China Sector ETFs To Arrive Tomorrow

Probably.

I was advised that the GlobalX China Consumer ETF (CHIQ) and the GlobalX China Industrial ETF (CHII) will start trading on December 1.

An initial look under the hood makes a good first impression in terms of these capturing what I had hoped they would when I first mentioned the filing--that is the story on the ground without being dominated by the same old megacaps we've all known for years. For a little JR high humor I will avoid China Yurun Food Group which has a large weighting in CHIQ. I will have more on these later in the week.

On another note we had a little wildfire here today (for anyone local it was on the way to Potato Patch). It was a tiny fire in a massive pile of wood chips or perhaps it was mulch. It had been smoldering, apparently, for a day or two making the rocks under and near the pile very hot. It was a lot of work turning everything over, including the rocks, to cool them off with water. We then had to shovel through the entire pile of chips to make sure it all got wet. I love the task of fighting a fire, it is very wearying work that really makes you feel like you've done something.
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Never Mind?

So after the big standstill news last week from Dubai the UAE Central Bank is going to provide a liquidity facility to help support the banks in Dubai and instill confidence for foreign banks in the region. Apparently property prices have plunged and from what I can glean this will not eliminate pain and losses but will allow things to function. The idea here appears to be showing that despite the news there is liquidity for banks to function.

Extraordinary measures like liquidity facilities, debt monetization and the associated acronyms are very polarizing. These things seems to both prevent the complete collapse of the entire financial system while at the same time creating a moral hazard whereby we privatize gains and socialize losses with no consequences for incompetence.

Unfortunately neither side jibes with reality, IMO. I think that taking a pound the table stand here requires believing that the proper regulatory framework was in place that promoted reasonable use of leverage, prudent lending standards and proper oversight of all the other things that went wrong. Most people seem to now realize that the proper framework was not in place and many people doubt that congress is on the right path to creating a proper framework.

We've heard Obama and others talk about making sure this never happens again which if that is what they are really focused on means we will not get a proper framework but instead will get something aimed at preventing the 2007 crisis. Before going on let me just say I am not trying to turn this post into a left right debate. The President talked about making sure this never happens again, that is not in and of itself a defining political statement. The path that the leadership in congress and the whitehouse choose to take is either effective or not and political beliefs may play a role in that outcome but we are not there yet.

As the story in Dubai evolves (default, now maybe not so bad??) it will either be good or bad but if bad it will not permanently break the system. However, the action on Friday gave a great preview of what to expect if/when there is some sort of market correction. Commodities, emerging markets, developed foreign and most other relatively volatile areas of the market dropped more than the broad market. Whether it ends up being the Dubai news or something else that causes a correction the heavier you are in the above mentioned areas the more you would feel a correction. Think about that now before it happens so that you are not caught off guard and react poorly. Note that even if you are staunchly in the bull market camp we can still go down 100-150 SPX points.

On a different note I spent quite a few minutes on Saturday looking through the on-screen guide (we get a lot of channels) for the University of Montana v South Dakota State FCS playoff game. I would have had to pay quite a bit of money for it which may not have been good for marriage harmony but it turned out to be a fantastic game. South Dakota State dominated the first three quarters taking a 48-27 lead.

Perhaps the game appeared to be over but Montana didn't think so and outscored South Dakota State 34-0 in the fourth quarter to win 61-48. The point here is a philosophical one about never giving up. Something is not over until it is over and until it is over there is still a chance for whatever outcome you are hoping for. This is most easily understood in the context of sports but I believe has broad applications in life.
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Hussman Posted Early

Hussman Funds - Weekly Market Comment

And the money quote;

Frankly, I've come to believe that the markets are no longer reliable or sound discounting mechanisms.

Wow.
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Sunday Morning Coffee

A couple of interesting items in Barron's this week.

First is this article about the extent to which the Chinese banks need to recapitalize and which banks have done what toward that end. The China theme has a lot of meat on the bone but it is complicated and as I have been saying all along (with no claim to originality) there will be bumps along the way.

If you have exposure to China through some sort of narrow fund or individual stock then you should know a little something about the loan growth in the last couple of years, their stimulus plan and the concerns that surround both. China may be showing signs of rolling over and if that is the case I would expect the banks, and maybe the insurance companies too, to feel it the most.

The concerns about lending in China and the newer news about Dubai should make you open to the possibility that the financial crisis may not be over, an opinion I have had all along, if you weren't already. I think going heavy in financials still offers a lot of the wrong kind of volatility and so I continue with simpler banks from Australia, Canada and Chile.

To the extent that this line of thinking makes sense to you then you probably want to avoid accessing China with most of the China ETFs or at least the most actively traded China ETFs like iShares China 25 (FXI) which is 46% financials, SPDR China ETF (GXC) and Claymore China All Share (YAO) each with 34%. A little more promising, in terms of being light in financial stocks might be the PowerSharers Dragon ETF (PGJ) at 7% financials and the Claymore China Small Cap ETF (HAO) with 14% in financials. I think a better way to go with ETFs though is with global industry funds with heavy China exposure, presuming you like the given industry or theme.

The other item was an article in Barron's about the healthcare mess currently underway. The article recaps a book about a guy who went to numerous countries for treatment for a bad shoulder. He got different suggestions in different countries ranging from big surgery in the US to "learn to live with it, mate" in the UK. Many other countries (the article made it seem like most countries) have the government involved with healthcare one way or another. It is my understanding that many of these countries also have private healthcare so that those with the financial means can bypass the public system when things take on an urgency that won't wait.

My biggest beef with all of this has been the belief that the numbers being kicked around, in terms of dollars and number of people, will not work. I also fear they may be trying to fix what they think is a 30 something million people problem but may in fact only be a 20 million people problem. Re-working something that might, I say might, only affect 6-8% of the population could merit different tactics versus something affecting 12-13% of the population.

But something else has been bugging me and I wasn't sure what it was. The arguments about free market and doctors making as much as the market can bare certainly makes some sense but the criticisms about over-testing and over-litigating are valid too and again many other countries have some sort of government something or other and they are no worse off than the US even though they do have financial problems.

I am convinced that the math doesn't work but undecided about the stuff in the previous paragraph but the breakthrough I had on this, the thing that has been bugging me that I finally put my finger on is the period of transition from what we have now to what we appear to be headed toward. There would be an adjustment period and I think a lot of mistakes could be made and a lot of things botched logistically resulting in sick people falling through the cracks and dying while all the kinks get worked out.

As part of this transition period a person could get sick and it not be clear how the person is covered. Yes preexisting condition and no one canceled, yeah yeah I get it but some sort of mistake... I may have this all wrong but expecting a massive overhaul from one wildly flawed system to another to go smoothly is not a bet I would make.
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The Big Picture for the Week of November 29, 2009

A few items today.

In the wake of the Dubai news the FT mentioned some of the trouble happening in Greece. For ages I have been talking about being underweight big Western Europe for having a lot of the same types of trouble that the US has but I have not mentioned the PIGS countries before.

I'm not sure when that acronym first popped up but it stands for Portugal, Ireland, Greece and Spain. These countries have a lot of problems, potentially worse than France, Germany and the UK (the UK of course not in the EMU but still it has problems). In addition to everything else they struggle with the various requirements to be part of the euro.

I used to own Ireland and Spain and got lucky selling when I did. The story in these places changed and so selling became prudent. This is part of the process for selecting individual countries, occasionally something changes in such a way as to warrant getting out. This is a tie in to the need for more work when going narrower than some mix of SPY, EFA and IWM.

Yesterday I put up a quick note that DP World, the ports company that is part of Dubai World, appears to be traded on the pinksheets with ticker DPWRF (Schwab said they could not trade it due to custody issues).

Part of the issue with selecting countries is trying to figure the best way in. The other day in the video from the basketball tourney I said that the ETF coming for Kuwait would likely be heavy in financials which might make the fund less attractive to hold.

