I have tried to encourage the growth of this part of the blogosphere in my short time doing this (a little over a year and half). In that time the blogosphere has grown in terms of number of participants and acknowledgement from mainstream media that there can be value added on these types of sites.
A big part of this site is the sharing of process by one money manger, me. I write about how I do my job, what I get correct, incorrect and the way I go about learning new things. There are other blogs that are similar to this one that add value.
There are some excellent blogs that focus on short-term trading, currency, options, economics and other areas of the capital markets.
The spectrum of bloggers ranges from real industry heavyweights to highschool age kids. Neither age nor experience has to be a barrier to providing good content. I am convinced that blogs will continue to add utility to what, as a function of numbers, has to be a an explosion in the number of do-it yourself investors.
That being said the reader needs to beware. Not all blogs are worthwhile. Let me be clear that I am not going to name names and I will delete any comment that takes a shot at any other blog. The point here is not to pick on anyone but to create some awareness that there are a few blogs where the input given just isn't very good.
One blog in particular is written in an authoritative tone, implying some experience, but the thought process shared and conclusions drawn are so off base that I think I question the bloggers knowledge and experience relative to how it is portrayed. Because of its authoritative tone people could take action based on input from this seemingly poor source. I differentiate this from any blog written by a self-proclaimed neophyte trying to learn about the markets and blogging his experience.
As you find new blogs I would advise going through the archives to try to really size up the content and to figure out whether that blogger adds value to what you are trying to do with your portfolio and what you are trying to learn.
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Wikinvest Wire
Sunday, April 30, 2006
Saturday, April 29, 2006
The Big Picture For The Week Of April 30, 2006
Apprehension about what may happen with Iran has elevated in the last few days. It seems like some markets are pricing in this bad situation escalating but some markets are oblivious for now. Well maybe not oblivious, maybe right in that perhaps nothing bad will happen.
Anytime gold spikes up like it did this past week it makes sense to explore whether that type of move is trying to convey a coming problem. Over the last week, Gold, as measured by GLD, was up about 4%. Gold is at an umpteen year high and this last move almost feels like a panic up. Obviously this could change on Monday but this is what has happened thus far.
Copper's chart is also starting to look parabolic. Obviously people don't buy copper in a flight to safety like with gold but something is driving capital in to the commodity complex.
Oil is off of its high but clearly above $70. With the totality of what is going on excluding Iran I think $60 is a high price (I am not saying too high) for oil. I obviously have no idea what the terror premium should be but crude was about $9 lower back in March.
An indicator I like to watch is the Aussie dollar vs. the Swiss franc. Both are developed markets but are thought by some to be at different ends of the same spectrum. It is thought that there is less global anxiety when the Aussie goes up vs. the Swissi.
Over the last few weeks money has clearly been coming out of the US dollar but the Aussie is also down almost 4% vs. the Swissi in the last two months.
The are several markets that seem to be less fazed by the latest in global current events.
The US yield curve has generally gotten steeper. This is generally an optimistic indicator as steep curves are usually associated with good growth prospects. If the bond market was more concerned about this you might expect to see the curve get flatter as money sought the safety of US treasuries. The other side of this particular coin of course is that the US dollar is taken a big hit so interest rates have to rise in order to compete globally.
The VIX index seems to be carefree and easy of late and while I drew in the red trend line it looks like an accurate line. With the verbal sparring under way I might expect VIX to be a little higher.
Most importantly for US equity investors the stock market has not cracked. I do not know if it will. I would not be surprised if it did but we are not that far from the 200 DMA. I feel no need, as usual, to out guess anything big and scary. As I noted during the week I did raise a little cash early in the week but not much.
A last point is that the way I have spelled out all of these indicators is in a basic fashion. I think that once you really have the basics down you can then begin to understand the more complex concepts behind all of them as all of the things listed could be interpreted differently than what I have here.
Read more!
Anytime gold spikes up like it did this past week it makes sense to explore whether that type of move is trying to convey a coming problem. Over the last week, Gold, as measured by GLD, was up about 4%. Gold is at an umpteen year high and this last move almost feels like a panic up. Obviously this could change on Monday but this is what has happened thus far.
Copper's chart is also starting to look parabolic. Obviously people don't buy copper in a flight to safety like with gold but something is driving capital in to the commodity complex.
Oil is off of its high but clearly above $70. With the totality of what is going on excluding Iran I think $60 is a high price (I am not saying too high) for oil. I obviously have no idea what the terror premium should be but crude was about $9 lower back in March.
An indicator I like to watch is the Aussie dollar vs. the Swiss franc. Both are developed markets but are thought by some to be at different ends of the same spectrum. It is thought that there is less global anxiety when the Aussie goes up vs. the Swissi.
Over the last few weeks money has clearly been coming out of the US dollar but the Aussie is also down almost 4% vs. the Swissi in the last two months.
The are several markets that seem to be less fazed by the latest in global current events.
The US yield curve has generally gotten steeper. This is generally an optimistic indicator as steep curves are usually associated with good growth prospects. If the bond market was more concerned about this you might expect to see the curve get flatter as money sought the safety of US treasuries. The other side of this particular coin of course is that the US dollar is taken a big hit so interest rates have to rise in order to compete globally.
The VIX index seems to be carefree and easy of late and while I drew in the red trend line it looks like an accurate line. With the verbal sparring under way I might expect VIX to be a little higher.
Most importantly for US equity investors the stock market has not cracked. I do not know if it will. I would not be surprised if it did but we are not that far from the 200 DMA. I feel no need, as usual, to out guess anything big and scary. As I noted during the week I did raise a little cash early in the week but not much.
A last point is that the way I have spelled out all of these indicators is in a basic fashion. I think that once you really have the basics down you can then begin to understand the more complex concepts behind all of them as all of the things listed could be interpreted differently than what I have here.
Read more!
Friday, April 28, 2006
Enough!
Can't CNBC find just one guest that will validate Erin's idea of increasing the gas tax so she will finally drop it?
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Reiteration Of A Point
I write a lot about trying to understand how certain things work in an effort to help remove emotion from the process.This chart compares the UK listing of British Pete to the ADR which is a client holding.
This week the dollar is down against the British pound by almost four cents. The stock has had a rough week down almost 5% in the UK. Because of the weak dollar in the same time period the ADR is down just under 3%.
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I've Been Misquoted!
Commodity-Based ETFs Not For The Long Haul - Yahoo! News
Another milestone for me is being misquoted in the above article in IBD. A chap named Edward Denson has written a short white paper for UBS titled Should Passive Commodities "Investments" Play A Role In Your Portfolio and his conclusion is no.
The above article says I generally agree which I don't. The writer emailed me the report so I don't have a link to give. In the interview I described the white paper as being incomplete because there was no mention of changes in demand and the reasons cited by Dr, Denson, I felt, had more to do with logistics of commodity exposure like futures roll than with flaws in the theme.
His conclusion could be right for all I know but how can you draw any conclusion without touching on demand?
He did say that commodities don't provide much hedge against inflation and that the price moves are a non-start and offered this chart.
I realize his chart is difficult to see but it looks like there is more room for upside based on how these moves have worked before.
My primary interests in commodity exposure are the low correlation to equities and the ability to rally in the face of equity market crisis. These attributes serve to reduce portfolio volatility.
On a different note, the silver ETF has started to trade today and seems to be off to a good start.
I still have a lot to learn about silver. What I know leads me to conclude the fundamentals are more complex than with gold.
As this chart shows buyers today are not buying low.
Read more!
Another milestone for me is being misquoted in the above article in IBD. A chap named Edward Denson has written a short white paper for UBS titled Should Passive Commodities "Investments" Play A Role In Your Portfolio and his conclusion is no.
The above article says I generally agree which I don't. The writer emailed me the report so I don't have a link to give. In the interview I described the white paper as being incomplete because there was no mention of changes in demand and the reasons cited by Dr, Denson, I felt, had more to do with logistics of commodity exposure like futures roll than with flaws in the theme.
His conclusion could be right for all I know but how can you draw any conclusion without touching on demand?
He did say that commodities don't provide much hedge against inflation and that the price moves are a non-start and offered this chart.
I realize his chart is difficult to see but it looks like there is more room for upside based on how these moves have worked before.
My primary interests in commodity exposure are the low correlation to equities and the ability to rally in the face of equity market crisis. These attributes serve to reduce portfolio volatility.
On a different note, the silver ETF has started to trade today and seems to be off to a good start.
I still have a lot to learn about silver. What I know leads me to conclude the fundamentals are more complex than with gold.
As this chart shows buyers today are not buying low.
Read more!
The Other Side Of The China Theme
I am a big believer in China as an investment destination. I have not gotten carried away with how much I have but do think it is an important theme. Part of managing a portfolio has to be seeking out the other side of your trades to either strengthen your conviction or make you realize when you are wrong.
Yesterday on European Closing Bell, analyst Diana Choyleva from Lombard Street Research came on and said that China is in for a very hard landing later this year. She says that China's rate hike is too late and that they will have to be very aggressive with rate hikes to slow down the 9% (or higher) GDP growth. She said profitability has already been destroyed by over-investment. She also sees a consumer lead slowdown in the US later this year that will domino to negatively impact China too.
She went on to say that the investment community has too much faith in the Chinese authorities to engineer a soft landing of any sort. Booms and busts are more typical for China than anything else. She sees no way out for China. She sees growth slowing to 5% which she calls a meltdown because it is so far below current growth rates. This, by extension, will be bad for all commodity prices except, perhaps, for oil.
So, is she right? I'm not sure how well I am conveying her negativity but I doubt she can be right in terms of magnitude this year, which is her time line. For the last two year the Shanghai Composite is down from 1600 to 1400. In the last twelve months it is up 40%. I don't think a good year can result in a true meltdown caused by excess returns. That is not to say it can't go down but it would be tough for a decline to be truly ruinous.
I also think that all of the catalysts moving China are still in place and likely to be in place for a while to come. None of this has to mean I am right but I have a small position, as I have all along, in case I am wrong. A 3%-5% can help a portfolio but not cause a wipe out if Ms. Choyleva turns out to be correct.
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Yesterday on European Closing Bell, analyst Diana Choyleva from Lombard Street Research came on and said that China is in for a very hard landing later this year. She says that China's rate hike is too late and that they will have to be very aggressive with rate hikes to slow down the 9% (or higher) GDP growth. She said profitability has already been destroyed by over-investment. She also sees a consumer lead slowdown in the US later this year that will domino to negatively impact China too.
She went on to say that the investment community has too much faith in the Chinese authorities to engineer a soft landing of any sort. Booms and busts are more typical for China than anything else. She sees no way out for China. She sees growth slowing to 5% which she calls a meltdown because it is so far below current growth rates. This, by extension, will be bad for all commodity prices except, perhaps, for oil.
So, is she right? I'm not sure how well I am conveying her negativity but I doubt she can be right in terms of magnitude this year, which is her time line. For the last two year the Shanghai Composite is down from 1600 to 1400. In the last twelve months it is up 40%. I don't think a good year can result in a true meltdown caused by excess returns. That is not to say it can't go down but it would be tough for a decline to be truly ruinous.
I also think that all of the catalysts moving China are still in place and likely to be in place for a while to come. None of this has to mean I am right but I have a small position, as I have all along, in case I am wrong. A 3%-5% can help a portfolio but not cause a wipe out if Ms. Choyleva turns out to be correct.
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A Few Thoughts
I am surprised Microsoft could be down this much on an earnings report. I would be further surprised if it trades with a 24 handle much longer.
We have snow on the ground today (not a John Snow shot but an actual weather report on the mountain).
Any other sports fans think ESPN regrets firing the NHL as they air Paintball Championships, Poker and Sumo Wrestling over and over?
More content coming soon.
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We have snow on the ground today (not a John Snow shot but an actual weather report on the mountain).
Any other sports fans think ESPN regrets firing the NHL as they air Paintball Championships, Poker and Sumo Wrestling over and over?
More content coming soon.
Read more!
Thursday, April 27, 2006
Welcome To The Blogosphere
Borderless Investor
John Christy from Forbes International Investment Report has joined the blogosphere with the Borderless Investor site, linked above.
John's got a lot of interesting things to say but where's the feedburner URL?
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John Christy from Forbes International Investment Report has joined the blogosphere with the Borderless Investor site, linked above.
John's got a lot of interesting things to say but where's the feedburner URL?
Read more!
Long Term Sure, All At Once?
This first chart compares the dollar vs. the krones of Sweden and Norway over the last two months. Norway has been stronger due to oil.
The second chart shows the euro's strength over the last few months. The dollar weakness has accelerated this week which some technicians might view as positive. Ok but don't be shocked if this stalls out or reverses a little bit before doing anything else.
I still believe the dollar gets weaker but nothing goes in one direction. Don't freak out if the dollar goes up for a short while and your foreign stocks go down in that time. This is not something I plan to trade around but it could be less frustrating if you expect it to come.
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Ok, But Remember
Faisal from over at Stocks and Blogs left the following comment about small cap.
This chart compares the S&P 500 to the Russell 2000 from 1/1/97 to 12/31/99. Small cap was dead. There were headlines and TV segments devoted to why small cap will not work, yada yada yada.
There is no reason to disagree or agree with Faisal's statement. This chart pattern will repeat in the future.
I'm sure reader OG will get on me here but patterns and cycles repeat. Large cap to small cap and back to large is one of these cycles. It does not make sense to give up on either one.
At times you will favor one over the other and you will be right on that call sometimes and wrong other times.
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Small caps are the root of American entrepreneurship. I believe some large caps like JNJ, BA and even MO will do well, but overall, owning large caps is a defensive strategy.
This chart compares the S&P 500 to the Russell 2000 from 1/1/97 to 12/31/99. Small cap was dead. There were headlines and TV segments devoted to why small cap will not work, yada yada yada.
There is no reason to disagree or agree with Faisal's statement. This chart pattern will repeat in the future.
I'm sure reader OG will get on me here but patterns and cycles repeat. Large cap to small cap and back to large is one of these cycles. It does not make sense to give up on either one.
At times you will favor one over the other and you will be right on that call sometimes and wrong other times.
Read more!
Picking On Oil
I enjoyed the Wendell Perkins interview (read sarcasm) because he knew the oil stocks would struggle. Too bad he wasn't on TV before the Exxon report. He is a good money manager but a worthless TV interview. His performance numbers reveal he really does know what he is doing but I kind of lump him in with Vince Farrell as someone who doesn't really share process in a helpful way.
I was very public with my reducing oil stock exposure on Monday and emerging market exposure on Tuesday. One of the EM stocks I trimmed was my Chinese oil stock. Yesterday these trades didn't look so good and today they do look good and obviously I do not know how they will look tomorrow. Fortunately I am not concerned with being right or wrong for a week.
I do not think anything has changed with the long-term macro themes but it makes sense to think there will be volatility in both energy and emerging markets. After all, oil was at $63 a month ago.
