Monday, February 28, 2005
This is a new, very big, CEF that sells call options. I may be off by one or two but I believe this is the 71st such fund to be issued in the last six months;-)
This a good article about emerging market investing. I am a huge fan of emerging markets but, as I have written before, its just a theme. I recently lightened up a little bit on Eastern Europe in my own account and for a few, more aggressive clients, I hope I don't regret the trade.
It would be easy to let a given week move your sentiment, but don't succumb. Fundamentally I don't see a lot of change on the way, but I could be wrong. The areas that worked in 2004 are still working, and the ones that didn't still aren't.
Giving up entirely on something that isn't working would be a mistake. It feels like the beta names may have exhausted the sellers, some of them anyway. It seems like the beta names are only lagging as opposed to going down a lot, this is just anecdotal to the ones I own or follow. A turn around is underway or it isn't, but missing a turnaround could derail your entire year.
Elan (ELN) and Biogen Idec (BIIB) pulled their drug Tysabri because of side effects that caused a fatality. ELN is down by 68% and BIIB is down by 46% as a result. The other day I wrote about picking stocks like Anheuser Busch not being that difficult but that trying to game an FDA approval is a different story. Today makes the point for me. The story behind this drug sounded great from the start, but most of the stories do. Both stocks have had a major lift because the Tysabri story was so exciting. Clearly the news came out of nowhere. I think that if there was any visibility to this happening neither stock would be down this much.
I have exposure to BIIB for some clients through the iShares Nasdaq Biotech Fund (IBB). BIIB has about a 6% weight in the fund but I'm not sure if the iShares site has adjusted that info for today's move or not. Other clients have exposure to a biotech stock that is not impacted by today's story.
The Irish Stock exchange is also feeling some pain down more than 5% due to Elan's weighting, but interestingly the financial sector in Ireland is up today.
I think it makes sense to explore what impact owning either of these stocks in a properly diversified portfolio would be. In the accounts I manage the largest weight a biotech stock would have is 2%. If I had a 2% weight in Elan today's drop would account for a 1.36% hit to the portfolio. I might get called out on the carpet by clients for the pick but this is not the type of blow that causes financial damage to someone's way of life. This is constructive as to why I have 40 or so stocks in an account. No one saw this coming. The next time some company commits ruinous fraud there will be very few people that will see that coming. Some things no amount of research can prevent. Diversification insulates a portfolio from the un-researchable.
A last point is about the Biotech HOLDRs (BBH). It had what I surmise was a 14% weight in BIIB before the news today. I wrote about this for ETFzone many months ago that the concentration in a lot of the HOLDRs makes them riskier than corresponding iShares. Today proves the point. BBH is down about 7% and IBB is down about 4%.
On another note this site was picked as a site of the week over at ThinkingBull.com. Thanks for the nod.
The easy one asks how I access CNBC Asia and Europe in Arizona. CNBC has created a channel called CNBC World that runs CNBC Asia from 3pm mountain time to 9pm. CNBC Europe runs off and on from 10pm mountain time until noon:30 the next day. I know the channel is available on Directv and Dish Network and it is advertised as a digital cable channel buy I don't know if any cable systems offer it.
The other comment posted was from someone named Luca who had this to say;
I disagree with you about the role of individual stocks in average investors' portfolios (remember, Ben Stein's article is about basic advice). There's nothing basic about investing in individual stocks. Without a decent understanding of markets, sectors, the economy and company financials (at the very least), buying a stock is a pure bet. And if BUD is such a no-brainer, why don't you own it? ;-)
I like these types of comments. Luca challenges the thought process behind the post which has the potential to be constructive.
To Luca's first point, one of the primary focuses of the blogs I am familiar with is to help create a decent understanding of markets, sectors, the economy and company financials. For people that do not have the time to, in any way, do it for themselves there are products and people to help. Based on the public comments and private email I receive, I have to say that most blog readers have an interest in doing it themselves and learning more than they currently know. It would seem that if someone has time to read a blog like this one they are able to prioritize their time in such a way that they are making their own education a priority.
Lastly Luca asks, tongue in cheek, why I don't own Anheuser Busch if its such a no brainer. I don't know how many stocks there are right now that have been public since 1971 (the time frame cited) but I would imagine that about half of them have done better than the market and about half have lagged the market? Maybe its more skewed to outperform just as a function of longevity, but I haven't studied the numbers.
Would anyone call a stock with a track record of at least 34 years of beating the SPX a pure bet? Do other people really think picking any stock is pure alchemy? Luca's questions are absolutely the right ones to ask but I think Luca's conclusions sell too many people short.
Without any hesitation I advocate using several different investment tools, including individual stocks. In the accounts I manage that are large enough to be fully diversified no one stock is more than 3%. If one of the 3%'ers goes to zero overnight my clients won't be financially damaged. This goes a long way to mitigating the risk that concerns Luca. So I reiterate that for someone managing their own portfolio a few stocks, a few ETFs, a few CEFs and maybe a couple of other things will work. This is not an endorsement to take short cuts or to stop actively managing your portfolio.
Thanks for the great comments!
Lastly, the guest of note on Asian Squawk Box last night was Stephen Gollop. I've previously written about Mr. Gollop here and here. Mr. Gollop has been bearish on US equities for a long time. On this appearance he gave a new, for me anyway, nugget about it would take for him to get interested in US equities again. He said US P/E ratios average more than 20 and he'd like to see them at 11 or 12. He thinks we will get there through years of sideways trading. For Mr. Gollop to be correct the market would have to do something it has never done, trade sideways for years.
Market historians will note that the market did not get back to its pre-great depression high until 1941 and the Dow first touched 1000 in the late 1960's and didn't get back until November 18, 1980. In between was a lot of volatility not sideways trade, at least in the way I think of it.
How often does the P/E of the market drop by 40% anyway?
Sunday, February 27, 2005
Mixing a few pop culture items that have nothing to do with investing I would ask how long has the Counting Crows guy looked like Sideshow Bob??
If you have read this blog for very long you probably know I don't mean that. I've written several times about using logic to make decisions, not emotions. Trying to trade these little ranges we have had is not the right thing for most investors (as opposed to traders).
The market clearly has some wind in its sails, but another South Korean-sell the dollar story could easily take the market back down a couple of percent at any time. There's nothing wrong with being happy with an up week but, despite what some of the TV folks are saying this weekend, not much had changed since a week ago, has it?
Ben Stein has an interesting article in the NY Times this morning that I would encourage you to read.
There are a couple of great points that I would that I would address. First he says that there are no TV shows that teach people how to be better investors. I think recently CNBC has tried to change this but they are not there yet. Fox has its moments of gleaning process from people which is very constructive but I think they may be able to do more when they start their new channel.
I write a lot about CNBC Asia and Europe. These channels have great content but I think it is more pointed to professionals. Any time I appear on CNBC Asia a friend, neighbor, client or my wife will tell me they had no idea what I was talking about yet I get asked back all the time, point being jargon is welcomed. When I was on Fox news in December they wanted me to avoid jargon, which I think I did. After those appearances no one I know was confused by my comments.
Between the two Fox shows I basically said four things. One stock I picked is down 5%, after being up 5%, the other stock I picked is up 13%. I also said oil would go back up to the mid to high $40's quickly and that we would have a rally through the end of the year but I wasn't very optimistic for 2005. By my reckoning I went 3 for 4 but to Mr. Stein's point did I help anyone watching become a better investor? Doubtful.