At different points during the 2003-2007 bull market market it would have made sense to have exposure to this part of the world (note that for purposes of this conversation I'm not trying to pick one country over the others). In picking countries you can't buy the big bank for each country you like, you'd be hideously overweight financials in that case.

A few countries have publicly traded ports and certainly they are a way to capture what is happening on the ground in these places so a port as a proxy is, at a minimum, interesting. Looking a little closer at DPWRF there is a fair bit of debt that appears not to be problematic but the company owns ports all over the world including Djibouti (BTW "the capital of Djibouti is Djibouti") and without having made a day of it I am not sure what portion of their revenue and earnings actually comes from the emirates. The company might be an useful hold but perhaps not a proxy for the emirates.

A reader left a link to a post on his blog about withdrawing money from a portfolio in retirement using a "bucket" approach. As one reader pointed out in the comments yesterday the general concept is not new. I wouldn't quibble with it but it has more moving parts than I prefer for my wife and I. I used to word my idea as "whatever you got, 4%" meaning take 4% annually of the balance to live on, period. I changed that to "whatever you got; 1%" meaning take 1% every quarter. Paying yourself quarterly is more realistic than annually (don't think people would disagree with that) but the way I have been writing about it (and believe in) is not to adjust the withdrawal up for inflation. Hopefully the portfolio is "inflating."

If you have $500,000 today then maybe you have $540,000 a year from now even after you took out your $20,000. If you have less a year from now then you'd have to take less out which I realize is problematic but a lean year is better than running out of money when your 85 and healthy. Along these same lines I am a proponent of working as along as you can but not in a job you hate wishing away every week to get to the weekend.

I recently heard from an acquaintance of ours who is going to run into trouble with the mortgage on his investment property. His reset is going to be bad and he is not in a position now where he is viewed as being in trouble so he cannot refinance to prevent getting hurt when the reset occurs. I do not know the particulars and it would not be appropriate for me to say anything (not that I could add anything anyway) about this to him but it is a good reminder about risk taking. Reasonable risk is buying a rental property that goes unrented but being able to pay the full mortgage. Unreasonable risk is what our acquaintance has taken. The place is rented but the reset is not affordable. Using leverage incorrectly can be ruinous, that cannot be stated enough.
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Dubai Ports Publicly Traded?

So apparently DP World, the port business of Dubai World which of course is at the center of all the hub-bub, is publicly traded on the pinksheets.

The five letter designator is DPWRF and it did trade on Friday. Not surprisingly Schwab cannot accommodate anyone interested due to custody issues but it is interesting to know that the stock exists.
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A New Default To Worry About?

Apparently the Dubai Brothers may have trouble making their next interest payment and the initial reactions from many world markets has been bad.

Ahem.

24/7 Wall Street provides a tidy recap and links out to some newsier articles for more info which you should take a look at.

This event is still unfolding and will either be the thing the triggers a meaningful risk-aversion trade or not but these types of events do happen periodically and they are not truly different in terms of how the market reacts even if the details are different.

Along the lines of risk-aversion, the other day a reader left a comment asking whether it would make sense to underweight volatile sectors in the face of QE ending or economic data getting worse and the like for fear that the market could drop as much and as quickly as it rose from March through to now.

I'm not likely to be the one to correctly predict a 60% move in either direction. For now demand for equities is healthy even if the economic footing in the US is shaky. When demand becomes unhealthy I will take more defensive action but for now I plan to increase exposure to investment destination that are on better economic footing. I view this as quite simple.

Decisions about sectors could be a little less important now than they were a couple of years ago. No sector is larger than 20% of the S&P 500 and none is so obviously and newly in trouble in the way that financials were (or are as the case may be). Tech is the largest sector of the market and I am a little skeptical of the potential for broad tech spending for a while so I am underweight there but not for fear of an implosion. I am still light on financials with 3/4 of that exposure being foreign as I do not believe the last shoe has dropped on the crisis. Materials can be a very volatile sector, depending on how you access it, but gold could do well in a risk aversion event so maybe the miners would too? Energy is a volatile sector but it seems to me I have read about energy doing well in both upturns and downturns so what is the answer there? Utilities are a tame sector but if part of the reader's scenario includes higher rates then I would expect utilities to struggle.

Right now I think country selection and avoidance is more important than sector weightings. Two years ago avoiding financials was the more important thing but now I think it is picking the right countries and avoiding certain other countries (big Western Europe and Japan). The list of countries I prefer is long and has not changed much over the last couple of years. I've been writing about the need to go narrower since I started writing. It has been important all that time and I believe will become increasingly more important as time goes on.
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Polish Power!

The Market Vectors Poland ETF (PLND) is up and running. I mentioned this in that very high quality video I posted not realizing it would be out on so soon.

As I thought, it is heavy in bank stocks, about 40% of the fund. Every country has a big bank or in Poland's case several big banks. Most countries also have a big oil company (even if it is more of a refiner and marketer than anything else) and a big phone company so you often see those types of stocks dominate these smaller country funds.

Van Eck has posted a report making the case for Poland as an investment destination. It has its attributes of course like avoiding recession, a young population, healthy FDI flows and the country does not rely on exports to the US. The country also has drawbacks which you can read about in the report. One thing about the report though that stuck out is that the part that compares to Poland to other countries in Central and Eastern Europe it seems like most of the other countries studied are very unhealthy. There are a couple of other countries that I believe are doing well like Slovakia.

The index underlying the fund yields 4.16% so less the fee and the fund should yield in the mid-threes.

A reader left a comment on the video saying that he did not see the need for a fund for Egypt or Poland. He mentioned his preference for broad based emerging exposure and that he would like to see small cap ETFs. Well first thing there are already a couple of small cap EM funds out there.

A lot of folks might say something similar including passive indexers and many RIAs catering to retail investors. Fair enough for anyone who thinks so but I will try to make the case for country selection by way of brief example. During the global bull market that started in 2003 going through to the 2007 peak the iShares Emerging Markets ETF (EEM) went up about 400% iShares South Korea ETF (EWY), a heavy component in EEM during that run, was up closer to 300% and the iShares Brazil ETF (EWZ) was up about 1000%.

It did not take a whole lot of mental heavy lifting to realize that global demand for resources might be heating up and that prices for all things related to consumer gadgets were dropping so instead of buying EEM which was heavy in South Korea (and Brazil too for that matter), Brazil could be a way to benefit more directly from a pretty big trend.

I've mentioned this example once or twice before over the years. Another example for country selection I've made many times has been Norway and Australia instead of EFA for very similar reasons. Obviously not every huge trend will work as hoped for which is why I write about small weightings in these things but spotting the really big catalysts is not rocket science.

One point embedded in this conversation is avoiding certain countries. Avoiding the right things can be as important buying the right things and broad based products simply do not allow for this. Decide for yourself.

The picture features a professional wrestler from way back named Ivan Putski whose rallying cry was "Polish Power." Looking for a suitable image was a great reminder of why I never got into watching professional wrestling.

Lastly I hope everyone has a good Thanksgiving.
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New Single Country ETFs Coming

This is a video I shot Monday at the Maui Invitational. Given our flight itinerary and having to spend the night at our inlaws I did not have time for a normal blog post.
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Send It In Jerome Yancy!

Yesterday I had an article run at TSCM about ETF investing ideas for 2010. One ETF I wrote about will move bigger than the market in both directions, one should do well but have a relatively low correlation to the US market and the other is somewhat defensive.

I tried to pick ETFs that have different attributes meaning that they each would/should react differently to whatever gets thrown at equity markets. The idea of responding differently to positive or negative influences is what diversification is all about.

