Friday, December 31, 2004
For now I wanted to close out 2004 with a kind of state of blogging/what this blog's purpose is type of article. I came up with this idea a couple of days a go and then I saw yesterday a similar idea floated on Bill Cara's new site. I should disclaim that Bill is a very smart guy and seems to be much more intellectual than I am, by a mile.
Stock market blogs have received a lot of attention in the last couple of months and I think that will continue to evolve in a good way. This will hopefully draw more smart people into the blogosphere which will benefit bloggers and investors. We should all hope this happens.
Back to Bill's posting. Someone emailed in asking Bill for a blog review. The writer just started a new blog is my guess. Bill's reply was to ask why the person was blogging before doing a review. Honestly I don't know why that was important to Bill in order to do a review, but its a good question for any blogger to ask himself.
I maintain this blog for several reasons.
I enjoy writing. Its a lot of fun to explore different concepts in the investing realm, take in the occasional comment and then figure out what went right and what went wrong. I learn from this process.
I hope that my writings help people become more informed investors. Whether I am smart or dumb, I think its fair to say I have a different take on a lot of investment related topics. I will say I think I do a good job on this blog at looking at different ideas and coming up with good questions that a lot of people might not come up with, but are important nonetheless.
The most important thing I try to bring to the table is my thought process. I don't hold back information. When I write an article, you are reading my entire thought process on the concept, as well as I can express it anyway.
One thing I don't write a lot about are specific stock holdings, but sometimes I do when it is relevant. As a top down manager stock selection is the least important part of the process, not unimportant but least important. For example I wrote awhile back about owning an Irish bank personally and for clients. There aren't too many Irish banks but all the ones I know about correlate quite highly to each other. I must admit that once I have decided I want own, sticking with the same example, an Irish bank the process of analysis is probably not very unique. Where I think value is added for my clients and on this blog is the other parts of portfolio construction, the big picture stuff. I have written before that if I can get most of the big picture stuff correct I believe my clients will be in good shape.
If you have found this blog to be useful and have learned from it, I am thrilled and hope I can keep it up. If you read this only to use me as a contrary indicator that is good too. You can still learn from people you think are dumb.
Time to watch a whole lot of college football. Happy New Year.
Thursday, December 30, 2004
Somehow I think there is a connection but this will take some more analysis.
There were two articles that are from the year end issue that I just stumbled across during our power outage.
The first one was about getting extra yield with a section about Master Limited Partnerships (MLPs) being a way to achieve this. I wrote about these the other day (I swear this was a coincidence) and wondered if we are closer to the end than the beginning for these. A major media tout is also a sign of a top, along with the CEF I profiled the other day. The thing with some of these is they went up so much, more than I would have expected for two of the ones I used to own, that they could go down more than anyone expects. The one remaining MLP I have for clients is only up about 10% during this run so I don't believe I am taking extreme risk by holding on to it. For new readers, I don't often name names so to avoid the oh he's just talking his book comments. There is no shortage of low beta MLPs to choose from if this area of the market interests you.
This section in B-Week about MLPs was very lacking in detail and gave no what might go wrong words of caution. I say Blog Value Added because if you spend time reading the right blogs you will get much more insight than you will by relying solely on something like BusinessWeek or SmartMoney. I could be dead wrong about these topping out but the questions asked here and on other blogs can be very useful to investors. At least I hope so.
The other article from B-Week is about selling covered calls. I am a big believer in the strategy and have written it and covered call CEFs. I have also written that in the last few months, or longer, writing calls has not been that compelling due to low premiums. Premiums have been low, by historical standards, because of fairly low volatility (VIX) and to a lesser extent very low interest rates. Although I do not expect big things from US equities, and a low VIX corroborates this sentiment, at some point the market could very well have a big big rally that comes from nowhere. As a contrarian indicator VIX shows a complacency that could be undone with a huge upside rally. While I'm not making big bets on this I allow for the possibility.
Taking in small premiums these days runs the risk of missing a big move. Said another way the market is not rewarding call sellers the way it usually has. Again, I could be 100% wrong about the outcome but the article doesn't pay any heed to the message of the market about this not being a great environment for this trade.
There are many blogs the center around options trading that give much better insight to options than major media outlets. One major media exception is Steve Smith from The Street.com. If you care about options, Steve is worth a read.
What wasn't in the online articles was the table of Harvard's unique asset allocation.
15% US equities
13% Commodities (about 3/4 of this part is in timber)
13% Private Equity
12% Hedge Funds
11% US Bonds
10% Foreign Equities
10% Real Estate
6% Inflation Index Bonds
5% Emerging Markets
5% High Yields
5% Foreign Bonds
-5% Borrowed Money
Some of these things are not very accessible to most folks, like the Private Equity and Hedge Funds. Timber can be accessed through a couple of different REITs, my clients have owned one of these for a long time and I continue to add the same name now for new clients.
One of the interesting things about this allocation is the, effectively, 40% equity weight in Foreign stocks. I am a big believer in foreign, my clients have about 30% of their equity exposure in foreign these days.
One thing I wish would have been addressed is why they feel the need to borrow money.
Anything you can read about what Harvard is doing is good stuff.
We have our electricity back so I'll be able to catch up on emails today and post again later.
Wednesday, December 29, 2004
I caught up on some reading. Forbes had an article about choosing a planner over a big firms planning products. The planner featured, apparently, uses open ended funds (we're not talking Vanguard funds with 20 beep expenses) for the long part of her clients' equity exposure (we're also not talking about people with $20,000 in assets, if you catch my meaning). For the life of me I don't understand how a planner can use open end funds for wealthy people. It is wasteful on several levels. Funds always have fees and sometimes loads. On top of the fees to the fund the planner gets a fee. Also too many open end funds have very mediocre returns. It really shocks me the this goes on. Using the occasional fund as a tool is one thing, building a portfolio of mutual funds is ridiculous. But maybe its just me.
I have had some emails pile up that I will answer when the power comes back on. It is important to me to answer emails so please bare with me and my utility company.
Tuesday, December 28, 2004
She asked about an ETF portfolio on David Jackson's Tech Uncovered site.
|IVV||iShares S&P 500 Index Fund||Large cap US stocks||0.09%|
|IJH||iShares S&P Mid Cap 400 Index Fund||Mid cap US stocks||0.20%|
|IWM||iShares Russell 2000 Index Fund||Small cap US stocks||0.20%|
|EFA||iShares MSCI EAFE Index Fund||Large cap foreign developed market stocks||0.35%|
|EEM||iShares MSCI Emerging Markets Index Fund||Large cap emerging market stocks||0.75%|
|RWR||streetTRACKS Wilshire REIT Index Fund||Real estate investment trust index fund||0.25%|
|LQD||iShares GS $ Investop Corporate Bond Fund||US corporate bonds||0.15%|
|SHY||iShares Lehman 1 to 3 Year Treasury Bond Fund||US short-term Governement bonds||0.15%|
|IEF||iShares Lehman 7 to 10 Year Treasury Bond Fund||US long-term Governement bonds||0.15%|
|TIP||iShares Lehman TIPs Bond Fund||US Governement inflation-protected bonds||0.15%|
I read David's site often, it is excellent. What good about the portfolio is there is no real overlap. Too many of these things miss this point. I do think it is possible to capture a little more yield in the fixed income component without taking a lot more risk, if any more risk. The other thing is I'm not sure if these should be equal weighted in the portfolio or not.
