Saturday, December 31, 2005
This is an education issue that I have touched on before. And here is the rest of it.
When an investor buys an actively managed mutual fund or goes through a broker who hires managers, in both instances the managers must assume that the asset allocation decisions have been made. It is right and reasonable for a small cap manager in the context above to be more than 97% invested at all times. A small cap fund needs to be a proxy for small cap stocks regardless of the direction and magnitude those stocks take. Fund managers and managers of separate accounts in brokerage house programs are not asset allocators that falls on you or your broker.
This is an education issue that I have touched on before. When an investor buys an actively managed mutual fund or goes through a broker who hires managers, in both instances the managers must assume that the asset allocation decisions have been made. It is right and reasonable for a small cap manager in the context above to be more than 97% invested at all times. A small cap fund needs to be a proxy for small cap stocks regardless of the direction and magnitude those stocks take. Fund managers and managers of separate accounts in brokerage house programs are not asset allocators that falls on you or your broker.
Roger, I'm looking for a few ETF's. I want one to be a ETF that invests in company's that produce Copper, Platinum and other metals and may track a Commodities spot index and I want a ETF that will invest in India. Also what is your favorite ETF's for 2006???
Deutsche Bank is supposed to be bringing an ETF that is linked to a commodity index that is expected to trade under symbol DBC. I'm not sure when it will price. For folks that do business at Merrill Lynch, they can access the Rogers International Commodity Index Fund. That one trades on the CME and for some reason does not seem to be available at other firms.
PowerShares will have an ETF for India soon. That last I read about it, probably at ETFInvestor.com, it was only going to have 17 components. There are two closed end funds for India. I own one of the two for some clients. The 17 thing is a bit of a concern to me.
Judging by the last question, I would guess the person might be a new reader of this site. I don't really have a favorite anything, where portfolios are concerned. I write a lot about themes that make the most sense to me and I overweight the best way I can.
The other thing is that I don't use too many ETFs for clients. Where possible I use common stocks. Sometimes an ETF is the best possible tool. I was quoted in the year-end issue of Businessweek talking about the iShares Austria, which is a personal holding and held for some clients. Austria, as a way to capture some of the benefit of Eastern Europe is something that I have been writing about here for almost a year. The theme is still intact, I think, but I don't know if it is my favorite.
I think I disclosed on this site that I bought the water ETF across the board and personally during its first week. That might be a favorite? I have an article about another ETF coming Tuesday on TheStreet.com that I've never mentioned before, that could be become a favorite I suppose.
In truth the use of the word favorite, or something similar, assigns an emotion to the idea. I try to leave emotion out of the process entirely. Something will be the best performer in client accounts and something will be the worst. It will either shake out as I expect or it won't.
As an example of this, many clients own Anglo Gold (AU) for their gold exposure, I have disclosed this many times. For 2005 the stock was up 40%. That makes it one of the best performers for clients. I did not have any notion that it would do so well (obviously it did well because of the move in gold and not because of my stock picking).
One word of warning would be if you use a retirement planning calculator to tell you how much you will have or how much you need to save or anything else. I plugged our numbers into two calculators yesterday and got results that made no sense. I assumed 7% average growth in assets and 4% inflation. So slower growth and higher inflation than we've had and both results were too encouraging. One calculator said I didn't have to save anymore money and the other said that with my savings plans my assets will be worth a gajillion dollars.
I'm not that old nor am I that wealthy. The idea that someone my age could stop squirreling away is ludicrous. I am a huge believer in giving yourself as many options as you can. Where saving and planning are concerned this means socking away as much as you possibly can, one way or another. For example, an investor that saved 50% more than needed with a plan of retiring in 2000 could have better handled a 25% hit to a properly diversified portfolio than if the amount saved was only exactly what was projected as the magic number 20 years earlier.
My example is flawed, but its the best I could come up with early on a Saturday and it does make the point.
Friday, December 30, 2005
A major aspect of my approach is to try to be right more often than I am wrong. There is no getting around being wrong, success can still be had being wrong on many things.
Theme-wise I really did not get too many thing wrong this year. Energy worked as the sector, measured by XLE, outperformed the SPX by about 35%. I overweighted dividends too. DVY actually lagged SPY by about 3%. Add back in the extra percent and half yield advantage and total return lagged by about 1.5%. That one might be a push?
I was obviously wrong with the little bit of defensive action I took in October. That caused some drag in the fourth quarter.
I overweighted foreign. Generally that worked very well. Of the roughly 29 foreign holdings that are in my ownership universe, 25 of them outperformed the S+P 500. I think what is most interesting is that many foreigns outperformed despite the dollar being up for the year. Also most of the countries I talked about all year beat the S+P as well.
Most of the wrongs were individual stocks. I had rough go's with BSX, BKF, ZBRA, IGT, SYMC, VZ, DELL and JNPR. My worst stock was FOXH which was owned by one client with an aggressive mandate. I sold it so he could take the tax write off. There may be others but that paints a good picture. Fortunately no one client owned all of them.
At this point I'm not sure how I did for the year. It looks as though I lost a little bit of my lead in the fourth quarter but I was still ahead of the S+P 500.
The reader shared that he has 32 positions. The largest holding as a very good OEF that comprises 9% of the portfolio and the smallest position is a CEF that captures a particular effect that has a 0.5% weight. He wanted to know if positions under 5% were worth it.
The short answer is yes.
I told the emailer that the half a percent weight might be a little light. I doubt that such a small weighting could capture whatever effect that is trying to be captured.
He gave me only two names out of the 32 but both were funds. Portfolios with a lot of funds need to be diligently monitored for overlap. I realize this can be tough to do for timeliness but do what you can.
My starting point for assembling a portfolio is to decide what weightings I want in each sector. I then go sector by sector using common stocks, ETFs or a combo of both. I then tweak those by factoring in things like the sector weightings in, for example, the India Fund for clients that will own that or the water ETF for people that own that.
This can be harder to control with broad based funds.
As for weightings with individual stocks, most of the time I weight a stock at either 2% or 3% of a portfolio. Google was an exception to the low side at about 1%-1.5%.
Thursday, December 29, 2005
I did an interview earlier in the week where I opined that the week would be very dull with most folks crossing their fingers and toes just hoping to close out the year where it is. Although most of the drop for the week was on one day I have to say I did not expect this big a move.
NYSE volume, as of ten minutes ago, was below 900 million shares.
As for the first couple of weeks of 2006 I think it could go either way but it seems like more people expect a negative start to the year. If that is the consensus then maybe January will start out pretty well.
This year the fund is way ahead of EFA and last year it lagged it by 6.8%. I think the bond component is the driver. A good bet on bonds (bet may not be a fair word) and the fund does well, a bad bet and the fund will do poorly. If rates rise, as is usually the case in a Fed tightening cycle, I would think the fund would be hurt.
I think it might be less risky (if done properly which is a big if) to replicate the strategy on your own. An individual bond will go back to par. A fund has no par price it must revert to.
A big difference between this and the PLMDX I looked at the other day is that PIPDX' strategy could be done on your own, and be less risky) PLMDX' strategy is not something that could be captured with any liquidity or breadth of currency. I don't think my bank has Hungarian florint NDFs readily available.
Since this addresses what I do for a living, I may be biased. The vast majority of people will not hire someone to help them, this seems quite clear to me.
I don't have a tremendous amount of insight here but I think it really just boils down to a couple of things. The first thing is trust. Not so much trust of not stealing (I don't think theft happens very often and if your assets are custodied at a brokerage firm it won't be a problem) but trust that the person cares about his clients, which is probably a bigger problem than theft, and that once you find someone that does care that they will be around for a while.