If every stock or fund you own up more than the S&P 500 since the March low then all of those holdings would very likely drop more than the S&P 500 should it correct down at some point. Note that this is not a prediction about the market in the near term but instead this is a how portfolios work type of comment. If every stock you have has reacted to whatever has pushed the market up by rising 120% then you should expect they would drop more than the market in a decline. This would be true in a bear or bull phase. So if everything you have is up in the manner described above then you don't have a diversified portfolio.

Our visit to Maui ends to today as we are flying back to the mainland for Thanksgiving. The basketball at the Maui Invitational was very good. Game 1 was a squeaker and game 2 was not as close but still pretty good. The picture is of Yancy Gates from the University of Cincinnati. Aside from enjoying the hoops I have never had a run catching waves (body-surfing) like this trip. Great fun and great exercise if you stay in the water long enough.
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Volatility Budgets

Recently I was asked what I thought about a particular big cap tech stock that is popular with investors. The person appeared to be surprised by my answer in such a way that lead me to think that he had not heard this point before.

The stock has pluses and minuses like every stock and has a history of going up more in an up market and down more in a down market so it is a source of volatility. Obviously there is nothing wrong with being a source of volatility other than knowing the volatility characteristics of what you own.

My answer not surprisingly to long time readers was from a top down perspective. Given what I perceive as potential headwinds in domestic tech spending I'm not in a big hurry to use the tech sector for places to add volatility to the portfolio. There are other segments like materials, emerging markets or agriculture. I perceive these areas to have tailwinds with regard to spending as opposed to headwinds.

Obviously these thought can turn out to be incorrect but that is how I see it. Part of the idea here is that if tech stocks only do ok (or worse) be it for spending patterns or any other reason it would be difficult for a stock to go up a lot while the rest of the sector muddles. Obviously some stocks would do very well while other stocks muddle but picking one of the ones that would do well would be very difficult.

Compare that to emerging market stocks continuing to do very well. Picking a stock that goes along for the ride with its group is not an impossible task. So if you do pick an ordinary stock (relative to its group) then focus needs to be given to picking the right group. Obviously the typical emerging market stock has done quite well lately so getting that call right becomes more important if you can buy into the concept of top down.

Let me repeat that easier does not mean you will always be correct but picking the one stock that skyrockets out of a muddling group or sector is very difficult to do.

Thanks for all the input about the dog situation. Diagnosing this is a process and we have unyielding faith in our Vet to do the right thing without jacking us up with unnecessary tests.
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Sunday Morning Coffee

A bit of a departure this morning as Thanksgiving is coming up in a few days. We had a bit of a scare in the Nusbaum household the last week or so. Two of our dogs have had seizures in the last couple of weeks the latest being Trixie this past Monday right before we headed out of town.

Dogs have seizures, a previous dog of ours had a couple of them before our then-Vet put her on phenobarb, and sometimes it is a big deal and sometimes not (so says our current Vet). We live very close to an old mine (the Sheldon Mine whose heyday was a little over 100 years ago). One things that causes seizures in dogs and is also nearby as a byproduct of the mountain's history (and elsewhere on the mountain that we know of) is lead. Given our situation, testing the dogs' blood for lead became prudent. If the dogs had lead problems then we too could have lead problems which could be quite serious for our health and our finances.

A high enough lead level in our soil could require that we move from a newly worthless house (or close to worthless)--who would buy a house with a lead problem? A less severe solution, if the lead level was not too high, could involve having a lot of dirt hauled in and put down to reduce the direct exposure (not sure how viable this is) but of course we'd still worry about it.

Every so often people are forced to move in this fashion and the impact financially can be devastating. I'm not sure if insurance can help here but it could be a dealbreaker if you have to move from a worthless house that has a mortgage and want to move to a house you would own.

Fortunately the lead levels came back at zero so we are thankful for that but we still have a bit of a mystery on our hands--the blood work for both dogs came back as being "perfect." We paid off our little cabin five years ago thinking that no more mortgage would offer a lot of flexibility for who-knows-what in the future not expecting that we might be forced to move (again this turns out not the be the case).

We bought the cabin for a very low price, had to put a lot down and so paying it off quickly became easy and logical and could have turned out to be crucial in terms of avoiding a financial deathblow. While I do not know if we truly would have had to move if this had played out differently we could have done it which is a long winded argument/example of why living below your means is so important. Had we bought what we could afford as opposed to what we needed we'd still be mortgaged up and a forced move as described above could have been ruinous.

So we are thankful we don't have to move and thankful we could have absorbed the loss had it come to that. One does not have to have a lot of money to be well off. If all you pay for each month are various insurances, utilities and groceries (ie low overhead) then you have a much better chance of absorbing really big financial shocks.

The picture shows Ko'olawe off in the distance and Molokini a little closer.
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The Big Picture for the Week of November 22, 2009

Something to ponder.

This came up in various places earlier on during this event but is worth thinking about again.

Simple question; historically when do the biggest bounces in stock prices occur?

While I have opinions as to what will happen the bigger thing is making sure to not get caught off guard by the things that potentially do the most harm. A decline, even if it were to be big would not do the most harm. What would do the most harm is panicking in the face of a decline.

The realistic consequence of riding a big decline all the way down is that you have to wait for it to build back up. The build back up, as I often say, is either at a pace that is acceptable or not but waiting is the consequence. However if someone panics out after a big decline then they will have done themselves farm more damage than simply failing to take defensive action and having to wait. This of course assumes proper asset allocation.

Based on how the market tends to work, big and fast rallies often occur during bear markets. This little nugget either applies now or it doesn't but this is a guh-olden opportunity for people to get completely blindsided by a large decline.

I believe a big part of success in the capital markets is avoidance. Avoidance can mean several things like avoiding the wrong sector, avoiding the wrong country or avoiding certain situations that could cause the most harm. For many people emotions create situations that could cause the most harm.

We are currently in Maui. On Monday I am going to the first two games of the Maui Invitational Basketball Tournament but this year I will leave Bill Raftery alone.
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ETP Utility and Silliness

First utility. IndexIQ is coming out of the gate as a bit of an enigma. The new Merger Arbitrage ETF (MNA) at first glance seems odd to me. There have been several articles already that have ripped it up for not really being an arbitrage product and I will say I don't get why shorting the broad market against long positions in takeout targets is the best way to go but clearly they did not get a crappy result from the backtest and decide "well even though the backtest is lousy we'll run with it anyway."

But that is not what I wanted to talk about. IndexUniverse has reported that IndexIQ has filed for a bunch of single country small cap ETFs. The countries included are Australia, Canada, Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Taiwan. They also filed for global small cap industry funds; agriculture, natural gas, crude oil and gold (Market Vectors may have beaten them to the punch on that last one).

While I always add the caveat that until a fund lists the filing doesn't mean much but these are interesting ideas for two reasons. First is the obvious which is access to parts of the market that are not easy to get to. Small caps in Malaysia? An evolving dialogue on this site has been the opening up of "new" parts of the market to do it yourselfers giving the chance for more diverse and sophisticated portfolios. These types of funds are exactly what I'm talking about.

The other thing that these funds do is provide starting points for researching names for people willing to pick individual stocks. I have talked before about going to the websites of foreign exchanges as being a way to learn about what companies are there but that is not always easy to do. Here's hoping IndexIQ follows through with these. This seems to have the potential to offer more value than 15 different ways of getting an absolute 6-8% return.

Now for some silliness. Barclays has launched a bunch of ETNs that are too complex to explain briefly so I will let IndexUniverse to the talking. But they offer different sorts of levered exposure to the S&P 500 both long and short. They give a payout based on where the index stands five years from now and you are paying for the leverage as you go. The important thing to realize is that they are nothing like the ProShares or Direxion funds.

These strike me as being very similar to brokerage house products that offered some exposure to the market but protecting principal along with several other moving parts.

I am making no attempt to sort these out. I am quite certain that the science behind these things is very compelling but it doesn't take much experience in the industry to realize the most complex of products often turn out very badly. These things should make an individual investor run screaming from the room with his hands flailing above his head.

