It's Too Late To Shut The Barn Door

I had that thought as I read this article in the Wall Street Journal about investment advisers starting to look at alternatives to buy and hold. According to the article more advisers are exploring tactical moves (ie defensive action) and introducing "new" asset classes into their clients' portfolios.

Long time readers will know I have been writing about this stuff since 2004 (which is as long as I have been writing). Creating a zigzag effect by whatever means possible with whatever tools available, IMO, gives the best chance for successfully navigating a bear market.

I imagine a few things inspired me in this line of thought including the first few things I ever read about the Harvard and Yale endowments.

While I obviously believe in this line of thought the time to explore this was several years ago not after the second 50% decline for stocks in this decade. One of the reasons I gravitate to the 200 DMA for defensive action is that it triggers early in the bear market. Not at the top mind you but early. Once heeded most of the work is done. No big decisions need to be made just decisions about tweaks and the tweaks are far less important than taking action of some sort when the original breach occurs.

While I generally like the ideas spelled out in the article I think the timing is horrible. Anyone who dropped all 50% is probably better off hanging in there as difficult as that might be. The fastest path to portfolio recovery from cutting in half will not come from selling a bunch of stock low and moving into a bunch of things that do not capture the market's beta. If volatility hurt you on the way down it probably makes sense to let it help you on the way up, whether the real way up is happening now or not.

In my opinion the time to entertain making big methodological changes should come during bull markets while you're feeling good not when your state of mind is "if I can only get back to X then I'll..."

I have no plans for big methodological changes. I have learned a few things in this bear that I hope will help smooth out the next bear phase more so than this one but I will continue to utilize a defensive strategy, incorporate alternatives asset classes and realize that while I might like to buy and then hold that will probably not be the best course of action.

One point of clarification. I would love to be able to hold something forever once I buy it but I do not believe that is realistic.
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Tuesday Tidbits

You probably saw the segment on CNBC yesterday about the BerkShares, a local currency being used in the Berkshires in Western Massachusetts.

Despite a lot of chatter about this on the internet (found after I watched the segment) I had never heard of this. BTW that is Herman Melville on the $20 bill.

This idea is both concerning and intriguing. I can't really articulate much in the way of real concern other than I get a sort of Jericho versus New Bern vibe off of the whole thing which I'm sure is unfounded. I find it intriguing in the same way I find the idea of moving to New Zealand or Uruguay intriguing. I have no plans to move anywhere there is just something intellectually interesting about the idea.

Frankly in watching the CNBC segment and looking around the site, I'm not very clear on what the purpose is. People using the BerkShares benefit from a 5% discount when they convert "federal dollars" in for the new currency (maybe they make up for it on volume?). This begs the question of whether we will see more local currencies created. Will we be able to short the rust belt against Oregon? Will there be ETFs to let us do this?

Speaking of ETFs, IndexUniverse reported that iShares has filed for foreign sector ETFs. WisdomTree was the first in the space with dividend weighted foreign sector ETFs followed by capweighted funds from SPDR and now the iShares filing, also for capweighted. This strikes me as a threat for WisdomTree (not an aggressive move on the part of iShares just something that threatens WisdomTree). This part of the product line covers a lot of ground for WisdomTree but their total AUM is only a coupla few billion. iShares has several individual funds larger than all of WisdomTree. SPDR also obviously has much deeper pockets than WisdomTree.

If it turns out that the dividend weighting offers no performance advantage then many people will think it just makes sense to go with the larger provider. I'm sure iShares is doing this simply in an effort to offer a more complete product lineup, they don't really need to be worried about a $3 billion competitor. Maybe this will be the tipping point for WisdomTree to really move forward with some of the currency funds they filed for a couple of years ago but unfortunately I am skeptical.

I realize I harp on this a fair bit but if things do not go well for US assets over the next five or ten years then single country access to multiple asset classes would be a huge difference maker but I'm not holding my breath.
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We Are Not Iceland, We Are Not Iceland

I had that thought I as took a peek at this from Barry Ritholtz attributed to Mike Larson.

Mike has some numbers on the extent to which the Fed has levered up its balance sheet and the composition of the holdings.

In the last two year the Fed has apparently gone from 27-1 leverage to 48-1 leverage and the quality of the holdings, not surprisingly, has deteriorated.

The consequences of this as listed by Mike and certainly not new to you include whether the US' AAA rating is in jeopardy, how long will foreign buyers of US debt drink the kool-aid and can dollar continue to hang in there as well as it has.

These issues are not new but they are also far from resolved. I tend to think that the worst case scenario (and the best case for that matter) does not happen, I mean the worst, but there can be negative outcomes, we are working through one now. Part of the argument for this turning out to be not so bad is that the Fed/Treasury/anyone else involved will know when to reverse the various extreme measures taken. Maybe this cabal will know when to start unwinding things but that is a tall order for anyone especially the government agencies involved.

These issues, albeit of a far less severe magnitude, have been around for years now and the best way to handle this, IMO, has been the same for years now which is have more foreign exposure for all asset classes and avoid loading up on high priced treasuries. While we are at it I would say that the domestic fixed income market is mostly broken--if you are one to use fixed income for income and to offset equity volatility. Traders of fixed income are probably having a field day with this.

I wish I knew how long it will take for things to get rightside up but for most people the best thing is to be patient for as long as it takes.
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Swine Flu

Busy morning, short post.

The market has been moved by the flu before. Where the market is concerned flu panics are short term events with no lasting impact.
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Sunday Morning Coffee

In sticking with this weekend's behavioral theme that started with yesterday's video, Barron's had an article about the shadier side of the investment newsletter business. The reason shady newsletters, pump and dumpers and the like exist is because people are greedy. If there was no greed to prey on there would be no investment scams. The stock market, hopefully, is a place to get rich slowly. Occasionally you or someone you know may luck into something that makes you rich quickly but that is unlikely to come from a newsletter, message board or unsolicited email.

In general, people seem to have a difficult time understanding the risks that they take. If you put 1/4 or 1/3 of your money into something that is not cash or a treasury product you are taking an enormous risk. Even if nothing bad happens you are taking the same risk nonetheless. An example of this that I have used before is with Amazon.com (AMZN). If you put 100% of your portfolio into the stock at $1.48 on June 27, 1997 and sold it Jan 11, 1999 at $92.31, was the risk you took any different than the person who bought your shares from you with 100% of his portfolio who then rode it down to $6.08 on October 2, 2001?

The risk is of course identical but the result different and only one of the two investors had to deal with negative consequences. Too many people take this type of risk. On a more realistic basis too many folks think nothing of putting 20% in something that they don't think can blow up. Anything can blow up, anything. Owning something that does blow up is probably beyond your control but how much of that blown up thing you own falls squarely on you.

I would call what happened to the Macquarie Infrastructure Trust (MIC) as a blowup. At a 2-3% weight it is the sort of thing that will literally be forgotten about. Had it been 20-30% it would have been ruinous.

Unrelated, there is a car parked at the bottom of our hill. It is a very cheap Mercedes and the license plate says SPENDZ. Do you wonder sometimes how we got to where we are with all of this financial mess? Well I think the person who drives this car is the epitome of what is wrong. They could have a whole lot more Toyota for less money than they spent on the Mercedes and they enjoy spending so much that they paid extra money to the DMV in order to proclaim it to the world.

