Turkey

Capital markets in Turkey got smacked hard due to worries about the coming presidential election.

Stocks opened 8% lower but finished 4% lower. The lira fell over 2% against the US dollar and debt yields went up dramatically.

Things like this come up every now and then with emerging markets. I am a huge fan of the space but they have had a great run over the last couple of years and for about the last year I have been urging moderation and have occasionally cut back exposure.

Longer term the story in Turkey is very compelling. The population is very young (average age in the early 20's) and large (close to 70 million). Growth is good, the country is on the road to EU ascension (admittedly a very long road) and they benefit from a new oil pipeline.

This is a country that I think will become more important on the world stage but it will be a bumpy ride.

I have traded the Turkish Investment Fund (TKF) in the past but have no plans to revisit it soon. iShares has filed for a Turkish ETF.

You can click here and here for the articles I read about today's action in Turkey.
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From Russia With Love

You probably know that Van Eck has finally listed its long awaited Russia ETF (RSX). You can click here for more info from Van Eck.

The fund is very heavy in energy at 40%. It is very heavy in several energy stocks you have heard of like Gazprom, Lukoil (client and personal holding), Rosneft and a few others.

In a few days or so I suspect the usual suspects will tell you to run from the room with your hands above your head and that you should scream while doing so.

That of course would miss the point. RSX offers exposure to a country with a low economic correlation to the US and a low stock market correlation. Russia has a much higher growth rate, surpluses of all sorts created by energy and a very strong currency.

The biggest wildcard is of course the political whims of Vladimir Putin. I think another Yukos is unlikely (not saying impossible) as it could cause a dramatic panic out of the country. The business from a year and half ago where the gas to the Ukraine was turned off shows that there could be problems in the future.
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Sell In May?

I received the following question;

What's your current thinking this year to the old adage: "Sell in May and go away"? (for the summer that is, for the folks not familiar with the saying)

I'm in a rather large 40% cash position at the present time.

I don't really act on these sorts of things in a meaningful way for a couple of reasons; first is that there may not a enough of a fundamental case to do it. The second reason is that I think I heard recently that it only works 54% of the time. I may have that wrong.

I can also recall, however, another study that showed the market does much better from November until May by a dramatic amount. The nature of this second study I am vaguely remembering focuses more on better returns during the winter as opposed to declines in the summer. Anyone with specifics on either is encouraged to leave the links.

Obviously in 2006 sell in May was 180 degrees wrong. In looking at the Stock Trader's Almanac for the last ten years from May to October inclusive sell in May was also wrong in 2005, 2003, 1999 and 1997. Selling in May looks like it was right in 2002, 2001, 2000 and 1998 and I am going to say it was a push in 2004.

I did not look further back due to time constraints and I would not really be able to defend an argument that says the time sampled is flawed, maybe because it includes the bubble and the aftermath. Hopefully you have a Stock Trader's Almanac and you can study it further if you are so inclined.

The way I might incorporate sell in May into my thinking might be to sell one stock for a little cash if I thought the market was extended. I currently have a stop order for a portion of the position for one across the board holding that is up a lot. As the market has had a big run if the stop order gets elected I don't think I would redeploy that cash. There are also one or two more other names that are up a lot that I have been mulling partial stop orders for.

Having three stop orders as described above all execute in a downturn seems compelling to me. It would probably raise 3-4% in cash, not a big bet but a way of letting the market reduce your exposure.

Big bet. I think that is what the reader has made by having a 40% cash position, unless of course the other 60% is in double long funds. The dilemma with such a big cash position is knowing how to get back in. I would not know what to do with such a big cash position taken for tactical reasons.

I have been bearish for nine or ten months. I have chronicled many times my skeptically going along for the ride so clearly I have no useful input for anyone with such a large tactical cash balance.

The thing that should be feared is down a lot. While that is the case, the thing to consider is that down a lot doesn't happen very often but when it does happen it gives plenty of time to get out. I would urge anyone managing their own portfolio to learn the history of this. I would add that down a little, like late February, should not be feared nor traded around by most folks.

The obvious question that would arise from that last paragraph is how do you know that a decline, like the one that started on February 27, won't be big? Well you can't know but you can put the odds in your favor. Fast moves down that create fear usually come back fast. Slow moves that don't bother people have historically been more of a problem for the market.
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Sunday Morning Coffee

In an article in Barron's there was a reference to the CBOE Exchange Index (EXQ). The index is comprised of the public exchanges traded on US markets. The press release I found on the CBOE website said there are six index constituents.

I got to wondering why there is no ETF for this index. There are plenty of very small sub-sectors (oil sands is another one that comes to mind) that investors might want to isolate with just pure play products.

Obviously an investible product with five to ten holdings assumes much more risk than any other sector product I can think of off the top of my head.

My take on this is that plenty of people might want access to oil sands but not be comfortable selecting an individual stock.

Invariably, if it existed, there would be people who misuse this type of fund but a do-it-yourselfer with a 12% weight to the energy sector overall (a modest overweight) with a quarter of his energy exposure in an oil sands ETF is not being reckless. He is probably adding volatility but he is not being reckless.

I think a similar example also fits with an exchange ETF, if it existed. An investor with an equalweight 20% exposure to financials with a 4% allocation to the exchanges, I would say, is simply adding volatility without being crazy.

There are a couple of capital markets ETFs out there but they are heavy enough in the big cap investment banks that it really isn't much of an investment in the exchange stocks.

If ETFs like this ever did come, Morningstar and USA Today would crap all over them but plenty of people allocate 5% to individual stocks like Chicago Merc (CME) or NYSE Group (NYX) so I don't really understand the argument that very narrow funds are bad products.

They may not be useful or appropriate for a lot of folks but that is a different matter and the market will either "approve" of products like this if they come or it won't.

I should note that there is an oil sands ETF from Claymore that trades under ticker CLO in Canada. According to Yahoo Finance it only averages 5400 shares a day. I inquired with Schwab several months ago about being able to access in the US and was given the impression it will not be available to trade in the US but maybe something has changed since.

For what its worth I am a fan of the oil sands theme. I have owned an individual stock for most clients in this area for quite a while.
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The Big Picture For The Week Of April 29, 2007

Other posts that mention Cummins Engine here and here.
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"I'll Take A Pound and Half"

What's all the excitement down on the floor? Why, from the I can't make this stuff up file, it could be the commencement of trading in salmon futures.

Yeah, apparently there is a fast growing seafood derivatives market.

I will try to figure out how to arbitrage the spread between salmon and lox (that I did make up).
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Friday Tidbits

The IPO market in China is en fuego. Both Citic Bank and China Molybdenum skyrocketed on their listings this week. This is a reminder of how much liquidity is out there. While I have been bearish it is clear the liquidity rules, until it doesn't I suppose.

Here is a link about platinum ETFs. It seems like there are some real supply issues with this. I wonder if the DB model of using futures makes more sense but of course some folks do not want a futures based product they want the real thing held in a vault. Our firm is looking into starting a rhodium ETF (joke joke).

My wife is still mad at me for watching the debate last night, not because of the politics espoused but because they are all so slippery. Am I wrong or is John Edwards utterly repugnant? I did get a kick out of the old timer from Alaska I have to say. "I was the swing vote on the Panama Canal!"

The GDP report crapped out badly, eh? Had I been asked I would have said a shade light (this would have been wrong in terms of magnitude) guessing that it would not be taken badly by stocks unless the inflation measure was bad. The inflation component was bad AND the headline print was bad, yikes.
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Big Train A Comin'

Randall Forsyth had an interesting post yesterday talking about Russia, China and Japan looking to diversify their reserves out of some portion of US treasuries they own in favor of more diverse investments funds similarly, as Randall notes, to how Norway and college endowments do, among others.