I will be truly shocked if these resonate at all with retail investors. I can envision some sort of institutional trade off of some sort of unintended byproduct that I am not smart enough to see ahead of time (to be clear something along these lines would not be my type of trade).
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Risk Assets And Other Greenback Fun

Yves Smith from Naked Capitalism had a particularly meaty post earlier in the week about the current affairs of the US dollar. Of most interest was the following one-liner;

But one difference this time is now the dollar, rather than the yen, looks like the best funding currency, and the dollar is a deeper market, so the scale of potential damage is much greater.

The size of currencies has come up a couple of times during this event in terms of certain countries (like Iceland and Switzerland) simply not being big enough to bail out their banks if they needed to. This context though is new, to me, but of course also matters. There are greenbacks everywhere. Many countries use USD for all sorts of purposes and so the breadth or scale as Yves says stands to be much larger if things become disorderly with the dollar as compared to the yen or the euro for that matter.

The word disorderly as a benchmark for concern gets used all the time but without definition. Perhaps we will "know it when we see it." Ooof.

Here is a link to the Hugh Hendry investor's letter. John Mauldin posted in on Barry's site and I saw a link to it on Seeking Alpha as well. I mentioned Hendry several years ago after seeing him on CNBC Europe. He is always a good read, but a better listen for the Scottish accent, because he tends to come at things with a unique viewpoint. I tend not to focus on whether he is right about something so much as trying to see what I can learn from the viewpoint (agree or disagree) and whether there is some kernel to work into my viewpoint.

He warms up with this;

The ability of fractional reserve banking to leverage this liquidity many times over provided the monetary mo-jo to instigate ever higher commodity prices.

There are quite a few fractional zealots out there and while this subject may not be my wheelhouse and definitely not my passion this part of the model becoming warped has contributed to whatever history will ultimately say about this decade.


It is not clear to me that the current prices of popular risk assets are at levels that will prove to be ruinous should they drop but perhaps we are early on in a trajectory that will prove to be ruinous. This is possible but do keep in mind that iShares Emerging Markets made a high two years ago near $55 and today after (or in the middle of) a heroic run it is at $41. The PowerShares Commodity ETF (DBC) hit $45 in the summer of 2008 thanks to crude craziness and is now up a good amount to $25. Even the SPDR Gold Trust (GLD), which I own personally and for clients, at $112 is only up 13% from its 2007 high.

Any of these things could drop or collapse as some might say but it is not obvious that the pricing of these things is here today nuts; N V T S (History of the World Part I reference). Money has flowed in yes but the prices do not appear ruinous. No matter the best way to describe the price action of these things, if you now own more than you should the logical course of action is to shave the positions down. If the dollar starts a meaningful counter trend rally tomorrow it should be obvious that the things we are talking about here would likely get hit very hard.

Hendry later ties in a similar idea as Yves Smith about the dollar being used in so many global financial functions. Hendry differs a little, as I read it, saying that the dollar has already devalued. Well it is down a lot and I have opined before that with so many other countries having a stake in the dollar an implosion seems unlikely because so many participants would be motivated by self interest to step in. A continued slow erosion still seems very likely though which should result in higher interest rates here.

Toward the end he lands this self-deprecating jab; "you have to discount the solace I seek in finding people even more miserable than myself."

There are no easy answers here. I believe the simplest approach involves a view from 30,000 feet. The US faces some fundamental obstacles that other countries do not. I would focus on the "do not" crowd.

The picture is from the United Animal Friends 2010 calendar that my wife and her friend Gayle put together. They are for sale at the UAF website and there are a lot of great pictures. I hope you can check it out.
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Death Blow ETFs

Kelly Capital launches 100x leveraged ETFs | ETF Express

I'm trying to be the first to coin the term Death Blow ETFs. LOL. Read the link above, these things are 100X levered. The symbols are SINK and SOAR. Death Blow ETFs, you (may have) heard it here first.
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What Was I Saying?

The other day I made a passing reference to the fact (hope?) that there would be some new ETP launched as the year winding down was a busy time. Well there have indeed been several interesting product launches that we can talk about.

First up is First Trust with the Smart Grid Infrastructure Fund (GRID)--the symbol is GRID; nice. As an amusing anecdote before talking about the fund I was asked to go on CNBC for a segment about Smart Grid stuff a few weeks ago but had to decline because about all I could have said was that I think a smart grid is better than a dumb one; ahem.

Anywhoo GRID is an international fund with noticeable weightings in France, Germany and Japan (I did not see the country breakdown anywhere) but is heaviest by far in the US. Industrials are the largest sector at 72%. While the foreign exposure is light, it seems as though the fund will actually capture this segment of the market for better or for worse. It has a couple of mega-caps in it as space filler (GE and Siemens) but they are not the largest stocks in the fund which is a good thing.

There are several funds in this general space already and more on the way. While I do not think the construction is bad there doesn't seem to be anything that really grabs your attention. I will be surprised if this gains any meaningful traction.

Next up is the iShares Diversified Alternative Trust (ALT). This is an absolute return vehicle that appears to be actively managed. Looking at the holdings, this thing is funky. It is long some currency futures and equity index futures and short some other currency and equity index futures. There have been a lot of absolute type product that have come in the last couple of years and some have worked better than others and some have stunk. You can read about the strategy from IndexUniverse and without criticizing the folks at IU it is not easy to glean the specifics of the overall tactic. The fund does not make a good first impression.

If the fund can prove itself great but by prove itself I mean hold up in a nasty downturn.

The Build American Bond ETF (BAB) is finally out and the PowerShares website avails a look under the hood. As I mentioned before it is a long dated product. Half of the holdings are 25 years or more and a quarter of the fund is 20-25 years. The average coupon reports at 6.37% but with no indication of current prices the actual yield of the fund is not yet available (if the average price paid is 110 then the yield would obviously be less than the coupon).

California appears to be the largest state with four issues totaling 16% of the fund. While a real problem is unlikely a good scare is quite possible meaning that prices on those issues could face a blip at some point. There is no North Dakota or Montana (the only two states without a budget problem) in the fund but maybe there are no BAB issues for those states or maybe if there are they are too small for the fund.

Pending the info on what the fund will yield (keep in mind yields for bond ETFs fluctuate) I think this fund will be popular. Just about every fixed income segment offers better value than the US treasury market but some are still quite risky. BAB might offer a tie in to closer to normal yields without crazy risk although I would like to see the exposure to California come down some as new assets come into the fund and it buys more issues from the index (it is my understanding that the fund is sampling the index).
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"Its Not Obvious To Me That There Is Any Large Misalignment Currently"

Sweet Fancy Moses.

I am not a big fan of the word bubble as I think it gets overused. Not everything that goes up a lot and then goes down a lot is a bubble. In all likelihood the best time to really assess whether something is a bubble or not is well after the fact. That does not mean you can't assess when something is better to sell but declaring bubble or not is not easy and I don't believe relevant.

However Ben Bernanke's comments yesterday essentially saying there are no bubbles would seem to be very misguided or poorly planned or something--something that is not right.

The folks on CNBC said that Bernanke seemed to be greenlighting the continued move higher in equities, commodities and anything else that seems to go up when the US dollar goes down. CNBC gets heckled a lot but the conclusion of Bernanke greenlighting speculation on risk assets is not an unreasonable inference to draw.

Greenspan came to be remembered, among other things, for a couple of very wrong comments and while I certainly don't know what comes next this sort of comment from the Fed Chairman, aside from striking me as inappropriate, has a great chance of being spectacularly wrong.

The notion of anyone with influence saying "keep on buying folks, its all good in the hood" seems outrageous. I typically do not get this worked up about things but this seems weird and not in a good way.

