Quarter End

The wrapping up of the quarter allows me to provide a little evidence to a point I have been making since the start of the blog, which is that predictions about the market are useless. The S&P 500 finished the quarter up 3.73%. If you add in the quarterly dividend the total return would be about 4.13% (ETFconnect has the yield of IVV as being 1.59%).

I have been saying all year that I think the S&P will finish the year between 1180 and 1219, down a little. I have not changed my opinion nor am I likely to. The prediction will either be right or wrong but for now it is looking very wrong.

Despite being wrong my generic portfolio that I maintain on Yahoo Finance was up 5.28% including dividends, but excluding interest earned on cash. It probably makes sense to subtract 0.30% as a management fee (this is my guess of the average fee charged to clients), keep in mind that any one client may have done better or worse.

This is not fantastic but it makes a couple of points. I wrote all along that the market showed no signs of cracking and that I was not going to try to outguess a big move in the market that may never come. If you can think of the quarter as being successful it was because I stuck to the same things that I always stick to which is being diversified, not making a lot of trades and relying on big picture themes to make overweights and underweights.

I thought that telecom might be in for a good year and it was the best performing sector as measured by iShares sector ETFs with a gain of 13% (I am eyeballing a chart for all of the coming numbers). The second best performing sector appears to be the industrials with a gain of just over 8%. It is possible that most of the 1.15 basis points I added came from this sector. One name was up 25%, another was up 14% and one other, Armor Holdings (AH) was up 35%. I sold AH this morning very close to the open at $58.61. It has been in this area for a while and I am concerned about it heading back down, the stock is kind of a hot potato.

The industrial sector was not really on my radar at all yet proper diversification (or at least my perception of it) worked once again. It is a good bet that it will always work. One thing I have written before is that in a portfolio, one stock will be the best performer, this quarter it was AH (unless I am forgetting something). Three months ago I would not have thought AH would have the best quarter out of what I own. It had not moved much in months. The point is that by being diversified my clients had less riding on my being right.

With time and discipline (which each have their own obstacles) this is easily replicated. This will not appeal to people that like to chase heat and trade but for people less interested in high turnover I think the concepts are sound.

One last point to really hit on is that no one can beat the market all the time (Bill Miller, an exception that proves the rule). All I am trying to do is stay close most of the time. If you have saved (or still saving) enough money this is all you have to do.
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The Deficit Trade

FT.com / Your money - Philip Coggan: Rates solution may be hidden behind the fringe

This is a good article about the high yielding currencies and some of the problems they are encountering right now.

One important note to add here is that I find most of these places to be interesting investment destinations which is why I write about them. However this is not the right time to be heavy in them. I touched on this the other day and I would add that this is a time to learn, watch and above all be patient.

A little exposure is fine and at some point they will become more attractive and have less risk than they have now. Going heavy right here would be a gutsy contrarian play, and not one I am making.
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More Narrow ETFs

When I wrote this morning about the very narrow healthcare sector ETFs I had no idea that the WSJ had a similar article (sub req'd), although the Journal did not mention the proposed Ferghana-Wellspring funds.

At the end of the article there was a quote from someone at Barclays who said the bank is exploring Eastern European and Indian ETF. Something along either of these lines would be more useful than a gastrointestinal ETF (no offense to my client who is in that field).

The article questioned whether PowerShares was offering funds that are too narrow. I was amused by a quote from a planner in Scottsdale who said that he stays away from them, the article implied this guy leaves the specialized ETFs for the bigger institutional investors.

While my initial reaction to the ETFs I wrote about this morning was negative, I will still check them out. It is possible that the names of the fund will be narrower than the actual holdings in the funds. For example, a company like Pfizer might reasonably have a foot print every sub ETF proposed by Ferghana-Wellspring. We may see bigger more familiar names showing up in several funds. I don't know but I am willing to wait and see.

Perhaps most interesting in this article was that Gus Sauter said that Vanguard is closer to the end than the beginning of its rollout of ETFs. This is interesting because they were slow to get in, may not have gained the traction they were looking for and seem to be discounting the future of ETFs.
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Odds N Ends

Yesterday on CNBC Asia, a graphic ran across the bottom of the screen quoting Australian treasurer Peter Costello as saying a single Asian currency is still a long way off. That it might be a long way off means it is on the table. I have been hearing about this for a while. I'm not sure which countries would be interested and which countries would not but a strong single Asian currency would yet another challenge to the US' role as currency superpower down the road.

I stumbled across this article on IndexUniverse.com about some new ETFs that have been filed for by a company called Ferghana-Wellspring.

FW Autoimmune-Inflammation Index Fund
FW Cardiology Index Fund
FW Central Nervous System Index Fund
FW Derma And Wound Care Index Fund
FW Diagnostics Index Fund
FW Gastrointestinal/Genitourinary/Gender Health Index Fund
FW Infectious Disease Index Fund
FW Metabolic-Endocrine Disorders Index Fund
FW Ophthalmology Index Fund
FW Respiratory/Pulmonary Index Fund
FW M-Cancer Index Fund
FW T-Cancer Index Fund

That is some pretty narrow action. According to the article each of the ETFs would have twenty stocks and be equal weighted. I'm not sure I could name twenty ophthalmology stocks but I assume that Ferghana-Wellspring has found that many.

I forget who, maybe State Street, is going to have a medical device ETF which I can see, most clients own a device stock but do most folks need a wound care ETF? I don't know.

On issue I see with these would be that the diversification could actually create more risk than owning one company. I imagine that in the endocrine ETF there would be one or two huge winners and a lot of stocks that end up struggling. This is not an impossible scenario and I could see it repeating in several of the ETFs if not the endocrine ETF.

Narrow to a point can be useful but for now I am skeptical on the utility of these proposed funds.

Now there is chatter that John Snow will not be the treasury guy too much longer. Hmm, first Paul O'Neill (smoke stack CEO) then John Snow (another smoke stack CEO). My hunch is that Bush will yet again shun anyone with capital markets experience for an economic related post. Regardless of your politics you gotta think Bush could have found an easier path for a lot of the decisions he's made since being first elected.

One last thing is the country breakdown for the Templeton Emerging Markets Fund (EMF), an equity fund.

CHINA                 10.8%
HONG KONG              3.2%
INDIA                  2.8%
INDONESIA              0.5%
MALAYSIA               2.2%
PHILIPPINES            0.8%
SINGAPORE              2.5%
SOUTH KOREA           18.4%
TAIWAN                13.7%
THAILAND               3.2%
TURKEY                 4.0%
AUSTRIA                0.5%
CROATIA                0.8%
CZECH REPUBLIC         0.1%
FINLAND                0.4%
HUNGARY                2.7%
POLAND                 1.5%
PORTUGAL               0.2%
RUSSIA                 5.7%
SWEDEN                 0.8%
UNITED KINGDOM         1.9%
BRAZIL                 9.8%
MEXICO                 3.6%
PANAMA                 0.3%
SOUTH AFRICA           9.5%
UNITED STATES          0.3%

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Morningstar

Greg Newton has a great article up at his site about the flaws with Morningstar's attempt to apply its star rating system to ETFs. The article was also covered on ETF Investor and on the WSJ's Market Beat page.

I have picked on Morningstar here and on RealMoney.com more times than I can remember. Greg's take seems to be similar to mine, it is very close to worthless.

The big issue, as I see it (and Greg touches on this) is that the ratings are based on past performance. Morningstar has a lot of CFAs in its stable. Weaving together a reasonable forward looking analysis on a country, cap size or style is not that difficult to do. Clearly any effort to do this across the board would yield some conclusions that are correct and some that are wrong. If they are right more often than they are wrong they would be adding value.

A while back I wrote a piece for RealMoney about Sweden possibly getting ready to have a run of outperformance. The forward looking analysis applied was quite simple. Higher GDP growth is expected (which is good for the economy) and the Riksbank (the Swedish central bank) was just starting a tightening cycle (good for the currency).

So far this turned out to be correct. EWD has outperformed SPY buy about ten percentage points and the dollar is down a couple of krona cents vs. the Swedish currency. I pay attention to Sweden on a regular basis, which is how I was in touch with the idea. I can guarantee that at some point the same circumstance will present itself for some other country and that trade will work too.