The biggest flaw would be with the person that implements this portfolio but doesn't continue to learn about new products. ETFs are in their infancy. CEFs used to be dominated by single country funds and bond funds. More and more CEFs are becoming very sophisticated. Both ETFs and CEFs will continue to evolve. I can not say they are right for everyone, but any do-it-yourselfer should take the time to keep up with this part of the industry.
The last time I wrote about Ameritrade I got a call from a VP of something apologizing for bad service I mentioned in the article. The fact is I only get correct information about half the time I call in, which thankfully is not that often.
I spent some time on the Amerivest website and talking with a rep at Ameritrade to learn more about the product, I did not go through the process of opening an account, nor am I likely to.
The demo on the site gave an indication of the risk tolerance questionnaire and nothing stood out being particularly unique, which isn't a bad thing.
I saw in the demo some example allocations. I asked the rep I spoke to, Carl, if what I saw might be a possible allocation and he said yes. Carl also addressed several other questions too.
First they only use iShares. The problem with that is there are ETFs from several other companies that may better than the corresponding iShare. I asked if the planning software would ever pick a sector ETF like Dow Jones Health Sector (IYH) or a specific country ETF like iShares Canada (EWC). I never got a straight answer after two tries at that one but I Carl left me with the impression that they would not at this point pick those types of narrow ETFs.
Amerivest currently uses about 30 ETFs, according to Carl, all of which are fairly broad based.
A big potential flaw I saw in the demo, that Carl corroborated could happen, is overlap. One of the sample allocations had iShares S+P 500 index (IVV) and iShares Russell 1000 (IWB). The problem with this is that IVV and IWB have almost a perfect correlation because they both have the largest 500 US stocks in them in a cap weighted fashion. The point of diversification is to capture different parts of the market in response to current events. Some parts of the market do well in rising rate environments, or at the end of an economic cycle and so on. IVV and IWB will react the same way to everything that moves capital markets. Whatever a person may need to have allocated in big cap can be accomplished with either IVV or IWB, for that matter OEF captures the same effect too. I wrote the other day that I would go with Rydex Equal Weight S+P 500 (RSP) over all of them for now.
Amerivest offers a rebalance feature. I asked Carl what I think was three times what the trigger is for rebalancing the account finally he said a 1% deviation would cause a rebalancing. I can't believe that could be true but maybe it is.
Lastly there doesn't seem to be any sort of ongoing active management of the product, at least Carl left me with that impression. I asked if nothing changes in the next ten years with my situation what types of changes would there be in the portfolio. Carl said the rebalancings and then he offered something about the bond allocation favoring shorter dated ETFs currently but I don't know what catalyst would switch that to longer dated bond ETFs.
My conclusion is that in its current state there isn't much value here. A do-it-yourself investor, and that is mostly who Ameritrade deals with, that does minimal reading will be more proactive than Amerivest is currently wired to be.
I can see this evolving to include more ETF families, and more strategic management in the future. Carl also left me with the impression that Amerivest will evolve, if it does I will revisit my thoughts on the product at that time.
MLP stands for Master Limited Partnership. My first exposure to MLPs was in 1990 when I was working at Lehman and our office was "pitching" a couple of them. MLPs typically pay a very high yield from some sort of reserve of natural gas or oil, these are referred to as royalty payments. American MLPs have to be structured in such a way that the asset is depleting. Canadian MLPs are allowed to raise more capital and replace depleting assets.
As a group MLPs have had a fantastic run. I used to own three of them for clients. One of them was taken over and another one went up 2 1/2 times so I sold both of those and I continue to own one for clients that has a 6.3% yield.
There are two things that concern me about the FMO fund. CEFs can trade at either a premium or discount to NAV. This can change at any time based on sentiment. I can envision that when something bad happens to energy prices, causing MLP prices to drop, FMO's price will drop far more than the actual NAV. I see this happen all the time with Nuveen Quality Preferred Income (JTP). A great thing about CEFs is they can be less volatile than an individual holding. JTP is clearly more volatile. I believe FMO will be the same.
The other thing is the timing. As I mentioned, MLPs have had a great run and many investors have missed out. I have written before about new products coming closer to a top than a bottom. We saw this in wild excess in the internet bubble. I have been writing about this for China products for the last few months. I am not saying China and MLPs are like internet stocks but as I often write, too much supply in the form of new products is not a good thing.
Monday, December 27, 2004
I had the above article published at the fool today. For some reason the editor reworded some of it in such a way that he changed some of the meaning in the first paragraph about dividends.
I believe investors should adjust their portfolio compositions over time, as valuations become extended or, on the other side, exceedingly cheap. I certainly agree with taking a more defensive posture when the market starts looking a little frothy, but I have to agree with Ed Brown when it comes to remaining fully invested. The difficulty with market timing is not so much in identifying when the market is over or undervalued, by whatever measure being used, but in knowing when to pull the trigger. Markets can stay relatively over or undervalued for long stretches of time. Many studies have been conducted testing the viability of market timing strategies, using various measures of value and rules for shifting allocations. For the most part the conclusions of these studies suggest staying fully invested is the way to go. Generally, the relative gains from correctly reducing allocations prior to market declines, were outweighed by the underperformance resulting from being out of the market when it rallied. The market of the mid-late nineties provide a good example of this. The market, by my calculations, was beginning to look pretty pricey by mid-1996, and by mid-1997 was extremely overvalued in my view. Had I reduced my equity exposure at that time, it likely would have proven far more damaging than remaining fully invested during 2001-2002.
John's point is valid. If you spend some time on going through some postings you will see that I do not rely on my gut, exclusively to take a defensive posture in the accounts I manage. I rely on three indicators, two of which I write about all the time. When the yield curve inverts, it historically has meant that a recession is on the way which is bad for equities. The other indicator is when the SPX goes below its 200 DMA. I would suggest that John study the history of both of these indicators. I view them as clear messages from the market that a problem is on the way. As a good friend of mine says, the market can only do four things; up a lot, up a little, down a little, and down a lot. Any investor will do wonders for their lifetime returns by missing big chunks (not all) of down a lot. The history of both indicators I use give you a great chance to side step down a lot. But that's all it is, a chance.
I have some exposure to Russia but do not own any individual names. I personally own NASDAQ BLDRS Emerging Markets 50 (ADRE) as do some clients. Russia makes up less than 2% of this ETF. I also own Central European Equity Fund (CEE) which has 46% in Russia, no clients own this one. Lastly I own PetroKazakhstan (PKZ), which is actually located in Canada with rights in Kazakhstan. A few, more aggressive clients own PKZ too.
I usually don't like to name names but there may be a change coming and I want to let you know what I am thinking right now. If I were to sell something it would probably be CEE, but I do not expect to do that. But I would reduce, not eliminate, individual Russian holdings if I had any. I take current events as a substantial increase in potential volatility which might result in more pain than gain for a while.
On a different note, I am hearing a lot of strategists favoring Japan for 2005. It seems to me that there are always people saying now is the time to own Japan. Tread carefully. Japan has serious systemic problems, they also import 100% of their oil. The dollar/yen trend is not helping their exports either. Most of the problems seem to be perpetual. Every so often the Nikkei has a monster year, like 1999, with no real obvious reason why. 2005 could be such a year, who knows?
Typically I like to have a simple, understandable catalyst would make an investment theme, like a country, work out.