One thing that may not be very important is performance. If you have saved enough money and that money captures most of what the market does, you will grow your assets sufficiently enough to pay the bills and keep up with inflation. It is only logical that any adviser will beat the market some years and lag it others. I'm sure there are exceptions on both sides but keeping close with a philosophy that you can be comfortable with is what I think is most important.
I think the last paragraph, while my general take, may not be that simple to do as far as finding someone. I would urge anyone that thinks they want to hire someone to meet as many people as they need to until they find someone they are confident in.
Wednesday, December 28, 2005
Today gold is up a lot at $518. What is important is that at $540 there was a lot of media attention. As par for the course the media cared at the wrong time. When gold bottomed out at around $488 and as it has moved up $30 from the low there is been almost no media attention.
The time to buy was when the media stopped caring. I am less confident about $518 than I was at $503-ish but I do know the media doesn't seem to care yet.
This is just a reiteration of a truism that repeats over and over.
I owned NZSX, an ETF-like New Zealand fund, for a year. I was stunned to have a $700+ trade fee at each end through Schwab. I aksed about it, blah blah, that is just the way it is done.
I spoke to Schwab about your question re the fee. They can trade the ETF based on the NZX Ten, the product brand is called SmartShares and I have written about these before. It trades below $1 per share US. There is a minimum ticket charge involved plus a substantial fee as a percentage of the trade for stock below $1 US.
I don't know why it needs to be that high but there is more work involved for this type of stock than others. I would not expect you to be happy with the answer but I can tell you from first hand experience that trading certain types of stocks is more expensive for the brokerage firm. When that happens they will absolutely pass that expense on to you.
This is a good post by Barry that does more explaining. One thing about this whole issue that is a concern is that it seems like far more people are trying to explain why this inversion (if it happens for real) will be different.
I have been thinking and writing all along that if it does, really, invert it will not be different. I don't find it necessary to spend time figuring why something that is correct 83% of the time will not be correct this time. I'm not that smart.
I looked at the holdings PDF and the fund owns a lot of different currencies. There are a lot of non-deliverable forwards from many countries including Tunisia, the Ukraine and Peru along with many other less exotic countries. The yields, generally, are not crazy high. Because of the vast diversity I think the only thing being captured is a drop in the dollar, as opposed to capturing just one region or one type of economy, like commodity based. Of course the dollar could rise and you'd capture the loss.
Both Schwab and Ameritrade allow clients to buy the fund (assumes I was given correct information). The fund is new, it looks like it listed in August. There has been one dividend declared so far, earlier this month, that was $0.028. I guess it will not be yield play as an investment?
I am a believer (recurring theme) of owning something that helps if the dollar drops. My first impression of this is positive but don't take that as me pounding the table as buy. I may come to that but for now it is just interesting to me.
This chart compares PLMDX to the unleveraged rising and falling dollar funds from ProFunds. Since PLMDX listed in August, the dollar is up so it makes sense that it had lagged the rising dollar fund. I am impressed that it has done so much better than the falling dollar fund but it may be too early for this to be valid.
Also being inverse dollar is not the exact mandate of PLMDX. I will keep tabs on it and I would encourage anyone that knows anything about this fund to please leave what they know as a comment.
Tuesday, December 27, 2005
I have thought of South African exposure as being a good bit of diversification, for less conservative investors, for a while. I would not be surprised to see some sort of easily traded product that gives direct exposure to the rand.
Maybe it already exists? If so please let me know.
The other dog is Tater Tot, whom we have had since April. It is possible that Roscoe and Tater Tot are litter mates. After we picked him this morning, we took him on a walk on one of our regular trails to wear him out a little before bringing him home.
He met Tater last week but had not met our third, and oldest dog, Kramer. We all met for some sniffing at our fire house before coming home. Tater and Roscoe love each other already.
Ben Stein tells people to get a dog. While I am no Ben Stein, I would also make the same suggestion.
According to the lead in Ted said the Russian Market is up 83% year to date and in the next sentence he said that TMRIX is up 47% for the year. The chart here is as far back as Big Charts goes.
The fund has taken a big departure from the index and has lagged badly. I wish they would have asked the manager about this. One little piece of the lag is the dividend reduction as you see in mid-December. I find this strange.
Another thing about Russia is all the chatter about Gazprom (OGZPF). The shares are restricted as to how much can be held by foreign investors. That restriction will loosen up by some measure allowing more foreigners to pile in. This is generally viewed as a positive for the shares.
So lemme get this straight, more supply will be good? Oooh, I don't know about that one. There are plenty of people that know more about this trade than I do but everyone thinking more supply is a positive could be a trade that should be faded.
I think that when one reaches the sixties in age, they should consider their Social Security Payements as Bond equivalents. (i.e. $i500 monthly SS payments would be equal to having a five percent long bond worth $360,000 in your portfolio. Also, any defined benefit pensions and fixed annuities etc., should be similarly classed. Then the Asset Allocation between Stock and Bonds will then be decided on the basis of your full portfolio, and avoids bond overweighting. Some Financial planners recommend this method.
This makes sense. Someone in their 60s can probably count on social security. I don't know that someone my age can and I'm not sure at what age the Mendoza line is for this but I like the logic for a 60 year old. The next 20 years are probably a good bet.
I think I want to ponder this a little bit more but it is insightful
I write all the time about using whatever tool is the best thing to capture a certain effect. For me this includes CEFs. Hopefully the Orphans site will continue to evolve to offer more things to more people, for now it is off to a good start.
ETFInvestor has a short commentary about investing in Turkey. I had a lucky trade on Turkey with the Turkish Investment Fund last winter. I should have gone back in but have not. Turkey has a shot at EU inclusion. If it does not get it it will likely be because the country is too big, 70 million, and the work force is too young. The theme makes a lot of sense to me and is worth learning if you do not already know it.
There was also an article on ETFinvestor about Japan. A lot of folks are bullish on Japan so of course if you want to own the country you buy EWJ. Not so fast my friend. There is another ETF for Japan, the iShares S&P TOPIX 150 Index (ITF). Actually the returns have been identical to EWJ. The composition is different, EWJ has about 280 holdings and the TOPIX ETF naturally has 151 (ahem) holdings. The differences haven't mattered yet and I don't know if they will matter later but there is a choice, albeit a lower volume choice.
I had a comment left by someone about bonds with a website he wanted to mention who believes in bond exposure because it allows him to sleep well at night. First, if you want to mention your site with a link, write the code in the body of the comment, it will be easier for other people. The sleep factor he refers to is crucial, no question. I think this comment was in response to my remark about another reader perhaps being too cautious with a 60% weight to bonds.
There are two different things at work here, sleep factor and the numbers. No question that some fixed income exposure is appropriate for just about everyone. It does reduce volatility. I think there is an argument, based solely on the numbers, for 100% equities at the target allocation. This would obviously ignore the sleep factor entirely but the numbers are worth considering as you try to figure what the right mix of stocks and bonds is for you.
Before I get piled on for that one, I am not saying the people should invest 100% equities, I am saying there is a statistical argument for it that should be understood.
Another reader asked what I thought about PIMCO Developing Local Markets Fund (PLMIX). The fund owns emerging market debt and currencies. It sounds interesting but neither Yahoo Finance nor Morningstar had any detailed info on the fund. I'll try to dig some up at the PIMCO site later. If I have any luck I'll put up a post.
Monday, December 26, 2005
First is time needed. This obviously depends on where someone is starting from and I think can also depend on how much money they have accumulated. A person with $10 million and with only a $150,000 income needed doesn't need his portfolio to do as much as the person with $1.8 million and a $100,000 income need. This assumes both of these examples have done what they need to with respect to estate issues.