The point here is that forward looking analysis can does not have to be difficult. A firm like Morningstar could easily do some simple things like this and actually provide some useful insight.

To be clear about one thing, the circumstances that lead me to the Sweden idea simply put the odds in favor of the trade working. When I see something like in the future, I will probably write about it but the trade may not work. If you can put odds in your favor more often than not you will probably do well but results are never guaranteed.
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Hectic Morning

So I got off to a late start, we had neighbors come over to use our fax machine, I had to implement a portfolio and start the ball rolling to finance our fire department's new truck.

A while back I solicited readers for donations to the Walker Fire Department to go toward our new truck. That was moderately successful but we are proceeding. A new truck is ordered and due to be ready in late April. This is a big deal.

Enough of that, gold is going crazy as it trades above $580 for most of the day. I understand the bullish case for equities and am participating in the move, despite my belief that the market will go down, but I have to wonder what gold might be saying about domestic equities and the US economy.

Could it be that gold does not matter? Could it be that gold now is correlated to equities and both can go higher? It is hard for me to think that can go on for any length of time. If the stock market keeps going higher, people will likely get giddier. I would advise getting more and more skeptical, cautious and aware. The market may not go down, it may finish the year up more than anyone expects, for all I know, but less giddiness when everyone else wants to be giddy could spare you some pain.
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Late Start

We had a nasty car accident late last night that I responded to (I was not in the accident, it was a fire department call) and so I am off to a late start.

A reader left a comment saying that he was reconsidering CNBC based in part to the value I attributed to the Gradient coverage. I apologize, I was be sarcastic. I find nothing but entertainment value in this. As an investment matter I find it to be a complete waste of time. It only matters to a very narrow slice of the investment community and Charlie Gasparino, who felt it necessary to continually interrupt his colleague, Herb Greenberg, to the point of almost not making his point.

As to why I watch CNBC, friendly heckles notwithstanding, there is certain news that is easier to just hear without having to spend time reading. For example I think the GM news is worth knowing but I haven't read anything about it. I don't own the stock so I just need to generally know what is going on, I don't need every detail. This is a time management issue. The other point is that in some interviews I can glean info about process from other people. I write to share my process and I want to hear about other people's process.

Another reader asked about whether the Japan Smaller Company Fund (JOF) is a good way to play Japan and how to go about choosing a closed end fund. Well, right or wrong, mostly wrong, I don't own Japan and have no plans to buy. Another reader suggested iShares Japan (EWJ) or iShares Topix (ITF) as better ways because there is no discount or premium issue to worry about. The correlation between EWJ and ITF is almost exact. Over the last year JOF has been much more volatile than EWJ but has outperformed by more than 10%. Over the last two years JOF has lagged by 10%. Over the last three years JOF has outperformed by 50% and over the last 4 years JOF has outperformed by 90%.

None of that provides forward looking analysis but sets a reasonable pattern that either the managers know what they are doing, small cap is often a better place to be than large cap (this has been the case in the US too) or both? That does not guarantee the future of course.

JOF has a wild premium/discount history that is tough for me to explain but it has calmed down lately and now has a 6.5% premium. I tend to not be concerned with premiums less than 5%. You can decide for your self whether 6.5% is too big for you.
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Crucial

I don't know about you but all the CNBC coverage of Gradient is helping me and everyone I have spoken to make a lot of money and be better investors.
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More Hungary

John Christy author of the Forbes International Investment Report left some positive comments about Hungary on the post I had yesterday.

He has Magyar Telekom (MTA) in his model portfolio. I would encourage you to read his comment through the link above.

Nicole Elliott from Mizuho had some comments about Hungarian bonds and the forint on CNBC Europe yesterday. She thinks that bond yields could go up another 100 basis points quite quickly and the currency could be in for a 2003-like decline so watch out.

This brings me to an important point. Hungary is a part of the same type of trade that is hurting New Zealand and Iceland. The demand for these high yielding currencies coming from the so-called funding currencies of Japan and Switzerland has been stunted for fear of the high yielders falling in value, thus offsetting the yield advantage.

I took clients out of New Zealand. I have personal exposure to Iceland. Zero for clients (well maybe we should count Australia as part of this) and small Iceland for me (again Australia too?) is not too much for a theme that might not be working. Portfolio exposure of 3% for something that is in the wrong part of the market, if indeed it really is wrong, is far from ruinous.

There is visibility for all these currencies to sink further, at one point last night the kiwi was below $0.60, but they may not, who can know for sure? Owning some MTA with no other exposure will not hurt your portfolio. Owning MTA, NZT and a few other stocks from countries that are exposed to this trade that comprise 10% of your portfolio would be a problem.

Part of trying to manage your own portfolio needs to be a reasonable understanding of what will hurt your various holdings, weigh the likelihood of what negatives might happen now and insulating somewhat against those likely negatives.

For example owning MTA, NZT and a couple of other like these two would have been OK two years ago. Now, it is probably OK to have a lot of exposure to oil or countries with surpluses. This is important top down concept.
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Was All Of The Buildup Just A Waste?

Yesterday stocks panicked lower and today they are chasing higher. What, if anything, does this mean?

Yesterday I thought that the net of the rate hike and statement would not mean much. I think it is too early to say for sure. Regardless of the next few days there is something very constructive here. The rate issue will never resolve. The market seems undecided on 5.25%. The Fed will stop at some point and then what? Speculation on when they start cutting rates. Once they do start to cut rates, how low will they go?

The media portrays this as getting some resolution but that is not how it works. Clearly the market cares about this on a short term basis but economic cycles will always come and go and a big chunk of the market's reaction to different trigger points will always be similar, not the same but similar.

Changes in the economic cycle also play a role in the way I manage portfolios. Stocks usually decline in front of a recession and usually turn up in front of a recovery. Going further certain stocks are better early cycle performers and some are better later in the cycle.

The extent to which you try to game this stuff short term, perhaps you can add out performance but longer term being in touch with the historical implication can allow you to tweak your portfolio slightly to capture some benefit. Understanding the history can make the job much easier.
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Ed Keon

Back on February 7 I noted that Ed Keon reduced is equity weight in his model portfolio from 100% down to 55%. I had forgotten about this call until I saw him on CNBC after the close.

In my post I questioned just about every aspect of the call and mentioned my inability to recall him being correct very often. It would appear that this call was very poorly timed. On that day the S&P 500 closed at 1254.78. That was the lowest closing level of any day since he made the call.

Since making the call the S&P has been as high as 1307.25, on a closing basis, that on March 17. That is a move of 4.17% or more than all of last year. His call cost anyone that was unlucky enough to follow his advice 180 basis points.

The point here is not to pick on Mr. Keon but to realize something I have been saying all along which is there is no need for investors to make drastic portfolio shifts all at once. The consequence for being wrong is too great. The move his call missed could turn out to be all the upside for the entire year.

Bear markets start slowly not with crashes. Since bear markets to start slowly there is no need to sell stock quickly which made Keon's call flawed from the start. Strategists will make calls like this one in the future and they will be no less unnecessary. We'd all be well advised to ignore these calls altogether.
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Fun With Ben

The Fed raised rates, yields went up, stocks went down and the dollar went up. Things seemed to move around quite quickly in reaction. There will plenty of more intelligent commentary than I could ever muster so I will just say that the stock market will tell you what it thinks of Ben's statement.

This is not a ten minute concept but maybe a day or two. If stocks keep selling off that will matter as far as a vote, or not, for Ben. The S&P took back a couple points off of its post announcement low. For what it is worth I don't think this will be awful for stocks but we'll see.

One other note, so how excited are you about Michael Eisner's TV show? CNBC is expecting well over a dozen viewers to tune in.
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Time To Learn

A few times in the past I have mentioned Hungary as a possible investment destination. There is one NYSE listed ADR that I have been following for a long time called Magyar Telekom (MTA). The stock has not done much in a while but has a very high yield.

One concern I have had about the stock has been that the dividend has been more than the earnings. This no longer appears to be the case. However, as it turns out, the payout exceeding the earnings was never a big deal. A while ago a reader passed along information that MTA has a very involved relationship with Deutsche Telecom (DT) such that DT has put a lot of money into MTA as sort of a long term commitment.

This chart compares the benchmark BUX index to the S&P 500 for the last four years. For the first couple of years the correlation looks kind of close then as emerging markets got hot, the BUX separated from the S&P.