There are two TV shows that I can think of that sort of delve into process, helping people become better investors. First is any of the holiday programming on Bloomberg TV. They typically air 30 minute segments with three people from the industry. And despite consistently painful interruptions from Brian Sullivan I learn a lot. I also think Cashin' In on Fox delves into process very well too. Take this week's comments by Jonas about gold. I think he's missing a few things but he did spell out a clear argument. Lastly Jimmy Rogers offers plenty of insightful nuggets anywhere he appears.
Mr. Stein also talks about his process for investing. He does not try to pick stocks, he writes. He refers to himself as a singles hitter. He also talks about using different types of funds to build the right allocation for when you have accumulated some investable assets. Keeping it simple is something I believe in wholeheartedly and write about often. TV's weakness of not making better investors can be the blogosphere's potential strength. One of the reasons I have this is to try to help people empower themselves to become better investors ( I write this so often I might be losing readers). Some of what I have written is very simple stuff that anyone can do, some of my posts have been sort of middle of the road in terms of complexity and some of the posts have expressed every bit of brain power I have. The hope being there's a little bit for everyone.
I do not agree with Mr. Stein's fund only approach. I think a mix of many different types of tools can be easily managed by most people and still be simple. This is the empowerment aspect that I refer to. You can be a singles hitter by having a couple of ETFs, some individual stocks and a couple of other tools. For example over the last 34 years (the extent of Bigcharts.com's data base) Anheuser Busch (BUD) has trounced the S+P 500 and the Morgan Stanley Consumer Index (CMR) and paid a dividend. How sophisticated of an investor do you need to be to pick Bud? To be clear, I have no interest in the stock and no plans to buy it but this is not a complicated pick and it was the first one I thought for this example. Trying to figure out whether some biotech company will get FDA approval can be a little trickier.
I also don't think keep it simple means pick a strategy today, then grow old with it and never change a thing. I don't think that is what Mr. Stein is saying but I could see where someone might infer that.
Keep it simple but keep it evolving.
Saturday, February 26, 2005
One other quick note. I have read in more than one place this morning that energy may be the new tech as far as providing growth leadership to the market. Maybe this is true or maybe not I'm not sure. Before anyone gets carried away with bubble worries here's some context. Energy currently represents 8.5% of the S+P 500, up from 7%. In 1981 it was about 30% of the S+P 500.
If and when any type of bubble occurs I would not expect the media to be out in front of it. This may be one piece of anecdotal evidence of why there is no housing bubble. But as I said earlier this week I have trouble understanding the never ending demand for new houses.
Friday, February 25, 2005
One of the things he said a long time ago that stuck with me was that almost every time a stock gets to $90 it then goes to $100. I don't know the exact numbers from his work, but it seems to me that he is right about this, and since I am not making a decision based on this little nugget, I don't need to know the exact numbers but Tom, if you read this site, you are welcome to post some details.
Does this rule of thumb work for ETFs? Since ETFs are derivatives, of sorts, the trading of the components in the ETF would seem to be the driver but perhaps I am wrong. The ETF in question is the Nasdaq BLDRs Emerging Markets 50 (ADRE). I own it personally and a few of my clients own it as well. It is been quite a while since I bought any shares of this and I don't know if I would buy it at this price or not. Today it broke above $90 for what I believe is the first time. The fund has had a very good run, consistent with most emerging market investments, and shows no sign of slowing down, based on the chart.
This is not the type of thing that would influence my trading but this may create a little knowledge about how things work, we'll see.
In putting this together I tried to blend together a mix of different volatilities with the intention of trying to minimize the likelihood of having the options assigned. Remember the intention is to enhance yield not pull in the most premium I can find. I also did not over leverage the account. As a rule of thumb the margin requirement for a naked put is 25% of the cost to buy the stock at the strike price. Fully leveraged our $100,000 could control $400,000 worth of stock. That could be a swift path to ruin. The way I have structured the portfolio if everything were assigned we would be spending $96,300. The puts are all out of the money by about 10% (some more and some less) and all expire in four, five or six months. This allows the strategy to be implemented at least twice a year. For each trade I assumed a $15 commission. The net income for all the trades was $1200. This is 1.2% on $100,000 so it annualizes out to 2.4% if it is in fact done twice a year. If your money market yields 1.5% adding 2.4% becomes significant (most brokerage firms will pay interest on cash being used to secure puts).
The stocks and ETFs chosen hopefully will not go down. I tried to use issues that don't have much recent history of big price drops, but who knows about the future? Also you may not want to write puts on companies that pay huge dividends. Stocks are reduced in price when they go ex-dividend. The options market prices in this type of event but a put you write 10% out of the money may suddenly be much closer to the money after a big dividend. I am purposely simplifying this issue too much. You should be able to find more detailed info on this aspect of the trade elsewhere if you are interested.
Here are the trades:
sold 3 DELL Aug 35's @ 0.45
sold 4 BK July 27.50's @ 0.50
sold 2 GSK Aug 42.50's @ 0.60
sold 4 XLI Sep 27's @ 0.25
sold 3 XLE Sep 37's @ 0.45
sold 2 NEM Sep 37.50's @ 0.70
sold 5 VOD Oct 22.50's @ 0.30
sold 4 XLU Sep 26's @ 0.25
sold 1 NKE July 80 @ 1.55
sold 2 HD Aug 35's @0.50
The only stock to disclose is Dell. Clients own it and I couldn't come up with another low impact tech stock that I have confidence in. Obviously I used several ETFs. ETFs have less option premium but the chance of XLI being down 10% in a day are slim. The stocks chosen are all fine companies but I do not know them as well as companies I own for clients, this is after all a paper trade to test a concept.
Another way to do this, but realize less premium would be to sell 19 OEF Sept 52 puts at $0.45. This would net $840, at twice a year, adding almost 1.7% in yield.
Also keep in mind that I am making several assumptions about future options premiums that may or may not be accurate. If interest rates at the short end of the curve go up a little more premiums might go up to. There are many variables to what could happen, there are no doubt some flaws and I 'm sure there is a better way to skin this cat but this is where we are. I'll give progress reports along the way. Fell free to weigh in if you have something to add.
There is visibility for major changes in the way the world uses the dollar. If any or all of those changes come to fruition the euro would likely be the beneficiary. When the euro first traded it was thought that it might supplant the dollar as the world reserve currency. That hasn't happened...yet. I don't know if it will or will not happen.
There is visibility for some sort of switch to the euro. Months ago Russia expressed an interest in buying euros with its petro dollars. Earlier this week there was the news from South Korea that was not as bad as first feared, but no should be surprised if large holders of US debt look to buy euro denominated debt in the future. Over the next couple of years there will probably be chatter about denominating things like gold, oil and copper in something other than dollars, probably euros.
I have heard that there are not enough euros in existence to begin to accommodate these types of things. Euroland is getting bigger, taking in more countries. This offsets a portion of that argument. Also I do not think that changes will necessarily be all or none. That places like India and Taiwan (both very large holders of our debt) may diversify a little with future investments is not much of a stretch.
Eastern Europe offers a high growth element to the continent that the US does not have. Countries like Turkey, Poland and the Czech Republic will eventually contribute to Europe's growth.