Sunday, December 26, 2004
Before the election I thought there would be no trend changing rally because there was very little precedent for such a move. I was wrong. The catch up rally has been correct. I can't imagine that the trend will change this week. At worst this week would be flat, but we'll see.
At this point it makes more sense to think about the next few months. I have devoted a lot attention on this site to potential risks that confront the market; weak dollar, deficits, slowing earnings, slower economic growth, rising rates, and so on. This is not a bearish outlook type of article but more of a know what can go wrong posting. If things start to go poorly for US stocks, because of any of the things I mentioned or for some other reason, I would expect a slow rolling over of the market as that is how bear markets usually start.
It also makes sense to have exposure to things that will benefit from the things that might cause a bear market. Oil might cause a problem so I continue to overweight the group. The dollar could be a real speed bump so I continue to be overweight foreign stocks that pay high dividends. New readers can look through the archives of this site to see other themes I think will work now.
Occasionally I comment on something positive or negative I see on stock market TV programming. One of my least favorite TV regulars is Joe Battipaglia. Based on his public commentary, which is the only track record I know about, I think he is dreadful. I have been critical of him before because of his propensity to pick mega cap stocks. I don't think someone that always touts the largest companies if offering any real insight. Maybe Joe has insight but maybe he doesn't. This week on Bulls and Bears Joe managed to tout four of the 17 US companies that are larger than $100 billion; Citigroup, General Electric, Johnson & Johnson, and Pfizer. Over the last year 11 of the 17 mega caps have lagged their respective sectors. Giant companies tend to lead at the end of a bull market, as they did in 1998 and 1999. Joe might be correct now for all I know, but he has been touting the same names for years which gives him only a broken clock's chance.
Regular readers will know I have been negative on Pfizer for many months. This past week it had a nice snap back rally. That rally may continue, but it will do so without me. The reason for my ongoing bearishness, even without the Celebrex problem, is that I don't think its pipeline can possibly create enough new drugs to offer a reasonable growth rate to a topline of $52 billion.
Saturday, December 25, 2004
Just a quick post today. Yesterday in the mail I received a kit from Rydex about their S+P 500 Equal Weight ETF (RSP). I first read about this right after it IPO'd not quite two years ago. I think this is a great product, in that it is innovative. I have made an effort to find what I think are innovative things and share them here. RSP has outperformed the SPX since its inception. As I have written before, mega cap companies usually lead the market toward the end of a stock market cycle. RSP reduces the average cap size of the portfolio by giving stock number 500 the same weight as GE. RSP is likely to outperform SPY at most points in the market cycle. The Chart posted above, of the SPX Equal Weight Index shows a long term record of outperformance.
To disclose, I don't own RSP nor do I own it for any accounts I manage. My firm has some small accounts that I never see that may own RSP because I have mentioned it as a good holding for a $10,000 type of account. If you have a diversified portfolio you can, with your holdings, manage the average cap size.
The point of this is that there are a lot of new things coming along, some of them like RSP are innovative. Some of them, like the Morningstar ETFs, offer nothing new.
I enjoy learning about new ways to invest, and will continue to write about them. Feel free to let me know if you hear about anything new along these lines and I'll look into it and try to write an article.
Friday, December 24, 2004
This is not a call to short China, but it is a call to not be too overweight the country. Depending on the client's risk profile, some of my clients own one of the Chinese oil companies, or have exposure in an emerging market ETF. Also all clients have exposure to Australia, which I have a positive outlook on, that benefits by being a large trade partner with China. If the Fool ever gets around to publishing the article without changing it too much it will say that I favor PGJ over iShares China 25 (FXI).
I can't imagine that the growth and modernization that is going on will slowdown, but the stock market could decouple from the spending and expansion.
I'll have a regular post up later today.
Thursday, December 23, 2004
I don't remember where I first heard that phrase but it sums up my approach. I don't do a lot of active trading. There are countless studies that show a lot of trading leads to poor returns because of bad decisions and giving away too much in commissions.
The commission thing has obviously become less of an issue in the last couple of years. The bigger thing is poor decisions. To be clear some people do very well trading actively. I have absolutely no doubt about that. But I also have no doubt that active trading is not something that everyone can do. The vast majority fail at it.
The most important thing, I believe, to being a successful trader is discipline. Being smart is not essential, but it helps. The active trader knows there will be losses. Successful traders I have known have a clear exit strategy on the upside and downside for every position they put on.
Part of any type investing, trading or otherwise, is introspection. I have written before that I think I do a good job of letting logic dictate my decisions. I believe that if I traded frequently I would lose that objectivity quickly and make too many decisions based on emotion.
There line from some movie that said "A man has got to know his limitations." That would be one of my limitations.
Active trading is not wrong, but it is not right for me.
For the last couple of days they have been teasing an interview with Hugh Hendry of Odey Continental European Fund that they finally showed today. Hugh is a smart guy who knows more than I do. I have seen him interviewed before and have learned from him. Today's interview was a disappointment. To sum up his thoughts he is bearish on equities because he says labor costs are going up, consumer debt is too large of a percent of GDP, he doesn't see enough top line growth to lift prices, and oil and steel prices are still high. He said the market has gone nowhere for six years, P/E ratios have been contracting and will continue to contract to 6. That may not mean a down market but at best a sideways market. What was disappointing about the interview was that he likes soft commodities like cotton and sugar because they are derivatives of the hard commodities. I don't know what that means and neither did Simon Hobbs, the show's host. Simon asked him three times what he meant and then gave up. Make what you will of what he likes but his caution for equities is worth thinking about because I am telling you, if you aren't familiar with this guy, he knows what he's doing.
Another interview of note was with Christopher Vale of Rexiter Capital Management. This was his first appearance and I have never heard of him. He specializes in Asia for his firm. He likes Hong Kong, Malaysia, Singapore, India, and Thailand. He does not like Korea or China. His concerns about China center around the government's ability to correctly moderate the growth. His concern is not unique but it is enough for him to want to be underweight.
I have direct exposure to China and India for clients and secondary exposure to China with Australia and Brazil. I have the other countries through an emerging market ETF. I would add a word of caution about Thailand. As you can see from the chart it had a great 2003 and gave back a lot the gain in 2004. Buying into the Thai market is less about manufacturing than most other Asian countries. Financials have a huge weight in the index. You are making more of a bet on internal growth. This historically lead to feast or famine returns. Part of why I like emerging markets is the role they play in the world economy. Thailand's role is less clear to me.
Wednesday, December 22, 2004
To me, this stresses the need for investors to empower themselves by avoiding open ended mutual funds and conflicted salesmen. Before you think that I'm schilling for separate account management, I'm not. I share every aspect of my thought process here, but I don't try to talk up the names I own. There are plenty of other sites where insight is shared too. Seek out a few good sites and keep things simple and you'll get to where you need to be.
The other thing that can help investors that don't want to use a separate account manager is to learn market history. I believe that history tends to repeat, although there are no absolutes. By learning history you can learn more about how the market works. For example, I wrote yesterday about the inverted British yield curve. The last time their curve inverted their equity market did poorly. Another example is that this is the wrong time in the stock market cycle for companies larger than $100 billion to lead the market, in fact most of those big companies have lagged.
There are no absolutes, but these things will put the odds in your favor. Trust me these are not the types of things that the guy at the local Edward Jones office is thinking about.