The potential dollars is colossal; many billions. Randall does not infer, and I wouldn't assume that China is going to sell out all $800 billion or so of the treasuries it owns (I believe that China's total reserve is about $1.1 trillion with $800 billion in US paper); that would hurt China almost as much as it would hurt us.

Assuming prudent amounts by all three countries it is still a lot of buying power coming into the market. But which market? The article thinks that emerging markets stand to see some of this capital along with US equities. There was also supposition that some of these countries would invest in commodity markets although I think Russia would be less inclined toward that market.

This is a big demand story because after the initial allocation, whatever that might be, there will be ongoing demand as all three of these countries have large current account surpluses, Japan just reported their surplus this week which was way ahead of expectations.

To the extent that it is possible to follow this investment flow it stands to reason that this coming diversification will put some wind in a lot of different sails.

I can see where this playing could create a boost for some frontier markets too.

The risk comes a few years down the line. A flood of new capital that alters the supply and demand characteristics becomes a big threat at some point. Too much liquidity is what creates manias and bubbles. While I am hard pressed to think the SPX will cut in half so soon after doing so at the start of this decade but investors can get hurt in manias.

Poor decisions after a normal bear market decline, a bear market that could start after several years of too many assets chasing too little supply, could set an investor back four or five years which could, depending on the timing, reduce the chance of retirement success.

For now this is not actionable. The lift this could cause and then the fallout that comes next will look like other manias (this is not an Armageddon-like scenario I am spelling out). If you are lucky to make money from this you should be cognizant that the music will stop at some point.
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Let's Try This Again

Well I am scheduled tonight on Capital Connection on CNBC World at around midnight:30 on the east coast or 9:30pm on the west coast.

Hopefully I can stay awake, last night I was struggling at 8:30 so we'll see.

I think we will be talking about earnings and economic data.
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Kiwi

The RBNZ raised their official cash rate to 7.75%. While they are raising rates they are talking down the currency. The rates need to be so high to curb the various excesses and deficits but the high rates make the currency attractive which contributes to the excesses.

Very circular.

The tightening cycle has lasted quite a while at varying frequency throughout.

There is mixed sentiment on whether RBNZ will hike again and what this means for ongoing kiwi strength or not; on one hand no more hikes means there may be no catalyst for future gains so why buy it but on the other hand it yields 7.25% more then the overnight rate in Japan which is still attractive to many people (even after the next hike in Japan) including local Japanese investors.

It is also possible that this helps Australia as well. The idea is that New Zealand and Australia are so similar (just don't say that to a kiwi) but Australia is thought to be on more surer economic footing than New Zealand.

It will be interesting to see if this news gives a lift to some of the more exotic high yielding currencies like the Turkish lira, Icelandic krona and the Hungarian forint.

The carry trade obviously gets a lot of attention and while I do have some exposure I have been public about having reduced exposure due to concern about market events like the one that happened in February. I think the chance of another shakeout like the one two months ago is pretty good.
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African or European?

I am up to my fill in the blank with foolishness at the office today, first day in the office in a month.

A reader left a comment asking ;

As far as choosing a S&P 500 ETF for investment purposes, do you have a preference for which one to select? It looks like IVE is the best choice based on historical performance.

The old style issue.

Well obviously sometimes value does better than growth and vice versa with the longer term nod going to value. An inverted curve should mean growth does better, but it hasn't.

The way I view is the decision to tilt to one or the other. A diversified portfolio should always have some exposure to both but one of the two gets favored.

Value has done better but no growth means big bet. I have more growth than I did a couple of years ago before the yield curve inverted but I am heavier in value than growth.
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Dow 13,000!!

I think I'm a half an inch taller and a big cut on I got on my leg from hiking on vacation has healed!
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"The S&P 500 Is A Global Index"

Bob Pisani was on a new riff yesterday saying the the S&P 500 is a global index not a US index because 48% of the earnings reported by SPX' components come from overseas.

On the surface I disagree completely. Global companies can benefit from doing some portion of their business overseas but this does nothing to somehow increase the correlation of a US stock to the index of some foreign market it does business in.

To the extent that the 48% smooths out the earnings of the index is a positive but again there is no magic bullet for increased correlation.

It is perfectly valid to buy a company because it benefits from its overseas business but you are likely to be disappointed if you expect a US multinational to track some other country. I have made this argument several times in the past.

But let's look at it the other way, let's say Bob is right, the S&P 500 is a global index for the very reason he says. Markets are becoming more globally interdependent. We have all heard this and it makes sense even if the extent of globalization could debated.

If this is true, and it may be, then this is all the more reason to not think of iShares MSCI EAFE (EFA) as a good way to diversify your portfolio, a subject I wrote about the other day. Maybe EFA should instead be thought of as a substitute for some portion of the dollars allocated to SPY and other broad-based index funds?

Sound crazy? Well maybe it is but SPY and EFA have a 0.846 correlation (according to PortfolioScience.com), the dollar might continue to get weaker and the markets that dominate EFA may continue to outperform the US market.

Really the point here is more of a reiteration of what EFA cannot do for a portfolio which, in my opinion, is create diversification for the few times during a stock market cycle when you most need it.

To the extent that this holds water it speaks to the rolling up of the sleeves that investors need to do to one way or another to create diversification for themselves. Of course that assumes that most investors are interested in the type of diversification that gives the chance for a smoother ride during rocky times.
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Emerging Markets

FTAlphaville had an interesting research note from Merrill Lynch about emerging markets.

The premise is that when the Fed begins to cut rates it could create an emerging market asset bubble (perhaps you think one already exists) making the returns of the last few years look small.

Cheap money in the US is a positive for emerging market assets, while this is true it is not clear to me from the post what the catalyst is for returns to accelerate.

If this starts to unfold investors will allocate more to the space and there will be more investment products created and the temptation will be to have a lot of your portfolio in emerging markets.

Be careful. It is good to think about this now before it happens, if it even ever does. I like the idea of having a modest weight, letting it go up a lot (hopefully), and then taking some off the table and leaving the rest of the position to keep going (again, hopefully).

Once stocks in the sector get going they move a lot but a broad based fund may not be the way to go. One name I have disclosed owning for clients is CVRD (RIO). I have owned the name for several years now. So far this year it is up 40% while iShares Emerging (EEM) is only up about 9% YTD.

I mention RIO as an example because it is far from an obscure pick, it gets touted all the time in print (a Barron's roundtable pick for three or four years running) and on the network. While picking this stock may not be right for some folks it is accessible enough to get information about.

To be crystal clear I am not suggesting anyone buy RIO, I haven't bought any stock up this high, it is just an example.
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The Rain In Spain

The SPDR International Real Estate ETF (RWX) is down more than 1% today due, I believe, to a pasting in Spanish property stocks, a company called Astroc Meditteraneo in particular. This dominoed to other stocks in Spain which is why I think RWX is down so much today.

This may or may not turn out to be serious but the reaction in RWX is interesting. Foreign real estate is new for most folks. There are a lot of property markets around the world that are perceived as being overheated and it makes sense to expect that RWX will feel it anytime a dust up, like the one today in Spain, occurs.

I have no foreign exposure in this sector. Most clients own one REIT and a few people own two so the weight is not that heavy.
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Tuesday Tidbits

General Motors took a lot of flak yesterday for tying their weak outlook to the subprime mortgage woes. I don't know whether GM is reaching with this or not, nor do I really care but it does bring up an important point to consider.

People will let other debt lapse before their mortgage. While there could be exceptions it seems intuitively correct. The implication here is that there could be problems with other type of consumer debt as a result of whatever is really going on with subprime mortgages.

If this seems familiar it should, the same point was written about in Barron's in the last few weeks (apologies, I don't recall when so I don't have the link). To the extent that this plays out out it could spell trouble for discretionary stocks and certain segments of the financial sector.

A reader left a comment that was critical of me for disagreeing with Jack Bogle about some of his ETF criticisms. So the reader thinks it is OK to disagree with me (which of course it is) but not OK for me to disagree with Mr. Bogle?