How much energy do you have? How much do you have in emerging markets? It amazes me that so soon after the Internet days people are willing to have way too much in certain parts of the market. I have to conclude that people don't learn from past mistakes? I hope this is wrong.
Read more!
I was very public with my reducing oil stock exposure on Monday and emerging market exposure on Tuesday. One of the EM stocks I trimmed was my Chinese oil stock. Yesterday these trades didn't look so good and today they do look good and obviously I do not know how they will look tomorrow. Fortunately I am not concerned with being right or wrong for a week.
I do not think anything has changed with the long-term macro themes but it makes sense to think there will be volatility in both energy and emerging markets. After all, oil was at $63 a month ago.
How much energy do you have? How much do you have in emerging markets? It amazes me that so soon after the Internet days people are willing to have way too much in certain parts of the market. I have to conclude that people don't learn from past mistakes? I hope this is wrong.
Read more!
I Must Have This Wrong
President Bush said in a speech the other day that the economy has created 5.1 million jobs since August 2003. This was an anecdote given to show the economy is healthy.
The adds up to 31 months of jobs reports not counting August 2003 or April 2006. 5.1 million divided by 31 months works out to an average of 164,000 jobs per month. I think remember hearing that average job creation in an expansion has historically run at about 200,000 jobs per month.
I also seem to recall hearing in several places that the economy needs to create 150,000 jobs per month just to stay in place. Is it possible that I have any of this correct? If I do that means actual new jobs created works out to 14,000 per month or a total of 434,000 new jobs.
On a different note Larry Kudlow said "poverty is no longer poverty in this country." This might be the single most insensitive thing I have ever heard from someone in the media. Wow!
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The adds up to 31 months of jobs reports not counting August 2003 or April 2006. 5.1 million divided by 31 months works out to an average of 164,000 jobs per month. I think remember hearing that average job creation in an expansion has historically run at about 200,000 jobs per month.
I also seem to recall hearing in several places that the economy needs to create 150,000 jobs per month just to stay in place. Is it possible that I have any of this correct? If I do that means actual new jobs created works out to 14,000 per month or a total of 434,000 new jobs.
On a different note Larry Kudlow said "poverty is no longer poverty in this country." This might be the single most insensitive thing I have ever heard from someone in the media. Wow!
Read more!
Wednesday, April 26, 2006
Norges Bank
Norges Bank - Norges Bank keeps the interest rate unchanged
This is from the central bank of Norway after their decision to keep rates unchanged...if you care about Norway.
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This is from the central bank of Norway after their decision to keep rates unchanged...if you care about Norway.
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OK, This Time I Really Really Mean It
Scott Wren from AG Edwards just made a case for large cap but admitted they have been wrong so far about the timing of the large cap move.
The case is compelling and has been for the last couple of years. Compelling does not equal right. A lot of the strategists favor the large caps, which might be part of the problem. An ongoing discussion for the last day or two has been about parts of the market rotating back into favor eventually. Major rotations tend to happen when people don't expect. It seems like a lot of folks expect large cap to do well, which is maybe why it won't.
At some point the gang may give up on this part of the market and that might be a better time to go a little heavier here. For now I think Johnson & Johnson might be the only domestic mega cap I own for clients, at least it is the only one that comes to mind right now. I do have foreign exposure above $100 billion with British Pete and Novarits to name two.
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The case is compelling and has been for the last couple of years. Compelling does not equal right. A lot of the strategists favor the large caps, which might be part of the problem. An ongoing discussion for the last day or two has been about parts of the market rotating back into favor eventually. Major rotations tend to happen when people don't expect. It seems like a lot of folks expect large cap to do well, which is maybe why it won't.
At some point the gang may give up on this part of the market and that might be a better time to go a little heavier here. For now I think Johnson & Johnson might be the only domestic mega cap I own for clients, at least it is the only one that comes to mind right now. I do have foreign exposure above $100 billion with British Pete and Novarits to name two.
Read more!
Is The End Nigh For The Dollar?
Probably not but look at that chart. Hey now!
I am not too worried at this point about the duration and magnitude of the decline. Client accounts have had a very good month (I realize it is stupid to think about one month but this is a worthwhile point) due mainly to the simple top down decision to overweight foreign.
This type of decision does not require keen insight, just a basic understanding about diversification. It is these types of portfolio moves where a lot of your return gets determined.
There are plenty of investment choices that that give broad or narrow foreign exposure without having to ever worry about single stock selection or risk, for people that do not want individual stocks.
I write about this a lot because I believe it is important and will become increasingly more important in the coming years.
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New ETFs
First Trust just listed two seemingly obscure ETFs based on broad-based Nasdaq indexes.
One ETF is the Nasdaq 100 Equal Weight Fund (QQEW) and the other is the Nasdaq 100 Technology Fund (QTEC). QTEC is also equal weighted.
It seems like a lot of people think equal weighting is better because the Rydex S&P 500 Equal Weight ETF (RSP) has trounced the S&P 500 index over the last few years. I think RSP is better is the wrong way to look at it. RSP has outperformed because it tilts to smaller cap and small cap has done much better than larger cap. Exxon (XOM), GE and Microsoft (MSFT) have been far from market leaders, in terms of performance, but the three make up 8.35% of iShares S&P 500 (IVV). Those same three companies combine to make up 0.60% of RSP. Any wonder RSP has outperformed?
At some point mega caps will rotate back into favor. Eventually everything rotates back into favor even if it seems like it won't.
As long and Microsoft, Intel, Cisco and Dell lag it is a good bet that QQEW and QTEC will outperform QQQQ.
That does not mean QQEW and QTEC are better. They favor different things so it is only logical that they would have periods of leading and lagging the cap-weighted index.
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One ETF is the Nasdaq 100 Equal Weight Fund (QQEW) and the other is the Nasdaq 100 Technology Fund (QTEC). QTEC is also equal weighted.
It seems like a lot of people think equal weighting is better because the Rydex S&P 500 Equal Weight ETF (RSP) has trounced the S&P 500 index over the last few years. I think RSP is better is the wrong way to look at it. RSP has outperformed because it tilts to smaller cap and small cap has done much better than larger cap. Exxon (XOM), GE and Microsoft (MSFT) have been far from market leaders, in terms of performance, but the three make up 8.35% of iShares S&P 500 (IVV). Those same three companies combine to make up 0.60% of RSP. Any wonder RSP has outperformed?
At some point mega caps will rotate back into favor. Eventually everything rotates back into favor even if it seems like it won't.
As long and Microsoft, Intel, Cisco and Dell lag it is a good bet that QQEW and QTEC will outperform QQQQ.
That does not mean QQEW and QTEC are better. They favor different things so it is only logical that they would have periods of leading and lagging the cap-weighted index.
Read more!
Tuesday, April 25, 2006
2010?
Coach CEO Lou Frankfort made an interesting comment in his CNBC interview right before the close. He mentioned that China could be huge for them and gave 2010 as a timeline for this possibility.
What makes this interesting is that the CEO is thinking about a long-term strategy over a period of years. All too often investors are worried about the next two weeks. The short-term mentality of the investor vs. the long term strategy of the company needs to be reconciled by the investor, for the most part.
This is not a call to by Coach, I have no idea whether the company can make hay in China or not but it is important to realize that a company you own probably cares more about the next few years than the next couple of points in the stock price. This makes trading even more challenging.
Does this matter? Maybe not but if you bought an oil stock or an emerging market stock two years ago and just held you probably have a double.
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What makes this interesting is that the CEO is thinking about a long-term strategy over a period of years. All too often investors are worried about the next two weeks. The short-term mentality of the investor vs. the long term strategy of the company needs to be reconciled by the investor, for the most part.
This is not a call to by Coach, I have no idea whether the company can make hay in China or not but it is important to realize that a company you own probably cares more about the next few years than the next couple of points in the stock price. This makes trading even more challenging.
Does this matter? Maybe not but if you bought an oil stock or an emerging market stock two years ago and just held you probably have a double.
Read more!
Deep Breathing
I have had a crazy morning. I had to come to Phoenix today. I am still working on the paperwork to finance our new Fire Truck (I'll have a picture up when it gets delivered). I had to give an interview this morning. I have had a mountain of email to my street.com account that I still haven't had time to answer.
On top of that, I did some more trading today almost across the board. I reduced exposure to emerging markets slightly today. Some of the emerging market stuff has tripled for people that came on board when I first started. A few other things are up close to 50% in just a few months.
Similar to Statoil yesterday all I did was trim as a function of portfolio weight this is not a change in my belief in the theme. Someone who is up 100% sold more than someone who is up 50% so there was a lot of figuring to do with these trades.
For the time being this raises cash and reduces foreign exposure. In the next couple of weeks I will deploy the cash raised into more consumer and health just to restore balance.
The idea of rebalancing one a year or at some other time interval is one that comes up regularly in the media. This can be more complicated than it seems. By sticking to the calendar, a do-it-yourselfer has an easier time with the discipline required and just makes it automatic.
The down side of that idea is that the market does not care about what day of the year today is. Oil hit $75 in the middle of a quarter not the end. By the end of the quarter it may be at $60. If that happens, and I don't know that it will, waiting may not have been a great idea. Again, one driver behind reducing oil exposure, albeit slightly, was my sense that too many people were on the same side of the trade up at $75; too much portfolio weight was the other driver.
Hopefully, as with yesterday's post, this post gets you to think about what is in your portfolio and encourage you to take an unemotional inventory and rebalance if appropriate. Even if the sales I have made in the last couple of days turn out to be wrong, making proactive decisions will give you a decent shot of success.
Read more!
On top of that, I did some more trading today almost across the board. I reduced exposure to emerging markets slightly today. Some of the emerging market stuff has tripled for people that came on board when I first started. A few other things are up close to 50% in just a few months.
Similar to Statoil yesterday all I did was trim as a function of portfolio weight this is not a change in my belief in the theme. Someone who is up 100% sold more than someone who is up 50% so there was a lot of figuring to do with these trades.
For the time being this raises cash and reduces foreign exposure. In the next couple of weeks I will deploy the cash raised into more consumer and health just to restore balance.
The idea of rebalancing one a year or at some other time interval is one that comes up regularly in the media. This can be more complicated than it seems. By sticking to the calendar, a do-it-yourselfer has an easier time with the discipline required and just makes it automatic.
The down side of that idea is that the market does not care about what day of the year today is. Oil hit $75 in the middle of a quarter not the end. By the end of the quarter it may be at $60. If that happens, and I don't know that it will, waiting may not have been a great idea. Again, one driver behind reducing oil exposure, albeit slightly, was my sense that too many people were on the same side of the trade up at $75; too much portfolio weight was the other driver.
Hopefully, as with yesterday's post, this post gets you to think about what is in your portfolio and encourage you to take an unemotional inventory and rebalance if appropriate. Even if the sales I have made in the last couple of days turn out to be wrong, making proactive decisions will give you a decent shot of success.
Read more!
Hedge Fund For You
A reader asked for my opinion about whether it makes sense to put 3%-5% into a hedge fund like Super Fund or another low minimum product from SP Trader. I have not studied either company or either product line so this post will have nothing to do with these specific funds.
The idea of trying to add performance to a small amount of your portfolio with something that gives you the chance for a monster home run is far from the dumbest thing you can do. It may not be right for a given investor but it is not an insane idea.
One thing about hedge fund investing that could be a negative is access to the capital invested. If an investor as $500,000 and commits $20,000 (4%) to a hedge fund product this might introduce a fair bit of volatility overall. Let's say in year one the stock market is up 2% but the $20,000 grows to $60,000. Now this investor has 10.5% in the hedge fund. If the hedge fund can triple one year it can cut in half the next. The example may be extreme but the point is that it could be difficult to maintain balance in your overall portfolio.
A driver behind the question was the reader's doubt in his own ability to successfully speculate with a small portion of his portfolio. Is this even a worthwhile intention, speculating with a small piece of your portfolio? Here again there is no yes/no answer that applies to everyone. I do not set aside a little bit of client money to speculate with as I don't think it is a strength of mine either.
Every so often for my account I will see something that seems obvious to me and so I will do a quick trade. The key, I think, with this is that you must sell out of a quick trade as soon as it fails. Fails is obviously subjective. For example if you like to try to game stocks before they report earnings with the intention of selling into the report you should sell as soon as the earnings print. If you are disciplined with your trading, and you do in fact trade, you have a good chance of having some success. A lack of disciplines seems to be one of the biggest problems that people have.
Back to hedge funds, one concept that I adhere to is keeping things simple. While simple is also subjective I don't think that taking on hedge fund exposure is a simple endeavor.
The reason my answer seems wishy washy is that there is no absolute answer. I rail on about OEFs but obviously some of them are good and plenty of people think they are positively the best way to invest. Just because I disagree doesn't make them wrong. Ditto hedge funds.
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The idea of trying to add performance to a small amount of your portfolio with something that gives you the chance for a monster home run is far from the dumbest thing you can do. It may not be right for a given investor but it is not an insane idea.
One thing about hedge fund investing that could be a negative is access to the capital invested. If an investor as $500,000 and commits $20,000 (4%) to a hedge fund product this might introduce a fair bit of volatility overall. Let's say in year one the stock market is up 2% but the $20,000 grows to $60,000. Now this investor has 10.5% in the hedge fund. If the hedge fund can triple one year it can cut in half the next. The example may be extreme but the point is that it could be difficult to maintain balance in your overall portfolio.
A driver behind the question was the reader's doubt in his own ability to successfully speculate with a small portion of his portfolio. Is this even a worthwhile intention, speculating with a small piece of your portfolio? Here again there is no yes/no answer that applies to everyone. I do not set aside a little bit of client money to speculate with as I don't think it is a strength of mine either.
Every so often for my account I will see something that seems obvious to me and so I will do a quick trade. The key, I think, with this is that you must sell out of a quick trade as soon as it fails. Fails is obviously subjective. For example if you like to try to game stocks before they report earnings with the intention of selling into the report you should sell as soon as the earnings print. If you are disciplined with your trading, and you do in fact trade, you have a good chance of having some success. A lack of disciplines seems to be one of the biggest problems that people have.
Back to hedge funds, one concept that I adhere to is keeping things simple. While simple is also subjective I don't think that taking on hedge fund exposure is a simple endeavor.
The reason my answer seems wishy washy is that there is no absolute answer. I rail on about OEFs but obviously some of them are good and plenty of people think they are positively the best way to invest. Just because I disagree doesn't make them wrong. Ditto hedge funds.
Read more!
Monday, April 24, 2006
Mergers?
Am I the only one that finds Josh Kosman's, from Mergermarket Consulting, appearances to be a complete waste of time?
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Two New (To Me) Blogs
In the interest of trying to create awareness I have recently come across two new blogs that I'll pass along.
