive. Doing this sort of thing on the fly is probably not my strong suit, hence my need for advanced planning.
Read more!
Saturday, September 24, 2005
The Big Picture For The Week of September 25, 2005
Saturday morning our fire department had a practice fire that lasted for four and a half hours. I recently became co-assistant fire chief so I was very involved in the whole drill.
I tivo'd all the Fox News shows. When I got back I saw that Neil had hosted the entire two hours with short little segments here and there about the financial markets.
When Katrina had first hit, I wrote that I was undecided what would be important economically, the devastation of what was lost or the lift from what gets spent on rebuilding. I saw no reason to draw a conclusion right away.
As time has gone on I have to say I can not see how this can possibly be a net positive anytime soon. Money spent in the region is clearly positive but not net positive. Who can know how much this could take off of GDP but it seems plausible that having this part of the country gummed up will slow all sorts of things down. Also, a point made on Fox, there will not be much tax revenue collected from businesses for a while in that part of the country.
It also makes sense that weeks on end of $3 gasoline, if that's what we get, will be a problem for a lot of consumers.
I am totally baffled by the Fed giving no real nod to the hurricanes, especially given its past willingness to make changes in the face of past crises.
I don't see the dollar collapsing like Jim Rogers, weaker yes, but collapsing no.
If the double hurricanes will be a net negative I think it may be a while before we start to see it coming through. The immediate aftermath could easily last a month or two if not longer, point being that the stock market may not think much of weak data points for a while. If this is right, it would tie into the idea that I have had for a while that the S+P 500 could work higher for a while before doing anything else.
The obvious question should be that if the market will be rough in 2006, as I think, why would the market go up first?
My first answer would be I could be wrong. There seems to be a lack of real selling pressure though. As of now, with the various ups and downs lately we are still in the same narrow range we have been in for months. Also, even if the fundamentals start to deteriorate, as I think they might, there is no reason that the market can't go up. It has happened plenty of times in the past; rising market with lousy fundamentals.
The important thing is understanding visibility for problems down the road. We have had a bull market for the last 30 months (starting from March 2003, some would say it started in November 2002). Soon we may have a bear market. This is how the market works. I feel no emotion about this, it just seems logical. If I am wrong, great, I won't have to make big changes in client portfolios. If I am right I will have to make changes. Since this is totally outside the span of my control it makes no sense to me to worry about this. I'll just stick to my knitting and listen to what the market says.
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I tivo'd all the Fox News shows. When I got back I saw that Neil had hosted the entire two hours with short little segments here and there about the financial markets.
When Katrina had first hit, I wrote that I was undecided what would be important economically, the devastation of what was lost or the lift from what gets spent on rebuilding. I saw no reason to draw a conclusion right away.
As time has gone on I have to say I can not see how this can possibly be a net positive anytime soon. Money spent in the region is clearly positive but not net positive. Who can know how much this could take off of GDP but it seems plausible that having this part of the country gummed up will slow all sorts of things down. Also, a point made on Fox, there will not be much tax revenue collected from businesses for a while in that part of the country.
It also makes sense that weeks on end of $3 gasoline, if that's what we get, will be a problem for a lot of consumers.
I am totally baffled by the Fed giving no real nod to the hurricanes, especially given its past willingness to make changes in the face of past crises.
I don't see the dollar collapsing like Jim Rogers, weaker yes, but collapsing no.
If the double hurricanes will be a net negative I think it may be a while before we start to see it coming through. The immediate aftermath could easily last a month or two if not longer, point being that the stock market may not think much of weak data points for a while. If this is right, it would tie into the idea that I have had for a while that the S+P 500 could work higher for a while before doing anything else.
The obvious question should be that if the market will be rough in 2006, as I think, why would the market go up first?
My first answer would be I could be wrong. There seems to be a lack of real selling pressure though. As of now, with the various ups and downs lately we are still in the same narrow range we have been in for months. Also, even if the fundamentals start to deteriorate, as I think they might, there is no reason that the market can't go up. It has happened plenty of times in the past; rising market with lousy fundamentals.
The important thing is understanding visibility for problems down the road. We have had a bull market for the last 30 months (starting from March 2003, some would say it started in November 2002). Soon we may have a bear market. This is how the market works. I feel no emotion about this, it just seems logical. If I am wrong, great, I won't have to make big changes in client portfolios. If I am right I will have to make changes. Since this is totally outside the span of my control it makes no sense to me to worry about this. I'll just stick to my knitting and listen to what the market says.
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Inverted Curve
Barron's Online - Current Yield
This weeks Current Yield column in Barron's quotes two strategists as saying the likelihood for an inverted curve is now greater. This was my initial reaction to the Fed announcement but we'll have to see.
The one saving grace I see first and foremost is the reissuing of the 30 year in February could move ten year yields up 40-50 basis points, which I think would take inversion off the table.
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This weeks Current Yield column in Barron's quotes two strategists as saying the likelihood for an inverted curve is now greater. This was my initial reaction to the Fed announcement but we'll have to see.
The one saving grace I see first and foremost is the reissuing of the 30 year in February could move ten year yields up 40-50 basis points, which I think would take inversion off the table.
Read more!
Friday, September 23, 2005
I Need Some Relief!
The hurricane coverage and footage is making for a very long day. I suppose they have to do this but a day like this is a terrible time to make strategic shifts to a portfolio because of what might happen as a result.
I think it would be very human to have an emotional response the might lead to portfolio changes. The SPX is down 1.20 points today. I don't view that as a catalyst for anything.
I am implementing a couple of new clients today but an not doing anything differently. A big focus for me is to remove emotion from what I do. So far so good. I hope you don't let the media's gloom dictate what you do.
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I think it would be very human to have an emotional response the might lead to portfolio changes. The SPX is down 1.20 points today. I don't view that as a catalyst for anything.
I am implementing a couple of new clients today but an not doing anything differently. A big focus for me is to remove emotion from what I do. So far so good. I hope you don't let the media's gloom dictate what you do.
Read more!
Interesting Lesson
Oil has backed off of its recent high a little bit. I wrote a week or so ago that I thought it might go back to the low $60s and that was right for about ten minutes until Rita popped up;-)
At the start of the month I was hitting hard on the fact the market has only been down in both August and September six times in the last 20 years. Well with a week to go anything could happen but it looks like I will be wrong about September not being down.
I thought that the treasury market would unwind its Katrina rally, which it did and from here I do not think the ten year will go down to 4% again because of Rita but this has been a very volatile market.
I have been leaning toward a weaker dollar for quite a while now and that has not really been working since the French vote in May.
Are you getting the point? It is easy to be wrong about different things happening in the market. The overall portfolio has done relatively well this quarter. I attribute this to something that I try to do but have not mentioned much lately; I try to get more big themes right than wrong. The sentence, and the strategy, assumes I will get things wrong. And I do. You will too and that is ok.
As a writer for RealMoney.com I get a free subscription and I have to say the content from the other writers is very good. There are a lot of articles that chronicle well thought out opinions and the actions taken around those opinions (this is not a pitch for the site). What I have trouble getting a hold of is that there is so much demand for content about what trades to make this week, or even just today. Clearly there is demand for very short term ideas, I'm just saying it is so foreign to how I look at things. Barry Ritholtz had an interesting comment in a recent article when he said (paraphrasing) treat 5% of your portfolio as hot money for short term trades. Maybe more people do this than I realized. Wrong yet again.
Read more!
At the start of the month I was hitting hard on the fact the market has only been down in both August and September six times in the last 20 years. Well with a week to go anything could happen but it looks like I will be wrong about September not being down.
I thought that the treasury market would unwind its Katrina rally, which it did and from here I do not think the ten year will go down to 4% again because of Rita but this has been a very volatile market.
I have been leaning toward a weaker dollar for quite a while now and that has not really been working since the French vote in May.
Are you getting the point? It is easy to be wrong about different things happening in the market. The overall portfolio has done relatively well this quarter. I attribute this to something that I try to do but have not mentioned much lately; I try to get more big themes right than wrong. The sentence, and the strategy, assumes I will get things wrong. And I do. You will too and that is ok.
As a writer for RealMoney.com I get a free subscription and I have to say the content from the other writers is very good. There are a lot of articles that chronicle well thought out opinions and the actions taken around those opinions (this is not a pitch for the site). What I have trouble getting a hold of is that there is so much demand for content about what trades to make this week, or even just today. Clearly there is demand for very short term ideas, I'm just saying it is so foreign to how I look at things. Barry Ritholtz had an interesting comment in a recent article when he said (paraphrasing) treat 5% of your portfolio as hot money for short term trades. Maybe more people do this than I realized. Wrong yet again.
Read more!
Thursday, September 22, 2005
Hanging In There
I think the market has put in a good showing today. There is SPX support around 1200 and I am optimistic it will hold for now but we'll see.
For all of the worry and concern and people trying to trade around the weather and the Fed the market is only down 3% or so, down a little.
If I am wrong about 1200 holding, that will mean a breach of the 200 DMA. My plan in getting defensive will be to sell partial positions and add a little yield. I do not plan big changes right away in case I am wrong.
Read more!
For all of the worry and concern and people trying to trade around the weather and the Fed the market is only down 3% or so, down a little.
If I am wrong about 1200 holding, that will mean a breach of the 200 DMA. My plan in getting defensive will be to sell partial positions and add a little yield. I do not plan big changes right away in case I am wrong.
Read more!
What Was That About A Proxy For Gold?
This article from Bloomberg had a couple of fun facts about Australia and gold. Australia is the third largest supplier of gold (knew that) and the fourth biggest supplier of copper (didn't know that exactly).
The article also says that the Aussie dollar has a 0.92 correlation to gold (did not know that, but not shocked). This chart shows what 0.92 looks like.
The Canadian dollar may have a closer correlation than the Aussie.
This has pluses and minuses. I am a big fan of both countries as investment destinations. Too much of them along with a gold stock or two may lead to more exposure to gold than desired.
Long time readers know that I think gold has a place in every portfolio but buying a Canadian bank along with an Aussie retailer might give you more correlation to gold than you think.
Just something to think about.
Read more!
The article also says that the Aussie dollar has a 0.92 correlation to gold (did not know that, but not shocked). This chart shows what 0.92 looks like.
The Canadian dollar may have a closer correlation than the Aussie.
This has pluses and minuses. I am a big fan of both countries as investment destinations. Too much of them along with a gold stock or two may lead to more exposure to gold than desired.
Long time readers know that I think gold has a place in every portfolio but buying a Canadian bank along with an Aussie retailer might give you more correlation to gold than you think.
Just something to think about.
Read more!
Wednesday, September 21, 2005
Foreign Stocks Up
This is a slice out of my foreign stocks monitor and accounts for a lot of the foreign names I own for clients. The names are not important but the effect is. The market feels worse off than the three SPX points it is down right now. The dollar is also lower today which accounts for the move up in these stocks.This illustrates what I have been writing for ages, my clients have a lot less riding on my being exactly right by virtue of deciding early on in the process that I want a lot of foreign exposure.
This is not that scientific, but is quite accessible for do-it-yourselfers.
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My Head In The Oven Part Deux
Um, did you hear the Matt Simmons interview on CNBC?
He basically said that Rita could knock the (oil) planet off of its axis. He made a comparison to Pearl Harbor.
He knows a lot more about oil than I do, I have no idea what he knows about weather.
I don't know much about weather either but have we ever had two hurricanes in a row like this before that have caused such devastation? It makes me wonder if people are overly cautious, rightly so, because of Katrina.
I'm shooting in the dark on this because I do not know, but it is a reasonable question.
Read more!
He basically said that Rita could knock the (oil) planet off of its axis. He made a comparison to Pearl Harbor.
He knows a lot more about oil than I do, I have no idea what he knows about weather.
I don't know much about weather either but have we ever had two hurricanes in a row like this before that have caused such devastation? It makes me wonder if people are overly cautious, rightly so, because of Katrina.
I'm shooting in the dark on this because I do not know, but it is a reasonable question.
Read more!
Short Oil Fund
Profunds has two new funds; Short Oil & Gas (SNPIX) and Short Real Estate (SRPIX).
One of the writers at Real Money does a lot of sentiment work by looking at inflows and outflows of the Rydex Funds. There could be some interesting sentiment gleaned from these two funds. I am more interested in the oil fund's flows than the real estate fund.
Neither fund is leveraged.
Short post this morning, I am doing an interview on a radio station about the Fed hike and I need to make sure my ducks are lined up.
Read more!
