Not Safe Havens

Nicole Elliott from Mizuho made an interesting comment on CNBC Europe yesterday: Anything that can go down 10% in one week cannot be considered a safe haven...of course I am talking about the Swiss franc and gold.

Both the franc and gold each had big drops (at different times) in August. Not putting too much in these things has been a major point here over the years and these week-long dips serve as microcosms for what can happen. Gold might be working its way back up to $1900, it certainly has bounced and for now the franc is still headed lower but at a flatter trajectory.

The problem with gold in this context is that it is very volatile. Some advise putting 20% in gold which I have never understood because of the potential volatility. I think gold works because it usually has a low correlation to equities. From 1980 to about 2001 it mostly went down as equities went up (low correlation) and since 2001 it has gone up a lot as equities have drifted lower (again low correlation).

Two big issues with the Swiss franc is that it is a very small currency and the run up from early this summer was evident of a buying panic. The currency is small enough that the SNB has tried several times to intervene in the currency market. It did not succeed but it obviously thought it could. Another issue, more of threat that might be on the back burner for now is that the banks are much bigger than the country in a similar vein as Iceland.

A recurring theme here, and it is still valid, is that these sorts of perceived safe haven exposures have fundamental risks and are subject to volatility same as most other holdings in a diversified portfolio. The better way to hide would be small allocations several types of perceived safe havens that hopefully have a relatively low correlation to each other.
Read more!

The WSJ Asks If Stockpicking Is Dead

The Heard on the Street column asked if stock picking is dead noting the proliferation of ETFs among other things which have served to cause higher correlations. Obviously the higher the correlation the harder it is to add value from stock picking.

A little more specifically, I would tie in the notion of selecting sectors, themes and countries. Eddy Elfenbein posted a table of sector returns which underscores the point of avoidance that I have been making for a long time. I forget who said this but there is a nugget about major league baseball that might relate here that goes something like in a 162 game season there are 60 games that a team is going to win no matter what, there are also 60 games that a team will lose no matter what, so what matters is the remaining 42 games, that is what makes or breaks a team's season.

The way I apply this to investing would be to realize that in a reasonably diversified portfolio that goes narrower than SPY/EFA/IWM is that some large portion of the portfolio will do well relative to your benchmark, some portion will do poorly but what will be most important is just handful of decisions that have a disproportionately large impact on the outcome of the portfolio.

Look at the funds run by Bill Miller and Bruce Berkowitz. At some point they each made a big decision to go heavy in financials and the outcome on the funds has been disproportionately large in a bad way on their respective results. As a matter of opinion the results we have had over the years can be largely attributed to a few large macro calls that were built into the portfolio along the way which is consistent how top down management is supposed to work; find some (hopefully) very obvious ideas and figure out how to avoid what should be avoided and own what should be owned.

From the top down someone believing in Jeremy Grantham's Malthusian idea could pick a narrow ETF like the Global X Fertilizer ETF (SOIL) and capture the outperformance they seek versus the market without having to pick a stock. If Grantham turns out to be correct it is very likely that SOIL would do well. If it went up 100% over five years versus 10% for the SPX you'd have a decent contributor to the portfolio's overall result. Sure it would be better to pick the stock that went up 150% but the hypothetical result from the ETF would be very good and capture a healthy chunk of the effect.

While the above might justify going heavy with ETFs, unfortunately it can be difficult to capture much in the way of dividends using only ETFs. Dividend investing was another big theme at the WSJ yesterday. Over long periods of time dividends deliver a large portion of total return. As a theoretical matter the greater the dividend yield the less stock market volatility one needs to take on. In the real world going for too high of yield is obviously a very dangerous thing. I think 100-150 basis points above the SPX can be done and still have a properly diversified portfolio. Getting that type of yield just using ETFs can be difficult to do and obviously not every theme or country you care about will be adequately addressed with ETFs.

As a quick note, if you look you will find a handful of broad based ETFs that yield 4% or more but they do not solve the problem necessarily. With ETFs, there can be no certainty with future dividend payments. Not only can the dividend policies of the constituent companies change but rapid growth in AUM can reduce the yield of the fund. A great example of the lumpiness is with the iShares TIP ETF (TIP), which is a client holding. Sometimes the dividend annualizes out to 4% and some months it pays nothing.
Read more!

Big Ideas

My post from the other day about prospects for US stock being grim drew a lot of comments on the Seeking Alpha version of the post. I answered several questions including a couple from David Jackson. I thought I'd post the content here, I think the format will make sense;

RN: First as far as the portfolio, when i first started writing in 2004 I was very public about have clients about 30% in foreign with the expectation that it would increase slowly to at least 50% by the start of the new (now this) decade and that is where we are. I expect to further increase the allocation to foreign as we move forward.

To the person who says you can't hide in foreign while the US is going down that is half right. During panics and otherwise fast declines yes foreign markets should be expected to go down too. However over a longer period of time, not true. In the last decade the SPX went down 24% on a price basis there were countless foreign markets that had normal returns for the decade or better than normal as the US dropped--they carried on without us. If your time horizon is a year then you probably should not own stocks but over a long period this has worked and I believe will continue to do so. Go to Bespoke's website for numbers on how foreign markets did in the last decade.

DJ: Which foreign markets are you allocating assets to? Are you looking at demographic factors in foreign markets as well?

RN: David, our list of countries we own is long and for now demographics are not the first priority although they contribute to our having underweighted and then avoiding big western Europe (the EMU countries). Canada, Brazil, Colombia, Chile, Israel, Norway, Sweden, Switzerland, UK, Denmark and China. We sold out of Australia recently but will go back in soon I imagine. Countries where I think demographics might be better and worth going into would be Turkey, Vietnam, Pakistan, India, Peru and maybe Mongolia. Interesting note, I believe Egypt's demographics are too good, that is the population is growing too fast which is an interesting concept.

I think the demographic idea is one that will pick up slowly but then increasingly, making it not crucial for 2011 or 2012.

DJ: Thanks Roger. It's interesting that your list of favored countries fair well (I think) in terms of demographics.

What's your rationale for allocating assets to the UK? Are you primarily trying to avoid the euro (which would also explain your exposure to Norway, Sweden and Switzerland)?

On the timing of demographics hitting the market, I think it depends on the mechanism. If it's about baby boomers selling stocks, your right that it will take a few years. If it's due to pressure on budgets, then the forecasts for retirement and medical benefits are already starting to impact policy, leading to fiscal tightening.

RN: David, some countries probably do fare well but for now the thesis for the countries includes their balance sheet situations, GDP, unemployment and inflation along with demographics. The other important thing I consider is whether the countries have something that the world must have (usually something in the ground but cheap labor would work too).

I would note that I try to have countries with all sorts of attributes in the portfolio but the stories in Western Europe and Japan are simply too lousy for me to own.

As for why the UK, a long time ago we had BP, Barclays and Diageo. We sold BP in 2006, BCS in December 2007 and still have Diageo which is not necessarily about the UK but as it is domiciled there I consider it a UK company.

Read more!

Sunday Morning Coffee

We had a crazy wildfire here yesterday that took two of us two an half hours to hike to up some hellacious hills. We found the fire for the Forest Service who came shortly after we arrived, we helped fight it for between two and three hours and then hiked back, it was much shorter on the way back.

It was a lightning strike and the picture is the tree on the way down after being cut by the Forest Service. This was the most physically demanding incident I've ever gone on and I am thrilled to have gone--now that it is over-- but it jacked up my Saturday so I don't have a regular blog post for today.