Hungary is front and center in the Eastern European theme. The country is growing quickly, it is modernizing, labor is cheap (compared to Western Europe, but not compared to Slovakia) and while it will never play a dominant role on the world stage it's role will be bigger than it is now.

One step to bigger would be if Hungary can join the EMU, it hopes to do this by 2010. Inflation is running below the 3% target, GDP has been growing in the 4% area for a while and direct investment n Hungary has been on the rise. Hungary is one of the high yielding currencies as 3-year bonds yield more than 7%. High yields could attract more foreign capital.

Hungary has a couple of warts. The current account deficit is a problem at 5% of GDP with visibility for it to increase. The various ratings agencies have all downgraded the outlook or the actual debt in the last few months. The currency (called the forint), like the kiwi and the Icelandic krona has recently weakened against the dollar.

The correlation of the forint to the kiwi is interesting in that I think it shows that structural economic problems may trump commodity-based diversification.

However, even though the currencies have traded similarly, the two stock markets have not.

If you want more information about Hungary I would suggest the Magyar Nemzeti Bank (the central bank) and the Budapest Stock Exchange.

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Texas Tea

Thanks to Greg Newton for finding this article in the WSJ (sub req'd) about the new crude oil ETF that should start trading next week on the Amex.

While we have heard much more about the Silver ETF lately but the crude oil ETF, which will trade under ticker USO, will be the second single commodity ETF assuming the Journal has it right.

There will probably be a couple of other single commodity ETFs like copper, nat gas and maybe a soft commodity or two.

The crude oil ETF could be interesting for a couple of reasons beyond the obvious. When GLD (client holding) was first issued it dropped almost 10% in its first couple of months. Perhaps it was a sell the news type of thing for the underlying. Crude has pushed a couple of dollars higher in the last few days so USO might also drop a little. While we are at it, silver has pushed up a lot lately so it could be in for a letdown immediately after the ETF lists before the fundamentals start to matter.

Another aspect of USO that I wonder about is whether the relationship between WTI and Brent might change or, if not, whether USO will have huge swings in short interest as people try to arb the spread between WTI and Brent.

Usually WTI has a higher price than Brent because it is lighter, although very recently Brent was higher. What makes this arb possible is that an ETF tied to Brent has traded in the UK for a while now under ticker OILB.

In general terms, these products, along with the currency products I have been writing about lately should be studied. The goal for most people with something like an oil ETF would be to have better diversification not to bet on a particular outcome.
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NZT Follow Up Question

This comment came in over the weekend.

Thanks for sharing your insights on NZT and the NZD. We have a holding of NZD and are panicking since it has fallen so low. Left the trade with our wealth manager and sadly he didn't advise us to get out of it last month but instead told us to hold on to it when we asked.
My wife only came across your blog last wk. Wish we could have done much more self monitoring instead of being so foolish and naive.

Do you mind sharing what it is about NZT that is appealing. What was the price you had bought it in your previous trade? If you've already covered this is a previous blog entry, pls refer us to it. Thanks again.

I think he has a typo in the second sentence. I think he has a holding in NZT, the stock, not NZD, the currency. I'll answer based on that assumption.

I would say that if they are panicked about the drop they have too much. Concern about an individual stock is OK, but actual panic is bad.

Their wealth manager advised that they stay in the name. This may or may not have been bad advice, we don't have enough information to know. If NZT is held because it has a low correlation to the US and the weight in the portfolio is low there may have been no need to sell. That is the benign spin on this. The more malignant take would be that the wealth manager has too many clients, does not really know why he recommended it and his ego won't let him tell the client to sell. Chances are the truth is in the middle.

Let me clear one thing up. I didn't handle NZT very well. It topped out around $39. I sold just shy of $28. Most clients owned it in the high $20s and low $30s. So, not great.

I think I will miss half of the decline in the currency. I think the currency might go to the high $0.50s and that might mean the stock has a $25 handle and I would expect to buy the name back. But if I get some part of this wrong I do not have to buy it back.

The self-monitoring issue is a great point. If you are paying for help and the person you rely on has a lot of clients and works for a bank or brokerage you need to realize you need to mind the store a little bit and help yourself. This is not to say that the advice might not be good but over reliance on someone with 200 clients may bite you.

There were several ideas behind NZT and most of them still stand up. When I first started to buy it, 2003, I had dim expectations for domestic telecom. Late last year I wrote that thought telecom would do well in 2006. The rest of the story is still in tact long term which is NZ and Australia are more commodity based economies, although each exports different products. The economic cycle of these countries tends to be different than service based economies like the US. Different economic cycles usually mean different stock market cycles which means potential diversification.

Also both countries tend to have less volatility in their stock markets, the last few months notwithstanding. Longer term I think that New Zealand could have a very healthy ecomony and provide a lot of growth. NZT is the largest company in New Zealand which I think makes it a good proxy for the country and while laying out the bottom up case would take a while, I'll just say the stock makes a lot of sense to me.

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Interesting Comment

I had the following comment come in on my forex post from this morning.

FXE hasn't been around long enough for accurate beta calculation, but eyeballing its performance superimposed on the S&P chart leads me to believe the beta is between .95 and 1.05. In other words, it is more volatile than many people suppose, and investing more than 2%-3% of your assets could be perilous.

This chart overlays FXE and the S+P 500. There appears to be some similarities in the range but the correlation seems to be low. I might disagree that the beta of FXE is so close to 1.00. In the time the FXE has been around the stock market has been in a very narrow range, narrower than what is normal for stocks.

The second chart shows the Euro* over the last three years and you can see that excluding a couple of short periods the currency has held in a very tight range. Riskless, absolutely not. As volatile as stocks, I have to say no to that as well.

*I just realized that BigCharts has currency charts. This chart is backwards from how the eurusd pair is usually quoted, I could not fund the symbol to chart it correctly. The chart tells you that the dollar is down in the last three years vs. the euro. Put another way the euro is up vs. the dollar.
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Such Vitriol!

That was my thought as I read through this article from the Associated Press about the Rydex Currency OEFs. The article quoted an investment advisor from Michigan named Richard Ferri as saying, "The buy-and-hold investor has no business being in this kind of fund at all, because it’s purely speculative," Ferri said. "It’s not for any of our clients, that’s for sure. We get currency diversification, but we get it for free because we own international equities in our portfolios through index funds. These funds are for traders, they’re for speculators. If that’s what you want to do — speculate on the value of the dollar — and you think you can beat the system, good luck!"

Wow. I don't think it makes sense to take this kind of stand with a potentially "new" asset class. Currency funds like the Rydex OEFs, the one ETF and the currency funds from ProFunds are all about ten minutes old. There are a couple of older OEFs out there but they are fairly small for now.

One of the first things I ever wrote on this site was that in the coming years there would be investment products providing access to markets that were previously not easily accessed. I mostly had commodities and currencies in mind.

The role that currencies might play is just starting to evolve. I may be right or wrong about currency exposure becoming very important. At this point it is unknown and I am only stating my opinion. That the role currency could play is unknown means that it should not be ignored, as far as your education.

To address the quote above and the comments that are bound to be left on this post, if you recall the early days of ETFs, there were more negative opinions than positive opinions in those days. Now ETF growth is dwarfing OEF growth and there is visibility for ETF growth to accelerate because of how useful the products are.

Even so, do you really think there aren't people out there that have blown themselves up using ETFs incorrectly? Wouldn't it be logical to believe that, like every other investment product ever created some folks have been too aggressive, over traded, had poor timing and leveraged themselves improperly with ETFs?

I'm gonna say yes. And when currency funds and ETFs are up and running with some track record there will be investors that misuse them and get pasted in the process. In this regard they will be no different.

In the quote above, Mr. Ferri notes that his clients get currency exposure through international funds. That is hard to disagree with. Aren't foreign bonds different from foreign stocks? I know have exposure to both for my clients and chances are Mr. Ferri does too. If you think about your allocation in terms of stocks, bonds and cash (we could add REITs and commodities but let me keep it simple for now) and you see the potential value in foreign stocks and foreign bonds shouldn't foreign cash at least be studied a little before it is ruled in or ruled out? Stocks, bonds and foreign cash.