One of the writers at Real Money does a lot of sentiment work by looking at inflows and outflows of the Rydex Funds. There could be some interesting sentiment gleaned from these two funds. I am more interested in the oil fund's flows than the real estate fund.
Neither fund is leveraged.
Short post this morning, I am doing an interview on a radio station about the Fed hike and I need to make sure my ducks are lined up.
Read more!
Tuesday, September 20, 2005
Kick In The Stomach
Or other places.
That is what FOMC may have done to the US stock market with the way it managed Tuesday's announcement.
It is said that it takes six-nine months for a hike to be fully felt in the economy. Assuming that is true we are just now processing last January's hike and the action today won't come to matter until next June. There are flaws to this thought process that perhaps shorten the time increments but perhaps not, if you know what I mean.
This feeds into my idea of 2006 a being a rough year for US equities. A lot of people would say that 4.25% is a certainty in fed funds. The ten year is now at 4.28%, I bought some 23 months treasuries yesterday for a couple of clients that yield 3.87%. I believe there is now greater risk for either an inverted yield curve or a V shaped curve.
Keep in mind this has happened and the S+P 500 is at 1223. I have no trade to make right now. We are about 2% or so away from the 200 DMA. That is down a little. Long term money should be able to handle down a little. This is important to me. My exit strategy has not come into play yet. I know exactly where it does come in to play and all I have to do is be disciplined. Long time readers will know that of my many flaws as an investment manager, discipline is not one of them. How about you?
Read more!
That is what FOMC may have done to the US stock market with the way it managed Tuesday's announcement.
It is said that it takes six-nine months for a hike to be fully felt in the economy. Assuming that is true we are just now processing last January's hike and the action today won't come to matter until next June. There are flaws to this thought process that perhaps shorten the time increments but perhaps not, if you know what I mean.
This feeds into my idea of 2006 a being a rough year for US equities. A lot of people would say that 4.25% is a certainty in fed funds. The ten year is now at 4.28%, I bought some 23 months treasuries yesterday for a couple of clients that yield 3.87%. I believe there is now greater risk for either an inverted yield curve or a V shaped curve.
Keep in mind this has happened and the S+P 500 is at 1223. I have no trade to make right now. We are about 2% or so away from the 200 DMA. That is down a little. Long term money should be able to handle down a little. This is important to me. My exit strategy has not come into play yet. I know exactly where it does come in to play and all I have to do is be disciplined. Long time readers will know that of my many flaws as an investment manager, discipline is not one of them. How about you?
Read more!
Maybe It Does Mean Inflation
I have written a couple of times in the last few days about trying to figure out what the move in gold might mean. I allowed for a couple of possibilities as I indicated I was still trying to figure it out.
On of the possibilities was that there is a mild panic due to Katrina aftermath and political uncertainty in Germany and New Zealand.
Last night it hit me, if panic is part of the equation we might see in strength in the Swiss franc. I have written a few times about Switzerland as a bomb shelter type of investment destination. This chart shows strength in the Swissi right up to the hurricane and then dollar strength since. The dollars being bought have not gone into treasuries but appear to have gone into gold as the yellow metal is denominated in US dollars.
I think panic is probably off the table. That leaves inflation and Asian holiday buying still on the table.
This is where I am in the process. That is what this blog is about, sharing my process. I have drawn a conclusion about one part of this that might turn out to be wrong but this is my thinking right now.
Read more!
On of the possibilities was that there is a mild panic due to Katrina aftermath and political uncertainty in Germany and New Zealand.
Last night it hit me, if panic is part of the equation we might see in strength in the Swiss franc. I have written a few times about Switzerland as a bomb shelter type of investment destination. This chart shows strength in the Swissi right up to the hurricane and then dollar strength since. The dollars being bought have not gone into treasuries but appear to have gone into gold as the yellow metal is denominated in US dollars.
I think panic is probably off the table. That leaves inflation and Asian holiday buying still on the table.
This is where I am in the process. That is what this blog is about, sharing my process. I have drawn a conclusion about one part of this that might turn out to be wrong but this is my thinking right now.
Read more!
Wheesch!
The market looked sick on Monday. Decliners out number advancers 2-1. Energy worked, gold worked and foreign didn't necessarily work so much as it wasn't putrid like domestic.
I am trying to put my thoughts together about the significance of the move in gold. My post on Monday about my CNBC Asia appearance didn't draw much of a conclusion. The move being just about inflation is valid but so is the idea of it being a seasonal thing. As is always the way, we will know more later.
This could be a worthwhile point to make. It is not crucial to have it all worked out right away. If your time horizon for a trade is just a few days, well maybe you do need to have it figured out right away.
The 200 DMA on the SPX is a hair under 1200, less that 3% away. I can risk 3% for long term money if the move in gold means the coming of a financial apocalypse and the final result is a 50% drop in the US markets.
To be clear, I do not think this is the start of a financial apocalypse with a 50% drop.
Read more!
I am trying to put my thoughts together about the significance of the move in gold. My post on Monday about my CNBC Asia appearance didn't draw much of a conclusion. The move being just about inflation is valid but so is the idea of it being a seasonal thing. As is always the way, we will know more later.
This could be a worthwhile point to make. It is not crucial to have it all worked out right away. If your time horizon for a trade is just a few days, well maybe you do need to have it figured out right away.
The 200 DMA on the SPX is a hair under 1200, less that 3% away. I can risk 3% for long term money if the move in gold means the coming of a financial apocalypse and the final result is a 50% drop in the US markets.
To be clear, I do not think this is the start of a financial apocalypse with a 50% drop.
Read more!
Monday, September 19, 2005
Media Appearance....
I am scheduled to appear in my regular slot during the first half hour of Asian Market Watch. Here's a list of what's on my mind.- The gold market is certainly worried about something, probably inflation but it could be a panic over what might be an very uncertain year end for the US economy. Either way the 5% move in such a short time is a headwind for equities. Another possibility is that we are just seeing a seasonal spike as some of the Asian holidays are on the way.
- The Fed meeting and statement are both potentially very important and market moving. There seems to be genuine indecision in the market about what the Fed will do at the next two meetings. The current meeting, I believe, is set that the Fed will hike again which seems odd because there is been a willingness, in the past, to change paths in the face of crisis or dislocation as is happening now with Katrina.
- I'm not sure the spike in oil on Monday will necessarily stick. I continue to be overweight the sector but this latest move seems to be borne more out of very short term news. A couple of weeks ago I thought the Katrina spike to $71 would not last and my gut says oil trades a little lower for a while. An average of $60 per barrel over a quarter would still mean fantastic earnings for the sector.
- The move in treasuries to 4.24% on the ten year is also consistent with unwinding Katrina and I think that 4.20%-4.50% is a positive relative to an inverted curve. Where it become a negative is rates moving up with gold to signal inflation. I think rates need to be higher than where they are now to confirm the move in gold is just about inflation.
- Some other commentators were looking for a calm week. Monday's action refutes that. We saw extreme moves in many different markets. I could easily be wrong about oil and underestimating the importance of the move in gold. The point here being that after a period of relatively low volatility we could see more coming for the next few months as some of these new variables work themselves out.
Read more!
Measuring Risk
I had the following comment left on a post about Morningstar from the other day.
I use Morningstar only for its raw data especially in mutual funds. The writers at Morningstar tend to offer too much personal(mistaken as professional)opions than the data would suggest. Till this day Morningstar has yet to come up with any good risk measurements for its funds or stocks. I would like you to write how you personally balance the reward with risk for your clients. After reading your blog for a while, I sense you probably know this area better than most people. I would appreciate if you can share some idea with us.
I'll take a stab at this but it may be difficult to articulate. Part of my idea about how to manage money is to look at the big picture first and try to assess what parts of the market are likely to have a shot of outperforming based on history and current events. Buying a Chinese oil stock was less risky two years ago than it was six years ago. Buying mega cap now is riskier than buying it in 1996.
In making decisions about what sectors, countries, style or cap size to overweight or underweight I am trying to reduce risk where possible. If I think tech will lag I would underweight it. An area of the market I expect to lag carries more risk as I see it, for the time being anyway.
When I get to sector composition I look to blend together various type of volatilities to capture whatever effect I think makes sense. For example with energy; I have been overweight for a long time. In the sector I have owned two large, foreign integrated oil companies, a second tier oil company with refining exposure and one of the Chinese oils.
Last fall I added beta with one of the tanker names and also Murphy Oil (MUR). I felt it was a good time to add beta. It turned out to be a good entry point for beta. I managed the tanker name poorly. It shot up a lot but I held on too long and most clients broke even or lost a little. I wrote about getting stopped out on MUR on the blog, but I may not have disclosed the name. Since I sold MUR the stock has languished compared to the rest of the group. In the mean time three of the oils I still own (lower beta, relatively) are up a lot, as you might expect for any energy stock.
The decision to reduce beta was motivated by a gut feeling and what had been a big move up to that point. Generally an area of the market is riskier after it has gone up a lot. This is obvious and simple but true.
One aspect of this topic I have written about before is watching a stock for several months to learn how it reacts to various kinds of news. As an example, last fall I wanted to add a little beta in consumer growth so I bought Advance Auto Parts (AAP). This stock is a hot potato and has been for a while. I bought in around $40 or so and it seemed like once a month it would have a week where it would go up 10%. I finally got stopped out this summer around $65. Since then it has traded around $61. The point is I knew ahead of time it could have big moves, I expected it to add a lot of alpha in a market that was not down. Had the market been down I think it would have lagged badly. Although it went up more than I thought it could, it generally filled the exact role I had hoped for.
On the other side of the risk coin would be a name like Johnson & Johnson. Just about every client owns it. I have mentioned before my view that the market is a great place to get rich slowly. JNJ is exactly the type of name I think about as applying to that phrase.
I don't know if this really answers the question or not. The thing here is that by learning how a stock reacts to news first hand, not just looking at a chart, I think I get a feel for what the stock can do. It would be naive for me to think I will always be correct but this allows to feel more confident about what I own. I also look at text book numbers like beta and so on.
Read more!
I use Morningstar only for its raw data especially in mutual funds. The writers at Morningstar tend to offer too much personal(mistaken as professional)opions than the data would suggest. Till this day Morningstar has yet to come up with any good risk measurements for its funds or stocks. I would like you to write how you personally balance the reward with risk for your clients. After reading your blog for a while, I sense you probably know this area better than most people. I would appreciate if you can share some idea with us.
I'll take a stab at this but it may be difficult to articulate. Part of my idea about how to manage money is to look at the big picture first and try to assess what parts of the market are likely to have a shot of outperforming based on history and current events. Buying a Chinese oil stock was less risky two years ago than it was six years ago. Buying mega cap now is riskier than buying it in 1996.
In making decisions about what sectors, countries, style or cap size to overweight or underweight I am trying to reduce risk where possible. If I think tech will lag I would underweight it. An area of the market I expect to lag carries more risk as I see it, for the time being anyway.
When I get to sector composition I look to blend together various type of volatilities to capture whatever effect I think makes sense. For example with energy; I have been overweight for a long time. In the sector I have owned two large, foreign integrated oil companies, a second tier oil company with refining exposure and one of the Chinese oils.
Last fall I added beta with one of the tanker names and also Murphy Oil (MUR). I felt it was a good time to add beta. It turned out to be a good entry point for beta. I managed the tanker name poorly. It shot up a lot but I held on too long and most clients broke even or lost a little. I wrote about getting stopped out on MUR on the blog, but I may not have disclosed the name. Since I sold MUR the stock has languished compared to the rest of the group. In the mean time three of the oils I still own (lower beta, relatively) are up a lot, as you might expect for any energy stock.
The decision to reduce beta was motivated by a gut feeling and what had been a big move up to that point. Generally an area of the market is riskier after it has gone up a lot. This is obvious and simple but true.
One aspect of this topic I have written about before is watching a stock for several months to learn how it reacts to various kinds of news. As an example, last fall I wanted to add a little beta in consumer growth so I bought Advance Auto Parts (AAP). This stock is a hot potato and has been for a while. I bought in around $40 or so and it seemed like once a month it would have a week where it would go up 10%. I finally got stopped out this summer around $65. Since then it has traded around $61. The point is I knew ahead of time it could have big moves, I expected it to add a lot of alpha in a market that was not down. Had the market been down I think it would have lagged badly. Although it went up more than I thought it could, it generally filled the exact role I had hoped for.
On the other side of the risk coin would be a name like Johnson & Johnson. Just about every client owns it. I have mentioned before my view that the market is a great place to get rich slowly. JNJ is exactly the type of name I think about as applying to that phrase.