Time needed breaks down into three things (my opinion). People need to spend learning, the need to keep learning never goes away. People need time to keep up with what is going on in terms of capital markets current events. This will help isolate some big picture themes and provide for proper monitoring of whatever you own.
The third time requirement, although this could be included in the first two, is the traditional staying current, from a bottoms up view, of what you own and seeking out new stocks or products to consider. For example I have written many times about my belief in New Zealand as an investment destination. I think Telecom New Zealand is the best way to access New Zealand but I don't know that that will always be the case. At some point there may be a better choice and when/if there is something better I would have no hesitancy in switching.
Understanding capital markets is crucial to managing your portfolio. Often emotion tells us to sell or buy at exactly the wrong time. While there are no absolutes, times of great fear mark bottoms not tops. In my brief career that has happened repeatedly, 1987, 1989, 1997, 1998, 2001 and I am sure I am leaving a couple out. This is just an example, there are countless this is how it works truisms that need to be learned. No one will know them all but you need to start somewhere.
There are also many basic market mechanics that I think need to be learned like that P/E ratios have a bad track record for predicting stock market behavior. Again, there are a ton of these as well.
I mentioned emotion previously but this is very very important, and again ties in with understanding and time committed. No matter how much emotion you spend on your portfolio, some things will not change. The market will be up (maybe not a lot) most of the time, more than 70% of the time actually. It will go down the rest of the time. That will not change no matter what think or how you react.
A $1 million bond portfolio with a maturity of 15 years will be worth $1 million in 15 years. The stock market has been up in more than 90% of every 15 year rolling period over the last 100 years. On December 26, 1990 the S+P 500 closed at 330.85. It is has been a almost a four bagger. From Dec 1975 to Dec 1990 the S+P 500 went from 90 to 330. The fifteen year period ending with the low of November 2002 saw the S+P 500 go from 241 to 876.
The magnitude may change but this is how it works, regardless of anyone's sentiment. If you are inclined to comment about this I would urge to look at some of the huge up years in the 1930's, huge. This is often thought of as a horrible period for stocks. Some of the years were bad but some were fantastic. Ditto the period from 1968 to 1981. In 1975, following after a lousy year, the S+P 500 was up 31%. In 1976 it was up another 19%.
The market often goes up a lot for no reason at all when few people expect it to. This is why despite my expecting 2006 to be down a little I am not taking action now because I could easily be wrong. If the market starts to roll over, that will be when I take defensive action again.
Another aspect to this is that people listen to reason when there is nothing to be afraid of but do not listen when there are things to be afraid of. For example, a market crash is a bottom not a top. This is just how it works over and over. We have no crash now so that is easy for anyone to believe. The next time we have a crash ( I guarantee there will be a next time) if I tell 100 people crashes are bottoms not tops, how many of those 100 people will sell anyway?
This may read like I don't think people can do it themselves which is absolutely not the case. With all that I have covered here, there has been no mention of time spent stock selection. Various funds, ETFs or products of any sort can allow for thorough diversification and successful results.
I also concede that this post is not a complete writing on the subject. I think this can be a good starting point for someone wading through this sort of decision process about what to do for themselves.
Sunday, December 25, 2005
While none these things may be appropriate or worthwhile they are interesting and perhaps with some very diligent thinking, some sort of integrated alternative strategy could be woven together.
David Swensen has been very popular on the TV rounds of late and has been very public about the Yale Endowment allocation which has a very heavy weighting to various hedge fund strategies. I can't cover every fund that could be thought of in this way but here a couple with a brief description.
Old Mutual Claymore Long Short Fund (OLA). This fund listed in August. Its IPO premium has eroded steadily and the fund now has a discount of 11.5%. The NAV has barely budged. Its probably too short of time frame to know if the strategy is working but it has not been horrible so far. The fund is about to pay its first dividend this week. If the dividend can be maintained, the fund yields 9.5% based on its current market price. As of November 30 the fund was long 120% and short 20%. The list of shorts included a couple of energy stocks and a few perpetual underperformers. Since the fund came out, the NAV is down about 0.9%. In that same time the S+P 500 is up about 0.6%. The fund is not a bust but it has yet to prove itself. If you were going to hire someone to to run a long short strategy they might have similar results but probably not have paid the big dividend.
Rydex Weakening Dollar (RYWBX). This fund goes up when the dollar goes down. It is leveraged to capture twice the effect. It is tied to the dollar index which measures the greenback against a basket of currencies. There are many ways to play the dollar up or down and some sort of falling dollar product, or something else that hedges the dollar, could become more important in the next few years, or sooner. One little quirk about the Rydex fund is that it was down on Friday. OK, but why was its counterpart, the Rydex Strong Dollar Fund (RYSBX), also down? I don't know the answer.
Any of the current or coming commodity ETFs, and other products, allow for a purer bet, or hedge, on that asset class. Again I think this will continue to be very important for a while to come.
There are also several OEFs that arb pending mergers. I am aware of two of these; the Merger Fund (MERFX) and the Arbitrage Fund (ARBFX).
I have been saying from the beginning of this blog that investment products will evolve to offer do-it-yourselfers the chance to capture parts of the market that have been previously unavailable. This is good.
A little later I will write a follow up post to this. I got the chance to speak with someone who is trying to decide whether to manage his own portfolio or get some help. This conversation got me to thinking that there must be other people wondering the same thing.
The follow up will explore what I think is needed for this. Just because there are different types of products available does not mean that managing your own portfolio is easier.
Saturday, December 24, 2005
None of the gobblety gook in the sidebar carries over. Fortunately Michael Taylor had a great tip that would be obvious for most folks, but not me, to paste the existing template into a word document so that I could recover the old layout as a worst case scenario.
Doing this requires manually including whatever links and things you want. Using Mike's tip meant this required just a little copy and paste as opposed to a lot of typing.
I'm not sure why the picture of me is so big (I expect this could scare away some readers) and it looks like the recent posts section is listed twice (this is now fixed)but it will work for now.
This went easier than I had expected.
Isn't the official measurement of an inverted yield curve the 3 month versus the 30 year?
Maybe, but since there is no 30 year anymore (it will be reissued in February), I'm not sure the market knows. I view this (if it lasts more than a couple of hours) as a marker for stocks to roll over slowly in a few months. If my thinking is wrong, well, yippee!
But if it is right it will take a few months to play out and it will happen slowly, small monthly declines three months in a row. I don't care about being right but I do care if the market starts to crack.
To be clear I just think there is visibility for this scenario, no one can be certain including me.
Friday, December 23, 2005
Time for everyone to line up and say why this time will be different and not lead to recession.
Assuming this time is not different, an inverted curve (I don't put much stock in it being inverted for only ten minutes so far) will lead to problems for equities in a few months.
This is funny because the clip aired at about 12:10 est. At 12:05 I published the following on RealMoney columnist conversation in response to a post by Bob Marcin about poor TV coverage.
Bob makes a great point about stock market television. Yet despite all its flaws we all watch it anyway (well maybe not all of us but I do).
It is wildly flawed, there are anchors that ask the wrong questions, they sometimes add one plus one and get eleven and when they have smart people on, those folks get talked over and are not given enough time.
So what good is it? Fair question. I watch more than my fair share for two reasons. One it is a much easier way, for me, to get certain types of news. Without the big news being reported (I concede to any comments about bias) I would have to spend time looking for it. For example I have no position in Time Warner (TWX) nor any plans to buy it but hearing the chatter about the AOL stake being sold to Google is worth knowing. I'm glad I don't need to spend time reading about it though.
The other use I have is hearing guests sharing parts of their process. I don't care so much about their stock picks but I am interested in hearing (time permitting) how they came to choose the stocks they are picking.