Where your money is concerned you can disagree with whoever you want. Gurus get things wrong all the time. FTAlphaville quoted someone who said the George Soros in his heyday was only right 30% of the time but when he was right he was really right and not that wrong when he was wrong.

I think it is very worthwhile to challenge various facts, truths and supposedly informed opinions as you manage your portfolio. I happen to disagree with Bogle, nothing says I am right however it is just my opinion. Relying on what someone who is smart says as being true when you yourself don't believe it is a bad idea.

For example, something I wrote about recently, I have never been a big fan of iShares EAFE (EFA) as a tool for diversification. Lots of very smart people swear by it, and the returns have been very good, but I just do not believe it will offer the protection from the next bear market in the manner that so many think it will. Perhaps I will be wrong but since I feel the way that I do I shouldn't rely on it so I don't.

On a humorous note last night there was a game seven between Dallas and Vancouver. The Canucks broke out these retro sweaters to try to help them win the game which apparently worked.

As soon as I saw them I made a comment to my wife that this is what the Canucks wore in the 1970s. I think my wife was ticked that I knew this right away like I did. Very funny.
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London Calling

I stumbled across this little nugget on FT Alphaville about a new closed end fund listing on the AIM market in London that will invest in Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Tajikistan and Russia.

There are a quite a few funds like this in London that invest in places that don't attract a lot of investment vehicles. Some of these funds can be accessed through US brokerage accounts and some cannot.

I do not know if this fund will ultimately be available here or not, I don't know if I would ever want to invest in any of the Stans or not but they are generally resource rich and I would like to have the choice to invest in the fund even if I never actually do.

Little funds like this and bigger stock listings have been favoring London for quite a while. At some point these funds and such that aren't available now will be soon but until then I think this is a big negative.
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Interview

I was interviewed by Matt Hougan wearing his HardAssetsInvestor.com hat about integrating commodity exposure into a portfolio.

You can read it here if you are interested.
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Back

Well the sun has set on our little trip to Molokai and we made it back safely late Saturday night. I have a few work related things to catch up on and one or two fire department issues and then I'm back in the saddle.

You may have heard that there will be a platinum ETF or two coming shortly. The platinum market has a lot of moving parts with regard to supply and industrial consumption.

Because of this there may be an issue with the ETFs being able to to buy and store the metal. I don't know how this will work out but the market for the metal is complex and I am hard pressed to think the too many individual investors will need a platinum ETF.

This is not to say that platinum ETFs shouldn't exist. They will facilitate speculation for those interested in that, some people will know the market well enough to trade it and if I were paying someone to manage a commodity pool I would want him to have access to ETFs if he thought they were a good way to play the space.

I take issue with a lot of the things that Jack Bogle says about ETFs but I agree with one big point of his which is that most people simply don't need exposure to segments where products have been created or will be created in the future. This point has nothing to do with whether they should exist or not.

I feel like I know a little about the platinum market but not that much and I have no plans to add it in for clients.
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The Big Picture For The Week Of April 22, 2007

We are flying back home on Saturday. Judging by the picture it looks like a lot has changed while we've been away. Actually the green was a tribute to Red Auerbach as the Sox had a serious come from behind win against the Yanks.

Here is a link to a Barron's interview with Robert Arnott. He sees equities averaging 5-6% per year over the next ten years.

He manages the Pimco All Asset fund which has been very underweight stocks and a focus in the interview was that he reduced stock exposure too early.

This is a good reiteration of a point I have made many times about not needing to reduce equity exposure too early. Bear markets start very slowly and give plenty of time to miss a big chunk of the pain.

His first ETF, PowerShares RAFI 1000 (PRF) was also discussed. The fund has soundly outperformed the S&P 500 since inception. I opined for TSCM 15 months ago that PRF, despite its holdings, might quack like a small cap product. Arnott actually called me at my house to politely (he really was very nice on the phone) tell me I was wrong but you can click here and decide for yourself.

Here is another link, this one to an excerpt from Jack Bogle's book in BusinessWeek. I disagree with a lot of what he says but he is Jack Bogle and it is worth reading.

He thinks specialized products are a bad tool because they lead to speculation and detract from the proven strategy of indexing. I look at the problems he cites as being more about flaws in human behavior than flaws in the products. Clearly a lot of people don't really know how to use narrow-based products and chances are most investors don't need a collection of nothing but sub-sector funds but they do offer utility and there is a correct way to use them which starts, I think with moderation.

He used the example of semiconductor ETFs as not being a tool for diversification. A semiconductor fund has a great chance of being mis-used but the stock market is made up of a bunch of sub-sectors.

Semiconductors account for about 6% of the S&P 500 (my math: tech is 15% of the S&P 500 and tech, as measured by iShares Tech IYW which is a client holding, is 40% semiconductors) so the group is far from obscure. A 15% weight to semi's is probably a lot but still every sub sector has some weight in the market. If you are going to equal weight everyone of them well then yeah you should just buy an index fund.

However if you want make active decisions about sector and sub-sector weights, and you have an understanding about how to do that, but don't want single stock risk you are going to use sector funds.
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Heiau

On Wednesday we went on a pretty good hike up a mountain and this picture is what we saw as we made our way up.

There wasn't much of a trail. We could see the trail but it was overgrown, wet with rain that was coming and going and it could have been dangerous if we hadn't been paying close attention.

This description could sort of lends itself to navigating the stock market.

About 2/3rds of the way back down Joellyn slipped on a wet rock and landed on her tail bone and man did it hurt, it brought tears to her eyes. It was painful but there is no lasting damage.

The stock market sort of slipped on a wet rock on February 27 and has now bounced back up with no lasting damage.

There are ways to reduce the impact of slipping on the trail (in the market). Joellyn could have not stepped on the rock, this was possible at the point on the trail where she slipped.

Investing can be done to minimize the impact of a slip too. One way is to avoid over sized bets on any one outcome. For example the energy sector makes up about 10% of the S&P 500 (and the Wilshire Total Market Index too for that matter). Going 15% energy might be an overweight that isn't absurdly risky where 30% energy probably would be.

Another example would be to see what sort of negative market event your portfolio is most susceptible to at a time when things are going well and deciding to reduce exposure to the thing you are vulnerable to.

I started getting worried about the yen in late January (I'm on vacation and to preserve marital harmony I am not taking the extra time to find the links) and in early February I sold DB Currency Harvest (DBV) thinking I was too exposed to the carry trade given I owned DBV along with Australian and Icelandic exposure.

Selling DBV may or may not been the best possible trade but it did reduce exposure to something I felt I was vulnerable to.

Most portfolios are vulnerable to something, including yours probably. This sort of introspective look could spare you from so slipping hard it brings tears to your eyes.

If this trail had a name it would be the Heiau (the title of this post) trail. It is pronounced hey-ow and you can click here to see what the word means.
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Media Appearance...Maybe?

I got an email from the producer of Capital Connection on CNBC Europe to be interviewed by phone about earnings reports.

Long story short I am not sure if I emailed them back in time to be on but if so it will be around midnight:30 on the east coast, 9:30pm on the west coast and of course 6:30pm here in Molokai.

UPDATE UPDATE
Never mind. Moved back to April 24.
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EFA...No Way

The stock market has been very cooperative while we are away this week; flat or up makes things a little easier.

A reader asked what I thought about mutual funds from Vanguard or Fido as substitutes for iShares MSCI EAFE (EFA).

Well, I am not a fan of EFA or any broad-based, total (or close to total) foreign market fund. A big reason to own foreign stocks is so they might offer diversification to a portfolio; zigging when the US is zagging is how I like to think of it.

I used a similar chart in a recent TSCM article. The time captured is mid-2001 to mid-2003 and it compares EFA to SPY.

While I was not concerned about increased correlations during the recent dip I would be concerned about increased correlation the next time we have another market that looks like the one in this chart.