The first is The Shark Report. Similar to Adam Warner's blog, The Shark Report offers some good humor with short insightful posts that are more trading oriented. A lot of the trades are done with ETFs. Even if you aren't a short-term trader (I am not) there is value with these posts because you can get a good feel for they do trade short-term. This creates more understanding for long-term holders.
At the other end of the spectrum might be Stocks and Blogs which focuses more on bottom up stock picking with some market commentary added in. Lately the stock research has focused on biotechs. The value in this type of site is that you are unlikely to have heard of many of the stocks they are writing about. I just found the site a few days ago so it is tough for me to know how smart they are but most of the stocks they write about seem like concepts that would take years to play out so you have time.
This site does not have much in the way of disclosure other than a general disclaimer in the first post. If you have questions on their position, or lack thereof, I would ask them.
Read more!
The first is The Shark Report. Similar to Adam Warner's blog, The Shark Report offers some good humor with short insightful posts that are more trading oriented. A lot of the trades are done with ETFs. Even if you aren't a short-term trader (I am not) there is value with these posts because you can get a good feel for they do trade short-term. This creates more understanding for long-term holders.
At the other end of the spectrum might be Stocks and Blogs which focuses more on bottom up stock picking with some market commentary added in. Lately the stock research has focused on biotechs. The value in this type of site is that you are unlikely to have heard of many of the stocks they are writing about. I just found the site a few days ago so it is tough for me to know how smart they are but most of the stocks they write about seem like concepts that would take years to play out so you have time.
This site does not have much in the way of disclosure other than a general disclaimer in the first post. If you have questions on their position, or lack thereof, I would ask them.
Read more!
Shaving Kit
FYI Blogger has been unalbe to publish today, until now. I wrote this post five hours ago.
This morning in the pre-market I shaved off a little of my Statoil (STO) position personally and for clients. I sold different amounts based on when the client bought the stock. The earliest purchases were in the $14's. Those clients sold more than a newer client that owned it at $24 or $19 and a couple of new clients that are only up from $29 did not sell any.
The trade here is primarily about portfolio weight. Just about every energy stock, besides Exxon, is up a lot. With oil at $75 and, based on what I read and watch, with so many people on the same side of the trade shaving some off makes sense. If oil keeps going up I will shave a little more off of another name.
To be clear I am no less bullish on the energy picture. I buy into the idea that demand is growing faster than supply and that oil will stay high. I do not know if it will stay this high however.
After the trade I am still overweight energy, just less so. Hopefully this post conveys a complete lack of emotion on the matter. The energy theme has worked very well, I don't want to be too long if it ever turns.
The oil companies will make a lot of money if oil averages $60 per barrel. That is not a prediction about price but more conviction in the theme even if the price drops 20%. If that big of a drop in crude happens the stocks' first reaction would be to get smacked. I'm slightly less exposed now if that scenario plays out.
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This morning in the pre-market I shaved off a little of my Statoil (STO) position personally and for clients. I sold different amounts based on when the client bought the stock. The earliest purchases were in the $14's. Those clients sold more than a newer client that owned it at $24 or $19 and a couple of new clients that are only up from $29 did not sell any.
The trade here is primarily about portfolio weight. Just about every energy stock, besides Exxon, is up a lot. With oil at $75 and, based on what I read and watch, with so many people on the same side of the trade shaving some off makes sense. If oil keeps going up I will shave a little more off of another name.
To be clear I am no less bullish on the energy picture. I buy into the idea that demand is growing faster than supply and that oil will stay high. I do not know if it will stay this high however.
After the trade I am still overweight energy, just less so. Hopefully this post conveys a complete lack of emotion on the matter. The energy theme has worked very well, I don't want to be too long if it ever turns.
The oil companies will make a lot of money if oil averages $60 per barrel. That is not a prediction about price but more conviction in the theme even if the price drops 20%. If that big of a drop in crude happens the stocks' first reaction would be to get smacked. I'm slightly less exposed now if that scenario plays out.
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Saturday, April 22, 2006
The Big Picture For The Week Of April 22, 2006
The blogosphere's own Greg Newton has an article in Barron's this weekend about investing in hedge funds and explores the merits of accessing them through investable indexes.The table to the left is from the article and has return information for investable and non-investable hedge fund indexes.
Hedge funds clearly have their place in the investment world and it is true that they provide liquidity to many parts of the market.
It makes sense to think that hedge funds will become easier to access, take the Super Fund as an example. Just because you can get into a hedge fund doesn't mean you should.
It may not be clear from the things I write about but I try to keep portfolios very simple. The things that effect simple portfolios can be very complex. I believe in trying to learn about complex factors that influence stock markets but I believe complex external factors can be married with simple equity portfolios.
The returns listed in the table don't look to be all that stellar but I think the picture is incomplete. I don't know what makes up the indexes nor does the table indicate the risk taken to get those returns. If a given index from the table averaged 6% per year for five years with only taking 25% of the volatility that would be taken in an S&P 500 index fund then 6% looks very good.
If a given index got 6% with double the volatility of the S&P 500 then 6% stinks.
Another aspect of the hedge fund question is that some of the strategies are easily recreated in a brokerage account for a lot less money. There are funds that invest in commodities, currencies, convertibles and so on. Obviously these funds will be a bad idea for some investors but then again if the fund is a bad idea for someone why would a hedge fund be OK for that same person?
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Friday, April 21, 2006
More Currency Diversification
Dismally, as it relates to the markets.: First diversification, then higher rates.
David provides more color on Sweden's announcement about currency reserves.
On a related note, CNBC Europe flashed a headline from Reuters that the Russian Finance Minister said the US dollar may have a difficult time remaining as the world reserve currency.
Not sure why he would say that as they own at least some dollars but there you go.
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David provides more color on Sweden's announcement about currency reserves.
On a related note, CNBC Europe flashed a headline from Reuters that the Russian Finance Minister said the US dollar may have a difficult time remaining as the world reserve currency.
Not sure why he would say that as they own at least some dollars but there you go.
Read more!
Oil At $40?
One of the reasons I have been bullish on energy stocks is that supposedly many brokerage firms use very low estimates for crude in the modeling.
I found an example of this today from Jyske Bank, which is a Danish bank. I read their commentary regularly because it is a good source of news and they offer opinions on a lot of the countries I care about including Norway.
Jyske recently issued a report (the link is to a PDF) on Statoil (which I have owned personally and for clients for about a year and a half). In the report they raise their price target on the stock slightly and they also raised their price target on oil slightly as well. Their old estimate for oil was $38 and the new target is, are you ready, $41. I don't have enough fingers and toes to count how far below current prices that is but I think it is a lot.
To be clear, their new price target is NOK 215 based on $41 oil. As more time goes by with oil in the $60s and $70s it should make earnings estimates look very low.
That is the thinking anyway, and I buy into it.
Don't take this as a call to buy Statoil. I have owned it for a while because I believe anything that is good for oil is good for Norway. This is a long term theme for me. In that belief I bought some last week for a new client before this last run up above $30 for the ADRs. Just like with Suncor, if oil goes down $10 Statoil will get smacked.
Read more!
I found an example of this today from Jyske Bank, which is a Danish bank. I read their commentary regularly because it is a good source of news and they offer opinions on a lot of the countries I care about including Norway.
Jyske recently issued a report (the link is to a PDF) on Statoil (which I have owned personally and for clients for about a year and a half). In the report they raise their price target on the stock slightly and they also raised their price target on oil slightly as well. Their old estimate for oil was $38 and the new target is, are you ready, $41. I don't have enough fingers and toes to count how far below current prices that is but I think it is a lot.
To be clear, their new price target is NOK 215 based on $41 oil. As more time goes by with oil in the $60s and $70s it should make earnings estimates look very low.
That is the thinking anyway, and I buy into it.
Don't take this as a call to buy Statoil. I have owned it for a while because I believe anything that is good for oil is good for Norway. This is a long term theme for me. In that belief I bought some last week for a new client before this last run up above $30 for the ADRs. Just like with Suncor, if oil goes down $10 Statoil will get smacked.
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A Microcosm Of Diversification
This morning as I was flipping on CNBC Rick Santelli mentioned something about the Riksbank in Sweden diversifying some of its dollar reserves into euros and Norwegian kronas. This lifted the euro from about 1.2280 up to 1.2328 which is a noticeable move for a currency in just a few hours. The Riksbank now has 50% of its reserves in euros, 20% in dollars (down from 37%), 10% in sterling and the Norwegian krona (the krona was previously zero) and 5% in the Aussie. The article where I found the numbers also said that 6% is in yen which adds up to 101%.
I don't think the exact numbers are the big thing. Sweden, a small country, reduced dollar exposure and there will be other countries that do the same. I have been writing about this for many months. The reaction in the currency market is noticeable. This noticeable move will not hurt anyone. As some point when a bigger country does this it may cause some discomfort but I don't think it will cause rioting in the streets as some people believe.
I may not have found this bit of news had I not flipped on CNBC. I bash on CNBC as do a lot of folks but this is why I watch it, it saves me the time of having to find more news items.
*****Possible Correction******
Marc Chandler on Real Money said the yen weight is now zero.
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I don't think the exact numbers are the big thing. Sweden, a small country, reduced dollar exposure and there will be other countries that do the same. I have been writing about this for many months. The reaction in the currency market is noticeable. This noticeable move will not hurt anyone. As some point when a bigger country does this it may cause some discomfort but I don't think it will cause rioting in the streets as some people believe.
I may not have found this bit of news had I not flipped on CNBC. I bash on CNBC as do a lot of folks but this is why I watch it, it saves me the time of having to find more news items.
*****Possible Correction******
Marc Chandler on Real Money said the yen weight is now zero.
Read more!
Thursday, April 20, 2006
A Top In Oil Is Nigh
I enjoy the ESPN program Pardon the Interruption. I get to watch it about once a week.On today's show they talked about the price of gas and the fact that oil goes up everyday.
I don't actually have the chutzpah to trade off of something like this but Mike and Tony aren't picking this off at the low.
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I Am So Stressed Out!!
But not because the entire mining complex and everything that touches the mining complex is getting crushed.
Today is a perfect example of why too much of a good thing is risky. Obviously I am assuming that the commodity theme is a good thing, which I do still believe.
The fire truck I wrote about a few months ago that our fire department is buying is almost done and getting the loan, we need to borrow a little under half the cost, has fallen on to my lap and the process is cumbersome and stressful. I had to fill out a two inch stack of paper work to get the loan approved and now I am in the middle of another two inch stack to get the funding of the loan to release.
Fortunately I have no experience with this and neither does anyone else!
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Today is a perfect example of why too much of a good thing is risky. Obviously I am assuming that the commodity theme is a good thing, which I do still believe.
The fire truck I wrote about a few months ago that our fire department is buying is almost done and getting the loan, we need to borrow a little under half the cost, has fallen on to my lap and the process is cumbersome and stressful. I had to fill out a two inch stack of paper work to get the loan approved and now I am in the middle of another two inch stack to get the funding of the loan to release.
Fortunately I have no experience with this and neither does anyone else!
Read more!
Jim Rogers Agrees With Me?
Well its probably the other way around.
As early as November 2004 I questioned if the US dollar might not one day share its role as world reserve currency or worse, lose it altogether.
The Daily Pfennig had this quote from Jim Rogers this morning from a speech in Singapore;
"The U.S. dollar is in the process of losing its status as the world's reserve
currency, sterling went down 80% from top to bottom (when it lost its
status as the world's reserve currency), the U.S. dollar's going to go
down a lot in the next decade or so."
Change on this front seems inevitable. It makes sense to explore what markets will benefit from this rotation in the currency market.
Read more!
As early as November 2004 I questioned if the US dollar might not one day share its role as world reserve currency or worse, lose it altogether.
The Daily Pfennig had this quote from Jim Rogers this morning from a speech in Singapore;
"The U.S. dollar is in the process of losing its status as the world's reserve
currency, sterling went down 80% from top to bottom (when it lost its
status as the world's reserve currency), the U.S. dollar's going to go
down a lot in the next decade or so."
Change on this front seems inevitable. It makes sense to explore what markets will benefit from this rotation in the currency market.
Read more!
Puts Can Be Expensive
A reader was kind enough to share a very comprehensive plan for hedging his portfolio as he is concerned that the market might correct sharply and he asked my opinion on what he has in mind.
He plans to buy puts on 1/3 of his portfolio that expire in January 2007. He did not say whether he plans to buy puts on individual stocks or on an index. He also did not indicate if he would be buying in the money puts or out of the money (I doubt in the money but he did not say). If he wants to buy out of the money puts, how far out of the money? That is an important question. As a hedger with puts are you will to give up 5% or 10% or some other number before the puts kick in?
Looking at S&P 500 puts that expire in December (there are no Jans) with a strike of 1285, the offer was $33.10 at the close yesterday. One put would hedge $128,500 worth of stock. For a $500,000 portfolio buying four puts would be about right for a hedge for the entire portfolio. The spread is quite wide, lets say that they can be bought for $32. To hedge 1/3 of the portfolio the reader would need to decide between one and two puts so it will cost him $3200 or $6400.
I have no idea if this is what the reader has in mind but if it is you can get a feel for the numbers. December expiration is December 16 (I realize that is a Saturday, options technically expire on Saturdays). What if the market starts falling on Dec 18?
Being right on trend and wrong on time is a common pitfall to option trading.
If the reader plans to buy puts on individual stocks it will cost more money. Also, I am making an assumption that the S&P 500 would be the puts he wants to use but if portfolio is too far, in composition, from the index it may not be a great hedge.
If the reader can let the market fall 10% before a hedge kicks in, the closest strike would be 1175 and those would cost $12 ($1200) per put.
Depending on when and how the market drops (assuming it does) the puts, even the 1175s, could go up in value before going in the money. There are all sorts Greek letter that can help you figure out some probabilities but those are future events and so are unknown.
I don't know if this is really worth doing or not for other people. I have no interest in buying puts in the manner the reader has outlined. It is cheaper and, IMO, easier to change the make up of the portfolio, use an inverse index fund or raise cash.
The important thing is that the reader has an exit strategy. That it is not something I would do is irrelevant. I have been saying all along that all exit strategies have pluses and minuses.
Good for this reader that he has some specific action planned.
Read more!
He plans to buy puts on 1/3 of his portfolio that expire in January 2007. He did not say whether he plans to buy puts on individual stocks or on an index. He also did not indicate if he would be buying in the money puts or out of the money (I doubt in the money but he did not say). If he wants to buy out of the money puts, how far out of the money? That is an important question. As a hedger with puts are you will to give up 5% or 10% or some other number before the puts kick in?
Looking at S&P 500 puts that expire in December (there are no Jans) with a strike of 1285, the offer was $33.10 at the close yesterday. One put would hedge $128,500 worth of stock. For a $500,000 portfolio buying four puts would be about right for a hedge for the entire portfolio. The spread is quite wide, lets say that they can be bought for $32. To hedge 1/3 of the portfolio the reader would need to decide between one and two puts so it will cost him $3200 or $6400.