I'm a big believer in taking in what a lot of other people do and then creating your own process. Some (not all) of the interviews allow for that. To that end I would encourage anyone to do what they need to in order to access CNBC Asia and CNBC Europe. Despite my appearances on the former, the content is far more sophisticated and and the segments last longer which allows for much more detail. Both also devote a lot of time to currencies (almost totally ignored in the US) which I think is quite important.
Its flawed but take from it what you can and is useful to you.
The site says they can use 50% leverage. If they have $100,000 in equity they can borrow $50,000. That $50,000 would be the limit but they view that as 1/3 leveraged. They have a point but you can decide for yourself. The more important thing is that the funds are essentially fully leveraged. The concept is still interesting.
I stumbled across two interesting closed end funds from Lazard that do some things I have never seen in a CEF before.
The funds are the Lazard Global Total Return & Income Fund (LGI) and the Lazard World Dividend & Income Fund (LOR). The funds are actively managed so you never really know what is in there. But some of the stocks shown as holdings on ETFconnect for LOR are interesting and show an effort to think outside the lines. The top ten includes one of my faves, Telecom New Zealand, Bank Hapoalim (Israeli bank), Magyar Telecom ( the one Hungarian NYSE listed ADR with a huge dividend that is more than its earnings, if someone knows about this stock please leave a comment) and Tele Norte Leste (a Brazilian phone company).
Aside from having an interesting stock picking process both funds use currency swaps to enhance yield. The details of this are complicated. The funds can leverage assets up to 50%. Of the 50% that can be leveraged only 1/3 of the 50% leverage can be deployed into the swaps. I take this to mean that roughly 17% of the fund can be in swaps. I do not know if the managers can have 10% leverage with all 10% being in swaps or if only 1/3 of any amount of leverage can be in swaps. I'll try to get an answer.
I get the impression that the swaps used are entirely for emerging market currencies. Speaking of the leverage, neither fund shows up on the Closed End Fund Association leveraged fund list (which is not the be all end all but its the only site I know that has any leverage info). Looking at the yields of both funds though, 6.83% for LGI and 7.88%, I don't think the leverage is that high. Both funds are at double digit discounts to NAV. The yields of the NAVs are 5.8% and 6.9% respectively. High? Yes. Some leverage? Probably, but if you look at the yields of the stocks you will see a lot of 4% and 5% yielders.
I just found these last night. The LOR is more interesting to me than LGI but I want to watch them for a while. I like the swaps idea for the innovation (as I say I am not aware of any other funds that do this). I continue to buy into the idea that products will continue to evolve to be more and more useful. Of course that means dealing with a lot of not-so-hot ideas too.
Thursday, December 22, 2005
Europe on the other hand has done well the last few days. France and Germany are up better than 1.5% in the last week, the UK, Switzerland and the Netherlands are up better than 1% in the same time.
If we spent some time on this maybe we could figure out why but I don't think it matters. For now money has rotated into these markets. I can't recall reading any predictions that Europe would lead the world for the month but that has been the case. This is a great example of why investors should always have exposure to all parts of the market. You never know where leadership will come from. I'm relatively underweight western Europe but by having some exposure I can capture some of this. Being diversified is not that difficult to do. The discipline might be difficult, but the tactics are not.
Wednesday, December 21, 2005
Ever since the GM story evolved into its current state I have been repeating my bad news begets more bad news refrain and this has been right for a long time.
Yesterday on the RealMoney columnist conversation I asked whether at some point Kirk Kerkorian might consider selling some of his stock. After the close it was announced that he did in fact sell some.
I think this was an obvious thing to ask and I don't think it took a lot of smarts or experience to come up with this. Very simple things will repeat over and over in your investing lifetime. Heeding the simple could make for an easier go of managing your portfolio and maybe even better returns.
This is a link about protected stocks. I think it is a good read. I have written about these before. They are not easy to find nor understand. I own one personally that I have disclosed before but I do not own any for clients because I'm not positive I could explain them well enough to live up to my fiduciary obligation. One of my short comings.
I think these have a place, selectively, in a portfolio. At the very least I think do-it-yourselfers should learn about these.
Part of why I think do-it-yourselfers read this site is to learn some of how I think and view things. Hopefully they take in content from several sources. If you are interested in really getting into the bull case I would tell you to look at any of the comments left by Jack Miller or better yet go visit his blog. Jack gets a lot of stuff right. I disagree with him about 2006, but I hope he's right.
Long time reader George left a great comment, noting that up a little is not in the bag yet. With seven trading days left he is correct but yikes, 50 points lost that quickly? I think that would cause all sorts of pandemonium.
I stumbled across an article from the Forbes site called 6 Stocks and 6 Funds for 2006. By the title I thought that meant six stocks and then six funds for a total of twelve. I went through the slide show twice and it turns out six and six just means six, not twelve.
Anywho, the picks were FTO, MSFT, IPAS, EWJ, FSCOX and JATTX. I have no smart alec comments, just passing along the picks. Given that I had to take a shot at my top pick for TheStreet.com, it would be tough to cast a stone at this.
I got an email from the Yahoo Mail Beta Team offering me access to their new email (beta test for now). The new layout sort of looks like Gmail. I did not completely explore it but it looks like it has the auto-refresh feature that Gmail has. As you might imagine it can be a huge time saver if you get a lot of email.
I'm sure there were other things but if my first impression of the new Yahoo mail was correct, is it really just a me too version of Gmail? If so is that a bad thing? Clients still own Yahoo. One idea behind the position is my belief that nothing will happen in the Internet world without Yahoo. Yahoo may be a little late with an enhanced email but it is in the game.
Tuesday, December 20, 2005
The quick and dirty is that over the last 50 years the occurrence of winning streaks longer than three years is very rare. This is yet another anecdotal this is how the market usually works type of indicator the ties into 2006 being, in my opinion, down a little.
Barry's BusinessWeek forecast was for SPX 880 which would clearly be down a lot. While I hope he is wrong it would be worthwhile to, if you have not already done so, map out a clear strategy of how you reduce domestic exposure and where that cash would rotate to, a moneymarket is fine the big thing is just to have a game plan.
Specifically, when do you take action and what is that action? If you have someone that helps you, they should have some sort of game plan. But if they don't have one and you have to tell them the game plan, what is the point?
I don't think the report today from the House of Morgan would be a reason to change whatever outlook you might have nor shape your desire to own any part of the group.
On November 25 they issued a report on the Vanguard Telecom VIPERs (VOX). Their take was negative, which is ok but their reasoning was a new one on me. Their beef is that the fund has dramatically outperformed its benchmark index, which on the surface is strange but there is a reasonable explanation provided in the report. The underlying index is flawed in that it violates IRS rules about stock concentration in mutual funds. As a result, VOX owns less baby bells than the index.
Morningstar is also critical that 2/3 of the assets are in the top ten holdings. If that is important, and I'm not saying it isn't, it might also be important for Morningstar to mention that roughly 3/4 of iShares Telecom (IYZ) is in it's top ten and iShares Global Telecom (IXP) has about 2/3 of assets in its top ten. This just in, a lot of sector funds are concentrated in this manner.
The report also contends that because of the deviations from the index it makes it "hard to gauge how well the squad is tracking telecom services stocks." I don't really know what that last sentence means but I do know that both VOX and IYZ have about 18% in Verizon and are with in two percentage points of having the same weight in the new AT&T so I don't think it would be that difficult. Lately though, VOX has dramatically out performed IYZ which, although I'm not sure, might be due to VOX' average market cap of $12 billion compared to an average cap size of $33 billion for IYZ.
If VOX has outperformed because of cap size issues, that makes it not so hard to gauge. VOX will lag IYZ by a little bit when large cap beats mid and small cap. Maybe.