Read more!

The Big Picture for the Week of August 28, 2011

The first picture is from the Midway Geyser Basin, the second one is of a little restaurant in Silver Gate, MT which is at the start of the Bear Tooth Highway and the third one is near Jenny Lake looking at the Grand Tetons.

The S&P 500 went up about 44 points in a shade over two hours yesterday. That is not typical behavior in a healthy market.

















Read more!

Prospects for US Stocks? Grim

The latest thing whipping around the web is research that concludes domestic equity returns are going to stink for many years to come for what amounts to demographic reasons. I first became aware of demographics' potential to move stocks a little over 20 years ago when I worked at Lehman Brothers. Back then it was put to us as a positive; wealth transference from Boomers' parents to the Boomers going into stocks and then at some point along the way it spun around to concern for what will happen when the Boomers take their money out when they presumably retire.

While I believe in demographic trends this type of look forward for US markets also needs to take in the fundamental picture too. The fundamentals are well worn ground so I'll just say there is a lack of visibility of what will help turn things around other than time which is not much to build an investment thesis on.

This whole idea will be familiar to long time readers in terms of prospects for US markets being relatively unattractive. I've probably underestimated the magnitude of consequence of this but we have been heavy in foreign equities since before this site started.

Quite frankly I think this type of general outcome has been quite obvious for many years and I think is still quite obvious looking forward. There will of course be big up years along the way but over some reasonable period of time, like maybe five years, the returns will smooth out to a lower average--this is has been going on and I am saying I believe it will continue.

This belief has been a big reason for why I have sought out exposure to foreign and to themes for client portfolios. A long running idea here has been that "normal" returns were available in many countries during the previous decade and they will be available in this decade if the conclusions linked to above about the US turn out to be correct.

To the extent there is comfort in crowds, much of the industry has been slow to adopt these views for US prospects and where to go to get "normal" returns. Being wrong about this sort of thing is referred to as career risk but even if the 9% per year linear return is a thing of the past (it never really existed) you can spend the time and take the risk thus giving yourself (or your clients) a better chance at some desired average return.

I do not mean to imply this is easy but it is not rocket science either. Time spent, even if just focusing on what to avoid, will hopefully help some people.

The top picture is from the Jackson Lake Lodge which is of course where the Fed's symposium is happening (this is hosted every year by the KC Fed). We stayed there one night on our trip. When they do the live shoots from there on CNBC you are seeing the Grand Tetons in the background (obviously) and the big grassy area has some animal activity. We saw a lot of elk when we were there. The second picture is the one I mentioned of the male grizzly bounding into the water. It might be difficult to see (not sure if they can be blown up one they've published on the blog) but his front paws are in the air as he is in mid-jump.
Read more!

Thursday Tidbits

The market continues to trade strangely with equities up a lot again yesterday and the shocking decline in gold continuing, actually yesterday was far worse for gold than Tuesday. We may not be in a bear market (I think we are) but this type of huge-move-day-after-day trading is consistent with bear market activity.

By now you know that Steve Jobs is stepping down as CEO of Apple (AAPL). By virtue of our position in iShares US Technology ETF (IYW) and AAPL's weight in that ETF we practically have a normal sized position in AAPL. The stock got hit for 5% upon the news and while there will probably be some uncertainty for a while the devotion of customers willing to wait in a line outside a store at night to buy new Apple products is unlikely to go away which might create a buying opportunity.

In the immediate wake of the Jobs news someone named Timothy Connolly tweeted "BREAKING: Jobs resigns. Black turtlenecks limit down." I thought that was hysterical.

Yesterday on the first hour of Closing Bell they had someone from Raymond James on who said (paraphrasing) unfortunately we've liked financials for a couple of years...we aren't wrong, just early as they like to say. This was followed by a nervous laugh. If they've been generally bullish on financials then they've been horribly wrong, I wonder if any of their clients think it is funny.

A new ETF company (you can read about the lineage here) has filed for several China ETFs including one to be called the China Urbanization ETF and the China Five Year Plan ETF. I would have to think the Urbanization fund would look a lot like the EG Shares China Infrastructure ETF (CHXX) but I think this is one of the investable concepts in China and the Five Year Plan fund would seem to have a lot of overlap as well but we'll see when/if they ever start trading.

If they do ever start trading then no doubt a lot of fun will made at their expense but assuming reasonable liquidity, funds like this are a democratizing force. More people are able (comfort-wise) to research a theme and invest at the theme level than can research a theme to then have to invest in an individual stock from that theme.

The first picture is obviously a bear in the woods. Specifically she and her two cubs were chased away from the aforementioned male grizzly who we watched run for about half a mile down a hill, swim across a river and then run just a little more to get to buffalo carcass I've mentioned previously. We have pictures of this run including one where he is in mid flight diving into the water which I will post soon.

The second picture is from inside the Old Faithful Inn. When we walked in we knew immediately we'd seen it before on some show (maybe the Ken Burns series?). The picture does not do it justice. If the Inn is unfamiliar to you it would be worth Googling.


Read more!

The Market Loves Gold!

Gold has gone parabolic this year, really over the last couple of months, as a perceived flight to safety for fear of ongoing US dollar debasement. You may have heard that the SPDR Gold ETF (GLD) is now bigger than the SPDR S&P 500 Trust (SPY).

The fundamental argument for gold is pretty good as there appears to be a willingness to sacrifice the greenback in trying to revive the US economy. While I cannot be certain I think the non-investing public is far more aware of what gold is doing than it was two years ago.

To me, this is evidence of mania, really a mania that has been ongoing for a while now. In addition to the fast rise in price we are seeing price targets continue to go up faster than the actual metal. We are close to $2000 which would not be a heroic move but as $2000 gets closer, the extrapolaters are now calling for $3000 or higher.

Our clients have obviously benefited from our position in GLD as I view it as a core holding as a form of insurance against certain types of shocks and as an asset that usually has a low correlation to equities. However against the mania I perceive we sold 1/3 (subject to rounding) of our position early in the day on Tuesday.

A lot of the behaviors with gold now are ones we have seen before. For example is gold a "chip shot" from $3000 (a reference to a comment by the late Joe Battipaglia about the Nasdaq going to 6000) and GLD becoming the biggest ETF which is similar to Cisco being the largest company in the world for a short time in 2000.

No doubt some will comment that the sorry state of the US makes gold different and while I generally agree fundamentally we have seen these sort of anecdotal indicators before and while the gold case may still be intact the thing I cite are negatives. Obviously the rapid price appreciation has allowed gold to grow in relation to the portfolio size which makes trimming it prudent and obviously if we sold 1/3 of our position we still have 2/3 remaining.

The picture is from early Sunday morning as the fog was still heavy on the river in the Hayden Valley. As we were driving into the park on Thursday we saw two rangers pushing a buffalo carcass from the shore into the water to float further down the river. This turned out to be pivotal for our trip as the carcass' final landing spot provided much of our animal viewing which was incredibly lucky for us. In this picture the male grizzly is standing on the carcass as a wolf (who had a buddy with him) tries to figure out how to get some meat. We have other pictures from this scene including the wolf getting some of the carcass which I will post later.

Read more!

The Crux Of The Dilemma

A reader left the following;

Baby Boomers like myself are running out of time! We need help and buy and hold
hasn't works for 10 years.

This is something I've been writing about since the start of this site. The dilemma is not new, hopefully, but there is no easy answer. Ultimately everyone will have to figure out there own solution.