This will not be appropriate for plenty of investors but closing the door is the last thing I'm going to do.
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The Big Picture For The Week Of March 26, 2006

The Fund of Information column is Barron's had some interesting information. A study done by Duke professor David Hsieh "estimates that the $1 trillion hedge-fund industry is chasing a mere $30 billion in alpha per year."

Obviously I have no idea if the number is accurate and the article quotes a couple of people to refute the number. The number itself is unimportant but the concept could be very important for anyone managing a portfolio (including do-it-yourselfers managing their own).

I think this ties in with a recurring theme of this site. Not everyone can beat the market every year. While the idea that there is only 3% in outperformance does not seem intuitively correct, I can buy into the idea that there is a finite amount of outperformance to be had.

If you maintain a diversified portfolio over a period of years you will likely beat the market some years and lag other years. What is important is that you stay close.

If you can embrace the fact that you will lag sometimes and lead other times, a whole new philosophy can open up to you. That is trying to stay even with the market with less volatility.

There are many tools that can be incorporated into a portfolio that have high yields, low beta and little correlation to the US stock market. Here I am thinking things like call writing CEFs, foreign bond CEFs, the infrastructure products listed by Macquarie Bank, a selectively chosen structured product and a couple of REITs.

Most of the choices in these categories have very high yields and very narrow trading ranges. An allocation of 20% to these types of products, with no single product having too much weight, would add a lot of yield and reduce volatility. I think this type of idea could do relatively well except during years like 2003.

I have been writing about having some exposure to these things for a long time. 20% might be too much but if you are expecting the market will not very much, several diverse holdings that yield 7% or 8% makes a lot of sense.

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Doh!!

I have written a lot lately about the New Zealand dollar drop being behind my coming out of Telecom NZ (NZT). In the short run this was the right move. I have been thinking I could get back in around $25 per share.

Along comes Barron's and the Up and Down Wall Street column(sub required) this week. The column points out a lot of what I have been writing about and also notes that the yield on NZT is comparable to Iraqi debt.

As one long time reader noted the stock has been very correlated to the currency. The Barron's mention could lift the stock for a day or two. The kiwi has fallen so quickly that I think this is an exaggerated move that will surprise most people and go down a couple of more cents than what consensus expects and I might get a chance at $25.
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Kiwi Breaks 0.61

The kiwi is down again in the on going sell the current account deficit countries theme.

Relating to a theme on this blog over the last few days, being in touch with the currency situation creates a better understanding of what might be coming for the NZ stock market.
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Icelandic Smackdown

This is an interday chart of the ICEX-15 Index. It is down 3.74% today. This week I had a poorly timed article out that followed up my first article for RealMoney. In the latest article I talked about the long-term theme being in tact but people worried about the next year should probably stay away.

The krona is also getting hit today as well, it is down about 1.5 kronas vs. the green back. Because of my schedule I haven't had time to find if there is any news today.

For anyone who is curious the CEO of Glitner Bank, Bjarni Ármannsson, was on CNBC Europe. You can get the interview here.

One comment I made in the article is that from the outside looking in, people say it will be bad. From the inside looking out people say it won't be that bad. Who can say how it will really play out? The reaction so far as been extreme, on the verge of panic. I am standing pat but more panic seem probable.

This is a fascinating story.
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Catching Up

There has been some interesting news and good comments to catch up to.

Google is going to be added to the S&P 500. I thought, incorrectly, that the name would have been added sooner than this. I was very public with my purchase last August (probably too late) and my sale last October (definitely too early). My thesis was that there would be a secondary effect of managers that are benchmarked to the S&P 500 (not index funds but active managers) would have to buy the stock because a then $80 billion growth juggernaught would make keeping up with the cap-weighted S&P much more difficult.

While this theory was never assured I feel less confidence about the theory working out now, six or seven months after I expected the SPX inclusion to come.

After the 9% pop after hours, I would be surprised if it outperforms the market sufficiently enough to compensate the risk and volatility. For example would it be worth owning if the market goes up 3% over the next six months and the stock went up 6% in that same time? Maybe not. Don't focus too much on the 3% and 6% but the idea of reasonably outperforming the market with a hot potato.

I had a lot of comments and personal email come in Thursday afternoon, I am sorry I won't get to all of them right away. One comment from "Investing Intelligently" stuck out. He wanted more from me about why I think understanding foreign currencies will become more important in the next few years. He wanted to know what will be different in the next 100 years from the last 100 years.

First, it is just an opinion and as opinions go I don't think this really goes too far out on a limb. That being said there are so many things that play in to my thought that I'll just bullet point a list.

• History says the US will not have two centuries in a row
• De-pegging in China and the coming free float of the Indian rupee are anecdotal evidence that the dollar will be less important, globally, as time goes on
• The EMU is getting larger and will probably soon be larger than the US economy
• There is visibility for commodities to trade in other currencies (like the euro)
  
• There has been chatter of an EMU-like union in the ASEAN region
• Continued globalization of the world economy
  

The sum of this, I believe, is that the US dollar will at best share the role of world reserve currency, the US will be on more equal footing economically with other countries. This creates visibility for a weaker dollar. If this pays out to any degree I think it will make a lot of sense and add a lot of value to understand currencies and perhaps strategize around the weaker dollar scenario.

I do not know if this will happen, and this is not a call to be a currency trader if it does, but there is visibility to this and distortions to our economy and stock market are possible. Trying to isolate potentially important risks that could be out there in the future is a big part of my job and sharing how I do my job is a big part of this blog.
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Water and Utilities

A reader commented on all of the attention water has received on CNBC in the last couple of days. The reader says he has exposure to the water ETF (client and personal holding) but wonders if there is way to get more international exposure in the water theme. He also asks about any foreign utilities.

I can only talk about one company with any detail which is Suez (SZE). I wrote about this company a while back for Motley Fool. It is a French company with a lot of water exposure. I own it for a couple of clients but based on the last year should have owned it for everyone. I view it as a little more aggressive which is why so few clients own it. Lately the news on the stock has been about the company possibly merging with Gaz de France in an effort to fend off another bid from Italian company Enel.

I am not selling SZE here but I am not a buyer for anyone new because of the merger triangle.

There are other foreign utilities and since I have not written much about them it might be worthwhile to explore them a little more.
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GMAC Sale

I'm sure you know by now that GM has worked out a deal to sell what some think is a pretty good asset with the GMAC division. According to what I read on Yahoo Finance, GM is selling 78% of GMAC for $1.5 billion in cash and $7.3 billion in debt is going away. Do I have this right?

Yahoo Finance says that GM has $285 billion in debt. I wonder if this was such a good idea. The significance is that GMAC as a stand alone might get a higher debt rating than what GM has which would probably making lending more profitable.

Even so, taking away $25 billion in debt (more than triple what appears to be happening) seems more like a band aid.

A friend asked the other day with all the stocks in world, why would anyone buy GM? Good question.

A funny comment was left today about wanting to read any posts I put up from a fire and warning me that smoke is bad for a computer. The computer will either be at home or in our evacuation bin.
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Jackpot

Well I got a good tip about wireless access.

We have breaks every 45 minutes so I'll be able to stay somewhat in touch and put a real post during our lunch break.
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Currency Content Followup

Yesterday I put up a post asking for input about currency websites. I got a lot of responses, some with websites and some with opinions. Thank you for all the replies.

First here is a list of the websites. I did not have time on Wednesday to really delve into them. I hope to spend more time with them this weekend.

• http://forexnews.com/
• http://www.worldinformation.com/
• http://www.fx-concepts.com/investment_mir.html
• www.morganstanley.com/GEFdata/digests/latest-digest.html
• www.rgemonitor.com/blog/setser
• http://www.globalinvestor.com/
• http://www.oanda.com/
• http://www.rgemonitor.com/blog/roubini
• http://www.dailyfx.com/
• https://saxobank.com
  

There were also a couple of interesting comments left that might be worth addressing. The first one said that when I write about currencies I "get into a trader's attitude" and the reader said that following forex is more for traders and he does not perceive me as being a trader.

The reader is correct I am not what most people would consider to be a trader. However, I absolutely think there is value for investors with long-term horizons and investment styles to be in touch with what is moving the market short-term. I think that someone could reasonably replace bond market with currency market in the reader's comment and have it apply to many people in the bond market.