I think reading these reports can be a great way to learn. They can be a starting point with some facts and some un-insightful thought. From there I think do-it-yourselfers can add their own common sense to decide whether a particular fund is useful or not.
Some clients own VOX and some own Verizon.
Monday, December 19, 2005
The US needs to attract $2.1 billion a day to fund the gap and keep the value of the dollar steady. 2.1 billion dollars a day! That, my friends, is a lot of foreign capital!
This came in the context of wondering if deficits matter and those folks that say it deficits do not matter. I have to think deficits don't matter has to be wrong. I am not smart enough to know when they start to matter.
This is something I have wanted to see happen since I first saw CNBC World back in 2002. So far so slow but its progress. Stock market TV is not for stock tips, it is for news and learning process. The global coverage of both is far superior to what we are seeing on the US version.
I have written about this on the blog in the past and I have also emailed CNBC asking for more cross-over coverage. Hopefully this is just the start.
First there is no link to the B-Week survey per se in that it is a paid subscription. I had a few comments spell out some current events that should lead to an up year for next year. I said in my post that my prediction is not based on current events but more this is how the market has historically worked.
One comment asked my rationale. Rationale for what, expecting down a little? Check the sixth paragraph, the one that starts with the words The fundamental reason.
If it wasn't clear in my original post, I would be thrilled to be wrong.
I find it interesting that most of the comments were from people that take the other side of my trade. While hardly a scientific sampling, the ratio of bull to bear (I hate those terms) is about what it was in the B-week survey.
I am pleased to have had so many comments.
Sunday, December 18, 2005
The idea is to take all of the numbers from the B-week survey, plot them on a bell curve and look for gaps. Then assess which of the gaps makes the most sense. Below is the bell curve;
Barry Ritholtz is an outlier at 880 and Elaine Garzarelli is an outlier at 1635.
Someone who is wildly bullish would probably pick 1500 for the S+P 500 for the end of next year. For months I have been saying that I thought 2006 would be down a little . There is a conspicuous gap between SPX 1180 and 1219. If it were to close next year in that range the loss would be between 3.7% and 6.8%, from 1267 as of 12/16/05. I think those types of numbers are in the ballpark of down a little.
The fundamental reasons behind my down a little idea (repeat for most readers) include slowing earnings growth, economic cycle is about over based on precedent, cyclical bull market is about over based on historical precedent, the yield curve will either invert or the ten year will go up quite a bit in yield (both are a negative so trying to figure which it will be is not too important to me), gold seems to want to go a little higher ( I am saying a little not a lot) which is not a plus for equities, I think there will be less demand for the US dollar. There is one other one that I had forgotten about until recently which is that the second year of the four-year presidential cycle is the worst of the four.
Most of this outlook is based more on how the market usually works types of indicators as opposed to trying to justify why certain current events will add up to a good year.
To be 100% clear, I do not care at all about being right or wrong. My job is to try to let assets grow when the environment is conducive to growth and protect assets when that is the better path. If 2006 does take the SPX up to 1500 I'll be fairly close on either side and that would be great. This goes with not letting ego be more important than client accounts. I can't know if the market will go down, its not going down in any serious way right now so there is no big action take. Hopefully there will not be action to take but my outlook says otherwise.
Saturday, December 17, 2005
Another worthwhile article might be top sector pick for 2006. I have a gut feeling that a contrarian pick is the way to go with this. I think telecom has a shot of being a leader (a leader not the leader which I think will still be energy).
Part of how the market it works is that equities tend to move ahead of the fundamentals. This repeats over and over in market history. To pick telecom to do well at this point amounts to a contrarian call.
So far in 2005 telecom has badly lagged the S+P 500. The domestic telecom iShare has lagged by about 700 basis points and the global kind has lagged by even more.
To be candid, it is tough to build a fundamental case for telecom here. I think this fact is built in to the lag. Contrast that to the energy sector which is all systems go and has wildly outperformed the SPX.
Telecom stocks played a big role in the building of the bubble and the sector got crushed in a similar fashion to the net stocks, in terms of SPX weighting being cut in about half. I think the bubble was caused by too much supply and high valuations. What was right was how the Internet has changed our lives. The promise of innovation is living up to what we were told ten years ago, in my opinion.
Innovation in the part of industry is vital for the evolution of our economy. Telecom is also vital in the modernization of emerging market countries theme that I write so often about. Investing in this takes a little thought. Most emerging countries will not invest in wireline infrastructures if they don't already exist. The more likely investment will come in wireless. The existing traditional phone companies will, at some point, need to redefine and reinvent what they do.
I am absolutely convinced that this will lead to telecom substantially outperforming the market. I have less conviction about the timing. I think there is no getting around the innovation and the modernization themes for this sector.
As of now I have not yet figured out the best way to increase telecom exposure. This is something to work on over the next few weeks and implement for clients. As this site tries to focus on process this post reflects the cultivation of a theme but there is still a lot of work to do.
Friday, December 16, 2005
The reader wanted to know if it is a good idea to own something like this coming ETF given the run that commodities have had.
Jim Rogers says he expects this commodity bull market to last for at least 15 years (based on the duration of past commodity bull markets) which means there are at least ten years to go. There is no way to know if that will be right but I think the logic is sound; commodities could outperform for an extended period.
I think every diversified portfolio needs some commodity exposure and if this is better than what I am using now I would not hesitate to switch.
One thing to understand is that where it has been it not very important. That commodities zig when equities zag is important. Buying Google at $345 (the price I sold it) was a great trade. The move from $85 to $345 should not have mattered to the person on the other side of my trade.
To be candid I do expect the run in commodities, in general, to last. I don't know about doubling in price from here and I don't know about gold either but I think it makes sense to overweight the asset class for a while to come.
Overweight does not mean 30%. For the portfolios I manage it does not even mean 10%. The other thing to add on this topic is that we are talking about an asset class. Being diversified means exposure to all asset classes, even the ones you don't expect much from.
I had some good comments left about my most recent thoughts on gold. After a big drop in such a short time, yeah I think it might be better to buy right here. It has fallen fast and hard as opposed to rolling over. Maybe I am wrong and it will fall a lot more. I still do not think $800 gold is coming soon. A lot of the comments about this point out the some of the fundamental catalysts for why gold should go higher. I know all of the reasons and they may turn out to be right but I don't think the central bank buying, as an example, will mean what so many folks think it will mean.
$500 may be high but I do not think is is baseless. The story has evolved to be more favorable for gold. From the start of this dialogue I have been doubtful about $800 and higher. I have not doubted a move a little higher above current levels.
Thursday, December 15, 2005
- The S+P 500 is up 5% or so for the year. The year end will be crucial for a lot of folks. A slight decline could hurt a lot bonuses, point being the action is likely to be very nervous. A hint of a move down could cause an over reaction leading to overselling of the US market.
- That being said the market does seem to be in a good mood. Despite nervous trade I think another 1%-2% has a decent chance of happening.
- Looking into first quarter it is generally accepted that earnings growth will begin to slowdown. Bulls expect multiple expansion and bears say slower earnings growth will mean lower stock prices. While I doubt we will see multiples expand I think it is clear that we will see whether slower earnings growth does or does not matter starting in January.
- Market participants' fear and greed seems most evident in the action in Sandisk. It has been a while since we have had a stock this important move so much on so little news. Fear and greed.
- Gold sold off nicely in the last few days. In my last appearance I was asked about gold and I was skeptical about entering a position for a trade. Clearly down here is a much safer entry point. In terms of a short term trade this might be a good entry point.
- The market did not have as big of a rection to the Fed language as some expected. We may be on the verge of a period of less concern about the Fed. We know they are not going to 5.25% and we know they will go to at least 4.50%. I take this to mean the Fed is now less important.