This takes me back to Nassim Taleb's appearance on Squawk Box a few weeks ago when he shared his grandmother's financial advice which was to have a lot of money in the bank and not have too much debt. Children know they should save and not have too much debt yet somehow something happens as people become adults and they make poor decisions. This is true of people in my family, my wife's family and probably somewhere in your family too. Who thinks living below their means is a bad idea? Who thinks living beyond their means is a good idea? I suspect that the problem is not that people set out to live beyond their means but that many who do don't realize it.

I think these sorts of behavioral things (spending too much, saving too little, letting greed get the better of you, panic selling, panic buying) do far more damage than the market ever does.
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The Big Picture for the Week of April 26, 2009

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No It's Not Me

A reader passed along this article from The Atlantic this morning (thank you) that is about several different aspects of the crisis on more of an everyman level.

It is long but about 2/3 of the way down the author spends some time with a survivalist in the mountains just outside of Prescott, AZ (no mention of Walker and neither Joellyn nor I have heard of him).

Included in the article are several very good one-liners including this one;

But we’re in a strange moment in American history when a mouse-eating barefoot survivalist in the mountains of Arizona makes more sense than the chief investment strategist of Merrill Lynch.

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Different Person, Same Perspective

European Closing Bell was co-hosted by Andy Hartwill from Quasar. I've never heard of him or the firm but I thought his points were interesting, mainly because they jibe with mine (ahem).

He seemed to stress two points; geographic diversification and that buy and hold "as we know it" won't work anymore.

His perspective is as a UK market participant so his home bias is, or was as the case may be, presumably the UK and he wants out of the region. Europe, including the UK, may turn out to be worse off than the US. Too many US based investors rely on products that are too heavy in Europe and the UK for their foreign exposure. This hurt in the current bear market and maybe a hindrance in the rebuilding of portfolios that hopefully will occur over the next few years.

This line of thinking is obviously consistent with what I have been writing about for a long time regarding investing at the country level. Better foreign diversification can be had by seeking out and buying countries that are fundamentally different than the US. Most of the EMU countries have a lot in common with the US in that they need to import a lot of stuff, are mature economies, "advanced" financial systems and heavily indebted. The opposite of this could include commodity based, exports a lot of stuff, a much simpler financial system and a little less debt.

While finding countries that meet all those criteria could be tough there are plenty of countries that are different enough. I guess my favorite countries are Chile, China, Brazil and Norway. I say I guess because I have been writing about them more than other countries (mostly at greenfaucet) but long time readers might remember what I have been doing with these countries over the last few years.

From the low point in November to now, Chile has had a very smooth ride to a 10% gain, China is up 25%, Brazil is up 45%, Norway is up 30% and the US has had a very volatile ride to a 10% gain. All four of those foreign markets dropped a lot at different points in this bear market but the timing has been a little different and owning them has helped smooth out the ride which as you know is a big priority here.

This is not a case of some great call I made. It doesn't take much to find out a country has a different fundamental make up than the US and if you believe in the concept (different fundamentals means different cycles) then you can figure which countries give the best shot at this effect.

The equity markets of these countries are becoming easier to access but the fixed income and currency markets no so much. WisdomTree filed for an ETF for just about every conceivable currency on the planet but have only actually listed a small handful of them. They filed so long ago that I have pretty much given up on them but in line with what Hartwill, I and others have been saying it will only get more important to seek these investments out.
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Agrarianism?

Yesterday I tried to find an interview from sometime this year (I think) where Marc Faber made a comment about not buying too much in the way US stocks but specifically thinking that owning a defense stock (military contractor not defensive staple stock) was a good idea. I'm a huge believer in this.

I did not find the interview I was looking for but I did find this little ditty that cites comments from Faber and Jimmy Rogers each talking about buying farmland and the potential for social unrest.

A lot of folks feel this way. One viewpoint that seems to pop up in these conversations is that we will somehow revert into a society that looks more like pre-industrial revolution America; more agrarian perhaps like the recent TV show Jericho.

I believe part of the new found awareness of commodity investment is some sort of desire for a simpler society. I make jokes all the time about shot gun shells and whiskey becoming the medium of exchange similar to what my brother has told me Howard Ruff used to say about ivory soap and cans of tuna back in the 1970s; maybe wealth will be measured in goats or perhaps daughters. The emotion that has cropped up as a result of this decade looking a lot like the 1930s is causing some people to lash out, loudly in some cases, against what our society has become.

There is fear that there will be social unrest, that our financial system will literally collapse and that large cities will be like police states with curfews. More than a couple of people have written about neighborhoods where some houses will be overcrowded with multiple generations living under one roof and other house sit there abandoned and dilapidated.

Can I just say Chillax Brrrrroseph?

Creative destruction is still alive and well. Technology continues to improve our lives at an accelerating rate. Advances in medicine are occurring at an accelerating rate. I have not seen any forecasts calling for unemployment to get anywhere near the 25% of the great depression so it is difficult for me to see how society can turn completely inside out if 85% of us still have our jobs.

The US is still the dominant military power, still the straw that stirs the global economic drink and it would be bad for everyone for these things to change abruptly.

This does not mean that things will not change because they will. Other countries are catching up to the US (still have a long way to go) whereas the US is in a position of weakness and trying to hold on to the top spot. I've written about this before; I think this results in dollar weakness, the dollar becoming a little less relevant and higher interest rates playing out over a long period of time but people in other countries will continue to aspire to the American lifestyle.

Additionally the delevering of US consumers, corporations and banks will continue and will have a lasting but not ruinous impact. We will still be leaders (not have the top spot to ourselves necessarily) in medical and technological advancement and be globally relevant even if, as mentioned above, a little less important in some aspects.

There is an aspect to all of this that the US is going to have to reinvent itself, well partially anyway, and even if that process is difficult I wouldn't bet against it.

Care to weigh in on this?
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Earth Day Randoms

Nicole Elliott is a technical analyst from Mizuho in London who is a regular on CNBC Europe on Tuesdays. She knows her stuff and I find her to be a must-listen. Yesterday she spelled out her logic for just about everything to continue going in the wrong direction to which anchor Guy Johnson joked about her making him unhappy.

She replied, in good spirit, that she was there to tell it how it is and there is no reason not to make money with this. Presumably she trades these opinions and advises the bank's clients to do likewise. You can decide for yourself whether or not you want to trade off of her suggestions but what is useful here is that the anchor introduced emotion into the discussion and without hesitating she removed emotion from the equation and her tone in doing so was that this was no place for emotion and she is right.

Far too many people, maybe because of what they see on TV or read in print, do let emotions into their market process.

In Robert Arnott's most recent article on IndexUniverse he makes a reference to a sixteen asset class portfolio that is detailed in the footnotes as follows;

Merrill Lynch (ML) U.S. Corporate & Government 1-3 Year
Lehman Brothers (LB) U.S. Aggregate Bond TR
LB U.S. Treasury Long TR
LB U.S. Long Credit TR
LB U.S. Corporate High Yield TR
Credit Suisse Leveraged Loan
JPMorgan (JPM) EMBI + Composite TR
JPM ELMI + Composite
ML Convertible Bonds All Qualities
LB Global Inflation Linked U.S. TIPS TR
FTSE NAREIT All REITs TR
DJ AIG Commodity TR
S&P 500 TR
MSCI Emerging Markets TR
MSCI EAFE TR
Russell 2000 TR

Man, that's a lot of asset classes. Apparently Arnott and his crew did research on how these 16 asset classes, equally weighted, did and the result was not good which is sort of what the article is about. The equal weighting of the 16 baffles me and I find the number of asset classes to be daunting. Most people put 30-40% into fixed income and as I count, ten of the 16 are fixed income and if I'm seeing right there is no slot for municipal bonds.