I have no idea if this is what the reader has in mind but if it is you can get a feel for the numbers. December expiration is December 16 (I realize that is a Saturday, options technically expire on Saturdays). What if the market starts falling on Dec 18?
Being right on trend and wrong on time is a common pitfall to option trading.
If the reader plans to buy puts on individual stocks it will cost more money. Also, I am making an assumption that the S&P 500 would be the puts he wants to use but if portfolio is too far, in composition, from the index it may not be a great hedge.
If the reader can let the market fall 10% before a hedge kicks in, the closest strike would be 1175 and those would cost $12 ($1200) per put.
Depending on when and how the market drops (assuming it does) the puts, even the 1175s, could go up in value before going in the money. There are all sorts Greek letter that can help you figure out some probabilities but those are future events and so are unknown.
I don't know if this is really worth doing or not for other people. I have no interest in buying puts in the manner the reader has outlined. It is cheaper and, IMO, easier to change the make up of the portfolio, use an inverse index fund or raise cash.
The important thing is that the reader has an exit strategy. That it is not something I would do is irrelevant. I have been saying all along that all exit strategies have pluses and minuses.
Good for this reader that he has some specific action planned.
Read more!
Wednesday, April 19, 2006
Impressive
I received an email from Aditya Kumar Singh telling me about his new stock market blog called Successful Investing. On his site he offers some excellent back to basics, know your limitations type of advice along with some rules of thumb that any stock market participant could benefit from even if it is just a revue.
On the side bar are links to his other blogs which include blogs about starting a new business and life in India which is where he lives.
OK, so this guy is doing a lot of things on the Internet and has some worthwhile things to say. Well that is nice but not that unique. Well, Aditya is 17 years old.
He is 17 and seems to know more about the market than a lot of folks. I wonder how much Grand Theft Auto this kid is playing?
Hey Aditya, can I have a job?
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On the side bar are links to his other blogs which include blogs about starting a new business and life in India which is where he lives.
OK, so this guy is doing a lot of things on the Internet and has some worthwhile things to say. Well that is nice but not that unique. Well, Aditya is 17 years old.
He is 17 and seems to know more about the market than a lot of folks. I wonder how much Grand Theft Auto this kid is playing?
Hey Aditya, can I have a job?
Read more!
One Other Thing
Not to draw too much fire here but I wanted to touch one one other thing with Suncor. It is up again today to over $89 per share.What started this was my not knowing whether $82 was a good entry point or not, someone then saying it was a terrible entry point and my questioning whether it was really terrible.
The stock is up a little under 10% since this all started last Thursday.
So clearly the chart readers who thought $82 was bad point were wrong!
Well no that is not right. The thing missing from all of this is that oil has moved up a lot in the same week. If oil was at $63 instead of $73 Suncor would be below $82, maybe far below, I don't know.
Citing a past example, perhaps all ten technicians would have said $82 was a bad spot on the chart but does anyone else besides me think that from here Suncor will continue to generally follow the price of oil?
If oil goes to $83 before $63 Suncor will probably go up a lot. If the next $10 is down, not up in crude, I would bet Suncor goes down a lot. This is far from insightful but isn't it possible that given Suncor's relationship, or co-dependence if you prefer, to the commodity might make TA less reliable in this case?
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Yahoo And Time
Yahoo reported earnings that were well received and the stock is lifting. Perhaps this news will be able to ignite a serious move, say back to $40?
After its last report the stock got smacked, I wrote in a couple of different places that I thought the stock would have a big move up by Valentines day. This was a gut call that was supported by gut calls on other tech stocks that turned out to be correct and I felt Yahoo was a similar situation, it wasn't.
Goes with the territory, being wrong.
A little bigger picture, Yahoo is a survivor and a good company. It proactively seeks out new products and new ways to monetize its business. I don't think too many people dispute this. This sort of good company stuff makes the stock compelling, to me, and is why I own it for clients.
What is in dispute is market share issues, growth rate issues and so on. It is these issues that make stock volatile and sometimes tough to own.
Every so often I will write about I stock coming from off the radar to be the top performing name in the portfolio. I have no idea if Yahoo is about to go on one of those runs but after languishing close to a low for many months, I have to think it is closer to a bottom than a top and perhaps it will take run sometime in the next couple of months.
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After its last report the stock got smacked, I wrote in a couple of different places that I thought the stock would have a big move up by Valentines day. This was a gut call that was supported by gut calls on other tech stocks that turned out to be correct and I felt Yahoo was a similar situation, it wasn't.
Goes with the territory, being wrong.
A little bigger picture, Yahoo is a survivor and a good company. It proactively seeks out new products and new ways to monetize its business. I don't think too many people dispute this. This sort of good company stuff makes the stock compelling, to me, and is why I own it for clients.
What is in dispute is market share issues, growth rate issues and so on. It is these issues that make stock volatile and sometimes tough to own.
Every so often I will write about I stock coming from off the radar to be the top performing name in the portfolio. I have no idea if Yahoo is about to go on one of those runs but after languishing close to a low for many months, I have to think it is closer to a bottom than a top and perhaps it will take run sometime in the next couple of months.
Read more!
A Couple of Things
A while back I mentioned The Fly on The Wall Service. In the daily morning email there is a technical snippet about Intel (INTC) possibly going up to $19.97. $19.97?
I am not quibbling with the TA they are doing this is more about shock that the stock is so low that a bullish scenario has the stock going up to a point that is still below $20. This is one of the many how the mighty have fallen type of company. It makes sense that at some point the company will reinvent itself or if it already has, it will do a better job of making the market realize it has. It may also get a tailwind when the mega caps rotate back into favor. Of course this may not happen until 2016.
I have picked on Ed Keon from Prudential quite humorously for bad timing and very rarely, if ever, being right. Well on Monday he upped if equity weighting from 55% to 60% and he was right, for a day anyway.
Lastly the dollar has been pasted this week which has helped foreign stocks a lot. Even the NZ dollar is up vs. the greenback. For now it can be assumed that my sale of NZ Telecom was not ideal. I sold when the kiwi was around $0.66. The kiwi broke $0.60 for about ten minutes one day (as I thought) but the NZ stock market had a big rally so the ADRs stayed in place. I still expect more selling in the kiwi and while I still plan to reenter the name I will continue to wait as per my original plan.
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I am not quibbling with the TA they are doing this is more about shock that the stock is so low that a bullish scenario has the stock going up to a point that is still below $20. This is one of the many how the mighty have fallen type of company. It makes sense that at some point the company will reinvent itself or if it already has, it will do a better job of making the market realize it has. It may also get a tailwind when the mega caps rotate back into favor. Of course this may not happen until 2016.
I have picked on Ed Keon from Prudential quite humorously for bad timing and very rarely, if ever, being right. Well on Monday he upped if equity weighting from 55% to 60% and he was right, for a day anyway.
Lastly the dollar has been pasted this week which has helped foreign stocks a lot. Even the NZ dollar is up vs. the greenback. For now it can be assumed that my sale of NZ Telecom was not ideal. I sold when the kiwi was around $0.66. The kiwi broke $0.60 for about ten minutes one day (as I thought) but the NZ stock market had a big rally so the ADRs stayed in place. I still expect more selling in the kiwi and while I still plan to reenter the name I will continue to wait as per my original plan.
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Tuesday, April 18, 2006
Going Along For The Ride
The market is up a lot which is a surprise to me. That I am surprised (read that as wrong) is of no real consequence to client accounts because (recurring theme alert) I do not want to try to out smart the down turn that I think is coming.
I am repeating this today because the action in the market is a good example of this idea. Some folks are nimble enough to game these types of moves, or they say they are, but I am not.
I had a chat with a client yesterday afternoon and told her that the types of themes in her account are they same ones that have been there for a long time. The market is doing its thing and taking a lot of oil stocks, foreign stocks and some others higher.
At some point the market will turn and as I have been saying I may or may not time it well but it will turn but there is no action to take until the market shows signs of cracking which it has not done yet.
I know from talking to people and from reading some comments that this idea of not needing to be smarter than the market can be difficult to grab onto. Fair enough, but the market tends to work a certain way more often than not. By being in touch with these ideas you can put the odds for success in your favor.
This guarantees nothing but it can help you sleep at night.
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I am repeating this today because the action in the market is a good example of this idea. Some folks are nimble enough to game these types of moves, or they say they are, but I am not.
I had a chat with a client yesterday afternoon and told her that the types of themes in her account are they same ones that have been there for a long time. The market is doing its thing and taking a lot of oil stocks, foreign stocks and some others higher.
At some point the market will turn and as I have been saying I may or may not time it well but it will turn but there is no action to take until the market shows signs of cracking which it has not done yet.
I know from talking to people and from reading some comments that this idea of not needing to be smarter than the market can be difficult to grab onto. Fair enough, but the market tends to work a certain way more often than not. By being in touch with these ideas you can put the odds for success in your favor.
This guarantees nothing but it can help you sleep at night.
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Stop Orders and Technical Analysis
I had some readers tear me a new one over my post yesterday about stops and technical analysis. There were also some comments that generally agreed with my thoughts and even a comment that is either calling me a proselytizing fanatic or calling one of the dissenting commenters a proselytizing fanatic. I apologize for not knowing.
First things first, my feelings will never be hurt by any comment left on this site. For reference, I played a lot of high school sports, was in a fraternity in college, worked on a trading floor for close to a decade and am now a firefighter. My skin is thick enough to handle a little criticism about investment strategy.
That being said and out of the way, as it says toward the top of this page, the point here is to share process and it is perfectly OK disagree with everything I write here, especially if it helps you become a better investor.
A couple of comments, if I read them correctly, seemed to think it was particularly moronic not use stop orders universally. One problem with stop orders is that some stocks gap down much lower than the stop price. Last fall I wrote about selling Google. This stock is a perfect example. Would you be shocked if on any day the stock opened $30 lower? What if you bought the stock at $420? The stock is now at about $405, down 3.5%. Your 8% stop order would be in at $386.
Back to the potential for a down $30 open. You are stopped out at $375 with a $386 stop. Would you cancel it before it executed? What if it then went lower? Would you let the stop execute, what if that was the low. These points don't make stop orders bad, they are simply some of the flaws with this particular exit strategy.
I am a big believer in having some sort of exit strategy be it with a stock or the entire portfolio but keep in mind they all have flaws. This does not seem to be that bold of a statement yet some of the commenters seemed quite ticked with me.
One reader left a comment about using mental stops. Great, its an exit strategy but with strengths and weaknesses like every other exit strategy. The biggest weakness, and this will not apply to everyone, would be that the mental stop is triggered (elected in trader parlance) but the investor does not sell. Again that will not apply to everyone.
Lastly on this topic was a comment from long time reader, George, who noted that specialists (he may have also been thinking market makers too) have been known to monkey around with stock prices to take out some stop orders. I have no direct knowledge of such things but I have seen peculiar trading in stocks that might make you wonder if this could ever be the case.
With regard to technical analysis I believe in it and use it but it is not the be all end all. If you get ten technicians to look at the same chart will all ten see the chart in the same way? Reasonably speaking, probably not.
One comment really lit into the note about Suncor being up another $2 from where someone else said was a bad entry point. This came about because I said I had no feel for whether $82 was a good entry point. Since that comment posted, the stock moved up another dollar. If the stock keeps going up, at what point will $82 have been a good entry point? I don't know the answer and I am not sure knowing matters for an investor who wants to capitalize on the oil sands theme.
For all I know the next five points may down and it may drop that entire amount in one day. I think an argument could be made for either direction and one of those arguments would be wrong.
This example does not invalidate the science. If using TA allows you to be right on 65% of your trades (for people who are traders) it might be right label that type of track record as wildly successful.
A final point would be that my exit strategy relies on the S&P 500 and its position above or below its 200 DMA. This is TA and it has flaws, like every other exit strategy. In the last couple of years there have been head fakes with this indicator. I try to mitigate this big flaw by not going 100% cash the instant SPX breaches its 200 DMA. You can check the archives for more on this.
Read more!
First things first, my feelings will never be hurt by any comment left on this site. For reference, I played a lot of high school sports, was in a fraternity in college, worked on a trading floor for close to a decade and am now a firefighter. My skin is thick enough to handle a little criticism about investment strategy.
That being said and out of the way, as it says toward the top of this page, the point here is to share process and it is perfectly OK disagree with everything I write here, especially if it helps you become a better investor.
A couple of comments, if I read them correctly, seemed to think it was particularly moronic not use stop orders universally. One problem with stop orders is that some stocks gap down much lower than the stop price. Last fall I wrote about selling Google. This stock is a perfect example. Would you be shocked if on any day the stock opened $30 lower? What if you bought the stock at $420? The stock is now at about $405, down 3.5%. Your 8% stop order would be in at $386.
Back to the potential for a down $30 open. You are stopped out at $375 with a $386 stop. Would you cancel it before it executed? What if it then went lower? Would you let the stop execute, what if that was the low. These points don't make stop orders bad, they are simply some of the flaws with this particular exit strategy.
I am a big believer in having some sort of exit strategy be it with a stock or the entire portfolio but keep in mind they all have flaws. This does not seem to be that bold of a statement yet some of the commenters seemed quite ticked with me.
One reader left a comment about using mental stops. Great, its an exit strategy but with strengths and weaknesses like every other exit strategy. The biggest weakness, and this will not apply to everyone, would be that the mental stop is triggered (elected in trader parlance) but the investor does not sell. Again that will not apply to everyone.
Lastly on this topic was a comment from long time reader, George, who noted that specialists (he may have also been thinking market makers too) have been known to monkey around with stock prices to take out some stop orders. I have no direct knowledge of such things but I have seen peculiar trading in stocks that might make you wonder if this could ever be the case.
With regard to technical analysis I believe in it and use it but it is not the be all end all. If you get ten technicians to look at the same chart will all ten see the chart in the same way? Reasonably speaking, probably not.
One comment really lit into the note about Suncor being up another $2 from where someone else said was a bad entry point. This came about because I said I had no feel for whether $82 was a good entry point. Since that comment posted, the stock moved up another dollar. If the stock keeps going up, at what point will $82 have been a good entry point? I don't know the answer and I am not sure knowing matters for an investor who wants to capitalize on the oil sands theme.
For all I know the next five points may down and it may drop that entire amount in one day. I think an argument could be made for either direction and one of those arguments would be wrong.
This example does not invalidate the science. If using TA allows you to be right on 65% of your trades (for people who are traders) it might be right label that type of track record as wildly successful.
A final point would be that my exit strategy relies on the S&P 500 and its position above or below its 200 DMA. This is TA and it has flaws, like every other exit strategy. In the last couple of years there have been head fakes with this indicator. I try to mitigate this big flaw by not going 100% cash the instant SPX breaches its 200 DMA. You can check the archives for more on this.