One last point is about CNBC and other TV channels. A lot of people say negative things about the content, including me sometimes. But it is a tool. I rely on TV for news and to hear what I can about the process other people use. It easy to cast stones but every outlet has some value.
I also saw an interview on CNBC Europe's Closing Bell where a very compelling bullish case was made for financials. Again, intelligent and well thought out. Both were very plausible. So what is the answer?
I don't know the answer but I can give my take and how I expose my clients to the sector.
Financials currently make up 20% of the S+P 500. 20% is high but the financials have had that weight for a while. A 30% weight is a real danger point, nonetheless I have been underweight financials for a while because of its weight in the index. In 2004 financials have outperformed the SPX by about 2%. I got that call wrong but luckily all of the financials I own were up enough to make up for my being wrong. The weighted average return of the financials I own for clients is up 19.85% YTD (not including a quick trade on CME at the beginning of the year). I always say stock picking is the least important part of the process, but not unimportant and this is a good example of that.
My exposure is and has been one American bank and the rest are foreign banks. They all have very high yields. The flatter yield curve and the Fed raising rates make domestic banks less attractive. I have avoided insurance and brokerage stocks because of the Spitzer risk. One name I owned, and sold way too early is Chicago Mercantile(CME). I did very well on it but sold it more than $100 too early. I am considering adding an emerging market bank soon, but I am still learning how it trades.
One thing I would not do with the sector is buy an ETF. The dividend yields of the banks I own are between 4% and 5%. You won't get that from a sector ETF and obviously that adds nicely to the price appreciation my holdings have given.
This posting gives insight into my sector analysis and big picture info about my stock picking, which the whole point of my blog.
Tuesday, December 21, 2004
I had this published today at the Fool.
I hadn't thought about that before and a fair critisism would that I should have. Nonetheless it makes sense that this type of product would be sensitive to the VIX index.
Click on Picture to Enlarge
I have been finding a lot of attractive British stocks lately. They seem to have compelling stories and very good dividend yields. Here is some of what I mean.
Allied Domecq (AED): Among other things owns Dunkin Donuts and Baskin Robbins yields 2.3%
Barclays Bank (BCS): Owns the iShares business yields 2.7%
BT Group (BT): Big phone company yields 3.6%
Glaxo (GSK): One of the drug companies that hasn't been hurt yields 3.1%
Lloyds TSB (LYG): Smallish bank with good valuations yields 7%
National Grid (NGG): Utility yields 3.4%
Pearson (PSO): Media company yields 2.9%
There are more names but you get the idea. The problem lies in the chart I pasted above. The British yield curve is inverted. This means a recession is coming. The yield curve has been inverted for a short while but the stock market has not started to roll over yet. I own two British names for clients. One name is a consumer staples name that yields 4% at current prices. I expect I will sell this stock in the next couple of months. The other name I own is British Petroleum. I expect what is going on with oil to trump problems with England's economy so I think I will keep that one.
I suppose this time could be different but the biggest problem, I think anyway, is that it is very difficult to access capital when the curve is upside down. This stifles the economy. This is not the type of thing I want to try to out smart. Too bad because a lot of the names I've listed are compelling but top down starts with the big picture which says avoid or be underweight England.
Zeke, I'll call him, asked me if I own the same stocks that I buy for clients. It was the first time anyone asked me that question. I thought my answer to the question would make a good article. This is just my thoughts about what is right for me. My way isn't better that any other approach but it is right for me.
The stocks, ETFs and CEFs we own are, as a portfolio, less volatile and higher yielding than what I own for clients. My income is derived from managing money. The plight of capital markets is obviously very important to me for this reason. From the logic that says don't have too much of your 401k in company stock because by working there you already have enough riding on the company already is how I look at the stock market.
I touched on this the other day (perhaps incorrectly), our financial plan assumes an average annual growth rate of 6%, which is very low but gets us where we need to be. Every so often the market will be up 20%-30%, every so often it is down by that much and most other years it does something much less interesting all of which adds up to that average 10% we have all read about.
I have unyielding faith that my exit strategies (that I realize I write too much about) will let me miss a lot of the pain that goes with down a lot. My belief in these comes from how they have worked in the past.
If in a year that the market is down 20% your account is only down 5% you will add a couple of percentage points to your average annual return for an close to an entire decade,very meaningful.
In our personal portfolio we are very overweight foreign, low beta, high yielding stocks which have all had a huge up year. My clients also own all the same names in their portfolios too. We also have five high beta US growth stocks that, again, my clients own. We also have emerging market exposure with a couple of stocks, one ETF and one CEF. The only name we own that none of my clients have is that Central European Equity Fund (CEE) that I have written about a couple of times.
The benefit to this approach is that I spend very little time looking at our accounts which is clearly better for my clients. For 2004 I was lucky enough to beat the SPX by a wide margin with very little trading thanks to good (or lucky) stock picking and about a 3.5% yield. I fully realize next year or the year after I might lag by a wide margin but I am not concerned about that. My intention with our stocks, and client portfolios for that matter, is to avoid down a lot. If from this point forward I do a lousy job of picking stocks for the rest of my life but I side step most of the down a lot periods we will reach our goal a little early.
Regardless of stock picking ability, one thing I am good at is removing emotion from the equation. I feel I have a good sense of how markets work. It is this sense I think I have that allows me to not get very worked up.
Later this week I will post a part two to this article.
Monday, December 20, 2004
All three panelists think the market will be up 8%-10%, right in line with the B-Week survey, and that it will come down to stock selection. As I remember 2004 was supposed to be a stock picker's market too. Someone else said 2004 turned out to be a sector picker's market. The point here is that too many people come on these shows and don't really share what they are thinking. Beth Dater, one of Lou's panelists picked Covance (CVD) on the show. Consuelo pointed out that Beth has mentioned that one before. The stock has done phenomenally well. Beth is clearly an excellent stock picker. There was no mention as to whether she would buy that name right now for a new clients at these levels which is important to know for a stock that is up 57% in 2004.
My ire over stock picker's market comes from my belief that individuals managing their own money will place too much emphasis on stock picking. Stock picking is very hard to do. If it were easy there would not have been 19 analysts rating Pfizer as a buy or strong buy two months ago before it all hit the Celebrex fan. Sometimes, stocks that should go up, don't. Over reliance or over confidence in stock picking ability has brought down plenty of pros and individuals alike.
Ed Brown, a regular panelist, said he thinks investors should be 100% invested all the time. If you have read this blog for any length of time you know I take a completely different view. The market gives clues, like the inverted yield curve or breaching the 200 DMA, when there may be a demand problem for equities. As you know I pay attention to these things and take defensive action when these indicators trigger. A lack of exit strategy hurt a lot of people four years ago. In my investing lifetime I expect there will be a couple of more bubbles followed by crashes. Why would anyone hire a manager who says he has no intention of trying to avoid some pain?
Sunday, December 19, 2004
I am not a big fan of buying individual bonds for people. Bond dealers are not very friendly to individual investors. The marking up and marking down of bonds is so rife with unfair protocol that I am shocked that the Spitzer crew didn't go after that part of the industry ages ago. If you own a bond that you have to sell, you should have zero expectations of getting a fair price. The typical investor has very small positions in a bond. Those small positions can be very difficult for the broker to sell to someone else. That means the broker may have to hold the bond for a while. That means you have to compensate the broker for taking the bond off your hands.