During the time period charted the Australia All Ordinaries (ticker ^AORD on Yahoo) declined by only 15%. The couple percentage points from EFA is not significant to me but the 15 percentage points from Australia is.

Canada, as measured by iShares Canada (EWC) correlated closely to the US until November 2002 before outperforming big time so I am not sure what to expect from Canada during the next bear market.

Each country offers different things to a portfolio but when all (or most) countries get lumped into one product a lot of the things offered by the countries individually get blended away as evidenced by the above chart.

To answer the reader's question I prefer the flexibility of the ETF format so I'll say EFA but you now know how little I think EFA brings to the table in terms of diversification. It does offer a chance for outperformance over the S&P 500 but that is a different issue.

The typical account I manage probably has exposure to ten or eleven foreign countries via individual stocks. In terms of priority I would say Australia is first followed by Ireland and then Norway. There are many ways to capture Australia in an ETF, while there is no ETF for Ireland there is a CEF (I use an individual stock, not the CEF) and for Norway there are only individual stocks unless you have direct access to the Oslo Exchange.
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Weak Dollar Implications?

A reader asked my opinion here.

Specifically he asked about the consequence of Iran selling oil in euros.

I have touched on this before and while there are many angles to this I have had the same opinion for several years now.

I view the dollar being on a long, slow road to being less important, globally, than it is now or has been in the past. The dollar is the world reserve currency. I think it will soon have to share that designation with another currency or two; the euro and the yuan seem the most logical candidates.

Because every commodity trades in US dollars there is a certain level of constant demand to transact certain kinds of commerce. Foreign countries need dollars to buy some of the things they consume. If those things become available in other currencies there will be less demand for dollars leaving the dollar weaker.

The consequence would be higher interest rates and generally less demand for US assets. As I mentioned the other day I generally expect lower equity market returns and higher interest rates and this is why.

I do not view this as death blow or a tipping point for Financial Armageddon but more of a hindrance for accelerating growth.

This is also why I was (and still am) a big fan of the currency ETFs early on. The easy thing, and you can read easy all over the MSM, would be to ignore currency products because they are so "risky" or you can realize that markets and investing do evolve over time and while currency exposure may not be for everyone there is no reason not to explore the subject to make to informed decision about whether to own currencies or not.
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Horizontal Rain

Barclays Global to advise 5 new index funds - MarketWatch

That is what we have this morning on the island so I am getting more reading done today.

I found the above link. iShares has filed for the following;

iShares Chile
iShares Thailand
iShares Turkey
iShares BRIC
iShares Israel

I have been a big fan of Chile for ages but it probably will not exposure to the big miners like Codelco.
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Sweet Protectionism!

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Great Debate!

I used this picture a couple of weeks ago when, in my opinion, Dylan Ratigan chopped down Peter Schiff in an interview.

Well I was up early enough to see Schiff chop down Ned Riley, again in my opinion.

I have made fun of both of these guys in the past for different reasons.

Peter blows a lot of wind but I did check out his website a while back and I have never made fun of what little I know about what he does for clients as I think his client accounts are well run, but I do make fun of his wind.

I have less of an idea as to what Ned Riley does for clients and really can only go on what I see from him on TV. His results might be wicked awesome (c'mon you know he has said that a couple of times before) but I don't get the feeling he knows as much as someone like him should know based on what he says.

This morning they were on and Ned said he owns no foreign stocks for clients because they are so "darn unpredictable." Peter took out the metaphorical chain saw and chopped him down. Peter pointed out that a savings account in New Zealand was up 30%. That could be true if you opened an NZ savings account during the ten minutes (exaggeration) that NZDUSD was below $0.60.

I took from the interview that Peter has zero in domestic stocks.

Neither stand seems ideal. Zero in foreign in the context Ned said makes me question whether he's even done the work to actually make a compelling argument as to why they are so "darn unpredictable" and if so why that is bad.

I would also say that given generally tame inflation of the last few years, Peter's fire and brimstone seem out of place too. I realize healthcare, energy and tuition are up a lot but the price of other goods in our baskets are down or not up a lot.

The returns overseas have been better but I don't think Peter's rantings hit anywhere close to the mark in terms of magnitude.

But I must say Peter absolutely got the better of Ned, it was hysterical.
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Easy Versus Right

This is the Halawa Valley which is at the end of the road on the east side of Molokai. We spent a little bit of time at the beach here on Monday.

As we were getting ready to leave Joellyn was taking pictures of an old building and as I waited for her a dog came up to me looking a little sheepish but generally friendly.

I noticed the dog looked too thin and had an ugly looking injury to her left shoulder. She also had a weird collar on her neck that was made out of fire hose material and ran the length of her neck.

We were out in the middle of nowhere, there were a few properties out there and even a church but we did not see anyone out there and we did not know what we were going to do. Leaving the dog there would have made us heart-sick but we had no idea if there was animal control here and for all we knew maybe she was someone's pet.

Fortunately someone who lived out there came back. She said the dog was probably a lost hunting dog (the fire hose collar was to prevent a boar from goring her in the neck) and that there was an animal control office in town--26 miles away, half of which was very narrow with lots of windy, blind curves.

We drove the dog into town, we waived down a police officer who took the dog for us.

There was no great outcome here but the dog, as a hunting dog, is worth money to someone and so her owner might be looking for her.

It would have been easy to leave the dog there but it would violated our sense of what is right. I can think of several ways to apply this to investing and chances are you can too.
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Uranium Contract To Debut on Nymex - WSJ.com

Uranium Contract To Debut on Nymex - WSJ.com

Is this a top or does this open a floodgate for new participants to bid Uranium higher?
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What Happened, Did I Miss Something?

If you have CNBC on this morning you have heard them say that the late Feb dip has now been made back. So in less than two months we made back that little hit.

This is a great microcosm for how fast moves down tend to work, although admittedly seven weeks is a short time.

I was quite consistent in saying that bear markets don't start with single day drops like the one we had on February 27. I took no action into that decline as I don't think it makes sense for folks with longer term views to try to trade around down a little.

To be clear this was not anything clever on my part, not even close. The action from late February and early March was something that has played out over and over in the past so really this was more about having seen this movie before in the domestic market.
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Financial Armageddon

I finished reading Financial Armageddon by Michael Panzner on Sunday. After reading this book you will soon grow weary of Nouriel Roubini's overly bullish rantings (humor attempt).

I don't believe I have ever read such a dark prognosis before. Michael believes it could even get to the point where there is not enough money for normal maintenance of infrastructure causing regular black outs.

As a matter of philosophy I tend to not expect the most extreme outcome (in either direction). If you know who Michael Panzner is you know he is very smart and very experienced but that does not have to mean he is right.

For everything to come unglued in the manner and with the all-encompassing depth he thinks will happen would require an incredibly perfect storm. The thesis seems to be that everything, and I do mean everything, that is unhealthy will play out to its worst possible outcome. Hyper inflation, asset price death spiral, higher unemployment than in the great depression and so on are all in the cards and we may take down a few other places with us.

He goes on to discuss the unraveling of the social fabric of the United States, higher crime rates, people having to take in destitute family members (which will lead to increased domestic violence and more stress related health problems) and maybe even Martial Law.

As I read it seemed like some of his beliefs were more opinion without a clear and obvious cause and effect. This last statement is obviously subjective on my part.

There were several things in the book that flat out do not add up to me and I'll mention a couple of them in this post.

Michael brings up the notion that some banks are too big to fail and so would not be allowed to fail. Given the US's role in the world economic order and the number of countries that have vested interest in the US staying solvent that the US might seem to be too big to fail. While this may or may not be true I think the point needs to entertained in order for the discussion to be complete.

Michael envisions banking problems similar to the bank runs that occurred during the great depression. I have trouble envisioning people going down to the bank fro any reason when money can be moved electronically from home. Michael does touch on this some but a bank run seems to ignore the general modernization of society that has happened.