For any of this to hold water would mean that the currency market is looking to the future and seeing that things may be different. The changes that might happen are not detrimental to the euro and my thinking is that potential demand for euros is more important, for the time being, than the current state of the economy.
Thursday, February 24, 2005
Roger what do you think about Fox starting up a Financial Show that will be similiar to CNBC. I can't help but think it will be a heck of a lot better in it's presentation and style or hope so.
This may not be easy for me to answer. I think my appearances on Forbes on Fox and Your World with Neil Cavuto in December may have been an audition of sorts and I'd like to go back on. But in an effort to remain as unbiased as possible I would say that Fox throwing its hat in the ring may be the single greatest thing to ever happen to financial journalism.
Seriously, I hope Fox knocks the cover off the ball. If they are successful I think it might mean better content on all the channels as CNBC and Bloomberg try to improve their content to keep the share they have. I would like to see less banter across the board and more insight. There will always be guests that don't really share what they are doing, but maybe there will be less of that. Hopefully Fox will be able to draw some new talent on their air. This ties into my process not product articles. For example there are a lot of very smart people that appear on stock market TV in other parts of the world. Perhaps Fox will find a way to fit some of these people in.
The idea of better doesn't play into my thinking. I am trying to learn as much as I can from anywhere I can. This channel has the potential to be another useful tool.
This is interesting. Thanks and welcome to the blogosphere Matt Fisher.
Process not product. I made it clear I didn't know much about the company. My entire thought was a basic sniff test that anyone is capable of.
If you can buy into this type of thought process at all you have to be prepared for missing some big things in the market. For me the big thing I have missed (or maybe am still missing) is the seemingly infinite demand for new houses. I have never owned a homebuilder stock personally or for clients. I think my problem is that I do not understand the never ending demand. This is a short coming of mine. Every investor has short comings, that's ok.
As a quick refresher the allocation is
35% us bonds
15% us and foreign REITs and resource stocks
15% other US stocks
10% Swiss govt bonds
What intrigues me about this fund is the unique approach to navigating capital markets. This is kind of a bomb shelter fund.
What was disappointing was the interview itself. Whether this fund is any good or not, clearly the process is very unique. They spent very little time on the unique aspects of the fund and got right to the stock picks which only make 15% of the fund. It almost doesn't matter what the stocks do they are such a small weight.
The John Hussman interview was similar in that they did not discuss what makes that fund different. In my ongoing quest to learn about process I find CNBC often comes up short. That may be a function of time more than anything else. They usually devote two minutes to a guest. This is a big reason why I like CNBC Asia and Europe so much more. They give guests at least four minutes, even a small fish like me.
Wednesday, February 23, 2005
The emailer was using this fund as a cash substitute. Before I delve into this article, if you know you are going to spend a piece of money soon don't invest it something that can go down.
The idea of a cash substitute got to thinking about an idea. I want to explore using naked puts. I wrote about selling puts once before. I would urge you to read that other posting for a more in depth understanding of the strategy.
Over the next day or two I will work up a paper trade using $100,000. The spirit behind this will be as a way to get a little more yield on the cash portion of a stocks/bonds/cash allocation but not to use cash that has a near term goal.
I will try to structure this in such a way where I try to minimize single stock risk, if possible. Without having looked at any premiums yet, it will be interesting to see what can be generated in the way of yield without taking on the risk profile of something like JDSU or MLNM.
I have never sold puts for clients. I personally had three successful naked put trades back in the bubble days, one was JDSU, another was SCMR and I don't remember the third one but I do know I closed them all out long before expiration. Not much of a track record, granted, but lets see where this goes.
A flatter curve helps growth stocks, but you wouldn't know to look at the trading. I have written many times that back around the election I added some beta (but not to an overweight position) to client accounts. That worked for a short while but has not been working in 2005.
So what's the problem? I'm not sure it matters what is causing this bifurcated market (I didn't like that term when it was popular and I still don't like it). It is possible that we could figure out what the problem is and I have specific opinions about this but whether my opinions are correct or not the fact still is that risk is not working. I am quite confident in the viability of all the beta names I own but not the stock price for the next few months. As an example I have disclosed previously that my clients and I own Yahoo (YHOO). Over the last twelve months Yahoo kicked off about 2/3 of $1 billion in free cash flow. They have $3.5 billion in cash. They are almost ubiquitous. The company isn't going away. That does not mean we won't see $29 before we see $39. Holding the stock does not make me the least bit nervous.
Compare this to, say, Findwhat.com (FWHT). The numbers, relatively speaking, are ok but have you ever used the site? If not, do you plan to use it in the future? Here's the real question, have you even heard of the site? For all I know this may out perform Yahoo every year for the next decade but for now the market doesn't seem to reward the risk taken for owning this type of stock.
At some point this will change. A manager may nail the exact turning point or miss it altogether. I don't want to be too cocky about my ability to nail it so I maintain some plain vanilla exposure to the these types of stocks with names like Yahoo. I will get a good chunk of the effect without exposing my clients to a lot of risk, on a relative basis.
This is right for my clients and me but not for everyone. This is just how I handle areas of the market that are out of favor.
On another note I got a good comment posted this morning calling me out on my idea about a snapback in the event of a crash. First is the comment and then my response.
None of your snapback examples occurred while the Fed was hiking rates. The best strategy in each of those cases was short until the Fed cuts and then buy. "This time it's different" is a difficult argument to make but the current stance of the Fed and increasing reluctance of central banks to finance U.S. borrowing could be a pretty big impediment to following the same course of action. I don't have a problem with your point so much as your examples
You may be right. But if there were some sort of horrible event to cause a crash, wouldn't the fed one way or another act? They can add liquidity and jawbone in addition to lowering rates. I would think the fed would do something, again, in the face of a crisis.
Both SPY and QQQQ were up slightly and have taken the CPI report well to move up a little higher. The CPI adds some validation to the notion that the PPI was a blip, but I think it also means that CPI is not picking up the areas of the economy where inflation exists, like healthcare.
Sometimes the market can be better off after a selloff like yesterday. My gut tells me that is not the case now, I could be wrong.
I don't know how serious this may or may not become but as a quick reminder, bear markets don't usually start with crashes. I would think a crash would be no different if it happens this time around. This is not a prediction but ties in with past writings of relying on logic instead of emotion.
Usually sharp selloffs snap back sooner than people expect, think Asian contagion, Russian Ruble & LTCM and 9/11. That may be worth remembering.
Tuesday, February 22, 2005
There has been an interesting mix of opinions and emotions on CNBC. It feels like the strategists and managers are not very concerned by today's action and the media personalities are trying to whip the audience up. It might be my imagination.
I think I have heard Maria say three times that there is nothing fundamental happening in Europe and question why investing there makes sense. Perhaps I am the only one that finds this odd. Between my clients and my own portfolio I have exposure to about eight European common stocks. Six of the eight were up today. I'm sorry but why is this a bad place to invest?
There is no doubt that today was a bad day. We had a couple of fears resurface; higher oil prices and visibility for decreased global demand for US debt. The market is right to worry about these things. There were other areas besides Europe that worked today; Australia, New Zealand and Brazil really stood out as did the one South African gold stock my clients own (but I'm not sure if other South African names did well). The point is not to pat myself on the back. I have been writing throughout the existence of this blog that if you have a properly diversified portfolio there should always be stocks that are up and always stocks that are down. Days like today, Maria notwithstanding, make my point for me.