We had some great banter on this site last week because I am skeptical about $800 gold. Since those posts, gold has sold off a lot. I actually think this could be plus for the bull case. The chart for GLD has gold topping out in the high $530s a few days ago and has it around $503 right now. Even if GLD's numbers aren't exact, it pretty well captures the magnitude.
I think a drop that big in only three days might mean a lot of late money got shaken out. I do not know if the current level makes sense as a trading bottom or not but if gold does find a bottom somewhere close it could have another nice rally.
I am not rooting for $800 gold because I don't think that can happen without bad things happening to the US stock market. I think I am building in a forecast of down a little for 2006 (I'll that post up soon). While I may have it upside down, $800 gold might go along with down a lot.
One last note, I often quote Bloomberg as saying the Aussie dollar has a 0.94 correlation to gold. Dave, over at Dismally, questioned me on the number. While it's Bloomberg's number and not mine I have to say it does not seem to be holding up in this move.
On to stuff that matters. I continue to not get Japan (kind of like Generalisimo Franco is still dead). I see it was down 1.3% today and down around 2% the day before. It was up 2% on Monday. That is a lot of octane for a developed country. For a long time, remember, Japan was going to take over the world.
I have said many times that I missed the current big run up and I will likely miss more if this run is the real thing. We've had a few false starts in Japan and I do not know if this is another one or not.
If you plan to, or already have, accessed Japan watch the weighting. It is volatile and might be more complex than most foreign markets you might invest in.
Wednesday, December 14, 2005
I was hoping to get onto the trading floor so after the breakfast I asked one of the officials if such a thing would be possible, and somehow it was. The NYSE stopped giving tours after 9/11 so getting on to the floor does not happen for outside folks very often.
One of the managing directors took around and told me a little about how it works. In my past as a trader I spent quite a bit of time on the phone with people on the floor so the mechanics were not new to me. So I really just looked around and listened to the flow.
My host took me to the post of Suntech Power Holdings (STP) which is a hot IPO that started trading today. I got to watch the process of bidding that determined the opening price. While we were standing there Bob Pisani came right up to where I was to report on the stock for the closing segment of Squawk Box. Since I bash him on this site so much I thought it would hypocritical to introduce myself, but I did think about it (insert smile). Right before he started his report my host asked me a question and I started to answer but she shushed me because my voice might get picked up by the microphone. Yeah, I was that close.
I had hoped to take a picture or two of the floor but that isn't allowed. My second thought was to take a picture of the floor through the glass doors that lead to the floor but you can't do that either, oh well.
As far as some other things I noticed, some of the specialists of smaller (in stature) stocks were just kids. They stood by their posts just typing away. Since I was only there for fifteen minutes I don't know if all six and half hours is just standing and typing but wow.
It was a great experience.
The article spells out their way of applying bottoms up analysis to ETFs. I have written before why I think this makes no sense and the above article, written by Morningstar, makes the case.
Their method involves calculating a fair value for just about every component and then figuring whether as a group the holdings are cheap or expensive. The article said that as was the case seven months ago energy is still expensive. Uh-huh. In that seven months iShares Energy (IYE) is up 30%, iShares Natural Resources (IGE), which is mostly energy stocks, is up 35% while the S+P 500 is up just under 10%.
The wording is not exactly clear to me but what I think I am reading is that they did not think owning an energy ETF was a good idea seven months ago and it's not a good idea now.
Their approach misses the forest amongst the trees. I have been writing about being overweight energy for the entire life of this blog. I think long time readers will agree that this has not been one of my more brilliant calls because of how obvious it has been. I can't begin to imagine how long it took for them to come to their conclusion about energy being overvalued but I would bet it took a little longer than it took me to conclude "yeah, energy looks pretty good."
The point of this post is that this sort of missing the point analysis is a ringing endorsement for seeking out and implementing simple themes where possible. Simple themes are not always there but when they are....
Investing might be complicated and take a lot of time and so on but the work attempted by Morningstar makes it far more difficult than it needs to be, and it missed one of the simplest dumb-money themes of the last few years to boot.
Tuesday, December 13, 2005
I only read the general description (which was confusing enough) from Quantum Online (free registration required). Here's the big picture thought on this. If gold is going to go to $1000 as some folks think, it would be better to own something other than an SP that has a cap on upside participation.
Gold is working right now. Who knows how long it will continue to work but I tend to think shying away from volatility in an area that is working may not be ideal.
Please note that this has nothing to do with how much exposure to have but more how to get (or not) exposure. Usually simple is better and these SPs tied to one stock don't ever seem to be simple.
I wanted to follow up with a little more about FXE and how it might find a place in a portfolio. First I should be clear that for now this is more of a brain storming exercise and not so much an important call I'm trying to make.
The dollar has had a big run against the euro of late, a run that I have said before I think is closer to the end than the beginning. If I am right about that then the timing is not as bad as has been the case for other new products.
There is an interest rate component to this that will probably improve as the ECB has just had one rate hike and most analysts don't think its the last. Aside from rising rates, generally being better for a currency it will also mean a higher yield for FXE holders.
I think this could be similar to a money market in one way, it is cash that pays a yield. It is unlike a money market in that it could move much more than investor just looking for a savings account might expect.
I mentioned in the other article that a 20% move in a currency is unlikely, but not a 5% move. If you buy what you think is a money market and you lose 5% on currency translation you will not be happy.
For now it is an easy way to access a foreign currency, easier and more liquid than the CDs at Everbank. I think there will be more of these but perhaps not just as ETFs. I've mentioned the structured product I own personally that owns a basket of Asian currencies. Perhaps growth will come in the structured product arena too. I'll try to stay on top of these but if you hear something please let me know.
I did not miss much in the stock market but it looks like the dollar got pasted. Speaking of the dollar, the Rydex currency ETF is finally out under symbol FXE. It tracks the euro.
One of the first things I think I ever wrote on this site was that there would be more innovation in the world of investment products and the successful listing of FXE leaves me all the more encouraged.
I think it important to realize what FXE can and cannot do for a retail investor's portfolio. I don't think this will lend itself to very quick trading. How often does the dollar move $0.02 in a day. FX traders are usually looking for increments so small that they quantify in pips. Pips are a little further to the right of the decimal point than the "2" from a couple of sentences ago.
In the last year the dollar has gone from $1.35 (ish) to $1.19 vs the euro. That is a big move, around 12%. That is not a huge number for a stock. Its not even a big number for a stock. 12% is a hair above average. I don't think FXE can offer equity like returns. Currencies are really a different type of asset class.
FXE, and any subsequent currency ETFs, will likely be bought by a lot of equity investors with not much currency experience. Think about it logically, a developed country (or economic union) will not let its currency move by 20% in a year without putting up a huge fight.
This is not to say the FXE, or anything that might come next, should be avoided but it is to say it should be thought of as a different type of asset class.
I'll have more on this later.
Monday, December 12, 2005
I was invited to attend a breakfast function at the NYSE on Wednesday morning with Bob Arnott as the primary speaker. I've never been in the exchange before and while I don't know if I will be able to see the exchange floor or not I'll have my camera just in case. This will likely be the only post today but posting will be the same the rest of the week.
The back and forth of late about my comments on gold and some of the great information about the subject that some of you have shared has made for some very useful content.
What is interesting to me is some of the reaction to my merely suggesting caution, which was my primary intent. It seems that this year I have had a name or two in the portfolio that goes up 30% in a given quarter. This quarter, give or take a couple of weeks, that stock was Anglogold (some clients own the GLD ETF instead).