Davpac asks about several fixed income alternatives. The first one in his email is CEFs that invest in municipal bonds. These types of funds usually use leverage. When rates rise, these types of funds get slapped hard. You can take a look at the chart of just about of these from July 2003 to see the effect. If anyone finds one without leverage I'd be curious to know about it.
Next davpac asks about REITs. There are several types of REITs. The only kind that really scare me are mortgage REITs. The mortgage business has more potential for shenanigans than other types of REITs. People swear by Annaly Mortgage (NLY) and it may be great and clean but when Novastar (NFI) got hit a while back NLY, clean business and all got whacked too. One word of caution for other types of REITs is they can go down in value. Believe it or not some of the closed end REIT funds can be more volatile than individual REITs and REIT ETFs yield less than most individual names. I think individual REITs are the way to go and I use a couple of them in my practice.
I am quite fond of preferred stocks. There is no shortage of AA companies with preferreds yielding in the sixes. One word of caution is watch the maturity/call dates. I expect the next big move in rates to be up. If that turns out to be correct long dated preferred stocks with no call feature will get hit hard. I would mix maturities favoring shorter dated issues. I would also avoid CEFs that own preferreds because in a rising rate environment a fund's price could go down a lot more than the NAV.
The last item on davpac's list was emerging market CEFs. I'll broaden that to include foreign bond funds. There are a few CEFs that buy foreign bonds and I use a couple of them in my practice. The yield is good, but not extraordinary, and if rates in the US do rise these types of funds should hold their value. I also wrote a piece that explored the idea of a CEF that just owned European bonds. It looks like such a thing doesn't exist yet. I have a lot of readers from sell side firms. If anyone works in an area of influence over such things, here is a vote for a European bond CEF for US investors.
One last type of fixed income CEF that davpac does not ask about is convertible bonds. There are a couple of these out there. The thing with converts is as the stock goes up to the conversion price the bond starts to trade higher too on the likelihood of conversion. As the stock trades lower the bond starts to trade more like a bond. I favor a fund because any one deal can blow up and also the trading friction I referenced in the muni paragraph.
The covered call fund is down a little bit from where I bought it and where I own it for most clients, I bought some this week for a couple of new clients and they are even on it, but have already collected a dividend. We'll see how it goes but I am in favor of innovative investment products and I expect that the covered call funds will be a good thing.
Something else to keep in mind is a hedge. There are several open end funds that short the bond market. I use one of these for some accounts. They will go up in price as bond yields rise. By themselves these types of funds are very volatile but as part of a fixed income portfolio they reduce overall volatility.
My strategy for fixed income is similar to equities. I want own different parts of the fixed income market for diversification. All these products have similar yields but are likely to react differently to various types of events which will protect my clients if I really goof up.
Here a a couple of resources that come to mind to research these things more; ETF Connect and Quantum Online.
Hopefully davpac wasn't just asking me what time it was and I told him how to build a watch, if you catch my drift.
I am shocked that so many Wall Street folks actually thought this could happen. If you read my thoughts on it from last month you'll see my analysis was not that clever, but it was obvious.
This is a theme that has repeated itself on this blog. Big events rarely turn out as expected. I wrote something similar about expensing options earlier this week.
For a long time, I have thought that the market would have some sort of rally, that would have started by now with real oomph, into year end as all sorts of managers would be playing catch up. Well we are starting to run out of time on that one being right. If the market does make some sort of move in the next two weeks, it could be exaggerated due to a lack of volume. At this point I think a move of 3% or more in either direction in the next two weeks could be unwound in the first week or two of January. We'll see.
Last week on Forbes on Fox I picked Zebra Tech (ZBRA) and Australia New Zealand Bank (ANZ). Both names had a good week after I picked them, which is ok but my time horizon was longer than a week. But I am glad that neither one blew up so I look like a complete moron. Funny stuff. By the way I have owned both names for clients for a while but I continue to buy them for new clients, which is an important point that I did not get to make. Too many people come on shows to tout names they haven't bought in months.
I'm not much of an anti-TV zealot but that sort of thing does bug me.
Saturday, December 18, 2004
The reason I think predictions are a waste of time is that, based on media accounts, I think too many people care too much about them. Very few people call the market correctly for the next twelve months, but still do well in the market. Having opinions about where the market is headed is important but fixating on a number for a year from now seems like a waste of time. At the beginning of 2004 I thought the market would be up about 15% this year. During the year the market went below its 200 dma so I got defensive in client portfolios. Back in January I didn't think about whether the market would deteriorate or not but it did so I took action.
Based on the current level of the S+P 500, and the less than two weeks remaining in 2004 I can't imagine that my 15% number will be anywhere close to right. I doubt any of my clients remember what my prediction was but some of them realize, with out my needing to point it out, that I have outperformed the market by about 200 basis points, due in large part to my focus on dividends and a couple of names that have moved up a lot. This type of return is exactly what I am shooting for if the market is up a little. The next time the S+P 500 is up 25% in a year I will be happy to lag it by 2%. A couple of huge up years in the market will do a lot of heavy lifting in an investing lifetime. Whether you think modest outperformance of the market in an up a little environment is good or mediocre is certainly fair game, but what is clear is that my prediction 12 months ago had no bearing on my results. Whether my 2005 prediction is right or wrong will have no bearing on my performance this year. Hopefully this makes it clear why I think predictions are useless.
On to my Prediction.
I think the market will be lucky to be up 5%. 2/3's of the people surveyed by Businessweek predict the SPX will close the year between 1240 and 1320. I don't believe that the consensus can be right, although 2004 may turn out to be the exception that proves the rule. The SPX could close above 1320 but I think the rate hikes, weak dollar, the threat of $2 trillion more debt to start the "new " social security and a few other things make up a lot unlikely. But I will be invested and if I am dead wrong it won't matter.
If private social security accounts ever come to be I will write in more detail, but I would be inclined to go with indexed ETFs and use my usual 200 dma breach and inverted yield curve triggers to go to cash. I can see plenty of people wiping this little bucket of money out in the next mania. Chances are if you care enough about investing to read a site like this you will know enough to do ok with this type of account. But too many people know nothing about capital markets, hence my pessimism. In theory it is a great thing....
My year end copy of Businessweek arrived today. On page 78 is the "What Fearless Forecasters See" survey for 2005. Over the next day or so I will be studying this to figure out my thoughts for 2005, for whatever that will be worth.
Lastly, I will be on CNBC Asia's Market Watch on Sunday night (US Time) during the first half hour of the show. The producer wants me to comment about Jeffrey Lacker's speech on Monday. Mr. Lacker is the president of the Richmond Federal Reserve Bank. I can comment on it but I can't envision a scenario where the speech will be market moving. Does any brand new Fed president really want to move the stock or bond market? I don't think so but I could be dead wrong.
Friday, December 17, 2004
I have exposure in that Central European Fund (CEE) I wrote about earlier.
Pfizer is getting crushed on the open on more bad Celebrex news. Regular readers will know I have been negative on the name for months. Is anyone really shocked that Celebrex may have problems? This has seemed so obvious and simple from the beginning.
Did anyone else see Bob Pisani interview John Thain yesterday? Bob actually asked Mr. Thain why getting the best price is important to investors. Luckily Thain blew that question off. I have always been very underwhelmed by Pisani even though he "talks to traders all day long." Am I the only that feels this way?