I don't know if this really answers the question or not. The thing here is that by learning how a stock reacts to news first hand, not just looking at a chart, I think I get a feel for what the stock can do. It would be naive for me to think I will always be correct but this allows to feel more confident about what I own. I also look at text book numbers like beta and so on.
Read more!
Saturday, September 17, 2005
The Big Picture For The Week of September 18, 2005
I had several questions come in during the last few days. Here are the questions (paraphrased) and my answers.
One asked about my thoughts about the hit Walmart took during the switch to the float method of calculating the S+P 500.
If you don't know, a lot of Walmart stock came out of the index as a result of the changes. I'm not sure if the question behind the question is should Walmart be bought here. All I can say is I have no interest in the name. From a market cycle stand point, companies larger than $100 billion have lagged and I think will continue to do so.
From a fundamental stand point the growth has slowed dramatically in the last few years and I am not sure how it can ramp up again. I live in the biggest town in my county, our town has only 35,000-40,000 people and we have two Walmarts. The point being there will be no more Walmarts here.
There are many other parts of the country that are also saturated to the point that there will be no new Walmarts. Sure they can expand overseas but there might be easier places in big box retail to make money while Walmart figures out how to market bok choi and Dodger's t-shirts in China.
One emailer asked about ADR sites. I use two of them. One is ADR.com and the other is the Bank of New York's ADR site.
A third question asked about small cap stocks. The emailer mentioned that he has read several multicap managers have been rotating out of small cap lately thinking the run is over.
I have touched on this before in a couple of different ways. The first thing here is the market history on this. Small cap typically leads at the start of a bull market cycle. The average period of time that small cap leads is about 3 years. There have been times where small cap has lead for as long as 5 years.
So far this year small cap has out performed by a matter of basis points. If small cap outperforms large cap this year, that would be six years in a row. I believe that would be a record. So it makes sense to at least question whether small cap will soon lag large cap. In some of the six years the lead of small cap has been very narrow, perhaps that invalidates the six year issue, I'm not sure.
With the history lesson out of the way, the reader wants to know what I think. I doubt he will like my answer. I don't think in terms of how much small cap or large cap I have. The way I look at it is by average cap size of the portfolio. The average cap size of the S+P 500 is about $90 billion. These days the average cap size of client portfolios is around $40 billion up from $35 billion a few months ago.
Depending on what is going on at the time, increasing cap size might mean selling a smaller name
or it might mean adding a a larger name with out selling anything. Hence the logic behind thinking of cap size in this way.
While I don't know exactly when, I imagine my next move will be to make the average cap size a little bigger than it is now. The visibility to this is that if things go I think they might next year I would add a little more foreign to the mix, some of which will increase the average cap size of the portfolio.
Read more!
One asked about my thoughts about the hit Walmart took during the switch to the float method of calculating the S+P 500.
If you don't know, a lot of Walmart stock came out of the index as a result of the changes. I'm not sure if the question behind the question is should Walmart be bought here. All I can say is I have no interest in the name. From a market cycle stand point, companies larger than $100 billion have lagged and I think will continue to do so.
From a fundamental stand point the growth has slowed dramatically in the last few years and I am not sure how it can ramp up again. I live in the biggest town in my county, our town has only 35,000-40,000 people and we have two Walmarts. The point being there will be no more Walmarts here.
There are many other parts of the country that are also saturated to the point that there will be no new Walmarts. Sure they can expand overseas but there might be easier places in big box retail to make money while Walmart figures out how to market bok choi and Dodger's t-shirts in China.
One emailer asked about ADR sites. I use two of them. One is ADR.com and the other is the Bank of New York's ADR site.
A third question asked about small cap stocks. The emailer mentioned that he has read several multicap managers have been rotating out of small cap lately thinking the run is over.
I have touched on this before in a couple of different ways. The first thing here is the market history on this. Small cap typically leads at the start of a bull market cycle. The average period of time that small cap leads is about 3 years. There have been times where small cap has lead for as long as 5 years.
So far this year small cap has out performed by a matter of basis points. If small cap outperforms large cap this year, that would be six years in a row. I believe that would be a record. So it makes sense to at least question whether small cap will soon lag large cap. In some of the six years the lead of small cap has been very narrow, perhaps that invalidates the six year issue, I'm not sure.
With the history lesson out of the way, the reader wants to know what I think. I doubt he will like my answer. I don't think in terms of how much small cap or large cap I have. The way I look at it is by average cap size of the portfolio. The average cap size of the S+P 500 is about $90 billion. These days the average cap size of client portfolios is around $40 billion up from $35 billion a few months ago.
Depending on what is going on at the time, increasing cap size might mean selling a smaller name
or it might mean adding a a larger name with out selling anything. Hence the logic behind thinking of cap size in this way.
While I don't know exactly when, I imagine my next move will be to make the average cap size a little bigger than it is now. The visibility to this is that if things go I think they might next year I would add a little more foreign to the mix, some of which will increase the average cap size of the portfolio.
Read more!
Travelzoo
About a year ago I wrote an article for Motley Fool about a PIPE (private investment in a public equity) that Travelzoo (TZOO) did 23% below the then market price.
In the year since the PIPE deal the stock has been a little volatile. In my article I did not say much about price but I wondered how shareholders could trust a management that would sell stock so far below the market.
After a few weeks of sideways trading the stock just about doubled and has since dropped about 75%.
The way the PIPE was structured, a blowup of some magnitude is not a shock but 75% is quite severe. Someone who is good at short term trades could have made a lot of money in the name last December. If nimble trading is not your strength, stories like the one from TZOO last year can be a lesson of what to avoid.
Read more!
In the year since the PIPE deal the stock has been a little volatile. In my article I did not say much about price but I wondered how shareholders could trust a management that would sell stock so far below the market.
After a few weeks of sideways trading the stock just about doubled and has since dropped about 75%.
The way the PIPE was structured, a blowup of some magnitude is not a shock but 75% is quite severe. Someone who is good at short term trades could have made a lot of money in the name last December. If nimble trading is not your strength, stories like the one from TZOO last year can be a lesson of what to avoid.
Read more!
Friday, September 16, 2005
Oh Snap!
Annaly Mortgage (NLY) is getting taken to the woodshed over a big dividend cut. Other mortgage REITs are down as well. I have written negatively about mortgage REITs four times on this blog going back to last November.
Here is the thing with them; they are complex, leveraged and interest sensitive. Earlier I wrote about certain areas being tough to own, I forgot to include mortgage REITs.
The visibility for problems in this area have been so clear that I am shocked more people couldn't see this coming. Over the life of this blog I have had a couple of useful calls but this isn't one of them for how simple and obvious it is.
If riskless instruments yield 3%, or whatever, then something that yields 12% has a lot of risk. In my portfolio and in client portfolios have some exposure to instruments that yield 7%-8%. These clearly take more risk than the riskless 3% but there is much less risk with a 7% yielder than a 12% yielder. I think most do-it-yourselfers can wrap their hands around this quite easily.
At some point there will be a trade in these things. I don't follow them close enough to know if sentiment has washed out or not, but at some point it will and they might snap back a little in a short time. For anyone thinking about that type of trade, I would forget about the dividend. If you are nimble enough to get 10% in a short time, take it.
Read more!
Here is the thing with them; they are complex, leveraged and interest sensitive. Earlier I wrote about certain areas being tough to own, I forgot to include mortgage REITs.
The visibility for problems in this area have been so clear that I am shocked more people couldn't see this coming. Over the life of this blog I have had a couple of useful calls but this isn't one of them for how simple and obvious it is.
If riskless instruments yield 3%, or whatever, then something that yields 12% has a lot of risk. In my portfolio and in client portfolios have some exposure to instruments that yield 7%-8%. These clearly take more risk than the riskless 3% but there is much less risk with a 7% yielder than a 12% yielder. I think most do-it-yourselfers can wrap their hands around this quite easily.
At some point there will be a trade in these things. I don't follow them close enough to know if sentiment has washed out or not, but at some point it will and they might snap back a little in a short time. For anyone thinking about that type of trade, I would forget about the dividend. If you are nimble enough to get 10% in a short time, take it.
Read more!
Gold
Gold is getting a lot of attention on CNBC today.
Trying to game what gold may do short term is very difficult and probably not the right trade for too many people.
Long time readers know that I maintain exposure for clients with a gold stock. Usually gold and gold stocks have a low correlation to the S+P 500 and they tend to go up when there is some sort of crisis.
This week most gold stocks are up a lot. Maybe you saw this coming or maybe it is out of nowhere but either way by maintaining some exposure you could have added a few basis points of upside in what has been a down week. Gold stocks are zigging while the market is zagging.
This ties in with what I wrote the other day about Oz, NZ and PCL, all three of which are having a big week.
PCL is a client and personal holding.
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Trying to game what gold may do short term is very difficult and probably not the right trade for too many people.
Long time readers know that I maintain exposure for clients with a gold stock. Usually gold and gold stocks have a low correlation to the S+P 500 and they tend to go up when there is some sort of crisis.
This week most gold stocks are up a lot. Maybe you saw this coming or maybe it is out of nowhere but either way by maintaining some exposure you could have added a few basis points of upside in what has been a down week. Gold stocks are zigging while the market is zagging.
This ties in with what I wrote the other day about Oz, NZ and PCL, all three of which are having a big week.
PCL is a client and personal holding.
Read more!
Witching and Rebalancing
Today is options expiration and they are also rebalancing the S+P 500 to account for the switch to the float method of calculating the index.
There has been some chatter about what the float methodology might mean going forward but I think that after the next couple of days it won't mean much.
While I am sure there is a good reason to rebalance the index on expiration day, I'm not sure this is the best way to do this. Both events on the same day may ramp up the volatility for the next day or two. It looks like we will open much higher and I would not be surprised if the day zigged and zagged and we close opposite of how we open. I always point out that whatever happens on expiration day is likely to get unwound the following Monday. While this makes clear and obvious sense to me it has been wrong more often that not lately.
Maybe that's why I don't try to game the market on an hourly basis;-)
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There has been some chatter about what the float methodology might mean going forward but I think that after the next couple of days it won't mean much.
While I am sure there is a good reason to rebalance the index on expiration day, I'm not sure this is the best way to do this. Both events on the same day may ramp up the volatility for the next day or two. It looks like we will open much higher and I would not be surprised if the day zigged and zagged and we close opposite of how we open. I always point out that whatever happens on expiration day is likely to get unwound the following Monday. While this makes clear and obvious sense to me it has been wrong more often that not lately.
Maybe that's why I don't try to game the market on an hourly basis;-)
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Thursday, September 15, 2005
Various Reader Comments
One reader asked for my thoughts on iShares Brazil (EWZ). Well, The Brazil Fund (BZF) has done much better and yields more than EWZ, but the dividend payment has been volatile. BZF trades at a 7% discount to NAV. I would tell anyone to study BZF before buying EWZ. Either one is probably valid but I have had better luck with individual stocks for Brazilian exposure.
Another reader asked about broad OEFs to capture Australia, New Zealand and timber. I have no idea about timber. I know Plum Creek from my days at Lehman Brothers in the late 1980s when it was still an MLP. I am quite comfortable with it and have not sought out any substitutes. I would be interested in a timber ETF, ala GLD, for its diversification value but I doubt that is a priority for any of the ETF companies.
As for broad OEFs, and the reader cited an actively managed fund or two as examples. If the manager likes Australia today but six months reduces Australia down to zero, you won't know about it in a timely manner and when you do find out you might need to make changes. So I'm not really on board with that idea but I concede there could be several funds that will always have some Aussie exposure. Given my lack of interest I have not researched this.
There is one OEF that I know of the invests in Australia and New Zealand , the Commonwealth Australia/New Zealand Fund (CNZLX). This fund has an excellent track record.
The same reader noted that there is some repetition in some of the questions I get and some of the commentary I provide. The suggestion was "greatest hits" section on the blog where these topics would be easily accessible.
This is a good idea. Here's the thing; I am always refining my process. That is one of the reasons for this site; to share my current process and share how it evolves. Additionally, it is important that readers that are trying to manage their own portfolios see me react with some consistency. For example, no matter what comes along, emotions play very little role in what I do. Markets work a certain way, that knowledge of history combined with understanding current events helps me figure out what I think needs to be done, or not done as the case may be.
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Another reader asked about broad OEFs to capture Australia, New Zealand and timber. I have no idea about timber. I know Plum Creek from my days at Lehman Brothers in the late 1980s when it was still an MLP. I am quite comfortable with it and have not sought out any substitutes. I would be interested in a timber ETF, ala GLD, for its diversification value but I doubt that is a priority for any of the ETF companies.