Throughout the book Michael makes historical references to support his argument but most of them (maybe all?) seemed to not have had anywhere near the impact that Michael sees coming. Put differently there is an assumption that some things will repeat but with a much larger impact. I'm not sure why that has to be and I'm not sure that the case for why was made either.

About a year ago Michael and I took different side on whether derivatives would be the financial undoing of the US economy in the Wall Street Journal (I looked for the link but it was no longer there). You can probably guess who took what side. Shortly there after Amaranth blew up with relatively little lasting impact. There are a lot of scary things that have happened before and will happen in the future but they are not necessarily systemic in nature.

I think he is correct that there are a zillion problems that threaten to make things more difficult here on the home front. I have written about this many time noting that I expect generally lower equity returns, slightly higher interest rates and some nasty changes in the various entitlement programs. However I do not place any realistic probability that the world will metaphorically end.

Reading the book is worthwhile and I would encourage you to judge for yourself. Michael, if you still read this blog I would welcome your feedback.
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Sunday Morning Saturday Night Coffee

This picture is from the Leper (leprosy is now called Hansen's disease) colony. You can mule down and back or go on foot. We went with the hiking option.

As we were hiking Joellyn said something about the show Fantasy Island and asked what it was about (she's never seen it). As I thought for second, I came up with the notion that the show was really about unintended consequences.

I think unintended consequences manifest themselves with some investment decision that people make too.

There is an element of making managing your own portfolio far more difficult than it needs to be. People employ very detailed trading strategies, elaborate methods of analysis or other sorts of models.

Realistically it is very difficult to adopt someone else's investment process, not impossible, but difficult.

Further, there are a lot of studies that show that active trading lags buy and hold the vast majority of the time. Clearly, no one embarks on a path of active or complex trading systems to lag the market but it happens, we all know this.

Many folks might say that in this market environment buy and hold is the wrong strategy. I think of it as buy with the intention of holding. I would love to be so right with every stock I buy for clients that they all do exactly what I hope they will and that I will never have to sell.

I recently disclosed selling long time holding Ameren. I perceived a change in the long term outlook (perception is reality right?) and decided to sell. I am very willing to sell a stock that I think might be broken or otherwise have a problem but the hope is still to hold forever.

Another type of unintended consequence comes from putting what turns out to be too much money in one part of the market. When emerging markets corrected last June I heard from a couple of readers who acknowledged having too much (this came about from previous email exchanges) in emerging markets when they did go.

If you have read this blog for a while you know that there are some themes that I am in love with yet any time I write about them I try to include how much I have exposed to those themes, moderation is very important.

One example here is Vietnam. I started out a year ago with a 1-1.5% weight, it doubled and I sold half. The theme seems like a no-brainer. Still who would want to make an outsized bet there? I certainly don't and again I think it is absurdly obvious. If I am wrong and it cuts in half I won't be financially damaged.
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The Big Picture For The Week Of April 15, 2007

I mentioned that I would get around to reading Financial Armageddon while we were here; I've knocked out a little more than half and my thoughts so far are holy cow!

As I was reading today I had a thought about sector weightings and when to cut back.

I thought of Tom Lydon's rule of thumb about using the 200 DMA as a point to get out; for clarification I use the 200 DMA of the broad market as a catalyst to start taking defensive action.

I then realized that I haven't made too many sector weight changes in the last couple of years; this does make some sense as the market has only been up a little. The two that come to mind have been with energy and emerging markets (I realize emerging markets is not really sector but you get the idea).

Reducing exposure in both sectors was done during past times of giddiness not weakness. These segments had grown larger than I thought they should be, combined with glee surrounding these segments (new readers can go to the April 2006 archives and look on or about April 24 and 25, there have been a couple of other instances too but the April 2006 posts cover the idea).

I am not sure if Tom would sell out completely from a sector that went below its 200 DMA but this is not what I would do. Zero percent is a big bet. I think part of top down analysis/portfolio construction is being out in front of when changes, good or bad, might be coming for a given sector. The expectation of course is that you will not be right 100% of the time which is all more reason not to go zero, and again I don't know if that is what Tom has in mind or not.

A comment came in asking about reducing sector exposure on Seeking Alpha and I replied that it is not an exact science for me. It is easy to envision a sector needing to be cut back at times of strength and weakness both.

If a sector can have good and bad times then sticking with just one rigid sell criteria would seem to be less than ideal.

No video this week, I didn't even ask if I could bring it--a key to our long marriage has been choosing your battles. Joellyn understands why I had to bring the laptop, but the webcam....

The picture is from sunrise this morning.
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The Rooster Crowed At Midnight

That was the title of a book from an episode of M*A*S*H* and we have one here. Still got a good night's sleep though.

I woke up to see the EURUSD trading above 1.35, Aussie above 0.83 (I was wrong about the one way action in that one) and USDNOK (this is the Norwegian) below 6.0.

US equities seem unphased. I think the way the market views this that it doesn't matter until it matters. That seems silly but think about the yen carry trade issue from earlier. It was moving to an extreme pricing but no one cared until they cared....when it contributed to the selloff.

It looks like Sallie Mae could be a private equity target. I used to own this stock for clients, this goes back a bit. The business seems like it would be a great one; tuition prices go up at a rate faster than inflation and there is ever growing demand for college loans. The stock though was tough to own, today's pop notwithstanding.

It seemed like SLM got hit anytime Fannie and Freddie made news. The last couple of years have not been good for shareholders. I sold quite a while back as it became apparent that Fannie and Freddie's problems could impact the price.

The point of this is that there are no doubt other stocks like SLM that are weighed down in a similar manner. If you are going to own individual stocks you need to be cognizant of this sort of thing.
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DFA

I read an interesting article in the current Bloomberg at the airport about Dimensional Fund Advisers, aka DFA. The basics, I think, of DFA is that the foundation is built on Fama and French.

The way the article reads, all the DFA believers think stock picking is a scam and that no one can predict what the stock market will do.

I met with a DFA guy a while back and he seemed to take pride in the notion that he would not take any defensive action ever.

The article was a weird read WRT to the various rules that DFA imposes on the advisers that use their funds.

I don't know a lot about DFA. It seems like their funds are structured to simply be the market yet any of their funds I have ever looked trounce their benchmark--if its even right to compare their small cap fund against the Russell 2000 and so on.

Their approach is not something I am ever going to buy into but it will appeal to a lot of folks. If you feel like you don't fully buy into what you are doing now, DFA may be something that works.

To be crystal clear this is not what I do nor will I but for some folks... Also important to remember that DFA, like every other strategy out there, will have strengths and weaknesses.

The picture is looking out the front door of where we are staying.
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Made It Here--Pictures to follow

Not too shabby.

Given the givens I may may not be able to keep up with all of the comments while we are here but the wireless at the condo works and we have CNBC so I will be able to stay with the market as hoped.
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Airport Blogging

Down a little as we wait to board.

Free wi-fi at Sky Harbor in Phoenix; who knew?

Thanks for all the comments wishing me a good trip, save for the usual comment I get when I go someplace expressing shock that we take a vacation.

I see that iShares has a junk bond ETF coming with ticker HYG.

A good comment was left on rebalancing from REW. He said that I overlooked the likelihood that someone would have rebalanced during the selloff last June and had better results, maybe. Interesting point.

I'm not sure if I would rebalance a portfolio along the lines of the type of mix talked about in that post during a short term V shaped dip. I'm not saying it should not be done but I had not thought of it and as I sit here in the airport I'm not sure what I would do there. We don't really manage portfolios with with three or four holdings.

As a follow up to the CCJ sale, the stock seems to be bopping right around the figure where I was stopped out. That amuses me, I have to say.

Well it looks like we will be on time (fingers crossed). My wife is thrilled that I was able to check the market and such from the airport, lol.
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Aloha

Joellyn and I are headed to Molokai on Thursday morning. We are going to spend tonight in Phoenix and then catch our plane.