Read more!
Monday, April 17, 2006
Gold Is Feeling Froggy
So it jumped.
Being correct about why it is up probably doesn't matter a lot in the context of a diversified portfolio.
I first wrote about gold on this site on October 29, 2004 and have been saying the same thing the entire time.
Some exposure to gold is always appropriate. It tends to zig when stocks zag. I think this is an important part of portfolio construction. Today is a microcosm of the effect.
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No Lance, But We've Got ETFs
As a buildup to the Tour de France, OLN has been showing the major spring races on Sunday afternoons. I noticed yesterday that one of the sponsors of Team Phonak is iShares.ETFs as a mainstream product (if you even call this mainstream) is an interesting thought. I'm not exactly sure what I think this means but I find it interesting.
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Chinese Banks In London
There is a story in the WSJ (sub req'd) that some of the Chinese banks may soon go public and that the LSE has plans to try to win these listings.
The LSE has been on my radar since last August. This article ties into a part of the story I touched on a couple of months ago about innovative products and access to new (for most Americans) markets.
For now trading in London is easy and difficult. Easy in that the securities listed there are easily quoted, easy to get information on and the markets are liquid. Difficult in that it might be very expensive (like at Schwab) or the order may not get handled properly the first time around (like at Ameritrade).
The bigger picture theme to this is that capturing returns in the future may mean being open to different ideas and a larger universe beyond what is currently comfortable.
Read more!
The LSE has been on my radar since last August. This article ties into a part of the story I touched on a couple of months ago about innovative products and access to new (for most Americans) markets.
For now trading in London is easy and difficult. Easy in that the securities listed there are easily quoted, easy to get information on and the markets are liquid. Difficult in that it might be very expensive (like at Schwab) or the order may not get handled properly the first time around (like at Ameritrade).
The bigger picture theme to this is that capturing returns in the future may mean being open to different ideas and a larger universe beyond what is currently comfortable.
Read more!
Taken To Task
Sort of.
Last week I put up a post about stop orders that repeated something I have written before which is that they are not the cure-all for every single trade or investment. The post was re-run on Seeking Alpha and the following comment was left by someone named Didier;
stop loss not only work but it is the only manner you can be successfull in the stock market and you have the responsibility to not spread this kind of non sense. What does not work was to buy the stock at 60$ when a retracement was expected. A stop loss does not mean you cannot enter the stock later again when it was more appealing at 50$.
Buy yourself a classic book from Schwager or Van Tharp, stop loss is the basic of all.
Suffice to say he does not agree with my idea and he would have known the stock was going to drop before I bought it. Putting aside the fact that I should only be writing what he believes in the comment does illustrate that there is more than one way to do everything related to managing your portfolio.
In that post about Suncor there was one or two other comments about my entry point at $60 looking bad on the chart. That turned out to be correct, no doubt.
Another way to look at the trade might be to ask is 15% of down side volatility worth the potential for what is now 40% of upside volatility (the stock is above $84 today) for a stock that is a hot potato and participates in a them you believe in?
Technical analysis does not always work. A couple of people said $60 was a bad entry point but as it was just reaching that point I'm not so sure that was easily detected. There was a comment or two that said $82 was a bad entry point when I said I had no feel for $82 and yet the stock is up another $2. All technical analysis does, for people that are consistently good at it, is put the odds in your favor. Like every other form of analysis it has strengths and weaknesses.
One point I made in the past about stop orders and the idea of putting an 8% stop under every stock you own is that 8% under Google is much different than 8% under Proctor and Gamble (PG).
Applying a bit of introspection to my own weaknesses if I had been stopped out of SU at $55.20 (8% below where I bought it) I would not have likely bought back in. I would not have known where to get back in. Perhaps the folks leaving comments along these lines would have known to avoid $60 but buy $50 but would you have known? If the answer is no, then perhaps an 8% stop under every single stock you believe in is not for you either.
I will post later today or tomorrow some other ideas about when and how to sell. Just because I do not use a stop on every stock does not mean no exit strategy either.
Read more!
Last week I put up a post about stop orders that repeated something I have written before which is that they are not the cure-all for every single trade or investment. The post was re-run on Seeking Alpha and the following comment was left by someone named Didier;
stop loss not only work but it is the only manner you can be successfull in the stock market and you have the responsibility to not spread this kind of non sense. What does not work was to buy the stock at 60$ when a retracement was expected. A stop loss does not mean you cannot enter the stock later again when it was more appealing at 50$.
Buy yourself a classic book from Schwager or Van Tharp, stop loss is the basic of all.
Suffice to say he does not agree with my idea and he would have known the stock was going to drop before I bought it. Putting aside the fact that I should only be writing what he believes in the comment does illustrate that there is more than one way to do everything related to managing your portfolio.
In that post about Suncor there was one or two other comments about my entry point at $60 looking bad on the chart. That turned out to be correct, no doubt.
Another way to look at the trade might be to ask is 15% of down side volatility worth the potential for what is now 40% of upside volatility (the stock is above $84 today) for a stock that is a hot potato and participates in a them you believe in?
Technical analysis does not always work. A couple of people said $60 was a bad entry point but as it was just reaching that point I'm not so sure that was easily detected. There was a comment or two that said $82 was a bad entry point when I said I had no feel for $82 and yet the stock is up another $2. All technical analysis does, for people that are consistently good at it, is put the odds in your favor. Like every other form of analysis it has strengths and weaknesses.
One point I made in the past about stop orders and the idea of putting an 8% stop under every stock you own is that 8% under Google is much different than 8% under Proctor and Gamble (PG).
Applying a bit of introspection to my own weaknesses if I had been stopped out of SU at $55.20 (8% below where I bought it) I would not have likely bought back in. I would not have known where to get back in. Perhaps the folks leaving comments along these lines would have known to avoid $60 but buy $50 but would you have known? If the answer is no, then perhaps an 8% stop under every single stock you believe in is not for you either.
I will post later today or tomorrow some other ideas about when and how to sell. Just because I do not use a stop on every stock does not mean no exit strategy either.
Read more!
TIC Data
The US can keep the lights on for another month as the TIC data came in with a relatively large number to fund the current account gap.
This is an important data point. If demand for our treasury debt stays this strong it solves quite a few problems. Hopefully this can continue and hopefully this number doesn't get revised down on the next go around.
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This is an important data point. If demand for our treasury debt stays this strong it solves quite a few problems. Hopefully this can continue and hopefully this number doesn't get revised down on the next go around.
Read more!
Model Portfolio
Hans Goetti from Citigroup Private Bank was on Asian Squawk Box and offered the following ingredients for a model portfolio but there was not much in the way of percentages.
He talked more about capturing themes as opposed to assets classes.
The following are the themes he thinks are important right now
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He talked more about capturing themes as opposed to assets classes.
The following are the themes he thinks are important right now
- Global Capital goods spending cycle
- Luxury goods because the rich are getting richer
- Stocks sensitive to interest rates as a contrarian play
- Asia and Japan
- 5% in Gold
- Other commodities including silver
Read more!
Sunday, April 16, 2006
The Big Picture For The Week Of April 16, 2006
In a big picture sense, oil from Russia is important because there is a lot of it in the ground and in the next few years it looks as though there will be more of that oil being processed and put onto the market for consumption.
That is the simple part. The rest is where it gets progressively more complicated.
Regardless of your opinion about the entire Yukos/Khodorkovsky affair I have never heard any dispute that Khodorkovsky was told, as were all the oligarchs, to stay out of politics and he did not. I am in no way opining as to whether he should or should not have made comments or anything else and it is possible that what I say is not in dispute is in fact in dispute. I am just trying to relay the facts as I understand them and I may have facts about Khodorkovsky incorrect but I have seen and read enough coverage that I think I this right.
The fallout of the Khodorkovsky affair was that Yukos was shut down and the assets were later put up for auction. Again, there was politics and controversy surrounding the manner in which this occurred and I don't want to turn this post into a debate of the politics of it.
The emerging company from all of this with the old Yukos assets is Rosneft. Rosneft is going to have an IPO and July is a possible date for the listing which is likely to be on the London Stock Exchange. I would like to learn more than what little I know now but I am interested in the company.
Some of the numbers, if true, are compelling. Earnings in 2005 were $3.9 billion vs $0.8 billion 2004. Revenue was $23.9 billion vs $5.3 billion in 2004. In 2005 the company reduced its debt by $1.7 billion down to $10.9 billion.
I would not get too excited about the growth built into those numbers because the old Yukos' operations were severely hampered in 2004 and so the company did not do a lot that year.
Some other fun facts about Rosneft include, among Russian companies, it is 2nd in gas production, 8th in oil production, 7th in reserves, and first for oil refining capacity. With the IPO, the company plans to sell 1/3 of the company for about $20 billion. As the company is now state owned, I presume the 2/3rds not sold will be held by the government and possibly sold later.
A lot of people assign a risk to Russian shares because of the Yukos affair. While I certainly cannot say it won't happen again I think it makes sense to believe that the Russian government does not want it to happen again. A second company being dismantled would probably cause a huge flight of foreign capital, much worse than Yukos. The country, I believe, wants to be a capitalist country with foreign investment. Fair to say they are still learning about capitalism but anything they do that jeopardizes foreign investment into the country is counter to their own interests. And it is worth pointing out that there are plenty of Russian companies traded on foreign exchanges in the US and in Europe.
Russia wants to be more important in the world economy not less. Between now and the listing date there will be a lot more to read about Rosneft before making any kind of decision.
Read more!
That is the simple part. The rest is where it gets progressively more complicated.
Regardless of your opinion about the entire Yukos/Khodorkovsky affair I have never heard any dispute that Khodorkovsky was told, as were all the oligarchs, to stay out of politics and he did not. I am in no way opining as to whether he should or should not have made comments or anything else and it is possible that what I say is not in dispute is in fact in dispute. I am just trying to relay the facts as I understand them and I may have facts about Khodorkovsky incorrect but I have seen and read enough coverage that I think I this right.
The fallout of the Khodorkovsky affair was that Yukos was shut down and the assets were later put up for auction. Again, there was politics and controversy surrounding the manner in which this occurred and I don't want to turn this post into a debate of the politics of it.
The emerging company from all of this with the old Yukos assets is Rosneft. Rosneft is going to have an IPO and July is a possible date for the listing which is likely to be on the London Stock Exchange. I would like to learn more than what little I know now but I am interested in the company.
Some of the numbers, if true, are compelling. Earnings in 2005 were $3.9 billion vs $0.8 billion 2004. Revenue was $23.9 billion vs $5.3 billion in 2004. In 2005 the company reduced its debt by $1.7 billion down to $10.9 billion.
I would not get too excited about the growth built into those numbers because the old Yukos' operations were severely hampered in 2004 and so the company did not do a lot that year.
Some other fun facts about Rosneft include, among Russian companies, it is 2nd in gas production, 8th in oil production, 7th in reserves, and first for oil refining capacity. With the IPO, the company plans to sell 1/3 of the company for about $20 billion. As the company is now state owned, I presume the 2/3rds not sold will be held by the government and possibly sold later.
A lot of people assign a risk to Russian shares because of the Yukos affair. While I certainly cannot say it won't happen again I think it makes sense to believe that the Russian government does not want it to happen again. A second company being dismantled would probably cause a huge flight of foreign capital, much worse than Yukos. The country, I believe, wants to be a capitalist country with foreign investment. Fair to say they are still learning about capitalism but anything they do that jeopardizes foreign investment into the country is counter to their own interests. And it is worth pointing out that there are plenty of Russian companies traded on foreign exchanges in the US and in Europe.
Russia wants to be more important in the world economy not less. Between now and the listing date there will be a lot more to read about Rosneft before making any kind of decision.
Read more!
Friday, April 14, 2006
Don't Frown, Average Down
A reader asked about throwing in the towel on a stock. She asked about averaging down on a premise you really believe in.
A lot of people do average down. You hear comments from these guys saying they just bought in and they hope it goes down so they can buy more. I cannot say those folks are wrong but that is not how I like to look at the world.
In a big picture sense of the question if I think I am wrong I sell. For example a while back I owned Symantec for clients. The premise makes sense, we need internet security, everyone I know uses their software and renews it every year. I bought the stock around $30 and gave up at around $20. I still don't know what went wrong. A little over a year ago I had three stocks trade similarly (in terms of downward price action) and sold them all. I could have sold earlier but did not. That quarter I lagged the market slightly.
Being diversified makes the consequence of this type of mistake less severe.
To the reader's question when I buy a stock I buy a full position. It will either be right or wrong, is how I view it. If I buy a stock with a 3% weight and it drops 20% how much would I add? Would commission get in the way? Are the stock peers down the same or not?
A part of my stock picking is so that the stock will capture an effect or two. If I want to own a European drug company to capture three different things it would make sense to follow up whether the stock is in fact capturing those effects. If telecom falls by 25% and my telecom stock falls 24% or 26%, that is not necessarily a sell. If telecom is up 3% and my telecom stock is up 30% or down 30% then it may be a sell.
One theme to my portfolio construction is to not inflict too much damage when I am wrong about a stock. I think the worst stocks I have owned were sold down about 30%. I believe this has only happened with stocks that were originally bought with a 2% portfolio weight. The hit in the example is 60 basis points to the portfolio. That is not a big deal.
If I keep buying I would make it worse. The bigger picture assumption here is that everyone will get stock picks wrong. We cannot know what stocks we will get wrong either. So the long-winded answer is I do not average down. It would be easy for the reader to find a compelling argument to do the opposite but that is not for me.
On a different note Jason Trennert was on Bloomberg TV this morning and when he wasn't being interrupted by Brian Sullivan he recommended Citigroup, Intel, Pfizer, Genentech, Amgen and I think Cisco. Who knows, maybe the 87th time will be the charm!
Read more!
A lot of people do average down. You hear comments from these guys saying they just bought in and they hope it goes down so they can buy more. I cannot say those folks are wrong but that is not how I like to look at the world.
In a big picture sense of the question if I think I am wrong I sell. For example a while back I owned Symantec for clients. The premise makes sense, we need internet security, everyone I know uses their software and renews it every year. I bought the stock around $30 and gave up at around $20. I still don't know what went wrong. A little over a year ago I had three stocks trade similarly (in terms of downward price action) and sold them all. I could have sold earlier but did not. That quarter I lagged the market slightly.
Being diversified makes the consequence of this type of mistake less severe.
To the reader's question when I buy a stock I buy a full position. It will either be right or wrong, is how I view it. If I buy a stock with a 3% weight and it drops 20% how much would I add? Would commission get in the way? Are the stock peers down the same or not?
A part of my stock picking is so that the stock will capture an effect or two. If I want to own a European drug company to capture three different things it would make sense to follow up whether the stock is in fact capturing those effects. If telecom falls by 25% and my telecom stock falls 24% or 26%, that is not necessarily a sell. If telecom is up 3% and my telecom stock is up 30% or down 30% then it may be a sell.