As for broad OEFs, and the reader cited an actively managed fund or two as examples. If the manager likes Australia today but six months reduces Australia down to zero, you won't know about it in a timely manner and when you do find out you might need to make changes. So I'm not really on board with that idea but I concede there could be several funds that will always have some Aussie exposure. Given my lack of interest I have not researched this.
There is one OEF that I know of the invests in Australia and New Zealand , the Commonwealth Australia/New Zealand Fund (CNZLX). This fund has an excellent track record.
The same reader noted that there is some repetition in some of the questions I get and some of the commentary I provide. The suggestion was "greatest hits" section on the blog where these topics would be easily accessible.
This is a good idea. Here's the thing; I am always refining my process. That is one of the reasons for this site; to share my current process and share how it evolves. Additionally, it is important that readers that are trying to manage their own portfolios see me react with some consistency. For example, no matter what comes along, emotions play very little role in what I do. Markets work a certain way, that knowledge of history combined with understanding current events helps me figure out what I think needs to be done, or not done as the case may be.
Read more!
Morningstar On DGT
Morningstar recently wrote up a analysis of the Streettracks Global Titans ETF (DGT). Like most of Morningstar's ETF reports I don't see much value from the work. The point of dissecting these reports is not to pick on the folks that write the reports but to help anyone who relies on this type of work to make investment decisions think about a few other things.
I mentioned DGT in a post about a month and a half ago because Doug Fabian made a good call about foreign but implemented the idea poorly with DGT.
DGT is comprised of the 50 largest companies in the world. 63% of the fund is US and the rest is foreign. The Morningstar article seems to like the fund but it is not that committal. It does point out the DGT has a competitive yield. It yields 2.23%.
The report strikes me as wildly incomplete, but only about two minutes away from being useful.
This fund owns mega cap stocks. The average market cap of DGT is $145 billion. Mega caps have been lagging for years. This fund will continue to lag until mega caps rotate back in to favor which could be a while.
This is a three year chart that shows DGT lagging EFA by a lot and SPY by a little. It would have been useful if the Morningstar would have pointed out that an investor would have been better off with 63% in SPY and 37% in EFA, the domestic/foreign weight of DGT.
This did not come up but a mention about the reason for the lag (I think it was cap size) and some forward looking analysis about why DGT might not lag anymore, if that is what they think.
The report as it reads is close to useless.
Read more!
I mentioned DGT in a post about a month and a half ago because Doug Fabian made a good call about foreign but implemented the idea poorly with DGT.
DGT is comprised of the 50 largest companies in the world. 63% of the fund is US and the rest is foreign. The Morningstar article seems to like the fund but it is not that committal. It does point out the DGT has a competitive yield. It yields 2.23%.
The report strikes me as wildly incomplete, but only about two minutes away from being useful.
This fund owns mega cap stocks. The average market cap of DGT is $145 billion. Mega caps have been lagging for years. This fund will continue to lag until mega caps rotate back in to favor which could be a while.
This is a three year chart that shows DGT lagging EFA by a lot and SPY by a little. It would have been useful if the Morningstar would have pointed out that an investor would have been better off with 63% in SPY and 37% in EFA, the domestic/foreign weight of DGT.
This did not come up but a mention about the reason for the lag (I think it was cap size) and some forward looking analysis about why DGT might not lag anymore, if that is what they think.
The report as it reads is close to useless.
Read more!
Wednesday, September 14, 2005
An Old Story
Hmm. This is one of my monitors on ADVFN. Materials, energy and utilities were the only sectors up on Wednesday.A compelling case could be made that all three are wildly expensive but wildly expensive sectors and stocks can still go up.
The point here is to not lose track of keeping diversified.
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Anemia
I think the market has a little case of it this week. Fortunately my time horizon is longer than a week. Believe it or not the SPX is still up a few a points for the months. That may evaporate but I think I am reading some exasperation coming through some of the sites I read. If the idea of being exasperated is correct then maybe the next few days will be up. Who knows?
I have noticed that Oz and New Zealand have been doing well lately. This is textbook low correlation stuff at work. Another low correlation holding that has looked sharp has been Plum Creek Timber (PCL).
This is easy portfolio construction work. Over the last 10 or 15 years there have been plenty of article highlighting the low correlation that timber has with equities.
I certainly did not invest the idea of owning Australia for diversification but admittedly those articles are tougher to find. I do have to say that I am really surprised by how few managers use foreign stocks. The companies are good, the dividends are high and the correlation to US holdings are low (I am talking in general terms, there are plenty of lousy foreign stocks that have a high correlation). If we are in for below average returns in the SPX for a while to come, wouldn't it be logical to think about more foreign? Maybe its just me.
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I have noticed that Oz and New Zealand have been doing well lately. This is textbook low correlation stuff at work. Another low correlation holding that has looked sharp has been Plum Creek Timber (PCL).
This is easy portfolio construction work. Over the last 10 or 15 years there have been plenty of article highlighting the low correlation that timber has with equities.
I certainly did not invest the idea of owning Australia for diversification but admittedly those articles are tougher to find. I do have to say that I am really surprised by how few managers use foreign stocks. The companies are good, the dividends are high and the correlation to US holdings are low (I am talking in general terms, there are plenty of lousy foreign stocks that have a high correlation). If we are in for below average returns in the SPX for a while to come, wouldn't it be logical to think about more foreign? Maybe its just me.
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Airlines
It looks like the wheels are falling off a couple of the big airlines right now. I'm not sure who might have paid $3 (or there abouts) for Northwest stock on Monday but a 50% hit the next day is about as bad as it gets.
Some areas of the market are much tougher than others. I first realized how screwed up the airline industry is back in 1989 when the UAL LBO went haywire and caused a 189 point drop in the Dow (the Dow was somewhere around 2750 back then).
There are other areas of the market that are tough to own, although maybe for different reasons, as well. Insurance stocks seems to have a history of hurricane and regulatory issues. Old media, I think, is a dyeing business (metaphorically at least). DRAM stocks will cause a lot of heartache. There are probably others that I am not thinking of right now.
Whether you think investing is easy, difficult or more likely somewhere in between anyone can make investing much easier for themselves by avoiding some obvious mine fields.
You don't need to be Peter Lynch to know that owning an airline is a tough business.
A big part of what I do relies on trying to find very simple themes that allow the path of least resistance. My approach, as with any, is bound to mean there will be periods of beating the market and lagging the market but a little assessment of risk versus reward, like with any of the above groups, can help you miss a couple of dogs.
Any time I say something bad about insurance stocks, someone sends a nastygram but there are much easier ways capture the financial sector.
Read more!
Some areas of the market are much tougher than others. I first realized how screwed up the airline industry is back in 1989 when the UAL LBO went haywire and caused a 189 point drop in the Dow (the Dow was somewhere around 2750 back then).
There are other areas of the market that are tough to own, although maybe for different reasons, as well. Insurance stocks seems to have a history of hurricane and regulatory issues. Old media, I think, is a dyeing business (metaphorically at least). DRAM stocks will cause a lot of heartache. There are probably others that I am not thinking of right now.
Whether you think investing is easy, difficult or more likely somewhere in between anyone can make investing much easier for themselves by avoiding some obvious mine fields.
You don't need to be Peter Lynch to know that owning an airline is a tough business.
A big part of what I do relies on trying to find very simple themes that allow the path of least resistance. My approach, as with any, is bound to mean there will be periods of beating the market and lagging the market but a little assessment of risk versus reward, like with any of the above groups, can help you miss a couple of dogs.
Any time I say something bad about insurance stocks, someone sends a nastygram but there are much easier ways capture the financial sector.
Read more!
Tuesday, September 13, 2005
Three Questions
A reader left a comment asking three questions that I thought I would answer here, where anyone who cares can see my answers.
1) Do you think the market will still end at around 1300 if Greenspan hikes interest rates?
I don't think I ever thought 1300. I made a reference to 1270 as an upside target for this year on July 31. I think the external shock of Katrina makes trying to figure when the high point will occur, whatever the level, very difficult. If Katrina does hurt the entire economy we could see a lot of earnings warnings in December that could take the market lower that month. Warnings in September could do the same thing but I would not be surprised if companies don't have a real sense of the Katrina effect so soon. This ties into why I think the market could trade higher a little higher for a while.
As for Greenspan, I have a hard time thinking (recurring theme) that with so little time left in his term that he will let the Fed action be too disruptive to capital markets. I think they will figure a way to communicate their intention in such a way that the market prices it in correctly. Maybe I am being naive.
2) What do you think about technical analysis (MACD, Moving Averages etc..)? Do you consider that to be a userful tool?
Since the most important aspect of my exit strategy revolves around a moving average, I would say it is very useful. I also look at charts for individual stocks when I want to put on a new position. This part of the process though comes after I know what stock I want to add. I don't use charts as a screen to find investment ideas.
3) What is your favorite color?
Actually this is a Monty Python reference.
3) What books would you recommend for someone who is still educating themselves on investing?
This is not an easy question. I suppose anything by Peter Lynch and Jeremy Siegel. The last book I bought was ;
I am saving the book for our plane ride to New Zealand next month.
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1) Do you think the market will still end at around 1300 if Greenspan hikes interest rates?
I don't think I ever thought 1300. I made a reference to 1270 as an upside target for this year on July 31. I think the external shock of Katrina makes trying to figure when the high point will occur, whatever the level, very difficult. If Katrina does hurt the entire economy we could see a lot of earnings warnings in December that could take the market lower that month. Warnings in September could do the same thing but I would not be surprised if companies don't have a real sense of the Katrina effect so soon. This ties into why I think the market could trade higher a little higher for a while.
As for Greenspan, I have a hard time thinking (recurring theme) that with so little time left in his term that he will let the Fed action be too disruptive to capital markets. I think they will figure a way to communicate their intention in such a way that the market prices it in correctly. Maybe I am being naive.
2) What do you think about technical analysis (MACD, Moving Averages etc..)? Do you consider that to be a userful tool?
Since the most important aspect of my exit strategy revolves around a moving average, I would say it is very useful. I also look at charts for individual stocks when I want to put on a new position. This part of the process though comes after I know what stock I want to add. I don't use charts as a screen to find investment ideas.
3) What is your favorite color?
Actually this is a Monty Python reference.
3) What books would you recommend for someone who is still educating themselves on investing?
This is not an easy question. I suppose anything by Peter Lynch and Jeremy Siegel. The last book I bought was ;
I am saving the book for our plane ride to New Zealand next month.
Read more!
"The Myth of International Investing"
This is the title of an article from the Daily Reckoning that was rerun on ETF Investor.
The basic idea is that the world has changed and buying any old foreign stock or fund will not give as much diversification as it used to. The article cites that investors need to look at foreign small cap to have a better chance of diversification.
I first touched on the concept, sort of, last November. The globalization of the worlds economy has caused the correlation between the US and certain serviced based economies to get tighter. It is for this reason, and I have been writing about this for a long time here, that I am very underweight western Europe and very overweight commodity based markets. The article made no mention about commodity based markets but my observations have lead me to believe my idea is valid, at a minimum, but I could be wrong. This is also why I am a big believer emerging markets as well.
As a recap, I think of commodity based, non emerging markets as being Australia, New Zealand, Canada and Norway. There are also several emerging markets that are commodity based like South Africa, Brazil, Chile, Peru and a few others.
For the way I structure portfolios, the first priority is not trying to capture a quick trade but instead to maintain exposure to an equity market that has a low correlation to the US market. I think that over the next 12 months (maybe longer) places like Canada and Norway have a chance to have better returns than the US but as a US based manager with US based clients, the US is by far the largest country weight. The commodity countries rely on, um, well, commodity prices. I do not want to over leverage client accounts to commodities but I do want the exposure. Hopefully that makes sense.
Read more!
The basic idea is that the world has changed and buying any old foreign stock or fund will not give as much diversification as it used to. The article cites that investors need to look at foreign small cap to have a better chance of diversification.
I first touched on the concept, sort of, last November. The globalization of the worlds economy has caused the correlation between the US and certain serviced based economies to get tighter. It is for this reason, and I have been writing about this for a long time here, that I am very underweight western Europe and very overweight commodity based markets. The article made no mention about commodity based markets but my observations have lead me to believe my idea is valid, at a minimum, but I could be wrong. This is also why I am a big believer emerging markets as well.