Arnott has forgotten more about this stuff than I'll ever know which makes a good point. Building a fixed income allocation with the above as a starting point makes the task very difficult. If you are an investor, as opposed to a trader, and you want treasury exposure you can buy the individual issues very easily. Ditto munis. If you want exposure to a couple of corporates it might makes sense to have a mix of individual issues and a fund. If you want foreign sovereign exposure and have access to individual issues I think that is better but there are now several ETFs for the space too. TIPS are easily accessed and then if you want to get zesty with a small portion, like maybe 5%, for emerging market, convertibles or high yield you would be covering all the bases.

I think a very diversified fixed income portfolio can be built with four or five bond asset classes. One thing to not lose sight of is that if rates are low that means prices are high. How much buying do you want to do when prices are high?

Finally from the "What did you say?" file a reader opined that the search for exotic or alternative investment products is a waste of time. He said they could be more harmful than helpful and that he never needed them before. For him or anyone else it might be a waste of time, used improperly they could be harmful and if you don't think you need them then you probably don't.

The big macro behind my utilization of these products (in moderation, can't stress that enough) and my writing about them ties in with trying to explore the concept of risk adjusted return. If I could build portfolios that went up 80 basis points every month in perpetuity with no standard deviation I would. While that is impossible building some of that smoothing out the ride into the portfolio is very worthwhile.

As a matter of philosophy I believe there are times to overweight volatility and underweight it and adding in a couple "alternative" vehicles or subsequently taking them off is a great way to manage the volatility. Moving 5% of the portfolio from close to not beta into the kind of high beta will have a very noticeable impact on a portfolio.

The reader says he hasn't needed alternative investments before, fair enough but I believe that portfolio construction and management is an evolving field of study. Fifteen years ago there was no ETF industry (I don't think two funds constitutes an industry if MDY even existed then) and now they are a mainstay. Options didn't come into existence until the 1970s, there have been other past innovations that have become financial market staples and there will be others. Not all of them have been good and not all of the future developments will be good either but the industry will evolve and some of the innovation will be a net positive. I'm not sue why someone would choose to ignore it.
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Tuesday Tidbits

Before anyone gets too worked up about yesterday's decline or what might come next conditions are not changing so fast as to justify the SPX dropping by 26% at the start of the year and then rallying by 30% in six weeks.

Maybe the market should be at 700 or maybe it should be at 900 but the moves between the two numbers have been panicked moves and I would not expect that we are done with panicked moves just yet.

On the way up there is hope that things are not that bad, on the way down there is fear of financial apocalypse and unfortunately I think too many people go back and forth between the two.

IndexUniverse has a post up about how poorly actively managed mutual funds did in 2008. Read the data if you are curious but it is so bad that the title of IU's podcast version of this story was Active Management Still Stinks. I'm not entirely sure what to make of the results but I think this supports a point I have been trying to make from day one here. In bear markets most stocks go down a lot. It is easier to recognize that a bear is starting (breach of the 200 DMA and the 2% rule) than to pick the stocks that will somehow go up. In that context the path of less resistance is to simply own fewer stocks when the market goes below its 200 DMA or the market goes down low single digits three months in a row.

Last up is an interview in Barron's with Jimmy Rogers. If you read all of the Rogers' interviews then you will not get any new strategic nuggets or new arguments for why he is doing what he is doing but there was one comment that I would hone in on;

Rogers: If they have the same convictions that I do (about China) then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.

Barron's: Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?

Rogers: Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States.

From the start of this site I have written a lot about foreign investing. I believe it is crucial and will only become more important over time. When I started the site I was at about 30% foreign, have increased since then and have said many times I could see being close to 50%, give or take, early in the next decade.

In the above quote Rogers is explicitly saying to chuck your homeward bias and put your money where it makes the most sense to you. My approach would be to spread it among many different countries, Rogers is more comfortable with a more concentrated allocation and you should do what you are comfortable with. I will take a moment to again bring up the limited utility of broad-based foreign funds like iShares MSCI EAFE ETF (EFA) for being heavy in Japan and Western Europe and also for it having a much higher correlation to the US market than narrower products. The higher the correlation the less diversification utility you get.
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Endowment Investing

A reader passed along a link to a Hard Assets Investor interview with Mebane Faber that was mostly about his new book The Ivy Portfolio. I have a copy of the book but need to apologize for not having had time to read and review it.

There is one point in the interview that I wanted to explore and perhaps we can elicit a response from Mebane.

In response to a question about how to access the commodity space Mebane says "...and in commodities and currencies, we think long/short makes more sense than long/flat." He goes on to say "To access the space, we use the managed futures ETN [the ELEMENTS S&P CTI ETN (NYSE Arca: LSC)); Claymore is now putting out an ETF on the same index. We really like the managed futures product."

He says that in the book he talks about broad commodity index for commodities. In the chart I have LSC compared to the iPath Commodity ETN (DJP) and PowerShares Commodity ETF (DBC) for the life of LSC. I don't think anyone could have too much of a gripe about the performance of the fund but it does not look like a proxy for commodities to me.

If you look at a chart for Rydex Managed Futured (RYMFX), which is similar to LSC and has been around about 15 months longer, compared to DJP and DBC you will see that it too does not really look like a commodity proxy. I believe in what LSC does (I own RYMFX personally and for clients) but I would not expect a long short vehicle to fully capture the reflation trade or any other commodity effect. In fact since the March low, DBC is up 6%, DJP is up 8% and LSC is down 10%.

Mebane makes another point that I agree with about replicating hedge funds and private equity. He says that thus far the ETPs out there are imperfect although I would note that the Index IQ Hedge Fund ETF (QAI) is too new to render a verdict yet. And as I mentioned the other day Index IQ filed for a bunch of other hedge fund replication funds. If some of them deliver as hoped for then that would be an evolutionary step toward recreating the endowment portfolio for those so inclined.
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Sunday Morning Coffee

The second portion of the Barron's editorial commentary contained this little nugget;

The Congressional Budget Office reported that payroll-tax receipts will barely cover Social Security benefits next fiscal year.

To repeat my tweet from yesterday about this; uh-oh.

Entitlements loom as a $50 trillion problem. The estimates about when it starts to run into trouble starts, I believe, in 2018 with some estimates call for it going under in 2042, if memory serves. Of course there are other folks who come up with much rosier scenarios. I don't know what is right all I can tell you is that I am not planning on having it--if I am wrong then all the better.

I write about this stuff every so often because I think it is important and interesting. I view it as a problem to be solved and I find learning about how others go about solving it to be very instructive. Over the years I relayed stories of how other folks are trying to figure this out which gets us to the above picture.

That is long time (very long time) Boston Bruins announcer Fred Cusick doing radio play-by-play for the Cape Cod Baseball League. Cusick retired from the Bruins in 1997 at age 78, did minor league hockey announcing for a while and now, at age 90, does the Cape Cod baseball. While it is safe to say announcing NHL games was not particularly lucrative when he started in 1952 it is also safe to say that save for something unusual (either behavioral or circumstantial) he does not need to work. For those who don't know the Cape Cod league is a very short season during the summer for college players.