We plan to do a lot of hiking and beaching and that's about it.

It is probably right that I will simply be working remotely while we are there but still we are looking forward to the trip.

I'm not sure if I can get to the blog on our travel day but I am taking the laptop and will be posting while we are there.

I have two books to read. One was a reader suggestion about the old ABA and for some lighter reading I have Financial Armageddon by Michael Panzner. Joellyn has a couple of other books I can read if I finish those two.

Aloha.
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"I'm Out!"

The other day I put up a post about Uranium and disclosed putting a stop in on Cameco (CCJ) at $45.50.

I got stopped out yesterday at $45.51. It looks like the stock closed a tad lower but then opened higher today by a few tads.

This reveals a flaw of stop orders that I have touched on many time before. When stop order gets elected the next move is either up or down. If down then the stop order was a good idea, if up it wasn't; in a manner of speaking.

I have no regrets, just the understanding that $45.51 will either turn out to be a good price or it won't.

The picture is a little fuzzy but it is the exact moment that Kramer says "I'm out." I can't believe I found it.
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Nuts and Bolts

The first topic this morning is rebalancing. There was a question about it and a good post about it too on Seeking Alpha by James Picerno.

Having the balance you think is proper is of course important but I think that the frequency with which rebalancing needs to occur is lower than most people think.

Taking the data from Picerno's article which goes through April 6, the Russell 3000 (IWV) was up 11.55% for 12 months, iShares EAFE (EFA) was up 19.61% and iShares Lehman Aggregate Bond ETF (AGG) was up 6.07%.

Taking these three as a lazy portfolio hypothetically weighted at $45,000 in IWV, $25,000 in EFA and $30,000 in AGG on April 6, 2006. Using James' numbers IWV is worth $50,197.50, EFA is worth $29,902.50 and AGG is worth $31, 821.00 for a total of $111,921.00 on April 6, 2007.

This leaves IWV with a 44.8% weight versus a target of 45%, EFA at 26.71% weight versus a target of 25% and AGG at a 28.43% versus a target of 30%. To rebalance you need to buy $220 dollars of IWV which is about three shares, sell $1700 of EFA which is 22 shares and buy $1500 of AGG or 15 shares.

I can't say you should not rebalance at this level but I wouldn't do it. Keep in mind this is one year of results and the need to rebalance is, at a minimum, questionable.

Here's a novel concept; rebalance as the market action of your holdings dictate regardless of the calendar. I took action yesterday with a stop order of 1/3 of the position for a stock that has been white hot of late which serves as a rebalance of sorts. The trend is seems to be up so I don't want to sell, it has grown to be fairly large and if it turns I will be cutting back at price that seems high.

The other topic this morning was from a comment that asked about how to deploy a lump sum; whether to go in all at once or go in some other way like waiting for dips.

A reader or two quickly jumped in to say to go all at once and provided a link on the subject.

From a numbers standpoint going in all at once is clearly the better choice. However it is not always the most comfortable choice depending on an individual's tolerance for volatility.

I tend to wade in slowly with new accounts over the course of a couple of months for most new accounts. Most people inclined to hire a money manager would feel a lot of discomfort if they went all in, for example, on February 23rd only to be down 5% one week later.

I can't defend the concept from a numbers standpoint but it does make people feel better.
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Fearless

You probably don't remember this but five or six weeks ago the market had a dip of about 5% due in part to the unwinding of the carry trade.

Obviously I say this tongue in cheek as it appears the Aussie/Swissi pair does not remember that dip.

It has shot up very fast in the last month leaving all its worries behind. This is an interesting pair to watch in a VIX-like manner.

Australia and Switzerland are thought to be at different ends of the same spectrum such that Aussie strength means less fear. I don't know whether the Aussie has been this high before but it has not been this high in the last five years.
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Chasing Yield

David Merkel has post about chasing yield offered by investment products, specifically closed end funds, that is a must read. The tipping point for the article was an article from the Wall Street Journal that ran on Friday.

Both articles offer a little bit of caution and skepticism to consider for anyone considering a call writing fund, a dividend capture fund or a fund that does both.

I have written about these types of funds many times and even been quoted in a couple of places on this subject.

The notion that a glut of these funds could have an adverse impact on the markets they invest in or that something could go wrong internally, think large scale problem, is not that high, in my opinion, but is absolutely within the realm of possibility.

If you are going to use these types of funds you have to mitigate this issue for yourself. I think the easiest way to do this is to use these funds in moderation. I have disclosed many times that for clients who are a little more tolerant of volatility I weight the one call writing fund I use at 10% of the fixed income portfolio which works out to at most 4% of the overall account (think here about an account with 40% allocated to fixed income). For clients with a little less tolerance for volatility I think of these as being part of the equity portion and weight it at about 3% of that part of the portfolio.

I don't believe that any of the other fixed income segments would be truly damaged if something bad happened in the call writing segment. If the fund I use somehow blows up in a manner I cannot foresee the consequence would be a small lag which I think is acceptable. It would be unacceptable to me to have four different funds totaling 10% of the account when a blow up happens potentially causing some sympathy declines in other funds.

Part of the understanding here, and this is very simple to grab onto, is that if treasuries yield somewhere near 4.75%, there is risk in anything that yields more than treasuries (obviously you need to consider like maturities).

There is not a whole lot of recklessness in having exposure to investment grade corporate debt in the high fives or low sixes but a portfolio full of products that yield 8-9% in a 4.75% world is not a risk I would take for anyone.

A conservative way to look at this might be simply seek to add a few basis points to the overall mix. A $500,000 account allocated 70/30 with $15,000 (out of a possible $150,000 earmarked for fixed income) in a call writing fund will add some basis points overall without jeopardizing your financial future if you own the one fund that blows up.

Still this is not for everyone, that needs to be decided on first of course. I do view these funds as very useful but to repeat myself where these funds are concerned; moderation, moderation, moderation.
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ETFs for the Lazy

ETFs for the Lazy

I had an article publish today at TSCM (free site) in which I create a lazy portfolio that is noticeably different than the one I posted here a couple of weeks ago.

The portfolio, like all of them that get created, has strengths and weaknesses. Take it as an academic exercise.
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ETF Problems

A lot of ETF articles editorialize the flaws of ETFs when in fact the flaws relate to human behavior and not the actual products. This article from MarketWatch seems to realize and acknowledge this.

One point made in the piece, in the form of quotes from people in the industry, is that ETF providers need to do a better job educating investors. This is very true but I'm not sure what kind of progress can be made here. Perhaps one template for how to do this correctly could be from HardAssetsInvestor.com. This is a new site and although it may be difficult to find on the site, Van Eck is running the show along with the gang from IndexUniverse.

There is the potential for conflict in educating investors by focusing exclusively on one product line of funds. It makes no sense intuitively that one company could have the best possible fund for every segment of the market.

Picking and choosing from various providers and various products (a point I try to stress repeatedly) seems to be the most logical.

Another point made in the article is the damage that could be done, image-wise, if there is a disaster of some sort with a fund. I'm not really sure what would constitute a disaster. If a fund company goes out of business the fund assets would still be there and likely be purchased by someone else. Funds have closed before and the assets were simply returned. Is there a fear that someone will loot the funds of their assets? This seems unlikely to me.

But just because I can't think of a disaster doesn't make the point invalid. A disaster of some sort would have a big ripple effect.

My take? Keep it simple. Simple is a subjective term, a fund you use should seem simple to you. A point that I think this article is making is that a lot of people will end up in ETFs they don't understand and will suffer poor performance as a consequence. This is very plausible even if it is not disastrous.

I would add that a lot of the detractors pick on gimmick funds. If you look at the holdings of a lot of them you will see they are simply a different mix of the same stocks with a successful back test. The realistic risk of a fund with a different mix of big cap stocks is that it lags. This risk of lagging is not ruinous by any means, which a lot of MSM fail to point out.