As a recap, I think of commodity based, non emerging markets as being Australia, New Zealand, Canada and Norway. There are also several emerging markets that are commodity based like South Africa, Brazil, Chile, Peru and a few others.
For the way I structure portfolios, the first priority is not trying to capture a quick trade but instead to maintain exposure to an equity market that has a low correlation to the US market. I think that over the next 12 months (maybe longer) places like Canada and Norway have a chance to have better returns than the US but as a US based manager with US based clients, the US is by far the largest country weight. The commodity countries rely on, um, well, commodity prices. I do not want to over leverage client accounts to commodities but I do want the exposure. Hopefully that makes sense.
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Micro Cap ETFs
Yahoo Finance reran an article from Morningstar about the two new micro cap ETFs that is worth reading.
At this point I don't know what I think about these funds. I mentioned, once before, that it is not clear to me if an ETF can capture the effect sought after but perhaps it can.
Typically, smaller companies outperform at the start of a bull market cycle but this has been a weird bull market because small cap has continued to outperform.
The way I can envision these being used is as a way to reduce the average cap size of a portfolio. At times this would be useful even if the ETFs look more like small cap than anything else.
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At this point I don't know what I think about these funds. I mentioned, once before, that it is not clear to me if an ETF can capture the effect sought after but perhaps it can.
Typically, smaller companies outperform at the start of a bull market cycle but this has been a weird bull market because small cap has continued to outperform.
The way I can envision these being used is as a way to reduce the average cap size of a portfolio. At times this would be useful even if the ETFs look more like small cap than anything else.
Read more!
Monday, September 12, 2005
Google is having a big big day off of the eBay news. At least this is my perception as I think money will rotate out of eBay on the off chance that the Skype deal really does mean growth in auctions is over.
I concede that I may not be the first one to come up with the idea but I haven't seen it anywhere else yet.
It would surprise me if eBay's growth really is over but who knows. I disclosed that I bought Google almost across the board in August at an average for most clients of $288.48. I have bought it subsequently at different prices for several new clients. The $10 move today is probably overdone but Google has demonstrated the ability to move a lot on certain kinds of news.
When I bought the stock it had been hovering around $290 for a while and I thought I had a decent entry point. I don't really have a feel for the $309 level as a place to enter. I should also note that I did not buy it expecting to hold it forever.
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I concede that I may not be the first one to come up with the idea but I haven't seen it anywhere else yet.
It would surprise me if eBay's growth really is over but who knows. I disclosed that I bought Google almost across the board in August at an average for most clients of $288.48. I have bought it subsequently at different prices for several new clients. The $10 move today is probably overdone but Google has demonstrated the ability to move a lot on certain kinds of news.
When I bought the stock it had been hovering around $290 for a while and I thought I had a decent entry point. I don't really have a feel for the $309 level as a place to enter. I should also note that I did not buy it expecting to hold it forever.
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The Fed
There has been a lot of air time today devoted to whether the Fed will or won't pause and if they do pause when will they do it.
For what its worth I think they will (not should, but will) hike next week and pause later in the year. I have no idea if I will be right and I am not too concerned about being right. If they do pause while the futures market says they will hike there will likely be a sharp reaction in the bond market and the currency market. I could come up with an argument for either direction for bonds but the dollar would sell off in that scenario.
This would be a big plus for any foreign stocks you own, although it is possible that US equities could rally some more, but as with bonds I can build a case for the other side of the trade too. Most commodities would probably also get a lift as well.
I need to think about some of this a little more, but this is where I am now.
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For what its worth I think they will (not should, but will) hike next week and pause later in the year. I have no idea if I will be right and I am not too concerned about being right. If they do pause while the futures market says they will hike there will likely be a sharp reaction in the bond market and the currency market. I could come up with an argument for either direction for bonds but the dollar would sell off in that scenario.
This would be a big plus for any foreign stocks you own, although it is possible that US equities could rally some more, but as with bonds I can build a case for the other side of the trade too. Most commodities would probably also get a lift as well.
I need to think about some of this a little more, but this is where I am now.
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M&A
Throughout all of the ups and downs of the last few months there continues to be a significant amount of merger and acquisition activity. I agree with the line of thought that says increased M&A is a sign of confidence in the economy and/or the environment for doing business.
There is a very long list of reasons why 2006 should be a rough year for stocks but the M&A contradicts the rough year idea. Oracle is not buying Siebel because of what might happen in the next two months. A purchase like this get done with an eye to the long term. Maybe longer term than Larry Ellison thinks or maybe not, that is a variable. Same thing with eBay buying Skype.
I have written a few times about my doubts for equities in 2006. I may be wrong. It is unlikely that Ellison thinks the Siebel deal could get cheaper six months from now otherwise he would wait. The deal is getting done now because either the price is right (in his opinion) or he thinks someone else would come in if he doesn't.
This is important to me as a reason why I might turn out to be wrong about next year. I haven't changed my opinion but this challenges my opinion. As a matter process I try to seek out and understand ideas that challenge my opinions.
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There is a very long list of reasons why 2006 should be a rough year for stocks but the M&A contradicts the rough year idea. Oracle is not buying Siebel because of what might happen in the next two months. A purchase like this get done with an eye to the long term. Maybe longer term than Larry Ellison thinks or maybe not, that is a variable. Same thing with eBay buying Skype.
I have written a few times about my doubts for equities in 2006. I may be wrong. It is unlikely that Ellison thinks the Siebel deal could get cheaper six months from now otherwise he would wait. The deal is getting done now because either the price is right (in his opinion) or he thinks someone else would come in if he doesn't.
This is important to me as a reason why I might turn out to be wrong about next year. I haven't changed my opinion but this challenges my opinion. As a matter process I try to seek out and understand ideas that challenge my opinions.
Read more!
Saturday, September 10, 2005
The Big Picture For The Week of September 11, 2005
Last week's strength in the market was a little surprising. Nothing had changed my near term outlook.
There was an interesting article in Barron's written by Sy Harding that points out the poor track record for the second year of presidential terms. I had heard about this before but had forgotten about it. I tend to buy into these types of things. When history repeats itself so often I pay attention. Another reason this interests me is that I been forming a negative opinion for 2006 over the last few months.
Barry Ritholtz wrote a piece where he opined that the aftermath from Katrina will be worse than what is now expected or being priced in to equity prices.
I touched on this during the week in my CNBC Asia interview. I said that at this point (Wednesday night) we don't yet know if the loss of commerce will outweigh the lift from the rebuild. Barry is probably right, he is usually is, but I don't necessarily feel they need to think I have this all figured out just yet. I know, for the most part, what action I will take if things head south regardless of the reason.
To harp on something; I view knowing what actions you might take should things change as being forward looking. There is a sports analogy here, I think. Larry Bird was always thinking two plays ahead on the court. I try to think two plays ahead in client portfolios.
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There was an interesting article in Barron's written by Sy Harding that points out the poor track record for the second year of presidential terms. I had heard about this before but had forgotten about it. I tend to buy into these types of things. When history repeats itself so often I pay attention. Another reason this interests me is that I been forming a negative opinion for 2006 over the last few months.
Barry Ritholtz wrote a piece where he opined that the aftermath from Katrina will be worse than what is now expected or being priced in to equity prices.
I touched on this during the week in my CNBC Asia interview. I said that at this point (Wednesday night) we don't yet know if the loss of commerce will outweigh the lift from the rebuild. Barry is probably right, he is usually is, but I don't necessarily feel they need to think I have this all figured out just yet. I know, for the most part, what action I will take if things head south regardless of the reason.
To harp on something; I view knowing what actions you might take should things change as being forward looking. There is a sports analogy here, I think. Larry Bird was always thinking two plays ahead on the court. I try to think two plays ahead in client portfolios.
Read more!
Friday, September 09, 2005
Good Question
A reader asked how exactly does one get defensive in a portfolio, a concept I write quite a bit about but should probably give time to defining.
I think the exact manner in which I would get defensive would depend on the circumstance. For example, twice in the last year and a half the market went below its 200 DMA, but not for long. I took action both times (and detailed it on this site) by only selling one or two names to start but then the market went back above.
One thing I would say is the bear markets don't start with crashes. If we dropped 5% on Monday because of a terror event of unprecedented scale I would not sell into that knee jerk reaction. As we saw with Katrina some portion will unwind, even if after the unwind it goes down again.
In getting defensive I would sell some stock. Maybe partial positions of a lot of stocks or entire positions of fewer stocks, it would depend on when we got there. I would use some cash to buy more short dated preferreds. If there is a need to get defensive soon my plan is to add a couple of more foreign names. I might add a little more to inverse index funds. Whatever I do, there will certainly be more allocated to cash than normal.
Also I would not do this all at once. What I would do and how I would do really depends but all at once allows little margin if I am wrong.
For example if I started getting defensive right now by reducing net exposure to US stocks by 10% and then the market went down by 5%, I'd probably be in better shape than the market and we'd still be in down a little territory. If I then took another 15% off the table the volatility and correlation of the portfolio would now be quite far from the market. Also add in that an inverse index fund would be carrying more weight at this point.
If, as I was making these changes, the market dropped another 10% I think I would have a very good chance of having missed a decent chunk of the roughly 15% down in this scenario.
As I look at things, if the market goes down 15% and clients' long term money is only down 8% or 9% I have added value.
There is no guarantee how this type of plan will work out but all I am trying to do is put the odds in my favor. Any plan may work out better or worse than hoped for but I think it is better to have some sort of plan than none at all. And that is the point.
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I think the exact manner in which I would get defensive would depend on the circumstance. For example, twice in the last year and a half the market went below its 200 DMA, but not for long. I took action both times (and detailed it on this site) by only selling one or two names to start but then the market went back above.
One thing I would say is the bear markets don't start with crashes. If we dropped 5% on Monday because of a terror event of unprecedented scale I would not sell into that knee jerk reaction. As we saw with Katrina some portion will unwind, even if after the unwind it goes down again.
In getting defensive I would sell some stock. Maybe partial positions of a lot of stocks or entire positions of fewer stocks, it would depend on when we got there. I would use some cash to buy more short dated preferreds. If there is a need to get defensive soon my plan is to add a couple of more foreign names. I might add a little more to inverse index funds. Whatever I do, there will certainly be more allocated to cash than normal.
Also I would not do this all at once. What I would do and how I would do really depends but all at once allows little margin if I am wrong.
For example if I started getting defensive right now by reducing net exposure to US stocks by 10% and then the market went down by 5%, I'd probably be in better shape than the market and we'd still be in down a little territory. If I then took another 15% off the table the volatility and correlation of the portfolio would now be quite far from the market. Also add in that an inverse index fund would be carrying more weight at this point.
If, as I was making these changes, the market dropped another 10% I think I would have a very good chance of having missed a decent chunk of the roughly 15% down in this scenario.
As I look at things, if the market goes down 15% and clients' long term money is only down 8% or 9% I have added value.
There is no guarantee how this type of plan will work out but all I am trying to do is put the odds in my favor. Any plan may work out better or worse than hoped for but I think it is better to have some sort of plan than none at all. And that is the point.
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A Little Lift
The market is up a little right now. That may or may not stick for the rest of the day but I continue to think things are ok for right now.
One of the perks of writing for the Real Money is free access to the other articles on the site. It seems like there is a lot of negative sentiment out there right now which is interesting.
I think this ties in with what I have been saying for a few days now (mostly in response to reader questions) about getting defensive because things should be getting worse.
A lot of people (pros and do-it-yourselfers) devote a lot of time to trying to successfully trade every short term trend. I do believe that certain people can get more right than wrong (and you don't need to be a pro). Most people probably should not be worried about the short term action.
I wouldn't suggest not having opinions, as a function of keeping tabs on what is happening, but I have to think if I tried to manage around short term issues I would be late to a lot of parties, have inferior numbers and cause my clients to pay a lot more commissions (we do not participate in commission revenue, that goes to Schwab).
Depending on what you read, it is easy to get caught up in trading more than is ideal. This may be cause to revisit your plan and what it is you are really trying to do and what you an tolerate if you are wrong.
When a trade needs to be done, do it and don't look back. But how many people do you know who need to try to game Broadcom's quarter to meet their financial goals?
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One of the perks of writing for the Real Money is free access to the other articles on the site. It seems like there is a lot of negative sentiment out there right now which is interesting.
I think this ties in with what I have been saying for a few days now (mostly in response to reader questions) about getting defensive because things should be getting worse.
A lot of people (pros and do-it-yourselfers) devote a lot of time to trying to successfully trade every short term trend. I do believe that certain people can get more right than wrong (and you don't need to be a pro). Most people probably should not be worried about the short term action.