In terms of lifestyle, those who can, should plan on figuring out how to earn some income during retirement or not actually retire. Everyone who needs to should be able to reduce their spending although this will be difficult on an emotional level as very few people think they spend a lot.


On a portfolio level the reader's comment that buy and hold hasn't worked for ten years, well he is mostly correct about domestic stocks at least where the indexes are concerned. I would add that buy and hold has worked for select other countries. Much of the content for this site has focused on a more tactical approach for a portfolio by taking defensive action based on a technical indicator.

What should be frustrating, I think, to many people is the lack of willingness within the industry to seek out innovative idea about how to construct a portfolio and how to navigate cycles. The market will do what it will do and without regard for what any of us need to happen to make our financial plans work. Some annualized target return is now not a realistic way to come at the problem so then a straight buy and hold cannot be a realistic way to come at the problem either.

There is no easy answer that will universally solve the problem for people for whom this is a problem-- which is of course most people. Although a bit of cold medicine, the reality for many will involve saving more, spending less and working (one way or another) longer. In mentioning this line of thinking in the past occasionally someone will say that this is not much of answer as many people can't do the above. No doubt spending less, saving more and working longer will be difficult, but something is going to have to give in order for things to work out.


Read more!

Beartooth Higher

For several weeks now I have been blogging about my belief that we started a bear market. At this point it is too soon for the call to be correct or incorrect although last week's action is a bit of supporting evidence to the argument, which again could turn out to be wrong.

As a tie in to a long running theme the US has become increasing less attractive as an investment destination and because of this, I have written extensively about foreign investing and implemented a lot of foreign exposure in client accounts. The idea of foreign investing is popular in many circles but at times like now there are often complaints about foreign not offering protection when correlations go to 1.00 in the face of some sort of downward move.

It is worth remembering that during the event, most things will go down. For someone only able to focus on a few weeks or a couple of months then foreign may not offer any solace or shelter. But when zooming out a little it should be clear to anyone able to focus on a suitable (for them) time horizon where the value becomes obvious.

Taking Chile as an example. I've been writing about this one for many years now. For about as far back as Yahoo Finance goes the IPSA is up about 200% since late 2003 compared to about 2% (not including dividends) for the S&P 500. During the panics, Chile as gone down plenty, the country has endured a bad earthquake and other occasional bumps in the road but has continued to work its way upward in a sometimes sawtooth manner. A 200% lift is obviously very good at the index level for that number of years.

If the US is indeed Japan (it is different than Japan) or is Greece (it is different than Greece) or anywhere else that is not good, there will be countries that (repeat theme coming) have normal or better than normal stock market results over the long term. You can decide for yourself whether Chile will continue to be one of them but seeking out these countries will give you a very good chance at "normal" equity returns.

We are leaving Wyoming today and may never come back, at least not to Yellowstone. We had such phenomenal luck with the animals we saw that it is unlikely we could ever do so well again in the future. Part of our good fortune came from a buffalo carcass in the river in Hayden Valley. The bears kept coming back to it. Saturday night we saw a male grizzly chase away a female with two cubs. The next morning we went right back out and saw the same grizzly working on the carcass while at the same time fending off two wolves. The wolves did get some meat though.

Earlier in the week we gave a ride to Rick McIntyre who is a very famous wolf expert and a ranger in the park. He hopped in and said "you will see the wolf." The pictures we took zoom up so close you can see the rodent in its mouth. More pictures of all of this to come when we get back. For people interested in animals this is neat and for those not interested, thanks for indulging me.

Read more!

The Big Picture for the Week of August 21, 2011

One of my favorite SNL skits is the more cowbell bit from about ten years ago. While the entire skit is gold, one line that cracks me up is when Bruce Dickinson, yes the Bruce Dickinson, tells Gene to really explore the space.

With that in mind I thought it would be an interesting thought exercise to build core and really explore portfolio at the sector level.

Tech Sector:
PowerShares Dynamic Technology Portfolio PTF
Mail Ru Group GDR (MLRUY) a Russian Internet company, not available at many brokers

Financials:
Canadian and Scandinavian Bank ETF (I made this one up)
JSE Limited (JSEJF) the stock exchange of South Africa



Energy:
Energy Sector SPDR (XLE)
MOL Oil & Gas (MGYOY) big oil in Hungary

Healthcare:
iShares DJ US Healthcare ETF (IYH)
Bumrungrad Hospital (BUGDF) a medical tourism stock

Staples:
Staples Sector SPDR (XLP)
NZ Farming Systems Uruguay

Discretionary:
First Trust Consumer Discretionary AlphaDEX Fund (FXD)
Gol Linhas Air (GOL) an airline in Brazil

Industrials:
SPDR S&P International Industrial Sector ETF (IPN)
PT United Tractor (PUTKY) Indonesian company, similar to Caterpillar

Materials:
PowerShares Dynamic Basic Materials Portfolio (PYZ)
New Britain Palm Oil (NBPOF) plantations in Papua New Guinea and the Solomon Islands

Utilities:
Utilities Sector SPDR (XLU)
RusHydro (RSHYY) Russian hydroelectric company, pinksheets.com shows no volume Google does

Telecom:
S&P Telecom Sector ETF (XTL) does not own ma-bell telecom
Nortel Networks Netas Teleko it is an equipment manufacturer, there is no US symbol but most brokerages should be able to trade it.

I have no disclosures so if you add one plus one and get 11 that is your own issue. There are a lot of odd little companies out there and while they are not going to be realistic additions to too many portfolios but it makes for an interesting discussion and might get people to look a little further under the hood of any specialized ETFs they might own.

Animal check; one grizzly bear, more buffalo and elk than can be counted, a wolf (upon close up of Joellyn's picture the wolf had something in its mouth), a couple of other things but no moose yet. To the reader who said go on the Beartooth Highway, thank you! That turned out to be a great tip.

Read more!

Friday Fun

Nouriel Roubini made some comments about gold and raising cash the other day (here is a recap from Murray Coleman). In there Roubini talked about paranoia that leads people to load up on "canned food, guns, ammunition and gold bars" and then "buy log cabin in the mountains." On some level it is funny to this line of thinking from someone who is not American. This is not a xenophobic thing, it just seems like the only place where this idea gets talked about is in the US.

Also funny is that I live in a cabin in the mountains but we are not long cans of tuna.

Being a little more serious I have always been an advocate of having some portion of a diversified portfolio in holdings with some level of bomb shelter protection, things that have a reasonable chance of going up when markets come unglued due either to something external like a terrorist attack or something internal like what has gone on for the last couple of weeks.

For us that has meant gold and a defense contractor as being a specific counter strategy to a shock. An absolute return fund can also play a role here depending on the particulars of the shock. During the current shock, exposure to Switzerland, specifically the franc, would have also done the job. Unfortunately this is not so simple that the franc can and will always now offer shelter in a storm.

The SPDR S&P Telecom ETF (XTL) had an interesting day on Monday as Motorola Mobility (MMI), one of its largest holdings, went up 50% on news a of a takeover by Google while Interdigital (IDCC), which was the largest holding, went down 15% for apparently being left out of the consolidation in the space. The actual ETF is very thin so it is not clear that 1.8% lift for the fund that day accurately captured the day. But this is an example of a point I made before, most notably about the HealthShares when they existed, which is that with some ETFs one component wins at the expense of another component such that the fund doesn't move much. It may not have been a big deal on Monday but it is worth being aware of.