Short post, I am hopping on a plane but hopefully this will whip up some good dialogue.
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Virtual ETF Conference

ETF Trends Partners with InvestmentNews on First Virtual ETF Conference

I'm participating in this event at 2pm EST on the day of the conference. It is aimed at advisors but I am not sure if it is limited to advisors or not but it is an all day ETF Palooza.
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She Loves Gold!

My brother forwarded this link from the NY Post by Hilary Kramer (remember her?) about gold. The article spelled out the recent history of the price of gold, some reasonable opinions as to why gold could go higher and then different ways to get into the space.

Over the last few years gold has gone up a lot in price due to several reasons. Collectively we know a lot more about gold than we did ten years ago and are collectively much more interested in owning it one way or another than we used to be.

The article itself was somewhat generic tilting toward owning gold as being a good idea based on what appears to be a visible path toward loss of purchasing power of the greenback at some point.

Unfortunately there was very little heed given to the risk of initiating a position in something that is up a ton already.

I have been very consistent in talking about owning gold as a little bit of insurance against an external shock and if it is going up for other reasons that is ok but I expect that if gold is doing well it probably means most other things are not. That sentiment is certainly true over the course of this decade even if not true for the last six months.

Now gold is at an all time high and concerns about the dollar could contribute to pushing the price higher or not. It seems like the price will go up but that is usually the case when something has already gone up a lot. With gold up here it is very likely that there will be a lot of articles in mainstream publications like the one linked to above that go heavy on the virtues and light on the risks.

Gold may go up a lot more or not but it makes sense to be skeptical if, as it keeps going up more and more people hop on the bandwagon. Obviously this could apply to any sort of tradeable, investable asset and while this line of thinking is not new it is worth repeating every so often.

Gold iPod! I'd hate to put that one through the wash.
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Sunday Morning Coffee

In the last couple of months I have taken to reading John Mauldin's weekly commentary via Barry Ritholtz' website. A few years ago, not knowing anything about him, I picked on some comments from Mauldin which was shortsighted on my part. But you learn and I have come to be quite fond of his letter.

He seems to do a good job of weeding through things and then rendering an opinion that is very easy to follow. Agreeing with him, or anyone for that matter, is not the point so much as learning about a particular point of view. He articulates his point very well whether you agree or not.

This week he knocks it out of the park with a couple of great one-liners and does a good job, with spreadsheet work from Mike Shedlock, of painting a pretty good picture of what the next decade in the US could look like economically and the influence certain political action could have over that period of time.

Mauldin takes Shedlock's spreadsheet of his expectation and creates a rosy outlook, a gloomy outlook and a middle of the road outlook. Based on the number of jobs needed to tread water, about 125,000 per month (1.5 million per year) there is no scenario where the unemployment rate goes back to where it was two years ago between now out to 2020 (there are numbers to back up the opinion so as mentioned above you can agree or disagree with the conclusion). The good scenario has the unemployment rate above 10% through 2013, the middle scenario has it up there through 2015 and the gloomy scenario stays at double digits through 2017 and above 8% through 2020.

Mauldin's gut leads him to conclude we will have a double dip recession starting in 2011. Part of his logic as follows;

I have serious doubts that we can have what amounts to the largest tax increase of all time in what will be a very weak (albeit growing) economy, without putting us back into recession. And Speaker Pelosi thinks it is a smart thing to add another 5.4% surtax on what will already be a rising capital gains and dividend tax.

I do not know Mauldin's politics but the things that the current leadership appears to believe in do not seem to be conducive to actually fixing things with an eye beyond the next election cycle. Not that the Republicans can take any high ground here as we'll be digging out from under the complete mismangement of almost everything under the Bush administration for a long time even if the seeds were planted during the Clinton years.

Here is a grim little nugget;

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about that. We have had a decade where there have been no new jobs added by the private sector. Real incomes are roughly where they were, and the stock market is down. Talk about a lost decade.

A year or so ago I talked about the idea of a lost decade. The the economy and the stock market were starting to roll over people were asking whether we could have a lost decade like Japan. I contended that with no stock market progress we had already lost a decade even before we start thinking about jobs and stagnant (adjusted for inflation) wages.

Ten years, or more, is a long time for things to be this lousy but even after the ten years we've had it isn't all that bad. People like Peter Schiff and a few others paint a picture of society crumbling under the weight of these problems. If this were a realistic threat I think it would have started by now. Japan has been on a similar ride for 20 years and their society has not crumbled. The problems here and there are significant but ruinous on a societal level? No.

It reminds me of a story from Western Civ 101. I do not remember where this was or who it was but some sect was calling for the end of the world at 9:15 am on October 15 of whatever the year was. After 9:15 on October 15 came and went without the end of the world the sect then proclaimed the world had indeed ended but that no one realized it.

Japan has been a lousy investment destination and the US appears to have gone in that same direction but the world has not ended. If things are this bad then the solution must be to figure out where "normal" returns can be had and then invest in those places.

On a lighter note yesterday was a fantastic day for sports. Purdue-Michigan State was a squeaker, Boise State won a big one on the blue turf, Ohio State won the Big Ten in OT, Utah got smoked by the Horned Frogs while at the same time North Dakota hockey was on (I love UND hockey and they are on all the time) and then the Pacquiao win over Cotto which I did not buy. Even New Zealand jumped in, making its first World Cup since 1982. Not too shabby!

The picture is of Roscoe jumping out of the "fish pond" near our house taken by our friend Amy. What a shot.
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The Big Picture for the Week of November 15, 2009

This past week kicked off what stands to be a very busy couple of months in terms of conferences, panels, what do you think for 2010 interview requests and maybe new exchange traded products.

What to make of a new year always makes for good discussion but 2010 could make for an especially engaging debate. 2008 was horrible and 2009 in terms of US equity market results is pretty good so far. Before getting to any sort of analysis a YTD gain for the S&P 500 of 21% is a good result.

Once we begin to peel away the layers some will conclude that in fact things are really as good as a 21% lift would indicate and others will find reasons to doubt how "real" the move is.

It is my nature to be skeptical of big moves up in the market against this type of backdrop for the simple reason that The Greatest Story Never Told (does Kudlow still use that one?) does not hurt my clients or cause them to freak out. We are certainly going along for the ride but doing so cautiously. People tend forget what it feels like when the market is puking down, I don't. It is those times, during a puke down, when the biggest mistakes get made so trying avoid ever being the position to potentially panic takes on a lot of importance.

Doug Kass made an interesting point on Thursday;

The message of the markets over the past few weeks is that, with increased certainty, investors are growing more comfortable with the forecast of a smooth and self-sustaining economic recovery in 2010 and beyond. Many now have even adopted the view that the current cycle is the start of a normal multiyear recovery that could resemble the average 45-month expansionary phases that have typically followed a recession.

Not too long long ago this was the worst crisis in 80 years, maybe even worse than the Great Depression. Now sentiment seems to be headed in the direction Kass mentions. From where I sit, for the recovery to be close to normal in terms of magnitude and when it starts then the world's assessment of the crisis being so bad would have to be wrong--meaning it wasn't that bad. But how can that be given the higher number of failures than normal, the higher number of foreclosures than normal, the current state of unemployment and under-employment and the very extreme actions being taken by the Fed and Treasury?

If this was worse than normal then it would be reasonable to conclude the stock market has it wrong, that there will be more economic and fundamental shoes to drop and if that is true then the chance of another shake out or a few more years of trading range becomes very plausible.

That being said I been very consistent (and wrong so far) about one more decline that scares a lot of people but does not make a new low. I don't think we get anywhere close to 670 on the SPX but maybe it trades with an eight handle again.

The goal with this sort of assessment is not to be correct so much as to not get blown up or totally blindsided in case it does play out this way. After all no one will panic if SPX closes out the year at 1200 but some folks might if it closed out the year at 850.