Options can be as simple or complicated as you want to make them. My experience tells me that for most, not all, people options are best left alone. Too often investors don't really understand enough about how options price, or implied volatility (IV), or time decay (known as theta), or messages from the options market or a whole host of other things that could determine the outcome of a trade.
Here is an example from the internet bubble days that might give a hint as to what I mean. We had one guy, I'll call him David, who would call into our desk and place enormous trades, 4000 or 5000 contracts at a time. There was one quarter that David expected Yahoo's earnings to disappoint the street. So he bought 4000 slightly out of the money puts expiring the next month two days before the report. David was right about the earnings and the stock dropped a couple of bucks but the put options dropped slightly in price even though the stock dropped. What happened is that the IV dropped because there was no longer uncertainty about the report. David's lack of understanding about a very basic thing cost him about $0.20. Twenty cents means $20, on 4000 contracts. You can do the math if you want. Any trader will likely have a bunch of stories about boneheaded trades.
I am no fan of things like straddles, butterflies, or credit spreads. These are not the types of trades that most people need to reach their goals. How does an options combo with a risk of $400 and a reward of $325 fit in with the typical person's financial plan?
This posting may draw some "yeah but I know what I'm doing" or maybe people telling me I am an idiot. Maybe so.
Obviously there are plenty of people that really know what they are doing but there are even more people that think they know but don't.
I do occasionally trade an option for clients or myself. Every now and then I will sell a covered call but with interest rates and volatility so low there aren't a lot compelling trades to do.
The other trade I will do, just for me not clients, is to buy a deep in the money call as a proxy for the underlying stock. Here's an example with a stock I don't own. Network Appliance (NTAP) closed at $34.09 on Wednesday. The $17.50 call expiring in January 2006 was offered at $18. The time premium in this option is $1.41 and the rest is intrinsic value. An option this deep in the money will have a delta of almost 1, meaning it will move just about point for point with the common. So you get the same effect of owning 100 shares for half the capital. If you would normally buy 400 shares this is not a chance to buy eight options. Remember you are feeling the gain or loss of 400 shares. A 400 share buyer should not own 800 shares. The other neat little thing about the "call option as a proxy" trade is that if NTAP drops a lot suddenly and unexpectedly the call option is likely to drop less as the delta would drop and the IV would go up. You can email me for more of an explanation on that one. Also this is not a good trade if the stock pays a dividend. Dividends only pay out on the common not call options.
Thursday, December 16, 2004
This strikes me as a Sarbanes/Oxley revisited. Do you remember that in August 2002 CEOs had to start certifying their companies earnings? There a was a lot of fear caused by this and it was a non event. Often big bad scary things turn out to be quite mild. Y2K comes to mind.
One thing about the FASB ruling is that this does not effect demand for routers, or PCs, or anything else. This will not effect revenue, or growth of revenue. Companies have been reducing options issuance for a while, that will probably continue. I would not be surprised to see the companies that do not cut options have p/e ratios expand.
Not to say there can't be a knee jerk reaction, but I am quite certain this will not auger the end of successful technology companies.
I haven't changed my mind about where Fed Funds will end up but if I think it makes sense to analyze what would make me wrong and then what action to take if I am wrong. Because really who cares about being right or wrong. If the markets dictate changes, you make changes.
One thing that could go wrong is that Nicole Elliott will be right and the dollar will go to new lows. At some point a dollar that is too weak could force the Fed's hand. A lot of people say a decline in the dollar is ok as long as its orderly. I find this to be a wildly empty thought. It is more logical that at some point a decline, orderly or not, will cause a series of events to occur that will impact US markets. I'm not sure if this will happen but it is possible that Stephen Roach will be right.
I think the globalization of the world economy means that if something bad does happen in the States, a lot of capital will flow to foreign equities. I have touched on this before. There are many ways to get foreign exposure. There are new ADRs, ETFs and CEFs coming to market all the time. If you have not already done so I would urge anyone reading this to start learning about investing outside the US.
In my personal financial plan I only need 7% annual growth to get where I want to be. I have a very low personal benchmark by design so I don't need to spend time trading or worrying about my account, that would take away from my clients. Large dividends from foreign stocks provide a big chuck of the 7% I think I need. I don't care where my return comes from, just that I get it. I haven't delved much in to strategy for our personal accounts much. That might be worthwhile for a future posting. I don't mean a talking my book type of article, but talking my strategy. Hopefully the difference is clear.
Clearly I did not understand the stock, but of course I say that in the article. The point of this post is just that, avoiding things you don't understand. No one investor can understand everything. You can try to learn about things you don't understand but I don't know that I want to try to learn with my money, or my clients' money.
Another example is the homebuilder stocks. I have never understood how there can be seemingly infinite demand for new houses. The way the stocks have traded and the consistent p/e ratios probably means that the trend will continue but I don't understand how that can be. I'm not saying I would short the group but I am saying that I can't see myself buying a stock where I can't grasp how the supply and demand works.
A lot of the names in the group have gains in 2004 that range from 20%-50%. Well as I mentioned yesterday I am getting those types of returns with stocks that I do understand. If you own 30 stocks and 4 or 5 of them are going to be monster winners, does it matter what group they come from? I'd say no.
Wednesday, December 15, 2004
In picking a stock I think it makes sense to avoid names that have huge tangible uncertainties. Research In Motion (RIMM) has had this patent infringement lawsuit dangling out there for a long time. News came yesterday that looks bad for RIMM. It looks like they may have to pay fines/royalties to NPT. I'm not sure how bad this is or isn't, the point of this posting is about process not whether RIMM is a buy, sell or hold.
This will not really pertain to short term traders that try to game events like this.
RIMM is clearly a stock that can skyrocket. To think the price could double or triple in a year is not a stretch. Every properly constructed portfolio should have at least a couple of names that are capable of that kind of move. Usually those stocks are in tech or biotech but they can come from any sector. In the portfolios I manage, I have three names that have about doubled over the last year. I also have a few more that are up 50%. This is not to boast, because I think anyone that spends time putting together 35 or 40 diversified stocks will always have some huge winners. The point is as RIMM has a little more than doubled since the beginning of the year there were plenty of stocks that gave similar returns without taking the litigation risk that RIMM has. Infospace (INSP), another name I don't own, has had a similar return as RIMM in 2004 but the only risk taken there was the company's ability to execute.
The results were not very specific, at least they weren't presented very specifically in the piece. Equities should outperform bonds. The dollar is expected to decline further and US equities are expected to lag other world markets.
The contrarian in me wonders if the survey will be wrong. By now we all know what the threats to the US markets are; the dollar, deficit, slowing economy, slowing earnings, oil, and so on. At this point I don't think a great 2005 is in the cards for the US market but I will address this closer to the end of the year.
Tuesday, December 14, 2004
Since I first wrote the article I have added MCN to my wife's Roth IRA and have bought it for clients as a fixed income surrogate. Both MCN and FFA have very high yields but because the underlying is common stock and not bonds I expect both of them to be less sensitive to a rise in interest rates. Let me stress I expect less interest sensitivity, not no interest sensitivity. FFA yields about 10% and MCN yields about 8%. I picked MCN because I am more familiar with the company, Claymore Advisors, that manages the fund.
The reason I am posting about this is that I stumbled across an excellent article from Index Universe.com, that describes and defines the buy-write index very well. Its worth exploring.