The other funny bit was this story about a hedge fund that scans tweets and invests (or speculates) based on observations gleaned from the tweets studied. The work here is obviously done by software or dare I say an algorithm and I'm sure the managers know what to do with the information but it is very funny. What's next, a hedge fund based on Facebook, foursquare and Yelp posts? A combo of all three?

Read more!

Quacks Like A Bear

A couple of weeks ago I posted that I felt we were now in a bear market with a high likelihood of a second recession.

Obviously such an opinon can turn out to be incorrect but the behavior of the market with the big moves on a daily basis, as we are starting today, along with some of the technical indicators I've mentione before are consistent with a bear market.

Maybe it won't be but for now it has all the markings of a bear. Times like this is what investing discipline are all about. Whatever your strategy laid out ahead of time when the market was less volatile is what should be stuck to now.

Read more!

Not Just Narrow for Narrow's Sake

IndexUniverse had a blog post making the case for a "small" emerging market ETF. Not a small cap fund but a fund that focuses on the smaller countries in the emerging market category. Per the blog post these smaller countries are Indonesia, Thailand, Chile, Poland, Turkey, the Philippines, Hungary, Peru, Colombia, Czech Republic and Egypt.

The concept is a little puzzling because nine of the eleven countries have single country funds, I know that one of the providers has filed for a Czech Republic fund and I think that same provider (the name escapes at the moment) also filed for a Hungary fund too.

The title of the article is Investors Miss Out... which is not the case here at all. It requires a willingness to go to the country level in order to get the effect the author thinks people are missing out on. I left a comment on the post noting that there were funds already for most of the countries and the author was kind enough to reply noting that given the demand he is surprised there is no single fund for group of 11.

Maybe there will be a fund but I think many (not all) investors would be far better off do the extra work required to own individual countries (or narrower) and don't forget this process can focus more effort on what to exclude than what to own. The last ten years or so offered at the very least, normal returns for people lucky enough to avoid (or underweight) the right countries and sectors.

Read more!

Swensen Is Not A Fan Of Mutual Funds

David Swensen the honcho at the Yale Endowment fund had an op ed in the NY Times over the weekend that was very critical of the mutual fund industry, specifically actively managed funds. It is not new that he believes individual investors are better off with broad index funds and certainly there is some segment of the investing population where that is the most suitable advice.

However I don't think simply dismissing all actively managed mutual funds is right either. Generally the traditional mutual fund wrapper is not my preferred vehicle. I generally prefer individual stocks and exchange traded funds but we have one traditional mutual fund that we have used as an across the board holding to seek out a specific effect. The fund in question has generally delivered that desired effect but of course no fund or stock or anything else can be perfect all of the time.

For someone building a portfolio that makes country and sector decisions even if not a lot of individual stock picks a traditional fund can work. For someone who wants Australia at the country level then I imagine the first thing they would look at is the iShares Australia ETF (EWA). There are several other ETFs, at least one closed end fund and at least one traditional mutual fund for Australia. If somehow the traditional fund in the space, it is actively managed, outperformed EWA at every turn then I think people would have to consider it, past-performance warnings notwithstanding. This could also be about a risk adjusted result too not just nominal performance.

Likewise with any other desired attribute for a portfolio. I tend to more interested in the realm of absolute return or alternative but whatever the case I would not totally dismiss some segment of the market.

Read more!

Mark Cuban Is Not A Fan Of Diversification

As a quick note, we are on our way up to Wyoming today for a week of National Parks and hopefully some animal sightings in Grand Teton and Yellowstone. There will be blog posts on most, if not all, days and hopefully an interesting picture or two. On to Cuban;

By now you probably saw that Mark Cuban thinks portfolio diversification is a "crock of shit." Apparently he prefers to sit in cash most of the time and then go big into one or two things when there is chaos or perhaps some other obvious buying opportunity.

It wouldn't make sense to simply say he is wrong because chances are he has made this work for himself. This is what he believes is the best way to go. By the same token the person who buys and holds forever or the person sells on short term strength can make it work as can the person who sells on short term weakness. The deep value guy can make it work as can the momentum trader or the guy who is in and out of options constantly.

For every strategy you have ever heard of, there are people making it work. So then the issue must be not what is best and what is just plain stupid but what is best for you and what would be stupid for you.

Where people get in trouble is with sticking with a strategy that is wrong for them for what ever reason or where they do not understand the risk. A point I've made many times in the past is that all too often people fund out they own too much of a segment or an asset class after it goes down a lot.

The focus of my strategy is diversification, foreign exposure, thematic exposure, smoothing out the ride as much as possible and trying to capture a little more yield than the broad market. Anyone who hires us needs to be on board with that or they will be disappointed.

I say that not as a pitch but to stress the importance of figuring out the right way for you to invest. Allow myself to quote myself (a play on Austin Powers); take little bits of process from many places to create your own process. People spend a lot of time on "75 Stocks That Famous Hedgefund Manager Bought" or "Ten Funds for the Next 90 Years" when they would be doing themselves a huge favor figuring out their own best strategy.
Read more!

Sunday Morning Coffee

Just a couple of quick items from Barron's as the weekend has been crazy busy with Fire Department stuff.

More so than most issues there was a heavy emphasis on why US stocks are attractive. Repeated a couple of times was the book value argument especially where financials are concerned. Although a reader took me to task a little on this the other day the book values are not reliable for financials. And while the reader in question certainly may feel otherwise the notion of questioning the book value is not something I thought of, I've seen this view expressed by many people far more knowledgeable than I'll ever be.

But there was one point made that seemed like grasping at straws which is as follows;

Knapp looks at the so-called earnings yield on S&P 500, which is the inverse of the price/earnings ratio. It's now at 8% based on 2011 profits and 9% based on forward earnings projections. He compares the earnings yield with the real, or inflation-adjusted, yield, on 10-year Treasuries, which is now about zero. Ten-year TIPS, or Treasury Inflation Protected Securities, now provide yield above inflation. The current spread of about nine points between the forward earnings yield and the real Treasury yield is at its highest level since the early 1980s, which strongly favors stocks.

Stocks are cheaper than bonds now but that does not offer any forward looking help as stocks could stay cheaper than bonds forever. Certainly stocks could start going up from here in some heroic fashion (not my base case) but it makes no sense to me to use two different periods of interest rate analysis to draw the same conclusion when one period featured the highest interest rates of all time and the other period has about the lowest rates ever. This would seem to be beyond upside down.

The other article to point at was about where to find yield now given how low some rates are. In with the various suggestions were closed end funds for a couple of different segments. If you click through and look how these CEFs did on Monday you will see they got crushed. Take Monday as a microcosm as they recovered by the end of the week but these things occasionally get crushed the same as stocks (look at July 2003 and all of 2008). Two of the CEFs mentioned were down more than 8% on Monday. There were also a couple of fund of fund products suggested that own closed end funds one of which was open end and the other closed (read the article if this sentence doesn't make sense) one of which was down 10% on Monday and the other down 6%.

I won't recap every product suggested. I will circle back to a point made often about how important it is to understand what these things are capable of doing. A portfolio of a bunch of CEFs that all go down 6-8% on a day that the stock market goes down 6% or that participate fully in a bear market decline would seem to be a bad idea for income investors.

While it might seem obvious to think well who would put an entire portfolio into these things (or any other high yielding vehicle that can drop a lot), but of course investors get caught holding what turns out to be too much of the wrong thing in every scary event.

A small exposure to this volatile space can make plenty of sense in terms of lifting the yield of the entire mix a little and if the exposure is moderate then a big drop like on Monday is pretty easily absorbed.