One theme to my portfolio construction is to not inflict too much damage when I am wrong about a stock. I think the worst stocks I have owned were sold down about 30%. I believe this has only happened with stocks that were originally bought with a 2% portfolio weight. The hit in the example is 60 basis points to the portfolio. That is not a big deal.
If I keep buying I would make it worse. The bigger picture assumption here is that everyone will get stock picks wrong. We cannot know what stocks we will get wrong either. So the long-winded answer is I do not average down. It would be easy for the reader to find a compelling argument to do the opposite but that is not for me.
On a different note Jason Trennert was on Bloomberg TV this morning and when he wasn't being interrupted by Brian Sullivan he recommended Citigroup, Intel, Pfizer, Genentech, Amgen and I think Cisco. Who knows, maybe the 87th time will be the charm!
Read more!
Thursday, April 13, 2006
First Goog and Now Sandisk
The Marketbeat page has a snippet about Sandisk being added to the S&P 500. It questions whether Standard & Poors is chasing heat ala 1999 and 2000 when the index was chock full $200 billion companies that had only been public for ten minutes.
I do not know if it is as bad as that but it makes sense to wonder if the make up of the SPX is shifting and if a beta of 1.00 might have a slightly different meaning.
One way to look at is that S&P is buying tech. If you look at from that point of view you would then ask "should I be on the other side of the trade or not?"
The initial reaction is probably that S&P has it wrong but I'm not sure that is universally correct.
Read more!
I do not know if it is as bad as that but it makes sense to wonder if the make up of the SPX is shifting and if a beta of 1.00 might have a slightly different meaning.
One way to look at is that S&P is buying tech. If you look at from that point of view you would then ask "should I be on the other side of the trade or not?"
The initial reaction is probably that S&P has it wrong but I'm not sure that is universally correct.
Read more!
Economic Uh-Oh
Barry Ritholtz has an important post about some assumptions for the US economy that may need to change.
Read more!
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Blogger Bonking Again
At least for me.
I have been trying put a chart of Suncor Energy (SU) to no avail. I own the stock personally at $60. It is at $82 now, so woo-hoo right?
Well yes but my purchase was in September of last year right before it went down to $50 (actually a little lower). I do not own this stock for clients, they own a much less volatile oil sand name.
The point here is about when to exit and when not to. I certainly could have found a much better entry point but I buy into the oil sand theme enough that I did not want to sell, even down 15%. Putting a stop order 8% under the purchase price of every stock you own has never made sense to me (I have written about this before) and this is an example of the point.
As for buying it here I have no feel for whether $82 is a good entry point or a bad one. If blogger comes back I'll add the chart to this post.
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ETF Wish List
I stumbled across a couple of articles by Matt Haugen, who writes for Index Universe (and a couple of other publications too), about an ETF wish list. One article was his wish list and the other was a wish list taken from reader input. Both articles are worth reading. I think they are free but you will have to register.
I thought it might be worthwhile to add my two cents to this. I am not the most creative fellow and no doubt there are some great ideas for products that are needed but that I would not come up with on my own.
One of Matt's articles touches on a currency ETF that is leveraged. There are a bunch of currency ETFs (unleveraged) slated to come out soon. I would favor leveraged currency ETFs but I also think some interesting things could be done, strategically, by blending a leveraged ETF with an unleveraged in pursuit of some effect.
I would like to see an ETF made out of the Rogers International Commodity Index. Currently it is only tradable as a futures product. The Rogers index has 35 different commodities. DBC is 55% in oil. There is a commodity ETF in the works from iShares that will be 80% energy. I have held off on buying DBC because of the energy (I am still undecided) but I would buy more broad-based product tomorrow if it existed.
I would like to see certain regions of the world isolated into ETFs. I would like to see central and Eastern Europe put into the ETF format. The regional closed end funds do the job but it is tough to get good information on what is in the funds.
I think a lot of interesting things could potentially be done with sub sectors of the market with both domestic and foreign stocks. There are too many to mention but I will say that if the industry goes down this road there is likely to be a mix of useful and useless.
Matt's articles also touch on fixed income ETFs. This one is a little lost one me. Once you get too far beyond generic government bonds it gets complicated. Take convertible bonds as an example. An ETF would not necessarily be able buy the same bonds to fulfill the need for creation units. Buying different bonds takes away the index aspect of the product. If the ideas floating around for bond ETFs are more about offering active management in such a way that the premium/discount common to CEFs goes away then that would be a great product but it wouldn't be a true ETF, IMO.
ProFunds has had inverse index funds in the hopper for a long time. I don't know if they will come this year as ProFunds earlier thought but I suppose eventually they will come. They would obviously be useful fro speculators and I think would use in diversified portfolios.
The idea of this discussion ties in with a long running theme of new investment products allowing access to parts of the market that were previously difficult to access.
Two years from now I think it will be possible to have much more control over volatility and returns such that a do it yourselfer can have a lot of predictability which in turn may make being exposed to equities easier.
Read more!
I thought it might be worthwhile to add my two cents to this. I am not the most creative fellow and no doubt there are some great ideas for products that are needed but that I would not come up with on my own.
One of Matt's articles touches on a currency ETF that is leveraged. There are a bunch of currency ETFs (unleveraged) slated to come out soon. I would favor leveraged currency ETFs but I also think some interesting things could be done, strategically, by blending a leveraged ETF with an unleveraged in pursuit of some effect.
I would like to see an ETF made out of the Rogers International Commodity Index. Currently it is only tradable as a futures product. The Rogers index has 35 different commodities. DBC is 55% in oil. There is a commodity ETF in the works from iShares that will be 80% energy. I have held off on buying DBC because of the energy (I am still undecided) but I would buy more broad-based product tomorrow if it existed.
I would like to see certain regions of the world isolated into ETFs. I would like to see central and Eastern Europe put into the ETF format. The regional closed end funds do the job but it is tough to get good information on what is in the funds.
I think a lot of interesting things could potentially be done with sub sectors of the market with both domestic and foreign stocks. There are too many to mention but I will say that if the industry goes down this road there is likely to be a mix of useful and useless.
Matt's articles also touch on fixed income ETFs. This one is a little lost one me. Once you get too far beyond generic government bonds it gets complicated. Take convertible bonds as an example. An ETF would not necessarily be able buy the same bonds to fulfill the need for creation units. Buying different bonds takes away the index aspect of the product. If the ideas floating around for bond ETFs are more about offering active management in such a way that the premium/discount common to CEFs goes away then that would be a great product but it wouldn't be a true ETF, IMO.
ProFunds has had inverse index funds in the hopper for a long time. I don't know if they will come this year as ProFunds earlier thought but I suppose eventually they will come. They would obviously be useful fro speculators and I think would use in diversified portfolios.
The idea of this discussion ties in with a long running theme of new investment products allowing access to parts of the market that were previously difficult to access.
Two years from now I think it will be possible to have much more control over volatility and returns such that a do it yourselfer can have a lot of predictability which in turn may make being exposed to equities easier.
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Wednesday, April 12, 2006
How Much Biotech?
A reader asked what I think is the best way to invest in biotech and how much should be in the sector.
The easier question is how much. The health sector represents 12% of the S&P 500. Roughly 10% of the health sector is biotech. So that means (in case that sentence is confusing) 1.2% of the S&P 500 is in biotech. Any more than that is an overweight. Not every client has biotech exposure, due to the volatility, but most do. The typical weight for clients with exposure is 2%-3%.
You can decide for yourself what a proper weight is.
The reader asks whether a stock or an ETF is a better way to go. Some clients own a stock and some on an ETF. I realize that puts me squarely on the fence but not every investor needs to take on the volatility of owning a biotech stock. An ETF offers the potential for capturing a big chunk of the move up but not cutting in half on bad FDA news. It should be clear that with an ETF there usually less risk taken so there will probably be less reward.
BTW Bob Pisani just said he follows about 1400 stocks.
Read more!
The easier question is how much. The health sector represents 12% of the S&P 500. Roughly 10% of the health sector is biotech. So that means (in case that sentence is confusing) 1.2% of the S&P 500 is in biotech. Any more than that is an overweight. Not every client has biotech exposure, due to the volatility, but most do. The typical weight for clients with exposure is 2%-3%.
You can decide for yourself what a proper weight is.
The reader asks whether a stock or an ETF is a better way to go. Some clients own a stock and some on an ETF. I realize that puts me squarely on the fence but not every investor needs to take on the volatility of owning a biotech stock. An ETF offers the potential for capturing a big chunk of the move up but not cutting in half on bad FDA news. It should be clear that with an ETF there usually less risk taken so there will probably be less reward.
BTW Bob Pisani just said he follows about 1400 stocks.
Read more!
Crap Storm
That is what I have walked into this morning with the workload I've got at the office today.
I read a piece by Jim Cramer about biotech having had a rough go for a few weeks but may now be coming back to life. He is probably talking about short term trading.
Most clients have exposure to biotech. As I was talking about Japan this morning being a theme that is tough for me to grab onto, biotech is part of an easy theme. The population is getting older and medical technology is advancing at an accelerating rate.
Biotech stocks, in general, will benefit from these trends. The stocks are volatile and periods of aggressive selling will go with the territory. If you have felt some pain from biotech of late but are diversified then you should have also taken in some gain with some other parts of the market.
This is a great example of what I write about a lot, some things are working and some are not. There should always a couple of things not working in a diversified portfolio.
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I read a piece by Jim Cramer about biotech having had a rough go for a few weeks but may now be coming back to life. He is probably talking about short term trading.
Most clients have exposure to biotech. As I was talking about Japan this morning being a theme that is tough for me to grab onto, biotech is part of an easy theme. The population is getting older and medical technology is advancing at an accelerating rate.
Biotech stocks, in general, will benefit from these trends. The stocks are volatile and periods of aggressive selling will go with the territory. If you have felt some pain from biotech of late but are diversified then you should have also taken in some gain with some other parts of the market.
This is a great example of what I write about a lot, some things are working and some are not. There should always a couple of things not working in a diversified portfolio.
Read more!
Funny Comment
I had a very funny comment left with a serious question after it.
The reader noted that he commented once before and that I "chided me (rightly so it seems) for cashing out because I thought the market would crash :-)"
The reader also asked why I was bearish on Japan. He has done some research on the Japan Smaller Company CEF (JOF) and seems favorably disposed toward the fund.
I'm not sure bearish is the description but I am a disbeliever. The biggest problem I have is that I have trouble seeing the bullish case. Japan has had other massive rallies since the peak in 1989. During all those runs, bullish sentiment was way up. Maybe this time is it and maybe it isn't, I don't know.
I have been saying the same thing about Japan since the start of the rally and have been wrong the whole time. I write about all sorts of themes on this site and they all are easy for me to grab onto, implement in the portfolio and explain to clients.
I would rather continue to be wrong than buy into a theme I don't fully understand or believe in.
One last point about this is that Japan is probably one of my blindspots, homebuilders would be another. All investors have blindspots this is normal but it is useful to try to get in touch with your blindspots if you aren't already.
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The reader noted that he commented once before and that I "chided me (rightly so it seems) for cashing out because I thought the market would crash :-)"
The reader also asked why I was bearish on Japan. He has done some research on the Japan Smaller Company CEF (JOF) and seems favorably disposed toward the fund.
I'm not sure bearish is the description but I am a disbeliever. The biggest problem I have is that I have trouble seeing the bullish case. Japan has had other massive rallies since the peak in 1989. During all those runs, bullish sentiment was way up. Maybe this time is it and maybe it isn't, I don't know.
I have been saying the same thing about Japan since the start of the rally and have been wrong the whole time. I write about all sorts of themes on this site and they all are easy for me to grab onto, implement in the portfolio and explain to clients.
I would rather continue to be wrong than buy into a theme I don't fully understand or believe in.
One last point about this is that Japan is probably one of my blindspots, homebuilders would be another. All investors have blindspots this is normal but it is useful to try to get in touch with your blindspots if you aren't already.
Read more!
Tuesday, April 11, 2006
$82??
Nicole Elliott was on CNBC Europe in her usual time slot today.She believes that Brent Crude will go to $82 "quite quickly." I added the think red line across the top, so forgive the angle but I think there is some serious resistance that needs to be overcome before she can be correct.
Perhaps the support at the bottom of the channel is what is more important.
If she turns out to be correct we should expect some real problems with US stocks. Also this could mean severe weakness from the dollar from the standpoint of oil up/dollar down to maintain a global equilibrium. If the dollar goes up as well world stock markets that import a lot of oil, like Japan, could be worse off.
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Blogger On The Fritz
Blogger is acting up today so if there are no more posts, you'll know why.
The real title of this post is Understanding Your Portfolio. If your portfolio has any element of active management (your active management or management you pay for) it will tilt toward certain themes. A day like yesterday tilts strongly to most of the themes I am overweight. Foreign stocks did well, energy did well, materials did well and domestic lagged.
Yesterday the equity portion of client portfolios generally did well. In addition to the above Statoil (STO) was up 5% on the oil news and economic data out of Norway.
Days where the dollar is strong and big US stocks do very well are days that I know the portfolio will lag. One part of the emotion that sometimes goes with owning stocks is a negative reaction on days that you lag. It is that reaction that might cause unnecessary trades to be placed.
A diversified portfolio can not beat the market every day. If the goal is to beat the market over longer periods of time and your themes lag more often than not, that is a signal that some of your ideas are wrong.
Lately, luckily, the days I have lagged have not been more than the days I have lead so for now no big changes. This is the type of thing to keep tabs on, again if beating the market is your goal.
Read more!
The real title of this post is Understanding Your Portfolio. If your portfolio has any element of active management (your active management or management you pay for) it will tilt toward certain themes. A day like yesterday tilts strongly to most of the themes I am overweight. Foreign stocks did well, energy did well, materials did well and domestic lagged.
Yesterday the equity portion of client portfolios generally did well. In addition to the above Statoil (STO) was up 5% on the oil news and economic data out of Norway.
Days where the dollar is strong and big US stocks do very well are days that I know the portfolio will lag. One part of the emotion that sometimes goes with owning stocks is a negative reaction on days that you lag. It is that reaction that might cause unnecessary trades to be placed.
A diversified portfolio can not beat the market every day. If the goal is to beat the market over longer periods of time and your themes lag more often than not, that is a signal that some of your ideas are wrong.
Lately, luckily, the days I have lagged have not been more than the days I have lead so for now no big changes. This is the type of thing to keep tabs on, again if beating the market is your goal.
Read more!
Gut Feeling
Worries over the Iran situation escalated over the weekend. I do not know how likely it is that some of the scary things that surfaced will come to fruition but events like this usually cause the dollar to rise and treasury yield to fall. My gut tells me that the dollar may weaken if the US engages in another war theater.