If you have not done so already I would urge you to learn about investing in foreign stocks (or funds) and explore how this might fit into your financial plan.
Pressuring U.S. assets was news from South Korea's central bank about how it intends to invest its $200 billion in currency reserves. The bank reportedly told Korea's parliament Monday that it plans to diversify the stockpile, pumping more money into Australian and Canadian securities and presumably lightening up on Treasury bonds.
That fanned fears that demand for dollar-denominated debt will wane around the world. South Korea's central bank owns about $69 billion in U.S. Treasury securities, according to Bloomberg, making the Asian country's investors the fifth-largest foreign holder.
"It's a prudent standpoint for South Korea," said Peter Boockvar, equity strategist with Miller Tabak & Co. "This follows talk from a few different central banks that it will continue, and it takes away one of the pillars in the U.S. Treasury market. While a weaker dollar can help some, if this were to continue with other central banks it would be obviously be a negative."
In addition to this news there was news a few months ago that Russia was going to put some of its petro dollars into Euros. This caused a stir about whether oil would soon be denominated in Euros instead of dollars.
I wrote about this issue of weakening demand for dollar denominated asset a few months ago. Wall Street media seems to have paid less attention lately, except for today. It is things like this that, again, stress the need for diversification. This feels like its going to be an ugly day for stocks (still too early know) but there are plenty of areas working today. Having broad exposure may not ensure higher returns but it does reduce day to day volatility. I can appreciate that there are plenty of people that aren't looking for less volatility but I would think if your are longer term and more of an investor (than a trader) the market action of the last few weeks demonstrates how you can reduce the ups and downs of the market.
These are things I have written about before, things I try to do in my practice and pass along in this blog. In the course of having a properly diversified portfolio you will have some stocks that are down. I don't think that they are down is the thing but why they are down.
We own a big broad line retailer. The stock had a great run last year, but like the market is off of its highs. The most recent news from the company has them beating past guidance. In this instance, that the stock is down with the market is not reason to be nervous or upset.
We own a tech stock that is down in the last few weeks a little more than the Nasdaq. The news here is also good, they are taking market share from an 800 pound gorilla and winning all sorts of new business. I expect the stock to outperform the sector in both directions. It is doing exactly what I expect it do. I wish it were going higher, but its not right now.
That being said, if the market goes below the 200 DMA I would not hesitate to sell either one. I don't know yet if I will, but in that instance a problem with demand for stocks (as I would see it) could become more important than what's going on at the companies. You may disagree with my approach but there is not much emotion in any of this. That is the point here.
The market works a certain way. The price of good companies goes up more often than not. I know that is simplistic but I try to keep it simple.
Monday, February 21, 2005
I've recently started following your blog, and I've read quite a bit of discussion about the BRICs. But what about Central, Eastern Europe and Russia, particularly the closed-end fund CEE? Thanks for your insight and your generous offer to comment; I've learned a lot about investing and ETFs from here.
I've written several times about CEE. I used to own it. I made a nice trade, but could have taken more out of it with some better patience. As a way to capture the region I think it is an excellent vehicle. TRF is another closed end choice too. There are several open end funds that I have not explored but may be better alternatives. If you have an interest in CEE check out the others first.
The article I wrote a couple of days ago about warning signs is just that; warning signs or things to look out for as far as the theme unwinding. I believe a lot would have to change the development of the region to come apart, but it would take a lot less for the stock markets to drop.
One thing about CEE is that it has a 45% weight in Russia. I owned CEE long enough to get the annual report in which the managers gave outlooks for all the countries in their universe. They feel that a second Yukos would damage the Russian theme. I personally have no idea if there is another oligarch with political ambitions, as Khordokovsky (spelling?) was alleged to have, and it sounds like the managers don't know either.
There may not be any Polish ADRs listed on the NYSE anytime soon but I do expect there will be more ways to invest in the region. It could be a long time before supply and saturation become a problem.
Sunday, February 20, 2005
The New York Times has an article online today (by the way I could swear this article is repeated from a couple of months ago) about the B.R.I.C. investment theme. B.R.I.C. stands for Brazil, Russia, India and China. The article itself reasonably balances the pros and cons of investing in these countries and in emerging markets in general.
One thing that caught my eye, aside from the entire article itself, is that HSBC(HBC) has created a product for European investors the invests in just these four countries and that a similar product may soon roll out in the states.
This is an important development. When investment themes become popular, investment banks create products to cater to demand. Eventually too much product gets created and the theme rolls over and can offer poor returns or completely blow up.
I don't want to minimize the importance of what is happening in these countries. They are all developing nicely and becoming more important to the global economy. Regular readers will know that I believe in these themes and have invested client's money in these areas (and my own money too).
Just because the countries will be better off for what is happening now does not mean that stocks have to up. The internet theme from a few years ago was correct. The internet has changed our lives, I don't think there can be much debate about this. This did not translate to net stocks undoing all previous rules of investing. The stocks did not go up forever, profitability did matter and companies with great stories could fail (Exodus Communications comes to mind).
The B.R.I.C. countries, or the entire emerging theme for that matter, will not go up forever. Economic growth and profitability will matter. My belief in emerging markets does not preclude me from cutting back if I think down a lot is on the way. Successful investing includes not letting emotion or excitement get in the way of logic. At some point Brazil, for example, will rollover. Maybe that will happen tomorrow or maybe not for a couple of years. Pay attention and listen to logic.
First, Mr Stein's comment; this time is different isn't as dangerous as having a financial over reliance on this time being different. To put it terms I understand better, equity market terms, there is historical precedence for bad things to happen to sectors that grow to become 30% of the S+P 500, tech in 2000 and energy in 1981. The next time a sector grows to be 30% of the market may not spell doom but you would be wise to be underweight when it happens. If it turns out not to result in a crash great, but an overweight position could be disastrous.
As for Mr. Adkin's comments; I believe he stopped short in his statement about affording your mortgage. I would add that you can afford your payment and the loan is amortizing. A lot of the loan products people buy these days don't pay down principle so you don't build equity from your payments. They only way to build equity in these instances is through price appreciation.
Interest only loans can be great things when used properly. My take on proper use is to, at a minimum, include the same amount of principle in your payment as if it were a normal loan. If the house is otherwise unaffordable other than by only paying interest, too much leverage is a problem.
There has been more devastation by mis-using leverage in capital markets from buying stocks on margin or from trading too many options.
I think over leverage is a function of speculation. The crowd tends to get most excited closer to the end than the beginning. Maybe this is happening in real estate.
I read something this weekend that got me to thinking about why Alan Greenspan feels the bond market is a conundrum. The US has not issued a 30 year treasury bond since 2001. I wonder if less supply of longer dated paper is contributing to the flatter yield curve. That would not, I believe, change any of the economic implications of a flatter curve. The slope of the curve impacts the way capital is accessed. The reason for the change in slope does not matter.