I wouldn't suggest not having opinions, as a function of keeping tabs on what is happening, but I have to think if I tried to manage around short term issues I would be late to a lot of parties, have inferior numbers and cause my clients to pay a lot more commissions (we do not participate in commission revenue, that goes to Schwab).
Depending on what you read, it is easy to get caught up in trading more than is ideal. This may be cause to revisit your plan and what it is you are really trying to do and what you an tolerate if you are wrong.
When a trade needs to be done, do it and don't look back. But how many people do you know who need to try to game Broadcom's quarter to meet their financial goals?
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ETF Portfolio Idea
ETF Investor ran an article written by XTF Advisors. The article compares DVY (personal holding) and PEY. It is a good read if you are interested in dividend paying ETFs.I was more interested to see what XTF does in the way of all ETF Portfolios. This the one sample I was able to find. I don't know if it is a real portfolio but it doesn't seem logical that a firm would create a fake portfolio with such detail.
Either way lets assume its real. I plugged this portfolio into Morningstar assuming $100,000 invested.
Over the last twelve months this portfolio has almost exactly matched the returns of the S+P 500. Additionally the overall yield is 2.67% as of now and while it might have been a little different twelve months ago, you get the idea. The portfolio has had close to market returns with only 70% invested in equities. I'd say that is pretty good.
Also revealed in the Morningstar X-Ray is that it is heavily tilted toward value and noticeably overweight financials, 26% to 19% for the S+P 500.
Anyone may want to structure a portfolio differently than this or not but the take away here should be that a lot more firms will offer all ETF portfolios. If this type of product appeals to you I recommend asking for an X-Ray kind of report on what they propose or spend the money and figure it yourself on Morningstar, or something similar.
I think this particular portfolio does not have enough foreign and I think this is the wrong time to overweight financials but every portfolio has flaws. The two I see right away with this one are either right or wrong but I think there is value in having this type of information.
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Thursday, September 08, 2005
Knowing What you Are Buying
After the close on Thursday Martek Bioscience (MATK) had some bad news that took 12.5% out of the stock after hours.I don't know what the news was, I don't really know what the company does. What matters, as the chart depicts, is that this stock is capable of huge moves in either direction at anytime.
I have written about this before. I take time to get to know a stock and how it can react to various kinds of news.
This is not to say the stock is good or bad, I really don't know it, but knowing how much of a hot potato a stock can be could spare some pain down the road.
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Steve Forbes On Oil
Steve Forbes was on CNBC Europe sharing his belief that the oil market is a bubble. He thinks the price will go back to $35 or $40. He does not believe in the China/India theme as being a lasting catalyst. He pointed out that they have been growing for years and years, oil production is more efficient and that no one is talking about oil being a bubble.
In any reference to the interview by show host Simon Hobbs, Simon said that Forbes thinks the popping if the bubble will "make the tech bubble look like a picnic." I watched the interview twice but was not able to glean that from Mr. Forbes comments.
So is Forbes right or wrong? I disagree with what he is saying. That doesn't make him wrong but I do disagree. In the late 1990's China exported about 2 million barrels of oil per day. China now imports, if memory serves, 4 million barrels per day. That seems like growth to me. Puru Saxena appears regularly on CNBC Asia with this little nugget about per capita consumption. US per capita consumption of oil is about 25 barrels per year. Both Chinese and Indian consumption is less than one barrel per year. As both countries modernize that fractional consumption in China and India will increase, according to Mr. Saxena. Makes sense to me. That is not to say per capita will be what it is here but up a little seems logical.
Also I am hard pressed to think that a huge bubble could occur so soon after the last one. Prices could drop but I don't think the fallout could be the same as the tech wreck.
But what if it is? What if somehow Forbes is exactly right and it hurts the entire stock market? How much energy exposure do you have? It would be correct to think of me as very bullish about oil. The most extreme weight I have in the sector for any one client is probably 13% (in most instances it is closer to 11%) compared to 9% in the S+P 500.
The tech sector cut roughly in half from peak to trough in terms of weight in the S+P 500. If the energy sector cuts in half it would have a 4.5% weight and my clients would lose 6.5% if I did absolutely nothing (worst case scenario); down a little.
For anyone with 25% in energy that type of move would be entering down a lot territory. I have to say for any sector's weight to cut in half it would probably be in the context of a general decline. I imagine on the way to this type of blow up in one sector the market would go below its 200 DMA and I might miss some of that down side.
The point here is I disagree but I can construct some thoughts on the matter in case I am wrong.
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In any reference to the interview by show host Simon Hobbs, Simon said that Forbes thinks the popping if the bubble will "make the tech bubble look like a picnic." I watched the interview twice but was not able to glean that from Mr. Forbes comments.
So is Forbes right or wrong? I disagree with what he is saying. That doesn't make him wrong but I do disagree. In the late 1990's China exported about 2 million barrels of oil per day. China now imports, if memory serves, 4 million barrels per day. That seems like growth to me. Puru Saxena appears regularly on CNBC Asia with this little nugget about per capita consumption. US per capita consumption of oil is about 25 barrels per year. Both Chinese and Indian consumption is less than one barrel per year. As both countries modernize that fractional consumption in China and India will increase, according to Mr. Saxena. Makes sense to me. That is not to say per capita will be what it is here but up a little seems logical.
Also I am hard pressed to think that a huge bubble could occur so soon after the last one. Prices could drop but I don't think the fallout could be the same as the tech wreck.
But what if it is? What if somehow Forbes is exactly right and it hurts the entire stock market? How much energy exposure do you have? It would be correct to think of me as very bullish about oil. The most extreme weight I have in the sector for any one client is probably 13% (in most instances it is closer to 11%) compared to 9% in the S+P 500.
The tech sector cut roughly in half from peak to trough in terms of weight in the S+P 500. If the energy sector cuts in half it would have a 4.5% weight and my clients would lose 6.5% if I did absolutely nothing (worst case scenario); down a little.
For anyone with 25% in energy that type of move would be entering down a lot territory. I have to say for any sector's weight to cut in half it would probably be in the context of a general decline. I imagine on the way to this type of blow up in one sector the market would go below its 200 DMA and I might miss some of that down side.
The point here is I disagree but I can construct some thoughts on the matter in case I am wrong.
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My Head In The Oven
Stephen Roach was just on CNBC spreading his message of cheer. He has been apocalyptic for quite a while now. I suppose eventually he will be right? Anyone that took action with their portfolio when he was making all the rounds a year ago with this message have probably missed out on some return.
This is a great example for what I write about so often. No matter how you think things look or no matter what you think will happen there is no real need to take defensive action until the market gives some sort of objective indication. To repeat myself from last week, long term money should be able to withstand down a little.
On a separate note I had a comment left about whether I think now is a good time to buy EWA and EWC. I have an article up today at Real Money about the Australian theme. I have written countless times about Australia. I don't really write about anything for a quick trade. I have both Australia and Canada in client accounts and would not hesitate to buy in today for a new account, but that is in the context of a diversified portfolio. If you buy 40 stocks all on one day to create a diversified portfolio it would be logical to assume that for some names you will have a great entry point, some names a lousy entry point and the rest will be a neutral entry point. There is no way to know which is which.
EWA is a personal holding and a few clients own it too.
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This is a great example for what I write about so often. No matter how you think things look or no matter what you think will happen there is no real need to take defensive action until the market gives some sort of objective indication. To repeat myself from last week, long term money should be able to withstand down a little.
On a separate note I had a comment left about whether I think now is a good time to buy EWA and EWC. I have an article up today at Real Money about the Australian theme. I have written countless times about Australia. I don't really write about anything for a quick trade. I have both Australia and Canada in client accounts and would not hesitate to buy in today for a new account, but that is in the context of a diversified portfolio. If you buy 40 stocks all on one day to create a diversified portfolio it would be logical to assume that for some names you will have a great entry point, some names a lousy entry point and the rest will be a neutral entry point. There is no way to know which is which.
EWA is a personal holding and a few clients own it too.
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Forrest For The Trees
Barron's Online has an interview with Judith Saryan who manages the Eaton Vance Utilities Fund (EVTMX). I have seen Ms. Saryan interviewed on CNBC every so often as well.
According to the article the fund has a 5.75% load. Also according to the article and Yahoo Finance the fund yields 2.25%. The yield lags iShares Utilities (IDU) and the Utilities Sector SPDR (XLU) which yield 2.63% and 2.92% respectively.
Since the inception of the ETFs the value added by EVTMX ebbs and flows. In looking at many different time periods there is no clear performance advantage. Depending on when you might have bought, either the OEF lagged or one of the ETFs lagged. There have been a couple of entry points where the 5.75% load was made back (via outperformance) and times where it was not.
In trying look ahead I'm not sure an investor could have a reasonable expectation that the OEF could outperform. The answer may just boil down to personal preference regarding loads.
I use IDU for accounts where single stock exposure is not appropriate.
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According to the article the fund has a 5.75% load. Also according to the article and Yahoo Finance the fund yields 2.25%. The yield lags iShares Utilities (IDU) and the Utilities Sector SPDR (XLU) which yield 2.63% and 2.92% respectively.
Since the inception of the ETFs the value added by EVTMX ebbs and flows. In looking at many different time periods there is no clear performance advantage. Depending on when you might have bought, either the OEF lagged or one of the ETFs lagged. There have been a couple of entry points where the 5.75% load was made back (via outperformance) and times where it was not.
In trying look ahead I'm not sure an investor could have a reasonable expectation that the OEF could outperform. The answer may just boil down to personal preference regarding loads.
I use IDU for accounts where single stock exposure is not appropriate.
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Wednesday, September 07, 2005
CNBC Asia Appearance
I am scheduled to appear in my usual slot during the first half hour of Asian Market Watch.Here are some talking points.
- A lot of the unwinding that I mentioned last week has occurred in both the price of oil and treasury yields. There may be more to come but the important thing is we understand more now than we did last week about Katrina and so some portion of the panic has unwound.
- Assuming no external shock, like Ophelia being worse than Katrina, the path of least resistance for US equities seems to be up. I think this is more short term, like a couple of months, than long term. 2006 looks like it might be rough.
- It seems like the Fed will pause but NOT in September. I have been concerned about whether the Fed will go too far as it often does and we could know that answer in January or February.
- Despite the selloff in oil prices, oil stocks are still a good place to be overweight. An average price for the 3rd quarter anywhere close to $60 will be very positive for oil company earnings.
- I also continue to want to stick with utilities in an overweight position. An element of high yielding, relative safety makes sense as the market still punishes riskier companies that disappoint.
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Pushing On A String
That is how my day is going. Anytime I come to Phoenix I have to get eight hours of work done in four hours. Being in the office takes me from what I think I should be doing which is reading, watching and writing. Fortunately I had to stop at my in-laws on the way in. There, I feel better.
Some may view this differently but I think the follow through today after yeasterday's big move is a positive. I have been writing for weeks that I think we could have a decent move up coming, unless the move to 1235 was it.
It seems like a lot of folks expect September to be down also. I have mentioned a couple of times that only six times in the last 20 years has the S+P 500 been down in both August and September. It a plus but that's about it. My gut says that assuming no external shock, like Ophelia being close to Katrina in magnitude, this month will be ok.
I have been short term positive for a couple of months but the market does punish high octane stocks that have bad news. That speaks to using ETFs for certain sectors, like tech or biotech.
Above all else if my opinion about what I think will happen is wrong I will not hesitate to make changes.
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Some may view this differently but I think the follow through today after yeasterday's big move is a positive. I have been writing for weeks that I think we could have a decent move up coming, unless the move to 1235 was it.
It seems like a lot of folks expect September to be down also. I have mentioned a couple of times that only six times in the last 20 years has the S+P 500 been down in both August and September. It a plus but that's about it. My gut says that assuming no external shock, like Ophelia being close to Katrina in magnitude, this month will be ok.
I have been short term positive for a couple of months but the market does punish high octane stocks that have bad news. That speaks to using ETFs for certain sectors, like tech or biotech.
Above all else if my opinion about what I think will happen is wrong I will not hesitate to make changes.
Read more!
Allocation
I will try to answer the question about how much to allocate to stocks, bonds, gold, RE etc.
There is no great answer because every situation can be unique.
Another way to look at this is by studying the numbers. Any long term data I have ever seen shows that, without question, nothing keeps up with stocks. Statistically, its not even close. Over shorter periods of time, anything could lead.