One final point is that funds have no par value to return to (hopefully this is not the first time you are reading this fact). A Nuveen closed end fund with symbol JTP was launched in 2002 at $15 per share. It is currently at $7.65. Getting a 7% yield in a zero percent world means taking a lot of risk one way or another.

Read more!

The Big Picture for the Week of August 14, 2011

Yesterday I found this article from Bloomberg about Michelle Bachmann. I only know a little about her and her politics but she is apparently willing to have an honest dialog on at least one point which is social security and medicare benefits. Today's post is not about her or her politics. I am not an idiot for thinking she should be president nor am I an idiot for thinking she should not be president, I have no opinion on her--heh, maybe I am an idiot for having no opinion yet but it is still early.

Back to social security and medicare, the pie simply isn't big enough for everyone to get what they think they are getting. It seems that no plan by anyone involves reducing benefits for anyone already receiving them. Between various ideas being talked about or the Ryan plan there will be varying thoughts about how to cut benefits, for whom to cut benefits and how much to cut benefits.

I doubt a couple making $50,000 combined (in 2011 dollars) will be at much risk of losing benefits unless the entire program implodes somehow. But there is some level of income where people should be setting something considerable aside and while the dollar figure might be subjective the concept might not be.

In the article Bachmann makes it seem that altering benefits is the obvious choice and while I agree with that it will catch many people off guard and create some other problem. Not that something doesn't have to give with benefits, it does, just that there are plenty of people who should have something set aside who don't.

One dynamic of this debate is the idea of punishing people who have done all the right things. This popped up with mortgages because seemingly only people who took on too much mortgage or were otherwise irresponsible got help. My take is that this attitude overlooks the huge psychic value of not having had to fret over their financial situation and this can apply to losing some portion of the expected entitlement as well. As a sign of how much trouble social security might be in, I read somewhere that they have stopped mailing out that annual statement with information of expected benefit. If that is true it sound rather desperate.

To repeat my idea, give people the option of contributing an unlimited amount to their retirement plan and getting the deduction with the tradeoff being they continue paying in their same FICA withholding while phasing out the benefit. Only a small portion of the population would be able to take advantage of such an idea but just about everyone who did would otherwise be getting the maximum benefit.
Read more!

Is Gold A Bubble? Maybe It Doesn't Matter

Gold has obviously gone parabolic. We have owned the SPDR Gold Trust (GLD) since it was in the mid $50s (Feb 2007) which was shortly after it started trading. I have said over and over that we own gold because it tends to go up when people are scared like in the face of some sort of external shock.

What is going on now might be called an internal shock in that it is financial and economic events causing the panic...or what looks like panic. Part of the equation must be perceived debasement of the US dollar and something similar with the euro.

For now gold is obviously playing the role of counter strategy to equities. As you know gold tends to have a low correlation to equities but not always of course but for the last couple of weeks it looks like the correlation is perfectly negative--almost anyway. Gold will not always be this effective of a counter strategy which is ok as long as you realize this. For now it is very effective and my hunch is that it will keep going up for a while until equities find a bottom or this current event otherwise plays itself out/calms down.

Understand that I don't really care if it is a bubble (mania would probably be a better word) that pops because we have a modest allocation. I've been saying for years that I have never understood the 20% in gold crowd because the price is so volatile and while it is "working" now it will not always work. The difference in consequence of holding gold at the wrong time when it is 20% of your portfolio versus 5% is huge. Just like any other asset, finding out you had too much after a large decline is a bad place to be.

Read more!

CNBC Today

The link to today's appearance on CNBC. It was the most fun I've had with a visit to the network.

Read more!

CNBC

Hello all, this is Roger's assistant. Roger will be appearing on CNBC today at approximately 2:30pm on the East Coast, 11:30 am on the West Coast. We'll be posting a link when it becomes available.
Read more!

The Market Does Not Get the Benefit of the Doubt

For a long list of reasons (see below) I believe we have entered a bear market and similar to late 2007 the market for now does not get the benefit of the doubt until the bear question gets proven right or wrong. For anyone new I believe I made a good call in this regard in late 2007. Last summer when the SPX breached its 200 DMA I took a little defensive action but I don't think I ever proclaimed bear market as I am now.

In no particular order the first issue is that the SPX is below its 200 DMA, actually a long way below. The 200 DMA is now at 1286. Later in the post I was going to list one reason I might be wrong is that the 200 DMA is still moving up except when I just went to Stockcharts.com to get the 1286 number I saw that the 200 DMA is headed lower ever so slightly. If I am seeing that incorrectly then it becomes a risk factor to my call.

The SPX is also a few days from having its 50 DMA cross below its 200 DMA and in certain cycles (in a let the chips fall where they may sort of way) this type of crossover can be more effective than a simple 200 DMA breach. This time it looks like it is turning out to be the simple breach that is more effective. Both indicate unhealthy demand for equities and if demand is unhealthy then that is a reason to be defensive.

As reader Andrew commented a week or two ago the 2% rule has been invoked. As a reminder an average 2% (or there abouts) decline three months in a row is evidence of a slow rollover which is consistent with how bear markets start.

When the GDP printed recently I said that I believe we are now headed into a recession based primarily two quarters in a row below 2% on GDP. ISM was no great shakes either. A common argument on TV about why we are not headed into a recession is that corporate profitability is very healthy. I think lousy GDP trumps healthy corporate profitability (if you even believe profitability is now healthy). If there is a recession soon we should expect stocks to go down first which I think is happening now. Also a recession so soon after the last one is supported by the idea of a balance sheet recession.

Slightly bigger picture all of the policies and programs by the Fed, Treasury and Administration proved out to either not work or be far less effective than anyone thought. When I say anyone I mean people constructing and implementing the policies and programs. And now some in the market wonder what the Fed will try next. That is not good.

The Fed yesterday set an expectation that they will need to keep short rates where they are until mid 2013. All of sudden we look more like Japan than we did a few days ago. By the way, three dissents at the Fed this meeting? Someone referred to that as a mutiny. For more on the Fed read this from Bruce Krasting but fair warning it is a bleak post.

Housing and jobs data still stink. The ten year treasury yields 2.18%. The US' debt was downgraded. All of the grownups in the room in Washington appear to be in way over their heads on how to fix this or more correctly on how to let things fix themselves. I will again say that the worst crisis in 80 years should take a long time to fix itself, unfortunately. This little nugget from Bespoke isn't too encouraging.

A little more anecdotal, the largest single day moves in either direction occur during bear markets. The decline on Monday was 6.66% . The rally yesterday was 4.74%. Early in the day I decided that if we got to up 4% for SPX on the day I would sell something (specifically a materials sector ETF for large accounts). We got there with a few minutes left in the day. Amusingly I placed the order with 5:12 left in the day and it was too soon. The idea here was that with a 2% rally for the day the likelihood of a lot of buying power remaining is pretty high but less so with a 4%, or more, rally.

There are plenty of reasons as to why this call could be wrong including just being wrong but based on what I know of market history and what I think is going on now this is the conclusion I draw. The consequence for being wrong will be that we lag, not miss, a big rally.
Read more!

Market Commentary From Navin R. Johnson

There are a couple of ways you can take this post. One is that I am a jerk (I have family that will agree with you) and the other is to understand how important it is to call BS on what you are hearing and look at things in their simplest light. Put differently, big picture things are often what they appear to be.