Friday, February 18, 2005
First is the action today in Fannie Mae (FNM). Anyone that has followed the market over the last few months (longer actually) has known that Fannie has had some serious threats to the way they operate. The stock is down from $75 last September. Multiple threats to how a company conducts it business is reason for most investors to stay away. There are plenty of professional investors for whom an assessment of the risks and then a decision to buy (in generic terms, not specific to FNM) is suitable because of the nature of the fund they may run. I don't think that description applies to too many individuals. It seems like everything has gone wrong for this stock. What would have happened if everything had gone right for Fannie? How well could it have done? That is not knowable it might make sense to think of it this way. It might have done a little better than the group overall but a do-it-yourself investor could have probably captured most of the move, more dividend with substantially less risk in a lot of different names or even a sector ETF. This type of analysis does not require any keen insight. To my way of thinking the potential for a few extra percentage points reward is not worth all the extra risk taken.
This type thing will happen again and again in our investing lives.
It may be happening right now somewhere else. First, if your so inclined, listen to this interview of Mariana Bush, the CEF analyst from Wachovia. Ms. Bush believes that income investors do not need to sell leveraged, muni CEFs even though she sees visibility for higher rates and reduced dividends. If you listen to the interview she says that these funds may face 5% of downward price pressure. I'm gonna say "not likely." I'm thinking that there will be a much nastier decline if/when they start to move at all. I believe Ms. Bush fails to take into account the sense of investor sentiment that sometimes moves these types of funds. Her hold'em don't fold'em thoughts make more sense for unleveraged funds. The spread between the NAV and the market price often moves on emotion. For a history lesson of what is possible look at a few different funds in July, 2003. Most of the people I've known that considered themselves income investors don't want the type of volatility that may go with a big move in rates.
The potential for volatility can be managed a few different ways. An investor can add some short duration funds or inverse bond funds. Another possibility might be to raise some cash for a short while and there are more ways still.
I had a couple of second opinion requests for Merck and one thing I said was that to buy Merck here would be a bet that some, previously unknown, positive change would have to come. Maybe the chance to put Vioxx back on the market because the problems effect the entire class of drugs is that thing? I don't know and I'm not buying the stock but it's possible.
My initial reaction is that the Fed will not do anything differently because of the number. First, at this point it is not a trend but a blip, for now anyway. Also it is said that changes in the Fed funds rate take six months or so to have their effect. We are several months from the last couple of hikes reaching that six month mark.
I have no doubt that stocks are fragile these days and this doesn't help. Bonds are selling off too. If my thoughts here are wrong and this is the start of a trend we may see the flattening trade unwind some more, meaning that intermediate and longer term bonds go down in price, up in yield.
Thursday, February 17, 2005
This is one of the cornerstones of top down management.
On a personal note I received my textbook for my classes at this years Arizona Wild Fire Academy. Its like a phone book. The amount of science that goes into managing a wildfire is astounding. The class I am taking will allow me to become what is called an engine boss, technically speaking I need two more fire seasons after the class to be an engine boss. I worked one fire last season where I was the defacto engine boss (this means I stayed with the engine to provide water to the line and to coordinate a hose relay to allow me to refill my water tank from one of the big water tenders, as they are called). Thanks for indulging this little glimpse into life here on the mountain.
I find your comment rather arrogant. While I agree that the fees on a mutual fund wrap can be expensive, that does not mean investing in active funds is all that bad. I am sure I could find plenty of open ended funds that have produced higher returns with less standard deviation than your record as an investment mgr. what is your record? Net of fees? Most investors do not have the stomach to invest in concentrated portfolios, they sell low because of fear. And ETFs are index funds, which are the epitome of momentum style investing. The s&p 500 weights whatever is working at the time. If you invested in a SPX etf in March of 2000, you were a fool and bought tons of stocks at bubble prices. Indexing cares nothing about price of a security, it just cares about the mkt cap of the company.
First, if the reader finds the post arrogant I say fair game. I try to share very specific opinions here and while I don't intend to be arrogant, his perception is his reality. He then says he could find plenty of funds that have better records than me. I bet he's right. I don't think I've ever pounded my chest boasting about track record. My benchmark is the S+P 500 I beat about 60% of the time on a quarterly basis. I have said countless times that most managers will both beat and lag the market as time goes on and that I am no different. Where I think I add the most value to clients is having the discipline to stick to the exit strategy I have written about too many times, this was a big help last summer.
The reader says most investors don't have the stomach for concentrated portfolios. I think we agree on this unless he thinks 40 stocks is concentrated.
He also says most investors sell at the wrong time due to fear. That is true. One purpose of this blog is to share what I've got to try to empower individuals to not make this kind of mistake. The market tends to work in a certain way and I try to share my take on how it works. This may not ensure perpetual outperformance but might reduce the instances of emotional mistakes, at least I hope so.
He next says indexing is a bad idea. I have never espoused a Boglesque (I think I just invented a word) blind devotion to indexing. Index funds like anything else are one tool, of many, available to us. The only broad index funds I use are for clients who ask us for ideas for something like a education account or some other small account, but they don't play a role in accounts that I actively manage. The article to which this person posted lays out more specifics on this topic.
In closing I would doubt this reader really understands what this blog is all about. I am still trying to figure if he is in favor of wrap accounts. I will also say, that while I think the reader has missed the point of almost everything I am trying to do here, this is what makes the blogosphere so potentially useful. The reader, I think, is trying to hold me accountable for my opinion. I feel a sense of accountability and responsibility. The primary goal is to share my process. Readers take a little from me, and a little from others and make their own process.
Squawk also had John Hussman on for too short of a time. He is someone we can learn from, I know I can. He got a couple of stock picks out and that about it. He says he focuses on risk adjusted returns. This is the type of approach I try to take to a point but I don't think I have ever used that term on the blog before. Here is a link to his site. http://www.hussman.net/
Wednesday, February 16, 2005
While I wish the article had a little more meat on the bone, the point made is important.
On another note I heard a sound bite from Mike Holland saying that the S+P 500 could be up 20% or 25% this year. This sounds impossible to me! But who cares what I think or Mike for that matter? Big years often come out of the blue. If this year turns out to be a huge up year and you are too defensive you miss out. This is why I stick to my often stated criteria for when I get defensive. This type of market is where traders try to get too clever and end up missing big moves. If the market gives you a big move in something you own, take the trade but too much cash for now might be a mistake.
I heard something like this in an interview last night. I don't think it's quite right. There is inflation but it seems to be confined to health care and energy/commodities, if you told me other areas where there's inflation I wouldn't argue with you. I do agree that inflation does not seem to be apparent in the typical inflation measures however.
The economy's expansion, unusual as it is, and the inflation (where it exists) makes raising rates appropriate. The trading at the longer end of the curve warns that the expansion may be weak and coming to an end soon.
The worst possible outcome of this situation is stagflation, rising rates and slowing growth (or even recession). While there is no real worry right now for stagflation its not impossible.
I believe it is important to stay in touch with what can go wrong with the market. At different points in the stock market and economic cycles the market faces different threats. One thing that could take the US further down the road of stagflation would be some sort of disorderly drop in the dollar. Currency strategists always talk in terms of orderly or disorderly moves to the point of being over used but breaking 100 on the Yen or 1.40 on the Euro might count as disorderly. The domino effect here is a currency gets too weak, rates get raised to make holding that weak currency more attractive (like a lot of the commodity currencies), hopefully causing the value of that currency to rise. The downside might be that rising rates could hurt the economy. But as I say not a real concern just yet, stay tuned.