All-ETF portfolios have never been my first choice and they still aren't. Just as one ETF company can't have the best fund for all market segments I believe that ETFs in general can't be the best product for all market segments either.
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Sunday Morning Coffee

"You don't win bike races easy. If you don't have trouble along the way, well it simply isn't a great race, is it?"

Phil Liggett earlier this year covering the Tour of California.

I think this is a great quote and I think it applies to investing. Over a normal investing lifetime you are going to have trouble along the way. This is guaranteed. We all had trouble at the beginning of this decade because of what the market was doing.

We can expect more of this, to some magnitude, in the future with corrections, bear markets and I would expect a genuine crash at some point too; 1929 was not the first crash and I doubt 1987 will be the last crash. This is not an attempt to predict a crash but more noting that they happen every once in a great while.

It has been a while now since the last big market event but it is not the end of them. I would suggest anyone get a Stock Traders Almanac and look at the monthly and yearly data and really take it in.

The periods where the market did nothing (after the depression and the 1970s) were actually wildly volatile on a year to year basis. There have also been quite a few six week periods where the market got hit 15-20%.

What sort of panic would ensue if the S&P 500 declined to 1230 between now and Memorial Day? What would you do if that happened?

Another type of trouble a long the way is making some sort of mistake within our own portfolios. There are white papers galore that expound on all of the emotional failings that get in the way of our stock market success. Ken Fisher believes that our brains are not wired for capital markets. I don't know if he is 100% right but I doubt he is 100% wrong.

One the things that leads me to put only 2% or 3% into a position is an acute awareness of how dumb I am. We will all make dumb stock picks, this goes with the territory. But I am not going to let this type of dumbness damage a portfolio.

I don't remember whether I referred to this on the blog before or not but reader and blogger "T" left a comment outlining his retirement plan; the best plan I have ever heard. He intends to get shot by a jealous husband when he is 110.

The picture is on the back porch of a coffee house that also sold art (or maybe it was an art co-op that also sold coffee) in Rawene, New Zealand.
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The Big Picture For The Week Of April 8, 2007

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Holiday Tidbits

The jobs number printed at 180,000, holy cow. Overall it seems like a very strong report. The futures got a nice pop but it will be interesting to see if that lift can carry over to Monday.

From the I need to get out more department I was hoping this weeks Barron's would be online today and that I would not have to wait until Saturday, no dice.

The post yesterday where I sort of answered an asset allocation/retirement planning question drew some comments asking more questions. One thing I would say to anyone who is their own planner; get a book or something that goes into great detail about how to take income from your portfolio. I think you need to really understand the numbers here before you started taking anything out of your account.

The market put in a good showing this week as it moves closer to turning the dip into a V. I blogged several times that it seemed like this is what would happen so now that it has (so far), what's next?

I guess the dip, while it was happening scared plenty of people but it was so small that I have to think another one of some magnitude is waiting for us nearby. If there is another one and it starts big on day I'll think it a V and if the market goes down like a water torture I'll think it is the next bear market.

I was saddened yesterday to hear that Darryl Stingley passed away. The thing about his story that I had never thought about until now was how young he was when he took the hit from Jack Tatum; 27.

Did you see the BC/North Dakota finish? Nutty ending but the right team won.

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Frozen Four

Today at the close (nice timing eh?) is game one of the Frozen Four NCAA hockey.

If you have never watched, it is some great action. The early game is Maine versus Michigan State and the late game is Boston College versus North Dakota.

I grew up a couple of miles from the BC campus so I will be rooting for the Eagles.

Enjoy the long weekend.

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Uranium

I have disclosed owning some quirky stuff personally in an effort to reduce the chance that I would ever have an emotional reaction to a decline in the stock market.

I own a few things that I think are really in their own world including uranium exposure. I own a little bit of Cameco (CCJ) in one of my IRAs and a little bit of the Uranium Participation Corp (U.TO) in my wife's Roth.

Uranium has gone parabolic of late, CCJ is up about 15% in a week and U.TO is up something similar in the same time period. Uranium is capable of very big moves. I don't own these for clients because they are very volatile. I have owned CCJ for quite a while and in that time I have been up lot, then down and then up again. Joellyn has only had U.TO since January so it has only gone up.

I do not have any great feel for what comes next so I have stop order in on CCJ that is very tight to the market. If I get stopped out it will cut my exposure by about 2/3.

The long term case for uranium is compelling and as has come up here before big increases in the spot price really doesn't have a big impact on the cost of nuclear power. But for the short term I just don't know so I have the stop order. I will move it up every day if the stock keeps moving up.

There are two points to this post. One is that it is OK to not have all the answers all the time. But just because you don't have all the answers doesn't not mean you should not have some sort of plan of action if market action so dictates. The other point is that if you have any exposure to the space you might want to think about some sort of exit strategy or pairing back.

Just a thought.

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Allocation Question

A reader left a question asking for particulars about his stocks/bonds/cash allocation. He gave some details about his situation, sounds like he has a good idea about when they will retire with the expectation of a little bit of income from outside the portfolio.

I don't know this person. Giving advice to or taking advice from a total stranger is a bad idea all the way around so I am going to punt on narrow advice and stick to some generalities.

The reader thinks he needs more fixed income, maybe you wonder the same thing about your portfolio.

There is a simple mathematical argument for 100% equities. The odds that equities will outperform bonds over the next 15 years is something like 92% (anyone inclined to find the exact number is welcomed to post it). Stocks generally go up in price and grow their dividends. If you buy a bond of any maturity today you will receive 100 cents on the dollar when it matures. $100,000 into a bond today gets you $100,000 ten years from now (or whatever maturity you buy). In 2017 $100,000 will buy a lot less than it does today as you know.

Chances are your emotional well being doesn't care at all about the above mathematical argument.

Part of the answer to how much in bonds, aside from any emotional aspect, is simple dollars and cents. The reader has $1.5 million now. If the income need from the portfolio is $35,000 then $1.5 million seems like a lot. If the income need from the portfolio is $110,000 then $1.5 million doesn't look so great.

I tend to think planning for retirement has to include a plan for spending. Maybe it breaks down to necessities, fun and the unexpected. Someone left a comment a while back saying this type of spending plan is similar to Ray Lucia's bucket idea. I haven't read his books but I make no claim of originality.

My view on taking income from a portfolio is that a person needs the portfolio to create a certain number. If that number is reasonable, 5% or less, then the mix (assuming something close to normal) can be more about tolerances than numbers. Even a 60/40 mix will give a good chance of providing enough growth.

Even then the equity portion can be constructed in such a way to reduce the likelihood of big blowups within.

A big issue that you really need to dig into if you are managing your own is how long your money needs to keep growing. Someone who is 60 or 65 who has just retired whose parents are alive needs to plan for many years of growth. Twenty years from now this person's expenses might be close to double (3% inflation means prices double in 24 years) what they are now. At that point this person in question here will likely still have plenty of more time yet.

To sum up, I doubt that less growth is going to be the best path too often.
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Iceland Update and a Gripe

I have been writing about Iceland for a couple of years and have been public about my investments in Iceland which consists of an account in the country at Kaupthing Bank that is 50% in the ICEX-15 ETF (this only trades locally in Iceland) and 50% cash.

My other on again off again exposure has been in shares of the Stockholm listing of Kaupthing Bank (KPBIF to trade in the US or KAUP.ST to quote on Yahoo).

Yesterday I sold my KPBIF shares at $15.50 (what think was SEK109.50). I bought in on December 21 at $12.30 (what I think was SEK84). Along the way I picked up a 145 basis point dividend (net of foreign tax).

There were a couple of reasons for the sale, the biggest being a possible ratings downgrade. The downgrade story is a weird one and does not single out Kaupthing or even Iceland but might be a tipping point for a correction. Despite the news having been out there neither the Stockholm or Reykjavik listings have been hit.