Another thing here is that accessing currencies is going to become easier and easier. As I mentioned recently I think that easier currency access will alter the role that cash plays in a stock, bonds, cash allocation. This is not to say that people who aren't traders should become traders but should you consider the coming Swiss franc ETF as part of your counter strategy? I think it should be considered. It will not be right for everyone, far from it. But I would encourage anyone to learn about the product because it will be a fit for some folks.

People willing to explore new products would be well advised to learn more about the currency market which is what I am trying to do. I am also trying to share this discovery as I go along.

A long time reader said that I am better at top down. I am not 100% clear what that means but the cliche about always learning new things, well that is not a cliche for me.

One last comment said that currencies could become "hot" but he thinks there are much more interesting things like the water ETF (PHO). PHO is a client and personal holding. I agree with the reader. I would hope that any cash strategy I might use in the future using a currency product would be one of the more boring things in the portfolio. If a client has a 10% allocation to cash, placing 20-30% of that cash into something that hedges the US dollar should be boring.

Perhaps there will be more debate about this in future comments and posts.
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Ignore The Man Behind The Curtain

I thought of this quote today as I heard Bob Pisani recap the day as he said not to look at Microsoft and one or two other active names on the board that were down.

A lot of people realize this type of overt cheerleading that goes on but there is a lot of less obvious bias that works its way onto the TV screen and into print. This is not a call to turn off the tube. CNBC is useful for news that breaks during the day. Honing your BS detector could make CNBC more useful.

Speaking of, Maria got interviews with two reasonably big fish today, each interview lasted about 2 minutes and we got almost nothing. I would like to see these interviews stretch a little longer and perhaps someone else could prepare her questions.

One last rant, do the folks producing Squawk Box really think that insight about fill in the blank is more useful coming from a journalist than someone who is actually in the business?

A couple of days ago I put up another post about the Jensen Fund and just like the first time it drew a lot of comments. First thank you for the comments.

A couple of comments seemed to agree with me and a couple seemed to say that fund might be a good hold. One comment asked for my opinion about an index fund that is as large cap biased as JENSX. The question threw me because I did not take the fund to be a mega cap and it isn't. Morningstar says the average cap is $34 billion. This is almost mid-cap territory, almost. I don't use any actively managed OEFs in my practice or personally so I don't have a suggestion.

This starts to get at the problem with OEFs in the first place. There is no way to do any forward looking analysis about a fund. "I think the fund will continue to do well" is a comment I hear and read a fair bit and it makes no sense. There is no way to know what the next big shift might be. The next big shift in a fund could possibly turn out to be the single best move the manager ever makes in his career or the worst, it is unknowable.

This applies to broad funds more so than funds with narrow objectives IMO. I could not argue with any list of drawbacks associated with any of the investment products I use so it boils down to what you can live with in your portfolio.
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Arizona Wildfire Academy

Some of you may recall that I am seriously involved as volunteer firefighter and that every March I attend classes at the Arizona Wildfire Academy.

This year I am only taking a two day class which starts tomorrow. The classes are held at the Embry Riddle campus here in Prescott and I was told that I would be able to access the internet wirelessly on campus. If that turns out to be correct I will be able to keep close tabs on the market and post during the day. If incorrect I will only have posts up early in the morning before I leave the house and my only contact with the market will be talking on the phone during breaks to various friends in the business.
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Calling All Readers

If you have been reading this site for any length of time you know that I write about currencies a fair bit. I think currency moves are important in trying to manage equity portfolios and I think understanding currencies will become more and more important over the next few years.

Based on reader comments or lack thereof, it is possible that I am not the single dumbest currency commentator on the planet but I feel like I have a lot to learn and am asking for your help.

If you are aware of any sites that have what you think is good currency commentary please let me know. I am not so much looking to make 4 pips in a couple of hours but more looking to read about current economic events in various countries and what that might to do the currency.

I am aware of and read a couple of sites along these lines. In no particular order;

• Dismally, as it relates to the markets
• Jyske Bank Capital Markets
• Bloomberg
  
• Everbank Daily Pfennig email
• Nicole Elliott's weekly market commentary
• Marc Chandler on RealMoney.com (sub required)
  

I stumbled across a couple of other sites yesterday along these lines but I am not sure what I think and welcome input from anyone that has an opinion;

• Forex Blog
• Capuchinomics.com

I also read stray articles from the WSJ, FT and other sites as I find the content or as readers pass along what they find. There may be a couple of other sites I am forgetting to mention, I don't intend to slight anyone with this post.

Collectively we might learn about some great new sites. Thank you.
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AUD and NZD

I have been writing about Australia and New Zealand as investment destinations since I started this blog. I had client and personal exposure to both countries for a long time but disclosed selling out of Telecom New Zealand (NZT) on February 23. I expressed concern in that post that the kiwi would keep falling (not a unique thought) and so I stepped to the sideline temporarily.

The Aussie dollar has also weakened, to a lesser extent, along with the kiwi. As a matter of philosophy, I don't want zero exposure so I kept Australian exposure as is.

In that last post I said I am sure that I will reenter NZT at some point in the future and that is still the plan. The stock is down about $1.50 from where I sold and I think could drop another $1.00 if the currency goes to $0.60 or lower.

Waiting this out takes patience. Having the patience to wait for a stock can be very difficult.
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Quagmire?

Are you watching this Bush press conference?

The whole Iraq issue seems to be getting worse. I am basing this on the questions he is being asked and the way he is answering the questions.

I certainly do not have the answers, but I do have questions. A lot of people have questions and I guess he is not answering them very well because he keeps getting asked the same ones over and over.

Did he want to go to war? It seems crazy that he would want to but one could reasonably wonder if he did in fact want to, based on how some things have shaken out.

I can easily buy into the idea that the world is better off without Saddam running the show, but is it worth the life of someone you love?

This is a real dilemma and I do not have the answer.

Has the war hurt the market? Has the war helped the market. Either case could be made. The president says they have a plan for victory. If so, he is doing a poor job of communicating what that plan is. Obviously he can't make military strategy public, but there has to be someone at his disposal smart enough to figure out how to PR this better than is being done now.
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Google Finance

Thanks to the folks at Seeking Alpha for pointing out the Google has launched a finance page, similar to Yahoo Finance for stock information.

It is new so it will take some getting used to. There is much more detail on the main page than Yahoo has on its summary page which is a good thing. Another neat thing is that the page has a section of blog headlines. Most of the stocks I looked at though had some old blog content.

There are still a few things to work out. The charting is very weak. The foreign stock info is also weak. It either does not have currencies or I could not figure it out. It did not recognize the Euro Currency Trust (FXE).

For things like options and earnings estimates you get referred to outside sites and I'm not sure what I think of that just yet.

A couple of months ago I stumbled across Clearstation and that site seemed more intuitive, somehow, than my first look at Google Finance.

I have to think it will tighten up over the next few months. I think it can be better than Yahoo in time which perhaps means that Yahoo will then strive to make improvements. I read something somewhere that Yahoo has plans for better charts, as an example.

We'll all have to stay tuned.
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The Jensen Fund

The Jensen Fund (JENSX) was profiled over the weekend in Barron's. According to the article there has been an outflow of dollars from the fund.

I first wrote about this fund last July. I said then that I did not think the fund made sense because of how limiting the strategy is. It was those limits that kept JENSX out of the energy and utilities sectors.

My past comments about this fund generated more hate mail than anything else I have ever written about. In fact it may have been the only hate mail I ever received.

Since that first post I am surprised that JENSX has only lagged by 2%. According to the article the fund has lagged the market by almost 7% annualized for the last three years.

One new thing I learned in the article is that a committee decides on big moves within the fund.

JENSX had a phenomenal 2000 when it was up 20% vs. a 9% loss for the S&P 500. A 29% spread is huge and I have to think accounts for most of the funds ten year track record which comes up as having outperformed 91% of its peers.

Different themes work at different times. A strategy that by definition can not rotate into certain themes makes no sense to me whatsoever.

The managers and defenders of the fund say you need to have a long term horizon and approach. OK, anyone out there think that after this run in energy peters out (don't know when that will be) we will have another one in the next 20 years?
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Again, Not How I Would Do It

We had another huge snow storm yesterday. I was outside at 6am cleaning off both satellites so I could get to work.