The Australian Stock Exchange (ASX:XBW) also has a buy-write index but I have not yet found a way for US investors to access it. If anyone knows more about how to invest in this please let me know.
Danske to buy two Irish banks for $1.93 billion - Banks - Financial Services - Company Announcements - M&A - Markets/Exchanges - Market News
Danish bank, Danske is buying Irish assets from National Australia Bank (NAB). I first wrote about Ireland a couple of weeks ago and have been investing there for a while. NAB needs to sell and Danske does not need to buy but Danske sees opportunity in Ireland. Obviously I agree. The bank I own personally and for clients is not directly effected by the deal.
I think it would be worthwhile to learn the Irish story if you do not already know it.
On a separate note, Nicole Elliott said this morning that she thinks the dollar will break its all time low as measured by the DXY. Gulp.
They also gave kudos to Galatime, Inventingmoney, Maoxian, Seeking Alpha, The Kirk Report, Trader Wizard, CanSlim, and Trader Mike.
While the attention is great, what is more important is the continued growing attention being directed to market related blogs. This sort of thing helps bloggers and it will eventually be beneficial to individual investors as they learn about this fairly new outlet for information. Good stuff.
A flurry of mergers sends several different messages to the market. I would expect that the over the next few days as some of these mergers, both real and proposed, play out we will hear about different interpretations about what all this means. Some mergers come from weakness which I think may be the case with Oracle/Peoplesoft. Some come from strength like Symantec/Veritas and JNJ/Guidant. And some I'm not sure about Sprint and whoever. For disclosure, my clients own SYMC, JNJ and VZ.
The argument for weakness is how could Oracle otherwise grow its business? The market treats it like a mature company who's best days are behind it. The market has liked Symantec and if they do buy Veritas it lets them offer a more complete suite of software and Veritas has higher profit margins.
On Today's Business Europe, Barry Hyman had a good quote, what good for the brokerage industry is good for the economy. All these mergers are good for the brokers (insert your favorite joke here).
My take is a little different it reverts to supply and demand. Do you think a lot of tech mutual funds own both Peoplesoft and Oracle? Me too. Its a cash deal. After the deal there are less big, not mega, software stocks to chose from. This is good for the remaining names.
I don't think that cash will be going into Oracle. If I'm only half right about that last comment you've got about $5 billion buying a lot of tech, specifically a lot of software stock. Someone that runs money that gets cash from a takeover is highly likely to replace what was taken over with a similar stock. That would be good for other software stocks.
The Fed is going to raise rates today by 25 beeps ( beeps is jargon for basis points). There is nothing new there. Some folks think the story will be what the Fed will say. The comments could be the story but I doubt the Fed wants to be the story. I have felt the big thing here is at what point is the Fed's policy neutral? I said in an interview that I think neutral is 2.5%-3.25%, probably the higher end of that range. The point at which the Fed stops the cycle could influence what the bond market does in other parts of the yield curve. Brian Westbury is the guest on Squawk, and the guy is very smart. He thinks the Fed will keep raising until it gets to 4%. I don't think the strength of the economy can handle that. For 4% to make sense he must see accelerating growth. I'm not so optimistic.
Monday, December 13, 2004
Thanks to everyone in my tiny sliver of the Blogosphere for the good luck emails and for anyone that watched the shows. The experience was a lot of fun. Obviously I am glad I didn't completely make an ass of myself but I do need to smile.
The Forbes people were great. They were all very supportive of me. We took a picture with Steve Forbes for our holiday card. Its a little blurry but we'll use it anyway. Steve was a great guy and has an excellent sense of humor. When I sat on the set for Forbes, David Asman made a very funny joke about not calling him Assman. I talked to Dennis Kneale the most.
I saw Charley Rangle in the green room of the Cavuto Show. I didn't get to meet Neil until I sat next to him on the set. He has a very sharp wit and just slayed Tobin off camera. I have no idea what the deal was with Tobin and his birthday but he lost a cufflink along the way. Neil was very friendly and said lets do it again.
People from both shows left me with the impression that I could come on again but who knows. All I can say is my wife and I had a blast and have nothing but good things to say about the way were treated and the people we met.
I have been writing for a while that I thought a lot of people running money will need to play catch up into year end. If this thought is to be correct the market would need to rally this week and next. Relying on the days between Christmas and New Years for a rally may not be a good call.
Over the last few days the yield curve resumed its flattening trend. The curve is still very much positively sloped, however. Growth should start to outperform value with the current curve shape, we'll see.
Just a short post for now. I need to catch up on a bunch of things today.
Friday, December 10, 2004
Cavuto is next.
Thursday, December 09, 2004
Today I walked by both the NYSE and the Amex. I spoke to a couple of floor people (not sure if who I met were specialists, brokers or something else) and I overheard a couple of other conversations. For whatever its worth there was no chatter about the selloff that was underway earlier in the day.
Getting on to the internet from the hotel room is not easy. I'm not sure how often I will be able to post but I will try.
The market started with some nasty action today and turned it around to go into positive territory with two hours to go. I think this shows that in the short term there is fear but there is demand for stocks going into year end. I think the demand comes from fund managers and hedgies chasing performance heat, as I have written before. The bigger question is will the fear that exists ever overcome demand. I am afraid this will happen but we are not there yet. As I often say I don't want to try to outsmart this as it could hurt my clients.
Wednesday, December 08, 2004
Friday, this week I am scheduled to be on Your World with Neil Cavuto and Saturday on Forbes on Fox. Please check the shows out if you can.
We are flying out tonight so my next post may not be until late Thursday.
Fridman is involved with several other companies too, including Telenor (TELN) the Norwegian phone company. Telenor is getting hit too because of its large stake in Vimpelcom. Also going down are the other Russian phone stocks, Rostelcom (ROS) and MobileTelesystem (MBT).
There is good reason to be concerned. I can't imagine that this will turn into another Yukos and there are several analysts out saying it is not the same situation. But it could be.
I have a little bit of exposure to this personally and for clients through a Russian oil stock, a closed and fund and an ETF. All three are down noticeably as a result of this news. For now I am not making any changes. Today is clearly a knee jerk reaction. I would expect a little bounce back at some point soon, as happened throughout the Yukos saga. Maybe I will make a change to my holdings later, but I doubt it.
There are all sorts of good lessons here. I am a big believer in Eastern Europe as an investment theme. Events like today have happened before and will happen again. I am trying to capture most of the, what I believe will be, positive effect of the region by owning a closed end fund. Today the effect is down. Oh, well. Today is not a good day. Does this mean the entire investment idea unravels? I doubt it, but if at some point it looks like it will come apart I will sell, but not now while too much emotion is moving these stocks.
One last note is about British Petroleum, a stock that my clients own. It is also connected this story through TNK-BP a joint venture in Russia that Mikhail Fridman is also involved with. BP has a 50% stake worth in the neighborhood of $2 billion. There is concern that TNK-BP could go down the same road as Yukos. Maybe, but here is a little perspective to chew on. BP has a market cap of over $200 billion. Its revenue is over $250 billion (that is correct, it trades below its revenue). If the entire joint venture went to zero, which is the worst possible outcome, it would be at worst $0.54 per share write off.
Oil now has a $40 handle. If it can stay away from $50 for any length of time a lot of stress is taken off the economy. Gold usually has a low correlation to equities. This is strange stuff.