For the past few years I have been a broken record on several points and nothing has changed fundamentally in a big picture sense with any of them. That the fundies haven't changed isn't the best way to articulate the point.

The banks first flashed a warning years and years ago by virtue of their weighting in the S&P 500; more that 20% is a flashing yellow light. Then the yield curve inverted which makes lending less profitable which lead to the perceived need by the banks to take more risk for the same return. This dynamic, referred to in some circles as a Minsky Moment, played a large role in the financial crisis.

By financial crisis I mean the worst one in 80 years.

At the same time Europe was having a financial crisis of its own and it too was really bad. If you've been following all along then you've been reading how bad this is, same as many people have and there has been no reason to think things have improved any. Quite the opposite, Europe appears to be much worse.

One argument in favor of buying banks has been that they are attractively priced in relation to their book value. This argument has been made up, down and all around including Barron's a couple times. Um the real estate market is nowhere near getting better so how can the book values be thought of as being correct? This question has been asked by some people but not enough. From the simplest view possible banks lend money for real estate, they have loans outstanding for real estate and the real estate market is still going down (slower than before) so how can book values be correct? You don't need a degree in forensic accounting to come up with this question.

Banks from the US and Europe have offered a couple of good trades along the way, no doubt, but the fundamentals have stunk all the way along and they still stink. I don't know how the pundits miss this but they do. Just stay away.

I've also prattled on about municipal bonds. The states are collectively up a creek even with tax revenues generally higher this year than last. There are deficit and underfunding issues galore which is a new phenomenon on this kind of scale. This makes the risk in the muni bond space different than it has been in the past--on this scale. This is not a Meredith Whitney proclamation of failures just a very obvious recognition that the fundamental dynamics in this space are not normal and this is manifested in intermarket yield spreads that are not normal. Where bonds are concerned I would prefer normal over abnormal.

Now it is possible that the downgrade will in turn have a direct impact on the muni market along the lines of states can't have a better rating than the country.

The above process of looking at things simplistically and going with the obvious conclusion can also apply right now to other European equities besides the banks, Japan and probably a few other things. This is obviously an Occam's Razor argument and while I do not know why some many people had to bet on BAC and Citigroup earlier this year there is no way that the simple viewpoint could leave anyone surprised that the worst crisis in 80 years still has a long way to go for the banks.

Can there be any doubt now that some huge portion of the doubling off the 2009 low was aided by the desperate measures taken by the Fed, Treasury and the Administration? The take away is to be skeptical anytime someone makes an extreme justification about why some apparently broken segment of the market is in fact not broken. Think about the parade of people who never saw the crisis coming (based on their public comments anyway). Now the downgrade doesn't matter. Really?
Read more!

Slow Rollover Gives Way to Fast Decline

A couple of weeks ago a reader asked a question about the 2% rule which is a way of isolating a slow rollover (2% decline three months in a row). We took some defensive action when the SPX breached its 200 DMA (at the time I joked that if it kept going down we should have taken more defensive action and if it turned around we took too much defensive action). I also mentioned that I think two sub 2% GDP prints means we are headed into a recession sooner than most experts think.

The above makes an argument for a bear market which will prove out right or wrong at some point. Now current events have turned a slow rollover into a fast decline. This potentially changes a couple of things. I offer this up not as a prediction but more as a potential what if and preparing a strategy.

The nature of fast declines is that they retrace a large portion of the decline quickly. This is not a Jim Paulsen-like bullish argument just an observation from past panics. I'm not concerned with trying to be correct so much as have something in mind if a retracement comes quickly. Animal caricatures aside I think the S&P 500 is going to be below its 200 DMA for a while. Currently the 200 DMA is at 1286 or about 150 points away. This makes an argument for being oversold and contributes to the argument for a retracement.

If there is a meaningful retracement, or as I have referred to this before as a feel good rally, I would expect it to stop well short of the 200 DMA. I think I see a possibility of a snapback taking it to 1210-1220 but that might be wrong and wishful thinking but the idea of a feel good rally seems very plausible.

I would take more defensive action if I thought a snapback was starting to tire out. Again I do not think the 200 DMA can be taken back anytime soon but there can still be a string of big up days in a bear market. It makes sense to think about this now, decide whether action for your portfolio is suitable in this context and if so think about what you would do.

Given that this is a panic for now (I believe it is anyway) I certainly don't know when it will end but there have been panics in past bear markets that are followed by feel good rallies which makes any meaningful selling on a day like Monday a bad idea based on how these usually play out.
Read more!

Are You an Investor or a Trader?

Over the weekend a reader left a comment on the Seeking Alpha version of an old post that mentioned Adecoagro (AGRO) in passing. AGRO is the Latam farming stock that recently went public. George Soros has been involved with the name. It is as interesting as any farming stock in terms of geography and breadth of products but it is still a Latin American farming stock.

The reader's comment expressed frustration at the performance noting that it started out doing ok but has since done poorly to which the reader attributes Soros selling the stock. I was not able to find news of an actual sale just a guess that he might sell as he gets out of the hedge fund business. As I understand it only a small portion of the hedge fund is not his own money so he may not in fact be a seller but we'll see.

Specifically he said it has gone to hell since he sold at a small gain. AGRO is in a theme that I care about and so I keep some tabs on the stock (not very close but somewhat) but the comment left me thinking maybe I missed something so I took a peek at it and in the last month (per Google Finance) it is down 14.56% compared to 13.43% for the iShares Latin American 40 ETF (ILF). For three months there is a two basis point difference between the two.

There was a stretch in there in late May where AGRO dramatically outperformed ILF and from that high water mark AGRO is down 21% versus 13% for ILF. I suspect that the reader is anchoring to that high water price and so in that case the stock has been a disappointment but other than that two or three week stretch in late May to early June the stock has not really stood out much either way.

It seems like there are several behavioral things going on with the reader's frustration which is the point of this post. Anchoring to some past stock price or portfolio value is a common behavior that unfortunately is unproductive.

Based on the limited information in the comment it actually seems like he got out at a decent price. If he is a trader then he was successful. For someone who is an investor in something like this (applies to any other long term theme) it is crucial to realize that something like farming cannot prove out right or wrong in a few months. It is possible that these things should be traded along the way or maybe half sold after a big move or something like that but great companies in an important theme will not always be top performers.

If you are buying a theme you probably need to have some sort of expectation that results from your research. If you think it will take five years for China's equity market to start doing really well again then getting impatient after three months doesn't make much sense. This is not to say that some stock in a theme can't turn out to be a bad pick for some reason that should be sold but if you buy a uranium stock that drops 16% when everything else in the group drops 14% you haven't made a horrible pick even if you are frustrated by that result.

It should also be clear, and more specific to the reader's gripe, that important themes should not be expected to be immune from some sort of global freak out. Over the last month this space in the market is down and AGRO's drop appears to be right in line. If what is going on in the market right now turns out to be really bad it will not change the long term prospects for certain specialized themes but stocks in those themes will go down with the market all the same.
Read more!

Sunday Morning Coffee

Just a few tidbits from the weekend.

Barron's had a profile of the Virtus Emerging Markets Opportunities Fund (HEMZX). Of interest to me was the manager's focus on investing in companies that meet the needs of "2 billion people who want to eat, drink more, gamble, buy toothpaste, candy and enjoy life in general." This is a point I have been making for a while which is that the demand is going to be steady. This does not ensure steady stock prices but does set up for a long term tailwind.