Geoff Considine has an article up at ETF Investor that I would encourage you to look at. I admit I did not read the whole thing, it was almost 2000 words. In the article Geoff lays out a model portfolio for a 40 year old woman using just ETFs. With this version, I believe he is advocating an equal 10% in each fund.

He has an equity-only version in the article as well. In the past I noted that I thought he was too heavily weighted to energy with specialty energy ETFs. Now, with this go around he is very underweight energy.

Sector distortions will always be a problem when you blend broad-based ETFs like IVV and sector based like IYH. This portfolio is very heavy in health and utilities.

There is one error. He lists ticker EWS which is iShares Singapore but in his paper EWS is listed as Asia ex-Japan which is actually symbol EPP. EPP is mostly Australia so there is a big difference between the two and I am not sure what he means.

It looks like he relies on a very short time period, back through 2003, for data to assemble the portfolio. I get the impression that utilities are so prominent is because they have had such a great run over the last three years. Utilities are around 3% of the S&P 500. In one portfolio he has them at 10% (that is just IDU, that does not include the sector's weight in the broad-based products) and in the equity-only portfolio they are at 15% (again add the weight in each broad-based fund).

Materials (which includes the commodity sector) has almost no weight and if he means EPP he has almost no emerging market exposure either.

Geoff's articles are great because they share process. That I would not do it the way he does it does not matter. Taking process from several sources to create your own process is the best thing you can do.
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The Big Picture For The Week Of March 19, 2006

The other day I quoted and linked to the Businessweek blog post about some new currency ETFs in the works.

I am fairly excited about being able to access currencies in this manner. I'll have more commentary on these as they come to market but I thought it would be worthwhile to address what currency ETFs will not do.

What they will not do is be a substitute for growth vehicles, like stocks. Since the Euro Currency Trust (FXE) listed a few months ago it is up not quite 2%. In the same time the iShares Euro 350 Index Fund (IEV) is up about 8%.

The things that move equities are not necessarily the things that move currencies, sometimes yes but sometimes no. The meaning here is that you should not buy FXE thinking it will always serve as a proxy for European stocks.

Most allocation models assess stocks, bonds and cash. I think that the currency ETFs will radically alter the cash part of the equation. One of the proposed ETFs is for the Swedish krona. I really am surprised that this would be one of the first ones as the USDSEK cross rate gets very little attention compared to some other crosses.

Be that as it may, the krona could be a good example of how this would work. A while back I wrote an article for TSCM about iShares Sweden (EWD). One possible catalyst I pointed to was that the krona could do well against the dollar because the Riksbank is just starting a rate hiking cycle. Since the article published, EWD is up about 8% and the krona is up about 2.5% versus the dollar.

This is just an example. Where equities are concerned, 2.5% is not a big deal. Where cash is concerned, adding as much as a couple of hundred basis points in returns to a portion of cash without taking equity market risk is compelling.

While it is compelling it is not riskless. In the last two months the krona could have been down by that much, or more. A strategy where some cash is parked in certain currency ETF will be appropriate for a lot of folks.

On a theoretical note, I wonder if the currency ETFs will alter portfolio management strategies to the point of being revolutionary. We'll have to check back in a couple of years on that one.
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Maybe Its Nothing

The Iranian Oil Bourse is due to start on Monday. I found some firm opinions that say it will be delayed.

Here are some links with more info here and here.

I found it curious that it never came up on any of the Fox business shows, not even from Jim Rogers.

For now it is on the back burner. I felt it was important to try to create awareness. I am still uncertain if the IOB will have a big impact by itself. As I said in one of my posts I think it could be one of several different things that could make the dollar less important globally.

Whether that is right or wrong I would suggest staying in touch with this issue.
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Good Info

More ways to use the latest ETFs

This is from Aaron Pressman on Businessweek's blog.
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More Dark and Dank

Reader DaveB left a useful link to Peter Schiff's January visit to CNBC where he delivered a similar message to his message this morning about the dollar and buying power. If you have highspeed, check it out.

The video clip gives a little more background to Schiff's thought process. He talks about measuring wealth in gold. Ok that is worth thinking about. He then says that in 2000 it cost 45 ounces of gold to buy the Dow and now it costs only 25 ounces of gold. Gold hasn't moved, he says, the dollar has. The Dow would need to be at 25000 to balance this out. I think I have his numbers correct, but I am close if not exact.

I have trouble, conceptually, with the idea that it makes sense to measure the Dow by its relationship to gold and what that relationship was in the past. I think it is too simplistic. I do not know enough about gold to know how coming off the gold standard distorted gold's value (and if gold was distorted, did equities also distort somehow?).

I have read a couple of things over the years that try to make the Dow vs. gold analysis stand up but I think there are too many moving parts to cloud this issue. One issue is that gold's only value is what people place on it. Before you jump all over me, what I mean is that there is very little industrial use for gold compared to other metals.

None of this makes me any less constructive on gold's role in a diversified portfolio.
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Chatter

I am quite thankful for the back and forth about the debt issues.

That the debt is not a problem so defiantly doesn't seem to be incorrect. The debate, I think should be the consequence of the problem.

I do not buy into some of the concerns like the earth will stop rotating on its axis or there will be a swarm of locusts. There are so many efficiencies that exist that a storm would have to be more than perfect for this to result in economic Armageddon. I am not saying impossible but I am saying unlikely.

Even if we had a depression it would not be the end. The country has come through a couple of depressions. BTW I am not predicting a depression.

What I think we are talking about recessionary magnitude. That the economic cycle is long in the tooth makes it easier for me to be right about a recession coming (a little media trickeration). I do not know how severe or mild the next recession will be. I think it would be on the severe side but that contradicts another cockeyed theory of mine that says as a function of maturation, economic cycles in the US will be generally mild in both directions.

For now I am unable to reconcile my divergent thoughts on this.

One quick note about my dollar down stocks up post from the other day that also drew a lot of chatter, New Zealand may be unfolding in a similar manner as I described could be coming for the US.

Over the last few weeks the NZ 50 and the kiwi currency look like mirror opposites. Pursuant to that first post, my thought was that if this relationship exist it would be short lived.

I still don't know how much this matters, and as David shared, he is not aware of this happening without hyper inflation but for now I will not completely dismiss it either.
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Just Wondering

Since he joined CNBC, has Charlie Gasparino done a report on something you actually care about?
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Just Wondering

Since he joined CNBC, has Charlie Gasparino actually done a report on something you care about?
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Debtor Nation Debate

CNBC had an interesting debate about the extent to which the US is or is not too much in debt. It was a strange exchange because clearly the US owes a lot of money but it boiled down to whether the amount of equity US investors own offsets the debt that we have. It was kind of a theoretical balance sheet discussion.

On the we have too much debt side was Peter Schiff from Euro Pacific Capital and on the equity is bailing us out side was Charles Biderman from Trim Tabs. His lead point was that the value of our holdings in foreign equity increased by over $1 trillion in 2005 compared to a $700 billion increase in the balance of payments deficits.

Biderman said we own more foreign assets in equity holdings than foreign investors own in our debt. Schiff said that is not true. It seems to me that an organization like CNBC would have been able to dig up the numbers but segment moderator never chimed in. I don't know the actual numbers and if anyone does and wants to leave a comment that would be great.

Biderman's point, whether numerically accurate or more of a it's not as bad as it seems nugget, seems like more of an academic, economic point than a real world point to me.

Your owning foreign stocks does not have an obvious direct benefit where the government's debt is concerned, at least I don't see it. Theoretically your owning foreign stocks could domino to eventually benefit the government having to much debt but I think this could be a reach.

I am having trouble coming up with a good analogy but does your having no mortgage and $600,000 in a 401k help you brother who has $20,000 saved and is living paycheck to paycheck?

I'm it would be easy for an economist to shoot down my thoughts on this matter but I am not hanging my hat on buying ADRs will solve our debt problem.
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Its March And My Wife Is Mad

Seton Hall and Wichita State just tipped off to start the tourney, wahoo!

This is a bone of contention in our house every year. The Wall Street Journal may have found a bone of contention in iShares' house with the way they calculate P/E ratios for their funds. You can read about this on ETF Investor, Accidental Consultant or in the original WSJ article.