While I don't think getting announcing jobs is particularly easy (Jerry Seinfeld and George Costanza cover this in an episode called The Revenge), part time or seasonal work in things you enjoy the most are not that difficult to find. Sticking with sports, Joellyn's retired uncle got a job offer a couple of years ago with a major league baseball team. The task would have actually tied in with his career, he ended up turning it down but it was not impossible to get. Here in Prescott we have three minor league teams each with three month seasons and a lot of the jobs go to people who appear to be of retirement age.

There is all sorts of seasonal work in tourism. I know that there are jobs at the North Rim of the Grand Canyon to be had for the summer--this must also exist at other national parks as well. If you can accept that this is a problem to be solved then you should also accept that finding the solution right for you (something you really want to do and can fit in with your lifestyle) will require ingenuity and take time to put together for yourself.

Aside from the mental and physical benefit working something close to full time for two or maybe three months a year is that it can be two or three months per year that you don't need to take anything out of your portfolio. Depending on what the market does relieving your portfolio of 20% of its income burden could make a monumental difference.
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The Big Picture for the Week of April 19, 2009

The CNBC video I reference in my video is posted down below.
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401k Video

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Friday Randoms

StateStreet launched a convertible bond ETF with ticker CWB. I turned in an article to theStreet about the fund which will probably run Monday (maybe today). Without front running my article I will just say that I think this is an important segment for fixed income. Anyone who was in the space last year learned a lesson about how volatile converts can be (me included) but I do think there is utility in having a small weighting and actively managing it. I think the ETF wrapper will be superior to CEFs.

Direxion, the triple long and triple short folks, listed four new funds;

3X Bull Ten Year Treasury
3X Bear Ten Year Treasury
3X Bull 30 Year Treasury
3x Bear 30 Year Treasury

The daily compounding of the triples is tough to game, at least for me, but as with the 3X equity funds people find a way to trade them. I have obviously been a big proponent of the double short S&P 500 ETF but have done nothing with the 3X and have not even written about them that much. I might be more inclined toward 3X short for hedging in a tamer environment like we had during the first six months of the bear market but since they weren't around back then there is no way to know if that would have been a good hold at that time.

Paul Krugman whipped up a bit of a ruckus when he commented that Austria could be the next country into bankruptcy after Iceland. Austrian finance minister Josef Pröll said it the comments were potentially a form of economic warfare. While I don't know about economic warfare the idea behind the reaction is that fear of there being a run on the bank will cause a run on the bank.

That said Austria is in a bit of a pickle. The growth catalyst at the start of the decade was that Austria was financing much of the expansion of Central and Eastern Europe. Now that part of the world is having a lot of problems and it would be very difficult for Austria to nationalize the bank debt if it "had" to.

A reader left the following quote and attributed it to Jimmy Rogers;

"Diversification is a scam. "Diversification is something that stock brokers came up with to protect themselves, so they wouldn't get sued [for making bad investment choices for clients]. Henry Ford never diversified, Bill Gates didn't diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket. You can go broke diversifying. Ask anyone who's diversified in the last three years. They've lost money."
Just look at various sector ETFs, country ETF's etc etc. They all went down. Diversification is a scam foisted on unsophisticated investors by scam artist wall street gurus and financial advisors. Do your homework and break free of the cnbc types.

I have no idea if Rogers really said that or not but even if he didn't you know this sentiment exists, the quote obviously paraphrases Andrew Carnegie with the bit about watching the basket. If you don't know my thoughts about diversification, and assuming you care, this post of mine on greenfaucet earlier this week gives an inkling.

Rogers has a point but so do the people who believe in diversification. How you structure a portfolio and how your thoughts about how to do that evolve ultimately has to make sense to you. You can and probably should read about the way other people do things to learn more about different methods or to gain more confidence in the way you do things or as I have said many times take a little bit of process from here, little bits of process from other places and create your own process.

Danny Ainge, get well soon.
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Out Of That Hole?

Yesterday I included a picture of this truck still in the hole as wrote about market conditions possibly impeding, or even setting back, the development of the ETF industry, specifically available funds.

Then right on cue IndexUniverse reported that IndexIQ filed for another 15 ETFs. IndexIQ is the company that recently listed a hedge fund strategy ETF under ticker QAI.

Regardless of whether any of the IndexIQ funds garner any assets or do what they are supposed to do there is no doubt that the product line is innovative. The company must have the funding to make a go at this and obviously they will believe that any fund they do actually list will work.

They filed for;

• IQ CPI Inflation Tracker
• IQ Hedge Equal Weight Multi-Strategy Tracker ETF
• IQ Hedge Asset Weight Multi-Strategy Tracker ETF
• IQ Hedge Inverse Multi-Strategy Tracker ETF
• IQ Hedge Distressed Tracker ETF
  
• IQ Hedge Convertible Arbitrage Tracker ETF
• IQ Hedge Dedicated Short Bias Tracker ETF
• IQ Hedge Managed Futures Tracker ETF
• IQ Hedge Market Directional Tracker ETF
• IQ Hedge Absolute Return Tracker ETF
• IQ Hedge Relative Value Tracker ETF
• IQ ARB Merger Arbitrage ETF
• IQ ARB Global Natural Resources ETF
  
• IQ ARB Global Real Estate ETF
• IQ ARB Global Infrastructure ETF

The idea, according to IU, is that most of these would be funds of funds. I don't know what all of them mean, I don't know how many will actually list but assuming for a moment that all of them list I would not doubt that at least a couple of them turn out to be good portfolio-volatility dampeners.

Take that last one as an example; the ARB Infrastructure (click here and then scroll up a little). As I read the description they will build an index of infrastructure stocks to go long and then create short exposure "through a long position in inverse and/or ultra inverse ETFs." It seems they might capture a purer effect going long the same basket and then going short some combo of the infrastructure ETFs.

For example if the long basket was 25% utility-infrastructure then maybe 25% of the short could be the SPDR Infrastructure ETF (GII) which is 90% utility stocks. Hopefully the utility longs outperform GII and the arb would work. There are issues with selling short within an ETF and obviously they did not file the methodology they did because they think it is the wrong way to go.

Questions like this could be asked about all 15 funds and either they will work or they won't. I am a big fan of integrating a small slice of what they are setting out to do into a portfolio. While I will not be the first one into any of them, if they prove to be nice boring holds in a volatile market I could see switching to one of them--to be clear they would need to prove themselves to me for something close to a year before I would consider buying in.
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Helping Animals

As some of you may know my wife is a full time volunteer for a local animal rescue called United Animal Friends (UAF). Recently Joellyn and her UAF colleague Katie came up with the idea to start a blog about animal rescue, it is called Table Scraps and Katie has been posting since March. Please check it out at least once.

On a very related note UAF is in some sort of competition for grant money that will be awarded based on the number of votes received. This is the sort of thing where the readership of this blog can make an enormous difference, collectively you can literally put money in UAF's bank account.

Please click here to vote. When the page loads please scroll down a little and in the search field for Shelter Name please put United Animal Friends, for the state please put AZ and for the city please put Prescott. You will only get one choice, the correct choice, and then just vote. You can vote everyday if you are so inclined but I won't repost this request anywhere near that often.