The Barron's interview was fascinating for the unique opinions put forth by Murray Stahl from Horizon Kinetics. He had an opinion about ETFs in general that I've never heard before and don't really agree with but it is very interesting. Long story short is that they do not capture the owner operator companies (which he feels is a very important trait).

Giving him the benefit of the doubt conceptually he is really talking about the construction of the index not the investment wrapper. So avoid broad indexes? Ok, I'm on board with that.

Stahl had three very interesting, to me, stock picks. He went with WisdomTree (WETF), the company not one of their funds, CBOE Holdings (CBOE) and Beijing Capital International Airport (BJCHF). In terms of trying to build the financial sector of a portfolio but exclude the banks in doing so I think fund companies and publicly traded exchanges are good places to look, I still don't know why there is no ETF that covers publicly traded exchanges. I've been writing about ports and toll road for years as being compelling ways into various countries.

Stahl also talked about the Kinetics Multi-Disciplinary No Load Fund (KMDNX) that he manages. Per the interview the fund sells puts to replicate a modest equity-like return. He gave the example of selling a put on a stock every six months and having the two premiums collected add up to an equity like return. The fund also owns fixed income but specifics on the options were not available at the website. The website does offer a sector breakdown of the short puts and 32% are in financials. That could be a problem at some point.

The big picture objective of KMDNX is to smooth out the ride and according to the chart from Morningstar is has indeed smoothed out the ride. It looks like it was down about 20% when the SPX was down about 40%. Some people can have success with selling puts but it is a difficult strategy to rely on heavily as opposed to opportunistically selling the occasional put option.

I was quoted in the ETF column talking about currencies which is always neat. One observation about the entire issue this week is that while a couple of the articles were very interesting most of the magazine this week was instantly out of date as it had been written before the news of the downgrade Friday night.

The picture is from Friday night dinner we had with one of my buddies from the fire department and his wife. He works in the beer industry and always has all sorts of different beers that most people have never heard of including He'Brew Messiah Bold which according to the bottle is the Chosen Beer. Needless to say this is hysterical and the beer was fantastic if you like dark beer (I do). You can learn more about it here.
Read more!

The Big Picture for the Week of August 7, 2011

Note I was going to publish this Saturday morning but news of the downgrade (which I get to toward the end) came out while I was working on it. For all we know the news may change yet again.

I am writing this post early on Friday evening so the new may change by the time this publishes. Friday was a very strange day in the markets and in the news.

Obviously there were some big swings in terms of opening up big sort of whooshing down and then more up and down before closing flat but the huge number of SPX points that the index was moving in a matter of minutes or in some instances seconds made for a truly strange tape. I don't ever recall that type of minute by minute action where it appeared to be hopping four or five points in either direction throughout the day. Certainly not on a day that ended flat. Seeing strange tape activity on a day like the flash crash or the like is another matter.

The other bit of strangeness is whatever the hell is going on with S&P and the US' AAA rating. I can't vouching for the various news stories going around that S&P was going to issue a downgrade and then changed their mind but there were rumors in the market for most of the day on Friday that there would be a downgrade over the weekend (Friday night) then there were reports (I saw mostly on Twitter with news sources cited) that the White House applied pressure somehow (there were mistakes in their math? really?) on S&P and they backed off.

First, any criticisms against the ratings agencies are deserved and I doubt there is any restoration of their reputations possible but the ratings do matter on some level. Again, maybe they shouldn't but they do.

The feeling I get is that this was going to happen which, as raised in a tweet by Pedro da Costa from Reuters, makes you wonder how something like this could get leaked to the point of being widely disseminated? Shouldn't someone fry for this?

As far as the notion of S&P making an error, while I do not know their process I am shocked to hear that the various double checks in place (there are double checks aren't there?) did not catch the error much sooner even something unofficial like "hey Joe (guy in the next cubicle over), gotta second? Does this look right to you?"

The way this is being portrayed (last night anyway) is "ok, let's go with it!...wait, what do you mean you found an incorrect number in row 231 column BE?" While I'd like to think this is not how it went down it is what it feels like.

I believe it is obvious that if the details of the US' current situation were applied to any other country, that country would be downgraded without a lot of controversy. One point I've made repeatedly since the crisis started is that the US is in a unique situation by virtue of its role in the world economic order. The rest of the world has a vested interest in the US' welfare which ultimately will prevent the type of perpetual panic in the streets that some people have been calling for since 2007 if not earlier.

"No perpetual panic in the street" is not exactly a compelling investment thesis however. As I've been saying for years, this crisis will take a long time to work through, in some ways things are getting worse and in some other ways things never got better or perhaps more correctly were masked by QE and other desperate policy measures that have come and gone since.

As opposed to debating whether the US should or should or should not have an AAA rating or whether there will or will not be QE3 (or some other desperate measure) it makes sense to just reduce your exposure to these problems. Clearly a short term decline will be felt everywhere but in terms of where we are at the end of some reasonably long period of time, markets ex-the trouble spots will be much farther ahead, at least that is how we are positioning.

Well I was about to hit the publish button when I noticed my Twitter feed blew up news that S&P downgraded the US after all. I told my wife and she asked what this means. Generically it should put upward pressure on interest rates and downward pressure on the currency but again the US has a unique role in the world economy by virtue of our being the biggest customer for many countries, by so many countries having their currency pegged to ours for one reason or another and because many transactions conducted between other countries are done in US dollars (although the trend is for less and less of this).

I don't know what to expect from the bond market as rates seem obvious but if something were to ever confound the obvious this would be it. I would think this will also be disruptive for equities for a time before we go back to worrying about Europe and our economy.

Comparisons to Japan do not stand up in my opinion because Japan has a different saving dynamic and never played the same role that the US does in the world economy. Interesting is how Tim Geithner made it very clear that a downgrade was off the table. Dude? Why say anything unless he wants this to be his out?
Read more!

Fade To...Red?

This was a strange open. Everyone on the teevee was calling for the pop to fade. While I believe that a fade was obvious, I guess I am surprised we did fade because so many people called for it.

Sorry if that doesn't make sense but that so many people correctly predicted the fade is a surprise.

I sold one stock for large accounts right at the open.
Read more!

That Didn't Take Long

Yesterday's little post-market post was reposted by Seeking Alpha very quickly and it was remarkable how quickly the comments filled up with a lot of emotion. Someone called me a moron, there was one about the wealth gap, several about politics; really too many comments focusing on the world's problems as opposed to just focusing on their own portfolios except for the one guy who bought puts before this happened.

The market is only down about 10% from the recent high and people are already freaking out. The market was down 55% not too long ago and even before the last few days it was still down 15% or so from the 2007 high water mark.

Yes there are wrongs in the world, injustices and same old same old on Wall Street but devoting time to that will not help you with growing your portfolio when appropriate or protecting your portfolio when that is appropriate.

All that should reasonably be worried about are things in our control. I've stuck to the plan we've laid out long in advance. If the market keeps tanking then I should have sold more, if the market now has that big rally that quite a few people are calling for I should not have sold anything. As the outcome is not knowable, not in our control, the only thing that can be done is to stay disciplined to a strategy that you have a reasonable basis for believing will work. Even it working during this event is beyond our control, all we can do (repeated for emphasis) is stay disciplined.
Read more!

Market Update

I just got back in from playing tennis all morning, did something happen?

Relax, just a little humor. The market appears to have entered a panic mode and obviously there is no way to know how long a panic will last. Yesterday and today, we took moderate defensive action consistent with when the SPX breached its 200 DMA and are prepared for more defense if circumstances dictate.