Accidental calls this deceitful. While I'm not sure if they intend to deceive or not it certainly is not helpful. The article focuses on the market cap ETFs. The iShares I use in my practice are the occasional single country ETF and some sector ETFs for clients where individual stocks are not ideal. The article did not touch on these ETFs so I don't know if they are effected.

Where this is problematic is in choosing what ETF to use to capture whatever effect you are going for. If you want broad small cap exposure in an ETF you only have a few choices. The likelihood that you get hurt because the iShares P/E ratio is higher than you thought is quite slim but it is discomforting nonetheless. I have a nickel that says this changes very soon.
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Dollar Down, Stocks Up, A Lot?

Categorize this as you don't need to ever have an original thought to understand the market.

A reader who I presume chooses to be anonymous passed along a photocopy from a text book that showed the German stock market going up dramatically during the beginning of its hyper inflation-mark devaluation days of the Weimar Republic of the 1920's.

The theory behind this was that stock prices had to go up a lot just to stay even, so to speak. I am in no way implying the US dollar will have that type of devaluation but the notion of a weaker dollar forcing stocks up just to stay even is a possibility. If it plays out this way, the extent to which the dollar does weaken would shape the details of how long this type of rally would last.

I could see the dollar going down by 10-15% and under this little theory, perhaps stocks rally short term by a similar amount before correcting. It would make sense for the resultant correction to go down further than the bottom of the recent trading range. In eyeballing a chart a move to below 1150 on the S&P 500 but not below 1100 might be a reasonable guess.

This would be unpleasant but not calamitous. I just can't buy into an everyone in the bunker scenario but a rougher recession than we've had over the last couple of decades does not seem impossible.

Remember, this is a theory.
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"It Just Doesn't Matter"

That tagline was the catalyst for John Winger's (Bill Murray) attempt to inspire the rest of his unit in the movie Stripes thanks for the corrective comments and emails it was Meatballs, not Stripes.

I had the same thought yesterday thinking about all of the cheerleading and all of the nay saying for the stock market.

I have been very clear all along that I expect 2006 to be down a little, the SPX between 1180 and 1219. For the first 50 trading days of the year I am flat out wrong. The S&P 500 is up 4.4% year to date.

That I am wrong does not matter, fortunately, because I have not tried to outguess a big turn in the market. I write this all the time. It might be correct to say I have a slight defensive bias but client accounts are close to fully invested and have been all year despite my belief about what the market will do.

For all of my opinions and concerns, I have said all along that the market has not yet cracked and until it does (here I mean breach the 200 DMA) I will not make big changes. I have made a couple of tweaks along the way and I think I have written about all of them but perhaps not.

The generic account that I maintain on Yahoo Finance is up 4.8% year to date not including dividends, they have to be added manually and I haven't gotten around to that yet. Individual client accounts may have done better or worse. That I am ahead by 0.40% is the same as being behind by 0.40%, I look to be dead wrong but am lucky enough to have stayed close.

This is easily repeated by any do-it-yourselfer because I have kept the portfolio diversified and did not knee jerk reduce exposure.

This has been a recurring theme here, right does not have to matter, and wrong does not have to matter. It all depends on how you implement you portfolio and whether you can subjugate your ego and realize you will be wrong from time to time.

One reminder would be that Barry Ritholtz predicted the market would start the year well before going down.
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TICS Data

For the last two months in a row, foreign purchases of US treasuries have not been enough to cover the current account deficit.

When does that start to matter?
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A Day For Emails

I received an email with several topics from one reader including concern about what the meltdown of the Middle Eastern stock markets might mean for the rest of the world.

I was able to find two markets on BigCharts, Egypt (in black) and Jordan (in yellow-ish).

There have been some spectacular moves in the last few pick your favorite time period. There were huge moves up and then they all topped out in late January to early February and have dropped a lot since.

Does any of this matter? The answer to that question depends on what things you care about. The market caps of most of these countries are so small they might as well not even exist. This serves to dilute the importance for today. If you care about being forward looking it makes sense to think that these countries will only become more important to the world economic order as time goes on, regardless of what the US thinks of their politics.

These markets will not directly disrupt US markets yet. I suppose they could domino to eventually reach us but I would not be concerned about that. I view this as part of a multi year maturation process that all markets go through. Iceland may experiencing something similar, albeit for different reasons.

Some of the companies in these markets are important now and will become more so in the future. The best example I can think of is Egyptian telecom company, Oroscom. That one company could make the rest of the market important is not unprecedented. I may be wrong but I doubt too many people paid attention to Finland before Nokia came along but the country does have importance today for European managers.

Hopefully that gets the reader started on how to think of these markets.
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GMAC Smartnotes

A reader asked if GMAC Smart Notes might be better to buy as they seem to be well bid. I will take his word about being well bid, as I have not looked.

I think the answer depends on why you want to buy debt. Do you need the income? Or do you want to use the fixed income market to find capital gains?

Another aspect is whether you use fixed income to reduce volatility or not.

I have no interest in these, a possible GMAC sale notwithstanding. They don't fit in with managing separate accounts for individuals (IMO). If I were managing a bond fund there would be a place for that paper. A portfolio of bonds, like stocks, needs some holdings that are steady eddies and some hot potatoes.

But in an individual's portfolio the stocks are where I want the volatility and growth to come from.

From a practical stand point, if you buy $25,000-$50,000 face now, things go poorly and you want to sell, watch out. I think I related a story about a client of our firm that bought some for himself and on one of the days where it was really bad there were no bids. If that happened before it can happen again.
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Reader Request

A reader emailed in asking for a review of PowerShares International Dividend Achievers Fund (PID) since it increased to 60 holdings.

As you might expect, the financial sector has the largest weight by a mile at 44.68%. If you look at the PowerShares site you will see it says 35.53% but for some reason the other category is all of the Canadian banks. I'm not sure why it is presented that way but I think it is safe to include banks in the financial grouping.

Both consumer sectors (discretionary and staples), energy, materials and the telecom sectors are weighted similarly in PID as the S+P 500. Tech and the industrial sectors are very underweight compared to the S+P and the utility sector is very overweight at 9.44% (this is not a surprise either).

As for country weightings, Canada is the largest at 22.06%, then the UK at 15.62, Ireland with 6.74% and several others around 5%, including Australia.

As you look at the chart you can see that PID does correlate closely to Canada, the UK and Australia.

PID's correlation to these places is not a shock but it is worth knowing.

That it is so heavy in financials is not, in and of itself a bad thing. Problems can arise if PID is blended together with several other products that own a lot of financial stocks. That sector makes up 20.8% of the S+P 500. With where we are in the economic cycle I would not want to be overweight the sector but this fund shows how easy being overweight can be. If being underweight turns out to be correct, a portfolio that is overweight because of ETF selection will lag and the dividend may not be enough to make up for the lag.
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Emerging Market Caution

Chet Courrier from Bloomberg has a good article up expressing caution about the Emerging Markets.

The article is not really that different from some of the concern I have written about over the last couple of weeks but it makes a good second opinion.

I receive email from readers of this site or my content elsewhere and it is truly astonishing to hear how much some folks have in emerging markets or energy trusts. One reader mentioned he would lighten up when CNBC started giving too much coverage. He might be able to time any moves based on something like a TV indicator but I find that to be making portfolio management much more difficult than it needs to be.

There is no real harm in irrationally justifying an asset class that takes up 10% of your portfolio. You may lag the market, which is OK, but you won't damage yourself financially. A 30% weight in the wrong area and you will damage yourself financially.

Can it be that people really don't get this?
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Exchange Mania

I am probably contributing to the mania. Today I had an article published on RealMoney about a couple of foreign exchanges (not the LSE which I have written about here before).

There are many exchanges that are public around the world and really the US is late to the party. One exchange I did not pursue for the article that I would say to avoid is the New Zealand Exchange (NZX.NZ). For now, it is not easily accessible because there is no five-letter OTC symbol to facilitate trading here. It would be easy to set one up, so I was told, but that is not the point.

The focus here is a little bit of process. I think I have been reasonably in touch with the public exchanges, I was wrote positively about the LSE for my since discontinued newsletter about a month ago.

There really is a mania for these stocks. Owning one of them in a diversified portfolio is not a bad idea as I think they can be proxies for all sorts of things related to the home country.