Thank you.
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A Hole In The Road?

From the beginning of my time blogging I have opined here and elsewhere that ETFs (more correctly exchange traded products) will be a means by which portfolio construction and management can be democratized in such a way that effective and efficient portfolios that don't rely on stock picking would be available to anyone inclined to spend the time.

While this observation was/is rather obvious it is still important.

The way things have evolved, most of the products that now exist have come during the double bear market of the oughts. Bear markets are a tough time to start a business let alone an industry.

As new funds have come out my take has been throw anything at the wall and let market participants determine what sticks. That type of business model assumes a certain amount of risk as listing and maintaining a fund costs money. In a bear market certain fund ideas will simply be more difficult to sell. Some funds have been shut and some entire product lines have been shutdown due to an inability to attract assets.

The closed funds that come to mind as I write this never held much appeal to me but maybe to at least a few folks...or not. So the concern is that some potentially very useful funds will end up getting shuttered which becomes a big negative for everyone.

WisdomeTree offers a lot of funds with unique exposure that I think are very useful but they also have funds that I know I will never be interested in. As I count on their site (so I may have mis-counted) I see 50 funds. According to the website the ETF AUM as of December 31 was $3.2 billion and the company lost money. WisdomTree obviously needs more AUM to be profitable. No company can lose money forever but it would be a big step back if these funds closed. I don't know anything and I am not spreading a rumor I am simply saying that their funds are important, they are losing money and it would impede my practice, I'm sure adversely affect other investors and obviously the employees.

There is an ETF company called EGA Emerging Global Shares that has not listed any funds yet but their big thing will be emerging market sector ETFs. As a person who builds portfolios at the sector level I obviously think this will be very important, probably not every sector mind you, but I think these will be very important collectively. Just because I believe this does not mean that the line has to succeed. Emerging market sectors is innovative and unique as opposed to a slightly different mix of domestic large cap stocks and anytime that innovative and unique fails it is a step back for everyone. I should mention that a friend of mine, Richard Kang, is part of the brain trust at EGA Global but I have no affiliation with the company.

The idea stated above of effective and efficient means being able to access all parts of the market via ETPs. The progress made has been good and once the financials crisis is over (it will end one day) then the remaining ETNs will go back to being a long shot for default the marketplace for ETPs will be a little wider and there will be more innovation that comes to market and will succeed at attracting assets. We will all be better off for this.

Please check me out on Twitter at http://twitter.com/randomroger.
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Rough Day For Sports Fans

Yesterday the sports world lost Phillies announcer Harry Kalas (also the voice of NFL films after John Facenda), college football coach Bruce Snyder and Mark The Bird Fidrych.

I have a specific memory of opening a pack of baseball cards in the spring of 1977 and seeing the card pictured to the left on top of the pack. I was pretty excited because it had the stats from his one great year (before arm trouble).

Late Sunday a reader left a question about this article which first ran on RealMoney and then was re-run on some sort of page at Fidelity's web site.

It is written by Eric Oberg and like several pieces he has written for RM it is an in depth dissection of the drawbacks of double short ETFs.

The big story is the day to day compounding that can either make holders very happy or make them regret ever buying shares. In the above link he cites an example of iShares Financial (IYF) being up 8% over some multi-month period while the ProShares Ultra Short Financials (SKF) being down 69%. BTW I am not questioning the math at all.

My only involvement with SKF, or any double short sector fund, was a couple of articles for RM a few years ago spelling out a potential pair trade. The concept I put forth generally "worked" for a while but obviously would have unraveled as we got deeper into the crisis. The only portfolio action I ever took with any double short fund was with the double short S&P 500 (SDS). It did not perfectly track twice the inverse of the SPX but it generally went up over time as the market went down, on days where the market was down a lot it pretty much did what it was supposed to and I was quite happy with the result and the volatility dampening effect on the portfolio.

There are a couple of things I would point out in defense of these products. Clearly, anyone who thinks these funds have collectively malfunctioned has a point. While the objective is for the daily result the example above of plus 8% versus down 69% would be very disappointing, no argument. It is true though that in the same time period, longer really, everything (perhaps a little hyperbole) has malfunctioned one way or another. The spastic movement in equity prices, volatility, commodity prices, currencies, muni yields compared to treasuries and a half a dozen other things perhaps make this a less than ideal time to draw a conclusion.

I would note that in the year ended March 9, 2009 SDS was up 80% while the S&P 500 was down 50%. Obviously not exact (actually if you add the dividends it gets closer to 100%) but of course that is not the objective. Had I held it all the way through to March 9 I would have been thrilled with the result. The reason I stopped at March 9 is because the rally since then has knocked the stuffing out of SDS. The daily reset that occurs will be rough if the market goes up every day for such a long stretch.

Given that the funds worked "better," not perfectly, before things got so out of hand I believe it is possible that these funds will work better when things normalize and if they never do normalize then maybe the sector products should never be used. My willingness to use SDS in the future has not been hampered by this in the least.
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What About The Customers Yachts?

That joke is both funny and sad.

Felix Salmon did a short write up on a longer post by Nick Gogerty that was critical of active management. Candidly I had trouble keeping the monkeys and the clowns (read the article) straight.

It was very easy to understand that Nick made a compelling argument against actively managed mutual funds.

The active/passive debate has come up here quite a bit in the last few months. I am not a big fan of actively managed mutual funds for the primary reason that you do not know what is in them right now and cannot know what will be in them in the future which makes constructing a portfolio very difficult to do (no way to manage the overweights or underweights).

Obviously I believe in the concept of active management but prefer to use stocks and narrow based ETFs to get the job done.

One way that active management is judged is whether the manager beat the market. This is not really the primary objective in my opinion. I view the task of navigating the markets (actively or passively) as having the goal of achieving a different result which is having enough money when you need it. This applies to whether you hire someone or do it yourself. How you get there depends on the person's tolerances and situation.

My take on the task is to try to give someone the best shot of having enough money with the smoothest ride possible. As a matter of philosophy I believe smoothing out the ride reduces the chance of panic and selling at precisely the wrong the time. Obviously the notion of smoothing out the ride ties in with the concept of risk adjusted return. I think an easy way to have better risk adjusted numbers is to recognize that at times it makes sense to have more or less risk, and really volatility is a better word than risk, in the portfolio depending on what is happening in the world.

One aspect of active management that is criticized, and Nick does so in his post, is the lack of recognition of that there was any sort of problem brewing and then a lack of protection against the trouble. Nick at one point writes about not knowing what you don't know--I love that saying.

I obviously believe in defensive action and have written about it to the point of boring readers and I would hope that after two 50% declines this decade more active managers (professional or otherwise) will start to think in these terms. Maybe managers who offered no recognition or protection from the meltdown should be criticized but one thing is true of literally every manager is that they will know more about their job in the future than they do now. They know more now than they did in the past. Capital markets is an endeavor where the learning never stops. That is not much solace for someone who heeded a strategy that resulted in a 40 or 50% decline but it is a true statement even for you managing your own portfolio.
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Sunday Morning Coffee

First up I wanted to expand on one of my Tweets from yesterday.

Barrons says "piling into financials" could be dangerous. Clearly a lottery ticket bounce has come for some, but real leadershp is a bad bet

Those aren't typos, with only 140 characters available per Tweet I'm learning that sometimes you need to economize on certain letters.