I cannot defend the fundamentals of this thought because this is not how it usually works. I will concede the fundamental argument and just say it is a gut feeling.
On another currency-related note here are some countries that have current account surpluses according to Everbank; Sweden, Norway, Switzerland, Denmark, Canada, the Eurozone and "all the Asian countries."
Here is a link to a story from Reuters about China and currency reserve issues passed along to me from a reader.
Read more!
I cannot defend the fundamentals of this thought because this is not how it usually works. I will concede the fundamental argument and just say it is a gut feeling.
On another currency-related note here are some countries that have current account surpluses according to Everbank; Sweden, Norway, Switzerland, Denmark, Canada, the Eurozone and "all the Asian countries."
Here is a link to a story from Reuters about China and currency reserve issues passed along to me from a reader.
Read more!
Monday, April 10, 2006
The weight of China's reserves.
Dismally, as it relates to the markets.: The weight of China's reserves.
I read David's stuff regularly and this is the best post from him I've ever read.
Read more!
I read David's stuff regularly and this is the best post from him I've ever read.
Read more!
More Reader Comments
A reader left info about Jason Trennert's asset allocation as being the following;
Equities - 75
Bonds - 20
Cash - 5
Value - 35
Growth - 45
Blend - 20
Large Cap - 93
Mid Cap - 5
Small Cap - 2
I can't vouch for these numbers but if correct the only real red flag is the style allocation. This is a very big bet on large cap. I personally would not be comfortable making this type of bet even if I was more bullish on large cap than even Jason is. BTW the reader also says that Trennert's track record has been hit or miss. Again I'll take the readers word because I don't know.
One other tidbit is about Iceland. There has been an onslaught of negative press about what will befall all things Iceland in the coming months. With so much piling on and so many people saying that have sold, I wonder if the worst is already priced in. The currency is down more than 15%. That could turn out to be the majority of the decline, from a contrarian viewpoint. The stock market is down a bunch too and may also have seen the majority of its decline.
This is not a call for anyone to buy in. I do not have any exposure for clients just personally. I think that the way it plays out could be a learning opportunity for anyone that invests in emerging markets. Sentiment was great now it is just awful. If sentiment is awful could the selling be mostly complete? I don't think you need to have skin in this game to learn from it.
A big thanks to David Gaffen over the WSJ's Market Beat Page (sub req'd) for linking to this blog. The page is a regular read for me because it captures a lot of info very concisely. Mr. Gaffen isn't even a relative!
One last nugget about USO comes from Aaron Pressman and the Businessweek blog, take a look.
Read more!
Equities - 75
Bonds - 20
Cash - 5
Value - 35
Growth - 45
Blend - 20
Large Cap - 93
Mid Cap - 5
Small Cap - 2
I can't vouch for these numbers but if correct the only real red flag is the style allocation. This is a very big bet on large cap. I personally would not be comfortable making this type of bet even if I was more bullish on large cap than even Jason is. BTW the reader also says that Trennert's track record has been hit or miss. Again I'll take the readers word because I don't know.
One other tidbit is about Iceland. There has been an onslaught of negative press about what will befall all things Iceland in the coming months. With so much piling on and so many people saying that have sold, I wonder if the worst is already priced in. The currency is down more than 15%. That could turn out to be the majority of the decline, from a contrarian viewpoint. The stock market is down a bunch too and may also have seen the majority of its decline.
This is not a call for anyone to buy in. I do not have any exposure for clients just personally. I think that the way it plays out could be a learning opportunity for anyone that invests in emerging markets. Sentiment was great now it is just awful. If sentiment is awful could the selling be mostly complete? I don't think you need to have skin in this game to learn from it.
A big thanks to David Gaffen over the WSJ's Market Beat Page (sub req'd) for linking to this blog. The page is a regular read for me because it captures a lot of info very concisely. Mr. Gaffen isn't even a relative!
One last nugget about USO comes from Aaron Pressman and the Businessweek blog, take a look.
Read more!
Reader Questions
A reader emailed in asking if it makes sense to benchmark returns vs. an index that includes foreign stocks. The short answer is that yes it might make sense. The world economy is globalizing and foreign investing is becoming more important.
In that vein using the MSCI World or something similar could be a way to go. To be clear, an argument could be made in either direction.
My own preference is to use a domestic benchmark. I use the S&P 500 to benchmark equity returns. Someone could write a thesis or two about whether the SPX is a good or bad benchmark. Perhaps we can leave that to another day and for now just focus on domestic or global.
As a US based money manager I am trying to add value vs. how the US market performs. I don't focus on benchmarking so closely that I am a slave to the S&P 500 composition. This should be obvious in that I have one third of client assets in foreign stocks and the average market cap in client accounts is around $35 billion vs. $95 billion for the SPX (these are things I have disclosed many times in previous posts).
If the hard core doom and gloomers turn out to be correct about the US economy and asset prices and our country implodes, I am sure I would make a change. Hopefully it won't come to that.
John Christy left a couple of good (as usual) comments. One questioned just whom USO is intended for. I had a discussion this morning with a friend about this who wondered if it might not have utility for a small business owner that spends a lot of gasoline for a fleet of vehicles. I suppose it could but I might think using gasoline futures (if hedging is really even necessary at all for a small business) with the help of a professional might make a lot more sense.
I think USO can have some use for retail accounts but I am not sure what that is just yet and I feel no urgency to be the one that figures it out.
John also left a couple interesting thoughts about benchmarking. He notes that despite the Third Millennium Russia Fund lagging its benchmark so badly the fund is up a lot and should not be dismissed. Who cares about the benchmark, John asks, the fund has added value for anyone that owns it. I never said otherwise. My only criticism was to wonder if the manager has nothing valuable to offer in the way of commentary given. The pool of stocks he can own are up a lot. He lags that pool of stocks consistently. The fund will do well as long as the pool he can choose from does well and if you believe in Russia the fund is not a bad way to go but the manager is not adding value vs. his benchmark but is adding value vs. the S&P 500.
Read more!
In that vein using the MSCI World or something similar could be a way to go. To be clear, an argument could be made in either direction.
My own preference is to use a domestic benchmark. I use the S&P 500 to benchmark equity returns. Someone could write a thesis or two about whether the SPX is a good or bad benchmark. Perhaps we can leave that to another day and for now just focus on domestic or global.
As a US based money manager I am trying to add value vs. how the US market performs. I don't focus on benchmarking so closely that I am a slave to the S&P 500 composition. This should be obvious in that I have one third of client assets in foreign stocks and the average market cap in client accounts is around $35 billion vs. $95 billion for the SPX (these are things I have disclosed many times in previous posts).
If the hard core doom and gloomers turn out to be correct about the US economy and asset prices and our country implodes, I am sure I would make a change. Hopefully it won't come to that.
John Christy left a couple of good (as usual) comments. One questioned just whom USO is intended for. I had a discussion this morning with a friend about this who wondered if it might not have utility for a small business owner that spends a lot of gasoline for a fleet of vehicles. I suppose it could but I might think using gasoline futures (if hedging is really even necessary at all for a small business) with the help of a professional might make a lot more sense.
I think USO can have some use for retail accounts but I am not sure what that is just yet and I feel no urgency to be the one that figures it out.
John also left a couple interesting thoughts about benchmarking. He notes that despite the Third Millennium Russia Fund lagging its benchmark so badly the fund is up a lot and should not be dismissed. Who cares about the benchmark, John asks, the fund has added value for anyone that owns it. I never said otherwise. My only criticism was to wonder if the manager has nothing valuable to offer in the way of commentary given. The pool of stocks he can own are up a lot. He lags that pool of stocks consistently. The fund will do well as long as the pool he can choose from does well and if you believe in Russia the fund is not a bad way to go but the manager is not adding value vs. his benchmark but is adding value vs. the S&P 500.
Read more!
USO Is A Go
It looks like the US Oil ETF is going to trade today, finally. There have been plenty of articles on the product over the weekend. Some telling us it is too risky and some explaining the nuts and bolts. I got onto the company's distribution list and you can check out their website here.
So should you buy it? Well, I don't know if you should but here are my thoughts. I have no plans to buy this personally or for clients today or tomorrow. I waited a long time before using GLD for clients. I held on to a miner stock until recently and switched to GLD when I thought the ETF was the better hold. In that time I was able to get a feel for how the ETF traded (this is a squishy thing and not any sort of statistical measure I am talking about).
Right now I am thinking the oil stocks are generally a better hold than the commodity. Oil has had a big move of late, how much is left? Could be a lot but I don't know. However if oil stays where it is, say $65-$70, for a while earnings from the oil companies, as a group, will be fantastic, this might cause stock prices to go up a lot more and dividends to be raised.
Occasionally oil will hit an air pocket and folks nimble enough to trade those moves will find USO to come in very handy.
I can also see where a combo of USO and some oil stocks could be a good way to allocate to this sector but in general terms I don't think owning a new product on day one is necessary, the water ETF (bought on day two) was an exception for me.
Read more!
So should you buy it? Well, I don't know if you should but here are my thoughts. I have no plans to buy this personally or for clients today or tomorrow. I waited a long time before using GLD for clients. I held on to a miner stock until recently and switched to GLD when I thought the ETF was the better hold. In that time I was able to get a feel for how the ETF traded (this is a squishy thing and not any sort of statistical measure I am talking about).
Right now I am thinking the oil stocks are generally a better hold than the commodity. Oil has had a big move of late, how much is left? Could be a lot but I don't know. However if oil stays where it is, say $65-$70, for a while earnings from the oil companies, as a group, will be fantastic, this might cause stock prices to go up a lot more and dividends to be raised.
Occasionally oil will hit an air pocket and folks nimble enough to trade those moves will find USO to come in very handy.
I can also see where a combo of USO and some oil stocks could be a good way to allocate to this sector but in general terms I don't think owning a new product on day one is necessary, the water ETF (bought on day two) was an exception for me.
Read more!
Saturday, April 08, 2006
The Big Picture For The Week of April 9, 2006
Businessweek had a good cover story (sub might be required) that ties into some recent posts and comments on this site about the death, real or perceived, of large cap, domestic stocks.
The most troubling part of the article was that the Fidelity Blue Chip Fund wants to change its benchmark from a broad-based benchmark (S&P 500) to a style-based benchmark (Russell 1000 Growth).
It may have never come up before on this site but changing benchmarks can be quite precarious. The proposal by Fidelity is not about switching to a better mouse trap but calls for fundamentally changing fund from broad to style. The article makes it seem like this has been proposed because the fund owns what has been the wrong part of the market.
The fund is what it is, it will be in favor sometimes and out of favor the other times. An attempt to change benchmarks due to lagging returns in the current benchmark is a disaster waiting to happen.
Fidelity as a zillion funds. There are probably quite a few funds targeted to parts of the market that are not working and plenty of funds that are doing well. Next year or the year after or the year after then when Pfizer, Microsoft and Citigroup lead the market, the old Fidelity Blue Chip would have been a great name to hold.
The majority of the article is devoted to how long big blue chips have lagged, how long small cap has lead and some comments about why large cap should finally take the lead but with a an occasional dissenting view for balance.
One of the leaders of the pro large cap-camp was Jason Trennert from ISI. The article acknowledged that Trennert has been wrong about this for a while but he still believes the values are compelling.
He is on TV a lot and while I do not know whether he is ever right about anything it would be more useful to hear how he allocates money. He favors large cap. OK, what does that mean? Is he 100% large cap? Is he 20% large cap with 10% in eight other things? What?
You'd think, if for nothing else, he would disseminate more detail just so he wouldn't look as wrong as he does. This kind of ties in with comments I have made about Vince Farrell in the past. These guys are not dumb but when they come on TV or get quoted they don't really say anything.
One thing I will repeat is that large cap will absolutely have its day again. You can try to time it if you think you can but it will happen. For all I know this article could be the bell ringing but having money exposed when the time comes will let you have, at a minimum, decent returns without having to be that smart.
Lastly this chart was in the article and while it is interesting I'm not sure how relevant it was.
Read more!
The most troubling part of the article was that the Fidelity Blue Chip Fund wants to change its benchmark from a broad-based benchmark (S&P 500) to a style-based benchmark (Russell 1000 Growth).
It may have never come up before on this site but changing benchmarks can be quite precarious. The proposal by Fidelity is not about switching to a better mouse trap but calls for fundamentally changing fund from broad to style. The article makes it seem like this has been proposed because the fund owns what has been the wrong part of the market.
The fund is what it is, it will be in favor sometimes and out of favor the other times. An attempt to change benchmarks due to lagging returns in the current benchmark is a disaster waiting to happen.
Fidelity as a zillion funds. There are probably quite a few funds targeted to parts of the market that are not working and plenty of funds that are doing well. Next year or the year after or the year after then when Pfizer, Microsoft and Citigroup lead the market, the old Fidelity Blue Chip would have been a great name to hold.
The majority of the article is devoted to how long big blue chips have lagged, how long small cap has lead and some comments about why large cap should finally take the lead but with a an occasional dissenting view for balance.
One of the leaders of the pro large cap-camp was Jason Trennert from ISI. The article acknowledged that Trennert has been wrong about this for a while but he still believes the values are compelling.
He is on TV a lot and while I do not know whether he is ever right about anything it would be more useful to hear how he allocates money. He favors large cap. OK, what does that mean? Is he 100% large cap? Is he 20% large cap with 10% in eight other things? What?
You'd think, if for nothing else, he would disseminate more detail just so he wouldn't look as wrong as he does. This kind of ties in with comments I have made about Vince Farrell in the past. These guys are not dumb but when they come on TV or get quoted they don't really say anything.
One thing I will repeat is that large cap will absolutely have its day again. You can try to time it if you think you can but it will happen. For all I know this article could be the bell ringing but having money exposed when the time comes will let you have, at a minimum, decent returns without having to be that smart.
Lastly this chart was in the article and while it is interesting I'm not sure how relevant it was.
Read more!
Friday, April 07, 2006
ETF Coverage
In the last few weeks Investors Business Daily has started to devote more attention to ETFs. I'm not just mentioning this because, ahem, I have been quoted several times.
The most recent article is out today is about iShares UK (EWU). In addition to a couple of thoughts from some joker in Arizona is some analysis from Matt Pickering, co-manager of the ICAP International Fund. Pickering said "The U.K., similar to Australia, is more of a mature economy..."
When I read that I thought there might be some discussion comparing the two but space did not permit. It is worth thinking about.
There are some similarities with the two ETFs, EWU and IShares Australia (EWA). Both have a lower beta than the S&P 500 and a higher yield. Both have a lot of resource heavy companies. EWU more so energy and EWA more of every other resource. Both are heavy in financials but EWA has 47% in financials while EWU is closer to 25% in the sector.
There are also a couple of stocks that show up in both funds due to dual listings, BHP Billition and Rio Tinto.