Alan Greenspan goes to Capital Hill to get yelled at by Barney Frank this week. I was asked for my opinion about his testimony the other night on CNBC Asia. I would be very surprised if he walks away from the two days having left turmoil in his wake. If there is some sort of big reaction to what he says on Wednesday I would look for it to be unwound the following day.
Tuesday, February 15, 2005
Among other things this article does a good job nailing down the potenital flaws of HOLDRs as opposed to other types of fixed baskets.
Year to date QQQQ and IWM are doing noticeably worse than the S+P 500. The SOX index has bounced aggressively after getting crushed in the first three weeks of the year.
To be clear a some things are working. Apple has had a great run and I think semi-conductors be in the middle of what may turn out to be a great trade (but with not much in the way of fundamental support behind it). But from a big picture sense, if you are an investor (as opposed to a trader) this may be a good time to reign in beta and use an ETF for some of your growth exposure.
About two months ago I wrote a post that included a little about my own portfolio. I don't really have a diversified portfolio. I am very tilted to boring dividend payers and low beta foreign stocks. My logic is that I don't need to spend much time on my account, which would take away from the attention I give clients. My account has outperformed substantially over the last couple of months. I expect I will lag dramatically if/when tech really takes off.
I may make a change or two over the next week or so for clients but I continue to overweight the things that have been working.
It thrills me that I can help a few people learn more about how to manage their portfolios. I hope this website continues to be useful and relevant.
To that point I am rolling out a new free thing. If you want a second opinion on a stock, CEF, ETF or something else you can email me or post a comment on the blog. At a minimum I will reply in the manner you ask the question. If you post a comment to ask, that will be how I respond so check back to the comments of whatever post you leave your question on. If you email me a question I will send an email reply. If your question might be useful to other I may write an article about it, but keep private any personal info you share.
What I hope to do with a second opinion is give some top down analysis, give my opinion on what needs to go right, what could go wrong and ask a question or two that you may not have thought of to challenge your idea. If possible I will try to offer up a substitute idea too. I will disclose if I have an interest in the stock you ask about.
I have no idea if there will be any demand for this or not. At this point I will limit people to two second opinions per month. One other thing is that if you ask me about some five letter stock with a $100 million cap I will probably tell you it is a lottery ticket and ask if you can financially withstand it going to zero. I'm not likely to have much more insight than that for most bulletin board stocks.
Hopefully some people will take me up on this.
Monday, February 14, 2005
My wife took this picture right after they got the back left wheel out of the hole. This happened in front our cabin. They had to transfer 4000 gallons of propane out of this truck into another before they could move it. Um, we've had a lot of rain lately.
This is a good article about the potential pitfalls of inverse bond funds. The article says that as a group they have done poorly and they are kind of expensive.
Bond prices have gone up and the prices of these funds have gone down. They are inverse funds, so to say they have done poorly doesn't quite seem right to me. They are supposed to move in the opposite direction of bonds and have done so. I'd say they've done well. What hasn't done well are the investors that have used these funds to speculate on the bond market.
The last few sentences of the article deal with a different use for these funds; hedging. I use the ProFunds for a few clients as a hedge if/when rates rise. I own a small enough position that it hasn't created much drag on that part of the portfolio. The decline over the last year has been about 13% in that one.
If the inverse bond funds are down that means that other parts of a fixed income portfolio are doing well, that's good.
That they are down is not in and of itself a reason to sell. You either want a hedge or not. If you do, it is working quite well. I'm not sure what to tell someone that is on the wrong side of a trade.
I am more interested in process not product. By tossing out a few fund names, she gave neither. I saw or heard 2/3 of the show and don't recall hearing anything more specific. If I missed something please post a comment.
This blog is written by Brian Shiau, a student at Princeton and a Scottsdale, AZ resident. Brian is not shy with his opinions and finds some very interesting stuff to write about. Welcome to the too small world of stock market blogs.
If you don't know Bob he is usually, if not always, very bullish. He mentioned that one thing going for the US market these days is historically low interest rates.
I got to thinking about Bob's comment from a contrarian view. We have had low rates by historical standards for quite a while. A good question might be to ask are they really low? This recovery has lacked the oomph of other recoveries, the trend for flattening has been around for quite a while too. Foreign countries are almost forced to buy our debt which may continue to keep rates low for a long time.
I think that low rates may not be a support for the market these days. I just wrote that the next big move will be up but that I don't know when. The when might not be for a couple of years, maybe the ten year goes to 3.50% before it goes to 5%. It is not clear to me that the action in the yield curve has helped stocks bounce around in here with out causing a lot of pain. If this thought holds any water at all then when things like earnings yield and other bond market tools used to predict the stock market say buy, perhaps they should not be relied on too heavily.
Or maybe not.
I will be on CNBC Asia Monday night (US time) ten or 15 minutes into the first half hour of Marketwatch doing my usual interview.
Sunday, February 13, 2005
So many people seem to be changing there tune about bonds lately that it is almost contrarian, now, to call for higher rates this year. For a while I have been saying the next big move will be up for rates (I realize there is nothing insightful there) but I have given up trying to figure out when.
Lastly I had an email that followed up to my Grit your Teeth article earlier in the week. The reader asked about 8% stop orders recommended by William O'Neil. This was my answer.
The answer to your question, I think, depends on what you are doing strategically with your account. For someone that has a bunch of stocks and they are looking to trade out on a, for example, 10% rise then some sort of stop order makes sense. I have not read O'Neil's book so I'm not sure why 8% is as opposed to 7% or 9% but some sort of consistent exit strategy is right.
If you have a diversified portfolio where you are trying to capture all parts of the market I could see where an arbitrary stop order could be the wrong thing. For example lets say you decide that you want to own China through one of the oil stocks as a long term theme, say 5 years. Chances are your would research the names and buy the one you thought was best. Now lets say all of them go down exactly 8% and you get stopped out on your stock. What do you do next? Would you give up on a five year theme because of a bad couple of weeks? Would you then buy what your first research lead you to second best? What if it goes down 8%, you get stopped out and the next day it is up 3%.
Stop orders are not the be all end all. I am not a fan of arbitrarily putting the same stop under every stock. 8% is a lot different in a name like Ask Jeeves than in Proctor & Gamble. Why is 8% right for both names? It might make sense to have a tighter stop on PG and give ASKJ a little more room.
Saturday, February 12, 2005
That being said there are a couple of things on Bill page that I would do a little differently. My going over this is, to me, what the blogosphere is all about. Take a little from one blog, a little bit from another blog and so on.
Bill lays out a recommendation for an all ETF portfolio for a very specific case study of a man in his 40's as follows;
5% LQD (corporate bond ETF, the rest are all equity)
5% EWU (UK ETF)
10% IEV (large cap European equity)
20% DIA (US large cap)
15% IWP (US mid cap growth)
10% IWO (US small cap growth)
10% IJT (US small cap growth)
10% IGE (natural resources sector)
5% BBH (biotech sector)
5% BDH (broadband sector)
5% HHH (internet sector)
Before I comment, you may want to read about the portfolio on Bill's page to have it all in the proper context.
I'm not sure why the small cap allocation is divided between two growth ETFs, IJT and IWO. I looked at charts from 1,2,3 & 4 year time periods expecting the correlation to be very tight but it turns out that IJT out performed by a lot, most of the time. Having one growth and one value makes more sense to me. IJS (a small cap value ETF) outperformed IWO for the last four years.