Anywho one thing that I always keep an eye on is sector weightings within the S&P 500. When a sector gets too big I view that as a warning sign. I am aware of two times where a sector grew to about 30%; one was energy in the early 1980s and the other was tech at the start of this decade. Energy stocks were in a bubble of sorts and contracted to mid single-digit percentages of the S&P 500 and stayed there until a few years ago before getting up to about 17% when crude went to $147 last summer.

Financials grew to a little over 20% at their peak from a norm of the mid teens. A 20% weight is a flashing light as opposed to a red flag if that makes sense but the 20% weight was what first got me to underweight financials quite a few years ago. Here is a blog post from 2004 which is the oldest one I can find with this detail. That was before the yield curve actually inverted but a sector that takes up more room than what is normal is something to follow closely and in this case where the sector in question was greater than 20% I went underweight.

Almost 30 years after the energy bubble and the sector only got back to about half of its peak weight, and even then only for a short time. Tech is a little over half its peak weight nine years later (and I would submit that is attributable to the implosion in the financial sector). Financials are now 12% of the index down from a peak of what I specifically recall as being 22% and my hunch is that once that lottery ticket bounce exhausts it will be a long time before the sector does something meaningful--individual stock could be a different story and I think certain foreign banks will come back because they avoided the types of behaviors that brought down US financials.

The picture above is from a local highway project taken Friday night and as many vehicles as there are in the picture it doesn't even capture the entire fleet. You may or may not have a big project happening near you but I think the picture serves as a good reminder. Whatever the final tallies will be for the size of the GDP contraction, the numbers for unemployment, output or various ISM numbers things are still happening. They are happening a little slower and less frequently right now but in the picture is a lot of Caterpillar vehicles (CAT is a client holding). They had to be bought at some point and we know there will be other projects all over the country and many other places in the world and some of them will need new vehicles.

Things have slowed down and may slow further but economic activity is not disappearing altogether. It can be easy to forget this when a stock goes down a lot but most companies are still selling things to their customers.

The second picture is an espresso maker that was featured in Barron's for $2400. The $2400 does not include the expense of going to Germany for two weeks to learn how to use it. A little humor attempt.

If you haven't done so already, please check me out on Twitter at http://twitter.com/randomroger
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The Big Picture for the Week of April 12, 2009

Please check me out on Twitter at http://twitter.com/randomroger.
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Tweet On Twitter

I am now on Twitter at twitter.com/randomroger. I was probably lucky to be able to get that address. The picture in this post is one I cropped (sorry Larry) for my Twitter profile.

I don't know exactly how I will use this so we'll just see how it evolves. I know there are widgets that can be embedded in various places but have not gotten to that yet.

Baby steps.

Please check me out if you have the time.
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Feeling Good!

A while back I started using the term feel good rally to describe a normal part of bear market activity and the run in the last month is exactly what I had in mind.

There are plenty of examples of fast and furious rallies, like the current one, occurring during bear markets. These types of moves are built on hope, some greed and maybe fear of missing something.

Hope, greed and fear are all emotions and in times like the last month they can move the market. However worried (another emotion) most people were on March 9 they are very likely less worried today which is reasonable after a 28% lift.

Clearly the rally has been big and as I have been saying since January I expected a really big bear market rally; even bigger than the 28% we have had thus far and maybe we are on the way to even bigger but obvious to long time readers I expected even bigger to have occurred before now.

Hopefully it is clear that a 28% rally in one month is a panicked move and not a sign of market health, that you might be feeling good perhaps supports the notion. Over the years I have been involved with the markets I have tried to pay close attention to these sorts of market events in order to remember what the trading looks like and how people react as the patterns and sentiment do repeat cycle after cycle even if the details of the event are different.

Knowing that most people deny problems at the start of a bear and knowing that many folks chase bear market rallies which then potentially extends them a little further (as two examples) can help avoid mistakes. For anyone new my positioning has been the same for a long time, I am in there but with a high cash level. Lagging a big move is not a problem but if this whole thesis is wrong and it is a new bull market then missing would be a big problem.
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My CNBC Visit Earlier Today

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CNBC

I am scheduled on CNBC today for 30 minutes past the US close as part of the Rebuilding Your Portfolio series they have been running today.

I will be discussing the merits of whiskey, ammunition, cans of tuna and the like (humor attempt).

On a sort of related and humorous note I made a joke to an uncle in law about keeping money in coffee cans in the back yard and he said no you should use Tupperware so no one with a metal detector can find it. OK!
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Decoupling Is Back?

Well no it isn't.

Much has been made in the last few years about the idea of decoupling. A few years ago investing in certain foreign countries was believed to be a way to beat bear markets. Then when the market started to turn down and correlations went up the folks banking on decoupling were sorely disappointed.

Now it is a few months later and the Wall Street Journal ran an article yesterday titled Finally, Global Markets Are Going There Own Ways.

This ties in with a lot of the stuff I 've written lately over at greenfaucet. From the beginning of this site I have tried to convey the same message about how to diversify with foreign exposure and what expectations to have about that foreign exposure.

In selecting foreign exposure I believe the most value is added by buying countries with different economic attributes than the US. Different economic attributes means that those countries are very possibly on different economic cycles and so could be on different stock market cycles. These types of countries provide the best shot that an investor has for a volatility reducing zig zag effect within the portfolio.

That does not mean that some market should be expected to go up 20% when the US goes down 20% but it can mean that some countries rollover into a bear later than the US, emerge out of a bear sooner or both. For months at greenfaucet I have been harping on countries that I think fit this bill (these places will be familiar to long time readers) and generally speaking they did start their bear later and appear to be emerging sooner as well; specifically Chile, Norway, Brazil and China fitting the bill one way or the other.

And while Australia has not done as well as these others I do have long term faith in that country as well. New Zealand is a bit of a dilemma in this regard and I do not have across the board exposure there. Many folks fancy NZ to emerge sooner and clearly their economy is different than the US but there is a lot of debt and it is unlikely that the current account will ever be a positive.

The flip side is investing primarily in Western Europe like UK, France, Germany, Spain or Italy. At different times any of them could of course be great holds but they are much less likely to zig when the US zags like the types of countries I mentioned above. This point makes a great case for avoiding the iShares MSCI EAFE ETF (EFA). The correlation between EFA and and the S&P 500 has always been very high.
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Ten principles for a Black Swan-proof world

FT.com / Comment / Opinion - Ten principles for a Black Swan-proof world

I did a write up about the above Taleb article at greenfaucet today and plan to do a little further dissection later.
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The Good News...

...we're still up on the quarter.

The S&P 500 got as high as 845 during the day on April 2 so since then it is down 3.5% but maybe it feels like more because of the size of the drop yesterday and the intraday decline that it partially retraced on Monday.

Obviously in a bear market rally of some length it cannot go up literally everyday. I have no idea if the bear market rally is over or not but the last few days serves as a good microcosm for the last few months.

A while back I started using the term stumble along the bottom (did not come up with the term, forget who did so if you know please leave a comment). To me this term means continued volatility, continued discomfort and no meaningful progress out of the trading range. I have been expecting a couple of more temporary deviations outside the general trading range than we have had thus far but the action has had a predictable impact on psychology.

The bear market is now 18 months old and investors do not feel like they have a lot of answers and there is little visibility at this point for the recovery. At some point we probably started grinding down of psyches perhaps in a similar manner to what we went through from November 2002-March 2003. That is not to say this phase will only last five months because it has been a little longer than five months now and doesn't feel like it is over yet.