Three months ago if someone had asked me what stock my clients own would be the best performer through the end of the year I doubt I would have guessed gold. My experience with diversification tells me that something will always be having a good quarter. Fortunately when your portfolio is diversified you don't need to know what will be hot.
My recent comments on gold tie in with this idea. I doubt gold will be white hot next quarter. I'm not a seller, I'm not telling anyone else to sell nor am I predicting $300. Just caution. In fact if I implement a new account this week I would not hesitate to buy gold in the manner mentioned above.
I think some of the comments left added one plus one and came up with eleven in interpreting my opinion here.
Saturday, December 10, 2005
In a couple of weeks I'll take my crack at trying predict what will happen next year. It makes sense to that various analysts will be right about some things and wrong about others.
My ideas about taking a little piece from here there and everywhere to form your own process really applies to this part of the job. What I think matters for now is that abrupt changes based on an article or two is probably a poor idea.
Personally, I filter through a lot of content to find useful, new ideas. That doesn't mean I can't learn from something or someone that does not have something new to offer. I learn a lot from John Hussman's commentary and read it every week but most of the time it is new information on a familiar theme.
On a different note the Striking Price column in Barron's had a couple of interesting predictions about increased retail option selling in 2006. In the same vane the article quoted an executive from OptionsXpress about the growth that firm has had with clients selling options.
I know a little bit about the firm and using a white hot growing company as an industry benchmark may not paint a very accurate picture. I have no idea how much options selling is or is not growing but I am quite certain that OptionsXpress is adding new accounts faster than just about any other firm. If that is correct then it makes sense to think that every type of account activity is growing exponentially, but again says very little about the industry which is probably is growing by some amount.
Friday, December 09, 2005
Roger I don't understand why you doubt the move in Gold. Also, who cares about the fundamental reasons? Look at the chart that is what we call a bull market, and charts don't lie. Gold $1000 you heard it from me. It will correct near term, but shorting gold is imho not a good idea. It is what it is, and the trend is your friend. Here is a better question; will oil hit $100 before gold hits $1000? Don't take this personal I still love your blog.
I hope I was clear, I'm not shorting gold. To repeat, I own it for everyone. Clients also benefit from Australia's correlation to gold as well. Bloomberg says that the Aussie dollar has a 0.94 correlation to gold.
Roberto's analysis and conclusion could be correct. I look at both sides of every theme I invest in and every theme I am thinking of investing in, its consistent with my notion of fiduciary obligation. This allows me to look any client in the eye and tell them I did my best, right or wrong.
Recently I wrote about getting lucky with two very quick trades for my personal account. I measured what I felt was the risk and the reward and had an idea of an exit strategy on the upside and the downside before I went in. That's just how I do things.
Back to gold, I have exposure and I have taken some inventory, I think, of the downside. Just seems prudent. But if $1000 turns out to be correct, I have to wonder what that does to domestic equities?
As far as taking it personally? Highschool sports to a fraternity to a trading floor to a fire department. I'd like to think my skin is a little thicker than "dude, I disagree with you about gold."
At this point I am doubtful about huge gains coming from here. I understand the fundamental case, it makes sense to me and my clients all have exposure so they will benefit if gold is still in the easy-money phase of the trade.
I was asked about gold last night during my CNBC Asia interview and I said it's diversification is always a good idea. "Mr.Market" left a good little nugget about the commitment of traders number not being so great these days. That has a chance of mattering a lot.
My commentary is more about caution and not about selling out. If you own gold you should have some opinion about what is a reasonable neutral weight and overweight. Beyond reasonable and you invite real problems.
Long time readers know my unyielding belief in the energy theme. That does not mean 20% is in energy. Gold is working and a diversified portfolio should have some. No matter how much you believe in gold right here I think you should seek out the bear case if for nothing else than to better understand your own bullish outlook (if that is where you stand).
Some semblance of balance is always a good idea.
I guess Jim picked up on the theme. Getting the mention was kind of neat. After finding out, I planned to watch it at 7:00, I was watching Asian Squawk at the time, but then I realized that I had CNBC on the other tuner (fellow TiVo geeks know what I'm talking about).
I admit that I am nerdy enough that I saved it on the TiVo. To further admit; the first time I watched I was spoon-feeding our dog Kramer (named after Kramer from Seinfeld for her hair and the way she used to punch through the doggie door). Kramer is very old and all of a sudden doesn't like her food bowl, but does like her food. The point is that no matter what else happens in the stock market or my life, I have to feed the dogs between 4 and 5 in the afternoon.
I'll have a real post up later this morning.
Thursday, December 08, 2005
- Intel and other semi-conductor stocks did not have good mid-quarter updates. More correctly the updates were not received well by the market. Since November 1 the semi-conductor sector as measured by the Semi-conductor HOLDR was up 14.9% before the Texas Instruments update yesterday. That compares a 4.5% lift for the S+P 500 in the same time frame. Point being semis have been an important market leader that looks to be rolling over.
- Merck and GM continue to make bad news. I think these are both just train wreck types of stories as opposed to market moving stories but if GM fails it will become a market moving story.
- I think 1180-1270 in the S+P 500 was the rally. From here it could move up a little more but we have seen the bulk of the lift. A 90 point move in the index exhausted a lot of buying power. Chasing too much risk now, after a big move, may not work out too well.
- The big rally in the US dollar looks like it may be rolling over as well. A big part of this rally has been the repatriation of dollars for a tax break. This has a finite time limit so this will no longer be a source of demand for US dollars.
- Bond yields in the middle of the curve are quite flat and staying low. I have said before on the show that the reissuance of the 30 year bond by the treasury should push rates on the ten year higher. I still believe that but if I am wrong that means we will have an inverted curve. Unlike many other folks I am not will to bet that an inverted curve will be different this time.
I obviously have a great chance of being wrong. CNBC just had a 2006 Outlook segment about gold. Two smart guys came on, both with plausible scenarios for higher gold and they may turn out to be right.
Seeing this made me realize that I can't recall seeing or reading the bear case for gold anywhere recently. Feel free to correct me if I'm wrong.
Anyone else think fading the bullish case gold might make sense? I find this all to be confusing. I am not a gold bug, I don't think that with what the market knows today, gold will challenge the 1981 high anytime soon.
The case for another 20% seems plausible but my guess is that it needs to go down or consolidate for a while first.
The thing to take away from this piece is that you should care about the thing no one is talking about.
Alan Bollard, the kiwi Alan Greenspan, made a rare appearance on Asian Squawk Box with some comments about the rate hike and what's ahead for New Zealand's economy.
In some ways the NZ economy is firing on all cylinders, unemployment is running at 3.4%, consumer spending is hot (perhaps too hot as debt is quite high) and inflation is on the high side near 3%.
The RBNZ forecasts inflation to run at 3.5% in 1H 2006 and slowdown to 2.75% in H2 2006.
The high NZ dollar makes it difficult for exporters but the rates need to be high for fear of overheating so there is a bit of a dilemma that Bollard says will likely result in the kiwi going lower, he says that current levels between the kiwi and other currencies are unsustainable.
Bollard says that monetary policy is working as growth has slowed from around 5% to 3% now. They see no prospect for easing to start anytime soon due to visibility for continued heavy household consumption with not much savings.
From a personal standpoint I can say that when I was there I saw a lot of banks and a lot of commercials for equity loans from banks.
Seeing Bollard get interviewed was interesting in that, not surprisingly, he is a little more accessible than Greenspan and can afford to be a little more plain talking about what he sees and and what he is thinking. Obviously Greenspan can't be completely candid but Bollard can be, almost.
I may be the only who cares about this.
Wednesday, December 07, 2005
How much do these interest rate differentials factor in the timing of your purchases, once you have used your top-down approach to determine you want to be in one of these markets? Is it a significant factor or simply one of many equally weighted?