The NZX is kind of a different animal. No secret that short term I am out of New Zealand but I am long term bullish and expect to be back in during the next few months. However, after having visited there I can say that for the most part, kiwis don't care about stocks. There is no stock market television because of lack of demand. I don't think this hampers growth in prices, in general, but if there is not much excitement about investing, shares of the exchange become a poor proxy for the economy.

I may not have thought about this had I not visited. A lot of the other exchanges out there have catalysts that could be important ranging from economic emergence to consolidation but NZX seems to be missing both.

This type of analysis, right or wrong, is a kind of top down assessment. In the big picture, I don't see the NZX being a share price leader or good proxy for the reasons I have stated. There are headwinds that make it relatively unattractive.
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Pass The Cyanide Now

There were a couple of very dark posts at Barry Ritholtz' site yesterday that you can read here and here. One is about the potential havoc from ARM resets and the other about economic disparity in the US between the haves and have nots.

Add to that the water post I put up the other day, the potential fallout from the Iranian Oil Bourse and anything else you want to throw in.

I believe in trying to assess risks that exist but not dwell on them, emotionally. An economic end to the world argument has existed my entire adult life and I have no doubt much longer than that.

The world has never ended before and I doubt it will anytime soon so while it is worthwhile to understand threats they do not need to permeate your life or your portfolio.

From the beginning of this site's life I have written about portfolio counter strategies. The general idea is protection when things distort. Owning gold or defense industry stocks are a couple of examples.

The way I think, I want to try to mitigate portfolio risks and personal finance risks. While I don't think a widespread housing market crash can happen, anyone that is overleveraged can get hurt at anytime. I know people with mortgages that don't amortze. I also know people that don't have a few months of expenses set aside, you know, from the first paragraph of every personal finance article ever written?

If you like where you live and have a mortgage you can easily afford, a housing market crash is not going to hurt you a whole lot. The bank doesn't want your house if you are making payments.

Hopefully the point here is to not let miserably depressing subjects bring you down and disrupt your portfolio. Selling two or three stocks and adding an inverse index can reduce a healthy chunk of your net long exposure. And if the market then runs up 25% right after you do those trades you'll still capture a big part of the move.

Please, keep an even temperament.
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Bill Gross

Bill Gross from Pimco was just on CNBC. He seems to draw a lot of negative attention all over for talking his book. The most recent commentary I read (I'm sorry I don't recall where this was) said that when he says yields are probably going lower, as he often does, it's because he needs the world to buy bonds from him.

I do not know how true that really is. Don't mistake this for a naive no he isn't argument, I am saying I do not know. I will say that if he is doing this, shame on him.

A knock on the argument that he is devoted to talking his book would be to ask why he would want to talk his book at the expense of his reputation for being wrong. Does being wrong matter?

The reality of this is subject to debate but I do know his track record for trying to predict the stock market is terrible.
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Correct

Morningstar called back and 62% is the correct number for how much weight the top ten holdings have in the fund.
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Mr. Kettle, Meet Mr. Pot

I was amused to see that Morningstar has licensed a dividend index that First Trust will list as an ETF this week.

Morningstar often criticizes ETF for have too much concentration in the top ten. This new fund, according to this article, based on their index, has 62% in the top ten. Oops.

The article also quotes Morningstar talking about differentiation. OK, well here are the tickers, again according to the article, for the top five holdings; C, BAC, MO, VZ and JPM.

The top five of DVY include MO, BAC, PNC, DTE, and PNW. The top ten account for 25.86%

The top five for PEY are MRK, WM, T, Progress Energy and Fnb corp. The top ten account for 26.28% of the fund.

The top five for SDY are CAG, ED, Vectren, First Horizon Natl and MO. The top ten account for 28.23% of the fund.

After doing that study I did not change the comment above about differentiation but maybe I should have because the names are reasonably different. Given that the percentages of the top tens of the other dividend ETFs are all in the 20's, I have to wonder if the 62% quoted in the article might be incorrect.

I called Morningstar and someone there is checking on the 62%. If I get a call back I will post the answer.

If correct, I think the the new Morningstar ETF might correlate very closely to the two mega-cap ETFs; the iShares S+P 100 (OEF) and the Rydex Russell Top 50 (XLG) but its too early to tell.
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Product Review

A couple of weeks ago I was offered the chance to have a free account to a news service called TheFlyOnTheWall.

Part of the job of managing money, your own or someone else's, is to keep tabs on news about your stocks. The service is similar to Briefing.com but is pushed to your desktop dynamically so that you don't need to seek out the content.

You can customize the feed to only look for certain stocks that you care about or have all the headlines included which I prefer in order to see names I haven't heard of before.

The content includes upgrades/downgrades, general news, rumors, MSM news, and options data.

So far it has turned out to be a huge time saver because I can just leave the window open and check it periodically.

The company does offer a free trial that is worth checking out.

The only thing to disclose is the one-year free subscription they are not paying me.
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Administrative Snafu

Over the weekend I tried to change my picture on the site. The picture didn't fit in well into the space allowed. I switched it back but for some reason it won't go back to the old picture here but does revert back on my other sites.

I will keep working on it.

The new picture was going to be me standing next to a fire truck in New Zealand.

Arrgghh!
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Scary Water Content

Investor's Diary: High & Dry In China

I can't vouch for the accuracy of the info in the post but if true, yikes!
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The Big Picture For The Week Of March 12, 2006

What a weekend! We have at least two feet of snow, the college basketball has been great and a neighbor plowed my driveway yesterday with his snow-cat-looking vehicle (too bad it snowed another foot since he came by!).

In doing my usual weekend reading it seemed like fear of all of the topical bad things seems to be growing. If I am reading these tea leaves correctly maybe we can see a little rally in the next few weeks. This is more of a contrarian thought than anything else.

I do think the market looks to be in rough shape, not crash-rough just decline-rough, but the market although shaky has not cracked. I have written many times that I don't feel the need to outguess big declines. The number of times the market has shot up, out of the blue for no reason at all is a lot. I do not want to miss one of those rallies.

This is more about philosophy than anything else. A lot of people do try to time these types of moves. I view that type of trading as one of my weaknesses so I tend to avoid it. I also don't think it is appropriate with respect to managing other peoples money, but that is just my opinion and not a condemnation of anyone that does it.

The recent flattening of the yield curve has been interesting to me. The bond market is pricing something in and I'm not sure what. I don't know that the inversion, such as it was, was long enough or steep enough to be automatically recessionary. That probably does not matter because the economic cycle is fairly long in the tooth and like to end soon, inverted curve or not.

That the curve flattened (before the inversion) is historical evidence that the economy is slowing down.

One last question, does it seem to you like the number of people that a month ago were saying the inverted curve won't matter have stopped talking? Maybe it's just me.
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Not As It Appears?

I was struck by the following piece of data in Barron’s, courtesy of Jim Stack, whom I respect a lot, from Investech Research.

He recently upped his weighting in treasuries to 36% because "equity fund assets, as of Dec. 31, had increased to $4.9 trillion, 22% above where they were at the last market top in 1999. At the same time, consolidation has reduced the number of funds by about 200. Bottom line: More money is chasing fewer good funds, some of which aren't welcoming new investors."

There is an obvious flaw with the data as presented. I have no idea if the flaw is in the research or in the way in which Barron’s presented the research.

The data, as presented, does not account for new money coming to the market through 401k contribution, IRA contributions or other new savings. Any money invested in late 2002 is up a lot. Not being a researcher I don’t know how to adjust the inputs or the outputs but I don’t think the numbers portray the situation accurately.

Long time readers know I am no perma-bull trying to justify why the market should go up. I do think the market is headed lower this year but if I am right I don’t think it will be because of the reasons stated above.
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Fascinating

I have mentioned the London Stock Exchange, as a possible stock investment, several times. The Nasdaq has made a £9.50 bid for the LSE. This tops the old £5.80 bid from Macquarie.

The timing of this is amazing, meaning all the excitement NYX has created this week. If there was any doubt before, now it should be clear that the Nasdaq and NYX are big rivals and we will see more movement in this area in the future.

I am a big believer in the LSE and, while I was dumb to not buy when I first stumbled across the idea, my frst reaction is to want to buy Nasdaq if they can make the deal happen. It certainly looks like the market likes the idea.
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