I think the foreign allocation misses some opportunity for better diversification. A chart that compares IEV, EWU and the S+P 500 shows a very tight correlation but you can see that iShares Australia (EWA) offers a chance for better diversification, due to it being a commodity based economy as I have written many times before. The ETF, EWA, is not as important as the concept.
The Natural Resource Fund is about 82% energy stocks which may not be a bad thing but is not obvious to me by the name.
LQD has a yield of 4.5%, average weighted maturity of 10 years and effective duration of 6.5 years. The duration is pretty good but there may be better ways, outside the ETF realm, to capture more yield.
Bill uses HOLDRs for sector exposure. I would seek out alternatives where they exist. HOLDRs, because of their structure, can sometimes be more volatile than an individual stock you might otherwise choose.
The last thing I would point out is, and I have written this before, I'm not sure that anyone needs only ETFs. The fictional person in this case study does not have a lot of time to watch his portfolio. I still don't think that equates to ETFs only. There are many tools that allow for low impact ways to manage your own portfolio.
This is just my second opinion and I'm sure Bill could easily out debate me on my points but that's what I would do differently.
Friday, February 11, 2005
I'll examine four different situations in an effort to analyze this process. AIG got taken down in an ugly fashion in the face of the Spitzer episode. I don't own this stock, don't plan on buying and wrote a negative article about it last spring for TMF. That doesn't mean it was ever likely to go out of business. Holders that got ambushed by Spitzer at $72 and watched go down to $60 and now back to $72 maybe had some opportunity cost but the likelihood that AIG was going to go away was miniscule.
Taser (TASR) is a stock that is having all sorts of problems and unlike AIG could go away. I'm not saying it will, but too many more deaths from the non-lethal weapon and sales could drop a lot. I wrote a positive article for TMF last spring on Taser saying there was clear and obvious demand for the product, I even got a nice email from the CEO thanking me. A perception of the stun guns killing people hurts that demand badly. If you own this stock, you own a name that could go away. This needs to be taken into account and perhaps patience isn't a virtue.
I own Starbucks (SBUX)for most of my clients (yes naming a name, but I don't think I can move this stock). Most clients own it lower than current prices. The stock is in the middle of a nasty correction. The way I see it Starbucks isn't going away. Patience is a virtue here. Obviously in hindsight I should have handled it differently but no manager will trade every move exactly right, nor do I think they necessarily should try to do this.
Another name I do not own going through a nasty slide is Veeco (VECO). They make equipment for nano technology. I do not know the story very well but they have an accounting issue, that I doubt is serious but again this is the type of company that could conceivably go away.
Go away is a metaphor of sorts. If a $30 stock drop below $5 and stays there, in a way that stock has gone away. If owned Taser here I would have to question whether I had lost touch with the story. I own Starbucks and have decided I have not lost touch with the story. For clients that own it, Starbucks is about a 2% weight. If I am dead wrong, clients will not be hurt. That is crucial to what I do.
I finally received this from the folks at Forbes. Can anyone tell me how and where to post it in my template so it is on the site. If you can help please do, but assume I am VERY dumb. Thank you!
I received an email from a reader asking me what I thought about this article and what it would mean for the future ADRs. The gist of the article is that because of the cost of Sarbanes/Oxley a lot of foreign companies want to delist from the NYSE.
I saw an interview with John Thain where he said no one had de-listed and he didn't think it would be a big issue. This article seems to refute some of Mr. Thain's comments.
The article mentions four stocks, only two of which I have heard of. Of the two I have heard of I only knew that one had ADRs. The point being that, as someone who devotes a lot of time to foreign investing, I don't think the issue is a big as Mr. Epstein perceives it to be.
I also think that the prestige of being able to list on the NYSE is important to many foreign companies. I remember years ago Nestle did not care about an NYSE listing and said so.
Lets assume I am very wrong about this and the number of ADRs cuts in half, or more. That would not change the demand for US dollars to find there way into foreign equities. What I think would happen is that trading in ordinary shares, although more difficult to do, would increase dramatically. We would also see interest in any type of product that gives exposure to foreign markets also increase. Big changes creates opportunities for the brokerage industry to shake the money tree. Just a little bit ingenuity would create a solution to this potential problem. It is even possible that we end up with something better than ADRs as we know them now.
To be clear I don't expect this to turn into a real issue.
Thursday, February 10, 2005
What's the significance of a large bid x ask spread on PWC? How is the trading price of this ETF related to its true NAV? I looked at it today, and the spread was about $.30. How do I know I'm buying/selling this ETF at the true NAV price?
Generally speaking the spread is a function of volume. The average volume for PowerShares Dynamic Market is 39000 shares. Some of you may remember PWC as the old symbol for Paine Webber. When you place an order your brokerage firm routes it to the Amex (or more likely the Chicago Stock Exchange or some sort of electronic trade platform). Some sort of professional trader somewhere has to take the other side of your trade. If you want to buy 1000 shares that person that is on the other side has to sell you 1000 shares. That might leave him exposed one way or another with out a realistic expectation about how long it will take to trade out of it. A big spread helps to compensate this type of risk.
As a rule of thumb a wide spread would not be a function of......
Alert! I just got to go on a medical call for our fire department, a tree fell on a guy in a logging crew doing work up here. Very cool to help out with this stuff
.........the NAV of the fund. As far as getting the NAV intraday, the PowerShares page for this fund has it. The page says it recalculates every 15 seconds.
As a question to readers, are postings that address market mechanics useful? Feel free to chime in.
I posted an article yesterday about dividend paying stocks wondering if this mania will turn out to be wrong. Now the Street.com is offering a newsletter devoted to dividend paying stocks written by David Peltier.
Mr. Peltier may be a great stock picker but if the whole dividend theme unravels, his ability won't be the important thing. If your portfolio contains nothing but high yielding value stocks you are taking the same type of risk as owning all internet stocks five years ago. Before you go berserk on me for that one, I am not saying you face the same consequence, an 80% loss, but loading up on one thing is never a good idea. Overweight is one thing, 100% is something else. If you are inspired to email me a nasty gram, please re-read the paragraph and get my intended meaning.
The SPX and the Nasdaq are eroding as of now but check out some the Aussie stocks.
Someone at TD Waterhouse actually believes this? Is that really the message that should be sent to people that wonder whether they can manage their own portfolios? How long does it take you to brew up some mud? Five minutes if your really groggy?
I may be over reacting but I think it is an absurd simplification to imply you can learn all you need to know about a stock in a few minutes.
As a side note, all types of stock screeners tend to rely a lot on backward looking data and not enough on forward looking analysis.
Wednesday, February 09, 2005
The point of this is not to pat myself on the back. I don't think this was a particularly insightful call. Anyone can watch the way options trade and see when distortions in premiums might be signaling something.
Even if you don't trade options this type of minding the store can be useful.
If you are unfamiliar with PowerShares, this articles gives a good idea about what the company is trying to do. I wrote an article for Motley Fool about their China ETF.
I too believe in the dividend paying theme. That does not mean I will be right. Part of trying to do a good job is to realize I could be wrong, know what the consequence of being wrong might be and have something in place to mitigate that consequence.
I am overweight low beta dividend payers compared to high beta growth names. The dividend payers, as a group are working much better than high beta growth names right now. I think if that changes around I won't be left too far behind with the growth names I have, but we'll see.