This is the type of thing that should already be in the stock and while I am a the market is always right type of guy, sometimes it isn't. If the sale turns out to be a bad one it will be due to this aspect of the thought process.

The picture is in Reykjavik from the top of what I think was the Lutheran church. In the upper left is Lake Tjornin and on the right side of the lake is the city hall, the only two landmarks I can pick out.

The gripe of this post is yet another article from Morningstar shunning anything innovative and showing the extent to which they don't understand the ETF market.

A lot of ink is devoted to picking on the HealthShare ETFs. While I am not certain the audience that HealthShares had in mind it is a good bet that they will be used more by institutions than individuals. I am convinced there is alpha to be had there, someone will find it and it won't be me. That does not make them the equivalent of financial typhoid.

You may not remember the genomic mania that occurred within the Internet bubble but the stocks got hot, genomics open end funds were created (this idea is just as narrow as anything from HealthShares) and they did poorly without ruining humanity.

The article brings out the ole chestnut about people working at the ETF providers not owning the funds as a sign they don't believe in the funds. The author says "If I were an ETF czar I'd declare that companies can only launch ETFs when the managers and every director invests $1 million in the fund." Well that may be the most juvenile thing I have ever read in MSM.

Plenty of new product will die on the vine which is how capitalism works.

This chart shows what has to be the worst case scenario for a fund-like product; the Internet Infrastructure HOLDRs (IIH) topped out around $105 and now trades around $5.

If you buy something that narrow you should know it might drop 95%. If that bothers you, you should not buy it but that you don't like the fact that something could go down than much in a perfect storm is not a reason for it not to exist and has nothing to do with whether someone working at the fund in any capacity should own it.
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Lazy Update

Paul Farrell had an interesting article up on Marketwatch about a possible evolution of Lazy Portfolios.

In the article Farrell cited a version of a lazy portfolio put forth by Jeremy Siegel using WisdomTree funds. What I think is evolutionary is someone at Farrell's readership level allowing for the possibility that something new could be better.

As a hasty generalization it seems like a lot of the financial journalism luminaries are slow to embrace new things.

Per the article, Siegel's portfolio is as follows;

• Total Dividend Fund DTD 15%
• Earnings Index Fund EXT 15%
• DEFA Fund DWM 20%
• High Yield Equity Index DHS 10%
• DEFA HighYield Equity Index DTH 10%
• Intl Energy Sector DKA 10% client holding
• Intl Consumer Non Cyclical DPN 10% this one is very heavy in healthcare stocks
• Low P/E Index Fund EZY 10%

I wrote about a funky version of a lazy portfolio about six weeks ago. The intention with that post was not to come up with something I will use but to illustrate that a lazy portfolio can draw in from many different places.

I should note that I have been a big fan of WisdomTree's dividend ETFs right from the start, they seem like an obvious way to add value but I am not so sure about the earnings ETFs just yet.

The laziness I put out was as follows;

• iShares Dividend DVY 25% client holding
• Rydex Small Cap 600 Pure Value RZV 15%
• WisdomTree DEFA High Yielding Equity DTH 25%
• BLDRS Emerging Market ADRE 5% client and personal holding
• DB Gold ETF DGL 5%
• iShares TIP ETF 20% client holding
• Advent Claymore Convert Fund AVK 5% client holding

To be clear, I don't have this mix for anyone it is just an academic exercise.

Generally I am not a fan of the concept but that might just be a quirky bias on my part. I don't think the bias is because of what I do for work as this blog gives away just about all the process, (as I think of it) but not really the names, for do-it-yourselfers can learn a little bit more.

That Farrell allows for WisdomTree having a place at the table might mean that some folks who would not have otherwise looked at these funds now will and I view that as a positive.

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A Different Take On Too Many

As I looked through the list of ETFs in registration and read some about some new funds that just came out I get a Jeff Spicoli sensation; dude, that was my skull.

This is not so much of a rant that there are too many ETFs or some silly idea that they will wag the dog but more about how unlikely it is that some of these funds will ever gain any traction.

One group of funds in registration is from VTL Associates. They want to bring revenue weighted ETFs for large cap, mid cap and small cap stocks. I doubt these funds will be radically different than other ETFs that weight stocks by market cap in pursuit of capturing their intended effect.

The funds might be outstanding, this is not to question the method employed. It is not clear to me what the catalyst is for someone who is really on top of the ETF space to switch into a fund that they might reasonably view as a slightly different mix of the same stocks and further I am not sure what the tipping point would be for someone who is not that familiar with ETFs to buy a fund from some new company they probably know nothing about.

I would expect me too funds from the bigger players to have trouble attracting assets too. I have written many times about trying to learn about new ETFs that come to see if they could be better mousetraps but it just about at a point where I will not be able to keep up with all of them.

I tend to think of ETFs as a way to simplify but 25 choices for a small cap growth ETF doesn't seem so simple to me.

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Opening Day!

If ever there was a recipe for a dull day in the market it has to be today.

Just about every religion has a holiday right around here, there are a bunch of baseball games on the ESPNs and the basketball game tonight.

The currency markets might be the exception as the dollar is getting hit probably off of the China paper tariff story from the other day.

It is hard to say what this will devolve into but this entire protectionist movement has the potential to cause some real problems with China. I do not believe they will cut off their own noses but the idea of poking them with a sharp stick doesn't seem so smart.

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Testing Stress

I got to thinking it might be interesting to see how some of the low beta, high yielding, defensive investment products came through the recent dip. The following list is not comprehensive so you should feel free to add any of your own.

• Claymore Sabrient Defender ETF (DEF) was down 3.00% on February 27 and from the close on 2/26 to the close on March 5 it was down 4.97%
• Claymore Yield Hog (CVY) was down 2.33% on February 27 and from the close on 2/26 to the close on March 5 it was down 5.52%
• iShares Dividend Select ETF (DVY) was down 3.21% on 2/27 and from the close on 2/26 to the close on 3/5 it was down 5.15%
• SPDR S&P Dividend ETF (SDY) was down 2.26% on 2/27 and for the same week as the others it was down 4.81%
• WisdomTree High Yielding Equity ETF (DHS) was down 2.80% on 2/27 and down 4.95 for the week measured as above
• Madison Claymore Covered Call Fund (MCN) was down 0.93% on 2/27 and down 1.73% for the week
• S&P 500 Covered Call Fund (BEP) was down 3.80% on 2/27 and down 5.56% for the week
• First Trust Covered Call Fund (FFA) was down 1.60% on 2/27 and down 3.98% for the week
• NFJ Div, Int, Prem Strategy Fund (NFJ) was down 2.91% on 2/27 and down 3.58% for the week
• Macquarie Infrastructure Trust (MIC) was down 1.52% on 2/27 and down 6.0% for the week
• Eaton Vance Enhanced Equity Income Fund (EOI) was down 2.15% on 2/27 and down 3.66% for the week
• Eaton Vance Tax Managed Diversified Equity Income Fund (ETY) was down 0.06% on 2/27 and down 2.35% for the week
• Alpine Global Dynamic Dividend Fund (AGD) was down 3.28% on 2/27 and down 6.26% for the week.
• DB Currency Harvest ETF (DBV) was down 1.75% on 2/27 and down 3.70% for the week.

The S&P 500 was down 3.47% on 2/27 and down 5.19% for that week. Lastly the CBOE BuyWrite Index (BXM) was down 2.91% and 5.05% respectively.

You can draw your own conclusions. To the extent you care you may want to look at how quickly any of these funds (or more correctly any of this type you care about) bounced back.

The value of what these funds are supposed to offer is more important during periods of rolling over into bear markets as opposed to V shaped dips but it is interesting nonetheless.

If you want to add any of your own in the comments I would ask that you study the same time periods so it is apples to apples.

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