Europe is obviously a concern but it has been a concern (or at least it has been a concern of mine for years) for a very long time. If this turns out to be the big one then those who have avoided or underweighted Europe (meaning big Western Europe and the crisis countries) will fare better. If this turns out to be the big one then those who have avoided or underweighted US financial stocks will fare better. I've been writing about this for years and have been positioned accordingly for years.

In terms of normal cyclicality I mentioned last weekend that I think a recession is now in the cards by virtue of the GDP reports and the ISM data so our initially modest defensive action for now has focused on the industrial sector. I also think that our having peeled back Australia earlier is helping us now.

A big focus of my writing is about avoiding emotional reactions to days like this. All today was for me was a little more work. Over the years I've tried to really hit home on the fact market declines happen as a function of normal market behavior. People tend not to fear the familiar in other aspects of life so hopefully they will not fear the familiar in the market.
Read more!

They Blew It All To Hell!

The market action might have left investors feeling like George Taylor (the Heston character) at the end of Planet of the Apes. In this case "they" might be the Congress or the entire political system.

Unfortunately the economic data stinks too. As a very simplistic reminder, the market goes up most of the time but occasionally it goes down and some of those declines scare the hell out of people. I can't really imagine the decline thus far has scared the hell out of too many people.

However, if the trend continues then more and more people will be driven to some sort of emotional response which might lead to panicked trades. For anyone new this is not a permabull argument to stay invested it is instead a stick to whatever strategy you laid out beforehand argument. If your strategy relies on a percent decline, a crossover of moving averages or a drop below a moving average or something else just stick with it. Presumably you came up with some sort of strategy at a time when your emotion was not a factor so all that needs to be done is that it is stuck to.

Now back in the real world, not enough investors, both professionals and do it yourselfers, have such a plan. It is valid for a plan to be hold on no matter what, that is not for me of course and maybe not you, but for people who still believe markets work (I do but have more faith in foreign markets) then a proper asset allocation that includes not selling equities based on cyclical events can be valid. All those people have to do is remember not to lose their conviction the next time there is a March 2009.

My opinion is that the economy is headed into a recession based on the GDP data and a couple of other things. That the previous recession was so recent should mean that it is now too soon for a recession however with a balance sheet recession there is a different dynamic which is evidenced by how poorly so many of the economic data points are and have been since the recession was declared to be over. You can read Cullen Roche on this matter and his many references to Richard Koo's work on the subject. But to repeat, more important than being correct about a recession or bear market is to remain disciplined.
Read more!

Tuesday Tidbits

Yesterday was one of the greatest examples of sell the news I've ever seen. Overnight I had seen the SPX futures up by as much as 20 points. When I got up Monday morning it was down to 14 points. The high for the day was hit at 9:32 and then it cratered. This was of course before the ISM reported.

While there was uncertainty about a deal in some corners I don't think too many people thought that the "deadline" would be missed. The AAA credit rating might be a different story however.

The decline took the S&P 500 below its 200 DMA for most of the day but in ended the day closing a point and half above. We will start to take action, incrementally, if it looks like there will be a second consecutive close below the 200 DMA (this is how I've always done it).

The market has flirted with its 200 DMA a couple of times recently giving the appearance that it is relatively important support right now. This is a rational assessment that will either be right or wrong but it is an assessment that can be made without emotion. The strategy that we are using will either turn out to be correct this time or not (it was in late 2007 but not last summer) but it can be carried out without emotion. This is how discipline works. The thing we watch (you may watch something else) will trigger or not and if it does then we start slowly with a trade or two start going on defense. There is no need to rush as bear markets start slowly giving many months to get out.

Lastly is a comment about a post from Josh Brown aka the Reformed Broker. He recapped a commentary from an advisor named Tom Brakke. Essentially he said that advisors often portray themselves as experts in too wide of a range of topics including politics which Brakke says will lead to spouting an ideology not offering a more practical assessment of how the portfolio might be impacted.

I probably gravitated to this for some sort of confirmation of what I try to do. I put out an email to clients on Friday that simply noted my doubt about missing the deadline but that the more important thing than being right is simply sticking to our discipline. From a portfolio perspective does it really matter why it goes bad (if that is what happens) so much as having something planned in case it goes bad.

From the world is a ludicrously small place file; Brakke emailed me Sunday night to share a little about his having passed through Richardton, ND, the home of the monastic cowboys I wrote about on Sunday.
Read more!

Hold These Funds Forever! Really? Forever?

There was an article over at Seeking Alpha about a few dividend stocks that the author posits can be held forever. Investing magazines have had cover stories about funds to hold forever for as long as there have been investing magazines.

The concept is fascinating; it would be great to buy six or eight or ten stocks, funds or combo of the two and never have to make a selection again. People who are still accumulating could just buy in proportionally every month and of course the buying could be automated so the investor wouldn't have to do anything. Seriously, such a holy grail would solve a lot of problems for people.

If I were constructing such a portfolio I might include client holdings Johnson & Johnson (JNJ) and Philip Morris International (PM) for domestic exposure, for developed foreign I might go with Global X Norway (NORW) and iShares New Zealand (ENZL), for emerging markets maybe iShares Chile (ECH) which a few clients own (I have a few shares too) and something covering Africa one way or another. I might include a couple of themes like water and infrastructure to tap into the ascending middle class. And I think a gold ETF would be important too.

For fixed income I think some sort of global inflation protected ETF, maybe the new Australian Debt ETF from Wisdomtree that will be converting soon from their New Zealand dollar ETF, one of the few closed end funds that uses very little leverage and tends to be very boring (there are a few of these) and maybe then round it out with some sort of absolute return product that usually looks like a bond fund but avoids interest rate risk.

That is 13 holdings.

You might think the above could be the bones for a pretty good idea or you might think the above stinks but either way there are flaws to the mix and the concept. I think the above covers a lot of ground but it misses a lot of countries and themes. As much as I believe in the long term prospects of the above, there are many other investment ideas I believe in just as much. Along the thematic line I think water and infrastructure will continue to be very important for portfolios but of course agriculture, fishing and cement could be far more important. Norway and New Zealand are great but Canada, Israel and Australia could be orders of magnitude more important over the next ten years. What about oil sands, coal and China? I can't stand solar (as an investment theme) but maybe one day the solar crowd will be right in a meaningful way.

The other big conceptual flaw is that nothing can be counted on to stay the same forever. If things did stay the same then American Twine would still be a Dow stock. A little more realistic, think about all the various themes that have come and go in your investing lifetime. Ten years from now a lot of themes we think of as being important today will have disappeared or at least become far less important investment themes. As an example in the 1950s there was a mania or bubble involving TV manufacturers. We still buy TVs but this is no sort of theme.

If somehow three years from now desalination can be done for close to nothing and somehow transporting desalinated water can be done for nothing then there is probably no longer an investment theme there. I'm pretty sure that neither can happen by 2014 but it is a simple path to radically different prospects for the theme.

As far as individual stocks I am quite certain companies like Polaroid and Digital Equipment were hold forever names. The two individual stocks above are probably hold forever names but that does not mean that holders don't have to be on the lookout for any meaningful changes.

What about actively managed mutual funds? Peter Lynch retired. Bill Miller could seemingly do no wrong forever and now I wonder if he just someone who has not learned from his mistakes (per Morningstar it had 22% in financial services as of its last reporting date).

A forever portfolio would be great but I don't think it is practical.

You probably saw the car on CNBC last week or the week before it is a Fisker Karma. No word yet on an all-wheel drive version.
Read more!