One thing that seems to have come from the action thus far is less "certainty" that the market is going to 500 or 600. I was never in that camp, obviously with the move to 666 we got close to 600 but we did spend very little time below 700. My hunch is that it would take a different type of news (and I don't really know what that would be) to take the market that much lower. I would qualify that by saying that is simply an opinion, I remain defensively positioned which makes the need to be right about not going meaningfully lower very unimportant.

Well the Red Sox got off to a good start beating the Rays 5-3. Dustin Pedroia and Jason Varitek each hit home runs and their pitching was pretty solid save for Hideki Okajima. Johnny Pesky, pictured above was at the game, he works for the team in some sort of coaching role, he is 89 years old and ran on to the field like a healthy 60 year old when we was introduced.
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Very Sad News

The Financial Times is reporting that blogger Greg Newton of Naked Shorts passed away from a heart attack. Greg and I were email/blogging buddies almost from the beginning of my blogging days; I used to write often about New Zealand and Greg was a kiwi which might be how he found my site. We met in person at a conference in NYC almost two years ago.

Greg's humor and whit were truly astounding and I view this as very sad personally of course but also for the blogospere.
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Interview in the Local Gazette

Every so often I get interviewed in the local paper about the markets. I've given them some good stuff in terms of saying when and why I thought a bear market was starting but I am not sure how often they quote me versus how often they interview me. Below are their questions and my unedited answers.

As the stock market is coming off four consecutive weeks with positive
gains, what's your take on it?

Normal bear market action includes what I call feel good rallies and which other people call sucker's rallies. The biggest, fastest rallies occur in bear markets. This is a truism that repeats cycle after cycle but somehow many folks forget this. It is more likely that when the next bull starts it will be far more gradual. Off the recent bottom, the market rallied close to 25% in less than a month. In the last bull market, the rally was about the same amount but took more like 9-10 months to go up as much as it did in March 2009. A 25% rally in such a short period of time is a form of panic and panicked moves do not come when the market is healthy.

What should investors take away from the market these days and how should
they be investing their money?

For now demand for equities in unhealthy. I want to remain somewhat defensive until demand again gets healthy. I define "healthy" as the S&P 500 being above its 200 day moving average (this is easily observed on Yahoo Finance). Defensive means having a higher cash level than normal but still have exposure to equities. While it is easy to say this is a bear market rally and it is easy to support the argument it might not be a bear market rally, it might be a bull market. While I don't think that is the case I do not want completely miss the next bull market whenever it comes. Many many people sell stocks after a big decline and then miss the move up so they sell low and then won't buy until it is high again which is the exact opposite of what we should be doing.

There are studies that show the market averages a 10% gain per year over the long term, actively managed mutual funds average about 8% (to cover the management fees) and fund holders average about 3% per year due to behaviors like the ones described above; selling low and buying high.

Are there certain sectors people should look to get into and others they
should avoid?

I don't believe in completely avoiding any of the big ten sectors as I view zero exposure as being a big bet. There are rule of thumb answers to this question which must be understood before doing anything else here. Healthcare, telecom, utilities and consumer staples stocks are defensive sectors and tend to lead going into and during an economic slowdown/bear market. Technology, consumer discretionary and industrials tend to lead coming off the bottom and early cycle. Materials and energy have mixed track records in this regard. I have been underweight the financial sector for several years and plan to stay that way for a while yet. Within financials I prefer foreign bank stocks (but not Europe) because they have much simpler business models (meaning less leverage and less complexity).

Any other thoughts?

I think investors need to decide for themselves whether or not they think the stock market is broken, IMO it is not broken. Once they sort that out they need to realize that in the short term there will likely be more volatility but over the longer term "normal" market returns will still be available but the easier path to "normal" in future market cycles will very likely require more foreign exposure than in past market cycles.
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Big Trouble In Little Cambridge?

Well probably not but Barry has an interesting post about the Harvard Management Company from when Larry Summers was the big man on the campus from 2002.

Apparently a relatively new employee back then expressed concerns for the risks that HMC was taking with derivatives and when she went to Summers with the issue in confidence Jack Meyer fired her. You can read Barry's post and the Boston Globe's coverage for more details.

No doubt there are two sides to the story but there must be a little meat on the bone.

I write often about learning from these pools of capital and this episode (regardless of how true it is or isn't) combined with the results of the fund from 2008 reiterates a great point that is always relevant. A common behavior that repeats over and over is misappropriation of risk and misuse of leverage. Assuming this story about HMC is accurate then that is what it is about.

People have blown themselves up using margin incorrectly or buying 20 call options when they would only buy 100 shares of common, putting 30% into junior mining companies or as one reader shared a couple of years ago having a lot riding on a one drug biotech.

I am at a loss as to how this still happens. There is an element of being too smart for their own good; overconfidence which of course brought down plenty of biggies. LTCM, Amaranth, is this what happened with Victor Niederhoffer, Nassim Taleb has simply awful things to say about Myron Scholes in this regard and there are many other examples. In the future there will be other industry heavyweights that will repeat the behavior.

As true as this is it is avoidable. If you have more than 20% of your portfolio in one sector you are headed toward trouble. Ditto a segment of the market like emerging markets or mining stocks. If you have more than 10% of your portfolio in any one stock (I put way less than 10% into any single stock) you are taking a big risk. If your idea of appropriate leverage means more exposure for the same number of dollars, trouble awaits.

You might laugh at some of this but plenty of people smarter than you and I have fallen prey to these exact problems and I promise you will hear more news like this in the future.

An important building block here is that people who save properly and then simply go along for the ride of the market will have enough when they need it. Once that is understood which may not be easy then issues of the significance the last ten years, whether stocks markets will work the same in the future or how much risk is appropriate can be tackled. The further we get from the building blocks of simple investing the more trouble we get into.
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Sunday Morning Coffee

There didn't seem to be a whole lot going on in Barron's this weekend but there was one article, that I only skimmed, about problems that investment funds for the cities of San Francisco and San Jose are having with some sort of stable value product from ING. I'm not too interested in the particulars but the problems lie with the book value of the contracts being worth less than some sort of market value.

The important thing is a reiteration of how important it is to just keep things simple. Some stocks (or stock funds), some bonds (or bond funds) and if you use a couple of "new" asset classes but access them via exchange traded products you are going to have very few, if any, structural/functional problems. Portfolio life is much easier if all you have to worry about being right or wrong about the market as opposed to also having to worry about your product functioning properly.

One reader asked about the Canadian hydro stocks that I wrote about a couple of times in the past and whether I thought buying them directly in Canada was better than buying them through a US brokerage account. My own preference is that whenever possible I would not want to open an new account anything I might want to buy. If you buy a foreign stocks (ADR or ordinary share) you are getting the currency exposure--that is that if the currency goes up against the green back you benefit everything else being equal. I don't see the need for separate account for Canadian investment vehicles.

Another reader asked what, if any, sectors (or groups) might indicate a recovery in the making. Well the timing of the question is amusing because I had an article run at TSCM on Friday that addressed two of them; copper and semiconductors. Both parts of the market have turned up but have done so slowly over several months without doing so in panic. As more of a this is how the market usually works indicator this is positive. It of course may not carry the day but it is a positive nonetheless.