Personally, I believe people should have as much equity exposure as they can handle. I would say that 80%-90% is ideal as a target allocation. Most people can not handle that much equity exposure and very few accounts I manage are even 80-20 let alone 90-10.
An 80-20 account can still be conservative. The composition can structured in such a way as to have very low volatility, very little single stock risk but still capture most of the returns provided by equities. Any stocks bonds combo can be as conservative or aggressive as you want to make it. So 80% equities should not be taken as aggressive, per se.
As for gold, most clients have a little exposure by owning a mining stock. As I have written before this is more for a counter strategy than anything else.
Most clients also have some REIT exposure as well.
There's not much more to say because from here differences in circumstances are really the determining factor.
One reader emailed me to ask about short term bond funds. Apologies, but I don't use any. If someone has a short term need to use the money I would rather they just have the money in cash. If I want to shorten the duration of the fixed income portion of the portfolio I use short dated preferred stocks, individual issues. An issue that matures in two years is not likely to stray very far from its par value the way something maturing in 20 years might.
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There is no great answer because every situation can be unique.
Another way to look at this is by studying the numbers. Any long term data I have ever seen shows that, without question, nothing keeps up with stocks. Statistically, its not even close. Over shorter periods of time, anything could lead.
Personally, I believe people should have as much equity exposure as they can handle. I would say that 80%-90% is ideal as a target allocation. Most people can not handle that much equity exposure and very few accounts I manage are even 80-20 let alone 90-10.
An 80-20 account can still be conservative. The composition can structured in such a way as to have very low volatility, very little single stock risk but still capture most of the returns provided by equities. Any stocks bonds combo can be as conservative or aggressive as you want to make it. So 80% equities should not be taken as aggressive, per se.
As for gold, most clients have a little exposure by owning a mining stock. As I have written before this is more for a counter strategy than anything else.
Most clients also have some REIT exposure as well.
There's not much more to say because from here differences in circumstances are really the determining factor.
One reader emailed me to ask about short term bond funds. Apologies, but I don't use any. If someone has a short term need to use the money I would rather they just have the money in cash. If I want to shorten the duration of the fixed income portion of the portfolio I use short dated preferred stocks, individual issues. An issue that matures in two years is not likely to stray very far from its par value the way something maturing in 20 years might.
Read more!
Tuesday, September 06, 2005
That's Just How It Works
Last week I mentioned that I thought treasury yields would unwind some of the Katrina reaction. This occurring today and may continue a little longer.
There is nothing insightful about this call. Markets tend to react to external events harshly and then unwind back to about, not exactly, where they were before. Over the weekend I suggested 4.20% on the ten year might make sense and while that could be wrong in terms of specifics the idea has a lot of historical precedent in terms of direction. This applies to most asset classes.
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There is nothing insightful about this call. Markets tend to react to external events harshly and then unwind back to about, not exactly, where they were before. Over the weekend I suggested 4.20% on the ten year might make sense and while that could be wrong in terms of specifics the idea has a lot of historical precedent in terms of direction. This applies to most asset classes.
Read more!
Fixed Income Allocation Request
I had a reader request my thoughts about the fixed income portion of a portfolio along the lines of what I wrote the other day about equity allocation. I wrote about this back in December that you can read here.
Another reader requested a post about how much to allocate to different assets; stocks, bonds, RE etc. I don't think I have one of those in the archives so I will try to work on it.
Lastly I have been getting a lot of bogus comments touting other sites that appear to be automated. I delete these but deleting them is a pain. Blogger has a verification thing that you will be prompted to type when leaving a comment. Sorry to have to implement this step for you but it is one step as opposed to my going through four or five steps to blow out some spam.
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Another reader requested a post about how much to allocate to different assets; stocks, bonds, RE etc. I don't think I have one of those in the archives so I will try to work on it.
Lastly I have been getting a lot of bogus comments touting other sites that appear to be automated. I delete these but deleting them is a pain. Blogger has a verification thing that you will be prompted to type when leaving a comment. Sorry to have to implement this step for you but it is one step as opposed to my going through four or five steps to blow out some spam.
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This Can't Be Just A Fad?
One of the lead ins to European Closing Bell was about a top in poker stocks. I have never looked at a poker stock, I don't know how many there are and I have no interest in learning about them.
The only thing I know about them is that they exist, I couldn't even name one of them. I am sure people made money trading them but the writing was on the wall from day one about this concept being a fad.
Hopefully you aren't on the wrong side of a trade in one of these but this was just a fad and there will be many more short term fads in your investing lifetime. Atkins also fit this description, for me anyway.
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The only thing I know about them is that they exist, I couldn't even name one of them. I am sure people made money trading them but the writing was on the wall from day one about this concept being a fad.
Hopefully you aren't on the wrong side of a trade in one of these but this was just a fad and there will be many more short term fads in your investing lifetime. Atkins also fit this description, for me anyway.
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20% Cash
Lehman Brothers changed its model portfolio to raise more cash. The new allocation they recommend to clients is 65% equities, 15% bonds and 20% cash. This move represents reducing equity exposure by 5% and bond exposure by 2.5%. The firm is suggesting this based on what they perceive as immediate Katrina aftermath.
The firm still sees the S+P 500 going to 1300 by year end so they may allocate more to equities very quickly.
I don't know whether this call will be right or wrong but this illustrates what I was writing about a few weeks ago. A couple of readers left comments detailing, what I felt were too extreme, defensive action they had taken in their portfolios. All stocks had been sold, as I recall, and there was consideration for shorting the market one way or another. I wrote a couple of times that I thought, and still think, 100% cash with long term money is very aggressive.
The call from Lehman is a tweak. If the market sky rockets from here the Lehman call won't hurt clients. It might cause a lag which is OK, actively managed portfolios will lag occasionally. If the Lehman call is right but then things deteriorate they can reduce equity exposure a little more. Most of this year has been in the realm of down a little/up a little. Low volatility is a time for the occasional tweak not huge changes.
At some point the environment will change in a substantial way but for now there is not much reason to turn a portfolio upside down.
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The firm still sees the S+P 500 going to 1300 by year end so they may allocate more to equities very quickly.
I don't know whether this call will be right or wrong but this illustrates what I was writing about a few weeks ago. A couple of readers left comments detailing, what I felt were too extreme, defensive action they had taken in their portfolios. All stocks had been sold, as I recall, and there was consideration for shorting the market one way or another. I wrote a couple of times that I thought, and still think, 100% cash with long term money is very aggressive.
The call from Lehman is a tweak. If the market sky rockets from here the Lehman call won't hurt clients. It might cause a lag which is OK, actively managed portfolios will lag occasionally. If the Lehman call is right but then things deteriorate they can reduce equity exposure a little more. Most of this year has been in the realm of down a little/up a little. Low volatility is a time for the occasional tweak not huge changes.
At some point the environment will change in a substantial way but for now there is not much reason to turn a portfolio upside down.
Read more!
Monday, September 05, 2005
Simple Theme
Marketwatch has a video interview with Stephen Burrows, the manager of Forward Global Emerging Markets Fund run by Pictet.
One thing I have written a few times is that often emerging markets have much fewer moving parts which can sometimes make them simpler to understand. One of Mr. Burrow's picks in the interview was PTelekomunikasi Indonesia tbk (TLK), the big phone company of Indonesia.
The idea behind the pick, not unique to emerging markets, is that only 20% of the 240 million citizens have a phone of some sort. Eventually more than 20% of the people will have a phone, cell or otherwise. Mr. Burrows thinks the stock will go up for this reason.
More people with phones is easy to buy into but everything else I know about Indonesia makes it a tough town to invest in.
I think this anecdote illustrates how simple some foreign themes can be.
I have no individual stock exposure to Indonesia but TLK has a 1% weight in ADRE which is a personal holding and also held by some clients.
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One thing I have written a few times is that often emerging markets have much fewer moving parts which can sometimes make them simpler to understand. One of Mr. Burrow's picks in the interview was PTelekomunikasi Indonesia tbk (TLK), the big phone company of Indonesia.
The idea behind the pick, not unique to emerging markets, is that only 20% of the 240 million citizens have a phone of some sort. Eventually more than 20% of the people will have a phone, cell or otherwise. Mr. Burrows thinks the stock will go up for this reason.
More people with phones is easy to buy into but everything else I know about Indonesia makes it a tough town to invest in.
I think this anecdote illustrates how simple some foreign themes can be.
I have no individual stock exposure to Indonesia but TLK has a 1% weight in ADRE which is a personal holding and also held by some clients.
Read more!
"Building a Focused Fund of Your Own"
This is the title of an article (subscription required) in the September 12 issue of BusinessWeek written by Lewis Braham. The author writes that there are quite a few focused funds that are actually less volatile than the broad market. The article also has some quick quotes from the fund managers mentioned, about how they do this.
The topic of this article is great but as a function of space there is not the type of detail I would hope to see. The most useful quote, in my opinion, was one from Tom Marsico that said although Genentech (DNA) and Zimmer Holdings (ZMH) are both health stocks that they tend to "react differently to market conditions."
After reading the article I thought it would be worthwhile to cover a couple of things to explore do-it-yourself portfolio construction. Several managers are quoted for their opinions about what level of attention is need to maintain a stock portfolio. Some of it made sense to me and some did not.
I try to construct the portfolios I manage to be less volatile than the market most of the time. There are points in the stock market cycle where more volatility makes sense, but not lately.
The following is a breakdown of sorts of the equity portion for a very client account ordinary account.
Financials
Domestic bank
Three different foreign banks
Healthcare
Medical services
American pharma
Foreign pharma
Medical devices
Foreign generic drug
Biotech
Tech
Computer company
Networking
Two internet stocks
Semiconductor
Industrial
Big equipment
Foreign vehicle
Big cap defense
Mid cap defense
Big cap conglomerate
Energy
Two foreign integrated
Big Chinese company
MLP
Materials
Foreign gold stock
Chemical company
Timber company
Emerging market resources
Telecom
Foreign high yielding
Domestic high yielding
Utilities
Two high yielding
Consumer
Foreign staples
Domestic staples
Specialty retailer
Broad retailer
Drug store
Other
REIT
Emerging market country fund
This account has 39 equity holdings. The names are not the important thing here. What is important for this post is that you can get a feel for how I try to create diversity with each sector. Within each sector there is, hopefully, very little overlap or at a minimum multiple effects captured.
I should note this account does not own every stock in my ownership universe, also this client has no special circumstance or requirements that would make it unique.
Of the holdings listed, there are only two ETFs and one CEF. More often than not I think an individual stock is the best way to capture a particular effect. Where it isn't, I use the tool that is best, for me. This applies to you as well.
For example my first choice for utilities exposure is common stock. You may feel, for your portfolio, an ETF is better. A recurring theme here is to make use of all tools available to build a portfolio that is right for you.
The account above has, as I mentioned, 39 holdings. Obviously I think diversification can be captured with this many stocks. It makes sense to me that not every do-it-yourselfer would want to keep tabs on this many stocks. I would add, though, that if you use an ETF to substitute for a sector you do need to stay up to date with the sector. This is probably easier than staying informed with three or four stocks, but needs to be done nonetheless. For example Citigroup makes up 10% of the Financial Sector SPDR (XLF). If you own XLF to capture the sector, it might be worth your time to be somewhat in touch with Citi, as an example.
Things like ETFs and CEFs can make the job easier but aren't green lights for no work either.
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The topic of this article is great but as a function of space there is not the type of detail I would hope to see. The most useful quote, in my opinion, was one from Tom Marsico that said although Genentech (DNA) and Zimmer Holdings (ZMH) are both health stocks that they tend to "react differently to market conditions."
After reading the article I thought it would be worthwhile to cover a couple of things to explore do-it-yourself portfolio construction. Several managers are quoted for their opinions about what level of attention is need to maintain a stock portfolio. Some of it made sense to me and some did not.
I try to construct the portfolios I manage to be less volatile than the market most of the time. There are points in the stock market cycle where more volatility makes sense, but not lately.
The following is a breakdown of sorts of the equity portion for a very client account ordinary account.
Financials
Domestic bank
Three different foreign banks
Healthcare
Medical services
American pharma
Foreign pharma
Medical devices
Foreign generic drug
Biotech
Tech
Computer company
Networking
Two internet stocks
Semiconductor
Industrial
Big equipment
Foreign vehicle
Big cap defense
Mid cap defense
Big cap conglomerate
Energy
Two foreign integrated
Big Chinese company
MLP
Materials
Foreign gold stock
Chemical company
Timber company
Emerging market resources
Telecom
Foreign high yielding
Domestic high yielding
Utilities
Two high yielding
Consumer
Foreign staples
Domestic staples
Specialty retailer
Broad retailer
Drug store
Other
REIT
Emerging market country fund
This account has 39 equity holdings. The names are not the important thing here. What is important for this post is that you can get a feel for how I try to create diversity with each sector. Within each sector there is, hopefully, very little overlap or at a minimum multiple effects captured.