The picture is from downtown Juneau. I think it is neat how Mount Robson shoots straight up behind the town.
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Friday Roundup

New Zealand Prime Minister John Key was on CNBC Asia Friday morning giving a lengthy and very candid interview. He talked about the run up in the kiwi dollar and how it would be helpful for it to correct some the other way. He spelled out specific opinions about economics in other countries in the region including the idea that it will not be a bad thing for various countries, including China, to let their currencies rise.

The interview was very refreshing because Key spoke plainly and directly to the questions asked including tough ones about the currency and taxation. Compare this to when officials from the US or other big or medium sized countries speak.

I believe what allows Key to be so frank is that the country is so small, has so few moving parts and a sneeze by a kiwi official won't send all global markets reeling so they can speak freely. While this could cause the occasional hiccup it would seem to me that a country could be well served by not having to try to interpret what the meaning of is is, if you know what I mean.

On another note PowerShares will be launching an ETF comprised of build America bonds. These are interesting issues. They are taxable municipal bonds with the feds kicking in to "make up the difference" to make the yields competitive with regular taxable paper. I find this segment to be very interesting but any of the issues I have seen have been very long dated. Barron's has talked about yields in the sevens which sounds pretty good but in looking at Schwab's inventory I never saw any with that kind of yield. If those yields do exist then perhaps they will be captured in the ETF. It will have ticker symbol BAB and should be out on November 17th.

One last little item is that Australian retailer Kathmandu IPO'd on the Australian Stock Exchange today with ticker symbol KMD. At some point, maybe in a couple of months, it will be assigned a five letter designator for US trading. We were in a Kathmandu in Auckland a few years ago, it is kind of like an REI (the one in Auckland was enormous) and assuming the company is sound (can't vouch for that one way or the other) then it stands to be a decent proxy for discretionary spending in the antipodes.
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Leveraged ETFs: A Seeking Alpha Expert Panel

Leveraged ETFs: A Seeking Alpha Expert Panel

If you're interested this is the transcript to the ETF panel I was on with David Fry and Don Dion moderated by Mick Weinstein.
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Discuss

Busier way beyond normal for the next couple of days so don't have time for a proper blog post just now but maybe we can whip up a good debate.

Nouriel Roubini seems to think that there is not much point in investing in gold and Peter Schiff, along with many others, thinks gold is going much higher. While it is true that gold's only value is what people perceive it to be worth it is also true that people perceive it to have a lot of value and bid it higher in the face of certain types of shocks or in expectation of certain types of monetary events.

So gold as an investment; what say you?

The picture is unrelated to what I hope will be a good debate. Put a 50-75 gallon water tank on that bad boy and it would be very handy for some of the small wildfires we get called out on.
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Leveraged ETFs: A Seeking Alpha Expert Panel -- Seeking Alpha

Leveraged ETFs: A Seeking Alpha Expert Panel -- Seeking Alpha

I'm participating in an online panel about levered ETFs at Seeking Alpha on Thursday at 2pm eastern time. The link above should work when the time comes.

Hope you can check it out.
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ETF Wednesday

A few bits of ETF news to chime in on.

First is an interesting filing from EG Shares (reported by IndexUniverse) for seven funds. They are India Infrastructure Index Fund, China Infrastructure Index Fund, Brazil Infrastructure Index Fund, India Mid Cap Index Fund, China Mid Cap Index Fund, Brazil Mid Cap Index Fund and the Growing Asia Large Cap Index Fund.

Any funds that go a little narrower into some popular/important destinations and or themes deserve a look. As this is just a filing it is a little early to really dissect the funds (I could not find the holdings anywhere).

There are all sorts of China funds and thematic funds that are heavy in China. Brazil has a couple of funds already including a small cap fund but India is sort of under represented. Investing in India is not quite as accessible as the other two (China A shares are obviously tough beyond that Morgan Stanley closed end fund with ticker CAF).

Without knowing the holdings the most interesting concept, for its uniqueness, is the India Infrastructure Fund. I used to have across the board exposure in India but pulled that back a while ago. A lot of things are going to happen in India but the broad based funds don't hold the same appeal that they once did and I have not found an easily traded stock that caught my eye either.

In many countries money is going to be spent on improving and modernizing infrastructure. These countries are getting wealthier and living standards are improving although this will happen in fits and starts. If we know that money is going to be spent then it would seem plausible that stocks involved can do well.

The prospectus gives a list of different groups than can be included in the infrastructure funds and based what is there (it is a long list) it is possible that any of the funds would be heaviest in large cap conglomerate-ish companies and so perhaps not much different than the couple of large cap ETFs that already exist.

If the China funds turn out to be better mousetraps then I would consider them but I am quite pleased with VALE for Brazil for now. I can't really figure out, based on the prospectus, what the Growing Asia Large Cap Index Fund is. It will own the 25 largest companies from the pool of Chinese and Indian companies and the 25 largest companies from the pool of companies from Thailand, Malaysia and the Philippines. There are a couple of other details of course and while it could be a great regional fund I cannot glean the significance of the word "growing" in the name of the fund.

The other thing to touch on is that the Junior Gold Miners ETF from Van Eck is out and it has ticker GDXJ, it large cap cousin has ticker GDX. Canada is by far the largest country at 62% followed by the US at 21% and Australia at 11%. My initial reaction is to be surprised that Australia isn't bigger than 11%. Of the ten largest holdings I recognize four of them. Not being much of a gold bug I kind wish I didn't recognize any of the names, if you know what I mean.

This will allow people to manage volatility in the mining space. The junior companies are inherently riskier but for people who know what they are doing there are times where it clearly makes sense to take on that extra risk (I say risk as opposed to volatility because some of the companies may not have revenues or gold deposits to mine).

To the extent there are times to take on more risk or reduce risk I believe this ties into the idea that portfolios constructed with narrow based ETFs will require more work not less.

The picture is a still shot from my visit to CNBC the other day. At this point I am opining that AAARRGGGHHH Fire Bad (I'm recycling this joke a bit)! About a minute later I advise shorting various pitchfork stocks like Consolidated Pitchfork and Pitchfork.com. As an alternative people can buy the ProShares Ultrashort Pitchfork Index ETF.
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They Love Gold!

The darker line shows the trend of central bank gold activity while the lighter line show the same thing from emerging market central banks.

This is from FT Alphaville.
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Tuesday Tidbits

A few random items this morning.

First up is this article titled Could You Be Saving Too Much? I'll save you some time, no you could not be saving too much. The premise has to do with having too much left over at the end such that you deprived yourself from doing other things earlier in life.

Certainly there is a balance to be struck but to paraphrase Woody Allen there is no problem where having more money made it worse.

Ambrose Evans-Pritchard has a post about Zimbabwe as an investment destination. Stock market volume is now booming. Apparently US dollars are used as the currency now which eliminates a few problems. There was one stock mentioned. Mwana Africa is a Zimbabwean mining company traded in London. It looks as though it also trades on the US pinksheets with ticker MWNAF but the volume is woeful. The London volume is much larger for anyone interested in this sort of thing with an account at brokerage offering direct access.

To be clear I am not buying this stock and am not suggesting anyone else do so. But it is interesting that there is a stock available for a destination like this. It would seem that if a country has something to offer then capital will find its way in one way or another at some point.

While I've never thought of Zimbabwe as an investment destination there are other countries that for now are not easily accessible with plenty to offer that I believe one day will be.

Schwab sent out notification that the Options Clearing Corporation is changing the symbol format for options. You can read about it from Schwab here. This stands to cause a lot of mistakes, trade errors or busted trades as this rolls out.

This article from Jason Zweig called ETFs Causing an Emerging Markets Bubble? is making the rounds. Zweig seems to be asking the question but concluding that the answer is no. I agree. Not everything that goes up a lot or might be overvalued is in a bubble.