I think the question is of a short-term nature. Since I manage serious (defined as can't be earned back again) it is not appropriate to try to game the next few weeks for any aspect of portfolio implementation.
Longer term if I felt the dollar was going to get stronger I would hold back on some of the foreign, less of an overweight than it currently has. However my opinion is that the dollar has to get weaker. It seems like there are too many this is just how it works things going on to allow for prolonged dollar strength.
So I guess the answer is that it factors in bigger picture for client accounts. Since I don't think shorter term for clients or personally (clients don't need a portfolio manager that spends four hours a day trading his own account) I'm afraid I don't have a great answer.
Here is another;
roger, i was reading this blog: http://anothermoneyblog
I take this as a question of probabilities.
After I concede that anything is possible I would say the probability of a dollar crash is low. That does not mean you shouldn't have a little gold because you should (be it stock, ETF, coins, whatever). Deficits carry big risks and clearly can create cracks in the dyke. The US has swung in and out of various deficits over its history and the worst case scenario in the last 100 years from what I'll just broadly refer to as excesses was the great depression ( fair enough if some thinks something else in that 100 year time period was worse).
The question feels like it has an apocalyptic tone to it so, if that is correct, a crash, an economic death blow that could be worse than the depression in terms of length and magnitude seems unlikely. There are too many efficiencies and market mechanisms to give this a high probability. As a matter of my own theories, as our economy becomes more mature (this is a perpetual thing I am talking about) the booms and busts will be less volatile and dramatic and may last longer than in the past. The much older European economy is perhaps a template.
A slow rolling over of the US economy as it cedes the role of the economic superpower to China or India (history would say it will be someone else's century, not ours) causing a general but prolonged weak dollar with below average market returns (maybe 6% on average vs 10%) seems more realistic to me.
So if you want your 10% returns in that environment you need to be prepared to learn more about foreign stock and commodities.
Actually I don't blame Canada for anything.
Yesterday the Canadian equivalent of the Federal Reserve raised interest rates to 3.25% and a couple more are expected in the coming months. The New Zealand equivalent is likely to raise its cash rate to 7.25% later this week.
In some of the smaller countries increasing rates can be a good thing for the stocks from those countries, in dollar terms. There are many explanations for this but the simple way I look at it is that there are fewer moving parts in these places. Higher rates, everything else being equal, causes capital to flow into that currency and a portion of that capital finds its way to the equity market.
The US is always more complex than that and sometimes Japan is as well. There has been a lot of chatter on CNBC Asia and Europe, and far less on CNBC US, about interest rate differentials lately. This stands to be important for US investors that own stock from other countries.
Australia get a lot of attention in this regard. Australia's overnight cash rate has been in the fives for quite a while. Early on in the US rate hiking cycle the interest rate differential was obviously very wide and made buying the Aussie and easy decision. That differential is now much narrower than before which makes buying the Aussie not such a layup. When US data comes out that leans to the Fed stopping sooner than later the Aussie goes up and data that says the Fed will keep going makes the Aussie get weaker.
The European Central Bank just raised rates to 2.25%. If they keep going there will be some Euro strength as the current rate differential between the US over the euro narrows.
I think the importance of how much this can help or hold back is subjective. For a long term investor it is important because these things can help reduce volatility short term and add to returns long term (remember that US markets lagged foreign in the 1970s, 1980s and so far in this decade). Over the course of one year in may not matter much.
For a portfolio manager it can add basis points to return. That can be a very important way for a portfolio manager to add some value from the top down.
Generically speaking, I am up quite a bit for the year compared to the S+P 500. One reason is that a lot of foreign stocks have out performed similar domestic stocks and and different times this year the currency moves have mattered.
The energy sector makes for an easy example. I own two big, slow moving, mega cap, integrated oil companies for clients. This is probably reasonable for a managed account but instead of owning Exxon Mobil clients own British Petroleum and Statoil. BP might be up a hair, literally, more than XOM but STO ( I disclosed this holding on Forbes on Fox in July) is up dramatically. I have blogged the process that took me to STO several times but the starting point was the simple desire to be overweight foreign.
There have been other helpers too this year but this has been an important one.
Tuesday, December 06, 2005
This morning TheStreet.Com published an article I wrote about the new water ETF from PowerShares that trades as PHO.
I had multiple emails asking for the components because they are not yet on the PowerShares site. You can click the image to enlarge it.
A reader left a question about my timber exposure, what and why.
The what is Plum Creek Timber (PCL). It is structured as a REIT, yields in the neighborhood of 4% and it owns timber-land all over the place.
I first learned about PCL in 1990 when it was still a master limited partnership. I was working at Lehman Brothers at the time and that it was a good diversification tool was part of the pitch, but at the time I didn't really understand what that meant.
Timber has a long track record for its low correlation to equities. If you do a search for Jack Meyer or Harvard Endowment you'll find plenty of content where Meyer spells it out in better detail than I can. Meyer was the long time head manager at Harvard before leaving due to issues of pay raised by alumni.
PCL is a core holding across the board because of its diversification potential. I think this is an important component to a diversified portfolio.
Monday, December 05, 2005
I don't know much about Mr. Thompson, how smart he is or if he has any track record for being right. All I do know is he is on TV a lot and I have only seen him be bullish.
It is possible that being wildly bullish will turn out to be correct but not being able to find the other side of your opinion makes absolutely no sense to me and is actually hard to believe. There are plenty of things out there right now to make someone bullish and there are plenty of other things to make someone bearish. That should usually be the case
If you manage your own portfolio, you should be introspective enough to understand the other side of your trade, if for nothing else than to give your belief more conviction.
One other thing from my sick-couch; is it me or is the argument that more Americans are working today than ever before empty? Isn't the US population always growing? A lot? Maybe there is a real jobs story going on but the more American than ever business is not it.
Back to sleep.
The keeper of the above site asked me make mention of the latest Carnival of Debt Reduction post, so there it is.
I don't write too often about personal finance issues. I have some very specific opinions about living below your means because I grew up with parents who lived above their means with a bad outcome.
If there would be any demand from this sort of thing from me, let me know.
If I had to move into 1 country, which one do you think it should be?
Limiting to just one country is not such a great idea. I think the question behind the question might be my opinion of a priority of what countries to own. Even that is a tough one. All of the countries I own have specific purposes for being there.
A very important theme is commodity based developed countries like Canada (oil), Australia (most other resources), New Zealand (timber) and Norway (oil). It would be tough to pick one over the others but my gut says Canada might lead due to that markets exposure to oil sands. That is a guess however and I own all four. My exposure for most clients is just common stocks but a few own iShares Australia (as do I).
I own Brazil, Chile and South Africa as commodity based developing countries. Here I use common stocks or ADRE (personal holding).
I don't necessarily own materials companies from these places but the economies rely on supply and demand for commodities.
I also have exposure to India and China. Either one is likely to be the next economic super power. For India I use a CEF and for China, one of the oil stocks.
Clients own Teva which is more of a bottom up healthcare pick but it is Israel as well.
From a top down standpoint my exposure to Europe is probably my least important foreign exposure. I say this because of my theory that western Europe as a mature service based economy has a tighter correlation to the US than other places.
But in Europe I have England, Ireland, Switzerland and Sweden. Sweden is a little different because it has a lot of timber. These countries I just have common stocks.
As a caveat I'm sure I'm forgetting a couple.
In trying to maintain a diversified portfolio all of these places play a role. One over the others really is not ideal. In a portfolio of just a few equity ETFs maybe Australia is the best choice for diversification? Watch out though because the Australian market, and by extension iShares Australia, has a heavy weight to financials and it would be easy to end up with too much exposure.