I think of it this way, money has been flowing out of oil for over a week now. Money has flowed out of gold today. Some of the oil money may have gone into bonds last Friday. It will need to go somewhere, stocks? Obviously it could stay in cash, but I am surprised it has gone to stocks yet.
December averages up 1.8%. There have also been plenty of Decembers where the middle of the month did not do well before a final rally to close the year out. My original thought was that a lot of people that run money will need to catch up to the rally in November and that would push markets higher. I still think that will happen but I don't think there will be much consequence to my clients' portfolios if I am wrong.
It looks like the futures market is a hair higher than when I first started writing, hold on!
Tuesday, December 07, 2004
This was an article that appeared on The Street yesterday. It ties in with something I wrote about a month ago.
Disclosure: I bought CEE in my Roth IRA about two weeks after I first posted the article.
A while ago I wrote an article that referenced his continued touting of mega-caps regardless of what's going on in the market. It has been years now since companies greater than $100 billion lead the market.
He had two comments today that really made me wonder what is going on with him. The first one was during the interview with Jim Moffett, fund manager for the UMB Scout Worldwide Fund. As Mr. Moffett was talking about weightings and countries, and ADRs versus ordinaries Vince slipped in a comment that you get foreign exposure through most of the S+P 500. I can't believe he said/thinks that! My friends at Fisher Investments have done a great job studying this and stocks tend to correlate with the country where they are listed. You are not getting foreign exposure by buying Coca Cola (KO). Good Grief!
The other that came up was yet another buy Pfizer tout. A quick note; I wrote this morning's piece on Pfizer before Vince made his comments. Doesn't the fact that it is being mentioned again underscore the extent to which it is over owned and over followed? Hemant Shah of HKS & Co. was on for a segment about big pharma. He thinks that it makes sense to wait on the group and wait on Pfizer but Vince says buy it now. To be clear I am not writing this because Vince disagrees with me but how can any viewer know when he is going to be right? He has been touting Pfizer, Intel, and GE for a long time now. One for three is not very good for a money manager. For all I know, now is the time to buy Pfizer but Mr. Farrell has lost all credibility with me, not that he should give a hoot about my opinion.
Hopefully I am conveying how important it is to not be over reliant on what these guys say. I watch and listen to learn other manager's process not to get their stock picks.
This still seems very obvious to me. At $27, however, I gotta believe there is a lot risk here than at $35.
I view my thoughts about Pfizer as very basic and big picture. At some point Pfizer will lead big pharma again and chances are I will miss the turn, which is ok.
For yesterday's downgrade to make sense, the analyst has to believe the stock will continue to lag but missing the last 20% down makes it tough for me to think he has a handle on it.
Monday, December 06, 2004
It looks like John Snow's days as treasury secretary are numbered. A leading candidate is white house chief of staff Andrew Card with Phil Graham as a close second. Bush's track record for making good picks is very bad. While I am no Clinton guy, one of the big reasons that history will look favorably on his presidency is some of the action taken by Robert Rubin. Mr. Bush, I am begging you to find a Wall Street guy to do the job. It will go a long way to improving your legacy. Phil Graham is close, he has a PHD in economics, but a Wall Street guy will be better. I can't be the only one that sees this?
On November 11 I wrote a piece about how to capture investing in Africa. There were only two options, the iShares South Africa (EZA) and the South Africa Fund (SOA). The mea culpa is that the shareholders of SOA approved a liquidation of the shares at $22.86349 per share. It never occurred to me to look for news of a liquidation vote. How often does that even happen? Either way it did happen and I was not aware of it when I wrote the article. My apologies.
Sunday, December 05, 2004
Let's try to deconstruct some of these events.
First the dollar. With the action that took place with the ever tanking dollar, I am a little surprised there wasn't panic in the street, metaphorically speaking. Here's some numbers:
If you follow currencies you know that these are not good numbers. I have been concerned about the dollar weakness and what harm it may do to our markets for a while. Your know from past postings that I am invested in stocks and have some holdings that benefit from the dollar's weakness. For I all know the weak dollar will never cause a problem but I will not stop staying on top of this. It makes no sense to me that this won't be a real issue, but for now the market is content to whistle past this graveyard.
Gold is making highs every day. You won't be shocked that this is a direct function of the dollar decline. In addition to gold being priced in dollars, at some point the weak dollar may have an inflationary effect on goods imported into the States. Gold is an inflation hedge, remember. What is interesting to me is the lack of upward movement in the mining stocks. I wrote earlier this week for Motley Fool that I think there is money moving from the miners into the GLD ETF. I have to wonder if there will soon be a catch up rally in the miners. One thing about GLD is that it will trade right with gold, period. The miners however can lag and get ahead of the price of the metal as emotions impact trading, that is the miners can outperform the metal while GLD can not. Perhaps in a short while we see money flow back to the mining stocks because of this.
Bonds had a very wild week, but you wouldn't know by the net change for the week. I asked earlier in the week if the brutal selling that was going on in the bond market was maybe over done and whether we would later find out it was PIMCO unwinding some position. Well Friday's action showed that the selling was overdone but I never heard if it was one big seller or not.
I could write almost the same thing about oil this past week too. The selling is over done, I think, and should take back some of what was lost, but who knows?
Despite all the turmoil stocks are still in the uptrend that has been in place for weeks. As I write over and over, listen to the market. It makes sense to be cautious but it makes more sense to heed the market's message.
Saturday, December 04, 2004
Do you know what TIPS yield? A 4% headwind (load + expenses) the first year and 1% there after is a lot to overcome, too much in my opinion. This type of thing is one of the reasons why I so dislike open end funds, save for Pro Funds which I use occasionally for clients.
iShares has an ETF that owns TIPS (symbol TIP) that only has a 0.20% expense ratio, no load, and a yield of 3.20%. The iShares does have 17 basis points less yield but that is more than made up for in price appreciation. Over the last twelve months the TIP has outperformed BBHIX by roughly three percentage points, more than making up for the slightly lower yield. As a quick note, not too many people buy TIPS for the income but instead use them for protecting a bond portfolio against inflation.
So to sum up BBHIX is more expensive and it under performs. Why is this fund good for anybody? I really don't know.
There is one other feature that the TIP ETF offers investors; the ability to sell covered call options to enhance the yield. In looking at the options available you will not get very excited about the premium but remember that where TIPS are concerned we are trying to capture extra basis points. TIP is currently trading at $105 per share. The June calls with a strike of 108 can be sold for $0.30 and with a little patience perhaps $0.35. The trade I would consider would be to buy 500 shares of TIP and sell five of the June 108 calls (symbol TIPFD.O). The June 108's are 2.8% out of the money. It took 12 months for TIP to move 3% so while it is possible that TIP could move that much in only six months, resulting in having to sell shares at the 108 strike price at or before expiration, it seems unlikely. Selling five calls for $0.30 twice a year after paying two $10 commissions nets $280 per year which works out to and extra 50 basis points of yield per year on the position. That is not insignificant when the yield of the fund is only 3.20%.
To be clear, I am not saying the trade is not right for everyone. If you think inflation is really going to take off, selling calls would not be smart, the trade would leave too much on the table. Also, this may not be a good trade for someone that has never sold a covered call before. This idea is just that, an idea. In a low rate environment it makes sense to explore ways to enhance yield. The more important point of this article is to be very wary of a bond fund that will take about a year to make up the sales load.