The picture is from my trip to the NYSE last Friday. The picture is taken in the little area just upstairs from the floor where the shoot Squawk on the Street and sometimes Street Signs. So they were shooting Street Signs from there when I was visiting. That is Erin in the background with a guest during a commercial. Hopefully the picture gives at least a little sense of how cramped it is up there.
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How About An Actual Solution?

Saturday night I went to my 25 highschool reunion and bumped into a friend who is a physician's assistant in an emergency room in Maine. I asked him what he thought about all the healthcare stuff that is either happening or not happening, depending on how you view it.

So remember he works an an ER, he said there has to be coverage for everyone, it is crazy that there is not, "every other country" has it he said. Then he tried to close me with "don't you think?"

I did not want to turn it into a political discussion so I stuck to my perception of the economics which is that the bottom line, regardless of the morals of the issue, is that the numbers will not work. The inputs being used to figure out what should be done are either suspect or incorrect which likely leads to the wrong solution.

But then I realized, maybe the last one to realize this, no politician, perhaps this is a tad hyperbolic, cares about a solution. They care about creating the appearance of having done something and having done something that won't blow up for a while--like until after they are gone. To the extent there is some truth there how does this ever get fixed? Ouch.

Before going to the reunion a reader braced me for the idea of there being a few grandparents there. Well I did not stumble into any grandparents but there was one guy who was somewhat obsessed with who had died. My buddy Martin and I bumped into this guy early and ran from him screaming. We found it odd that he lead with this as opposed to, you know, waiting a little while until everyone had loosened up some.

Short post, Joellyn is going to put down a wood floor in the bedroom today (she can do anything) and I have to move the furniture.
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The Big Picture For The Week Of November 8, 2009

That was the best picture I could get at the NYSE. It was a great time and David Darst is a very nice guy.

Index Universe has a post up about iShares wading in to emerging market sector ETFs.

Potentially bad news for EG Shares and my friend Richard Kang but probably good news for investors. The EG Shares tend to be very bric heavy which can be useful of course but there are plenty of other non-bric destinations and stocks to buy as well.

There is something to be said for emerging market investing that avoids or minimizes BRIC exposure. Obviously I am a big fan of China and Brazil but they do not have to be the only destinations.

A quick word about the CNBC appearance yesterday. I kind steered the conversation toward rattling off a bunch of countries because the way the interview was going I did not think we were giving anyone anything to work with so I tried to put a little meat on the bone to chew on. I did not get a chance to discern between Nike and discretionary because we were done so fast but basically discretionary is more short term, IMO, to ride the rally as opposed to the narrow pick of Nike having what I believe is a long term macro catalyst of lifestyle ascendancy.

25th reunion tonight in Newton, MA. One reader told me to prepare for a lot of 43 year old grandparents. Ouch.
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10.2 on the Richter Scale

As you know 10.2 was the unemployment print and the work force shrunk (meaning more people no longer unemployed using the gubmint's definition).

The U-6 was 17.5%.

One in ten is "unemployed" and almost two in ten is un or under employed.

I typically try to avoid PHD level economics jargon but holy schnikies.

These are bad numbers but apparently stocks are ok with it to start. Well, back to breakfast (Starbucks at Broadway and 81st).
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In NYC Just In Time For The Yankees Parade!

Sweet!

No joke, the vast majority of the time that I have to fly during market hours (we're talking four or five times a year) the market skyrockets. Sorry party people, I'm flying back on Sunday.

I'm writing this the Starbucks on Broadway and 81st maybe, eighty something anyway.

Given my schedule this will be quick but hopefully useful. In the last few months I've made a few tweaks to the portfolio in an effort to trade more in line with the market but still have plenty of cash and leaving the ever-eroding position in SDS there to grow should/when the market correct down.

I've increased discretionary, energy, tech, emerging and took a "diversifier" out of the portfolio. Obviously on a given day anything can happen but generally the portfolio looks more like the market than it has in ages.

A lot of the commentary here in the last five years has been about my preference for small positions, wading in or out slowly, not making big bets and the like. The thing to reiterate is that it does not take a lot of trades to change various characteristics of how a portfolio behaves.

For example swapping just one mega cap stock (greater than $100 billion) for one that is maybe $2-$3 billion can dramatically change the cap size of the portfolio. Putting 5% (which is bigger than any position I've ever initiated) into a 2X inverse fund will neutralize a lot more of the portfolio than you might intuitively expect.

By the same token as I have favored foreign (not exclusively foreign) in deploying some of the cash I would obviously feel a huge dollar rally, counter-trend or otherwise, a little more than I might have six months ago.

In my mind there is no question there will be another scare-the-hell-out-of-them drop in the US market during this cycle, if I'm wrong I'm wrong, but after two years it makes sense to have started moving back in at some sort of frequency--in my case fairly slowly but to each his own.

I will be on CNBC today between 3:05pm-3:15pm east, 12:05-12:15 west doing the "floor-shot" so I am pretty excited about going onto the NYSE floor again, been there twice. Hope you can watch.
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Thursday Tidbits

By now you've heard about India buying 200 tonnes of gold from the IMF. Alphaville quoted the Indian Finance Minister as saying "the European and US economies had 'collapsed.'" Alphaville also noted that this was "the strongest signal yet that Asian countries are moving away from the US currency."

I have no idea if that is the "strongest signal" or how important it really is in the big scheme of things but it is relevant and there will be more things like this in the news from healthier countries. But it is one small thing, not disruptive in a meaningful way, just part of a gradual move to the USD being a little less important which should ultimately make interest rates a little higher creating something of a headwind to US growth on most fronts. What it will not do, consistent with yesterday's post, is not cause the complete breakdown of US society.

I found this article about how much people need to save for retirement. It was pretty good but I would urge you not focus on replacing X% of your income but instead focus on your expenses. If you make $20,000 per month but live on $5000 then the $5000 becomes a more relevant starting point. From there you'd need to add some padding for one-off items (we had to get tires for our pick up truck last week, ouch!), things you know will get more expensive like healthcare expenses and chances are your tax situation will change.

The other thing, save as much as you can, many people don't and it is such a simple thing to do.

Lessons that Jim Chanos says we've already forgotten;

1) Borrowing short and lending long is a still bad idea
2) Accounting matters...a lot
3) Conflicted Ratings Agencies: Still not unbiased observers
4) Regulate the activities not the actors
5) Black Swans are real
6) Glass and Steagall were right after all
7) Too big to fail=too big to exist
8) Quantitative easing has a cost
9) Insurance without reserves is not insurance
10) Shooting the messenger does not change reality

Nouriel Roubini is all over the place talking about the mother of all carry trades ending badly. Specifically the world is borrowing at "negative interest rates" and betting on high risk assets like emerging markets and commodities.

It will not be very often I agree with him on magnitude, and I don't now either, but one thing is clear which is this is a time of flux. We have just had (or are still having?) and extreme move in one direction that was in some part the result of an extreme move in another direction. More extreme moves that go faster than fundamentals dictate will very likely be part of the landscape for a while longer which is why although I expect to have more foreign exposure I am moving slowly.
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Thoughts on Inflation

If you read enough you can find persuasive arguments for both deflation and inflation. We've have clearly had an asset price deflation and people like Mish are convinced there will be a debt deflation, which would be bad. One bit of clarity about deflation is that prices coming down for certain types of items like computers and TVs due to efficiency and innovation is not really deflation. I'm pretty sure that cheaper TVs is not included when discussing deflation.

The case for inflation seems to be more of a looming threat as opposed to right here right now. The actual definition of inflation is increasing the money supply which we would expect to result in higher prices (more money chasing the same amount of goods). The numbers can be spun however the end user wants but while money has been printed and some debt monetized there does not appear to be more money hitting the street in the form of lending which might be why despite the many months of zero interest rates and quantitative easing we have not seen higher prices work their way into the government's inflation data. Point taken about the G manipulating the data but I think that data would at the very least capture the direction and trend even if not the magnitude.