I do not think that dividend payers, as a group, are going to implode or do something horrible. Clearly I think they will do quite what well. If I am wrong I think it will be because high beta takes over leadership of the market and, as a group, has an up a lot type of year versus and up a little type of year for dividend payers.
As I have written before a properly diversified portfolio is unlikely to lag by a wide margin but I think the potential for a lagging year, and all managers have years where they lag, can be managed effectively by keeping a balance.
Comcast is one of the giant cable TV companies. There is no shortage of information about this company if you want to look it up. The chart shows that Comcast has the dubious distinction of having trailed the S+P 500 over the last five years. Comcast is 40% owned by mutual funds/institutions, none of the 38 analysts that follow it (according to Yahoo finance) give it a sell rating. I take this as meaning the stock is over owned and over sponsored. For these reasons the stock reminds me of Pfizer.
It may be a great company, with a lot going for it but none of that is obvious to me. None of the numbers for this company seem to stand up very well to other cable companies.
In general terms, media stocks tend to do better later in the stock market cycle. This is because the advertising market usually does better when there is less ambiguity about the state of the economy.
Cable TV is a tough business, I doubt that bulls on the stock would disagree. I could be dead wrong and my article could mark a bottom but it seems that demand would only come from new products and that existing services face a continuous threat of becoming obsolete.
When I think about buying a stock I like the catalyst for higher prices to be very simple. This is not the case for me with Comcast. Some may be tempted to think of it like a utility of sorts but it pays no dividend. If the stock goes up it can do it with out me.
Tuesday, February 08, 2005
I have written countless times about oil in this regard. Brazil is interesting because of the commodities it supplies to various other countries. Nickel and copper stocks are interesting as are stocks like Bunge (BG) and Corn Products (CPO). Soy and corn. By the way CPO also got a mention from Jim Jubak today.
Where I think some understanding of commodities is important is trying to learn how supply and demand for these commodities can effect stock markets. I believe the recent increase in demand (real or perceived) for commodities has been very important in the strength of stock markets and currencies in certain countries.
I am inclined to think this trend will continue for a few more years. Long time readers know I have portfolios tilted this way but not in any kind of extreme bet.
I wanted to clarify my position, which will help to explain my approach. My clients have a 2% or 3% weight in one New Zealand stock and 3% or so in Australia. This part of the portfolio is meant to be a counter strategy to US holdings. The stocks have very high dividends, low betas and because they are from commodity based economies tend to have a low correlation to US stocks.
I would use the same criteria to get defensive in these countries as I would in the US markets.
If you look at the site for the Copenhagen Exchange you will see that there is a decent mix of most sectors. The exchange has financials, energy, health, telecom and consumer stocks in the top ten.
I have written a lot about Norway. If you look at a chart that compares Norway and Denmark you see that there was a correlation that has deteriorated as the price of oil has gone higher. Denmark does not participate in the oil market in the manner that Norway does.
Denmark seems to have a fairly low, not inverse mind you, correlation to US markets. If the US deteriorates more than expected I may look to deploy some assets in to Denmark.
I also like that Denmark is not part of the Euro currency and is not likely to be part of it for a while. The reason I like this is that the correlation between the US and Euro denominated countries may be growing tighter. I like that there are still several countries in Europe that don't have the obvious potential for tighter correlation.
At this point, though, I have no real interest in buying Denmark but I am interested in watching the market. Currently there are only two Danish stocks listed as ADRs on the NYSE, Novo Norsk (NVO) and phone company TDC (TLD). A friend who manages money owns NVO for clients and TLD pays a 4.5% dividend.
The point of this article is to share the starting point of an investment theme. I have done a little bit of research to begin to learn the Danish story, I do not consider myself very knowledgeable about it yet and I don't know if I ever will become knowledgeable. When I hear about something new to me this is what I do. I learn a little and then watch. This is a good idea for new markets and new stocks.
Monday, February 07, 2005
I thought there was more available than actually exists. There is only one stock on the NYSE that is a New Zealand company (according to ADR.com) and three others that look like they trade here on the pink sheets. Also there is only one equity CEF that has NZ exposure (according to ETFconnect). My clients and I own the one NYSE name, Telecom New Zealand (NZT). I have to disclose I am implementing a new client account and so may be violating my two week rule. Hopefully you will realize that I am not violating the spirit of the rule by buying the stock for one new client.
The one CEF is Aberdeen Australia Equity (IAF) which has a 6% weight in NZT. I am waiting on a call back from the fund to know the total weight of New Zealand for the fund. If they get back to me I will edit this post.
One thing the question did not ask was about ETFs. NZT has a 0.42% weight in the iShares Global Telecom (IXP). Clearly this won't capture the effect but it will save you the time of looking for yourself.
ETF Investing: Funds of ETFs burdened with high fees, poor results - Financial - Financial Services - Markets/Exchanges - Mutual Funds - Market News
This article illustrates the poor performance and high cost of open end funds that try to market time using ETFs. This is a great article because we see an idea that is attempt to be innovative that turns out to not do very well. Put another way we can learn from other people's mistakes.
In a separate note I think I just heard Squawk host David Kelly suggest Bill Belichick for Fed Chariman.
As some of you may recall I grew up near Boston so I am a huge Patriots fan. I am writing this in the 4th quarter with one very nervous eye on the TV screen. Teddy Bruschi is a big time play maker by the way.
Asian markets are have a big up day. Australia and New Zealand continue to lift and the Hang Seng is up huge as well. While I have not been able to keep the normal close tabs on what is going on tonight this would appear to be follow through from Friday's US rally. The question still is can US markets follow through and work higher? The VIX still concerns me but the market can rally in the face of a low VIX. I also like that sentiment seems to have eroded.
That seems OK for a short term rally but at this point I can't figure out what would cause a substantial rally from here. This is an important point. Just because there is no visibility for a rally doesn't mean it won't come. This is why timing the market can so difficult and why I don't try to do it.
Crap, Philly just scored with 1:48 left.
Sunday, February 06, 2005
While I disagree with some of Mr. Farrell's generalizations the strategy behind what he is doing with his "lazy portfolio" should appeal to a lot of people. I know it plays a role in the way I construct portfolios.
I have said before, and I'll say again that a year ago there were so many strategists and managers called for a trading range market type of market that will last for years. Well this is what a trading range market feels like. For all the anguish from January, the S+P 500 is down 9 points year to date. The S+P is up 40 points from its Jan 24 closing low.
There seems to be couple of different ways to make money in this flat, so far, market. One way is to be a nimble trader and another is to ramp up the yield in you account. Either way is fine, just know which way better suites you.
If I were more of a trader I would be concerned with the decline in the VIX this past week. While VIX has not been 100% reliable lately, a very low VIX like we have (lowest since early 1996 as I read the chart) is not a tailwind for more gains.
I'm not sure if this is indicative of a top or a bottom but last night Dick Vitale, in this course of announcing the Notre Dame-Syracuse game referred to someone as a Dow Joneser, always up and down.
From the Doh! file comes this nice compliment from Public Mutual Fund. I can't do any better.
It looks like Ask Jeeves is buying bloglines, thanks Trader Mike. The blogosphere continues to evolve. Although I am fairly new to blogging I feel quite certain that bigger things are on the way.
Lastly the second issue of the newsletter is out so if you subscribe and you don't have it please check your spam filter and then email me if you still don't have it.