I should note this account does not own every stock in my ownership universe, also this client has no special circumstance or requirements that would make it unique.
Of the holdings listed, there are only two ETFs and one CEF. More often than not I think an individual stock is the best way to capture a particular effect. Where it isn't, I use the tool that is best, for me. This applies to you as well.
For example my first choice for utilities exposure is common stock. You may feel, for your portfolio, an ETF is better. A recurring theme here is to make use of all tools available to build a portfolio that is right for you.
The account above has, as I mentioned, 39 holdings. Obviously I think diversification can be captured with this many stocks. It makes sense to me that not every do-it-yourselfer would want to keep tabs on this many stocks. I would add, though, that if you use an ETF to substitute for a sector you do need to stay up to date with the sector. This is probably easier than staying informed with three or four stocks, but needs to be done nonetheless. For example Citigroup makes up 10% of the Financial Sector SPDR (XLF). If you own XLF to capture the sector, it might be worth your time to be somewhat in touch with Citi, as an example.
Things like ETFs and CEFs can make the job easier but aren't green lights for no work either.
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Sunday, September 04, 2005
The Big Picture For The Week of September 4, 2005
We have a few things to cover this weekend.
We had a down August, although only down a little. In the last 20 years there have only been six times where the S+P 500 was down in both August and September. Short term, I continue to be hopeful for a nice run up. The market weathered Katrina (and the oil shock) well, for the first week anyway. I have to think that some of the Katrina reaction in various markets will unwind. If so that means cheaper oil (I'm talking low $60's) and treasury yields moving up from panic levels. If the ten year yield goes from 4.01% for 4.20% we would probably see some of that bond money rotate into equities. Again, I am thinking this is a 2-4 month story.
I don't want to turn this into a political or sociological debate, but I am having trouble reconciling the totality of the humanitarian effort to the hurricane victims.
Thanks for all the mostly kind words for the Real Money announcement. One of the reasons I am so committed to writing about this stuff is to try to help people with their investing. To whatever extent I do that on this site, writing for Real Money means my style of content is now easily found by many more people. I really am thrilled about the whole thing.
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We had a down August, although only down a little. In the last 20 years there have only been six times where the S+P 500 was down in both August and September. Short term, I continue to be hopeful for a nice run up. The market weathered Katrina (and the oil shock) well, for the first week anyway. I have to think that some of the Katrina reaction in various markets will unwind. If so that means cheaper oil (I'm talking low $60's) and treasury yields moving up from panic levels. If the ten year yield goes from 4.01% for 4.20% we would probably see some of that bond money rotate into equities. Again, I am thinking this is a 2-4 month story.
I don't want to turn this into a political or sociological debate, but I am having trouble reconciling the totality of the humanitarian effort to the hurricane victims.
Thanks for all the mostly kind words for the Real Money announcement. One of the reasons I am so committed to writing about this stuff is to try to help people with their investing. To whatever extent I do that on this site, writing for Real Money means my style of content is now easily found by many more people. I really am thrilled about the whole thing.
Read more!
Saturday, September 03, 2005
Fox Business Block
Fox News had hurricane coverage on instead of the Business Block. If you don't know, those shows usually repeat, or in this case first run, overnight on Sunday. The on screen guide for Directv says they will be on if you want to Tivo them. FYI.
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Barron's Nuggets
The Electronic Trader Column had a link to a free site I have never heard of called Risk Grades that evaluates holdings for risk. Maybe I'm the last to know about it but it looks quite useful.
They also had a shout out to the China Stock Blog, kudos to Ezra and David.
Lastly was this little pearl from Stephen Roach,"Katrina may have been the tipping point for a long simmering endogenous shock." He believes stocks could sag under the "weight of prospective shortfalls to corporate earnings."
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They also had a shout out to the China Stock Blog, kudos to Ezra and David.
Lastly was this little pearl from Stephen Roach,"Katrina may have been the tipping point for a long simmering endogenous shock." He believes stocks could sag under the "weight of prospective shortfalls to corporate earnings."
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Friday, September 02, 2005
New Covered Call CEF With a Wrinkle
Claymore Securities priced a new CEF last week called the Old Mutual Claymore Long Short Fund (OLA). The fund goes selectively long 120% in an attempt to have its picks beat the S+P 500. It shorts stocks with 20% of the fund. It also sells index call options against 80%-90% of the portfolio to start but can sell more or less as they feel is prudent. The can also sell options against individual holdings.
If the 80%-90% is unclear, I'll try to explain. One S+P 500 option struck at 1200, for hedging purposes, equates to $120,000. So if you had a $1.2 million portfolio of S+P 500 stocks, eight options struck at 1200 would hedge $960,000 out of the $1.2 million.
Based on how I read the fact sheet on the fund's site, this is how they plan to create income. This fund sure has a lot of moving parts. One thing that is true about the covered call CEF I own and use in my practice is that it is much simpler than OLA. My first reaction is that simpler is better. I want this piece of the portfolio to move very little and pay a nice yield.
OLA has a chance to be more volatile than the other 172 (hyperbole) covered call CEFs.
On the positive, I am continually impressed by Claymore's efforts to be innovative with these products. When any company creates a lot of products it is unlikely they will all be a hit but I am glad they are so committed to this.
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If the 80%-90% is unclear, I'll try to explain. One S+P 500 option struck at 1200, for hedging purposes, equates to $120,000. So if you had a $1.2 million portfolio of S+P 500 stocks, eight options struck at 1200 would hedge $960,000 out of the $1.2 million.
Based on how I read the fact sheet on the fund's site, this is how they plan to create income. This fund sure has a lot of moving parts. One thing that is true about the covered call CEF I own and use in my practice is that it is much simpler than OLA. My first reaction is that simpler is better. I want this piece of the portfolio to move very little and pay a nice yield.
OLA has a chance to be more volatile than the other 172 (hyperbole) covered call CEFs.
On the positive, I am continually impressed by Claymore's efforts to be innovative with these products. When any company creates a lot of products it is unlikely they will all be a hit but I am glad they are so committed to this.
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Useful Reminder
Dylan Ratigan made a great point a few minutes ago. He put up a graphic that had the amount of energy exposure for several large mutual funds with the comment that people probably do have exposure to the sector even if they don't own any individual stocks in the group.
Maybe this seems obvious to you but I can see a lot of people not realizing.
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Maybe this seems obvious to you but I can see a lot of people not realizing.
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Reader Questions
I had a couple of emails asking about my foreign exposure and one about Iceland.
Here is a list of countries with a quick blurb about why, I may forget one or two.
No client has every country listed. This list could be thought of as my ownership universe.
As for Iceland; oh boy. You need to open an account at a bank in Iceland (which has 19 simple steps, unless you are there visiting), send money and buy whatever it is you want to buy. I know you can do this through Kaupthing Bank but there may be others.
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Here is a list of countries with a quick blurb about why, I may forget one or two.
- Ireland-great story, business friendly government
- Norway- oil
- Australia & NZ-commodity based economies
- Canada-commodity based economy
- Switzerland-bomb shelter aspect
- South Africa-gold
- Brazil-emerging and commodity
- Chile-emerging, commodity and public pension money going into the stock market
- Austria-check archives or better yet my article on Real Money
- UK- high yield
- China & India-for exactly the reasons you think
- Israel-this is more about one stock that happens to be from Israel (I sold ISL before it got mentioned on TV)
- Mexico-oil and emerging
No client has every country listed. This list could be thought of as my ownership universe.
As for Iceland; oh boy. You need to open an account at a bank in Iceland (which has 19 simple steps, unless you are there visiting), send money and buy whatever it is you want to buy. I know you can do this through Kaupthing Bank but there may be others.
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Announcement
I am going to be writing once or twice a week about ETFs for RealMoney.com. My first article is up today (subscription required).Needless to say I am thrilled. I am just about finished with my second article that I expect to have in today to hopefully be published next week.
Thanks to all of you for reading this site. I think it is the following that this site has developed that helped me get to this point. The flow of posts on this site will not change.
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The Way Back Machine
Back on July 20th I posted about an interview with the manager of the Jensen Fund (JENSX) in Barron's. The sum and substance of my comments was that rigid screening can lead to missing big themes. As of the interview the fund had no energy or utilities exposure. I mentioned that the fund had lagged in 2003, 2004 and was lagging YTD as of the article. It is still lagging YTD. Eyeballing a chart shows the SPX up less than 1% and JENSX down 2.5% YTD.
Last night I had a commented posted anonymously, I responded, the commenter posted again and I replied again. Here is the exchange with anonymous in green and me in dark red.
And here is the chart. Since the first article Morningstar has reduced it from 5 stars to 4 stars. I did not know, before this person posted his comments last night, to what extent this fund appears to have lagged the market. To be clear I looked at one year at a time starting with January 2, 1993.
I have to believe there are mutual funds with just as strict criteria as JENSX that have done better than the market. One of those might have been a better example to defend the technique.
The whole point of this is to, as I say all the time, take a little from me and a little from other places and come up with your own process. Long time readers know that I find simple to be better and easier. That was the point on July 20th and it is the point today.
As a side note there is no spell check in the comment feature and I did not correct any typos from the comments for this post.
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Last night I had a commented posted anonymously, I responded, the commenter posted again and I replied again. Here is the exchange with anonymous in green and me in dark red.
Roger... JENSX has a disciplined investing strategy. Just because energy is hot now, they will not change their discipline. The reason they NEVER had any weighting in the fund in sectors like Energy and Utilities (and for that matter Financials except for MBNA (KRB)) is because these the first two sectors are capital intensive and do not consistently generate a ROE of atleast 15% (which is a requirement for any stock to be in the fund). Warren Buffett once said "Stock market is medium that delivers returns from the active to the patient" (or something to that effect). Finally, look closely at the fund's portfolio on Morningstar and you would see that almost all the fund's holdings are wide moat companies with long term advantages in their respective areas of market place. For ex. sysco (SYY), the food services giant. PEP, KO and BUD are few other examples. I think they beat Buffett to BUD recently.
energy and utilities are hot now? at any point in the market cycle there are groups that lead and groups that lag. figuring out what groups have a shot at leading and then overweighting them makes managing a portfolio much easier. if you get that wrong however but at least underweight the area you expect to lag you probably won't get hurt. no energy and no utilities is not diversified. I prefer a diversified portfolio.
Roger.... If you want to chase trends then this fund is not for you. Try ProFunds or Rydex funds or Fidelity Select funds. By prospectus and definition a concentrated fund like JENSX is NOT diversified. If you want a diversified fund (with average returns over the long term, I might add), try VFINX, FSMKX or VTSMX. Good Luck.
um, i guess you are not very familiar with this site. I am a huge believer in individual stocks, almost preachy in fact. Individual stock selection accounts for 90% of my practice.
As far as chasing trends? If you spend just a little time reading what I have written on this site over the last eleven months it will be clear that I am not late to too many parties.
The only way I can figure these anonymous posts from you, a month and half or two after the fact is you work for the fund.
According to BigCharts.com the fund goes back to late 1992. I looked year by year from 1993-2004 and year to date 2005. JENSX only beat the SPX thrice; 2000 2001 & 2002. There was a problem on the chart for the end of 1997 so I can't be sure either way about that year.
Your comment mentions something about average returns. JENSX has been below THE average 76% of the time, assuming Big Charts is correct about the inception date.
Further since inception JENSX is up what looks on the chart to be 140%. In the same time frame SPX looks to be up a hair over 180%.
This has been a great exchange. I am going to post the whole thing with charts tomorrow. thank you.
And here is the chart. Since the first article Morningstar has reduced it from 5 stars to 4 stars. I did not know, before this person posted his comments last night, to what extent this fund appears to have lagged the market. To be clear I looked at one year at a time starting with January 2, 1993.I have to believe there are mutual funds with just as strict criteria as JENSX that have done better than the market. One of those might have been a better example to defend the technique.
The whole point of this is to, as I say all the time, take a little from me and a little from other places and come up with your own process. Long time readers know that I find simple to be better and easier. That was the point on July 20th and it is the point today.
As a side note there is no spell check in the comment feature and I did not correct any typos from the comments for this post.
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