If you read Peter Schiff or others like him they really pound the table with words like collapse and destruction in such a way as to make you think the end is nigh, as in tomorrow or the next day. The US has had these same types of systemic threats or problems for years and they have not torn the social fabric nor had the sort of widespread damage and panic that some tell us we should expect.

Given the dollar's role in the world it would seem very unlikely that there will ever be a violent dislocation. The damage to the dollar has been meaningful this decade but has not caused martial law, the collapse of our government or a complete breakdown of the country's infrastructure.

The US has become an increasingly less attractive investment destination and this trend will probably continue but it is not reverting to a third world country. The hyperbolic commentary from the various Schiffians does a great job making the bear case and explaining the problems (and to be clear there are a lot of problems) but I think the magnitude they call for is incorrect. Zimbabwe played almost no role in the world economic order when its problems started. It is right to expect headwinds galore in the US but not the USD going to zero, I actually read something yesterday that asked why can't the dollar go to zero.

The investment implication is simple and been repeated here often, more foreign exposure added slowly over time.

Tomorrow I'm flying to NYC for a scheduled appearance in CNBC for Friday and then on to Boston for my 25th highschool reunion. I've come to realize through FaceBook that I knew far fewer people than I thought I did back then, far fewer, but I do know some buddies from the basketball team will be there so at least I won't be sitting by myself at a table for two hours listening to my iPod.
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The Periodic Table of Finance Bloggers

The Periodic Table of Finance Bloggers

From the Reformed Broker, Joshua Brown.

I'm in the category of Baby Buffetts, probably because there is no Slack Jawed Yokels category. Very funny.
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A Trade

We said goodbye to a dear old friend a few days ago by swapping out of Plum Creek Timber (PCL) and into American Tower (AMT).

The reason why I owned PCL at all, actually there were several reasons, was because timberland generally has a low correlation to equities and PCL did a reasonable job of capturing that for quite a while in addition to having a good dividend yield. It generally behaved as hoped for on the way down, started out tracking the rally that started in March but has traded in a volatile yet sideways pattern since June.

That isn't necessarily bad in terms of whether to keep it as a long term hold but looking forward I can see some changes in the portfolio. Other than PCL the material sector has been a source of volatility for the portfolio and a good sector to add foreign exposure. With the dollar down so low right here I don't necessarily feel the need to add more foreign exposure in the immediate term, regardless of the sector, right now.

In buying AMT I am adding exposure to an area where I think money has to be spent in the US, increased wireless traffic. And although it is not a terribly volatile stock I expect it to be more so than PCL so if the market rockets higher AMT might go along for the ride a little better than PCL and if the market goes down from here I have the same amount of dry powder.

Not everyone owned PCL but for many of those folks I did buy AMT. I believe it will be an important hold for the next few years.

A while ago I made short buy list of what I expected to buy as time went on and I've generally stuck to it but have made some changes along the way. The timing of these things may turn out to be right or wrong of course, obviously just about any purchase from earlier in the year has generally worked out, but even if the US' recovery is a slow one where are two years from the peak which is a decent amount of time if this isn't the 1930s. I don't think this is the 1930s but if it is I think it would be more like the late 30s so slowly getting more exposure makes some sense.
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Price Targets?

Jeff from Milan (two days in a row for him) asked a question that despite his being good naturedly heckled could make for a useful post. He asked a question that I took to be about how to set price targets and time horizons for stocks.

Jeff will not like my answer but here it goes; I construct diversified portfolios from the top down. My idea of diversified means to always have some exposure to each of the ten big S&P 500 sectors. Embedded in that is the overweighting and underweighting of each of the sectors based on what I think is going on in the world and then filling in those sectors with stocks or funds of different countries, volatilities, cap sizes and so on.

Each holding then becomes a proxy for a certain part of my outlook and so plays various roles in the portfolio. It would be great to be so correct with a stock pick that it starts out as the best proxy and then remained the best proxy for ever. I bought Bank of America (BAC) many years ago thinking it could be held forever and I did hold it for quite a while. Fearing big mergers, I sold it when they announced that peculiar Merrill Lynch deal. I've owned Johnson & Johnson (JNJ) for many years and I hope to hold it forever but if it ever does something so obviously stupid I would not hesitate to sell it right away.

So something can be a very useful proxy, the best way to capture a sector or whatever (obviously this is subjective) and then something changes either slowly or overnight and so a change should be made. Recently I said goodbye to another longtime friend by selling Plum Creek Timber. This was more of a slow change in the story and quite possibly the change may have just been changes of perception but I lost faith in its ability to act as a diversifier. Additionally there is probably less need to hold onto as many diversifiers now compared to two years ago even if there is one more scare the hell out of them decline.

One type of trade I have done over the years (and blogged about) is selling down and or buying back up a position. The best example might be Statoil. I first bought it years ago around $14, sold partial positions above $40 twice and bought some back in the mid teens during the panic. The stock has always been the best proxy (again this is a subjective opinion) so I have continued to want to hold it but at times it became too big and the one time it got too small. I imagine it will have some sort of very fast move again at some point where it gets ahead of itself (like both previous runs above $40) and if that even happens I'll sell it down again.

I tend not to make price targets a top priority. The drivers for making changes tend to be turning out to be wrong about a stock (either it not working out as hoped for or the story changing after having bought it), rebalancing (as mentioned above) or the top down need to make a change in the portfolio like changing a sector weight or take defensive action. Another catalyst, and this doesn't happen too often, is the need to work in a new theme like water or infrastructure.
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Sunday Morning Coffee

In contributing to yesterday's conversation Jeff from Milan recycled quite the nugget from Nassim Nicholas Taleb that if people really understood the risks of investing in equities they'd never do it.

While I do not agree with never investing in equities it is very clear that people generally do not appreciate risk or perhaps more correctly the effect that volatility has on their psyches. The words risk and volatility get interchanged often but I don't think risk is the best word, especially for people who use funds (traditional or exchange traded). A fund is not reasonably speaking going to go to zero so what you are vulnerable to in that instance is volatility.

Anyone who implemented a portfolio of funds in December 2007 became subject to some very painful volatility but if they were not lucky enough to have taken some sort of defensive action then they are way off their low-water mark and at some point will get back to their high water mark of course as I always say the time needed could turn out to be "too long" but it will happen.

Risk would seem to be more like putting all your money into a restaurant that subsequently fails. Putting too much into any one stock could also be risky but done correctly buying individual stocks doesn't have to be risky as opposed to taking on the threat of volatility. A portfolio of 50 stocks each weighted at 2% faces very little risk but plenty of volatility. If the market cut in half after purchasing those 50 stocks then clearly the volatility would be brutal but the odds of even one stock failing (based on the number of stocks that go to zero versus the number of stocks that exist) are pretty low. Yes possible but the probability would be low.

The context of this conversation of course assumes correct asset allocation. You don't put a $50,000 college fund for an 11th grader into equities.

But after things have been good for a while people forget how they felt when things were bad and they go on to repeat or come close to repeating the type of behavior that supports Taleb's assertion. I remember in 2006 getting a lot of email in my TSCM email account from people not understanding my belief in small weights to emerging markets. Then sure enough in the 2nd quarter of that year there was a short but reasonably deep correction that rattled some people and one reader emailed back saying that they understood where I was coming from.

We know that after a bull phase there will be a bear phase. The bear phase will erase some portion of the gains made in the bull phase, we know this. If we can operate with this in mind and try to navigate toward a result thought of in the time frame of an entire bull bear cycle it should lead to a different take on how much volatility you expose yourself to and gets you away from gaming XYZ's earnings report or trying to figure out how to make money this week.

The picture is from Red Canyon which is on the way into Bryce Canyon National Park.
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