Long time readers may know I enjoy writing about off the wall retirement ideas. I believe the willingness to think about and implement retirement differently will be crucial to a successful retirement. To that point have you seen those commercials for the texting service KGB? You have a question, you text it in and for $0.99 they give you an answer. I don't know any of the numbers but the first time I saw one of their commercials I thought working for them, probably from home, answering questions could be a decent gig. It turns out their "agents" do work from and I get the impression from the web site that the company is hiring.

I always say we should be willing to work at least part time in retirement to which someone will correctly counter that not everyone can. Working from home with something like this is doable for many (I realize not all) who cannot work outside the home. Obviously today's 50 and 60 year olds are more technically savvy than past generations of 50 and 60 year olds so someone who is 57 today could easily know how to do something like this when they are 70. Also obvious, there are plenty of folks 70 and above right now who are plenty tech savvy for something like this.

Yesterday, between the college lacrosse and MSU/UConn game I watched about ten minutes of Primera Division Uruguaya futbol--did I mention Directv has a lot of channels? Yesterday's game was between Defensor Sporting and Nacional de Montevideo. The Primera Division has 16 teams, so I'm thinking a 16 year old kid who starts for his highschool team has a pretty good shot of making the pros.

Why bring up Uruguay? I mentioned a few months ago as one of these expat havens where you can buy a 10,000 square foot house for $20,000 and pay full time servants $8 a month. Well those numbers might be off by a tad but Uruguay does get some attention in this regard. While I doubt we are going anywhere there is something intriguing about the idea.

We got some pretty good final four hoops last night but Jim Nantz + Clark Kellog = Zero Chemistry, listening to them is not good.

The picture is obviously from Fenway Park, it is from my holy pilgrimage there last summer. Opening day is tonight and more broadly tomorrow. Nice.
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Better Late Than Never

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Family Emergency

A combination of a family emergency, Joellyn and I are fine, combined with an important obligation to the fire department today means I can't post here today and I'm not sure if I will be able to post tomorrow.

However I submitted a lengthy post for greenfaucet today that might already be on the site or it will be soon. You'll be able to get to it here, hope you can check it out.
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News Team!

Stocks markets are ready to rumble as the SPX is printing 840 as I write this.

I guess the excuse today is easing up of the mark to market rules but whatever the cause the move is big, could be the fuel for the huge bear market rally I have been expecting for months but a bit of temperance is in order.

Moves of 20% that occur in just a matter of days is emotional, reactionary buying and these moves most often occur in a bear market.

It would not surprise me to see a bear market rally get up near 1000, I was not kidding when I said 'huge bear market rally,' but the biggest moves do occur in bear markets. If this idea holds water then we should be prepared for some sort of big move down again. It would not surprise me if big up followed by big down repeated a couple of more times but we'll see.

The S&P 500 is still 160 points or so from its 200 DMA but the 200 DMA is dropping very quickly. The market taking back its 200 DMA regardless of the level that occurs would obviously make me more optimistic and trigger a slow (I'd prefer not to get whipsawed) re-equitization.
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What the PBGC Does With It's Portfolio

The graphic comes from the Boston Globe with a tip o the cap to Rolfe Winkler from Option Armageddon. You can click on the chart for a better look. Rolfe did a write up on the PGBC's prospects and it is a good albeit glum read. Here is something Barry published that is written by Jack McHugh that questions why the PBGC is even in the stock market, the Globe's coverage and Randy Forsyth's take.

For purposes of this blog I am more interested in what can be learned from the allocation.

What I like about the "New Target Allocation," that we don't often see with these types of funds, is the small allocations to the narrower market segments seen at the bottom of the chart.

Diversifiers are great in moderation but so many large pools of capital put huge weightings in commodities, absolute return or illiquid investments and that works most of the time but as we saw in 2008 when it did not work the results were budget altering.

The 22% now allocated to long term treasuries would seem to be a big red flag. If rates go up a lot then that part of the portfolio will drop precipitously in value and the income stream at that time would be way below the prevailing market--hopefully for the fund's sake they realize this threat and are hedged one way or another.

It is interesting that 25% in is foreign equity (19% developed + 6% emerging) versus only 20% in domestic. The commitment to foreign equity makes sense to me but then it is difficult to reconcile there being almost no exposure to foreign debt. The TIPS exposure would obviously help mitigate some of the loss of purchasing power of the dollar if that seemingly inevitable consequence comes to pass but more exposure to foreign debt would also help in this regard.

Although not broken down in the graphic it would be interesting to see how they construct the equity portion of the portfolio. It is not clear from the nitty gritty that I was able to find whether the equity portions will be actively managed or indexed. It reads like active managers will be selected but it does say "index strategies will be considered."

To the extent someone wanted to, the PBGC allocation is easily recreated with ETFs. While I would leave one or two things out I would, again, want some foreign sovereign debt. The biggest omission appears to be commodities and while not a glaring omission I am a huge believer in absolute return which also appears to be missing.
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Guru Roundup

Jimmy Rogers was on with Maria yesterday and although his message doesn't change very frequently (not a bad thing) I do think he is worth listening to.

He does not think equities have put in the bottom which I took as his expecting the stumble along the bottom to continue. If SPX 666 turns out to be the low it could still be a while before the market breaks through the upper band of the trading range, feel free to assign whatever number you want to upper band. He has been buying commodities still as he says that if stocks have bottomed commodities will lead the way out and if stocks have not bottomed commodities will not go down as much.

Maria asked if he is still buying agriculture which he took as agricultural commodities but I think Maria meant farmland. Buying farmland is something he just started talking about in the last couple of months or so-- long time readers may recall my writing about farmland stocks quite a while ago.

He said that the fundamentals are not improving for Citigroup (C) or General Motors (GM) but they are improving for commodities. He said banks everywhere are printing money which has always lead to higher prices. He thinks they are crazy for doing but he knows the end result; higher prices for all of us.

The only stocks he bought recently were in China back in October and November. He said that China has huge reserves for a rainy day and now they are starting to spend some of it. He said Singapore is in a similar situation as China but he did not say he bought any stocks from Singapore. He also said that China is not big enough to bail out the world or the US and he said you need to own the right sectors in China; if you sell to Walmart or Sears you are having trouble and it's going to get worse.

Kind of interesting to me is that his timing on China was similar to mine. I went back in a little earlier than him, after being out for just over a year. I have also been saying that I do not want exporters or financials from China. For the stock in question I was a clearly a few weeks early but the point is that after a market drops 60%, even if it is on its way 70%, it has discounted an awful lot of problems.

Next up is what I believe to be the latest portfolio allocation from the Harvard Management Company. Per that link it is allocated as follows; 34% of the portfolio in public equities, 17% in private equities, 18% in absolute return strategies (hedge funds), and 26% in real assets (real estate and natural resources). HMC CEO Jane Mendillo denied rumors that the endowment sold illiquid assets, presumably private equity investments, for pennies on the dollar.

Per the article the endowment was down 22% from June 2008- to October, the S&P 500 was down 24% during the same stretch. Obviously during that period of time just about every asset was down a lot and based on the above information it would seem that the HMC did not find too many hiding places for capital. I am a huge believer in owning some diversfiers but they are not the be all end all for every market scenario.

While I incorporate small allocations to those sorts of things and I do believe they smooth out the ride there is nothing wrong with overweighting cash every once in a while.
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