There are some big differences between the two countries. Australia has not had an economic recession since 1991. GDP growth is healthier down under as well. Despite the heavy weight to resources, the UK is not where the resources are. Over the last year, both EWU and EWA have traded similarly but over the last four years EWA is way out in front of EWU because, IMO, EWA captures the commodity effect.
Read more!
The most recent article is out today is about iShares UK (EWU). In addition to a couple of thoughts from some joker in Arizona is some analysis from Matt Pickering, co-manager of the ICAP International Fund. Pickering said "The U.K., similar to Australia, is more of a mature economy..."
When I read that I thought there might be some discussion comparing the two but space did not permit. It is worth thinking about.
There are some similarities with the two ETFs, EWU and IShares Australia (EWA). Both have a lower beta than the S&P 500 and a higher yield. Both have a lot of resource heavy companies. EWU more so energy and EWA more of every other resource. Both are heavy in financials but EWA has 47% in financials while EWU is closer to 25% in the sector.
There are also a couple of stocks that show up in both funds due to dual listings, BHP Billition and Rio Tinto.
There are some big differences between the two countries. Australia has not had an economic recession since 1991. GDP growth is healthier down under as well. Despite the heavy weight to resources, the UK is not where the resources are. Over the last year, both EWU and EWA have traded similarly but over the last four years EWA is way out in front of EWU because, IMO, EWA captures the commodity effect.
Read more!
Can This Be True?
Before I get into this post, I want to ask you to think a little deeper and not take this is just another piece that picks on bubble vision.
Earlier in the week Bob Pisani was talking very forcefully about how great the market is right here. People accuse him of cheerleading and ok I get that but this felt different to me and it seemed strange, of course this post would have more credibility had I mentioned it earlier.
I did not share his view in fact I think it would be reasonable to label my comments as cautious. I had a thought about Pisani's commentary, I wonder if he really does not understand the thing he has been reporting on for so many years. This is not about saying he or the network has an agenda but if really does not understand capital markets. I'm not saying wrong sometimes, I am wondering if he has any kind of understanding at all (not sarcastic humor).
Here is an analogy that might hold up. The extent of my knowledge about how the court system works comes from TV shows. However realistic or unrealistic shows like LA Law or Law and Order might have been, that is the sum total. So how qualified am I to do commentary for Court TV? I have no real understanding.
This is where we might be with a lot of the on air personalities. Perhaps one way to judge these folks is by what questions they come up with when an interview goes off script. If Bob is telling the truth about how much he talks to traders then it makes sense to wonder if anything half-way intelligent you have ever heard him say came from one of those traders he is always talking to.
CNBC was working Alexis Glick into Bob's role before she left to do the today show. Rick Santelli, as a former trader, seems to be working out. I have to think they could find a half dozen reasonably telegenic people to come work for the network which would make the information more valuable.
Read more!
Earlier in the week Bob Pisani was talking very forcefully about how great the market is right here. People accuse him of cheerleading and ok I get that but this felt different to me and it seemed strange, of course this post would have more credibility had I mentioned it earlier.
I did not share his view in fact I think it would be reasonable to label my comments as cautious. I had a thought about Pisani's commentary, I wonder if he really does not understand the thing he has been reporting on for so many years. This is not about saying he or the network has an agenda but if really does not understand capital markets. I'm not saying wrong sometimes, I am wondering if he has any kind of understanding at all (not sarcastic humor).
Here is an analogy that might hold up. The extent of my knowledge about how the court system works comes from TV shows. However realistic or unrealistic shows like LA Law or Law and Order might have been, that is the sum total. So how qualified am I to do commentary for Court TV? I have no real understanding.
This is where we might be with a lot of the on air personalities. Perhaps one way to judge these folks is by what questions they come up with when an interview goes off script. If Bob is telling the truth about how much he talks to traders then it makes sense to wonder if anything half-way intelligent you have ever heard him say came from one of those traders he is always talking to.
CNBC was working Alexis Glick into Bob's role before she left to do the today show. Rick Santelli, as a former trader, seems to be working out. I have to think they could find a half dozen reasonably telegenic people to come work for the network which would make the information more valuable.
Read more!
A Mighty Wind
The movie really cracks me up.A direct play on wind power is Vestas Wind (VWSYF). I have been interested in the stock for a while but have never owned it. You can click here to read a PDF report on the company by Jyske Bank.
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China Factoids
I have been writing about investing in China since I started this blog. I have thought this is a big, easily visible theme. The exposure I have is small but I have it none the less.
Here are a couple of pieces of information from the InvestmentU newsletter. I can't vouch for the accuracy of the numbers but I believe the trends implied in the numbers.
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Here are a couple of pieces of information from the InvestmentU newsletter. I can't vouch for the accuracy of the numbers but I believe the trends implied in the numbers.
- 80% of the world's cranes are now in China for all the skyscrapers being built
- Shangai has more than 4000 skyscrapers, twice the number in Manhattan, with another 2000 on the way
- There are more than 170 cities with more than 1 million people
- They are building, throughout the country, the equivalent to a city the size of Houston every month
Read more!
Comments, Comments, Comments
I have had more comments than I can respond to. Thankfully other readers have picked up the slack.
I wanted to weigh in on the dialogue between High Alpha and George. High Alpha points out that small cap value (scv) has been the best place to be and provides some data. George counters that large cap growth was it during the late 1990's and that things can change.
Both are correct but I think more color needs to be added to give some additional historical perspective. If you look at one of those 80 year charts from Ibbotsons you will see that scv has been the best performing assets class. I think that over long time frames, that is likely to continue. However George's comments almost understate the sentiment to small cap during the late 1990's. It was the death of small caps. They were never going to do well again, ever. This was a prevalent thought.
Since that time you almost need to take off your socks to count the number of years that small cap has been leading.
Where we were then with small cap is where we are now with mega cap stocks, sort of. Quite a few people predicted 2005 would be a year for large cap, ditto 2006 and it is not happening yet. Most of the analysis I have heard about why large cap should do well has not really made sense.
Let me be crystal clear here, at some point large and mega cap will rotate into a market leader and people will wonder, again, if small cap is dead. This cycle will not go away. I do not know when this will happen of course. I own a few mega caps for clients but more importantly I look at cap size of the entire portfolio not the components. My average cap size is in the area of $35 billion, vs. $90-$95 billion for the S&P 500. This is up a little from a year ago.
Usually the maturation of the economic cycle is what drives a rotation into large cap but that has not been the case so far. If you want to be diversified you need some exposure to this part of the market even if you don't expect it to work very well. Being diversified means blending together things that are working and things that are not working. At some point that which is not working will start to work. Most people are unlikely to time these changes very well so by always maintaining diversified exposure good timing becomes less important.
For example I am underweight the financial sector. At some point being overweight will be the right trade. Being wrong with an underweight is a lot better than being wrong with a zero weight.
Read more!
I wanted to weigh in on the dialogue between High Alpha and George. High Alpha points out that small cap value (scv) has been the best place to be and provides some data. George counters that large cap growth was it during the late 1990's and that things can change.
Both are correct but I think more color needs to be added to give some additional historical perspective. If you look at one of those 80 year charts from Ibbotsons you will see that scv has been the best performing assets class. I think that over long time frames, that is likely to continue. However George's comments almost understate the sentiment to small cap during the late 1990's. It was the death of small caps. They were never going to do well again, ever. This was a prevalent thought.
Since that time you almost need to take off your socks to count the number of years that small cap has been leading.
Where we were then with small cap is where we are now with mega cap stocks, sort of. Quite a few people predicted 2005 would be a year for large cap, ditto 2006 and it is not happening yet. Most of the analysis I have heard about why large cap should do well has not really made sense.
Let me be crystal clear here, at some point large and mega cap will rotate into a market leader and people will wonder, again, if small cap is dead. This cycle will not go away. I do not know when this will happen of course. I own a few mega caps for clients but more importantly I look at cap size of the entire portfolio not the components. My average cap size is in the area of $35 billion, vs. $90-$95 billion for the S&P 500. This is up a little from a year ago.
Usually the maturation of the economic cycle is what drives a rotation into large cap but that has not been the case so far. If you want to be diversified you need some exposure to this part of the market even if you don't expect it to work very well. Being diversified means blending together things that are working and things that are not working. At some point that which is not working will start to work. Most people are unlikely to time these changes very well so by always maintaining diversified exposure good timing becomes less important.
For example I am underweight the financial sector. At some point being overweight will be the right trade. Being wrong with an underweight is a lot better than being wrong with a zero weight.
Read more!
Thursday, April 06, 2006
Great Portfolio Composition Chatter
There have been some great comments left about using ETFs or OEFs for portfolio construction. There have been comments about how to study these products, where to get info and some well thought out opinions.
No methodology is absolutely right or wrong but hopefully readers can pick up up some points that they had not thought of before.
One thing that seems to be missing from the comments is an acknowledgement of the flaws of these products. Stocks, OEFs, ETFs, etc all have flaws. I think you need to be in touch with the flaws of the products you use and the strategy you deploy. This does not make any of this bad but by knowing the weaknesses of what you are doing, you might be able to mitigate a portion of the flaws.
The biggest drawback, IMO, to an all ETF, all OEF or any combo is the lack of dividends. When the market is flat, a higher dividend yield can matter a lot. The broad-based ETFs all have fairly low dividend yields. Lately there have been several dividend-centric ETFs created and it seems like they all concentrate in the same sectors and the yield has a three handle. That is a fine yield but I would expect the dividend ETFs to all lag when the market is up a lot.
So the last paragraph isolated flaws in two popular types of ETFs. This does not mean they should be avoided but perhaps the flaws can be mitigated to some extent?
I think the 3% yield available in the dividend ETFs can be matched with a diversified portfolio that blends together stocks with 4%-5% yields and some stocks that provide the chance for growth. Here is a simplified example of what I mean. Let's say a moderately conservative investor has a two stock portfolio. He puts 70% into Consolidated Edison (ED-client holding) and 30% into Google (GOOG). The yield on this combo would be 3.7%, about 200 basis points more than the S&P 500. Google offers the potential to go up a lot. If Google goes up by 50%, it would add 15 percentage points of growth to the overall portfolio, plus the yield and it would be close to 19% total return.
This example is an extreme but makes the point. The consequence of not enough growth is somewhat mitigated with Google and the consequence of Google's volatility is somewhat mitigated by the dividend.
So now apply the concept in a manner that actually makes sense. There are plenty of stocks that yield 4%-5%. There are plenty of stocks that offer the chance for growth. There are plenty of narrow products that offer yield or growth.
My approach is to blend together all of the above but to be clear I do not like broad-based products. I am not sure how well I can communicate this but if you have enough money to diversify, I think you are shortchanging yourself when you don't diversify. The goal of diversification doesn't have to be to beat the market. It is possible to construct a portfolio that by and large just keeps pace with the market but with less volatility. A portfolio that does not capture dividends very well may have a tougher time with the market equaling/less volatility idea.
Additionally being too broad means you will probably miss some themes. Here I am thinking about themes I have (and have been writing about forever) like Norway, Australia and India. Norway does not really have a big enough presence in any broad-based foreign product that I am aware of yet it has been a huge winner for reasons written about previously. In the last few days Australian ADRs are up a lot but Australia only has a 5.6% weight in EFA. In the last ten days EFA is up about 3.75% while iShares Australia (personal holding) is up 7%. India only makes up 5.3% of EEM but, again, in the last ten days EEM is up 5% vs. 9% for India as measured by IIF which is a client holding.
Again this merely points out potential drawbacks. The drawback to EWA and IIF is that they lag instead of lead. I have researched the narrower themes that I have tilted to and have confidence in them. You may be comfortable doing this for yourself or you may not but I am convinced that you can be a better investor by applying an introspective analysis to what you are doing.
Read more!
No methodology is absolutely right or wrong but hopefully readers can pick up up some points that they had not thought of before.
One thing that seems to be missing from the comments is an acknowledgement of the flaws of these products. Stocks, OEFs, ETFs, etc all have flaws. I think you need to be in touch with the flaws of the products you use and the strategy you deploy. This does not make any of this bad but by knowing the weaknesses of what you are doing, you might be able to mitigate a portion of the flaws.
The biggest drawback, IMO, to an all ETF, all OEF or any combo is the lack of dividends. When the market is flat, a higher dividend yield can matter a lot. The broad-based ETFs all have fairly low dividend yields. Lately there have been several dividend-centric ETFs created and it seems like they all concentrate in the same sectors and the yield has a three handle. That is a fine yield but I would expect the dividend ETFs to all lag when the market is up a lot.
So the last paragraph isolated flaws in two popular types of ETFs. This does not mean they should be avoided but perhaps the flaws can be mitigated to some extent?
I think the 3% yield available in the dividend ETFs can be matched with a diversified portfolio that blends together stocks with 4%-5% yields and some stocks that provide the chance for growth. Here is a simplified example of what I mean. Let's say a moderately conservative investor has a two stock portfolio. He puts 70% into Consolidated Edison (ED-client holding) and 30% into Google (GOOG). The yield on this combo would be 3.7%, about 200 basis points more than the S&P 500. Google offers the potential to go up a lot. If Google goes up by 50%, it would add 15 percentage points of growth to the overall portfolio, plus the yield and it would be close to 19% total return.
This example is an extreme but makes the point. The consequence of not enough growth is somewhat mitigated with Google and the consequence of Google's volatility is somewhat mitigated by the dividend.
So now apply the concept in a manner that actually makes sense. There are plenty of stocks that yield 4%-5%. There are plenty of stocks that offer the chance for growth. There are plenty of narrow products that offer yield or growth.
My approach is to blend together all of the above but to be clear I do not like broad-based products. I am not sure how well I can communicate this but if you have enough money to diversify, I think you are shortchanging yourself when you don't diversify. The goal of diversification doesn't have to be to beat the market. It is possible to construct a portfolio that by and large just keeps pace with the market but with less volatility. A portfolio that does not capture dividends very well may have a tougher time with the market equaling/less volatility idea.
Additionally being too broad means you will probably miss some themes. Here I am thinking about themes I have (and have been writing about forever) like Norway, Australia and India. Norway does not really have a big enough presence in any broad-based foreign product that I am aware of yet it has been a huge winner for reasons written about previously. In the last few days Australian ADRs are up a lot but Australia only has a 5.6% weight in EFA. In the last ten days EFA is up about 3.75% while iShares Australia (personal holding) is up 7%. India only makes up 5.3% of EEM but, again, in the last ten days EEM is up 5% vs. 9% for India as measured by IIF which is a client holding.
Again this merely points out potential drawbacks. The drawback to EWA and IIF is that they lag instead of lead. I have researched the narrower themes that I have tilted to and have confidence in them. You may be comfortable doing this for yourself or you may not but I am convinced that you can be a better investor by applying an introspective analysis to what you are doing.
Read more!
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